By Frank Mulder
UTRECHT, Netherlands, Jan 4 2016 (IPS)

Venezuela doesn’t want investment treaties anymore if they give investors the right to drag the country before a commercial court. “The system has been set up to break down the nation-state.”

All is not going well for Venezuela. While the country is torn apart by poor governance, poverty and polarisation, it is attacked from the outside by oil firms claiming tens of billions of dollars.

The method these firms use is called ISDS, or Investor-State Dispute Settlement. This is a mechanism by which investors can sue a state by means of arbitration, which is a kind of privatized court. Many lawyers stress the advantage that plaintiffs don’t have to go before a local judge whom they feel they cannot trust. You can choose a judge for yourself, the opponent does the same, and the two of those choose a chairman. They are called arbitrators. The case is heard at a renowned institute, like the World Bank. How could it be more fair?

Biased

But Bernard Mommer, former vice-minister for oil in the time of Hugo Chavez, now the main witness in different claims against Venezuela, has to laugh a bit. “I won’t say that Caracas is a neutral venue. But don’t be so foolish to say that Washington is neutral. The whole arbitration system is biased in favour of investors.”

After Argentina, no country has been sued as much as Venezuela: until 2014 at least 37 cases have been filed against this Latin American state. However, the fine they can expect now exceeds all of the others. ConocoPhillips, a Texas-based oil company, claims 31 billion dollars and seems to be on the winning side. According to critics, that case represents everything that’s wrong with the ISDS system.

Oil dispute

The dispute about oil began in 2006. Under the activist leadership of Chavez, Venezuela decided to nationalise the oil sector. Also, higher taxes were announced. Mommer was responsible for the negotiations with international oil firms about compensation. Most of the 41 companies in the country agreed with the buyout. Two didn’t. Those were the Texas-based companies ConocoPhillips and Mobil (now ExxonMobil).

“When we started with the expropriation, they went for arbitration,” says Mommer. “I didn’t even know that this was possible. For arbitration two parties need to consent, don’t they? How could they sue a state?” But Mommer discovered that Venezuela signed Bilateral Investment Treaties (BITs) in 1991, among others with the Netherlands. Those treaties give all investors from the given country an offer to arbitration if they feel treated unfairly by the host state.

Dutch sandwich

ConocoPhillips and Mobil quickly moved their Venezuelan holdings to the Netherlands in 2006. That gave them the opportunity to claim, as Dutch investors, that the unexpected policy change violated their BIT rights. Together, they demanded 42 billion dollars.

“This is called the Dutch sandwich”, says George Kahale III, a top lawyer from New York, who defends Venezuela in different cases. “You put a Dutch holding in the middle of your company chain and you can call yourself Dutch.”

Companies are not allowed to do this if the dispute already started. ExxonMobil and Conoco said that their move was made independently of the dispute. However, a remarkable message has been found among the Wikileaks cables. In these a representative of Conoco told someone from the American embassy that they “already” moved to the Netherlands to “safeguard their arbitration rights.”

Unlawful

The cases are still dragging on. ExxonMobil has had no luck. The three arbitrators have judged that the expropriation was lawful. ExxonMobil gets compensation, but not much more than what they were offered earlier, around one billion dollars.

But the Conoco case evolved differently. Two of the three arbitrators found the expropriation unlawful. This means that Venezuela has to compensate the firm, not on the basis of the low oil price in 2006, but on the basis of the much higher price at the time of the claim. This will amount to tens of billions of dollars.

This is insane, says Kahale. “The fact is that four out of six arbitrators found that the expropriation was perfectly lawful. And yet Venezuela can expect a mega award.”

Unfair

Talking about fairness: among the Wikileaks cables another juicy anecdote has been found. In a cable from 2008, the Conoco representative tells the American ambassador that the negotiations are going well and that Venezuela is being reasonable. This is in contradiction to what Conoco was claiming in public. Yet the arbitrators – at least, two of the three – now say that they can’t change their conclusion anymore and now have to proceed to the next phase, about the damages.

“In other words”, says Mommer, “the investor can lie. We can’t sue them anyway. They alone can sue us. This shows why Western countries have invented this system. It has been set up to break down the nation-state.”

Disaster

ISDS is structurally flawed, says Kahale. “Who are the judges? They are investment lawyers. Their commercial background shines through in their decisions. Every judge of course always brings his own views to his job. But in arbitration these people are deciding no longer private commercial disputes, but megacases of international significance, with sometimes vital importance for individual states, involving billions of dollars, with very little training in international law.”

