E-Newsletter

Does a second passport entitle a private investor to BIT protection?

Introduction

A tribunal established under United Nations Commission on International Trade Law (“UNCITRAL”) rules has allowed dual nationals of Venezuela to sue their own State of nationality in international investment arbitration. This decision is significant in various ways, including dual-nationality and standing, and the relevant date to assess the nationality of the investors.

In García Armas and García Gruber v. Venezuela (PCA Case No. 2013-3), a tribunal composed of Prof. Eduardo Grebler (Brazilian), Prof. Guido Santiago Tawil (Argentinian) and Rodrigo Oreamuno (Costa Rican) rendered a Decision on Jurisdiction on 15 December 2014 upholding jurisdiction over an investment dispute brought against Venezuela by two Spanish nationals who also held Venezuelan nationality. Arbitrator Oreamuno appended a dissenting opinion to the decision to clarify a point on the law, which, nevertheless, did not affect the outcome of the ruling.

The decision is unusual in that it allowed investors to sue one of their States of nationality under an investment agreement. The decision appears to reveal another means by which investors, under certain circumstances, could gain protection under international investment agreements: the acquisition of a second passport. Furthermore, the decision highlights a side-effect of Venezuela’s denunciation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”). While ICSID tribunals are not allowed to hear claims brought against States by nationals of that State, the decision in García Armas and García Gruber v. Venezuela may indicate that other arbitral tribunals – to which investors may increasingly turn following Venezuela’s withdrawal from the ICSID system – may accept jurisdiction in cases involving dual nationals, potentially increasing Venezuela’s exposure to this type of claim.

Also, as explained below, the Tribunal’s adoption of a more formal approach to nationality is in line with previous decisions by investment tribunals but departs from general public international law (which continues to apply the “real or effective nationality” test).

Facts of the case

The Claimants in the case, Mr Serafin García Armas and his daughter, Ms Karina García Gruber, are private investors who claim that Venezuela breached the bilateral investment treaty between Spain and Venezuela (the “BIT”). They are seeking compensation of the damages that they allegedly suffered as a result of, among other measures, the alleged uncompensated expropriation of their food distribution business and currency exchange restrictions that they claim hindered their ability to pay foreign suppliers. The Claimants further state that the companies’ debts have increased since the take-over of operations by the Venezuelan Government in 2010. As a consequence, Mr García Armas is currently facing various lawsuits in Venezuela and in the United States in his capacity as personal guarantor of company debts that have not been honoured by the Venezuela’s administration of the company.

The decision of the Tribunal

Objection to the Tribunal’s jurisdiction on grounds of dual nationality

Venezuela objected to the jurisdiction of the Tribunal claiming that dual nationals do not qualify as investors under the BIT. Venezuela maintained that it had not consented to be sued by its own nationals in an international forum. In support of its objection, it relied on rules of international law concerning the diplomatic protection of dual nationals where the nationality of the respondent State is the predominant or effective nationality of the claimant.

The Claimants argued that neither the BIT nor other applicable rules of international law exclude dual nationals from enjoying the protection of the BIT. Furthermore, the Claimants contested that the exclusion of dual nationals under Article 25(2)(a) of the ICSID Convention could be extended to apply to other forms of arbitration available under the BIT.

The Tribunal held that the BIT was lex specialis between the parties and interpreted it in accordance with the Vienna Convention on the Law of Treaties (the “VCLT”). In the Tribunal’s view, the BIT did not impose any limitations on dual nationals. Both Venezuela and Spain had signed investment treaties with other States that had expressly excluded dual nationals from their scope, which, according to the Tribunal, suggested that when intending to deny the benefits of the BIT to dual nationals the parties had a habit of doing so in express terms. The Tribunal thus concluded that, for the purposes of the BIT, possession of Spanish nationality, in addition to Venezuelan nationality, was sufficient for the investor to qualify as a foreign investor in a claim against Venezuela and, consequently, for the Tribunal to enjoy jurisdiction over the claim. The Tribunal rejected as irrelevant Venezuela’s contention that the Claimants’ Spanish citizenship was “purely formal”.

