Clorox v. Venezuela award is set aside by Swiss courts; abuse of rights argument is remanded to the arbitral tribunal
May 29, 2020 | by Lisa Bohmer – https://www.iareporter.com/
Case(s) discussed in this article: Clorox v. Venezuela
The Swiss Federal Tribunal has set aside a May 20, 2019 award in Clorox Spain v. Venezuela, after disagreeing with the UNCITRAL tribunal’s decision that the underlying Spain-Venezuela BIT required an “action of investing”.
Notably, in the recently-published March 25, 2020 decision [click here to download]*, the Federal Tribunal found that, absent any express provision to the contrary in the BIT, only the claimant’s nationality, and not the origin of the funds invested, was relevant for jurisdictional purposes. The court concluded that there was no basis in the treaty for the additional requirement of an “action of investing”, warranting the award’s annulment.
Nevertheless, the court noted that an abuse of process argument may be available to Venezuela, and it remanded the case to the original tribunal for a decision on this point, as well as on other potential jurisdictional objections. (The abuse of process argument was raised by Clorox in the arbitration, but the arbitral tribunal found it unnecessary to examine this objection in light of its finding that the claimant had not carried out any action of investing.)**
The Federal Tribunal was composed of judges Christina Kiss (chair), Fabienne Hohl, Martha Niquille, Yves Rüedi, and Marie-Chantal May Canellas.
In the court proceedings, Clorox was represented by Lenz & Staehelin, while Venezuela relied on counsel from Canonica Valticos de Preux + Associés.
(In the arbitration, Clorox relied on counsel from King & Spalding, while Venezuela was represented by Garcia & Morris and GST.)
Arbitral tribunal declined jurisdiction after identifying an “action of investment” requirement in the BIT
As we’ve reported, in the underlying award, an UNCITRAL tribunal of Yves Derains (chair), Bernard Hanotiau (claimant’s nominee) and Raul Vinuesa (respondent’s nominee) decided that, by defining ‘investment’ as “any kind of assets invested by investors of one Contracting Party”, the BIT covered only investments that had involved an “action of investing”.
On this basis, the tribunal found that the original investment in Clorox’s local company had been made by two US-based entities, which, on April 15, 2011, transferred their shares to the newly-incorporated Clorox Spain. The arbitrators stressed that Clorox Spain had not provided any consideration in exchange for the shares, and therefore had not carried out any action of investing, leading the tribunal to decline jurisdiction.
Clorox Spain initiated set-aside proceedings at the seat, in Switzerland.
Court has the power to decide the tribunal’s jurisdiction
The investor notably asked the Swiss Federal Tribunal to find that the arbitral tribunal had jurisdiction to hear the case.
Starting with the scope of its review, the Federal Tribunal stressed that, in general, it was not allowed to enter the merits of arbitration disputes, since the set-aside mechanism had the characteristics of a limited appeal (cassation).
However, according to the court, these restrictions did not apply if the dispute concerned the arbitral tribunal’s jurisdiction. On jurisdictional issues, the court had the power to fully review the case, and to find in favour or against the tribunal’s jurisdiction.
The claimant’s request for a positive finding of jurisdiction was therefore found to be admissible.
VCLT applies as customary international law
As a preliminary matter, the court noted that it had the power to carry out an interpretation of the terms ‘investment’ and ‘investor’, as defined in the BIT.
For that purpose, the court stressed that the interpretative principles of the Vienna Convention on the Law of Treaties (VCLT) applied, although Venezuela never ratified the VCLT, since these principles qualified as customary international law.
Court adopts “pragmatic approach” to the definition of investment
Turning to the definition of ‘investment’, the court noted that this term may have different meanings in legal language and in economic language. In addition, the Federal Tribunal stressed that the legal definition of this term varied from one investment tribunal to another, while doctrinal approaches also diverged.
In light of this observation, the court concluded that it was appropriate to adopt a “pragmatic approach”, by applying the interpretative principles set out in the VCLT.
(As we reported, the Federal Tribunal reached a similar conclusion in its ruling on the Deutsche Telekom v. India case, a case in which the judges concluded that the term “investment” covered indirect investments.)
Key question is not whether the investment was direct or indirect
The court next reasoned that the arbitral tribunal was correct to consider that the key question at hand was not whether the investment was direct or indirect. The court noted that Clorox Spain directly owned all the shares of the local entity, which qualified as a direct investment.
(In this respect, the court noted that its ruling in the Deutsche Telekom v. India case was therefore not applicable.)
The court further disagreed with Clorox’s argument that a contradiction existed between the arbitral tribunal’s finding that an action of investment was required on the one hand, and the tribunal’s observation that the BIT applied to indirect investments on the other hand. The judges saw no such contradiction, as the requirement of an action of investment did not exclude all indirect investments, but only those that were not actively made.
Corporate restructuring appears to be the “decisive element” that led the tribunal to decline jurisdiction
Turning to the arbitral tribunal’s interpretation of the terms ‘investment’ and ‘investor’, as defined in the BIT, the court noted that the arbitral tribunal’s reasoning appeared, at first sight, “particularly simple and devoid of ambiguity”: the arbitrators found that the claimant had not actively acquired the shares in the local entity in exchange for a certain consideration, and that Clorox Spain was therefore not entitled to rely on the BIT.
However, according to the court, behind this apparently simple approach appeared a “more complex” reasoning, which was related to the origin of the funds used for the investment, as well as to the manner in which the investment was structured.
