Insights from Seda v. Colombia – EJIL: Talk!

On June 27, 2024, the court in the investment dispute Seda vs Colombia delivered a long-awaited ruling. The decision, hailed by Colombia as “historic,” represents the first public ruling in which an investment tribunal accepted the “self-assessment” nature of a provision in an investment agreement. Moreover, it is the first public ruling in which an entire claim is dismissed on the basis of invoking a security exception (see, however, the partially successful invocation in Devas vs India and the unpublished Tenoch vs India).

After a brief account of the facts, this paper analyses the tribunal’s detailed engagement with the issue of self-judgment. It argues that a lasting significance of the award will lie in the fact that the tribunal made a review at all, despite the provision being worded as what I describe as an ‘enhanced self-judgment’ clause.

The Facts: Luxury Real Estate and Colombia’s Fight Against Organized Crime

At its core, the dispute is in Seda vs Colombia was about the seizure of a luxury property by Colombian authorities due to the property’s historical connection to organized crime. In the region around Medellín, drug cartels are known to have laundered money through property acquisitions in the past and are still active in such practices. In order to combat organized crime, Colombian law allows courts to forfeit assets suspected of having been used for money laundering.

Mr. Seda, a U.S. citizen, invested in several Colombian real estate projects beginning in 2008. One of the investments, which involved funds from several other legal entities and individuals, was the Meritage project, intended to be a luxury hotel and residential complex. The investors’ company acquired the land for Meritage from a local firm through several agreements between 2012 and 2015. Prior to the acquisition, the investors had conducted due diligence, including a title study, and obtained a certificate from the Attorney General’s office, ensuring that the property was not involved in any criminal proceedings or investigations.

In 2016, Colombia’s Asset Forfeiture Unit seized the Meritage property, citing irregular ownership transfers linked to a criminal syndicate prior to its acquisition by investors. In addition to ongoing and unsuccessful attempts to challenge the seizure in Colombian courts, in 2019 the plaintiffs initiated arbitration under the 2006 Colombia-US Trade Promotion Agreement (TPA), seeking more than $255 million in compensation for the property’s seizure. The plaintiffs allege that Colombia’s actions violated guarantees protecting against unlawful expropriation and ensuring fair and equitable treatment, national treatment, and full protection and security.

The ‘enhanced’ exception for essential security interests based on self-judgment

The decisive issue in the proceedings was the interpretation of the essential security interest exception in Article 22.2.(b) of the TPA. It provides:

Nothing in this Agreement shall be construed as preventing a Party from applying measures it considers necessary for (…) the protection of its own essential security interests.

The clause is a classic example of what is usually called an explicit ‘self-judging’ or ‘self-judging’ provision. The self-judgment element of the clause arises from the phrase ‘it sees fit’, which places the invoking state in a position of special authority when it invokes the exception.

A series of decisions by international judicial bodies, including the landmark cases of the International Court of Justice in Djibouti v Franceand a panel of the World Trade Organization in Russia – Traffic in Transithave established in recent years that the explicit self-judging elements of a provision are still subject to good faith review by a competent judicial authority. It is a standard of review indicating that a reviewing authority will not assess the reliance on a self-judging standard for its ‘correctness’, but will only determine whether the reliance was made in ‘good faith’.

However, Article 22.2 of the TPA goes further than a classic provision on self-judgment. A footnote to the provision specifies that

“(for greater certainty) if a Party invokes Article 22.2 in an arbitration proceeding (…) the tribunal or panel hearing the case shall find that the exception applies.”

This addition makes the exception part of a newer generation of self-assessment provisions that the US and India in particular have increasingly incorporated into a number of their investment agreements (see section 4.4 here). These ‘enhanced self-assessment provisions’ go beyond the classic self-assessment by emphasizing whether strengtheningthe power of the State to decide on the application of the clause.

To defend the seizure, Colombia invoked the enhanced self-judgment exception in Article 22.2(b) of the TPA. This was, to my knowledge, the first time an enhanced self-judgment provision had been invoked.

‘No doubt about the non-justifiability’?

