Copper Mesa Mining Corporation v. Republic of Ecuador, PCA No. 2012-2
A tribunal under the auspices of the Permanent Court of Arbitration (PCA) constituted under the Canada–Ecuador Agreement for the Promotion and Reciprocal Protection of Investments (FIPA) has reached the award stage.
The tribunal ordered Ecuador to compensate a Canadian company for expropriation of two mineral concessions. The alleged expropriation of the company’s option interest in a third concession was dismissed. In light of contributory negligence by the company’s executives, the tribunal discounted damages by 30 per cent. The parties were ordered to bear their own legal costs and to share arbitration costs equally.
Background and claims
Between 1991 and 1997, the first sophisticated geological tests were conducted in the Junín area of Northwestern Ecuador. The final technical report confirmed large deposits of copper and noted potential environmental impacts of a proposed mine. Since then, an increasing number of local residents concerned about the deleterious impacts of mining organized to resist the activity.
Even so, in December 2002 Ecuador granted the Junín concession to an Ecuadorian national. In 2005, Canadian company Copper Mesa Mining Corporation Exploration (Copper Mesa), through Barbadian and Ecuadorian subsidiaries, acquired the Junín concession, the neighbouring Chaucha concession and an option for the Telimbela concession.
From 2005 onwards, Copper Mesa made a series of expenditures in relation to the concessions. In particular, it commissioned a geological report, acquired a neighboring concession and surface land in and around the concession areas, prepared and submitted an environmental impact study (EIS) for the exploration phase, employed a team of Ecuadorian staff and committed resources to providing social services and community development.
In April 2008 Ecuador’s Constituent Assembly passed legislation known as the Mining Mandate, which declared that mineral substances were “to be exploited to suit national interests” and provided for the termination “without economic compensation” of mining concessions falling into a number of categories (para. 1.110). Ultimately, Ecuador’s Under-Secretary of Mines ordered the termination of the Junín and Chaucha concessions due to a lack of prior consultation with the local residents.
In July 2010 Copper Mesa sent a written Notice of Dispute to Ecuador under the Canada–Ecuador FIPA, alleging that Ecuador unlawfully revoked or terminated the concessions, thereby depriving it the entire value of its investments and causing it to suffer substantial damages.
Investor is entitled to advance own claims in relation to inter-company loans to affected subsidiaries
Ecuador objected to the tribunal’s jurisdiction over all of Copper Mesa’s claims. In regard to the Junín concession, Ecuador also objected to the admissibility of the claims.
In an important objection to jurisdiction, Ecuador argued that Copper Mesa’s claim concerning damages to its local subsidiaries must be distinguished from a claim on its own behalf, and that the local subsidiaries must have separately consented to arbitration and waived any rights each may have under Ecuadorian law. However, the tribunal agreed with Copper Mesa that the company had complied with the formal requirements for initiating arbitration. It held that Copper Mesa was entitled, as a matter of jurisdiction and admissibility, to advance its own claims against the respondent, in respect of its own investments in Ecuador. According to the tribunal, the claimant was not seeking to advance or espouse any claim in the name of any its subsidiaries; it was only claiming compensation for harm that it itself had suffered.
The tribunal also addressed Ecuador’s contention that Copper Mesa had “unclean hands.” For the tribunal, Ecuador had adduced an impressive amount of expert testimony and materials relating to the legal doctrine of unclean hands under international law, including the obligations of foreign investors on human rights in the broadest sense. Even so, the tribunal indicated that this was a matter of admissibility rather than jurisdiction, and that Ecuador had not made a single complaint as regards international law, international public policy or human rights to the claimant prior to the commencement of arbitration. For the tribunal, it was then much too late.
Tribunal reconciles unlawful expropriation and FIPA’s General Exception provision
Copper Mesa’s substantive claims included Ecuador’s obligations to pay compensation upon direct or indirect expropriation, to provide fair and equitable treatment and full protection and security, and to provide national treatment.
