Express Tribune | 25 July 2019
The lessons of Reko Diq
By Femi Ogunlende
The question for Pakistan now is what lesson can be learned from events that led to the International Centre for Settlement of Investment Disputes (ICSID) Tribunal making a $5.9 billion award against the Government of Pakistan. The seeds of the ICSID decision were sown many years ago when in 1993 the Balochistan Development Authority entered into the Hills Exploration Joint Venture Agreement (Agreement) with BHP International Ltd (who subsequently transferred its interest to Tethyan Copper Company (TCC) and in 1998 when the Government of Pakistan signed a Bilateral Investment Treaty with the Government of Australia (Investment Treaty). These two agreements would combine to result in the $5.9 billion ICSID award. Crucially, the Investment Treaty contained an arbitration clause, which stated that in the event of an unresolvable dispute between an “investor” under the Treaty and the host country, the dispute could be referred to ICSID for resolution (there was also an ICSID arbitration clause in the Agreement). The whole purpose of international arbitration clauses is to enable the investor to bypass the domestic court system. Governments are generally willing to agree to international arbitration clauses in return for the investment such protection can bring. The ICSID clause in the Investment Treaty was significant as it gave the TCC recourse to a dispute resolution forum that was both external to and independent from Pakistan. Importantly, in the context of the Agreement, this would be a forum which would not have at its forefront the public policy consideration of Pakistan. As Pakistan has discovered, ICSID clauses can be extremely expensive.
It is the intersection between the provisions of the Investment Treaty, the Agreement and the actions of the Government of Balochistan and, to a lesser extent, the decision of the Supreme Court of Pakistan that has proved so problematic. Arguably, the Government of Pakistan, the Government of Balochistan and the Supreme Court failed to fully appreciate the potentially far-reaching and damaging effect of this combination. The Supreme Court petition was commenced on November 11, 2010 and the Supreme Court was the first forum to be seized of the matter. However, unusually the parties to the Supreme Court case were not the same as those to the ICSID arbitration. The Supreme Court proceedings did not arise out of a dispute between the parties to either the Agreement or the Investment Treaty, but rather involved third parties who questioned the lawfulness of the Agreement. The ICSID request for arbitration was not made until November 28, 2011, two weeks after the decision to refuse to grant the TCC a mining lease. The Supreme Court handed down its decision on the petitions on January 7, 2013. In the intervening period the ICSID Tribunal had to be fully constituted and the Tribunal had handed down its own decision on the TCC application for provisional measure in December 2012.
What does not appear to have been fully taken account of by the Supreme Court is that the ICSID Tribunal was primarily concerned with whether or not the terms of the Investment Treaty had been breached as well as matters of general international law. While this obviously involved consideration of the Agreement, the task was wider than this. The Supreme Court’s primary concern was, rightly, on the interpretation the Agreement under the Pakistani law. Given this difference of emphasis of each forum, the Supreme Court should have been alive to the fact that declaring the Agreement void would not definitively answer the question of whether or not there had been a breach of the Investment Treaty. The Supreme Court’s attempts to support its decision by referring to ICSID decisions on corruption in other bilateral investment treaties was always very unlikely to be accepted. Similarly, the Supreme Court’s decision to declare that the arbitration clause was void was also very unlikely to be accepted by the ICSID. If for no other reason than that the Supreme Court did not adequately address the principle of the “severability” of arbitration clauses (which means an arbitration clause will survive even if the underlying agreement is void). Unsurprisingly the ICSID Tribunal was not deterred by the Supreme Court decision from deciding whether or not there had been a breach of the Investment Treaty. For all intents and purposes, the Supreme Court decisions to nullify the Agreement and the arbitration clause were ignored. Ultimately, it appears that the Supreme Court was reluctant to reconcile itself with the fact that the Government of Pakistan through the Australia-Pakistan Investment Treaty had effectively outsourced the final jurisdiction of disputes concerning “investors” to the ICSID. In permitting this outsourcing, the Government of Pakistan had also effectively limited its own ability to changes to its policy in any manner it sought fit, in so far such changes negatively affected an “investor” and domestic courts hands were similarly tied. It is perhaps this fact more than any other that the Supreme Court appeared unwilling to accept. The implication of this jurisdictional limitation is that in the future, domestic courts will need to recognise that there are practical consequences for Pakistan where investment treaties and arbitration clauses are present. If the courts choose to ignore international arbitration clauses then there are likely to be substantial consequences for Pakistan at the international level.
What the Reko Diq events demonstrate is that caution needs to be exercised by governments when agreeing the terms of bilateral investment treaties. Firstly, all provinces need to be made fully aware of the terms of all investment treaties Pakistan has entered to, so as to ensure that they understand the potential consequences of contracting with companies from these countries. Secondly, care needs to be taken when the terms of investment treaties are being agreed to ensure that their scope is sufficiently limited. TCC is an Australian registered company owned by Antofagasta plc (a UK company with its headquarters in Chile) and Barrick Gold Corp (a Canadian Company). Despite the fact that the owners of the TCC were not Australian, the terms of the Investment Treaty allowed the TCC to take advantage of the protection it offered. While it is not suggested that the TCC should not have been classified as an “investor”, this does highlight an inherent problem with investment treaties in general. The problem is that investment treaties can allow foreign investors willing to invest in Pakistan to incorporate companies in home countries that have a favourable investment treaty with Pakistan, when they have no meaningful links with that home country. Including a ‘denial of benefits’ clause can address this issue by allowing the host state to deny the benefits of the treaty to companies that don’t have a sufficient business connection with the alleged home country. Thirdly, the question arises as to whether or not Pakistan should, in fact, continue to incorporate ICSID clauses in its investment treaties at all. The disadvantages of ICSID clauses are widely recognised and some countries, including Australia, no longer use ICSID clauses in their investment treaties. There is increasing international acknowledgment that domestic court rather than international arbitral tribunals are more suitable forums for settling investment disputes. Following the Reko Diq award, the Government of Pakistan should now re-assess its investment trade policy going forward and consider whether or not the protections offered to foreign investors are worth risks assumed by the Government of Pakistan in providing this enhanced protection.