Colombia argued that this reliance on the essential security interests exception meant that the Tribunal ‘has no jurisdiction’ and that the Tribunal ‘was obliged to apply the exception automatically’ (Respondent’s Reply, paragraphs 29, 27). According to Colombia, the text of the treaty ‘left no doubt as to the non-justiciability’ (Respondent’s Reply, paragraphs 35). Importantly, this also implied that the Tribunal was not allowed to conduct a good faith review. In summary, although Colombia conflated non-justiciability and the Tribunal’s jurisdiction in its argument, it considered its unilateral decision to be the sole determining factor for the application of the essential security interests exception.

The US participated in the hearings as an uncontested party and, in line with its long-standing positions, supported Colombia’s arguments, relying on the preparatory work.

The claimants, on the other hand, argued that the tribunal was obliged to conduct at least a good faith review of Colombia’s reliance on Article 22.2(b) of the TPA, regardless of the enhanced self-assessment language (Award, paragraph 278). Not surprisingly, they also argued that Colombia had failed to meet this good faith standard.

The implications of the footnote

The Tribunal considered the enhanced self-judging provision at length. As for the ‘classic’ self-judging language in the provision (‘it considers necessary’), the Tribunal built on previous case law and held that the self-judging nature of a standard must be explicit. Given the use of the phrase ‘it considers necessary’, the Tribunal found that the language ‘leaves no doubt that this provision is self-judging’ (Award, paragraph 638). As a result, a ‘margin of deference’ must be afforded (Award, paragraph 640).

However, the tribunal attached little weight to footnote 2 to Article 22.2 of the TPA. It held that, since it was required to make a ‘finding’ and the provision ‘did not comply with the express language exempting the measure from all review’, the case was ‘not without merit’ (Award, paras 659, 723-725). Instead, the provision ‘left open an important question: what is the standard of review’ (Award, para 661).

For the tribunal, the decisive criterion was whether the measure taken was ‘plausible’ in the circumstances. In assessing the connection between the state measures and the security interest, the tribunal held that its task was to carry out a ‘“light-touch” good faith review – not too restrictive as to infringe on the explicit self-assessment language’ (Award, paragraph 655).

Applying this standard, the tribunal found that Colombia’s seizure of the property was plausibly linked to the fight against organised crime, and that there was no evidence that the measure had been taken in bad faith (Judgment, paras. 792-793). Consequently, the claim was dismissed.

The latest chapter in an ongoing battle

Seda vs Colombia has broken new ground by revising a strengthened provision on self-judgment, marking the latest chapter in the ongoing debate over the meaning, implications, and limits of “self-judgment” that has lasted for decades.

The significance of the decision lies not so much in the outcome, but rather in the fact that the tribunal conducted a review of the provision at all, despite a footnote ostensibly intended to preclude such a review. States such as the US or India, eager to establish self-review as a tool for enshrining unfettered discretion over international judicial bodies, may see the decision as moving the goalposts. While good faith review of ‘classic’ self-review provisions has become widely accepted, strengthened self-review clauses have long been considered ‘not reviewable at all’.

Next Seda vs ColombiaStates can no longer be certain that a clarification requiring a court to “find that the exception applies” on the basis of a State’s appeal will actually result in the court accepting that appeal.

Doctrinally, the central element of Seda vs Colombia What critics can emphasize is that the Tribunal’s interpretation, however detailed, effectively renders the amplifying footnote — which provides that the Tribunal “shall determine that the exception applies” — meaningless. It is difficult to imagine how the Tribunal’s decision would have been different had the footnote not existed. In line with the established case law of the ICJ and WTO panels, as well as handed down dicta of investment courts, it would likely have conducted a good faith review.

It is easy to sympathize with the tribunal. For many lawyers, particularly those charged with deciding disputes, it is hard to accept that state parties might seek to retain the unilateral right to avoid such adjudication by means of what the plaintiffs called a “get-out-of-jail-free card.” Nevertheless, states are neither obliged to submit to judicial dispute resolution, nor is the Competencies Competition of courts a matter of only cogens.

At the same time, reducing international judicial bodies to bystanders empowered only to approve state decisions seems anachronistic. It remains to be seen whether states determined to preserve the space for unfettered discretion will use even stronger language in self-judgment clauses in the future. It seems unlikely that Seda vs Colombia will be the last word in the ongoing battle over self-condemnation.