Panoramic aerial view of downtown Bogota Colombia on a beautiful golden sunset.

COLOMBIA

Claudia Benavides and Jesus Villegas

A. LEGISLATION AND RULES

A.1      Legislation

Domestic and international arbitration in Colombia continues to be governed by Law 1563 of 2012 (“Law 1563”), which entered into force in October 2012. Law 1563 provides for a different set of rules depending on whether arbitration is domestic or international. Section 3 of Law 1563, which governs international arbitration, is mostly based on the UNCITRAL Model Law with certain amendments.

Law 1682 of 2013 (“Law 1682”), which governs contracts for transport-related infrastructure projects, contains rules for arbitration when state-owned companies or public entities are involved in disputes arising out of such projects. Although Law 1682 allows arbitration to be agreed upon, it forbids ex aequo et bono awards. The arbitration agreement must contain suitability requirements to be met by prospective arbitrators, but neither the contract nor any document related to the contract may predefine who the arbitrators will be in a potential arbitration nor include a list of potential arbitrators. State entities must establish in the arbitration agreement a cap on arbitrators’ fees, but contracts may contain a formula to re-adjust such fees. Due to the public nature of state entities, the arbitrators’ fees and the costs of arbitration must be included in the budget of the state-owned company or public entity.

Law 1682 also echoes previous jurisprudence by establishing that the arbitral tribunal does not have jurisdiction to decide upon the legality of an administrative act of a state-owned company or public entity when exercising exceptional powers (e.g. unilateral termination, interpretation or amendment of the contract, caducidad[1]). This means that the arbitration tribunal may only decide upon the economic effects of such administrative acts.

Congress is currently considering an important arbitration reform bill submitted in 2019 (the “Bill”). This Bill amends various provisions of Law 1563, including some provisions of section 3 dealing with international arbitration, such as the concept of “Appointing Authority,” the clarification of some circumstances when the arbitration will be deemed international or the requirements for granting precautionary measures at the parties’ request when it is submitted before Colombian courts.

Under Law 1563, Colombian courts act as a “last resort” appointing authority. The Bill proposes to name The Hague Permanent Court of Arbitration as appointing authority of last resort. It will intervene in the arbitration proceeding to appoint the arbitrator(s) when parties fail to reach an agreement over the method of appointing arbitrators or do not appoint their arbitrators. It will also decide any challenge to an arbitrator in ad hoc arbitrations and declare the termination of an arbitrator’s role in cases of absence or legal impediment to act as such.

Regarding the so-called internationality criteria, that is, circumstances when as a matter of law the arbitration will be deemed international, the bill amends three relevant provisions of section 3 of Law 1563. First, the bill clarifies that the legal nature of arbitration (whether national or international) is something the law defines and is not subject to the parties’ agreement, following recent rulings of the Civil Chamber of the Supreme Court of Justice[2]. Second, the bill states that an arbitration will be deemed international also when the contract (and not only the dispute) discussed in the arbitration affects international commerce’s interests and clarifies that a contract affects international commerce’s interests when it refers to a contractual relationship or an economic operation that implies cross border transfer of goods, services or funds. Third, under article 62 of Law 1563, an arbitration is international when the parties to the arbitration agreement have, at the time of the conclusion of that agreement, their “domiciles[3] in different states. However, there was some discussion on whether an arbitration involving domestic branches of foreign companies is international or not, because under Colombian law branches are not separate legal entities from their parent company, but they do have their own domicile. The Bill puts an end to this discussion by clarifying that the parent company’s domicile will be the domicile to be considered for this purpose so that arbitration involving the branch of foreign companies will be deemed international.[4]

Finally, since article 17(j) of the UNCITRAL Model Law does not provide any guidance to domestic courts on how to address requests for precautionary measures in support of international arbitration, the bill adds some specific rules to be followed in these cases. We highlight that, unlike domestic rules applicable to precautionary measures, these rules require that the defendant be served of the request submitted by its counter-party before a decision is made.

