217 Million Reasons for Brazilian Companies to Structure their Foreign Investments
Written by Quinn Smith – posted on Blog of Smintlaw
Original Posted: Wednesday, 02 May 2012 14:14
Yesterday, Ecuador announced a 217 million USD settlement with Petrobras for payment of assets nationalized in 2010. This is the kind of news that all Brazilian investors should remember when investing abroad–there’s value to structuring the investment properly.
As many readers know, Brazil has not ratified any bilateral investment treaties, and it is not a member of the Washington Convention, which established the International Centre for Settlement of Investment Disputes and handles many claims between investors and states. The only way to bring an investment arbitration claim against a state is through valid consent by both the investor and the state to arbitration. Usually, this consent comes through an investment treaty, and unless the investor is a national of a country with any investment treaty, the investor cannot bring an investment arbitration claim against a state. So if Brazil is not a party to a bilateral investment treaty, how did Petrobras file a notice of dispute with Ecuador and proceed on the path to investment arbitration? And why does it matter?
According to news reports, Petrobras started the process for bringing an investment claim by filing a notice of dispute under the Ecuador-Argentina bilateral investment treaty (or “BIT”). This means that Petrobras likely initiated its investment through its Argentine subsidiary, which is a national of Argentina and can benefit from the protection of the BITs Argentina has ratified. This is likely how Petrobras put itself in the position to be able to start an investment arbitration. In negotiations with a state, this can matter, sometimes quite a lot.
Like many negotiations, the final outcome is often a result of the bargaining power of the parties. While there are many moving pieces, one of the key elements is the ability to seek redress for nationalization of assets. Without an investment treaty providing for arbitration, this means a lawsuit in the courts, usually the courts of the country where the investment is located. Because of the difficulties inherent when bringing a large claim against a country in its own courts, the investor can find itself at a disadvantage when negotiating with a state relative to nationalization of assets. One of the ways to tip the scale a little bit in the favor of the investor is to have the possibility of starting an investment arbitration claim. From news reports, it appears Petrobras used the possibility of an investment arbitration to help in its negotiations. If the news reports are true, Ecuador moved its inital offer of $168 million to a final settlement at $217 million, a sizable amount.
The mechanics behind the settlement are likely far more complicated, and one can only guess at the details. There are many factual distinctions that can determine the strength of Petrobras’ potential claim, including its ability to use the Ecuador-Argentina. But it appears that Petrobras pursued a clever path in this instance, which other Brazilian companies should study for their investments.