Judgment C-252 of 2019 of the Constitutional Court of Colombia: Change of precedent on the control of BITs

Judgment C-252 of the Constitutional Court of Colombia,[1] on the constitutionality of the Colombia–France BIT,[2] has aroused interest[3] for being the response of the constitutional judge to the way in which foreign investment protection clauses are incorporated into domestic law. I set out below some aspects of the context in which this decision was taken, the main points addressed in the judgment and the reasons supporting it. My concluding remarks highlight the limits established by the court for the negotiation of treaties of this type, with the caveat that genuine protection of the national interest in this area involves making deeper changes in the management of economic foreign policy.

Background

A first important aspect is the legal context of this judgment. Under the more than 24 BITs, FTAs and other investment-related treaties ratified by the Colombian state[4] at the time the judgment was handed down, there were 20 ISDS claims filed by multinationals against Colombia, 9 of which were in the direct settlement phase and 11 of which had gone to formal proceedings. Notably, these claims total USD 9.525 billion, a sum greater than 10 per cent of the entire national budget for 2019 and which can only increase when interest and legal and arbitration costs are added in.[5] In addition, 9 of the 11 claims undergoing arbitration proceedings are based on alleged international wrongful acts on the basis of judgments issued by the very Constitutional Court, in either “tutela” or constitutionality proceedings.

These elements are added to certain features of the global context that increase the high vulnerability and risk that states such as Colombia face with regard to ISDS. By end 2018, states had signed 3,322 investment protection treaties. While the number of treaties ratified has marginally decreased, the number of claims by foreign investors has increased, reaching 942 worldwide. Of known cases, 61 per cent were decided in favour of investors.[6]

Empirical evidence on this subject indicates that developing countries are net losers in ISDS and, in general, the big winners are multinational corporations or individual billionaires from capital-exporting countries, as well as the arbitrators, who are paid substantial fees for deciding disputes.[7]

Interpretative method: prior situation and the change of precedent introduced by the judgment

The constitutionality review of international treaties in Colombia is exercised over two aspects: the instrument’s approval process and the compatibility of the treaty’s substance with the constitution. On account of various particular features of constitutionality review, the type of review being carried out by the court over the substantive clauses of investment treaties was limited to cross-checking them against the constitution, with no reference to the scope of such clauses in dispute settlement by arbitrators.[8]

The court firstly reiterated that investment treaties are consistent with the constitution according to the criteria of national interest; reciprocity; and the internationalization of its political, economic and social relations.[9] The change of precedent made by the Court in C-252 of 2019 was in the study of the substantive compatibility of the investment protection clauses with the constitution. The court disaggregated the mandates derived from each treaty clause, checked their scope against relevant guideposts that awards had set over material control clauses, and determined which were admissible and which were inadmissible based on constitutional interpretation. It complemented this exercise with a review of the current global debate on investment law, comparing the Colombia–France BIT to recent developments in the area such as USMCA, CPTPP, the Indian model investment treaty and CETA, as well as domestic law decisions such as those adopted by the French Constitutional Council for CETA and the 2015 Trade Promotion Authority (TPA) of the United States. Several of these committed France both domestically and externally and contained elements that differed from those that France had agreed with Colombia.

The Court’s decision

The Constitutional Court advised the President of the Republic of Colombia that if he decided to complete the treaty’s ratification process, he should make a joint interpretative declaration with France to clarify the terms indicated by the judgment.[10] The court established seven conditions:

1. The substantive rights granted to foreigners must not lead to “unjustified more favourable treatment than the treatment accorded to nationals.”[11]

For a better understanding of the conditions set by the court with respect to the FET standard for foreign investors,[12] see the relevant part of the treaty article on FET (unofficial ITN translation from Spanish original):[13]

Each of the Contracting Parties shall accord fair and equitable treatment in accordance with applicable international law to the investors of the other Contracting Party and to their investments in their territory. For greater certainty, the obligation to provide fair and equitable treatment includes, inter alia:

a) The obligation to not deny justice in civil, criminal or administrative proceedings in accordance with the principle of due process.

b) The obligation to act in a transparent, non-discriminatory and non-arbitrary manner with respect to investors of the other Contracting Party and their investments.

This treatment is consistent with the principles of predictability and consideration of investors’ legitimate expectations. […] [emphasis added]

Regarding the FET standard, the Court laid down three conditions:

1. The term “inter alia” must be interpreted restrictively, in an analogical sense and not a comprehensive one; in other words, it is prohibited to limitlessly commit the state to obligations that are not agreed between the parties.[14]
2. The term “in accordance with applicable international law to investors of the other Contracting Party and to their investments in their territory” is subject to its content being determined by the parties (through a joint interpretation) in order to have legal certainty on what states commit to.[15]
3. The term “legitimate expectations,” also used in the expropriation clause as one of the factors to be considered in determining indirect expropriation,[16] must be understood as “taking into account that these will only come into effect on condition that they derive from specific, repeated acts carried out by the Contracting Party that induce the good-faith investor to make or maintain the investment and that there are abrupt and unexpected changes made by government that affect their investment.”[17]

The court also established conditions related to the national treatment and MFN standards. See the relevant part of the text of the clause for better understanding (unofficial ITN translation from Spanish original):[18]

Each Contracting Party shall in its territory apply to the investors of the other Contracting Party, in respect of their investments and activities related to their investments, treatment no less favourable than that granted in like situations to its investors or the treatment granted to the investors of the most-favoured nation if such treatment is more favourable [emphasis added].

