18 Oct 2022
(ICSID Case No. ARB/12/1 - A case study)
Introduction:
Since 1996, Congress has required federal courts to grant full faith and credit to arbitral awards from the International Centre for Settlement of Investment Disputes (ICSID). In this article, we will shed light on a decade-long dispute between two major parties with regard to an International Investment agreement; a joint venture agreement and the role of ICSID and its decision that triggered events that ultimately landed the dispute here.
Parties to the Case:
Claimant: Tethyan Copper Company Pty Limited, a company incorporated and registered under the laws of Australia and owned in equal shares by Antofagasta plc, a company incorporated in the United Kingdom and headquartered in Chile, and Barrick Gold Corporation, a company incorporated in Canada, hereinafter referred to as “Claimant” or “TCC".
Respondent: The Islamic Republic of Pakistan, hereinafter referred to as “Respondent” or “Pakistan".
Case Background and Facts:
The Chagai Hills, located in Tethyan Belt, stretches from Turkey and Iran to Pakistan, and contains a significant quantity of copper deposits in addition to being one of the world’s five largest gold mines. Although having an abundance of valuable natural resources, they remain unexploited due to Pakistan’s lack of financial and technical know-how to mine these areas. As a result, agreements are made with foreign mining firms, who then want a substantial portion of the profits.
In order to enhance the mining capabilities in Chagai Hills, a Joint Venture Agreement, Chaghi Hills Exploration Joint Venture Agreement (the CHEJVA) was signed in January 1993 between the Balochistan Development Authority (BDA) and BHP Minerals Intermediate Exploration Inc., a US Company (BHP), for the exploration of minerals in the Pakistani region of Reqo Diq. The applicable law of the CHEJVA was Pakistani law which was stated to incorporate “principles of international law”. The CHEJVA also provided that disputes would be resolved by the London-based ICSID arbitration.
The CHEJVA has undergone numerous revisions in the years following its signing that have favoured mining firms. The CHEJVA was modified to replace and add new parties, as well as relaxation of the 1970 Balochistan Mining Concession Rules (BMCR) to make exploration in the area easier. For mining businesses in extremely challenging circumstances, BMCR 1970 created specific facilities.
On March 4, 2000, a change to CHEJVA was put into effect that allowed for the entry of new mining companies and replaced the BDA with the Government of Balochistan as the new contracting party. As a result, Tethyan Copper Company (TCC) (an Australian company) was created and an exploratory alliance with BHP was established through the option agreement. In these situations, forming a new company is a way to distribute risk because it has a separate legal personality from its parent company. Losses will be borne by the new firm, while earnings can still be retained by the original company. Additionally, an Addendum was signed between BDA and BHP to the CHEJVA along with the Governor of Balochistan on behalf of the Province of Balochistan. In 2006, the parties to the Addendum entered into a novation agreement with TCC whereby the parties agreed to novate BHP’s rights and obligations in the CHEJVA to TCC, known as the Novation Agreement.
Through the execution of a Novation Agreement, TCC took over BHP’s rights to 75% of the joint venture and the authority to explore and develop any gold and copper deposits discovered. The changes made to CHEJVA, although were to accommodate the removal and addition of contracting parties as well as the relaxation of BMCR 1970, the constitutionality of such changes was called into question.
Procedural History:
Soon after the 2006 agreement, petitions contesting the legality of the CHEJVA and subsequent petitions were submitted to the Balochistan High Court on the ground inter alia that the CHEJVA was executed contrary to the provisions of Pakistani law, that the Balochistan government had broken the law by loosening the applicable regulations and awarding mineral titles for Reko Diq to BHP. By its order dated 26th June 2007, the Balochistan High Court dismissed the petition and upheld the validity of the CHEJVA and ruled that the respondents’ actions, including the enactment of the BMR and the relaxation of the BMCR 1970, were all lawful and valid.
