By Nudrat Piracha (George Washington University)

Investment arbitrations have in the recent years attracted criticism for second guessing decisions affecting interests of States and their decisions relating to public policy issues. This has led many to call into question the legitimacy of the investor-State dispute settlement system. The decision on liability rendered in the ICISD proceedings brought by Tethyan Copper Company (“TCC”) against Pakistan in relation to the termination of TCC’s operations pertaining to the mining of copper reserves on 20 March 2017 is a case in point. The tribunal found violations of the Agreement between Australia and the Islamic Republic of Pakistan on the Promotion and Protection of Investments (Islamabad, 7 February 1998) (“Australia-Pakistan BIT”) by Pakistan, despite the Pakistan Supreme Court’s findings that the investment was tainted by corruption and that the CHEJVA (defined below) was void.

Balochistan, a province of Pakistan, is a land enriched and embedded with rare, exotic and valuable minerals. To engage in the exploration of gold and copper in the Reko Dek area in the Chagai District, on 29 July 1993, the Balochistan Development Authority (“BDA”), along with BHP Minerals Intermediate Exploration Inc. (“BHP”) became parties to the “Chagai Hills Exploration Joint Venture Agreement” (“CHEJVA”). The CHEJVA was on 4 March 2000 converted into a tripartite agreement, through an addendum entered into between the Governor of Balochistan (“GOB”), BDA and BHP. On 28 April 2000, BHP entered into an Option Agreement with Mincor Resources, establishing an exploration alliance, giving exploration and acquiring mineral rights from BHP to Mincor, against a consideration of $100. Mincor created a specialised company, TCC, which was granted an Exploration License to operate in the designated area. Mincor was also granted the right to assign its rights under the Agreement to TCC at any time.

Subsequently, a Novation Agreement was entered into between TCC, GOB, BDA and BHP on 1 April 2006. The recitals re-stated that GOB, through the Chairman of BDA and BHP, were parties to the CHEJVA, and provided that the parties agreed to substitute TCC with BHP as a party to the Agreement. The Novation Agreement further provided that TCC, in replacing BHP, would enjoy rights and benefits accorded to BHP under the CHEJVA, and that the percentage interests of GOB and TCC would be 25% and 75% respectively. Registered with the Board of Investment, TCC incorporated a local subsidiary (“TCCP”) and, in December 2007, the Islamabad High Court approved the union of both companies under the scheme of arrangement and all licences and properties were transferred to TCCP.

However, in 2006, Maulana Abdul Haq and others filed Constitution Petition No. 892 of 2006 in the High Court of Balochistan to challenge the legality of the CHEJVA along with the lack of timely completion (this case is reported here (“Reko Dek Case”). The petitioners sought declarations that the transactions based upon the CHEJVA were illegal. The High Court in its judgment dated 26 June 2007 dismissed the Petition and found the CHEJVA and other acts of GOB/BDA to be legal and valid.

Other petitioners filed Constitution Petitions directly before the Supreme Court of Pakistan under Art 184(3) of the Constitution, questioning the validity of the grant of licence(s) to BHP/TCC on the grounds of absence of fairness, violation of laws and risks to the vital interests of the Province of Balochistan. This was followed by a Civil Petition for Leave to Appeal No. 796 of 2007 against the judgment of the Balochistan High Court. All of the petitions and miscellaneous applications were heard together and disposed of in a single judgment.

Pursuant to a special meeting held on 14 November 2011, an application for the grant of a Mining Lease by TCC was dismissed by the Mines Committee constituted under BMR 2002 along with the challenge to the decision by TCC through filing an administrative appeal before the Secretary, Department of Mines & Minerals, Government of Balochistan. TCC argued that the local laws were biased towards BHP and non-transparent. TCC did not challenge the orders before the High Court of Balochistan under Art. 199 of the Constitution, but filed simultaneous ICC and ICSID arbitrations against the Governments of Balochistan and Pakistan. Upon obtaining interim orders from the courts in Pakistan, the Supreme Court of Pakistan sought to enjoin the ICC and ICSID tribunals from proceeding. However, both tribunals declined to stay their proceedings, issuing interim awards and granting certain conservatory measures.

