Audley Sheppard QC, Amanda Murphy and Karolina Rozycka, Clifford Chance LLP
This is an extract from the 2021 edition of GAR’s The Middle Eastern and African Arbitration Review. The whole publication is available here.
Increased demand for certain commodities (such as gold, iron ore, copper and some rare earth metals) following the global disruption caused by covid-19 will naturally result in increased foreign investment flow to those countries that are endowed with such resources. Depending upon the response to this demand, states may be exposed to the risk of claims and arbitration. Although resource nationalism continues to be one of the greatest challenges currently facing investors, several African countries (such as Egypt and South Africa) have recently shown willingness to liberalise their approach to foreign investment in the mining sector. One of the major ways in which political risk can be mitigated by an investor is by entering into a host state agreement, which may provide, among other things, stabilisation of the applicable legal framework and recourse to international arbitration in the event the stabilisation provision is breached. Social and environmental concerns are invariably associated with mining projects, and so these issues are also an increasingly common feature of mining disputes and arbitration in Africa.
- Environmental, soial and governance (ESG)-related issues are likely be an increasingly prominent feature in mining arbitrations in Africa, driven by the increasing references to protection of environmental, social and public health objectives in both contractual arrangements and investment treaties.
- China’s investment in the African region will likely continue; however, the commencement of the first arbitrations by Chinese investors against African states in 2020 may signal an increasing willingness by Chinese investors to resort to international arbitration.
At the time of publishing the previous edition of this chapter, the coronavirus pandemic was only just beginning, and no one could have predicted just how disruptive and challenging the crisis would become – with the battle still being fought a year on. While most African states (aside from South Africa) have so far appeared to fare better than key trading partners in the United States, Europe and Asia, they were certainly not immune from the mass-scale disruption the crisis caused to global supply chains and capital flows. However, surprisingly, the impact of coronavirus on the mining sector, particularly in terms of price volatility, has largely been positive, with the initial falls in commodity prices seen at the outset of the covid-19 outbreak soon plateauing and then turning upwards. Most metals prices have returned to at least pre-pandemic levels, and the demand for some commodities has skyrocketed reaching historic highs, particularly iron ore and gold. China’s speedy recovery from its pandemic experience resulted in high demand for iron ore as China ramped up steel production. The pandemic also triggered a boost to gold prices as a safe-haven asset.
But 2020 was not all about the covid-19 pandemic. Despite the crisis, there has been an increase in climate change action from many states and global energy majors. A large number of states set net-zero carbon targets in 2020, including three of Asia’s largest emitters (Japan, South Korea and China). Many countries have already passed laws establishing net-zero targets, including Sweden, the United Kingdom, France, Germany and Spain, and a number of other states have pledged to achieve net-zero at the policy level, including Canada, Chile, Costa Rica, Norway, Portugal, South Africa and Switzerland. More than 27 of the world’s leading mining and metals companies have made commitments to address climate change as members of the International Council on Mining and Metals (ICMM), including Anglo American, AngloGold Ashanti, Barrick, Glencore, Gold Fields, Sibanye-Stillwater, BHP, Rio Tinto, Newmont, Vale, Newcrest and South32. The transition to a greener economy is already starting to bump up demand for commodities needed for the transition, such as copper, nickel and rare earth elements. More recently, 2020 also saw the end of the Trump presidency, and the swift rejoining in early 2021 of the United States to the Paris Agreement.
This chapter focuses on the impact that these and other recent developments have had, and may have in the future, on mining projects in Africa, and consequently mining arbitration in Africa. From a mining perspective, the African continent offers some of the richest mineral resources in the world, with large swathes of territory that remain unexplored using modern exploration methods. From the perspective of many African countries, mineral exploration and production is of critical economic importance, representing a substantial component of their economy at present and critical sources of future state revenue. However, because of this rich abundance of resources in sub-Saharan countries, it is also a fertile ground for commercial and investment disputes arising from mining projects. The increasing demand for certain commodities (such as those needed for the green transition, such as copper and some rare earths) will naturally result in increased foreign investment flow to those countries that are endowed with such resources, and depending upon the response to this demand, countries may be exposed to the risk of claims and arbitration.
