Mining projects, by their very nature, are commercially risky investments. There is never a guarantee that significant upfront expenses at the exploration stage will lead to commercially profitable operations at the exploitation stage for any given deposit. Add to this the fact that many of the most promising mining prospects in the world are found in countries that suffer from varying degrees of political and economic instability, and the risks can increase exponentially.
Traditionally, when their operations were subject to discriminatory measures, unfair treatment, or expropriation, foreign investors had only two means of addressing the problem: seek a diplomatic resolution of the issue between the investor’s government and the host state government, or take action in the domestic court systems of the host state. However, achieving an effective diplomatic resolution of the matter requires strong support from the investor’s government, and the investor has little, if any, control over the process. At the same time, the investor may view the domestic court system of the host state, for one reason or another, as being inadequate or biased towards the host government.
What are BITs?
Bilateral investment treaties (BITs), referred to as foreign investment protection and promotion agreements (FIPAs) in Canada, can serve to alleviate much of the political and non-commercial risk associated with mining ventures and are a powerful tool for businesses seeking protection for their investments in foreign jurisdictions. In the event of a dispute, BITs enable investors to seek monetary damages from the foreign government by bringing a claim before an independent arbitral tribunal.
Over the last decade or so, BITs have quickly emerged as a third option for businesses seeking protection for their investments in foreign jurisdictions. At the end of 2007, there were some 2,500 BITs in force worldwide, over eight times the number of BITs that existed in 1990.
Canada’s BIT and FTA Activity
Within the last couple of years, Canada has stepped up efforts in negotiating BITs, or in some cases free trade agreements (FTAs) that provide for similar investor protections, with a variety of countries that have significant Canadian investment in the mining sector.
For example, on June 20, 2007, the Canada-Peru BIT1 came into force, adding to the BITs that Canada already has with countries in the region where there is significant Canadian investment in the mining sector (such as Ecuador and Venezuela). Canadians are among Peru’s largest foreign investors and the largest foreign investors in the mining sector. The Canada-Peru BIT was the first BIT to be negotiated by Canada in eight years and the first to be based on Canada's new Model BIT. It was followed by the signing of a comprehensive FTA with Peru on May 29, 2008. The investment chapter of the Canada-Peru FTA builds on and includes provisions from the Canada-Peru BIT.
On June 7, 2008, Canada announced the conclusion of FTA negotiations with Colombia. At the time of writing, the text of the Canada-Colombia agreement is not yet available as it is undergoing a final legal scrub, however it is being described as on par with the Canada-Peru FTA with similar investor protections provided under its investment chapter.
Canada is currently negotiating BITs with seven countries, including Tanzania, Madagascar and Mongolia (all countries with significant mining prospects), and has recently concluded BITs with India and Jordan. Canada expects to conclude BIT negotiations with China shortly. Within the last couple of years, Canada launched FTA negotiations with the Dominican Republic, the Caribbean Community and Jordan. In May of this year, Canada also agreed to participate in exploratory discussions on the possibility of FTA negotiations with Panama.
What Protections are Available Under Canada’s BITs?
Although the substantive investment obligations imposed on host governments may differ from one BIT to another, they typically include the following:
- non-discriminatory treatment – the foreign investor must be accorded treatment no less favourable than that accorded in like circumstances to domestic investors (national treatment) and investors from any other country (most-favoured-nation treatment);
- standard of treatment – the foreign investor must be accorded fair and equitable treatment in accordance with international law, including full protection and security; and
- expropriation – expropriation or measures equivalent to expropriation must be for a public purpose, nondiscriminatory, in accordance with due process of law, and accompanied by payment of prompt, adequate and effective compensation.
A BIT may include other obligations relating to transfers of profits and other amounts out of the host territory, performance requirements, and host government measures concerning the nationality of senior management and boards of directors.
The primary attraction of a BIT is its dispute resolution mechanism. In addition to government-to-government procedures, BITs also contain a private investor-state dispute mechanism enabling private foreign entities to sue host governments for damages arising out of their failure to comply with their BIT obligations. This mechanism is available regardless of whether the investor already has a contractual or arbitration arrangement with the host state or one of its governmental entities.
Under most BITs, the foreign investor has the option of proceeding with an ad hoc arbitral panel under the United Nations Commission on International Trade Law (UNCITRAL) Rules or proceeding with an institutional alternative, such as an arbitral panel established under the auspices of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). Most BITs contain acknowledgements that each treaty government has consented to the submission of claims to arbitration under the BIT in accordance with the requirements of international conventions for the recognition and enforcement of arbitral awards, including the 1958 New York Convention.
Generally, BITs require that the arbitral proceedings be brought in a state that is party to the New York Convention. Under the New York Convention, contracting parties are required to enforce arbitral awards made in the territory of other state parties. The procedure for obtaining the enforcement of an arbitral award under the New York Convention is relatively straightforward.
The arbitral award does not have to be confirmed by the courts in the jurisdiction of the seat of arbitration. The investor seeking enforcement is only required to supply the court in the enforcing jurisdiction with a duly authenticated original award and the relevant BIT.
Given the significant risks associated with mining operations in foreign jurisdictions, it is critically important that companies understand the BIT protections available to them when considering investing in foreign operations. Certainly, when faced with discriminatory, unfair or expropriatory measures from host governments, BITs offer a potentially powerful means for mining companies to address these challenges, in addition to traditional government-to-government diplomacy or the pursuit of a remedy in the domestic court system.
There are currently at least six reported BIT cases involving the mining sector pending before ICSID and at least one reported BIT case pending under the UNCITRAL Rules against host governments in Burundi, Congo, Venezuela, Bolivia, South Africa and the Kyrgyz Republic. The claims range from in the hundreds of millions to over a billion dollars. Approximately a quarter of all BIT cases filed to date relate to mining or oil and gas exploration activities.