Countering An Illegal Expropriation to the Sound of the Gavel: GM vs Venezuela?
By Danilo Ruggero Di Bella† (Bottega Di Bella)
This article illustrates how bilateral investment treaties (BITs) help foreign investors to protect their undertakings against expropriations by the host state. By taking a real life example, the article will briefly discuss the 2017 expropriation of General Motors’ assembly plant in Venezuela. Following that, it will show how GM may avail itself of international rights to counter the unlawful expropriation by filing for international investment arbitration based on the applicable BIT. In arbitration, GM may ask for the restitution of the plant and/or the payment of compensation of over $100 million. The article will conclude by making reference to the applicable arbitration rules and forum, and how the ensuing arbitral award may be enforced worldwide.
The background of the dispute
In April 2017, a Venezuelan court ordered the seizure of GM’s entire plant in Valencia – a plant estimated to be worth over USD 100 million – to compensate two car dealerships for the termination of their dealership agreements by GM.
Back in the year 2000, on July 12, GM Venezuela sent a notice to two car dealerships to terminate their agreements. These dealership agreements were entered into on July 19, 1999, and were due to expire on January 15, 2000, but GM Venezuela extended their duration up to August 15, 2000. The agreements provided grounds for early termination in case the parties defaulted on their obligations. Because the car dealerships defaulted on their obligations, GM Venezuela sent them a notice of termination that went into effect on August 15, 2000.
Upon receiving the notice, the two car dealerships filed a claim for constitutional protection with Venezuelan courts to rescind the effects of the notice of termination. On October 25, 2000, the court declared the two notices of termination null and void, thus reinstating the original dealership agreements, which themselves were due to expire on August 15, 2000. As such, the court decision limited itself to declaring the invalidity of the two notices of termination of July 12, 2000, without amending or further extending the duration of the dealership agreements, and the agreements were expired on August 15, 2000.
After the court case had remained dormant for seven years, the two car dealerships purported to execute the court’s ruling by requesting the delivery of over 9,000 vehicles from GM Venezuela, to be paid at cost price and only upon purchase of any given vehicle by the final customer. Although the court’s ruling did not impose either compensatory effects or constitutive effects that provided for new obligations for the parties in the dealership agreements , the enforcement court issued an order on August 7, 2007 giving effect to the car dealerships’ request, without even notifying GM Venezuela of the process, and thus depriving GM of the right to defend itself.
The 2007 enforcement order went beyond the res judicata boundaries of the 2000 ruling. Indeed, there is no identity between what was intended to be executed (an order to hand over vehicles) and the operative part of the 2000 court’s ruling (a declaration of invalidity of the notices of termination). As such, this constituted a grotesque violation of due process. Accordingly, GM opposed the 2007 enforcement order, which resulted in158 vehicles being impounded.
On June 13, 2016, another enforcement order was issued against GM Venezuela that renewed the injunction to hand over more than 9,000 vehicles. Because GM could not materially comply with the delivery of these vehicles, the court ordered on April 4, 2017, the forced seizure of GM’s assets in order to collect a monetary sum equal to the value of the 9,000 vehicles. This monetary sum was approximated by the court at $100 million based on an anonymous estimation, without input from any experts.
On April 18, 2017, Venezuelan authorities forcibly took over GM’s plant in Valencia, seizing production facilities and car stock, and causing GM to cease all operations in Venezuela.
On April 25, 2017, GM Venezuela challenged the court’s decision before the Venezuelan Supreme Court, arguing that it defies any legal logic. Nevertheless, on May 25, 2017, the Supreme Court confirmed the lower court’s order to seize GM’s assets, including its assembly plant. However, one of the Supreme Court’s judges expressed a dissenting opinion finding elements that hinted at violations of due process and the constitutional order.
The Potential Treaty-Based Investment Arbitration
In light of this denial of justice leading up to an unlawful expropriation disguised as court enforcement orders, GM may seek protection and redress under a BIT. General Motors Venezolana Compañía Anónima (“GM Venezuela”) is wholly owned by General Motors Automotive Holdings SL (“GM Spain”), a company incorporated in Spain. As such, GM Spain may invoke the Spain-Venezuela BIT to launch an investment arbitration, through which it may claim that Venezuela breached her international obligations under that treaty with respect to its investment in Venezuela – viz. GM Venezuela – and seek reparation. Specifically, GM may claim that Venezuela has committed a breach of her international obligations to provide full protection and security, to accord fair and equitable treatment, and to pay compensation following a creeping expropriation.
