Henry G (Harry) Burnett and Fernando Rodriguez-Cortina, King & Spalding
This is an extract from the first edition of GAR’s The Guide to Mining Arbitrations. The whole publication is available here.
International legal framework surrounding community consultation
The two major international instruments that lay the foundations for community consultation are the International Labour Organization’s Convention concerning Indigenous and Tribal Peoples in Independent Countries (ILO 169) and the United Nations Declaration on the Rights of Indigenous Peoples of 2007 (UNDRIP). The scope of each instrument, however, is limited. As their names reveal, each instrument focuses only on the rights of indigenous peoples and only ILO 169 carries the binding force of an international treaty.
ILO 169 was enacted in 1989, and since then 22 countries, most of them Latin American, have ratified it. One of the salient features of ILO 169 is that it requires states to implement mechanisms and procedures that allow them to consult indigenous peoples before undertaking or authorising any project that could affect their interests. Specifically, with respect to extractive activities, ILO 169 requires that states establish and maintain procedures to consult indigenous peoples: ‘with a view to ascertaining whether and to what degree their interests would be prejudiced, before undertaking or permitting any programmes for the exploration or exploitation of such [mineral or sub-surface resources] pertaining to their lands’.
Under ILO 169, the obligation to ensure that indigenous peoples are consulted in the context of a project rests with the state and not with the private companies. Yet, not all ratifying countries have incorporated ILO 169 into their legal system, and those which have, do not incorporate or implement it uniformly; rather, they have created individualised legal frameworks. This is particularly evident with certain principles that are set forth in ILO 169, such as the principle of free prior and informed consent (FPIC).
On a basic level, FPIC can be defined as the right of indigenous peoples to be involved in the decision-making process of the development of projects affecting their lands and resources. Nonetheless, there is no international consensus on the scope of FPIC, and the nature and extent of the rights of indigenous communities and the expectations of business, industry and governments with respect to FPIC are not always clear.
ILO 169 outlines procedures that states are required to follow to engage in good faith consultations with ‘the objective of achieving . . . consent.’ The Convention adopts principles guiding how community consultations should be undertaken but does not impose an obligation of result. ILO 169 does not provide indigenous people with a veto right that can be exercised against a specific project. In this respect, ILO’s Committee of Experts noted that consultations ‘do not imply a right to veto, nor is their result necessarily the reaching of agreement or consent’.
FPIC-specific rights and obligations are ultimately determined by how states decide to implement and regulate the FPIC, and in particular, how they choose to regulate it with respect to a specific industry. Although most of the member states expressly recognise the indigenous peoples’ right to FPIC, historically, the lack of clear implementing regulations left its application in a state of ambiguity. As the ILO’s Committee of Experts observed in 2009: ‘the establishment of appropriate and effective mechanisms for the consultation and participation of indigenous and tribal peoples regarding matters that concern them is the cornerstone of the Convention, nevertheless it remains one of the main challenges in fully implementing the Convention among a number of countries.’
In more recent years, however, both ILO 169 and UNDRIP have had an important influence in the development and implementation of state legislation. Some of the principal mining countries in Latin America have enacted legislation implementing and building upon the concept of FPIC.
Peru is a good example of this new dynamic. Peru’s Regulations on Citizen Participation in the Mining Subsector (Supreme Decree No. 028) and implementing Ministerial Resolution 304 incorporate ILO 169 Article 15 into local legislation. These regulations provide for a formalised community consultation process before the project receives exploitation permits. Supreme Decree No. 028 confers on Peru the responsibility of guaranteeing the right to citizen participation. It also makes clear under Article 4 that ‘[t]he consultation does not grant the populations the right to veto the mining activities of the authority’s decision.’
Clear legislation, like Supreme Decree No. 028, not only serves to protect communities’ rights, but also provides legal certainty to mining companies with respect to the scope of FPIC. As set forth in the summary of cases below, in asserting defences to treaty claims, states have claimed it is the mining companies themselves that must guarantee the right of consultation of the indigenous communities, while that duty is, in fact, that of the state. States often also justify measures affecting mining companies’ rights by alleging that outreach activities were not enough. Investment arbitration tribunals have rejected such arguments by analysing the inventors’ and states’ conduct in light of ILO 169 local implementing regulations. In Bear Creek v. Peru, for example, the tribunal found that the relevant question for the tribunal was not whether claimant could have gone further in conducting outreach activities, as Peru alleged, but whether Peru could claim that such further outreach was legally required in Peru.
