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Deep-sea mining: dispute settlements under international investment law

Mining Technology | 6 June 2024

Deep-sea mining: dispute settlements under international investment law

In part three of our series about international deep-sea mining regulation, Louise Woods and Elena Guillet of Vinson & Elkins explore how international investment law could be applied to dispute resolution.

Deep-sea mining activities on the seabed and ocean floor beyond national waters are a risky and capital-intensive venture. The unpredictability of little-known ecosystems and environmental impacts translate into regulatory uncertainty where a sponsoring state may be tempted to revoke sponsorship, amend the applicable regulations or alter the agreed economic bargain.

Contractors – parties exploring for minerals in these areas – and their ultimate foreign investors, therefore, seek robust contractual or international frameworks to protect their rights and their investment.

As we explored in the first part of the series, a contractor – such as a corporation, entity or individual – can only apply for the right to exploit the minerals on the international seabed once it is sponsored by a state party to the UN Convention of the Law of the Sea (UNCLOS) under a sponsorship agreement. The most important contract for contractors, as covered in part two, is the exploitation contract with the International Seabed Authority (ISA), which grants them access to the minerals and defines their rights and obligations for exploration.

In addition to the dispute resolution mechanisms enshrined sponsorship agreement and the exploitation contract, there may be another international regime available to contractors to protect their investment: international investment law.

While the applicability of international investment law to disputes between contractors and sponsoring states is so far only theoretical and untested, this article provides an overview of the requirements to bring a claim under an international investment treaty.

What is international investment law and why does it matter?

International investment law is the body of international law concerning the admission and treatment of foreign investment, and it relies on the existence of investment treaties.

These treaties are concluded between two or more states and aim to promote investment flows between the state parties. They do this by establishing obligations about how investments by nationals of one state will be admitted and protected in the territory of the other state.

These treaties allow protected investors to bring disputes against the host state to international investor-state arbitration, rather than the national courts or the UNCLOS tribunals in this case. This is a potentially attractive solution for the foreign shareholders of the contractor entities incorporated in the sponsoring states.

What are the requirements to bring an investment treaty arbitration?

First, there must be an investment treaty between the state of the contractor’s shareholders and the host state (i.e. the sponsoring state). Second, there must be a qualifying ‘investor’ under the treaty. Third, there must be an ‘investment’ under the applicable treaty.

Turning to the question of whether there is a qualifying ‘investor’, the difficulty is that under the ISA’s regulations, the contractor must have the same nationality as the sponsoring state and international investment law only protects foreign investors.

However, there are two potential mechanisms through which the contractor’s shareholders may qualify. First, under the ICSID Convention, there can be recognition by the parties to a treaty or an investment contract that an entity with the nationality of the host state should be treated as a foreign investor because of external control [1]. This mechanism would need to be considered alongside the test for effective control of the contractor entity under the ISA’s regulations.

Second, international investment treaties can offer protection to foreign shareholders whose investment is held through an entity with the same nationality as the host state. In the past, shareholders have been able to recover losses that result from wrongs done to the company (i.e. reflective losses) [2]; this may cover the losses incurred by the contractor’s ultimate shareholders as a result of wrongs done against the contractor.

Concerning the requirement for a qualifying investment, this will depend on whether the exploitation contract with the ISA qualifies an investment within the territory of the sponsoring state under the relevant investment treaty.

There are strong arguments against finding that international investment law applies to seabed investments in the seabed and ocean floor beyond national waters. This is because international investment law is premised, either explicitly or implicitly, on the existence of the extractive activities, that is, the investment, within the territory of the state, and the area is by definition “beyond national waters”. Two theories have been developed by international tribunals that may be of relevance.

First, tribunals have developed the economic benefits theory, under which financial transactions performed outside of the host state’s territory qualify as investments under the relevant treaty as long as the capital associated with those transactions was made available and used “for the benefit” of the host state [3]. Under the sponsorship agreement, contractors have to pay mineral recovery payments to the host state. Therefore, the deep-sea mining extractive activities generate funds which are placed at the disposal of the national authorities of the Sponsoring state. In addition, the sponsorship agreement may also include other requirements regarding the use of national infrastructure, the involvement of local communities or the use and training of a local workforce, which reinforces the economic benefits theory.

Second, tribunals have developed the economic unity of investment theory [4]. In these cases, the claims concerned the host state’s non-execution of contracts for the provision of services outside of the territory. The tribunals held that the requirement that the investment be in the territory of the host state does not restrict how the investment can be made. It is sufficient that the result of the investment activity takes place in the territory of the host state. Therefore, for contractors, tribunals should consider both the operations within the area and the assets within the sponsoring state when determining the existence of an investment under the applicable treaty.

Whilst these theories illustrate several ways of determining the existence of an investment, there is no precedent for deep-sea mining activities. The host state may raise a defence arguing that the economic unity theory is incompatible with the status of the seabed and ocean floor beyond national waters as the common heritage of mankind. This is because the economic benefits and economic unity theories would imply an extension of sovereignty over international waters.

There are strong arguments both for and against the applicability of the international investment regime to deep-sea mining activities. The specific applicability will depend in part on the precise terms of the sponsorship agreement between the contractor and the sponsoring state, as well as the provisions of any applicable investment treaty. In any event, the substantive application of the international investment regime will need to be developed and clarified through jurisprudence.

[1] Convention on the Settlement of Investment Disputes between States and Nationals of other States, 18 March 1965 (entered into force 14 October 1966), UNTS vol. 575, p.159 [ICSID Convention], article 25.

[2] For example, Compañía de Aguas del Aconquija S.A. (formerly Aguas del Aconquija) and Vivendi Universal S.A. (formerly Compagnie Générale des Eaux) v. Argentine Republic (I), ICSID Case No. ARB/97/3, Decision on Jurisdiction, dated 14 November 2005.

[3] FEDAX N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3; Abaclat and others (formerly Giovanna A. Beccara and others) v. Argentine Republic, ICSID Case No. ARB/07/5.

[4] SGS Société Générale de Surveillance S.A. v. Republic of Paraguay, ICSID Case No. ARB/07/29; Deutsche Telekom AG v. The Republic of India, PCA Case No. 2014-10.

 source: Mining Technology