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Estefanía Ponce-Durán
Associate, Posse Herrera Ruiz, Bogota
estefania.ponce@phrlegal.com

Nicolás Caballero-Hernández
Associate,Posse Herrera Ruiz, Bogota
nicolas.caballero@phrlegal.com

Colombia’s Council of State sets aside an international arbitral award under the 2012 Colombian arbitration statute for the first time

The positions and opinions expressed by the authors are strictly their own, and do not necessarily represent the views of Posse Herrera Ruiz.

On 27 February 2020, the Colombian Council of State set aside an international arbitral award under Law 1563 of 2012 (the ‘Arbitration Statute’) for the first time, citing departure from the procedure agreed by the parties.¹

The Council of State’s judgment setting aside the award concluded that the Arbitral Tribunal misconstrued the procedural rules agreed to by the parties in Procedural Order No 1 (PO1) and breached the right of one of the parties to present its case. According to the Council of State, not allowing a party to benefit from a procedural opportunity set out in PO No 1 was, in itself, sufficient to set aside an award on the grounds of article 108.1(d) of the Arbitration Statute (‘the arbitral procedure was not in accordance with the agreement of the parties’). The court reviewed text of the Tribunal’s PO No 1 de novo and applied local rules of interpretation and local procedural standards.

The arbitration

In the underlying Bogotá Chamber of Commerce arbitration, Consortium China United Engineering Corporation and Dongan Turbine Co. Ltd. (‘Consortium CUC-DTC’) and two Colombian State-owned entities, Generadora y Comercializadora de Energía del Caribe – Gecelca SA ESP and Gecelca 3 SAS ESP (‘Gecelca 3’, and collectively with Generadora y Comercializadora de Energía del Caribe – Gecelca SA ESP, ‘Gecelca’) raised breach of contract claims regarding the construction of a power plant under an engineering, construction and procurement contract (the ‘Contract’).

The parties agreed to a series of procedural rules, which were incorporated into PO No 1. The arbitration provided for two rounds of written submissions for Consortium CUC-DTC’s claims and Gecelca’s counterclaims, with which they could present written witness statements and expert reports. No new claims, documentary evidence, written witness statements or expert reports could be submitted after the parties presented their memorials.In addition, PO No 1 included the following rules: ‘Following the submission of written memorials, [the Parties] may not introduce new submissions or present new documentary evidence, witness statements and/or expert reports, nor new allegations or claims’ (section 45); and ‘[w]henever a Party submits an expert report with the Memorial of Rejoinder by an expert of that Party, the Arbitral Tribunal shall set a reasonable term for the other Party to dispute [the contents] of such expert report by means of submitting another expert report’ (section 62).²

After Consortium CUC-DTC submitted expert reports with its rejoinder, Gecelca requested that the Tribunal allow it the opportunity to present an expert report in response. The Tribunal rejected Gecelca’s request, since section 62 of PO No 1 would only apply if the expert reports submitted with the rejoinder actually dealt with issues which had not been previously addressed by the parties in their memorials or in their expert reports. The Tribunal considered that the basis for Gecelca’s request was actually the increased complexity of the expert reports submitted with the rejoinder. When deciding Gecelca’s request for reconsideration, the Tribunal further noted that, in accordance with international practice, the respondent to a claim has the final word.

In its final award dated 4 December 2017,³ the Arbitral Tribunal held, inter alia, that: (1) the Contract and the deadline for the power plant’s initiation of commercial operations had been extended; (2) Consortium CUC-DTC had not breached its contractual obligations, since the power plant was constructed and delivered in due time; and (3) Gecelca had breached the Contract by means of imposing, without a valid justification, a contractual penalty fee of over US$10m. The Tribunal therefore awarded over US$13 million in damages in favor of Consortium CUC-DTC.

Writ for protection of fundamental rights (tutela)

Gecelca 3⁴ challenged the award simultaneously by means of a request to set aside before the Colombian Council of State, and a writ for protection of fundamental rights (tutela) which was eventually decided by the Constitutional Court.⁵

In the tutela, Gecelca 3 claimed that the Tribunal committed a series of due process violations. It further alleged that the Tribunal decided upon the imposition of a contractual penalty based on altered documentary evidence.

