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ABSTRACT
Arbitral awards of ISDS cases have greatly contributed to the emergence of the “regulatory chill” through broad and
investor-protection-oriented interpretation of investment treaty provisions. Therefore, it is essential to examine cases
concerning the public-
interest actions of the states, which shed light on the lessons to be learnt for drafting “balancing
provisions”. One of these cases is Bear Creek Mining v. Peru. It involves a dispute arising out of circumstances, where
the investor seeks damages from the host state for having revoked a permit in response to protests by a local
population against the investment operations. This article analyzes how arbitral award of Bear Creek Mining case has
contributed to the “regulatory chill” and proposes certain mechanisms aimed at eliminating the “chilling effect” of
the treaty provisions.
KEYWORDS
S
tates’ right to regulate, investment arbitration, FTAs, interpretation of treaty clauses
.
INTRODUCTION
BEAR CREEK MINING CORPORATION v. REPUBLIC OF
PERU
Arbitral awards of ISDS cases have greatly contributed
to the emergence of the “regulatory chill” through
broad and investor-protection-oriented interpretation
of investment treaty provisions. Therefore, it is
Research Article
THE EROSION OF STATES’ RIGHT TO REGULATE IN ISDS
Submission Date:
January 03, 2023,
Accepted Date:
January 08, 2023,
Published Date:
January 13, 2023
Crossref doi:
https://doi.org/10.37547/ijlc/Volume03Issue01-02
Dr.Mustafa Alper Ener
Assistant Professor At Ankara Haci Bayram Veli University, Uzbekistan
Akhtamova Yulduz Akhtamovna
Lecturer At Tashkent State University Of Law, Uzbekistan
Journal
Website:
https://theusajournals.
com/index.php/ijlc
Copyright:
Original
content from this work
may be used under the
terms of the creative
commons
attributes
4.0 licence.
Volume 03 Issue 01-2023
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(ISSN
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VOLUME
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essential to examine cases concerning the public-
interest actions of the states, which shed light on the
lessons to be learnt for drafting “balancing
provisions”. One of these cases is Bear Creek Mining v.
Peru. It involves a dispute arising out of circumstances,
where the investor seeks damages from the host state
for having revoked a permit in response to protests by
a local population against the investment operations.
In this case, a Bear Creek Mining Corporation (Bear
Creek), incorporated under the laws of Canada, sought
to acquire silver mining rights of the Santa Ana project,
located close to the Peru-Bolivia border and indigenous
populations in Peru
1
. However, under the Constitution
of Peru, a foreign national could not obtain mining
rights in border regions without a declarat
ion of “a
public necessity”
2
. Therefore, the Bear Creek agreed
with one of its Peruvian employees that she would
acquire the concession rights in her own name, while
Bear Creek as a foreigner obtained a declaration of
public necessity
3
. In November 2007, the Bear Creek
successfully obtained Supreme Decree 083-2007,
which entitled it as a foreigner to own and carry out
relevant mining concessions including the Santa Ana
Project.
4
However, the mining project was extremely
controversial
among
neighboring
indigenous
communities in the region, who made constant
protests against the project during the period of 2008
and 2011. In the meantime, Bear Creek had carried out
an environmental and social impact assessment (ESIA)
1
Bear Creek Mining Corporation v. Republic of Peru,
ICSID Case
No. ARB/14/21. Award (30 November, 2017) para.140
2
Ibid
para.124
3
Ibid para.126
4
Ibid para.149
5
Ibid paras.152-169
6
Ibid paras.152-171
7
Ibid paras. 156-163, 235-238?
and it was approved by governmental bodies in 2011,
5
who requested the investor to execute community
engagement activities
6
. Accordingly, Bear Creek had
conducted consultations with local communities as
required by Peruvian law
7
. Nevertheless, the strikes
against the ESIA of the Santa Ana project continued to
grow requesting its revocation
8
. As a result, the
central government intervened so as to deal with these
concerns by meeting the representatives of the
protestors, which led to the issuance of Supreme
Decree 032-2011-EM that annulled Supreme Decree
083-2007 and thus, cancelled authorizations issued to
Bear Creek
9
. Consequently, Bear Creek commenced
ICSID arbitration against the Republic of Peru pursuant
to the investment chapter of the Canada-Peru Free
Trade Agreement (Canada-Peru FTA)
10
and claimed
that Peru has violated its obligations under the FTA
particularly, those pertaining to FET, expropriation and
full protection and security
11
.
