Investment Treaties and ICSID Jurisdiction

1. Venezuela denounces the ICSID Convention

In 1995 Venezuela ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) that established the International Center for the Settlement of Investment Disputes (ICSID). ICSID provides facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States. The Convention has 157 signatory states. Bolivia and Ecuador denounced the Convention in 2007 and 2009 respectively.

On January 24, 2012, Venezuela denounced the ICSID Convention. According to Article 71 of the ICSID Convention, Venezuela’s exit will take effect within six months as of the date of notice to the depository, which means that Venezuela will not be a member of the ICSID Convention as of July 25, 2012. Any arbitration already commenced before ICSID will continue its course. However, pursuant to Article 25 the ICSID Convention, once Venezuela is no longer a member of the ICSID Convention it will not fall under the definition of a Contracting State and therefore ICSID, under the prevailing (hitherto untested) interpretation of the ICSID Convention, will no longer have jurisdiction.

2. ICSID jurisdiction in Venezuelan BITs

Venezuela signed 27 different bilateral investment treaties or BITs, of which 25 are in force (see also: Venezuelan Investment Treaties). Venezuela denounced the Dutch BIT on April 30, 2008, but it will continue to be effective for a period of fifteen years from the date of termination. The Venezuela-Brazil BIT has not been ratified by Brazil. The 27 BITs signed by Venezuela contain seven different types of arbitration provisions. Six BITs provide exclusive jurisdiction before ICSID in case of arbitration. Four BITs have, as an alternative to ICSID, an ad hoc arbitration with the Uncitral Arbitration Rules. Twelve BITs call for ICSID jurisdiction and the ICSID Additional Facility or Uncitral Arbitration Rules as a backup. The Russian BIT has the Stockholm Center of Arbitration and the Uncitral Arbitration Rules but no ICSID. The BIT with Iran uses Uncitral Arbitration Rules, ICC or ICSID. The BIT with Cuba calls for arbitration under the Uncitral Arbitration Rules and the two remaining BITs provide as an alternative to the Uncitral Arbitration Rules any other ad hoc arbitration tribunal previously accepted. This means that up to now ICSID has been at the heart of the Venezuelan BITs, so that Venezuela’s leaving ICSID will not be problem-free for investors.

3. Specific types of BITs

The first group of BITs includes those with Holland, Chile, Barbados, Denmark, France and Germany. These only provide for ICSID in case of arbitration and, therefore, represent for investors the most delicate cases. Of these six, five (all except for France) provide that while Venezuela has not adopted the ICSID Convention, the BIT is subject to ICSID Additional Facility (see for example clause 8.2 in the Venezuela-Barbados BIT). Some of these BITs were signed before Venezuela adopted the ICSID Convention. Does this mean that the alternative jurisdiction (ICSID Additional Facility) returns now that Venezuela has denounced the ICSID Convention? The most delicate case is the France-Venezuela BIT, which has no alternative to ICSID in case of arbitration.
The second group of BITs includes Switzerland, Paraguay, Sweden and the Belgium-Luxembourg Economic Union. These BITs call for ICSID arbitration and an ad hoc arbitration under the Uncitral Arbitration Rules as a backup.

The third group of BITs includes Argentina, Ecuador, Portugal, the Czech Republic, Lithuania, the United Kingdom, Peru, Brazil, Spain, Canada, Costa Rica and Uruguay. This group of BITs calls for ICSID arbitration and, as an alternative, the ICSID Additional Facility or an ad hoc arbitration under the Uncitral Arbitration Rules. A condition for the Secretary’s approval of access to the ICSID Additional Facility, according the article 4.2 of the Rules, is that both parties give their consent in writing to submit to the Centre. Does this consent on the part of the Contracting State arise from the BIT? If so, then the only missing consent is that of the investor. As a fallback, this group of BITs also provides for arbitration under the Uncitral Arbitration Rules as an alternative to the ICSID mechanisms. The Uncitral Arbitration Rules include the possibility of naming the Secretary-General of the Permanent Court of Arbitration at The Hague as an appointing authority.

The BITs entered into with Vietnam and Belarus call for ad hoc arbitration under Uncitral Arbitration Rules or any other ad hoc arbitral tribunal previously accepted.

The Cuba-Venezuela BIT provides arbitration under Uncitral Arbitration Rules. The Protocol of this agreement states that if, in the future, both parties (Cuba and Venezuela) were Contracting States of the ICSID Convention, the arbitration will take place in the ICSID with, as an alternative, arbitration under Uncitral Arbitration Rules. Currently, Cuba is not a Contracting State of the ICSID Convention and Venezuela has left ICSID, therefore the previous provision is not applicable.

4. Alternative steps

a) Notice of Acceptance of ICSID Jurisdiction

One possible interpretation of Articles 71 and 72 of the ICSID Convention permits the benefits of the ICSID Convention to be locked in by initiating an arbitration procedure, and this would be deemed to have been done by making a request to ICSID (Article 36 of the ICSID Convention), assuming that at the time of the request a dispute exists.

