Pakistan has asked a US federal court to pause an Australian copper company’s bid to enforce a $6 billion arbitral award while it looks to have the award nixed, reports Law360, a New York-based legal publication.
The company — Tethyan Copper Co. Pty Ltd — won the award last summer following a dispute over the rejected Reko Diq mining project in Balochistan.
Pakistan informed ICSID that the proposed project was based on agreements that were invalid under Pakistani law and, therefore, Tethyan Copper couldn’t seek any damages
Case of controversies
In 1993, a US-incorporated mining company, BHP, entered into a joint venture (JV) with the Balochistan Development Authority (BDA). The JV was set up to prospect for gold and copper, and in the event of favorable discoveries, to seek a mining license. BHP was not optimistic about the project’s profitability and dragged its feet on exploration. In the early 2000s, it assigned the prospecting rights to an Australian company, which created Tethyan Copper Company (TCC) for the project.
In 2006, Antofagasta acquired TCC for $167 million, and sold half to Barrick Gold. Soon after the purchase, however, the original JV agreement with BHP was challenged in Pakistan’s courts. In 2013, the Pakistan Supreme Court found that the JV’s terms violated Pakistan’s mining and contract laws in several ways and declared the agreement – and thus the rights claimed by TCC – to be null and void.
To see how the so-called international rule of law enables rich companies to exploit poor countries with impunity, look no further than the @WorldBank's International Center for the Settlement of Investment Disputes, writes Jeffrey Sachs @Columbia https://t.co/dUuhja8Xs9
— Project Syndicate (@ProSyn) November 26, 2019
When TCC lost its case in Pakistan’s Supreme Court, it simply turned to the World Bank’s International Center for the Settlement of Investment Disputes (ICSID), in complete disregard of Pakistan’s laws and institutions. A panel of three arbitrators with no expertise in or respect for Pakistan’s legal system ruled that TCC deserved compensation for all future profits that it allegedly would have earned if the non-existent project, based on avoided agreement, had gone forward!
Because there was no actual project, and no agreement for one, the arbitrators had no basis to say what terms – royalties, corporate taxes, environmental standards, land area, and other basic provisions – the governments of Balochistan and Pakistan would have set. In fact, disagreement on many of those terms had stalled negotiations for years.
The Reko Diq mine, located in the troubled Balochistan province, hadn’t produced a single ounce of gold or a ton of copper as it was years away from becoming operational when it ran into legal trouble.
Read more: World Bank mugged Pakistan: How much weight does Jeffrey Sachs’ argument hold?
When it came to deciding the size of the compensation, the arbitrators relied on the testimony of a TCC expert named Professor Graham A Davis of the Colorado School of Mines.
Davis, who specialises in mineral economics, came up with a contested method to calculate what the mining companies ‘might’ have earned over the 50-year lifespan of the Reko Diq mine.
Pakistan argued in a federal court in Washington that the enforcement could have “devastating consequences for its political and economic stability”, said the author, Caroline Simson.
How do we predict how a particular business is going to do in 20 years? Do we take into account climate change? What presumptions do we make about technology and how it will change?
In a brief submitted in the court on Friday, Pakistan argued that Tethyan “shouldn’t be allowed to proceed with the litigation while it looks to annul the award based on “numerous substantive and procedural errors”.
The report noted that the award is the second largest ever to be issued by the International Centre for Settlement of Investment Disputes (ICSID) and equals 2 per cent of Pakistan’s annual gross domestic product and 40 per cent of its total liquid foreign reserves.
ICSID is an international arbitration institution established in 1966 for legal dispute resolution and conciliation between international investors and is part of and funded by the World Bank Group, headquartered in Washington.
2 out of the total 14 Reko Diq mines can pay off our whole debt | PM Imran Khan#PublicNews #PublicNewsLive@pmln_org @MediaCellPPP @PTIofficial#PMImranKhan #HunarmandPakistan @ImranKhanPTI #PrimeMinisterImranKhan #RekoDiq pic.twitter.com/mcHjZsdjNJ
— Public News (@PublicNews_Com) January 9, 2020
Pakistan said in the brief that its economy was already facing “significant challenges and weaknesses” and that enforcing the award would effectively negate a $6 billion loan it received from the International Monetary Fund last year to stabilise its government and economy.
