The Colombian Constitutional Court has upheld the arbitrability of a contract dispute involving a State entity, el Departamento del Valle del Cauca, suggesting that parties are free to choose the procedural rules applicable to arbitrations involving state contracts. The Valle del Cauca decision contrasts with the TermoRío opinion of the Council of State (Consejo de Estado), Colombia's highest administrative court, holding that an arbitration agreement contained in a state contract providing for ICC procedural rules violated Colombian law.

The Valle del Cauca decision (sentencia de unificación), rendered by the Constitutional Court on March 14, 2007, sets forth certain factors applicable to the arbitrability of contractual disputes involving a state entity, including the choice of procedural rules. (Corte Constitucional, Sentencia SU-174/07, Exp. T-980611, March 14, 2007). The case related to a concession agreement for the construction, operation and maintenance of a public road between Concesiones de Infrastructura S.A. ("CISA") and the Departamento del Valle del Cauca ("Valle del Cauca"). A dispute over the application of certain contractual terms was resolved by an arbitral award rendered in favor of CISA. The award was challenged before the Council of State and was upheld. Not satisfied with the outcome, Valle del Cauca filed a constitutional protection claim (acción de tutela) before the Constitutional Court, alleging violation of due process. On March 22, 2006, the Constitutional Court annulled both the award and the decision of the Council of State (Corte Constitucional, Sentencia T-481-2005, March 22, 2006). A year later, on March 14, 2007, the Court overturned its own decision, declaring that (i) a constitutional protection claim could not be used to challenge the validity of arbitral awards and annulment proceedings, and (ii) in any event, neither the arbitral tribunal nor the Council of State had violated Valle del Cauca's due process rights because the subject matter of the dispute was arbitrable.

Valle del Cauca had argued, inter alia, that the unilateral declaration of the termination of the concession agreement could not be subject to arbitration as it was a prerogative of the state. On this issue, the Constitutional Court set out certain factors relevant to the interpretation of the arbitrability of administrative acts. It distinguished between the economic aspects of a dispute arising in connection with an administrative act, which can be subject to arbitration, and the review of the validity and legality of administrative acts, which it identified as the exclusive prerogative of the State. The Constitutional Court held that (i) arbitration is an alternative voluntary method of dispute resolution that is constitutionally guaranteed and protected, and "constitutes the manifestation of a democratic and participative regime"; (ii) all arbitral awards are final and binding, differing from a judicial decision only in that they are not subject to appeal (with the exception of certain limited remedies established by law); and (iii) given the contractual and voluntary nature of arbitration guaranteed by Colombian law, parties may freely choose the rules governing arbitration proceedings.

The decision of the Constitutional Court in the Valle del Cauca case contrasts with a previous opinion of the Council of State setting aside an arbitral award involving a state-owned entity, holding that an arbitration agreement providing for arbitration under the ICC Rules violated Colombian law. (Electrificadora del Atlántico S.A. c. TermoRío S.A. E.S.P., Consejo de Estado, Sala de lo Contencioso Administrativo, Sección Tercera, Sentencia de 1 de agosto de 2002). In the TermoRío case, the parties had concluded a power purchase agreement governed by Colombian law referring all disputes to ICC arbitration. The Council of State vacated the award, holding that the arbitration agreement violated Colombian law because (i) the arbitration was domestic in nature, as the conditions established by Law 315 of 1996 for international arbitrations had not been met, and (ii) under Decree 2279 of 1989 (in force at the time of the agreement), the parties did not have "either the freedom or the authorization" to choose the rules to govern the arbitral proceedings.

Subsequentlty, TermoRío and one of its shareholders filed suit before the US District Court for the District of Columbia, seeking to enforce the award. On May 25, 2007, the DC Circuit Court of Appeals affirmed the decision of the district court, applying the New York Convention and refused to enforce the award (TermoRío S.A. E.S.P. v. Electrificadora del Atlántico S.A. E.S.P., 421 F. Supp. 2d 87 (D.D.C. 2006)). The appellate court held that "the arbitration award was lawfully nullified by the country in which the award was made," and therefore TermoRío could not "seek enforcement of the award under the Federal Arbitration Act or the New York Convention." It further held that to enforce an arbitration award lawfully set aside by a competent authority in the state in which the award was made "would seriously undermine a precept of the New York Convention." The Court clarified that "[b]ecause the Consejo de Estado is undisputedly a 'competent authority' in Colombia, and there is nothing in the record indicating that the proceedings before the Consejo de Estado were tainted ... appellants have no cause of action" pursuant to the New York Convention, Art. V(1)(e). (TermoRío, S.A. & Lease Group, LLC v. Electrificadora del Atlántico S.A., - No. 06-7058, F.3d, 2007 WL 1515069 (DC Cir, May 25, 2007)).

Under the TermoRío decision, domestic arbitration had to be governed by the Colombian Code of Civil Procedure. In contrast, the Valle del Cauca decision allows parties to choose freely the procedural rules applicable for the resolution of a dispute. The Council of State had nevertheless, already begun moving in this direction when it ruled on a case involving an arbitration with a seat outside Colombia. In that case, Empresa Colombiana de Vías Ferreras (Ferrovías) v. Drummond Ltd. (decisions of October 24, 2003 and April 22, 2004), the Council held that it lacked jurisdiction to set aside an ICC award rendered in Paris pursuant to French procedural law and which related to a contractual dispute between Ferrrovías, a Colombian State-owned entity, and Drummond, a private company. Attempting to follow the TermoRío precedent, Ferrovías had argued that contractual disputes between the parties could not be governed by international rules, as had been provided in the arbitration clause, as they involved a public entity, the contract was to be performed in Colombia, and it was governed by Colombian law. The Council rejected this argument, and held that under the applicable Colombian law, state contracts may be submitted to international arbitration. The Court further reasoned that, pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), which prevailed in this case over the Code of Civil Procedure, only the competent authority of the country in which the award was rendered, i.e., the French courts, could annul the award. (Empresa Colombiana de Vias Férreas c. Drummond Ltd., Consejo de Estado, Sala de lo Contencioso Administrativo, Sección Tercera, October 24, 2003 and April 22, 2004).

Notwithstanding the Valle del Cauca and Ferrovías decisions, it is not clear whether international arbitration is available for all state contracts. In a decision rendered on November 22, 2006 (C-961/2006), the Constitutional Court confirmed the constitutionality of provisions of the Investment Stability Law (Law 963/2005), pursuant to which investors may submit disputes to domestic arbitration governed by Colombian law, but not to arbitration under international rules. The Court held that legal stability agreements are a type of administrative contract concluded to guarantee a stable application of Colombian law to investors. The Court further noted that because any dispute would relate to the application of Colombian law, it is "reasonable" and "proportional" for the arbitration proceedings to be domestic and governed by Colombian law. (Corte Constitucional Sala Plena, Sentencia C-961/2006, Exp. D-6304, November 22, 2006).