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:
Diora Ziyaeva, Partner at Dentons
Julia Grabowska, Managing Associate at Dentons
Each year, we have been witnessing an increase in the number of mining projects – and, each year, there appears to be an associated increase in mining-related disputes. This remains true for Latin America, more specifically, where in many countries, mining is one of the main GDP contributors and a key draw for foreign investment. With its complex history and geopolitical reality, it should come as no surprise that ESG concerns have come to the forefront in debates surrounding the presence and growth of the mining industry in the region.
Rise of ESG
While a global focus on ESG is not particularly new, its implementation in the private sector in Latin America has experienced a resurgence in recent years. While the causes of this are multiple – such as political shifts, the climate crisis, market volatility – it has brought both global and local attention to ESG issues. Locally, Latin American governments have committed to various international environmental instruments in an effort to curb emissions and protect the local environment. Internationally, there now is increased pressure from the global community and international organizations on the public and private sectors to foster sustainable investment, protect human rights and the environment, and combat corruption. This pressure has come from judicial bodies too: for example, the August 31st, 2021, ruling by the Inter-American Court of Human Rights which obliges all parties to the American Convention on Human Rights to comply with the UN Guiding Principles.
It should come as no surprise that ESG issues are particularly relevant to the mining industry in Latin America. Mining often involves stakeholders with competing objectives, such as local communities and MNCs. Further, extractive industries by their very nature impact the environment. While many companies and governments alike have been taking steps to ensure that corporate governance going forward focuses on environmental protection, this has not always been the case.
Recent Cases
In the past decade, a growing number of cases before investor-State and commercial arbitral tribunals have involved environmental, social or governance issues. ESG issues have come before arbitral tribunals on numerous occasions in the Latin American context. Most frequently, they will arise either as part of a State’s defense based on the doctrine of sovereign powers, or as a State’s counterclaim. The most recent and salient examples of ESG issues framed in both contexts in arbitrations against Latin American States have been set out below.
First, it should be noted that there has been a shift in how tribunals address ESG issues. When ESG issues were first discussed by an investor- State tribunal in a mining dispute, in Gold Reserve v. the Bolivarian Republic of Venezuela in 2014, they did not alter the tribunal’s ruling. Venezuela argued that it had revoked the investor’s construction permit due to the project’s impact on indigenous communities and the local environment. However, the tribunal found the State’s obligation to protect communities and the environment did not nullify its responsibility to the investor.
Similarly, in the 2015 decision in Quiborax et al v. the Plurinational State of Bolivia, the tribunal did not ultimately defer to the State’s sovereign right to protect the public interest in contravention of its obligations to the investors. Bolivia had revoked the investors’ mining concessions, formally due to tax irregularities, but also due to widespread community opposition to the project. The tribunal stated that Bolivia may have had a legitimate interest in protecting the project area – a salt flat reserve – but that this did not change the unlawful nature of the expropriation. In the end, environmental and social concerns, even though they were within Bolivia’s sphere of legitimate interest, did not outweigh the investor’s private interests in the project.
However, much has changed since. In 2016, the Copper Mesa v. the Republic of Ecuador tribunal openly considered ESG issues and granted them significant weight in its decision. In response to the investor’s claims of expropriation of mining concessions, the State pointed to the investor’s behavior towards local communities and its failure to secure their approval. While the tribunal found that Ecuador had breached the BIT, it brought in the investor’s actions towards the communities to reduce the awarded damages. The violent response of the investor to social opposition of its project thus led to a 30% reduction in damages awarded.
Tribunals took similar views in Bear Creek Mining v. Peru and South American Silver v. the Plurinational State of Bolivia. The Bear Creek decision, issued in 2017, related to mining concessions that the State revoked after severe social conflict erupted in protest. Local indigenous communities were concerned about the potential impact of the project on their land and water rights; the resulting protests culminated in riots and the death of several demonstrators. While the tribunal found that the revocation of the concessions was not justified, it took into account the level and scale of community opposition in calculating damages. The lack of social support for the project, and no hope of ever obtaining it, were leading causes for the tribunal’s decision to award less than 50% of the investor’s damages.
Similarly, in South American Silver, the tribunal considered the investor’s actions when assessing damages. Local indigenous communities mounted fierce opposition to the project, which was expected to cause severe impacts on their environment (which included sacred sites). In response, the government canceled the investor’s mining concession. While the tribunal found that this amounted to expropriation, it took a hard look at claimant’s actions on the ground. The tribunal found that the investor’s actions exacerbated the conflict and caused further violence. As such, it was awarded $18.7 million of the $385.7 million sought.
While ESG issues as counterclaims are rarer in this context, it is helpful to mention the case of Pereneco. In Perenco Ecuador Ltd v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), the French investor brought claims against Ecuador related to legislative acts that increased the investor’s financial burden under hydro-carbon exploration contracts it had with the State and the State-owned oil company. Ecuador counterclaimed, alleging that Perenco caused environmental harm to the Amazon during its operation. While the tribunal granted Perenco partial damages, it did also award $54 million to Ecuador for its counterclaim.
Last, it should also be noted that ESG issues have likely been brought forth with greater frequency in commercial arbitrations as well. The confidential nature of these proceedings makes this more difficult to assess. However, where allowing a project to go forward leads to social unrest, it may be expected that States would look to force majeure or other hardship clauses as a means of defense in a dispute.
Conclusion
Going forward, we can expect that the importance of ESG issues in mining disputes will continue to rise. It is recommended that parties to contracts pay close attention to language, so as to ensure ESG-related disputes are addressed. With regards to investor-State proceedings, as more are brought under newer BITs, we are likely to see differences in how tribunals approach these issues. Newer BITs, which often have more stringent provisions on State measures related to the environment or the public interest, are bound to produce different results. On their part, investors should remain cognizant of national and international rules and guidelines on environmental and corporate governance.
ABOUT THE AUTHORS:
Diora Ziyaeva is a Partner at Dentons New York. Her practice focuses on investor-state arbitration, international commercial arbitration, complex commercial litigation, and public international law. Dual qualified in Uzbekistan and New York, she has 14 years of experience successfully representing sovereign states and corporate clients in over 30 significant international arbitration proceedings. Diora has been recognized as a “Future Leader” in arbitration by Who’s Who Legal, and as one of the American Bar Association’s On the Rise – Top 40 Young Lawyers. In addition, she is a Council on Foreign Relations Term Member, a certified mediator, arbitrator, and serves as an Adjunct Professor of Law at Cornell Law School and at Fordham University School of Law, where she teaches investor-state arbitration.
Julia Grabowska is a Managing Associate in Dentons’ New York office and a member of the Litigation and Dispute Resolution practice. Julia focuses her practice on international commercial arbitration, investment arbitration, and complex commercial litigation. She has experience representing clients in a variety of industries, including mining, energy, hospitality, life sciences, and cryptocurrency. Julia holds a J.D. from Columbia Law School, M.Sc. from the University of Oxford, and B.A. from Stanford University.
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