Glencore obtains first treaty award against Colombia

  • Colombia
  • 08/29/2019
  • Latin Lawyer

An International Centre for Settlement of Investment Disputes (ICSID) tribunal has ordered Colombia to repay a US$19 million fine imposed on Swiss commodities trader Glencore relating to a contract amendment concerning mining royalties – at the same time rejecting alternative claims worth US$600 million and the state’s allegations of corruption.

In a 341-page award dispatched on 27 August, a tribunal chaired by Spanish arbitrator Juan Fernández-Armesto ruled that the manner in which the fine against Glencore’s local subsidiary Prodeco had been calculated was an “unreasonable measure” and a breach of fair and equitable treatment under the Switzerland-Colombia bilateral investment treaty (BIT). Colombia was ordered to repay the fine with interest.

It is believed to be the first treaty award ever issued against the state.

The tribunal – which included Argentine-US arbitrator Oscar Garibaldi and Canada’s J Christopher Thomas QC of the National University of Singapore – dismissed an alternative claim by Glencore for US$575 million plus interest, which was predicated on the assumption that the previous royalty regime would be reinstated.

The tribunal refused to order Colombia to give specific assurances about its future conduct towards the companies, concluding that such relief was unnecessary, as its decision already implied that Colombia should refrain from the same wrongful conduct in the future.

Colombia was also ordered to pay over US$2 million towards Glencore’s legal expenses and the costs of the arbitration. Interest was also awarded on the damages and costs.

While the tribunal was unanimous on the result, Garibaldi expressed disagreement over the threshold to be applied to a state’s unreasonable conduct under the treaty, which he explained in footnotes to the award.

Glencore and Prodeco were represented in the arbitration by Freshfields Bruckhaus Deringer LLP in Washington, DC. The firm did not wish to comment.

Prodeco said that it was important the dispute had been resolved and that it hoped to continue developing its investments in the country.

Colombia was represented by Dechert in Paris and Washington, DC. The firm tells GAR that “Colombia is pleased with the award” in light of the fact that claims exceeding US$550 million and requests for injunctive relief were rejected.

Glencore has operated in Colombia since 1995 when it acquired the Prodeco Group, which held mining rights over the Calenturitas thermal coal mine in northern Columbia – one of the largest in the country.

The dispute stems from a 2010 amendment to a mining contract signed with Colombian state mining agency Ingeominas, which Glencore says changed the system of calculating royalties and gross income and induced it to undertake a “massive additional program of investment” to expand the mine.

Later that year, Colombia’s General Comptroller’s Office – then headed by Sandra Morelli Rico, herself a former ICSID arbitrator – conducted an investigation into the new royalties regime and concluded it was detrimental to the state. The office ultimately ordered Prodeco to pay US$19.1 million in 2015 to cover the alleged shortfall the new regime had created.

Glencore and Prodeco paid the fine under protest and filed the ICSID claim in 2016, alleging that it amounted to an unreasonable measure that had impaired its investment as well as a breach of fair and equitable treatment (FET) under the BIT.

“Greenmail” scheme not evidence of corruption

Among its jurisdictional objections, Colombia argued that the claimants had procured their investment through corruption and in bad faith.

The state contended that Prodeco had procured the 2010 amendment to the royalties regime by paying a bribe to Ingeominas’ then director general, disguised as the purchase price for land adjacent to their mining project. The claimants did not dispute that they had paid US$1.75 million to former employees of the ministry of mines for the land but said they were victims of a “greenmail” scheme.

The tribunal rejected Colombia’s corruption allegation, saying the “dots simply do not connect”. It noted that Prodeco had repeatedly complained to the Colombian authorities about the greenmail scheme on multiple occasions.

Moreover, Colombian authorities only lodged a criminal complaint alleging corruption in the procurement of the royalties amendment in 2017, a year and a half after the commencement of the ICSID claim. The tribunal observed that country’s criminal prosecutor and courts had not initiated an investigation into the allegations.

In asserting corruption, Colombia had sought to rely on a number of documents seized by its competition authority from Prodeco’s premises in the context of a separate antitrust investigation. The tribunal excluded these from the record in an earlier phase of the case, ruling that Colombia was precluded from coercing evidence from the claimants through its administrative powers.

In its award, the panel also said it was persuaded that Prodeco and the government had renegotiated the contract “in good faith and at arm’s length”, during which time Colombia had ever opportunity to request further information from the company.

Colombia’s objection based on a fork-in-the-road provision was also denied, as the panel concluded that the pending proceedings in the Colombian courts had been initiated after the arbitration had been filed. If the provision applied, the arbitration would take precedence.

The tribunal rejected Colombia’s arguments that the claim was inadmissible as the claimants had not suffered any harm, concluding that there was prima facie evidence of “certain loss or damage”. It did, however, uphold the state’s objection to claims under the BIT’s umbrella clause, concluding that the state parties to the treaty had “withheld their consent to solve umbrella clause disputes by way of international arbitration”.

