Legal Stability Contracts — Contracting With The Government Against Changes In Specified Laws and Regulations

To minimize risk from adverse legal and regulatory changes during the life of an investment, Colombia has a law allowing for contracts with the government that provide stability of specific legal regimes (“contrato de estabilidad jurídica“). The law was adopted in July 8, 2005 (Law 963) and implemented by Decree 2950 of (August 29) 2005 and Decree 1474 of 2008 and protects against adverse changes in the laws or regulations itemized in the contracts.

Legal stability contracts are meant to ensure investors of more than US$1M that if rules or interpretations, that are specifically identified in the contracts as determining factors for investment, change in an adverse manner during the contract term, these changes will not affect the investment.

The stability contracts are available for investments in tourism, industrial activities, agricultural activities, free trade zones and petroleum zones, forestry activities for export, mining, export processing zones,  telecommunications, construction, port and railroad developments, electric power generation projects, irrigation and efficient use of hydro- resource projects.  The contracts are also available for any other activity approved by the Committee to implement the law, which consists of  the Ministers of Commerce, Industry & Tourism, Finance, and Public Credit, plus the Director of the National Planning Department.  At least theoretically, these are the agencies chiefly interested in promotion of foreign investment.  Foreign portfolio investments cannot be covered by stability contracts.

The contracts may have terms of 3 to 20 years.  The price is an annual premium of 1% of the amount of funds to be invested.  Decree 2950 of 2008 provides a detailed list [translation needed] of the requirements of each stability contract.

A good review of the law can be found in the Latin America Regional Forum Newsletter of March 2009 from the International Bar Association (IBA), Legal Practice Division, at p. 14.  It was written by Bogota lawyers Carlos Gerardo Mantilla Gomez, and Daniel Bayona Valderrama, of Muñoz Tamayo & Associados, Bogota.

Mantilla and Bayona report in the IBA newsletter that premiums are subject to some negotiation, and may be paid in lump sums.  Also arrangements can be made for idle periods. A review of the agreements signed to date confirms these observations.

They also argue that improvements in the “frozen” laws or regulations should flow to the investor, because the law should be construed in light of its purpose — to protect against only adverse developments.  That aspect of the law is said by the authors to be untested, but  a number of the contracts reviewed by The Colombia Law & Business Post have language that specifically provides only for protection against “adverse” (not all) changes in the laws.

Mantilla and Bayona also address the ability to use stability contracts in connection with acquisitions, commenting that mere acquisitions without new investment would not be covered, but that stability contracts should be transferable with ownership of the entities that have signed them.

Legal stability contracts can be arbitrated, but only in Colombia and under Colombian law, according to Article 7 of Law 963.  That means that foreign arbitration is not permitted, which may be unattractive, especially to first-time investors, despite a reportedly strong Bogota Chamber of Commerce arbitration system. 

However, foreign arbitration law in Colombia (if available) would have limits where governmental actions are involved.  For example, Law 80 of 1993 Article 70 states that in arbitration with state-owned entities, arbitration may not resolve the legality of administrative acts or the legality of the application of “exceptional powers” of administration (i.e., unilateral interpretation, unilateral modification, unilateral termination, and continued usefulness or “caducity” of the public contract). Arbitration may resolve, however, the economic effects thereof. Nevertheless, foreign arbitration appears to be the manner of choice for resolving contractual disputes, even with Colombian governmental agencies. Therefore, that foreign arbitration is not permitted, that is, that the government agencies in a given case are prohibited from negotiating and agreeing upon a manner of foreign arbitration, arbitrators, and arbitration process, may paradoxically serve as an impediment to the realization of the goals of stability contracts.

Nevertheless, the number, size, sophistication, and international reach of the companies that have signed stability contracts suggests confidence in the domestic arbitration mechanism. Presumably, even domestic arbitration is better than trying the matter in the Colombian courts. The Latin America Venture Capital Association (LAVCA) 2008 Scorecard (at p. 15/43) rates Colombia 1 (lowest) on a scale of 4 for perceived corruption, stating that although the judiciary is highly regarded, its lower levels and those of the civil service are susceptible to corruption and intimidation. The strength of the judicial system itself, however, is rated somewhat higher, 2/4, because Decree 1818 “broadly permits” foreign arbitration. Like foreign arbitration awards, however, the domestic arbitration award will eventually have to be enforced in the Colombian courts, and that could well be a concern until arbitration awards in stability contracts have been confirmed and followed in a commercially reasonable way. Until then, the best indication of market confidence may be the number of and the parties to the stability contracts signed to date.

