FET for mining enterprises and their foreign investments

As covered in Protecting China’s investment in overseas mining (China Business Law Journal, volume 14, issue 10), the foreign interests of mining enterprises may be compromised by local anti-mining sentiment, which cannot always be aptly protected against by the host states and their police forces. Investors may resort to the Full Protection and Security (FPS) doctrine of the international investment law for remedies.

There is another pivotal principle, Fair and Equitable Treatment (FET), which lays out how investors can protect themselves against host states’ arbitrary conduct.

FET principle

The FET principle generally requires a host state to ensure:

1. Protection of investors’ reasonable expectations;
2. Transparency of the state’s conduct;
3. Due process and fair procedure; and
4. Avoidance of engaging in unduly coercive and harassing conduct.
   In addition, some tribunals interpret the FET principle to include a requirement that the state act in good faith.

Numerous tribunals have emphasised the importance of the host states’ maintaining a stable and predictable legal and business environment to protect investors’ legitimate expectations in making their investments. Typically, if a state has made specific representations to an investor, the tribunal may deem these an important basis for the investor’s reasonable expectations.

With respect to transparency, several tribunals have maintained that inconsistency between promises or actions by different arms of the government of the host state could constitute a violation of the FET standard by the host state. This becomes particularly apparent when investors base their investments on assurances from one government department, only to discover later that these promises conflict with requirements imposed by another government organ, rendering the investment illegitimate.

In terms of due process, certain tribunals have considered a host state’s failure to provide adequate notice to investors regarding procedural steps – such as permit or licence revocation, asset seizure, and auction of assets – as a breach of the due process requirement, ultimately leading to a determination that the host state has violated the FET standard.

The FET standard also necessitates that states abstain from actions that could be construed as unduly coercive towards investors. This includes actions such as substituting an unlimited operating licence with a limited one, and manipulating the issuance of a domestic arbitral award to unfairly disadvantage the investor to pressure the investor into accepting a settlement agreement with significantly reduced compensation.

Tribunals are not settled on whether bad faith is a necessary element for a state to be held in violation of the FET principle. Some tribunals have opined that it is not a prerequisite. Others have held that the FET standard requires the states to act in good faith.

Crystallex v Venezuela

The Crystallex International Corporation v Bolivarian Republic of Venezuela case notably illustrates how specific representations made by a state can form the basis of the investor’s legitimate expectation, the violation of which can lead to the state’s being found to be in breach of the FET standard.

In Crystallex v Venezuela, the investor entered the gold mining sector of Venezuela around September 2002 by signing a contract with a Venezuelan state-owned corporation named CVG. The contract mandated the investor to bear exploration and exploitation costs.

After years of investments and fulfilment of obligations, the investor received a letter from the Venezuelan authority, dated 16 May 2007, in which the authority assured the investor that upon submitting a guaranteed bond to the government the investor would be granted the necessary permit to commence the exploitation stage.

However, after the investor submitted the bond, on 14 April 2008, the government declined to grant the permit because of a subsequent policy change. Despite numerous appeals, the investor’s investment in the local area was ultimately forfeited because of the denial of the permit.

The dispute concerns, in part, whether the 2007 letter would constitute a concrete representation by the Venezuelan government to the investor and hence be a basis for the investor’s legitimate expectation of receiving the permit.

The tribunal decided that the representations made in the 2007 letter show that the process of analysis and approval had been completed, and that Venezuela’s government was ready to issue the permit once the bond was posted. Also, because the 2007 letter was issued after the investor had made years of investments, the investor could have reasonably relied upon the representations in the 2007 letter.

The tribunal rejected the notion that representations such as the investment contract or high-level government officials’ speeches supporting the projects prior to the government’s denial of the permit in 2008 would establish a basis for the investor’s reasonable expectation. According to the tribunal, these representations were too generic and not specific promises.

The tribunal further held that Venezuela also acted arbitrarily and breached due process by failing to give specific reasons for the denial, which prevented the investor from effectively challenging the decision or rectifying its conduct. For these reasons, the tribunal eventually held that Venezuela violated its FET duty.

Takeaways

Crystallex v Venezuela highlighted the importance of obtaining specific, clear and concrete representations/commitments by the host state to maximise protection under the FET standard.

Mariana Zhong is a partner and Zheng Xinming is an associate at Hui Zhong Law Firm