Mining Concession Pitfalls

Mining companies often operate in less than hospitable parts of the world and face a number of political and other risks, ranging from cancellation of concessions, leases or licenses, and expropriation of shares, to windfall and other taxes, political interference, environmental regulation and remediation responsibility, land rights issues, riots, protests and theft from employees or the local community, illegal mining in the concession area, prohibition on the repatriation of profits, and exchange rate risks, to name but a few. The matrix of more than 3,000 bilateral investment treaties (BIT), multilateral investment treaties and free trade agreements may provide foreign mining investors with a level of protection under international law beyond the remedies that are available under contract or national law or the protection offered by political insurance.

BITs generally oblige the state parties to treat foreign investments in accordance with minimum international standards and bar expropriation without compensation or other arbitrary or discriminatory measures. BITs also provide for the resolution of disputes through international arbitration. The advantage of arbitration is that, unlike dispute resolution in the courts, the parties can appoint the members of the tribunal and the award may be enforced internationally more easily. Depending on the terms of the treaty and the nationality of the parties, the arbitration may take place under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), an institution devoted to arbitration of investment disputes between foreign investors and states. 

In the face of a growing trend among mining companies to avail themselves of the protections of BITs, this article explains briefly how BITs can minimize investment risk for mining companies.

Protected Investors

BITs are designed to promote and protect investments by investors of the other state party to the treaty. The investor’s nationality is typically determined by the domestic law on citizenship in the case of individuals and by the state of incorporation and/or the seat of company management in the case of companies. Some BITs also provide that juridical persons incorporated in the host state but controlled by nationals of the other contracting state may be treated as foreign nationals.

Mining companies should be aware that some treaties seek to exclude certain investors from the treaty’s coverage through so-called “denial of benefits” provisions. These provisions are normally aimed at excluding “mailbox” companies with no substantial business activities in the state of incorporation, although they sometimes will also exclude entities controlled by nationals of the host state or a third country.

Similar to tax planning, mining companies operating in foreign countries should consider structuring an investment through an entity incorporated in another state having a favorable investment treaty with the host state or restructuring existing investments before a dispute is foreseeable so as to take advantage of treaty protections, if necessary.

Protected Investments

Most investment treaties protect a broad range of investments, which encompass all assets, including but not limited to, moveable and immovable property; company shares, stock and debentures; claims to money or to any performance under contract; intellectual property rights, goodwill and know-how; and business concessions conferred by law or under contract, including natural resources concessions. As mining companies typically acquire concessions or hold shares in a locally incorporated company that holds concession rights or mining licenses, such investments most likely would be within the protection of investment treaties.

Many BITs also permit investors to make claims for directly or indirectly held investments as well as minority shareholdings. Thus parent companies or individual shareholders are often able to assert rights relating to an investment held through a subsidiary company. Similarly, tribunals have concluded that contractual rights and promissory notes may amount to investments.

Despite the breadth of the definition of investment, there are certain limitations. BITs would not protect investments procured through mis­representation or bribery. Further, one-off sales transactions, passively held portfolio investments, or pre-investment expenditures will generally not qualify for protection either.

Fair and Equitable Treatment

The fair and equitable treatment standard is the most frequently invoked standard in investment disputes. The standard is fact-specific and has generally been defined to include protection of legitimate and reasonable expectations which have been relied upon by the investor to make the investment; good faith conduct; conduct that is transparent, consistent and not discriminatory; and conduct that complies with due process and the right to be heard.

The investor’s legitimate expectations are based on the host state’s legal framework, contractual undertakings, and any undertakings and representations made explicitly or implicitly by the host state. Changes in the legal framework would not be considered as breaches, unless they represent a reversal of assurances made by the host state to the foreign investor. For example, a tribunal found a breach of the standard where, in making the investment, the investor relied upon the availability of tax refunds and the state subsequently denied the refunds and provided unsatisfactory explanations.

In the context of a mining investment, the fair and equitable treatment standard may be invoked in multiple ways. For instance, if a mining company has a stabilization clause as to taxes and royalties in its concession agreement and the government subsequently imposes windfall or other taxes or increases royalties in contravention of the stabilization clause, this would constitute not merely a breach of contract but also potentially of the relevant investment treaty. Further, the standard could be of assistance if a mining company concludes a concession agreement with a ministry, only to find out subsequently from another state body that the company has no rights to mineral-rich areas granted under the concession agreement due to overlapping concessions and uncertain mineral and land rights.

