The Dutch Sandwich

Our African blog, Socialist Banner, has already drawn attention to ISDS, or Investor-State Dispute Settlement and what is known as the “Dutch Sandwich” in relation to the oil company suing Uganda. And this blog has also highlighted it in posts concerning the proposed TTIP and TTP trade treaties. ISDS is a mechanism by which investors can sue a state by means of arbitration, which is a kind of privatized court. Many lawyers stress the advantage that plaintiffs don’t have to go before a local judge whom they feel they cannot trust. You can choose a judge for yourself, the opponent does the same, and the two of those choose a chairman. They are called arbitrators. The case is heard at a renowned institute, like the World Bank. How could it not be more fair?

Bernard Mommer, Venezuela’s former vice-minister for oil in the time of Hugo Chavez has to laugh a bit, “The whole arbitration system is biased in favour of investors.” After Argentina, no country has been sued as much as Venezuela: until 2014 at least 37 cases have been filed against this Latin American state. However, the fine they can expect now exceeds all of the others. ConocoPhillips, a Texas-based oil company, claims 31 billion dollars and seems to be on the winning side. According to critics, that case represents everything that’s wrong with the ISDS system. 

The dispute about oil began in 2006 when Chavez decided to nationalise the oil sector. Mommer was responsible for the negotiations with international oil firms about compensation. Most of the 41 companies in the country agreed with the buyout. Two didn’t. Those were the Texas-based companies ConocoPhillips and Mobil (now ExxonMobil).

“When we started with the expropriation, they went for arbitration,” says Mommer. “I didn’t even know that this was possible. For arbitration two parties need to consent, don’t they? How could they sue a state?” But Mommer discovered that Venezuela signed Bilateral Investment Treaties (BITs) in 1991, among others with the Netherlands. Those treaties give all investors from the given country an offer to arbitration if they feel treated unfairly by the host state.

These oil firms were offered a brilliant compensation,” says Juan Carlos Boue, a Venezuelan researcher at the Oxford Institute of Energy. “But when the oil price rose, they decided to leave the country with as much money as possible.” For ExxonMobil, a giant with a revenue of 400 billion dollars, twice as big as the GDP of Venezuela, there is more at stake. “They have unlimited resources. They want to let the world know what happens if you challenge them.” And the arbitrators? “Some of them are on the boards of multinational companies. They just don’t want the countries to get away with it. They have an extreme dislike towards countries like Venezuela.”

ConocoPhillips and Mobil quickly moved their Venezuelan holdings to the Netherlands in 2006. That gave them the opportunity to claim, as Dutch investors, that the unexpected policy change violated their BIT rights. Together, they demanded 42 billion dollars.

“This is called the Dutch sandwich”, says George Kahale, a top lawyer from New York, “You put a Dutch holding in the middle of your company chain and you can call yourself Dutch.”

Companies are not allowed to do this if the dispute already started. ExxonMobil and Conoco said that their move was made independently of the dispute. However, a message in the Wikileaks cables where a representative of Conoco admitted that they “already” moved to the Netherlands to “safeguard their arbitration rights.”

ExxonMobil has had no luck. The three arbitrators have judged that the expropriation was lawful. ExxonMobil gets compensation, but not much more than what they were offered earlier, around one billion dollars. But the Conoco case evolved differently. Two of the three arbitrators found the expropriation unlawful. This means that Venezuela has to compensate the firm, not on the basis of the low oil price in 2006, but on the basis of the much higher price at the time of the claim. This will amount to tens of billions of dollars. This is insane, says Kahale. “The fact is that four out of six arbitrators found that the expropriation was perfectly lawful.”

Among the Wikileaks in a cable from 2008, the Conoco representative tells the American ambassador that the negotiations are going well and that Venezuela is being reasonable. This is in contradiction to what Conoco was claiming in public. Yet the arbitrators – at least, two of the three – now say that they can’t change their conclusion anymore and now have to proceed to the next phase, about the damages.

“In other words”, says Mommer, “the investor can lie. We can’t sue them anyway. They alone can sue us. This shows why Western countries have invented this system. It has been set up to break down the nation-state.”

SDS is structurally flawed, says Kahale. “Who are the judges? They are investment lawyers. Their commercial background shines through in their decisions. Every judge of course always brings his own views to his job. But in arbitration these people are deciding no longer private commercial disputes, but megacases of international significance, with sometimes vital importance for individual states, involving billions of dollars, with very little training in international law.”

Too many, conflicts of interest arise. “You will never see a supreme court judge acting as a counsel in another case. But many arbitrators also act as a counsel. It’s very hard to preside over the legality of something one day, and advocate the same issue the other day. It is natural that I’m holding back in one or the other, depending on which case is more important to me. There are very few checks and balances. Too many mistakes are made.”

Venezuela is fed up with ISDS claims. Soon after the claims were filed, they pulled the plug, not only from the ICSID convention (which acknowledges the World Bank as arbitration court) but also from a number of BITs. The Dutch BIT was the first to be terminated a few years ago. Unfortunately for Venezuela, this treaty contains a clause giving investors the right to arbitration until 2023.