ICSID Tribunal declines jurisdiction due to claimants’ failure to obtain environmental impact assessment in breach of local law

In a recent investment arbitration Award, in Cortec Mining v Kenya, an ICSID tribunal has declined jurisdiction over a claim brought by a trio of mining companies on the basis that the mining licences at issue had not been obtained lawfully due to the Claimants’ failure to obtain the required environmental impact assessments.

In its award of 22 October 2018, the tribunal held that the withdrawal of the Claimants’ mining licence by the Kenyan Government could not be challenged under the 1999 UK-Kenya bilateral investment treaty (“BIT“), as the relevant mining licence had not been obtained lawfully. Despite the fact that the BIT contained no express requirement of compliance with local law, the tribunal nevertheless held that the BIT and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1966 (the “ICSID Convention“) protect only lawful investments. The tribunal affirmed that a principle of proportionality should apply when assessing the impact of unlawful conduct on the right to bring a BIT claim, with minor omissions or inadvertent misstatements not precluding the BIT from applying. However, in this case, environmental considerations were of fundamental importance and non-compliance with the protective regulatory framework was a “serious matter” justifying the tribunal in declining jurisdiction.

Background

The dispute concerned investments by the Claimants, a Kenyan and two English companies, in a mining project at Mrima Hill in southern Kenya, which contains one of the world’s largest undeveloped niobium and rare earth deposits. Kenyan law protects Mrima Hill as a sacred indigenous area and forest, nature reserve and national monument. A 1997 governmental decision prohibited all prospecting and mining in the Kwale district, where Mrima Hill is located. However, the Claimants successfully petitioned the then Mining Commissioner to reopen this area to prospecting, and obtained a “Special Prospecting Licence” in 2008 and a “Special Mining Licence” (the “Mining Licence“) in early 2013. In August 2013, the Claimants’ Mining Licence was revoked by the Minister for Mining and the Environment due to suspected irregularities in the process of issuing the licences between 15 January 2013 and 15 May 2013. Kenya claimed that the licences had to be reviewed in light of findings of improper conduct by the former Mining Commissioner.

The Claimants challenged the revocation of the Mining Licence before the Kenyan courts. The High Court and Court of Appeal held that the Mining Licence was void, as mining activities at the Mrima Hill site were prohibited. The Claimants then brought a BIT claim, alleging that their investment in the mining project was “nationalised”, and, therefore, constituted an expropriation contrary to the BIT. The Kenyan Government responded that there was no expropriation of the Mining Licence, arguing that the licence was void ab initio for illegality.

Claimants had failed to obtain a required environmental impact assessment

Having heard expert evidence on Kenyan law, the tribunal concluded that Kenyan regulations required an environmental impact assessment to be conducted as a condition precedent to obtaining the Mining Licence. No such environmental impact assessment was conducted prior to the issuing of the Mining Licence, rendering the Mining Licence void from the outset as a matter of Kenyan law.

BIT and ICSID Convention protect only investments in “substantial compliance with” significant legal requirements of host state

The tribunal identified the central question as being whether the Mining Licence constituted a protected investment under the BIT. The tribunal emphasised that it was mandated to apply international law to that question, rather than domestic law, but that the application of international law resulted in the same conclusion as domestic law as regards the legality of the Mining Licence. This was because the mining licence was wholly a creature of Kenyan domestic law, with its creation governed by Kenyan law.

The Claimants sought to rely upon the fact that the BIT contained no express legality requirement, and argued that the tribunal was not permitted to import a jurisdictional limit which was not specified in the BIT. The tribunal concluded however that for an investment such as a licence, as a “creature of the laws of the Host State, to be protected, it must be made in accordance with the laws of the Host State (Kenya), which the Mining Licence was not. The tribunal concluded that neither the BIT, nor the ICSID Convention, could be construed to protect an investment prohibited under domestic law. The Claimants knew that they were not entitled to the Mining Licence and had attempted to obtain it by way of political means. They were successful in doing so, but knew enough about the Kenyan regulatory system to understand that they had not yet met its requirements. As such, the tribunal concluded, the Claimants did not have a legitimate expectation that the Mining Licence was valid.

The Claimants had also argued, relying on Kim v. Uzbekistan, that the principle of proportionality should be applied when assessing the impact of the alleged unlawful conduct. In that case, it was held that not all domestic law breaches preclude BIT protections from applying. The tribunal agreed with this approach, and considered that minor omissions or inadvertent misstatements would not have precluded the BIT from applying. The tribunal concluded that “to be protected on the international level, [the investment] has to be in substantial compliance with the significant legal requirements of the host state.

However, in this case, environmental considerations were of fundamental importance and non-compliance with the protective regulatory framework was a “serious matter” justifying the tribunal in declining jurisdiction. The tribunal paid special attention throughout its Award to environmental considerations, which it held to be of “fundamental importance“, noting that “[i]t is difficult to overstate the importance of environmental protection in areas, such as Mrima Hill, of special vulnerability“. In particular, it recognised the social importance of the environment by stating that “[t]he text and purpose of the BIT and the ICSID Convention are not consistent with holding host governments financially responsible for investments created in defiance of their laws fundamental protecting public interests such as the environment“. Ultimately, the tribunal concluded that the Mining Licence was not a qualifying investment under the BIT, but just “a scrap of paper issued by an irresponsible bureaucrat contrary to specific legislative requirements“.

Costs and funding

Kenya also made corruption allegations regarding the Claimants’ process of obtaining the Mining Licence. The tribunal rejected these allegations, on the basis that they were not substantiated with sufficient evidence. The tribunal’s disapproval of Kenya’s conduct in relation to these allegations, as well as its excessive costs, led the tribunal to award only 50% of Kenya’s total costs.

Comment

The award clarifies that investments that are not in substantial compliance with significant legal requirements of the Host State will not be protected by the ICSID Convention or BITs, even where (as here) the treaty in question is silent on the issue. However, the precise scope of the distinction drawn between minor and serious breaches of domestic law in this regard may be tested in other proceedings in future.

The Tribunal’s overarching approach is also another example of the seriousness with which environmental considerations have been treated in recent years (see, for example, our previous related posts on Urgenda v Netherlands, David Aven v Costa Rica, the Dutch model BIT, mineral regulation in Africa, Costa Rica v Nicaragua, and Bear Creek v Peru). The Tribunal’s consideration of the environment as a matter of public interest makes this an area of the law to continue to follow closely.

For further information please contact Andrew Cannon, Partner, Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
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+44 20 7466 2852
Iain Maxwell
Iain Maxwell
Of Counsel
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+44 20 7466 2646

 

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