10. Juni 2020

Arbitration Newsletter Switzerland: Clorox vs. Venezuela – Unter welchen Voraussetzungen qualifiziert eine Investition als „Investment“ im Sinne des Investitionsschutzabkommen zwischen Spanien und Venezuela?

On 29 May 2020, the Swiss Federal Supreme Court (the „Supreme Court“) published on its website a new decision in the field of international arbitration (the „Decision“)¹ dealing with a negative jurisdictional ruling by a Geneva-seated arbitral tribunal regarding an investment treaty claim by Clorox España S.L., Madrid („Clorox España„) brought against the República Bolivariana de Venezuela („Venezuela„).²

The Decision was rendered by all five members of the First Civil Chamber on 25 March 2020 and will be included in the Supreme Court’s publication of leading cases.

1. Facts

On 18 May 2015, Clorox España, incorporated on 15 April 2011 by a representative of The Clorox International Company (USA) („Clorox International„) by contributing 100% of the shares in Clorox de Venezuela S.A. („Clorox Venezuela„), initiated arbitration proceedings against Venezuela based on the Convention for the Reciprocal Promotion and Protection of Investments concluded between Spain and Venezuela on 2 November 1995 (the „BIT 95„). According to Clorox España its rights as investor under the BIT 95 were violated by acts of Venezuela on various levels, resulting in significant damages.

On 20 May 2019, the Geneva-seated arbitral tribunal composed of Yves Derains (chair), Bernard Hanotiau and Raúl Vinuesa³, rendered an award (the „Award„) declining jurisdiction ratione materiae with the reasoning that Clorox España’s shares in Clorox Venezuela – under the circumstances Clorox España came into possession of those shares – did not qualify as an investment protected by the BIT 95.⁴

According to the arbitral tribunal, the BIT 95 requires that an asset must have been invested by a legal or natural person of a contracting state in the territory of the other contracting state, whereby the holder of the asset must be the active subject in the act of investing. Clorox España, however, had (only) obtained the shares in Clorox Venezuela at the time of its (Clorox España) incorporation by way of a contribution in kind. As no transfer of value had taken place as consideration for the shares in Clorox Venezuela between Clorox España and Clorox International (respectively its representative) contributing the shares, the holding of the shares in Clorox Venezuela by Clorox España did not qualify as an investment within the meaning of the BIT 95.

Clorox España filed an action for annulment with the Supreme Court, arguing that the arbitral tribunal had erroneously introduced a number of conditions for an investment not contained in the BIT 95 and had applied these in a manner contrary to the object and purpose of the BIT 95. Accordingly, Clorox España requested that the Award be annulled and that the Supreme Court should determine that the arbitral tribunal has jurisdiction to hear the dispute in question.

The Supreme Court annulled the award of 20 May 2019 and referred the case back to the arbitral tribunal for a new decision on jurisdiction.

2. Considerations

To begin with, the Supreme Court reminded us that, in an action for annulment regarding the jurisdiction of the arbitral tribunal, it freely examines questions of law, including preliminary questions. In previous cases regarding bilateral investment treaties, the Supreme Court already had to determine the meaning of the terms „investment„, „investor“ and „invest“ and had to do the same in the present case. Such interpretation is made in accordance with the rules of the Vienna Convention on the Law of Treaties. The Supreme Court noted in this respect that the fact that Venezuela had not ratified this convention does not preclude recourse to these rules of interpretation in the present case, since these rules are codified customary international law with regard to the interpretation of international treaties.

The Supreme Court then noted that there was no abstract, definitive and unanimously accepted definition of the concept of ‚investment‘ in international bilateral or multilateral treaties and that it favours a pragmatic approach by interpreting this concept in good faith on the basis of the wording in the treaty in accordance with the ordinary meaning of the relevant terms considered in their context and in light of the object and purpose of the treaty.

The Supreme Court then interpreted Art. 1(2) BIT 95 which reads „The term ‚investments‘ means any kind of assets invested by investors of one Contracting Party in the territory of the other Contracting Party and in particular, although not exclusively, the following assets: a) Shares, securities, bonds and any other form of participation in companies […]“ and came to the conclusion that the BIT 95 does not provide distinctive criteria or characteristics of the notion „investment„. Apart from the wording „invested by investors„, on which the arbitral tribunal heavily relied, the BIT 95 definition of investment did not contain any particular restriction or requirement regarding the nature of the protected investments. Conversely, it seems that the contracting states of the BIT 95 had sought to include a wide range of investments in the BIT 95 which, according to the Supreme Court, neither contained any denial of benefits clause, nor any origin of capital clause nor any other provision introducing additional conditions for an asset held by an investor to be considered as an investment within the meaning of the treaty, even though such clauses were already common at the time of the conclusion of the BIT 95 in November 1995. Since many countries, including Spain, have already signed international investment treaties containing an explicit restriction on the scope of application to guard against treaty shopping, it must be accepted that the contracting states of the BIT 95 knowingly waived the inclusion of such limiting provisions in the treaty. Thus, in the absence of express provisions to the contrary in an investment treaty, it is reasonable to assume that only the nationality of the investment holder is relevant and not the origin of any consideration to be paid at the time of investment.

The Supreme Court then held that it appeared that the arbitral tribunal had intended to deprive Clorox España of the protection of the BIT 95 on the grounds that its investment in Clorox Venezuela was initially made by a company located in a non-contracting state, namely by Clorox International which had its seat in USA, a country with which Venezuela has no bilateral investment treaty in place, and was only transferred at a later stage to Clorox España – a company which apparently had been incorporated for the purpose of gaining protection under the BIT 95.

