South32 v. Colombia

South32 SA Investments Limited v. Republic of Colombia, ICSID Case No. ARB/20/9

Summary

Earlier this summer, in South32 SA Investments Limited v. Republic of Colombia (South32 v. Colombia), an ICSID arbitral tribunal issued an award of over USD 4 million in historical damages and ordered future damage compensation for the enforcement of provisions that were found to violate the Colombia–U.K. BIT.

The investor, South32, claimed that they endured unfair treatment, were subject to arbitrary government action, and had their legitimate expectations undermined regarding their nickel mining operation, all of which would violate their BIT investment protections.

Colombia, in response, challenged the dispute on jurisdictional grounds, asserting that the claimant attempted to “treaty shop,” the dispute should be handled domestically as a matter of domestic law, and that the claims were entirely premature, all of which were dismissed by the tribunal.

The tribunal found that Colombia’s attempt to retroactively raise and review nickel royalty rates, change free-on-board (FOB) prices, revise and reduce deductible costs, and institute new royalties on the iron content of mined nickel was legally and economically contradictory and inconsistent, thus violating FET provisions of the relevant BIT because of legal uncertainty and arbitrary conduct against the investor. However, the tribunal did not award South32 their entire claim, holding that using the recalculated FOB in the future was not a violation of the treaty. Furthermore, since much of the claimed damage was in the form of future liabilities, the tribunal did not agree to induce Colombia to withdraw the challenged measures but ordered the state to hold South32 harmless if said provisions were to be enforced. In his dissent, Juror Andrés Jana diverged from the majority decision in granting indemnity for future damages.

Background

The dispute centres around the Cerro Matoso mine in Montelíbano, Colombia, one of the world’s largest open-pit ferronickel mines in operation since 1982. Ferronickel, or class 2 nickel, is not pure nickel and is composed of roughly 30% nickel and 70% iron.

This mine has been owned and operated by Cerro Matoso SA (CMSA) since 1979 and was later almost fully acquired by investor Billiton Overseas, whose subsidiary under which the mine was laid was later renamed South32. The governance of the mine came under a few crucial concession agreements, namely the 1963 Concession 866 and 1971 Concession 1727, which both expired in 2012, and the 1996 Contract 51, upon which the previous concessions were incorporated, in force until 2044. These contractual concessions provided the basis for nickel royalty rates and cost deductions for the mine, which were set at 8% and 80%/100%, respectively. In 1994, the passage of Law 141, or the Royalties Law, set a new domestic minimum nickel royalty rate of 12% and allowable cost deductions at 75%; however, these were set to apply only to new or extending concessions.

The relevant governmental authorities surrounding the mine’s activities and regulation have been the Colombian Ministry of Mines and the Comptroller General’s Office. In the lead-up to the dispute, Colombia claimed that the Royalties Law had applied to the original mine concessions since 2005 (when the contracts were amended into the Mining Code in order to be extended), meaning that paid royalties would be recalculated at the higher rate. The Royalties Law also changed the calculations of how nickel ore was valued, which was finalized in Resolution 293, which was passed in 2015. Colombia also sought to have this new pricing mechanism applied to activities since 2005. Furthermore, deductions calculations were audited by the state to exclude costs that they saw as outside the “exploitation” purview. Lastly, in 2019, Colombia demanded that CMSA pay royalties on the iron content of the mined ores since 2012 and prior, which had not been done for the previous 40 years.

In response, the investor claimed that these retroactive applications of the law were unlawful. In terms of the iron royalty, South32 objected that since iron is not the final sold product, it should not be included in royalty payments. Lastly, upon termination of the contracts in 2012, the investor argued that the state was not entitled to re-open the cases to review the past royalty payments, and thus South32 went to domestic courts to attempt to settle the accounts in 2018, a case among other domestic challenges that have remained pending.

Tribunal’s analysis

South32 filed for ICSID arbitration against the state of Colombia under the Colombia–U.K. BIT in March 2020 for damages (totalling USD 90 million).

Jurisdiction

First, the arbitral tribunal considered its jurisdictional competence. Colombia raised jurisdictional objections on a few separate grounds: treaty shopping, abuse of process, fork-in-the-road, and other objections.

