Q&A: Managing and resolving mining & commodities disputes
October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
FW moderates a discussion on managing and resolving mining & commodities disputes between Dawna Wright at FTI Consulting, Warren Beech at Hogan Lovells, Craig A.B. Ferris at Lawson Lundell LLP, and Cameron Ford at Rio Tinto.
FW: How would you describe the kinds of disputes currently taking place within the mining and commodities sector? Are there any recurring themes?
Wright: The themes in Australia are related to the significant change in the industry over the last couple of years. It is not surprising that the type of disputes are being driven by the commercial realities in the sector. The Australian economy has been dominated by the mining and resources sector boom for the better part of the last decade. However, just as our construction mega-projects are giving way to production, we are experiencing major downturns in commodity prices in many of Australia’s resources such as iron ore, coal, copper, gold and nickel. Miners have been winding down construction and slashing costs. Large, multinational mining companies have put smaller contractors under enormous pressure. Purchasers of commodities find themselves with offtake agreements that are ‘under water’. These pressures give rise to disputes as contracts are increasingly ‘un-commercial’ for one of the parties. Common types of disputes are caused by cancellation of offtake agreements, cancellation of contractor agreements, project cost overruns and impairment write downs.
Ferris: We are currently seeing two recurring themes in mining and commodities disputes. First, on a global scale, there is the growing voice of indigenous or local groups. This has led to new claims being brought in North America for activities normally conducted by subsidiary corporations elsewhere in the world. Notably, the Supreme Court of Canada ruled on 4 September 2015 that a group of Ecuadorian plaintiffs can proceed to ask a Canadian court to determine whether a multibillion dollar Ecuadorian judgment can be enforced against Chevron Canada Limited. The other major theme has been the impact of low commodity prices, which has led to an increase of disputes, and a hardening of positions in those disputes. This has impacted all types of mining and commodities disputes such as, for example, with respect to option agreements, royalty issues and licensing agreements. It has also resulted in those involved in the mining and commodity sections seeking efficient means of dispute resolution.
Beech: The devastating impact on the South African mining industry – which has been hit by tumbling global commodity prices, shrinking demand, significant increases in production costs, work stoppages in various forms and labour unrest – is reflected in aspects such as reliance on commercial force majeure clauses, material adverse governmental provisions, cancellation of commercial contracts, the number of companies going into business rescue, and the general downscaling or closure of operations, resulting in significant job losses. In addition to the commercial disputes that naturally arise out of these processes, there has been a significant response from the regulator, namely the Department of Mineral Resources (DMR), particularly in relation to downscaling and closure of operations. This has resulted in urgent applications to the courts, internal appeals and administrative reviews in the Courts, by the holders of the rights to prospect and mine that have been adversely affected by the actions of the DMR. The current situation that the mining industry finds itself in has resulted in a substantial increase in both ‘commercial’ litigation and ‘regulatory’ litigation. It has also resulted in more careful consideration of commercial agreements, particularly the force majeure, breach, termination and penalty provisions. Disputes involving communities and employees are, understandably, on the increase. These disputes should not, where practically possible, be resolved through the courts or arbitration processes – they are often long-term disputes, and emotions run deep. These disputes require an approach which is based on a proper understanding of the motivation behind the dispute and an acknowledgement of diversity and divergent interests, particularly in the mining and resources sectors. Appropriate communication structures and relationships play a crucial role in these disputes.
Ford: With prices in the mining and commodities sector generally falling, the pendulum has swung to purchasers wishing to escape commitments to purchase volumes set at earlier higher prices. This is a recurring theme and naturally applies where companies are sellers of mining products and commodities and at the same time are purchasers of the materials necessary for production. At any one time, a company can be trying to avoid purchase commitments with its suppliers but holding its buyers to their commitments. Disputes will arise, for example, where buyers do not arrange for letters of credit or other agreed forms of payment, or they do not place orders for the contractual quantities, or they look at quality through a magnifying glass where in the past they may have accepted some departures from specification. Parties are scrutinising their contracts for any legal or commercial reason not to be held to their apparent commitments, with the result that previously workable ‘agreements to agree’ on price or quantity are becoming unenforceable. In contracts that still retain the clauses there can be disputes over whether the present economic climate qualifies as a ‘hardship’ event or ‘material adverse change’, however defined. In rare cases, force majeure will be broadly defined so as to arguably include economic impacts on parties, inevitably leading to discussions over its applicability to the current situation.
