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The Creaking Bear: latest developments in investment arbitration in environmentally sensitive projects

01 February 2018
Following latest International Centre for Settlement of Investment Disputes (ICSID) case law on the subject (Bear Creek Mining Corporation v Republic of Peru), foreign investors are advised to take extra care when making investments in socially unstable and environmentally sensitive parts of the world. 

This article first appeared in Thomson Reuters: Practical Law Blog on 2 February 2018. 

Following latest International Centre for Settlement of Investment Disputes (ICSID) case law on the subject (Bear Creek Mining Corporation v Republic of Peru), foreign investors are advised to take extra care when making investments in socially unstable and environmentally sensitive parts of the world. 

This may mean that investors might have to bear contributory responsibility for managing the foreign investment environment and the human capital that resides within it. Foreign investors will not be able to hide behind a full protection and security (FPS) standard, in the hope that the host state will provide reliable social stability where the investment itself is the prime cause of political and social instability. In this context, the Indigenous and Tribal Peoples Convention 1989 (ILO Convention 169) may play a decisive role in managing the foreign investor’s conduct in the host state and require an investor to consult with indigenous communities affected by the investment to ensure the proper conduct of the investment. Ultimately, whether the investor may be held contributorily liable or not will be a question of evidence on a case-by-case basis, but as the dissenting opinion in this case demonstrates, there is a tangible risk that a tribunal may go either way.

By way of background, the claimant, Bear Creek, a Canadian mining company, decided to invest in a silver mining project, the Santa Ana Project, in Peru, in an area populated by a number of indigenous communities. Pursuant to the Peruvian constitution (which prohibits direct and indirect foreign ownership of natural resources, such as mines, in Peru), in order to be able to take ownership under Peruvian law, a foreign investor must make out a case for a “public necessity” by way of an official ministerial decree. Securing the adoption of such a decree in the form of Supreme Decree 83, Bear Creek received the Peruvian government’s approval of its investment in the Santa Ana Project, subject to obtaining relevant operating licences and a so-called “social licence”. The social licence essentially required Bear Creek to secure local support for the project, in particular from the various indigenous communities present in the project area. Following continuous social unrest, the Peruvian government was ultimately forced, by adoption of Supreme Decree 32, to revoke Supreme Decree 83 and, with it, Bear Creek’s authorisation to own mineral concessions in the project area.

Following those events, Bear Creek brought arbitration proceedings against Peru, under the Peru-Canada Free Trade Agreement (FTA), before ICSID. In essence, Bear Creek advanced a number of claims, including in particular a claim for unlawful expropriation through adoption of Supreme Decree 32 of its investment in the Santa Ana Project, breach of the minimum standard of fair and equitable treatment within the meaning of the Peru-Canada FTA, and breach of the Peruvian government’s obligation of FPS.

The tribunal (composed of Dr. Michael Pryles and Professor Philippe Sands QC as co-arbitrators and chaired by Professor Karl-Heinz Böckstiegel) found in favour of Bear Creek. In examining the claimant’s claims, the tribunal considered that, given its findings on the expropriation claim, it was not required to investigate further the balance of claims advanced by Bear Creek. On the expropriation claim more specifically, the tribunal found that Supreme Decree 32 constituted an indirect expropriation within the meaning of Article 812.1 (Annex) of the Peru-Canada FTA. Relying on the express wording of that Article, the tribunal concluded that the revocation by the Peruvian government of Supreme Decree 32 had an obvious economic impact on the Santa Ana Project and interfered with Bear Creek’s distinct, reasonable expectations in relation to its investment in the project. According to the tribunal, the Peruvian government also violated the requirements of due process of law under Article 812.1 of the FTA, having failed to consult Bear Creek on the anticipated adoption of Supreme Decree 32. As a result, the tribunal concluded that Supreme Decree 32 constituted an unlawful indirect expropriation in violation of Article 812 of the Peru-Canada FTA.

In recognition of the above violation, the tribunal awarded Bear Creek a total amount of around US $18.2 million in damages, which equated to the actual claimed expenses in relation to its investment in the Santa Ana Project. This, no doubt, fell far short of the US $522 million originally claimed in damages, but the tribunal found that, given that operations of the silver mine had not yet started (not to mention all relevant operating licenses obtained), Bear Creek could not prove a better entitlement (for example, to loss of profit). The tribunal refused to reduce the amount for contributory liability in the terms claimed by the Peruvian government, on the basis that the respondent had failed to prove that Bear Creek contributed to the demise of the Santa Ana Project.

That said, Professor Sands, appointed by the Peruvian government, dissented. In his dissenting opinion, he disagreed with the majority’s assessment of damages. Pursuant to Professor Sands, contrary to the findings of the majority, the evidentiary record of the arbitration clearly demonstrated the claimant’s contributory liability for the events and the social unrest that ultimately led to the adoption of Supreme Decree 32 and the loss of the claimant’s investment. According to Sands, it was apparent from the evidentiary record that Bear Creek had failed to take all relevant measures to address concerns of all indigenous communities affected by the Santa Ana Project and not only a select few. Bear Creek’s failures to obtain a social licence were of its own making and not attributable to the Peruvian government. In Sands’ words, the Canada-Peru FTA was not, any more than ICSID, an insurance policy against the failure of an inadequately prepared investor to obtain such a licence. On that basis, Sands advocated splitting the damages awarded by the majority in half.

Bear Creak appears to reflect what could be taken as a new generation approach to environmentally sensitive investments. It would appear that in these types of investments, the burden of compliance is shifting to the foreign investor, who is expected to be familiar with the risks that are inherent in an investment in an environmentally sensitive area. The investor will have to comply with provisions of international law, including for example the ILO Convention, even if such instruments do not impose direct obligations on private investors (but only governments). As seen in Urbaser v Argentina, such instruments can produce legal effects on private investors in the terms demonstrated in the present case. Such compliance may require a private investor to contemplate and make arrangements for the timely implementation of a social communication program in order to prevent the loss of its own investment (see, for example, Abengoa v Mexico).

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