A.2      Institutions, Rules and Infrastructure

A.2.1   Center of Arbitration and Conciliation of the Chamber of Commerce of Bogotá

The Center of Arbitration and Conciliation of the Chamber of Commerce of Bogota, which is the most important arbitration center in Colombia, produced a set of rules for domestic and international arbitration that entered into force on 1 July 2014 and apply to all requests for arbitration filed after that date.

After the entry into force of Law 1563, and by applying the internationality criteria set forth by that law, the number of international arbitrations seated in Colombia has been continuously increasing. Complex commercial contracts, infrastructure and shareholders’ disputes are the most common ones and United States, Panama, China and Mexico lead the statistics of the countries of origin of the parties to international arbitrations filed before the Chamber of Commerce of Bogotá.

A.2.2   Rules by the Superintendence of Corporations

In August 2015, a set of rules put forth by the Superintendence of Corporations came into force (“SoC Rules”). The SoC Rules contain a general set of rules and a specialized set of rules. The general rules provide for proceedings similar to domestic arbitration established under Law 1563 and aim to resolve any type of dispute.

The specialized rules aim to regulate arbitration for corporate matters, resolving disputes faster and with less associated costs. These rules provide for shorter terms and more expedited proceedings and allow the tribunal and the parties to establish a procedural schedule for the gathering of evidence. The rules establish a schedule of fees per arbitrator according to the amount in dispute as well as the administrative costs of the Arbitration Centre of the SoC.

A.2.3   The Presidential Directive and other Directives

On May 18th, 2018 the President issued Directive number four on the Subscription of Arbitration Agreements and the Selection of Arbitrators (“Presidential Directive”). It includes specific regulations for international arbitration against public entities.

Pursuant to the Presidential Directive, the director of the Colombian National Agency for the Judicial Defense of the State (“ANDJE”) shall approve the subscription of international arbitration agreements applicable to state contracts. The Presidential Directive also indicates that arbitration agreements in state contracts cannot establish that ICSID Rules will govern the arbitration.

In regard to the selection of arbitrators, the Presidential Directive provides that at least 10 business days prior to the date established by the parties for the constitution of the tribunal, the head of the legal office or legal director of the public entity shall send to ANDJE a list of at least 10 eligible candidates for domestic arbitration or five eligible candidates for international arbitration, with specific experience in the topics that will be discussed within the proceedings.

The list must include each candidate’s CV and a summary of the dispute. The public entity is not permitted to send identical lists if it has multiple arbitral proceedings, since these lists must be constituted on a case-by-case basis. The director of ANDJE shall evaluate the appropriateness and convenience of the proposed candidates and shall present its recommendations to the Legal Secretary of the Presidency of Colombia within the following three business days.

The secretary shall approve or dismiss the candidates evaluated by ANDJE, subject to prior consultation with the Secretary-General of the Presidency of the Republic of Colombia. This period of consultation may be exceptionally reduced if the public entity does not have timely knowledge of the call for the selection of arbitrators and the claimant does not agree to extend the period of time to select the arbitral tribunal. If the parties cannot reach an agreement on at least one of the candidates proposed by the ANDJE, it is possible for the public entity to participate in a draw to appoint the arbitrators from the preexisting lists of the designated arbitration center. However, under no circumstance may a national entity or agency of the executive branch propose or select as an arbitrator a lawyer who acts as a counterparty in another proceeding involving a national public entity.

The above procedure for the appointment of arbitrators does not apply to investment arbitration proceedings.

In relation to arbitration proceedings against public entities, the Presidential Directive also establishes that the ANDJE shall be informed of procedural developments related to international arbitral proceedings.

In addition to the Presidential Directive, Colombia’s capital city Bogotá also issued a very similar Directive applicable only to public entities based in Bogotá, which includes some guidelines for public officials when entering into an international arbitration agreement with a private party in state contracts.[5]

The Procuraduría General de la Nación recently issued Directive No. 20 of 25 November 2019 (“Directive”), which is applicable to all Colombian public entities or private parties who exercise public functions. Under the Directive, public entities that have initiated or have been served with a notice of international arbitration by a counterparty shall inform the Procuraduría General de la Nación within the five business days following the receipt of the notice of arbitration. The Directive also provides that the state entity shall request the arbitral tribunal to include in the list of recipients for notifications and communications related to the case, the public officials of the Procuraduría General de la Nación that had been designated for each case.