With regards to expropriation, Ecuador contended that the Mining Mandate was a measure issued by the state in exercise of its legitimate regulatory authority and responding to a compelling public policy consideration, that is, the need to consult the affected local population, and seeking to address many unsolved social, economic and environmental issues. For Ecuador, the Mining Mandate therefore fell under the FIPA’s General Exceptions provision.
In the tribunal’s view, the applicable legal standards under international law were not in doubt. Rather, the primary issue was whether, in the circumstances, the government had acted in accordance with due process and not in an arbitrary manner. In particular, the tribunal sought to emphasize that its inquiry stemmed not from the Mining Mandate itself but from the Termination Resolutions ordered by the Under-Secretary of Mines based on the Mining Mandate.
Given the particular circumstances of the Termination Resolutions, the tribunal decided that they were “no mere regulatory measures, because, in the circumstances, these Resolutions were made in an arbitrary manner and without due process,” (para. 6.66) and held that “the permanent taking of the Claimant’s Junín concessions was an expropriation” under the FIPA (para. 6.67).
Damages reduced to reflect claimant’s contributory negligence
Copper Mesa had sought in its primary case on quantum to have the tribunal ratify a market-based quantification of damages with the mid-point of the relevant range falling at US$69.7 million. In the alternative, it presented a cost-based quantification amounting to US$26.5 million, as confirmed by its audited financial statements.
The tribunal began its analysis with the general principle under international law that it is for the claimant to prove the extent of its injury. It found that, ultimately, the market-based quantification relied on a methodology that was too uncertain, subjective and dependent upon contingencies. According to the tribunal, the “most reliable, objective and fair method in this case for valuing the Claimant’s investments in November 2008 and June 2009 is to take the Claimant’s proven expenditure incurred in relation to its Junín and Chaucha concessions” (para. 7.27).
With regards to the Junín concession, the tribunal decided that Copper Mesa contributed to 30 per cent of its loss by negligent acts and omissions committed by its own senior management in Canada. After deduction of such 30 per cent, the net loss on the Junín concession was set at US$11,184,595.80.
For the Chaucha concession, contributory negligence was not an issue, and Copper Mesa was awarded $8.3 million plus compound interest. For the claim related to Copper Mesa’ option on Telimbela having been dismissed, no damages were awarded.
Local residents sought to “countersue” Copper Mesa in Canadian courts
The Junín concession was located adjacent to a series of small villages. Between December 2005 and July 2007, tensions between village residents and Copper Mesa exploded into a series of physical confrontations.
In 2009 certain village residents filed a claim in Ontario courts against Copper Mesa and various other Canadian persons. In that lawsuit, the village residents claimed to have been subjected to a “campaign of intimidation, harassment, threats and violence” by security forces and other agents of Copper Mesa (OCA Judgment, para. 11). The court however found that, as the claims against Copper Mesa were based solely on vicarious liability, they disclosed no reasonable cause of action under the applicable Canadian law.
Subsequently, the Ontario Court of Appeal dismissed the village residents’ appeal. In doing so, it found: “The threats and assaults alleged by the plaintiffs are serious wrongs. Nothing in these reasons should be taken as undermining the plaintiffs’ rights to seek appropriate redress for those wrongs, assuming that they are proven. But that redress must be sought against proper parties, based on properly pleaded and sustainable causes of action. The claims at issue in these proceedings do not fall in that category” (OCA Judgment, para. 99).
Notes: The tribunal was composed of V.V. Veeder (President appointed by party agreement, British national), Bernardo Cremades (claimant’s appointee, Spanish national), and Bruno Simma (respondent’s appointee, German national). The final PCA award of March 15, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7443.pdf. The Ontario Court of Appeal’s judgment in Piedra v. Copper Mesa Mining Corporation, 2011 ONCA 191, is available at http://www.ontariocourts.ca/decisions/2011/2011ONCA0191.pdf.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.