The Constitutional Court issued a judgment on 6 August 2019⁶ concluding that the tutela was not admissible because the request for set aside was still pending. According to the Constitutional Court, Gecelca 3 did not prove that the alleged due process violations could not be analysed under the grounds for annulment set out in section 108 of the Arbitration Statute, nor did it prove that it suffered an irreparable damage that justified the immediate intervention of the constitutional judge.

Nonetheless, this judgment paved the way for the annulment of the award. It highlighted the importance of the right to due process and noted that an arbitration could be declared null if an arbitral tribunal’s decision were based on altered evidence.

Judgment on setting aside by the Council of State

Gecelca 3 filed its application to set aside the final award on the grounds that: (1) ‘The party making the application[…] was otherwise unable to present his case’ (section 108.1(b) of the Arbitration Statute); and (2) ‘The […]arbitral procedure was not in accordance with the agreement of the parties[…]’(section 108.1(d) of the Arbitration Statute).

According to Gecelca 3, the arbitral procedure was not in accordance with the agreement of the parties, since it was not allowed to submit an expert report as provided for in section 62 of PO No 1. Under the procedural rules of the arbitration, its expert would not be able to make any arguments at the hearing, which were not based on an already submitted written expert report. Consequently, to properly present its oral case, Gecelca 3 deemed it crucial that the expert be permitted to present an expert report in response to those submitted with Consortium CUC-DTC’s rejoinder.

Also, Gecelca 3 argued that the Tribunal incorrectly allowed Consortium CUC-DTC to present a new expert report at the hearing. Consortium CUC-DTC referred to this document merely as a ‘correction’ of prior reports. However, Gecelca 3 claimed that it was a new report which included fundamental changes to the reports which had been previously submitted by Consortium CUC-DTC’s expert. Gecelca 3 claimed that, during the review of the terms of PO No 1, the parties had agreed that no other expert report could be submitted following the written phase of the arbitration.

Consortium CUC-DTC opposed such allegations. It argued, inter alia, that under the correct interpretation of PO No 1, a party may only present an additional expert report if the other party had indeed included new issues in the expert report submitted with its rejoinder and which content had not previously been debated or contradicted.

On Gecelca’s allegation regarding the expert ‘correction’ presented at the hearing, Consortium CUC-DTC clarified that its expert had submitted two separate documents:

• on 14 February 2017, it submitted an 11-page document (a few days prior to the initiation of the hearing); and

• on 21 February 2017, it submitted a two-page document (during the hearing).

Consortium CUC-DTC noted that the Tribunal did not include into the record the 11-page 14 February 2017 document. Rather, during the hearing, the Tribunal had only accepted into the record the two-page document named ‘correction’.⁷

The Council of State laid out a series of premises for the application of the grounds of set aside in the Arbitration Statute. For instance, it recalled that an award can only be set aside for errors in procedendo or for breaches of due process, excluding errors regarding the merits. It also noted that in deciding an application of setting aside, the court may not rule on the merits of the dispute, nor evaluate the criteria, analysis of evidence, reasoning, or interpretation of the tribunal. An award is thus only set aside in exceptional, limited and extraordinary circumstances.

Regarding the present case, the Council of State concluded that the sole fact that the Tribunal had not granted Gecelca an additional opportunity to present an expert report in response to the expert reports submitted by Consortium CUC-DTC with its rejoinder was contrary to section 62 of PO No 1 and to the agreement of the parties.

The Council of State reviewed de novo the text of PO No 1 without according deference to the Tribunal’s interpretation of its own order. It did not address the fact that the procedural order in fact reflected the agreement of the parties, as reviewed and issued by the Tribunal.

The court based its decision on a strict reading of section 62 and on the fact that it did not expressly reserve the presentation of such expert report to a situation where new facts or new issues were raised in the rejoinder. It further criticised the Tribunal for not applying a rule of literal interpretation⁸ and the principle according to which a specific rule trumps a general rule wherever they conflict.

The Council of State also concluded that the Tribunal unjustifiably breached sections 91 and 92 of the Arbitration Statute, according to which the Tribunal shall treat the parties with equality and give each party a full opportunity to present its case. While the Tribunal denied Gecelca’s opportunity to submit a further expert report after Consortium CUC-DTC’s rejoinder, it nonetheless allowed Consortium CUC DTC to present an additional report (this being the 11-page ‘correction’ submitted just prior to the hearing, which, according to Consortium CUC DTC, was not included in the record). Notably, although the Council of State quoted the expert’s ‘correction’, it did not analyse whether these were indeed corrections to a previous report, or an additional and new expert report.

