IN case you missed it, Pakistan just suffered a bit of a setback in its ongoing arbitration with the Tethyan Copper Company over the cancellation of its mining lease in Reko Diq when its request to disqualify one of the arbitrators on the World Bank tribunal was denied a few days ago.

It appears Pakistan was counting on dragging the case out long enough to force TCC into an out-of-court settlement, something that could still happen, and one key plank in that strategy was to keep raising doubts about the arbitrators appointed to the tribunal. That strategy is now at an end, and a new approach will have to be adopted if dragging the proceedings out is still the main game plan. Given that upwards of $10 billion, as per reported figures, is at stake in the damages claim, any ruling that goes against Pakistan is a significant milestone.

Also read: Decision in Reko Diq case not final ruling, says AG

Some background first. The dispute went into international arbitration back in 2012 when TCC and its parent company, Antofagasta, decided to seek damages after Pakistani courts cancelled their mining lease for the copper and gold deposits at Reko Diq in Balochistan. The World Bank’s International Centre for the Settlement of Investment Disputes was chosen as the forum for seeking damages. ICSID rules say that, in such an event, a tribunal of arbitrators is set up where one person is nominated by the bank, and the parties to the case get to nominate one person each. Both parties have the right to question the other’s nominee and seek disqualification if they feel that the person selected is not fit to serve on the tribunal.

Pakistan challenged the first nominee of TCC at the outset and won a favourable ruling. That ate up a couple of years. Then it challenged the second nominee as well, and that challenge has been denied.

The Reko Diq story is significant because it shows what happens when long-term projects are taken up with international investors, and then cancelled.

The case made by Pakistan’s lawyers involved the second nominee’s involvement in a separate case. TCC is using a methodology to calculate damages that Pakistan is contesting. The methodology is a new development, and uses a novel approach to figure out the quantum of damages suffered by the mining concern in the event of premature cancellation of its mining licence. The method uses an algorithm to map out up to 200,000 or so future possibilities had the lease not been cancelled, each projecting different scenarios (eg regarding the prices of copper) far into the future, and for each scenario is calculates a net present value. Then it averages them all out to generate one possible NPV as the damage suffered by the concern.

Pakistan has challenged the use of this methodology in calculating the damages suffered by TCC in cancellation of its licence, arguing that it grossly overstates the real damages suffered by the challenger. In challenging the arbitrator nominated by TCC, the government’s lawyers argued that the nominee is a legal counsel in another case in which he has defended the use of this methodology. Therefore, since he has already made up his mind that the methodology in question is a valid recourse for calculating damages in a dispute of this sort, he has a conflict of interest in hearing the government’s case which is built on disputing the validity of the method altogether.

A few days ago, the ICSID ruled against Pakistan in that challenge. Since the tribunal has already decided that Pakistan has liability in this case, the only thing left to decide now was the amount. Now that the challenge to the arbitrator has been dismissed, those proceedings are set to commence.

Since the government’s liability in the case has already been established by the tribunal, we now move forward towards that day when we will all learn how much Pakistan will be asked to pay. Of course, it doesn’t end there. With their ruling, TCC will then have to go to local courts around the world to try and get further rulings to attach property owned by the government, then try and get that transferred to them. That process alone can take many more years, and it involves very costly litigation; it is more likely that the company will use the proceedings to build a negotiating position for themselves before agreeing to settle out of court for a far smaller sum than what is currently being sought.

This story is significant for us because it shows what happens when long-term projects are taken up with international investors, and then cancelled. The stakes can be large, and with time, they will only grow. At the moment the government is contracting out large LNG handling capacity, and has already entered into a long-term supply arrangement with a foreign partner. More such deals are expected in the future, to the point where soon the balance in the composition of gas in the country will shift away from domestic to imported LNG.

Many of the investors who are entering these deals are apprehensive about the possibility that a different government in the future might seek to cancel these deals, arguing that ‘corruption’ occurred when they were signed. It will be very difficult to back away from these deals, but given how the courts operate here, and how hotly contested politics is, it is possible that an attempt to undertake exactly such a reversal could be mounted at some point in the future.

Beyond LNG, the growing role of foreign investors under the CPEC umbrella is seeing large stakes being acquired in the power sector as well. Those deals will be harder to challenge, because reportedly the Chinese are seeking a special bilateral dispute resolution mechanism so forums like the ICSID need not be approached and the arbitration process be streamlined.

It is crucial that the Reko Diq case serves up the right lessons, not only to those in the government, but also to the legal fraternity, so that the costs of bandying about corruption allegations as if they were toys can be properly understood.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, September 14th, 2017


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