Based on Article 72 of the ICSID Convention, a notice of consent by the investor could also be considered a valid mechanism to lock in the benefits of the ICSID Convention even though there was no dispute pending when the notice of consent was given. The investors notice to ICSID and to the Republic should express a willingness to submit to ICSID any possible future investment dispute. The notice would be effective once it is sent. This interpretation has not yet been put to the test, but it might serve to support the investors case for ICSID arbitration even though Venezuela was no longer a Contracting State by the time the dispute actually arose and required resolution.

A less favorable interpretation of Article 72 of the Convention (for the investor) is that, if the investor did not give his consent (acceptance of the State’s offer to submit their disputes to ICSID arbitration) before Venezuela denounced the ICSID Convention, then ICSID does not have jurisdiction in case of arbitration because consent had not been perfected prior to the receipt of notice of the denouncement. Under this interpretation, investors that did not accept the offer of Venezuela to submit arbitrations to ICSID before January 24, 2012 cannot bring claims before the Center.

b) Migration

An alternative is to migrate the investment to a jurisdiction where the arbitration provision of the BIT has an alternative jurisdiction. This could mean migration to any of the BITs in the second group including inter alia Portugal. For European investors, Madeira, Portugal could be an attractive jurisdiction. Migration does, however, mean taking into consideration issues such as tax, corporate and contractual, among others.

5. Vienna Convention

Regarding the validity of the Arbitration Clause in the BITs, it could be held that most of these were executed after Venezuela entered into the ICSID Convention with the purpose of regulating investments between the corresponding parties. The BITs are thus more recent and more specific to the issue of dispute settlement between Venezuela and foreign investors and for these reasons the term of validity of ICSID jurisdiction should be the term in the BIT and not that of the ICSID Convention. Additional support could emerge from provisions of the Vienna Convention on the Law of Treaties (1969) (the Vienna Convention), such as Article 26 (pacta sunt servanda), Article 30 (application of successive treaties relating to the same subject matter), Article 31 (general rule of interpretation) and Article 42 (validity and continuance in force of treaties). Despite the fact that Venezuela is not a party to the Vienna Convention, similar arguments could be made under Article 38 of the Statute of the International Court of Justice, particularly international custom and the general principles of law recognized by civilized nations.

Following the above argument, most BITs entered into by Venezuela provide that either party can terminate the BIT by notice given to the other party. However, investments made before the termination of a BIT are grandfathered in their rights of protection under the BIT for a period of 10 to 15 years (see for example Venezuela-France BIT, Art. 15). The essence of the BIT protection is the dispute resolution clause. A BIT without resolution mechanism acceptable to the parties is useless. Then, can a simple unilateral denouncing of the ICSID Convention serve as a de facto repeal of the BIT? It seems that this is an inconsistent reading of the ICSID Convention together with a BIT. The use of the above arguments seems to be a difficult, albeit interesting, approach to the whole new problem of an ICSID exit that leaves a BIT like an empty shell.

6. Justification of the denunciation

On January 25, 2012, the Venezuelan Ministry of Communication and Information published a press release announcing the denunciation of the ICSID Convention. The press release included a copy of the communiqu issued by the Ministry of Foreign Affairs in that regard. Both documents explain that the denunciation was made was to conform with the mandate of the Venezuelan Constitution, as amended in 1999 (see website, specifically, in that the ICSID Convention is in conflict with Article 151 of the Venezuelan Constitution, which establishes that contracts of public interest must include a clause submitting the contract to Venezuelan courts and applying Venezuelan law for the settlement of any doubts or controversies and excluding any possible foreign claims. The communiqu also refers to protection of the Venezuelan sovereignty, insinuating that submitting to ICSID was a threat to its sovereignty.

Regarding the Constitutional basis of the denunciation, Article 151 of the Constitution establishes that the jurisdiction limitation only applies when it is not contrary to the nature of the contract, or agreements: international conventions to resolve foreign investment disputes by nature include foreign jurisdiction. Furthermore, a similar provision to Article 151 already appeared in the previous Constitution (Article 127 of the 1961 Constitution); the possibility of ICSID arbitration was recognized by Article 22 of the Investment Promotion and Protection Act of 1999, enacted by Presidential Decree; several treaties opting for ICSID arbitration were ratified by the Venezuelan National Assembly after the 1999 Constitution came into effect, and some were signed by the current Administration; the unconstitutionality argument will affect all foreign arbitration commitments and not only those of ICSID.

7. Foreseeable consequences

It is possible that the Venezuelan government may object to any arbitral awards coming out of ICSID on the grounds of the unconstitutionality of the acceptance of its jurisdiction.

The exit from ICSID raises questions as to the effect it may have on the clauses of BITs that provide for ICSID arbitration. There may be different possible interpretations and actions by the Contracting States or affected investors, including taking action to lock the benefits of the ICSID Convention before the denunciation becomes effective, renegotiating the BITs, and relocating the holding of the investments.

February 24th, 2012