Too many, conflicts of interest arise. “You will never see a supreme court judge acting as a counsel in another case. But many arbitrators also act as a counsel. It’s very hard to preside over the legality of something one day, and advocate the same issue the other day. It is natural that I’m holding back in one or the other, depending on which case is more important to me. There are very few checks and balances. Too many mistakes are made.”

Venezuela is fed up with ISDS claims. Soon after the claims were filed, they pulled the plug, not only from the ICSID convention (which acknowledges the World Bank as arbitration court) but also from a number of BITs. The Dutch BIT was the first to be terminated a few years ago. Unfortunately for Venezuela, this treaty contains a clause giving investors the right to arbitration until 2023.

Don’t challenge us

Arbitration can be an elegant method for solving a dispute. But is has developed into an instrument for multinational companies to pressure states.

“These oil firms were offered a brilliant compensation,” says Juan Carlos Boue, a Venezuelan researcher at the Oxford Institute of Energy. “But when the oil price rose, they decided to leave the country with as much money as possible.” For ExxonMobil, a giant with a revenue of 400 billion dollars, twice as big as the GDP of Venezuela, there is more at stake. “They have unlimited resources. They want to let the world know what happens if you challenge them.”

And the arbitrators? “Some of them are on the boards of multinational companies. They just don’t want the countries to get away with it. They have an extreme dislike towards countries like Venezuela.”

ExxonMobil and ConocoPhillips refrained from any comment.

(End)

Excerpt:

The heavily criticized legal mechanism, known as ISDS, is an important tool for European companies to pressurize developing countries. This year Uganda joins the rank of developing nations asking themselves: “Why have we ever signed this?”

Earlier this year, the French oil company Total filed a request for arbitration against the government of Uganda. In essence, arbitration is a way to resolve a dispute, not by going to a public court, but by asking the verdict of a private court. Both parties choose an arbitrator, usually an investment lawyer, and the two of them choose a third one. The arbitration is hosted, in this case, by the World Bank.

This is a new step in the frustrating process of Uganda trying to turn its oil into cash.

Peaceful names

Crude oil reserves in Uganda are estimated by government geologists at 6.5 billion barrels, half of which lies beneath the famous Murchison Falls, a famous national park, known for its wild animals. Wells have been given exotic names, like Crocodile, Buffalo, Giraffe and Warthog.

These peaceful names contrast with the bitter fights that are being fought over the oil. Commercial production has been repeatedly delayed by disputes with explorers over taxes and development plans. Now it’s the French oil company Total refusing to pay tax. It acquired a 33 per cent share in a 2.9 billion dollar project owned by Tullow Oil. According to Ugandan law, when a stock is bought, a stamp duty must be paid.

However, the oil firm refuses to do so, citing no legal obligation to honor the government claims. Total has not disclosed how much tax is at the heart of the dispute or why it objects to the tax levy but a source at the Uganda Revenue Authority told Reuters earlier that the Production Sharing Agreement (PSA) includes a tax waiver.

Secret

From their offices in an eight-story glass building located in the lush green high-end Nakasero area in the capital city Kampala, Total’s Corporate Affairs Manager Ms. Ahlem Friga-Noy stated that “given the applicable confidentiality obligations, we are not in a position to comment further on the proceedings.”

The Office of the Attorney General of the Government of Uganda replies in the same manner: “We are under obligation not to disclose the content of the matter to the public until it is appropriate.”

This points exactly to the problem of arbitration. In a court room all affected parties and stakeholders have the right to speak, or at least listen, but an arbitration procedure is very secretive. No one is obliged to disclose details. Has the state really behaved badly? Or is it the company who abuses arbitration as a pressure to get a tax reduction? The public remains completely in the mist, until the final verdict of the tribunal is published, which can be a multimillion dollar fine.

The Dutch sandwich

The problem Uganda now faces has been made possible by the Bilateral Investment Treaty signed in 2000 with the Netherlands. According to the treaty, all Dutch investors in Uganda have the right to pursue arbitration before the World Bank court if they feel treated unfairly. The French company Total Uganda registered itself as a Dutch company.