A.2.4   Dispute Resolution clauses in concession contracts

The Colombian National Agency of Infrastructure has several model concession contracts that contain dispute resolution clauses. Although the model dispute resolution clause is not identical in every model concession contract, there are certain common features to highlight. It contains provisions to constitute an amiable compositeur panel, which shares some of the characteristics of the dispute boards but are not the same. The amiable compositeur resolves the dispute through a binding decision that has the legal effects of a settlement agreement (contrato de transacción) under Colombian law and thus the decisions have the legal effects of res judicata. The decision delivered by the amiable compositeur may be subject to arbitration if a party questions its validity.

The model clause also contains provisions for domestic and international arbitration. According to the model clause, the internationality of the arbitration is defined by the parameters established by Law 1563. International arbitration cases could be administered either by the ICDR or the ICC. The arbitral tribunal will be seated in Bogotá and the merits of the case will be decided under Colombian law.

B. CASES

B.1      Colombia’s First Investment Arbitration Award

In its final award dated 27 August 2019, an ICSID arbitration tribunal composed by arbitrators Juan Fernández-Armesto, Oscar Garibaldi and Christopher Thomas QC decided an investment dispute filed on 16 March 2016 by the Swiss commodities trader Glencore International A.G. (“Glencore”), and its Colombian subsidiary C.I. Prodeco S.A. (“Prodeco”) against the Republic of Colombia for an alleged violation of articles 4(1) and 4(2) of the 2006 BIT concluded between Colombia and the Swiss Confederation (“Treaty”)[6]. The arbitral tribunal awarded Glencore restitution of USD 19,100,000 plus interests at a rate of Libor plus 2%, capitalized semi-annually, and ordered Colombia to pay Glencore USD 2 million for costs of the arbitration.

Glencore’s investment in Colombia related to Prodeco’s ownership of mining rights over one of the largest thermal-coal mines of the country called the “Calenturitas” mine. On 2010, the mining contract between Prodeco and the Instituto Colombiano de Geología y Minería (“Ingeominas,” subsequently assigned to the National Mining Agency) was amended (“Eighth Amendment”) to readjust the formula for the calculation of royalties to be paid by Prodeco to the Republic of Colombia for the exploitation of the Calenturitas mine, reducing annual revenues to the Republic of Colombia, but increasing investments to expand the mine’s production capacity, which in the long term could result in a net benefit for the Republic of Colombia.

However, after a long investigation initiated in 2011, on 30 April 2015 Colombia’s National Comptroller’s Office issued a decision declaring that Prodeco, a former director of Ingeominas and a former Minister of Mining were liable for the detriment to State’s finances derived from the execution of the Eighth Amendment since it did not properly defend the interests of Colombia in the royalties of the Calenturitas mine. Therefore, the Comptroller’s Office ordered them to pay, jointly and severally, a compensation worth USD 25,000,000 to the Republic of Colombia. Prodeco paid this amount in its entirety but filed reconsideration and appeal motions to overrule it. Neither of them succeeded and then Prodeco filed an annulment action against the decision before the Colombian administrative courts. Pending a final ruling by the Council of State, Glencore filed a request for investment arbitration against Colombia based on the Treaty.

Glencore argued that the Comptroller’s Office treated its investment unfairly and inequitably, in violation of the Fair and Equitable Treatment standard (FET), and impaired such investment with unreasonable measures, resulting in a breach by Colombia of its obligations under articles 4(1) and (2) of the Treaty.

