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SCOTUS rejects expropriation claim: The alternative of using BITs for investment protection

Author(s): Eric Morgan, Riyaz Dattu, Waleed Malik

May 8, 2017

Our last international trade brief dealt with the impact of softwood lumber tariffs on Canadian companies, and the Trump administration’s investigation of the effect of steel imports and similar investigation on imported aluminium on national security grounds, using a rarely invoked process. In this brief, in several articles, we discuss government procurement and dispute settlement under the Canadian Free Trade Agreement (CFTA), the alternative of using BITs for investment protection so as to avoid sovereign immunity defences such as was the basis for the rejection of an expropriation claim by a unanimous United States Supreme Court, and Boeing launching a trade remedies petition against Bombardier

The plaintiffs (a U.S. company and its Venezuelan subsidiary) in the U.S. Supreme Court case, Bolivarian Republic of Venezuela v Helmerich & Payne Int’l Drilling Co [PDF] (Helmerich), brought a claim seeking compensation in U.S. courts alleging that the Venezuelan government had unlawfully expropriated the subsidiary’s oil rigs. The defendant, the Republic of Venezuela, claimed immunity under the Foreign Sovereign Immunities Act of 1976 (FSIA), which regulates proceedings in U.S. courts brought against sovereign states. The plaintiffs relied on the expropriation exception in the FSIA, which allows claims to be made in any case “in which rights in property taken in violation of international law are in issue.”

While the Court of Appeal for the District of Columbia had, on an interlocutory motion brought by Venezuela to strike the claim on the basis that the expropriation exception did not apply, held in favour of the plaintiffs and permitted the suit to continue, the decision was unanimously reversed in the U.S. Supreme Court.

The Supreme Court held that a party relying on the expropriation exception must advance a valid claim that property was taken in violation of international law, to establish jurisdiction against a foreign sovereign. It is not enough, the Court concluded, for a plaintiff to simply advance a “non-frivolous” argument to that effect. The Court also added that, as a matter of policy and consistent with the objective of the FSIA to exempt foreign sovereigns from suits, this question should be resolved as close to the outset and well in advance of the full merits of the case are considered.

As a result of Helmerich, plaintiffs may find it more difficult to get even past the initial stages of a lawsuit in U.S. courts, when seeking redress for expropriations by foreign governments. This suggests that investment planning and risk mitigation that involves access to international arbitration where claims of sovereign immunity is governed by the arbitration agreement which usually provide for a waiver of such a defence, will become even more so paramount. Investment treaties and their investor-state dispute provisions can, in some cases and with appropriate corporate structuring, provide protection and an opportunity to seek remedies not otherwise available in judicial proceedings in domestic courts whether in the United States or other jurisdictions. The applicable treaty need not be directly between the country of the company’s main place of business and the overseas territory. For example, several oil companies with investments in Venezuela have in the past availed themselves of the dispute resolution mechanisms in the Netherlands-Venezuela bilateral investment treaty, as there did not exist a similar treaty between the U.S. and Venezuela. When structuring their operations and investments (including acquisitions or organic growth), companies should be closely reviewing the protections afforded by these agreements, which in many cases can be combined with international tax planning.

For more information on international investment treaties and state-investor arbitration, please consult Osler’s guide on International Trade and Investment Law [PDF], and the Osler Update on Canada’s ratification of the ICSID Convention.