Advertisement

Reko Diq Case: How Mismanagement landed Pakistan in Quagmire

Pakistan's gold mine and believed to be the world's 5th largest gold deposit, Reko Diq is in a dismal state as Pakistan has been handed a fine of 6 Billion US Dollars for its mismanagement and efforts at expropriation. How is this humungous fine going to affect Pakistan's Foreign Exchange Reserves?

Print Friendly, PDF & Email
The award in famous Reko Diq case handed down by International Centre for Settlement of International Disputes (ICSID) has provided a fresh impetus to the seemingly endless debate on limitations to be observed in the exercise of powers of Supreme Court under Article 184 (3) of the 1973 Constitution of Islamic Republic Of Pakistan. Additionally, the issue has also gained traction owing to the humongous amount of the award for nearly USD 6.00 Billion and its effect on already depleting foreign exchange reserves not to mention the collateral damage which may result in form of depreciation of investor confidence in case Pakistan has to finally pay the awarded amount.

The dispute in the Reko Diq case arose out of the non granting of mining lease to Tethyan Copper Company Ltd (TCC), operating in Pakistan through wholly-owned subsidiary i.e TCCP, which pursuant to novation agreement dated 1.4.2006 became party to the Chaghai Hills Exploration and Joint Venture Agreement (CHEJVA) executed on 29.7.1993 with Baluchistan Development Authority(BDA) for exploring copper and gold in the Reko Diq area of Balochistan.

The first challenge to the legality of CHEJVA was made in 2006 through a constitutional petition before the High Court of Baluchistan which was dismissed declaring the relaxation of Baluchistan Mining concession rules 1970 (BMCR) and other acts of Governor of Baluchistan and BDA to be legal and valid. The judgment by Baluchistan High Court was challenged before Supreme Court of Pakistan along with other constitutional petitions under Article 184 (3) of the Constitution challenging the grant of license to BHPM/TCC on the ground of non-transparency, lack of fairness and possible risks to vital interest as a result of the grant of mining lease. The supreme court in its judgment reported as PLD 2013 Supreme Court 641 held that all the key provisions of CHEJVA were made subject to the reliance on relaxations that were illegal and void ab initio.

The illegality having seeped into the root of contact rendered the entire contract as illegal and void. It is interesting to note that the Governor of Baluchistan as a party to the legal proceedings, had supported the legality of CHEJVA in proceedings before the High Court of Baluchistan but came up to take a contradictory stance before the Supreme court. This retraction was allowed on the ground that documents produced before Supreme Court smacked of extensive irregularities and corruption and it was only in proceedings before the Supreme Court that the government examined and decided not to defend the same.

Under international law, a sovereign state is entitled to expropriate foreign assets by paying compensation in manner prescribed by international law and according to BIT provisions.

Clause 15 of CHEJVA provided for resolution of the dispute between the parties through arbitration before two different international forums. The claimant simultaneously opted for both kinds of the arbitrations seeking specific performance of CHEJVA as international private contract before ICC and filing of treaty-based claim for arbitration through ICSID under bilateral investment treaty (BIT) between Pakistan and Australia claiming specific performance of CHEJVA and grant of mining lease along with application for provisional measures for status quo.

The most important contention of Tethyan Copper Company Pty Ltd (i.e claimant) in the arbitration proceedings before ICSID was that the denial of mining license by Government of Pakistan (i.e respondent) and Baluchistan would deprive the claimant of its investment in the project and constitute expropriation under Article 7 of Bilateral Investment Treaty (BIT) between Australia and Pakistan.

The said provision of BIT without defining or prohibiting expropriation merely stipulates the grounds on which an expropriation can be made in addition to the manner in which compensation is to be computed and paid to a foreign investor. This gives rise to the question as to what amounts to expropriation and what are the international rules applied in determining the legality of such an action and compensation to be paid to a foreign investor as a result of expropriation.

Given the fact of non-publication of a final award due to lack of consent by both the parties sole reliance has to be placed on ICSID decision on the request for provisional measures in gaining the sense of legal issues which may have been raised in arbitration proceedings similar to the one initiated by TCC (the claimant). These issues may include the following:

1: Whether the refusal of mining lease to TCC amounts to expropriation.

