Key takeaways:
- To prove expropriation, the following requirements must exist: (a) a substantial deprivation, (b) of a permanent nature, (c) without justification under the police powers doctrine and (d) the expropriation must be unlawful.
- The criteria for determining the lawfulness of expropriation are cumulative, non-compliance with any one of them renders the expropriation unlawful.
- Even if legally justified, expropriation becomes illegal if proper compensation is not provided.
The phenomenon of expropriation of foreign investments is a recurrent theme in various parts of the world, particularly prevalent in third-world countries. These actions often spark disputes that find their way into international dispute resolution forums where, more often than not, culminate in substantial compensations compelled from the respective states. Behind most states’ decision to expropriate lies a conviction that the approach taken is legally defensible. However, a critical question looms large: are these actions rigorously examined against the multifaceted components that constitute lawful expropriation, or are they merely driven by a steadfast belief in their justification?
This article delves into a recent landmark decision that meticulously analyses the elements integral to lawful expropriation. By dissecting the case of Nachingwea U.K. Limited, Ntaka Nickel Holdings Limited and Nachingwea Nickel Limited (collectively the Claimants) versus the United Republic of Tanzania – as presented in ICSID Case No ARB/20/38 (Nachingwea Dispute), we aim to highlight the criteria that outlines a lawful expropriation. This elucidation not only serves as a guide for states in evaluating the legality of their actions preceding expropriation, but also provides investors with a ceremonial blueprint for fortifying the protection of their foreign investments under International Investment Agreements (IIAs).
Background
The Nachingwea Dispute concerns a matter submitted to the International Centre for Settlement of Investment Disputes (ICSID or Tribunal) on the basis of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Republic of Tanzania for the Promotion and Protection of Investments which came into force on 2 August 1996 (the BIT) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which came into force on 14 October 1966 (the ICSID Convention).
The facts of the Nachingwea Dispute are in connection with the Ntaka Hill Nickel Project (the Project) in Tanzania, encompassing the exploration and development of nickel sulphide deposits. The Project’s exploration efforts uncovered substantial ultramafic-hosted nickel sulphide deposits with one of these licenses becoming the core license area as it contained the whole mineral resource defined by the Claimants. As the core license approached expiration, the Claimants sought and obtained a retention license (Retention Licence) on the core license under the then section 37(1) of the Mining Act 2010. According to this provision, a retention license could be sought and granted if a holder of a prospecting license identified a mineral deposit of commercial significance within the prospecting area, and the deposit could not be immediately developed due to technical constraints, adverse market conditions or other temporary economic factors. In terms of the law, the retention license was conferred for a duration of five years, after which the holder would be obligated to apply for a mining license.
In 2017, significant changes swept through the mining sector in Tanzania, prompting an amendment to the Mining Act 2010. Notably, one of the amendments involved the repeal of the retention license classification. This amendment did not specify the impact on existing retention license holders. To operationalize this change, the Mining (Mineral Rights) Regulations, 2018 (the 2018 Regulations) were introduced, stating that the rights over all areas subject to retention licenses are without further assurances reverted to the Government of Tanzania (the Government). This amendment was part of Tanzania’s efforts to revamp its existing mining regime, by introducing new legislation which was aimed at ensuring that the state benefits more from its natural resources.
Subsequent to this move, the Mining Commission of Tanzania issued a call for prequalification for the joint development of areas previously held under retention licenses to “eligible companies with technical and financial records in the mining sector.” These events prompted the Nachingwea Dispute, grounded in the BIT. The Claimants, asserting that their investment had been unlawfully expropriated, sought compensation and invoked Articles 5 and 2 of the BIT, affirming their right to fair and equitable treatment and protection against the impairment of their investment through unreasonable and discriminatory measures.
In response, the Respondent contested these claims, maintaining that no expropriation of the Claimants’ investment in Tanzania had taken place. Through a Counter-Memorial, the Respondent sought a declaration of no breach, arguing that the Claimants had suffered no damage. Alternatively, the Respondent alleged that the Claimants had violated Tanzanian laws governing the mining sector, the BIT and customary international law and requested that the Claimants should be liable for damages resulting from breaches of Tanzanian laws and general principles of law.
