Stuck between Two Shafts: How MMDR Should Avoid International Investment Disputes
INTRODUCTION
Mining disputes are not a contemporary development. However, the introduction of foreign investors, and consequently international investment disputes, adds a new layer of complexity. The Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”) lacks the procedural framework to avoid such disputes. It does not provide domestic alternative dispute resolution (“ADR”) mechanisms, and thus investors have no choice but to approach international tribunals if litigation is unsuccessful.
The ongoing Indo Gold v. India case exemplifies how delayed license grants and application termination through amendments can breach bilateral investment treaties. These issues can be alleviated through the implementation of a mediation model for mining, which would avoid the problems of investor-state dispute settlement (“ISDS”) and domestic litigation. Further, it would handle conflicts regarding damage to investment and quantum of compensation.
INDO GOLD V. INDIA AND THE PROBLEMS EXPOSED
Gold exploration company Panthera Resources PLC (“Company”) announced that the Company’s Australian subsidiary Indo Gold Pty Ltd (“IGPL”) had formally issued a Notice of Arbitration to India as a result of the alleged breaches of obligations under the 1999 Australia-India BIT (“BIT”). The recourse to arbitration, which was submitted under Articles 3 (Promotion and Protection of Investments), 4 (Treatment of Investments), and 7 (Expropriation and Nationalisation) of the BIT, was a result of two governmental actions. First, the Government of Rajasthan rejected the Prospecting License Application of Metal Mining India Pvt Ltd (“MMI”) which is a wholly owned subsidiary of IGPL; second, the 2021 Amendment to the MMDR Act included a provision that required any pending prospecting licenses to lapse. While these two actions were the root of the problem in this case, they signify a larger pattern of hurdles in the mining sector that raise the need for recourse to a different model.
Governmental (In)Actions
The Company’s position is that there had been consistent frustration of their right to be granted a Prospecting License over Bhukia, a project in Rajasthan. The Company had made its initial investment in Bhukia via IGPL in 2004 and had subsequently managed the joint venture exploration programmes in compliance with government rules. The Prospecting License Application was rejected again by the Government of Rajasthan in August 2018, after a significant delay, on ‘spurious and legally untenable grounds.’
Further, the 2021 Amendment included two provisos under Section 10A(2)(b) of MMDR Act, the first of which takes away the preferential rights of persons who had carried out reconnaissance or prospecting in order to obtain a prospecting or mining license. This caused IGPL to lose their hold over Bhukia in the absence of an approved license. The objectiveof the Central Government in bringing about the provisos to Section 10A(2)(b) was to close the pending cases of non-auctioned concession holders which had not resulted in the grant of mining leases despite over five years passing. The shift to an auction model for granting concessions was to ensure a more transparent and non-discretionary process, after the concerns raised about the first-come-first-served mechanism.
However, this provision was opposed on grounds that it would slow down investment and lead to lawsuits. This critique rung true – IGPL filed for arbitration because this provision, and the subsequent cancellation of their application, amounted to expropriation of their investment, wherein the State takes the property that belongs to a foreign investor. Moreover, in September 2023, the writ petition filed by MMI was dismissed due to the inclusion of Section 10(A)(2)(b).[i] Since this Section itself was contested, this dismissal could amount to a lack of fair and equitable treatment being provided in judicial proceedings, and thus a violation of Article 3(2) of the BIT.
Compensatory Conflict
The Company noted that the gold deposit at the site could be worth over USD$1 billion based on information from the Geological Survey of India (“GSI”). This raises the critical question of damages, and another axis of conflict: while Section 10A(2)(b) entitles parties to be reimbursed for the ‘expenditure incurred towards reconnaissance or prospecting operations’, the BIT ensures them fair and equitable compensation.
The MMDR Act specifies in Section 13(2)(u) read with the second proviso to Section 10A(2)(b) that the Government has the power to frame rules to prescribe the manner of reimbursement towards permits or prospecting operations. However, arbitral jurisprudence often sets the applicable standard of compensation as full reparation for the damage actually suffered. To manage this complexity, the arbitral proceedings were bifurcated into two stages, where the Tribunal would first deal with jurisdiction and the general principles of compensation, and in the second stage with the precise quantum of damages.
