Everything seemed to be going just fine with the project: the reserves report showed healthy numbers, the capital markets were appreciative of this and the funds needed to develop the project appeared to be within reach. What could shatter this rosy vision?
To which the answer comes: a review of the terms of your mining concession, a rumour of renegotiation of contracts, the introduction of a new mining code or even the introduction of new taxes. None of these are implausible scenarios and indeed Guinea and Sierra Leone’s governments are reviewing all existing mining concessions, Mali’s new government is expected to follow suit and renegotiate some contracts, Liberia is drafting a new mining code and Ghana is consulting on a windfall tax on gold mining companies. Aside from ruing the day, what could you do to respond in the circumstances?
This note is a short introduction to the possibility of relying on a Bilateral Investment Treaty (“BIT”) to try to seek redress from the relevant host state in the circumstances.
What Are BITs and What Do They Offer an Investor?
BITs are treaties concluded between two sovereign states which establish the terms of private investment by nationals and companies of one state (“Investors”) in another state. Their great attraction is that they give Investors extra legal protection from the consequences of, e.g., expropriation and also access to the ICSID arbitration regime, which can be a much more attractive forum than a local court or arbitral tribunal.
BITs confer on Investors the right to certain protections and the right to claim damages if the rights are breached. Every BIT is different but typically BITs give Investors the right to:
- Fair and equitable treatment;
- The same treatment as nationals;
- Compensation for expropriation of assets;
- Various agreed dispute resolution mechanisms.
The fair and equitable treatment obligation essentially requires the host state to treat international investments in such a way that the legitimate commercial expectations that were taken into account in making the investment are unaffected. Accordingly, changing the terms of a mining licence contrary to an Investor’s legitimate expectations could engage the BIT provisions on fair and equitable treatment and therefore trigger the payment of compensation.
Interference with contractual rights such as the terms of a mining licence can amount to expropriation. It is really a question of fact and degree in each case whether any proposed review of a mining licence/concession and/or new terms imposed as a result of it would amount to expropriation.
Broadly speaking, BITs (if they can be accessed by the relevant investor, as to which see further below) offer a route into arbitration administered by the International Centre for the Settlement of Investment Disputes (“ICSID”) which is an arbitral institution established under the auspices of the World Bank and intended to provide a neutral forum for the resolution of Investor State disputes.
In order to access the ICSID arbitration framework there must be:
- An Investment;
- An Investment Dispute;
- The Investment must be in a host state that has consented to ICSID jurisdiction; and
- An absence of submission to a competing forum.
There is no definition of an Investment, but these are broadly, the most common hallmarks:
- Substantial duration;
- Regularity of profit and return;
- Assumption of risk by both parties;
- Substantial commitment in money and/or expenditure; and
- Significant contribution to the host state’s development.
Broadly speaking, if the first four criteria are satisfied there is an investment, with the fifth not being determinative.
Mining and exploration licences and concessions have all been found to constitute Investments within the ICSID convention.
An Investment Dispute typically requires that there has been a breach of one of the obligations owed in a relevant BIT, such as a breach of the fair and equitable treatment standard or that there has been failure to pay compensation for a state expropriation of assets. It would be rare that a simple breach of contract claim as between an Investor and a state would amount to a breach of a BIT and indeed there are quite a number of cases where that type of argument has not succeeded before an ICSID tribunal.
This also means that if your claim is really for a breach of contract and you have agreed to have that contract dispute resolved in the local courts or perhaps in a different international arbitration forum (e.g., ICC or LCIA) that you will be held to that election and have to seek resolution of your dispute before that forum. Conversely, if the fundamental basis of the claim is breach of a BIT obligation then the existence of an exclusive jurisdiction clause or arbitration agreement in a contract between an Investor and the respondent state cannot operate as a bar to the application of the relevant BIT.
There is a slight twist to this if the BIT on which you rely contains a so called “fork in the road” provision. Some BITs allow for a series of dispute resolution avenues including pursuing the claim in a local court of the host’s state to bringing ICSID arbitration or pursuing the claim in a different international arbitration forum. As noted above a local court jurisdiction clause is confined to contract claims unless it clearly extends to treaty claims. Further, concurrent proceedings in national courts do not generally oust ICSID’s jurisdiction. However, if the relevant BIT contains a “fork in the road” provision stipulating that if the investor chooses to submit a dispute to the courts of the host state or to some other agreed dispute resolution procedure the investor will lose the right to submit the same claims to an ICSID arbitration.
My Investment Vehicle Is a Local Company. What Can I Do?
It is a common place that a local subsidiary must be incorporated at the relevant host state’s request to hold assets in the host state and/or to employ local individuals etc. That could cause a problem within the context of a BIT claim because typically BITs require that the claimant party be from one contracting state party and that the respondent be from the other contracting state party. However, many BITs get around this problem by deeming the entity that makes the investment directly (i.e., the local subsidiary) or the foreign corporation or individual that directly or indirectly “controls” that entity to be from the Investor’s host state.
“Control” attracts a broad meaning under international law and encompasses influence arising as a result of majority shareholding, management responsibility, voting rights or even the nationalities of board members. Where there is a holding company in a non-contracting state it is very likely that most BITs would deem that holding company to be a national of a contracting state and therefore have standing to pursue a claim under a BIT.
Which Countries are Signatories to the ICSID Convention?
Ghana and Sierra Leone have bilateral investment treaties with the UK which give access to the ICSID convention. Mali, Guinea and Liberia do not have any BITs with the UK. However, they are signatories to BITs with other countries, which may allow you to access the ICSID Convention, depending on where your investment vehicle is incorporated. A full list of BITs can be found at www.unctad.org.
BIT arbitrations throw up complex commercial and legal problems but they may provide a route to home in circumstances where the only other option is the often unappealing choice of pursuing a claim in a local court or in front of a local arbitral tribunal.
This note is really just an introduction to the concept of BITs and to some of the sorts of claims that could be pursued by way of a BIT claim. Any BIT claim will turn of course, on its own facts but also very much on the terms of the relevant BIT sought to be relied on. If you think you may be in a position where you require advice on a potential BIT claim then please do get in touch with Nicholas Scott or your normal Memery Crystal contact.