Paris Court of Appeal, No. 16/20822 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, Pole 1 - First Chamber, 29 January 2019, No. 16/20822

BOLIVARIAN REPUBLIC OF VENEZUELA
vs.
RUSORO MINING LIMITED

Rusoro A Ltd (Rusoro) is a Vancouver-based company incorporated under the laws of the Province of British Columbia (Canada) and engaged in the acquisition, exploration and operation of gold mines.

Between 2006 and 2008, Rusoro acquired a majority stake in 24 Venezuelan companies that held a total of 58 mining concessions and contracts for the exploration, development, and exploitation of gold and other minerals in the south-eastern state of Bolivar, Venezuela.

During 2009 and 2010, the Bolivarian Republic of Venezuela (the Republic of Venezuela) adopted various measures restricting the export of gold, as well as exchange control rules.

On 16 September 2011, the Venezuelan Government issued a nationalisation decree which provided for the transfer of gold mining activities to joint ventures with majority public participation. At the end of the negotiation period and in the absence of agreement on the terms of the transfer, the mining rights of Rusoro and its subsidiaries were automatically extinguished on 15 March 2012. Rusoro left the exploitation zones and the Venezuelan Republic took possession of them in April 2012.

On 17 July 2012, Rusoro filed a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID) under the bilateral investment treaty between Canada and the Republic of Venezuela (BIT). It alleged the violation of provisions relating to expropriation, fair and equitable treatment, protection and security, national treatment, transfer of funds and export restrictions. It sought payment of the sum of USD 2,434,939,917 as compensation for the damage it allegedly suffered.

By an award issued in Paris on 22 August 2016, the arbitral tribunal, composed of Messrs. X and Y Z, arbitrators, and Mr. B-C, Chairman, and ruling at the end of proceedings conducted in accordance with the ICSID Additional Facility Rules, decided:

that it had no jurisdiction to rule on the counterclaim of the Republic of Venezuela,
that possible violations of the BIT based on the 2009 measures were time-barred,
that the Republic of Venezuela violated Article VII of the BIT by expropriating Rusoro’s investment without compensation, and was ordered to pay the sum of USD 966,500,000 plus interest,
that it violated paragraph 6 of the Annex to the BIT by adopting the 2010 Central Bank Resolution and imposing additional restrictions on the export of gold, and was ordered to pay USD 1,277,002 plus interest,
that it was ordered to pay Rusoro the sum of USD 3,302,500 for costs related to the arbitration.

On 19 October 2016, the Republic of Venezuela filed an action to set aside the award.

The award was granted enforcement (in French: Exequatur) by an order of the Pre-trial judge dated 16 March 2017.

By submissions filed on 8 February 2018, the Republic of Venezuela requested the court to set aside the award and order Rusoro to pay the sum of EUR 100,000 pursuant to Article 700 of the Code of Civil Procedure. It claimed, firstly, that the arbitral tribunal did not have jurisdiction to rule on the dispute, firstly, because the precondition for an attempt at amicable settlement had not been met and, secondly, because the damage alleged by Rusoro was unrelated to an alleged violation of the BIT, and lastly, because the ratione temporis scope of the BIT excluded claims relating to a breach, or the harm incurred as a result of such breach, where more than three years had elapsed between the time when the investor should have become aware of it and the date of commencement of the arbitration. Secondly, the claimant argues that the arbitral tribunal failed to comply with its mission when it did not respect the agreement of the parties neither on the standard of compensation nor on the date of assessment of the damage in case of expropriation.

By submissions notified on 19 July 2018, Rusoro requested the court to declare inadmissible the claims alleging the lack of jurisdiction of the arbitral tribunal and that all its grounds were unfounded, to dismiss the claimant’s submissions, to confirm the enforcement order (in French: Ordonnance d’exequatur) and to order the Republic of Venezuela to pay him the sum of EUR 200,000 pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the first ground for annulment based on the lack of jurisdiction of the arbitral tribunal (article 1520-1 of the Code of Civil Procedure):

The Republic of Venezuela submits, first, that the letter sent by Rusoro to it on 15 December 2011 alleging violations of the BIT did not constitute a notice of dispute within the meaning of Article XII § 2 of the Treaty because it did not specify the nature and amount of any damage and therefore did not cause the six-month period provided for in that text for reaching an amicable settlement to run, with the result that the Arbitral Tribunal did not have jurisdiction.