The Council of State openly disagreed with the Colombian Supreme Court of Justice’s jurisprudence of section 108.1(d) of the Arbitration Statute. In the view of the Supreme Court of Justice, an award shall be set aside if an arbitral tribunal unjustifiably disregards the procedural rules set out by the parties, so long as such disregard has a bearing on the whole arbitration (and not just on a specific procedural instance), or is the basis of a breach of the right to a defence.

For the Council of State, whether this procedural error had any bearing on the Tribunal’s award was irrelevant to its decision to set aside the final award. It deemed that the judge’s role is simply to guarantee that the parties’ procedural agreement is strictly complied with. Even though the effects of the procedural defect may or may not have had a bearing on the Tribunal’s award, this was not a matter that concerned the judge in considering the application for set aside since it would necessarily imply reviewing the award on the merits. According to the Council of State, it would have had to determine not just the evidentiary bases for the Tribunal’s decisions, but also ‘the structure of the decision itself, in order to determine how the award could have been substantiated and decided if certain evidence was or was not taken into account’.⁹

Justice Sánchez-Luque submitted a dissenting opinion indicating that not all procedural errors should lead to setting aside the award. In his view, a judge would not necessarily decide on the merits of the case in determining whether the procedural decision had a bearing on the award. The judge’s role would be limited to considering the place of the procedural decision in the Tribunal’s overall ruling and to determining if, having admitted the evidence in question, it could have possibly altered the award.

International standards

The Council of State’s judgment raises questions regarding the standard of judicial review of an arbitral award in set-aside proceedings; and the seriousness of the alleged procedural defect or the impact of such defect in the tribunal’s decision, which would merit setting aside the award.

Regarding the standard of judicial review, opinions are divided. A view suggests that the New York Convention does not impose standards of review to the judge of the seat. Therefore, the pro-enforcement principle derived from the New York Convention is not mandatory at the annulment stage.¹⁰ According to a second view, de novo review only applies to the tribunal’s jurisdictional rulings and to determining the existence and validity of the arbitration agreement, based inter alia on the text of article 16(3) of the UNCITRAL Model Law.¹¹ Also, the New York Convention imposes implied limits to the annulment judge and some degree of deference to the tribunal’s decision should be granted. Some courts have concluded that a narrow degree of intervention when deciding applications for setting aside is consistent with the objectives of the UNCITRAL Model Law as inspired by the New York Convention.¹² In line with such objectives, courts have granted comity to the reasoning of international arbitral tribunals’ decisions.

Regarding the seriousness of the alleged procedural defect or the impact of such defect in the tribunal’s decision, the party that seeks to set aside an award bears the burden of proof which, as a general matter, involves proving that the procedural error is substantial or material.¹³ Some courts have required proving that ‘such violation worked substantial prejudice to the complaining party’.¹⁴Others have required that the defect have a bearing on the decision;¹⁵ while others have required that such omission has an effect on a party’s substantive rights.¹⁶

Conclusion

The Council of State set aside the final award in the arbitration between Gecelca and Consortium CUC-DTC.

The court held that the Tribunal denied Gecelca the opportunity to present an expert report, in breach of section 62 of PO No 1 and, thus, of the procedure agreed to by the parties.

The authors propose that some degree of deference should have been granted to the Tribunal’s interpretation of its own PO No 1. Gecelca’s claims touched upon both the exclusion and admission of evidence and the Tribunal’s interpretation of the parties’ agreement regarding the presentation of such evidence. First, arbitral tribunals possess broad authority regarding procedural and evidentiary matters. Second, the Tribunal was in a better position to initially interpret the terms of its own procedural orders, compared to the Council of State as the set aside judge. The starting point of the Council of State’s analysis could have been the reasonability or the rationality of the tribunal’s reasoning rather than the parties’ procedural arguments de novo.

