{"id":5858,"date":"2018-12-21T08:38:52","date_gmt":"2018-12-21T14:38:52","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=5858"},"modified":"2024-08-09T18:29:16","modified_gmt":"2024-08-09T16:29:16","slug":"kenya-prevails-in-bit-arbitration-british-investors-claims-dismissed-due-to-the-absence-of-environmental-impact-assessment-xiaoxia-lin","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2018\/12\/21\/kenya-prevails-in-bit-arbitration-british-investors-claims-dismissed-due-to-the-absence-of-environmental-impact-assessment-xiaoxia-lin\/","title":{"rendered":"Kenya prevails in BIT arbitration: British investors\u2019 claims dismissed due to the absence of environmental impact assessment"},"content":{"rendered":"

Cortec Mining Kenya Limited, Cortec (Pty) Limited and Stirling Capital Limited v. Republic of Kenya, ICSID<\/span> Case No. ARB\/15\/29<\/h2>\n

On October 22, 2018, an ICSID tribunal constituted under the United Kingdom\u2013Kenya BIT<\/span> issued its award, dismissing all claims and ordering the British investors to pay Kenya half of its legal costs, plus all ICSID arbitration costs. Remarkably, the tribunal confirmed that the environmental impact assessment (EIA) study was one of the requirements of a lawful investment in accordance with Kenyan law.<\/p>\n

Background and claims<\/h3>\n

The claimants were Cortec Mining Kenya Limited (CMK), a private company constituted in Kenya, and its majority shareholders, Cortec (PTY) Limited and Stirling Capital Limited, two British holding companies. The claimants began to invest in a mining project at Mrima Hill in Kenya in 2007 and obtained their Special Prospecting License (SPL 256) in 2008, which expired in December 2014 after two renewals. According to the investors, they were also granted Special Mining License 351 (SML 351) in March 2013 based on SPL 256.<\/p>\n

In August 2013, the newly elected Kenyan government investigated and suspended several hundred \u201ctransition period\u201d mining licences, including the investors\u2019 SML 351, due to \u201ccomplaints regarding the process.\u201d According to the investors, this amounted to a revocation of their licence.<\/p>\n

In their 2015 request for arbitration and subsequent submissions to the tribunal, the investors claimed that Kenya\u2019s revocation of their SML 351 (their \u201ckey asset\u201d) constituted a direct expropriation contrary to the United Kingdom\u2013Kenya BIT.<\/p>\n

Investors made a premature application for a mining license in absence of EIA<\/h3>\n

Prior to addressing jurisdictional issues, the tribunal analyzed the relationship between SPL 256 and SML 351. It confirmed that SPL 256 required CMK to conduct a mine feasibility report and an EIA study before applying for a mining licence, in accordance with the Kenyan Mining Act and Environmental Impact (Assessment and Audit) Regulations (para. 104). The tribunal dismissed the Mining Feasibility Study<\/em> hastily produced by the claimants, holding that it failed to fulfill standard industry practices (para. 129).<\/p>\n

The investors contended that a Kenyan government official, Mr. Langwen, had approved the EIA four months after the issuance of SML 351 by Mr. Masibo, the Commissioner of Mines and Geology. They argued that Masibo also had the discretion to convert the EIA, as a condition precedent to CMK\u2019s application for a mining licence, into a condition consequent that could be fulfilled after the issuance of SML 351.<\/p>\n

Siding with Kenya, the tribunal affirmed that the EIA licence is a condition precedent to the issuance of a special mining licence, in accordance with Kenyan law. It also concluded that Langwen\u2019s \u201capproval letters\u201d proved that CMK had no EIA approval at the time of the issuance of SML 351, and that he was actually not given the authority to issue these letters. Therefore, the tribunal held that the investors failed to undertake an EIA that might allow them to obtain a valid mining licence.<\/p>\n

Tribunal grapples with Kenya\u2019s allegations of corruption<\/h3>\n

Kenya alleged that Jacob Juma, a businessman hired by the claimants for the licence application, worked together with Commissioner Masibo corruptly to issue SML 351. Kenya submitted a witness statement to show that Juma \u201chad a history of paying bribes to Commissioner Masibo\u201d (para. 183).<\/p>\n

The tribunal did not accept the witness statement as convincing evidence of corruption. It also considered that Juma was deceased and that Masibo was not given the opportunity to explain his conduct and receive cross-examination. The tribunal was not persuaded to accept the corruption allegation against Masibo in absence of due process.<\/p>\n

Tribunal affirms that the investment was made in good faith<\/h3>\n

The tribunal affirmed its jurisdiction under Article 25 of ICSID Convention<\/span> and Article 8 of the United Kingdom\u2013Kenya BIT. It also cited the Phoenix v. Czech Republic<\/em><\/a> case and particularly referred to two of the criteria used in that case (namely, assets invested in accordance with the laws of the host state and assets invested in good faith) to define \u201cprotected investment.\u201d<\/p>\n

