Marc J. Goldstein Arbitrator & Mediator NYC
September 30, 2013

US Law of Foreign Investment Retains Vitality Where BIT Is Absent

The denunciation in early 2012 of the ICSID Convention by the Venezuelan government of the late Hugo Chavez left some US energy sector investors unaffected, as Venezuela had never seen fit to make a bilateral investment treaty with the United States that would have enable US investors to access ICSID arbitration via a US BIT. And in the absence of an investment treaty to channel disputes into arbitral tribunals, it was predictable that the nationalist economic policies of the Chavez government would attract some afflicted investors to try their luck bringing suits against Venezuela in US federal courts. For those of us who enjoy, as players and spectators, international law as it is applied in US courts, perhaps we can look forward to a new golden era of jurisprudential development in the courts. A case in point: the recent decision of a US District Court in Washington in Helmerich & Payne Int’l Drilling Co. v. Bolivarian Republic of Venezuela, 2013 WL 5290126 (D.D.C. Sept. 20, 2013).

From this decision we gain some helpful development of a handful of international law concepts, most notably the “direct effect in the United States” needed to invoke jurisdiction under the commercial activity exception in the Foreign Sovereign Immunities Act. Here, the plaintiff oilfield services company had seen fit to provide in its contracts with Venezuela’s state-owned petroleum companies that a certain percentage of the dollar value of its invoices would be payable in dollars to its account at the Bank of Oklahoma in Tulsa — unless¬† Venezuela elected not to so pay but instead to pay in Bolivars in Venezuela. ¬†The District Court invoked the principle (from the Supreme Court’s 1992 Argentina v. Weltover decision) that the qualifying US effects of a foreign sovereign’s commercial activity outside the US must be proximately and logically connected but not necessarily important or substantial. But this principle was not necessarily sufficient, in the Court’s view, to resolve the issue in favor of “direct effects” based on the cessation of a stream of US dollar payments to a US bank account. To resolve the case on that basis would have required the Court to hold that the fact that Venezuela had indeed made dollar payments into the US account, even though having the option not to do so, meant there was a “direct effect” in the US when Venezuela terminated the contract. The Court instead opted for a less controversial avenue to finding “direct effect” in the US of commercial activity abroad. The contracts required the drilling company’s Venezuelan subsidiary to purchase an array of required equipment from particular US vendors in various US locations. These “third party effects,” the Court held were “direct” irrespective of the substantiality of the required purchases so long as these requirements were non-trivial.

On this basis the Helmerich & Payne plaintiffs can hope at least to prevail on their breach of contract claims, having established that Venezuela may be sued under the commercial activity exception to sovereign immunity. How they might fare on their expropriation claims is less certain. This decision also holds that the plaintiff Venezuelan subsidiary is deemed a Venezuelan national based on its place of incorporation and therefore may not invoke international law as the basis of an expropriation claim — with the Court finding the suggestion of a contrary position in the Second Circuit’s well-known Sabbatino case (307 F.2d 845 (1962)) to be an isolated instance that has not influenced customary international law toward its view that the nationality of the shareholders should be attributed to the foreign subsidiary where the foreign Government takes action motivated by the shareholders’ nationality. The Court also reserved judgment on whether the “Act of State” doctrine might furnish a merits defense to the expropriation claim.

The proliferation of BITs and the strategic deployment of foreign investment via countries who have BITs in place with the host state have diminished but not entirely pre-empted the role of US courts in resolving investment disputes. When a US Court has the opportunity to study with care international law principles that apply uniquely to the resolution of such cases in the courts, as is evident in the case here discussed, the analysis is worthy of our close attention.

Leave a Reply