Lupaka Gold Corp and the Future of Investor-State Dispute Settlement
Tanisha Merkley & Jiayi Zhang
This article is part of a two-part series on ISDS. CJCA blog posts represent the individual opinions and perspectives of their authors. The Canadian Journal of Commercial Arbitration does not maintain or publish a collective or institutional view on any legal or political issue.
Investor-state arbitration is a means often used to resolve disputes between host states and foreign investors. The availability of arbitration is necessary to ensure that investor-state disputes are resolved fairly, by a system independent of the host state’s judiciary.
Lupaka Gold Corp v Republic of Peru (Lupaka) is a pending case registered on October 30, 2020. This blog post will examine the legal basis for Lupaka and its potential outcome. The example of Lupaka illuminates the benefits of an independent process and shows the value that investor-state dispute settlement (ISDS) continues to provide for Canadian companies.
Lupaka Gold Corp, a Canadian company, purchased a property in Peru on which a mine could be built and conveyed it to their subsidiary, Invicta Mining Corp (IMC). By September 2018, IMC had completed work on the mine comprising 3,000 meters of underground workings and a 29-kilometer access road. IMC secured community agreements from communities that owned lands within the project area. Upon completion, IMC requested a final inspection of the site so extraction work could begin.
In October 2018, before the final inspection, gunmen from the neighboring community of Parán forced IMC’s workers from the site and set up a blockade on the access road, preventing workers from entering the site. The blockade set up on the access road was on the Community of Lacsanga’s property. According to Lupaka’s press release, the demonstrators from Parán demanded that their community be the sole beneficiary of the social and economic benefits of the project. This was contrary to the agreements made with Lacsanga and Santa Domingo, the two communities most closely impacted by the mine.
The Community of Lacsanga and IMC requested that local authorities assist in removing the blockade and restoring access to the mine. However, no assistance came, and due to the illegal blockade, IMC was unable to generate any revenue. Ten months after the blockade began, IMC defaulted on its loans and lost its investment.
Lupaka contends that the loss of the mine was a direct consequence of Peru’s acts and omissions in failing to clear the blockade. Lupaka has commenced arbitration and seeks over 100 million USD in compensation.
The Investor-State Dispute Settlement (ISDS) Process
Foreign direct investment occurs when an investor acquires an asset in another country with the intent to manage the asset. The host state has the right to regulate foreign investment, but it is restricted by its treaty obligations, typically enforced by arbitration between the investor and the host state.
States have negotiated close to 3,000 bilateral investment treaties (BITs), as well as numerous multilateral trade agreements that include investment chapters. BITs are highly controversial because, depending on the remedies available within the host state’s legal system, they may give foreign investors a privileged status over domestic investors. ISDS, an important element of BITs, is especially controversial because it is the only international regime where non-state actors have direct standing against host state governments without exhausting local remedies.
Canada and Peru are among the 155 Contracting States to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), which establishes an administering institution and sets jurisdictional and procedural rules for investor-state arbitrations. Further, the Canada-Peru Free Trade Agreement (CPFTA), a bilateral investment treaty which entered into force in 2007, provides for ISDS including arbitration under the ICSID Rules. Lupaka submitted their Request for Arbitration pursuant to Article 36 of the ICSID Convention and Article 824 of the CPFTA.
How This Case Will Be Decided
Lupaka is not the first Canadian mining company to hail Peru into arbitration. In 2017, Bear Creek Mining Corporation, a Vancouver-based company, won an ICSID arbitration against Peru, in a case with significant similarities to Lupaka’s. Bear Creek also concerned mining rights and involved a similar debate on whether the investor had obtained a “Social License” from local communities in the area of its mine. In Bear Creek, the tribunal ruled in favour of the claimant investor and awarded damages of US$18,237,592.
To initiate its Santa Ana mining project, located near the Peru-Bolivia border amid several Indigenous communities, Bear Creek acquired concession rights (essentially, a government license to extract natural resources in a particular territory) through one of its Peruvian employees, who acquired a “public necessity” decree from the Peruvian government. The project raised concerns about potential environmental impacts and unequal distribution of the benefits among the local Indigenous groups. Strikes and protests against the project took place. To quiet the protests, the Peruvian government revoked Bear Creek’s concession and required it to conduct new rounds of consultations with local communities.