The likelihood of resource-related disputes is heightened owing to certain factors that – without being Africa-specific – are often prevalent in resource-rich African countries:
- Mining investments and projects in Africa are often sensitive to political risk, which commonly manifests itself in the form of executive interference due to a climate of political instability, lack of stable and consistent governance and limited infrastructure and public services.
- A corollary of Africa’s structural and political challenges is increased exposure to security threats, ranging from trespass by artisanal miners to attacks by military or paramilitary groups.
- Finally, an important feature of the mining sector in sub-Saharan Africa is the extensive role played by new investors today. These are often state-controlled companies (such as from China) but also increasingly private investors, teaming up with local entities that lack sufficient funds to invest in their country’s resources on their own.
For states, the harmful actions of some foreign investors in Africa in the past rightly justify a focus on compliance by investors with local laws and, increasingly, international environmental and human rights standards. A failure to comply with these laws and standards may result in claims or counterclaims being made by states against investors. Many new treaties entered into by states contain express statements regarding the states’ right to regulate in order to protect public welfare objectives such as public health, safety and the environment. Social and environmental concerns are invariably associated with mining projects, and so these issues are an increasingly common feature of mining disputes and arbitration in Africa.
This chapter aims to provide a concise overview of the risks and characteristics of mining disputes in Africa, rather than a definitive theoretical framework for approaching them, in the context of the current investment climate and as we move further into the 2020s.
The mining industry and covid-19 in Africa
Although the African mining sector was somewhat more resistant to the disruption caused globally by the coronavirus pandemic in comparison with other fields, mining companies still had to face a number of new challenges as the crisis began spreading in the first half of 2020. Today, the most visible consequence of the pandemic on the mining industry in Africa probably relates to the measures taken to contain the spread of the virus by national governments, including the mandatory (albeit temporary) shutdown of mines as lockdowns were enforced.
In South Africa, mines were initially closed for at least 21 days, and took several weeks to reopen. Several provinces in the Democratic Republic of Congo also resorted to lockdowns. In Mozambique, Zambia and Tanzania, similar measures lead to a temporary shutdown of mines, while Angola, Ivory Coast, Burkina Faso and Mali tried to maintain activity.
After this initial interruption in production, even if temporary, a number of mining companies struggled to ramp up production to previous levels, while having to screen all workers for covid-19 and adapt work processes to newly imposed safety measures.
As noted above, the pandemic has also impacted mineral prices, leading to extreme volatility in the first half of 2020, and stabilising afterwards at often higher than pre-pandemic levels. The initial lockdown in China first led to a massive drop in demand for base minerals, resulting in significant price volatility in the first half of 2020. In the third quarter of 2020, prices jumped back to pre-pandemic levels, if not above, and stabilised at that level. Gold regained its status as a safe haven, with prices rising by 27 per cent on annual average, beating previous record highs.
2020 turned out to be the start of a predicted super-cycle in commodities, a trend underlined by the fluctuation of the biggest mining companies’ market valuation. In 2020, the market valuation of the world’s 50 largest miners fell to a low of US$700 billion on 31 March, only to rocket back to US$1.28 trillion by the end of 2020. Compared to the-pandemic level of US$989 billion, mining companies’ valuation grew by approximately 29.4 per cent. As a continent with large undeveloped resources, interest from foreign investors will no doubt increase in a super-cycle environment, as the global economy seeks to pull itself into recovery following the pandemic. A high level of competition for resources and a desire to accelerate projects could lead to disputes between investors and governments, with a consequent increase in referrals to arbitration.
In respect of mining arbitrations that were already under way prior to the outbreak of the pandemic, the emergence of virtual arbitrations was a major procedural change. From filings to hearings, 2020 saw entirely remote arbitrations become the norm, with the associated technological challenges. Some institutions even issued guidelines on the best practices for virtual hearings in Africa, taking into account the specific challenges on the continent. A number of (often complex) mining arbitrations, were delayed, as parties and tribunals awaited the possibility of arguing their disputes inperson.