Regarding the FET standard, Glencore claimed that Colombia denied Prodeco a due process in the course of the proceeding initiated by the Comptroller’s Office, acted with bad faith, was biased and breached claimants’ legitimate expectations. The tribunal disagreed with the claimants. The facts of the case showed that neither the Comptroller’s Office flout procedural rules of Colombia’s fiscal liability proceeding to force former junior Ingeominas’ officials to change their sworn witness statement and turn their depositions against Prodeco, nor did the Comptroller’s Office failed to provide reasons in its decision to limit Prodeco’s right to file additional evidence in the fiscal liability proceeding. On the other hand, even though some public statements by former Comptroller’s Office Director Ms. Morelli regarding the fiscal liability proceeding under course against Prodeco were reprehensible and ill-advised because they could be understood as prejudgment of a probable appeal motion, they were inconsequential since Ms. Morelli had left office when the final decision under review was taken, appealed and affirmed.

Glencore stated that the Comptroller’s Office acted in an arbitrary and unreasonable manner by finding that Prodeco acted with the intention of causing damages to the Republic of Colombia and that the damages caused to the Republic of Colombia should be calculated based on what the Eight Amendment called the “Transition Period.” The tribunal agreed with claimants and pointed out that the determination of existence and quantum of damages made by the Comptroller’s office was contrary to basic principles of legal reasoning and financial logic since the expert report that grounded the Comptroller’s judgment only took into account data from the first year after the execution of the Eighth Amendment without any other reason than that it was the only available information to determine the existence of damage. However, according to the tribunal, the structure of the Eighth Amendment contemplated further investments to expand Calenturitas’ capacity following the works and investment plan (PTI) presented by Prodeco in 2010 to Ingeominas’, approval that was supposed to increase the Republic of Colombia’s royalties in the long term and could even compensate a decrease in the first years of implementation of the Eighth Amendment. The tribunal criticized that the Comptrollers judgment did not use or at least properly assessed financial simulations to predict alternative scenarios of cash flows with and without the Eighth Amendment, as well as the royalties associated to each of them to conclude with much more certainty the existence of damages to the Republic of Colombia. The tribunal found this practice not only unreasonable but also biased. It also concluded that if the expert report was not at all conclusive as to the existence of a real damage to the Republic of Colombia during a reasonable term of performance of the Eighth Amendment taking into account the 2010 PTI, then the Comptroller’s judgment frustrated Glencore and Prodeco’s legitimate expectations that the fiscal liability regime would be applied in a reasonable manner to them.

Even though Colombia filed an application for annulment of the award on 30 December 2019 Glencore’s case is relevant for the next rulings to come, taking into account that another 11 ongoing investment cases filed under ICSID arbitration rules are to be settled in the years to come, one of which is a second arbitration filed by Glencore and 2 of its Colombian affiliates[7].

B.2      Admissibility of constitutional actions for the protection of fundamental rights against international arbitration awards

Colombian constitutional law provides that any person has a legal action before a court for the defense of its fundamental constitutional rights whenever they result threatened or violated by any act or omission of any public authority, known as “acción de tutela.” The Constitution also provides that the law shall establish the cases when the tutela shall be admissible against private parties temporarily vested with the role of exercising public powers, or whose actions directly and severely affect common interest[8].

The tutela action has been admitted against domestic awards on similar grounds of a tutela action against judicial decisions, related mainly with violations of due process, such as procedural errors of sufficient gravity, errors of sufficient gravity on the examination of evidence or evidently erroneous factual findings. The issue of the admissibility of the tutela against awards rendered by international arbitration tribunals seated in Colombia had not been addressed by the Constitutional Court until its most recent ruling dated 6 August 2019 where the court decided that, under very exceptional circumstances (excepcionalisimas), parties to an international arbitration seated in Colombia can file a tutela against the award rendered in such proceedings based on violations to fundamental rights[9].

The case involved two parties to an international arbitration tribunal seated in Bogotá, Colombia, conducted under the rules of international arbitration of the Chamber of Commerce of Bogotá. One of the parties was a state-owned company and the other was a consortium of Chinese companies (“Consortium”). The dispute concerned the allegedly incorrect performance of an EPC contract to build a thermoelectric plant. The dispute was settled by a final award dated 4 December 2017 where the arbitral tribunal ruled in favor of the Consortium ordering the state-owned company to pay over USD 40 million.

