This article is taken from GTDT Practice Guide: Mining 2022. Click here for the full guide.
International energy analysts agree that the transition from traditional energy sources (eg, oil and gas, coal) to renewable energy sources will cause an explosion of demand for mineral inputs. The Paris Agreement, for example, requires the world to quadruple its mineral requirements for clean energy technologies to obtain climate stabilisation by 2040 (defined as global temperature rise at ‘well below 2°C’).2 In order to hit net zero globally by 2050, the world would need to utilise six times more mineral inputs for energy production than are used today.3 To take two concrete examples, the IEA reports that electric cars require six times the mineral inputs compared to conventional automobiles and that onshore wind plants require nine times the mineral inputs compared to those needed for gas-fired plants.4
With this dramatic expected increase in mining for key mineral resources, industry experts also expect an increase in international mining disputes5 – a trend confirmed by data collected by UNCTAD Investment Policy Hub.6 These disputes, in all likelihood, will be geographically concentrated in only a few countries due to the geographic concentration of energy transition minerals (as compared to the geographic dispersion of traditional energy sources such as oil and gas, which can be found in many countries). To cite one example of certain critical minerals needed for electric cars (cobalt, copper, lithium, nickel): the Democratic Republic of the Congo (DRC) is responsible for 70 per cent of the global production of cobalt;7 Chile is responsible for 28 per cent of global copper extraction;8 Indonesia is responsible for 37 per cent of global nickel extraction and Australia is responsible for 52 per cent of lithium extraction.9
Finally, and most significantly with respect to the content of future mining disputes, mining projects often take place in remote areas where there are significant water and energy requirements and require a high degree of coordination with national governments (eg, through the negotiation of concession contracts) as well as local governments and communities where the project takes place.
The necessity for mining investors to liaise with local government and communities makes the concept of a ‘social licence to operate’ – that is, the process in which a mining investor gains approval from the local community where the mining project will occur – a key issue raised in international mining arbitrations. How past arbitral tribunals have dealt with the ‘social licence’ concept can, in turn, encourage companies, governments and legal practitioners to plan strategies to avoid disputes – or to employ effective dispute resolution strategies if any dispute relating to a ‘social licence’ arises. This is the focus of the present chapter.
Social licence to operate – what type of obligation is it?
The social licence to operate (SLO) is a framework coined by mining executive and political risk expert Jim Cooney in 1997 as a way for mining companies to manage growing political risks concerning their mining rights. He describes it as a two-track process involving gaining legal approval from the government and gaining approval via a ‘social licence’ from the local community where the mining would occur.10 The core ideas behind the framework are simple:
- build relationships with all relevant stakeholders in the community;
- be transparent with the stakeholders regarding project developments; and
- allow stakeholders to participate in the decision-making process.
But what started as a tool for companies to plan a successful project in advance is now raised by respondent states as a requirement (or even condition precedent) for a mining company to obtain relief (including compensation) from the state for mining projects that fail – perhaps due (in whole or in part) to tensions or conflicts between the mining company and local communities. This defence is perhaps best captured in the Republic of Peru’s arguments, filed on 24 March 2022, in its investor-state arbitration against Lupaka Gold:
As any responsible and experienced mining operator anywhere in the world knows, obtaining a social license is fundamental to the viability of a mining project; without it, a mining project will likely face severe disruption and may ultimately fail.11
For further detail on the history behind the social licence to operate and an exploration of whether the concept is consistent with the rule of law, please refer to the chapter titled ‘Social Licence and the Rule of Law’ in the previous edition of this publication.12
The social licence to operate is a more specific concept than the concepts generally associated with corporate social responsibility (CSR). Although the concepts may be interrelated, ‘social licence’ is not primarily concerned with the broad social implications of a company’s business practices. Instead, ‘social licence’ focuses on the intimate relationship between a company’s local presence and the community directly affected by its presence. A ‘social licence’ (in common parlance) may not strictly be considered a legal obligation and can be understood by some stakeholders as a social or business norm that is ‘even more important than a legal obligation’.
