Episode 23

 Read the transcript below:

Hello and thank you for tuning into the Beyond Hourly Podcast, hosted by Omni Bridgeway, one of the world's most experienced dispute funders and enforcement specialists. Our podcast focuses on commercial disputes around the globe and innovative ways to maximize value for clients and law firms. Episodes of this podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify, and other podcast networks. We welcome you to subscribe to the podcast and leave us reviews.

My name is Geoff Moysa and I'm your host for today's podcast. I'm an Investment Manager and Legal Counsel based in Omni Bridgeway's Toronto office. Prior to joining Omni Bridgeway, I was a Litigation and Arbitration Partner at McMillan LLP in Toronto. My role at Omni Bridgeway involves in part assessing investment opportunities in the mining space and beyond, and serving as a strategic resource for the parties we fund throughout the funding relationship.

Our topic today is mining disputes. We'll cover trends and developments in both investor-state arbitration cases, as well as downstream commercial disputes, including royalty litigation and arbitration. I'm delighted to be joined today by two very accomplished guests in two different jurisdictions. First, we have Junior Sirivar. Junior's a partner in McCarthy Tetrault's Litigation Group in Toronto and Co-Chair of the firm's International Arbitration Group. Junior is a member of the firm's Global Mining Litigation Practice Group and holds a certificate in Mining Law from Osgoode Hall Law School. He has assisted mining clients with commercial disputes arising from a variety of agreements, including shareholders agreements, joint ventures, and royalty agreements. Junior is ranked in the current edition of Chambers, Canada as a Leading Lawyer in the area of Dispute Resolution: Arbitration. Junior, welcome to the Beyond Hourly Podcast.

Junior Sirivar: 
Thanks for having me, Geoff.

Geoff Moysa: 
And second, we have Jon Drimmer. Jon is a partner in Paul Hastings’ Investigations and White Collar Defense practice and is based in the firm's Washington, D.C. Office. 

During his career Jon has acted as Senior Legal Officer for a Global 500 company, a federal prosecutor and a seasoned advocate. He is a recognized international expert speaker and author on anti-corruption in business and human rights. Before joining Paul Hastings, Jon was Deputy General Counsel and Chief Compliance Officer of Barrick Gold, one of the world's largest mining companies, with operations on five continents. The compliance program he built at Barrick has served as an industry standard and elements of it have largely been duplicated by numerous other companies inside and outside of the extractive sector. Jon, welcome to the Beyond Hourly Podcast.

Jon Drimmer:
Thanks for having me and Junior, it's nice to be on with you.

Junior Sirivar:
Thanks, Jon. Likewise.

Geoff Moysa:
It's great to have you both. And I wonder if we can start by giving our audience a little bit of background and flavor as to how you got started and developed your niche and career in the mining practice.

Junior Sirivar:
For my perspective, Geoff, my firm, which is a national Canadian firm with offices also in the UK and a small office in New York, has for a considerable amount of time had one of its core industry groups in the extractive sector. I became interested in the mining sector in particular early in my career, being involved with strategic advice and litigation of all manner from the earliest days of my practice. It's evolved to the point now where I would say the bulk of my practice is in the mining sector in some fashion or other. It isn't always purely litigation. Although, of course, that is the bulk of what I do. I do provide some strategic advice, both in the acquisition context and otherwise. I have developed some notional expertise, I would say in a self-deprecating way, in all manner of mining disputes, but also mining transactions.

Geoff Moysa:
Excellent. Jon, your path has been a little bit different. You spent some time as we noted in-house at Barrick Gold in Compliance. Tell me how your career path has developed.

Jon Drimmer:
Yeah, sure. So I started as outside counsel to mining companies back 15, 16 years ago, largely focusing on international regulatory and compliance issues, anti-corruption issues, human rights issues, things of that sort, and over time grew to know the industry fairly well as outside counsel. But when I went in house to Barrick, when I joined Barrick in 2011 and having spent eight years there, that's really where the full scope of my mining practice developed. And so, in addition to the work that I had been doing, focusing on international regulatory and compliance, I oversaw the company's global investigations, its global disputes, and other areas as well.

