Identifier
Created
Classification
Origin
07CARACAS217
2007-02-01 15:19:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

INTERNATIONAL ARBITRATION VS. THE BRV

Tags:  EINV PGOV ECON VE 
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VZCZCXRO5284
RR RUEHAG RUEHROV
DE RUEHCV #0217/01 0321519
ZNY CCCCC ZZH
R 011519Z FEB 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7668
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEBAAA/DEPT OF ENERGY
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000217 

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TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
ENERGY FOR CDAY, DPUMPHERY, AND ALOCKWOOD
HQ SOUTHCOM ALSO FOR POLAD
EB/IFD/OIA
L/CID

E.O. 12958: DECL: 01/22/2016
TAGS: EINV PGOV ECON VE
SUBJECT: INTERNATIONAL ARBITRATION VS. THE BRV

REF: A. CARACAS 59


B. CARACAS 84

C. CARACAS 132

CARACAS 00000217 001.2 OF 004


Classified By: Andrew N. Bowen, Economic Counselor, for reasons 1.4(b)
and (d).

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 000217

SIPDIS

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TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
ENERGY FOR CDAY, DPUMPHERY, AND ALOCKWOOD
HQ SOUTHCOM ALSO FOR POLAD
EB/IFD/OIA
L/CID

E.O. 12958: DECL: 01/22/2016
TAGS: EINV PGOV ECON VE
SUBJECT: INTERNATIONAL ARBITRATION VS. THE BRV

REF: A. CARACAS 59


B. CARACAS 84

C. CARACAS 132

CARACAS 00000217 001.2 OF 004


Classified By: Andrew N. Bowen, Economic Counselor, for reasons 1.4(b)
and (d).


1. (C) Summary: International arbitration will become
increasingly important to foreign investors as Chavez moves
forward with his selective nationalizations and disputes over
"prompt, adequate, and effective compensation" arise.
Foreign investors have three options to avail themselves of
arbitration rights - bilateral investment treaties (BITs),
contractual provisions providing for international commercial
arbitration, and domestic law. BITS seem to offer investors
the best chance of ensuring the BRV's cooperation in the
proceedings and enforcing an arbitration award. The BRV's
track record of compliance with treaty arbitration is
stronger than commercial arbitration and the business
ramifications of non-compliance would be far greater. Though
the United States and the BRV have not signed a BIT, some
U.S. investors, such as Verizon and AES, operate through
subsidiaries that could claim BIT protection. The BRV's
reluctance to enforce international commercial arbitration
awards may make U.S. courts the final stop for many
investors, in an attempt to attach BRV assets located in the
United States. End Summary.


--------------
A Robust Legal Market: Changes Ahead
--------------


2. (C) Econoffs met separately with legal counsel from two
prominent law firms in Caracas, Elisabeth Eljuri and
Victorino Tejera from the Canadian oil and gas firm Macleod
Dixon, and Hernando Diaz and Bernardo Weininger from the
Cleveland-based firm Squire Sanders (strictly protect). Both
firms told Econoffs that they were left guessing as to
exactly where Chavez was heading in terms of legal reform,
but that consequently, business was booming. Eljuri said
that her phone was ringing off the hook with clients

inquiring as to the business climate in Venezuela and what
their best options would be to protect investments. In
particular, dispute resolution and arbitration practices of
major firms stand to gain a lot of business. The U.S. firm
Latham and Watkins, whose partner was counsel for the U.S.
Export-Import Bank on the Hamaca strategic association in the
Faja, published an article in early January 2007 outlining
foreign companies' options under international arbitration in
Venezuela, with the expectation that Chavez' nationalization
campaign will generate a lot of legal work. Latham did not
discuss provisions in BRV domestic law for arbitration and
suggested that the two options available to foreign investors
would be (1) investment treaty arbitration, and (2)
international commercial arbitration.


3. (C) Eljuri, a Harvard-educated attorney admitted to the
N.Y. Bar, said the BRV was generally wary of international
arbitration and would, in her view, move quickly to enact
legal changes to try to limit foreign investors' rights to
arbitration. As a practical matter, both firms told us that
currently it is almost impossible to negotiate an
international arbitration clause in a contract with a
state-controlled entity. Eljuri suggested that refusing to
recognize the validity of commercial arbitration claims in
BRV courts may be one of the constitutional changes Chavez
will put forward.


