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What is the link between the global decarbonisation drive, the DRC and green industrial activity?  Copper. Its importance to the global economy in the years to come is expected to be so central to the world economy that Goldman Sachs’ Global Head of Commodities Research recently described it in the following terms:

“Copper is so central to the world of green energy and complying with targets of the Paris agreements.  Because we are going to rely on electricity to create our transportation, heat our houses, and propel industrial activities.  Copper is the single best conductor of electricity. If we are going to electrify the world and decarbonise this way, copper is the most important commodity taking over that role from oil.”

AUTHOR: Ahmed Abdel-Hakam, Counsel – Eversheds Sutherland (International) LLP – London

Being one of the world’s top producers of copper, the DRC is set to indirectly become one of the global players in the world’s decarbonisation efforts.  The main challenge facing the country will be how to ensure that its legal framework continues to attract investors in its mining industry and at the same time ensure that mining extraction/production of copper is also in line with environmental standards.

THIS ARTICLE FIRST APPEARED IN MINING REVIEW AFRICA ISSUE 3, 2021
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My intention in this opinion piece is to outline lessons which could be learned from disputes which arose out of environmental issues.

Taxonomy of environmental risks

Mining activities are perceived to have an impact on the environment.  As a result, States and mining companies are bound to cooperate to mitigate and minimise this environmental impact and ensure that mining activities do not result in damaging levels of environmental pollution.

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The environmental impact of mining covers three main types of risks:

Transformation of landscapes and ecosystems.  This could result from diversion of water supplies; dust emissions; and land erosion.  Available environmental management and reclamation techniques will significantly reduce the environmental impact of mining and metallurgical projects. Even when these techniques are properly employed, the mining and metals sector relies on various mechanical (drilling, blasting, smelting) and chemical (including hydrometallurgical) processes that are inherently dangerous and could result in catastrophic accidents and instances of environmental contamination. Parties involved in mining projects must therefore ready for the possibility of significant environmental disputes and liabilities.

Air, soil, and water contaminations. Metallurgical extraction processes often rely on toxic reagents like mercury, arsenic, or cyanide to separate precious metals from the ore.  Accidental mishandling of these substances may result in environmental contamination.   Mining activities can also trigger a phenomenon known as acid rock drainage (ARD), which refers to the acidic water that is created when sulphide minerals are exposed to air and water and produce sulphuric acid, through a natural chemical reaction.

Although significant progress has been made over the past decade in understanding, preventing, and treating ARD, chemical contaminations of air, soil, ground/surface water potentially resulting from the mining process constitutes perhaps one of the main environmental risks associated with mining.  Soil and water contaminations are particularly prone to result in complex environmental disputes because they can manifest themselves decades after a mine closure.  This could potentially create substantial litigation risk for the owners of the mine.  A frequent legal issue arising in this context is the apportionment of liability between the successive owners and operators of a mining project; some of whom may be out of business or have been acquired (by third parties) by the time a dispute arises.

Risks inherent to the closure of mining projects. Most jurisdictions now impose extensive closure and reclamation requirements on mining projects, including the reconversion of the mine infrastructures and returning of mine lands and water resources to natural or productive use.  Mining companies unwilling or unable to comply with those requirements could face significant liability under the applicable legislation of the host state.

The failure to comply with environmental norms and regulations may result in regulatory fines or penalties for mining companies (or, even the withdrawal of their mining licenses). More importantly, mining companies responsible for environmental contaminations or pollutions may also be required to clean-up the polluted areas.

Environmental liabilities can therefore threaten the profitability, in some cases the existence, of a mining project, and by ricochet have an impact on the revenue that the host state could extract from the mineral that is extracted and sold from its mines.

As a result, in order to minimise such risks, it is important that host states clearly define the applicable environmental regulations and for mining companies to properly identify the environmental risks associated with their operations and to make sure that they strictly comply with the applicable environmental regulations.

Environmental disputes

In order to address the above-mentioned environmental risks, a number of mining jurisdictions have adopted comprehensive environmental regulations applicable to the mining sector.

However, imposing strict environmental requirements without ensuring fair and non-discriminatory treatment amongst foreign investors operating in the country, could substantially impact the profitability or even the existence of mining projects, which can cause foreign mining companies to challenge the host state’s regulations/measures in accordance with the international investment agreements (or contracts) to which the host State and the investor’s home state are party.

Let me take two examples of investor-State mining disputes arising in connection with the application of environmental regulations enacted by the host state.  These examples could serve as guidance to host states and mining companies alike, as to how some investor-state arbitration tribunals have approached these issues.

Glamis Gold Ltd. v. United States of America

Glamis Gold Ltd., a Canadian gold mining company, filed an arbitration pursuant to the North American Free Trade Agreement (NAFTA) for alleged injuries relating to a gold mine in Imperial County, California. 

