Bear Creek v. Peru

Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/2

(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 15, 2018. Read more here.)

Decisions and award are available at https://www.italaw.com/cases/2848

Keywords

Silver mining, general exception clause, social licence to operate, human rights and rights of Indigenous Peoples

Key Dates

Request for arbitration: August 11, 2014

Constitution of tribunal: December 3, 2014

Partial dissenting opinion of Philippe Sands: September 12, 2017

Award: November 30, 2017

Arbitrators

Karl-Heinz Böckstiegel (president)

Philippe Sands (respondent appointee)

Michael Pryles (claimant appointee)

Forum and Applicable Procedural Rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable Treaty

Free Trade Agreement between Canada and the Republic of Peru

Alleged Treaty Violations

• Expropriation
• Fair and equitable treatment
• Full protection and security
• Protection against unreasonable or discriminatory measures

Other Legal Issues Raised

• General exception clause
• Jurisdiction
• Lawfulness requirement of an investment

1.0 Importance for Sustainable Development

The Bear Creek v. Peru arbitration illustrates the extent to which it is important that foreign investors as well as the host state engage in public consultation and outreach with the local population to guarantee that investment projects are well received and viewed positively. Canadian investor Bear Creek had found indications of significant silver ore deposits in the Santa Ana mine in Peru, but was ultimately barred from pursuing the exploitation of the mine due to the significant mistrust of the local population toward the project and the investor, which culminated in violent protests and social unrest. Bear Creek thus did not have a social licence to operateits investment. The concept of social licence is not a legal requirement but expresses the acceptance of a local population and other stakeholders about an economic project based on their perceptions and opinions.

The majority of the Bear Creek tribunal agreed that it is mainly up to host states to establish a legal framework that allows efficient consultation processes with the local population. However, one dissenting arbitrator argued that the foreign investor also plays an important part in this process of obtaining local trust—that is, the social licence. Namely, the dissenter found that International Labour Organization (ILO) Convention 169 (concerning Indigenous and Tribal Peoples) had legal effects on foreign investors as well. The dissenting arbitrator seems to continue a trend, illustrated by Urbaser v. Argentina,[1] to increase the international accountability of foreign investors with respect to certain social and human rights obligations. These cases also underline the fact that the need for corporate liability is gaining more attention, and tribunals must provide more space for considerations of human rights in investment disputes.

The number of cases dealing with the interaction between investment protection and the rights of Indigenous communities is increasing. Other pending cases include Álvarez y Marín Corporación S.A. and others v. Panama (involving claims of invasion of the investors’ properties by Indigenous groups) and South American Silver Limited v. Bolivia (involving claims of an investor’s misconduct in its relationship with local communities near a mining project).

The Bear Creek award, moreover, highlights another interesting development in recent investment arbitral case law, relating to the calculation of damages for investments that had not yet begun to operate. The tribunal accepted the sunk costs approach and refused to apply the discounted cash flow (DCF) method given that the future profitability of the investment was uncertain. This approach had also been applied by the tribunal in Copper Mesa v. Ecuador.[2]

2.0 Case Summary

2.1 Factual Background

Bear Creek Mining Corporation (Bear Creek), a Canadian company, sought to invest in Peru for the development of the Santa Ana silver mine, located in the Puno Region near the border with Bolivia. According to the Peruvian constitution, mines situated within the border zone of 50 km require explicit authorization from the Peruvian executive. A Peruvian national and employee of Bear Creek had originally acquired the mining rights. Bear Creek only later applied for the mining rights in its own name.

In November 2007, through Supreme Decree 083-2007 (Decree 083), Bear Creek obtained authorization to acquire, own and operate the corresponding mining concessions (para. 149). From 2007 onward, Bear Creek engaged in promising exploration work in the Santa Ana mine and conducted an environmental and social impact assessment (ESIA). Peruvian authorities approved the ESIA in 2011 but instructed the investor to implement community participation mechanisms to evaluate the ESIA (para. 168).

However, local communities strongly opposed the development of the Santa Ana mine, including through violent protests (paras. 190 et seq.). The concerns of the local population were that the mining activity of Bear Creek would negatively affect their land and thereby their cultural identity. In June 2011, the newly elected government, in an attempt to deal with the social unrest in the Puno region, issued Supreme Decree 032-2011 (Decree 032), which revoked Supreme Decree 083 (para. 202). Decree 032 had the effect of shuttering the mining project.

