{"id":7513,"date":"2019-12-17T00:33:52","date_gmt":"2019-12-17T06:33:52","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=7513"},"modified":"2024-08-09T18:30:31","modified_gmt":"2024-08-09T16:30:31","slug":"colombia-is-ordered-to-pay-over-usd-19-million-for-frustrating-glencores-legitimate-expectations-glencore-international-a-g-and-c-i-prodeco-s-a-v-republic-of-colombia-icsid-case-no-arb-16-6","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2019\/12\/17\/colombia-is-ordered-to-pay-over-usd-19-million-for-frustrating-glencores-legitimate-expectations-glencore-international-a-g-and-c-i-prodeco-s-a-v-republic-of-colombia-icsid-case-no-arb-16-6\/","title":{"rendered":"Colombia is ordered to pay over USD 19 million for frustrating Glencore\u2019s legitimate expectations"},"content":{"rendered":"

Glencore International A.G. and C.I. Prodeco S.A. v. Republic of Colombia, ICSID<\/span> Case No. ARB\/16\/6<\/h2>\n

An ICSID tribunal found that Colombia frustrated the legitimate expectations of Swiss mining company Glencore and its investment in Colombia in breach of the non-impairment and FET<\/span> clauses of the Colombia\u2013Switzerland BIT<\/span>. The tribunal ordered Colombia to pay Glencore over USD 19 million in compensation plus interest, roughly half of its legal costs and full arbitration costs.<\/p>\n

Background and claims<\/h3>\n

In 1995, Glencore acquired Prodeco, a Colombian company that had a coal mining exploration and exploitation contract with Carbocol, the Colombian mining agency. Three agencies later replaced Carbocol: Ingeominas, the Colombian Geological Service (SGC in its Spanish acronym) and the National Mining Agency (ANM in its Spanish acronym).<\/p>\n

The parties renegotiated the contract in December 2009: Ingeominas agreed to lower royalties in exchange for Prodeco\u2019s further investments in the mining operation. The amendment could not be registered with the Colombian Mining Registry because it was contrary to Colombia\u2019s interests. After further negotiations, a new amendment in favour of Colombia was registered.<\/p>\n

Subsequently, the Colombian agency supervising public funds, Contralor\u00eda, launched an investigation into Ingeominas. The investigation report indicated that the amendment reduced Colombia\u2019s revenues, against the country\u2019s interests. Prodeco, in turn, argued that the revenue had to be calculated throughout the contract\u2019s entire duration and not just during 2010, which inevitably reduced Colombia\u2019s revenues.<\/p>\n

In 2012, SGC requested the amendment\u2019s annulment in domestic administrative courts. In 2015, Contralor\u00eda used the report to hold Prodeco and Ingeominas officers jointly liable for a fiscal liability fine. Prodeco paid the USD 19.1 million fine but challenged it, first administratively and later judicially. At the time the award was issued, both SGC\u2019s proceeding to annul the amendment and Prodeco\u2019s legal challenge to the fine were pending.<\/p>\n

Finally, in March 2016, Glencore and Prodeco (jointly, Glencore) initiated ICSID arbitration. They claimed that Colombia\u2019s actions\u2014namely, the fiscal liability fine and the annulment proceedings\u2014breached the FET and non-impairment standards and the umbrella clause of the BIT. They requested that the tribunal order Colombia to reimburse the fine, honour its obligations under the contract and its amendment, and stop the annulment proceedings.<\/p>\n

Tribunal dismisses jurisdictional and admissibility objections, but declines to exercise jurisdiction over umbrella clause claim<\/h3>\n

Colombia argued that the contract was negotiated in violation of Prodeco\u2019s good-faith obligations and was thus illegal. However, the tribunal was not convinced, since the allegation only arose during the arbitration and there was no direct evidence of Prodeco\u2019s deliberate misrepresentation.<\/p>\n

The tribunal also rejected Colombia\u2019s fork-in-the-road objection, since Prodeco had made the clear choice to pursue arbitration. It reasoned that previous negotiation and conciliation attempts with Colombian agencies did not trigger the clause.<\/p>\n

Colombia argued that the claims were not ripe for adjudication and were therefore inadmissible. The arbitrators rejected this argument, finding that Prodeco complied with the BIT by pursuing administrative proceedings for six months before initiating arbitration. The tribunal held that since the contract annulment proceeding was not an administrative action, the claimants were not required to pursue it.<\/p>\n

However, the tribunal rejected Glencore\u2019s umbrella clause claim on jurisdictional grounds, because BIT Article 11(3) expressly excludes the umbrella clause from the scope of the state parties\u2019 consent to arbitration.<\/p>\n