However, there was, according to the Supreme Court, no evidence available which indicated that the two contracting states of the BIT 95 were willing to exclude such an investment from its scope. Not only had they provided for a particularly broad and open definition of the term „investment„, but they had also refrained from including provisions introducing additional requirements aimed at protecting against treaty shopping or relating to the source of the funds invested, even though such clauses are widespread in international investment treaties.

Contrary to the arbitral tribunal’s finding, the Supreme Court held that there is no reason to infer from „invested by investors“ the requirement of an active investment that must have been made by the investor itself in return for a consideration. To the contrary, the BIT 95 did not contain any requirements going beyond the holding of assets by an investor of one contracting state in the territory of the other contracting state. Therefore, the arbitral tribunal’s award could not be upheld given that it had relied upon additional conditions, which it considered not to have been be fulfilled in the present case, to decline jurisdiction.

However, the absence of such limiting provisions in an investment treaty does not mean that practices aimed at abusively benefiting from the protection of a treaty have to be tolerated. Indeed, the prohibition of abuse of rights is an internationally recognized general principle which forms part of Swiss substantive public policy. Delineating the contours of this principle, which in this context amounts to drawing the line between legitimate nationality planning and treaty abuse, is a difficult exercise which arbitral tribunals have to undertake in investment disputes.

In the context of this analysis, the timing could be decisive. Indeed, in order to establish whether the acquisition of nationality, for example through the incorporation of a company in the territory of a contracting state and the transfer of the investment to such company, constitutes an abusive practice, it is necessary to examine, inter alia, the time at which it was made in relation to a specific dispute between the investor and state where the investment was made. The Supreme Court noted in this regard that if an acquisition had taken place after the commencement of the dispute, the question of possible abuse of right seems irrelevant, as the arbitral tribunal would under such circumstances decline jurisdiction ratione temporis. However, abuse of right may come into play when the transaction in question was carried out with a specific view to a potential future dispute. In fact, the protection by an investment treaty is to be denied to an investor when he implemented the transaction for the acquisition of nationality at a time when the dispute giving rise to the arbitration was already foreseeable (in French: „prévisible„; in German: „voraussehbar„) and this transaction must be considered, according to the rules of good faith, as having been carried out with that dispute in view.

The Supreme Court then held that there is, for the time being, no need to establish general criteria for determining such foreseeability of a dispute. It will be for the arbitral tribunal to consider this aspect in the context of the treatment of Venezuela’s objection relating to an alleged abuse of right by the Clorox España.

Therefore, the Supreme Court remitted the case to the arbitral tribunal for a decision on the question of abuse of right and any objections not yet addressed concerning the arbitral tribunal’s jurisdiction raised by Venezuela.

3. Considerations

In recent years, the Supreme Court has increasingly become engaged in BIT arbitration cases, particularly involving Russia⁵, Poland⁶, Vietnam⁷ and India⁸, including a very detailed analysis of the terms „investment“ and „investor“ as used in the German-Indian BIT. All those actions for annulments were rejected by the Supreme Court. However, it was, of course, just a matter of time before the Supreme Court annulled an award rendered in a BIT arbitration with its seat in Switzerland. And here we are!

The Decision itself does not give rise to specific comments. The Supreme Court merely strictly applied the language used in the BIT 95, in particular as stated in its Art. 1(2), defining what qualifies as an „investment“ and „investor“ and it concluded that none of the additional conditions imposed by the arbitral tribunal found any basis in the language in the BIT 95.

But Clorox España ain’t home yet! In the second phase of this jurisdictional controversy the arbitral tribunal will have to decide whether it lacks jurisdiction either ratione temporis or by reason of treaty abuse. In this respect, the Award reveals an interesting sequence of events, as seen by Venezuela, the respondent:⁹

• 15 January 2011: the then President Hugo Chavez announced that it will become necessary to implement a price control mechanism and that his government is already working on this new statute;
• 14 February 2011: Clorox International inquired at the Commercial Registry of Madrid about the availability of the name Clorox España;
• 15 April 2011: incorporation of Clorox España;
• 18 July 2011: the „Ley de Costos y Precios Justos“ was enacted. This statute is the triggering point for various claims for damages and compensation by Clorox España in the aggregate of USD 184,6 mio., as allegedly suffered under the application of that statute;
• 3 August 2011: a shareholders‘ meeting of Clorox Venezuela took note of the transfer of its shares from Clorox International to Clorox España and adapted its articles of association to the new shareholders‘ structure.

To decide whether the above pattern of facts results in treaty abuse the arbitral tribunal will likely seek guidance in the award regarding the BIT case of Philipp Morris Asia Limited vs The Commonwealth of Australia of 17 December 2015 on jurisdiction and admissibility, where comparable legal issues had to be resolved. In that case the arbitral tribunal¹⁰ had concluded, after a careful analysis of a number of BIT awards dealing with the same question, as follows:

„In view of the above considerations, the Tribunal concludes that the commencement of a treaty-based investor-State arbitration constitutes an abuse of right (or an abuse of process) when an investor has changed its corporate structure to gain the protection of an investment treaty at a point in time where a dispute was foreseeable. A dispute is foreseeable when there is a reasonable prospect that a measure that may give raise to a treaty claim will materialise.„¹¹

Most likely the Supreme Court will – sooner or later – have to deal with this case again!

2020-06-09-Arbitration-Newsletter-Switzerland.pdf (pdf 233 kB)