The claimant claims, secondly, that the scope ratione materiae of the BIT is limited to damages suffered as a result of violations of the BIT. In the present case, the arbitral tribunal awarded Rusoro for the illegal expropriation in 2011 compensation that does not reflect the value of the company at a date immediately prior to the expropriation but was calculated on the basis of the value of the company between 2006 and 2008 without taking into account the collapse of the stock market value between 2008 and 2011 caused by measures or circumstances. The arbitral tribunal considered it either did not fall within its jurisdiction ratione temporis or did not constitute violations of the BIT, so that what was compensated was not a damage resulting from expropriation.

Thirdly, the claimant states that Article XII § 3 of the BIT excludes from the jurisdiction of the tribunal claims relating to a violation or damage suffered as a result of such violation if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired knowledge of the alleged breach and knowledge that the investor has incurred loss or damage; that in the present case, the request for arbitration was filed on 17 July 2012 and thus excluded all claims arising out of a breach and harm of which Rusoro knew or ought to have known before 17 July 2009. However, the Arbitral Tribunal awarded Rusoro compensation based on its value between 2006 and 2008 without taking into account the fall in its market capitalisation especially between February 2008 and 17 July 2009, so that the Arbitral Tribunal had compensated for losses known before 17 July 2009 and resulting from measures taken before that date.

Rusoro replied that the first part of the ground, on the one hand, was inadmissible as it had not been specifically submitted to the arbitral tribunal, even if objections of lack of jurisdiction on other grounds had been raised during the arbitral proceedings, on the other hand, that it is not an objection of lack of jurisdiction but a plea of inadmissibility which does not fall within the cases of annulment provided for in Article 1520 of the Code of Civil Procedure, and that, contrary to what the Republic of Venezuela claims, the notice of dispute was in accordance with the provisions of the BIT.

The defendant claims that the second part of the ground, on the one hand, is inadmissible since the Republic of Venezuela discussed the methods of assessment during the arbitral proceedings without claiming that the tribunal would not have the jurisdiction to apply them, and on the other hand, that it challenges the method of assessment of damages, and therefore relates to the merits of the award and relies, not on the BIT provisions relating to jurisdiction, but on those relating to the determination of damages.

Rusoro argues that the third part of the claim is not a plea of lack of jurisdiction but a plea of inadmissibility which does not fall within the scope of the remedies provided for in the Code of Civil Procedure, moreover, the arbitral tribunal only compensated the loss relating to the expropriation in 2011 which was not time-barred and that the claimant’s complaint relates to the manner in which that loss was calculated, i.e. on the merits.

On the first part of the ground:

The ground based on a prior conciliation clause does not constitute a plea of lack of jurisdiction but a question relating to the admissibility of the claims, which does not fall within the cases for setting aside the award listed in Article 1520 of the Code of Civil Procedure. The ground in the first part can only be dismissed.

On the third part of the ground:

The annulment judge reviews the decision of the arbitral tribunal on its jurisdiction, whether it declared that it had jurisdiction or not, by looking for all the elements of law or fact allowing to appreciate the scope of the arbitration agreement and to deduce the consequences on the respect of the mission of the arbitrators. This is no different when the arbitrators are seized on the basis of the provisions of a treaty.

In this case, the Republic of Venezuela’s offer to submit disputes to arbitration arises out of the Agreement between the Government of Canada and the Government of the Republic of Venezuela for the Promotion and Protection of Investments, concluded on 1 July 1996 and entered into force on 28 January 1998 (BIT), Article XII of which on the ‘Settlement of Disputes between an Investor and the Host Contracting Party’ provides:

1. Any dispute between one Contracting Party and an investor of the other Contracting Party. relating to a claim by the investor that a measure taken or not taken by the former Contracting Party is in breach of this Agreement, and that the investor or an enterprise owned or controlled directly or indirectly by the investor has incurred loss or damage by reason of, or arising out of, that breach, shall, to the extent possible, be settled amicably between them.

2. If a dispute has not been settled amicably within a period of six months from the date on which it was initiated, it may be submitted by the investor to arbitration in accordance with paragraph (4). For the purposes of this paragraph; a dispute is considered to be initiated when the investor of one Contracting Party has delivered notice in writing to the other Contracting Party alleging that a measure taken or not taken by the latter Contracting Party is in breach of this Agreement, and that the investor or an enterprise owned or controlled directly or indirectly by the investor has incurred loss or damage by reason of, or arising out of, that breach.