The tribunal held Peru liable because the government had violated its CPFTA obligations by indirectly expropriating Bear Creek’s investment and failing to provide due process of law. The lynchpin of the case was the investor’s obligation to obtain a “Social License” for its investment, meaning that an investor should meet expectations from local communities as part of fulfilling its corporate social responsibilities. Although the term “Social License” does not appear in the text of any international investment treaties, the discussion of this concept in the Bear Creek award demonstrates a salutary development in the law governing relations between investors and local communities. The tribunal divided on the question of who bears responsibility for securing a Social License for large projects like mines, which have great potential to both benefit and harm local communities. The majority concluded that states are obligated to monitor investors’ public outreach to local communities, while the dissenting arbitrator considered Social License to be the sole responsibility of investors.
Bear Creek can shed light on the Lupaka arbitration for two reasons. First, as in Bear Creek, the tribunal will need to decide whether the Government of Peru and its subdivision, the Community of Parán, provided due process of law. Parán’s blockade was illegal under Peruvian law and afforded no due process to Lupaka. According to Lupaka, “Parán’s blockade party were often violent and did not hesitate to fire rifles and threaten Lacsanga’s community members and IMC’s employees.” Moreover, although Lupaka actively sought help from the local police force, the local court, and government officials, none of them provided any assistance to alleviate the blockade. To the extent that Bear Creek serves as a precedent, therefore, the tribunal is likely to find that Peru violated its obligations to Lupaka.
Second, since Lupaka’s case also involves allegations of unequal distribution of benefits among local groups, the Government of Peru will likely raise the issue of Social License again. In Bear Creek, the only dissenting arbitrator, Professor Philippe Sands, agreed with the majority that Peru owed Bear Creek compensation, but would have held that the damages should be halved since Bear Creek did not gain the full support of the local Aymara community. However, the majority held that the notion of “Social License” requires the state to take the leading role in monitoring investors’ interactions with local communities. In the current case, how Lupaka interacted with the government and people of Parán may affect the tribunal’s assessment of damages. Since Lupaka appears to have maintained good relations with other local communities and the mining project is not actually on Parán lands, the tribunal will likely award full damages to Lupaka. This likelihood may increase if the tribunal finds that the Peruvian government had failed to monitor the interaction between Lupaka and the Parán community.
The Benefits of Investor-State Dispute Settlement
International arbitration has benefits not only to investors but also to states, as it often is faster, cheaper and simpler than the main alternative, litigation in the courts of the host country. Arbitrators have higher levels of expertise and are in most cases able to render decisions quicker than traditional courts.
The biggest advantage of investor-state dispute settlement is the independence and neutrality of the proceedings. Before the 1960s, when the current investor-state system was created, investors could not sue states under international law, and their only remedy was through national courts or through claims brought on their behalf by the investor’s own state. The purpose of investor-state arbitration is to provide a fair, neutral, and depoliticized mechanism for resolving international investment disputes. Creating a formal system allows an investor to have its claim heard by an independent and qualified tribunal, which it is not guaranteed in domestic courts. In many jurisdictions, domestic courts are considered to be biased against foreign investors or to lack independence from the government—which would also be the defendant in such proceedings. The independence of the arbitration process is enhanced by hearing cases outside of the host state. Through international arbitration, both parties exercise more control over the process by appointing one arbitrator each, which enhances impartiality. ISDS provides a predictable and orderly process that is not influenced by the host state’s domestic court system or politics.
One might argue that this detachment from host state politics is exactly the problem: ISDS claims involve policy decisions that states should be free to make for their people and within their territory. But states are free to include articles which defend public interest measures while negotiating their investment treaties. For example, CPFTA Article 812(1) allows expropriation, so long as it is “for a public purpose, in accordance with due process of law, in a nondiscriminatory manner and on prompt, adequate and effective compensation.” This is essentially the same as Canadian expropriation law. In any event, investors should be protected from arbitrary deprivations of their rights, such as Lupaka’s loss from Peru’s alleged failure to maintain the rule of law within its territory.
Seeking dispute resolution while investing abroad is never easy. Fortunately, Canadian companies like Lupaka can take advantage of Canada’s expansive free trade and investment treaty network and bring sovereign countries who have committed wrongs against them into arbitration. Foreign investors have the same right against Canada, but this is only fair, and the safeguards provided by ISDS may encourage investment in Canada. Further, there is value in creating a uniform and neutral system for the resolution of cross-border disputes, even if redress is available in local courts. ISDS provides an independent and reliable means to protect the interests of investors and hold host governments accountable.
