Bolivian Governing Law and Dispute Resolution in the Hydrocarbons Industry

By

Ramiro Moreno Baldivieso

A. INTRODUCTION.

The international commercial and investment arbitration landscape was, and still is, the
object of several criticisms by many sectors within Bolivia. The Washington Convention
of 1966 together with ICSID was said to be a mechanism which favored the investors and
not the State. Various Bolivian politicians also stated it lacked impartiality and that the
State was facing complaints based on the BITs under unequal conditions against the
claiming investors1. Some Bolivian analysts countered that the awards rendered under the
BITs following the ICSID regime were balanced and did not favor either party2.

These circumstances resulted in a backlash to arbitration as a dispute resolution

mechanism, and afterwards in the withdrawal of some countries from the Washington
Convention of 1966, as is the case of Bolivia, Ecuador, and Venezuela, albeit some minor
variations regarding Bolivia3. As a common factor, the withdrawal of these countries was
their attempt to recover their sovereignty over their natural resources, although political
perception also played an essential role in the withdrawal. For instance, the President of
Bolivia, Evo Morales, stated that investors harness the ICSID to claim unfair millionaire
compensations4.

Furthermore, throughout the last decade, Bolivia has experienced a large set of significant
modifications to its legal and political system, which have repercussions on the
hydrocarbon sector. Concerning its legal system, the approval of the Political Constitution
of 2009 set the base to posterior modifications in the legislative framework regarding
both hydrocarbons and dispute resolution. Politically, the stability generated by one party
obtaining a majority in the parliament and, thus, being able to control the government
creates a favorable environment to carry out processes such as the nationalization of the
hydrocarbons industry and the already mentioned withdrawal from the Washington
Convention.

B. GOVERNING LAW AND COMPETENT COURTS IN THE HYDROCARBON

SECTOR IN BOLIVIA – AN OVERVIEW

Regarding the governing law, all contracts related to the Hydrocarbons Industry are
subject to Bolivian Law and the parties cannot agree otherwise. This essential feature of
the Bolivian legal framework is the result of the historical experience.

1
Valverde, Max. Bolivia se margina del CIADI, Puentes, Volume 9, Number 1. March 1, 2008. Available
at: https://es.ictsd.org/bridges-news/puentes/news/bolivia-se-margina-del-ciadi
2
Idem.
3
Bolivia withdrew from the Washington Convention of 1966 on May 2nd, 2007, with effect on November
1st, 2007. See Puentes, Vol. 9, No. 1, March 2008, http>//ictsd.org/i/news/10649/
4
Bolivia inicia campaña internacional contra el CIADI: http://www.uruguay.attac.org/Documentos/vari-
os/ciadi.htm

1
The latest event that shaped this characteristic of the legal system took place in 2006 when
hydrocarbons went through a process of nationalization as the result of a violent social
riot a couple of years earlier, in 2003, recalled by history as “Octubre Negro” (Black
October) or “La Guerra del gas” (Gas War). This event led to over 60 people losing their
lives and to the resignation of the then President of Bolivia, Gonzalo Sanchez de Lozada.
It also left Bolivia mired in a political disruption and it led to a call for presidential
elections resulting in the appointment of Evo Morales as President.

After these events, the Bolivian State recovered property of hydrocarbons. Hence the
national oil company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), acquired
preeminence within activities of exploration, exploitation, commercialization, and export
of hydrocarbons. Furthermore, since 2006, Bolivia, under the Government of President
Evo Morales, conducted a series of structural economic, social and legal changes which
led to a new Political Constitution of the Plurinational State in 2009. This fundamental
laws based on the preeminence of the State in many activities with economic, social and
legal implications, and on a population participative basis, leaving aside the neoliberal
model and leading to a political-social current denominated "Socialism of the 21st
Century". Under the new legal-constitutional framework, Art. 366 of the CPE establishes
that:

"Every foreign enterprise that conducts activities in the hydrocarbons production

chain in name and representation of the State will submit to the sovereignty of the
state, to the dependency of the laws and authority of the state. No foreign court
case or foreign jurisdiction will be recognized, and foreign investors may not
invoke any exceptional situation for international arbitration, nor appeal to
diplomatic claims."

This statement consecrates the Calvo Doctrine, as it fixes the subjection of all industries
related to hydrocarbons to the sovereignty of the State, hence the subjection of all actors
intervening in this sector to the laws of Bolivia and to its entire legal order. Accordingly,
the Bolivian legal order establishes that the laws and regulations and the subjection to the
Bolivian jurisdiction are of mandatory application. There are no exceptions or excuses.

