Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

The ANH was vested with the authority of providing the general terms and conditions with respect to the contracts for the exploration and production of oil and other conventional hydrocarbons in accordance with article 76 of Law 80 of 1993 (Public Procurement Statute). Pursuant to this, the ANH enacted Agreement 4 of 2012, pursuant to which the standard contract of Exploration and Production (E&P) was regulated. By means of the E&P contract the ANH, as the agency representing the Colombian state, concedes the right to explore the contracted area to the contractor, which bears all the risk of the enterprise in this phase. As consideration, the ANH receives a price from the contractor for the surface that includes the contracted area.

If the contractor succeeds in finding significant oil reserves, the second phase starts, namely the production phase. This phase entitles the contractor to extract hydrocarbons for a period of up to 24 years, extendable by petition of the interested party. The ANH receives a mutually convened price proportional to the production of the field.

Midstream services depend on the destination of the oil. Colombia is an oil-exporting country and some of its production is sold abroad; the part of the production that is not exported is generally sold to ECOPETROL (the partly state-owned oil producer and refiner in Colombia) for its refinery.

With respect to mining standard contracts, article 14 of Law 685 of 2001 (Mining Code) provides that the only title for appropriation of mineral resources is the mining concession. Article 45 of the same law provides that this contract is different to that of public construction and public service concession. Indeed, by means of this contract, the National Mining Agency (ANM) concedes the right to explore and extract, in an exclusive manner, the area described in the contract. The duration of the contract cannot exceed the term of 30 years (article 70 of the Law), except for a unique extension of two years. The person or company must pay the mining title (the negotiable title that constitutes proof of the right that the bearer has upon the extraction of the mineral in the conceded area).

In the electricity sector, the wholesale electricity market is highly liberalised and hence the agents can celebrate one or many of the following contracts, according to their needs: firm energy auctions (disciplined by resolution 056 of 2011 of the Regulatory Commission of Energy and Gas (CREG)); bilateral contracts between generators and commercialisation companies (in the form usually of distribution contracts); and energy spot market transactions according to the price and offer set forth on the energy exchange on an hourly basis.

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

The general rules that govern contractual interpretation are contained mainly in the Civil Code. There are multiple canons for interpretation:

  • subjective interpretation (articles 1618 of the Civil Code) by which the interpreter must establish the real will of the parties above all other indications;
  • authentic interpretation, in which the interpreter must establish the subsequent practices and acts of the parties so as to determine the sense of a primal assertion;
  • systematic interpretation (article 1622 of the Civil Code) in which a determinate clause must be given the interpretation that would best fit the totality of the contractual rights and obligations;
  • effective interpretation, in a disjunctive between two interpretations, the one that provides an effet utile to the clause must be preferred to the one that renders the same clause redundant or useless; and
  • interpretation against the drafter of the clause (article 1624, last subparagraph), as a subsidiary interpretation rule (which in fact constitutes a sanction) the clause that is obscure or ambiguous will be interpreted against the drafter of the clause.

There are no special rules of interpretation for any of the contracts regarding energy, even though many of these contracts interact within highly regulated industries. However, that E&P and mining concession contracts are public in nature and hence article 28 of the Public Procurement Statute provides that contractual clauses must be interpreted in good faith in accordance with the ends and objectives of public procurement and bearing in mind the principles of equality and equilibrium between the rights and obligations of the parties.

Describe any commonly recognised industry standards for establishing liability.

In Colombia, liability is established ab initio by analysing whether the activity involves private or public parties. In the first scenario liability is analysed from a private law perspective, while in the latter liability will be established based upon public law standards.

Regarding activities that involve private individuals or companies, furthermore it is important to remark that liability can be either contractual or tort, depending on whether the operator had a pre-­existing legal relationship that is also singular and concrete in nature (decision dated 18 September 2005 by the Supreme Court of Justice).

In tort law, industry standards are defined mainly by decisions of the Civil Cassation Chamber of the Supreme Court of Justice, in the absence of a list of activities with a predetermined standard of liability. However, the tendency is to define activities concerning energy as ‘hazardous activities’. This legal category provides that when a third party suffers injury or losses resulting from one of these activities, the victim must only establish: the loss or harm and the causation of the harm with the activity; in other words the standard of liability is, for practical purposes, objective (Supreme Court of Justice decision dated 26 August 2010). An activity will be hazardous when, due to the handling of certain objects or to the exercise of a specific conduct that is intrinsically apt to produce harm, there is a possibility that the forces multiply and the result becomes concrete (Supreme Court of Justice decision dated 23 October 2001). There are several activities that have been described as hazardous by the Supreme Court of Justice, including the transport and carrying of oil (decision dated 13 August 2001) and the generation of electricity (decision dated 13 August 2015). If harm is caused by the operator, the Supreme Court of Justice has adopted the theory of ‘shared guardianship’ (decision dated 13 May 2008) provided, respective of third parties, both the owner of the assets and the operator are held liable.