The measures adopted by the Venezuelan judicial authorities can indeed trigger the international responsibility of the Venezuelan state. Article 4 of the Articles on State Responsibility expressly sets forth that the actions and omissions of domestic courts can be directly attributed to the respective state and thus entail its international responsibility; this is even more so when a subject-matter has litigated all the way through its highest court, such as here, and, where all local remedies have thus been exhausted.
On the other hand, Venezuela may argue in her defense that the dispute resolution provision under the Spain-Venezuela BIT contains a fork-in-the-road provision, meaning that because GM Venezuela has already litigated this subject-matter before Venezuelan courts, it cannot resubmit the same dispute to international arbitration. Nevertheless, this objection can be effortlessly rebutted because it is not the same dispute, as the disputing parties, the causa petendi, and the petitum do not overlap. In international arbitration, GM Spain would be the claimant against the state of Venezuela, whereas the parties involved in the proceedings before the Venezuelan courts was GM Venezuela and the two car dealerships. The Spanish company’s claims would be based on the Spain-Venezuela BIT, rather than Venezuelan national law, thus creating a different cause of action. Additionally, the relief sought in the arbitration could differ from the relief sought before Venezuela courts. Whilst GM Venezuela was asking for the annulment of the courts’ orders in the domestic proceedings, GM Spain may request restitution in kind for the assembly plant in international arbitration, and/or request adequate, prompt, and effective compensation amounting to the value of the expropriated plant.
Because Venezuela breached her international obligations through her judiciary, GM Spain may put forward a denial of justice claim and ask for reparation. A denial of justice occurs when state organs obstruct access to justice hindering a foreign investor’s right to bring a claim before a competent court or arbitral tribunal, or when state courts deprived a foreign investor of a fair and equitable procedure. In the case at hand, the denial of justice claim can be framed under the full protection and security standard (FPS standard) as per Article 3 of the Spain-Venezuela BIT, as well as under the fair and equitable treatment standard (FET standard) pursuant to Article 4 of the BIT.
Under the FPS standard, the host state is under an obligation to proactively protect foreign investments from adverse effects caused by private parties and state organs. In the case at hand, adverse effects stemmed from both private parties (the two car dealerships compelling GM to deliver 9000 vehicles without no legitimate grounds) and from state organs (the state courts seizing GM’s assets on account of GM’s inability to deliver the 9,000 vehicles).
Additionally, the FPS standard obliges the host state to guarantee legal security enabling foreign investors to operate their businesses effectively. On this point, the International Court of Justice has established in the ELSI case that the FPS standard is not restricted to physical protection, but extends to legal protection through the host state’s domestic courts. Here, not only did Venezuelan courts fail to provide any protection for GM Spain’s investments in Venezuela, they also deliberately took actions that adversely affected GM Spain’s investments.
As to Article 4 of the Spain-Venezuela BIT, Venezuela violated the FET standard provided therein through her judiciary because her courts failed to ensure a fair and equitable procedure to GM Venezuela.
By failing to notify GM Venezuela of an enforcement procedure taking place 7 years after the issuance of the allegedly corresponding judgement, Venezuela denied justice to GM Spain. Precedent supports this interpretation: in Middle East Cement vs. Egypt, an ICSID tribunal came to the conclusion that the respondent-state breached the FET standard by failing to notify the investor of the seizure and actioning of a ship belonging to the investor.
Moreover, given the inconsistency between the 2000 declaratory judgment, which left without effect the notice of termination of the two dealership agreements, and the corresponding enforcement orders of 2007, 2016, and 2017, which first requisitioned 9000 vehicles before requisitioning GM’s assembly plant, the whole procedure of the Venezuelan courts is blatantly ambiguous by any standard of review. The enforcement court executed the declaratory judgment ultra petita – beyond the boundaries of the judgement’s scope – and thereby infringed upon GM’s due process.
