Tribunal finds Pakistan breached FET, expropriation and non-impairment obligations in the context of a mining joint venture with Australian investor Tethyan Copper Company
Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1
An ICSID tribunal ordered Pakistan to pay more than USD 5.9 billion in compensation, interest and legal costs to Tethyan Copper Company (Tethyan) for breaches of the Australia–Pakistan BIT.
Background and claims
Tethyan—a joint venture registered in Australia—established a Pakistani subsidiary in 2000. In 2006, it replaced BHP as a party to the Chagai Hills Exploration Joint Venture Agreement (CHEJVA) with the Pakistani province of Balochistan through a novation agreement, taking on BHP’s rights to 75 per cent of the joint venture and the right to explore and develop any gold and copper deposits found.
After expanding its exploration and discovering large gold and copper deposits, Tethyan applied for a mining licence in 2011, but Balochistan denied the application. Tethyan’s subsidiary initiated an administrative appeal, which Balochistan rejected. Following a domestic court action, the Pakistani Supreme Court decided in 2013 that the CHEJVA was void, because Balochistan had exceeded its powers by signing it, and invalid, because it was contrary to public policy. In addition, Tethyan filed an ICC arbitration claim based on the CHEJVA and obtained a favourable preliminary ruling in 2014.
In November 2011, Tethyan initiated ICSID arbitration against Pakistan, claiming that the denial of the mining lease breached the FET, expropriation and non-impairment obligations under the BIT.
Tribunal rejects corruption-based objection based on lack of evidence
In June 2015, Pakistan presented evidence of corruption by Tethyan and presented jurisdictional and admissibility objections. In a March 2017 decision, the tribunal affirmed its jurisdiction, rejecting Tethyan’s claims that the evidence resulted from an interception of Tethyan’s communications with its lawyers. However, it rejected the objections for lack of evidence.
At that time, the tribunal had already written the merits award, so it deviated from ICSID protocol and sent the parties a draft award to comment. The decision on jurisdiction and liability was published on November 10, 2017.
Decision on jurisdiction and liability
The tribunal first decided that Tethyan had a valid investment under the BIT as it exercised control over its subsidiary and its 75 per cent interest in the joint venture. Pakistan argued that because the CHEJVA was void according to the Supreme Court, the investment did not respect Pakistani law and thus was outside the treaty’s scope. However, the tribunal rejected the argument, reasoning that the treaty covered investments accepted into the host state at the time of their establishment, not only legally established investments. It noted that Pakistan did not mention CHEJVA’s potential invalidity when negotiating the 2006 novation agreement and that the Pakistani Supreme Court decision was based on Balochistan’s breach of its internal laws, not Tethyan’s actions.
The tribunal also refused to apply domestic laws to the dispute, holding that only ad hoc tribunals must apply domestic law, while ICSID tribunals must apply customary international law rules. Under these rules, the tribunal concluded that Balochistan’s actions were attributable to Pakistan.
FET breach: denial of mining lease frustrated Tethyan’s legitimate expectations, lacked due process
The tribunal found that the treaty’s FET clause is an autonomous treaty standard as it does not mention customary international law. According to the tribunal, “a dominant principle of the FET standard is the protection of the investor’s legitimate, investment-backed expectations” (para. 811).
It decided that Tethyan had a legitimate expectation of receiving the mining lease because of Pakistan’s assurances in the CHEJVA, its regulatory framework and direct assurances from its government officials. The tribunal held that even if the contract was ultimately declared void, it had given the right to the mining license at the time of its conclusion, noting that, “up to early 2011, all parties involved in the conclusion and performance of the CHEJVA acted on the assumption that it was valid” (para. 905). It considered that Pakistani authorities did not have enough discretion in assessing the licence requirements to shake Tethyan’s expectation of receiving its mining licence and that government officials—including Pakistan’s President and Prime Minister—gave Tethyan sufficient assurances to justify a legitimate expectation.
The tribunal rejected Pakistan’s arguments that the denial of the licence had valid grounds and concluded that the denial violated Tethyan’s legitimate expectations. It found evidence that Pakistan planned to establish its own mine and rejected Pakistan’s assertion that its alternative plans at the Reko Diq site were for a different smelter project.