But for the predictability of legal relationships and outcomes, it is significant that a ‘social licence’ now implicates questions of obligation, breach and remedy (as well as a forum to hear any dispute). In other words:
- When does a mining company have an affirmative obligation to obtain a social licence?
- From what legal instrument does the affirmative obligation to obtain a social licence arise?
- If a mining company has the legal obligation to obtain a social licence, what level of community consultation is sufficient to meet its legal obligation? Are there clear standards against which a mining company’s conduct should be judged when evaluating whether it has met (or breached) the obligation to obtain a social licence?
- What is the consequence on the mining company if it has failed to obtain a social licence?
Indeed, a clear framework setting out the expectations of companies, communities, governments and adjudicators with respect to the requirement of a ‘social licence to operate’ would benefit all actors and contribute to the advancement of a ‘social licence’ legal framework.
Potential sources of the legal obligation to consult local populations
Local laws are critical sources of a legal obligation to consult with the local communities affected by a mining project (and thus, may also be a source of a mining company’s obligation to obtain a ‘social licence’). Respondent states have raised local mining laws as part of their arguments that mining companies have failed to obtain a social licence. Below are some examples of how respondent states have invoked local laws to allege (expressly or implicitly) that a mining company investor has failed to obtain a social licence:
In Lupaka Gold Corp. v the Republic of Peru,13 Peru stressed that the mining investors are required to comply with local laws, including the Peruvian Constitution, the General Mining Law (Supreme Decree No. 014-92-EM, enacted in 1992), the Land Law (Law No. 24656, 13 April 1987) and the Environmental Mining Regulation (Supreme Decree No. 040- 2014-EM).
Peru argued that the local legal framework reflects the social licence requirement, which is applicable to all mining projects in Peru. The state cited Peru’s Environmental Mining Regulation, which (it argued) requires mining companies to (1) reach and fulfil social agreements with local communities; (2) engage local communities at all stages; (3) promote citizen participation processes; and (4) participate in mechanisms for the prevention and resolution of any conflicts that may arise, among other commitments.14
Peru also argued that mining companies operating in Peru are legally required to engage local communities and secure their participation at every stage of a mining project, through the use of an environment impact assessment (EIA) and a social management plan.15 In preparing an EIA, a mining company must identify and engage with all rural communities located within the mining activity’s direct and indirect area of influence.16
Further, Peru also argued that, in preparing its social management plan, the mining company must engage directly with local communities concerning the mining activity through a process called ‘citizenship participation’. Potential local community engagement methods include participatory workshops, informational workshops and public hearings. The law further prescribes that citizen participation must take place in five different stages: (1) before preparation of the EIA; (2) during the preparation of the EIA; (3) during the evaluation phase of the EIA; (4) during the construction of the mine; and (5) during the operation of the mine.17
In South American Silver v Bolivia,18 Bolivia alleged that the mining company infringed on indigenous communities’ right to self-determination and, in particular, self-government to impose its vision of development.19 Bolivia also argued that the fundamental right was internationally recognised in the national laws of Bolivia and its Constitution, and it applies to the mining activity by express provisions in the Mining Law.20
In Copper Mesa v Ecuador,21 Ecuador argued that obtaining a mining concession under the 2000 Mining Law did not translate into immediately enforceable mining rights.22 Rather, Ecuador alleged that the mining company needed to take further steps under the applicable law to undertake actual mining activities, including environmental impact studies and environmental management plans designed to prevent, mitigate, control, repair and compensate environmental and social impacts related to mining activities, as well as requirements of consultation of local communities that may be affected by the contemplated mining project.23
In Bear Creek Mining v Peru,24 Peru argued that the Peruvian legal requirements (eg, Legislative Resolution No. 26253 of 1993) did not require a strict or specific path for a company to seek a social licence but that the citizen participation process for a mining project is covered by two principle legal norms: Supreme Decree 028 and Ministerial Resolution No. 304. Peru argued that these legal norms set out necessary, but not sufficient, steps towards securing a social licence.25 Peru also argued that, in 2001, a Peruvian ministry published a guide advising on best practices for designing and executing a community outreach programme to develop mining activities. Moreover, Peru referenced 2011 legislation entitled the Law on the Right to Prior Consultation to Indigenous Peoples, recognised in Convention 169 of the International Labour Organization, which embraced all of the recommendations of ILO Convention 169.26 Peru also argued that in addition to these procedures, the mining company must reach agreements with all land owners and possessors on the mine sites.27
International legal obligations in legal instruments separate from the investment treaty in question
Respondent states may also invoke international legal instruments (eg, multilateral conventions) that are separate from the investment treaty in question as a source for the obligation to consult with (and obtain approval from) local communities. But, unlike local laws that may provide some guidance on what local-community consultation might entail, international legal obligations found in other treaties are often stated in broad terms or terms that may be difficult to apply in an investment treaty dispute.