And so when I left Barrick, 18 or so months ago, that core of work activities largely has come with me. And so today, I do represent a lot of mining companies - also oil and gas - but a lot of mining companies. I do continue to provide advice on international regulatory compliance issues, both from the compliance standpoint and investigations, along with disputes that do arise out of those issues and frankly more generally. Arbitrations, litigation, other types of disputes that do involve mining companies, and so that's sort of the nature of what I'm doing these days.

Geoff Moysa:
Oh, that's great. And it's valuable for us to have two experienced voices from both ends of the border and North America in the extractive sector. So, thank you both for participating in this. Based on your experience and just to orient everyone, we're in 2020. We're well into the year of COVID, and the global landscape in terms of the extractive sector - what elements and resources are of interest to industries and countries is changing on the fly. I'm wondering from both of your perspectives, what issues are top of mind for your mining clients today? Starting with Jon.

Jon Drimmer:
Yeah, I mean, I think that today, you know, obviously COVID has had a huge impact and thinking about the impact on earnings, on relationships with governments, and relationships with local communities, that is a big issue. Looking down the pike a bit, there's a bit of concern that the lack of income and the lack of revenue for governments may lead to more expropriations, may lead to more arbitrations, may lead to tax and royalty fights going forward. Outside of the mining clients, but in terms of other stakeholders, there's no question that there's a focus on responsible mining activities, and within that, a real focus on alternative energy sources and responsible mining, sustainable mining and responsible mining for those components, those minerals that are used - metals and minerals that are used in alternative energy sources - that they're mined in a sustainable and responsible way. So, that's another big issue that external stakeholders are looking at also.

Geoff Moysa:
And Junior in your practice, what kind of trends or developments are you noting?

Junior Sirivar:
On the dispute side, I would say there has been a marked increase in royalty disputes. Whether it is an opportunity for the mining companies to make a new assessment of an existing relationship or there's an acquisition that results in the review of existing agreements, it remains somewhat unclear. But what is clear is that there has been a steady increase over the last 18 to 24 months. I would say a significant increase in actual royalty disputes, whether it's as to the validity of existence of a royalty or more commonly the calculation of a royalty, disputes over what expenses are to be included in certain types of royalties, that the dominant forms of royalties, either the NSR or NSR type royalties - and so, the nature of the amounts to be deducted from the royalty become ever increasing. The other thing that we're noticing is the mining industry's long history of being an arbitration proponent, largely because of the need for a specialized adjudicative body, but also the need for a quicker resolution with a view to making decisions has been reinforced by the COVID context.

And I think that the prevalence of mining arbitrations will increase. And if I had to estimate, I would say, would increase materially as the form of dispute resolution mechanism, largely because it is well-established within the industry, would be the providers and institutional elements - to the extent that they aren't, who weren't already there have been forced to bring the technologies in line with the current demand. If you would ask people in my world and the litigation or arbitration world about doing a virtual hearing, most advocates would be traditionalist who would say that the second best to an in court or being in a hearing room arbitration because you can't assess credibility. I think that people in the industry in particular have now recognized that the virtual setting is nearly identical for those types of hearings. I would anticipate that on the dispute side, we will see more arbitration. We will see more virtual arbitration, and I anticipate that the increasing dispute over royalties will continue.

Geoff Moysa:
And Junior, that increased use of virtual hearings, do you think that's a development that's here to stay?

Junior Sirivar:
I think it's been here for much longer than the arbitration context because of the geography that's usually associated with mining disputes, but I certainly think that it's become indoctrinated in counsel in a fairly significant way. My prediction would be that it is here to stay in a serious way.

Geoff Moysa:
Yeah, not only for arbitrations, but perhaps for court proceedings as well has been our observation. I wanted to pick up on a few points that had come out of those sort of overview answers and get into some of these areas in a bit more detail, starting Jon, with what you had said about government cash flows and potentially greater expropriation events. And I wanted to talk a little bit more about the bilateral investment treaty dispute world. What kind of country risks are presented upstream in an exploration and how those are dealt with? So, what types of things Jon, do you expect to come out in terms of expropriation in mining disputes?

