Kanaga Dharmananda SC, Timothy Paul O'Leary and Marshall Timothy McKenna, Quayside Chambers (Perth)
This is an extract from the first edition of GAR’s The Guide to Mining Arbitrations. The whole publication is available here.
State agreements and native title
Specifically Australian issues
There are a number of observations to be made in relation to arbitration in the Australian context, beyond the mere subtle distinctions between the statutory frameworks of Australian jurisdictions for commercial arbitrations.
In particular, there are some observations to be made in relation to drafting trends, use of Australia as a seat, particularly in the context of commodity contracts, and the peculiar statutory arbitration under the Native Title Act 1993 (Cth).
There are two notable drafting trends that are observable in the Australian jurisdiction.
Many commodity contracts have dispute resolution clauses including arbitration. Likewise, many joint venture or commercial cooperation contracts in relation to resources have alternative dispute resolution clauses including arbitration. The latter form of agreements routinely include ‘expert’ determination clauses in relation to the resolution of ‘technical’ issues.
Seat of arbitration
In the 1990s, arbitration clauses would routinely nominate the seat of arbitration in the jurisdiction of the commodity supplier (i.e., Australia). In more recent decades, there has been an observable retreat from this position. Likewise, use of Hong Kong as a seat for Sino-Australian commodity agreements has been gradually declining. Over time the relevant counterparties appear to have retreated from use of the home jurisdiction of either party and anecdotally it is now more common to see commodity contracts with arbitration clauses that are seated in Singapore. It is rare to see commodity contracts with seats in New York, London or the Hague – the obvious reason being the relative distance of those seats from the jurisdiction in question.
Again, in the 1990s, it was rare to see an expert determination clause. More recently, expert determination clauses have been becoming increasingly important, and parties have sought to apply them to fundamental issues such as setting a price under a contract (specifically a royalty rate).
Obviously, it is not possible to do a survey of agreements to identify the commonality of arbitration and expert determination clauses and their relative frequency of use in the areas in which they are used. Secondary evidence (arising out of disputes that enter the public arena through stay applications or otherwise) suggests that expert determination clauses remain less common than arbitration clauses, although the alternate explanation is that there is less dispute about their application.
Government or state agreements
Western Australia is a major resource province. Large, infrastructure ‘heavy’ projects are historically supported by agreements with government that are ratified by the state parliament. The ratification process is for two main reasons. First, under the Western Australian Constitution, interests in land can only be disposed of by the legislature, so that the grant of mining tenure needs to be authorised by Parliament. Second, those kinds of agreements routinely require amendment to or exception from existing legislation (primarily the Mining Act 1978 (WA)).
The relevance of such agreements from an arbitration perspective is that the dispute resolution provisions of all such agreements is by way of arbitration. Because of the confidentiality issues surrounding such disputes, there is only anecdotal information as to how often they have been applied and what outcomes arose.
State agreements will have either statutory or contractual force depending on the words used in the enactment. The starting point when confronted with a state agreement is to consider its legal character. State agreements are given legislative support, but they do not always have statutory force.
State agreements are affected by sovereign risk. The best way to control sovereign risk is through cooperation and a sound relationship with the executive. Regardless of a concession agreement or other agreement with the government, it will always be possible for a sovereign parliament to amend the agreement’s terms so as to affect a project. This is relevant both to Australia and projects outside Australia, particularly in Asia and Africa.
Understanding the consequences of sovereign risk reveals that attention to methods of dispute resolution, or the extent to which a particular provision is seen as inviolable, is not a guarantee for transactional security. Greater focus may need to rest upon a clear specification of what is required under the agreement. It may be that governments, and even states, would be anxious to ensure that they do not become known as the contract breaker.
Western Australian businesses make up a large part of Australia’s investment in resources projects in Africa. Western Australia’s influence has led various African countries to consider replicating Western Australia’s state agreement-based resources model. The rise of bilateral investment treaties may ensure the continued relevance of state agreements.
It appears that there have only been two arbitrations, which have both occurred in the past decade, and in each case the result was to force the relevant minister to exercise a discretion or to reconsider the exercise of a discretion. That is, while there has been reticence to engage in the dispute resolution processes until recently, arbitration can be an effective mode of alternate dispute resolution that can be used in the context of a long-term and ongoing commercial relationship.
