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Reko Diq case

Published Apr 04, 2017 04:07am


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THE arbitral tribunal of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), before which one of the international arbitration proceedings were ongoing in the Reko Diq case, has decided against Pakistan. According to preliminary news reports, the arbitral tribunal has rejected Pakistan’s final defence against liability and declared that Pakistan violated certain provisions of its Bilateral Investment Treaty (BIT) with Australia. The Australian BIT was applicable because the other party, Tethyan Copper Company (TCC), a joint venture between Antofagasta PLC and Barrick Gold Corporation, is incorporated in Australia.

TCC had argued that Pakistan abused its discretion in denying, without any legal basis, TCC’s mining application in the year 2011 after it had spent a substantial amount of money on mining exploration and feasibility studies for around 10 years. Subsequently, TCC initiated arbitration proceedings before ICSID against the Pakistan government under the BIT with Australia and also before the International Court of Arbitration (ICA) of the International Chamber of Commerce (ICC) against the Balochistan government on the basis of the Chaghai Hills Joint Venture Agreement (CHEJVA) between TCC and the Balochistan government.

ICSID’s decision comes around four years after the Pakistan Supreme Court declared the agreement with TCC illegal and void. In a previous article on this case, I argued that the SC’s judgement declaring the agreement illegal did not appear to be in line with the applicable international law as well as with Pakistan’s contractual obligations to foreign investors specifically under the BIT with Australia in this case. To me, the proverbial writing was on the wall.

The critical issue now is the amount Pakistan would be ordered to pay TCC. The arbitral tribunal will make this determination in the next phase of the proceedings. The liability and quantum of damages proceedings were bifurcated in this case. One of the objectives of bifurcation is to save time and costs involved in submitting evidence on the damages that one party is claiming. The idea is that the substantial costs involved in submitting evidence in the arbitration proceedings may turn out to be wasteful in the event the tribunal decides that the respondent, Pakistan in this case, had no liability in the first place.

In question is the amount Pakistan would be ordered to pay TCC.

In international arbitration proceedings, once the tribunal has determined liability, it has broad discretion in determining the quantum of damages. Although the parties can stipulate in their arbitration clauses certain limits on the amount of damages that may be awarded by the tribunal and also rule out the possibility of awarding consequential or punitive damages, such limits are generally uncommon in the case of BITs and there is no such reference in Pakistan’s BIT with Australia either.

The question now is what options Pakistan has, if any. Can it still try to reach a settlement with TCC to avoid paying a substantial amount, $10 billion by one estimate? One recent news report has indicated that the Balochistan government will try to settle the dispute by paying TCC around $350 million. There were similar reports about a possible settlement around two years ago also. Back then, TCC did not appear too keen on settling this matter because it was expecting the tribunal to decide in its favour. Now that the tribunal has done so, why would TCC want to reach a settlement? More importantly, even if TCC decides to settle, would it not have stronger bargaining power in view of the ICSID decision in its favour enabling it to demand an even higher amount from Pakistan or the Balochistan government?

A couple of factors that TCC would consider before deciding to reach a settlement are the costs and duration of proceedings related to enforcement of the arbitral award. Although the award on damages is expected next year, collecting on it will be a cumbersome and protracted process especially if Pakistan refuses to voluntarily comply with the award to pay TCC. TCC could then seek the award’s enforcement through Pakistani courts and the courts of countries in whose jurisdiction Pakistan owns assets.

Pakistan has enacted the New York Convention and the ICSID convention for enforcement of foreign arbitral awards but this does not ensure smooth enforcement. Besides the obstructive and dilatory tactics that could be adopted by the counsel representing Pakistan, Pakistani courts may also ultimately rely on the few narrow exceptions in these laws as grounds for refusing enforcement. This highly likely scenario may well be taken into consideration by TCC in deciding whether to reach a settlement with Pakistan or wait for the tribunal’s decision on the quantum of damages.

The writer is a lawyer and president of the Center for International Investment and Commercial Arbitration.

Published in Dawn, April 4th, 2017


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The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (16) Closed

Red Dawn Apr 04, 2017 07:09am

Can you please quote the source of USD 10 billion settlement amount?

The going figure is $400-500 million which seems more accurate as the TCC had the contract to mine one block. I am quite startled to read this figures. Its actually more that projected revenues of the mine for four years at full capacity.

It just does not add up.

Muneer Apr 04, 2017 10:32am

Obstructive and dilatory tactics will be extremely injurious to foreign investment in Pakistan.It will also harm Pakistan's credibility. The best solution will be to re allow contract to TCC or pay them as per the award.

Ali Vazir Apr 04, 2017 12:16pm

If something good happens, the politicians, the administration and even judges are too quick to start jumping up and down. So why not drag the administration that made this shaky deal, and the so-called 'suo motto' judge of the supreme court that ordered the contract to be null and void? They must be made to pay for their ill deeds. We have all seen the so-called judge roaming around in business class air-tickets (usually 3 times the price of economy tickets) and the luxurious BMW.