FW: Broadly speaking, what particular dispute management and resolution techniques would you suggest are most suitable for this sector? How would you evaluate the benefits of mediation, arbitration and litigation?
Beech: Historically, there has been a strong focus on mediation and alternate dispute resolution methods, as a primary means of resolving disputes. One of the key benefits of mediation was the preservation of the relationship between the parties. This may no longer be a primary consideration, and the move, in commercial disputes, is to arbitration. Meanwhile the clear emphasis, in regulatory disputes, is on the courts because of the quicker turnaround times, associated with urgent applications and interim relief. Where possible, parties are still resorting to arbitration with the primary advantages being a possible preservation of relationships with the hope of medium to long-term recovery and resumption of services, agreement on the identity of the arbitrator, and control over the processes. With the impact being so far reaching, that those disputes which could have been overlooked two to three years ago, or settled amicably at an operational level, now often results in an immediate escalation, which includes dispute resolution, both through the courts and private arbitration. Companies that are in financial distress as a result of, for example, cancellation of contracts, are being placed under pressure, to be seen to be taking action to recover losses and other damages, with the dominant themes being early termination of contracts, penalties and standing time.
Ford: Negotiation remains by far the most common and effective method of resolving these disputes, although naturally some have to be taken further in certain instances. When a downturn in prices is industry-wide and not party-specific, due to bad management or other reasons peculiar to that party, companies understand that almost every player in the industry is affected both on the purchasing and selling side. It is usually in the interest of most parties to negotiate some temporary solution, perhaps in the form of price or volume reduction, or finding some other way of meeting both parties’ expectations and needs in the new climate. If negotiation does not produce an acceptable solution, mediation is by far the next best method of breaking through. Mediation often finds some common ground where negotiation merely between the parties failed. Mediation is designed to explore the parties’ interests rather than their perceived rights and to identify areas where those interests coincide, or where a combination of actions can meet the different interests of the parties. Mediation can also reveal strengths and weaknesses in a party’s case, either to the other side or to the party itself, with the result that one party realises it is in the weaker position and is prepared to compromise more. Mediation can also help a party realise that, no matter how strong their case, they will have little prospect of recovering anything meaningful from the other party if they go to arbitration or litigation. We have seen mediation succeed in seemingly un-resolvable cases and believe it should be seriously considered before commencing proceedings and also after they are commenced. A mediation which does not produce a settlement is not a failed mediation. Like dating, it can take a few mediations before agreement can be reached. Of course, there are situations where formal arbitration or litigation proceedings are necessary and will be the only method to produce the desired result.
Wright: Any forum that avoids the lengthy litigation process will often be beneficial, particularly when the issues at hand are ‘real time’ issues and decisions need to be made quickly. However, the process also needs to be able to deal with the complexity involved in these projects. Arbitration is well suited to a shorter timeframe. However, the shorter timeframe may result in increased uncertainty related to the ‘counterfactual’ scenario, such as the applicable commodity prices. For example, how should the long-term iron ore price be forecast in a period of major price volatility? The advantage of a more protracted litigation process is that more of the future scenario will be known by the time the matter is decided. When the client is fighting to survive, litigation is also an effective deferral tactic, even if it might result in net higher costs of final outcome/settlement. Mediation, adjudication or independent expert determination can all be particularly effective and efficient for dealing with more discreet issues – although still complex – such as cost overruns. Of course, commercial negotiation is often the most efficient and effective way to resolve an issue.
