Ogilvy Renault LLP's Yves Fortier says “scoundrel” governments (Venezuela?) are finding it much harder to ignore arbitration hearings and awards."

The first thing employees noticed when a stream of military vehicles pulled into a Venezuelan mining exploration camp in the late fall of 2001 were the automatic rifles carried by dozens of National Guard soldiers. The second was the government notice ordering everyone off the site.

Some mining workers laid down their tools, others packed their belongings and one was stranded on a nearby road after his truck was halted and seized. By the time that November day was over, the staff of Vancouver-based Vannessa Ventures Ltd. found themselves on the outside of the remote camp looking in at what is believed to be South America's richest gold deposit, a discovery with so much potential that it has been compared with the fabled city of gold, El Dorado.

Today, Venezuela's storied Las Cristinas gold deposit represents another motherlode, this time a legal El Dorado that is beginning to strengthen the weak hand of Canadian companies against fickle foreign governments and state agencies.

Vannessa, which recently changed its name to Infinito Gold Ltd., has spent seven years and hundreds of thousands of dollars in legal fees on nearly a dozen legal proceedings before unsympathetic Venezuelan courts to claim more than $181-million it says it invested in the mining camp. Is it a doomed legal quest against the entrenched populist regime of Hugo Chavez? Until a few months ago, the answer would have been a decisive “yes.”

In one of the first wins for a Canadian company against a hostile foreign state, a tribunal of the International Centre for Settlement of Investment Disputes ruled in August that the Vancouver company had the right under a bilateral investment treaty with Venezuela to have the merits of its claim heard before one of its arbitration tribunals. That hearing is not expected to begin until December, 2009.

Infinito's win is just one step in a long legal journey. But, according to legal experts, it is a big step. Only one other Canadian group of investors is believed to have successfully used the lever of a bilateral treaty to prevail against a foreign government, this time against Hungary for improperly seizing control of a Budapest airport terminal. That $83-million (U.S.) victory in 2006, combined with Infinito's jurisdiction win, signals that the International Centre for Settlement is increasingly prepared to stand up against foreign investment seizures.

“The legal system of Venezuela failed to provide protection to our clients,” said Torys LLP litigator John Laskin, who, along with his partner John Terry, has been arguing Vannessa's case for five years. “The tribunal's decision shows the potential of these treaties to provide real protection for Canadian businesses,” he said.

At the heart of the mining company's jurisdiction win is a Bilateral Investment Treaty, one of an estimated 1,500 bilateral treaties that Canada and other industrialized countries began signing with emerging countries in the early 1990s to provide a legal safety net to companies and investors venturing into risky political regions. Like many bilateral treaties, Canada's 1996 accord with Venezuela was designed to promote and protect foreign investments.

For the first decade, disputes under the treaties were rare. But as commodities prices went into orbit in recent years, multinationals came under increasing political scrutiny in developing countries as their profits from local resource projects soared. Some countries such as Venezuela lowered the boom and nationalized foreign-controlled oil and gas and mining projects. Others increased taxes or demanded more royalties.

A growing number of companies are challenging the resource grabs by filing claims with the International Centre for Settlement, which has effectively become the global referee for companies or investors who cry foul under bilateral treaties. Most of the arbitration decisions are public, which Torys' Mr. Terry said “is building an important body of precedent that is helping to reinforce the rule of law” in treaty investment disputes.

When companies take their claims to arbitration hearings, tribunal decisions tend to hang on interpretations of corporate contracts with foreign nations and the wording of underlying bilateral treaties. In Infinito's case, Venezuela argued that it had legally ejected the company because control of the Las Cristinas mining claims had previously changed hands between Vancouver companies. The tribunal, however, found that there were no provisions within the mining claims contract that entitled Venezuela to block the transfer.

Such decisions are putting increased pressure on countries to negotiate settlements with aggrieved investors, even pint-sized junior mining companies such as Infinito. Before the advent of bilateral treaties, stranded Canadian companies' only recourse was on long-shot federal diplomacy.

Yves Fortier, a partner with Ogilvy Renault LLP and a respected author of many international arbitration decisions, said “scoundrel” governments are finding it much harder to ignore arbitration hearings and awards. “Sooner or later, countries need to borrow money from international investors so they will only be able to refuse to honour arbitration decisions for so long.”