2: Whether the expropriation was legal or in accordance with Article 7 of the Aus-Pak BIT.

3: What should be the amount of compensation to be paid to TCC.

Reko Diq & Pakistan’s Inefficiency

What constitutes the taking of property commonly known as expropriation or nationalization? the question has been the source of permanent inquiry by ICSID since almost all disputes referred to it under BIT involve an allegation of host state responsibility for some form of expropriation without compensation.

Simply put expropriation means taking of assets of foreign companies or investors by a host state against the wishes and without the consent of the company or investor concerned. An expropriation can be broadly classified into direct and indirect expropriation. A direct expropriation involves an outright or express taking of the assets by a government decision whereas an indirect expropriation involves a governmental whether administrative or legislative measure that does not directly take property but results in depriving the owner of substantial benefits of the property.

Read more: PM orders probe to fix responsibility in Reko Diq case

A further distinction that may have substantial bearing on the amount of compensation is that of lawful and unlawful expropriation. Lawful expropriations are carried out against compensation and in accordance with international foreign investment law and provisions of BIT as against unlawful expropriation involving nonpayment of compensation and violation of foreign investment law or provisions of BIT.

Besides generalized definitions of expropriations attempts by judiciary an arbitral tribunals have also been made to provide a comprehensive legal definition of the term. The notable decision setting the tone for defining expropriation and relied upon by subsequent tribunals and commissions is the one by Permanent Court of International Justice in the case of Germany Vs. Poland (1926) a case involving illegal or confiscatory expropriation by Poland of German assets in violation of the Geneva Convention of 1922 between Germany and Poland on Upper Silesia.

The case established that a state may expropriate property where it interferes with it and even though a state may not purport to interfere with rights to the property it may by its actions render those rights so useless that it will be deemed to have expropriated them. Essential reference may also be made to the decision by US-Iran claims tribunal in the case of Amoco International Finance Corporation Vs. Iran.

The case involved nationalization of the Iranian oil industry under the Single Articles Act in the aftermath of the Islamic revolution during which Khemco an Iranian company jointly owned and managed by AMOCO was also nationalized. Defining expropriation as a compulsory transfer of property rights the tribunal observed that the process may extend to any right which can be an object of commercial transaction i.e freely sold and bought and thus has a monetary value.

The facts of the Reko Diq case yearn for the application of above expansive definitions of expropriation by international courts and tribunals. Refusal of mining lease to TCC on ground “not satisfactory” and dismissal of administrative appeal against the same despite submission of feasibility report by TCC to government of Baluchistan as envisaged by CHEJVA that too in the wake of alternative proposals by Dr. Samar Mubarikmand and another by Metallurgical Group Cooperation, a Chinese state-owned company, operating mine close to Reko Diq, to submit a financial and technical proposal for Reko Diq, TCC’s failure to earn any return on its considerable investment as result of exploration and feasibility studies spanning over 10 years may clearly be seen as an instance of Indirect expropriation by Pakistan of the assets and interests owned by TCC in Reko Diq.

The second legal issue which ICSID may be called upon to decide in such a case is whether the expropriation is lawful. Under international law, a sovereign state is entitled to expropriate foreign assets by paying compensation in manner prescribed by international law and according to BIT provisions. Expropriation of foreign assets by a state may be ascribed to various reasons including exploitative nature of the business of investor, violation of the rights of the host state, a change of government or change in priorities of the host country, change in policies as a result of the change of government through elections.

However, international law, specifically, the international foreign investment law does impose certain restrictions on the right to expropriate which the state is presumed to voluntarily accept upon inviting and admitting foreign investor. Hence, any taking of assets in an illegal manner amounts to confiscation and attracts state responsibility.

Article 7 of the Aus-Pak BIT clearly exemplifies the state of international rules on the issue. Without prohibiting expropriation it specifies the grounds on which the same can be carried out by any contracting party. The provision requires that an expropriation should be for a public purpose and under due process of law. The international law is lacking in an agreed definition of term i.e. pubic purpose. As observed by the tribunal in AMOCO, that the modern acceptance of the right to nationalize/expropriate has resulted in the term being broadly interpreted and states being granted extensive discretion in this regard.