C. FOREIGN INVESTMENTS IN BOLIVIA.

Even though the Bolivian state promotes investments regardless of their origin,
investments are not treated equally. The political Constitution in its article 320 states:

I. Bolivian investment will be prioritized against foreign investment.

II. All foreign investment will be subject to the jurisdiction, the laws and the
Bolivian authorities, and nobody will be able to invoke a situation of exception,
nor appeal to diplomatic claims to obtain a more favorable treatment.
III. Economic relations with foreign states or companies will be carried out under
conditions of independence, mutual respect and equity. Cannot be granted to
states or foreign companies more beneficial conditions than those established for
Bolivians.

The first part of this article is strongly characterized by political and ideological content.
As noted above, the Bolivian Political Constitution of 2009 is the result of a countrywide
development of events, which resulted in a change of the state’s fundamental basis and

2
principles, sweeping reforms throughout Bolivian legal order. In this context, given that
since the 2009 Constitution, the Bolivian State takes a much more active part in the
conduct of the country’s economy and industrial development, it became necessary to
pass a law to establish the grounds to treat investments. As a result, the Law No.516 dated
April 4th. 2014 on the Promotion of Investments (“Investment Promotion Law”) was
enacted.

The Investment Promotion Law establishes diverse categories for investments:

1. Priority Investment, Quality granted by the Ministry of Development Planning to

investment projects that develop productive activities of strategic interest for the
country, which are identified in this Law. This quality allows investment to access
specific incentives.
2. State’s Productive Investment is a modality of Bolivian investment. The
productive state investment is made within the framework of the planning of the
economic and social development of the country, is destined to productive
activities qualified as preferential investment, is made with public resources and
has advantages established in this Law.
3. Mixed Investment is a form of investment, made up of productive state investment
on the one hand, and private national and/or foreign investment on the other, in
which the State maintains control and direction of productive economic activity.
4. Foreign Investment is the investment of foreign origin, private or public, made by
foreign natural or legal persons or Bolivian individuals residing abroad with a
permanence of not less than two years. Commented [EP1]: This could be moved to a footnote.
Although it is interesting it is outside the scope of this
chapter.
Regardless of the kind of investment, Law on Promotion of Investments determines as
Commented [MB2R1]: Although it may be more suitable in
investment facilities commercial companies, public companies, mixed companies and a footnote, it is an essential part of the Bolivian legal
contracts or other joint investment instruments5. This law also considers an investment as framework concerning the subject at hand. Consequently, I
a social commitment and establishes a series of conditions for investments. At the same think it should remain as part of the text.
time, it creates general and specific incentives and priority investments6. It does not,
however, mention investors in cases of dispute. The only reference to that effect is
contained in the third transitional provision that states:

The Ministry of Justice and the Attorney General of the State, within a period of
three (3) months from the publication of this Law, will elaborate the new
conciliation and arbitration norm that will include specific regulations for the
resolution of controversies in matters of investments.

The new conciliation and arbitration norm being the already addressed Law No. 708 dated
June 25th., 2015 (“New Conciliation and Arbitration Norm”).

D. DISPUTE RESOLUTION IN THE HYDROCARBON SECTOR

(i) Dispute resolution in the hydrocarbon sector prior to the Political

Constitution of 2009

5
As per defined in the article 9 of the Promotion of Investments Law.
6
Ibidem, article 11.

3
Arbitration has been developing substantially since the 1980's due to diverse causes
which contributed positively to intensive use of arbitration. Perhaps the most important
reason amongst others was the new economic policy supplemented by the opening of a
market-based economy.

Consequently, Law No. 1770 dated May 10th, 1997 (“Arbitration Law”) was enacted.
This Law, based on the UNCITRAL Model Law, was in effect for 19 years and may
indeed be considered as the most significant change in the arbitration regime in Bolivia.
Arbitration Law also clearly identified the matters that could be subject to arbitration in
its article 74:

Disputes in which the State and legal persons of Public Law are interested parties
may be subject to arbitration, provided that they deal with available rights and
derive from a legal relationship of private law or contractual nature.

In consideration of this piece of legislation, a full range of matters could be solved through
arbitration, for instance, the term to perform certain activities within a contract or the
fulfillment of obligations by each party. The only limitation concerning hydrocarbons
was the application of Bolivian law as the law governing the substance of any agreement
over the Bolivian resources, in accordance with the Calvo doctrine mentioned above.
Therefore, hydrocarbons arbitration is subject to Bolivian laws as governing substance
law.

The flow of investments towards Bolivia occurred as a consequence of the economic

measures implemented since 1985, with the introduction of the new economic policy
based on market-led economy.