As a result of their dissatisfaction with the Balochistan High Court’s rulings, constitutional petitions opposing the Balochistan High Court ruling were submitted to the Supreme court of Pakistan (SC) challenging the license(s) given to BHP/TCC. According to the petitions, national laws safeguarding the interests of the people of Balochistan and Pakistan had allegedly been broken, casting doubt on the legality of the licenses issued to mining firms on the grounds that they were unjust, lacked fairness and lacking in transparency.
In February 2011, a lease application for mining was submitted by the TCC with the Balochistan government however, the Balouchistan government rejected the request in November 2011. The rejection was based on the fact that the smelting and refining should be done in Pakistan as opposed to it being done outside Pakistan, the royalty rates should be increased, the financial model should be reconsidered and the local population should be more involved in the project.
The Decision of the SC And TCC’s Approach Towards the Arbitration Proceedings:
During the SC proceedings, TCC argued that BHP was the target of the claims made regarding the CHEJVA and the loosening of local laws, not TCC, which was not even in existence at the time. In any case, the invalidity of the CHEJVA shouldn’t affect the legality of the Novation Agreement. The Novation Agreement had the effect of putting an end to the prior contract and replacing it entirely with the terms of the new agreement with the parties’ mutual consent, according to TCC, who claimed that a novation of contract does not transfer a right or liability under the original contract but rather causes it to be void. In light of this, TCC requested, among other things, specific performance of the CHEJVA and the granting of specific mining leases in the Reko Diq region.
Accordingly, TCC started ICC and ICSID arbitration proceedings against the Government of Pakistan after articulating its claim before the SC and making a number of interim applications (but before the SC rendered a final verdict). The ICC claim was started in accordance with the CHEJVA arbitration agreement, and the ICSID arbitration procedures were filed in accordance with the bilateral investment agreement between Australia and Pakistan (BIT). Adequately, TCC asked for the same relief from both arbitration tribunals as it did from the SC. On 7 December 2012, the SC ordered the Government of Pakistan to ask the relevant ICC and ICSID tribunals not to take any actions until the matter had been resolved by the SC.
In a detailed judgment on 7 January 2013, the SC three-judge panel, which was made up of former Chief Justice Iftikhar Muhammad Chaudhary, Justice Azmat Saeed, and Justice Gulzar Ahmed, upheld most of the claims of the individual petitioners and concluded that the CHEJVA was void and illegal because the Balouchistan government exceeded its powers by signing it, and invalid, because it was contrary to public policy. Therefore, since the CHEJVA itself was void, the Addendum and the Novation Agreement as well as all other contracts related to the CHEJVA were equally null and void. Regarding TCC’s claims that the illegality had no bearing on the Novation Agreement, the SC ruled that the original agreement that was to be substituted must be valid in order for the novation to be executed. Any revisions, variations, or novation’s made after a contract is declared invalid are equally void. Furthermore, in spite of a novation, a collateral illegal contract or an earlier illegal contract would still be illegal. Regarding the arbitration clause, the SC stated that because Pakistani law was the legislation that applied to the contract, and Pakistani courts should be used to evaluate whether or not the CHEJVA was legitimate. The SC made three significant considerations in this regard:
- New York Convention’s Article 2(3) – incorporated in Pakistan’s domestic law – provides that: “When a court of a contracting state is faced with an action involving an agreement between the parties that falls under the purview of this article, the court shall, at the request of one of the parties, refer the parties to arbitration—unless the court determines that the said agreement is invalid, ineffective, or incapable of being carried out.”. Accordingly, a local court seized of an action has the authority to decide whether an arbitration agreement is invalid, ineffective or unable to be carried out. The SC did just that.
- Allegations of corruption were brought forward during the SC sessions. According to Article 34 of the UN Convention Against Corruption 2003, “each State Party shall take action, in accordance with the core values of its domestic legislation, to cure the effects of corruption.” In addition, Article 34 states that state parties may consider characteristics of corruption in judicial actions to nullify or terminate a contract. Therefore, the SC now has an additional legal foundation to rule on the CHEJVA and its related documents.