Pakistan also pointed out that ICSID’s secretary general provisionally stayed enforcement of the award after registering the annulment bid in November, adding that the benefits of pausing the litigation are “overwhelming”.
The brief claimed that the tribunal wrongly disregarded international law limiting the amount of damages available for lost profits and that it relied on a novel damages calculation method “without authorisation or explanation” that resulted in a number billions of dollars higher than a traditional model would, Law360 reported.
A panel of three arbitrators with no expertise in or respect for Pakistan’s legal system ruled that TCC deserved compensation for all future profits that it allegedly would have earned if the non-existent project, based on a voided agreement, had gone forward! https://t.co/LUqCO0LXhL
— Aanya Niaz (@aanyafniaz) November 29, 2019
Experts have argued that there’s no sure way to calculate the future price of a mineral and the expected profit as political uncertainty and factors such as environmental impact are hard to predict.
“How do we predict how a particular business is going to do in 20 years? Do we take into account climate change? What presumptions do we make about technology and how it will change?”, said Robert Howse of New York University.
Pakistan argued that the “discounted cash flow approach”, used for awarding Tethyan, failed to properly account for certain risks and uncertainties in the project.
Read more: Mine-d your own business: Khewra, Reko Diq, and Saindak
Also, the calculated damages were based on a projected 56-year operating period for the mine even though no lease or permits for the project were ever issued by Pakistani authorities, the brief added.
Pakistan informed ICSID that the proposed project was based on agreements that were invalid under Pakistani law and, therefore, Tethyan Copper couldn’t seek any damages.
The Chilean copper miner Antofagasta plc won the award last July in arbitration that arose out of Pakistan’s 2011 denial of a mining lease for the Reko Diq project.
Farooq Tirmizi argues that Sachs knowledge on the matter is limited as TCC is the aggrieved party here, and the government of Pakistan was clearly in the wrong.
Jeffrey Sachs Criticism
“Thanks to the World Bank’s flawed and corrupt investment arbitration process, the rich are making a fortune at the expense of poor countries. The latest shakedown is a $5.9 billion award against Pakistan’s government in favour of two global mining companies for an illegal project that was never approved or carried out” said Jeffrey Sachs, a world renowned economist and author of “The Age of Sustainable Development, in his article last year “How World Bank Arbitrators Mugged Pakistan”.
The article criticises the exploitive nature of international institutes such as the World Bank which make their fortune on the back of developing countries.
Farooq Tirmizi argues that Sachs knowledge on the matter is limited as TCC is the aggrieved party here, and the government of Pakistan was clearly in the wrong.
Jeffrey Sachs is wrong when he says "World Bank arbitrators mugged Pakistan" writes @FarooqTirmizihttps://t.co/s9DExM8rSP
— Khurram Husain (@KhurramHusain) December 9, 2019
Tirmizi argues that the underlying economics of the transaction agreement do not appear to be unfair. The main bone of contention was that the Balochistan government was obligated to pay for 25% of the costs of the exploration and eventual development of the mine. Since the government of Balochistan did not have the money for the exploration or development of the area, BHP said that they would cover the costs in the form of a loan to the Balochistan government, payable only if a profitable mining operation were to start in Reko Diq. This connects to the timing of the transaction being challenged. When the opposition began in late 2009, TCC discovered actual gold and copper and began preparations for mining.
In December 2010, shortly after the media frenzy against TCC started, a miraculously well-timed “counterproposal” was submitted by the Metallurgical Corporation of China (MCC), a Beijing-based state-owned company. Tirmizi questions the convenience for them to have been ready with a proposal right when the fate of TCC’s mining licence was being litigated in the highly ill-informed court of public opinion.