Political risk continues to be one of the greatest challenges currently facing investors in the mining industry. This is particularly the case in some African countries where political instability, the lack of strong governance and political structures, and more limited administration and public services, may adversely impact the development and operation of mining projects.
Political risk most often manifests itself in executive and legislative measures aimed at increasing governmental control over the development of natural resources in a manner that disregards the rights of existing concession holders – a policy phenomenon often described as ‘resource nationalism’. This is not to be confused with the legitimate aim of states to seek to achieve the highest return from their natural resources, so that the people for which governments are responsible will enjoy the greatest benefit from their nation’s natural endowment. Rather, disputes arise when measures are taken against investors that are unlawful, in that they are discriminatory, not in the public interest, not carried out under due process of law and not accompanied by fair compensation.
Resource nationalism in sub-Saharan Africa is arguably closely connected to its history of colonisation and decolonisation. While Western powers wished to retain control of natural resources post-decolonisation, buoyed by their access to specialised workforces and their ownership of hydrocarbons and mining projects, the newly independent former colonies wished to regain control of their own resources. In 1962, the United Nations General Assembly adopted resolution 1803 (XVII) on Permanent Sovereignty over Natural Resources (Resolution 1803). Resolution 1803 consecrates many of the host government’s rights (including regarding nationalisation and expropriation of natural resources on its territory) while also providing guarantees and compensation for foreign investors owning natural resource projects who are affected by state measures. In this sense, some commentators consider Resolution 1803 to be a key predecessor to the system of investment protection based on international investment agreements in force today.
The resurgence of resource nationalism in recent years has resulted in part from a significant drop in metals and minerals prices from their peak in 2012. The price downturn put substantial pressure on both states and investors, especially since it followed a period of exceptionally high prices, which had resulted in a surge in investment. It is perhaps unsurprising in this context that a number of African states implemented measures designed to maintain the economic contribution of mining projects to their overall budgets in a context of declining prices. One significant method of achieving this has been through the enactment of legislation increasing the amounts payable to the state (in the form of taxes and royalties). Mining laws enacted over the past few years by Mozambique, Zambia and Ghana all contain a series of measures in furtherance to that objective.
More recently, in December 2020, the Republic of Congo issued a series of decrees in which it stripped a number of mining companies of their existing rights with respect to various iron ore deposits, granting them to a third company. The Republic of Congo is now facing at least two new arbitrations as a result – one pursuant to the ICC Rules and one at ICSID.
In this climate of increasing resource nationalism, the financial pressure felt by host states is naturally also being felt by (or transferred to) investors, as an increasing number of new state measures affect the profitability and operability of mining projects. From an investor perspective, unforeseen restrictive measures imposed by governments may result in a desire to suspend projects, restrict production or find some other way to protect their investments. Further, given mining companies’ general reliance on debt financing, investors may increasingly be forced to take whatever measures they can to meet their repayment obligations. In this context, impacted investors are likely to challenge state measures that they view as confiscatory, punitive or unfairly imposed. Challenges may be based on contracts providing for arbitration as the dispute mechanism, or on investor-state dispute settlement provisions in international investment agreements, such as bilateral investment treaties (BITs), linking African host states with partner states around the globe. There are now many examples of African states taking such measures, including:
- The Democratic Republic of the Congo (DRC): the DRC enacted a mining code in March 2018, providing for increases in taxes and royalties and imposing more stringent requirements regarding the repatriation of export income. The 2018 Mining Code also purports to disregard the stabilisation mechanism previously provided in the DRC’s 2002 mining code, which would have guaranteed investors the stability of certain provisions of the previous legal regime for a further 10 years from the promulgation of a new law, such as the 2018 Mining Code.
- Sierra Leone: in September 2018, Sierra Leone’s Minister of Mines and Mineral Resources announced plans for ‘key reforms’ in the mining investment sector, including revising Sierra Leone’s minerals policies and laws. Among other priorities, these reforms purport to generate jobs and additional income to Sierra Leoneans. The Minister’s statement also acknowledged that ‘investors require sufficient guarantees of a business-friendly environment characterised by predictable laws, fiscal stability, transparency, security of tenure, etc’. To this day, the reform project has not been abandoned, thus investors in Sierra Leone may be watching the reforms closely to ensure that their rights are indeed preserved.