For example, in Lupaka Gold Corp. v the Republic of Peru,28 Peru referred to Convention 169 of the International Labour Organization (relating to the right to prior consultation of indigenous and tribal peoples) (ILO 169), as well as the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) as providing further authority for the need for consultation with local communities. More specifically, Peru referred to the following articles of ILO 169:
- article 6.2 (establishing that consultations with indigenous peoples must be carried out in good faith with the objective of achieving agreement or consent to the proposed measure);29
- article 7.1 (providing for indigenous communities to exercise control over development that affects them);30
- article 15.1 (providing for the right of participation in the use, management and conservation of resources pertaining to their lands);31 and
- article 15.2 (providing indigenous peoples with the right to be consulted with respect to the exploration or exploitation of subterranean resources pertaining to their lands).32
Peru raised similar arguments in Bear Creek Mining v Peru.33
A tribunal may need to evaluate whether there is specific language in the investment treaty in question that allows for the application of separate international legal obligations on investors and states, before finding that such obligations are binding in the context of the investment treaty dispute. Each case may present unique legal issues, depending on the facts and the legal instruments that are implicated.
International legal obligations in the investment treaty itself
There are no known investment treaties that contain an explicit obligation for an investor to obtain a social licence to operate (as a condition precedent for treaty protection or otherwise). But some contain obligations that may give rise to affirmative obligations on investors that may potentially be read broadly to include local consultations or social licence, depending on their interpretation. Some examples are below. (The authors note that it is still relatively rare to find investment treaties that impose affirmative obligations on investors, though there appears to be a trend to include such obligations in newer treaties.)
Examples of bilateral investment treaties (BITs) or Model BITs with binding language
Netherlands Model BIT (2019),34 article 7 provides that:
- Investors and their investments shall comply with domestic laws and regulations of the host state, including laws and regulations on human rights, environmental protection, and labour laws;. . .
- The Contracting Parties reaffirm the importance of investors conducting a due diligence process to identify, prevent, mitigate, and account for the environmental and social risks and impacts of its investment;
- Investors shall be liable in accordance with the rules concerning the jurisdiction of their home state for the acts or decisions made in relation to the investment where such acts lead to significant damage, personal injuries, or loss of life in the host state.
Netherlands Model BIT (2019),35 article 23 provides that:
Without prejudice to national administration of criminal law procedures, a Tribunal, in deciding on the amount of compensation, is expected to take into account the non-compliance of the investor with its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.
Morocco–Nigeria BIT (2016),36 article 14 provides that:
Investors or the investment shall conduct a social impact assessment of the potential investment. The Parties shall adopt standards for this purpose at the meeting of the Joint Committee.
Colombia–UAE BIT (2017),37 articles 1(1) and 2.1(b) extend the definition of ‘investor’ to only ‘responsible investors’, or those who make a ‘responsible investment in accordance with the law of the other contracting party.’ Colombia–UAE BIT (2017),38 article 10 provides that the investor has an obligation to conduct its investment ‘in accordance with applicable environmental and labour law of the contracting party.’
