Reproduced from www.worldbank.org/icsid with permission of ICSID.
Claimant's Reply has now confirmed that Freeport-McMoRan Inc. ("Claimant") is seeking to relitigate before this Tribunal a dispute that has already been resolved in litigation all the way up to and including Perú's Supreme Court. Simply put, Claimant did not get the answer that it wanted in Perú, and it is now trying again here, hoping to persuade this Tribunal to overrule Perú's highest courts regarding the scope of a Peruvian-law administrative contract that has been interpreted according to Perú's mining laws and regulations.
All of Claimant's claims arise out of the legal stabilization agreement signed between Peruvian company Sociedad Minera Cerro Verde S.A.A. ("SMCV") and Perú's Ministry of Mines and Energy ("MINEM") on February 13, 1998 ("1998 Stabilization Agreement") and relevant provisions of Title Nine of the Single Unified Text of the General Mining Law (Texto Único Ordenado de la Ley General de Minería - "Mining Law"). The case turns on the scope of that Agreement under the Mining Law. That question, however, is a matter of Peruvian law, it has already been resolved by Perú's Supreme Court, and it should not be before this Tribunal.
In its Reply, Claimant insists that Peruvian law provides that legal stabilization agreements signed under the Mining Law ("mining stabilization agreements"), such as the 1998 Stabilization Agreement, grant unlimited and open-ended stability guarantees in advance to any and all activities and investment projects, present or future, that a mining titleholder might choose to carry out within the area of a mining concession or "mining unit" during a period of up to fifteen years. Unfortunately for Claimant, however, that is not the interpretation of the 1998 Stabilization Agreement correctly applied by Perú's mining and tax authorities consistent with Perú's laws and then confirmed by Perú's highest court.
On July 12, 2017, Perú's Supreme Court determined that the 1998 Stabilization Agreement shielded from legislative and regulatory changes only SMCV's activities related to the specific investment project for which the Agreement was signed--namely, a leaching plant that processes a particular type of copper ore. The Court found that this interpretation was in accordance with the Mining Law and its regulations that were in force at the time the 1998 Stabilization Agreement was signed, which provided that mining stabilization agreements grant stability guarantees only to the specific investment project for which the agreement was signed-- as outlined in the underlying feasibility study on which the application for the stabilization agreement rests. The core problem with this arbitration is that Claimant is attempting to dress up those local law questions--which have already been resolved by Perú's highest court--as an investment treaty dispute, in order to use this Tribunal as a court of last resort to overturn the Peruvian Supreme Court's answer to those Peruvian law questions.
In its Reply, Claimant once again insists that this "restrictive" understanding of the Stabilization Agreement was new, allegedly devised by Perú some eight years after the 1998 Stabilization Agreement was signed in order to deny stability coverage to SMCV's investment in a concentrator plant to process a different type of copper ore (primary sulfides) from the Cerro Verde Mine (the "Concentrator Project"). Perú did no such thing. Contrary to Claimant's allegations, Claimant is not the victim of arbitrary acts by Perú. Instead, over the term of Claimant's investment, Perú has strictly applied the terms of the Agreement and has acted consistently, reasonably, and in accordance with international and Peruvian law.
Of note, Claimant is a late arrival on the stage of the Cerro Verde story. In 2007, almost a decade after SMCV had signed the 1998 Stabilization Agreement and three years after SMCV had decided to invest in the Concentrator Project, Claimant, a U.S. company, acquired an indirect majority stake in SMCV. SMCV, in turn, holds a series of mining concessions ("Mining and Beneficiation Concessions") that grant it the right to operate the Cerro Verde copper mine located in Arequipa, Perú ("Cerro Verde Mine"). SMCV was established much earlier, in 1993, after Perú decided to privatize the operation of the Cerro Verde Mine. By the time Claimant invested in SMCV in 2007, it knew or should have known that SMCV's 1998 Stabilization Agreement would not shield the Concentrator Project from legislative or regulatory reforms.
Indeed, Claimant's Reply further confirms that SMCV (and Claimant) knew or should have known that its interpretation of the Agreement was contrary to Peruvian law and that the Concentrator Project fell outside the scope of the 1998 Stabilization Agreement. SMCV (and Phelps Dodge Mining Corporation ("Phelps Dodge")--Claimant's predecessor--and Claimant) understood and was concerned about the fact that its interpretation of the Agreement was never actually confirmed by any competent government official with authority to agree to the company's position. Nevertheless, SMCV and Phelps Dodge decided to take a calculated risk and invest in the Concentrator Project anyway. Claimant voluntarily and consciously took on a share of that same risk when it subsequently invested in SMCV in 2007. This has been established in this arbitration in at least four ways:
First, the record in document production has driven home the fact that SMCV and Phelps Dodge were worried about this question and repeatedly sought, but never obtained, confirmation in writing from Perú that SMCV's interpretation of its 1998 Stabilization Agreement was correct. That should have concerned SMCV and Phelps Dodge and made them pause. Instead, SMCV and Phelps Dodge elected to forge ahead, relying on alleged oral assurances from select government officials (only one of whom provides a witness statement in these proceedings) and written documents that do not actually provide any confirmation of SMCV's (untenable) interpretation. When Claimant then appeared on the scene, it did not do any sort of due diligence on SMCV's interpretation prior to its investment.
