The Situation: In 2021, Pedro Castillo, a left-wing socialist from Peru's Marxist party, was elected the country's president. President Castillo promised to transform the mining sector by granting the State more control and ensuring that local communities in mining regions would benefit from the distribution of profits from the copper-mining industry. In March 2022, protests flared around the country in response to rising fuel and fertilizer prices resulting from sanctions imposed on Russia following its invasion of Ukraine. This uprising has negatively affected major mining companies in Peru's copper-rich regions.
The Result: Two major Peruvian copper mines owned by foreign investors, the Las Bambas and the Cuajone mines, suspended all operations due to safety concerns, and others face ongoing protests.
Looking Ahead: In light of the existing legal and political uncertainty, foreign investors involved in the mining sector in Peru should consider various strategies to protect their investments, including assessing international treaty protections available to them.
Last year, Peru elected Pedro Castillo as its new President. As a candidate, President Castillo ran as a left-wing socialist from Peru's Marxist party, Perú Libre. His presidential campaign agenda was built on a promise to rewrite the Peruvian Constitution to grant the State more control over certain industries, including the mining sector. President Castillo also appealed to the rural populace through assurances that he would vigorously protect communities' collective rights, such as the right to a healthy environment, strong social programs, and democratic governance ("ESG rights"). President Castillo's agenda included promises that local communities in mining regions would benefit from the distribution of profits from the copper-mining industry.
In early March 2022, protests around the country flared up in response to rising fuel and fertilizer prices resulting from sanctions imposed on Russia in response to its invasion of Ukraine. These protests quickly intensified into violent anti-government demonstrations reportedly involving the deaths of at least six people. Local indigenous communities started massive protests against major mining companies, alleging that local communities had not received the promised profits from copper development and that the mines have caused (and continue to cause) significant environmental pollution.
In an attempt to quash the protests, President Castillo has declared a state of emergency in various parts of the country, including in Lima and the copper-rich southern regions of the country. Hundreds of protesters, however, have ignored these measures and are continuing massive anti-government demonstrations across the country. The anti-government sentiment does not seem likely to subside. In fact, during his first year in office, President Castillo has already been subjected to two sets of impeachment proceedings. And, as a result of record low approval ratings (19%) and the increasingly violent protests, on April 28, 2022, Castillo's own party, Perú Libre, presented a bill to Congress seeking to cut his presidential term from five to two years, and to conduct general elections in 2023 instead of 2026.
While President Castillo's political fate is yet to be decided by Peruvian lawmakers, in light of the existing legal and political uncertainty, foreign companies involved in the mining sector in Peru should consider strategies to protect their investments, such as assessing international treaty protections available to them.
Protests Affecting Mining Companies
In the wake of massive protests around the country, on April 14, 2022, members of the Fuerabamba and Huancuire indigenous communities entered the property of the Chinese-owned Las Bambas copper mine in the Apurimac region in south-central Peru. This mine alone supplies 2% of the world's copper. The company's disagreement with the Fuerabamba community is not new. A decade ago, Las Bambas' developers paid the Fuerabamba community approximately US$ 161 million as compensation for their resettlement, but the indigenous community is now demanding the return of what they describe as their ancestral land. This time around, the invasion of the Las Bambas mine, where the protesters set up a camp, caused the suspension of copper production.
A similar situation has occurred at the Cuajone mine in the Moquegua Region, which is owned by a Mexico-based mining company. The Cuajone mine was likewise forced to suspend operations (including copper production) on February 28, 2022, when members of the Fuerabamba community shut down the mine's water supply, demanding monetary compensation of US$ 5 billion and a 5% share of the mine's profits. During the protests, the protesters damaged mine installations essential for mine operation, reportedly causing the mine to shut down.
Since operation of the mines can only resume after the indigenous communities vacate the mines' property, investors have tried to negotiate with the government to find a lawful solution to remove the protesters. After numerous unsuccessful attempts by the mines to evict the protesters on their own, on April 27, 2022, the government eventually waded into the dispute and declared a state of emergency near the Las Bambas mine, allowing police to begin evicting protestors.
