There is a record that distinguishes the administrations of Hugo Chávez and Nicolás Maduro from previous governments in Venezuela: the number of international lawsuits filed against PDVSA. The reasons are varied, but it all boils down to another unique feature of both Chávez and Maduro: a total disregard for contracts and their legally binding aspects. The law is not something that ever stands in the way of the Bolivarian Revolution. If it cannot be modified on the fly to suit revolutionary needs, it is simply ignored. Since 1999, Chávez and Maduro have disregarded numerous contractual obligations that PDVSA had committed to, but in a 2004 ruling, their own Supreme Court provided the plaintiffs with an unbeatable legal argument: the Saet Precedent.
PDVSA has faced numerous international lawsuits in various jurisdictions from different creditors. A common characteristic is PDVSA’s refusal to comply with its obligations. Another typical aspect is the repetitive use of the alter ego argument by PDVSA. The goal of this strategy is to pierce the corporate veil to protect the assets held by PDVSA and/or its subsidiaries. In essence, defendants are asked to establish a connection between PDVSA and its subsidiaries, and to provide evidence that PDVSA exercises executive, administrative, and operational control over its subsidiaries—something the alter ego doctrines and corporate veil make almost impossible.
For instance, in a case filed against PDVSA for defaulting on payments due to bondholders, CITGO cannot be held liable. Invariably, the defense attorney’s argument is that CITGO and PDVSA are completely separate entities, making it impossible to compel CITGO to pay PDVSA’s debts, nor can CITGO’s assets be seized under an award granted to a claimant. CITGO is merely one of many wholly-owned subsidiaries of PDVSA. For all practical purposes, PDVSA is the ultimate beneficial owner (UBO) and controller of each of the group’s subsidiaries.
While PDVSA has had some success with the alter ego argument in international disputes, Venezuela’s Supreme Court itself ruled in the Saet Precedent (reiterated numerous times since) that such a thing does not apply. In a labor conflict, a worker filed a lawsuit against his employer (Transporte Saet La Guaira C.A.), which in turn was a subsidiary of another (Transporte Saet La Guaira C.A.). The ruling established that neither the parent company nor its subsidiary could evade liability to the employee, as the CEO of both entities was the same person and the principal shareholder of the subsidiary was Transporte Saet C.A.
In an article titled “Piercing the Corporate Veil and PDVSA,” Carlos Eduardo Acedo explained:
“When the Saet Precedent pierced the corporate veil, the Constitutional Chamber did not require evidence of fraud or any other grievance justifying the obligation to compel one company to pay a debt owed by another company in the same group. The rationale is that the indivisibility of the obligations of the enterprise group generally results in a group liability that prevents fraud or other grievance. Therefore, fraud or any grievance is not a requirement for group liability; rather, fraud or grievance is precisely what group liability seeks to prevent. This group liability generally arises from the indivisibility of the obligations of the group companies.”
“Thus, in accordance with the Constitution and the Hydrocarbons Law, the PDVSA group consists of PDVSA, whose sole shareholder is the Republic, and the PDVSA subsidiaries; all of these companies are subject to the control of the Minister. Accordingly, PDVSA and its subsidiaries are jointly liable under the Saet Precedent.”
“The Supreme Court has applied the principles of the Saet Precedent to PDVSA and its affiliates. For example, the Social Chamber ruled on April 16, 2013, in the labor case of Marco Tulio Acosta Ferrer against PDVSA (the “Acosta precedent”). In this case, PDVSA had presented a defense citing lack of standing, as Marco Tulio Acosta Ferrer worked for PDVSA Petróleo, S.A. (“PDVSA Petróleo”), another subsidiary of the group, and not for PDVSA, which is a distinct legal entity. This defense was rejected by an appellate court; thus, PDVSA filed a cassation appeal to the Social Chamber, which upheld the decision of the appellate court. The appellate court’s decision to reject PDVSA’s lack of standing defense is noted in the Acosta Precedent.”
“It is thus evident that, although the commercial entity PDVSA Petróleo, S.A. and the commercial entity Petróleos de Venezuela, S.A. are separate legal persons, the commercial entity PDVSA Petróleo, S.A. is a subsidiary of Petróleos de Venezuela, S.A., and that the commercial entity Petróleos de Venezuela, S.A. is the sole shareholder of PDVSA Petróleo, S.A., meaning that the commercial entity PDVSA Petróleo, S.A., and Petróleos de Venezuela, S.A. constitute an economic unit” (emphasis added).
“CONCLUSION. Under the current Venezuelan legislation, the corporate veil between entities within the same group can be pierced by establishing the relationship between them; thus, the corporate veil between PDVSA and its subsidiaries can be lifted by showing that the Republic owns PDVSA, which in turn owns its Affiliates, all of which are controlled directly or indirectly by the Minister. The Constitution and the Hydrocarbons Law require this ownership and control. Currently, to pierce the corporate veil, it is not necessary to establish fraud against the creditors of the corporate group or any other illegality. It follows that it is not required to show that PDVSA, its Subsidiaries, or the Republic have committed an abuse of power or any other illegal conduct. According to Venezuelan law, as applied consistently by the Supreme Court and other courts, judges may pierce the corporate veil simply because PDVSA and its subsidiaries belong to a corporate group owned and controlled by the Republic. This has been the case since 2004, when the Constitutional Chamber, exercising its authority to create binding precedents under the Constitution, declared that the only requirement to pierce the corporate veil is the existence of a corporate group that results from ownership, control, or law. Therefore, as long as Venezuelan law applies, the corporate veil must be pierced because PDVSA and its subsidiaries form a corporate group” [emphasis added].
Crucial for all parties suing PDVSA, on March 30, based on the Saet Precedent, a court in The Hague ruled against BARIVEN (a wholly-owned subsidiary of PDVSA) and jointly against PDVSA, in a case brought by Sealing Gasketing & Corrosion Controls LLC.
Two additional rulings were also made by Judge AM Voorwinden of the court in The Hague, on the same date based on the Saet Precedent, in lawsuits filed by IGS TECHNOLOGIES & SERVICES LLC, and ADVANCED PRODUCTS SUPPLY LLC.
Just as the Saet Precedent establishes, in Venezuelan jurisprudence, that PDVSA and all its subsidiaries form an economic group and are jointly liable, Judge Voorwinden establishes an international precedent against PDVSA and its subsidiaries based on the Saet Precedent.
The rulings from The Hague not only established jurisdiction but could also open the floodgates in every last dispute that PDVSA and its subsidiaries face internationally. They will force a re-evaluation of the delineation of CITGO’s assets in the U.S., as well as a review of the restructuring process at Nynas in Sweden. They will provide validated legal arguments for all creditors seeking to enforce arbitration awards. Given the outstanding debt amounts and the number of creditors waiting to seize assets owned by PDVSA, this will trigger a race that PDVSA cannot win. Expect a ruling that invalidates the Saet Precedent from Maduro’s judges in Venezuela’s Supreme Court.