- The parties that filed the petition with the Pakistani courts to challenge the validity of the CHEJVA were not parties to the CHEJVA and, thus, were not parties to any arbitration agreement. Therefore, the validity of the arbitration clause contained in the CHEJVA was a matter for the courts to consider, not an arbitral tribunal.
Finally, in relation to the ICSID arbitration, the SC further emphasized that the protections provided to investors under the Australia-Pakistan BIT were stated to be “in conformity with [each side’s] applicable laws and investment policies applicable at the time “. Therefore, the Australia-Pakistan BIT requires that investments must be made in compliance with Pakistani law; otherwise, the investor will not be entitled to any protection under the BIT. To support its stance, the SC cited a number of previous rulings from investment treaty tribunals.
The Proceedings Before the ICSID and the Tribunal’s Decision:
On November 28, 2011, TCC filed an ICC arbitration claim to the ICSID seeking USD 11,430,000,000 (US dollar eleven billion four hundred thirty million) in damages against Pakistan. After the Balochistan government rejected the company’s CHEJVA lease application, the company alleged that Pakistan’s denial of the mining lease violated the FET, expropriation, and non-impairment provisions of the BIT and was granted a favourable preliminary decision in 2014. According to TCC, the company has already invested more than USD 220,000,000(US dollars two hundred twenty million) (Rs 35 million by the time the provincial government unexpectedly refused to grant them the mining lease required to continue operations and claimed USD 11,430,000,000 (US dollar eleven billion four hundred thirty million) in damages for the unexpected and sudden termination of the agreement).
On July 23, 2012, TCC applied for interim court measures to maintain its rights to the Reko Diq mine. The company stressed that there is nothing in the Australia-Pakistan bilateral investment agreement that prevents investors from demanding specific performance (as compensation) rather than compensation. In its December 13, 2012 decision on the plaintiff's motion for interim measures, the court held that it had the power to order interim measures to protect the rights of a party and that it could not presume that the TCC had no right capable of being enforced by specific performance. However, there was insufficient evidence to show that the interim measures order was necessary to avoid irreparable harm (although the court ordered Pakistan to inform it and the TCC of its plans and intentions with respect to certain deposits).
In July 2017, the ICSID ruled that the TCC had a legitimate expectation of receiving a mining lease, because of assurances given by Pakistan in the CHEJVA, its regulatory framework and direct guarantees from government officials and concluded that there was no wrongdoing in CHEJVA – the ground on which the SC of Pakistan had terminated the agreement and that Pakistan was liable to pay damages.
On July 12, 2019, the ICSID awarded damages of USD 5,840,000,000(US dollars five billion eight hundred forty million), USD 4,870,000,000 (US dollars four billion eighty-seven million) in addition to USD1,753,000,000 (US dollars one billion seven hundred fifty-three million`) in plus approximately of USD 62,000,000 (US Dollars sixty-two million) in costs to TCC. The ICSID found that Pakistan had illegally denied the TCC a lease to mine copper and gold deposits at the Reko Diq mine, violating fair and equitable treatment standards (FET) and that the state had committed an unlawful expropriation under the Australia-Pakistan bilateral investment treaty.
Although the decision was in his favor, TCC Chairman William Hayes offered Pakistan a new deal to secure his business and legal protections in Pakistan. Pakistan, already dismayed with the decision, considered going for an appeal favorable instead of going for conciliation. Thus, in November 2019, Pakistan had challenged the award and initiated proceedings seeking its annulment. In March 2020, the Attorney general of Pakistan (AGP) office announced that it had filed a request for the annulment of the award rendered by the ICSID on July 12, 2019. In addition, according to Article 52(5) of the ICSID Convention, Pakistan requested a provisional stay on the enforcement of the award imposed against the country on November 18, 2019. The application caused a provisional stay of enforcement, as required by the ICSID rules. Seven months later, the Annulment committee decided to keep the stay under specific conditions. The committee demanded that Pakistan provide an "unconditional and irrevocable" bank guarantee or letter of credit (LC) from a respectable international bank based situated outside of Pakistan, for 25% of the award, plus accrued interest as of the decision date. Pakistan was given 30 days to provide the requested security. However, Pakistan missed the deadline and was unable to provide the bank guarantee or letter of credit for 25% of the amount.
