Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela: when may an entity be considered a "governmental instrumentality"?

On 18 November 2014, an ICSID Tribunal in Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, held Venezuela liable for breaching its BITs with Chile and Switzerland on the ground of expropriation and denial of justice. In doing so, the Tribunal considered and rejected a number of jurisdictional challenges by Venezuela. In this post, we will discuss one of them – Venezuela's objection that Flughafen was a government instrumentality of the Swiss State and, as such, Flughafen was prevented from bringing claims under the ICSID Convention.

The tribunal's decision is of interest because it provides a useful test to ascertain whether an entity may be considered a "governmental instrumentality" under article 25 of the ICSID Convention.

Background

The arbitral proceedings were brought by Flughafen Zürich A.G. ("Flughafen"), a company incorporated under the laws of Switzerland, and Gestión e Ingenería IDC S.A. ("IDC"), a Chilean corporation. The Claimants had formed a consortium to administer, manage and operate the Isla Margarita airport under a contract with the state of Nueva Esparta.

Flughafen's status

Venezuela contended that the arbitral Tribunal lacked jurisdiction ratione personae because Flughafen was not a "national of another contracting state" as required by Article 25 of the ICSID Convention but a governmental instrumentality of the Swiss state. Venezuela argued that the public nature of Flughafen was supported by two key facts: first, the Canton of Zurich was one of the shareholders in Flughafen and, second, Flughafen was engaged in essentially governmental activities, namely the control of the air space in Switzerland.

The Tribunal confirmed that article 25 of the ICSID Convection envisages an investor bringing a claim against a host state. States are not allowed to bring claims against one another under the ICSID Convention. The Tribunal observed that doubts may come up where the investor is not the State itself but an entity belonging to or controlled by a State.

Both parties relied in their submission on a passage written by Aaron Broches, former ICSID's Secretary-General and one of the architects of the ICSID Convention, in his 1972 General Course at The Hague Academy of International Law.

“[I]n today’s world, the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated. There are many companies which combine capital from private and governmental sources and corporations all of whose shares are owned by the government, but who are practically indistinguishable from the completely privately owned enterprise both in their legal characteristics and in their activities. It would seem, therefore, that for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as “a national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function.”

The Tribunal adopted Broches' analyses. It first noted that Flughafen was a corporation incorporated in Switzerland and therefore it had to be considered prima facie a national of another contracting state. But Flughafen was also a "mixed economy company" because the Canton of Switzerland, a subdivision of that State, was a shareholder. Therefore, the Tribunal considered that the issue to be decided was whether Flughafen was acting as an agent of the Swiss state and/or was performing essentially governmental functions.

The Tribunal held that Flughafen was not an agent because it did not act on behalf or for the benefit of Switzerland; more than 60% of Flughafen was owned by private shareholders and the Canton did not have control over the board of directors; Flughafen was listed in the SIX Swiss Exchange and Flughafen's corporate purpose was to create value rather than defending the public interests of Switzerland.

The Tribunal then concluded that Flughafen's activities could not be considered as governmental. Contrary to Venezuela's assertions, the Tribunal found that Flughafen was not engaged in the control of Switzerland's airspace. Its business was rather the management and operation of airports around the world. This is not an "essentially governmental function" because it does not falls within what the Tribunal described as a State's "core non-delegable public activities". Rather, the management of an airport is something that can be committed to private parties. That was what had happened when the state of Nueva Esparta decided to engage the Consortium in the administration of the Isla Margarita airport.

The tribunal's reasoning provides a useful test to consider whether an entity owned or controlled by a state qualifies as a governmental instrumentality and therefore does not qualify as a "national of another contracting State" able to bring a claim under Article 25 of the ICSID Convention. This decision is likely to have an impact on future cases brought by state-related entities.

For further information, please contact Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.