Notwithstanding these efforts, all operations at both the Las Bambas and Cuajone mines remain suspended, and it is not clear, due to safety concerns, when the mines will be able to restart copper production. These closures represent a major economic set-back, not only to the affected companies, but to Peru as well. The Las Bambas mine produces around 300,000 tons of copper per year and the Cuajone mine produces around 170,000 tons. Together, these mines comprise 20% of Peru's copper production. Peru is now the world's largest producer of copper after Chile, with 2.3 million tons produced in 2021. The suspension of copper output from the Las Bambas and the Cuajone mines has caused Peru massive financial losses. So far, the country has lost more than US$ 260 million in exports and US$ 400 million in tax revenue due to the disruption of copper production at the Cuajone mine alone, and more than US$ 110 million in copper exports from the Las Bambas mine.
Unfortunately, the civil unrest in Peru does not appear to be abating. Indeed, local communities in the Espinar Province have also started protesting against an expansion of the Antapaccay mine, which is owned by a Peruvian subsidiary of an Anglo-Swiss multinational mining conglomerate. In this case, the indigenous community is demanding new infrastructure developments and an acknowledgment from Antapaccay that it has caused serious environmental damage in the region. As of now, and despite the disruption caused by the protests, the Antapaccay mine continues operations (including the production of copper).
The Peruvian Government's Long-Term Response
Peruvian government officials are currently negotiating with representatives of the relevant indigenous communities as well as the affected foreign investors to resolve the situation. Indigenous communities occupying the Las Bambas mine, however, refuse to participate in negotiations until the state of emergency is lifted. It is not clear at this point whether the government's involvement will cause the protests to subside or, to the contrary, to spread around the country impacting other mines and other foreign investors. However, given President Castillo's low approval ratings and the fact that local communities have been emboldened by his campaign promises, it seems unlikely that the situation will resolve itself easily.
In this uncertain environment, foreign investors involved in Peru's mining sector should bear in mind that the country has a history of violating investors' rights in response to the violent protests of the indigenous communities. In 2008, for example, employees of a Canadian mining company were attacked and seriously injured during similar protests. As the civil unrest escalated, the Peruvian government revoked the decree granting the Canadian mining company its mining concessions, which resulted not only in the immediate termination of the project but also in the filing of an arbitration under the Canada-Peru Free Trade Agreement (Bear Creek v. Peru, ICSID Case No. ARB/14/21). The arbitral tribunal in that case ruled against Peru and awarded US$ 18.2 million to the foreign investor for the costs incurred in the development of the project plus compound interest on that sum at a rate of 5% (roughly amounting to an additional US$ 6.5 million), as well as 75% of its legal fees and costs (around US$ 6 million) plus compound interest at the same rate.
This illustrates the importance of giving early consideration to the ways in which foreign investors can protect their investments in Peru should the situation worsen.
How Foreign Investors Can Protect Their Rights in Peru
Depending on how the situation develops and the actions the Peruvian government takes in response to intensifying protests, foreign investors might be able to initiate international legal proceedings against Peru through the investment protection clauses in applicable international treaties. Peru is a party to more than 45 investment treaties and free trade agreements that include investment protection including ones with the countries of the entities owning the Las Bambas, Cuajone, and Antapaccay mines. However, not all investment treaties are created equal, with some containing less favorable jurisdictional and/or substantive protections. Choosing a corporate structure that maximizes treaty protection before a dispute arises is therefore a worthwhile endeavor.
The first step is to analyze the investment's existing corporate structure to determine whether it is already protected by an applicable investment treaty and/or agreement. These may include the various bilateral reciprocal investment promotion and protection treaties ("BITs") in force between Peru and another nation (i.e., those with China, Switzerland, the United Kingdom, Mexico, and France, among others), as well as multilateral treaties such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") between Peru, Mexico, Australia, Canada, Japan, New Zealand, Singapore, and Vietnam.