Native Title Act 1993
In 1992, the High Court of Australia recognised that certain rights of indigenous peoples survived the process of colonisation, and where rights could be traced back to rights that existed before solvency and were still in existence by reason of continuous adherence to traditional laws and customs, they could ground a plan for native title rights and interests. Those rights and interests have to a greater or lesser extent been impacted by time and the acts of the executive, including grants of competing tenure. Given the existence of the Racial Discrimination Act 1975 (Cth), all grants of tenure or acquisitions of land affecting native title rights were potentially invalid. The Commonwealth government’s response to that case was to enact the Native Title Act 1993 (Cth), which had several purposes including validating all existing grants of title and setting out an array of processes to govern the grant of titles following the enactment of the Native Title Act (on 1 January 1994). One of those processes involves arbitration.
Several important types of tenure grants are governed by Subdivision P of Division 3 of Part 2 of the Native Title Act, the most common of which is the grant of mining tenure (other than titles granted for the sole purpose of constructing an infrastructure facility) and compulsory acquisition of native title rights and interests by government for the purpose of granting tenure to private proponents.
The arbitration is unique in several regards:
the process of arbitration is only available after there has been a period in which the parties are obliged to and must negotiate in good faith – such negotiation being a jurisdictional precondition to referral of the matter to arbitration;
the process of arbitration is limited by the statutory context which provides that the only available outcomes are that the relevant act be allowed, subject to conditions (not including the payment of compensation tied to profits) or that the act may not be done; and
the factors relevant to the exercise of discretion are expressly and exhaustively listed under the Act.
In addition, there is potential, following the completion of arbitration, for the relevant Commonwealth minister to intervene and impose an outcome different from that decided by the arbitrator, regardless of the presence of any error on the part of the arbitrator.
Expanding on the above issues, the unusual aspects of the process are:
- the requirement of negotiation in good faith as a jurisdictional precondition to a referral to arbitration;
- the exhaustive criteria set out in the statute; and
- the limited outcomes available.
Negotiation in good faith
Parties must negotiate in good faith with a view to the act being done. The principles of good faith are difficult to encapsulate comprehensively, but do not require that negotiations be progressed to any particular stage. The obligation to negotiate in good faith continues after a matter has been referred to arbitration.
Referral and arbitration
A matter may be referred to the National Native Title Tribunal to determine the matter provided that:
- there has been negotiation in good faith; and
- at least six months have elapsed since the notification of the proposed act by the granting authority.
Once a matter is referred the tribunal is empowered to determine that the act must not be done, the act may be done or the act may be done subject to conditions to be complied with by any of the parties.
The arbitral body is specifically prohibited from determining conditions that have the effect that native title parties are to be entitled to payments worked out by reference to the amount of profits made, income derived, or anything produced by any granting party as a result of doing anything in relation to the land and waters concerned.
Specific criteria to be considered by the arbitral body are exhaustively set out and are:
- the impact of the act on:
- enjoyment of the native title party of their rights;
- the native title party’s way of life, culture and traditions;
- the development of social, culture or any economic structures;
- freedom of access to the land or waters in question and the ability of the native title party to carry out rites, ceremonies or other activities of cultural significance in accordance with their traditions; or
- any area or site of significance;
- the interests, proposals, opinions or wishes of the native title party in relation to the management, use or control of the land in question;
- the economic or other significance of the act to Australia;
- the public interest in doing (or by corollary the not doing) of the act; and
- any other matter that the arbitral body considers relevant.
There are only three instances in which the tribunal has declared that an act not be done (being the grant of mining tenure in each case). The instances in which the arbitral body has ruled that the act may not be done appear to be based on Aboriginal heritage or the archaeological value of the sites.
Mining Act matters
Australia’s mining legislation and the system of its operation has been exported to a number of countries.
The Western Australian Court of Appeal has observed that one of the primary objects of the Mining Act 1978 (WA) is to ensure:
that land which has either known potential for mining or is worthy of exploration will be made available for mining or exploration subject to reasonably stringent conditions. However that is not its only object. Other objects or purposes identified by the courts include:
- identifying circumstances in which a tenement holder will be allowed to hold a mining tenement without mining or giving it up for others who may wish to actively mine the land.
