Colombia and Venezuela agree a new Bilateral Investment Treaty, Venezuela's first since withdrawing from the ICSID Convention

On February 23, 2019, Venezuela broke diplomatic relations with Colombia and gave Colombian diplomats twenty-four hours to leave the country. Four years later, on February 3, 2023, Colombia and Venezuela signed an unprecedented bilateral investment treaty (BIT) that evidences the marked improvement in their relations since the election of President Gustavo Petro in June 2022. The BIT will come into force 60 days after both countries notify each other that they have completed the necessary domestic procedures.

Despite having 25 BITs in force, the Venezuelan Government has been bitterly critical of investment treaty protection over the course of the last decade, going so far as to denounce the ICSID Convention in 2012. Indeed, the new BIT with Colombia is the first BIT signed by Venezuela since 2008 (when it entered into BITs with Russia and Vietnam), and therefore the first since its withdrawal from the ICSID Convention.

Unlike Colombia, which has embraced free trade in recent decades (it is a founding member of the Pacific Alliance, for example), Venezuela has faced a barrage of sanctions and investment claims triggered by the controversial policies and expropriations introduced by former President Hugo Chavez and subsequent President Nicolas Maduro. Mindful of this experience, the new BIT appears to address many of the sensitive points that have caused challenges for Venezuela in the 57 investment claims that it has faced so far.

Background

Up until the recent election of leftist President Gustavo Petro, relations between Colombia and Venezuela had become increasingly cooler as the countries pursued markedly different economic and political strategies. The decision of Petro's predecessor, Ivan Duque, to recognise Juan Guaido as the legitimate President of Venezuela resulted in Nicolas Maduro breaking diplomatic relations with Colombia on February 23, 2019. Yet, on the campaign trail, Petro committed to rebuilding relations with Venezuela, and, after his electoral victory, he designated his closest advisor to be Colombia's new ambassador to Caracas.

Despite sharing a long border and close cultural ties, exports to Venezuela currently account for less than 1% of Colombia's total exports—a low proportion when compared to Colombia's exports to other neighbours such as Panama or Ecuador. The new Colombia-Venezuela BIT provides an opportunity to bolster trade and investment between both countries, and it also provides an experimental template for a BIT that addresses the concerns of countries (such as Venezuela) that have previously denounced BITs for curtailing the sovereignty of governments.

Key features of the new BIT

• The state's right to regulate: Under the new BIT, there is an explicit recognition of the right of the host state to apply legal measures that are "designed to protect human life of the environment" or ensure the "conservation of natural resources." This has been a sensitive topic for Colombia: in the Eco Oro v Colombia ICSID arbitration, Colombia successfully argued (in a very complex arbitration) that its decision to prohibit mining activities in an environmentally sensitive wetland did not amount to unlawful exploration.
• Narrower definition of 'Investment': Although the definition of 'Investment' in the new BIT broadly includes the same categories of investments that are typically covered by BITs, there is an additional requirement that an investment must contribute to the economic development of the host state in order to be considered an 'Investment' and benefit from the treaty protection. Although this is a criteria that has often been used by tribunals to determine what constitutes an investment, not all tribunals have applied it uniformly and therefore its express inclusion in the BIT takes it a step further to the more restrictive interpretation of “investment”.
• Right to expropriation: The new BIT explicitly sets out the right to expropriate investments, although this is tempered by a requirement that this must be for reasons of necessity or public interest, and that there must be due process and compensation. In relation to the compensation, it must be equivalent to the investment's market value. However, this could have the effect of denying compensation for loss of future profit.
• No ICSID arbitration: Reflecting Venezuela's denunciation of the ICSID Convention in 2012, the new BIT provides that disputes between investors and the host state may be resolved in the domestic courts of the host state or submitted to arbitration under the 1976 UNCITRAL Arbitration Rules. However, such disputes cannot be referred to ICSID arbitration. Importantly, prior to taking the dispute to the domestic courts or to arbitration, there must be a six-month negotiation period.
• Origin of funds requirements: Under the new BIT, there is an explicit rule setting out that the funds to make an investment cannot originate in the host state. Likewise, dual Colombian-Venezuelan nationals have been excluded in the BIT from benefitting from its protections.
• Shorter sunset clause: Whereas most BITs have typically had ten-year sunset clauses (allowing investors to benefit from the protection of their existing investments for a period of ten years from the termination of a BIT), the new Colombia-Venezuela BIT seeks to limit the number of such claims that could arise by establishing a sunset clause of only five years.

Discussion

The new Colombia-Venezuela BIT is an interesting development that reflects a more restrictive application of investor-State provisions. With Venezuela having faced a range of economic challenges in recent years, this BIT reflects the Venezuelan Government's desire to improve the economic position of the country. However, in doing so, it reflects the continuing scepticism of the existing standards contained in most other BITs.  Therefore, it should be approached carefully by foreign investors to determine whether the protection offered truly compares to the type of protection traditionally found in other types of BITs.

For more information, please contact Christian Leathley, Partner, Daniela Paez, Senior Associate, Maria Lucila Marchini, Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Derek Lee for his contribution to this post.