Firstly, Peru made a jurisdictional objection, alleging
that the claimant had breached constitutional law
when it acquired the concession rights through its
employee, which could not be corrected by a
subsequent permission
12
. According to Peru, this
action of the claimant resulted in the illegality of its
investment, which could not be protected under the
FTA
13
. Peru grounded its argument about the legality
requirement on the “corpus of international law and
8
Ibid paras.172-201
9
Ibid para.202
10
Ibid
paras.113-115
11
Free Trade Agreement between Canada and the Republic of Peru
(signed 28 May 2009, entered into force 1 August 2009)
12
Bear Creek Mining Corporation v. Republic of Peru
(n 145)
para.306
13
Ibid
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persuasive international arbitration jurisprudence”
14
.
However, the tribunal limited its analysis to the
wording of the FTA, which states that the host state is
entitled to “prescribe special formalities in connection
with the establishment of covered investments such as
a requirement that investments be legally constituted
under the laws or regulations of the Party.”
15
Thus,
the tribunal held that Peru did not exercise this right
and the FTA did not include any jurisdictional
requirement for the investment to be established in
accordance with national law of Peru.
16
Therefore, it
rejected Peru’s jurisdictional objection.
17
Secondly, one of the core allegations of the claimant
was that Decree 032 amounted to an indirect
expropriation of its investment.
18
In response to this
claim, Peru invoked police powers doctrine
19
in order
to justify the annulment of the mining rights by stating
“the protest made it impossible to maintain the former
Decree.”
20
Surprisingly, the tribunal considered the
police power justification as an exception to the FTA
violation rather than examining the absence of an
indirect expropriation.
21
In particular, the tribunal
based its reasoning on the general exception provision
of the FTA, which included an exhaustive list of three
exemptions to violations of its investment chapter.
22
14
Ibid. 302
15
Canada-Peru FTA (n 155) Article 816
16
Bear Creek Mining Corporation v. Republic of Peru
(n 145)
para.319
17
Ibid para.323
18
Ibid para.371
19
” Ibid para. 460 The police powers doctrine is a principle of
international law, according to which “a State is not liable for takings
that may result from legitimate exercises of a State’s inherent power
to regulate for the protection of safety and public order”
20
Ibid para. 561
21
Bernasconi-Osterwalder (n 1) 8
22
Canada-Peru FTA (n 155) Art.2201 states that “…nothing in this
Agreement shall be construed to prevent a Party from adopting or
enforcing measures necessary:
Accordingly, it
mentioned that “the interpretation of
the FTA must lead to the conclusion that no other
exception from general international law or otherwise
can be considered applicable in this case”
23
, thereby
excluding the application of the police powers
principle of international law.
24
Consequently, the
tribunal held that the revocation of the mining rights
did not fall under the general exceptions clause and
constituted indirect expropriation of the investment.
25
Lastly, Peru argued that the adoption of the Decree 032
was based on the social unrest that was caused by the
claimant’s conducts, specifically not taking adequate
steps to obtain social license as required by
International Labour Organization (ILO) Convention
169.
26
Peru based this argument on Supreme Decree
028-2008-EM, which included Citizen Participation
Process (CPP) and referred to ILO Convention 169.
27
The respondent claimed that the recovery should be
precluded or should be considered by the Tribunal as a
contributory fault and the damages should be reduced
accordingly.
28
By contrast, the claimant argued that it
imposed direct obligations only on the States, not
(a) to protect human, animal or plant life or health, which the Parties
understand to include environmental measures
necessary to protect human, animal or plant life or health;
(b) to ensure compliance with laws and regulations that are not
inconsistent with this Agreement; or
(c) the conservation of living or non-living exhaustible natural
resources.”
23
Bear Creek Mining Corporation v. Republic of Peru
(n 145)
para.473
24
Bernasconi-Osterwalder (n 1) 9
25
Bear Creek Mining Corporation v. Republic of Peru
(n 145)
para.478
26
Ibid para.251
27
Ibid para.238
28
Ibid para.564
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private corporations.
