After a decade of implementing the Belt and Road Initiative, Chinese enterprises and their foreign direct investments in the metal and mining sector reached a record high in 2023. However, China’s progressively expanding footprint in overseas mining is challenged by illegal mining, local mafia, corruption and crime.
This article explores the legal remedies potentially available to Chinese enterprises against these challenges under the Full Protection and Security (FPS) doctrine of international investment law.
In investment arbitration, arbitral tribunals often adopt a two-pronged approach to delineate FPS protection. The first entails the host state’s responsibility to implement measures preventing interference by any third parties, the host state, its organs or its associated entities. The second involves the host state’s obligation to prosecute those who have wrongfully harmed an investor or its investment.
The first prong, the duty to prevent, was elaborated on in El Paso v Argentina, which required the host state to prevent interference by third parties. The same principle was also determined by a tribunal in Eastern Sugar v Czech Republic. Interference may also come from state organs and state representatives, as exemplified in Wena Hotels v Arab Republic of Egypt.
The second prong, the duty to prosecute, is illustrated in cases such as Suez & InterAgua v Argentina and Electrabel v Hungary, explaining that a host state bears the duty to provide adequate mechanisms and legal remedies for prosecuting wrongdoers or for obtaining redress.
Many tribunals have found that a host state’s duty to prevent and prosecute is not a strict liability or an assurance of a particular outcome. Instead, it is a proportionality test that depends on the special circumstances of the case.
In AMT v Zaire, the tribunal interpreted this proportionality test as a “due diligence” duty and considered that the host state “shall take all measures necessary to ensure the full enjoyment of protection and security of its investments”. This is also seen in cases such as Saluka v Czech Republic, Pantechniki v Albania, and Tulip v Turkey.
Investor-state arbitration tribunals are divided over whether the FPS standard is limited to physical protection or extends to providing a predictable and secure commercial and legal environment. Most tribunals resist a broad interpretation that encompasses legal and commercial aspects, as evident in cases like Rumeli v Kazakhstan, Saluka v Czech Republic and BG Group v Argentina.
Nevertheless, some tribunals embrace the expansive interpretation that includes providing a certain, foreseeable and secure investment environment beyond mere physical safety, as seen in cases like Siemens v Argentina, Biwater v Tanzania and National Grid v Argentina.
Chinese enterprises making investments overseas in the mining or metals sectors can argue that the foreign host state is under the obligation to: (1) accord protections for investors from physical harm and damage; and (2) ensure a certain, stable and secured business environment and legal framework.
As mining stands out as one of the fastest growing industries for Chinese investors venturing into foreign countries, the case of Copper Mesa Mining Corporation v Republic of Ecuador underscores the potential for social riots and vandalism that foreign investors might encounter, and how the FPS principles can be leveraged to protect investments.
Here, the Canadian investor faced substantial challenges in accessing its mining site, encountering roadblocks erected by local anti-mining protesters concerned about the project’s potential negative environmental impact. The situation escalated into violent clashes involving tear gas, gunfire and vandalism, which eventually violated Copper Mesa’s interests.
Subsequently, Ecuador’s government passed a resolution requiring all investments to undergo an environmental impact study (EIS); an EIS failure would result in investment forfeiture without compensation. Due to the intense violence and protests taking place between Copper Mesa and the local anti-mining community, it became impossible for Copper Mesa to fulfil this EIS prerequisite.
Notably, another mining company had invested in the same area before the Canadian investor. The preceding investor entirely withdrew after encountering a similar occupation of mining areas by local anti-mining groups, including vandalism against its properties and personnel. This underscored the historical and persistent ineffectiveness of the police force in the region.
In view of this, the tribunal reiterated that the FPS obligation was not a strict liability but imposed a duty akin to the exercise of due diligence on the part of the government.
The tribunal said the complete withdrawal of the previous investors demonstrated the genuine, longstanding and well-known risk presented by anti-mining groups in the operational area – a risk that predated the claimant investor’s involvement.
It also considered the consistently intermittent and ineffective presence of the respondent state, including its police force, which indicated that the investor claimant could not have reasonably expected the same level of security as in a more stable country.
Separately, the tribunal concluded that the FPS principle was indeed breached, but only due to the state’s regulatory change in issuing the EIS-related resolution that led to the forfeiture of the investor’s investment without compensation. In this case, an expansive interpretation of the FPS protection was embraced to include the state’s duty to ensure the certainty and stability of its legal environment.
This case underscores the importance of elements such as pre-existing investment risks, and the presence and power of governmental police forces at mining sites when tribunals evaluate respondents’ liabilities under the principle of the FPS. It stands as a solemn reminder for future investors to thoroughly investigate these elements as part of their due diligence process.
Arbitration avenues. Prior to any investment, it is imperative for investors to meticulously analyse the treaty protections between the involved countries. If deemed necessary, investors may strategically structure their investments through a third country to utilise its more favourable investment protection terms.
However, arbitration tribunals have split views regarding the legitimacy of such “treat shopping” strategies. To optimise the chances for benefits, it might be wise to consider engaging professional legal services early in the investment process.
Non-violence. The resort to violence in response to local riots or physical threats should be avoided, as it has the potential to be perceived negatively by arbitral tribunals and may be considered a contributory factor in disputes.
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