The Council of State’s decision was also based on a literal interpretation of section 62 of PO No 1. The court applied local rules of interpretation of domestic procedural provisions to the rules agreed to by the parties and incorporated in the Tribunal’s order. However, when deciding an application for setting aside, a court should bear in mind international standards and practice.¹⁷

Among such international standards and practices, applications for setting aside also require a showing that the alleged procedural defects are substantial or material. In the present case, the Council of State concluded that it would not analyse whether the procedural defect had any bearing on the Tribunal’s award since this would necessarily entail a review of the merits of the Tribunal’s decisions.

Lastly,the Council of State applied local standards in deciding that the Tribunal had granted Consortium CUC-DTC an additional opportunity to submit an expert report, in breach of the principle of equal treatment of the Parties and of PO No 1. The court held that the 14 February 2017 document presented by Consortium CUC-DTC’s expert constituted a newexpert report.¹⁸ However, from the text of the judgment, it is unclear whether the Tribunal had actually included such document into the record of the arbitration or whether the court was referring to the 20 February 2017 document submitted at the hearing. In any event, the Tribunal did not analyse the content of the document to determine whether it was indeed a new expert report, or whether it was a mere correction of a previously submitted report.

Notes

1. Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020.

2. See Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020, p 85 (‘Después del intercambio de memoriales escritos, no podrán formularse nuevos alegatos o presentarse nuevas pruebas documentales, declaraciones de testigos y/o dictámenes periciales, ni tampoco nuevas reclamaciones o pretensiones’ and ‘Cuando alguna Parte presente un dictamen pericial preparado por un perito designado por esa Parte con el escrito de Dúplica, el Tribunal fijará un término razonable para que la otra Parte pueda controvertir ese dictamen mediante la presentación de otro dictamen.’) [authors’ translation]. The procedural rules included in sections 45 and 62 of PO No 1 were not listed among the procedural issues disputed by the parties and ultimately decided by the Tribunal in its PO No 1.

3. Consorcio China United Engineering and Donfang Turbine Co Ltd (‘Consorcio CUC-DTC’ v Generadora y Comercializadora de Energía del Caribe– GECELCA SA ESP and GECELCA 3 SAS ESP, Final Award, 4 December2017.

4. In its final award, the Tribunal held that it did not have jurisdiction over Generadora y Comercializadora de Energía del Caribe – Gecelca SA ESP.

5. The Council of State decides applications for setting aside against arbitral awards issued in Colombian seated arbitrations which involve state entities. If no state-owned entities are parties to the underlying arbitration, applications for setting aside are decided by the Colombian Supreme Court of Justice. The Constitutional Court has held consistently that arbitral awards may potentially violate the constitutional rights of the parties. Therefore, arbitral awards may be reviewed by means of a tutela in a proceeding which is different and independent from the set-aside proceeding. In this case, the tutela was presented first before the Fourth Chamber of the Council of State in first instance, which was then reviewed, on appeal, by the Fifth Chamber of the Council of State. The Constitutional Court has the discretion to review any tutela decisions which it deems relevant. This particular tutela was selected by the Constitutional Court for review.

6. Constitutional Court, Fifth Revision Chamber, Judgment T-354/19, 6 August 2019.

7. Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020, p 45. Consortium CUC-DTC argued that, in its application for setting aside, Gecelca had not referred to the 21 February 2017 two-page document (which was indeed included in the record), but to the 14 February 2017 document – consisting of 11 pages – that was excluded by the Tribunal.

8. Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020, p 90 (‘[…] the examination of compliance with the agreed procedural norms must be carried out taking into account their ordinary meaning insofar as [such norms] aim to establish, in a clear and precise fashion, the manner in which the proceeding is carried out’) [authors’ translation].

9. Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020, p 102.

10. Gary B Born, International Commercial Arbitration (2nd Edn, 2014), p 3168 (‘Under the orthodox analysis of annulment authority, which holds that the Convention imposes no limits on the annulment of awards in the arbitral seat, a Contracting State would in principle be free to subject all international awards made on its territory to de novo judicial review, with full evidentiary and legal submissions on the merits of the parties’ dispute, treating the award as relevant evidence in the litigation, if that, but no more. That is the necessary consequence of holding that the Convention “provides no restraint whatsoever on the control functions of local courts at the seat of arbitration.”) [footnote omitted].’ See Gulf Petro Trading Co., Inc. v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742, 747 (5th Cir. 2008) (“Convention permits a primary jurisdiction court to apply its full range of domestic law to set aside or modify an arbitral award”); Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 287-88 (5th Cir. 2004) (“courts of primary jurisdiction, usually the courts of the country of the arbitral situs, have much broader discretion to set aside an award [and] may apply their own domestic law”).