29
The tribunal concurred with
the respondent’s argument by mentioning that
“claimant could have gone further in its ou
treach
activities … to obtain social licence”,
30
but the
relevant question was whether the respondent legally
required the claimant to take these additional steps,
which the tribunal eventually refused.
31
However, co-arbitrator Professor Sands had a
conflicting view on the matter of contributory fault.
Specifically, in his Partial Dissenting Opinion, he
asserted that the acts and omissions of Bear Creek
contributed in material ways to the social unrest that
gave a rise to the issuance of Decree 032.
32
He
highlighted that the claimant was responsible for
acquiring a social license by making an extensive
reference to ILO Convention 169 relating to Indigenous
and Tribal Peoples in Independent countries.
33
Thus,
he concluded that the Convention may not directly
impose responsibilities on foreign investors, but as
such could not mean that “it is without relevance or
legal effects for them” and suggested to reduce the
proposed damage by half.
34
Nevertheless, the amount
of damages was not reduced by the tribunal and the
claimant was awarded US$18,237,592.
35
Lessons Learned from Arbitral Award of Bear Creek
Mining v. Peru
29
Ibid para.241
30
Ibid para.408
31
Ibid
32
Bear Creek Mining Corporation v. Republic of Peru,
ICSID Case
No. ARB/14/21, Partial Dissenting Opinion of Philippe Sands (30
November, 2017) paras.4-6
33
He referred to consultation requirements provided by article 15 of
the Convention and mentioned that:
“It may be the function of a State or its central government to deliver
a domestic law framework that ensures that a consultation process and
outcomes are consistent with Article 15 of ILO Convention 169, but it
There are a number of investment arbitration cases
related to states’ right to regulate or not giving permit
due to environmental reasons.
36
According to
developments of international law if the harm of
international investment is more than its benefit there
won’t be any impediment to cancel the Project if only
the proof of harm could be seen (come in sight) after
the establishment of the investment.
37
In Bear Creek
Mining v. Peru case, the arbitral tribunal addressed a
number of legal issues that are relevant for the
protection of states’ regulatory power. The
interpretation of certain treaty provisions by the
tribunal enables to identify the deficiencies of the
language used for drafting treaty clauses and informs
about its consequences.
To begin with, the tribunal did not take into account
the legality of investment in determining the right of
Bear Creek to benefit from FTA protection. It grounded
its reasoning on the lack of specific requirement in FTA
for the investment to be established in accordance
with the national law of the host state.
38
Thus, the
tribunal extended availability of treaty protection to
unlawfully established investments as well. As it was
mentioned earlier, the rationale for the protection of
foreign investments by means of IIAs was their
contribution to the development of the contracting
state parties. Since the preamble of the Canada-Peru
FTA also demonstrates sustainable development
is not their function to hold an investor’s hand and deliver a ‘social
license’ out of those processes. It is for the investor to obtain the ‘social
license’, and in this case it was unable to do so because of its own
failures.” Ibid paras.7-9
34
Ibid para. 10
35
Ibid para.661
36
Murpheyores Inc. v. Commonwealth; International Bank of
Washington v. OPIC; Ethyl Corporation v. Canada;
Metalclad v. Mexico
37
Tiryakioğlu, Bilgin, Doğrudan Yatırımların Uluslararası
Hukukta Korunması, Dayınlarlı, Ankara, 2003, p. 87-88.
38
Ibid para.319
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objectives of the contracting parties,
39
it is difficult to
assume that the parties intended to extend its
application to the protection of illegal investments.
This is because such investments undermine good
governance within the host state instead of
contributing to its development.
40
Therefore, specific
legality requirements must be explicitly drafted in IIAs
by excluding not only unlawfully established
investments, but also investments involving unlawful
activities after the establishment from the protection
of IIAs.
Furthermore, the arbitral tribunal was unwilling to
integrate principles of general international law
41
such
as police powers doctrine, while interpreting general
exceptions clause of the FTA. Specifically, it called
thr
ee exceptions included in the FTA as an “exhaustive
list” and totally excluded the application of the police
powers doctrine.