Jon Drimmer: 
Yeah, so I, I think, you know, often events that lead to claims of expropriation aren't the government taking over a property in a way that you might think. I mean, often, it's looking to levy some additional tax or putting into place an onerous operating provision or term that ultimately creates an inability for the company to operate or, effectively, the company will turn around and say, this is not something that we're willing to do. So often, it's really for the purpose of forcing a renegotiation and companies then will respond to that ultimately in different ways. Right now, a traditional event that we've seen is countries looking to increase their revenue with higher taxes and higher royalty rates that are targeting either the mining industry or certain segments of the mining industry. And that then leads to challenges from mining companies and ultimately claims of expropriation. Right now, given economic situation and coming out of COVID hopefully next year, I do think that is going to be a real risk.

I do think we are going to be looking at revenue, generating events by countries at the expense of mining companies. Always a challenge when you continue to operate in that jurisdiction and you want to fight a government revenue increase or tax increase, always difficult given the dynamic and the fact that you’re dealing with the government, but in the end, you know, those are the kinds of things that will often lead to disputes, they often lead to expropriation claims, and I have a feeling that the next 12 - 18 months we're going to start seeing some more of them.

Geoff Moysa: 
Yeah. That's interesting. And do you see a trend line in whether these disputes are being resolved at the negotiation stage or whether parties are having to avail themselves of their treaty rights?

Jon Drimmer: 
I think you have to separate it, Geoff, into whether the company still wants to operate in that country because initiating an international arbitration and claiming expropriation is not something that most companies will do if they want to continue to operate. So, if they want to operate in the country, they typically will sit down. They will work out a negotiation, typically not always. And if they're less desirous of staying in the country, the risk of going into arbitration increases. So I think you have to separate it into really two categories depending on what the business goal is.

Junior Sirivar: 
If I can add, Geoff, one of the things that we're looking at, not specific to the extractive industry, but as a predictor of where disputes might arise is when you consider the COVID context and you consider the level of government spending to address the ramifications, prevention, and hopefully soon, the implementation and distribution of vaccines and the strain that that has had on various levels of governments globally. There are only a limited number of sources from which any particular government can generate that. And Jon alluded to some of them that are particular to the mining industry, but overall, they're limited in terms of their ability to generate revenue through either taxation or some other like means.

And given the nature of the pandemic and the cost of the pandemic to the various levels of global government, there is almost certainly, I would say, going to be considerable pressure brought to bear on government to find sources of revenue that from a political perspective are not limited to individual or small business tax payers. And so that likely in my view, is going to increase the individual government focus or strategies directed towards revenue generation within sectors, such as the mining industry, which for the most part, apart from disruptions and operations, as a result of COVID-19, the transactional activity suggests that the industry is quite healthy overall, such that they may be a source that governments look to, to generate revenue much more quickly than others that are politically more challenging areas or avenues to pursue.

Jon Drimmer: 
I'll come in there, Jay. I totally agree with everything Junior says. And you know, in some countries, obviously the mining industry is a dominant industry and in developing countries that are resource rich, it is a very logical place to turn for increased revenue. And also, the price of gold has remained high, gone high and remained high. So gold companies obviously do present an attractive target for revenue generation, and we've seen an increase in copper and other metals recently. So, in the end, I think that you have a confluence of events that is going to make the mining industry in a lot of places an attractive target just as Junior said.

Geoff Moysa: 
Yeah and it's a very interesting point that you both raised in terms of the pressure on governments and on sovereigns to raise revenue through the valuable industries that they have indeed - maybe that paves the way to the resolution of some of these disputes where licenses have been revoked or expropriated, or there's a disagreement over royalty or taxation. So that is, I agree, a very interesting trend to watch. Now, of course, if negotiations don't work, the parties have to avail themselves of the bilateral investment treaty regime to the extent that that applies. And I think what we've seen generally, not just in extractive sectors, but across energy and other infrastructure intensive areas that certainly from the stats that are made available by ICSID and other bodies, those cases and the filings, they rise year over year. So, there seems to be definitely an upwards trend in investment treaty cases being filed and brought.