ILO 169 and UNDRIP address the role of governments, and not of the private sector with respect to FPIC. While not rising to the level of international law, several international standards relevant to mining activities have articulated the expectation that companies obtain FPIC. Some of these standards include, for example, the IFC Social Performance Standards, the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. Notably, in 2014, the UN Global Compact issued a ‘Good Practice Note’ recommending companies to adjust their policies and procedures to address the right to FPIC found in UNDRIP. Although these standards are not binding upon companies as a matter of law, ignoring them may, for example, impact a company’s ability to obtain funding from financial institutions to develop the relevant project, or as discussed in the following section, to secure the social licence to operate.
The ambiguous concept of social licence to operate
Social licence or social licence to operate (SLO) is a multifaceted and often unwieldy concept that plays an important role in the context of social disputes in connection with extractive activities. Unlike the FPIC, SLO focuses on the actions that firms in the private sector should perform to meet the expectations of local communities and other stakeholders.
The ‘licence’ in this case is not a paper or tangible certificate obtained from the government or communities following an application or resulting from the culmination of a regulated process. While certain best practices may exist, neither international instruments nor local laws impose a clear-cut obligation on mining companies to obtain SLO. Rather, SLO is a behavioural standard that ‘emerged as an industry response to opposition and a mechanism to ensure the viability of the sector’. The licence is obtained by gaining acceptance and trust to proceed with the project in question from the concerned stakeholders.
In this context, the term has been incorporated into mainstream discussion during the past couple of decades and deemed as decisive for enhancing business reputation within the mining industry. Definitions abound and vary denoting a difficulty to capture a universal meaning or a practical form of measurement. Despite conceptual and terminological difficulty, few would disagree in considering it as a source of legitimacy for envisioning, undertaking and concluding a project.
Complications towards a clear understanding surface form at least two prongs: (1) SLO comprises different components both legal and extralegal, where extralegal components (i.e., social norms) can supersede legal rules; and (2) SLO is not fixed in time – it is subject to the evolution of standards and societal perceptions, making the term malleable and its obtainment often discretionary.
The undefined scope of SLO complicates the certainty desired by private actors who operate resource projects in foreign jurisdictions. By most measures, gaining SLO depends on voluntary action taken by private companies, which sometimes goes beyond simply meeting legal requirements or complying with the norms of a certain legal system. Multiple mining projects have been frustrated by extralegal impacts in recent times, either because companies remain uncertain on how to develop a successful SLO approach or because governments, instead of supporting and protecting the right of investors, choose to support actors that object to a given project.
The process to gain SLO grows in complexity when a project impacts different communities that claim to have a stake in the project. In these situations, it is difficult to deploy actions that satisfy the demands of a myriad of individuals that usually overlap with or exclude one another. Companies have opted to carry out what is often referred to as ‘best practice’, which basically consists of strict standards that consider most factors involved in a business project. This term usually takes the form of a ‘community relations’ programme or a strategy for substantial engagement. Nevertheless, observance of a best practices strategy cannot guarantee that a certain mining site will not face social opposition.
With almost no legal footing, communities question how SLO can protect their rights to seek modifications in or even achieve cancellation of investment projects. On the other hand, the intangibility and lack of clear parameters of the SLO may also result in uncertainty for investors. The success of a mining project may be left to the mercy of community members or other individuals that have personal or political interests that drive them to object to a project, beyond the legitimate interests of the true stakeholders. While governments certainly have an incentive to protect legitimate interests of true stakeholders, they need also to protect private investors from groups or persons that have no legitimate claim or concern to object the project in question. Because of the often isolated nature of communities in or near mining projects in remote areas of a country, it is sometimes relatively easy for such groups or persons to manipulate the communities themselves for their own personal objectives.
Available mechanisms to communities and companies to ensure that rights are respected
Mechanisms available to communities
In the context of extractive projects, it is common for mining companies to commit to certain actions in exchange for social support. Communities wonder how they can make private actors deliver on their promises. In fact, there are several mechanisms available to local communities to ensure that commitments are respected. The nature of each alternative varies depending on the relationship sustained with the project and the phase the project is in. We briefly enumerate some of the most important ones below.
When communities are involved at an early stage, they may participate in the creation of specific programmes (along with the private actor) to define, among others, the extent of the project’s objectives, heritage and environmental concerns, labour, and economic benefits. These social programmes may achieve legal recognition if they are incorporated into the terms of a contract or to a concession agreement. Ideally, through these negotiations and reciprocal trade-offs, stakeholders would be able to reach an agreement and secure the development of a successful project. They could also seek contractual remedy when one of the parties fails to comply with the content of the programme.
But relationships between communities and companies can become contentious as projects span a long period of time. When communities feel that their rights have been violated by the companies or the government, they may resort to local courts to seek compliance with commitments or ultimately ask for the project’s termination. When addressing the courts, communities often portray their claims as a violation of human rights, aggravated by their indigenous population character. Communities that become especially frustrated or are otherwise influenced by outside elements with their own interests in mind, have also resorted at times to mass protests, work stoppages, road blockages and vandalism, which exacerbate tensions between the players and rarely lead to achieving the objective.
