Colombia is ordered to pay over USD 19 million for frustrating Glencore’s legitimate expectations

Glencore International A.G. and C.I. Prodeco S.A. v. Republic of Colombia, ICSID Case No. ARB/16/6

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 clauses of the Colombia–Switzerland BIT. 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.

Background and claims

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).

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

Subsequently, the Colombian agency supervising public funds, Contraloría, launched an investigation into Ingeominas. The investigation report indicated that the amendment reduced Colombia’s revenues, against the country’s interests. Prodeco, in turn, argued that the revenue had to be calculated throughout the contract’s entire duration and not just during 2010, which inevitably reduced Colombia’s revenues.

In 2012, SGC requested the amendment’s annulment in domestic administrative courts. In 2015, Contraloría 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’s proceeding to annul the amendment and Prodeco’s legal challenge to the fine were pending.

Finally, in March 2016, Glencore and Prodeco (jointly, Glencore) initiated ICSID arbitration. They claimed that Colombia’s actions—namely, the fiscal liability fine and the annulment proceedings—breached 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.

Tribunal dismisses jurisdictional and admissibility objections, but declines to exercise jurisdiction over umbrella clause claim

Colombia argued that the contract was negotiated in violation of Prodeco’s 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’s deliberate misrepresentation.

The tribunal also rejected Colombia’s 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.

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.

However, the tribunal rejected Glencore’s umbrella clause claim on jurisdictional grounds, because BIT Article 11(3) expressly excludes the umbrella clause from the scope of the state parties’ consent to arbitration.

Merits: Arbitrators discuss threshold of non-impairment clause

The tribunal pointed out that BIT Article 4(1) on non-impairment prohibits “unreasonable or discriminatory measures” rather than the more common “arbitrary or discriminatory” measures. It found that “unreasonable” measures are broader than “arbitrary” ones since they included biased and irrational measures, not only biased ones.

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 Contraloría’s report was outdated, lacked necessary reasoning and employed overly simplistic and biased calculation methods since it focused on a single year (2010).

Tribunal holds that Colombia’s violation of the non-impairment clause also breached legitimate expectations under FET—but rejects other FET violations

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.

However, the arbitrators found that due process was not denied because Glencore failed to prove that Contraloría’s inquisitorial powers were used in violation of FET and due process. In effect, the tribunal noted that Contraloría did not use the modified statements in its prosecution and that Prodeco had never mentioned them before the arbitration.

Additionally, the tribunal rejected Glencore’s argument that the former Comptroller General was biased against Prodeco, noting that the authority was replaced before the final fiscal liability decision.

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’s challenge of the amendment before administrative courts.

Although the FET clause does not expressly reference legitimate expectations, the tribunal decided that its assessment had to consider “whether the state made specific representations to the investor before the investment was made and then acted contrary to such representations” (para. 1310).

The tribunal found that Glencore failed to prove that the fiscal control regime itself was a violation of legitimate expectations. It held that “a mere contractual breach by the State will not per se result in a violation of the international law FET standard,” but that an additional factor—such as acts of “puissance publique”—was required (para. 1378).

According to the tribunal, investors must be aware of the host state’s 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.

However, the arbitrators found that the fiscal control was executed arbitrarily and unreasonably (see section above on non-impairment) and thus violated Glencore’s legitimate expectations to a reasonable fiscal control.

The tribunal did not find a BIT breach in the different Colombian government agencies’ diverging positions. According to the tribunal, “[t]he modern nation-state typically endows different agencies with different legal and policy responsibilities and objectives” (para. 1420).

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

Decision: Compensation and costs awarded, but specific performance rejected

Finding that Colombia’s investigation report and fiscal liability fine impaired the use of Glencore’s 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’s legal expenses (USD 3.4 million) and approximately 50 per cent of Glencore’s (USD 1.69 million).

The tribunal denied Glencore’s 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 “reparation of the international wrong committed by Colombia requires full reparation…achieved by restitution…not by ordering Colombia to perform the Eighth Amendment” (para. 1667).

Notes: The tribunal was composed of Juan Fernández-Armesto, (president appointed by both parties, Spanish national), Oscar M. Garibaldi (claimant’s appointee, American and Argentinian national) and Christopher Thomas (respondent’s appointee, Canadian national). The award of August 27, 2019 is available at https://www.italaw.com/cases/7539

Sofia de Murard is a New York University IFD Fellow with IISD’s Investment for Sustainable Development Program.