42
This exclusion can be considered as
an excessive restriction of state’s right to regulate by
ISDS. In order to prevent such kind of interpretation,
IIAs containing exception clauses must expressly
mention that the list of exceptions is not exhaustive
39
The preamble of Canada-Peru FTA 2009
40
Stefanie Schacherer ‘Metal-Tech v. Uzbekistan’ (2018)
Investment
Treaty
News
<
https://www.iisd.org/itn/2018/10/18/metal-tech-v-uzbekistan/
accessed 20 February 2021
41
According to the general rule of interpretation of VCLT
1969, “for the purpose of the interpretation of the treaty
….any relevant rules of international law applicable in the
relations between the parties shall be taken into account”
Art.31 (3)(c). Thus, the tribunal had an option to integrate the
police powers doctrine through the systematic integration
approach.
42
Bear Creek Mining Corporation v. Republic of Peru
(n 145)
para.473
43
Jean-Michel Marcoux and Andrew Newcombe ‘Bear Creek
Mining Corporation v Republic of Peru: Two Sides of a
and any relevant rules of international law can be
applicable when the state’s right to regulate is at issue.
Moreover, the award is significant for finding that
foreign investors do not have obligations under the
international law in the context of acquiring social
license to operate, as long as they are engaged in
community consultations in accordance with domestic
laws. However, the conflicting approaches taken by
the members of the Tribunal demonstrate ongoing
changes with regard to the consideration of foreign
investors’ obligations in international investment law.
43
In order to ensure effective application of the
contributory fault principle,
44
IIAs must incorporate
investor obligations by obliging them to comply with
international obligations of the host states such as
human rights, labour and environmental obligations.
45
CONCLUSION
This article critically examined arbitral award of Bear
Creek Mining v. Republic of Peru case concerning the
public-interest actions of states. This arbitral award
was
based
on
investment-protection-oriented
interpretation of the protection standards. Therefore,
‘Social License’ to Operate’ (2018) 33 (3) ICSID Review
pp.659
44
This principle is included in Article 39 of the International
Law Commission’s Articles on Responsibility of States for
Internationally Wrongful Acts (“ILC Articles”): “In
determination of reparation, account shall be taken of the
contribution to the injury by wilful or negligent action or
omission of the injured State or any person or entity in relation
to whom reparation is sought.”
45
Investors’ obligations as such take part in Model BITs and
IIAs. For instance, Turkish Model of Bilateral Investment
Treaty 2009 art. 4; Agreement Between the Government of the
Republic of Uzbekistan and the Government of the Republic
of Türkiye Concerning the Reciprocal Promotion and
Protection of Investments, art. 5/1. Ener, Mustafa Alper,
Uluslararası Yatırım Hukuku, Seçkin Yayıncılık, Ankara,
2021, p. 249-250.
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Bear Creek Mining v. Republic of Peru case was
selected in order to assess the “chilling effect” of
broad interpretations and to identify shortages of
treaty mechanisms allowing such interpretation.
Accordingly, it highlighted sensitive points of the
treaty language and proposed certain mechanisms
aimed at eliminating the “chilling effect” of the treaty
provisions. Specifically, while negotiating and writing
IIAs, states should take into account the interpretation
of treaties by arbitral tribunals and their right to
regulate resulted from their sovereignty. Lessons
taken from this case are states should expressly
mention list of exceptions as not exhaustive; they
should keep in mind that the application of relevant
rules of inter
national law shouldn’t be allowed in order
to protect themselves from undesired outcome; they
should clearly put pen to paper.
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1.
Bear Creek Mining Corporation v. Republic of Peru,
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2017)
2.
Copper Mesa Mining Corp v. Republic of Ecuador,
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3.
Free Trade Agreement between Canada and the
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force 1 August 2009)
4.
Amicus Curiae Brief Submitted by the Association
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(DHUMA) and Mr. Carlos Lopez (Non-Disputing
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Urbaser SA and Consorcio de Aguas Bilbao Bizkaia,
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James
Harrison,
‘Significant
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Environmental Cases: 2017-
18’ (2018) 30 (3) Journal
of Environmental Law
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Jean-Michel Marcoux and Andrew Newcombe
‘Bear Creek Mining Corporation v Republic of Peru:
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33 (3) ICSID Review
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-Community Conflicts in
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uzbekistan/> accessed 20 February 2021
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Seçkin Yayıncılık, Ankara, 2021