Ferris: Given the jurisdictional issues involved in the mining and commodities sector, with many entities in different locations, arbitration is a very effective dispute resolution technique. It generally resolves disputes more quickly and the procedures can be tailored to the specific dispute, including limiting the disclosure of documents or prehearing examinations of witnesses. In addition, as the parties can choose their arbitrator, you can usually appoint an arbitrator who has expertise that is suited to the particular dispute. The choice of the arbitration rules regime to govern the process is a key element and needs to be carefully considered and agreed upon by the impacted parties. Mediation can be effective but, in our experience, it is usually best used at the outset of the dispute where the mediator can encourage the parties to come to a voluntary resolution of the matter immediately without expending funds on a legal process. Once a dispute resolution process is underway and the parties have invested in it, the benefits of a mediated settlement are reduced and the parties usually benefit more from a binding determination given by an arbitrator or a judge. The court process works if both companies are located in the same jurisdiction or there is a court that can take jurisdiction over both. The main benefit of a court process is that the court is already set up and is organised procedurally to resolve disputes without the parties needing to appoint the judge or choose a procedure. However, a court process is generally slower and can at times be more costly than arbitration. In addition, unlike arbitrations, court proceedings are not held in private and therefore the outcome of the proceedings and documents disclosed will not be kept confidential. As a result of the considerations outlined above, my preference is for arbitration of these types of disputes.
FW: Have there been any recent cases of note? What lessons can the mining and commodities industry learn from their outcomes?
Ferris: The Chevron v. Yaiguaje decision is very important as it established that a Canadian court will hear an application to enforce a foreign judgment against a parent or related company, even though the parent or related company has no real or substantial connection to the jurisdiction that issued the judgment. Other cases have been filed in Canada, though have not yet proceeded to trial, where a claim has been brought against a parent company for the activities of a foreign subsidiary, including Adolfo Garcia v. Tahoe Resources Inc and Araya v. Nevsun Resources Ltd. Both of these cases will be important if they get to trial. The lesson to be taken from these cases is that mining and commodities companies should be prepared to defend the activities of foreign subsidiaries in the courts of their home jurisdiction.
Ford: One case typical of this process was settled before trial, where an iron ore producer was sued by a number of shipping companies for failing to meet the contracted shipping volumes. One claim for $130m was settled for $6.1m with the restructuring of future cargo obligations into different terms, the freight rate being set slightly under the market rate, and a higher incentive payment of an additional 50 percent. The incentive payment included a profit share arrangement where the amount paid would be reduced if future market rates trade above the base rate during the term of the charters. This is a very good example of parties finding solutions which cater to their interests rather than merely insisting on their rights. Indulging interests here led to a long term contract which seems to suit both parties, rather than to a bitter fight in court.
Beech: Arbitrations are, by their nature, private matters, and the parties generally do not agree to disclosure. The arbitrations generally also turn on their facts, and each matter must be dealt with on its merits. Two recent cases that have had a significant impact on the mining industry relate to the disclosure of health and safety and environmental information. The level of comfort, previously held because of confidentiality of commercial and related information, has been eroded by the case of Arcelormittal South Africa v. Vaal Environmental Justice Alliance and Industrial Health Resource Group and Others v. Minister of Labour and Others. These decisions have reconfirmed the right to information which is relevant to health, safety and environment, and the obligations placed on companies to disclose this information. These decisions are likely to make it easier for regulators, and other interested and affected parties, to enforce compliance with the relevant mining laws. The essential lesson is to err on the side of caution and to accept that all relevant information may be disclosable.
FW: What issues would you suggest companies consider when dealing with a dispute as it arises? What early steps can assist the process?
Wright: We always advise companies to ‘arm themselves with information’ in relation to both financial data and an assessment of risk. Why is it that disputes often don’t settle until they approach a trial? Sometimes it’s because not until then has there been a full assessment of exposure – both legal and financial. There is no reason that some of this analysis can’t take place earlier, so that the client can negotiate based on a fully-informed position. Early steps include a pre-dispute assessment of contract compliance to identify cost overruns before they become contentious, and an exposure analysis in relation to potential damages to assess the magnitude of the issue. Contractors also need to consider the impact on their reputation – and share price – of entering into public disputes. There have been examples of contractors’ share price taking a hammering as in the current equity market, investors are looking for reasons ‘not’ to invest. This risk can create a strong incentive to at least start with a commercial negotiation.
