Pakistan’s arbitration woes: sifting myth from reality
Like Pakistan, they too have been subject to copious levels of arbitration in a short time resulting in costly awards
The writer is a lawyer and currently in the second half of his barrister course in the UK
In March 2017, an arbitration tribunal of the World Bank’s International Centre for Settlement of Investment Disputes ruled in favour of the Tethyan Copper Company (TCC) in an investment dispute brought by it against Pakistan. The subject matter of the claim concerned the denial of mining rights to the Chilean company for the Reko Diq project in 2011.
The underlying facts of the TCC case offer insight into the truly arbitrary nature of the global arbitration regime imposed upon developing countries. TCC, a Chilean company incorporated in Australia, had conducted exploration work in the Reko Diq area since 2005 under licence granted by the provincial government of Balochistan. The agreement provided no future commitment to grant the TCC mining rights to the Reko Diq project, however, the procedure for which was to be conducted separately under the discretion of the relevant licensing Authority. Thus in January 2009, several companies were invited to submit financial and technical proposals for the mining rights to the Reko Diq project. This process included the TCC, as well as Chinese state-owned company China Metallurgical Group Corporation (“MCC”) and other local investors. TCC’s application was eventually rejected by the local authority, which proffered a lack of comprehensive feasibility studies conducted by the company as well as public interest considerations as the foundation for their refusal.
The matter was subsequently submitted to arbitration by the TCC under the Australia-Pakistan Bilateral Investment Treaty (BIT), alleging Pakistan to be in breach of Article 13(3) of the agreement, having caused the claimant to incur a loss of investment through the denial of mining rights. It is to be noted that no allegations of corruption or procedural impropriety were levelled, with the claim merely concerning the manner in which the discretion to award the mining rights was exercised by the local authority. In a visibly harsh, but not altogether unexpected ruling, the three-member arbitration panel concluded that by simply exercising its regulatory powers for the benefit of local development, the government of Balochistan, and in turn the state of Pakistan had breached several of its obligations under the relevant BIT.
Due to the politically sensitive nature of the Reko Diq project, the expectedly exponential award expected (conservative estimates amount to around £400 million) and the involvement of the ex-chief justice of Pakistan in providing a separate but pertinent ruling on the matter which further disengaged TCC from the project in 2013, the tribunal decision against Pakistan made front-page headlines across the domestic media.
As is often the case, however, the debate in Pakistan remained captive to a whirlpool of sclerotic and self-serving political rhetoric. Depending on the observer’s political leanings, several explanations, each more benighted than the last, were offered for the embarrassing and costly loss. The allegedly maladroit management of the Balochistan government, the pernicious judicial activism of Iftikhar Chaudhry and Pakistan’s weak legal fraternity that offered no match for Machiavellian foreign arbitrators were some of the leading narratives. Unfortunately, the discourse ignored entirely the more pressing and relevant matters of concern. In truth, the TCC tribunal failure did not reflect an internal failure on the part of Pakistan’s state apparatus as much as it did the hegemonic nature of the global BIT regime that developing countries have been subjected to by the West.
Bilateral Investment Treaties are unique agreements that allow investors of the sending state to sue their host states for violations of a range of rights enshrined within the treaties. Traditional BIT agreements, as the one between Pakistan and Australia, actively encourage private investors to directly sue host states in investment disputes before international tribunals without prior discourse to domestic remedies. These agreements are usually undertaken between a “capital exporting” Western state and a “capital importing” developing state, which inevitably leaves the latter to deal with the brunt of claims. Underpinning all contemporary BITs are widely drafted provisions relating to protection of investments, fair and equitable treatment and expropriation. These provisions are in turn interpreted in an investor-friendly manner, as was the case in the TCC arbitration, by panels marred with allegations of conflict of interest.
Often labelled as the “inner mafia”, arbitrators from these panels come from a closely-knit community of international law firms that often enjoy close links with multinational corporations that are claimants in most cases.
So why does Pakistan, along with other developing states, accept such limitations on its sovereignty and subject itself to a hostile arbitration bureaucracy inbuilt to protect the investor? Traditionally, Western countries and financial institutions such as the World Bank have promoted the use of BITs as means of ensuring protection for foreign investors in developing countries where regulatory systems and judicial institutions are deemed to provide inadequate cover, owing to their structural deficiencies. The popular myth that flowed from this foundational aim was that without the presence of the dispute-resolution mechanisms offered by a BIT, investors would be discouraged from bringing their investments to a particular state. Developing states were thus indoctrinated to believe that BITs happened to be prerequisites for attracting foreign investment.
