An arbitral award worth around US$700 million might be regarded as an award worth fighting over. Certainly, that was the view taken by Venezuela, who adopted a path of clear resistance to an award of that value obtained against it by the Canadian mining company, Gold Reserve Inc.
Despite an apparent settlement having been reached, just last week the Paris Court of Appeals – the court at the seat of the arbitration – rejected Venezuela’s challenge to the award on various grounds including lack of jurisdiction.
just last week the Paris Court of Appeals – the court at the seat of the arbitration – rejected Venezuela’s challenge to the award on various grounds including lack of jurisdiction.
The Paris Court of Appeals decision follows that of an English court issued just over a year ago, also rejecting a jurisdiction challenge to the award – Gold Reserve Inc v The Bolivarian Republic of Venezuela. Here we take a look back at this case, which sits at the heart of the interface of public international law and arbitration law.
This is a two-part post. In this first part, we look at the English Court’s approach to the jurisdictional issues. In the second part, we look at the practical aspects arising out of this decision for handling arbitration claims against a State.
Litigating investment treaties
In some ways it may seem counter-intuitive that national courts can determine the jurisdiction of an investment treaty tribunal, and in so doing, conduct a de novo review. In investment treaty claims, jurisdiction is not infrequently a central issue involving consideration of weighty issues of public international law.
In some ways it may seem counter-intuitive that national courts can determine the jurisdiction of an investment treaty tribunal
The widely accepted rationale is that the dispute resolution provisions of an investment treaty act as a standing offer by the State to qualifying foreign investors. A notice filed by a foreign investor commencing arbitration proceedings constitutes an acceptance of this standing offer. This agreement to arbitrate gives the investment treaty tribunal its jurisdiction. (An arbitration agreement formed in this way is sufficient to amount to a State’s waiver of the adjudicatory jurisdiction of the English court for the purposes of section 9 of the State Immunity Act 1978; Gold Reserve ).
The concept sounds simple, but complex public international law issues can arise in answering the following question: does the foreign investor qualify as an investor under the applicable treaty? This in turn frequently imports other issues such as whether the investor has the correct nationality, is required to and has contributed economically to the state against which the claim is brought and whether there is a qualifying investment. As a consequence, it is not unusual for investment treaty claims to be bifurcated so that jurisdiction is determined in a substantial preliminary and separate stage of the proceedings.
The issue of “justiciability” of these issues was confirmed by the Court of Appeal in the context of an application at the seat to set aside an award for lack of jurisdiction (Occidental Exploration & Production Company v The Republic of Ecuador  2 WLR 70).
In Gold Reserve Inc. the issue of jurisdiction arose in the context of an application for the recognition and enforcement. The key issue was whether Gold Reserve was an “investor” as defined in the BIT.
The relevant award was issued following a claim by Gold Reserve the Canada-Venezuela Bilateral Investment Treaty (“BIT”) brought under the ICSID Additional Facility Rules.
Venezuela contested jurisdiction on the grounds that Gold Reserve was not an “investor” as defined under the BIT. The salient background facts in this regard were that:
- in 1998 Gold Reserve became the indirect owner of the Brisas Project due to a restructuring of the group’s company effected through a company merger and share transfer further down the ownership structure – in other words it did not transfer any funds in order to acquire its ownership stake in the Brisas Project; and
- between 1998 and 2008 Gold Reserve raised some US$225 million in equity financings and convertible debt, largely from Canadian sources, and spent close to US$300 million in developing the Brisas Project.
The court’s analysis of the jurisdictional issue
The real question was whether Gold Reserve was an “investor” within the meaning of the BIT to whom Venezuela had made an offer to arbitrate. Under the BIT an “investor” included a company incorporated in Canada “…who makes the investment in the territory of Venezuela and who does not possess the citizenship of Venezuela;…”.
Mere passive ownership was insufficient.
Venezuela argued that Gold Reserve had not made an investment in Venezuela because it had “acquired” the indirect ownership of shares and mining rights “without taking any active step of its own by way of commitment of money or resources to the economy of Venezuela in connection with that acquisition”. Gold Reserve argued that there was no “superadded requirement for the transfer of economic value to Venezuela”.