Glamis claimed that certain governmental actions and measures with respect to environmental requirements for open-pit mining operations resulted in the expropriation of its investments in violation of Article 1110 of NAFTA, and denied its investments fair and equitable treatment (FET) under international law in violation of Article 1105 of NAFTA.  The disputed measures imposed, amongst other things, certain surface reclamation requirements (grading and backfilling of excavated areas) on owners of mining projects situated in the vicinity of Native American sacred sites.

The arbitral tribunal issued an award dismissing Glamis’s claims and ordering Glamis to pay two-thirds of the arbitration costs in the case.  Specifically, the Tribunal rejected Glamis’ argument that the backfilling and grading requirement imposed by the State of California resulted in a negative value for the project.  Accordingly, the Tribunal concluded that: “the complained of measures did not cause a sufficient economic impact to the Imperial project to effect an expropriation of the claimant’s investment.”  The Tribunal also held that the United States had not violated the FET standard.  

Accordingly, a very high threshold would have to be met by Glamis in order to prove a breach of the FET standard.  The Tribunal held that a violation “requires an act that is sufficiently egregious and shocking gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons …”.

The Tribunal also concluded that the environmental measures at issue could not meet that burden.  The Glamis award shows that international arbitration tribunals may potentially consider legitimate, non-discriminatory environmental measures as a permissible exercise of governmental regulatory discretion and not as potential treaty violations.

William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v.  Government of Canada

Four US citizens, Messrs William Ralph Clayton, William Richard Clayton, Douglas Clayton, and Daniel Clayton, and Bilcon, a US company, commenced an arbitration against Canada under NAFTA. Bilcon claimed that Canada’s federal government and provincial government of Nova Scotia’s decision to reject Bilcon’s plans to build and operate a mining quarry and marine terminal in Whites Point, Nova Scotia, was unfair, politically motivated, and discriminatory; and therefore in breach of Canada’s obligations under NAFTA.

In its award on jurisdiction and liability, the majority of the Tribunal concluded that the joint review panel tasked with reviewing Bilcon’s proposal had acted unlawfully and arbitrarily by rejecting the project on the basis of community core values a “fundamentally novel and unsubstantiated standard of review and by failing to consider Bilcon’s proposed measures to mitigate environmental harm.”

In addition, the majority observed that Bilcon had submitted a 3 000-page environmental impact statement saying, “the product of millions of dollars of work involving 35 experts,” as Bilcon describes it. Yet, the joint review panel only heard testimony from Bilcon’s experts for 90 minutes during the 90 hours that the hearings lasted.”

Based on the above, the majority concluded that Canada had failed to treat Bilcon’s investment in accordance with the minimum standard of treatment (NAFTA Article 1105) and NAFTA’s national treatment standard (Article 1102).  The majority noted in this respect that similar projects backed by Canadian investors had not suffered similar rejections. 

The majority of the Tribunal went on to clarify the standard relied upon to determine whether environmental standards constitute environmental violations. The majority explained that while investment treaty provisions should not be used to obstruct the implementation of high standards of environmental protection, “environmental regulations, including assessments, will inevitably be of great relevance for many kinds of major investments in modern times. The mere fact that environmental regulation is involved does not make investor protection inapplicable.”

Conclusion

With its copper resources, DRC is ideally placed to power the world’s green energy revolution.  The challenge is to find the right balance between attracting foreign investments in its mining sector and increasing production on one hand, and ensuring that the copper extraction is as environmentally friendly as possible.  Investor-State tribunals have recognised to the host State’s a right to regulate as long as it is proportionate, pursuing a legitimate public policy goal and non-discriminatory.

About the author

Ahmed Abdel-Hakam

Ahmed Abdel-Hakam represents clients in high-profile cross-border disputes with a multilingual element and legal and procedural issues across civil and common law jurisdictions. He draws upon +10 years of experience in international disputes.  He has advised both multinationals and States in relation to disputes arising out of investments in regulated sectors (mining, oil & gas and telecommunications) in Africa (including South Sudan, Tanzania, Burundi, Zambia, Angola, Algeria, Central African Republic, Sudan, Tunisia).

He advises investors on both potential claims under international investment law and investment structuring to access investment treaty protections. He also provides training to governments on investment treaty arbitration and is a contributor to Oxford University Press’ online publication “Investment Claims”.  He regularly speaks at conferences on energy and natural resources on the African continent.  

In 2019, Abdel-Hakam was selected as a Young Leader by the Franco-British Council which selects a small group of young talented French and British individuals under 40 on an annual basis, with distinguished careers across a variety of sectors from sciences to arts, politics, law, the military and finance. He also currently serves on the Y-ADR Steering Committee of the International Institute for Conflict Prevention & Resolution (CPR) based in New York, USA.