Introduction

Hydrocarbon companies are very cautious in their choice of applicable law and dispute resolution mechanism in their contracts. To this end, they carry out exhaustive analyses of the legal and institutional frameworks and alternatives available.

International contracts for the sale of hydrocarbons are cross-border commercial agreements for the exchange of goods between two or more parties located in different jurisdictions. In each of these contracts there should be a clause that determines the applicable law that will govern their relations. Private International Law admits the general principle of party autonomy in contractual obligations for determining the law applicable to international contracts, especially in commercial matters.

In this brief essay we will take on the task of explaining the important issue of the law applicable to international contracts for the sale of hydrocarbons, with some references to Venezuelan law.

 

The contractual clause on applicable law

Contracts usually have a clause that defines the applicable law, that is, its substantive law in the stricter sense.[1] In simple terms and by way of example, this clause could be as follows: «This contract will be governed in accordance with the laws of the State of New York«. As we know, this clause is accompanied in the contract by a clause on dispute resolution in which the parties agree to submit them to a court of ordinary jurisdiction or to an arbitral tribunal. It is common that both clauses are subjected to negotiations.

By choosing the applicable law in the contract, the parties convene on the governing legal framework. This includes the formation, existence and validity of the contract, its interpretation, the rights and obligations of the parties, the determination and effects on third-party beneficiaries, the performance and breach of obligations, the assessment of damages, indemnifications, the non-adimpleti contractus exception,[2] the limitation and exoneration of liabilities, joint and several liabilities, extraneous non-attributable clauses and their corollary, force majeure, penalty clauses, legal, compensatory and conventional interests, assignment of the contract and subcontracting, extinction of obligations, prescription and expiration of legal actions, invalidity and nullity of the contract.

When choosing the substantive law to the contract, the parties are covered by the principle of party autonomy. The options available in the choice of the applicable law will be national law; equity; Public International Law, including general principles of law; concurrent laws,[3] transnational law, including the Lex Petrolea and the Lex Mercatoria; as well as recognized practices, usages and standards. The law chosen by the parties must also address the cardinal principle that contracts must be concluded, interpreted and executed in good faith. This principle is enshrined in the Venezuelan Civil Code[4], which provides that contracts shall be executed in good faith with the consequences therein according to equity, usage or the Law.

In the absence of an express or ineffective choice as to the applicable law, the contract shall in principle be governed by the law of the State with which it has the closest ties according to conflict-of-law rules. The absence of express choice or ineffectiveness of the law will cause uncertainty to the parties in contract performance and in the resolution of disputes.

In Venezuela, in accordance with the Law on Private International Law[5] and the Inter-American Convention on the Law Applicable to International Contracts,[6] the parties can choose the legal system that will govern the contract. Likewise, this legislation establishes trade usages and principles of International Commercial Law, as well as the commercial standards and practices of general acceptance, as sources of law applicable to contractual obligations. Likewise, the Venezuelan Commercial Code[7] recognizes trade usages as a supplementary source of law.

Venezuela has not ratified the 1980 Vienna Convention on Contracts for the International Sale of Goods (United Nations Convention[8]). This important treaty regulates the formation and conclusion of international commercial sales contracts, as well as the rights and obligations of the contracting parties. Although it is not part of the Venezuelan legal framework, there is a long-admitted practice of accepting its provisions as general principles in international sales contracts.

 

Features of the international contract for the sale of hydrocarbons

An international contract for the sale of hydrocarbons is the typical example of a cross-border commercial contract, as the mechanism for the commercialization of crude oil, natural gas, diluents, and by-products. This contract regulates the sale, price, volumes, quality, point of origin, delivery point, payment terms, applicable law, dispute resolution, force majeure, transfer of property, and risk allocation. This type of contract includes offtake agreements, which are widely used in project financing.

There are no limitations in Venezuelan law for the parties to choose a law other than the Venezuelan law to govern their commercial relations. In a contract of these characteristics, practices, commercial standards, and trade usage will serve the parties to fill in any legal gaps, along with the so-called transnational law.

Let us remember that the Venezuelan Organic Law on Hydrocarbons[9] still in force at the time of writing, provides that only wholly-owned state companies are entitled to commercialize natural hydrocarbons. For its part, Presidential Decree N° 1,648 of 2002[10] sets out that the export and import activities of hydrocarbons by-products shall be carried out by wholly-owned state companies, until the National Executive determines the exclusion of some of these products. This means that no private enterprise or mixed company (joint venture) is authorized to import or export gasoline, jet fuel, diesel, diesel or other fuels. Decree N° 1,648 reserved to the Venezuelan State the control and commercialization of these by-products. However, on January 29, 2026, the National Assembly of Venezuela passed a noteworthy legal reform of the Organic Hydrocarbons Law. We need to review the text of this new law, once published in the Official Gazette, in order to know its implications on the commercialization of hydrocarbons.[11]

It should be noted that an international contract for the sale of hydrocarbons in which the State or a State entity is one of the parties must be considered an act «iure gestionis«, that is, an act of a commercial nature. Such acts do not compromise sovereignty or state power. «Iure gestionis» acts must be distinguished from «iure imperii» acts in which the State or a State entity acts in the exercise of sovereign authority.