2.2 Summary of Legal Issues and Decisions

In August 2014, Bear Creek filed a claim against Peru under the Canada–Peru Free Trade Agreement (FTA). It argued that Decree 032 breached the requirements of the FTA, namely, to protect investors against unlawful expropriation, to afford them fair and equitable treatment (FET), to grant them full protection and security and to not impair the investment with unreasonable and discriminatory measures (para. 113). The investor claimed damages of USD 522 million, representing the expected profitability of the Santa Ana project. Peru, in turn, argued that the tribunal lacked jurisdiction given that the investment was made in bad faith and in violation of domestic laws. Moreover, the tribunal received three amicus curiae applications, of which two were accepted (brought by a Peruvian human rights organization and a Peruvian lawyer) and another (brought by an American think tank) which was rejected with the argument that it had not sufficiently been shown that it would be able to contribute any further information or arguments that would assist the tribunal (Procedural Order No. 6, para. 38). This raises questions about the discretion given to tribunals regarding the acceptance of amicus briefs.

In its award, the tribunal rejected the jurisdictional objections raised by Peru and accepted that Bear Creek must be compensated for the unlawful expropriation of its investment by Peru. The tribunal declined to make any finding on the investor’s additional FTA claims, reasoning that any such finding would not change or add to those that follow from the finding of expropriation. While accepting that there had been an indirect expropriation, the tribunal did not follow Bear Creek’s reasoning on the amount of damages claimed, awarding it sunk costs only.

2.3 Select Legal Issues

Legality Requirement of Investment is Not Part of General International Law

Peru objected to the tribunal’s jurisdiction, claiming that Bear Creek had violated domestic laws when it obtained Decree 083 through an employee of the company who originally acquired the mining rights. According to Peru, this behaviour was in breach of constitutional law and could not be cured by a subsequent approval (para. 306). The respondent based the legality requirement of the investment not on a specific provision in the FTA but argued that it was part of the “corpusof international law and persuasive international arbitration jurisprudence” (para. 302, emphasis in original).

In its analysis of the jurisdictional objections relating to the alleged illegal conduct by the investor in obtaining Decree 083 and operating the investment, the tribunal looked at the language of the FTA to assess whether it contained any preconditions for a finding of jurisdiction based on the legality of the investment. In fact, FTA Article 816 provides that the host state is free to “prescribe special formalities in connection with the establishment of covered investments.” The tribunal concluded that Peru did not make use of this latter option and that the FTA does not contain an explicit requirement for investments to be made in compliance with domestic law (para. 319). The tribunal thus declined to read such requirement into the FTA or to base it on general international law.

Tribunal Finds an Indirect Expropriation

One of Bear Creek’s central claims was that Decree 032 constituted an indirect expropriation of its investment. Like many of the recently concluded international investment agreements (IIAs), the FTA between Canada and Peru contains an express provision on indirect expropriation (Article 812.1), further detailed in footnotes to the article and in a specific annex (para. 372). FTA Annex 812.1 sets out four factors that a tribunal should examine in order to determine whether a measure constitutes an indirect expropriation.

The first factor refers to the economic impact of the expropriatory measure. The tribunal found that “there was an obvious economic impact”which had deprived the investor of all major rights it had obtained through Decree 083 (para. 375). In other words, because Bear Creek could not lawfully do anything with the Santa Ana project, the value of the investment had been substantially compromised.

With respect to the second factor, it found that Decree 032 had also interfered with the investor’s reasonable expectations to develop its project based on the express governmental authorization it had acquired through Decree 083 (para. 376). According to the tribunal, Bear Creekwould not have invested the amounts it invested without such authorization issued by Peru.

The third factor—the “character of the measure”—required a more comprehensive analysis of Decree 032. In this respect, the tribunal engaged in a fact-finding exercise, analyzing, in particular, the circumstances under which the decree was adopted. It highlighted four factual elements. First, the authorities met on June 23, 2011 without inviting the investor to participate. Second, the evidence upon which Decree 032 was issued was not produced in the arbitration; it was therefore not possible to assess the reasonableness of the revocation. Third, given that the government knew about and approved the participation of the employee of Bear Creek in the authorization procedure, the employee’s involvement could not have constituted a legal justification to revoke Decree 083. Fourth, the social unrest in the area was not caused by the investor’s conduct, which was repeatedly endorsed by governmental authorities.

