Canadian mining company awarded sunk costs only in compensation for Peruvian expropriation
Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21
An arbitral tribunal constituted under the investment chapter of the Canada–Peru Free Trade Agreement (FTA) has issued its award.
The tribunal accepted that the claimant mining company must be compensated for expropriation by the host state. However, the tribunal awarded sunk costs only, and a dissenting arbitrator found that damages should have been reduced in light of the investor’s contribution to the unrest that led the state to expropriate the investment in the first place.
Background and claims
The claimant, Bear Creek Mining Corporation (Bear Creek), is a Canadian company headquartered in Vancouver. In 2004, Bear Creek found indications of significant silver ore deposits in the Santa Ana mine, located in the Puno department of Peru.
Under Article 71 of the Peruvian Constitution, because the mine is within 50 kilometres of the Peru–Bolivia border, specific authorization from the Peruvian executive was required for any foreign investor to operate. In order to preserve its claim to Santa Ana, Bear Creek first had a Peruvian employee register the relevant mining rights. Subsequently, Bear Creek applied for and received the authorization needed to acquire those rights in its own name. Ultimately, the rights were transferred to Bear Creek in December 2007.
Between 2007 and 2011, Bear Creek raised external finance for the development of Santa Ana. According to the company, it had proposed a sustainable design for the mine site as demonstrated by the governmental approval of its impact assessment report in 2011. The company also submitted that public meetings with local residents had been well-attended and resulted in mostly favourable inputs.
However, from 2011 onwards, Santa Ana encountered significant social opposition, resulting in protests that sometimes turned violent. Concern spread within some of the nearby communities that mining activities were contaminating local land and the nearby Lake Titicaca. When a new president was elected in June 2011, Peru issued a decree revoking Bear Creek’s authorization (Supreme Decree 032).
In August 2014, Bear Creek filed a Request for Arbitration with the International Centre for Settlement of Investment Disputes (ICSID). Pursuant to FTA Article 832, Canada filed a non-disputing party submission. The tribunal also received three applications to file written submission as amicus curiae, but accepted only two.
Tribunal rejects objections to jurisdiction
Peru submitted that, as the Peruvian national who originally acquired the mining rights was an employee of Bear Creek, the company had become the de facto owner of the rights prior to satisfying the constitutional condition precedent. It argued that, although option agreements are commonly used in the mining industry, the usage in this case lacked good faith. For Peru, the implication was that Bear Creek had failed to properly apply for approval for its interest in Santa Ana, and, as a result, any approval that had been granted was invalid. The tribunal, however, was unanimous in rejecting this, noting that FTA Article 847 provides an express and wide definition of “investment” that must be applied in the present case.
In a separate objection, Peru submitted that, as a general rule, investment tribunals lack jurisdiction over investments made in violation of domestic law. The tribunal found, however, that any such determination should be made based on the applicable treaty. Finding that the FTA provided no evidence of a legality requirement, it rejected Peru’s objection.
Post-election reversal of authorization constitutes illegal indirect expropriation
Bear Creek claimed that Supreme Decree 032 constituted an indirect expropriation of its investment in Santa Ana. The tribunal noted the detailed guidance as to the nature of an indirect expropriation provided in Article 812.1, its footnotes and a related annex. It thereby distilled three factors: economic impact; interference with distinct, reasonable expectations; and the character of the measure at issue. While the tribunal was immediately satisfied that the first two factors were met in the current case, the third factor required detailed examination of Supreme Decree 032 and the circumstances in which it was decided.
According to Peru, the revocation was within its broad remit to exercise police powers—and thus not an indirect expropriation—given reasonable fears that the border crossing with Bolivia would be disrupted by violent protests. In this regard, Peru argued that Bear Creek had actually focused its community relations efforts on a narrow segment of local society and that this was the reason why opposition to the mine grew from strikes and protests to instability, food shortages and poor sanitation.
Bear Creek contended that the protestors were not local and were rather organized by then presidential candidate Ollanta Humala, who was pursuing an anti-foreign investment campaign. According to Bear Creek, it was given no hearing or advance notice of the decree, and the reasons offered were merely politically motivated pretexts for expelling foreign investment.
The tribunal found that “even though the concept of ‘social license’ is not clearly defined in international law” (para. 406), actions to gain social license beyond those Bear Creek undertook would have been possible and feasible. However, ultimately, “the relevant question for the Tribunal is whether Respondent [could] claim that such further outreach was legally required and its absence caused or contributed to the social unrest, so as to justify Supreme Decree 032” (para. 408).
In seeking to answer this question, the tribunal agreed with the principle in Abengoa v. Mexico that, in order for international responsibility of a state to be excluded based on an investor’s omission or fault, it is necessary to prove not only said omission or fault, but also to establish a causal link to the harm suffered. On the evidence, all outreach activities by Bear Creek had been known to Peruvian authorities and were in fact conducted with Peru’s approval, support and endorsement. Given this continuous approval and support, Peru could not, in hindsight, claim that the investor’s conduct was insufficient such that it caused or contributed to the social unrest.
The tribunal proceeded to hold that Supreme Decree 032 constituted an illegal expropriation.
Investor’s other claims reserved in favour of judicial economy
The investor had also invoked the FTA’s guarantees of fair and equitable treatment (FET) and most-favoured-nation (MFN) treatment. As the parties had not presented arguments related to the legal consequences of an FET or MFN finding, and that such a finding would not change or add to those that follow from the finding of unlawful indirect expropriation, the tribunal declined to make any findings on these additional claims.
Damages limited to sunk costs
In considering the damages owing to Bear Creek, all three members of the tribunal agreed that it was not possible to calculate damages by relying on the expected profitability of the mine under the discounted cash flow (DCF) method. Expected profit was not relevant in the case of a non-producing, early-stage mine, such as Santa Ana. The task was therefore to assess the value of what Bear Creek had actually invested prior to being expropriated.
It was uncontested that Bear Creek had spent USD 21,827,687 on the project, but Peru argued successfully that this amount included monies spent prior to Bear Creek’s authorization to mine at Santa Ana. The tribunal determined that the USD 3,590,095 spent prior to authorization could not be considered part of the investment, and therefore awarded USD 18,237,592.
One arbitrator dissents on the amount of compensation
For the dissenting arbitrator, Philippe Sands, the assessment of damages should be reduced because it was “clear that the protests and unrests were caused in part by the Santa Ana Project” (dissent, para. 1).
The International Labour Organization’s Indigenous and Tribal Peoples Convention (ILO Convention 169) was of “particular relevance” (dissent, para. 7). While the majority relied on the position that ILO Convention 169 “imposes direct obligations only on States” (para. 664) such that private companies cannot fail to comply, for the dissenting arbitrator “the fact that the Convention may not impose obligations directly on a private foreign investor as such does not, however, mean that it is without significance or legal effects for them” (dissent, para. 10).
As in Urbaser v. Argentina, the dissenter found that ILO Convention 169, in particular its Article 15 on consultation requirements, could not be overlooked. He concluded that “it is for the investor to obtain the ‘social license’, and in this case it was unable to do so largely because of its own failures” (dissent, para. 37). On this basis, he proposed that the amount of damages should have been cut in half to account for the investor’s contribution to the events leading to Supreme Decree 032.
Notes: The tribunal was composed of Karl-Heinz Böckstiegel, (President appointed by the parties, German national), Michael Pryles, (claimant’s appointee, Australian national), Philippe Sands (respondent’s appointee, British national). The award of November 30, 2017 along with the dissenting opinion of arbitrator Philippe Sands are available at https://www.italaw.com/sites/default/files/case-documents/italaw9381.pdf.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.