3. An investor may submit a dispute as referred to in paragraph (1) to arbitration in accordance with paragraph (4) only if: (a) the investor has consented in writing thereto; (b) the investor has waived its right to initiate or continue any other proceedings in relation to the measure that is alleged to be in breach of this Agreement before the courts or tribunals of the Contracting Party concerned or in a dispute settlement procedure of any kind; (c) if the matter involves taxation, the conditions specified in paragraph 14 of this Article have been fulfilled; and (d) not more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.

4. The dispute may, by the investor concerned, be submitted to arbitration under: a) The International Centre for the Settlement of Investment Disputes (ICSID), established pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature at Washington 18 March. 1965 (lCSID Convention), provided that both the disputing Contracting Party and the Contracting Party of the investor are parties to the ICSID Convention; or (b) the Additional Facility Rules of ICSID, provided that either the disputing Contracting Party or the Contracting Party of the investor. but not both, is a party to the ICSID Convention; or In case neither of the procedures mentioned above is available, the investor may submit the dispute to an international arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

5. Each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration in accordance with the provisions of this Article.

Under public international law, a State may require its consent to arbitration to be subject to various conditions which must, therefore, be regarded as delimiting the arbitrators' power to judge. In the present case, it follows from the clear terms of the above-mentioned paragraph 5 of Article XII of the BIT that the Contracting Parties have made their offer of arbitration subject to compliance with the conditions listed in that Article and, in particular, with the condition set out in paragraph (3)(d) that an arbitral tribunal constituted under the BIT shall not have jurisdiction to consider adverse facts of which the investor was aware or should have been aware for more than three years at the date of the request for arbitration. Moreover, the arbitrators themselves have developed this point under the heading: ‘VI Jurisdictional Objections’ and ‘VI.1 The first objection to jurisdiction: the dispute is time-barred’.

It is therefore up to the judge hearing the claimant’s action, seized on the basis of Article 1520-1 of the Code of Civil Procedure, to verify whether the arbitrators wrongly declared they had jurisdiction with regard to facts that would have been known to the investor for more than three years when the dispute was submitted to them.

In the present case, between 2002 and 2003 the Panamanian company Grupo Agapov took control of several Venezuelan companies holding mining rights in the State of Bolivar. In 2006, in order to raise the capital necessary for its expansion, Grupo Agapov merged with the Panamanian company Newton Ventures, which became Rusoro A (Panama) Inc, a wholly-owned subsidiary of the Canadian publicly traded company Rusoro, in which a majority stake was taken by Grupo Agapov’s shareholders. Through Rusoro A (Panama) Inc, the Canadian company Rusoro thus became the owner of Grupo Agapov’s Venezuelan subsidiaries.

Between December 2006 and June 2008, Rusoro acquired directly or indirectly shares in several companies holding mining rights in Venezuela.

At the time these investments were made, legislation on exchange controls had been in place since 2003. It provided, on the one hand, that all private persons had to sell to the Central Bank of Venezuela (BCV) at an official exchange rate the foreign currency obtained in return for exports, except for the possibility of keeping 10 percent to cover the costs of export activities, and on the other hand, that the purchase of foreign currency was subject to authorization. There was a parallel market (‘swap market’) fuelled by the purchase of sovereign bonds issued by Venezuela (Award, §§ 140-143). A law of 17 May 2010 prohibited the claimant from using the swap market (Award, § 154). However, in July 2010, the exchange control regime applicable to gold producers was relaxed. The obligation to sell foreign currency to BCV at the official exchange rate was reduced to 50% of export revenues, with the remainder being retained and used abroad (Award, § 159).

Regarding the export of gold mined in Venezuela, the system in force at the time of Rusoro’s investments was the result of a 1996 BCV resolution which laid down a principle of freedom subject to registration, the issuance of a (non-discretionary) BCV licence and the sale on the domestic private market of at least 15% of production (Award, § 138 and 139).

