Originally from Journal of Damages in International Arbitration

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I.  INTRODUCTION

Claimants commenced ICSID arbitration against Venezuela, arguing that the State had illegally expropriated its investment and violated the fair and equitable treatment (“FET”), non-discrimination, and full protection and security (“FPS”) standards prior to the expropriation.  The Tribunal, consisting of John Beechey (President), Judd L. Kessler (Claimants’ appointee), and Toby T. Landau, QC (Respondent’s appointee), found that Venezuela had unlawfully expropriated Claimants’ investment but rejected all other claims.  Faced with Claimants’ nominal damages calculation of US$235.9 million and Venezuela’s calculation of US$0, the Tribunal rejected the two valuation methodologies employed by both parties’ experts and implemented its own methodology, arriving at a nominal damages award of US$60.2 million. 

II.  FACTUAL BACKGROUND

In 2004, the Luxembourg-based Tenaris S.A. (“Tenaris”) was a significant investor in Venezuela’s recently-privatized steel industry.   In April of that year, two of its affiliates, including the Venezuelan-based Siderurgica del Orinoco C.A. (“SIDOR”), incorporated Materiales Siderurgicos Masisa S.A. (later “Matesi”) in Venezuela for the purpose of purchasing certain assets of the company “PosVen,” including a plant with the world’s third-highest production capacity for hot briquetted iron (“HBI”), a key component in the production of finished steel.  Following several sales agreements, the 100%-owned Portuguese subsidiary Tenaris, Talta-Trading E Marketing Sociedade Unipossoal LDA (“Talta”), obtained a 50.2% interest in Matesi, while SIDOR owned the remaining 49.8% interest.   On April 27, 2004, Matesi and its affiliates entered into a US$120 million asset and sale purchase agreement under which Matesi acquired the assets of PosVen.   Matesi also entered into a contract with CVG Ferrominera del Orinoco, C.A. (“CVG FMO”), the monopoly supplier of iron ore in Venezuela, for the supply of the iron mineral and pellets it required to make HBI.   In order to finance the acquisition and Matesi’s start-up costs, Talta and SIDOR issued loans to Matesi.   Matesi then entered into off-take agreements with Talta and SIDOR, under which it was required to sell a certain proportion of the HBI it produced to the companies.  Talta and SIDOR were, in turn, obliged to purchase 30.12% and 29.88% of Matesi’s HBI production, respectively.