ICSID tribunal awards damages for Venezuela’s indirect expropriation of steel industry investment
Tenaris S.A. and Talta-Trading e Marketing Sociedade Unipessoal LDA v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/26
An arbitration tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has issued its award on the nationalization of a foreign-owned company producing hot briquetted iron (HIB) for the steel industry in Venezuela. The sum of damages and pre-award interest awarded by the tribunal totals US$172,801,213.70.
The tribunal found jurisdiction under the Venezuela–Luxembourg bilateral investment treaty (Luxembourg BIT) and the Venezuela–Portugal bilateral investment treaty (Portugal BIT).
On the merits, the tribunal dismissed claims that pre-expropriation interference with the investment resulted in international liability. However, it agreed that Venezuela had unlawfully nationalized the claimants’ investment resulting in an indirect expropriation.
Background
The claimants are a company incorporated under the laws of the Luxembourg (Tenaris) and a company incorporated under the laws of Portugal (Talta). Talta is wholly owned by Tenaris through an intermediary company.
Through the privatization of Venezuela’s steel industry in the 1990s, an affiliate of Tenaris (SIDOR) came to control that country’s, and South America’s, main finished steel exporter, which was a major consumer of HBI. Subsequently, Tenaris together with SIDOR incorporated a Venezuelan company known as Matesi to acquire certain HBI-production capacity (PosVen). Among the conditions precedent to this transaction was that Matesi enter into contracts for the supply of raw materials crucial to the production of HBI with a number of state-owned entities on terms no less favourable than those enjoyed by its predecessor. Tenaris’ majority shareholding in Matesi was later transferred to Talta.
In 2008, Venezuelan President Hugo Chávez announced that SIDOR was to be nationalized, a decision that was subsequently ratified by parliament. In 2009, President Chávez announced an intention to nationalize Matesi and other HBI producers. Formal confirmation was set out shortly thereafter. In 2010, President Chavez announced that Matesi was to be expropriated, as it had not proved possible to reach an agreement with shareholders on the terms of nationalization. The arbitration concerns the circumstances whereby the claimants lost the use and enjoyment of their investment in Matesi.
BITs’ “siège social” and “sede” require effective management, which claimants demonstrated
The primary issue for the tribunal’s determination was whether the claimants had established a “siège social” and “sede” in Luxembourg and Portugal, respectively, as per the specific terms of the BITs.
Venezuela argued that the BITs required not only incorporation but also the place of effective management to be located in the home state. It also argued, based on filings with the U.S. Securities and Exchange Commission and other documents, that “Tenaris is an Argentine company, with 27,000 employees, billions of dollars of revenue and offices on the 26th and 30th floor of a 30-storey office block in Buenos Aires” (para. 120).
In order to resolve this objection, the tribunal first considered the ordinary meaning of the terms “siège social” and “sede.” On the basis of the parties’ submissions, the tribunal found it clear that neither term was a consistent “legal term of art” and that in fact the terms have a number of ordinary meanings.
The tribunal then considered the meaning of these terms given their context as well as the object and purpose of the BITs. It found that, placed in their context, the terms “must connote something different to, or over and above, the purely formal matter of the address of a registered office or statutory seat” (para. 150). The tribunal therefore determined that “siège social” and “sede” in the BITs in issue in this case mean the place of effective management. On the basis of the submissions and the evidence, the tribunal concluded that Tenaris and Talta had their place of effective management in Luxembourg and Portugal, respectively, and accordingly upheld its jurisdiction ratione personae over the claimants.
Tribunal rejects Venezuela’s objection that the dispute was merely contractual
Venezuela also objected to jurisdiction on the basis that claims in respect of allegedly insufficient or discriminatory supply of inputs to Matesi gave rise to a purely contractual dispute. The claimants responded that their claims for discrimination arose solely out of breaches of the fair and equitable treatment (FET) and non-impairment clauses of the BITs. They argued that the relevant supplier was CVG FMO, a state entity with a sovereign monopoly.
The tribunal approached this second objection by distinguishing between jurisdiction to hear the claims and ultimately liability regarding those claims under the BITs. At the jurisdictional stage, the determinative question was not whether the claimants’ factual allegations were true. Thus, Venezuela’s argument that CVG FMO was acting in a commercial and private capacity, while a key issue in terms of ultimate liability, was not a bar to the tribunal’s jurisdiction.