This is known as the Dutch Sandwich; you put a Dutch company in between and then you become a Dutch investor. Which turns the treaty into a tool to drag a state before a tribunal of three men in Washington, having a commercial background and the ability to award billion dollar fines, without a possibility to appeal. If Uganda is condemned to a compensation but refuses to pay, the company has the right to seize Ugandan assets in the world.

Against Ugandan law

This is against Ugandan law, says the renowned Human Rights lawyer Isaac Ssemakadde. “According to the constitution, taxation is wholly the creation of the law of the state.” Which means that disputes have to be settled on the basis of the law alone. “Even an agreement between parties cannot supercede the obligation fixed in the law. There is therefore no room for arbitration on taxation,” he said.

“In an earlier tax dispute, between Heritage Oil and Gas against Uganda Revenue Authority, the High Court has forbidden the state to refer proceedings to the arbitration processes in London or anywhere else outside the jurisdiction of the Ugandan courts of law,” noted Ssemakadde.

In short, “Total is being treated differently to other business persons which is in violation of article 21 of the constitution of Uganda which states that all persons are equal before and under the law.”

Nobody can check Total’s claims about a tax waiver, because the Product Sharing Agreements are confidential. This is so despite the fact that Uganda has an Access to Information law that was promulgated in 2005. This limits the discussion, and knowledge, about the proceedings in the country’s oil sector to senior politicians and bureaucrats. The ordinary Ugandan is kept in darkness about what happens there.

The secrecy is not only advantageous for oil companies, but also for certain politicians, who seem to be interested in “personalizing” the oil resources. The Ugandan president Yoweri Museveni recently told Ugandans that those people who are challenging him politically in the forthcoming general elections “are after my oil.”

Why BITs?

A new interactive map made by Dutch journalists, with all known ISDS cases in the world, shows that ISDS is mainly used against developing countries. Sometimes because they clearly behaved badly towards an investor, but in other cases it’s more likely that it is used as a bargaining tool and a threat by multinational companies for better deals. Litigation costs amount to 8 million dollars on average, calculated the Organisation for Economic Co-operation and Development.

For lawyers and arbitrators this is simply an effective tool to defend the rule of law. “I’m happy there is arbitration”, a Dutch investment lawyer says. “There are many thug states in the world. And why do they complain? They signed the treaty themselves.”

“In the end, it’s the ordinary Ugandan taxpayer to bear the brunt and consequences for the enormous amounts of money that is going to be spent on this arbitration process,” says Ssemakadde. “Whereas Total can afford to maintain a given team of lawyers in Washington for, say, a month, Uganda can hardly afford this.”

The people remain ignorant about the deals that are made, and who exercises pressure on whom. Unless the general public starts to view the oil, as well as the treaties their government signs, as belonging to them and not the selected few in government, companies like Total will continue dragging the state into expensive arbitration processes, paid by the Ugandan taxpayers, who are the actual owners of the national resources.

This article is part of a research by De Groene Amsterdammer, Oneworld and Inter Press Service, supported by the European Journalism Centre (made possible by the Gates Foundation). See www.aboutisds.org.

By Federico Lavopa
BUENOS AIRES, Aug 12 2015 (IPS)

The investor-state dispute settlement (ISDS) system has come under increasing criticism in recent years.

Inconsistent decisions, poorly reasoned awards, lack of transparency, parallel proceedings, serious doubts about arbitrator’s impartiality and the sheer size of the compensations sought by investors and awarded by arbitration tribunals are just some examples of the flaws that have been pointed out by detractors of the system.

Federico Lavopa

The dozens of cases that were initiated against Argentina as a result of the outburst of one of its worst economic and financial crises in late 2001 became an often-quoted sad illustration of many of these shortcomings of the ISDS system.

Apart from the tragic consequences entailed by the economic and political crisis which was faced by Argentina, in particular in 2001/2002, which included a fall in gross domestic product (GDP) per capita of 50 percent, an unemployment rate of over 20 percent, a poverty rate of 50 percent, strikes, demonstrations, violent clashes with the police, dozens of civil casualties and a succession of five presidents in 10 days, Argentina received a flood of claims from foreign investors that were filed under different ISDS mechanisms and, in particular, before the International Centre for Settlement of Investment Disputes (ICSID).

Indeed, in the period 2003-2007, claims against Argentina represented one-quarter of all the cases initiated within the framework of the ICSID Convention. These claims before international arbitral tribunals challenged the changes to the economic rules that Argentina had implemented to contain the effects of perhaps the worst economic cycle of its history.

