Churchill Mining PLC and Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB/12/14 and ICSID Case No. ARB/12/40

(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 18, 2018. Read more here.)

Award is available at https://www.italaw.com/sites/default/files/case-documents/italaw7893.pdf

Keywords

Forgery (forged documents), investor due diligence, coal mining

Key Dates

Request for arbitration: May 22, 2012 (based on United Kingdom–Indonesia BIT), November 26, 2012 (based on Australia–Indonesia BIT)

Constitution of tribunal: January 22, 2013

Decision on jurisdiction: February 24, 2014

Award: December 6, 2016

Application for annulment: March 31, 2017

Annulment decision: Pending

Arbitrators

Gabrielle Kaufmann-Kohler(president)

Michael Hwang (respondent’s appointee)

Albert Jan van den Berg(claimant’s appointee)

Forum and Applicable Procedural Rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable Treaty

United Kingdom–Indonesia BIT and Australia–Indonesia BIT

Alleged Treaty Violations

• Expropriation
• Fair and equitable treatment

Other Legal Issues Raised

• Admissibility
• Cost allocation
• Due diligence of investors
• Legal consequences of forgery

1.0 Importance for Sustainable Development

Responsible behaviour of an investor investing abroad is crucial for ensuring that investment is sustainable. The case of Churchill Mining v. Indonesia raised the question of whether an investor can be denied access to investment arbitration based on its failure to comply with the due diligence requirement in relation to business relations with local partners. The tribunal found that that the claims were effectively “based on documents forged to implement a fraud aimed at obtaining mining rights” and that, as a consequence, all the claims were inadmissible.

The tribunal noted that neither the ICSID Convention nor the applicable BITs contained language on the consequences of unlawful conduct by a claimant or its business associates. Based on previous jurisprudence, it nevertheless found that general principles can “exist independently of specific language to this effect in the Treaty,” and concluded that claims arising from rights based on fraud or forgery are inadmissible as a “matter of international public policy.”

The case shows that under international investment law, investors can be held accountable for their own behaviour and that of their associates. It also indicates that some tribunals might in some instances find the basis for accountability outside the applicable text. At the same time, the reasoning of the tribunal shows that if state parties want to ensure responsible investor behaviour, it will be best to make this clear in the treaty text itself—this is what tribunals look at first. Also, the tribunal categorized investor fraud as a matter of public order, insofar as the claim arises from “rights based on fraud and forgery.” This means that there will be a consequence if the right itself is tainted by fraud (here the mining licence), but fraud committed during the operation of the investment would likely have a different, or no consequence in an arbitral proceeding, leaving irresponsible behaviour without consequence.

2.0 Case Summary 

2.1 Factual Background

Churchill Mining PLC (Churchill), a British company, and Planet Mining Pty Ltd. (Planet), an Australian company, provide mining services, including general survey services, exploration and exploitation of mining sites and invested in Indonesia. Their investment—the East Kutai Coal Project (EKCP), located in the Regency of East Kutai on the island of Kalimantan in Indonesia—is a mining project that has been developed by the claimants jointly with Indonesian companies. The area of EKCP hosts one of the largest coal deposits on the planet.

In 2010, upon the recommendation of the Indonesian Ministry of Forestry, the Regent of East Kutai revoked the licences related to the EKCP because the licence was allegedly forged (paras. 35–36, decision on jurisdiction). The claimants (as well as the other Indonesian companies) engaged in legal proceeding before domestic courts against the revocation decrees. The claimants alleged that they obtained the licenses lawfully through their partnership with a local group of companies, the Ridlatama companies, and therefore considered the revocations illegal.

2.2 Summary of Legal Issues and Award

Both Churchill and Planet filed requests for ICSID arbitration, based respectively on the United Kingdom–Indonesia and the Australia–Indonesia BIT. The two cases were consolidated and, in its decision of February 24, 2014, the tribunal found that it had jurisdiction.

In the course of the arbitration, Indonesia disputed the validity of the mining licences at issue. In particular, Indonesia raised allegations of forgery, and argued, among other things, that some of the licenses on which the claimants relied were forged by the claimants themselves and by the claimants’ Indonesian partner, the Ridlatama companies. The claimants, on the other hand, allegedthat they had acted in good faith.

In its final award, the tribunal determined that the claims were effectively “based on documents forged to implement a fraud aimed at obtaining mining rights” and that all the claims were inadmissible (para. 528, award). While unable to definitely identify the source of the forgeries, the tribunal indicated that the local business partner of the claimants was likely the source of the fraudulent conduct but that the claimants failed to exercise sufficient due diligence in carrying out their investment. The tribunal ordered the claimants to pay costs and arbitration fees of nearly USD 9.5 million. In March 2017, they submitted an application for annulment at ICSID.