Under Art 16 of the CHEJVA, the law applicable to the Agreement was the law of Pakistan but the parties agreed to adhere to certain principles of international law as well. On 7 January 2013, the Supreme Court of Pakistan declared the CHEJVA void for illegality on public policy grounds. It was firstly held that the laws of Pakistan took precedence to decide the legality of the agreement. The Supreme Court relied on the case of Inceysa v. El Salvador (ICSID Case No ARB/03/26) in which it was held that a contract made in violation of the host country’s law would not benefit from the protections of the relevant BITs or the rights granted by them, including the right to arbitration.

The Supreme Court, citing the ICSID decision in World Duty Free v. Kenya (ICSID Case No ARB/00/7), noted that the safeguard mechanism offered to investors under the Australia-Pakistan BIT were subject to the investment being “in accordance with laws and investment policies applicable from time to time.” Hence, the Australia-Pakistan BIT required that investments be made in accordance with the law of Pakistan. Where investments are not made in accordance with that law, the investor was not entitled to any protection under the BIT. A similar approach was adopted in Tokios Tokeles v Ukraine (ICSID Case No ARB/02/18), which was also cited by the Supreme Court. In that decision, it was observed that it was a common requirement in modern BITs for “investments [to have] be[en] made in compliance with the laws and regulations of the host state”.

The Supreme Court also found that parties were not parties to any valid arbitration agreement. Consequently, it was for the courts (and not an arbitral tribunal) to decide the legality of the arbitration agreement contained within the CHEJVA. In this regard, the court found the transaction to be tainted by corruption, and those involved in finalizing the same on behalf of the government to have been in positions of conflict. For instance, the signatory of the CHEJVA on behalf of the government, Mr. Ata Muhammad Jaffer had held the dual positions of Chairman BDA and Additional Chief Secretary at the relevant time, which created a conflict of interest. He had demonstrated visible haste in executing the agreement to the detriment of the government, and had been convicted for corruption under the Balochistan Civil Servants (Efficiency and Discipline) Rules 1983 for “living beyond his means”. In relation to the evidence of irregularities and corruption made available to the court, the Supreme Court noted that “[t]he Government examined the same and decided not to defend the said acts [of corruption and irregularities] and accordingly it decided to render full assistance to this Court from the record that was filed”, and further observed that “this record made shocking disclosures of extensive irregularities and corruption”.

The Supreme Court further observed that it had broad authority under Art 184(3) of the Constitution to oversee the actions of the other State organs such as the Executive and Legislature under the principle of trichotomy of powers. Arising from the verdicts of the historic cases of Miss Benazir Bhutto v. Federation of Pakistan (PLD 1988 SC 416), the Supreme Court emphasised the need for an independent and vigilant system of judicial administration where all acts and actions leading to infringement of fundamental rights are nullified and the rule of law upheld in society. It further observed that a court cannot confer validity or immunity to a mala fide action or shield such action from judicial scrutiny.

Further, the Supreme Court ruled that various recitals in the CHEJVA, the Addendum, the Novation Agreement, Mincor Option, Alliance Agreement were void and unenforceable as a matter of Pakistani contract law as they were contrary to public policy. Dismissing TCC’s arguments that this illegality did not affect the Novation Agreement, the Supreme Court stated that a necessary element for the execution of a valid novation is the validity of the original agreement that is to be substituted. Where an agreement is void, all subsequent alterations, variations or novations based upon such agreement will also be invalid under Pakistani law.

In its judgment, the Supreme Court noted that the executive authority of Balochistan acted in a non-transparent, arbitrary and unreasonable manner in the disposal of public property, thereby failing to obtain the best competitive price for the said mineral resources. Tenders were not floated nor any competitive bids invited, making the entire process of awarding the CHEJVA to BHP uncompetitive, non-transparent and illegal.

The decision of the ICSID tribunal has not been made public and the grounds on which the tribunal dispensed with the States concerns are not thus publicly known. The damages will be decided by the tribunal in a separate quantum phase.

 

Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan – liability under a BIT despite domestic court’s findings of corruption and illegality

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