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Latin America litigation

A decision of the Colombian Constitutional Court, issued in August 1996, has blocked the ratification of a bilateral investment treaty entered into by Colombia and the UK in 1994 and approved by the Colombian Congress in late 1995. With the failure of a recent government initiative to overturn the constitutional basis for the court's decision, it now appears that the treaty has been shelved indefinitely.

Under Colombia's constitution, an international treaty can only be ratified by the President after the Constitutional Court has reviewed its text and affirmed that it is consistent with the Constitution. In this instance, the court, by a six to three vote, refused to approve Article 6 of the Treaty, a core provision of the model bilateral investment treaty guaranteeing the nationals or companies of each treaty party the right to:

  • non-discriminatory and lawful exercise of government expropriation powers for a treaty party's investments, for reasons based on the public welfare or social interest relating to internal needs of the host treaty party;
  • "prompt, adequate and effective compensation" for expropriation of a treaty party's investments (defined to include interest on an award and free repatriation of all proceeds, limited only to a per annum limitation of 33.33% of the total amount in cases of exceptional balance of payment problems); and
  • independent judicial review of any violation of the foregoing treaty obligations.

The court found it "clear beyond any doubt" that Article 6 was contrary to similar provisions in Article 58 of the 1991 Constitution providing for prior compensation in cases of expropriation of private property but also reserving to the legislature discretion to deny such payment for "reasons of equity". Article 58 states, in the relevant part:

"In all such matters, the legislature, for reasons of equity, may specify the cases in which there will be no payment of compensation through a vote of an absolute majority of the members of both chambers.

The reasons of equity, as well as the reasons of public welfare or social interest, invoked by the legislature shall not be judicially overturned."

To the extent that Article 6 gave special rights to investors from the UK, the court also found a violation of Article 13 of the Constitution, which guarantees to all persons equal treatment under the law.

In so doing, the court rejected the arguments of the independent advocate charged with representing the individual and collective rights of the Colombian people (the Procurador General de la Nación), as well as ministries of the executive branch and the Central Bank. These government entities defended the constitutionality of the Treaty as consistent with the government's Programme of Internationalization and Modernization of the Economy promoting foreign investment, as well as overarching principles of international law and Article 21 of the American Convention on Human Rights assuring fair compensation for the expropriation of private property.

With respect to the apparent conflict with Article 58, the Procurador noted that the legislature was the entity empowered to determine when compensation should not be granted for 'reasons of equity' and that it had not found any objections warranted by Article 6, implicitly exercising its power to refrain from denying compensation for expropriation of British investments. It argued that the constitutional requirement of equal treatment was satisfied by the reciprocal guaranties assured to Colombian nationals by the UK.

The court rejected the suggestion that the legislature could make a blanket renunciation in all cases involving British investors of its prerogative to deny compensation for reasons of equity. For the majority, such a determination would be inconsistent with Article 58 because it would apply to "a category of cases" — that of British investors — rather than to a "concrete case"; and more importantly, because the concept of 'equity', which the court framed in Aristotelian terms, implied a specific assessment of individual factors within the context of a concrete case. In addition, the court also found that the guarantee of judicial review under Article 6 of the Treaty was inconsistent with the provisions of Article 58 withdrawing jurisdiction from the Colombian courts over any right to review a decision of the legislature denying compensation for reasons of equity. Finally, it refused to accept that reciprocal treatment of Colombian and UK citizens satisfied the constitutional principle of equal treatment. The result of the court's ruling was to permit the President to ratify the Treaty subject to a reservation as to the enforceability of Article 6.

In a powerful dissenting opinion, the minority criticized each of the grounds of the court's decision, noting that the voluntary limitation of the legislature's power implied by the Treaty did not differ from those in other international agreements through which the state voluntarily limited its freedom of action. It turned to the concept of unjustified enrichment as the origin for the constitutional reference to 'reasons of equity', which it took as a standard for general, legislative enactments exempting certain cases of expropriation from the general constitutional requirement of just compensation. In focusing on individualized determinations of 'equity', the dissent argued, the court mistakenly transformed what should be the legislature's function of formulating general laws into a properly executive function of resolving specific cases. The dissent also echoed the Procurador's argument that the Treaty was consistent with the foreign policy and economic powers established in the Constitution, and noted that the court's interpretation of Article 58 would inevitably require constitutional reform by the legislature.

In the wake of the court's decision, the government did introduce a proposed amendment to Article 58 as part of a broader set of constitutional reforms. However, after receiving the approval of the Chamber of Representatives, the amendment to Article 58 was rejected in the Senate and, in early 1997, the government withdrew the entire package of constitutional amendments. Although investment in Colombia from the UK continues to be strong — particularly in the petroleum sector — the British government has made clear that the Treaty will not be approved without the entirety of Article 6, and will therefore remain in limbo until the constitutional obstacles imposed by the court's decision are removed.

Mark O'Donoghue and Andres Consuegra
Curtis, Mallet-Prevost, Colt & Mosle
New York

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