The Decision on Jurisdiction, Liability and Directions on Quantum in Eco Oro v Colombia (Liability Decision) was rendered by an ICSID tribunal on 09 September 2021, in which Colombia was found to have breached the Minimum Standard of Treatment (MST) and the Fair and Equitable Treatment (FET) under Article 805 of the Canada-Colombia Free Trade Agreement (FTA) 2008 (FTA), while not committing expropriation following Article 811. Eco Oro’s claim was based on its mining rights in the Angostura project, an area that coincided with the Santurbán páramo, an ecosystem crucial for preserving biodiversity because of its ability to absorb and regulate water. The Liability Decision attracted extensive criticism for the majority finding of the MST/FET breach, considering that the tribunal was interpreting a newer generation investment treaty with express provisions providing protection for the environment. It was suggested that the interests of the fossil fuel industry prevailed over the preservation of the vulnerable ecosystem of the Páramos.
The much awaited Award on Damages (Quantum Decision) has recently been rendered on 15 July 2024, granting no damages in favour of the investor. Eco Oro severely criticised the Quantum Decision as ‘deeply flawed‘. In its opinion, the tribunal’s majority decision not to award any compensation directly contradicted its earlier observation as to Colombia’s MST/FET breach, albeit by a different majority. Moreover, it asserted that the tribunal failed to objectively assess the evidence produced by the Claimant.
Aligning the Quantum Decision with the finding of MST/FET violation initially seems to be a daunting task. This post argues that a meticulous examination of the Quantum Decision reveals sound reasoning based on which no damage was awarded. The Claimant did not adduce evidence to prove its loss flowing from Colombia’s treaty breach. The State’s legitimate exercise of regulatory power to preserve its environment was considered by the tribunal while evaluating the breach of the MST/FET provision. This post will firstly discuss the impact of environmental considerations in investment arbitration, before analysing the approach adopted by the Eco Oro tribunal to assess the claim for damages. Then, the manner of tribunal’s scrutiny into Eco Oro’s lost commercial opportunity will be analysed to validate the arguments made in this post.
Environmental Implications
None of the major aspects of Eco Oro v Colombia was decided unanimously, either in the liability or during the quantum phase, manifesting the exceptionally contentious nature of the asymmetrical relationship between the investor’s legal protections and the environmental protection. Whereas the majority consisting of Juliet Blanch and Philippe Sands found no expropriation under Article 811 due to Colombia’s lawful exercise of police powers to preserve its environment (followed by a Partial Dissent from Horacio Grigera Naón), another majority composed of Blanch and Naón held that Colombia’s inconsistent and arbitrary conduct in delimiting the Páramo zone violated FTA’s MST/FET provision (accompanied by Sands’ Partial Dissent). In the quantum stage, Blanch and Sands formed the majority in deciding not to compensate the investor despite Colombia’s breach, while Naón rendered his dissent, illustrating the inherent complexity pertaining to environmental considerations in investment claims.
The conclusion as to the MST/FET breach by the tribunal in the Liability Decision is controversial, as another majority upheld Colombia’s regulatory power to have been lawfully applied bona fide and without discrimination to preserve its vulnerable ecosystem. Colombia was found to have legitimately imposed the absolute ban on the mining activities in the Páramos, pursuant to the police power doctrine. Scholarships expressed the view that the Eco Oro tribunal committed error in the Liability Decision by considering other grounds of liability, even after finding the State measures to be regulatory. Sands was also deeply concerned with this incongruity (Partial Dissent, para 16). This issue was satisfactorily addressed by the majority in Red Eagle v Colombia involving similar impugned measures restricting mining in the Páramos (this time Sands forming the majority with Andrés Rigo Sureda).
The Red Eagle tribunal dismissed the investor’s MST/FET claim as it was satisfied that Colombia acted for the legitimate purpose of protecting environment. In determining the MST/FET breach, the adjudicators found it unnecessary to question how the State chose to balance the competing interests, being the State’s right to regulate, on the one hand, and the investor’s rights under the investment treaty, on the other (para 308). This demonstrates the Red Eagle tribunal’s willingness to grant extensive discretion to the host State respecting regulatory affairs engaged with environmental issues.
