Venezuela’s Icsid test

Country may not dodge investment cases by pulling out of disputes convention

Will Thomas
Will Thomas

On 24 January Venezuela gave notice to the World Bank of its denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, following in the footsteps of Bolivia (2007) and Ecuador (2009). This 1966 convention established the International Centre for Settlement of ­Investment Disputes (Icsid).

Arbitration under the auspices of Icsid is one of several dispute resolution options commonly prescribed by bilateral investment treaties (Bits), under which a contracting state agrees to provide certain standards of investment protection to investors from another contracting state.

In the past two decades the ­number of disputes arising under such Bits has increased dramatically, including in Latin America.

Venezuela has been an Icsid ­member since 1993. Its announcement has provoked widespread ­discussion in the press, but politics aside, what are the tangible consequences of such withdrawals from the convention?

Member states certainly have the right to denounce the Icsid convention. Article 71 provides that, once notice has been given, “denunciation shall take effect six months after ­receipt of such notice”.

Venezuela’s denunciation follows a rash of high-value Icsid cases being brought against the state. This, ­therefore, appears to be an attempt to use Article 71 as an exit strategy ­intended to prevent Icsid tribunals from taking jurisdiction over claims against Venezuela in the future.

Venezuela has taken this decision despite the potential parallel effect on its own outward investors, who may also stand to lose access to Icsid arbitration in the context of disputes arising with other host states.

However, the consequences of withdrawal remain subject to debate. This results from the wording of ­Article 72, which states that notice of denunciation “shall not affect the rights or obligations under this ­convention of that state […] arising out of consent to the jurisdiction of the centre given by one of them ­before such notice was received”.

Commentators disagree over how Articles 71 and 72 should operate ­together. Some argue that an Icsid claim may not be commenced by a claimant investor once a notice of denunciation has been filed by a host state and the six-month notice period has expired. Others say Article 72 applies to every unilateral offer of Icsid arbitration made by a denouncing state in its Bits, meaning a claimant may commence arbitration even after the denunciation notice period has expired, provided the relevant underlying Bit remains ­operative.

This issue has yet to be ruled on by an Icsid tribunal, but whichever way the convention is interpreted, two points bear recalling. First, denunciation will not affect Icsid arbitration claims made prior to expiry of the six-month notice period. Second, most Bits offer a range of dispute settlement forums beyond Icsid, including ad hoc arbitration under the UN Commission on International Trade Law rules and/or arbitration under the auspices of other arbitral institutions. As such, withdrawal from Icsid seems unlikely to prevent aggrieved investors from bringing their claims to arbitration.

Eversheds senior associate Andy Moody assisted with this article