Unlawful nationalization results in indirect expropriation under the BITs
The tribunal addressed the claims arising from the nationalization of Matesi on the basis that “[n]o doubt about it, Venezuela nationalized Matesi” (para. 451). The issue was therefore whether Venezuela’s nationalization of SIDOR in 2008 and subsequently Matesi in 2009 amounted to an unlawful indirect expropriation, as per the claimants, or whether the nationalization had been entirely legal under Venezuelan law, such that it was only upon formal expropriation that the BITs applied.
The tribunal was persuaded that “Venezuela failed to implement the procedures that it had put in place to effect the nationalisation of SIDOR and its subsidiaries and, specifically, Matesi” (para. 493). It found that, in so doing, Venezuela manifestly failed to conform with the requirements of the “tailor made” domestic law process for nationalization, which resulted in indirect expropriation under the BITs. The tribunal went to on observe that the case is “akin to the ADC [v.] Hungary case, in that the affected investor has not had: ‘a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard’” (para. 497).
Events prior to indirect expropriation do not rise to level of treaty breach
According to the claimants, Venezuela breached the FET, non-discrimination, and non-impairment provisions of both BITs by virtue of CVG FMO’s discrimination against Matesi, that is, the claimants’ investment.
Although the claimants’ affiliate SIDOR regularly had the kind of inputs needed for production of HBI by Matesi, SIDOR was obliged to sell these inputs to CVG FMO. According to the claimants, their supply agreement with CVG FMO was “pivotal to [their] decision to invest in Matesi and was a condition precedent to [their] purchase of PosVen’s assets” (para. 322).
In terms of whether CVG FMO discriminated against Matesi, the tribunal found that the evidence pointed to certain failures. However, it then found that CVG FMO was neither an organ of the state for the purposes of Article 4 of the International Law Commission (ILC) Articles on Responsibility of States for Internationally Wrongful Acts nor empowered by Venezuela to exercise elements of governmental authority under ILC Article 5.
The claimants further argued that serious labour unrest, lost access to Matesi’s physical plant, and the holding against their will of some 20 members of its administrative staff resulted in a breach of Venezuela’s obligations under the security and protection standard in the BITs. The tribunal accepted the claimants’ submission that Venezuela’s obligation was not exclusively limited to physical protection from third parties but that it could also include adverse effects stemming from the host state and its organs. It then noted that the claimants were seeking merely declaratory relief for damages suffered during the nationalization process, but that the alleged failures to provide security and protection took place post-nationalization.
Tribunal departs from Discounted Cash Flow method in determining damages
Having found that expropriation occurred without prompt and adequate compensation, the tribunal set out to determine the compensation to be paid by Venezuela. Regarding the calculation of compensation, the tribunal found the relevant provisions in the BITs very similar to those contained in the ILC Articles, which it considered the most accurate reflection of customary international law.
The parties’ experts agreed that, where arm’s-length transactions are unavailable, the value of an asset generally is determined best by the Discounted Cash Flow method. However, the tribunal observed that “the devil, alas, is in the detail” (para. 521). Whereas the claimants’ expert had pinned the value at US$239 million, Venezuela’s expert had arrived at a value of US$0. The tribunal concluded that there were major flaws in the approaches of both parties.
The tribunal proceeded to canvass other approaches to determining the Fair Market Value ultimately returning to the notion of agreed price in an arm’s-length transaction. In this context, the tribunal considered the 2004 acquisition of Matesi’s underlying assets by SIDOR and the claimants. This transaction provided relevant data having regard to the criteria for an arm’s-length transaction.
Ultimately, the tribunal ordered that Venezuela pay US$87,300,000 for breaches of the BITs, as well as pre-award interest from the valuation date of April 30, 2008, at an annual rate of 9 per cent, in the sum of US$85,501,213.70 within six months of the date of the award.
Notes: The tribunal was composed of John Beechey (President appointed by agreement of the parties, British national), Judd Kessler (claimant’s appointee, U.S. national), and Toby Landau (respondent’s appointee, British national). The final award of January 29, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7098.pdf.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.