After 1991, Argentina had embarked on an economic deregulation and liberalisation programme. Among others, this programme included the convertibility of the Argentine peso and the creation of a currency board to maintain parity between the peso and the U.S. dollar by limiting the local money supply to the amount of Argentina’s foreign exchange reserves. “If all investors that sued Argentina had obtained 100 percent of their claims, the total amount that the country should have had to bear would have been at around 80 billion dollars”

This economic and pro-market programme was accompanied by a strong emphasis on the attraction of foreign investment which, among other aspects, resulted in the conclusion of 58 bilateral investment treaties (BITs) – 55 of which came into effect.

It also included a mass privatisation process of public companies which, at that time, represented an important part of the domestic economy.

This market-oriented model reached its limits in the late 1990s, and in May 2003 a new president took office, whose government reformed the regulatory framework for the economy – particularly that for the public services privatised over the 1990s – and introduced a package of emergency laws which implied a considerable change in the conditions under which foreign investors and, in particular, public services providers had to run their business in Argentina.

As a consequence, many of them decided to resort to the investor-state dispute settlement mechanisms embodied in the dozens of bilateral investment treaties that Argentina had signed in the 1990s. In total, in the period 2001-2012, exactly 50 cases were filed against Argentina.

A striking characteristic of the Argentinian experience is the amount of requests for compensations made by the companies that sued Argentina. According to estimates made when the peak of cases following the crisis was reached, if all investors that sued Argentina had obtained 100 percent of their claims, the total amount that the country should have had to bear would have been at around 80 billion dollars.

This sum would have been practically impossible to pay, even if Argentina had not been undergoing a period of acute economic crisis, because it represented approximately 13 percent of Argentina’s GDP for 2013.

Although Argentina’s response to this flood of cases was varied and it is still early to offer definite figures, it is already possible to conclude that, in general, arbitration tribunals were prone to render awards in favour of investors.

Almost 45 percent of the cases have received a condemnatory award, although most of these cases could still be reversed by annulment proceedings, whereas only 15 percent of the arbitration proceedings ended up with a final decision completely in favour of Argentina. The remaining 30 percent are mostly cases which resulted in an agreement between the parties or which were altogether suspended.

All in all, of the 80 billion dollars of the possible amount of compensations calculated when the peak of cases against Argentina was reached following the crisis, Argentina has so far received final rulings involving the payment of 900 million dollars.

The first salient conclusion is that the ISDS system has a very low capacity to adapt to totally exceptional circumstances for which it does not seem to have been designed. Despite the efforts of Argentinian attorneys to show that the measures implemented in the post-crisis period were adopted in an emergency context, being so exceptional as to justify any breach of the substantial clauses of the BITs, few tribunals were prepared to sustain this defence.

This notwithstanding, and with most of these cases having already been dealt with, the upcoming scenario for Argentina seems much less drastic than that forecast when the peak of cases was reached.

While they represent a heavy burden for a developing country like Argentina, so far the compensations actually paid amount to a small portion of the sum initially estimated.

The Argentinian case also represents a worrisome example of the failure of the ISDS system to ensure coherence and soundness in its decisions.

Although the dozens of cases submitted against Argentina addressed exactly the same package of measures (the post-crisis emergency laws) and  had to assess very similar arguments of the different claimants and a practically identical series of defences put forward by the Argentinian government, the conclusions at which they arrived have shown striking differences.

Additionally, some of the decisions have been subject to strong criticism and/or declared null and void by annulment committees.

Finally, the experience of Argentina shows the difficulties that arbitration tribunals might encounter when trying to scrutinise the economic policy choices made by governments. On top of the sensitiveness of examining sovereign decisions of States, arbitrators might find themselves in the awkward situation of deciding on highly technical matters which they are clearly ill-equipped to assess.

The case of Argentina thus represents a sad example of the urgent need to reconsider and reform the ISDS system. Yet, the lessons to be drawn from this experience do not seem to lead to clear conclusions about which direction to take.

On the one hand, the system has proved to be extremely inflexible, which prevented it from addressing the exceptional peculiarities of the Argentinian case. On the other hand, however, the wide margin of discretion available for the arbitral tribunals resulted in the adoption of inherently poor decisions, and with high levels of incoherence among them. (END/COLUMNIST SERVICE)

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

*  This column is based on a paper with the same title published as South Centre Investment Policy Brief No 2, July 2015, available here.

Excerpt: