​On 13 November 2017, it was confirmed that Venezuela had defaulted on its sovereign debt after failing to meet the deadline for payment of US$200m of interest on its sovereign bonds due in 2019 and 2024.1 It is expected that Venezuela may also default on other sovereign debt obligations, as a further US$420m of interest payments is overdue.2 Overall, it is estimated that Venezuela has US$63bn of outstanding bonds,3 including debt issued by the government as well as by state-owned companies such as the oil company Petróleos de Venezuela, S.A. (PDVSA).

A sovereign debt crisis of this nature could result in a unilateral debt restructuring, among other government measures affecting bondholders. The types of restructuring mechanisms that could be employed are diverse, including debt rescheduling (deferring interest payments or the principal), coupon reductions (a reduction on the interest rate payable) or a principal "haircut". These measures could be applied separately or in combination with each other.

Against this background, some foreign bondholders hold rights of protection under international law – and under bilateral investment treaties (BITs) in particular – that would allow them to bring Venezuela to an international arbitration, claim the international responsibility of the State and recover losses arising from any actions that the Government of Venezuela might adopt in breach of a BIT. Some comments on standing, substantive protection and arbitration options under BITs, as well as potential enforcement issues, are set out in more detail below.

Standing under BITs and lessons from Argentina and Greece

There are currently 26 BITs in force between Venezuela and other States (including, among others, Belgium, Luxembourg, Canada, France, Germany, Portugal, Spain, Switzerland, United Kingdom and the Russian Federation).4 Both natural and legal persons are protected under the BITs. Qualifying "investors" are nationals of the other contracting State, with the requirement of nationality typically being established for companies or other legal persons by reference to domicile or place of incorporation.

Investment treaty protection is limited to qualifying "investments", although BITs generally provide a broad definition of "investment" followed by an illustrative list of assets protected under the treaty, which may or may not expressly refer to bonds as a qualifying investment. In Abaclat and Others v. The Argentine Republic,5 Ambiente Ufficio S.p.A. and others v. The Argentine Republic,6 and Giovanni Alemanni v. The Argentine Republic7the dispute arose as a result of Argentina's default on its sovereign bonds, which resulted in thousands of treaty claims by affected bondholders that commenced arbitration under the Argentina-Italy BIT. Although the BIT did not expressly include bonds within the list of qualifying investments, the tribunal in all three cases held that Argentine sovereign bonds qualified as an "investment" under the BIT. In contrast with these cases, the tribunal in Poštová Banka, A.S. and ISTROKAPITAL SE v. Hellenic Republic 8 considered that certain Greek government bonds did not qualify as an investment under the Slovakia-Greece BIT.

Ultimately, the question of whether a sovereign bond falls under the definition of investment under a BIT will depend on the specific wording of the treaty. Therefore, in order to establish whether the Venezuelan government bonds constitute an "investment" for the purposes of a BIT, it will be necessary to look at the express wording of the relevant treaty.

Substantive protections under BITs

The BITs entered into by Venezuela contain various substantive protections. These include: (i) the obligation to accord fair and equitable treatment (FET), typically understood to encompass the protection of investors' legitimate expectations; (ii) the obligation not to depart from any commitments or undertakings entered into with foreign investments; (iii) the obligation not to impair qualifying investments; (iv) the obligation not to adopt arbitrary or unreasonable measures; and (v) the protection against expropriation (or measures having an equivalent effect to expropriation) when a substantial deprivation of the asset occurs. These provisions could protect bondholders from measures that Venezuela might adopt as a result of its debt default, including any unilateral actions to restructure the debt.

The assessment of potential claims that foreign bondholders may bring against Venezuela will be influenced by the unfolding conduct of the Government. Should investors be deprived of the principal amount of the bonds, the expropriation provisions may come into play. In addition, Venezuela's failure to make the due payments could amount to a breach of investors' legitimate expectations to receive their principal together with an interest payment. These expectations are protected under the FET standard, one of the most commonly invoked obligations in investment treaty arbitration. Discriminatory treatment of foreign investors compared with other bondholders may also breach the FET standard. Some BITs could also protect investors' rights against Venezuela's sovereign debt default through provisions that require the State to comply with contractual or other commitments entered into with foreign investors.

Venezuela's sovereign debt crisis also raises the issue as to whether the State might be held liable as a result of PDVSA's own debt defaults, either as a result of the State's actions or omissions affecting PDVSA or by considering that PDVSA's departure from its own debt obligations towards investors are attributable to Venezuela.

Arbitration options

Most BITs, including those entered into by Venezuela, allow qualifying investors to bring a claim against the host State under different arbitration rules, including arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) or under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). In addition, certain BITs (including some of the treaties entered into by Venezuela) allow the possibility of bringing treaty claims under the ICSID Additional Facility Rules, when only one of the States involved (the respondent State or the investor's home State) has ratified the ICSID Convention.9

ICSID arbitration proceedings have certain advantages over proceedings under other arbitration rules because the ICSID Convention requires the national courts of the contracting States to recognise and enforce monetary awards automatically, as if they were final court judgments of the State in which enforcement is sought. Awards rendered in proceedings under other arbitration rules, such as the UNCITRAL arbitration rules, still benefit from a favourable enforcement regime under the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 (the NY Convention), which has approximately 154 contracting States.

In 2012, Venezuela withdrew from the ICSID Convention, thereby limiting the arbitration options for investors seeking resolution of investment disputes with Venezuela. The recent arbitration ruling in Fábrica de Vidrios Los Andes, C.A. and Owens-Illinois de Venezuela, C.A. v. Bolivarian Republic of Venezuela10 confirms that, as a result of Venezuela's withdrawal from the ICSID Convention, the arbitration options for investors would be limited to proceedings under the UNCITRAL Rules and not the ICSID Convention.

That said, while ICSID is probably the most favourable forum for the settlement of investment disputes, arbitration proceedings under the UNCITRAL Rules potentially better preserve the confidentiality of the proceedings. Another potential advantage of UNCITRAL over ICSID is that under the latter it would be necessary to establish that the bonds at issue qualify as a protected investment under both the BIT and the ICSID Convention (which contains its separate jurisdictional requirements that the claimant must satisfy). This is not the case under UNCITRAL arbitration proceedings.

Depending on the extent of the exposure of the affected investors to the Venezuelan bonds, investors might consider bringing a collective action against Venezuela. In Abaclat, the tribunal allowed a collective claim by some 60,000 bondholders. The majority's view was that, if a tribunal had jurisdiction over the claims of several claimants, there was no logical reason why the tribunal should lose such jurisdiction when the number of claimants passed a certain threshold. The arbitrators further reasoned that to treat the silence of the ICSID Convention as a prohibition on collective proceedings would be contrary to the purpose of the BIT and the ethos of ICSID.11 The position is likely to be the same under the UNCITRAL Rules, which also do not prohibit collective proceedings.

Enforcement considerations

The practical issue of enforcement must be borne in mind before bringing a claim. Given that affected investors are likely to bring arbitrations under the UNCITRAL Rules, recognition and enforcement of a subsequent favourable award would be subject to the provisions of the NY Convention. As noted above, the NY Convention offers simplified procedures for enforcing awards in more than 154 States, setting out limited grounds for enforcement to be refused.

It is reported that the Venezuelan Government has less than US$10bn of foreign currency reserves.12 China and Russia are two large creditors of Venezuela whose exposure exceeds this amount (China alone is said to have lent more than US$60bn).13 A perception that Venezuela's financial situation might affect the potential enforcement of a favourable award has prompted investors to look for alternative ways to monetise treaty claims before the arbitration proceedings are concluded. Alternatively, parties holding favourable awards are assigning awards to third parties, usually funds or private investment firms, thus giving rise to a growing market of award trading.