Salone News

Government of Sierra Leone versus SL Mining and Shandong

11 October 2019 at 13:19 | 2443 views

Opinion

A double edged sword: The use of international arbitration clauses in mining and infrastructure contracts in Sierra Leone must be minimized.

By Kortor Kamara, USA

The government of Sierra Leone’s recent termination of mining lease agreements with two iron ore mining companies, namely SL Mining, a Gerald Group wholly owned subsidiary and the Chinese miner, Shandong Mining Company, over disputed royalty payments and non-compliance with the nation’s mining laws, has resulted in referral of the government to international arbitration by SL Mining Company.

SL Mining in a statement on October 8, 2019 is claiming compensation for damages in excess of 500 million dollars.

In addition, the defunct Timis Mining, who previously operated the London Mining iron ore mines has also served notice for mediation with the government.

Despite the very cogent public policy arguments adduced by the government for the termination of the licenses, the inherent risks and costs of international arbitration, coupled with the arbitral seat, at the heavily foreign investor friendly ICC, can be very huge and expensive for Sierra Leone.

The costs of arbitration, excluding damage claims, can be very prohibitive as evidenced by the incurred expenses and legal bills in the 40 to 50 million dollar range, for just defending 4 to 5 ICSID claims against an African government.

As an example, The Gambia with a GDP of 903 million dollars in 2013 was faced with 2 ICSID claims filed by the Australian company, African Petroleum, which if judgement was issued against it, would have severely affected its domestic budget.

Already, without even delving into the merits of the dispute, the ICC tribunal has made two very key adverse decisions against the government of Sierra Leone. Firstly, the tribunal ruled in September that the government should reverse and lift its export ban against SL Mining.

Secondly, just last week, the ICC tribunal issued an updated ruling stating that the government did not have the right to cancel the mining license of SL Mining.

The ICC’s inherent biases against the Sierra Leone government are already so glaring with the above determinations, that the reputation of international arbitration as an unbiased dispute resolution forum, is greatly being dented. In 2018, citing bias of international arbitration institutions, the Tanzania government totally rejected international arbitration in mining agreements.

A cursory review of the SL Mining Lease Agreement between the former Minister of Mines, Minkailu Mansaray and the iron ore miner, ratified in 2017 shows poor contract negotiations by the government at the outset, risk exposure due to wrong legal advice, lack of due diligence and an inattention to arbitral seat issues, where arbitration cases are adjudicated. It is worth noting that when dispute clauses are ignored, as in agreeing to ICC or LCIA international arbitration, the costs can be very significant to the government.

It’s indeed a truism in international business law that wherever foreign direct investments (FDIs) abound, business disputes and contract interpretations invariably occur. Such is the case with Africa’s abundant natural resources, which has concomitantly attracted FDIs with a resultant increased utilization and need for arbitration as a dispute resolution mechanism.

The major international arbitral institutions, such as the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA) have both reported increased referrals of arbitration cases from Africa. LCIA reported African referred cases increased from 2 in 2004 to 30 cases in 2013. The companion ICC reported increased referrals from 68 cases in 2005 to a total of 163 cases in 2014.

Sierra Leone, like most African countries ratified the 1966 International Centre for Settlement of Investment Disputes (ICSID) arbitration convention, under the auspices of the Workd Bank, which ostensibly created a forum for resolution of investment disputes between host countries and international private investors.

In addition, the Investment Promotion Act, 2004 provides a legal framework for arbitration under the United Nations Commission on International Trade Law (UNCITRAL) rules. The Public Private Partnership Act, 2014 further provides for international arbitration in Sierra Leone.

However, over the past several years, the trend of universal acceptability of international arbitration clauses, in order to attract foreign direct investments, by African governments has gradually been shifting among more sophisticated policy makers and African countries. Why the erstwhile Sierra Leone government still continued agreeing to such clauses as late as 2017, is an issue for later discussion.

As a result of measurable loss experience data and often biased arbitration proceedings and outcomes against African governments, especially at the ICC and the LCIA, a paradigm shift appears to be taking hold, were governments no longer easily accept international arbitration clauses.

As a mineral resource rich country, Sierra Leone should ostensibly hold much of the bargaining power with investors expected to compromise, especially as relates to the seat of arbitration, as the scramble for minerals and resources has and continues to be highly competitive.

The trend currently for African governments appears to be avoidance of the traditional arbitral institutions, such as the ICC or LCIA due to their perceived biases against African governments at arbitration, in favor of their own domestic African centers. At the very least, African governments should compromise for the seating of either the ICC or LCIA in African jurisdictions rather than in London or Paris.

The fact that ICC arbitration is being held in London greatly disadvantages the Sierra Leone government. This anomaly should have been addressed at contract negotiations.

Going forward, the use of international arbitration in all mining agreements must be minimized if not eliminated in Sierra Leone. The issue of bilateral investment treaties (BITs) need to also be reviewed in conjunction with reviews of provisions of the Investment Promotion Act, 2004 and the Public Private Partnership Act, 2014.

Dubious mining companies operating in Africa are currently holding African nations hostage via international arbitration clauses. Just the threat of international arbitration and its resultant exorbitant costs and damage awards against African governments suffices to pit investors interest rights against the public interest rights inherent in governmental actions.

However, the lack of transparency in contract negotiations and the corruption in the mining industry has highly exposed the nation to huge sovereign financial risks.

The erosion however of our sovereign laws by the inclusion of international arbitration clauses seem to have gained much usage over the past decades. We are now seen a trend developing were dubious companies like Timis companies, Gerald Group/SL Mining Company are using international arbitration clauses to blackmail our country.

Finally, the inherent biases of the current international arbitration system is what is of concern. I disagree that we don’t have options to get out as some commentators have adduced. In fact, the trend is for opting out of such unconscionable clauses, as both Tanzania and South Africa have passed legislation recently outlawing the practice of international arbitration in the mining sector and Nigeria encourages the use of local seated arbitration institutions RCICA Lagos.

Sierra Leone needs to adjust our laws also, as the financial burden by just a few international arbitration judgments against our country, as envisaged by SL Mining/ Gerald Group, Timis Group, Shandong, etc. could effectively bankrupt our fledgling economy. The track record of international arbitration against African countries is not good and is essentially biased!

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