Recent literature, however, has given a lie to this popular myth. Evidence reveals that there is simply no correlation between the existence of BITs and foreign investment inflows. At the time of the investment, investors remain largely indifferent to whether a BIT exists, with most only being concerned with it at the time a dispute arises. The decision to invest is driven purely by the capital potential of the investment, depending on what the state offers by way of its natural resources. The TCC for example, in all probability, based its decision to invest in the Reko Diq project on the basis of its lucrative potential rather than the existence of an Australia-Pakistan BIT.
This shift in academic opinion on the actual impact, or lack of impact for that matter, of BITs has incubated something of a Third World revolt in regards to international investment agreements. States such India and Indonesia have already initiated ‘the revolt’ thorough reviews of their existing BIT policy. Like Pakistan, they too have been subject to copious levels of arbitration in a short time resulting in costly awards. Indonesia remains one the most highly litigated against states in the region, with India having suffered its watershed moment with regard to global arbitration with the White Industries vs India ruling in 2013. Both these countries now seek to reinvent their BIT policies with a view to safeguarding state sovereignty and assuring that ministerial are able to perform their regulatory functions for the purposes of sustained development without hindrance from litigation-savvy investors. Unsurprisingly, contrary to the vehement warnings of the several pro-BIT commentators and in line with empirical data, Indonesia’s termination of several of its BITs bore no impact on its ever-increasing levels of FDI.
Pakistan, which hopes to attract greater levels of foreign investment in its quest for economic revival, must remain wary of the dangers posed by draconian BIT agreements which can severely undercut any benefits of such investment incurred by the receiving state. Already, it faces an additional arbitration claim brought by the Turkish energy company Karkey Karadeniz over accusations of expropriation. Together with its legal and academic community, the government of Pakistan should embark upon a course of action similar to that adopted by India and Indonesia, and begin thorough review of its 53 BIT agreements. Whether it chooses to terminate existing agreements or merely establish a more suitable Model BIT for the future can be decided as appropriate during the review. For the purposes of a new Model BIT, imposing obligations to comply with certain social responsibilities and the requirement to exhaust all domestic remedies before resorting to arbitration would be welcome additions to future agreements. A narrower qualification of some of the more liberal provisions pertaining to protection of investments will also go a long way in insuring that the fruits of foreign investment are shared equally between host states and investors. Eventually, the experience gained during such a review process will assist Pakistan not only with future BITs, but other trade and investment agreements, paving the way for a far more productive FDI regime and allowing sustainable development in the country.
Published in The Express Tribune, January 20th, 2018.
The underlying facts of the TCC case offer insight into the truly arbitrary nature of the global arbitration regime imposed upon developing countries. TCC, a Chilean company incorporated in Australia, had conducted exploration work in the Reko Diq area since 2005 under licence granted by the provincial government of Balochistan. The agreement provided no future commitment to grant the TCC mining rights to the Reko Diq project, however, the procedure for which was to be conducted separately under the discretion of the relevant licensing Authority. Thus in January 2009, several companies were invited to submit financial and technical proposals for the mining rights to the Reko Diq project. This process included the TCC, as well as Chinese state-owned company China Metallurgical Group Corporation (“MCC”) and other local investors. TCC’s application was eventually rejected by the local authority, which proffered a lack of comprehensive feasibility studies conducted by the company as well as public interest considerations as the foundation for their refusal.
The matter was subsequently submitted to arbitration by the TCC under the Australia-Pakistan Bilateral Investment Treaty (BIT), alleging Pakistan to be in breach of Article 13(3) of the agreement, having caused the claimant to incur a loss of investment through the denial of mining rights. It is to be noted that no allegations of corruption or procedural impropriety were levelled, with the claim merely concerning the manner in which the discretion to award the mining rights was exercised by the local authority. In a visibly harsh, but not altogether unexpected ruling, the three-member arbitration panel concluded that by simply exercising its regulatory powers for the benefit of local development, the government of Balochistan, and in turn the state of Pakistan had breached several of its obligations under the relevant BIT.
Due to the politically sensitive nature of the Reko Diq project, the expectedly exponential award expected (conservative estimates amount to around £400 million) and the involvement of the ex-chief justice of Pakistan in providing a separate but pertinent ruling on the matter which further disengaged TCC from the project in 2013, the tribunal decision against Pakistan made front-page headlines across the domestic media.