Teare J held as follows:
The dispute was a matter of interpretation of the BIT, with the following approach to be taken:
- Articles 31 and 32 of the Vienna Convention on the Law of Treaties applies with the effect that the court should have regard to the “ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”; and
- There is no presumption in favour of a wide construction of “investor” with a view to favouring the jurisdiction of the arbitral tribunal – but rather the BIT should be interpreted even-handedly and objectively. (This contrasts with the approach taken to the interpretation of an arbitration agreement in a commercial contract).
Under the Canadian-Venezuela BIT an “investor” is someone “who makes an investment in the territory of Venezuela”. Teare J considered the meaning of these words, concluding that:
- Mere passive ownership was insufficient.
- The ordinary meaning of “making” an investment includes the exchange of resources, usually capital resources, in return for an interest in an asset. The acquisition of an asset does not necessarily mean an investor has made an investment. It could be gifted, for example. Therefore, there must be some action on the part of the investor.
- But it goes too far to say that an investor had only “made” an investment in circumstances where he had contributed value in order to create or acquire the asset.
If this approach was taken, it would exclude investments which took the form of funding the development of assets in Venezuela where such investment were made by a person who, although the indirect owner or controller of such assets, had not paid to create or acquire such assets. This was inconsistent with the object and purpose of the BIT that is to promote investments.
On the facts of this particular case:
- There was no evidence that Gold Reserve made any payment or transferred anything of value in return for becoming the indirect owner or controller of the shares in the investment (the Brisas Project). Therefore, at that time, it did not make an investment;
- But, in subsequent years Gold Reserve raised finance for the purposes of developing the Brisas Project, expending nearly US$300 million, money which clearly went into “the territory of Venezuela”. Therefore Gold Reserve made an investment in assets in respect of which it sought the protection of the BIT; and
- Moreover, Gold Reserve controlled the Brisas Project in its won name by retraining consultants, experts and financial advisers.
Here the English court stepped into the shoes of the arbitral tribunal and walked what is now a well-trodden path of testing to what extent a claimant must have itself made a contribution to the host state in order to qualify as an “investor”.
while many investment treaties are expressed in relatively simple terms, investment structures are often complex
Investment treaties are for the promotion and protection of investment; the host State entices investment into its territory by agreeing to guarantee a foreign “investor” making an “investment” certain protections. However, while investment treaties traditionally have simple definitions of “investor” and “investment”, ownership structures for investments are often significantly more complex. Ultimate ownership of an investment may be indirect. The ultimate owner may not provide the funding, but secure it from a third party or cause it to be made by a subsidiary. The result is that it is not always obvious that the definitions of “investor” and “investment” cater for the situation at hand.
The ICSID Convention did not apply in this case; the English court confirmed that the meaning of “investment”, as defined in Salini v Kingdom of Morocco, was not applicable. However, a recent investment treaty case dealing with similar issues did receive quite a bit of attention from the parties and the court – Standard Chartered Bank v United Republic of Tanzania ICSID Case No. ARB/10/12.
In Standard Chartered the tribunal considered the definition of “investment”, concluding that in order for an investment to be “of” the claimant, it had to be made not simply held by the investor. What was required was that “the investment was made at the claimant’s direction, that the claimant funded the investment or that the claimant controlled the investment in an active and direct manner”.
Although the wording is different in the Standard Chartered case, the court followed a similar approach
As already noted, it was the definition of “investor” at issue in Gold Reserve. This included the requirement that the investor “makes” the investment in Venezuela. Therefore, while the wording is different in the Standard Chartered case, the court followed a similar approach, noting in its conclusion not only that Gold Reserve had funded the Brisas Project, it had also controlled it.
Interestingly, the Tribunal’s analysis of this particular issue is not as extensive and Standard Chartered does not warrant a mention. (Perhaps because the jurisdictional phase of the arbitration appears to have been completed prior to the issue of the Standard Chartered award). Ultimately the Tribunal and the court reached the same decision; but the difference in approach signals the possibility that when undertaking a de novo review on jurisdiction, the English court may well reach a different view on the critical issue of jurisdiction.