Key point of determination
In determining the Nachingwea Dispute, the Tribunal was tasked with deciding on jurisdiction in response to objections from the Respondent. Additionally, a thorough analysis was conducted to determine damages. Our primary focus in this article is to delve into the core of the Nachingwea Dispute, specifically examining whether there was an act of expropriation by the Government.
The Claimants contended that the Government violated its obligations under the BIT following unlawful expropriation of the Claimants’ investment which contravenes Article 5 of the BIT. Furthermore, the Claimants contended that Tanzania failed to grant their investment fair and equitable treatment, breaching Article 2(2) of the BIT.
Article 5 of the BIT stipulates that investments of nationals or companies from either contracting state shall not be expropriated or subjected to measures equivalent to expropriation, except for a public purpose related to the internal needs of that contracting state. Any such expropriation must be conducted on a non-discriminatory basis and must involve prompt, adequate, and effective compensation. In parallel with that, Article 2(2) of the BIT requires each contracting party to encourage and create favourable conditions for nationals or companies of the other contracting party to invest capital in its territory.
Tests for determining expropriation
The Tribunal, in its findings underscored that when evaluating (1) expropriation and (2) its lawfulness, the following three key criteria must be met: (a) substantial deprivation, (b) of a permanent nature and (c) without justification under the police powers doctrine.
Subsequently, the Tribunal in examining the unlawfulness of the expropriation, applied the following tests (a) in accordance with due process of law, (b) serving a public purpose, (c) being conducted on a non-discriminatory basis, and (d) involving prompt, adequate and effective compensation. Each of these aspects will be assessed alongside the facts of the Nachingwea Dispute sequentially below.
The test of substantial deprivation
In delving into this principle, the Tribunal, drawing from Stati v Republic of Kazakhstan SCC Case No. V (116/2010), Award, 19 December 2013, underlined that substantial deprivation involves a range of actions impacting the investor’s control, day-to-day operations, administration, dividend distribution and property or control of the company.
Drawing from the facts of the dispute, the Claimants argued that a substantial deprivation occurred due to a series of measures undertaken by the Government, including the repeal of the law giving the right to hold retention licenses, the cancellation of the Retention License, the reversion of license areas to the state and the subsequent issuance of public tender for the areas covered by the Claimants’ license. These claims were denied by the Respondent who argued that there was no substantial deprivation as the Claimants still possessed all the geological data related to the Project and following the claimed changes, they were extended with the opportunity to apply for a special mining license or a mining license in January 2021. These arguments were, however, rejected by the Claimants who contended that despite retaining the geological data, it had become entirely valueless as they lost their title to the Project area and further that special mining licenses or mining licenses do not offer the same rights and obligations as a retention license.
In light of these arguments, the Tribunal found that there was a substantial deprivation of the Claimants’ investment when the 2018 Regulations were published, which in essence led to the cancellation of the Retention License and the reversion of the areas covered under the Retention Licence to the state, thus denying the Claimants effective use and control over their investment. In addition, the Tribunal also underscored that the geological data held by the Claimants was valuable due to the title under the Retention License, which they lost leaving the data held by the Claimants without value.
Furthermore, in upholding existence of substantial deprivation, the Tribunal also considered the fact that the Government had offered the Claimants an invitation to apply for a special or mining licence and not an actual mining license; there was no guarantee that a license would be granted, emphasising that offering the Claimants an invitation to apply for a new licence could not be said to undo the deprivation of the Claimants’ investment. The Tribunal also took into consideration the fact that the Claimants had sought authorization to apply for a special mining license, shortly after the cancellation of the Retention License under the 2018 Regulations but was rejected by the Respondent, therefore narrowing their chances of obtaining an alternative license pursuant to the public invitation all of which affirmed the existence of substantial deprivation.
Of a permanent nature
Deprivation of a permanent nature occurs where government measures result in a situation where there is no reasonable prospect of return of control to the claimants. Making reference to the case of Quiborax and Non Metallic Minerals v Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Award, 16 September 2015, the Tribunal in establishing this test held that permanent deprivation took place on the date when the legal and economic use of mining concessions granted to the Claimants was definitively lost.
