Resource World Magazine

in structuring natural resource investments is for a public purpose, in accordance with due process of law, non-discriminatory, and with payment of adequate compensation. Canada's model FIPA clarifies that an "indirect" expropriation does not require a formal transfer of title or an outright seizure, and is a fact-based inquiry that considers economic impact, the reasonable expectations of the investor, and the character of the expropriatory measure. Non-discriminatory measures adopted in good faith to protect legitimate public welfare objectives generally will not be considered an "indirect" expropriation. Transfer of Funds: requires the host country to permit all transfers relating to an investment to be made freely and without delay into and out of the territory. One of the key benefits of an investment treaty is that it permits the investor to file an arbitration claim for damages directly against the host country, rather than leaving the investor dependant on government to government dispute resolution or the host country's domestic judicial system. BITs normally provide the investor with a choice of venue for arbitration. The International Center for Settlement of Investment Disputes (ICSD) was created by the ICSID Convention, which establishes an arbitration system for the settlement of investment disputes. Since Canada has not yet ratified the ICSID Convention, its model FIPA allows for arbitration under the ICSID Additional Facility Rules. Similar to many other BITs, Canada's model FIPA also allows for arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). february 2013 Considerations when making a natural resource investment The availability of BIT protection should be considered prior to making investment decisions to ensure that the investment is structured to take advantage of the treaties. A threshold consideration is whether the country of intended investment has one or more BITs in force. The absence of BITs may signal a poor investment climate and higher risk. South Africa's decision last year to terminate its BIT with the Belgo-Luxembourg Economic Unit and to not renew a number of other BITs with European Union countries has shaken investor confidence in that country. Likewise, Venezuela's denunciation of the ICSID Convention and its expropriation of natural resource businesses make investments in that country high risk. Venezuela's denunciation also underscores the importance of BITs, in that it does not affect Venezuela's consent to ICSID arbitration mandated by existing treaties, such that recourse to the ICSID Convention will still be available for investments covered by existing BITs. If the host country is a signatory to several BITs, an investor should review the available treaties to consider how to structure the investment to take advantage of the preferred investment treaty. Most BITs give the investor standing to bring a claim for damages caused directly to the investor (e.g. parent company or shareholder), as well as standing to bring a claim on behalf of an enterprise that it has created in the host country (e.g. a special purpose vehicle). However, there is a wide divergence in BITs regarding the extent to which the ultimate investor who is located in a non- Party is permitted to benefit from a BIT by bringing a claim in the name of a related entity located in the country that is a party to the BIT. Some BITs have stringent "denial of benefits" clauses, which exclude investors from the protection of the BIT if the investor is owned by a non-Party and does not have substantial business activities in the territory of the party to the BIT. The issue of denial of benefits recently arose in Pac Rim Cayman LLC v. The Republic of El Salvador, a multi-million dollar claim brought in part under the Central American Free Trade Agreement (CAFTA), arising from El Salvador's refusal to grant extraction permits for the El Dorado gold mine. The ultimate investor in the gold mine is a Canadian company, Pacific Rim Cayman LLC. After the permits had been denied, ownership of the mine was transferred to Pacific Rim's US subsidiary Pac Rim Cayman LLC. The ownership change was motivated at least in part by the investor's intention to bring a CAFTA claim (the US is a party to the agreement; Canada is not). In a ruling issued last summer, an ICSID tribunal dismissed Pac Rim's CAFTA claim on the basis of the "denial of benefits" clause, as the US company had no employees, office space, or bank account at the time the investment was made. Other Pacific Rim companies in the US did have substantial business activities, but ownership had not been transferred to those companies. Notably, the arbitral tribunal rejected El Salvador's argument that the ownership transfer in the midst of the dispute constituted an "abuse of process" due to the continuing nature of the breach, but observed that the structuring of an investment to take advantage of a treaty www.resourceworld.com 35

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