The two conditions established by the court were the following:

1. The term “like situations” should also be detailed in such a manner that is consistent with legal certainty.[19]
2. While Congress reserves competence in the ratification phase of the treaty, the court stated that the word “treatment” must be understood to preserve “the power of the President of the Republic with regard to directing international relations, and concluding treaties, pursuant to article 189.2 of the constitution.”[20]

Finally, the court established a condition concerning the article on expropriation and compensation. See the relevant part of the text of the clause for better understanding:[21]

Measures taken by a Contracting Party that are designed to protect legitimate public policy objectives, such as public health, security and environmental protection, do not constitute indirect expropriation when they are necessary and proportionate in the light of these objectives and are implemented in such a way that they effectively respond to the public policy objectives for which they were designed [emphasis added].

1. In this context, the Court established the condition that the term “necessary and proportionate” should be understood in such a way that “the freedom of structuring and autonomy of national authorities is respected for the purposes of, respectively, ensuring public order and protecting legitimate public policy objectives.”[22]

However, the interpretative method and conditions laid down with regard to the substantive protection clauses were not similar in the ISDS analysis. Intervening Magistrates Álvarez,[23] Urueña[24] and Correa[25] and the reasoning of Magistrate Carlos Bernal’s opinion warned of the risks of what was agreed there, such as the lack of interpretation in conformity with human rights of certain arbitration decisions, the trend of states losing cases in such instances, the possible revision of judgments of the Constitutional Court by arbitrators and the amounts claimed, which may substantially affect the state’s finances. Despite these warnings, the court declared the pure and simple enforceability of the agreement, that is, its constitutionality or applicability.[26]

Additional comments on the decision

ISDS, the design of the substantive provisions of investment treaties and the content of various arbitration awards develop and contain an unjustified and inappropriate limitation on the regulatory capacity of the state and its environmental, administrative and economic prerogatives. This limitation translates as excessively preferential treatment to FDI that ultimately becomes a severe impairment to the economic and political sovereignty of states, especially if they are developing states.

It is unprecedented—and equally important—that the Constitutional Court has set limits and constraints on the traditional interpretation of the investment protection clauses of FET, national and MFN treatment, and expropriation. However, if the court had serious objections regarding the constitutionality of certain terms (as it did, indeed, have) a declaration of partial unenforceability or non-constitutionality of the elements that ran counter to the constitution would have been more practical. This is all the more true given that the interpretive declaration has to be agreed with France and is not subject to consideration by Congress, public opinion or the court itself.

This judgment also reflects the need to rethink foreign policy with regard to international economic law for Colombia and for developing countries. The court’s judgment establishes new criteria and, in turn, helps the country review its agenda in terms of international economic law in matters of investment as well as trade, double taxation and intellectual property,[27] given that several of the premises mentioned have implications in these areas.

The importance of reviewing the policy of the Colombian state on these issues is pressing, bearing in mind that the first ISDS award against the Colombian government was issued in late August 2019. This award requires Colombia to pay Glencore USD 19 million plus interest and legal costs. The content of this decision has serious consequences for the fundamental powers of the state to sanction fiscal or administrative violations incurred by multinational companies.[28]

Similarly, given the nature of the judgment of the Constitutional Court, this decision does not imply an immediate review of trade, investment or intellectual property agreements, matters that are generating many of the international claims that foreign investors have brought before ISDS and that endanger the regulatory capacity and autonomy of the Colombian state. Therefore, an authentic and integral defence of Colombia’s interests requires a review of the management of the country’s international relations, which is headed by the executive branch. In addition, there should be an increase in the levels of control and deliberation that the legislative branch and civil society have over the process of the incorporation of instruments such as international agreements on investment and trade.

Authors

Federico Suárez Ricaurte is a lawyer, professor and researcher in international economic law and constitutional law at the Faculty of Law of the Externado University of Colombia. He was a visiting researcher at the Transnational Law Institute at King’s College London (2016).

Notes

[1] Constitutional Court of Colombia (CCC), Judgment C-252 2019. Retrieved from http://www.corteconstitucional.gov.co/relatoria/2019/c-252-19.htm [Judgment].

[2] Agreement between the Government of the Republic of Colombia and the Government of the French Republic on the promotion and reciprocal protection of investments, 10 July 2014. Retrieved from https://investmentpolicy.UNCTAD.org/international-investment-agreements/treaties/bilateral-investment-treaties/3488/colombia—france-bit-2014- [Colombia–France BIT].