- Mali: as Africa’s third-largest gold producer, Mali has recently been negotiating with mining companies to draft a new mining code. Under the new proposed code, investors who are currently protected from changes to the fiscal regime for 30 years would see a reduced period of protection, only applicable during the lifespan of the mine. The government threatened to implement a new law unilaterally ‘like in DRC’ if no compromise was reached – a move that may force international mining companies to turn to arbitration.
- Madagascar: in late 2019, Madagascar announced that it would also reform its mining legislation, with the aim to increase taxation on mining benefits. The reform project was near completion in early 2020, the Council of Ministers having voted a preliminary version of the text in November 2019 and started public consultations in January 2020. It has then been at a standstill since the beginning of the pandemic. The mining reform project is now back on the agenda of the government, with a goal to refurbish the state’s finances after the health crisis.
- Ivory Coast: also amended its new 2018 Investment Code, implementing provisions favouring national and OHADA arbitration instead of other institutions. These changes were said to be illustrative of a growing mistrust of several African countries towards Western dispute resolution mechanisms and generally towards foreign investors.
However, although resource nationalism remains in parts of Africa, several countries have recently shown willingness to liberalise their approach to foreign investment in the mining sector. Egypt has adopted new mining regulations, which aim to alleviate many of the burdens the previous mining regulations imposed on investors, such as the requirement to form a joint venture with the Egyptian government. This reform also sets a 20 per cent cap on royalties, again underlining the willingness to provide for a more open investing environment in Egypt.
The South African government has also stressed its intention to review mining regulation in order to help the mining industry back onto its feet after the pandemic, and to rely on it to fuel the country’s recovery. It remains to be seen whether these two very recent examples are illustrative of what might be a return to investor-friendly legislation, as prices are expected to rise again after the covid-19 crisis.
Managing political risk through host state agreements
Another key area in which political instability can manifest itself, often linked to resource nationalism measures, relates to changes to the applicable law. One of the major ways in which this form of political risk can be mitigated by an investor is by entering into a host state agreement, which may provide, among other things, stabilisation of the applicable legal framework and recourse to international arbitration in the event the stabilisation provision is breached.
Stabilisation of the applicable legal and regulatory framework is increasingly seen as essential for large-scale mining projects, given the often lengthy time frames involved from resource definition to exploitation. In this respect, mining companies are drawing on the experience of the international oil and gas industry, where businesses have long sought to manage the risks of adverse legislative change by including stabilisation clauses and choices of international law in their long-term agreements with their host governments.
Some African states have recently taken steps to retrospectively amend the protections afforded by host state agreements in the mining sector, underscoring the need for stabilisation in long-term mining projects. Tanzania’s mining reform of 2017 is a prime example, whereby the state sought to introduce a unilateral review and renegotiation of any existing contract containing an ‘unconscionable’ term and purporting to void any existing contract terms that submit the state to foreign court jurisdiction. Later, in 2018, Tanzania passed the Mining (Mineral Rights) Regulations, reportedly abolishing various companies’ retention licences for projects and transferring their rights to the government. Tanzania’s commitment to numerous BITs left it exposed to claims under investment treaties (such as unlawful expropriation or fair and equitable treatment (FET) standard claims) challenging the provisions of the new laws it introduced. This resulted in a number of arbitration cases including three new claims in 2020:
- On 17 January 2020, Canadian company Montero Mining issued a notice of intent to submit a claim to arbitration to Tanzania pursuant to the Canada–Tanzania BIT.
- On 27 July 2020, an ICSID proceeding was registered by Canadian company Winshear Gold Ltd pursuant to the Canada–Tanzania BIT.
- A third ICISD arbitration was commenced on 5 October 2020 by Australian company Indiana Resources Ltd pursuant to the UK–Tanzania BIT.