Although the full record in Lupaka is not available, the decision in Bear Creek suggests that Lupaka deserves compensation and likely would not be able to get it in another forum, given the illegal blockade it suffered and the local and national governments’ indifference to that blockade. Whether Lupaka took adequate steps to obtain a Social License from local groups is a valid question, but likely relevant only to the assessment of damages.
 Lupaka Gold Corp, Request for Arbitration, “Lupaka Submits Request for Arbitration Claim Against the Republic of Peru” (October 29 2020), https://www.lupakagold.com/site/assets/files/5170/2020_10_29_arbitration_files.pdf at para 3.
 Ibid at para 4.
 Lupaka Gold Corp, Request for Arbitration at para 5.
 Ibid at para 6.
 Stephen E Blythe, “The Advantages of Investor-State Arbitration as a Dispute Resolution Mechanism in Bilateral Investment Treaties” (2013) 47:2 Int Lawyer at 274
 Ibid at 274.
 Jonathan Bonnitcha, Lauge N Skovgaard Poulsen, & Michael Waibel, The Political Economy of the Investment Treaty Regime (Oxford: Oxford University Press, 2017).
 “Database of ICSID Member States” (2021), online: ICSID <https://icsid.worldbank.org/about/member-states/database-of-member-states>.
 Free Trade Agreement Between Canada and Peru, online: UNCTAD Investment Policy Hub <https://investmentpolicy.unctad.org/international-investment-agreements/treaties/treaties-with-investment-provisions/3245/canada-peru-fta>.
 Lupaka Gold Corp, Request for Arbitration at para 1. See Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, April 2006, art 36; Agreement Between Canada and The Republic of Peru For the Promotion and Protection of Investments, Canada and The Republic of Peru, November 14 2006 (entered into force June 20 2007), art 824.
 Bear Creek Mining Corporation v Republic of Peru (2017), ARB/14/21, online: ICSID <icsid.worldbank.org/cases/case-database/case-detail?CaseNo=ARB/14/21>.
 Joshua Paine, "Bear Creek Mining Corporation v Republic of Peru: Judging the Social License of Foreign Investments and Applying New Style Investment Treaties" (2018) 33:2 ICSID Rev 340.
 Jean-Michel Marcoux & Andrew Newcombe, "Bear Creek Mining Corporation v Republic of Peru: Two Sides of a ‘Social License’ to Operate" (2018) 33:3 ICSID Rev 653.
 Lupaka Gold Corp, Request for Arbitration at para 4.
 Supra note 13.
 Supra note 13.
 Michael Faure & Wanli Ma, “Investor-State Arbitration: Economic and Empirical Perspectives” (2020) 41:1 Mich J Int Law at 5.
 Ibid at 5.
 Gus Van Harten, “Private authority and transnational governance: the contours of the international system of investor protection” (2005) 12:4 Review of international political economy : RIPE 600–623, p 602 and https://www.nortonrosefulbright.com/en-ca/knowledge/publications/8014c6b7/frequently-asked-questions-about-investor-state-dispute-settlement#section3.
 US, Office of the United States Trade Representative, The Facts on Investor State Dispute Settlement, (March 2014), https://ustr.gov/about-us/policy-offices/press-office/blog/2014/March/Facts-Investor-State%20Dispute-Settlement-Safeguarding-Public-Interest-Protecting-Investors.
 United Nations Conference on Trade and Development, UNCTAD Series on International Investment Policies for Development, Investor-State Disputes: Prevention and Alternatives to Arbitration, 2010, at p 14, https://unctad.org/system/files/official-document/diaeia200911_en.pdf.
 Gabrielle Kaufman-Kohler and Michele Potesta, “Why Investment Arbitration and Not Domestic Courts? The Origins of the Modern Investment Dispute Resolution System, Criticism, and Future Outlook” 2020, EUROYEAR, (SpringerLink) https://link.springer.com/chapter/10.1007/978-3-030-44164-7_2.
 Supra note 25.
 See Expropriation Act, RSC 1985, c E-21.
 See Akhmad Bayhaqi and Howard Mann, “ISDS as an Instrument for Investment Promotion and Facilitation,” APEC Policy Support Unit, Policy Brief No. 28, October 2019.