Venezuela seeks to tear down private investment firewalls

Though the threat has lingered for a few years, the government now seems out to fulfill it by abandoning the traditional investment protection system.

The legal momentum held in recent years by a few transnational corporations before institutions like the International Centre for Settlement of Investment Disputes (Icsid) on the topic of expropriation has sapped the patience of Venezuelan President Hugo Chávez.

"We must distance ourselves from the Icsid (...).We will no longer adhere to Icsid's decisions," claimed Hugo Chávez during his televised program Aló, Presidente on January 8.

Rafael Ramírez, minister of Petroleum and Mining, ratified the decision and went on to add that the government will not even accept awards by arbitration courts approved by the Union of South American Nations and that bilateral investment protection agreements will be negotiated with over 20 other countries. The minister emphasized that "there are no international arbitration provisions included in any new oil-sector projects."

A lawyer specializing in arbitration matters, Luis Alfredo Araque, adamantly claims that "we would be facing severe international issues" should Venezuela bow out of the Icsid and disregard its bilateral treaties on investment protection.

"If (Rafael) Ramírez is saying that contracts will be signed without investment-protection arbitration clauses, then they will be executing contracts entirely unknown to us with Iran, and contracts with international oil companies will simply come to an end."

Araque is certain that, in the context of international trade, it is unimaginable for a private enterprise to invest in other markets if there is no guaranteed option to resort to international arbitration in the event of disputes.

Diana Droulers, executive director of the arbitration center of the Caracas Chamber of Commerce, agrees with Araque and adds that, apart from sparking investors' inhibitions, those comments on the Icsid treaty may cause an "avalanche" of new arbitration processes.

"There will be an avalanche of new cases in the short term as those who believe their interests may be at risk are bound to seek arbitration."

According to Icsid standards, a state is detached from that organization six months after lodging denunciation of the treaty, but all cases previously accepted will still run their course, and all related awards and decisions will be binding.

With regards to bilateral agreements, most establish that their provisions will remain applicable for 10 years after the agreement is denounced in connection with any investments made while the treaty was still in effect. Therefore, the possibility of the government having to pay compensation will remain latent.

Should the government refuse to pay, Araque believes that the risk of seizure or freezing of assets belonging to companies like state-owned petroleum conglomerate Pdvsa will be imminent.

Faulty argumentation

The fundamental reason used by authorities to justify this move is that international arbitration is not applicable to "public interest" contracts and projects.

Araque points out that article 151 of the Venezuelan Constitution supports the government's claim. Nevertheless, he adds that there is no definition of "public interest" and that qualification of investment contracts is made by the National Assembly according to article 150, and not afterwards like the national government has intended to do.

"It is logical that any contract that has not been qualified as such cannot be deemed a public-interest contract," adds Araque, who also authored the Commercial Arbitration Manual.

If the government intends to replace the Icsid with an arbitration court like the one at the United Nations, Araque believes that the nature of the issue will remain unchanged: "It is exactly the same, a court just like Icsid."

rdeniz@eluniversal.com

Translated by Félix Rojas Alva