Examples of treaties with hortatory language
Some treaties contain hortatory language, but this language could be used as an interpretative tool for binding obligations elsewhere in the treaty, including a commitment to observe local laws.
Morocco-Nigeria BIT (2016),39 article 24 provides that:
Investors should strive to make the maximum feasible contributions to the sustainable development of the Host State and local community through high levels of socially responsible practices.
Argentina-Japan BIT (2018),40 article 17 provides that:
The Contracting Parties reaffirm the importance that each of them encourages enterprises operating within its Area or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines, and principles of corporate social responsibility that have been endorsed or are supported by that Contracting Party.
Austria-Kosovo BIT (2010)41 provides in its Preamble that it is ‘[r]referring to the international obligations and commitments concerning respect for human rights.’
The Canada–Peru Free Trade Agreement (2009)42 (referenced by Peru in Lupaka Gold Corp. v the Republic of Peru43) contains hortatory language relating to CSR, providing in its article 810 that:
Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labour, the environment, human rights, community relations, and anti-corruption. The Parties remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies.
In their concession contracts, a state party (or its state-owned company) and an international mining company acting as an investor may agree to require a mining company to conduct consultation with local communities or even to reach certain agreements with local communities. These contractual requirements may work in concert or in addition to other legal or regulatory requirements.
Lessons learned – key arbitral awards dealing with social licence
Through our analysis of past cases, the authors observe that respondent states typically raise arguments relating to a ‘lack of a social licence to operate’ in three distinct stages of arbitration proceedings.
Admissibility objections in investment arbitration
Respondents may raise an illegality objection or ‘establishment’ requirement as an admissibility objection, arguing that the investor has failed to establish its investment in accordance with the laws of the host state. No such admissibility objection is known to have been accepted by an arbitral tribunal, primarily because a dispute between a mining company and the local population typically occurs during the course of a project and not at the project’s inception (ie, when an investment is first established in a host state). In Bear Creek Mining v Peru, for example,44 the tribunal concluded that questions of the investor’s conduct (including whether the investor obtained a social licence or met any applicable requirement for local community consultation during the project) could not be raised as an admissibility objection. Instead, the tribunal determined that these issues should be considered in evaluating the merits of the mining company’s claims and in the quantification of possible damages.45
Likewise, in Copper Mesa v Ecuador,46 Ecuador submitted, as a jurisdictional/admissibility objection, the issue of illegality. Ecuador argued that the mining company’s conduct constituted severe breaches of legal principles governing corporate social responsibility and was contrary to international public policy, including the UN Global Compact, the OECD Guidelines, and the Voluntary Principles.47 The Tribunal concluded that the wording of article 1(g) of the relevant treaty provided that the ‘legality’ requirement (as a jurisdiction or admissibility hurdle) applies when the investment is made, and it does not extend to the mining company’s subsequent operation, management or conduct of its investment.48 Therefore, the tribunal rejected Ecuador’s illegality objection.49
Similarly, the tribunal in South American Silver v Bolivia rejected Bolivia’s illegality objection on the basis that Bolivia had not shown that the mining company’s alleged violations went ‘to the essence’ of the investment, therefore would amount to an illegal investment.50 Therefore, the tribunal held that Bolivia’s allegations regarding the mining company’s illegal conduct should be considered with the merits.