Ford: It is important that companies do not merely retreat to their corners and come out fighting. When that happens, parties become entrenched in their position and it becomes too costly personally and financially to compromise at the right time. People involved in the dispute can become emotionally invested in a particular outcome and can be desensitised to adverse facts or to reason and common sense. To prevent this happening it is often useful to distance those intimately involved in the dispute from management of the dispute. Those who were involved can be better as providers of fact and background instead of being the ones making decisions as to how the dispute is handled and whether it is resolved. Disputes should be handled like any other project in the company, with cost-benefit analysis devoid of emotion being carried out as in any other investment decision. This process is helped if those intimately connected to the dispute are not the sole decision makers. Others not so involved will be more objective and can see the dispute from a company-wide or at least division-wide perspective, rather than from the point of view of the instant transaction and the perspective of those who might feel affronted or thwarted by the other party. To the same end, the true facts should be ascertained as quickly as possible from emails and objective bystanders if there are any and, importantly, each party should determine how its interests could be served by alternative means. If minds are directed down this path early and explored within each party and between the parties, resolution can be found much sooner and the cost and distraction of the dispute can be minimised.
Ferris: The first issue we address with companies is making sure they have a dispute. By this I mean make sure you are proceeding on the correct set of facts. Often mining properties and corresponding agreements have changed hands many times, been amended or the properties are located in foreign jurisdictions, and there is a limited understanding of the local law. In addition, you may no longer have access to the people who know the history of the particular issue. This means that companies can get into disputes without knowing the full extent of the legal agreements which apply, or the legal regime. In order to make proper decisions, every effort needs to be made to ensure you are operating under the correct facts before strategic decisions are made. Once you know you have a dispute, then two questions should be addressed. First, is there a business solution or a business reason why you do not want to have this dispute? If not, the next question is whether both parties would agree to some form of settlement process – either by mediation or otherwise – to resolve the matter quickly and efficiently. Those facing a dispute should avoid litigation or arbitration unless they are sure they have facts which support their position and that there is no early solution to the problem.
Beech: Resolution of disputes, whether by way of arbitration or litigation, can carry significant costs and it remains preferable for the mining industry to avoid resolving disputes in this manner. Our experience is that the key to avoiding disputes arising is multi-level communication among the parties. Good communication at an operational level often results in a better understanding of the features which lead to disputes.
FW: What steps can mining and commodities companies take to help prevent disputes from surfacing, particularly when drafting commercial agreements?
Ferris: As a litigation lawyer I approach this question from a different perspective than commercial lawyers. In my role, I see the agreements or situations that have come to form the basis of disputes. The main causes of these disputes lie in poor legal drafting. The commercial agreements either do not address or are ambiguous on the points relevant to the dispute. An example is a case involving an off-the-shelf joint venture agreement for two parties that someone used for a three party joint venture. In addition, clauses that are really ‘agreements to agree’, such as agreeing to ‘industry standard’ NSRs or ‘standard’ operating agreements, are minefields for companies and lead to a great deal of litigation. Legal shorthand, while a quick solution at the outset, can impede or halt the development of successful projects. In my view, the best way to avoid disputes is to make sure the commercial agreements are not put together from standard boilerplate or form agreements because there is rarely a one size fits all agreement. More care at the outset can avoid many of the more common legal disputes.
Beech: It is essential for the parties to have a clear understanding of the parameters or scope of works. Our experience is that the majority of disputes arise from differing viewpoints on what was meant or intended at the outset. This most commonly applies in relation to aspects which could potentially have significant cost implications. For example, if rehabilitation forms part of the services to be delivered, it is essential for a multi-disciplinary team to sign off on what is contemplated, and more importantly, what is required in terms of the relevant environmental approvals. A misunderstanding regarding these aspects could result in additional costs being incurred, disputes with regulators, and penalties, as a result of prohibition notices that are issued. Similarly, for example, with new regulations being promulgated regarding safety equipment to be fitted to trackless mobile machines, unless this is contemplated and addressed, in the commercial agreements, disputes regarding which party will carry the costs of the installation of the safety devices and systems, could be long-lasting and could impact significantly on production and the scope of works. In summary, our view is that all draft agreements should be reviewed by a multi-disciplinary team comprised of legal advisers, technical advisers, financial advisers, operational advisers and environmental specialists, before they are signed off.
Wright: We recommend a risk-based approach to preventing disputes. The major agreements should be reviewed to identify the areas where something is likely to go wrong. Depending on the outcome of the contract risk assessment, the commercial tactics that can help prevent disputes from surfacing include frequent monitoring of costs and payments as compared with the contract requirements, a review of the internal disclosure system looking at how efficiently and effectively issues get escalated, and reviewing forecasting models. Commercial negotiation is often going to be the best way to save a contentious situation from becoming a dispute. We have seen some very innovative behaviour where both counterparties have recognised the potential mutual value destruction from entering into a dispute and have effectively ‘torn up’ the contract and restructured the commercial relationship.