In establishing this test, the Claimants contended that the cancellation of the Retention License was permanent and irreversible, pointing to the offer of the Retention License area through an invitation to tender issued on 19 December 2019 as a constituting factor in the permanent and irreversible deprivation of their investment. In contrast, the Respondent negated that the deprivation was not permanent because the public tender process had not been concluded, and the areas under the Retention License remained vacant without transfer to any other investor.
In determining this test, the Tribunal affirmed that there was a permanent deprivation of the Claimants’ investment in Tanzania following the publication of the 2018 Regulations. These regulations effectively cancelled the Retention License, and the underlying areas reverted to the state without offering any recourse for former retention license holders. Consequently, the Claimants were permanently deprived of their right to participate in the control and management of the Project. Moreover, the Tribunal emphasized that the invitation to tender on 19 December 2019, served as confirmatory evidence of the permanent deprivation that had transpired by 10 January 2018, when the 2018 Regulations were published.
Without justification under the police powers doctrine
According to the Respondent, the police powers doctrine is considered a fundamental principle of customary international law and takes precedence over Article 5 of the BIT. Relying upon this principle the Respondent was of the view that it had inherent powers to invoke police powers to regulate the country’s mining sector. Additionally, the Respondent also submitted that it had various justifications for the cancellation of retention licenses, stating that it was intended to enhance the management of mining industry operations, to address economic viability concerns as holders of retention licences, including the Claimants, used them to acquire funds which were then not used to invest in Tanzania, and exercise police powers for public interest to allow potential mines to operate and contribute revenues to the country.
In response, the Claimants argued that the Respondent’s submissions on the police powers doctrine reveal a misunderstanding of its scope. Citing the case of Magyar Farming v Hungary ICSID Case No. ARB/17/27, Award, 13 November 2019 (Magyar v Hungary), the Claimants contend that there are only two broad justifications under the police powers doctrine. These justifications include measures enforcing existing regulations against the investor’s own wrongdoings (such as criminal, tax and administrative sanctions) and the other is taking regulatory measures aimed at abating threats to public health, the environment, or public order all of which were not applicable in the Nachingwea Dispute.
In its findings the Tribunal, adhered to the legal principles set forth in Magyar v Hungary as put forward by the Claimants, and dismissed the Respondent’s justifications under the police powers doctrine by holding that none of the reasons put forward by the Respondent aligned with the limited circumstances recognized by Magyar v Hungary. The Tribunal agreed with the Claimants that when a state asserts that the measures were adopted for a specific purpose, it must be supported by contemporaneous evidence to demonstrate that such measures were in fact adopted for the specific purpose stated.
Lawfulness of the expropriation
Having settled that the Claimants’ investments were expropriated, the Tribunal proceeded to assess its lawfulness using the following criteria:
a) due process;
b) public purpose;
c) non-discrimination; and
d) the provision of prompt, adequate and effective compensation.
Notably in terms of the BIT, these four criteria are cumulative and the absence of compliance with anyone renders the expropriation unlawful. The Tribunal also underscored that even if an expropriation is legally justified, failure to provide proper compensation, as stipulated under the BIT, renders the expropriation illegal.
In accordance with due process of law
The Claimants’ position was that the expropriation process lacked proper legal procedure, emphasizing the absence of consultations and advance notice by the Respondent before cancelling their Retention License. Citing the case of ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, the Claimants stressed the necessity for reasonable advance notice, a fair hearing and an impartial adjudicator for a legally justifiable expropriation.
In response, the Respondent argued that it adhered to due process, referring to a public notice issued to all stakeholders by the Tanzanian Parliament to comment on the proposed bills prior to making the amendments.
In analysing this requirement, the Tribunal, sided with the Claimants, pointing out the lack of reasonable advance notice and proper consultation, stating that despite the Respondent’s claim that there was an open legislative process, adverse inferences are drawn, suggesting a hurried and insufficient consultative process. For these reasons, the Tribunal concluded that the Respondent failed to adhere to due process in its expropriation measures, specifically lacking reasonable advance notice and adequate consultation.
