Daniel Powell and Leigh Crestohl explore what the Air Canada victory against Venezuela means for future international arbitration proceedings

November 10 2021

Air Canada lands victory against Venezuela: What this means for future international arbitration proceedings

International investors increasingly rely on bilateral investment treaties (BITs) in order to pursue sovereign states for losses they incur. In the latest example, an International Centre for Settlement of Investment Disputes (ICSID) panel recently awarded Air Canada, the publicly traded national carrier, repatriation of profits which had been held up by Venezuela, a country beset by numerous problems: hyperinflation, shortages of food and medicine and, overriding everything else, punitive US sanctions. In the past few years, 5.6 million Venezuelans (20 per cent of the country’s population) have left. In October, Venezuela launched a new currency featuring six fewer zeros: the one-million bolivar note, worth just $0.25, became one new Venezuelan bolivar.

The exchange rate of the bolivar against the US dollar was central to Air Canada’s investment treaty claim against Venezuela: to repatriate outstanding profits by way of exchange between the two currencies. During proceedings, the political turmoil in Venezuela, including the impact of sanctions, was raised. For international arbitration practitioners in future cases, the Tribunal’s findings provide valuable insight into how potential obstacles can be navigated, as well as the application of the fair and equitable treatment (FET) provisions in investment treaties: a broadly defined protection to which previous Tribunals have taken varied approaches.

Repatriated profits

Canada and Venezuela entered into a BIT in 1996. Previously, Air Canada had repatriated profits on earnings in Venezuela by converting bolivars into US dollars through a Venezuelan State commission which managed currency exchange. In 2014, following a very significant devaluation, the commission altered the bolivar’s exchange rates. Soon afterwards, Air Canada suspended its flights to Venezuela. The airline later invoked arbitration pursuant to the BIT under the ICSID Additional Facility Arbitration Rules, alleging a breach of the protection of the free transfer of funds (Art. VIII, BIT), breach of the protection of fair and equitable treatment (Art. II, BIT), and expropriation (Art. VII, BIT).

The Tribunal awarded Air Canada $20,790,574 for repatriation of revenues, after accounting for set off against sums that were owed to Venezuela as part of the currency exchange, plus costs and interest. But the Tribunal found that there was no expropriation, so no additional compensation was awarded.

Instead, damages were awarded, based on the Tribunal’s finding that Venezuela had breached the protection of the free transfer of funds through its failure to process Air Canada’s numerous currency exchange requests. The airline had successfully argued that the right to freely transfer funds is central to the international regime for the promotion and protection of investments. As such, it was not strictly necessary for the Tribunal to decide Air Canada’s FET claim, but the Tribunal went on to do so.  It is instructive to consider the Tribunal’s approach to the FET provision, as well as its resolution of procedural issues that arose from political factors and the impact of international sanctions, issues which are occurring more frequently in international arbitration.

Fair and Equitable Treatment

The parties were diametrically opposed in their arguments as to how the scope of the FET protection under article II of the BIT should be interpreted. The Tribunal rejected Venezuela’s argument that the threshold for violation of the FET standard was high, requiring a more restrictive interpretation of BITs article II, and instead adopted a purposive approach to interpretation:

“Rather, international law requires this Tribunal to interpret the concept of fair and equitable treatment in a manner consistent with the context of investor-State arbitration and the purpose of the RIT itself: namely investment protection. In this regard, the more liberal approach, which focuses on the broadly consistent elements of "fair and equitable", is appropriate”.

In recognising that the BITs purpose is to provide investment protection, the Tribunal favoured an interpretation that would permit Air Canada, as an investor, to rely on it for relief. The Tribunal further found that the Venezuela’s actions had been arbitrary, had lacked transparency and, by failing to process the airline’s requests for repatriation, had not performed to its legitimate expectations. This is yet another example of a Tribunal finding in favour of an investor on the basis that a sovereign state had failed to comply with established processes.

Venezuela’s Constitutional Crisis

During proceedings, the Tribunal was asked to consider an unusual issue arising out of Venezuela’s current political difficulties. The legitimacy of the incumbent President Maduro has been disputed since elections were held in 2019. A number of countries, including the USA, Canada, Brazil, the UK and the European Union, recognise opposition politician Juan Guaidó as president, or “interim” president. A representative of Mr Guaidó, who claimed to be Venezuela’s attorney general with exclusive responsibility for legal representation of the Venezuelan Republic, argued that the Tribunal should no longer grant standing to Venezuela’s legal counsel, appointed by the Maduro Government.

In rejecting this argument, the Tribunal allowed Venezuela’s current legal counsel to continue. This approach is consistent with decisions reached by other international tribunals where the same issue has arisen.

The complex nature of Venezuela’s political situation does, nevertheless, have potential implications for the conduct of future international arbitration proceedings. Because Venezuela is subject to a series of stringent economic sanctions by the US, Venezuela’s quantum expert was unable to make himself available for examination at the hearing and substantiate the contents of his report. Even so, the Tribunal dismissed Air Canada’s attempt to exclude the report and considered its contents, albeit with less weight. It is easy to imagine circumstances potentially arising where another may consider it inappropriate to admit disputed forensic expertise which cannot be tested at a hearing.

Keeping politics out of proceedings

In considering BITs, especially when political factors may disrupt arbitration proceedings, Tribunals routinely have to balance the legislative power of states with investors’ rights. In this case, the Tribunal’s approach to the FET clause was purposive, recognising that the BIT was designed to protect investments and to ensure that states comply with established processes on which investors rely.

Despite having to navigate Venezuela’s fraught political situation, the Tribunal reached a decision in accordance with international law principles. In doing so, the arbitrators focused their analysis primarily on BIT provisions. Notably, the arbitrators did not permit the proceeding to become destabilised by removing Venezuela’s legal counsel and an “equality of arms” was preserved by allowing the country to rely on its quantum expert.

Accordingly, the arbitrators did not allow the proceedings to become undermined either by the sanctions issue, or by other political considerations. This demonstrates the potential benefit for investors of relying on existing BITs to seek relief from international tribunals. It also shows that arbitrators can act to attenuate the disruptive impact of political circumstances, thereby enabling them to focus primarily on treaty provisions and doing justice between the parties.  In this case, the final outcome was largely unimpacted by sanctions and the integrity of the arbitration process was preserved. It remains to be seen whether other Tribunals will apply a similar approach in future arbitrations where such challenges arise.

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