As Pakistan faces an ICSID award for damages for its 2011 decision to deny a mining lease for the Reko Diq project to Tethyan Copper Company Pty Limited, Amber Darr (Coventry)explains how the real issue for Pakistan is not just the colossal damages they may have to pay, but to accept responsibility for what appears to have been a crisis of governance.”
On 12th July 2019, an international arbitration tribunal of the World Bank’s Centre for Settlement of Investment Disputes (‘ICSID’), awarded damages in the sum of $5.84 billion to Tethyan Copper Company Pty Limited (‘TCC’) following Pakistan’s 2011 denial of a mining lease to TCC for the Reko Diq project. Although the rationale for the decision has not been made public, the damages award, which is as large as the IMF loan package recently approved for Pakistan, appears to have sent shock waves throughout the country: the Pakistani press has termed the outcome ‘a fiasco’, social media users have clamoured for ‘accountability’, and the Pakistani Prime Minister, Imran Khan, has issued orders for the formation of a commission to investigate and fix responsibility for the penalty.
Why the outrage?
Petitions in relation to TCC and Reko Diq had been first filed in Pakistani courts as early as 2007. By 2012, when the Supreme Court of Pakistan started hearing the matter, it had before it at least eight civil, criminal and human rights petitions as well as related applications which challenged the Reko Diq project on issues ranging from the legality of TCC’s mining lease, the circumstances in which it had been granted, to its legal and human rights implications. The Supreme Court hearings were conducted in open court in the presence of the Pakistani media. Such was the publicity generated by the hearings that by the end of 2012, the remote and unknown region of Reko Diq had become a household name.
The federal and Balochistan governments, as respondents in the multiple matters being heard by the Supreme Court, were aware of the arbitration clause in the agreement between TCC and the Balochistan government. They were also aware that TCC’s investment was governed by Pakistan’s Bilateral Investment Treaty with Australia (BIT Australia) and that TCC had already brought a case before ICSID under BIT Australia and named Pakistan as the respondent in the proceedings. However, despite analysts hinting at future legal complications, the federal as well as the Balochistan governments not only submitted to the Supreme Court’s jurisdiction but also celebrated the Supreme Court’s decision to cancel TCC’s mining license, as a testament to Pakistan’s autonomy and sovereignty.
Pakistan was also aware of its substantive and procedural obligations as a signatory to BIT Australia and to the ICSID Convention. Prior to Reko Diq, Pakistan had been a party to at least four arbitrations before ICSID each of which also involved a BIT. These included the 2001 SGS v. Pakistan (BIT Switzerland), the 2003 Bayinder v. Pakistan (BIT Turkey) and Impreglio v. Pakistan (BIT Italy), and the 2013 Karkey Karadeniz v. Pakistan (also BIT Turkey). Of these, two were settled (SGS and Impreglio), one was decided in favour of Pakistan (Bayinder) and another in favour of the investor (Karkey Karadeniz). Against this background, Pakistan’s outrage regarding Reko Diq is surprising. This blog aims to understand Pakistan’s perspective in the Reko Diq dispute by examining the Supreme Court’s decision in this regard.
The History of the Reko Diq dispute
Reko Diq, located in the Chagai district in Pakistan’s Balochistan province, is famous for its vast gold and copper reserves and allegedly the world’s fifth largest goldmine. In 1993, BHP Minerals Intermediate Exploration Inc. (BHP), an American company, entered into a Joint Venture Agreement (the 1993 agreement) with Balochistan Development Authority (BDA) to explore the Reko Diq area. In terms of Clause 3.4 of the 1993 agreement, BHP and BDA agreed to share revenue in the ratio of 75:25, and in terms of Article 15, they agreed to refer any disputes arising under the 1993 agreement for arbitration to ICSID or if ICSID refused to accept jurisdiction, to the ICC. In 2000, the Balochistan government ratified the 1993 agreement as well as all actions already taken in pursuance of the 1993 agreement (the 2000 agreement).
In 2006, the Australian joint venture TCC entered into a Novation agreement with the Balochistan government (the 2006 agreement), whereby TCC replaced BHP as a party to the 1993 and 2000 agreements. In doing so, TCC acquired BHP’s rights to explore the Reko Diq area, agreed to share revenue with the Balochistan government in the ratio of 75:25, and to refer any future disputes between TCC and the Balochistan government to ICSID or ICC for arbitration. Soon after the 2006 agreement, the 1993 agreement was challenged before the Balochistan High Court on the ground inter alia that the Balochistan government had acted illegally in relaxing the relevant rules and granting mineral titles for Reko Diq to BHP. By its order dated 26th June 2007, the Balochistan High Court dismissed the petition.
Aggrieved by the orders of the Balochistan High Court, the petitioners and several others filed petitions before the Supreme Court, challenging the licence(s) granted to BHP/TCC on the grounds of absence of fairness, non-transparency, violation of laws, and risks to the vital interests of Balochistan and Pakistan. The three member bench of the Supreme Court comprising former Chief Justice Iftikhar Muhammad Chaudhary, Justice Azmat Saeed and Justice Gulzar Ahmed, held in its detailed order that the 1993 agreement was contrary to law and public policy and, therefore, the 1993 agreement and the 2000 and 2006 agreements derived from it, were void. In a single stroke, the Pakistan Supreme Court dismantled the legal superstructure governing the exploration of Reko Diq in Pakistan to the detriment of TCC.
