The KCM saga has dominated headlines since a liquidator was appointed to run the Chingola-based mine in May, after ZCCM-IH (which owns approximately 20% of KCM) accused majority shareholders, Vedanta Resources, of breaching its licence.
On the one hand, there now appears to be a move from South Africa’s High Court to stop proceedings but, conversely, the Zambian government has repeatedly told Vedanta — in Zambia and, this week, in India — that it plans to go ahead with a sale regardless of the consequences. What might those consequences be, and are they connected to the commencement of international arbitration? And what is international arbitration anyway?
Mining For Zambia enlisted the help of a few legal experts to explain what’s happening.
How does international arbitration apply within the mining industry?
International arbitration is a form of Alternative Dispute Resolution (ADR), involving the hearing of a dispute, outside of any court, before private adjudicators (arbitrators) nominated by each party involved. It is preferred by parties (whether companies or governments) that are domiciled in different countries, that wish to have their disputes heard in a neutral environment. It is also usually far quicker and less expensive than formal court proceedings.
Because mining involves substantial capital investments (and, hopefully, returns) made over long periods of time, during which regulatory, political, and economic circumstances often change, disputes are near-inevitable.
Peter Leon, attorney and co-chair of global law firm Herbert Smith Freehills’ Africa Group, who has previously sat as an arbitrator in Africa, adds:
“There are several very good reasons for international arbitration, and one major reason is that it de-politicises a dispute. It takes it out of the hands of the host state, and puts it in the hands of an international arbitral tribunal, and that is very important.
It’s not uncommon in the mining industry that you have an agreement to go to international arbitration between the government and the investor in the Concession Agreement which the mining company enters into with that government. In relation to KCM, the agreement to go to international arbitration is actually contained in the shareholders agreement between Vedanta and ZCCM-IH. And that’s the subject of the recent South African High Court judgment.”
Why has the South African High Court become involved?
When Vedanta and ZCCM-IH drew up KCM’s shareholders’ agreement, they listed Johannesburg as the place in which any potential disputes would be handled. It is common practice to choose a third, neutral country — known as the “seat” of an arbitration — for dispute resolution.
What gives it the authority to order the Zambian government to halt the liquidation of KCM (pending the resolution of the dispute through arbitration)?
“The High Court in South Africa said that because “dispute” is so widely defined (both in the arbitration agreement, and in South Africa’s International Arbitration Act, which the High Court applied in its judgment) the court issued an ‘anti-suit injunction’, stopping proceedings in Zambia, because the only option provided for was international arbitration in South Africa.”
“There are several very good reasons for international arbitration, and one major reason is that it de-politicises a dispute.”
Advocate Michael Kuper, who chairs the Arbitration Foundation of Southern Africa adds:
“National Courts may sometimes be called upon to issue injunctions or interdicts where it is necessary for them to preserve the status quo, i.e., where one party is taking steps which will destroy the subject matter of the arbitration, or make it academic. In such cases, the Court must ask itself whether in the circumstances it has the power to grant an injunction and, if so, whether it should do so.
It appears that the judge held as follows: The terms of the arbitration agreement were wide; The grounds on which the government was trying to liquidate the company was based on disputes, and those disputes were covered by the arbitration agreement; The other party wanted to have those disputes heard by arbitration as agreed, and not by way of a Court application for liquidation.
Therefore, it was appropriate in the circumstances for the Johannesburg Court to exercise jurisdiction, it being the Court at the place where the arbitration would be held, and, therefore, the Court which should protect the arbitration process.”
But KCM operates in Zambia. How does International Arbitration affect the application of Zambian law?
In short, it doesn’t.
Leon explains: “There’s a big difference between the seat of the arbitration, where the law of the seat will apply. So, in the KCM case, the South African International Arbitration Act really only governs the procedure around the arbitration. The parties would have to agree what law applies to the substantive issues in dispute. As far as I know, the governing law of the shareholders’ agreement is Zambian law. In other words, you can separate the governing law from the law of the seat of arbitration.”
What could happen if the Zambian Government proceeded with a sale of KCM?
Initially, nothing. But, when international arbitration proceedings begin (whether in a year or two, or less if the process is expedited), ZCCM’s actions will become part of the hearing. ZCCM and its business partner, Vedanta, mutually agreed to make international arbitration a part of their shareholders’ agreement. This is a fact that neither party can reverse or ignore.
So, despite the fact that the South African High Court has issued an order “blocking” any potential sale of KCM until international arbitration has been concluded, this can’t be enforced in Zambia?