Relevant dates to assess the nationality of investors

The Decision on Jurisdiction also addressed the question of when the nationality of investors should be taken into consideration for the purposes of BIT protection. Venezuela contended that the Claimants did not possess Spanish nationality at the time when the investments were first made in 2001 and that as a consequence their investments did not qualify for protection under the BIT. Venezuela contended – and the Claimants disputed – that Mr García Armas had not possessed Spanish nationality from 1978 to 2004 and that Ms García Gruber only acquired Spanish nationality in 2003.

The majority of the Tribunal sided with the Claimants to find that the relevant question to consider was whether the investors held Spanish nationality (a) when the expropriatory measures at issue were put into place and (b) when the Claimants submitted their request for arbitration. Both Claimants were Spanish nationals at these two critical points in time. Hence, the Tribunal asserted jurisdiction over the claim.
Arbitrator Oreamuno appended a dissenting opinion to the Decision on Jurisdiction, stating that the nationality of the investors should also be considered at the time when the investment is made. However, he noted that at least parts of the investment had been made after 2004, when both investors unquestionably had Spanish nationality. In his view, that fact was enough for the purposes of protection under the BIT. Therefore, he agreed with the majority that the Tribunal had jurisdiction to hear the investors’ claims.

Comments

The Decision on Jurisdiction in García Armas and García Gruber v. Venezuela suggests that in the absence of a provision similar to Article 25(2)(a) of the ICSID Convention, private investors may be allowed to sue their own States as long as they also hold a second nationality at the time when they bring their claims. This means that in certain circumstances investors could seek to acquire a second nationality and, consequently, become entitled to BIT protection against subsequent measures by the host State.

Notably, the Tribunal refused to subject the nationality of the investor to the test of effective or predominant nationality under general rules of diplomatic protection. This finding of the Tribunal should be put in context both of general rules of public international law and of the rules applicable in ICSID disputes.

Under settled public international law, dual nationals cannot receive diplomatic protection by one country of nationality against the other country of nationality, unless the nationality of the former State is predominant. The test to determine the predominant nationality was set out by the International Court of Justice in the Nottebohm case, where the Court noted that international arbitrators “in cases of dual nationality […] have given their preference to the real and effective nationality” (Second Phase, p. 22). The Court recognised the right of States to freely grant nationality to individuals, but that States were entitled to have such a grant of nationality recognised by other States only if there was an effective or genuine link between the State of nationality and the individual. In a context of international investments, the effective nationality approach has been embraced by the Iran-US Claims Tribunal, which has exercised jurisdiction over claims against Iran by dual nationals when the “dominant and effective nationality” at the relevant time was American.

If the test of effective nationality had been applied in the García Armas and García Gruber v. Venezuela case, the jurisdictional decision might have led to a different outcome. The Claimants were arguably more connected to Venezuela than to Spain. Mr García Armas moved to Venezuela when he was only 17 years old, while Ms García Gruber was born and raised in Venezuela. Nevertheless, as mentioned above, the Tribunal understood that the formal grant of Spanish nationality was enough to entitle the Claimants to sue Venezuela.

While departing from general public international law, the Tribunal’s adoption of a more formal approach to nationality is in line with previous decisions by investment tribunals. For instance, in Saba Fakes v. Turkey, an ICSID tribunal held that “[t]he rules of customary international law applicable in the context of diplomatic protection do not apply as such to investor-State arbitration” (para. 69). In that case, the adoption of the effective nationality principle by the Iran-US Claims Tribunal was explicitly distinguished from the solution adopted by the drafters of the ICSID Convention and the approach adopted by ICSID tribunals. The principle of effective nationality was also rejected in Micula v. Romania (ICSID Case No. ARB/05/20).