Public purpose
In analysing this requirement, the Tribunal relied on the case of Vestey Group Limited v Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award, 15 April 2016 which outlines that a state has the discretion to judge what it deems useful or necessary for the public good. However, the Tribunal emphasized the need to assess whether the expropriation measure was genuinely for the expressed public purpose including considering the government’s post-expropriation conduct so as to determine if the measure had a reasonable nexus with the declared public purpose.
The Respondent had put forward various justifications for the cancellation of retention licenses, some of which aligned with its arguments on the police powers doctrine that have been discussed above. Among others, the Respondent contended that the revocation was carried out in good faith to prevent investors from holding an area for an extended period without further development. Besides the cancellation was also framed as a measure to enhance the management of the mining sector, ensuring the utilization of mineral resources for the benefit of both the people of Tanzania and investors and also aimed to enable the productive use of areas held under retention licenses and facilitate joint operations between the State and investors.
In their defence the Claimants argued that the justifications presented by the Respondent lacked substantial justification for the cancellation of retention licenses as the Respondent had failed to establish a significant connection between the purported justifications and the act of expropriation.
The Tribunal found that the Respondent did not provide any concrete evidence for the measures showing a contemporaneous consideration of the necessity for the 2017 amending legislation or the 2018 Regulations, especially for the asserted public purposes. The absence of relevant evidence raised doubts about the stated benefits for Tanzanian people, addressing mining sector challenges, or improving sector management. Besides, even if the Respondent’s justifications were deemed to be for public purposes, the Tribunal held that the Respondent failed to establish a reasonable connection between these justifications and the expropriation measures. Additionally, the Tribunal emphasized the illegality of the expropriation due to the lack of due process and failure to provide prompt, adequate and effective compensation.
Non-discriminatory basis
In establishing this principle, the Claimants contended that the expropriation was discriminatory, primarily targeting foreign mining companies, as all retention license holders, except one, were foreign entities. The Respondent, however, were of the view that the cancellation was not discriminatory, emphasizing the inclusion of a Tanzanian majority-owned company, among the affected retention license holders.
However, in its analysis, the Tribunal observed that, apart from the one entity that had majority Tanzanian ownership which was subsequently granted a mining license, the Respondent has not identified other local companies affected by the cancellation, leaving the Claimants’ assertion of discrimination unchallenged.
Moreover, the Tribunal considered the context surrounding the legislative changes, citing multiple news sources that reported the use of the term “economic war” against foreign companies. Parliamentary debates were noted, emphasizing that investments in the mining sector, largely by large foreign investors, were perceived as not benefiting Tanzanians. The discussions labelled foreign mining companies as “looters” and “thieves.” These findings underscored the discriminatory intent behind the legislative alterations aimed at targeting foreign mining companies.
Prompt, adequate and effective compensation
In light of this principle, there was no dispute that prompt, adequate and effective compensation was not offered to the Claimants following the loss of the Retention License.
Instead, the Respondent argued that the Claimants abused their Retention Licence and further that no compensation was due because the expropriation was performed by exercising the state’s police powers, which renders the Claimants’ alleged investment “not compensable,” all of which were disputed by the Claimants.
In evaluating whether the measures were for public purposes, the Tribunal dismissed the application of the police power doctrine and rejected the notion that the Claimants’ investment was “not compensable.” The Tribunal emphasized that the revocation of the Retention License, being a right, necessitates compensation and as such absence of prompt, adequate and effective compensation renders the expropriation illegal.
Conclusion
The Tribunal concluded that the Claimants are entitled to full reparation for the unlawful expropriation of their investment. Subsequently, the Government has initiated annulment proceedings, the status of which is still pending. This case serves as a meticulous examination, highlighting the essential criteria for lawfully exercising expropriation powers under the IIAs. Each of the discussed criteria plays a crucial role in establishing lawful expropriation, emphasizing that expropriation is typically legal but subject to fulfilling specific legal requirements. This analysis aims to guide states to be diligent when exercising expropriation powers within the bounds of international agreements, avoiding potential consequences that may arise due to non-compliance. It also provides valuable insights for investors navigating such scenarios.
For more information on this topic, please contact the authors, Thomas Sipemba and Emma Kimario.
