COLOMBIA’S WITHDRAWAL FROM THE INVESTMENT PROTECTION SYSTEM 

 Por: José Manuel Alvarez Zárate^[1]

The reasons are clear: there is no imminent danger to international investors because the status quo will remain in place for at least another ten years following Colombia’s withdrawal from investment protection treaties. The survival clauses in each treaty guarantee this right to international investors. What the doomsayers have failed to mention is that the only thing that will change is the procedural rules applicable to potential international claims against Colombia. Six months after the treaty is terminated, the Rules of the Investment Dispute Settlement Centre (ICSID) would cease to apply, and the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) would take their place, unless Colombia and the claimant agree otherwise.  

In addition, the experience of Latin American countries shows that the heated debate between politicians and lawyers with opposing ideological positions, following President Petro’s announcement of Colombia’s withdrawal from the system, should not be a cause for concern in the current international context, given recent history.  Staunch defenders of the system can rest assured that the status quo ultimately remains intact. Furthermore, investors can also rest assured that Colombia has participated in the UNCITRAL Working Group III negotiations since 2017, and the group is on the verge of approving a permanent international investment court to replace the current system of arbitrators who adjudicate investors’ claims.

This suggests that those who claim the President’s announcement undermines investor confidence, creates market uncertainty, or affects legal certainty are unaware of the specifics of the current investment protection system. They have overlooked Colombia’s existing international obligations regarding investment protection and the imminent adoption of the Multilateral Investment Court within the UNCITRAL framework. Above all, however, they have overlooked the recent history of Latin American countries that withdrew from ICSID, partially denounced investment protection treaties, and then returned to the system.

In this context, the government’s argument that withdrawing from the investment protection system would shield Colombia from international claims seems misguided at first glance. Evidence from the last two decades shows that, following the withdrawal of Bolivia, Ecuador and Venezuela from ICSID, claims against those states continued. Withdrawal also did not shield the states from having to meet their financial obligations when they were found liable.  

Between 2007 and 2017, this group of countries withdrew from various international investment mechanisms. Bolivia initiated the process in May 2007 by withdrawing from ICSID and terminating its bilateral investment treaty (BIT) with the United States. Ecuador followed suit in July 2009, withdrawing from the organisation and terminating 16 BITs, including those with the United States, Canada and Spain, in 2017. Finally, in January 2012, Venezuela formally denounced the BIT with the Netherlands and withdrew from ICSID. Over the years, it became clear that this effort and political strain did not prevent these countries from being sued, found liable, and ordered to pay compensation.

Indeed, withdrawal from ICSID and certain BITs did not prevent the aforementioned countries from facing more than 110 claims and continuing to deal with 24 pending cases, with total awards currently standing at just over USD 18 billion. One of the most glaring problems is that the State lost 45.2% of the 77 concluded cases, whilst investors won 54.8%, which obviously affects these countries’ public finances.  

In Colombia’s case, the USD 379 million award plus interest, in the Telefónica case was a heavy blow, raising alarm bells about potential losses similar to those suffered by Ecuador in the OXY II v. Ecuador case (USD 1.061 billion), or ConocoPhillips v. Venezuela (over USD 8.7 billion), not including interest and adjustments. This is not an unfounded concern, given that states have been acknowledging the flaws in the current arbitration system for several years.

President Petro’s announcement took everyone by surprise. The reasons set out in the letter from 200 economists and legal experts could be considered alongside further evidence to inform the decision. For instance, a future government could reverse the withdrawal, as has occurred in several countries that have withdrawn from ICSID and subsequently returned. Ecuador, for instance, rejoined in 2021 and has since negotiated new investment protection treaties. Similarly, Honduras has just rejoined ICSID after withdrawing in 2024.  

However, it is unreasonable to deny that the investor-state dispute settlement system, as administered through international arbitration, is subject to significant criticism regarding its legitimacy. The European Union has therefore proposed the abolition of the current system of private arbitrators and their replacement with a multilateral court comprising independent, permanent judges who are free from economic interests. This reform proposal has been under discussion since 2017 within the multilateral framework of UNCITRAL Working Group III. There is widespread consensus among countries regarding the criticisms levelled at the system. For example, there are concerns about legitimacy due to a lack of consistency and predictability, arising from contradictory and incorrect decisions by arbitral tribunals. There are also concerns about conflicts of interest arising from the overlapping roles of arbitrators who also act as advisers and litigants.  

The ethics and conduct of arbitrators were extensively debated by the States on this last point, leading to the adoption of a Code of Conduct in 2023. This was an attempt to address the perceived lack of impartiality among arbitrators, as well as their conduct when acting as advisers or litigants. Although several countries criticised the final outcome as insufficient, it represents a step forward in the multilateral recognition of a persistent problem in international arbitration that needs to be solved.

Other criticisms relate to the disproportionate size of awards affecting states — an issue that was raised during the UNCITRAL negotiations — and the lack of a full review of arbitrators’ decisions on appeal. Progress on issues of interest to developing countries has been slow, but it is hoped that guidelines on calculating damages and compensation will be established to prevent tribunals from using speculative methodologies that inflate award amounts. It is also hoped that a second-instance appeal mechanism will be created to review arbitrators’ decisions.  

Finally, the Petro government’s announcement of its withdrawal from the international investment protection system could provide an opportunity to take a step back and independently assess and design Colombia’s international policy on the protection of foreign investment, moving away from the ideological extremes witnessed in recent weeks. This is reminiscent of the situation when Colombia began negotiating the Free Trade Agreement with the United States in 2004. This assessment should inform the decision on whether to approve the UNCITRAL Working Group III reforms or to maintain the current arbitration system, but with treaties that genuinely contribute to Colombia’s development.  

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^[1] José Manuel Álvarez Zárate is a professor of international economic law at Externado University in Colombia, as well as an international litigant. This note was originally written in Spanish and can be found via this link: https://razonpublica.com/la–experiencia–latinoamericana–salir–del–sistemaproteccion–inversiones/