BITs usually require that the expropriation of foreign-owned property must be for a public purpose, non-discriminatory, in accordance with due process, and accompanied by prompt, adequate and effective compensation usually equivalent to the fair market value of the expropriated investment. An expropriation may result from either direct transfer of title from the investor or an indirect taking (e.g., a cancellation of a licence) that substantially deprives the investor of the economic value, use or enjoyment of its investment. Further, an expropriation may occur through a series of government acts, i.e., a creeping expropriation.

A government measure would constitute an expropriation if it effectuates a permanent loss of the economic value of a mining investment and falls beyond the government’s powers to regulate the general welfare. The cancellation of a mining concession or a mining license or a lease generally would qualify as an expropriation. The grant of a mining concession and the subsequent declaration of the concession area as a protected land is also most likely to constitute an expropriation. On the other hand, the imposition of more onerous environmental regulations – which, for example, increase environmental remediation costs but do not destroy the economic value of the mining concession – would not be considered an expropriation. Thus in Glamis Gold v. United States, the tribunal dismissed Glamis’ claims that the United States expropriated its rights to mine gold by regulatory measures that reduced the value of the mining project from US$ 49 million to US$ 20 million.

Full Protection and Security

The full protection and security standard requires host states to take reasonable measures to prevent the physical destruction of an investor’s property. Mining companies may invoke a host state’s obligation to provide full protection and security if the state was aware of, but failed to prevent, damage to the company’s property or personnel caused by riots and protests or failed to take measures with respect to theft or illegal mining on the concession area. Similarly, as the grant of mining rights sometimes results in resettlement of communities, any disturbances by the displaced communities may constitute a failure by the host state to provide full protection and security to a mining investment.

Treaties usually impose a legal obligation on the host state not to impair the management or operation of the investment by “arbitrary or discriminatory measures.” An example of a breach of the standard was found where, without justification, a state entity refused to pay a contractually agreed double tariff for electricity supplies to the producer operated by the investor while it continued to pay such tariffs to two locally owned producers.

An umbrella clause is a provision in an investment treaty that guarantees the observance of obligations assumed by the host state vis-à-vis the investor. Umbrella clauses thus may turn a host state’s breach of contract or other commitment into a breach of the treaty. If a contract contains an exclusive dispute resolution provision, some tribunals have accepted jurisdiction on the ground that contract claims and treaty claims are not co-extensive, while other tribunals have held that the claimant must comply with the provision and the umbrella clause claim is inadmissible. Another possible limitation of umbrella clauses is that they may require privity of contract between the state and the foreign investor, thus leaving outside their scope contracts between the state and a locally incorporated company.

Umbrella clauses can be particularly useful to mining companies, since the host state often assumes obligations vis-à-vis mining investors in the form of mining concessions, leases or licenses. Mining investors, however, should be mindful of exclusive dispute resolution clauses in mining contracts.

Most-Favored Treatment

National treatment clauses require the host state to treat foreign investors at least as favorably as it treats its own nationals. Conversely, pursuant to most-favored-nation (MFN) treatment clauses, the state is obliged to treat foreign investors at least as favorably as it treats nationals from any country. A MFN clause ordinarily grants a claimant the right to benefit from substantive guarantees contained in other treaties to which the host state is a party (for example, to benefit from a fair and equitable treatment standard if one is not contained in the applicable treaty). On the other hand, attempts to use MFN clauses to extend the tribunal’s jurisdiction generally have failed. In light of the rapidly evolving jurisprudence on MFN clauses, it is crucial that mining companies obtain legal advice.

Most treaties also provide that the investor has the right to carry out a transfer of funds in a freely convertible currency without delay and that the transfer takes place at the official rate of exchange of the host state on the date of the transfer. The schemes on transfer of funds vary between treaties, and it is thus crucial to examine the wording of the relevant treaty in order to determine the types of transfers that are permitted.

The Available Remedies

Although restitution is in principle available, investors typically seek monetary compensation. In some cases, investors would be entitled only to the amount invested plus costs and expenses. Lost profits will usually be awarded only if the investment has a record of profitability or there are other indicia of future profits. Events subsequent to the unlawful act may be taken into account if they affect the damage caused, for example, where the value of the investment had risen considerably after the date of the illegal act.

Any mining company operating in a foreign country must be aware of the growing matrix of BITs which provide extensive protections and access to international arbitration at ICSID or other institutions. Although many of the investment protections may seem similar in wording, even minor distinctions in treaty clauses could have important consequences, and it is therefore recommended to seek specialist legal advice.


Baiju Vasani  is a partner and Sylvia Tonova is a senior associate in the global disputes practice of Jones Day, London. They have significant experience in disputes related to the mining industry. The information contained in this article is for informational purposes only and should not be considered legal advice. For more information, visit www.jonesday.com/london.

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