The sectors to which the investments were channeled were mainly hydrocarbons and
mining. Additionally, there was a state reform with the adoption of a privatization
mechanism that was called the "capitalization process", which consisted in the
transformation of the leading public companies of the state into mixed economy
partnerships. 50% of the shares of those companies were sold through an international
bidding process, and the other 50% of the shares were supposed to be distributed among
all of the Bolivian citizens who were older than 21 years of age. However, the shares were
actually placed in a trust on behalf of the people and finally turned into a pension fund.

The hydrocarbon sector was one of the sectors affected by this process and the Bolivian
entity in charge of the entire industry of this sector, Yacimientos Petrolíferos Fiscales
Bolivianos (YPFB), was broken down into various companies in order to make the share
selling process viable. Naturally, the entire process was accompanied by a group of
norms and, as a complement to the entire process, various laws were enacted, such as the
Law on Hydrocarbons No. 1689 dated April 30, 1996, and the above mentioned
Arbitration and Conciliation Law of 1997 based on the UNCITRAL Model Law.

Under this legal framework, the Calvo Doctrine was well established, as per article 24 of
the now-abrogated Bolivian Political Constitution declared:

Foreign companies and nationals are subject to Bolivian law, in no event may
invoke exceptional situation or appeal to diplomatic claims.

4
Reinforcing the aforementioned, article 135 stated:

All companies established for exploitation, exploitation or business in the country

will be considered national and will be subject to the sovereignty, laws and
authorities of the Republic.

The above-mentioned articles imply the categorical ban on submitting claims to

international authorities. However, this prohibition was contrary to what was established
in the ICSID Convention and other BITs (For example, those concluded with Argentina,
France, Netherlands, United Kingdom, United States and Spain). This contradiction with
unconstitutional implications was submitted to the attention of the Constitutional
Tribunal7, which refused to issue a decision on the substance of the controversy and
instead, stated that the articles of the Constitution imply a violation of the Vienna
Convention (article 24 of which states that a party may not invoke the provisions of its
internal law as justification for its failure to perform a treaty). As a result, both, the ICSID
Convention and BITs remained in force, notwithstanding their unconstitutionality, thus it
was possible to resort arbitration in spite of its contradiction to the Political Constitution.

It is important to highlight that notwithstanding the nationalization processes carried out

by the government of the president Evo Morales, although there were international
arbitration complaints filed in other sectors (water resource and mining, to give the most
representative examples), there was only one proceeding brought to the ICSID pertaining
to investments in the hydrocarbons. In that case, the investor claimed compensation for
the expropriation of the totality of shares that the company Pan American Energy LLC
had in Empresa Petrolera Chaco S.A.8 This proceeding was not completed because the
Government of Bolivia and the shareholders of the company reached a settlement.

Notwithstanding the settlement, it is important to analyze the aspect related to the law
that governed the substance in the complaint of Pan American Energy LLC against
Bolivia.

The Republic of Bolivia signed with the USA a Bilateral Investment Treaty (BIT Bolivia-
USA) which entered into effect for Bolivia on June 6th, 2001. As per its Art. IX, the BIT
established that Bolivia consented to resolve the investment disputes with the investors
of United States through arbitration under the ICSID rules9. Given that the claim was
related to expropriation, there was no prior agreement between the parties to define the Commented [EP3]: No governing law in their investment
applicable law. Hence, the norms governing the substance of the dispute relied upon the agreement?
basis of the BIT and consequently the ICSID Convention. Therefore, the Tribunal was Commented [MB4R3]: No, as stated, no legislation was
defined prior the dispute. It was during the arbitration that
obliged to apply the treaty due to it having the character of special law applicable to the the tribunal was force into deciding the substance law to
case (Lex Specialis) and finally apply the Bolivian Law due to multiple reasons such as apply.
the place where the operations were carried out and the Bolivian public order. Ultimately,
it can be affirmed that Bolivia within matters of hydrocarbons, as a product of the

7
The Constitutional Court, now a Plurinational Constitutional Court, is the authority in charge of the
control of constitutionality in Bolivia.
8
Pan American Energy LLC v. the Plurinational State of Bolivia, ICSID Case No. ARB/1078
9
Treaty between the government of the Republic of Bolivia and the government of the United States of
America regarding the reciprocal promotion and protection of investments of April 17th, 1998, in effect
in Bolivia since June 6th, 2001.

5
expropriations and nationalizations, only had one claim which was not resolved by the
rule of the Arbitration Tribunal.

