(The blog was published on the International Economic Law and Policy Blog on 2 October 2022. See the link: https://ielp.worldtradelaw.net/2021/10/guest-post-eco-oro-minerals-corp-v-republic-of-colombia-some-thoughts-on-an-investors-due-diligence-.html)
The investor’s due diligence has become a significant factor in determining whether the legitimate expectations based on the stability of a regulatory framework of an investor give rise to protection under the FET standard. According to numerous recent decisions (Charanne v. Spain, Isolux v. Spain, Stadtwerke München and others v. Spain, Antaris v. Czech Republic, Belenergia v. Italy, Hydro Energy v. Spain), the evidence of a due diligence process is a requirement for the protection of legitimate expectations arising out of a stability claim. The threshold for a violation of legitimate expectations is whether the state’s contested regulatory changes were unforeseeable for a prudent investor. To determine whether this is the case, a tribunal usually consider: (1) the form and the content of due diligence and (2) the extent of the foreseeability of regulatory changes that can be determined by the efforts undertaken by an investor to assess the risks of change (see the analysis here: https://link.springer.com/article/10.1007/s40802-020-00170-7).
Currently, the requirements for the form and content of due diligence are not clearly defined and vary from case to case. Furthermore, the execution of a due diligence process itself is not always accepted as a requirement for the protection of the legitimate expectations by tribunals. The recent decision on jurisdiction, liability and quantum in Eco Oro Minerals Corp. v. Republic of Colombia, (9 September 2021) is a good illustration of that. In this decision, the tribunal found that Colombia violated the fair and equitable treatment standard under Article 805 of the Free Trade Agreement between Canada and Colombia. The majority found that Colombia frustrated the legitimate expectations of Eco Oro (the investor) by refusing to proceed with mining exploitation activities in the entire area of Concession because of the environmental reasons.
In its assessment of legitimate expectations, the majority emphasizes the significance of an investor’s due diligence in protection of the legitimate expectations. The tribunal concludes that no due diligence has been performed by the investor, providing ‘whilst there is no evidence on the record of the due diligence actually undertaken by Eco Oro, it cannot be disputed that proper due diligence would have notified Eco Oro of the presence of páramo within the area of the Concession. Equally, due diligence would have alerted Eco Oro to the fact that páramo presence had been known to Colombia since 1851 and Eco Oro would also have been alerted to the fact that Colombia had had the duty to protect páramo ecosystems since Law 373 of 1997 but had not taken any action. Eco Oro should also have been aware that given the terms of Constitutional Court Judgment C-293 of 2002, its rights pursuant to Concession 3452 were subject to the overriding interests of the State to protect the environment. (..)’ (para. 768).
The majority acknowledges that even ‘the most cursory due diligence even before Concession 3452 was granted would have revealed (i) the potential existence of a páramo ecosystem within the boundaries of Concession 3452; (ii) the Government’s commitment and obligation to protect these ecosystems; and (iii) that such protection could be achieved by the imposition of a mining’ (para. 682). This being said, the tribunal still found a breach of the legitimate expectations, essentially disregarding the absence of the investor’s due diligence. As prof. Sands underlined in his dissenting opinion, ‘the majority nevertheless concludes that Eco Oro had a legitimate expectation in relation to MST, on which it could rely notwithstanding the total absence of any exercise of due diligence. In reaching its conclusion (at paras. 804 and 805 of the Decision), the majority passes in silence on due diligence.’ (Dissenting opinion, para. 18).
What is interesting in this decision is the tribunal’s disregard of its own conclusions in the final determination of the legitimate expectations, namely the acknowledgement that the process of due diligence is a relevant factor in the assessment of legitimate expectations and the recognition of the fact that the investor has not undertaken any due diligence. Earlier tribunals that do not place a significance on an investor’s due diligence usually consider any limited efforts on the part of an investor to assess the risks to constitute sufficient due diligence. Or, some tribunals determined that a due diligence would not have changed anything in the appraisal of the regulatory framework. For example, in Novenergia v. Spain, the tribunal was of a view that the state’s assurances that originated from Royal Decree 661/2007 and which stated that the original rate of returns would remain were so ‘adamantly clear’ that it did not require a ‘particularly sophisticated analysis’, such as legal due diligence. Also, in the tribunal’s view no formal due diligence would have been capable of revealing the regulatory changes that were later enforced by the state. (para. 679).
Although an investor’s due diligence has clearly become a factor in assessment of the protection of the legitimate expectations. There is no consistency concerning the scope of an investor’s due diligence in investment decisions, as well as its role in the final determination.