Not all claims upheld on the merits

Glencore and Prodeco argued that it had been denied FET in three main respects: a denial of due process; bias and bad faith by the Comptroller General; and a breach of their legitimate expectations that the Comptroller would not be able to start a fiscal liability process.

The tribunal did not find there had been a breach of due process as the Comptroller General had provided valid reasons for her decision, which was based on documentary evidence and not on depositions by witnesses. The legal system permitted Prodeco to challenge the decision, which it did, and there was no allegation that the Colombian courts had committed a denial of justice.

On bias and bad faith, the tribunal criticised the conduct of Morelli, describing her public statements on the issue as “reprehensible and ill-advised” and an indication she had prejudged the case.

However it noted that Morelli left her post in August 2014, and a new Comptroller General decided Prodeco’s appeal, which was rejected – meaning that Morelli’s apparent bias was inconsequential and could not amount to a breach under the treaty.

The tribunal also found that the extension of the fiscal liability regime to a private company had not been a breach of legitimate expectations, as the Colombian legal framework around mining contracts was “idiosyncratic”, allowing an administrative law regime to co-exist with a fiscal liability regime.

The panel went on to find that the Comptroller’s calculation of the damage caused to the state was an “unreasonable measure” as it had been “biased” and “contrary to basic principles of legal reasoning and financial logic”.

The methodology used by the Comptroller had focused on the royalty income of the government for a single year, which was “deeply flawed”. Any calculation should take into account the investments made by Prodeco and the increased levels of production at the mine over the life of the contract, the tribunal said.

The tribunal also concluded that the Comptroller’s actions had violated the claimant’s legitimate expectations that the Comptroller’s findings on damage would be reasonable, meaning that this conduct also breached the FET standard.

Alternative claims dismissed

The tribunal granted Glencore and Prodeco’s request for restitution of the fine it paid. It noted that if the Comptroller decided to initiate new proceedings over the royalties amendments, the office would be bound to respect the findings in the ICSID award. Otherwise the new calculation of damages would be unreasonable for the same reasons.

Glencore and Prodeco had made a number of alternative claims in its request for relief, including that the tribunal order the state to provide specific assurances that it would not seek to impose similar fines in the future.

The tribunal said that Colombia and its Comptroller are required under the treaty to abstain from wrongful conduct. Therefore such assurances were unnecessary. On that basis, the panel concluded that Glencore and Prodeco’s alternative claims for damages and indemnities if the state breached those assurances were moot. These claims assumed that the tribunal would order Prodeco to pay royalties under the prior regime, which did not occur.

Glencore and Prodeco had also requested that Colombia immediately and unconditionally cease the pending proceedings before the Colombian courts and guarantee it will refrain from initiating any new proceedings over the royalties amendment.

The tribunal rejected that request, finding that it was drafted in “terms which are too broad”. If Prodeco breaches the amended contract, there is no reason why the country’s mining agency should be prohibited from bringing a claim, it said.

Glencore is also bringing a second ICSID claim against Colombia, filed in July this year over the construction and maintenance of the access channel to a port facility. The commodities trader is again using Freshfields, alongside Dechamps International Law.

Glencore International AG and CI Prodeco SA v. Republic of Colombia (ICSID Case No. ARB/16/6)

Tribunal

Juan Fernández-Armesto (Spain) (chair)
Oscar Garibaldi (US-Argentina) (appointed by claimants)
J Christopher Thomas QC (Canada) (appointed by Colombia)

Counsel to Glencore

Freshfields Bruckhaus Deringer LLP

Partners Nigel Blackaby and Caroline Richard, with counsel Alexander Wilbraham, senior associate Gustavo Topalian* and associates Ankita Ritwik, Jessica Moscoso and Amy Cattle in Washington, DC, with associate Diego Reuda in New York

  • Now a partner at Dechamps International Law in Buenos Aires

Álvarez Zárate & Asociados

Partner José Manuel Álvarez Zárate in Bogotá

Counsel to Colombia

Dechert

Partner Eduardo Silva Romero and José Manuel García Represa in Paris with special legal consultant Juan Felipe Merizalde Urdaneta and international counsel Alvaro Galindo in Washington, DC, with associates Audrey Caminades, Cataline Echeverri, Luis Miguel Velarde and Ruxandra Esanu in Paris and associates David Attanasio and Ana Maria Duran in Washington, DC

Pierre Mayer

Agencia Nacional de Defensa

Ana María Ordóñez Puentes and César Augusto Méndez Becerra in Bogota

Expert witnesses for Glencore

Pablo T Spiller, Santiago Dellepiane*, Mark Sheiness and Arun Parmar of Compass Lexecon *Now at Berkeley Research Group

This article was originaly published by Latin Lawyer’s sister publication Global Arbitration Review on 28 August.

Practice area : Arbitration, Mining & metals
Country : Colombia, International
Industry : Mining and Metals

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