This article was originally published in Mining Journal's 2015 Dispute Resolution Guide.
The mining industry is facing unprecedented pressures, not only from falling commodity prices but also a plethora of legislation. It is almost as if every regulator in every country has decided to make life as difficult as possible for the industry.
For many, the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and The Dodd-Frank Act loom large.
Companies facing this regulatory onslaught do have assistance and the Organisation for Economic Co-operation and Development (OECD) has produced good guidance for upstream and downstream due diligence to help them comply with the Dodd-Frank Act. It has also produced useful information on bribery acts, which tend to be interwoven due to the nature of the global mining business.
Bribery codes are far-reaching and companies and directors can, often inadvertently, be caught by another jurisdiction. Throw into the mix resource nationalism, which creates anxiety for so many in the industry through its twin lieutenants, indirect and direct expropriation, and you have a complex array of problems before your main objective – making a profit – is in sight.
Resource nationalism takes different forms. For example, South American countries have historically taken a more direct and honest approach and have gone for direct expropriation, letting their armies and police forces do the talking. In Africa, expropriation is likely to take a much more opaque form, revealing itself through increased taxes and royalties, and demands by government for larger equity stakes in projects.
Resource nationalism is infectious and normally rears its head at the top of a cycle. Then, to the displeasure and annoyance of mining companies and their shareholders, it is implemented on the down curve of the cycle adding further difficulties for companies under commodity price pressure at the time they most need support from host governments to keep costs down to support employment, social projects and running projects as economically as possible. It is hardly surprising to read the Chatham House Report of 2012, which said "resource nationalism is the miner's number-one fear and a major threat to national security".
There is a whiff of nationalism in the air and everyone in the industry, together with regulators, is very conscious of it.
Strategically, companies will normally take out political risk insurance as the first line of defence against direct and indirect resource nationalism. They should try to negotiate a premium reduction by arguing their corporate structure incorporates a Bilateral Investment Treaty (BIT).
The International Bar Association (IBA), after a long consultation, has published a very carefully considered template for a Mine Development Agreement which contains useful and well-constructed clauses.
It has made every effort to produce a clear and concise agreement framework. Crucially, clauses have been drafted in an even-handed way for companies and a host nation. They are drafted to give the company state protect ion with, for example, a clear tax stabilisation clause, and a state guarantee clause which deals with expropriation and rights interference, similar to clauses found in a BIT.
In most countries governments have put in place foreign investment legislation that is designed to protect a company and to encourage investment. It is usually supported by use of arbitral systems and the host nation's local courts. Problems emerge when there is a change of government, a coup d'état, a bullish mining minister who feels the last incumbent was misguided, or the state enacts new legislation, or a new mining bill. Or indeed if bribery and corruption were involved.
New government incumbents have a tendency to change the law or be reluctant to enforce old judgments. Local courts may follow a political line and be subject to corruption.
BIT of this, BIT of that
Faced with these types of difficulties, a company is in a much stronger position with the benefit of a BIT in its corporate structure.
The importance of BITs has grown considerably over the past few years in the era of infectious or even contagious resource nationalism. A BIT derives from a liberal concept of free trade. It is a treaty made between two countries containing reciprocal undertakings for the promotion and protection of private investments made by nationals in each other's territories. These agreements establish the terms and conditions under which nationals of one country invest in the other, including the rights and protections afforded to them, namely compensation for expropriation or unfair treatment.
One of our favourite definitions of expropriation comes from esteemed South African lawyer, Peter Leon, who defines it "as any measures, regulatory or contractual, taken by a state to enhance its control over a nation's natural resources".
Bolivia's president Juan Evo Morales is known for creating "mining mayhem". South American Silver Corp faced the loss of its mine in Bolivia and the country's mining minister Mario Virreira announced in October to Canada's Globe & Mail that his nation had no financial obligation to the Toronto Stock Exchange-listed company: a straightforward example of expropriation.
The arbitration is now running and a claim has been launched against Bolivia at the Permanent Court of Arbitration in the Hague. South American Silver is looking for compensation of US$385 million for its Malku Khota silver mine. President and CEO Ralph Fitch was quoted as saying: "We are satisfied to see that the arbitration is moving forward in pursuit of full compensation for South American Silver, who suffered significant losses as a result of Bolivia's blatant and deliberate breaches of the Treaty and International Law."
Common to all BITs are six fundamental principles:
- Access to the country
- Due Process
Today, more than 3000 BITs have been created. Some are linked to multilateral- treaty based systems such as the ICSID Convention and UNCTD. In 1996 there were only seven known BIT cases under the ICSID system, but by 2013 there were 38 concluded cases and in 2014 there were 184 pending cases.
Contents of a typical BIT include:
- Definitions (the main ones being the investor/investment). We feel it likely that in new BITs states, in order to prevent treaty shopping by investors, will require that substantial business activities are carried out in their home country by the investor to gain the benefit of a BIT.
- Scope of Protection (core provisions). Fair and equitable treatment is one of the most commonly used provisions in negotiating with the host nation, and claims in the arbitral system. The provision in the early BITs was widely drawn and companies and host nations argue the environment has changed since they made their earlier investment decision.
- Expropriation. Many newer BITs contain the word "indirect". The definition is broad, leaving much to argue about at the arbitral tribunal.