On 11 January 2018 the state-owned company filed before the Third Section of the Council of State of Colombia a motion to set aside the arbitration award under article 108 of Law 1563, arguing, among other things, that the award conflicted with Colombia’s international public order. Pending the decision on the motion to set aside the award, the state-owned company also filed a parallel tutela action against the arbitration award for an alleged violation of the Consortium’s rights of due process and access to justice.

First instance and appeal judges declared that the tutela was not admissible against the award in the particular case, but did not analyze whether or not the tutela action was admissible in the context of international arbitrations seated in Colombia. It is worth mentioning though that one of the appeal judges issued a separate opinion on why the tutela shall not be admitted against any award rendered by an international arbitration tribunal, reasoning that international arbitrators are not public authorities, and are not comparable to domestic judges, in contrast with national arbitrators, who are temporarily vested with public functions. Therefore, considering international arbitrators as public authorities could lead to international responsibility of the Colombian State for awards rendered by arbitrators that might not even be Colombian nationals.

Under Law 1563, the only remedy against an international arbitration award is a motion to set it aside[10]. Nonetheless, in its ruling, the court interpreted that in accordance with the Colombian Political Constitution, neither the principle of non-judicial intervention enshrined in article 67 of Law 1563 nor the freedom to choose the applicable law to the arbitration as set forth under article 101 of the same statute, preclude the possibility of obtaining constitutional protection against awards issued by international arbitration tribunals seated in Colombia.

As to the principle of non-judicial intervention enshrined in article 67 of Law 1563, the court states that an ordinary law such as Law 1563 cannot override a constitutional provision such as article 86 of the Constitution, and then, the principle of non-judicial interventional embodied in such article 67 shall not be understood as precluding parties to the arbitration to seek constitutional protection whenever their fundamental rights are being threatened or have been breached in the proceedings.

As to the freedom of parties to choose the applicable law to the subject matter of the arbitration as set forth in article 101 of Law 1563, the court stated that such provision does not contradict the admissibility of constitutional protection against awards, but it does limit the scope of analysis in cases where substantive law applicable to the subject matter of the arbitration is not Colombian law, narrowing it to possible violations of Colombia’s international public order, specifically to fundamental rights, subject to previous exhaustion of the motion to set aside the award under article 108 to meet the subsidiarity requirement of admissibility of the tutela.

As some commentators[11] have suggested, this issue remains open-ended, since the Constitutional Court’s ruling does not address important topics, namely, the interplay between the New York Convention, with this new “motion” against awards, and the notion of international arbitrators as “public authorities.”

 

[1] Caducidad under Colombian law means unilateral termination by the public entity due to gross breach of contract.

[2] Supreme Court of Justice, Decision of January 15, 2019. File No. 11001-02-03-000-2016-03020-00. Judge Aroldo Wilson Quiroz.

[3] UNCITRAL Model Law uses the term ‘places of business‘.

[4] This clarification was introduced by the First Commission of the Senate in the first debate to approve the Bill.

[5] Directive of the Legal Secretariat of the municipality of Bogotá No. 22 of October 31, 2018.

[6] Glencore International A.G. and C.I. Prodeco S.A. vs. Republic of Colombia (ICSID Case No. ARB/16/6). Award of August 27, 2019.

[7] Glencore International A.G., C.I. Prodeco S.A., and Sociedad Portuaria Puerto Nuevo S.A. vs. Republic of Colombia (ICSID Case No. ARB/19/22). Registered on July 9, 2019. Tribunal not yet constituted. Respondent’s appointed arbitrator is Claus Von Wobeser.

[8] Political Constitution of Colombia, article 86.

[9] Constitutional Court of Colombia. Fifth Revision Chamber. Decision T-354/19 of August 6, 2019. Judge Antonio José Lizarazo Ocampo.

[10] Law 1563, article 107.

[11] Zuleta E., Rincon M.C. “Colombia’s Constitutional Court Declares That Constitutional Injunctions (Tutela) Can Be Upheld Against Awards In International ArbitrationKluwer Arbitration Blog. Nov. 4, 2019.

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