The PDVSA Bonds, Autocracy, and the Venezuelan Constitution
November 22, 2022
The Second Circuit’s recent decision in Petróleos de Venezuela S.A. v. MUFG Union Bank, N.A. certified a number of choice-of-law questions to the New York Court of Appeals. The decision to certify, which had the effect of postponing a definitive resolution of the dispute, was previously discussed at TLB here and here.
In this post, I focus on the Venezuelan constitutional background to the dispute. In doing so, I draw both on my own prior work and on an amicus brief that was filed on behalf of four comparative constitutional scholars, including myself. The other scholars involved in the amicus were Diego Zambrano (Stanford), Mila Versteeg (Virginia), and Nelson Camilo Sanchez Leon (Virginia).
Abusive Constitutionalism and the Suppression of the Congress in Venezuela
The erosion of democracy in Venezuela has been well documented. An important feature of this erosion – one seen too in other instances of authoritarianism around the world – is the heavy reliance on legal tools, including use of constitutional law. After winning office, Hugo Chavez oversaw a constitutional replacement in 1999 that consolidated power in the hands of the executive and marginalized the opposition. Later, Chavez eliminated presidential term limits via a second attempt at a referendum, after a first attempt narrowly failed. This allowed Chavez to remain in power until his death in 2013.
The instrumental use of constitutional law has also been a part of the increasing repression seen under Chavez’s successor, Nicolas Maduro. Most relevantly for our purposes, dubious uses of the constitution became a key tool to suppress the opposition-held legislature. In late 2015, in a context of deep economic crisis, a well-organized opposition won an overwhelming victory in the unicameral National Assembly, despite Maduro’s attempts to tilt the electoral playing field heavily in his favor. A few seats in outlying regions of the country were disputed, and at stake was whether the opposition would have a two-thirds supermajority able to amend the constitution. The Electoral Chamber of the Supreme Court, which had been completely packed by the regime, issued decisions in those seats ordering the Assembly to seat the pro-regime legislators. When the Assembly did not, the Supreme Court began holding it in contempt.
Thus began an extraordinary multi-year campaign where the Maduro regime relied on the Supreme Court to suppress essentially all of the Assembly’s powers. In some cases, as when it invalidated a political amnesty law, the Court simply relied on highly dubious uses of constitutional doctrine and international human rights law. But in many other cases, it cited the contempt order as a way to nullify the Assembly’s actions. In addition, it transferred key powers that are constitutionally reserved to the Assembly, such as the power to promulgate the budget, to Maduro, who exercised them unilaterally. The logical culmination of these decisions was a 2017 decision that took away all of the Assembly’s powers while the order of contempt persisted, and held that in order to avoid a “legislative omission,” the Court itself could exercise all legislative powers, or transfer them to the institution of its choosing (i.e. President Maduro). The Court partially backed off some parts of its decision (such as stripping parliamentary immunity) after even some Maduro loyalists balked, but its core logic remained intact. Internationally, some countries, including the United States, sanctioned the justices directly following this decision.
In mid-2017, the regime changed tactics even as it continued to suppress the Congress. Using a dubious read of the constitutional text, Maduro called elections for a National Constituent Assembly unilaterally, without holding a prior referendum, and then appeared to alter the vote totals for his (unopposed) candidates in order to create an image of greater popular support and legitimacy. The new Constituent Assembly was a kind of farcical version of Chavez’s 1999 constitution-making body. During its more than three-year life, it never bothered to write a new constitution or even to enact any constitutional changes. Instead, it viewed its main function as using the doctrine of “original constituent power” – its supposed powers as the embodiment of “the people” – to take over legislative powers. The new Constituent Assembly removed public officials, called new elections for a series of posts (including the presidency, which allowed Maduro to win another term), and passed a sweeping series of laws via “decree.”
Article 150 and Attacks on Legislative Power
This background is relevant because the 2016 PDVSA bond swap occurred during this period, after the opposition had won a solid majority of the Assembly, and while the Supreme Court was taking a series of steps to nullify its powers.
Article 150 of the Venezuelan constitution requires that contracts in the “national public interest” be approved by the National Assembly before going into effect, as established by law. Similarly, Article 187 gives the Assembly power to “authorize the National Executive to enter into contracts in the national interest.”
In our amicus brief, we point out that these clauses are reasonably common comparatively, both regionally and globally, and in some cases follow episodes where there is significant concern about authoritarianism or democratic erosion. We also note that these provisions are related to the concept of legal reserve, or the idea that certain sensitive issues should only be regulated after legislative approval.
The Maduro administration’s indifference towards these constitutional provisions, and decision to move forward despite a legislative resolution disapproving of the bond swap, is not surprising in light of the context noted above. It was not an accident or a legitimate dispute about the separation of powers, but rather part of a coordinated (and successful) campaign to suppress congressional power, and to transfer that power to Maduro. Moreover, that dynamic would have been clear to outside observers.
The implications of these points for the litigation (and, politically, for the balance of power between the regime and opposition) are complex. As the Second Circuit panel recognizes, the relevance of the Venezuelan constitutional issues are modulated in unpredictable ways by the interaction between New York choice-of-law rules and the federal act of state doctrine. The Second Circuit opinion suggests, without deciding, that there are good arguments for applying Venezuelan constitutional law to determine the validity of the bonds at issue, either via the N.Y. U.C.C. or via a common law public policy exception. We will see, of course, what the New York Court of Appeals ultimately decides on these questions.
Depending on what the Court of Appeals decides, the case could become an example of what Dixon and Jackson have called “extraterritorial constitutional interpretation.” Constitutional interpretation by outsiders, such as foreign courts or international organizations, is increasingly common, but it raises problems of competence and legitimacy. This is a particularly thorny issue in cases like this one, where domestic legal institutions like the Venezuelan Supreme Court cannot be trusted for unbiased interpretation. The interpretation of “national public interest” contract, for example, is not obvious, although it would seem to me that it would have to include the 2016 PDVSA bond swap if the term is to have any meaning.
Liberal democratic states can sometimes play at least a modest role in preventing and responding to what Dixon and I have called “abusive” uses of constitutional law like those that pervade the Venezuelan regime. And thus, as we stated in the amicus brief, it would seem both reasonable and consistent with U.S. values for the New York Court of Appeals to give effect to the important policies found in Article 150 of the Venezuelan Constitution.