11. See Born (n 10 above), pp 3207 et seq.

12. See Quintette Coal Ltd v Nippon Steel Corp et al, British Columbia Court of Appeal, 24 October 1990, para 27, in Yearbook Commercial Arbitration 1993 – Vol XVIII (‘The reason advanced in the cases discussed above for restraint in the exercise of judicial review are highly persuasive. The ‘concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes’ spoken of by Blackmun, J. are as compelling in this jurisdiction as they are in the United States or elsewhere. It is meet therefore, as a matter of policy, to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing international commercial arbitral awards in British Columbia. That is the standard to be followed in this case.’).

13. See Born (n 10 above), p 3262 (‘The burden and standard of proof for annulment of an award based on failure to comply with the parties’ agreement regarding arbitral procedures parallels the treatment of these issues under other bases for annulment. It is clear that the award-debtor bears the burden of proof of noncompliance with the parties’ agreed procedures. It is also clear that the burden of demonstrating procedural irregularities, sufficient to warrant annulment of an award, is a substantial one under most national arbitration regimes.’) and footnote 558 quoting RJ O’Brien & Assocs Inc v Pipkin, 64 F3d 257, 263 (7th Cir 1995) (‘although arbitration must be conducted in accordance with specified procedures, “a trivial departure from the parties’ agreement however, may not bar enforcement of an award”’) and Sumukan Ltd v Commonwealth Secretariat [2007] EWCA Civ 1148, para 28 (English Ct App) (‘court will wrestle to avoid setting aside an otherwise perfectly good decision by virtue of non-compliance with a provision which really does not matter’).

14. US District Court, District of Columbia, 29 May 1992, 90-0169 (Compagnie des Bauxites de Guinee . Hammermills Inc), in Yearbook of Commercial Arbitration 566, Vol XVIII. Such ruling has been consistently followed by other courts. See, for instance, US District Court, Southern District of Texas, Houston Division, 4 December 2001, Civil Action No H 01-0634 (Karaha Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara), para 26, in Yearbook of Commercial Arbitration 814, Vol XXVII (‘The Court finds the Hammermills decision well-reasoned and adopts it as persuasive authority. The Court therefore holds that Pertamina must show that there is a violation of an arbitration agreement between the parties and that the violation actually caused Pertamina substantial prejudice in the arbitration’); US District Court, Southern District of New York, 92 Civ 4623 (MGC), 21 December 1992 (PT Reasuransi Umum Indonesia v Evanston Insurance Company, Utica Mutual Insurance Company and Others), para. 4, in Yearbook of Commercial Arbitration, Vol XIX.

15. UNCITRAL Secretariat, Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (2016), article V(1)(d), §§ 42; Quebec Court of Appeal, Rhéaume v Société d’Investissements L’Excellence Inc, No 2269, 2010, para 61 (‘determine whether the breach is of such a nature to undermine the integrity of the process, and assess the extent to which the breach had any bearing on the award itself’).

16. Born (n 10 above), footnote 590 citing Dan River, Inc v Cal-Togs, Inc, 451 F.Supp 497, 501-02 (SDNY 1978) (‘AAA’s alleged error in selecting arbitral forum and procedural rules not basis to vacate award without showing of effect on “substantive rights”’).

17. Colombian Arbitration Statute, article 64. See UNCITRAL Model Law, article 2A. See, also, US District Court, Southern District of Texas, Houston Division, H-95-4114; H-95-5553; H-96-0166 (Trans Chemical Limited v China National Machinery Import and Export Corporation), 7 July 1997, para 45 in Yearbook of Commercial Arbitration, Vol XXIII(‘The right to due process does not include the complete set of procedural rights guaranteed by the Federal Rules of Civil Procedure. By agreeing to arbitration CNMC subjected itself to its advantages and disadvantages’).

18. Council of State, Third Chamber, Ref No 11001-03-26-000-2018-00012-00 (60714), 27 February 2020, p 91.

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