However, as alluded to above, in investment disputes under the ICSID system, claims brought by dual nationals against either State of nationality are precluded by Article 25(2) of the ICSID Convention. Arguably, for that reason, the outcome in García Armas and García Gruber v. Venezuela would not have been possible had the case been brought under the ICSID Convention.

ICSID tribunals have expressed some concern about possible abuses of the system by dual nationals. This extends to the possibility that dual nationals may use a corporate structure to avail themselves of the possibility to sue one of their States of nationality. For example, the Burimi v. Albania tribunal held that it would be “anomalous that the principle against use of dual nationality in 25(2)(a) would not transfer to the potential use of dual nationality in 25(2)(b),” which defines the nationality of juridical persons (e.g., corporations) (para. 121). If it did not, “any dual national who is a national of the Contracting State to a dispute could circumvent the bar on claims in Article 25(2)(a) by establishing a company in that state and asserting foreign control of that company by virtue of his second (foreign) nationality.” (id.)

Along similar lines, the tribunal in National Gas v. Egypt (ICSID Case No. ARB/11/7) declined jurisdiction on the basis of the bilateral investment treaty between Egypt and the United Arab Emirates (“UAE”) because of the investor’s dual nationality. In that case, the majority owner of the Egyptian claimant company was a corporate entity of the UAE, which was fully owned by an individual that was a dual national of Egypt and Canada. The claimant relied on the fact that the Egypt-UAE BIT provided that the Egyptian company, because of the UAE ownership, was to be regarded as a foreign investor. However, applying the second segment of Article 25(2)(b) of the ICSID Convention, the tribunal contended that in order to confirm its jurisdiction over the claim, it had to determine the existence of “foreign control” by examining the true controllers, in this case the Egyptian-Canadian individual. At the time, Canada was not a party to the ICSID Convention and in any case not a party to the treaty under which the claim was brought; nor was the individual in question formally a party to the proceedings. His Canadian nationality could thus not be a factor under Article 25(2)(b), whereas his Egyptian nationality carried with it the result that the investment ultimately was deemed to be Egyptian. Consequently, the tribunal declined jurisdiction.

As a result of the Tribunal opening up to claims by dual nationals under non-ICSID rules, the Decision on Jurisdiction and Merits in García Armas and García Gruber v. Venezuela seems to highlight a possible side-effect for Venezuela resulting from its denunciation of the ICSID Convention. As a result of Venezuela’s withdrawal from the ICSID dispute settlement mechanism – which, for various reasons, is often the preferred forum for foreign investors to bring their claims – Venezuela may find itself facing arbitration requests before other tribunals by Venezuelans with dual nationality – whereas before those individuals may have resorted to ICISD arbitration without stopping to consider the jurisdictional bar under Article 25 of the ICSID Convention. As mentioned above, Article 25(2)(a) of the ICSID Convention precludes ICSID tribunals from hearing claims brought against States by nationals of that State. In Pey Casado v. Chile (ICSID Case No. ARB/98/2), for instance, Mr Victor Pey Casado, a dual Chilean-Spanish national, renounced his Chilean nationality before bringing a claim against Chile. Similarly, in Nations Energy v. Panama (ICSID Case No. ARB/06/19), the tribunal concluded that Mr Jaime Jurado, an alleged dual national of Panama and United States, had lost his Panamanian nationality in 1954 and had never reacquired it, leading the tribunal to conclude that it had jurisdiction only to hear claims concerning Mr Jurado’s investments in Panama after he was no longer a Panamanian national.

Non-ICSID tribunals, however, may follow the García Armas and García Gruber example and allow dual nationals to proceed to the merits with claims against Venezuela, increasing the range of potential investment disputes against the Latin-American State. Even if the García Armas Tribunal is rare in its decision to allow dual-nationals suing one of their States of nationality, the possible precedential value of its Decision on Jurisdiction should not be quickly dismissed.