The Bolivian scheme of dispute resolution was well defined. Under the Law on
Hydrocarbons No.1689 dated April 30th, 1996, arbitration clauses within the framework
of Joint Venture agreements between the Bolivian State and foreign investors were
enforceable: Law No.1770 dated May 10th, 1997 determined in its article 74 that the State
was able to take part in an arbitration provided that the arbitration deal with available
rights and derive from a legal relationship of private law or contractual nature. Commented [EP5]: This was explained before?
Commented [MB6R5]: Kindly refer to page 4. Should you
In every other case, where the dispute was not a consequence of a contractual relationship, consider it unnecessary, please feel free to remove the quote
of this part.
arbitration was also possible under the ICSID Convention or a possible BIT.

(ii) Dispute resolution in the hydrocarbon sector after the Political Constitution of
2009

(a) General Ban on Arbitration in the Field of Foreign Investments

Since the “Gas War” and the modifications in the Bolivian legal order, including in the
dispute resolution regime, there has been a profound change in the Bolivian dispute
resolution regime. This change was composed of the enactment of a new Law on
Hydrocarbons in 2005, the nationalization process carried out by the back-then recently
elected government of Evo Morales in 2006, the withdrawal from the ICSID Convention
in the year after, the promulgation of a new Political Constitution in 2009 and, finally,
the enactment of the Law on Promotion of Investments, which laid down the task of
passing a new norm on Conciliation and Arbitration, which later turned out to be, Law
No. 708 dated June 25th., 2015

As the very foundation of the Bolivian legal order, the 2009 Political Constitution
establishes in Art. 366 a prohibition to resort to arbitration in what are considered
strategic sectors, such as hydrocarbons. This prohibition applies to the entire productive
chain in these sectors. Hence, international arbitration is strictly not allowed:

All foreign companies that carry out activities in the hydrocarbon production
chain in the name and representation of the Bolivian State will be subject to the
sovereignty of the State, to the dependence on the laws and the State authorities.
In no case shall a foreign court or jurisdiction be recognized, and they may not
invoke any exceptional situation of international arbitration or resort to
diplomatic claims.

This means that investors within the strategic sector of hydrocarbons cannot submit their
disputes to international arbitration. What is more, in domestic arbitration it is only
possible to apply the Bolivian Law. In line with this development – and as mentioned
above –Bolivia withdrew from the Washington Convention, which had been deemed as
unconstitutional by some even before the promulgation of the Political Constitution of
2009.

Concerning the dispute resolution system within the framework of the New Norm on
Conciliation and Arbitration, the introduction of the “Special Regime for the Resolution
of Investment Related Controversies” is possibly one of the most striking aspects within

6
matters of investments. To have a clear understanding of the current dispute resolution
regime, it is necessary to analyze this law, in particular its articles. 127 - 133, which
contain this so-called "Special Regimes related to Controversies with the State in matters
of Investments” (Chapter II), as well as “Controversies in matters of Bolivian
Investments” (Section II) and “Controversies in matters of mixed and foreign investments
(Section III)."

Going into the analysis of the Controversies with the State in matters of Investments,
according to the text of Law No. 708 dated June 25th., 2015, investments are subjected
entirely to the Bolivian jurisdiction, laws, and authorities. This principle is consistent
with the constitutional rule of Art. 320 - II of the Political Constitution which states that:
"All foreign investments will be subjected to the jurisdiction, the laws and the authorities
of Bolivia, and no person can invoke a situation of exception, nor appeal to diplomatic
claims to obtain more favorable treatment." It is important to point out that even before
the enactment of this law, the Plurinational State of Bolivia approved Law No. 516 dated
April 4th, 2014 concerning the Promotion of Investments. The common element between
these two laws is that in all cases the national law governs exclusively any disputes,
including those related to hydrocarbons10

Article 127 of Law No. 708 dated June 25th., 2015, for its part stipulates that:

II. The rules of this Chapter shall apply to disputes of a contractual or extra-
contractual relationship, when the State is a party to said controversies and these
arise or are related to an investment established in Act No. 516 dated April 4,
2014, on Promotion of Investments.
III. The parties to the dispute, prior to resorting to arbitration, must resort to
conciliation.
IV. The controversies of public companies, within the framework of Paragraph II
of this Article, will be resolved:
Applying Section II of this Chapter11:
– When they arise as a result of the interpretation, application, and
execution of decisions, activities and norms between partners of
the state intergovernmental company.
– When they arise inland and between state companies and
intergovernmental state companies.
Applying Section III of this Chapter12:
– When they arise as a result of the interpretation, application, and
execution of decisions, activities and rules between partners of the
mixed state company and mixed company.
– When they arise in the interior and between mixed state companies
and joint ventures.