Ford: The problem with contracts, particularly the longer term ones that are typical of this area, is that they are often formed in one part of the cycle when one party has the balance of power, with disputes arising when the cycle turns and the balance shifts to the other party. The result is it is difficult to have clauses in contracts which suit the needs of both parties at all stages of the cycle, since the weaker party in negotiations will not have the power to get what it needs when the cycle turns. Even if it is possible to foresee every possibility in the life of the contract, it may not be possible to negotiate terms to meet those possibilities. The result is that disputes or disagreements will arise, so parties should concentrate in contract negotiations on adding clauses which are not usually contentious but can help resolve disputes when they do arise. The tiered dispute resolution clause is one of these mechanisms, typically being negotiation followed by mediation and then arbitration or litigation. Not only is this process helpful for exploring settlement possibilities, it also gives the aggrieved party the means of showing to the other that they are serious about the dispute without the necessity of commencing formal proceedings. Without a tiered dispute resolution clause, a party is left with the two extremes of either doing nothing or commencing proceedings. If there is no legal or moral compulsion on the other party to negotiate or mediate, they may be content to remain unresponsive in the hope or knowledge that the aggrieved party will not go to the extreme of commencing proceedings. Other mechanisms can also be used in contracts to defuse disputes when they arise, one of them being submission of a dispute to senior counsel for advice either on paper or after very brief oral submissions. Frequently the dispute will be over the interpretation of a particular clause or its application to particular facts. Even if an evaluation and advice by senior counsel is not binding, the process of obtaining, and the fact of having, silk’s advice can make both parties comfortable with the outcome.
FW: How do you see disputes in this sector developing over the coming 12 to 18 months? Are there any flashpoints of conflict in play?
Ford: We expect to see more of these types of disputes for the next 12-18 months while present conditions continue. The flashpoints will occur where companies involved in different parts of their industries are not affected at the same time as other parts. One party seeking relief from its counterpart may find that its counterpart is not under similar pressure and is not inclined to give relief, or conversely that counterpart might be under similar pressure and not able to accede to some form of reduction.
Ferris: Low commodity prices have many in the mining and commodities sector concerned about insolvency issues. In particular, many companies are considering how to protect their rights in the event a partner, optionor or other industry participant enters insolvency. Others in the industry see opportunities arising from insolvency scenarios. We expect this to be an area to watch over the next 12 to 18 months. We also expect to see the continued use of litigation in mining and commodities companies’ home jurisdictions by indigenous or local interest groups. These lawsuits are growing, not receding, and are being brought by experienced class action counsel. We would expect to see more of these types of claims.
Wright: The stress in the sector will continue to cause disputes. The major conflict in play is that the very issue causing disruption and disputes – falling commodity prices – makes it more challenging to resolve them. It is difficult to assess damages over the life of a long-term project when pricing volatility will have a significant impact on the projected cash flows to be realised. The other significant driver of complexity is the convergence of economic, political and financial issues – such as the combined effect of changing demand from China, threatened changes to the taxing of mining profits and volatile commodity price. Forecasting in the mining sector is particularly complex because it involves long term projections with a number of specialised and interdependent variables. When combined with a volatile commodities market, challenges will continue in complying with Australia’s continuous disclosure requirements in relation to assessing impairment. Although generally the domain of the finance team, we advise in-house counsel to be familiar with the process as it influences disclosure requirements.
Beech: The unfortunate reality is, due to the current situation being faced by the mining industry, commercial and regulatory disputes will arise, and it is preferable in our view for these disputes, where possible, to be resolved through processes such as mediation. If this is unsuccessful, parties should then turn to arbitration. It is also an unfortunate consequence of the current situation that parties do not have the resources, either financial or human, to see disputes through, and this may impact on the outcome of disputes going forward. The primary basis of most of the commercial disputes are currently, and are likely to remain, cancellation of contracts, subsequent payments, penalties and damages.
FW: What final piece of advice can you offer to mining and commodities companies on effectively managing their disputes?