In terms of treaty shopping, the respondent claimed that the 2014 acquisition of CMSA by the company eventually known as South32 came with the awareness of the existence of a dispute with Colombia and thus aimed to exploit BIT protections fraudulently. These claims relate to BHP Billiton undertaking a demerger in 2014, where the company moved its share in CMSA to a U.K.-based holding company later named South32, which then owned nearly all of CMSA. However, although South32 seemed to have acquired the investment from an unprotected Jersey company, ultimately, the top ownership of CMSA had consisted of U.K.-based BHP even prior to the merger. Hence, the tribunal found that in either case, the investment was always subject to treaty protection, dismissing this objection (paras 111–115).

Next, the tribunal looked at whether the Colombian claim that a dispute would have been foreseeable during the demerger. The tribunal also rejected this notion, finding that when the company’s restructuring was finalized in February 2015, the claimant would not have been able to reasonably predict that a future dispute would materialize. Thus, the tribunal also dismissed the debate on the degree of foreseeability necessary to constitute abuse of process (para 131).

Another objection that Colombia makes is that since the claimant has already filed suit domestically for the same disputes, it may not do so internationally as outlined in the fork-in-the-road provision and Art. IX.13 of the BIT, which says that “The Tribunal shall not be competent to rule on the legality of a measure taken by a Contracting Party as a matter of domestic law.” The tribunal held that it was not ruling on the legality of the measures as a matter of Colombian law but of international law, and even if it did, it is not clear that this would be a jurisdictional condition (paras 177–180).

In the last two areas of jurisdictional objections, the tribunal again sides with the investor. In response to the allegations that the investor is making its claims prematurely, the tribunal noted that South32 is claiming historical damages and, hence, the objection is baseless. Lastly, to the claim that the investor did not file notices of dispute on time according to the BIT, the tribunal found that the claimant was compliant since they sent notices of dispute both in 2016 and 2018 with clear intentions (paras 198, 206–207).

Merits

The tribunal then analyzed five areas of dispute raised by the investor: the royalty rate and percentage of deductible costs on nickel, the reference price of nickel, deductible costs, iron royalties, and settlement of the contracts.

Royalty rate and deductible costs

First, the parties disagree on when the higher rate of 12% of royalties and 75% cost deductions from the Royalties Law become applicable to the investment. Colombia claims that this should be since 2005, when the contracts were modified and thus turned into a new “future” contract. However, South32 disagrees, finding that the new rates should apply from 2007 and 2012 when the two contracts themselves were extended and incorporated into new agreements. This is backed by the fact that the state calculated royalties along these timelines previously; however, they reassessed royalty rates later and then attempted to follow their own new prescriptions.

The tribunal sided with the claimant here, citing clear contradictions and irrational state conduct, such as revisions of settlements and intentions to apply higher rates in retrospect with Resolutions 576 and Order 63 (para 280). Furthermore, they cite a lack of consistency and rational behaviour by the government (para 268).

FOB price

The change in the reference price of nickel is important to note. Since 1985, CMSA and the state had set a reference price formula based on the European and American metal free markets for how ferronickel was to be priced and, thus, what calculated royalties would be. The Royalties Law set out to reformulate this calculation, and in 2015, Resolution 293 set the FOB price according to the average of premiums in the European, North American, and Asian markets. The dispute here stems from South32 arguing that the development of the FOB price set in Resolution 293 is incorrect and in violation of the Royalties Law. They contend that the FOB price in Colombian ports should be based on CMSA’s own ferronickel sales price since they are the only nickel exporter in the nation and are not linked to some international metric.

The tribunal’s majority did not agree with South32’s interpretation. Firstly, they see the Royalties Law as setting the generic bar for all nickel mining operations, and simply because CMSA is currently the only nickel producer, that may not be the case forever; thus, solely using CMSA’s sales price would not be justified. Furthermore, they consider the new pricing formula aligned with the Royalties Law mandate, as it includes relevant FOB pricing mechanisms, and since CMSA itself had proposed using this calculation previously during negotiations (paras 347–353).

The retroactive use of this new pricing formula is where the tribunal does take issue, finding it unreasonable for the country to retrospectively apply the new formula to the past settlements from 2007 to 2012. They base this on a similar conclusion made in a 2022 arbitration award between CMSA and the National Mining Agency (para 402).

Deductible costs

The tribunal also finds contradictory and inconsistent behaviour in state action toward CMSA relating to their cost deductions taken historically. In 2015, the National Mining Agency asserted that the company had incorrectly made cost deductions and that they owed nearly COP 11 billion, while a separate government agency reassessed royalties for that same timeframe. Their diverging conclusions led the tribunal to find that the state had acted contradictorily (para 512, 523).

Additionally, due to a law from 2000 that mandated a 5-year limitations period for the opening of fiscal responsibility actions, the tribunal sides with the claimant that the state had unreasonably disregarded the limitation period (para 534–537).