Do you see those as having any sort of deterrent effect or behavioral effect on these kinds of expropriation cases? Or is there on the other hand, maybe a backlash against them by the sovereigns?

Jon Drimmer: 
Yeah, I'll start. I haven't seen any evidence that it's having a deterring effect, Geoff. As you say that the numbers continue to go up in terms of the number of cases filed, the amount of awards continues to go up. I've certainly seen no slowdown in the number of cases that have been filed. It certainly suggests that expropriating events continue to be on the rise as well. You know, that very well could have to do with the fact you have change in governments and change in government officials who might be involved in these decisions. I do think there is pushback against the bilateral investment treaty arbitration process more generally. And we are seeing objections from governments to the larger system of dispute resolution, but I haven't seen any evidence that there's a slowdown in cases.

Junior Sirivar: 
If you take a step back and think about what, from a governments perspective, leads to an expropriation event or a decision to take measures that are ultimately viewed by the mining company to being some form of expropriation, it's really driven in large measure to keep it completely neutral by a desire to do what we were talking about a bit earlier, which is to generate revenue for reasons that the government usually believes are politically necessary. And so, if that's the underlying genesis for these events, I agree with Jon that it's not likely that the increase in claims, which are the companies’ responses to the event are going to have any real deterrent effect because the underlying decision is being made for a reason that:

1. recognizes that taking the step and undertaking the expropriative measure gives leverage to the government to
2. negotiate a better outcome and
3. really, it's only at the most extreme end of the range that a dispute is actually, or a claim is actually, commenced and the governments would have plenty of opportunity to avail themselves of whatever settlement mechanisms are available to them. So, I agree with Jon, but I don't know that on a go-forward basis, that the rise in claims is going to have any material effect on the decision that governments take in that regard.

Geoff Moysa:
And I suppose part of that government decision-making process not only extends to responding to the claim, but also in terms of their reaction and behavior, once an award is obtained. So not only does a claimant sometimes have to fight to get an award, but to have an award paid.

And so, my question for you both is how often do you find, to the extent those awards are received, that they're paid willingly versus a claimant having to take enforcement steps against a sovereign?

Jon Drimmer: 
So enforcement, you know, it certainly happens, and I don't want to say it's uncommon, but there are a number of points along the life cycle where resolution is possible, certainly in the cooling off period after an award is rendered. I think once you're into the anullment phase, you know, at that point you can probably count on getting to the end of that phase and maybe taking a few steps towards enforcement. So, it definitely happens, it isn't uncommon, but I think more cases, frankly, resolve before you get to the actual enforcement activity, then you do get there.

Junior Sirivar:
I would just add Geoff that to Jon's point, one of the things that has become clear is that most developing countries and most jurisdictions, particularly where the extractive industries are important, the domestic courts are as a general proposition, fairly arbitration-friendly and enforcement-friendly. And so, to the extent that enforcement measures are necessary, it's likely that an award would be enforced by the domestic courts once recognized. And to that, I think that all speaks to the point that Jon made, which is that a large number of these awards you'd expect would not get to the enforcement stage and would resolve long before that because the parties know that they will ultimately enforce it.

Geoff Moysa: 
Right. And now, none of these steps, whether it be bringing the claim on the merits or the enforcement are easy or inexpensive. And so given that often, you know, parties who are expropriated are single asset exploration type companies who don't have a way to raise revenue once that asset is taken away, are you seeing interest in third-party funding increase as these cases become more common?

Junior Sirivar: 
I'll take that first, Geoff. I would say the answer to the question, yes. I actually wouldn't limit it to the single asset company, which is, I think where the bulk of the discussion occurs - is really a financial need from the small player for third party funding.

