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Global overview of disputes avoidance and mitigation for the mining sector (Part 2)

Volatility as the new normal

Global Publication November 2020

Introduction

This article is a companion piece to Global overview of disputes trends in the mining sector (Part 1). In Part 1 we reviewed the challenging global risk landscape for the mining sector, noting that it is volatile and multi-faceted, with many of the risks being intersectional and in flux. In challenging times such as these, considerations of agility, resilience and risk mitigation – in particular, disputes-risk mitigation – must feature high on every corporate agenda. In this Part 2, we look more closely at the disputes trends for the sector and ways of mitigating disputes-risk. A disputes-risk mitigation and management strategy is a crucial part of any modern corporate risk protocol, and can save management time, money and crucially, can preserve important counterparty relationships. 

 

Disputes-risk avoidance and mitigation

Disputes-risk considerations must be a keystone of any risk assessment – as history shows, volatility almost inevitability leads to a surge in commercial disputes, and in a tumultuous environment there is a greater risk of such disputes becoming “bet the company” concerns. 

There are a number of categories of disputes in the mining sector that are on the rise or anticipated to rise. The first category is disputes with states and state-owned entities. The trend towards resource nationalism is a key threat in this regard, as are fluctuating regulatory and judicial responses to evolving macroeconomic threats such as climate change, ESG issues and the pandemic. Disputes with states commonly manifest in the context of licensing, permitting or regulatory changes (including taxation or tariffs), as well as conduct such as direct or indirect expropriation of assets. As noted above, many in the sector are concerned about protectionist governmental responses to improve the economy post-pandemic such as changes to resource tax or royalties policies. 

To mitigate this risk, mines and investors need to focus at the outset of a project on embedding mechanisms to manage or transfer political risk. This may include contractual mechanisms such as stabilization clauses or material adverse change clauses. Another key tool in the investors’ toolkit is foreign investment treaty protections. If structured appropriately at the outset, an investment made by a foreign investor in a host state may benefit from additional protections found in bilateral or multilateral investment treaties, or sometimes in free trade agreements such as NAFTA. Frequently, such treaties afford investors greater substantive protections of their assets than might otherwise be available under domestic law or under contract. Common substantive treaty protections include: fair and equitable treatment, full protection and security, national treatment, most favoured nation treatment, no expropriation without full (and prompt) compensation, and free transfer of capital. 

What gives these protections teeth is that such treaties also often contain investor-state dispute settlement (ISDS) provisions. Those commonly provide that the foreign investor has the right to bring proceedings against the host state directly in a neutral forum should the state breach its treaty obligations. This is a powerful avenue of recourse for investors. Without such rights they may have little to no recourse for state conduct before the local courts. That would mean the only other recourse would be state to state diplomacy, something that is not always available, effective nor even appropriate (given it politicizes an otherwise commercial dispute). 

The dispute resolution mechanism provided for in investment treaties is often international arbitration. This allows disputes to be resolved in a neutral forum, before impartial adjudicators, and in accordance with transparent rules. Monetary compensation is the most common remedy. However, in certain cases other remedies, including declaratory relief and restitution, may be available. Interim relief whilst proceedings are ongoing may also be available, including interlocutory measures to compel or restrain a party from certain conduct (such as might aggravate the dispute or render the dispute resolution process nugatory). For more information on investor-state dispute resolution in the mining sector, also see our FAQ on ISDS in issue 11 of the International Arbitration Report

Another key category of disputes on the rise are claims relating to the contractual obligations underpinning the various transactions discussed above – exploration or operations enhancement projects, project finance arrangements (in particular alternative financing disputes), digital or technological investments, mergers and acquisitions, joint ventures, partnerships and arrangements with shareholders or third parties, as well as new contracts with new counterparties in new markets, or the renegotiation of existing contracts, in the interests of greater diversification of supply chain, customer base and workforce. 

Risks of disputes arise in every transaction, but these increase where miners are engaging with new contractual counterparties and new markets. This risk is compounded where non-traditional players are involved, or miners are crossing over into non-mining sectors. This is because the parties’ expectations and understanding of sector norms or common commercial practices may not be aligned. For example, there may be less impetus to preserve relationships, which has historically been a hallmark of long-term, capital intensive mining investments. 

Areas of law and regulation that are still in flux, such as climate change and ESG, also complicate matters and raise unique risks. Those breaking new ground (pardon the pun) in space mining or deep sea mining also face novel and fluctuating risks – and therefore complex disputes – as laws and regulations develop, parties create new contractual mechanisms to allocate risk, or resort to international law principles, to deal with novel issues (such as how to take security over something, like a satellite, that would be very difficult to recover). Similar issues and potential disputes-risk come up in respect of new ways of working and doing business (such as the use of drones for virtual due diligence by deal teams in place of site visits). 