- protecting tenement holders who have defaulted in compliance with the Act in some minor respect, or because of some circumstances beyond the control of the tenement holder, against loss of the tenement.
- providing that, in general, the holder of a mining tenement should carry out the relevant mining activity on the tenement.
This statement reflects the subject matter of typical disputes arising under the mining legislation in Western Australia, and similar (though not identical) legislation in each of the other Australian states.
In Forrest & Forrest Pty Ltd v. Wilson, the High Court of Australia held that where a statutory regime confers power on the executive government of a state to grant exclusive rights to exploit the resources of the state, it is essential that those requirements be complied with for the making of the grant to be effective. The statutory conditions regulating the making of a grant must also be observed. These observations have led to close scrutiny of mining tenement applications, both by the state and by private third parties who are entitled to intervene in the application process by lodging objections to the grant of mining tenements.
Similarly, tenement holders who do not carry out relevant mining activity and incur sufficient expenditure to meet the conditions of any grant, risk forfeiture of their mining tenements where that non-compliance is sufficiently serious in the view of the executive. Again, third parties have rights under the process. Any person can apply to forfeit mining tenure on the basis that expenditure is insufficient, and present evidence of a tenement holder’s non-compliance at a hearing before a mining warden, who has power to recommend forfeiture of mining tenure to the relevant Minister. Tenement holders can seek exemption from expenditure requirements on the basis of specified grounds, or for any reason which the relevant Minister considers is sufficient to justify such exemption.
These administrative proceedings challenging the validity of tenement applications or attacking the security of mining tenure will frequently be the subject of judicial review proceedings, or otherwise the subject of direct representations to the relevant Minister.
Questions may arise as to the extent to which regulatory or administrative matters can be the subject of arbitration as opposed to determination by the court or tribunal referred to in relevant legislation. That will turn on the approach taken to the interpretation of arbitration agreements.
Enforceability of arbitration provisions in mining agreements
Australian courts frequently determine the enforceability of arbitration agreements, and tend to interpret the scope of such agreements broadly. The approach has been described as a robust approach to enforcement of arbitration agreements and a light-touch approach to supervision of arbitral disputes. Courts generally adopt a ‘broad, liberal and flexible approach . . . and should favour a construction which provides a single forum for the adjudication of all disputes arising from, or in connection with, that agreement’.
Contracting parties that have agreed to resolve disputes by way of arbitration will often preserve the right to institute court proceedings to enforce payment due under the subcontract. Recent decisions of the Australian courts have confirmed that such clauses do not refer to the payment of amounts that are disputed. Rather, these provisions are directed to the enforcement by the court of payment of money due and owing and that are no longer disputed under the contract. Allowing the parties to pursue court proceedings regarding disputed payments where they have an arbitration agreement would fragment the dispute resolution process.
In Samsung C&T Corporation v. Duro Felguera Australia Pty Ltd, the court considered the proper approach to determining whether there was an agreement to arbitrate in the context of an application for stay of court proceedings pursuant to Section 7 of the International Arbitration Act 1974 (Cth) and Article 8 of the UNCITRAL Model Law on International Commercial Arbitration. The Court observed that Article 16 of the Model Law gives effect to the principle of Kompetenz-Kompetenz: that the arbitral tribunal may independently rule on the question of whether it has jurisdiction, including any objections with respect to the existence of the arbitration agreement, without having resort to a court. That principle potentially gave rise to a ‘friction’ where Section 7 of the International Arbitration Act requires the court to take a view on the existence and scope of the arbitration agreement in question, such that any determination by the court on the existence and scope of the arbitration agreement ‘may well intrude into the authority of the arbitral tribunal’s kompetenz-kompetenz’.
There is a threshold question as to the approach a court should adopt in determining the existence and scope of the arbitration agreement. The first approach is to undertake only a prima facie review of the existence and scope of the arbitration agreement (thereby preserving the arbitral tribunal’s Kompetenz-Kompetenz). The second is that the court should determine the existence and scope of the arbitration agreement when it hears the stay application: this is what the Singapore Court of Appeal referred to as the full merits approach.
Consistently with several recent Australian and English cases, the court in Samsung adopted the full merits approach. It noted that if the party seeking the stay cannot prove the existence of an arbitration agreement that covers the disputes that are the subject of court proceedings then the conditions for staying the proceedings under Section 7(2) of the International Arbitration Act will not have been met.