I'm seeing more and more consideration of third party funding being discussed by larger mining companies where the recognition is now that the third party funders are industry specific and sophisticated and offer sort of white glove services that really get to the sorts of things that I'm sure Jon remembers from his in-house days, which is as an in-house lawyer, you have more than a full-time job dealing with the day to day advice you give to your internal clients that the disruptive nature of judicial or arbitration proceeding on your management on your in-house legal team is such that there may be a price that you are prepared to pay, to get services from a well-recognized sophisticated third party, funder, to help you marshal your resources. And quite frankly, allow you to hold for some of the core aspects of your business. We are seeing that, and I suspect that trend will continue.

Jon Drimmer: 
Yeah, no, I think there's no question. We're seeing an increase in interest as Junior says, not only among juniors, but among mid tiers and seniors as well, you know, funding does provide a hedge. It provides an additional level of predictability. It's also helpful sometimes bringing in an additional expertise that sophisticated funders can provide in the management and direction of the case. And it's just becoming more common. So ultimately, I think it has increased and it will continue to increase. And I wouldn't expect, you know, the next stretch of several years to be any different from what we're seeing now.

Geoff Moysa: 
Yeah. And that certainly tracks with what we're seeing in terms of increased interest from, you know, sophisticated and major players as this product starts to get treated more and recognized more as just, you know, project finance for a different type of project in a different type of asset. So, certainly we're happy to see that for obvious reasons. One of the other major areas that is a source of discussion and debate within investment treaty world and the international arbitration world, has to do with damages and particularly how damages are compensated or calculated for early stage projects and extractive projects depending on where they are in their life cycle. So, the traditional view in these cases is that if the project is at a sufficiently advanced stage of development, for instance, post feasibility study, then you've got a chance of getting some sort of income-based or DCF damages.

Whereas if it's not yet at that stage, you might instead be awarded your sunk costs. And that description is at the risk of grossly over oversimplifying the analysis, but from your perspectives, starting with Junior, is that trend changing in terms of how you see tribunals looking at these damages in cases today?

Junior Sirivar: 
Not substantively. And I think part of it is the recognition that one, the tribunal in an arbitration context or the court in a judicial context, would recognize that they have to quantify damages. The fact that having a lot of cases speak to the proposition, that the fact that it's difficult to quantify damages, doesn't relieve the tribunal from the obligation to do so. That said, I think everybody would accept this basic proposition. If you're talking about a pre-feasibility study project and trying to quantify the value of that project, looking at assumptions as to cost assumption as to put metals prices, assumptions as to all of the inputs that go into that, it's virtually impossible to come up with a realistic number that the parties would agree as fair. Slight changes in discount rates would swing the value wildly.

I think overall, when you're looking at a pre-feasibility stage, you're going to get a tribunal that's much more inclined to look at, to the extent that they can, comparable to the extent that they can't look at comparables. I think it becomes more difficult to get something beyond sort of the sunk costs. Although obviously that in and of itself can occasion some injustice depending on the nature of the project, but there is some reticence in trying to come up with a damages figure for a project that early in the cycle. To the extent that there's an availability for something like specific performance or some other non-economic relief that would allow the agreed party to be put in the shoes that they otherwise would have been in the tribunals, going to be much more likely to go in that direction. But I think at least for the pre-feasibility study stage, it really hasn't changed. And there is a reluctance to use a DCF type analysis and try to determine what the value is of the project.

Jon Drimmer: 
I certainly do see, and there are major cases that do use DCF and other types of damages modeling, even for projects that are in the previous stage. So, I don't know. I think it's, I think it is a mix, although certainly there are cases that say otherwise. No question though. You know, tribunals are comfortable with comparables. They're comfortable with seeing how decisions are made on the ground in practice. And it's almost like buying a house. You know, certainly you can have a sense of what houses were. You can look and make predictions based on the demographics and based on other characteristics of the neighborhood. But in the end, you know, looking at housing sales for comparable homes in the area is what people often will do to gain comfort around pricing. And I think psychologically, it's the same for tribunals. Making decisions the way that businesspeople make decisions is something that they have comfort with, and that often involves looking at other sales and comparable projects.

