Australian investor wins big at ICSID

In brief 6 min read

In a landmark decision, the Government of Pakistan has been ordered to pay $US5.84 billion ($A8.3 billion) to Australian mining company Tethyan Copper Company after its application for a mining lease was rejected. We look at the significance of this decision for Australian investors with investments overseas – in particular, the opportunities arising from investor-state dispute settlement.

Key takeaways

• Australian companies benefit from the protection of a broad network of investment treaties, and are increasingly utilising them to protect their foreign investments and mitigate political risk.
• These agreements require foreign governments to accord Australian investors certain legal protections and, depending on the treaty, may permit recourse to international arbitration in the event of a dispute.
• This decision is the latest example of an Australian corporate utilising an investment treaty, and is particularly significant given the size of the award – one of the largest ICSID awards to date.

Background

On 12 July 2019, the Government of Pakistan was ordered to pay $US5.84 billion ($A8.3 billion) to Tethyan Copper Company (TCC), a joint venture between Canadian miner Barrick Gold and Chilean Antofagasta Minerals. TCC sought to develop and operate an open-pit copper-gold mine in Pakistan, but the Provincial Government of Balochistan rejected its application for a mining lease.

Using investment treaties to protect your foreign investments

TCC based its claim on alleged violations of the bilateral investment treaty (BIT) between Australia and Pakistan (Australia-Pakistan BIT). The Australia-Pakistan BIT contains an investor-state dispute settlement (ISDS) mechanism, which permits an investor from one State Party to initiate international arbitration against the Government of the other State Party where that Government violates the protections set out in the treaty. As no separate contractual relationship with the Government is required to initiate an ISDS proceeding, TCC was able to bring a claim under the Australia-Pakistan BIT by virtue of its corporate nationality as an Australian investor. The Australia-Pakistan BIT is one of Australia's 18 BITs and seven free trade agreements (FTAs) that contain an ISDS mechanism.¹ TCC initiated proceedings before the International Centre for Settlement of Investment Disputes (ICSID), the pre-eminent institution for the resolution of ISDS cases.

What happened to TCC that prompted the claim?

In 1993, the Balochistan Development Authority and BHP Minerals Intermediate Exploration Inc (BHP) signed the Chagai Hills Joint Venture Agreement (the CHEJVA) with the purpose of exploring gold and copper reserves in the Reko Diq area in Balochistan. BHP's rights and obligations under the CHEJVA passed to TCC in April 2006 under a novation agreement.

TCC completed a scoping study in 2007 and pre-feasibility studies in 2009 and 2010, before formally submitting a feasibility study, as required under the CHEJVA, to the Government of Balochistan in August 2010. Since 2006, TCC claims to have invested more than $US220 million in the project.² In February 2011, TCC's local subsidiary Tethyan Copper Company Pakistan (Private) Limited (TCCP) submitted a mining lease application (together with its environmental and social impact assessment). According to TCC:

TCC believes that, under the Chagai Hills Joint Venture Agreement ('CHEJVA') between TCC and the Government of Balochistan, as well as under the Balochistan Mineral Rules 2002, TCCP was legally entitled to the mining lease subject only to 'routine' government requirements.³

However, in November 2011 the Provincial Government of Balochistan rejected TCCP's application for a mining lease. TCC contended that it satisfied (and exceeded) the requirements to be granted a mining lease under the CHEJVA and applicable rules, and that without the mining lease, it could not earn any value from its investments.⁴ Pakistan submitted that, as a project of this scale had never been executed in Pakistan, the applicable Government procedures could not be considered 'routine'.⁵

The proceedings before ICSID and the Tribunal's decision

TCC filed its request for arbitration on 28 November 2011. TCC claimed that Balochistan rejected its mining lease application and was seeking to develop Reko Diq 'on its own' or to 'transfer some or all of it to third parties'.⁶ TCC contented that denial of the mining lease constituted an expropriation for the purposes of the Australia-Pakistan BIT.⁷

On 23 July 2012, TCC sought provisional measures from the Tribunal to preserve its right to mine Reko Diq. The company submitted that nothing in the Australia-Pakistan BIT prevented an investor from seeking specific performance (as restitution) instead of compensation. Pakistan denied that TCC had the right to a mining lease or any right capable of specific performance. In its Decision on Claimant's Request for Provisional Measures of 13 December 2012, the Tribunal held that it had the power to order provisional measures to preserve a party's rights and that it could not assume that TCC did not have a right capable of enforcement by specific performance.⁸ However, on the facts there was insufficient evidence to show that an order of provisional measures was necessary to avoid irreparable harm (although the Tribunal ordered that Pakistan inform it and TCC of its plans and intentions regarding particular deposits).

In March 2017, the Tribunal ruled that Pakistan had violated several provisions of the Australia-Pakistan BIT,⁹ and, on 12 July 2019, awarded TCC $US5.84 billion in damages ($US4.087 billion plus $US1.753 billion in interest), as well as nearly $US62 million in costs.¹⁰ The calculation of damages was based on the fair market value of the project at the time of the denial of the mining lease.¹¹ While this falls short of the $US11.43 billion TCC reportedly claimed, it remains one of the largest ICSID awards in history (the largest being the $US8.7 billion award handed down to ConocoPhillips earlier this year).

What next for Pakistan?

Investment treaty arbitration leaves limited scope for an unsuccessful party to appeal against the Tribunal's decision. This is particularly so with ICSID arbitration, as all 154 States (including Pakistan) that have signed and ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) are bound to recognise and enforce decisions of ICSID tribunals as if they were a final judgment of a court in that State. Pakistan is not able to challenge the award before Pakistani courts. Accordingly, the only recourse left to it is to apply for full or partial annulment on the limited grounds set out in the ICSID Convention (eg that the Tribunal manifestly exceeded its powers, there has been a serious departure from a fundamental rule of procedure, or the award failed to state the reasons on which it is based).¹² However, the statistics do not weigh in Pakistan's favour. There have been 170 awards rendered since 2011, and of these, 60 applications for annulment have been made – 37 were rejected, 18 were discontinued, and just five decisions successfully annulled the award in part or in full.

Nevertheless, TCC Chairman William Hayes is reported to have said that TCC remains willing to discuss the potential for a negotiated settlement with Pakistan; an approach Pakistan has welcomed.¹³ Given the potential difficulties and costs involved in seeking enforcement of the award against Pakistan's assets abroad, it remains to be seen whether TCC and Pakistan will be able to negotiate a settlement.

What does this mean?

This is a landmark decision for Australian investors. It demonstrates the potential of ISDS to operate as a means of mitigating the political risk inherent in investing overseas (particularly in higher-risk jurisdictions); and may also encourage Australian investors to consider the degree to which their foreign investments are protected by investment treaties (and, potentially, to restructure where those protections are inadequate). As Australia's network of investment treaties with ISDS mechanisms continues to expand, Australian companies are increasingly well placed to benefit from the protections that ISDS affords.

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