Along with a denial of justice claim for breaching the FPS and FET standards, GM Spain may also advance a creeping expropriation claim under Article 5 of the Spain-Venezuela BIT. A creeping expropriation takes place when a series of acts attributable to the host state over time culminate with the taking of the investor’s property without the investor receiving compensation, therefore having an effect tantamount to an unlawful indirect expropriation. In this regard, Article 5 of the Spain-Venezuela BIT is broadly phrased to include measures with similar effects to expropriation, including creeping expropriations.
By repeatedly ordering the delivery of over 9000 vehicles on predatory terms, only to then seize GM’s factory in Valencia upon GM defaulting on the delivery, Venezuelan courts committed a creeping expropriation of GM Spain’s investment in Venezuela. Besides their unfairness and arbitrariness, the lack of proportionality of the Venezuelan courts’ measures in addressing a mundane dealership-manufacturer court case is a further indication of their expropriatory character. Objectively, it appears that the long-dormant court case between the two dealerships and the automaker was used as a pretext by the Venezuelan state to take over the whole business of GM Venezuela, whose plant was estimated to be worth over $100 million – being not only the largest assembly plant in Venezuela, but in the whole Andean region, comprising of Colombia, Ecuador and Venezuela – employing 2,700 workers, with a production capacity of 80,000 units per year, and counting on a network of 79 dealerships.
The arbitration forum, the ensuing arbitral award, and its enforcement
In light of Venezuela’s 2012 denunciation of the ICSID Convention and the recent arbitral award in Kimberly-Clark vs. Venezuela, which concluded that an arbitration under the ICSID Facility Rules is no longer an option for foreign investors who want to sue Venezuela, the only rules available to arbitrate an investment dispute against Venezuela under the Spain-Venezuela BIT are the UNCITRAL Arbitration Rules. Hence, GM Spain may initiate an UNCITRAL arbitration which could be administered by the Permanent Court of Arbitration in The Hague. Potentially, an UNCITRAL arbitration could also be administered by other arbitration institutions, including the ICSID itself, as this Arbitration Institution also offers to administer disputes under the UNCITRAL Arbitration Rules or to render administrative services in ad hoc arbitrations under these Rules.
An award rendered under the UNCITRAL Arbitration Rules can be enforced in accordance with the 1958 New York Convention, adopted by 172 states, which allows for the recognition and enforcement of foreign arbitral awards practically worldwide.
Such an award could be used to attach Venezuelan assets located abroad. For instance, arbitral award-creditors of Venezuela are attempting execution over CITGO, a US-based subsidiary of PDVSA (the Venezuelan National Oil Company). On 29 July 2019, the US Court of Appeals for the Third Circuit found that PDVSA is an alter ego of Venezuela because of the government’s extensive control over the commercial entity. Therefore, the court held, Venezuela could not shield the entity behind the sovereign immunity defense, and creditors could attach the entity’s shares. Other creditors have attempted execution in Singapore over oil tankers owned by PDV Marina, another subsidiary of PDVSA.
Interestingly, recent enforcement actions have also been taken against individuals indicted for money-laundering on behalf of the Venezuelan government. One of these individuals reportedly owns luxury properties in Madrid and Marbella, one of which alone is worth approximately €10 million, that have been seized by Spanish authorities pending a criminal investigation for money laundering in connection with PDVSA.
Additionally, one of the most substantial assets of Venezuela is the $1 billion in gold stored in London, which has been used as collateral in international transactions by the Venezuelan government.
Alternatively, GM Spain could also leverage the award – or even a settlement award – to re-enter the Venezuelan market by regaining control over its assembly plant in Valencia; GM Spain could achieve this by virtue of an arbitral decision providing for restitution in kind as the first remedy in terms of reparation, failing which a monetary compensation amounting to the value of the plant would be owed.
In sum, the Venezuelan courts’ actions and omissions – which are attributable to the Venezuelan State – are in contravention of the international rights that GM Spain enjoys under the Spain-Venezuela BIT.
Accordingly, GM Spain may commence an UNCITRAL arbitration against Venezuela under that BIT to request the restitution of its plant and/or the payment of a compensation in excess of $100 million. The resulting arbitral award could be enforced worldwide on assets belonging to the Venezuelan government and its instrumentalities, thanks to the 1958 New York Convention.