Angel Samuel Seda and others against Colombia: new avenues in the application of security exceptions?

One of the most controversial issues in investor-state dispute settlement (“ISDS”), which has sparked extensive scholarly debate, and yet one of the least settled legal questions in arbitration practice, is the functioning and effect of security exceptions. One reason for this is the relatively small number of investment treaties that contain such provisions (according to the UNCTAD Investment Policy Hub408 of the 2592 mapped treaties contain a security exception). The underlying idea is that a treaty does not prevent (necessary) measures to protect the security interests of the state.

The first arbitral awards on the case arising from the 2001/2002 Argentine financial crisis are notable for their contradictory outcome (see in particular CMS v Argentina, Sempra against Argentina, Enron vs Argentina on the one hand, and LG&E vs. Argentina on the other hand). The most critical issues of security exceptions concerned the distinction between this and the state of emergency, a so-called self-judgmental nature and the effect of a successful invocation. The clarification through ad hoc Committees (see the annulment decisions in CMS v Argentina And Sempra against Argentina) has somewhat strengthened the application of such clauses in recent cases (Deutsche Telekom v India, CC/Devas v India). In this sense, security exceptions function as anomalies rather than as an affirmative defense. Yet this is not the end of the story and the most recent decision Samuel Seda vs Colombia is different in several respects. This relates to the facts of the case, the defendant’s litigation strategy and, most importantly, the invoked security exception clause in Article 22.2. of the US-Colombia Trade Facilitation Agreement (TPA). itself, which reads in relevant parts as follows:

“Nothing in this Agreement shall be construed:

(…)

(b) prevent a Party from applying measures that it deems necessary for the performance of his obligations relating to the maintenance or restoration of international peace or security, or the protection of his own country essential security interests.” (Emphasis added)

It is the first publicly known ruling in which the tribunal was faced with a safety exception including the so-called self-judgmental terminology “it deems necessary”. Even more striking is the accompanying footnote suggesting a barrier to judicial review: “if a party relies on Article 22.2 in an arbitration proceeding (…) the tribunal or panel hearing the case will determine that the exception applies”. After a brief overview of the facts, this blog post will discuss the topicality of such a defense, its self-condemning character and the degree of scrutiny.

Criminal prosecution and security interests

Not only does the design of the relevant safety exception differ from previous cases, the underlying factual circumstances also differ considerably. Until now, tribunals had to assess emergency measures (see the cases arising from the Argentine financial crisis) or decisions believed to be related to military objectives (see Deutsche Telekom v India, CC/Devas v India) under security exceptions. On the contrary, the present case concerned domestic asset forfeiture proceedings in connection with organized crime and drug trafficking. The investor, an American national, had invested in luxury real estate development projects in the Medellín area. Despite official assurances from the state that the property was unencumbered, Mr. Seda faced legal problems. The presumed previous owner took the stage and claimed that he had been extorted from the building by local cartels. As a result, Colombian prosecutors seized the properties as a precaution under Colombia’s asset forfeiture law. While the judicial review of Mr. Seda’s challenge to this case was still pending, he initiated arbitration proceedings under the American-Colombia TPA, alleging a violation of investment protection standards.

Never too late to defend security interests

Because Colombia had only invoked the security exception in its rejoinderthe tribunal had to first deal with the claimant’s objection that this “new defence” was too late. The plaintiff has argued that the defendant should have already recognized the security interest that was at stake when taking the contested measures. Nevertheless, the tribunal quickly cleared the way forward in its procedural decision No. 9. It held that the clause did not impose any time limit as the footnote referred solely to an appeal “in arbitral proceedings”. Because Colombia used the exception as a jurisdictional objection, the tribunal emphasized that it has the power to “consider its jurisdiction (…) at any time during the proceedings.” It added that several rounds of submissions and an additional hearing upheld the plaintiff’s right to be heard.

The protection of security interests – a matter of (non-)justice, jurisdiction or merit?

Colombia not only invoked the security exception at an advanced stage of the proceedings, but also developed its trial strategy. First, Colombia claimed that the clause is not subject to legal action. i.e that a tribunal has no power to review his appeal but must dismiss the case entirely. This argument is based on the footnote added to the clause and is supported by the comments of the US non-dispute party. Second, Colombia argued in an amended argument that a successful appeal would deprive the tribunal of its jurisdiction. Thirdly, and alternatively, it has argued that the self-assessment nature of the clause limits substantive review.

The key question is to what extent, if at all, a tribunal can review the appeal to a security exception. Although the tribunal accepted that the terms ‘it considers necessary’ imply a self-judgmental character, such an effect is strongly contested. The first argument of non-justification in particular has been extensively argued on behalf of the US in recent WTO cases (see the United States – Certain measures on steel and aluminum products cases with ChinaNorwaySwitzerland and Turkey And United States – Origin marking requirement). So far, all panels have denied such an effect for Article XXI GATT. Despite the ominous footnote purporting to require a tribunal to “find that the exception applies,” the tribunal also rejected such effect. In particular, it distinguished it from exceptions in other treaties that expressly adopt the concept of non-justification. Consequently, the tribunal prevented unfettered use of this defense tool, which could undermine the objectives of the Convention, namely legal certainty and predictability. Although contracting parties can define the scope of the ISDS mechanism, it is doubtful that a security exception can override any dispute simply by invoking it.

This led to the question to what extent the tribunal can actually test the contested measures. While arbitration tribunals and the International Court of Justice (see Military and paramilitary activities in and against Nicaragua and the Oil platforms cases) have uniformly confirmed that the concept of “it considers necessary” has a self-assessing effect, the tribunal said Seda vs Colombia is the first to apply such a security exception. In line with previous cases, the tribunal accepted a wide margin of appreciation for the state in defining its security interests, limited only to good faith. To define this standard of good faith, the tribunal used the plausibility test established in recent WTO panel reports (see e.g Russia – Measures regarding transit traffic, Saudi Arabia – Measures regarding the protection of intellectual property rights). This means that a plausible relationship between the contested measures and the stated safety objective is necessary. As to the outer limits of the concept of security, the tribunal distinguished the clause from Article XXI GATT, which arguably limits the permissible security interests. via its subparagraphs on (i) fissile materials, (ii) arms trade and (iii) situations of “war or other emergencies in international relations”. The tribunal concluded that the asset forfeiture proceedings were plausibly linked to the security interest of combating organized crime, including drug trafficking and money laundering. It therefore ruled that the security exception applied and dismissed the claims. While some guidance from the recent WTO panel reports is not surprising, the tribunal was also aware of the systemic differences between trade and investment law. It therefore remains to be seen whether future tribunals will continue down this route. The approach to the concept of security interests is new. Previous tribunals required an emergency situation exceeding a certain threshold (see the cases arising from the Argentine financial crisis), a (para-)military objective of a measure (CC/Devas v India), or demanded a threat of national dimension (see Michael Lee-Chin v Dominican Republic) to apply a security exception.

What can you expect for future cases?

The award is a further step in gaining a clearer picture of the powerful tool of security exemption clauses, while several issues remain open. First of all, it strongly rejects an unjustified effect of safety exceptions, even if the treaty texts point in that direction. Second, it consolidates the reasoning that distinguishes safety exceptions as aberrations from the state of emergency as an affirmative defense. Third, it adopts an initial interpretation of security exemption clauses, including self-assessment language, based on a plausible relationship between the contested measure and the asserted security interest. Because the clause differs from the exceptions modeled on Article XXI GATT, the ruling does not tell us how a tribunal would approach such a provision. Therefore, a case-by-case assessment of security exceptions is required.