Bear Creek Mining Corp. v. Peru: the potential impact on damages of an investor's contributory action and failure to obtain a social license

In an award dated 30 November 2017 (the "Award"), an ICSID Tribunal ordered Peru to pay around US$30.4million to Canadian company Bear Creek Mining (the "Claimant") following its finding that a 2011 decree ("Decree 032") constituted an unlawful indirect expropriation of the Claimant's right to operate the Santa Ana mine (the "Project").

This post discusses the disagreement between Karl-Heinz Bockstiegel (the president of the tribunal) and Michael Pryles (appointed by the Claimant) (together, the "Majority"), and Prof. Philippe Sands QC (appointed by Peru), on the assessment of damages. Prof. Sands considered that the damages should be reduced due to contributory fault on the part of the Claimant.

The impact the Claimant's conduct had on the Tribunal's calculation of damages was, in any case, significant. Given the extent of, and reasons for, the opposition to the Project by the time of Decree 032, the Tribunal thought a hypothetical purchaser would not have obtained the necessary 'social license' to proceed with the Project. Ultimately it awarded the Claimant only a fraction of the US$522 million claimed. The reduced damages award emphasises the importance of respect for human rights and engagement with indigenous communities by investors.

The respective views expressed by the arbitrators concerning the Claimant's conduct are also interesting in light of the broader debate about the relevance of the human rights of non-parties in investor-state arbitration.

An overview of the overall Award can be found in the post published on 16 December 2017 on the Kluwer Arbitration Blog.

Background

By Decree 032, Peru revoked a 2007 decree ("Decree 083") which authorised the Claimant to acquire, own and operate certain mining concessions. The revocation followed protests from March to June 2011 by local communities against the mining activities. The Claimant argued that Decree 032 had violated several of Peru's obligations under the Canada-Peru free trade agreement ("FTA").

The Tribunal was unanimous in finding that Decree 032 constituted an unlawful indirect expropriation of the Claimant's investment. The three members of the Tribunal were also in agreement on the Claimant's right to compensation, and on the basis for calculating this.

However, Prof. Sands disagreed with the Majority on certain points. In particular, he considered that:

1. Peru had proved a causal link between the Claimant's conduct in relation to the Project and Decree 032; and
2. the damages award should be halved on the basis that the Claimant had failed to carry out the actions legally required of it to obtain a 'social license', and had contributed to the social unrest that left Peru with no option but to act to protect the public well-being.

The causal link between the Claimant's conduct and Decree 032

The Tribunal agreed that the applicable legal standard in relation to the Claimant's conduct was as stated in Abengoa S.A. y Cofides S.A. v United Mexican States. The tribunal in that case held that:

"For the international responsibility of a State to be excluded or reduced based on the investor's omission or fault, it is necessary not only to prove said omission or fault, but also to establish a causal link between [the omission or fault] and the harm suffered."

Prof. Sands' reasoning and conclusion

Prof. Sands considered that the evidence before the Tribunal clearly showed that the Claimant's actions from 2007 to May 2011 contributed in material ways to the events that led to the Project's collapse.

Prof. Sands found that the Claimant had failed to give sufficient effect to the rights protected by Article 15 of the ILO Convention 169 and the implementing domestic law.  Article 15 of the ILO Convention 169 (Indigenous and Tribal Peoples Convention) safeguards the "the rights of the peoples concerned to the natural resources pertaining to their lands… including the right …  to participate in the use, management and conservation of these resources".

Whilst the Tribunal noted that ILO Convention 169 imposes direct obligations only on states, Prof. Sands concluded that this did not mean that the Convention "is without significance or legal effects for [foreign investors]". While it is the State's function to deliver a domestic law framework that ensures that a consultation process and outcomes are consistent with Article 15, it is for the investor to obtain the 'social license' - "the necessary understanding between the Project's proponents and those living in the communities most likely to be affected by it, whether directly or indirectly". In this context, he said, the FTA "is not…an insurance policy" against the failure to do so.

Prof. Sands criticised the Claimant for having "at best, a semidetached relationship to the vital rights set forth in this part of the Convention". He noted that, while the Claimant was aware from 2008 that numerous communities had strong objections to the Project, it continued with the same strategy in its outreach programme. This did not involve all the potentially affected communities, offering jobs only to some and engaging in consultations which were uneven and insufficient.

Prof. Sands concluded that the Claimant's contribution to the Project's collapse was material, due to the Claimant's inability to obtain a 'social license'. He would accordingly reduce the measure of damages by one half, on the basis that the Claimant's responsibilities were no less than those of the State.

The Majority's reasoning and conclusion

The Majority noted that the ILO Convention 169 imposes no direct obligations on private companies, and does not grant communities veto power over a project. As a matter of law, the absence of local support for a mining project did not vitiate Peru's 2007 declaration that the Project was of public necessity. At most, it entitled Peru to require the Claimant to undertake additional community outreach.

However, on the evidence, Peru was aware of and did not object to the Claimant's outreach activities, and indeed often endorsed these, right up to June 2011. It was not open to Peru to justify the derogation of the 2007 decree by claiming that the Claimant's conduct was contrary to the ILO Convention 169 or was insufficient, and caused or contributed to the social unrest in the region. Even if the Claimant had failed to secure a 'social license', Peru's actions prevented the Claimant from undertaking additional community outreach in order to obtain one. Peru had failed to prove that its breaches of the FTA were caused by the Claimant.

Comment: impact of failure to get social license on measure of damages

While the measure of damages was not reduced on the basis of contributory fault of the Claimant, the Tribunal agreed that the damages should be quantified on the basis of the amount actually invested in the Project. This was because there was little prospect for the Project to obtain the necessary 'social license' to allow it to proceed to operation by the time Peru adopted Decree 032. Therefore, the Project could not, in the short term at least, be considered to be viable. There was no evidence to support a track record of successful operation or profitability in the future, so the Project was too speculative for damages to be quantified by reference to its potential profitability using the DCF method.

The Claimant had requested compensation of at least US$522 million based on its evaluation of the fair market value of the Project using the DCF method; it was awarded around US$30.4 million (US$18.2 million actually invested in the Project from Decree 083 up to Decree 032, plus interest and around US$6 million in legal fees and arbitration costs).

As this case highlights, while States continue to face significant difficulties in seeking to rely on human rights arguments to defend breaches of their treaty obligations, an investor's failure to obtain a 'social license' may have a significant impact on the amount of damages. Investors are reminded that promoting and respecting human rights constitutes the first line of risk management, especially when making an investment that will affect indigenous communities.

For more information, please contact Christian Leathley, Partner, Naomi Lisney, Senior Associate, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.