Mining executives turn to legal finance to raise liquidity
Several governments have announced significant reforms seeking increased control in the mining sector in recent months, particularly in certain strategic minerals.
As a result, some projects and contracts will be subject to a forced renegotiation or prematurely ended by the host state. Companies may be protected in these scenarios through bilateral and multilateral investment treaties, under a national investment law, or a concession contract or license.
In short, these actions may amount to a legal violation of foreign investors’ rights for which investors can seek compensation through international arbitration.
The numbers confirm that mining companies are among the highest arbitration users across economic sectors. Between 1966 and 2021, 25% of all ICSID cases have been tied to disputes between foreign investors and sovereigns in the oil, gas and mining sectors. Likewise, many energy and resources disputes - including mining projects - accounted for about 38% of the ICC’s 2020 caseload, and 26% of the LCIA’s 2020 caseload.
That said, the path to a final arbitration award on liability and damages against any sovereign, not to mention a collection of award proceeds, is not without its challenges.
The average duration of investor-state arbitrations is long (4.28 years), and the average costs continue to increase ($7.49mn). For these reasons, arbitration finance has quickly become an essential tool for mining companies in international arbitration.
As a result, mining companies have relied on arbitration finance in cases against various sovereigns, including Bolivia, Colombia, Congo-Brazzaville, Costa Rica, Guatemala, Poland, Romania, and Venezuela, to name a few.
Simply put, arbitration finance has become common in both treaty and commercial claims, both to fund the arbitration expenses at the outset and, if successful, to monetise any resulting award.
By using arbitration finance to cover fees and expenses for single high-value disputes or portfolios comprising multiple matters, mining companies have been able to recover the value locked up in pending claims. In so doing, companies defray the often-significant upfront costs or downside risk of pursuing the matters.
Mining and commodities companies are increasingly drawing advances against the future value of pending claims - known as monetisation - to use the capital for any business need. This capital is non-recourse: The provider assumes downside risk and earns back its investment and a return only upon successful resolution of the disputes.
Because investor-state disputes are complicated and time-consuming, a sophisticated finance partner is essential as they can add value beyond supplying capital. With that in mind, mining companies should seek arbitration finance partners with deep expertise in funding investor-state disputes.
While control of strategy and settlement decisions ultimately remain with the client, working with an experienced arbitration finance partner delivers a host of other benefits, including insights on case strategy, arbitrator selection, damages methodology, and judgment enforceability.
Jeffery Commission is a Director with responsibility for overseeing Burford’s underwriting and investment activity in international arbitration, and co-author of Procedural Issues in International Investment Arbitration (Oxford University Press, 2018), as well as The Law and Practice of Third-Party Funding in International Arbitration (Oxford University Press, 2023).
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