MINING MEDIATION MODEL
Need for an Alternative
The Company’s MD said that despite efforts to resolve the matter amicably, it had to be escalated to the international arbitration stage due to the significant harm caused by Indian authorities to their investment. This highlights one part of the issue: the lack of efficient domestic systems that international investors can take recourse to. However, the issue is two-fold: first, why is international arbitration not sufficient to settle the parties’ issues? Second, why is mediation recommended?
The issue with ISDS is that tribunals tend to favour companies and grant foreign investors greater rights than host governments. However, even discounting this point, the creation of a mediation framework would assist in avoiding certain claims before investment tribunals. For instance, a FET provision is broad enough that the absence of an effective and neutral remedy for the delays and harm caused could constitute a denial of justice claim. As considered in White Industries v. India, providing an effective means of judicial resolution also means local remedies need to be available and not inefficient.[ii]
Creating a mediation model would bolster India’s claims, while providing the investor a more accessible forum to turn to. The provisions of the Mediation Act, 2023 (“Mediation Act”) give ample foundation for an effective framework. Section 3(h) establishes the independence and neutrality of the mediator as a third-party assisting with an amicable settlement, and Section 10(1) mandates them to disclose any conflict of interest that would hamper their impartiality. Mediation provides the possibility of a binding order being issued as under Section 27, which can add to the regulatory confidence of the investor.
The MMDR Act under Section 30B already provides for the constitution of Special Courts for the speedy trial of offences relating to prospecting or mining operations to be under licence or lease. The Mediation Act, through various Schedules, has specifically amended major substantive laws to align them with the new framework. While this form of amendment is primarily targeted to amend Acts that have ADR provisions already, it can be used as a reference to bring about a similar change in the functioning of the MMDR Act.
Proposed Framework
The proposed model deals with two significant issues: first, it creates a time-bound settlement system in line with the Mediation Act, and mandates mediation prior to the termination of a licence; second, it creates a space where the interests of both parties can be evaluated, with the help of Technical Experts, to resolve compensatory conflicts.
The timeline of the proceedings must comply with Section 18 of the Mediation Act which states that all proceedings must be completed within maximum 180 days of the first appearance before the mediator. Both parties would be bound to facilitate a speedy resolution. Further, such mediation should be made mandatory prior to the termination of a license.
While retrospective application of this provision is not possible, it is nevertheless a relevant safeguard to have since according to Section 4A of the MMDR Act, the Central Government may still prematurely terminate a prospecting or exploration license or mining lease in consultation with the State Government on certain grounds. Having a mediation system in place to allow the parties to put forth their interests before such an action is taken would prevent avoidable litigation.
The mediation should include experts for the purposes of determining the amount of damages to be granted. As evidenced by arbitral jurisprudence, the valuation of a mineral asset is required for damages analysis, and this must be done by qualified individuals. The Indian Bureau of Mines follows the UN Framework Classification for Fossil Energy and Mineral Resources (“UNFC”), which is suited to government reporting of estimates and forecasts for attracting investments. To maintain this consistency, an independent Technical Expert with knowledge of UNFC and relevant systems should be included in order to give a fair valuation that is based not only on accounting expenditure, but also on the geological reserves. According to Section 22 of the Mediation Act, all such experts would be required to maintain complete confidentiality of the proceedings and thus safeguard any commercial information.
If the parties are willing to evaluate their costs and determine what makes commercial sense, then valuation disputes can be mediated with the active assistance of experts. Like in tribunals, such reports by party-appointed experts would need to be accompanied by a statement of independence from the parties.
CONCLUSION
The introduction of an auction regime is a commendable step towards bureaucratic transparency; however, this does not discount the missteps already taken by the administration in their treatment of investors like IGPL. Moreover, provisions of the MMDR Act such as the Government’s discretion and the lower standard of compensation leaves India vulnerable to more investment disputes if proactive steps are not taken to prevent it.
The mediation framework would ensure that such disputes are managed in a more efficient, time-bound, and independent manner that allows all interests to come forward. Future tensions, as well as past disputes, will have an alternative that does not leave them stuck for years in litigation institutions, nor in expensive international arbitrations.
*Shivali Yadav is a Third Year Law Student at Jindal Global Law School.
[i] Metal Mining India Pvt Ltd v State of Rajasthan (2023) SCC OnLine Raj 3715.
[ii] White Industries Australia Limited v The Republic of India (Final Award) (UNCITRAL, 30 Nov 2011) para 11.3.2.