Kenya alleged that the claimants\u2019 conduct violated the principle of good faith by referring to the Inceysa v. El Salvador<\/em><\/a> and Khan v. Mongolia<\/em><\/a> cases, which shared the same maxim nemo auditur propriam turpitudinem allegans <\/em>(\u201cnobody can benefit from his own fraud\u201d).<\/p>\n

The tribunal, however, seemed unimpressed by such allegation. Apart from reiterating the unsubstantiated corruption allegations, it added that other allegations of bad faith on the part of the claimants had not been proven so as to satisfy a \u201cbalance of probabilities\u201d standard (para. 308). Therefore, the tribunal concluded that there was no bad faith.<\/p>\n

United Kingdom\u2013Kenya BIT contains implicit obligation of domestic law compliance<\/h3>\n

Citing Bear Creek v. Peru<\/em><\/a>, the claimants contended that regulatory compliance is not a jurisdictional issue as there is no express legality requirement in the United Kingdom\u2013Kenya BIT (para. 314). Kenya, in turn, heavily relied on the Phoenix<\/em> case, which held that compliance with domestic law is required even when not expressly stated in the relevant BIT.<\/p>\n

The tribunal confirmed that both the ICSID Convention and the BIT protected only \u201clawful investments.\u201d It also recognized the inconsistency of text and purpose between the BIT and the ICSID Convention as to whether the host state should be liable for the investment \u201ccreated in defiance of their laws fundamental[ly] protecting public interests such as the environment\u201d (para. 333). Importantly, the tribunal determined that \u201cexplicit\u201d language was unnecessary and held that investments must be made \u201cin accordance with the laws of Kenya\u201d to be protected (para. 333).<\/p>\n

Tribunal endorses Kim test to invalidate SML 351 issued by Masibo<\/h3>\n

As an alternative argument, the claimants submitted that, even if the tribunal were to treat compliance as a matter of jurisdiction, it should apply the principle of proportionality established in Kim v. Uzbekistan<\/em><\/a> to reject the alleged \u201cillegalities\u201d as a basis for the \u201charsh consequence\u201d of denying treaty protection (para. 316). Kenya relied on a domestic court ruling that the Masibo had no authority to issue the licence under Kenyan law. This court decision, in Kenya\u2019s view, was not subject to the scrutiny of the arbitral tribunal.<\/p>\n

As suggested by the investors, the tribunal applied the three-stage approach of the proportionality principle in Kim<\/em> case to assess the impact of alleged illegalities. In Kim<\/em>, the tribunal first assessed the significance of the obligation allegedly breached by the investor; second, it assessed the seriousness of the investor\u2019s conduct; and third, it evaluated whether the legal consequences of such violation are proportional to the harshness of denying access to the protections of the BIT (paras. 406\u2013408 of the decision on jurisdiction<\/a> in the Kim<\/em> case).<\/p>\n

The Cortec <\/em>tribunal first affirmed the significance of the environmental legislation to the Mrima Hill project, with special environmental vulnerability. It held that non-compliance with the protective regulatory framework was a serious breach. While some Kenyan law experts supported the \u201cwait and see\u201d and \u201clive together\u201d theories in treating the EIA, the tribunal had no hesitation to confirm that the EIA should be completed prior to the issuance of the licence, in accordance with Kenyan law.<\/p>\n

As such, the tribunal accepted the finding of the Kenyan courts that SML 351 was void from the outset under Kenyan law. As an extra note, the tribunal added that no protection should be given to SML 351 on the merits even if it were not void, on the grounds that Masibo abused his authority in deviation of Kenyan law.<\/p>\n

Tribunal rejects investors\u2019 claims and grants half the costs claimed by Kenya<\/h3>\n

After concluding both on jurisdiction and merits that SML 351 was not a protected investment, the tribunal dismissed all of the investors\u2019 claims. The tribunal ordered the investors to pay half of the costs claimed by Kenya, in view of the unsupported \u201ccorruption objection\u201d allegation and other blameful conduct by Kenya during the arbitral proceedings.<\/p>\n

Notes<\/em>: The tribunal was composed of Ian Binnie (President appointed by the parties, Canadian national), Kanaga Dharmananda (claimants\u2019 appointee, Australian national) and Brigitte Stern (respondent\u2019s appointee, French national). The award is available at https:\/\/www.italaw.com\/cases\/3974<\/a>. The Kim v. Uzbekistan<\/em> decision on jurisdiction of March 8, 2017 is available at https:\/\/www.italaw.com\/cases\/5403<\/a><\/p>\n

Xiaoxia Lin<\/strong> is a New York University School of Law International Finance and Development Fellow with IISD<\/span>\u2019s Investment for Sustainable Development Program.<\/p>\n