In this respect, the court noted that it was not “innocuous” that the arbitrators had placed emphasis on the fact that the capital and know-how invested in Venezuela originated from two US-based companies, which were not entitled to rely on the BIT.
Thus, according to the court, the arbitrators had, in reality, carried out a “material analysis” regarding the origin of the funds invested, while they were claiming to apply a “formal” criterion based on the existence of an act of investing. In fact, the court also observed, the arbitrators did recognize that, prima facie, the claimant qualified as an investor and its shares as an investment in the sense of the BIT.
The Federal Tribunal concluded that the “decisive element” that led the arbitrators to decline jurisdiction appeared to be the fact that the shares had been transferred to a Spanish entity during a company restructuring which, in turn, appeared to have been aimed at obtaining protection under the BIT.
BIT contains a broad definition of the term ‘investment’ but no limitation regarding the origin of the invested capital
The Federal Tribunal then examined the BIT’s definition of the term ‘investment’.
In this respect, the court reckoned that the BIT’s definition was a “classical” asset-based definition, containing a general clause followed by a non-exhaustive list of examples which, notably, referred to company shares as investments.
In comparison with other BITs, this definition was characterized by its “openness”, according to the court, since it did not contain any restrictive language, besides the expression “invested by investors”.
In fact, the court noted that many investment treaties contain more limitative clauses. In particular, the court stressed that contracting states could protect themselves through “denial of benefits clauses”, by referring to an origin of capital requirement, or by including a requirement of reciprocity in the preamble and the relevant definitions.
The court also considered that such clauses were already commonly used at the time when the BIT was concluded, in 1995. Nevertheless, the BIT did not contain any such requirements.
Arbitrators wrongly read the requirement of an action of investing into the BIT
In this context, the court further reasoned that “in the absence of express provisions to the contrary in an investment treaty, it is reasonable to assume that only the nationality of the entity which holds the investment is determinative, and not the origin of a possible consideration to be made at the time of the investment”.
The Federal Tribunal concluded that, since the BIT did not contain any express restrictions against treaty shopping but included, to the contrary, a broad definition of the term ‘investment’, there was no basis for adding any “supplementary conditions” to those set out in the treaty.
Thus, the arbitrators had wrongly read a requirement of an action of investing into the BIT, the court concluded.
Abuse of process argument is available irrespective of the treaty’s provisions
Nevertheless, the Federal Tribunal added that, simply because the BIT did not contain any express prohibition of treaty shopping, this did not imply that “certain practices aimed at benefitting in an abusive manner from the protection of the treaty in question must be tolerated by the contracting states”.
According to the court, the prohibition against an “abuse of rights” was a “generally recognized international principle”, as well as part of Swiss public policy.
Thus, an abuse of process argument would be available to the respondent irrespective of the BIT’s language, according to the court.
Abuse of process argument and further jurisdictional objections are remanded to the arbitral tribunal
The Federal Tribunal next offered certain considerations regarding the notion of abuse of rights in investor-state arbitration.
The court noted that the distinction between legitimate corporate planning and an abuse of process was a “difficult exercise”, in which the “temporal aspect is determinative”.
According to the court, if the restructuring took place after the dispute had already arisen, then the abuse of process argument was unnecessary, since the arbitral tribunal would simply decline jurisdiction on a ratione temporis basis.
To the contrary, for the court, the abuse of rights argument could prove “decisive” if the corporate restructuring was carried out at a time when the dispute was already “foreseeable”, and if there was some indication that the restructuring took place in anticipation of the dispute.
However, the Federal Tribunal added that it was not for the court to establish “general criteria” to determine whether or not a dispute was foreseeable; rather, this was a task for the arbitral tribunal.
(Previous tribunals have disagreed in their interpretations of the foreseeability requirement. While a tribunal in Pac Rim v. El Salvador decided that a party must be able to foresee a dispute, and not merely a controversy, with a “very high probability”, the arbitrators in Philip Morris v. Australia rejected this restrictive approach. More recently, tribunals in Cervin and Rhone v. Costa Rica and Albacora v. Ecuador have briefly addressed this issue.)
As a consequence, the court decided not to exercise its power to make a definitive ruling on the arbitral tribunal’s jurisdiction. Instead, the Federal Tribunal remanded the case to the same UNCITRAL tribunal, in order to allow the arbitrators to address the abuse of rights argument, as well as other possible jurisdictional objections.
(The fact that a case is remanded to the original tribunal after a final award was rendered appears to be rather unusual in treaty-based arbitrations. While the French courts remanded certain jurisdictional issues in the UNCITRAL Serafin Garcia Armas and Karina Garcia Gruber v. Venezuela case to the original tribunal, that tribunal had upheld jurisdiction, and it was therefore still seized of the case at the time when the (partial) annulment decision was rendered. In the ICSID context, annulment decisions have sometimes led to resubmission requests, but such request are usually brought before a newly-constituted tribunal; see, e.g., our reports on the resubmission awards in TECO v. Guatemala (2) and Pey Casado v. Chile (2).)
Venezuela is ordered to pay 2/3 of the costs
In light of its findings, the Federal Tribunal ordered Venezuela to pay 2/3 of the procedural costs, with Clorox paying the remaining third.
The court also noted that the parties’ legal fees, which amounted to 220,000 Francs each, should be apportioned following the same formula, resulting in Venezuela having to reimburse 73,333 Francs to Clorox.