As to the fourth factor, Peru had claimed that the reason for the revocation of Bear Creek’s mining rights was the social unrest in the region. The tribunal agreed with the respondent that the claimant could have gone further in its outreach activities to the local population to obtain the social licence but stressed that the issue was whether additional outreach by the investor was legally required (para. 408), which the tribunal ultimately denied. According to the tribunal, Bear Creek could take for granted that it complied with all legal requirements as the respondent continuously approved and supported the investor’s conduct (para. 412). Given all these elements, the tribunal held that Decree 032 constituted an indirect expropriation.

General Exceptions Clause v. Police Powers?

To deny the existence of an indirect expropriation, Peru raised the doctrine of police powers, justifying that the revocation of the mining rights was a legitimate reason to ensure public security (para. 460). Interestingly, the tribunal treated the police power argument as an exception to an FTA breach rather than as negating the existence of an expropriation. In doing so, the tribunal prioritized the parties’ arguments based on the general exception clause contained in FTA Article 2201. This provision sets out an exhaustive list of three exceptions to breaches of the investment chapter of the FTA.[3] The tribunal held that “the interpretation of the FTA must lead to the conclusion that no other exception from general international law or otherwise can be considered applicable in this case” (para. 473), thus excluding the application of the police powers doctrine. Applying the general exception clause to the fact, the tribunal underlined that nothing in Decree 032 referred to any of the reasons allowing an exception under FTA Article 2201.

Tribunal Awards Sunk Costs Only

With respect to the damages to be awarded to Bear Creek, the tribunal held that the damages should not be calculated by relying on the potential profitability of the investment calculated through the DCF method. Based on the test for early-stage projects in the Vivendi v. Argentina II award,[4] the tribunal concluded that the claimant did not produce sufficient “convincing evidence of its ability to produce profits in the particular circumstances it faced” (para. 601). In sum, the tribunal found that the project remained too speculative and uncertain to allow the DCF method to be applied, the damages should consequently be calculated by reference to the amounts actually invested by Bear Creek, the so-called sunk costs. The tribunal finally awarded USD 18,237,592.

The Contributory Fault of Investor and the Amount of Damages

Peru reiterated its argument that Bear Creek had contributed to the social unrest and therefore the amount of damages should be reduced. On the issue of contributory fault of the investor, there was considerable disagreement between the members of the tribunal, which led co-arbitrator Philippe Sands to issue a partial dissenting opinion (para. 663).

In his dissenting opinion, Sands agreed with Peru that the assessment of damages should be reduced because the protests and social unrest were a result of the Santa Ana project (dissent, para. 1). Sands referred to the International Labour Organization’s Indigenous and Tribal Peoples Convention (ILO Convention 169) to assess the investor’s behaviour with respect to the local population. While he acknowledged that the convention imposes direct obligations only on states and not on foreign companies, he argued that this would not mean that the convention was “without significance or legal effects” for private companies (dissent, para. 10). According to Sands, the ILO Convention requires states to deliver a domestic law framework that ensures effective consultation processes and outcomes, but it is ultimately for “the investor to obtain a ‘social license’ out of those processes” (dissent, para. 37). He concluded that Bear Creek failed to engage the trust of all potentially affected communities and that, although the claimant was aware of those communities, it failed to take the appropriate steps to address their concerns. For these reasons, he suggested that the amount of damage should be cut in half, taking into account Bear Creek’s contributory fault.

Notes

[1] Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26. Retrieved from http://www.italaw.com/cases/1144.

[2] Copper Mesa Mining Corporation v. Republic ofEcuador, PCA No. 2012-2. Retrieved from https://www.italaw.com/cases/4206.

[3] Article 2201.1 of the FTA provides for the following “Exceptions”:

3. For the purposes of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner that constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:

(a) to protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life or health;

(b) to ensure compliance with laws and regulations that are not inconsistent with this Agreement; or

(c) the conservation of living or non-living exhaustible natural resources.

[4] Compañia de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic,ICSID Case No. ARB/97/3, Award, August 20, 2007, paras. 8.3.4., 8.3.8, 8.3.10. Retrieved from https://www.italaw.com/cases/309.