In April 2009 BCV adopted a new resolution requiring that 60% of quarterly production be transferred to it. It paid the price in VEF (bolivar fuerte) by converting the international gold price, denominated in USD, at the official exchange rate. 10% of production could be sold freely to the domestic processing sector and 30% could be exported subject to (discretionary) authorisation by BCV or had to be sold to BCV if authorisation was refused (Award, §§ 144-147). In June 2009, a new resolution was passed that relaxed this system only for producers in which the state or its agencies held a majority stake (Award, §§ 149-151).

In July 2010, the obligation to sell to BCV was reduced from 60% to 50% of production and the obligation to sell on the domestic market of 10% of production was removed. Subject to authorisation, 50% rather than 30% of production could now be exported.

On 16 September 2011, the Venezuelan Government adopted a nationalisation decree which provided that gold mining activities could only be carried out by the State or companies wholly owned by the State, or by mixed companies in which the State held a stake of at least 55% and exercised decision-making power. All gold had to be sold to the State and all concessions and contracts granted prior to the decree of nationalisation had to be transferred to mixed companies within the meaning of this text.

At the end of the negotiation period provided for in the decree, no agreement having been reached, the mining rights of Rusoro and its subsidiaries were automatically extinguished. On 26 March 2012, Rusoro requested the Venezuelan government to send it a document describing the terms of the transfer. Having received no official response, it left the exploitation zones on 31 March 2012. The Venezuelan Republic took possession of it in April 2012.

On 17 July 2012, Rusoro filed a request for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) based on the BIT. It alleged violations of the provisions relating to expropriation, fair and equitable treatment, protection and security, national treatment, transfer of funds and export restrictions. It sought payment of USD 2,434,939,917 as compensation for the damage it allegedly suffered.

It is common ground that the date to be used to determine the jurisdiction ratione temporis of the arbitral tribunal is 17 July 2012. Consequently, facts known to the investor before 17 July 2009 are excluded.

In this case, as the award notes, the measures restricting gold exports taken in April and June 2009 were published in the Official Gazette of the Republic of Venezuela prior to that date and Rusoro’s knowledge not only of these decisions but also of their negative impact on the business of its subsidiaries, is established by a letter sent on 30 June 2009 to the Vice-President of the Republic in which the investor protests against these measures, pointing out that they establish ‘new rules for the sale of gold which harm our gold production companies alone’ (sentence, § 213 to 216).

Furthermore, the arbitral tribunal recognised, on the basis of the definition of a composite act given by Article 15 of the International Law Commission’s Articles on State Responsibility for Internationally Wrongful Acts, that the elements of such a qualification are lacking in the present case. Thus, there is no consistency between the strict control measures taken in 2009, the substantial relaxations adopted in 2010 and the decision on nationalisation in 2011 that would qualify them as ‘creeping nationalisation’ and allow these decisions to be treated as a single unlawful act (Sentence, §§ 221-232).

Accordingly, the arbitral tribunal found that two claims by Rusoro fell within its jurisdiction: first, the violation of paragraph 6 of the Annex to the BIT by the 2010 BCV resolution imposing additional restrictions on the export of gold, and second, the violation of Article VII of the BIT resulting from the expropriation of Rusoro’s investment without compensation.

The claimant’s complaints against the award for lack of jurisdiction ratione temporis relate only to the second of these convictions.

According to Article VII of the BIT:

‘Expropriation

1. Investments or returns of investors of either Contracting Pany shall not be nationalized, expropriated or subjected to measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Pany, except for a public purpose, under due process of law, in a non-discriminatory manner and against prompt, adequate and effective compensation. Such compensation shall be based on the genuine value of the investment or returns expropriated immediately before the expropriation or at the time the proposed expropriation became public knowledge, whichever is the earlier, shall be payable from the date of expropriation with interest at a normal commercial rate, shall be paid without delay and shall be effectively realizable and freely transferable.

2. The investor affected shall have a right, under the law of the Contracting Pany making the expropriation, to prompt review, by a judicial or other independent authority of that Pany, of its case and of the valuation of its investment or returns in accordance with the principles set out in this Article.’

In the present case, the arbitral tribunal held that the nationalization decree clearly stated its object, which was a legitimate aim of economic policy (Award, § 385), thus no illegality of this act in the Venezuelan legal order had been demonstrated (§ 393) as well as no discrimination (§ 397). Nevertheless, the nationalization decree set a maximum amount of compensation not provided in the BIT, nor by Venezuelan law, and the offer made to Rusoro, which did not even reach that maximum because of the State’s rebate on the unfounded ground of Rusoro’s unlawful acquisition of its mining rights, did not comply with the requirement of reasonable compensation, it being further observed that the amount offered (which had not been communicated to the court because it was covered by an undertaking of confidentiality) had not even been recorded (paras. 406-409).

