Killing another golden goose

Right approach to Reko Diq would require SC to check whether foreign investors were aware of rules not being followed.

On January 7, 2013, the Supreme Court of Pakistan released the short order in the Reko Diq case. To the surprise of very few, the Court found against the respondent Tethyan Copper Company (TCC) and held that the 1993 joint venture agreement between the Government of Balochistan and the predecessors in interest of TCC was not valid.

Since the Supreme Court (SC) has yet to release its detailed reasons, speculation and criticism of the short order may appear unwarranted. At the same time, I still think there is much to be said for sifting through the entrails of the short order. To digress for a moment, there is a famous Sherlock Holmes story in which, he explains to Dr Watson the significance of the dog that did not bark. Similarly, what makes the short order interesting is not because of what it says but because of what it doesn’t say.

Lawyers and courts draw a distinction between different kinds of wrongdoing and, in particular, between misfeasance and malfeasance. Misfeasance means that someone has acted in a manner contrary to that prescribed by law, for example, by signing a contract without obtaining board approval. Malfeasance means deliberate misfeasance. For example, a government servant who sells state secrets for money has committed malfeasance.

In the case of the short order, what I do not see is any discussion of malfeasance. Instead, the short order merely says that the 1993 joint venture agreement (and subsequent agreements) was ‘illegal’ without clarifying whether the illegality was a product of simple misfeasance or of malfeasance (such as bribery). Given the time and effort devoted to this issue, my tentative conclusion is that the SC did not find any malfeasance. If so, we have a problem.

Before going further, let’s review the facts. In 1993, the Government of Balochistan (GoB) entered into a JV with BHP Billiton. In 2000, the JV was amended to allow BHP Billiton to sell out (which it did in 2002). Between 1993 and 2011, the JV spent approximately $440 million in exploring parts of Balochistan to find massive commercially exploitable deposits of copper and gold. In 2011, the JV applied to convert its exploration licence into a mining lease. In 2013, the SC has held that the JV has no rights whatsoever, apparently without finding any malfeasance on the part of the foreign investors.

If the above factual summary is correct, then the inescapable conclusion is that the foreign investors have been penalised for the incompetence of the GoB. In other words, the foreign investors have been told that their agreement — and their investment of close to half a billion dollars — is worthless not because they did anything wrong, but because the Government of Balochistan did not follow the correct protocols. I don’t find that fair.

The standard legal response to a Reko Diq type problem is that there is no estoppel against law. In other words, if the law prescribes a particular way of doing something, and if that method has not been followed, then no matter what the consequences, the step taken remains illegal and can be set aside at any point in time.

I appreciate the sentiment that the illegal cannot be treated as the legal merely because of the passage of time, but this is certainly not the law when it comes to other areas. For example, in the case of private contracts, the ‘indoor management’ rule provides that companies cannot wriggle out of their agreements by citing non-compliance with internal procedures. Similarly, the Limitation Act of 1908 prescribes different time periods after which civil actions are not maintainable. You cannot, for example, sue to enforce a contract more than three years after you become aware of its breach.

My view is thus that the ‘no estoppel against law’ approach is unfair because it shifts the burden of legality onto private parties. In other words, if I am contemplating a commercial transaction with a government entity, it is now my responsibility to ensure that each and every ‘t’ is crossed and each and every ‘i’ is dotted. I see no reason why the government may be the beneficiary of its own incompetence.

More importantly, this ‘zero-tolerance’ approach is dangerous because it makes investment in Pakistan an extremely dicey business. If hundreds of millions of dollars of investment can be thrown into jeopardy through the autopsy of a 20-year-old agreement, who is ever going to bother investing in Pakistan? This particular case was already marred by the suspicion that the Supreme Court was catering to media plaudits and jingoistic nationalism. It was, therefore, particularly necessary for the SC to provide a reasoned and fair basis for interfering with investor rights. So far, at least, I have not seen any such basis.

In my view, the court should have applied the ‘bona fide purchaser’ rule in the Transfer of Property Act of 1882. What that provides is that (1) normally a buyer of land only gets as good a title as the seller actually had; but (2) there is an exception for purchasers in good faith. In other words, if I buy property in good faith from someone who looks like they actually have the title to the land in question, then the law will deem me to be the proper owner even if it turns out that the seller was a complete fraud.

Applying that approach to Reko Diq would require the SC not only to check if rules were violated but also whether the foreign investors were aware — or should have been aware — that rules were not being followed. If there is any basis to conclude that the investors did not act in good faith, well and good. But in the absence of any such conclusion, the investors would be left alone.

Pakistanis are fond of clichés, none more so than the parable of the golden goose. If the detailed reasoning of the Reko Diq decision does not explain why it was equitable to rob foreign investors of their contractual rights, the rest of the world will only conclude that the foreign investors were wronged. And I, for one, will agree with them.

Published in The Express Tribune, January 22^nd, 2013.