Considering that most of these claims pursued in the local judiciary have a human rights component, when local recourses have been exhausted, communities have in the past sought relief by the intervention of international bodies. That is the case, for example, of the Inter-American Commission on Human Rights and the Inter-American Court of Human Rights (IACHR), bodies that rest upon the Organization of American States and the American Convention on Human Rights. It bears noting that in this regard, communities can, and do, bring claims alleging injury from actions or omissions by a state and not the private company. Interestingly, when adjudicating communities’ claims, the IACHR has used the ILO 169 as an interpretative tool for supporting its rulings.
Mechanisms available to private mining companies
The key to avoiding conflicts with the communities, in addition to complying with local laws and regulations while taking into account international standards, is for mining companies to have well-planned and interactive community social responsibility programmes. These can include supplying resources in the areas of education (e.g., environmental programmes, cultural events, metals training, teaching transferable skills), nutrition (e.g., agriculture and livestock programmes), healthcare (e.g., sanitary services and electricity), infrastructure (e.g., roads, irrigation, transportation, civil works) and housing, among others. It is important to know and consider the expectations of key stakeholders. It is also important to truly understand the history, customs and mores of the specific communities, including differences between them when more than one type of community is impacted, while also considering the relationship between the communities and the state itself.
Mining companies should focus on the protection of:
- employees, many of whom will be from the communities, by operating at the highest levels of worker safety;
- the environment, by establishing a strong regard for environmental protections;
- civil society, by operating in a socially responsible manner; and
- shareholder value, by striving for operational success and profitability.
Risk management through strategic alliances is key and can involve, among other things, alliances with communities themselves in implementing indigenous development plans, entering into joint venture agreements for mining services, implementing NSR royalty programmes with, for example, mining cooperatives. Commitments to sustainable development can also generate support from international organisations, NGOs and local, regional and central governments.
In the event disputes with communities arise and are not successfully addressed with the assistance of the state, or the state fails to assist at all, resulting in significant project delay or even permanent shutdown, or when the government itself takes affirmative action against the company and its investment resulting in significant or total loss of value, the most effective legal mechanism available to foreign or foreign-owned companies is to resort to international arbitration. While mining companies do not have recourse in arbitration against communities that are interfering with the companies’ mining rights (although injunctive relief in local courts may be available), companies protected under an investment treaty may, in appropriate circumstances, bring arbitration against the state, when the state fails to protect the investor against illegitimate demands from communities or when the social unrest is used as a pretext for the government to adopt measures that hinder the miner’s rights.
Accordingly, it is essential for foreign miners doing business abroad to protect themselves through appropriate corporate structures designed to ensure treaty protection. Careful corporate planning for mining companies doing business in foreign jurisdictions, especially high-risk jurisdictions, remains a key priority.
We will analyse in the following sections some of the most relevant cases.
Relevant investor–state arbitration cases
Bear Creek Mining v. Peru
In 2007, Peruvian authorities issued a public necessity decree authorising Bear Creek to acquire the rights to different mining concessions that formed the Santa Ana mining project in a remote part of the Puno region, near the Bolivian border. The government revoked the public necessity decree in June 2011 in response to the social unrest that was taking place in the Puno region. Bear Creek was not notified in advance, nor was it given an opportunity to be heard.
In the arbitration, Peru blamed Bear Creek for the social unrest alleging that its outreach activities were insufficient. In analysing the respondent’s argument, the tribunal acknowledged that ‘even though the concept of “social license” is not clearly defined in international law, all relevant international instruments are clear that consultations with indigenous communities are to be made with the purpose of obtaining consent from all the relevant communities.’ However, the tribunal observed that the relevant question for the tribunal was not whether the claimant could have gone further in conducting outreach activities, but whether the respondent could claim that such further outreach was legally required and whether its absence caused or contributed to the social unrest.
In responding to this question, the tribunal found that Peru could not allege that the investor’s conduct contributed to the social opposition engulfing the project, because the Peruvian authorities were aware of, approved and endorsed the claimant’s multiple outreach activities, including its comprehensive citizen participation plan. Evidence showed the state was largely absent from this remote region. The tribunal further held that the: ‘Respondent, after its continuous approval and support of Claimant’s conduct, cannot in hindsight claim that this conduct was contrary to the ILO Convention 169 or was insufficient, and caused or contributed to the social unrest in the region.’ The tribunal observed, in response to Professor Philippe Sands’ dissent, that the ILO Convention does not impose an obligation of result, so even if the result of social licence was not achieved, the legal issue was whether the investor employed all its best efforts in good faith to reach an agreement with the communities. Absent any valid reasons to justify the presidential decree that revoked the investor’s rights, the tribunal determined that an indirect expropriation had occurred.
