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.

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Upheaval and uncertainty in mineral regulation in parts of Africa: resurgence of resource nationalism highlights the importance of investment treaty protections

The last few months have seen significant changes to mining regulations in various African states, giving rise to a concern that a regional trend of resource nationalism may be (re-)emerging. In this context it is important for companies associated with the mining sector to be aware of the protection international investment treaties may provide against the impact of resource nationalism on their assets, and how to maximise that protection before risks materialise.  This bulletin briefly considers some of the last few months’ developments, before discussing how companies can use investment treaties to protect themselves against the risks they pose.

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Bear Creek Mining Corp. v. Peru: the potential impact on damages of an investor’s contributory action and failure to obtain a social license

In an award dated 30 November 2017 (the “Award“), an ICSID Tribunal ordered Peru to pay around US$30.4million to Canadian company Bear Creek Mining (the “Claimant“) following its finding that a 2011 decree (“Decree 032“) constituted an unlawful indirect expropriation of the Claimant’s right to operate the Santa Ana mine (the “Project“).

This post discusses the disagreement between Karl-Heinz Bockstiegel (the president of the tribunal) and Michael Pryles (appointed by the Claimant) (together, the “Majority“), and Prof. Philippe Sands QC (appointed by Peru), on the assessment of damages. Prof. Sands considered that the damages should be reduced due to contributory fault on the part of the Claimant.

The impact the Claimant’s conduct had on the Tribunal’s calculation of damages was, in any case, significant. Given the extent of, and reasons for, the opposition to the Project by the time of Decree 032, the Tribunal thought a hypothetical purchaser would not have obtained the necessary ‘social license’ to proceed with the Project. Ultimately it awarded the Claimant only a fraction of the US$522 million claimed. The reduced damages award emphasises the importance of respect for human rights and engagement with indigenous communities by investors.

The respective views expressed by the arbitrators concerning the Claimant’s conduct are also interesting in light of the broader debate about the relevance of the human rights of non-parties in investor-state arbitration.

An overview of the overall Award can be found in the post published on 16 December 2017 on the Kluwer Arbitration Blog. Continue reading

Churchill Mining v Indonesia: ICSID Tribunal takes cautious approach to request for provisional measure

On July 8, 2014, a tribunal composed of Professor Gabrielle Kaufmann-Kohler (President), Michael Hwang S.C., and Professor Albert Jan van den Berg (the “Tribunal”), issued a Procedural Order No. 9 denying Churchill Mining PLC and Planet Mining Pty Ltd (“Claimants”) their application for provisional measures. Relying on Article 47 of the ICSID Convention and Rule 39 of the ICSID Arbitration Rules, Claimants asked the Tribunal to “recommend,” among other things, that the Republic of Indonesia (“Indonesia” or “Respondent”) (i) “refrain from threatening or commencing any criminal investigation or prosecution against the Claimants, their witnesses in these proceedings, and any person associated with the Claimants’ operations in Indonesia, including their wholly owned subsidiary (…);” and (ii) “stay or suspend any current criminal investigation or prosecution against Claimants’ current and former employees, affiliates or business partners pending the outcome of th[e] arbitration.” The Claimants also requested more general measures seeking to prevent Indonesia from threatening “the exclusivity” of the ICSID proceedings and generally aggravating the dispute.

At a time where the investor-state dispute resolution system is criticized for permitting too lax an access to treaty-based remedies through arbitration, the Churchill Mining Tribunal showed restraint and caution in addressing Claimants’ request to enjoin a host state from initiating or continuing criminal proceedings against Claimants’ witnesses and potential witnesses. The Tribunal did recognize Claimants’ theoretical right to protection against existing or threatened criminal proceedings that would be likely to impair Claimants’ rights in the arbitration. However, the Tribunal set a high bar for the evidence that Claimants would have had to adduce to establish the likelihood that their rights are indeed put at risk by Indonesia’s actions.

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Rise in arbitration in the extractive industries

According to a recent report from think-tank Chatham House, arbitration cases have increased nearly fourfold between 2001 and 2010 in the mining sector, reflecting tensions among stakeholders which escalated with the commodity price boom.