Iron royalties

For nearly 40 years, CMSA had paid only nickel royalties on their mined product. However, in 2017, the National Mining Agency began to attempt to collect a royalty on the portion of ferronickel that was iron for the years 1982–2012, which South32 paid for the 2012–2022 period in protest. However, the investor disputed the levying of this new royalty, and the tribunal sided with them, stating that Cerro Matoso was always a nickel mine and the long-term precedent favours the claimant. In both the Royalty Law and the original mining contracts, the tribunal found that the mining of Cerro Matoso related to the exploitation of nickel and that its iron content was never relevant, thus naming the iron royalty contradictory and lacking legal basis (paras 575–576, 594–595).

Settlement of contracts

The last area of dispute comes from how the administrative contracts on the mine should be closed and if they can be reopened for royalty claims. In 2005, it was agreed that when the original concession contracts were to end (which happened in 2012), the two parties should settle the accounts of the contract. In 2017, however, the National Mining Agency ordered the combination and recalculation of nickel royalties back to 1982 and introduced new iron royalty calculations. In 2018, the National Mining Agency issued the Cundinamarca Petition, attempting to settle the accounts in court. South32 argues that it was unfair to raise new issues in the petition that hadn’t been mentioned during the original settlement process.

The tribunal sided with the claimant again, stating that any breaches by CMSA should have been addressed when they happened, not ex novo. Furthermore, they noted that the state ignored the statutory limit set by Colombian law. Again, the tribunal found the state’s actions inconsistent, unreasonable, and contradictory (paras 641, 658, 672).

Ruling

Considering all the previous conclusions, the tribunal homed in on the FET standard in the BIT, emphasizing that it protects against arbitrary actions and ensures legal certainty for the investor, even when tied to international law standards, an area the two parties disputed (paras 709–710). The tribunal referenced several legal cases and expert opinions to clarify what constitutes arbitrariness, such as actions based on personal preference or taken in violation of due process. Applying this standard, the tribunal found that Colombia’s actions were inconsistent, lacked legal basis, and disregarded limitation periods, leading to legal uncertainty and violations of due process for the investor (paras 751-755).

Thus, the tribunal awarded South32 USD 4.5 million in historical damages but dismissed most of the claimant’s requests for future compensation. However, the majority did order compensation for any future damages resulting from Colombia’s continued enforcement of the contested measures. South32 had argued that the enforcement of these measures would cause certain and foreseeable harm. The tribunal agreed, reasoning that the causal link between Colombia’s wrongful actions and the damage was already established. Colombia countered that the damages were hypothetical and that awarding compensation would infringe on its sovereignty. However, the tribunal majority dismissed this concern, asserting that enforcing these measures would lead to specific harm, justifying a future damages claim.

The tribunal also ruled that the compensation should be free of Colombian taxes but did not exempt the claimant from British taxes. Additionally, Colombia was ordered to pay USD 5 million in costs to the claimant, with interest accruing at the U.S. prime rate plus 2% from July 2023 onwards.

Dissenting opinion

In his dissent, Andrés Jana Linetzky, while agreeing with most of the majority decision, argued that compensation for future speculative damages contradicts international legal principles and lacks precedent, emphasizing that damages should be based on proven and materialized harm. The dissent contends that this decision could constrain state sovereignty and interfere with local judicial processes.

Conclusion

South32 v. Colombia centres on Colombia’s enforcement of measures reforming its mining sectors for which South32 sought compensation for future and historical damages. The tribunal’s majority ruled in favour of South32, determining that the damages were not hypothetical but rather a real and likely outcome. The tribunal ordered Colombia to compensate South32 in the event of any future losses, despite objections from Colombia and a dissenting opinion that argued against awarding damages for harm not yet materialized.

In this case, the tribunal showed how regulatory measures can be perceived to undermine an investor’s legitimate expectations. Furthermore, its interpretation of FET implies that legal uncertainty and contradiction may violate the standard. South32 v. Colombia may have implications on a state’s ability to regulate the mining sector, specifically regarding the regulation of royalties, deductions, and contractual concessions.

Note

The ICSID tribunal was composed of Deva Villanúa (President, national of Spain), Guido Santiago Tawil (appointed by claimant, national of Argentina and Portugal), and Andrés Jana Linetzky (appointed by respondent, national of Chile and Portugal).

Author

Ovinabo Banerjee studies at Princeton University and is a former fellow at IISD’s Economic Law and Policy program.