Access to mineral resources is essential for a modern and sustainable economy. Recent global commitments to climate change and achieving a net zero carbon emission environment have created a rush for certain minerals, such as copper, lithium, nickel, cobalt, manganese and graphite.
Demand for these critical materials has surged in the last few years. According to the International Energy Agency, between 2017 and 2022, lithium demand tripled and nickel demand grew by 40%. In the same timeframe, the share of demand for both metals for clean energy applications has increased to 56% from 30% for lithium and to 16% from 6% for nickel.
The supply of some critical minerals is currently concentrated in a small number of countries. For example, the Democratic Republic of Congo (cobalt); Indonesia (nickel); and graphite and rare earth elements (China). Demand is only expected to increase. By 2040 the world is expected to need four times the amount of critical minerals for clean energy technologies as it does today.
Competition for these mineral resources is also increasing. China, the United States, the United Kingdom, and member states of the European Union have invested billions of dollars to acquire access to critical minerals around the globe. This rush has also led developed countries to diversify and enhance international cooperation.
Pressure on contracts
For example, the UK has signed an agreement with South Korea to strengthen supply chain resilience, which will include discussions on critical minerals. Japan has signed a series of agreements with five African countries to mitigate its reliance on China for critical minerals. South Korea has signed cooperation agreements with Canada on the supply chain of critical minerals.
This increased global competition for access to critical minerals may put a strain on existing contractual relationships as players may adopt aggressive strategies such as disrupting pre-existing contracts to dislodge other players. Such disruptions can lead to claims of broken contracts. In law, it’s called tortious interference of contractual relationships.
This article provides a high-level overview of how claims can arise and how they are resolved, and provides suggestions for protective measures that mining companies to consider. It also covers how tribunals and courts quantify the damage that results from such claims.
Protect your company with a bilateral investment treaty. Credit: Adobe Stock
Third-party interference
Third-party interference occurs when, for example, one entity tries to persuade a host country to give it a licence that has already been granted to another company. Tribunals and courts can find situations like these constitute tortious interference.
A recent example of such a situation involves a claim brought by a Switzerland-based mining company, Solway Investment Group, against Liberia for allegedly terminating the company’s exploration licence. The West African state allegedly reached a “behind the scenes” deal, according to Solway, to transfer the company’s rights to ArcelorMittal (NYSE: MT), the Luxembourg-registered steelmaker, for US$50 million.
In any case, tortious interference in existing contractual relationships involves substantial risk to all parties involved. First, if a company’s concession or license is terminated without reason, then it can be financially exposed after having invested considerable amounts.
Second, the host state seeking to award the project or contract to a new investor may be exposed to claims and requests for provisional measures brought by the original investor. Also, the mining project may be frozen for the duration of legal proceedings to determine whether termination of the concession was wrongful. That can take several years.
Finally, a third-party investor accused of interfering in the existing contractual relationship may be forced to pay compensation to the original investor if it was forced to exit the pre-existing contract with the state. Such a payment may be initiated by the third-party investor as an amicable resolution to the dispute or may be ordered following a court or arbitration tribunal’s decision.
A legal strategy for mining companies to preserve their rights is to seek protection through a bilateral investment treaty (BIT). Under a BIT, investments made by foreign mining companies are protected against a host state’s wrongful conduct.
Such protections typically include guarantees: to treat the investor fairly and equitably; not to discriminate against the investor; to allow the investor to freely repatriate funds abroad; the full protection and security of the investment; to provide adequate and prompt compensation in the event the investment is expropriated; and to resolve any disputes that arise between the investor and the host state before a neutral arbitration tribunal.
Determining damages
If any of these protections are breached by the host state, the mining company is entitled to seek damages. Measuring damage from tortious interference is based mainly on the cash flows the harmed party would have earned if the interference hadn’t occurred. It could affect mining licences or long-term supply agreements.
Although supply agreements usually outline how much the supplier must compensate the customer for volume shortfalls, this compensation may be higher or lower than the profit lost. Frequently, a miner faces penalties as stipulated in its contract with a smelting company, which can be considered part of its damage. Also, many supply agreements include change-of-law clauses that specify applicable procedures when laws change, and often require the supplier to find replacement volumes or alternative supply sources.
In the context of supply agreements, tribunals often choose to calculate damages using discounted cash flows: the amount of money the asset is likely to make in the future, adjusted by the discount rate.
As another example, if a company was exploring a mining property, tribunals tend to choose damage calculations based on valuation methods advised in mining codes such as the Canadian Institute of Mining, Metallurgy and Petroleum’s CIMVAL.
These approaches include the use of discounted cash flows from the project and multiples of reserves or production from comparable projects. The tribunal’s approach often depends on the stage of the property. For example, tribunals may award damages based on historical costs incurred for projects that had not advanced beyond the development stage.
The calculation of damages can be performed with or without the benefit of hindsight, depending on the legal context. Without hindsight, the focus is solely on the cash flow scenario that was known or expected at the time of the interference.
With hindsight, one can look back at how mineral prices actually evolved during the interrupted period of expected profits. For example, using hindsight will increase damages to a company if mineral prices increased after the interference but were expected to decline at the time of the interference.
To sum up, damages are typically assessed by estimating the market value of the stream of profits or cash flows that would have been realized if not for the alleged interference.
Ahmed Abdel-Hakam is a partner at law firm Volterra Fietta while Tiago Duarte-Silva is a vice-president at consultant Charles River Associates. Both are in London, U.K.
The conclusions set forth herein are based on independent research and publicly available material. The views expressed herein are the views and opinions of the authors and do not reflect or represent the views of either Volterra Fietta or Charles River Associates or any of the organizations with which the authors are affiliated.
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