On the other hand, in order to retrieve its money from Pakistan, TCC initiated a case before the high court of justice in the British Virgin Islands (BVI). Thus, on December 16, 2020, the BVI High court through an ex-parte order issued judgment in favour of TCC and ordered to freeze 100 percent shares of the Pakistan International Airlines Investment Limited, including the company’s interests in the Roosevelt Hotel in Manhattan, New York, and Scribe Hotel in central Paris as well as froze 40 per cent interest of PIA in a third entity, Minhal Incorporated. The BVI court in its December 16 order had also appointed the receiver on an interim basis. Thereafter, a review appeal was submitted by Pakistan, and the same court on May 24, 2021, retracted its earlier order and ruled that PIA could retain its two assets, a situation that Pakistani officials described as a legal success. The BVI high court not only retracted the TCC plea for attachment of the PIA assets but also imposed USD 5,000,000 (US dollars five million) costs as well as USD 50,000 penalties on the company.
Motion To Stay Enforcement:
Following ICSID’s decision, TCC filed a petition in the United States District Court of Columbia seeking an order confirming the arbitration award and entering judgement in the amounts stated. Pakistan appealed the award to the ICSID, requesting that it be annulled or modified in its entirety.
Washington DC’s District Court has dismissed Pakistan’s motions for stay enforcement of the USD 6,000,000,000 (US dollars six billion ) award against the country in Reko Diq case by the ICSID in July 2019.
Investment Arbitration Reporter (IA Reporter) has reported that Pakistan alleged that it had not waived its sovereign immunity under the Foreign Sovereign Immunities Act (FSIA) in the absence of a valid arbitration agreement. The court, however, stressed that it has no authority to consider such an arbitrability argument with relation to an ICSID award under the FSIA. It further stated that even if it were permitted to do so, it would owe deference to the arbitration tribunal’s decision on this matter.
The court then held that the US law implementing the ICSID Convention requires courts to give awards “the same full confidence and credibility as if the arbitration award were final”. While Pakistan argued that no such confidence and credit should be granted because the arbitration tribunal lacks jurisdiction, however, the court quickly dismissed the argument, emphasizing that “long-standing precedent prevents any attempt to recycle a lost jurisdictional argument”. As a result, Pakistan’s move to dismiss was denied.
The IA Reporter further stressed that the award is final and that Pakistan has an obligation to comply with the award in accordance with Articles 53(1) and 54(1) of the ICSID Convention, as well as to implement the pecuniary requirements arising under the award. The court then instructed the parties to agree to a joint proposal for a final judgment consistent with its Memorandum Opinion, including the current amounts for pre- and post-arbitration interest.
Current Status:
The Pakistani government was actively working with TCC - a consortium formed by the Canadian-based mining company Barrick Gold and Chile’s Antofagasta to work specifically on the Reko Diq project, to reach a settlement as the country faced a USD 6,500,000,000 (US dollars six billion five hundred million )penalty as a result of its top court’s decision to deny the firm of a mining lease.
Therefore, in order to revive and advance the Reko Diq project, Pakistan and Barrick Gold reached an out-of-court deal in March 2022 whereas, Antofagasta withdrew from the project. Half of the new project’s shares would be held by Barrick Gold and the remaining half would be divided between the Baloch state-owned firms and Pakistani federal companies. The project would involve a USD 10,000,000,000(US dollars ten billion) investment and would create a total of 8,000 jobs. USD 11,000,000,000 (US dollars Eleven billion) in penalties imposed by ICSID and the London Court of Arbitration would be set aside. Henceforth, both the TCC and Pakistan will withdraw all of the legal proceedings permanently. Visit our official website to know more about the latest legal updates and facts.