Once the applicable treaties are identified, investors should carefully examine each, as the availability of international law protections and the strength of such protections can vary widely between treaties. For example, each treaty might contain unique procedural requirements, such as temporal limitations for bringing an investor-state arbitration claim. Some treaties also contain so-called "fork-in-the-road" provisions requiring an investor to choose between bringing a domestic proceeding or an international arbitration. In some cases, fork-in-the-road provisions are so stringent that investors could be foreclosed from all international fora under the applicable treaty if they initiate an action in local Peruvian courts. But even where the applicable treaty does not contain a "fork-in-the-road" provision, investors should still remember that everything they plead and submit in local courts might be used as evidence in any later arbitral proceedings.
In terms of substantive treaty protections, the most common are the protection against expropriation without fair compensation and the guarantee of fair and equitable treatment ("FET"), but their scope can differ from treaty to treaty. In general, expropriation takes place when the government substantially deprives an investor of the use, benefit, or control of its investment, which typically includes not only subsidiary companies or shares therein, but also contracts, permits, and any other legal entitlements. Most of Peru's international treaties guarantee protection from expropriation unless such taking happens for reasons of public interest, on a nondiscriminatory basis, in accordance with the rule of law or due process, and upon payment of just compensation. But, some treaties exclude certain environmental or public welfare measures from the reach of the protection against expropriation. For example, Annex B.13(1) of the Canada-Peru Free Trade Agreement of 2009 ("Canada-Peru FTA") specifies that measures "designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment" do not constitute expropriation. Similarly, Annex 10-B of the Peru-United States Free Trade Agreement of 2006 provides that "non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations."
FET, in turn, is the most frequently invoked protection; it guarantees good faith and due process, and prohibits arbitrary or discriminatory treatment. Under the general FET standard, Peru must refrain from impairing the operation, management, maintenance, use, enjoyment, or disposal of covered investments by unreasonable measures. The FET standard is fact-specific and may be breached by Peru's actions or omissions that: (i) are not transparent or consistent and create an unstable or unpredictable legal framework or business environment for the investment; (ii) violate the investor's legitimate expectations, which were relied upon by the investor to make the investment; (iii) are discriminatory; or (iv) violate due process or result in a denial of justice, among others. Some of Peru's treaties narrow the FET standard to treatment in accordance with international law or with customary international law, which is a more stringent standard.
Investors should also be aware that some investment treaties provide guidance as to how the rights of local stakeholders and environmental protection should be addressed in the context of investment protection. The China-Peru FTA, for example, provides that "the Parties reserve the right to adopt or maintain any measure that accords differential treatment to socially or economically disadvantaged minorities and ethnic groups." Similarly, under Annex II of the Canada-Peru FTA, Peru "reserves the right to adopt or maintain any measure according rights or preferences to socially or economically disadvantaged minorities and . . . indigenous and native communities." The CPTPP's Preamble also recognizes the importance of "environmental protection and conservation, gender equality, indigenous rights, labour rights, inclusive trade, sustainable development and traditional knowledge, as well as the importance of preserving their right to regulate in the public interest."
Finally, it is important to be mindful of President Castillo's anti-investor-state dispute settlement views, which he raised in his campaign manifesto. According to President Castillo, arbitral institutions and mechanisms only serve transnational corporations and protect them with "cloaks of impunity." Therefore, President Castillo has entertained a potential withdrawal from free trade agreements and other international treaties, which he argues have turned Peru into a "commercial colony." In light of this, investors should be aware that investment treaties generally include so-called "sunset clauses," which typically provide for several years of additional treaty protection for investments that were in existence prior to a treaty's termination.
In sum, foreign investors that could be negatively affected by the uncertainty in Peru's current environment would benefit from assessing potential international law remedies now to ensure their assets are adequately protected.
Three Key Takeaways
- Foreign investors should analyze the investment's existing corporate structure to determine whether it is protected by an applicable investment treaty and/or agreement.
- Foreign investors should carefully examine each treaty as the availability of international law protections and the strength of such protections vary widely.
- Foreign investors should give early consideration to the ways in which they can protect their investments in Peru and, before initiating any domestic legal action, should ensure that such action does not inadvertently foreclose potential international law claims and remedies under a "fork-in-the-road" provision.
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.