All three of these claims relate to the abolishment of the claimant companies’ retention licenses pursuant to the 2018 laws. Tanzania’s arbitration docket has been increasing for several years:
- In July 2017, a subsidiary of Canadian mining major Barrick Gold commenced two arbitrations against Tanzania using the mechanism provided by mineral development agreements with the Tanzanian government. These claims were settled in 2019, with Barrick Gold agreeing to pay US$300 million and accept new concession terms.
- South Africa’s AngloGold Ashanti had also filed an UNCITRAL claim in 2017 over a set of earlier Tanzanian mining reforms, although its claim is currently stayed while the parties look to settle the dispute.
Similar unilateral action was announced by Mali following a coup d’état by Malian armed forces on 28 August 2020, which overthrew the government of Ibrahim Boubacar Keïta. Former Defence Minister Bah N’daw was sworn in as president to lead a transitional government until elections in 2022. President N’daw announced that, on advice from the Auditor General, his transitional government will undertake a review of mining conventions signed by the former Keïta government with foreign mining companies. According to press reports, the Auditor General advised that ‘[t]he conventions establishing mining companies include clauses which do not always guarantee the protection of the interests of the state’. Even though the existing Malian Mining Conventions are governed by the law of Mali, they are also arguably automatically subject to the general principles of international law (because they are contracts between a sovereign state and foreign investors). International law includes the pacta sunt servanda principle. The Malian Mining Conventions also contain clauses allowing the Convention holder to refer disputes with the government to arbitration at ICISD. If Mali proceeds with its announced review, there may be a wave of cases against Mali by holders of existing mining conventions, as seen in Tanzania.
Security issues, IHL and the impact on mining disputes
The physical security of mining assets has also long been a matter of concern for investors in Africa. Increasingly, mining companies are being called upon to understand and comply with their obligations under international humanitarian law (IHL) if they are operating in active conflict zones. In 2020, the Australian Red Cross released a ground-breaking publication entitled ‘Doing Responsible Business in Armed Conflict’, being one of the few guidelines to assist companies understand both their rights and obligations under IHL. The publication explains that, unlike human rights initiatives that businesses may adopt or enter into voluntarily, IHL is already binding on anyone whose activities are closely linked to an armed conflict.
From an arbitration perspective, in countries where there is armed conflict, host states generally have a duty to protect the physical integrity and private property of their residents and investors, although this may be difficult to achieve in remote or dangerous areas. Mining companies may rely on relevant provisions of their mining concessions or conventions to secure the unimpeded enjoyment of their mining rights. Foreign investors may also rely on the application of the FET and full protection and security standards, which are present in most international investment agreements currently in force. Full protection and security has been interpreted to mean that the state is obliged to take ‘active measures to protect the investment from adverse effects’ that ‘may stem from private parties’, including demonstrators and armed forces. States have been held liable for failing to protect investors or their investments against private violence, for example, through the failure of police to protect an investor’s property from occupation and to respond adequately to violent incidents. A series of arbitral awards confirm the application of ‘full protection and security’ to investments in Africa.
Another recurring security issue for large-scale mining companies is the increasing encounters with unauthorised artisanal and small-scale miners in areas where they hold exclusive mining or access rights. While artisanal mining can help create employment in underdeveloped areas and finance development infrastructure in local communities, it is often associated with poor health and safety conditions and may entail very negative environmental and social consequences. Artisanal mining may therefore create direct safety risks for local populations and for large-scale mining companies, who run the risk of being blamed for the damage done by these unlicensed operators.
The presence of unauthorised (and often, inadequately equipped) artisanal miners on a large-scale mining site creates a substantial risk of injury for the trespassers, as well as for the legitimate site users. Moreover, the activity of artisanal miners may interfere with ongoing exploration and production works, in part by creating hazardous excavations or using inefficient processes that prevent the future recovery of valuable minerals left behind. In addition, artisanal miners often use toxic substances or processes to extract or treat minerals without taking adequate protection measures. The resulting environmental contamination may endanger local populations, impair large-scale mining operations and result in substantial liability for the large-scale mining company holding mineral rights over the area.