International contracts for the sale of hydrocarbons in which one of the parties is a company based in Venezuela, including Petróleos de Venezuela, S.A. (PDVSA) and PDVSA Petróleo, S.A. might be subject to foreign law, through the respective contractual clause. In the cases of contracts of a commercial nature signed by Venezuelan state-owned companies, these companies do not act as sovereign entities with the powers and prerogatives of Venezuelan public law, but as commercial entities whose purpose is to obtain profits for the benefit of the shareholders.

 

Mandatory rules and public policy laws

Mandatory rules are laws enacted by a State that cannot be waived or relaxed by contractual agreements, to safeguard the general interest. These norms are compulsory while supplementary rules can be modified or disapplied by the parties’ decision. We find mandatory rules both in Private Law contracts (for example, a contract for the sale of hydrocarbons) and Public Law contracts (for example, an oil concession). In the European Union in accordance with the Rome I Regulation of 2008 ((EC) Nº 593/2008[12]), these mandatory rules are referred to as police laws, having as a result a restriction on the parties’ autonomy.

Norms on the protection of competition, anti-corruption, sanctions, and environmental protection are generally considered mandatory rules. In an international hydrocarbon sales contract where one of the parties is a U.S. company, the U.S. Foreign Corrupt Practices Act («FCPA«) provisions will apply to the contract. This Act of extraterritorial reach prohibits payments, gifts or promises to foreign officials for the purpose of exerting influence on them or otherwise securing any undue advantage to secure international contracts or business dealings.[13] Moreover, on January 29, 2026, the Office of Foreign Assets Control (OFAC) issued General License N° 46 establishing as a condition for the authorization of the transactions therein described (including the sale and marketing of Venezuelan-origin oil) that it shall be specified as the governing law in the related contracts with the Government of Venezuela, PDVSA and PDVSA Entities, with a U.S. entity, the laws of the United States or any of its jurisdictions.[14]

A distinction is now made between (i) mandatory laws or rules and (ii) laws or rules of public policy. The difference between them is by no means settled. It has been argued that the former are enshrined in specific legislative provisions, while the latter are limited to the violation of principles. These principles would reflect the pillars of the social, moral and economic order that sustain a legal system. In the Venezuelan legislation there is no conclusive distinction between the two notions. For instance, the Organic Law on Labor, Males Workers and Female Workers[15] prescribes that its norms and those derived from it, are public policy and of imperative, mandatory and immediate application.

 

Conclusions

The choice of the applicable law is an essential element in international contracts for the sale of hydrocarbons. In this way, the parties have a legal framework as reference. The applicable law is key in contract interpretation, determination of the obligations and rights of the parties, the consequences of a breach, and damages’ valuation, among other aspects.

At first, the available options are national law, equity, Public International Law, including general principles of law, concurrent laws, transnational law, as well as practices, trade usages and commercial standards. The absence of an express choice of law clause or its ineffectiveness triggers undesired legal uncertainty.

The parties are governed by the principle of party autonomy when choosing the applicable law to the contract, in view of their good faith and within the limits imposed by mandatory rules and public policy laws. To this end, tt is paramount to take into consideration OFAC regulations and the FCPA provisions.

International contracts for the sale of hydrocarbons entered into by state entities such as PDVSA and affiliated companies are contracts of a commercial nature and as such are deemed «iure gestionis» acts. So, these entities are subject to the rules of Private Law, as if they were private enterprises, when they perform commercial activities.

 

[1] Let us clarify that the applicable law arising out of a contractual relationship has other meanings (other than the substantive law of the contract), namely: a) the law that regulates the arbitration agreement (if any); b) the law that regulates the judicial or arbitral procedure; c) the law that regulates conflicts of laws; d) the law that regulates the capacity and existence of the parties; e) the law that regulates the form and publicity of the contract; e) The law that regulates the recognition, execution and challenge of the judicial decision or arbitral award.

[2] The «exceptio non-adimpleti contractus» allows a party to a bilateral contract to refuse to perform its obligations if the other party has not fulfilled or is unwilling to perform its own obligations.

[3] Concurrent laws are based on the doctrine of «tronc commun» – a concept of Private Law and arbitration according to which in the event that the parties have not chosen a national law in their contract, a set of general principles must be sought within the main legal systems, instead of a single State law. This doctrine seeks to harmonize the application of norms in international disputes, resorting to common principles as substitutes for national law.

[4] Official Gazette N° 2,990 extraordinary of July 26, 1982.

[5] Official Gazette N° 36,511 of August 6, 1998.

[6] Official Gazette N° 4,974 extraordinary of September 22, 1995.

[7] Official Gazette N° 475 of December 21, 1955.

[8] https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg

[9] Official Gazette N° 38,493 of August 4, 2006.

[10] Official Gazette N° 37,429 of April 24, 2002.

[11] https://www.reuters.com/business/energy/sweeping-oil-reform-venezuela-approved-operators-expected-gain-autonomy-2026-01-29/

[12] https://eur-lex.europa.eu/eli/reg/2008/593/oj/eng

[13] https://www.justice.gov/criminal/criminal-fraud/foreign-corrupt-practices-act

[14] https://ofac.treasury.gov/recent-actions/20260129

[15] Official Gazette N° 6,076 of May 7, 2012.