In cases where the Supreme Court of Justice has not defined an activity as hazardous, the standard will be usually determined on the basis of professional responsibility (as a subsidiary regime), which in turn mean that the standard is that of a reasonable and prudent operator so long as this regime is subjective (negligence or other title of fault must be established).

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

Force majeure and the theory of unforeseen events (similar to that of commercial impracticability) are recognised in Colombia as legal concepts that excuse performance of contractual obligations. In this sense, the general theory is plainly applicable (Council of State, Third Chamber, Decision dated 29 May 2003).

Notwithstanding the previous assertion, in Colombia E&P contracts have a special clause that enables the parties to face price volatility; this clause is used in a standard form by the ANH and is known as the ‘high price’ clause. Pursuant to this clause, when the oil barrel reference price is higher than the one established by the ANH, and a certain goal of production is achieved, the ANH recognises a prime for that production. This clause enables the producer to be in a financially better off position, in situations when oil prices are low.

Additionally, the ANH has enacted Agreement 003 of 2015 pursuant to which, provided the collapse of global oil prices, E&P contractors are given certain benefits, for instance they are excused from of the breach of certain obligations or are given extendable terms to perform them.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

The majority of activities in the energy sector are of public interest:

  • Oil: the Petroleum Code (Decree 1056 of 1953) provides as per article 4 that the petroleum industry in the phases of exploration, exploitation, refining, transportation and distribution is of public utility.
  • Electricity generation: article 5 of Law 143 of 1994 provides that the generation, interconnection, transmission, distribution and commercialisation are activities of public utility.
  • Mining: article 13 of Law 685 of 2001 declares of public utility the mining activity in all its phases and modalities.

The previous statements are important as, according to article 58 of the Colombian Constitution, when private interest collides with activities of public interest, the latter shall prevail. Thus, claims on nuisance have to be analysed from this perspective.

One example of nuisance to the enjoyment of land rights is the legal easement for the exploration, exploitation and transportation of oil. Law 1274 of 2009 provides that the interested party shall negotiate directly with the owner of land rights about the duration and compensation for the easement (article 2). If no direct arrangement is achieved, the municipal civil judge of the territory where the land is located has the authority to valuate and decide upon the controversy (article 4). The easements must be registered in the registry that the Office of Public Instruments holds for transactions upon immovable property (article 7).

Claims of third parties can obstruct energy development. In Colombia a significant issue regarding this is the protection of the right of previous consultation that indigenous and African-descendant groups bear upon the activities and decisions that will affect their ancestral territories (see question 25).

Liability and limitations

How may parties limit remedies by agreement?

In Colombia, two institutions are of significant importance when limiting remedies: liquidated damages clauses and liability limitation or exoneration clauses.

A liquidated damages clause is defined as the contractual agreement pursuant to which parties convene to do or give something in the event of a breach of their contractual obligations, both in event of imperfect performance or retardation in its compliance (article 1592 of the Civil Code). There is unanimous doctrinal consent that the liquidated damages clause can serve these two purposes: dissuasive, inasmuch as the debtor is fully aware of the consequence of a breach of contract; and indemnifying, because parties agree in an anticipated manner the quantum of remedies. Pursuant to this function, the debtor cannot defend his or her case arguing that the breach did not result in effective loss or harm (article 1599 of the Civil Code), and it can serve the purpose of a security, especially in those cases were assets guarantee the performance (in the form of a mortgage, for instance).

Liability limitation or exoneration clauses are, on the other hand, perfectly legitimate in the Colombian legal system provided that the last subparagraph of article 1604 of the Civil Code enable parties to modify the rules of liability, with some limitations. Indeed, parties can aggravate, exonerate or limit their liability if no public policy norms are contravened. The settled opinion among doctrine agrees that examples of public policy norms that cannot be modified or contravened by the clause are:

  • the anticipated exoneration of wilful misconduct or gross negligence is not valid (article 63 and 1522 of the Civil Code);
  • those that go against a constitutionally protected right (article 4 of the Constitution of Colombia);
  • those that limit or are contrary to good faith principles; and
  • those that alter the essence of the contract or are contrary to the nature of the structure of obligations (ie, those that state that an absolute breach of the essential contractual obligations will not result in any damages in favour of the creditor).

Is strict liability applicable for damage resulting from any activities in the energy sector?

The general description of liability applicable to activities in the energy sector depends upon the qualification of the activity as hazardous or not. If the activity is determined as hazardous, for practical purposes, the liability regime is strict. If activities are non-hazardous the general regime of liability is applicable. In many cases, however, activities in the energy sector have been described as hazardous (see question 5).