This marks a point of distinction between Australian and English courts and the Singapore Court of Appeal, which has adopted the alternative prima facie approach. Though the Full Federal Court of Australia has stated subsequently that ‘any rigid taxonomy of approach is unhelpful, as are the labels “prima facie” and “merits” approach’, aspects of the prima facie approach were said to ‘have much to commend them . . . However it is difficult to see how the Court can exercise its power under Section 8 without forming a view as to the meaning of the arbitration agreement.’ Despite the robust approach to enforcement identified above, Australian (and English) courts are relatively less likely to grant a stay of proceedings given the more onerous burden imposed on a party that must satisfy the full merits approach.
Commodity agreement disputes
Many mineral resources involve long-term contracts for the sale of product; this is relevant for project finance required for commencing the development of a mineral resources project.
Price review provisions
A price adjustment clause is a key clause in long-term contracts. It allows the party to adjust the contract price, on the occurrence of a nominated event or at a specific time, to reflect the market price for that commodity. Such clauses can take the form of a price indexation clause or a price review clause. An indexation provision adjusts the price up or down based on an agreed index. A price review clause would reopen the entire price or identify components of the price formula for resetting. Similar clauses, serving similar ends, may sometimes take the form of a hardship clause. A hardship clause allows a party a right to negotiate with the other if a hardship is suffered. Some of these clauses may be difficult to enforce and recent evidence suggests that such clauses are the exception rather than the rule.
Price reviews can give rise to significant financial consequences and so they often give rise to disputation. Usually, the clause will involve some trigger before the clause is activated. There may well be disputes as to whether the trigger event has occurred. Some clauses operate by reference to one party’s state of mind but where the relevant trigger is a state of affairs, there may well be disputes about the occurrence of the event. Arbitrations will usually take in both the issue as to the trigger as well as the more substantive matters for resolution. Particular difficulties may sometimes arise because the review clause will demand that the parties negotiate with a view to reaching agreement. Where previously such provisions could have been viewed as unenforceable, the current trend is to view them as binding.
Failure to agree may well give rise to a dispute sufficient to attract the definition of a dispute within the relevant agreement. Both the Commercial Arbitration Act (Western Australia) and the International Arbitration Act (Commonwealth) would accommodate the failure to agree a price as giving rise to an arbitral dispute. Observations about the task entrusted to the arbitrator were made by the Queensland Court of Appeal in Queensland Power Trading Corp v. Extrata, where the court held that the exercise to be performed by the arbitrators, namely to determine a ‘new adjusted unit charge’ by applying certain criteria, was similar to a judicial determination and was, therefore, an arbitration.
Issues of interpretation
Interpretation issues are prevalent during the trigger event stage because they require the requesting party to show that certain qualitative changes have occurred in the relevant market that merit revision of the price formula. Difficulty arises from the meaning of words such as ‘significant’, ‘value’ and ‘economic circumstances’, as well as factual disputes regarding, for example, whether changes were foreseeable or beyond the control of the party requesting the price review.
The qualitative changes to which this criticism relates include the following:
- a ‘significant’ or ‘substantial’ change has occurred in the ‘buyer’s market’;
- the change occurred before the ‘review date’;
- the change was beyond the control of the party requesting a price review; and
- the change must have, or be likely to have, an effect on the market value of gas in the buyer’s market.
Matters to address
Regardless of the conception of the inquiry to be undertaken, the parties will ordinarily need to address the assumptions underlying the set price and the changes affecting the determination of that price. This will necessitate attention to the relevant circumstances at the time of drafting as well as the relevant circumstances at the time of disputation.
More often than not, this inquiry will require expert evidence and industry expertise. This is likely to be a complex and difficult area given obligations of confidentiality that exist within the industry. One other matter that arises is the capacity of a party to terminate a supply agreement. Various temptations may arise, including a drastic change in market conditions, inviting termination. It is here that attention to the remedy of specific performance will require particular attention. As is commonly understood, specific performance will only be awarded if damages will not be an adequate remedy. It is here that arbitrators, particularly those with a civil law background, may more readily impose a specific performance-type remedy. Factors that may contribute to the grant of such an award may be the availability of supply, the nature of the parties’ conduct and whether third-party interests have been affected in respect of the supply obligation.
