ICSID tribunal finds Venezuela’s 2009 seizure to be lawful expropriation and awards US$46.4 million in compensation

Tidewater Investment SRL & Tidewater Caribe, C.A. v. The Bolivarian Republic of Venezuela, ICSID Case No ARB/10/5

An oil and gas marine services dispute with Venezuela has resulted in an arbitration award at the International Centre for Settlement of Investment Disputes (ICSID).

The tribunal agreed with the claimants, two companies within the Tidewater group, that the government’s 2009 seizure constituted an expropriation under the Barbados­­–Venezuela bilateral investment treaty (BIT). It awarded US$46.4 million in compensation plus interest compounded from the date of expropriation.

The damages awarded fell significantly short of the claimants’ ask of US$234 million. The tribunal did not accept that the expropriation was illegal under the BIT. In addition, the tribunal’s discounted cash flow (DCF) analysis led to an assessment of fair market value that was significantly lower than the claimants’ suggestion

Background

SEMARCA, a Venezuelan company within the Tidewater group, has been operating marine transportation services since 1958. From 1975 onwards, SEMARCA provided maritime support services to subsidiaries of Venezuela’s national oil company, PDVSA, under various contracts.

On May 7, 2009, Venezuela enacted the “Organic Law that Reserves to the State the Assets and Services Related to Primary Activities of Hydrocarbons” (Reserve Law). The following day, May 8, 2009, Venezuela issued Resolution No. 51, identifying the claimants, along with 38 other service providers, as subject to the Reserve Law. PDVSA’s subsidiaries seized SEMARCA’s assets on Lake Maracaibo—its offices and 11 vessels—almost immediately and, later, its four vessels in the Gulf of Paria. Tidewater initiated arbitration in February 2010.

In its February 2013 Decision on Jurisdiction, the tribunal dismissed the claims of six of eight claimants from the Tidewater group. The tribunal found jurisdiction over only Tidewater Caribe, C.A., a Venezuelan company that owned SEMARCA at all material times, and Tidewater Investment SRL, a Barbados company that owned Tidewater Caribe, C.A., since 2009 (jointly referred to as Tidewater). 

Seizure of Tidewater’s assets had effect of expropriation

The tribunal assessed whether the seizure of Tidewater’s vessels constituted an expropriation. It remarked that BIT Article 5 on expropriation included a formulation that is commonly found in many investment treaties. The tribunal highlighted the question of “effect,” stating that “it is well accepted in international law that expropriation need not involve a taking of legal title to property. It is sufficient if the State’s measures have an equivalent effect” (para. 104).

In assessing whether the measures in the current case had an effect equivalent to expropriation, the tribunal found it useful to consider the factors relied upon by the tribunal in Pope & Talbot, namely, whether:

• the investment has been nationalized or the measure is confiscatory;
• the state has taken over control of the investment and directs its day-to-day operations;
• the state now supervises the work of employees of the investment; and,
• the state takes the proceeds of the company’s sales.

On the evidence, including the statements of witnesses from Tidewater and PDVSA’s subsidiaries, the tribunal found that expropriation had occurred upon the physical seizure of the vessels.

The tribunal found that, “[w]hilst the seizure would have come as a surprise,” it was natural for the claimants not to accept its effect immediately. According to the tribunal, “the scope of that effect upon Claimants’ investment did not finally become clear until the seizure of the remainder of the vessels at Corocoro [in the Gulf of Paria] some two months later. In these circumstances, documents from Claimants asserting the continuation of their business in the intervening period are consistent with a dawning realisation that their business had been nationalised” (para. 109).

Tidewater fails to establish that expropriation was unlawful

Tidewater had sought to convince the tribunal that the government’s failure to pay compensation rendered the expropriation illegal under the BIT. Based on the parties’ pleadings, the tribunal reviewed the international case law from Chorzow Factory onwards pertaining to a taking that lacks only the payment of fair compensation to be lawful. It further noted recent investment arbitrations following a consistent approach. The tribunal in Goetz v. Burundi, for example, held that “all other conditions for a lawful taking having been met, the failure to pay prompt and adequate compensation did not suffice ‘to taint this measure as illegal under international law’” (para. 135).

In the present case, Tidewater argued that the taking was illegal since Venezuela’s contemplated level of compensation under the Reserve Law was inconsistent with the standard of compensation required by the BIT. The tribunal observed that, while the BIT defines the compensation payable for expropriation as market value immediately before an expropriation, the determination of that market value is delegated to the tribunal.

Fair and Equitable Treatment claim is quickly dismissed

The real focus of the claim was not on the procedural fairness of Venezuela’s treatment of the claimants, but on its taking of their property. The tribunal saw as simply inapposite claims for breach of fair and equitable treatment as well as arguments based on national treatment and most-favored-nation treatment.

Material factors of fair market value, such as country risk, determined by tribunal

The tribunal found that determining fair market value by reference to either the liquidation value or the book value of the seized assets, as Venezuela proposed, would likely only be appropriate where the enterprise was not a proven going concern. Rather, given that SEMARCA was not a publicly listed company and that its business was limited to one country and one customer, a DCF analysis was appropriate.

As the parties’ expert reports tended to contain overly optimistic estimates, the tribunal made its own assessment as to each of six key factors in the DCF analysis, namely: scope of business, accounts receivable, historical cash flow, equity risk, country risk, and business risk. In terms of country risk, the claimants’ expert had discounted a very modest 1.5 per cent to induce willing buyers prior to the 2009 taking. Venezuela’s expert, on the other hand, had been in the potentially awkward position of discounting 14.75 per cent in respect of perceived political risks. The tribunal found the respondent’s position reasonable adopting a 14.75 per cent premium. Ultimately, the expropriated assets’ market value was determined to be significantly lower than claimed.

Notes: The tribunal was composed of Campbell McLachlan QC (President appointed by the Chairman of the ICSID Administrative Counsel, New Zealand national), Andrés Rigo Sureda (claimant’s appointee, Spanish national), and Brigitte Stern (respondent’s appointee, French national). The final award of March 13, 2015 is available at http://www.italaw.com/sites/default/files/case-documents/italaw4206_0.pdf

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.