Determining Compensation
The FTA does not provide the criteria for quantifying damages for the MST/FET breach. In investment arbitration, the rule emerged as a substantive principle requiring compensation to be paid for the MST/FET violation at the same standard as in cases of expropriation (Sempra v Argentina, para 403). The Quantum Decision does not differentiate between computation of damages for the MST/FET breach and the State’s expropriatory conduct. In the absence of any treaty guidance, the tribunal took recourse to the highly influential secondary rules of the ILC Articles on State Responsibility (ILC Articles) which includes loss of profits within the purview of compensation (Article 36(2)). When calculating damages, the tribunal noted that value of the entire project was obliterated by the implementation of lawful measures of Colombia, requiring it to specifically assess the particular loss caused by the breach of Article 805 (paras 299, 316). Thus, assessment of compensation under Article 805 was dependent on the majority findings as to Article 811 in the Liability Decision (Quantum Decision, para 316).
The tribunal observed that breach of Article 805 was attributable to the totality of Colombia’s actions perpetuated through a series of measures, rather than any single act (paras 295, 301). It further pointed out that the challenged measures were adopted according to the principle of police power making the Respondent State’s actions legal, though Eco Oro could only recover compensation caused by internationally wrongful act. Damages arising out of lawful conduct are not recoverable (paras 299, 300-302). For these reasons, the resulting loss being the concession contract was not recoverable in the manner as Eco Oro pleaded, despite its entitlement to damages (paras 298, 302). Although not expressly stated, this line of reasoning resonates perfectly with Articles 2 and 15 of the ILC Articles.
Loss of Opportunity
After rejecting the investor’s claim for damages to the entire project, the tribunal identified lost opportunity with regard to Eco Oro’s possibility of obtaining environmental licence as the only recoverable compensation (para 303). When the arbitrators feel unable to engage in the precise calculation of lost profits, it may choose to award damages for loss of commercial opportunity, being a sub-head of lost profits. However, the Eco Oro tribunal ultimately declined to award damages for loss of opportunity to the investor due to a number of reasons.
Firstly, the investor adduced expert evidence assessing the market valuation of the concession contract incorporating the Angostura Deposit in Colombia’s eastern region, instead of providing any evidence to assist the tribunal in determining the value of the lost business chance. Thus, Eco Oro ignored the tribunal’s request contained in the Liability Decision (Quantum Decision, paras 303, 316). Secondly, the Claimant produced no evidence suggesting that the concerned Angostura Deposit would fall outside the Páramo demarcation entitling it to an environmental licence (para 308). Finally, the tribunal was unable to determine the value for lost opportunity because Colombia could lawfully refuse to grant the environmental licence (para 305). Eco Oro was not awarded damages because it could not prove that it would have secured an environmental license if Colombia had not violated the FTA.
The last reasoning coheres with Clayton and Bilcon v Canada where the investor was awarded damages for loss of opportunity regarding acquisition of regulatory approval, in the presence of internationally wrongful act by the Respondent State (para 396; also Concurring Opinion of Professor Bryan Schwartz, paras 9-13). Loss of opportunity can only be compensated when it is calculable, which Eco Oro miserably failed to prove (Quantum Decision, para 315). Assessing lost opportunity is an extremely difficult task (Gemplus v Mexico, para 13-99), as proof of lost chance requires much higher threshold. The challenging nature of computing lost opportunity is adequately addressed in the investment jurisprudence (S.D. Myers v Canada, Second Partial Award, para 161), which trend has been consistently followed in Eco Oro v Colombia. Further, the tribunal was unable to determine the loss due to the unavailability of the final delineation of the Páramo, though Colombia’s responsibility in failing to identify this zone cannot be disregarded (para 317).
Conclusion
Eco Oro v Colombia epitomises an exceptional instance where Colombia may be ‘benefitting’, despite its own treaty breach (para 317). Though Colombia violated the FTA’s MST/FET clause, the valid exercise of regulatory measures laid down the foundation for successfully defending Eco Oro’s investment claim for damages. The tribunal evaluated the implication of the breach under Article 805 in the light of its analysis of Article 811, illustrating the complex interplay between different substantive obligations under the investment treaties. According to the tribunal’s analysis, only loss of opportunity was recoverable which could not be determined due to the Claimant’s failure to prove the quantum by adducing evidence, even when specifically asked to do so. Eventually, the Claimant could not establish what quantifiable loss was caused by Colombia’s breach.
Khan Khalid Adnan has recently completed his LLM in Litigation and Dispute Resolution from UCL with distinction. He is a Fellow of the Chartered Institute of Arbitrators (FCIArb), a Barrister in England and Wales, and an Advocate of the Supreme Court of Bangladesh. Currently, he serves as the Head of the Chamber at Khan Saifur Rahman & Associates, Dhaka, Bangladesh.