Beech: As with most disputes, it is essential to engage competent advisers with an in-depth knowledge of the industry. It is critical, in our view, for there to be a level of trust and honesty in the advice given, to ensure that disputes are not declared, which are unsustainable, whether for economic or substantive reasons, and extremely careful consideration should be given to any apparent disputes before they are declared. The fact remains that what appears to be a principle position in the heat of the moment can turn out to be an extremely costly process.
Ford: Treat disputes as a project with all the usual controls on projects appropriate to the particular dispute. Make sensible concessions at the right time rather than holding onto positions which may be principled but are not commercial. Get those intimately involved in the dispute out of the decision making process and into the fact providing process. And mediate, mediate, mediate.
Wright: Be proactive in managing the risk associated with existing contracts. Go in on the front foot to analyse the data and look for anomalies related to payments being made under the high-risk contracts. Take advantage of ‘right to audit’ clauses written in to existing contracts. Employ a highly experienced owner’s representative team to actively manage the contract and contractors to a successful outcome. Be prepared to act early and commercially to address problems. Consider open book negotiation of issues within contracts and understand the cost/benefit before entering a dispute. Be aware of the financial position of your key contractors. In the current environment, ‘de-risk’ the supply chain by first assessing the risk and exposure to financial distress of contractors. Their exposure to issues may result in exposure for you. A good owner’s representative team can assess the risk and then develop and implement strategic responses.
Ferris: Recently the Canadian Supreme Court has confirmed that good faith is an organising principle of our law of contract. In the case of Bhasin v. Hrynew, the court recognised a duty of honesty in contractual dealing. While not a mining or commodities decision, it does have implications for the sector. The emphasis on good faith means that mining and commodities companies should carefully consider relying on an interpretation of a contract that allows them to act in a way that, while seemingly technically permissible, may take away the benefits the other party to the contract reasonably expected. In short, careful consideration should be given to contractual interpretations that seem to lead to an outcome that may be too good to be true or fortuitous and that harms the other contracting party as there are now greater risks that a court will use the good faith organising principle to interpret the contract in a way that does not recognise the technical fortuitous interpretation. We would also emphasise the importance of building in a proper alternative dispute resolution clause, incorporating mediation and/or arbitration at the outset and, in doing so, carefully considering what types of legal procedures you envision as being sufficient and acceptable for disputes that are likely to arise under the particular agreement.
Dawna Wright is the Australia Leader/Forensic Accounting and Advisory Services at FTI Consulting. She has over 20 years of experience in auditing and forensic accounting. She has lived and worked in Canada, Paris, New York and now resides in Melbourne. Ms Wright has led a wide range of matters as expert witness, consulting expert, expert determiner and investigator. She has been involved in many engagements in the mining and resources industries, including both litigation and arbitration matters. She can be contacted on +61 3 9604 0604 or by email: firstname.lastname@example.org.
Warren Beech is head of the mining sector at Hogan Lovells in Johannesburg. He provides multi-disciplinary legal and related services, primarily to the mining, construction and engineering industries. This includes health and safety, environmental, commercial, litigation, criminal and employment law, as well as related services such as training, auditing and consulting. He consults locally and internationally, and has represented mining and non-mining companies in more than 1800 fatal inquiries and inquests arising out of incidents and accidents. He can be contacted on +27 11 523 6076 or by email: email@example.com.
Craig A.B. Ferris, Q.C. is a partner in the litigation and dispute resolution group at Lawson Lundell LLP. He regularly acts for clients in commercial and business disputes. His particular areas of specialisation include mining disputes, shareholder remedies, and securities and transactional litigation. He has also acted in private arbitrations and in administrative settings including before the British Columbia Securities Commission. Mr Ferris has particular expertise in class actions and acted as lead counsel in several successful defences of major class proceedings. He can be contacted on +1 (604) 631 9197 or by email: firstname.lastname@example.org.
Cameron Ford is corporate counsel with Rio Tinto in Singapore. Previously, he was a disputes resolution partner in a law firm and a barrister at the independent Bar in Australia, head of dispute resolution for four States at National Australia Bank, and acting head of legal for Rio Tinto in Mongolia. He is on the arbitrator panels of SIAC, KLRCA and the Beijing Arbitration Commission. He can be contacted on +65 6679 9187 or by email: email@example.com.
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