AW Apr 04, 2017 01:08pm

The government is clearly responsible for this incredible loss to the nation. Whether the ICSID decision is enforced or a settlement takes place between the parties, two (2) obvious consequences are detrimental to the country: (1) the episode has scared potential foreign investors and has shaken their confidence in the government in terms of honoring its contractual obligations as well as shaken their confidence in the Pakistani judicial system; (b) Payment of ICSID awarded damages or the settlement amount shall be an incredible burden on the nation already starved for cash and facing annual payments of about $7.0 billion on accumulated foreign debt.

Feroz Apr 04, 2017 01:21pm

Why was the contract cancelled ? Did the government want to oblige the Chinese with the mining contract ? What are the plans to make up the revenues shortfall now that mining lease has been cancelled.

Munir Ahmad Kakar Apr 04, 2017 01:41pm

What a shocking and abominable irony ! A valuable asset has turned out to become a crushing liability. The reasons are crystal clear i.e. corruption, greed, ignorance, incompetence and above all preference to private interest at the cost of public interest. Those who have contributed to this appalling fiasco should be brought to book. This is an extremely disgusting but unsustainable scenario indicative of governance failure and reflective of grotesque state of affairs in the State.

powayman Apr 04, 2017 02:35pm

Islamabad recommended settlement of this case years ago - clear indication that somebody knew basic business law and predicted a loss in this case. In the meantime Reko Diq is going nowhere until this debacle is finally resolved

Well Meaning Apr 04, 2017 03:03pm

these kind of cases are like bad adverts for FDI in the country . the longer it drags the more harm it does to image just as govt trying to avoid paying sovereign guarantees / liabilities in power purchase agreements . this is not good for economy

AK Apr 04, 2017 04:36pm

Two lessons: 1) Not the job of the courts to dictate economic policy. 2) Populism and sensationalism by politicians can really damage a country.

mansoor Apr 04, 2017 05:27pm

Message is loud and clear. If you want to do business in Pakistan, rather than Islamabad do it through Rawalpindi.

Bilal Kaifi Apr 04, 2017 08:46pm

A very well written article about the pragmatism of arbitration , additionally pak has option to 1. Following the example of chilain and Czech republic goverments , Pakistan too has the very valid option of revoking the Australian bi lateral investment treaty. Austrlia too is considering doing so to enforce its court orders against the big tabaaco. 2. Pakistan exports to austrlia are less than USD 50 million with historical trade deficits, so pak is better off protecting its resources, else the trade deficit will exponentially escalate. 3. Pak should also enforce extra ordinary security costs, and security infra structure costs to be built

Akram Apr 04, 2017 09:29pm

@AW this mess is not the federal governments fault, it was the Balochistan government who cancelled the contract, they foolishly did so because they sought to nationalise the asset and look to build a copper refinery in Pakistan. The objective was noble, however the decision makers Nawab Aslam Raisani in particular understood nothing about Mining.

If you compare with other such mines in Chile, Brazil or Australia. Countries are fighting to get major mining giants like Antofagasta & Barrick gold (who make up TCC) to come and explore for minerals. Only in Pakistan are we telling them to get lost, and then wondering why nothing has come of the resource after years.

The situation can still be arrested by settling with TCC and striking a fair deal by international standards. The point lost is Balochistan has far more minerals lying undiscovered, waiting for someone to discover them. Pakistan needs to partner with TCC and others to get what it wants.

Ash20 Apr 04, 2017 11:59pm

If Pakistan does not pay then foreign investors will run away from Pakistan including Chinese. Now best option is to try to negotiate with TCC as companies don't prefer such litigations even though they are winning and will settle for reasoanable amount. My Guess is that would be in the region of 1-1.5 billion dollars.

UKumar Apr 05, 2017 02:10am

@Ash20 Chinese will not run away. 1.This cancellation of agreement was for benefit of Chinese. 2. Chinese have strong leverage with the Pakistan government and will never loose their investment.

Shafiullah shirazi Apr 05, 2017 01:18pm

Pakistani politician are pretty rich. Why the responsible politician are not forced to pay instead of Pakistan government??

One thought. Apr 05, 2017 04:30pm

@mansoor . If you want to do business in Pakistan.... think again. Quite amazing the people who made the contract null and void, have no responsibility for their action, the nation has to pay, how can an individual or a company even think of investing in a nation when one never knows who can strike a deal down, when and for what reason. This case has become a "game changer" for those who wish to invest, this is the reality. These multi-million contracts should have knowledgeable and experienced people in the particular field to advice the government correctly, not populist people. Pakistan does not have highly qualified and experienced people in this field to advice.