How African States are Increasingly Raising a Range of ESG Issues as Defences To Investors’ Claims
This article was featured in our 2023 Mining Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Mundi and Jus Connect.
This issue explores the mining industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of February 2023. Discover updated insights into mining arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on mining projects, disputes, & arbitration from leading lawyers, arbitrators, experts, and in-house counsel.
THE AUTHORS:
Solomon Ebere, Partner at DWF
Natasha Gunney, Director in DWF
OleksandraVytiaganets, dual qualified solicitor at DWF
Introduction
The African continent is home to 10 of the top 15 mining-intensive economies in the world. The mineral reserves of Sub-Saharan Africa are estimated to make up 30% of the world’s total. Given that a greater proportion of the essential minerals for the energy transition, like lithium, chromium, and manganese, are located in sub-Saharan Africa, this market is of paramount importance.
With the growing inflow of investment in mining projects accompanied by the perception that the population of African States are not receiving a fair share of the benefits, the mining sector has undoubtedly played a significant role in the increase of investor-State disputes in the region. The survey of claims that had been registered with the International Centre for Settlement of Investment Disputes (“ICSID”) as of February 15th 2023, shows that 31 out of 84 (40%) claims attributable to mining pro- jects were brought against African States. These 31 cases amount to 16% of the total 186 ICSID claims brought against African States. Of these 31 cases, 10 have been initiated in the past three years (since June 2020).
This article will explore the increasing role of Environment, Sustainability and Governance (“ESG”) considerations in mining investment disputes against African States. We assess the impact of ESG considerations from two angles. First, ESG used as a sword and triggering new claims when host States fail to carefully implement new regulations. Secondly, ESG used as a shield and exploited by host States in defending investment claims when they have arisen. To further explore the role of ESG in mining disputes, we will consider it by reference to three types of ESG issues, namely (1) taxation, (2) corruption, both of which speak to governance issues, the “G” of ESG, and (3) environmental concerns.
Taxation and Revenue
May trigger claims: many resource-rich countries have recently amended their legislation to increase mining revenues and indirectly increase tax.
Examples of such regulatory changes include:
- a significant increase in taxes and royalties (Democratic Republic of Congo (“DRC”), Mozambique, Ghana);
- strengthened transfer pricing regulations (Liberia, Guinea, Mali);
- a limitation on interest deductions (South Africa, Nigeria); and
- more stringent ESG and local content requirements (Tanzania, DRC, Angola, Burkina Faso, Ghana, Guinea).
Changes such as these can give rise to claims in a number of ways, including arguments that they amount to a breach of any stabilisation clause. There have been several cases of this type including:
- Somilo v. Mali (concluded ICSID case) wherein the Tribunal found that tax adjustments made by the State breached a contractual tax stabilisation clause; and
- Montero Mining v. Tanzania (ongoing ICSID case) wherein the claimant claims, amongst other things, that the local content requirement breached the applicable BIT;
May be used as Defence? Tax avoidance claims have been used by resource-rich African States against mining companies as a defence or quantum-reduction tool in investor-state disputes (e.g., clean hands doctrine). Also, in parallel, the State can retaliate by bringing a claim for tax avoidance against the mining company, ideally before the courts of the home jurisdiction of the mining company.
Corruption
May be used as defence: as illustrated by BSGR v Guinea wherein the State argued that BSGR’s claims stemming from the revocation of its mining rights were inadmissible because those mining rights were obtained through bribery of public officials and corruption. The Tribunal established overwhelming evidence of corruption and found the investor’s claims inadmissible on the basis that the claims were secured through corrupt practices. The Tribunal ordered BSGR to pay 80% of ICSID’s costs and Guinea’s legal costs.
May trigger claims: on the other hand, corruption allegations are now being used by claimants as part of their claims. By way of example, Cassius Mining (Australian) threatened to bring a potential USD 275m claim against the Government of Ghana in relation to a gold mining project near the border with Burkina Faso. The allegation is that the Government of Ghana failed to protect the company from a Chinese competitor who would have stolen USD 142m worth of gold as officials may have been bribed by the Chinese competitor: Ghana hit with claim over mining trespass. By way of further example, in Eni v. Nigeria, ENI claims the impropriety of the corruption allegations made by the FGN before the Italian, Nigerian and UK courts: Dutch and Nigerian Subsidiaries of Oil Giant Eni Bring OPL 245 Battle to ICSID.
Environmental Concerns
May trigger claims: States are increasingly signing up to international commitments to meet climate change goals and reinforcing environmental protection. Investors in the mining sector have been challenging environmental regulatory measures for decades (e.g., Pac Rim v. El Salvador and Bear Creek Mining v. Peru) and, despite the increasing recognition of a State’s right to apply and enforce its environmental protection laws against foreign investors, the issue remains controversial as most invest- ment treaties were drafted without consideration of the host States’ right to introduce measures to protect the environment (see also Environmental Issues in ISDS.)
May be used as defence or counter-claim: in contrast, host States may argue that investors’ failure to comply with environmental requirements prior to the granting of a mining license is good grounds to deny investor rights (case in point: Cortec Mining v. Kenya). States outside the African region have also been bringing environmental counterclaims against investors for the environmental impacts of their investment activities (e.g., Perenco v. Ecuador and Aven v Costa Rica).
Thus, ESG issues are both causes of new claims (e.g., a State’s ESG measure is potentially in violation of a stabilisation clause) and defences to new claims (e.g., the violation of ESG such as corruption could prevent the Tribunal from having jurisdiction or violation of environmental regulations could amount to a substantive defence) or even claims the Government could bring against the mining companies in their home jurisdictions (e.g., a tax avoidance claim before a US Court).
A Common-Sense Way Forward
The key takeaway is that given the effectiveness of defences based on corruption and/or failure to follow local laws, host States are likely to raise similar ESG issues in future cases. For this reason, investors must make sure that their investments adhere to all local ESG regulations in order to prevent disputes from ever emerging in the first place and to guarantee that legitimate claims will not be rejected due to regulatory violations. If practical, investors could even consider working together with host States to establish and execute ESG policies.
ABOUT THE AUTHORS:
Solomon Ebere is a Partner in DWF’s International Arbitration team whose practice encompasses advising sovereign States, private clients and multinational corporations in international disputes. He has considerable experience in investor-state arbitration, with a particular focus on sub-Saharan Africa and the Gulf. Solomon is also the Director of Communications at the Africa Arbitration Academy, a critically acclaimed advanced training programme provided to young African practitioners, and admitted to practice in New York and Paris.
Natasha Gunney is a Director in DWF’s International Arbitration team and a Member of the Chartered Institute of Arbitrators. She is dual qualified in both England and Wales and the Eastern Caribbean Supreme Court. Natasha has advised on arbitrations in the LCIA, ICC, DIFC-LCIA, ICSID and ARIAS with a focus on project and infrastructure based disputes often involving entities in the MENA regions and in South East Asia.
OleksandraVytiaganets is a dual qualified solicitor in DWF’s International Arbitration and Litigation team. She regularly advises on high-value cross-border commercial litigation and arbitration disputes. Oleksandra’s experience includes working for the Ukrainian Government as legal advisor for a Member of Parliament and advancing legal reforms in Ukraine. Oleksandra holds a Ph.D degree in international investment law. Her main interest is the interaction between international invest- ment guarantees and state regulatory powers.
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