Finally, artisanal mining activity results in the production of non-renewable mineral resources by a third party who is not the rightful permit holder, thus depriving the latter of its economic rights over these resources. This competition over the same resources – and the large-scale miners’ efforts to keep artisanal miners from trespassing – may result in conflicts between the large-scale operators and artisanal miners (who may be armed or supported by armed groups). This risk is particularly high in areas where government presence and economic opportunities are limited.
In an attempt to solve the problem, Nigeria made artisanal mining legal in 2020. The government hopes that this change will help decrease the violence and improve the working conditions in artisanal mines, and bring in US$500 million a year in royalties and taxes.
A recent case-in-point is the experience of Canadian gold mining company Banro Corporation, which had been operating the Nayoma mine in the DRC. The company was forced to halt production several times as a consequence, and in September 2019, the CEO of Banro stated that: ‘The government has done nothing to create a sustainable and positive environment for Banro’s employees to work safely and securely.’ Banro claims to have suffered financial distress forcing it to attempt to sell its interest in the mine following incursions of artisanal miners and repeated attacks by militia and alleged lack of protection from the government.
Impact of Chinese investments in Africa on African mining disputes
Another driver of mining arbitrations in Africa is the surge of Chinese investment in African mining projects over the past decade, with Chinese foreign direct investment (FDI) to Africa increasing markedly from around US$75 million in 2003 to US$2.7 billion in 2019. China is now the largest trading partner in the African region, having surpassed the US since 2014, with the DRC, Angola, Ethiopia, South Africa, and Mauritius being the top five recipients of FDI from China in 2019. China’s 2018 pledge to invest US$60 billion in Africa was said to include ‘US$15 billion of aid, interest-free loans and concessional loans, a credit line of US$20 billion, a US$10 billion special fund for China-Africa development and a US$5 billion special fund for imports from Africa’. However, for low- and middle-income African countries, repayment of the loans provided by China may become a significant problem. In such circumstances, governments may be forced to turn to alternative ways to repay their debts, such as through granting rights and concessions over valuable resource assets. The inability to repay debt will likely reinforce China’s economic influence and control over vast reserves of metal and mineral resources on the African continent. It may also see China take steps to stem its losses, such as scaling back or restructuring investments, and these actions may have flow-on effects for other projects in the region and may increase the potential for disputes between investors and host states.
One particular characteristic of Sino-African mining contracts over the past decade is the inclusion of commitments to develop or contribute to infrastructure development, as some agreements between African states and China or Chinese state-owned companies contemplate the provision of infrastructure as a means of payment for the resource. These arrangements increase the potential for disputes between foreign investors and host states which can arise not only from the development and operation of mining projects but also from the construction and operation of large-scale infrastructure projects. The interconnection between access to mineral resources and infrastructure investments could also result in situations where host governments decide to terminate mining rights as a result of an investor’s failure to deliver on its infrastructure commitments.
Unsurprisingly, a sizeable network of Sino–African BITs has emerged in parallel with this considerable surge in Chinese investments in Africa. By March 2021, UNCTAD’s database had registered 36 BITs signed between China and African states, of which 20 had already entered into force. However, these BITs are not necessarily published or easily accessible, and so the actual figure for Sino-African BITs may be higher.
Until recently, no Chinese investor had launched a claim against an African state. However, the very first claim by a mainland Chinese investor against an African state was reportedly launched on 10 February 2021 by Beijing Everyway Traffic and Lighting Tech Co Ltd (a Beijing construction company). The investor reportedly served a notice for arbitration on Ghana pursuant to the China-Ghana BIT, to be conducted at the LCIA. The China-Ghana BIT provides for disputes to be settled by an ad hoc tribunal, and contains a provision for submission of disputes regarding the quantum of compensation payable for an expropriation. The case relates to the cancellation of a contract for the Accra Areawide Traffic Intelligent System, which was intended to help reduce traffic congestion in the capital city, involving the installation of CCTV and automatic number plate recognition systems. The claimant alleges that Ghana subsequently approved a new contract to complete the project with two other Chinese contractors.