Certain rules cannot be covered by stability contracts, specifically social security, taxes decreed by the National Government under states of exception, indirect taxes, moderate regulation of the financial sector, and the price rate regime for utilities. While these exceptions might give some investors concerns that a signed stability contract is subject to manipulation through later litigation or regulatory changes invoking these “exceptions,” again, the number of stability contracts and the fact that sophisticated companies continue to seek them might be a sign that such concerns were addressed in negotiation.

As of February 2009, ProExport reports that there have been 38 legal stability contracts signed (see slide 17/22). However, I found only 28 listed on the Commerce Ministry website. That list (showing the contract number, hyper-linked, and the investor) as of the original date of this post is reproduced below.  UPDATE (See New Post)

Alpina SA was the first business to sign such an agreement, in 2006.  Alpina makes and distributes consumer dairy products like milk, yogurt, and infant formula, and was founded by two Swiss immigrants to Colombia in 1945. The ten-year contract protected the US$25M expansion of the company, spent on infrastructure, new equipment, and engineering. The expansion was expected to generate 3000 jobs (directly and indirectly).

Avianca S.A. (the national airline of Colombia) signed a US$300M stability contract to protect its acquisition of new Boeing and Airbus aircraft.

Schlumberger and the Mines and Energy Minister signed a stability contract in 2008 for seven years.  The oilfield services firm has operated in Colombia for 70 years and has five bases employing 800 people.

Those are just a sampling. A fuller list follows with live links to the actual contracts on file with ProExport.

• 1. EJ-01 de 2006.        Alpina Productos Alimenticios S.A.
• 2. EJ-01 de 2007.        Proficol Andina B.V. Sucursal Colombia.
• 3. EJ-02 de 2007.        DIVCO Comestibles (Sucursal Colombia) DIVCO S.A.
• 4. EJ-03 de 2007.        Almacenes Exito S.A.
• 5. EJ-04 de 2007.        Sociedad de Fabricación de Automotores S.A.Sofasa S.A.
• 6. EJ-05 de 2007.        Comertex S.A.
• 7. EJ-01 de 2008.        Cervecería del Valle S.A.
• 8. EJ-02de 2008.         Bavaria S.A.
• 9. EJ-03 de 2008.        Avesco S.A.
• 10. EJ-04 de 2008.      Empresas Públicas de Medellín E.S.P.
• 11. EJ-05 de 2008.      Teledatos Zona Franca S.A.
• 12. EJ-06 de 2008.      Hotelería Internacional S.A.
• 13. EJ-07 de 2008.      Nova Mar S.A.
• 14. EJ-08 de 2008.      Schlumberger Surenco S.A.
• 15. EJ-09 de 2008.      Interconexión Eléctrica S.A. E.S.P. ISA E.S.P.
• 16. EJ-10 de 2008.      Cine Colombia S.A.
• 17. EJ-11 de 2008.      Zona Franca Argos S.A
• 18. EJ-12 de 2008.      Compounding & Masterbatching Industry Ltda. — COMAI
• 19. EJ-13 de 2008.      Propileno del Caribe S.A – Propilco S.A.
• 20. EJ-14 de 2008.      Inversiones Inmobiliarias de Colombia S.A.
• 21. EJ-15 de 2008.      Renting Colombia S.A.,
• 22. EJ-16 de 2008.      Arcelormittal Stainless Service Andino S.A.
• 23. EJ-17 de 2008.      Leonisa S.A
• 24. EJ-18 de 2008.      Productora de Confección PROCO
• 25. EJ-19 de 2008.      Gas Natural Comprimidos S.A., GNC S.A. o GAZEL.
• 26. EJ-20 de 2008.      Avianca S.A. y SAM S.A
• 27.  EJ-1 de 2009.       GYPLAC S.A.
• 28.  EJ-2 de 2009.       Novavento S.A.