Investor Rights and Legal Stability: Insights from Telefonica v Colombia

Introduction

In the case Telefonica v Colombia, ICSID case No. ARB/18/3, an ICSID tribunal determined that the respondent breached the investor’s legitimate expectations. This case concerns the interplay between investment arbitration and long-term concessions in the telecommunications sector. The decision delves into the modification of long-term contracts and fuels the debate regarding the definition of legitimate expectations and radical change to a legal framework. The decision also addresses the potential weight of comments from politicians in shaping investors’ expectations.

Background

In 1994, Colombia granted a concession to Colombia Telecomunicaciones S.A. E.S.P (“ColTel”) to provide mobile phone services (the “Concession”).[1] The Concession could be extended until 2014, after which all assets would revert to the State.

In 1998, Colombia enacted Law 422 providing that the only asset that had to be reverted was the radio spectrum. In the ICSID arbitration, the parties would disagree if this law applied to the ongoing Concession. In 2004, Telefonica invested in ColTel.[2] In 2009, Law 1341 was enacted repeating that the only asset that had to be reverted was the radio spectrum. Although these laws were enacted, there was no express modification to the Concession via contract. By 2012, Telefonica had a majority shareholding in the concessionaire while Colombia had a minority interest.

In the ICSID arbitration, Telefonica would argue that these laws and statements from Colombian politicians led them to believe that these laws applied to and modified the Concession.

Following an application of the Comptroller, in 2014 the Colombian Constitutional Court declared that these laws did not apply retroactively. When the Concession was nearing its end, the Ministry of Communications commenced a domestic arbitration against a number of concessionaires including ColTel. The ministry claimed payment of the value of the assets that had to be reverted. The award was paid under protest. Telefonica then started ICSID proceedings against Colombia based on the Spain – Colombia BIT. Telefonica claimed the amount paid under the domestic award, i.e. US$379 million.

Jurisdiction

Colombia contested the tribunal’s jurisdiction. Colombia argued inter alia that the claim related only to a contractual dispute, the Concession had a forum selection clause in favour of domestic arbitration, the domestic arbitration decision meant the claim was res judicata, and the Constitutional Court’s decision could only amount to a treaty breach if there was a denial of justice.

The tribunal rejected these objections. The claim was regarding interpretation of the Concession but whether there was a breach of international law. Further, the tribunal explained that while Colombian law should be considered, the domestic arbitration or its domestic law did not shield Colombia from claims of conduct contrary to the BIT.[3] Moreover, the tribunal decided that res judicata is an issue of admissibility and not of jurisdiction.[4] In any event, the test for res judicata was not met.[5] Concerning the denial of justice argument, the tribunal expressed that it was not the only possible allegation for a claim based on the actions of a country’s judiciary.[6]

Merits

On the merits, the investor argued several breaches of the applicable BIT, including the breach of the fair and equitable treatment standard (“FET”). Telefonica contended it had legitimate expectations that the radio spectrum was the only revertible asset. Telefonica asserted that laws 422 and 1341 applied retroactively and encompassed contracts entered before these laws were enacted.[7]

On the other hand, Colombia asserted it was clear that such laws did not modify the Concession. On this point, Colombia argued the application of the pacta sunt servanda principle and that these laws did not apply retroactively.[8] The investor thus could not legitimately expect that the only revertible asset was the radio spectrum.