--------------
Treaty Arbitration vs. Commercial Arbitration
--------------


4. (U) We will discuss two types of international
arbitration that appear to be available for investors: treaty
arbitration and commercial arbitration. Treaty arbitration
refers to arbitration proceedings in which the underlying
claim stems from a state's alleged breach of its obligations

CARACAS 00000217 002.2 OF 004


under an international treaty -- generally, a BIT. These
claims are submitted to the International Center for
Settlement of Investment Disputes (ICSID),an independent
organization affiliated with the World Bank. International
commercial arbitration refers to resolving commercial
disputes between transnational actors (whether private
parties or states) pursuant to the terms of an arbitration
clause in the underlying agreement. In contrast to ICSID's
set rules and procedure, the parties themselves determine the
procedural rules applicable to the commercial dispute.
Parties will generally elect institutional arbitration, such
as the International Chamber of Commerce, International Court
of Arbitration, or London Court of International Arbitration.



--------------
BITs: Treaty Arbitration
--------------


5. (C) Venezuela is a signatory to the multilateral ICSID
Convention and has entered into BITs with more than 20
countries, though not with the United States. Investors that
qualify as nationals of countries with which the BRV has
signed a BIT can bring arbitration claims against the BRV, or
state-controlled entities, to ICSID. U.S. companies may
still benefit from BIT protection if they operate through
subsidiaries incorporated in jurisdictions that have a BIT
with the BRV, such as the Netherlands or Canada. Verizon and
AES own their 28.5 percent stake in CANTV, and 82 percent
interest in Electricidad de Caracas (EDC),respectively,
through non-consolidated subsidiaries incorporated under
Dutch law. Both could assert arbitration rights under the
BRV-Dutch BIT and pursue ICSID arbitration claims against the
BRV. (Note: We have heard that some U.S. investors have
hired local legal counsel to register existing investments
through such vehicles. End note.)


6. (C) Failure to cooperate in ICSID arbitration proceedings
or to enforce an arbitration award in court would constitute
a violation of both the bilateral BIT and the multilateral
ICSID Convention, setting the BRV up as the pariah of the
international business and legal community. ICSID
arbitration proceedings are published on the World Bank
website and the public nature of the process, in contrast to
commercial arbitration which is strictly confidential, would
make BRV non-compliance immediately and widely known.
Blatant disregard for an ICSID award would make foreign
counterparts wary of entering into any type of commercial
relationship with the BRV. The limited track record to date
suggests that the BRV has a decent record with respect to
compliance with mandatory treaty arbitration provisions. The
BRV is currently involved in three pending ICSID proceedings
with Vanessa Ventures, Ltd., a Canadian mining exploitation
company, the Vestey Group Ltd., a UK food production company,
and I&I Beheer, a Dutch energy company. (Note: Vestey has
suspended its claim as it reportedly has reached a settlement
with the BRV. End note.)


--------------
International Commercial Arbitration
--------------


7. (C) Investors may elect international commercial
arbitration, assuming that the underlying contracts provide
for it. The New York Convention of 1958 on the Recognition
and Enforcement of Foreign Arbitral Awards, signed by the
United States and the BRV, calls for signatory states to
enforce international arbitration awards in their domestic
courts. The 1991 CANTV privatization agreement, by which
Verizon acquired its interest in CANTV, reportedly contains
an international arbitration clause, and we understand that
all of the operating agreements for the strategic
associations in the Faja provide for international
arbitration.


8. (C) Recent case law with respect to international
commercial arbitration suggests that foreign investors will

CARACAS 00000217 003.2 OF 004


have a difficult time enforcing awards in Venezuelan courts.
In a February 2006 decision involving Haagen-Dazs, BRV courts
invalidated an American Arbitration Association award entered
in Miami. The President of the Constitutional Chamber of the
Supreme Court wrote a dissenting opinion stating that the
court had acted in complete disregard for the Venezuelan
legal system and in fulfilling international obligations. In
April 2006, a BRV court set aside an International Court of
Arbitration award entered in favor of an Italian electronics
company against VTV, the state-owned television channel, in
connection with a concession agreement. The court said that
the arbitration agreement was not authorized in conformity
with a 1998 Venezuelan Commercial Arbitration Law, even
though the agreement pre-dated the law. The arbitrators
involved were also called in to "explain themselves" before
the BRV court.


9. (C) Comment: International commercial arbitration offers
far weaker prospects for the investor than treaty
arbitration. The New York Convention contains a provision
excluding enforcement based on public policy concerns, a
possible out for BRV courts. The BRV's contrasting treatment
of commercial arbitration and BIT arbitration shows that the
New York Convention doesn't have the same muscle that BITs
do. Because commercial arbitration proceedings are
confidential, the BRV could drag its feet on cooperating

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without outside pressure. End Comment.