[3] See, for example, Zuleta, E. & Rincón, M. C. (2019, July 4). Colombia’s Constitutional Court conditions ratification of the Colombia–France BIT to the interpretation of several provisions of the treaty. Kluwer Arbitration Blog. Retrieved from http://arbitrationblog.kluwerarbitration.com/2019/07/04/colombias-constitutional-court-conditions-ratification-of-the-colombia-france-bit-to-the-interpretation-of-several-provisions-of-the-treaty; Prieto, G. (2019, July 29). The Colombian Constitutional Court judgment C-252/19: A new frontier for reform in international investment law. EJIL Talk. Retrieved from https://www.ejiltalk.org/the-colombian-constitutional-court-judgment-c-252-19-a-new-frontier-for-reform-in-international-investment-law/#more-17376

[4] Judgment, note 1 supra, para. 50.

[5] Judgment, note 1 supra, para. 60.

[6] UNCTAD. (2018). World investment report: Investment and new industrial policies. UNCTAD: Geneva. Retrieved from https://UNCTAD.org/en/PublicationsLibrary/wir2018_en.pdf

[7] Schultz, T., & Dupont, C. (2014). Investment arbitration: promoting the rule of law or over-empowering investors? A quantitative empirical study. European Journal of International Law, 25(4), 1147–1168. Retrieved from http://www.ejil.org/pdfs/25/4/2551.pdf; Van Harten, G., & Malysheuski, P. (2016). Who has benefited financially from investment treaty arbitration? An evaluation of the size and wealth of claimants. Osgoode Legal Studies Research Paper Series, 12(3), No. 14. Retrieved from https://digitalcommons.osgoode.yorku.ca/olsrps/135; Comisión para la Auditoría Integral Ciudadana de los Tratados de Protección Recíproca de Inversiones y del Sistema de Arbitraje en Materia de Inversiones (CAITISA, Commission for the Citizens’ Integral Audit of Reciprocal Investment Protection Treaties and the International Investment Arbitration System). (2017). Auditoría integral ciudadana de los tratados de protección recíproca de inversiones y del sistema de arbitraje en materia de inversiones en Ecuador. Informe ejecutivo. Retrieved from http://caitisa.org/index.php/home/enlaces-de-interes; Olivet, C., Müller, B. & Ghiotto, L. (2019, April). ISDS in numbers: Impacts of investment arbitration against Latin America and the Caribbean. Transnational Institute: Amsterdam. Retrieved from https://www.tni.org/en/publication/ISDS-in-numbers

[8] See CCC, Judgment C-750 2008 (Colombia-United States FTA). Retrieved from http://www.corteconstitucional.gov.co/RELATORIA/2008/C-750-08.htm; CCC, Judgment C-608 2010 (Colombia-Canada FTA). Retrieved from http://www.corteconstitucional.gov.co/relatoria/2010/C-608-10.htm, among others.

[9] Constitución Política de Colombia, 1991, Art. 226. Retrieved from http://www.suin-juriscol.gov.co/viewDocument.asp?ruta=Constitucion/1687988

[10] Judgment, supra note 1, para. 68.

[11] Judgment, supra note 1, para. 112.

[12] Judgment, supra note 1, para. 174.

[13] Colombia-France BIT, supra note 2, Art. 4(1), first part.

[14] Judgment, supra note 1, para. 208.

[15] Judgment, supra note 1, para. 204.

[16] Colombia–France BIT, note 2 supra, Art. 6(2)(c): “[…] To determine whether a measure or series of measures by one Contracting Party constitute an indirect expropriation, a case-by-case analysis shall be performed considering among other factors: … c) The consequences of the measure or series of measures on the investor’s legitimate expectations” [emphasis added].

[17] Judgment, supra note 1, para. 212.

[18] Colombia–France BIT, supra note 2, Art. 5(1).

[19] Judgment, supra note 1, para. 256.

[20] Judgment, supra note 1, para. 256.

[21] Colombia–France BIT, supra note 2, Art. 6(2), last part.

[22] Judgment, supra note 1, paras. 247, 248 and 250.

[23] Judgment, supra note 1, para. 360.

[24] Judgment, supra note 1, paras. 361–363.

[25] Judgment, supra note 1, para. 364.

[26] Judgment, supra note 1, para. 373.

[27] Externado Radio. (2019). El control constitucional en el tratado de libre inversión entre Colombia y Francia. Derecho a la Carta, 331 (audio podcast). Retrieved from https://www.spreaker.com/user/externadoradio/331-el-control-constiticional-en-el-TBI-

[28] Glencore International A.G. and C.I. Prodeco S.A. vs. Republic of Colombia, ICSID Case No. ARB/16/6, Award, August 27, 2019. Retrieved from https://www.italaw.com/sites/default/files/case-documents/italaw10767_0.pdf