The Balochistan government and the cancellation of the mining lease
The Balochistan government had entered into the 2000 agreement after duly negotiating its terms and with the approval of the Balochistan Chief Minister. By 2012, however, when the case was being heard by the Supreme Court, the Balochistan government, through its counsel Mr. Ahmer Bilal Soofi suggested that BHP had exercised undue influence first on BDA and then on the Balochistan government to convince them to sign the 1993 and 2000 agreements (para 15); that the 2000 agreement ratifying the 1993 agreement by the then Governor and Chief Minister of Balochistan was illegal and, therefore, void (para 16); and that TCC itself had drafted the rules that were to govern its mining operations in Reko Diq (para 48).
In this manner the Balochistan government distanced itself completely from the 1993 agreement and rendered full assistance to the Supreme Court (para 63). Furthermore, the Balochistan government denied its ICSID obligations as well as Pakistan’s commitments under BIT Australia which was applicable by virtue of TCC being an Australian venture. It argued that the 1993 agreement was void under Pakistani contract law, and could not be ratified (para 67); that the Balochistan as well as the federal governments were not parties to the 1993, 2000 or 2006 agreements (para 69); that Pakistan was not liable before ICSID in its capacity as a party to the agreements but only voluntarily through its commitments under BIT Australia (para 109); and that in bringing a case before ICSID, despite the Court’s ‘benevolence’ towards it, TCC had disrespected the Supreme Court (para 111).
Not the first time
Not only the Pakistan government but also the Supreme Court has considerable experience of international arbitration agreements. Two Supreme Court decisions are particularly significant in this regard: the HUBCO decision (HUBCO v. Pakistan WAPDA PLD 2000 SC 841) and the SGS decision (Societe Generale de Surveillance S.A. v. Pakistan 2002 SCMR 1694). In the HUBCO decision, the Supreme Court, recognised the validity of the ICC arbitration agreement, but decided that the dispute between the parties was not capable of being referred to arbitration due to allegations of fraud and corruption. In the SGS decision, however, the Supreme Court restrained SGS from proceeding with the ICSID arbitration on the grounds inter alia, that ICSID did not have jurisdiction over the matter in dispute, and that by submitting to the jurisdiction of the Pakistani courts, SGS had waived its right to ICSID arbitration.
The HUBCO decision, appears to bear a strong resemblance to the Reko Diq decision, because both discuss contracts procured through corruption and bribery. The Supreme Court’s stated position in this regard, summarised in a talk given by Justice Umar Bandial, is that matters involving questions of criminality or public policy cannot be referred to arbitration and have to be adjudicated by a court of law. However, the two decisions are different because unlike HUBCO, the Reko Diq dispute is not merely a contractual dispute between the Balochistan government and TCC but also falls within the ambit of BIT Australia in terms of which the federal government has agreed to promote and protect investments made by Australian investors (art.3), desist from expropriating or nationalising these investments (art.7), and resolve disputes through international arbitration before ICSID (arts. 12 &. 13).
The issue before the Supreme Court, therefore, as much one of Pakistan’s obligations under BIT Australia and international law as it was that of criminality under Pakistani law. BHP made this point before the Supreme Court and urged it to exercise judicial restraint (para 60). However, the Balochistan government framed the issue entirely as contractual rather than an international investment dispute under BIT Australia and termed the 1993 agreement a ‘surrender document’ (para 61). The Supreme Court’s decision in this regard is also premised primarily on contract law (para 88) and suggests that the Supreme Court’s understanding of Pakistan’s liability under a private international contract (for which TCC had commenced arbitration under the ICC Rules) (para 98) is conflated with its public international obligations under BIT Australia for which TCC had brought the case before ICSID (para 99).
The ICSID award has not yet been made public and, therefore, the tribunal’s findings in respect of the role played by the different parties to the Reko Diq dispute are not available for scrutiny. In the absence of the rationale of the decision, it is difficult to comment on the motivations and choices of the parties leading up to the dispute and the manner in which it was handled before the Supreme Court and then before ICSID. However, a review of ICSID’s 2017 decision on jurisdiction and liability provides important insight. It suggests that ICSID found that TCC held assets in Pakistan are protected by BIT Australia (despite Pakistan’s assertions that TCC’s investment was contrary to the law) and that BIT Australia’s cover could not be retroactively revoked by a Supreme Court decision. ICSID also did not give credence to Pakistan’s allegations of corruption on TCC’s part.
ICSID also found that BDA was empowered to exercise governmental authority and, therefore, the 1993 agreement as much as the 2000 and 2006 agreements derived from it, were to be treated as agreements between Pakistan and the TCC, the Australian investor. Finally, ICSID held that the Pakistani authorities (including BDA and Balochistan government) had created legitimate expectations that TCC would be granted a mining license upon meeting routine requirements. ICSID was not convinced by the reasons provided by Pakistan for denying the license to TCC and came to the conclusion that the relevant authorities had breached TCC’s legitimate expectations to camouflage ‘the state’s real motive of pursuing its own project at the site’.
In view of the preceding, the most pressing issue before Pakistan is not merely determining the quantum of damages that it may have to pay to TCC in pursuance of the ICSID award. Indeed, news reports suggest that Pakistan’s dispute with TCC is headed towards a negotiated settlement: TCC has offered it and Pakistan has welcomed it. The real issue for Pakistan is to recognise that cases such as Reko Diq raise significant public interest issues and must be addressed with the utmost legal transparency and with an understanding of Pakistan’s obligations in matters involving BITs and international investment arbitration. An even greater challenge for Pakistan is to accept responsibility for what appears to have been a crisis of governance and to devise a co-ordinated strategy for dealing with international investment in the future.
Amber Darr is a Lecturer in Law at Coventry University and a Senior Research Fellow at the UCL Centre for Law, Economics and Society. She holds a PhD in Law from University College London (UCL) and is also a Barrister of Lincoln’s Inn and an Advocate as the Supreme Court of Pakistan. She tweets @AmberMDarr