Geoff Moysa: 
Right, yeah - because you want to see what the market is actually thinking of these projects and how the market's viewing them, as opposed to perhaps an exercise that speculates income 30 years out, which of course, you have to do in a mining project. But I think I would agree with that, to the extent you can anchor a tribunal’s decision-making and give them comfort in what market participants at that time thought of that project and that opportunity, then that's probably a much more of a realistic metric for people to be relying on.

Jon Drimmer:
Well, I think part of it is that it's realistic, but part of it, you know as well, is fairly straightforward, and fact-finders often will look at experts and you may have competing experts and you know that, you know, the expert, while they are bringing a level of integrity, they are hired by a party. And, you know, being able to look at tangible evidence that is not something that is really an expert running a complicated model. I think that gives them a degree of comfort as well.

Geoff Moysa: 
And one of the interesting emerging areas that play more of a role in these disputes, both in Canada, I think internationally, is corporate social responsibility, environmental and human rights issues within the context of sort of larger the mining landscape and disputes. And we've seen some recent Canadian developments on this and most prominently, the Nevsun Resources case in which the Canadian Supreme Court held that a private non-state actor in this case, being a mining company, can be held liable in Canada for alleged breaches in international law in other countries. And I know there's been some other cases as well in Canada that follow this trend. And so, I'm wondering first to Junior, from a Canadian perspective, what role in prevalence do you see these issues playing in mining disputes in the future?

Junior Sirivar:
I think certainly the fact that our highest courts have talked about the availability of some of these causes of action is important, but I think it's important not to over analyze what the courts have actually said in the sense that all they have said is, as far as I'm aware, is that these causes of action could be pleaded. And most of the decisions, if not all these decisions, have been at the pleading stage where the court is simply saying, it's not plain and obvious that there is no such cause of action or that this action is destined to fail. They said nothing about the relative merits of such a claim and whether or not there is likely to be a trial decision in favor of or against a mining company on these issues.

That said, the fact that these are at least as pleaded viable causes of action, will almost certainly have an impact on the way and the type of minor disputes that are brought to the fore because the narrative underlying these issues is often one that claimants or plaintiffs can use to their advantage in an effort to paint the mining industry player, the mining company, in an inequitable light with a view to convincing the adjudicator that relief against that entity is only fair and just.

So, I think that the narrative around these cases will remain important and it'll, it'll likely result in more of these cases being brought certainly in court, in front of the courts. Obviously these are not going to have much play in the arbitral context or the contract narrative, but certainly in the judicial proceedings, I suspect we may see more of these unless and until the Nevsun cases are addressed in a manner that that is favorable to the industry.

Geoff Moysa: 
And Jon, do you see this trend being picked up in cases outside of North America?

Jon Drimmer: 
Oh yeah, no, I think there's no question that we're seeing a trend in cases outside of North America. They're based on security related issues, and so, you've alleged security abuses based on environmental issues; based on health and safety issues, we're seeing cases brought in South Africa, recently cases brought in the UK and elsewhere in Europe - so, I do think these are increasing frankly. And in number outside of North America, they've always had a fair amount of activity in the United States. I think in Canada, as Junior said, there's certainly been some and we'll see if it really, you know, increases after Nevsun, but abroad over the last 10 years, we've seen a real rise and that's something that we're not seeing any indications is going to slow down.

Geoff Moysa: 
And that brings us to the end of the first segment of our podcast series on mining disputes.

Junior and Jon, thank you very much for being our guests on Omni Bridgeway’s Beyond Hourly podcast and sharing your knowledge with our listeners.

As I mentioned at the outset, episodes of the Beyond Hourly podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify and other podcast networks and I invite you to subscribe and leave us reviews. You can also access a transcript of this podcast on our website. Feel free to follow up with me, Geoff Moysa at [email protected] for any feedback, ideas, or insights you have on topics you think we should cover in the future.

Please join us next time for part two of our podcast, which will focus on downstream commercial disputes in the mining industry. Until then, thank you for listening.