In its decision, the tribunal examined the historical and economic background of the telecommunications sector in Colombia. The tribunal stated that the telecommunication sector requires constant investments and an investor cannot predetermine the maximum investment amount necessary throughout the concession.[9]

According to the tribunal, since an investment in telecommunications needs to be updated continuously, laws are enacted to ensure that concessionaires could continuously invest in the sector.[10] The tribunal added that while the contracts should be performed per their wording, this does not negate the need for subsequent adjustments through additional contracts or updated legislation.[11]

The tribunal also commented on the investor’s specific profile. The tribunal stated that an operator such as Telefonica would not invest heavily to expand its services if non-depreciated and non-amortized assets would revert to the State without compensation.[12]

In determining the FET test, the tribunal reasoned that FET comprehends the principle of stability and predictability in the legal and business environment.[13] The tribunal asserted that Telefonica had for approximately 15 years the legitimate expectation that the laws 422 and 1341 applied to the Concession.[14] The tribunal decided that Colombia had breached the FET by radically changing the legal framework by demanding the reversion of assets in addition to the spectrum. The tribunal expressed that while “radical” was probably not the best term, the treatment had not been equitable when compared to other operators.[15]

In reaching its decision, the tribunal analyzed the preparatory works for Law 422. The tribunal found that, during such discussions, the Executive and Legislative power commented that Law 422 would apply to ongoing contracts. For instance, the tribunal cited the Communications Minister stating that the law clarified something already in writing. Further, politicians opposing such draft bill warned about the possible financial consequences for the State.[16]

The tribunal held that since the Concession was a long-term contract, Telefonica could not expect that new laws would be inapplicable to the Concession given that there were more beneficial laws for the new investors in the sector.[17]

The tribunal found that the Constitutional Court judgment led to unequal treatment of operators, marking a radical legal change. The tribunal also noted that Colombian authorities did not clarify that assets would depreciate over the concession’s life as opposed to the useful life of the asset, affecting Telefonica’s legitimate expectations. This meant investors could end up with valuable assets without compensation after the concession ended.

Comment

This decision is under annulment proceedings. Its future is uncertain. For now, this award remarks the importance of clarifying the applicable legal framework at the earliest opportunity. Colombia argued that such clarification was not necessary because it was clear the subsequent laws did not apply retroactively regarding the revertible assets. The tribunal, however, disagreed since the contract in the telecommunications sector needed to be constantly adapted to reflect its long-term characteristics and need for additional investment. The tribunal held that the investor had an expectation for approximately 15 years.

The decision also highlights that comments of politicians, whether in power or opposition, may carry weight in subsequent investment arbitrations. This is a debated issue in investment arbitration. In other cases, tribunals have held that general comments not specifically addressed to the investor do not give rise to legitimate expectations.[18] This case thus fuels the ongoing debate within the doctrine of legitimate expectations, particularly regarding whether general statements not specifically directed at an individual investor can give rise to legitimate expectations. This issue has been addressed in cases such as RWE Innogy v. Spain, ICSID Case No. ARB/14/34.[19]

Interestingly, this decision diverges from the outcome of a case with similar facts, America Movil v. Colombia, ICSID Case No. ARB(AF)/16/5.[20] In that case, however, the claim was made under expropriation since the applicable treaty did not provide for FET. The investor argued the expropriation of an alleged right concerning the non-reversion of assets. The tribunal determined that even if were to be assumed that all the organs of the state considered that there was a right to the not reversion of assets, this alleged conviction was irrelevant since legitimate expectations did not create a right that could be expropriated.

[1] Telefónica, S.A. v. Republic of Colombia, ICSID case No. ARB/18/3, page v.

[2] Id., at para 417.

[3] Id., at para 94.

[4] Id., at para 98.

[5] Id., at para 104.

[6] Id., at para 142.

[7] Id. at para 411.

[8] Id. at para 411.

[9] Id. at para 386.

[10] Id. at para 400.

[11] Id. at para 402.

[12] Id. at para 392.

[13] Id. at para 443.

[14] Id. at para 442.

[15] Id. at para 423.

[16] Id. at para 414.

[17] Id. at para 415.

[18] El Paso v. Argentina, ICSID Case No. ARB/03/15, para 378.

[19] RWE Innogy v. Spain, ICSID Case No. ARB/14/34, paras 451-458.

[20] America Movil v. Colombia, ICSID Case No. ARB(AF)/16/5, paras 472-473.