According to this law, the parties must first turn to conciliation before resorting to
arbitration but it does not state that the conciliation be conducted mandatorily. In these
authors’ view, however, due to the nature and importance of investment disputes,
conciliation shall be prior and mandatory.

10
Law No. 516, dated April 4th, 2014 concerning the Promotion of Investments, Third transitory
provision
11
To Controversies in matters of Bolivian Investments
12
to Controversies in matters of mixed and foreign investments

7
Aside from foreign investments made in the Bolivian territory, the Bolivian legislation
does recognize some form of international commercial arbitration in its New Conciliation
and Arbitration Norm, as will be explained below.

(b) Prohibition to Apply Any Other Law than that of Bolivia

In addition to the ban to resort to arbitration in the case of hydrocarbons, Bolivian law
does not allow any investment in Bolivia to be subjected to any other norms than those
of Bolivia. In addition to Art. 320-II of the Political Constitution mentioned above, which
subjects all foreign investments in Bolivia to the laws of Bolivia, article 127 of Law No.
708 dated June 25th., 2015, states as follows:

I. Investment disputes will be subject to the jurisdiction, the laws and the Bolivian
authorities.
II. The rules of this Chapter shall apply to disputes of a contractual or extra-
contractual relationship, when the State is a party to said controversies and these
arise or are related to an investment established in Act No. 516 dated April 4,
2014, on Promotion of Investments.

These rules also apply to controversies arising out of a relationship relating to Law 516
dated April 4th, 2014 on Investment Promotion, in cases where the State is a party to such
disputes.

Thus, Bolivian law mandatorily applies to contracts in the hydrocarbon sector. This is
somewhat at odds with the slightly more liberal rule that governs other foreign
commercial transactions in Bolivia. The New Conciliation and Arbitration Norm adopted
on June 25th, 2015 in its Articles 54 – I and II, establishes in a direct manner two
situations regarding the applicable law:

1.- Domestic arbitration will be seated within the Plurinational State of Bolivia
and will be subjected to the Bolivian law, both substantial and procedural.

2.- International arbitration will occur when the parties’ consent, within an
arbitration clause or agreement, that the arbitration will be seated outside of the
Plurinational State of Bolivia. Such arbitration will be subject to the norms
agreed upon by the parties, provided that the chosen law not violate the Political
Constitution of the Plurinational State.

By default, according to Bolivian law, arbitration is governed by the laws of the place of
arbitration. Nonetheless, arbitration related to strategic natural resources such as
hydrocarbons are restricted to Bolivian law as previously stated. Arbitrations seated in
Bolivia are considered as domestic, regardless of the identity of the parties or the nature
of the dispute. If the arbitration is seated outside of the Bolivian territory, however, the
arbitration is considered international.

All this being said, the hydrocarbon sector is subject to the stringent regime, which forbids
both international arbitration and the application of a foreign law.

8
F. CONCLUSIONS.

Although the Bolivian norm on arbitration does allow certain forms of arbitration – be
they domestic or international–, the mandatory constitutional precept that bans
international arbitration related to all strategic sectors, that is entirety from the
hydrocarbons industry.

That being said, because Law No. 708 dated June 25th, 2015, on Conciliation and
Arbitration has had a short-term of effect, it is difficult to assess how investment
arbitration agreements concluded with the state before the enactment of the law will be
dealt with in practice. This is because - in the author’s view - there has not been a
significant flow of foreign investments to Bolivia since the enactment of the arbitration
law in 2015. This is particularly true within sectors that traditionally received
considerable foreign investment, such as hydrocarbons and mining. Therefore, it may be
possible to affirm that the ban to resort arbitration in these two sectors has stopped the
flow of investments. It is, in fact, foreseeable that foreign investors consider this
prohibition to be an important restriction to the protection of their interests. This reticence
of the investors, coupled with the internal conditions of the Bolivian legislation and the
current political factors, no increase in foreign investments is anticipated in Bolivia in the
near future.

With regards to domestic arbitration, as mentioned previously, it is possible to state that

the enactment of Law 708 dated June 25th., 2015, is not an adequate reform to the
arbitration system, given that it caused a debatable restriction on the freedom of the
parties to choose the governing law.

On the contrary, it is to consider that the modification was unnecessary, because the prior
norm received praising comments from arbitration researchers and scholars and, in its
practical application, it fulfilled the expectations that came with its enactment, coming to
signify an exciting development and consolidation of arbitration in Bolivia as an effective
form of alternative dispute resolution.