--------------
BRV Investment Promotion Law
--------------


10. (C) Domestic legislation in the BRV provides protection,
in theory, to foreign investors through the 1999 Investment
Promotion Law. The law offers similar protection as BITs,
protecting against expropriation or equivalent measures,
requiring fair and equitable treatment for foreign investors,
most-favored nation treatment (MFN) and free transfer of
investment returns. It does not allow investors to opt for
international arbitration, unless they can otherwise qualify
through a BIT, but permits them to bring claims to a domestic
arbitration tribunal. The international law firm Freshfields
Bruckhaus Deringer, counsel to I&I Beheer and Vestey in their
arbitration claims, speculated that the MFN provisions
contained in this law may give rights to other ICSID
Convention signatory states to pursue ICSID arbitration, even
in the absence of a BIT with the BRV. (Comment: While this
is an attractive legal argument because of the ramifications
for U.S. investors and legal practices, this claim is highly
speculative and creative. Our reading of the Investment
Promotion Law is that investors only have rights to ICSID
arbitration if they can qualify under a BIT. End Comment.)



11. (C) Comment: While the 1999 Investment Promotion Law
provides -- in theory -- for similar investor protection as
under BITs, it is hard to see a foreign investor getting very
far by relying on domestic law in light of the legal system's
attitude towards arbitration and an increasingly politicized
judiciary, especially vulnerable to pressure from the
President. If the VTV decision is any indication, the BRV
would not hesitate to invalidate arbitration rights that
pre-date any legal or constitutional changes that may be on
the way. End Comment.


--------------
The Oil Sector
--------------


12. (C) The 2001 Hydrocarbons Law takes major steps towards
denying international arbitration rights to foreign investors
altogether. The law requires disputes to be settled by BRV
courts and "may not give rise to any foreign claims for any
reason whatsoever." U.S. oil companies formed their
heavy-oil strategic associations with PDVSA prior to 2001 and
their agreements have arbitration clauses. If these
companies were required to re-negotiate their existing

CARACAS 00000217 004.2 OF 004


relationships to fit the Hydrocarbons Law, as the BRV has
been pressuring, it would be important for them to expressly
protect their arbitration rights. Our reading of the law's
catch-all repudiation of arbitration in the oil sector is
that it is meant to nullify arbitration rights under BITs as
well. (Note: The law's dispute resolution framework is
tantamount to unilateral repudiation of a BIT. Since BITs
constitute treaty obligations of the BRV, any attempt to
curtail investor rights thereunder via a domestic law could
be considered as a violation of international law. End Note.)


--------------
Enforcement in the United States
--------------


13. (C) Investors may turn to U.S. courts to enforce
commercial arbitration awards, given the uphill legal battle
they would face in Venezuela. Econoffs asked Eljuri how easy
it would be to attach BRV assets in the United States to
satisfy an arbitration award. She responded that, in her
view, "it would be difficult, though not impossible." (Note:
U.S. courts have traditionally made it difficult to sue
foreign sovereigns. Plaintiffs typically encounter subject
matter and jurisdictional obstacles such as the Act of State
Doctrine and the Foreign Sovereign Immunities Act. However,
enforcing an arbitration award should be more
straightforward. U.S. courts will not apply the Act of State
Doctrine in reviewing arbitration awards and consent to
international arbitration is generally construed as a waiver
of sovereign immunity. While PDVSA directly owns some assets
in the United States, and petroleum tankers frequently call
on U.S. ports, the most significant BRV asset in the United
States is Citgo Petroleum Corporation. In determining
whether an investor could attach Citgo assets, U.S. courts
would likely consider several factors such as Citgo's
management and ownership structure, and whether Citgo has
acted as an instrumentality of the BRV. End note.)


--------------
Comment
--------------


14. (C) Arbitration is a predictable target for the BRV
because it smacks of "imperialism" according to the BRV world
view, imposing rights under international legal principles
above those provided by domestic law. If recent case law and
the 2001 Hydrocarbons Law are indicative, which we believe
they are, Chavez would probably happily do away with
recognition of arbitration awards entirely if he could.
Foreign investors' best recourse may be to try to find legal
protection under a BIT. BIT arbitration seems to be one area
where the BRV has tread cautiously, despite its bull in a
china shop approach to international law. If U.S. companies
are unable to find protection under BITs and are left with
commercial arbitration as their best option, they may be left
with little choice than to start preparing legal briefs to
enforce arbitration awards in U.S. courts.

BROWNFIELD