The rise in commodity prices increased popular expectations, and governments accordingly came under pressure to show that citizens would receive greater benefits as a result of the rising resource revenues.  In the face of growing uncertainty about future prices and demand, however, extractive companies started to face pressure from their shareholders to scale back, delay or even cancel projects.  Governments were therefore seeking to benefit from windfall profits during price spikes, whilst on the other hand the companies wanted the ability to delay or downsize the project during a downturn.  Unfortunately, many contracts did not provide the flexibility required; the Chatham House report notes that model contracts of the 1990s have by and large failed to weather the commodities price boom.

For the purposes of its report, Chatham House carried out an analysis of disputes and the arbitration data available, looking for patterns and indicators that might help identify the drivers and conditions for company-government disputes in the extractive industries.  Whilst it found it difficult to draw robust conclusions to help identify expropriation- or arbitration- prone countries, it did identify key drivers of disputes, namely “resource nationalism”, tensions with local communities, and environmental issues.     

“Resource nationalism” is a popular concept generally used to refer to moves by producer countries to gain greater control of their country’s resources.  It is more likely to become a problem in cases where the initial deal struck with the government is perceived as unfair by local communities:  this will increase the risk that the government will come under pressure from stakeholders to renegotiate the deal or even renege on its agreement at a later stage.  

Stéphane Brabant (co-head of the Business and Human Rights Group as well as the Mining Group at HSF), recently attended the Second Annual United Nations Forum on Business and Human Rights in Geneva to discuss the implementation of the UN Guiding Principles on Business and Human Rights at the international and national level by States and companies.  At the breakfast panel session hosted by Herbert Smith Freehills (HSF) on 5 December 2013 to mark the publication of a new report by the McKinsey Global Institute (MGI), “Reverse the Curse: Maximizing the potential of resource-driven economies”, he noted that companies are waking up to the connection between the upholding of human rights and shareholder value.  Indeed, breaches of such “soft law” principles can lead directly to “hard” sanctions as well as potentially serious reputational damage. 

An audience participant at the breakfast seminar noted the importance of flexibility in contractual arrangements to ensure the sustainability of a deal.  He also commented on the importance of effective communication to ensure that a fair deal is appropriately perceived as such by all stakeholders.  This is an important theme of the MGI report, which stresses that effective communication with the government and local stakeholders is key at all stages: before the deal is struck, when it is crucial to understand their objectives and address potential future concerns; during operations, to manage expectations and make local stakeholders aware of the importance of the company’s contribution to the local economy; and when projects are likely to be delayed or cancelled, to make the host government aware of the potential downside of attempts to renegotiate deals or expropriate assets.

Many deals will need to be renegotiated.  In West Africa, for example, where mining contracts and codes are being opened to public scrutiny as part of initiatives such as the Extractive Industries Transparency Initiative (EITI), governments are under pressure to renegotiate contracts and review their mining codes, and various reviews of the sort are already under way in Guinea, Sierra Leone, Mali, Liberia and Ghana. 

In many cases, companies and governments will be able to come to a new agreement, cooperating to ensure that the host country’s legitimate policy concerns are addressed and a strong and stable legal framework is put in place for their deals.  Where governments make sudden changes in the terms of investment, acting under pressure to offset societal unrest or to drum up political support, however, it may not be possible to reach a mutually acceptable compromise.  In such circumstances, companies may need take a hard line and be willing to resort to arbitration against a host government for reneging on an agreement or changing its provisions, not least as an important precedent for future disputes.  The MGI report cites the example of ExxonMobile, which was able to recoup roughly USD300 million in 2007 after its assets in Venezuela were expropriated.

Although commodity prices are now falling, according to the Chatham House report, disputes between resource groups and governments are only likely to keep increasing as companies start reducing their capital expenditure and come under pressure to renegotiate their contracts with host governments or lose their licences as a result.  HSF has extensive experience in advising companies on crisis management and dispute resolution in the mining sector.  Companies may wish to get in touch to obtain specialist advice on the options available to them if they have any concerns regarding their mining deals.   

For more information, please contact , Matthew Weiniger, Partner, Naomi Lisney, Associate, or your usual Herbert Smith Freehills contact.

Matthew Weiniger
Matthew Weiniger
Partner
+44 20 7466 2364
Naomi Lisney
Naomi Lisney
Associate
+44 20 7466 2749