There have been reports that another claim has been launched against Nigeria also by a mainland Chinese investor, although little is known about this claim so far. It is possible that these two recent cases signal the start of a pattern of claims by Chinese investors in Africa, in light of the substantial Chinese investment in Africa and tensions associated with escalating debt.
In this context, the African continent is also seeing an increase in the development of arbitration centres. For example, in 2016 the China Africa Joint Arbitration Centre (CAJAC) was created in a joint effort by Chinese and African stakeholders to resolve commercial disputes between Chinese and African parties, given the rapid development of trade and investment between China and Africa. The CAJAC is based in South Africa and China and is a joint initiative between the Arbitration Foundation of South Africa, the Association of Arbitrators and the Shanghai International Trade Arbitration Centre, supported by the China Law Society. The CEO of CAJAC stated that although CAJAC is not an arbitration authority standing by itself, it is ‘an integral part of the support structure specially crafted to foster trade and investment between China and Africa’. It may be that the industry will see an increasing number of China–Africa disputes being resolved in these forums.
The rise of ESG and its relevance to mining disputes in Africa
All companies, not just those operating in Africa, are being required to show that they comply with high standards of environmental and social governance (ESG). This broad and encompassing term has risen fast to the top of boardroom agendas, and requires policies and frameworks to address all aspects of ESG in their operations, including climate change, sustainability and human rights-related risks. This is particularly the case in the context of mining investments in Africa, in part because of the specific risks and characteristics outlined in this chapter. Stakeholders increasingly demand effective actions and heightened levels of transparency in relation to ESG issues, and mining investors seeking finance are increasingly required to demonstrate their ESG credentials. Mining investors need to be ready to demonstrate their efforts to comply with local laws and regulations, socio-environmental standards and business human rights principles. This is particularly true in the context of investor-state disputes concerning natural resources projects located in emerging jurisdictions, where respondent states and sometimes third parties, through amicus submissions will increasingly question claimants’ compliance with their legal obligations.
It is likely that ESG-related issues will be an increasingly prominent feature in mining arbitrations in Africa, driven by the increasing references to protection of environmental, social and public health objectives in both contractual arrangements and investment treaties. Foreign investors are usually obliged to comply with local laws as a condition of their concession, or as a term in a host state agreement (where there is one). Breaches of these obligations may result in claims against the investor, or counterclaims by the state. In the context of investment treaty arbitration, the plea of illegality, namely that the investor has failed to comply with local laws, is often pleaded by states ‘as a question of admissibility or a question on the merits of the case’.
There is an increasing emphasis today on placing sustainability at the centre of economic development in Africa. For example, the Pan-African Investment Code of the African Union Commission (PAIC) contains obligations on investors to ‘adhere to socio-political obligations’ and ‘contribute to the economic, social and environmental progress with a view to achieving sustainable development of the host state’. The PAIC, which was adopted as a non-binding instrument, is now informing negotiations on the Investment Protocol of the Africa Continental Free Trade Area Agreement (AfCFTA), and so it is possible the Investment Protocol will contain similar ESG provisions.
There are also numerous voluntary compliance mechanisms that many foreign investors operating in Africa seek to observe, such as the Organisation for Economic Co-operation and Development (OECD) Guidelines, the United Nations Global Compact, the International Code of Conduct Association (for private security companies) and the Voluntary Principles on Security and Human Rights. Ensuring responsible global supply chain management of tin, tantalum, tungsten (their ores and mineral derivatives) and gold is of particular relevance for companies operating in Africa. Participation in the Extractive Industries Transparency Initiative and the Kimberley Process necessitates that companies undertake due diligence of their supply chains, including in-country due diligence, to ensure they meet the requirements of these voluntary regimes. However, there is already a groundswell for shifting from voluntary-based mechanisms to hard legal obligations, and once this ‘soft law’ hardens, there will be fertile ground for disputes as investors are challenged on these grounds.
The authors thank Joshua Banks, Associate at Clifford Chance (Perth) and Maximilian Pailhès, intern at Clifford Chance (Paris) for their contributions in preparing this chapter.
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