Provisions, similar to Article 7 of Aus-Pak BIT requiring expropriation to be accompanied by prompt, adequate and effective compensation can be cited in numerous other BITs.

In the case of Reko Diq, the immense value of vast copper and gold reserves as public property and its importance for economy of Pakistan coupled with admitted and overarching relaxation of rules by governor of Balochistan in favour of TCC without specifying the rules to be relaxed in clear violation of relevant Rules simply in exercise of executive authority, failure to obtain the best competitive price through tenders for the said mineral resource are the factors which may support claim of expropriation for public purpose in case such argument has been put forward by Pakistan during arbitration proceedings.

Further, one of the requirements of due process of law as regards expropriation may obligate the disputing parties to exhaust local remedies unless a BIT provides otherwise. In this case, the jurisdiction of local courts had been completely ousted by Article 15 of CHEJVA which only provided for consultation and thereafter arbitration through ICSID or arbitration of international Chamber of Commerce as the only modes of dispute resolution. in view of the above, ICSID may have found the non-grant of mining lease to TCC as expropriation in accordance with Aus-Pak BIT and therefore lawful.

Last but not least, the amount of compensation for expropriation has to be decided through an award by ICSID. As noted earlier, international law requires host states to pay compensation for expropriation without defining the nature of compensation. Provisions, similar to Article 7 of Aus-Pak BIT requiring expropriation to be accompanied by prompt, adequate and effective compensation can be cited in numerous other BITs. However, some BITs have deviated from this standard of compensation and have stipulated just or appropriate compensation for expropriation. Hence, in the absence of any universally accepted terms of compensation and what those terms stand for, customary international law remains uncertain as to the standard of compensation.

Decisions of international courts and tribunals may lend a helping hand to identify rules on the nature and amount of compensation. A review of awards by different tribunals highlight the following factors which may be considered in awarding compensation:

1: Assets whether tangible or physical or book assets such as debts and monies due.

2: Interest on the value of assets; and

3: Loss of future profits.

The practice indicates to include both (a) and (b) for both lawful and unlawful expropriation. However the third factor i.e loss of future profits is to be treated relevant only in case of unlawful expropriation. this view has been endorsed by ICSID under NAFTA provisions in SD Myers Inc V. Canada (2000-2002).

Another rule applied to determine the amount of award is based on the fair market value of the assets expropriated. The fair market value was defined by Iran-US claims tribunal in INA Corporation Case as the amount which a willing buyer would have paid to a willing seller for the shares of going concerned disregarding any diminution of value due to nationalization itself or anticipation thereof and excluding consideration of events thereafter that might have increased or decreased the value of share.

Read more: Reko Diq fiasco: TCC ready to negotiate settlement with Pakistan

This standard of compensation was applied by the ICSID tribunal in Enron Vs. Argentina in awarding USD 106 million seen as one of the highest amounts of compensation in 2007 for losses suffered by Enron as a result of emergency legal and regulatory measures taken by Argentina during its financial crisis.

Clause 7 (2) of Aus-Pak BIT indicates the application of the rule as to fair market value. In case such value cannot be ascertained the compensation shall be determined in accordance with generally recognized principles of valuation and equitable principles. going through ICSID decision on the request for provisional measures which fails to mention any amount of investment or value of assets and considering the huge amount of USD 4.8 Billion as compensation/penalty and 1.87 billion as the interest it appears that fair market value rule may not have been applied in case of Reko Diq. In such a situation ICSID may have exercised the leeway in determining compensation under generally recognized principles of valuation and equitable principles which may be susceptible to a successful challenge by Pakistan.

Sikander Hayat is a practicing lawyer. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

Latest

JS Bank dedicated to customers as it opens new office in...

With the new office in Islamabad, JS Bank aims to facilitate priority customers with dedicated financial advisors who will guide customers and assist them in wealth management, estate planning, and provide other multi-dimensional solutions.