3.0 Select Legal Issues

3.1 The Establishment and Assessment of Evidence

In cases of alleged illegal investments due to fraud, corruption or, as in this case, forgery, it is not always easy to establish sufficient evidence. In the present case, Indonesia alleged that 34 licence documents were forged given that the signatures in those documents were not authentic and not authorized. The tribunal found that it was not for the claimants to provide evidence but for the respondent to bear the burden of proof (para. 238). This meant that Indonesia had to provide sufficient evidence in order to sustain its allegations. The tribunal added that the evidence provided by Indonesia was to be measured on a “standard of balance of probabilities or intime conviction” that takes into account that more persuasive evidence is required for implausible facts. Moreover, the tribunal held that “intent or motive need not be shown for a finding of forgery or fraud but may form part of the relevant circumstantial evidence” (para. 244).

Based on the evidence provided by Indonesia, the tribunal made the following assessment. First, as all the signatures in the disputed documents had been mechanically reproduced, Indonesia showed that government officials typically sign important documents such as the ones related to mining licences by hand. Second, certain similar documents existed in more than one version; others did not contain signatures or initials of officials and still others out of the 34 documents were not registered in the Indonesian governmental database. Third, there was no evidence for any official licence application with respect to the EKCP made by the Ridlatama companies. Fourth, the tribunal found it particularly ODD that 10 days after the Regent of East Kutai had revoked the licences of the Ridlatama companies a supposed Re-Enactment Degree was issued to declare the licences valid again (para. 441).

Based on all these elements, the tribunal “found that a fraudulent scheme permeated the Claimants’ investments in the EKCP” (para. 507). It acknowledged that the evidence pointed “towards Ridlatama rather than the Claimants in relation to the forgery of the contentious documents,” but found that this assumption was not decisive to draw the proper legal consequences in the present case (para. 476). 

3.2 Principles of International Law on the Legal Consequences of Forgery

As the tribunal indicated, neither the ICSID Convention nor BITs, in general, contain substantive provisions on the consequences of unlawful conduct by a claimant or its business associates during the life of an investment (para. 488). However, arbitral jurisprudence at numerous occasions has already had to deal with the impact of the illegality of an investment on its protection under international investment treaties and in investor–state arbitration. And as had been set out in the Metal-Tech v. Uzbekistan award, there are general principles “that exist independently of specific language to this effect in the Treaty” (para. 490).

Looking at arbitral jurisprudence, the tribunal found that, depending on the facts of a case, tribunals found that illegality can affect a tribunal’s jurisdiction[1] or the admissibility of the claim,[2] or can be addressed in the merits[3] (para. 494). In any set of circumstances, fraudulent behaviour constitutes an abuse of right, which is contrary to the principle of good faith. In particularly serious cases of fraud, such as was the case in World Duty Free v. Kenya and Metal-Tech v. Uzbekistan, tribunals found that the investors’ conduct was contrary to international public policy.

Based on the facts of the case, the tribunal concluded that a “fraudulent scheme permeated the Claimant’s investments in the EKCP” (para. 507) and added that claims arising from rights based on fraud or forgery are inadmissible as a “matter of international public policy” (para. 508). 

3.3 The Required Level of Due Diligence of the Investor

As the tribunal found that the author of the forgeries were not directly the claimants but their Indonesian business partner, the Ridlatama companies, the question arose whether the claimants adopted an adequate level of due diligence when investing in the EKCP. The tribunal relied in particular on the reasoning of the Minnotte v. Polandcase, in which the tribunal contemplated the possibility that a claim may be vitiated where the claimant unreasonably failed to perceive evidence of serious misconduct or crime by a third party (para. 502). According to the Churchill and Planet tribunal, the Minnottecase concerns the so-called “head-in-the-sand problem,” where a claimant knew or should have known of third-party wrongdoing in connection with an investment and still chose to do nothing (as opposed to just failing to take due care) (para. 504). This standard is also referred to as “conscious disregard” or “willful blindness.” The tribunal added that in particular when investors invest in a risky business environment, they are expected to exercise due diligence before committing any funds (para. 506).

In the present case, the tribunal held that the claimants did not act with due diligence but rather in a negligent way when they inquired into the processes through which their Indonesian partners had secured the mining licences (paras. 517–527). Such a lack of diligence, in relying on fraudulent acts by a third party barred the protection of the applicable BITs. Thus the “willful blindness” of the claimants was such as to make their claims inadmissible.

Notes

[1] See for instance Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5. Retrieved from https://www.italaw.com/cases/850.

[2] See for instance Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24. Retrieved from https://www.italaw.com/cases/857.

[3] See for instance David Minnotte & Robert Lewis v. Republic of Poland, ICSID Case No. ARB (AF)/10/1. Retrieved from https://www.italaw.com/cases/707.