Copper Mesa v. Ecuador
In this case, the investor brought a claim against Ecuador because of Ecuador’s termination of the company’s title to several concessions, including that of the massive Junín project. Ecuador argued that the Junín concession was revoked as part of a legitimate reform of the respondent’s mining regime adopted for the public policy purposes of protecting public health and the environment where the requirement to consult the local population on the basis of an environmental impact study (EIS) was specifically intended to protect the residents and local communities and to reduce the environmental impacts of mining activities. Ecuador claimed that the investor failed to secure the approval of local communities required for the EIS approval because of the opposition from the community in the region of exploration at the regions of the concession, and instead its senior personnel directed violent acts committed on its behalf.
While the tribunal did find that the termination that stemmed from Ecuador’s mining reform amounted to an expropriation, it did not delve into whether the laws and regulations that were enacted as part of the reform were for the national interests of the respondent. In this respect the tribunal observed that it was not a regulator and deferred to the respondent’s sovereign right to regulate.
The tribunal’s analysis with respect to the claimant’s allegations that Ecuador breached the fair and equitable and full protection and security obligations under the Canada–Ecuador BIT provide insight into rights available to mining companies to make sure that their mining rights are respected. The question for the tribunal under both FET and FPS standards was whether Ecuador should have provided more support to Copper Mesa against the protesters, to facilitate the investor’s consultation and EIS obligations. Under the specific factual circumstances of the case, the tribunal found that there was a breach by the respondent of the FET and FPS standards, because rather than encouraging the anti-miner’s physical blockade of the Junín concessions, ‘the Respondent should have attempted something to assist the Claimant in completing its consultations and other requirements for the EIS.’
Notably, the evidence of the case established that several of the claimant’s senior personnel in Quito directed violent acts against anti-mining protesters (including threats to the activist involving firing guns and spraying mace at civilians) in violation of Ecuadorian criminal law, significantly fuelling the social tension. As a result, the tribunal found that the injury was not caused solely by the respondent’s wrong and reduced the damages awarded by 30 per cent.
South American Silver Ltd v. Bolivia
In South American Silver v. Bolivia, the tribunal had a very different view on the contributory negligence argument advanced by the respondent. While the tribunal found that South American Silver’s community relations programme was deficient to certain extent, it did not consider that South American Silver’s actions or omissions contributed to the damages it suffered. The tribunal observed that the expropriation complied with the requirements of public purpose and social benefit established in Article 5 of the UK–Bolivia BIT, and that it was only Bolivia’s failure to compensate or offer to provide compensation that violated it. Because Bolivia’s failure to offer compensation could not be attributable to the investor, the tribunal found that it could not reduce the amount of compensation owed to the investor for a treaty violation unrelated to its conduct.
Although not a mining case, Abengoa v. Mexico is relevant for purposes of assigning responsibility on states to implement a clear regulatory framework with respect to the community approval mechanism. Mexico argued that the investor’s subsidiary failed to implement a programme of ‘social communications and public relations’, which led to the demise of the claimant’s investment, a project of a residual treatment plant. This programme was agreed to be developed in a joint effort between the private investor and the municipal authorities to ease environmental concerns before the installation of a residual treatment plant. While the tribunal acknowledged that the investor could have developed a timelier and more efficient communications and public relations programme as Mexico argued, it ultimately found that: ‘there was not a legal and regulatory framework that could define in a clear manner the obligations of a residual treatment plan operator with regards to communications with the community.’ In this respect, the tribunal held that the state could not reduce or excuse its international responsibility.
In this ongoing case, a mining company was unable to initiate operations owing to regulatory hurdles and the presence of social opposition. The government of Romania argues that the company failed to secure social licence – equating it to ‘stakeholders’ approval’ – to develop the mining site. Among the factors that Romania points out as the company’s failure to secure social licence are:
- financial benefits offered to communities were limited and did not extend over generations;
- domestic challenges grew to over 50 administrative challenges;
- massive protests surged around the country; and
Romania asserts that obtaining social licence is an obligation that remains a private investor’s own. In light of this provocative pattern of facts and legal arguments, the award in this case is expected with anticipation.
Fostering positive relations with communities impacted by a mining project and obtaining an ongoing social licence to operate is of utmost importance for the success of any project. The role of the state is crucial for setting up an effective framework to assist private investors in pursuing productive and effective consultations. As discussed above, there are many local and international treaties, rules, regulations and guidelines to assist states, private investors and stakeholders when seeking to establish stable relations with communities. Effective and coordinated implementation is often challenging. When faced with arbitration claims by private investors, some states have resorted to asserting defences that place the blame of the social unrest on the investor, while ignoring its own legally mandated obligations. These types of situations can be avoided by ongoing and documented interaction and coordination between all relevant parties.
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