As is often the case, however, the debate in Pakistan remained captive to a whirlpool of sclerotic and self-serving political rhetoric. Depending on the observer’s political leanings, several explanations, each more benighted than the last, were offered for the embarrassing and costly loss. The allegedly maladroit management of the Balochistan government, the pernicious judicial activism of Iftikhar Chaudhry and Pakistan’s weak legal fraternity that offered no match for Machiavellian foreign arbitrators were some of the leading narratives. Unfortunately, the discourse ignored entirely the more pressing and relevant matters of concern. In truth, the TCC tribunal failure did not reflect an internal failure on the part of Pakistan’s state apparatus as much as it did the hegemonic nature of the global BIT regime that developing countries have been subjected to by the West.
Bilateral Investment Treaties are unique agreements that allow investors of the sending state to sue their host states for violations of a range of rights enshrined within the treaties. Traditional BIT agreements, as the one between Pakistan and Australia, actively encourage private investors to directly sue host states in investment disputes before international tribunals without prior discourse to domestic remedies. These agreements are usually undertaken between a “capital exporting” Western state and a “capital importing” developing state, which inevitably leaves the latter to deal with the brunt of claims. Underpinning all contemporary BITs are widely drafted provisions relating to protection of investments, fair and equitable treatment and expropriation. These provisions are in turn interpreted in an investor-friendly manner, as was the case in the TCC arbitration, by panels marred with allegations of conflict of interest.
Often labelled as the “inner mafia”, arbitrators from these panels come from a closely-knit community of international law firms that often enjoy close links with multinational corporations that are claimants in most cases.
So why does Pakistan, along with other developing states, accept such limitations on its sovereignty and subject itself to a hostile arbitration bureaucracy inbuilt to protect the investor? Traditionally, Western countries and financial institutions such as the World Bank have promoted the use of BITs as means of ensuring protection for foreign investors in developing countries where regulatory systems and judicial institutions are deemed to provide inadequate cover, owing to their structural deficiencies. The popular myth that flowed from this foundational aim was that without the presence of the dispute-resolution mechanisms offered by a BIT, investors would be discouraged from bringing their investments to a particular state. Developing states were thus indoctrinated to believe that BITs happened to be prerequisites for attracting foreign investment.
Recent literature, however, has given a lie to this popular myth. Evidence reveals that there is simply no correlation between the existence of BITs and foreign investment inflows. At the time of the investment, investors remain largely indifferent to whether a BIT exists, with most only being concerned with it at the time a dispute arises. The decision to invest is driven purely by the capital potential of the investment, depending on what the state offers by way of its natural resources. The TCC for example, in all probability, based its decision to invest in the Reko Diq project on the basis of its lucrative potential rather than the existence of an Australia-Pakistan BIT.
This shift in academic opinion on the actual impact, or lack of impact for that matter, of BITs has incubated something of a Third World revolt in regards to international investment agreements. States such India and Indonesia have already initiated ‘the revolt’ thorough reviews of their existing BIT policy. Like Pakistan, they too have been subject to copious levels of arbitration in a short time resulting in costly awards. Indonesia remains one the most highly litigated against states in the region, with India having suffered its watershed moment with regard to global arbitration with the White Industries vs India ruling in 2013. Both these countries now seek to reinvent their BIT policies with a view to safeguarding state sovereignty and assuring that ministerial are able to perform their regulatory functions for the purposes of sustained development without hindrance from litigation-savvy investors. Unsurprisingly, contrary to the vehement warnings of the several pro-BIT commentators and in line with empirical data, Indonesia’s termination of several of its BITs bore no impact on its ever-increasing levels of FDI.
Pakistan, which hopes to attract greater levels of foreign investment in its quest for economic revival, must remain wary of the dangers posed by draconian BIT agreements which can severely undercut any benefits of such investment incurred by the receiving state. Already, it faces an additional arbitration claim brought by the Turkish energy company Karkey Karadeniz over accusations of expropriation. Together with its legal and academic community, the government of Pakistan should embark upon a course of action similar to that adopted by India and Indonesia, and begin thorough review of its 53 BIT agreements. Whether it chooses to terminate existing agreements or merely establish a more suitable Model BIT for the future can be decided as appropriate during the review. For the purposes of a new Model BIT, imposing obligations to comply with certain social responsibilities and the requirement to exhaust all domestic remedies before resorting to arbitration would be welcome additions to future agreements. A narrower qualification of some of the more liberal provisions pertaining to protection of investments will also go a long way in insuring that the fruits of foreign investment are shared equally between host states and investors. Eventually, the experience gained during such a review process will assist Pakistan not only with future BITs, but other trade and investment agreements, paving the way for a far more productive FDI regime and allowing sustainable development in the country.
Published in The Express Tribune, January 20th, 2018.