Along with carefully crafted terms to allocate risk between the parties, a valid and effective dispute resolution clause – tailored to the parties, needs and circumstances – is the crucial risk mitigation tool. This is because it is often the key to viable legal proceedings. After all, no matter how beautifully crafted, a contract that is unenforceable is not worth the paper it is written on. 

Many mining sector commercial contracts, regardless of subject matter, contain international commercial arbitration agreements. International arbitration has been popular in mining sector contracts for decades, with good reason. The cross-border nature of many mining investments, combined with the involvement of emerging or challenging jurisdictions and state or state-owned counterparties, has meant that many parties prefer to arbitrate disputes privately than risk ending up before local courts. Local courts in many jurisdictions present real risks of state influence, lack of judicial independence, corruption, delay, or simply lack of expertise in dealing with complex international commercial legal disputes. The ability of parties to select their own specialist arbitrators is also seen as important in mining disputes, particularly as many mining sector disputes involve technical or complex issues. This applies equally to disruptive technology disputes. Confidentiality and the ability to adapt the arbitration procedure to suit the parties’ needs is also welcomed – indeed, this procedural flexibility came into its own during the COVID-19 pandemic, allowing parties to progress disputes in arbitration despite a near global shut-down that closed or seriously restricted the operation of most courts. 

However, most frequently it is enforcement that provides the main impetus for arbitration. International arbitration (unlike litigation) benefits from a straightforward enforcement regime, the New York Convention, that has near-global uptake, with some 166 states having ratified the convention as at the date of this article. As noted above, contractual rights are worthless without a means of enforcement – but that pithy comment should be caveated to say that successful litigation without means of ultimately enforcing the judgment or award against assets is a far worse sin as it will mean an expensive and time-consuming Pyrrhic victory. At the risk of sounding like a character from Alice in Wonderland, the end (enforcement) is always where any experienced disputes advisor should begin. And that applies whether advising on disputes-risk mitigation at the outset of a transaction, or dispute management or mitigation after the onset of a dispute. 

Another key element of proactive disputes-risk mitigation (one which is unfortunately too frequently overlooked) is an assessment of where, how and why disputes are arising. This involves a strategic analysis of the factual circumstances and contractual arrangements in which disputes have arisen. Or, in the case of innovative relationships or projects, an analysis (often based on analogous deals) of likely key areas of disputes-risk. This assessment can be holistic or focused – such as limited to a particular suite of transactions, a particular time period, or a particular region. Commonly, patterns can be observed which allows for identification of underlying issues and early commercial or strategic intervention to avoid similar disputes in the future. Such disputes-risk assessments are critical because too often in the heat of battle or in the relief of the aftermath, the underlying issues that caused a major dispute are forgotten. Similarly, a spate of lower value or less commercially important disputes can slip individually beneath the radar, despite amounting collectively to a significant drain on financial and management resources. The opportunity to identify a common cause underlying those disputes can be missed. In the case of smaller skirmishes, it can also mean missing a red flag that the conditions for a major dispute are forming. 

Related to this is the importance of having in place appropriate systems to record disputes as well as to preserve documentary and other evidence from the earliest stages of a dispute. Such systems lead to more efficient and effective dispute resolution proceedings, but importantly also allow earlier and more informed decisions as to the appropriate strategy for resolving the dispute and avoiding future disputes. 

Investing in the assessment of disputes-risk (both at the outset of a deal and in the post-mortem of a dispute), and implementing processes for managing disputes can prove invaluable. In the long run it can save management time and money – and crucially, preserve important counterparty relationships. With operations and finance under pressure and disputes-risk on the rise in the face of global volatility, this is an important component of any risk protocol. 

 

Conclusion 

The risk landscape for the global mining sector is volatile and complex, and one that is increasingly challenging to assess and navigate. Given the capital-intensive, long-term projects that are the norm in the mining sector, it has always been important to consider operational and supply chain resilience and risk mitigation. However, these factors are even more crucial in the current environment given the range of significant disruptors that are impacting and will continue to impact not only the mining sector but also global geopolitical relations, financial markets and businesses in the wake of the pandemic and in coming years. With ‘volatility being the new normal’, there will inevitably be an increase in disputes, which will have impact on miners’ finances, management time and counterparty or stakeholder relations. A strategy for disputes-risk assessment, avoidance and mitigation should be a key component of any modern comprehensive risk strategy. 

 

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