The arbitrator’s role
Arbitrators are asked to perform a different role compared with typical commercial arbitrations – they are asked to determine whether the contractually stipulated criteria for an adjustment of the contract price formula have been satisfied and, if so, what that adjustment should be.
Arbitrators must understand:
- The commercial context of the dispute and find a solution that is acceptable and economically sustainable for both parties.
- The basics of pricing, which may be different to the traditional task of evaluating complex factual evidence against a defined legal principle or standard. A failure by a tribunal to adjust its mindset to the requirements of a price review can lead to unpredictable and commercially unsatisfactory awards.
JORC Code issues
Many agreements entered into in the context of mining projects will have occasion to refer to the JORC Code. Joint venture agreements, concession agreements, earn-in agreements, and profit-sharing contracts may, in one way or another, require attention to be given to the nature of the resource at hand. The JORC Code is a professional code of practice that sets minimum standards for public reporting of minerals, exploration results, mineral resources and all reserves. Classification will occur in accordance with the level of confidence in geological knowledge, technical assessment and economic relevance. Given the history of the JORC Code, it will become material to identify which particular version is being referred to for the purposes of any dispute. At times, this will be defined in the relevant agreement. If it is not, then it is wise to achieve agreement on that issue by the issue of a procedural order.
The manner in which the JORC Code may come into play illuminates its considerable relevance to international mining arbitration. Some examples follow. A provision in a put option or earning agreement may be triggered where a resource to a particular level is identified by reference to the JORC Code. The parties may be in dispute about the relevant provision and, inevitably, there will be attention given to the JORC Code. There may be an obligation to ‘free carry’ a party to a particular period so long as the resource is of a particular quality. Again, inevitably, the JORC Code will come into play. The JORC Code sets a requisite minimum standard for public reporting. The 2012 edition JORC Code does not provide for the manner in which a competent person estimates a mineral resource. ‘JORC compliant’ is therefore read to mean ‘reported in accordance with the JORC Code and estimated (or based on documentation prepared) by a competent person, as defined by the JORC Code’.
Figure 1 of the 2012 edition JORC Code shows that as the level of geological knowledge and confidence for a mineral deposit increases, using exploration results and other techniques, a mineral resource may be found to be ‘an inferred’ mineral resource, then upgraded to ‘indicated’ mineral resource and then finally upgraded to ‘measured’ mineral resource. An underlying concept is that the portions of a deposit that do not have reasonable prospects for economic extraction cannot be included as a ‘mineral resource’.
These concepts may assume a large significance in the context of investment treaty dispute where, at times, to assess any compensation that may be payable for breach of a treaty standard, attention must turn to what exactly was lost.
At other times attention will turn to whether a particular resource falls within one category or another. A recent case in the Queensland Supreme Court, Wellington v. Huaxin Energy (Aust) Pty Ltd, reveals exactly this type of dispute. In this case, Justice Jackson considered the JORC Code in detail as part of his consideration as to whether a particular clause of an agreement had been triggered; the case concerned the question of upgrading inferred mineral resource to a measured mineral resource.
Such questions often arise in the context of disputes that are referred to arbitration. Three matters are critical to advancing a case that requires evidence pertaining to the JORC Code. First, there must be a careful selection of the expert. The expert must be a competent person for the purposes of the JORC Code. Second, the relevant applicable substantive law must be considered to determine whether any other provision or industry guide is pertinent to a consideration of the question at hand. This may turn on the clause but it may also turn on the relevant applicable law. Third, to the extent that any filings within any relevant exchange or regulatory authority occurred during the relevant period or the period relevant to the dispute, these may be considered and could give rise to material relevant to the cross-examination of the expert or to a collateral cause of action.
While the JORC Code is not the only one of its type, it has, by reason of its use in many jurisdictions where Australian-listed companies have invested, become widely known. There is much to be gained by a clear understanding of the Code’s operation.
The diversity, depth and importance of the mining industry to Australia in terms of its economy and people reminds us of the wealth of experience and intellectual capital available in Australia for use in the context of international mining arbitrations.
Hersch Lauterpacht once commented on the utility of local law analogues when addressing problems at an international level. A similar perspective is able to be applied when attention turns to address disputes in the context of an international mining arbitration. Domestic analogues from Australia may shed useful light, or reveal a path to be taken.
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