Merits: Arbitrators discuss threshold of non-impairment clause<\/h3>\n

The tribunal pointed out that BIT Article 4(1) on non-impairment prohibits \u201cunreasonable or discriminatory measures\u201d rather than the more common \u201carbitrary or discriminatory\u201d measures. It found that \u201cunreasonable\u201d measures are broader than \u201carbitrary\u201d ones since they included biased and<\/em> irrational measures, not only biased ones.<\/p>\n

The arbitrators found that Colombia acted unreasonably in affirming that the amendment has caused damages to Colombia and in calculating those damages. They found that Contralor\u00eda\u2019s report was outdated, lacked necessary reasoning and employed overly simplistic and biased calculation methods since it focused on a single year (2010).<\/p>\n

Tribunal holds that Colombia\u2019s violation of the non-impairment clause also breached legitimate expectations under FET\u2014but rejects other FET violations<\/h3>\n

Glencore argued that Colombia breached the FET standard under BIT Article 4(2) by denying due process to Prodeco during the fiscal liability proceedings. In particular, it contended that the charges against some civil servants were dropped after they changed their statements to incriminate Prodeco and that Prodeco was denied the chance to present additional evidence.<\/p>\n

However, the arbitrators found that due process was not denied because Glencore failed to prove that Contralor\u00eda\u2019s inquisitorial powers were used in violation of FET and due process. In effect, the tribunal noted that Contralor\u00eda did not use the modified statements in its prosecution and that Prodeco had never mentioned them before the arbitration.<\/p>\n

Additionally, the tribunal rejected Glencore\u2019s argument that the former Comptroller General was biased against Prodeco, noting that the authority was replaced before the final fiscal liability decision.<\/p>\n

Glencore also argued that its legitimate expectations were violated by the fiscal control regime itself, the arbitrary manner in which it was imposed, and by SGC\u2019s challenge of the amendment before administrative courts.<\/p>\n

Although the FET clause does not expressly reference legitimate expectations, the tribunal decided that its assessment had to consider \u201cwhether the state made specific representations to the investor before the investment was made and then acted contrary to such representations\u201d (para. 1310).<\/p>\n

The tribunal found that Glencore failed to prove that the fiscal control regime itself was a violation of legitimate expectations. It held that \u201ca mere contractual breach by the State will not per se <\/em>result in a violation of the international law FET standard,\u201d but that an additional factor\u2014such as acts of \u201cpuissance publique\u201d\u2014was required (para. 1378).<\/p>\n

According to the tribunal, investors must be aware of the host state\u2019s legal framework when making an investment. This meant that Prodeco should have known that fiscal controls were routine in Colombia and so could not have had the legitimate expectation that the company would be exempt from them. Even if Prodeco had legitimate expectations, they were not breached because the fiscal control acted in accordance with domestic law.<\/p>\n

However, the arbitrators found that the fiscal control was executed arbitrarily and unreasonably (see section above on non-impairment) and thus violated Glencore\u2019s legitimate expectations to a reasonable fiscal control.<\/p>\n

The tribunal did not find a BIT breach in the different Colombian government agencies\u2019 diverging positions. According to the tribunal, \u201c[t]he modern nation-state typically endows different agencies with different legal and policy responsibilities and objectives\u201d (para. 1420).<\/p>\n

Finally, the tribunal did not find the amendment proceedings to be a violation of Prodeco\u2019s legitimate expectations, considering that initiating them was within SGC\u2019s rights under both the contract and domestic law, thus Prodeco could not have the legitimate expectation it would refrain from such action.<\/p>\n

Decision: Compensation and costs awarded, but specific performance rejected<\/h3>\n

Finding that Colombia\u2019s investigation report and fiscal liability fine impaired the use of Glencore\u2019s investment and breached FET, the tribunal ordered Colombia to restore the USD 19.1 million fine paid by Prodeco as compensation, plus interest. It also ordered Colombia to pay the arbitration costs (USD 1.3 million), Colombia\u2019s legal expenses (USD 3.4 million) and approximately 50 per cent of Glencore\u2019s (USD 1.69 million).<\/p>\n

The tribunal denied Glencore\u2019s request to order ANM to continue to perform the contract, cease local court proceedings and promise to avoid initiating similar proceedings. Without answering whether a tribunal could issue such an order, it held that the \u201creparation of the international wrong committed by Colombia requires full reparation\u2026achieved by restitution\u2026not by ordering Colombia to perform the Eighth Amendment\u201d (para. 1667).<\/p>\n

Notes<\/em>: The tribunal was composed of Juan Fern\u00e1ndez-Armesto, (president appointed by both parties, Spanish national), Oscar M. Garibaldi (claimant\u2019s appointee, American and Argentinian national) and Christopher Thomas (respondent\u2019s appointee, Canadian national). The award of August 27, 2019 is available at https:\/\/www.italaw.com\/cases\/7539<\/a><\/p>\n

Sofia de Murard<\/strong> is a\u00a0New York University IFD Fellow with IISD<\/span>\u2019s Investment for Sustainable Development Program.<\/p>\n