International Arbitration: Canadian Firms in Troubled Waters

11 06 2010

It seems that lately, Canadian firms have been at the mercy of government’s will to play nice or not. In the last remedy available to protect substantial investments in developing countries’, firms have turned to international arbitration hoping to overturn decisions made by sometimes corrupted domestic courts or abrupt policy shifts.

Africa-First Quantum (TSX: FM, LSE:FQM)

The highest profile case to emerge lately was of course First Quantum whose rights to two mines (Frontier and Lonshi) in the Democratic Republic of Congo were annulled by a court and handed over to a state-owned firm. The Court cancelled a letter giving First Quantum’s the mining rights to the two properties claiming that subsequently to a reform of mining laws, a decree was required to allow First Quantum to exploit the mines. This behaviour from Congolese authorities could be partly explained by the decision of the firm to seek international arbitration in relation to a previous ruling made on its Kolwezi project.

The Kolwezi project is developed by the Kingamyambo Musonoi Tailings SARL (“KMT”), a partnership involving First Quantum (65%), the state-owned Gécamines (12.5%), Industrial Development of South Africa (10%) and the International Finance Corporation (5%). A contract review conducted in September 2009 highlighted contract irregularities and production delays to the project. The review pointed that the constitution of the company resulted of a fraud for which Gécamines and the Mining Registry were seeking compensation of US $7 billion and 5$ billion respectively.

First Quantum explained in a press release that partners in the Kolwezi project were not served and with a proper Notice of Hearing Date for matters related to the Kolwezi project and noted that there were grounds for thinking that the Code of Civil Procedure was not adhered too in the process. The firm began arbitration procedures on February 1, 2010 through the International Chamber of Commerce International Court of Arbitration in Paris which (sadly) does not publish documentation on the case on its web site.

Central America

 Amazingly enough, 61% of the mining cases filed to the International Center for Settlement of Investment Disputes, the most commonly used arbitration court, involved Latin American countries. It seems that Governments have settled previous dilemmas between resource development and environmental protection and have taken swift turns in the latter direction, making some mining projects casualties.   

El Salvador-Pacific Rim (TSE: PMU), a Vancouver-based firm, has seen its El Dorado gold project jeopardized as a result of the government refusing to provide a mining permit for fear of being clobbered by citizens opposing mining. In responding to popular pressure the Government avoided to approve an Environmental Impact Assessment. The company provided its first impact assessment in 2004 and substantially reviewed it, at the Government’s demand until 2006, and then nothing.

 Ironically, it was conveyed in the press that the environmental quality of the project is not the factor preventing the issue of the permit as the final design of the mine is exceeding international standards. The government of then-President Tony Saca acknowledged this by telling the company that there is no technical problem with the mine, only political ones”. Opponents to the project however argue that the measures to mitigate adverse environmental impacts are not sufficient. In response to this stalemate, Pacific Rim has filed for international arbitration.

 Pacific Rim announced in December 2008 their intention to file for arbitration under Dominican Republic-United States-Central America Free Trade Agreement’s (“CAFTA”) investment rules. Pacific Rim can rely on this agreement as it has U.S. subsidiaries operating in El Salvador (PRES and DOREX). The company formally filed for arbitration at the ICSID on April 30, 2009. The hearing of preliminary objections has taken place only recently on May 31st and June 1st 2010. The Government of El Salvador was attempting to get the case dismissed at the outset. Video recordings of the hearing are available here. We are still months away of any substantial developments. Should any newsworthy development arises, you will be made aware.

Similarly to Pacific Rim, Vannessa Ventures, through its subsidiary Industrias Infinito S.A, attempted to obtain an environmental permit for its Cerro Crucitas gold project. The permit it obtained was overturned in 2004 by the Supreme Court of Costa Rica as the permit violated provisions from the constitution guaranteeing the public a healthy environment. The court ordered the state to pay costs, damages and compensation to Vannessa Ventures. The company later on filed for arbitration with the ICSID and is now operating on another name: Infinito Gold Ltd. A bit of browsing has indicated that Infinito Gold has also filed for arbitration regarding the expropriation of its Las Cristinas project in Venezuela. Gracias!

 This was just a quick sightseeing of the international arbitration seen from the mining industry’s perspective. The UN Commission on International Trade Law another international arbitration body, similarly to Chamber of Commerce International Court of Arbitration, does not publish a registry of cases. So this entry is only a sampling of current cases but it does underscore the political and social risks inherent to mining operations.

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