Data

Date:
30-10-2017
Country:
International Centre for Settlement of Investment Disputes (ICSID)
Number:
ARB/11/19
Court:
International Centre for Settlement of Investment Disputes (ICSID)
Parties:
Koch Minerals Sárl and Koch Nitrogen International Sárl v. Venezuela

Keywords

STATE CONTRACTS – LONG-TERM CONTRACTS - SUPPLY CONTRACT - BETWEEN TWO SWISS COMPANIES AND THE VENEZUELAN GOVERNMENT - ALLEGED VIOLATION BY THE LATTER OF BILATERAL INVESTMENT TREATY - REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET APPLICABLE LAW (INTERNATIONAL LAW)

DETERMINATION OF EXTENT OF HARM - DISSENTING OPINION OF ONE OF THE ARBITRATORS - COMPENSATION ONLY FOR FORESEEABLE HARM - REFERENCE TO ART. 7.4.4 UNIDROIT PRINCIPLES AND ART. 74 CISG

DETERMINATION OF EXTENT OF HARM - DISSENTING OPINION OF ONE OF THE ARBITRATORS - LOSS OF PROFITS CALCULATED AS THE DIFFERENCE BETWEEN THE CONTRACT PRICE AND THE PRICE PAID BY THE BUYER FOR REPLACEMENT GOODS OR THE DIFFERENCE BETWEEN THE CONTRACT PRICE AND THE MARKET PRICE AT THE TIME DELIVERIES SHOULD HAVE BEEN MADE IF REPLACEMENT GOODS ARE NOT PURCHASED - REFERENCE TO ARTS. 7.4.5-7.4.6 UNIDROIT PRINCIPLES AND ART. 75-76 CISG

Abstract

In 1997 Koch Minerals Sárl, a Swiss company, and Petroquimica de Venezuela S.A., a Venezuelan state-owned company, entered into a series of agreements for the development, construction and operation of two ammonia and two urea plants in Venezuela. Under an off-take agreement, the parties agreed to purchase a guaranteed quantity of ammonia and urea produced by FertiNitro, another Venezuelan state-owned company, at a discounted set price for their own consumption or resale in local or export markets. Koch Minerals Sárl later assigned its rights and obligations under the off-take agreement to Koch Nitrogen International Sárl, a company of the same group.

From 2005 onward, Venezuela imposed on FertiNitro a series of new taxes and tax increases. Moreover, in 2007 Venezuelan President Hugo Chávez issued a decree whereby manufacturers, suppliers and exporters of nitrogenous fertilizers were required to supply urea and ammonia on a priority basis to the national market, at a maximum price set by regulation. On October 10, 2010, President Chávez announced the expropriation of FertiNitro on TV and an expropriation decree was published the next day. One day later, the Venezuelan Minister of Energy and Petroleum visited the plants and stated that Venezuela was already in control of the plants.

The two Swiss companies initiated arbitration against Venezuela in June 2011 on the basis of the Venezuela–Switzerland bilateral investment treaty (BIT) and the ICSID Convention. They claimed that Venezuela violated BIT since the expropriation decree and the Minister’s declarations constituted an unlawful indirect expropriation.

In turn, Venezuela alleged that the mandatory acquisition of FertiNitro’s assets was ordered pursuant to Venezuelan law and in compliance with BIT. Moreover, the unilateral termination by FertiNitro of the off-take agreement was a commercial decision, which could not be qualified as an expropriation under the BIT.

In the tribunal’s view, Claimants failed to prove that the measures were not taken in the public interest, and that they were discriminatory. The Tribunal disagreed with the Claimants that Venezuela was required to give them advance notice of the expropriation decree and found that the expropriation was carried out in accordance with due process of law.

However, since Claimants did not receive any compensation from Venezuela after the expropriation decree, the Tribunal ordered Venezuela to pay damages.

In a separate opinion, the state-appointed Arbitrator dissented on the Tribunal’s finding that Venezuela expropriated foreign investor’s interest in the off-take agreement. In his view, the expropriation decree could only produce effects in the Venezuelan legal system and could not deprive the foreign investor of its intangible property rights under New York law, the governing law of the off-take agreement. He stated that investor’s rights under the off-take agreement remained valid and binding even after the expropriation decree and that the foreign investor could enforce them by invoking the arbitration clause contained in the agreement.

The Arbitrator contested also the amount of damages awarded to Claimants affirming that "international law requires that the recoverable loss could have been anticipated or foreseen by the parties at the time of the conclusion of the contract" and expressly referring to Art. 7.4.4 Unidroit Principles and Art. 74 CISG.

Moreover, in his view, the loss of profits must be calculated according to Art. 7.4.5 UNIDROIT Principles and Art. 75 CISG (difference between the contract price and the price paid by the buyer for replacement goods) or according to Art. 7.4.6 UNIDROIT Principles and Art. 76 CISG (difference between the contract price and the market price at the time deliveries should have been made if replacement goods are not purchased), also considering parties' duty to mitigate loss (Art. 7.4.8 UNIDROIT Principles and Art. 77 CISG). In the case at hand, the investor failed to prove the prices that it actually paid for replacement quantities of urea and ammonia following the purported expropriation of
the off-take agreement and investor’s valuation expert has disregarded this evidence for the purposes of his calculations.

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