To determine the ‘genuine value’ of the expropriated investment within the meaning of Article VII of the BIT, the arbitral tribunal used a weighted combination of three valuations:

the Maximum Market Valuation in an amount of USD 700.6 million;
the Book Valuation of USD 908 million and
the Adjusted Investment Valuation of USD 1,128.7 million

It concluded that the genuine value of the investment as on 16 September 2011 was $966.5 million, for which it ordered the Republic of Venezuela to pay (Award, § 790).

The wording of the sentence explains the different values in the following terms:

In mid-2008, before Venezuela adopted the 2009 and 2010 Measures and its political risk escalated, the stock market valued the equity of Rusoro at USD 752.4 million, which after exclusion of debt net resulted in an enterprise value of 601 approximately USD 700.6 million [the “Maximum Market Valuation”]. (§ 768)
The net book value of Rusoro’s assets, as of 30 September 2011 (the last day of the quarter in which the expropriation took place), amounted to USD 908 million [the “Book Valuation”]
When Rusoro initially invested some USD 774.3 million in its Venezuelan enterprise, it did so at a time of low (but rising) gold prices and gold company valuations. The timing of Rusoro’s investment was prescient: gold prices and consequently also gold company valuations rose while Claimant held its investment. Venezuela chose to expropriate at the time when gold prices and gold company values had reached their peak. Ceteris paribus, i.e. assuming no change whatsoever in micro- or macro-economic conditions, the mere evolution of the gold price, which significantly increased during the time between investment and expropriation, would have led the value of the investment to increase to more than USD 1,128.7 million [the “Adjusted Investment Valuation”]

It appears, therefore, that 25% of the valuation obtained by the arbitral tribunal is based on the value of Rusoro’s shares in 2008, without taking into account their subsequent variation (maximum market valuation), and that for 50% of this final result, the arbitrators reasoned on the basis of the initial amount of the investment made from 2006 to 2008, assuming that its subsequent evolution would be as follows was affected by only one parameter, the gold price (‘Adjusted Investment Valuation’).

This reasoning is conducted ‘all other things being equal’ when, precisely, they were not, and when, as the award recognises, the value of Rusoro’s Venezuelan subsidiaries had been significantly reduced by the changes in the regulatory environment that occurred in 2009. By neutralising the effects of the gold export restrictions decided in April 2009, the arbitral tribunal includes in fact, as the claimant correctly points out, the compensation for the loss resulting from the expropriation in 2011 the compensation for the loss resulting from the 2009 measures, although it is not within its jurisdiction ratione temporis.

As a result, the claim that the arbitral tribunal lacks jurisdiction is well-founded. It affects the provisions of the award which order the Republic of Venezuela to pay to Rusoro the sum of USD 966,500,000 as compensation for the expropriation of its investment, together with interest thereon. The second part of the first ground, as well as the ground articulated by the claimant on the ground of violation of the mission, relate exclusively to the same subject-matter.

The award should therefore be annulled, but only in so far as it orders the Republic of Venezuela to pay Rusoro the sum of USD 966,500,000 for the expropriation of its investment without compensation, together with interest on that sum.

On Article 700 of the Code of Civil Procedure:

Rusoro cannot benefit from the provisions of Article 700 of the Code of Civil Procedure and will be ordered on this basis to pay the Republic of Venezuela the sum of 100,000 euros.

FOR THESE REASONS:

Reverses the award but only in so far as it orders the Bolivarian Republic of Venezuela to pay the company Rusoro A Ltd the sum of USD 966,500,000 for the expropriation without compensation of its investment, together with interest on that sum.

Upholds the enforcement order (in French: Ordonnance d’exequatur) issued by the Pre-trial judge on 16 March 2017 for those parts of the award not affected by the annulment.

Dismisses all other applications.

Orders Rusoro A Ltd. to pay the costs and to pay the Bolivarian Republic of Venezuela the sum of EUR 100,000 pursuant to Article 700 of the Code of Civil Procedure.