Importantly, SMCV could have requested and signed a new stabilization agreement for the Concentrator Project. It did not take that approach for one simple reason: by the time SMCV was able to launch the Concentrator Project, Perú had already enacted the 2004 Mining Royalty Law, which imposed a royalty on mining concession holders for the extraction of ore. Had SMCV signed a new mining stabilization agreement at the time it launched the Concentrator Project (which is what it should have done under the law), it would have stabilized a legal and administrative regime that already included (as of 2004) an obligation to pay royalties to Perú for the primary sulfides it would extract and process under the Concentrator Project.
SMCV and Phelps Dodge did not want to pay those royalties, as proven by contemporaneous documents obtained in document production.
Thus, SMCV and Phelps Dodge had to get creative and try to find a way to surreptitiously include the Concentrator Project in the 1998 Stabilization Agreement. For this reason, Claimant argues before this Tribunal--as SMCV unsuccessfully did before local administrative bodies and judicial courts--that MINEM allegedly confirmed that the Concentrator Project was included in the 1998 Stabilization Agreement when MINEM agreed to expand the area and production capacity of SMCV's Beneficiation Concession to include the Concentrator Project. But Claimant's theory is incorrect. The expansion of the physical boundaries and production capacity of the Beneficiation Concession was entirely unrelated to the legal scope of the 1998 Stabilization Agreement for tax and royalty purposes, and nothing in the process to approve that expansion or in the document that approves that expansion confirms that the Concentrator Project would now be included in the 1998 Stabilization Agreement.
SMCV's, Phelps Dodge's, and later Claimant's gambit was unsuccessful. Perú's competent administrative and judicial authorities have repeatedly told SMCV that the Concentrator Project was never part of and could never be part of the 1998 Stabilization Agreement. Perú should not be held internationally liable for a calculated risk made by an investor that went awry.
Second, Claimant has not put on the record any evidence of credible due diligence that it undertook before it invested in SMCV in 2007, or even evidence that SMCV (and Phelps Dodge) undertook reasonable due diligence at the time they decided to proceed with the investment in the Concentrator Project in October 2004--even though the record shows that Claimant knew that the applicability (or not) of the 1998 Stabilization Agreement to that Project was a looming and economically significant issue both for SMCV and Phelps Dodge. During document production, the Tribunal ordered Claimant to produce documents containing its due diligence (or others' due diligence on which Claimant relied) with respect to the scope of the 1998 Stabilization Agreement. Claimant failed to produce any documents showing any type of adequate due diligence.
The documents that Claimant did produce show that SMCV and Phelps Dodge were concerned that the Stabilization Agreement would not cover the Concentrator Project and, because of that concern, sought confirmation in writing that the Concentrator Project would be covered by the 1998 Stabilization Agreement. Of course, no such confirmation in writing ever materialized. Nevertheless, SMCV and Phelps Dodge went forward with building the Concentrator Plant anyway. Claimant understood that SMCV's interpretation of the Agreement was anything but ironclad, and it took a calculated risk. Respondent should not be held internationally liable for Claimant's own expensive mistakes.
Third, it is clear that Claimant knew that there was a serious risk that SMCV's interpretation of the Agreement would not hold and that it would be obliged to pay royalties for the Concentrator Project. Phelps Dodge's contemporaneous 10-K Forms filed before the U.S.
Securities Exchange Commission show that, even after Perú approved the expansion of the Beneficiation Concession (which Claimant asserts confirmed the Concentrator Project's inclusion in the scope of the Stabilization Agreement--it did not), Phelps Dodge was uncertain about whether SMCV would be obliged to pay royalties for the Concentrator Project.
Finally, although Claimant presents a fanciful conspiracy in which Perú's government officials initially agreed with SMCV's interpretation of its 1998 Stabilization Agreement and then reversed course and devised a new and restrictive position to deny stability coverage for the Concentrator Project due to alleged political pressure from Congress, the truth is very different. Contemporaneous evidence shows that Perú has consistently maintained that the scope of mining stabilization agreements, and SMCV's 1998 Stabilization Agreement in particular, is limited to the specific investment project or projects for which the stabilization agreements were signed. Most notably, prior to June 2006 (when, according to Claimant, the government allegedly changed its mind regarding the scope of the 1998 Stabilization Agreement):
VI. REQUEST FOR RELIEF
For the foregoing reasons, Respondent respectfully requests that the Tribunal find that it does not have jurisdiction over Claimant's claims or, in the alternative, that Claimant's claims have no merit, and award Respondent the costs and fees, including attorneys' fees, that it has incurred in this arbitration.
Stanimir A. Alexandrov
Stanimir A. Alexandrov PLLC
Jennifer Haworth McCandless
María Carolina Durán
Sidley Austin LLP
Counsel for Respondent