Dr Muhammad Khurram
AS the saying goes, every cloud has a silver lining, this stupendous award against Pakistan also presents multifarious opportunities for course correction if we realize that scant institutional capacity coupled with crisis of governance were igniting fuel for hurtling train of whimsical desires. It is not the case that this was first instance in history in which Pakistan was involved in an arbitration dispute also involving a bilateral investment treaty (BIT). There have been at least four other similar cases. Two of these, namely, SGS vs Pakistan & Imbroglio vs Pakistan were settled while Bayinder vs Pakistan was decided in our favour. The fourth one, Karkey, was decided against Pakistan. It would therefore be important to look at current case from the perspective of highlighting missed opportunities and lessons for future.
First, poor posturing by Government of Balochistan in entire dispute raises eyebrows. If the government had other potential prospectors or was capable of managing the project herself, she should not have relaxed the rules to allow BHP to explore the area. If this was not the case, the provincial government should have defended her decision to work with foreign companies in relaxation of rules as only viable option. Also, if the government was having second thoughts about allowing a foreign company to explore for minerals she should have simply refused to enter in novation and option agreements in 2000.
Interestingly, government of Balochistan opposed the petition in Balochistan High Court to declare CHEVJA illegal but took an opposite position in Supreme Court alleging that the agreement had been procured through undue influence by BHP. These events make it abundantly clear that there is stark lack of institutional capacity at provincial level to engage in international agreements.
Cursory reading of Supreme Court’s judgment reflects that the apex court raised all these questions to strike at the legality of CHEVJA. Were any tenders floated internationally for the extraction from the Reko Diq mines, which were proven by the year 2000 when respondent number 4 (TCC) bought the share of respondent number 8 under CHEVJA for US $ 60 million? Did the government of Balochistan make the decision on the basis of relevant facts brought on record related to rationality and competence, and technical and financial considerations? Were competitive offers from successful mining companies operating in other countries obtained for comparison and negotiation? All these questions have been raised in the decision pointing to hazy and shoddy work of Balochistan government.
A brief analysis of ICSID’s award would help us understand how our international obligations are viewed at independent fora. Pakistan argued that because the CHEJVA was void according to the Supreme Court, the investment did not respect Pakistani law and thus was outside the treaty’s scope. However, the tribunal rejected the argument. It noted that Pakistan did not mention CHEJVA’s potential invalidity when negotiating the 2006 novation agreement and that the Pakistani Supreme Court decision was based on Balochistan’s breach of its internal laws, not Tethyan’s actions.
The tribunal noted that CHEJVA did not include Tethyan’s obligation to provide for smelting and refining minerals in Pakistan. Hence, it concluded that failure to carry out those activities was not a valid ground to deny the license. The tribunal also found that the license refusal procedure lacked due process, given that the grounds of the decision were insufficient. A major pillar of decision is issue of legitimate expectation. The tribunal concluded that Tethyan had legitimate expectation of receiving the mining lease because of Pakistan’s assurances in the CHEJVA and that the denial violated Tethyan’s legitimate expectations. The tribunal adjudged that the denial of the license was equivalent to expropriation, because it substantially deprived the investment of its value.
It held that this expropriation breached the BIT as it was discriminatory and without public purpose or compensation for TCC. The story of grant of exploration license and refusal for mining license followed by intervention of courts and the award should be an eye opener for us. Several phases to formation of contract beginning from international tenders till formation of contract are of vital importance. However, most critical phase in my opinion is once negotiations with a sifted bidder begin and continues till formation of contract. Is there a bilateral investment treaty between Pakistan and another country from which the bidding company originates? If so what is impact of such a relationship? What legitimate expectations would arise from the contract? Grant of an exploration contract usually creates a legitimate expectation for being allowed right of first refusal for mining contract for the company. If not same would have to be explicitly mentioned in contract.
For international contracts, Pakistan must put in place an institutional framework at federal level consisting of legal and technical experts which coordinates with provinces assisting in negotiations and finalization of contracts. This becomes all the more important keeping in view disparity in institutional capacity of provinces. The framework would help in standardization and predictability not only for Pakistan but also for prospective investors. We must also realize that merely crying corruption and undue influence would not help our case in voiding contracts subsequently. Unless there is convincing evidence to prove the same, such allegations would be thrown out by independent international arbitration bodies. Making an opportunity out of current predicament would be way better than howling over the past.
—The writer is a civil servant having an LLM from Harvard Law School, MSC from University of Oxford and an LLM from University of Turin/WIPO academy.