Leon responds: “Every country is sovereign. It may be very difficult to have the judgment enforced in Zambia because Zambia has not signed or ratified the Hague Convention on the Recognition and Enforcement of Foreign Judgments.
But if the sale goes ahead, it is possible that the arbitrator may say that the liquidation should never have happened, and is of no force and effect. In other words, Zambia can ignore the order in Zambia, but that doesn’t mean this will not have any consequences in the arbitration proceedings in Johannesburg. I think it will.”
So would an arbitration award have any effect in Zambia?
ZCCM and its business partner, Vedanta, mutually agreed to make international arbitration a part of their shareholders’ agreement. This is a fact that neither party can reverse or ignore.
“Theoretically, because of the Arbitration Act, an award given in an international arbitration will be recognised as enforceable in Zambia,” say Head of Litigation at Lusaka-based law firm Chibesakunda & Company, Rodwyn Peterson, and his colleague Luwizya Mwamulima.
“Zambia ratified and assented to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on 14 March 2002. That means that, once ratified, Zambia like other signatory States is bound by its provisions and, as such, recognises all arbitral awards.”
What are the possible outcomes of arbitration, and how long can the process take?
“The outcomes of an arbitration depend largely on the claims and cross claims of the parties,” explain Peterson and Mwamulima. “The outcomes could be a total or partial win on any of these claims, or a total loss on any or all of the claims. It is common for a reasonably complex arbitration to take around 12 months from start to finish.”
According to legal experts, the general principle in international arbitration is to make an award of damages to the injured party, which can be a very substantial sum of money, given the multi-billion dollar size of mining investments.
In the case of KCM, Vedanta initiated the arbitration proceedings, on the grounds that it had not been allowed to participate in KCM’s liquidation process.
But ZCCM’s actions against Vedanta came after several warnings from the Zambian government about KCM’s “empty promises” with regards to investment and revenue generation. Couldn’t ZCCM initiate arbitration proceedings against Vedanta?
Yes, ZCCM has equal access to international arbitration mechanisms.
According to one arbitrator: “States tend to initially ignore an arbitration to begin with and often have to be coerced into participating, but at the end of the day, they do participate. In this case, if they don’t participate, they’re going to land up with an adverse order.”
So could ZCCM receive damages as the injured party?
In theory, yes. International arbitration has benefitted governments (or state-owned companies) and private companies in the recent past. The commercial arbitration case, Senegal v. ArcelorMittal is perhaps the most widely-reported.
ArcelorMittal, a multinational steel manufacturing corporation with its headquarters in Luxembourg, entered into a $2.2 billion contract with Senegal, where it planned to develop an iron ore mine and various infrastructure projects to support it. When the company suspended work on the mine following the global economic crisis in 2008, Senegal rescinded the agreement. In 2013, the International Chamber of Commerce’s arbitration court in Paris ruled that Senegal was within its rights to cancel the deal, and ArcelorMittal eventually paid US$150 million in settlements.
Vedanta says that it has invested significantly in KCM since 2004, and should therefore be involved in decisions about its liquidation. So what sort of remedy will they seek?
Arbitration experts assume that Vedanta will seek an award of damages. There are other cases with parallels, such as the extended dispute between Canadian-owned First Quantum Minerals (FQM) and the Democratic Republic of Congo (DRC), which ended in a payment to FQM of US$1.25-billion in 2012. The DRC government had initially sold FQM’s expropriated assets to Israeli businessman Dan Gertler, who sold them to Eurasian Natural Resources Corporation (ENRC). FQM took the DRC government to international arbitration and sued ENRC, which was unable to operate legally in the interim. Eventually, both FQM and ENRC nominated a negotiator and reached an agreement in which FQM was awarded US$1.25-billion. In turn, ENRC came out with a legal ceasefire and was able to legitimise its claims to FQM’s DRC-based assets, and the arbitration against the DRC government was dropped.
Another case that caught the eye recently in July 2019 was the enormous $5.8 billion arbitration award for Barrick Gold and its Chilean partner Antofagasta against Pakistan, for an act of expropriation that happened years prior.
Legal and arbitration experts — along with players in the mining industry in general — seem to agree on one thing: the KCM saga will result in an arbitral award sooner or later, to one party or another. And, the consequences might not just be felt by those parties fighting the arbitration; industry insiders foresee that the party that is most likely to face the consequences of a sale of KCM will be the eventual purchaser.