In addition, the tribunal rejected Pakistan’s grounds for denying the mining licence. First, it found that requiring an applicant to hold 100 per cent interest in the exploration licence violated the good-faith obligations of joint ventures. Second, considering that the CHEJVA did not include Tethyan’s obligation to provide for smelting and refining minerals in Pakistan, it concluded that the failure to carry out those activities was not a valid ground to deny the licence. Finally, it considered that the lack of economic viability of a mining project occurred in the mining industry and did not breach Pakistani law.
The tribunal also found that the licence refusal procedure lacked due process, given that the grounds of the decision were insufficient and that further details or meetings with Tethyan were denied. It refused to admit the new grounds raised during the arbitration because this would violate Tethyan’s right to be heard and in any event did not prove Pakistan’s case.
Expropriation and non-impairment
The tribunal found that the denial of the licence was equivalent to expropriation, because it substantially deprived the investment of its value. It held that the indirect expropriation breached the BIT as it was discriminatory and without a convincing public purpose or compensation. The tribunal also found that the refusal of the licence also breached the BIT’s non-impairment obligation as the measure denied Tethyan the use of its investment.
Tribunal accepts jurisdiction over three counterclaims by Pakistan but rejects them on the merits
The tribunal accepted jurisdiction over Pakistan’s counterclaims—based on Tethyan’s violations of the CHEJVA, domestic law and the BIT—finding them to be closely tied to the dispute and therefore within the parties’ consent to arbitration under the BIT. However, the tribunal found that Pakistan lacked standing to raise the contractual and domestic law counterclaims since Pakistan was not a party to the contract and the domestic laws were not enacted by Pakistan, but by Balochistan. It rejected the BIT-based counterclaim on the same grounds presented in the jurisdictional phase: the BIT did not require the investment to be legal, simply admitted into Pakistan.
Decision on quantum
The tribunal decided that discounted cash-flow (DCF) would be used for the valuation of the investment’s market value because the method presented certain advantages in this case and there were no fundamental uncertainties that would make it inappropriate. Citing Crystallex v. Venezuela and other cases, the tribunal noted that DCF valuation was taken into account by mining bodies, such as the Canadian Institute of Mining, Metallurgy and Petroleum, rejecting Pakistan’s argument that it was not part of the mining business practice.
Compensation was reduced after the tribunal considered that Pakistan probably would have offered Tethyan a 15-year tax compensation and might have declined to renew the licence, and after it found that some of Tethyan’s security risk assessments were inadequate. The amount Tethyan would have to spend to restore social and environmental damages was also deducted. The tribunal rejected Pakistan’s argument that Tethyan’s lack of planning for social and environmental restoration made the investment less valuable since it might face public opposition. Instead, it noted that even in the absence of planning, Pakistan’s low standards in these areas would likely be met. It also dismissed Pakistan’s request to reduce compensation because obtaining land rights would cause delay and community opposition, considering such risks were unlikely and had been taken into account.
Rejecting Pakistan’s argument that compound interest was unlawful under domestic law, the tribunal set a compound interest rate according to international law authorities. This led to a compensation figure of USD 4.087 billion, plus interest, in addition to USD 62 million for the legal costs of both parties, in light of Pakistan’s unsuccessful defences, corruption allegations and counterclaims. The tribunal found that the project’s evolution over time justified compensation in an amount much higher than Tethyan’s original investment of USD 150 million.
Notes: The tribunal was composed of Klaus Sachs (president appointed by both parties, German national), Stanimir Alexandrov (claimant’s appointee, Bulgarian national) and Leonard Hoffmann (respondent’s appointee, British national). The decision on jurisdiction and liability of November 10, 2017 is available at https://www.italaw.com/sites/default/files/case-documents/italaw10738.pdf; the decision on quantum of July 12, 2019 is available at https://www.italaw.com/sites/default/files/case-documents/italaw10737.pdf
Sofia de Murard is a New York University IFD Fellow with IISD’s Investment for Sustainable Development Program.