The global risk landscape for the mining sector is multifaceted and increasingly volatile. This is by virtue of the complexity of current and predicted global geopolitical and macroeconomic risks combined with the nature of the industry. Mining investments are capital-intensive and long-term. The physical assets involved are enormously valuable and are frequently located in physically challenging environments. Assets are generally of strategic, political and economic importance to the host state and local communities. The sector in most jurisdictions is therefore unsurprisingly heavily regulated and invariably entails collaboration between mining investors and the state or state-owned entities and other local stakeholders.
As a result of all these factors, mining disputes are generally high-stake matters and rarely simple. Mitigating the risks of disputes must therefore be the keystone of any mining project. Investors need to ensure mechanisms are in place to manage or transfer risk throughout the life cycle of the investment.
One critically important protective mechanism for Canadian investors in foreign mining sectors, as well as overseas investors in Canada’s mining sector, can be found within the investment treaty regime.
The international investment treaty regime
There are over 3,000 international treaties globally that include protections for foreign investors. These are state-to-state agreements that can be found in bilateral investment treaties, free trade agreements as well as other multilateral treaties or investment agreements. Common substantive protections offered in investment treaties include the right to fair and equitable treatment, full protection and security, national treatment, most favoured-nation treatment, no expropriation without full and prompt compensation, and free transfer of capital.
In addition, investment treaties will commonly provide a procedural mechanism for investor-state dispute settlement (ISDS). This is what gives the substantive protections real teeth. ISDS provisions often provide that the foreign investor has the right to bring proceedings against the host state directly in a neutral forum – usually international arbitration – before impartial adjudicators and in accordance with transparent rules, should the host state breach its treaty obligations.
This is a powerful avenue of recourse for foreign investors. Without such rights they may have little to no remedy for state misconduct under domestic legal regimes or before local courts. The fallback is to seek state-to state intervention, which is not always available nor effective, and can lead to the politicization of what is often, essentially, a commercial dispute.
The protections offered by investment treaties are particularly important for mining investments. For example, it is rare that a host government will accept a foreign law as the governing law of a mining licence or contract that gives a foreign investor rights over natural resources within its territory. The investor is therefore largely at the mercy of the host state which can exert significant influence within its jurisdiction, including by changing the legal and regulatory landscape to the investor’s detriment, influencing the outcome of domestic judicial proceedings, or both, assuming any legal recourse could in fact be pursued. ISDS was developed specifically to address these issues, and is ultimately designed to provide minimum safeguards for foreign investors to protect the value of their investment.
Protections for foreign investors
Canada is a party to a number of multilateral investment treaties which impact the rights and protections of Canadian companies investing in foreign jurisdictions and vice versa.
Under NAFTA Chapter 11, all three of the state parties had mutually consented to ISDS. Under its 2018 replacement, the Canada-United States-Mexico Agreement (CUSMA) Chapter 14, Canada has withdrawn from the ISDS regime entirely. Canadian foreign investors with new investments in the U.S. and Mexico no longer have these protections available to them. Canadian investors with existing investments in those countries, and U.S. and Mexican investors with existing “legacy investments” in Canada, remain protected for a three-year sunset period until June 30, 2023.
New claims under CUSMA Chapter 14 are restricted to claims by American or Mexican investors against Mexico or the U.S., respectively. The types of claims that may be submitted to ISDS are also more restricted than was the case under NAFTA Chapter 11. For instance, claims for direct expropriation may be pursued but claims for indirect expropriation may not be. In addition, the substantive obligations of the parties have been narrowed compared to what had been agreed under NAFTA Chapter 11.
The Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) entered into force in December 2018, and current state parties include Canada, Mexico, Australia, Japan, New Zealand, Singapore, Malaysia, Vietnam, Brunei, Chile, and Peru. A number of other important trading nations have also expressed interest in or started the process for joining CPTPP, including the U.K., China, Thailand and South Korea.
The ISDS provisions in CPTPP Chapter 9 apply to all investments, regardless of whether they were made before or after its entry into force. That said, Chapter 9 will not bind a CPTPP member state in relation to an act or fact that occurred before the agreement’s entry into force by that member state. A claim under CPTPP Chapter 9 may also be brought only in relation to certain commitments prescribed in that chapter and a limited number of commitments in CPTPP’s Financial Services Chapter. This limited scope bars claims for breaches of investment agreements and investment authorizations, therefore offering narrower investor protections.
The ISDS regime under the Comprehensive Economic and Trade Agreement (CETA), the landmark 2017 trade deal between Canada and the EU, will only come into force when each of the 27 EU Member States have ratified the agreement. Only 15 have done so to date.
Once the ISDS provisions come into effect, a permanent, institutionalized dispute settlement tribunal will be constituted. The tribunal will be composed of 15 members who will hear claims for violation of CETA’s investment protection standards. CETA also establishes an appellate tribunal, modelled on the WTO appellate body.
Disputes between foreign investors and host states are not uncommon, even in developed countries. As an example, there have been at least 67 NAFTA claims brought by investors in the 26 years it was in force. Without NAFTA, these disputes would have run their course under domestic laws – if any, in fact, restricted the conduct raised in the complaint – and before the domestic courts of the host states. There is no doubt that treaty protections are of critical importance to foreign investors.
To benefit from these protections, mining investors must consider the structure of their investment before investing. Specifically, investors should consider investment treaty protection in parallel to considering the tax structure of their investment. Structuring the investment with a view to the long-term will help ensure that adequate safeguards are in place to protect the investment against adverse conduct by the host state at any stage of the investment’s life cycle. Those with existing investments need to keep abreast of actual or proposed changes to their rights and protections, and consider the impact on existing claims as well as the risk allocation of projects. Foreign investors should also look to contractual mechanisms that might offer some protection against the risk of adverse state conduct.
Martin Valasek is Norton Rose Fulbright Canada LLP’s head of International Arbitration, Alison FitzGerald is Of Counsel, International Arbitration and Cara Dowling is director, Global Disputes. Lindsey Wilson also contributed to this article.