- Most-Favoured Nation Provisions (MFN). MFN provisions, depending on which ICSID decision you read, permit an investor to "cut and paste" the most favourable provisions in any other BIT the host state has entered into. This provides a foreign investor with treatment which is at least as favourable as that contained in other BITs. There has been much argument and debate in front of arbitral tribunals as to whether these MFN clauses can be used to include procedural matters.
- 'Umbrella clauses'. Again, there has been much debate and argument as to whether these provisions 'elevate' contractual obligation into the realm of treaty obligation. This is a very controversial area.
- Jurisdictional provisions.
- Settlement of disputes between the host state and an investor.
- Entry into force of the BIT. It should be noted that although the BIT may be signed by the host nation, in many cases you will find that it is not actually ratified for many years.
- Duration of the BIT.
It is important that decisions of the International Arbitration Forums are publicly available so that investors in the country understand and know of the existence of any disputes. Another perplexing problem for companies embarking on an arbitration is that they cannot rely on precedent and this makes it difficult to judge the outcome of any arbitration with any certainty. Each tribunal case will be taken on its own facts and the views of the arbitrators and therefore this does lead to conflicting decisions, and companies must bear this in mind before seeking arbitration.
BITs usually specify the appropriate arbitral forum – for example, the International Centre for the Settlement of Investment Disputes ICSID (or perhaps the Court of Arbitration of the International Chamber of Commerce, or an Arbitrational Tribunal under the Arbitrational Rules of the UN Commission on International Trade Law UNCAD).
It is common in BITs to see a clause whereby the company should first exercise recourse to the country's legal system before using an arbitral system as specified under the BIT. From experience, in cases where there may have been bribery or some form of corruption and resulting loss of a licence, companies would rather commence an arbitration action than rely on the local courts. This may not be possible unless the company can use the 'MFN clause' to obtain the benefit of provision in a BIT with another country.
However, the safest course to follow is to exhaust the local court system, as the arbitral panel in our experience would like to see that the company has respected the local laws and has done whatever it can to seek a local outcome. The company, before starting arbitral proceedings, should also utilise diplomatic channels to try to resolve the issue.
The BIT must be read very carefully and is it important to view all the BITs pertaining to the host nation. Although BITs tend to follow a similar format, the definitions must be examined closely. An important practical point is that many companies base themselves in Jersey, Guernsey or the Isle of Man, and care must be taken to determine whether a BIT between the host nation and the UK has been extended by way of an exchange of notes. This point is often overlooked by companies based in the Channel Islands, mistakenly considering that they have the benefit of a UK BIT.
In practical terms, what should a company do to protect itself and its shareholders when its operations are outside its own country besides taking out political risk insurances? The tax structure is of primary importance as the company should implement the most advantageous tax structure. Equally important is to superimpose upon such an arrangement a BIT structure, so that the company has the benefit of any bilateral treaty the host country has entered into. Care must be taken to avoid claims of treaty shopping. The question is whether it is possible to introduce a BIT into your structure in order to get the benefit, although you may not be fully operational in that country? Some arbitration tribunals have shown concern over treaty shopping and although many decisions have conceded that BITs have been used by companies for the sole purpose of getting their benefit, there does not appear to be a decision that would dissuade an adviser from trying to find a company with a suitable BIT with the host nation. However, caution must be exercised and it seems good sense to introduce a BIT at the top end of the corporate structure rather than at the bottom end.
In Saluka Investments BV versus Czech Republic, the tribunal considered this point but did not dismiss the claim. Quite naturally, companies cannot go treaty shopping and alter their structure once a dispute has emerged, and this area should be approached with caution.
Although we are looking at the mining industry through the eyes of an interested party, one should be cognisant of the fact that there is a growing feeling that many BITs are not bilateral but unilateral and that in particular, in Africa, many were signed as the colonial powers withdrew without governments in some cases taking the best advice. On some occasions there is tension between the terms of the BIT and what is best for the host nation, as sometimes the balance gets out of kilter, particularly in the case of badly drawn BITs which can fetter the economic growth of the host nation. It would appear from the grandstand of hindsight that many governments did not give enough consideration to the effects of treaties they entered into and now face problems with balancing the onerous provisions of BITs against the growth and well-being of their country. Investment was the mantra – at any cost.
Some South American countries, notably Bolivia, have denounced their BITs but it does not necessarily mean provisions of the BIT fall away, as those companies that have already invested may still have the benefit of the BIT. We are in full agreement with the academic papers that suggest it is better for a country to renegotiate the BIT rather than denounce – for example, under ICSID. Renegotiation of BITs is certainly the focus from a practical point of view, and from our experience, the way forward. What is needed is a designated fund, perhaps from the World Bank, to support this work. If a dispute should emerge, it is important to open negotiations with the host government as soon as possible. It is partly about building relationships, partly poker, and understanding the importance for the government of the host country not to lose face, and strategies must be geared accordingly.
A great deal depends on the nature of the expropriation. If the company feels that there has been indirect expropriation, removal of the licence, or non-renewal of the licence through corruption or fraud, then the company must have a strategy. In the early stages of negotiation, the position is often that the government of the host nation will not want to concede, but it won't want to run the risk of an arbitration, for example, in Washington, because of the length and cost of such arbitrations. It may be up against a company which has third-party funding and the market has changed dramatically in the past few years with many funders coming into the market, which is changing the way governments are looking at the problem. This, in our experience, has swung the balance of power back to the junior company in many instances, provided it can obtain funding.
These early negotiations require sensitivity, firmness and the ability to build trust.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.