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Foreign Arbitration In Colombia and Enforcement Issues

April 24, 2009

In the “flat” world that New York Times columnist Thomas Friedman describes, investors, entrepreneurs, and businesses need a reliable legal system to enforce contracts efficiently and minimize unforeseen or unforeseeable outcomes.   Investors stay away from countries where their contractual rights are illusory because they cannot be enforced.  Foreign arbitration is the state of the art, as it also ensures a fair shake for foreign investors and locals alike.

Colombia has taken many steps toward modernization of its legal regimes to attract foreign investment. For example, legal stability contracts (contratos de estabilidad juridica) are available to insure against adverse changes in laws and regulations upon which investment decisions are based.

The Colombian legal system rates only a 2 on a scale of 4 according to the Latin America Venture Capital Association (LAVCA) 2008 Scorecard. The LAVCA scorecard rates Colombia 1 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 World Bank’s Control of Corruption Indicator paints about the same picture.

The same 2008 Scorecard, however, says foreign arbitration is “broadly permitted” (though there is “no relevant experience with international arbitration in private equity investments,” according to LAVCA).

Two useful overviews have been published recently by prominent Bogota lawyers. Daniel Posse Velasquez & Carolina Posada, of Bogota law firm Posse & Herrera, write in their article “Colombia Arbitration” in the Latin Lawyer (available by searching for “arbitration” at the “News” tab of that firm’s website) that there has been positive change in Colombia’s laws relating to foreign arbitration. A similar questionnaire-response format report was published by the Global Arbitration Review by German Marin of Cavelier Abogados

The Colombian laws on arbitration and other helpful links can be found on the Latin Laws website.  Law 315 of 1996 provides the framework, and Decree 1818 of 1998 (link is in Spanish) modernized the law to protect and enhance the viability of foreign arbitration awards.

Arbitration agreements must be in writing and signed both by the claimant and by the party against whom enforcement is sought. Colombian law does not permit an arbitral tribunal to assume jurisdiction over disputes unless all parties are signatories to a written agreement.  The contract must give the name and domicile of the parties, the conflicts that will be subject to arbitration, and the process to be followed when applicable. The signed written contract may be a stand-alone arbitration agreement or it may contain an arbitration clause. Arbitration agreements may be prospective or may deal with an existing dispute.

All disputes that parties have the private power to resolve by agreement may also be resolved by arbitration.

Disputes involving securities issuers are strongly encouraged to be settled by alternative dispute resolution. (Regulation 28 of 2007.)

International arbitration is available only where at least one party is not a Colombian national.

Legal stability contracts are not subject to international arbitration (only domestic arbitration) under Law 963 of 2005 (Art. 7).

In arbitrations with state-owned entities, Law 80 of 1993 Article 70 states that 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. How does this work in practice, however? Is foreign arbitration with a state entity ever really viable? Domestic arbitration?

In international arbitration, parties are free to select the nationality and number of the arbitrators as well as the method of their designation. Parties may select the language for international (but not domestic) arbitration. Arbitrators in international arbitration need not be Colombian citizens or residents. If the arbitration is under law, however, the arbitrators must be lawyers, but if it is in equity, they may be non-lawyers.

Colombian courts will enforce arbitration agreements to the same extent they enforce all contracts. Arbitration agreements are severable from the contracts that contain them.

The Bogota Chamber of Commerce operates domestic and international arbitration (in conjunction with the International Chamber of Commerce).

Foreign arbitral institutions may hold an arbitration proceeding with its seat in Colombia.

Arbitrators may adopt interim measures (claim registrations and seizures) in disputes of property rights, but not preliminary awards or interim relief.

Colombian courts have no jurisdiction over arbitration proceedings or procedure except to determine the validity and existence of an agreement to arbitrate and require the parties to submit to arbitration.

The time it takes to enforce an arbitration award may be lengthy, but is better than trying to enforce a foreign judicial award, and better than resorting to Colombia courts.

Colombian courts generally take considerable time to resolve contract disputes.  The process is comprised of 34 procedures and takes an average of 1346 days to conclude.   

Bankruptcy reform is said to have increased the efficiency of the bankruptcy system in Colombia by reducing reorganization costs, making reorganization an attractive option for distressed but viable firms.

To be enforced, arbitration awards must be confirmed before the Supreme Court in an “exequatur” proceeding which typically lasts 1-2 years. This proceeding determines the validity of the arbitration award. Only thereafter is execution on the award permitted.

LAVCA’s 2008 Scorecard reports that bankruptcy laws are “adequate” but enforceability is “problematic.” A new bankruptcy law was created in December 2006 to shore up existing restructuring mechanisms that seek to make liquidation a last resort. LAVCA reported on a 2008 proposal to separate secured assets from the general assets of a firm in liquidation.

LAVCA reports that shareholder agreements must be structured carefully to solidify limited liability.

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