Respondent states may raise the equitable doctrine of ‘unclean hands’ as an admissibility objection or as a merits issue that precludes recovery of specific claims for damages, compensation and relief. The doctrine of unclean hands was unsuccessfully raised as an admissibility objection by Ecuador in Copper Mesa v Ecuador51 and by Peru in Bear Creek Mining Corporation v Republic of Peru,52 although the tribunal in both cases did consider the mining company’s conduct when evaluating the merits and determining damages. In South American Silver v Bolivia, the tribunal held that the treaty did not expressly reference the unclean hands doctrine and further concluded that it was not convinced that the unclean hands doctrine is a general principle of international law or that it forms part of international public policy.53
Contributory negligence and contributory fault (reduction of quantum)
Respondent states have had the most success in decreasing the compensation awarded to a mining company by alleging that the mining company’s conduct was a contributing factor in the damages sustained by the mining company. For example, in Copper Mesa v Ecuador,54 the tribunal performed a factual analysis, held that injury was not caused solely by Ecuador’s wrongdoing, and awarded a quantum reduction by 30 per cent. In so doing, the tribunal referred to article 39 of the ILC Articles on State Responsibility in its analysis of contributory fault,55 and concluded that the mining company’s injury was jointly caused by Ecuador’s unlawful expropriation as well as the mining company’s contributory negligent acts, omissions and unclean hands.56
In Bear Creek Mining Corporation v Republic of Peru,57 Peru’s primary defence was that the mining company failed to obtain a social licence to operate and thus contributed to the protests. Though the arbitral tribunal found that the mining company was entitled to compensation, it awarded only US$30 million of the US$500 million claimed based on the tribunal’s rejection of the ‘discounted cash flow’ or DCF method, and the tribunal’s related conclusion that the investor was entitled only to compensation for amounts actually invested.58 The majority of the tribunal refused to reduce the mining company’s compensation based on a theory of contributory fault, but the dissenting arbitrator (Professor Philippe Sands) noted in a dissenting opinion that he would have decreased the quantum by half based on the mining company’s alleged violation of ILO Convention 169.59
Summary of trends observed from past international arbitration cases
Based on past international arbitration cases, the authors observe the following trends:
- Both mining companies and host states would benefit from clearer legal rules regarding requirements on mining companies to conduct social consultations with local communities where mining operations take place.
- Mining projects tend to cause protests and opposition movements from local communities more often than traditional energy (eg, oil and gas) projects, which suggests that additional education and investment may assist in ensuring local communities obtain tangible benefits from and observe measurable benefits from mining projects in a similar way as traditional oil and gas projects.
- A mining company’s failure properly to consult and deal with social conflicts with local communities can result in the revocation or termination of mining rights and licences – and a mining company should consult with qualified counsel to ensure that their investment is protected by applicable bilateral and multilateral investment treaties.
- If a mining project fails due to a failure to obtain approval from local communities, past cases suggest that it may be difficult to obtain (as compensation) the total expected value of the investment, and investors are more likely to obtain the actual money invested in the project.
- If a mining company is found to have contributed to its own loss (through unlawful or negligent conduct in the host state – especially in regard to disputes with local communities), this may substantially reduce the compensation awarded.
Future considerations for state parties and mining companies to mitigate uncertainty
In light of the uncertain legal framework for social licence and local-community consultation, parties to concession agreements may consider:
- Setting out in their concession contracts the exact obligations (or lack of obligation) that a mining company has with respect to social licence and consulting with local populations.
- Being proactive during the initial contracting phase in considering specific challenges and risks that may arise in the specific locale of the mining project.
- Obtaining commitments from local government or community leaders of support for the mining project or guarantees of commitments from national governments regarding support for the mining project in light of local community opposition.
- Setting out in concession contracts the exact parameters by which a mining company shall be required to obtain community support, with measurable (and not subjective) obligations. This may include:
- specifying how many meetings between the mining company and each local community is required and how often meetings would occur (quarterly, yearly, etc);
- specifying how meetings will be memorialised (minutes, recordings, etc); and
- if there are disputes between local communities and mining companies, a dispute resolution or mediation provision shall provide a definitive outcome regarding a solution (with specified remedies for local populations and the mining company).
- Including specific reference to local and international laws that apply to the mining project (after first consulting with qualified legal counsel).
- Negotiating a stabilisation clause that provides the investing party (ie, the mining company) with some protection against future changes in regulatory or local law.
By negotiating specific legal obligations related to the general concept of ‘social licence’, parties can devise strategies to resolve potential issues before they escalate and can mitigate unpredictable outcomes (including litigation risk) if a dispute or arbitration arises from the mining project later on.