The Role of Experts in Mining Arbitration

Introduction

Commercial and treaty arbitrations relating to mining projects arise frequently due to a complex set of factors including environmental issues, social licence issues, political issues, resource nationalism and economic issues. Given the complexity and interplay of these various issues and the large value of the disputes, experts in many disciplines are typically required to provide opinion evidence in mining arbitrations to assist the arbitrator’s decision on jurisdiction, liability and economic damages.

In this chapter, we discuss the role of experts in arbitration generally, and within mining arbitrations more specifically. This includes a discussion of the types of expert disciplines that are typically required in mining arbitrations and the types of issues they are asked to address, with examples from recent mining arbitration awards. We also discuss how arbitral tribunals use expert evidence in mining arbitrations based on our review of a number of recent awards in mining arbitration cases.

The role of experts in arbitration

Expert witnesses play an important role in mining arbitrations by providing opinions on technical matters within their areas of expertise to assist the tribunal to reach a fair and informed decision.

Expert witness opinions can be used in the following:

• the jurisdiction phase: for example, a legal expert can provide an opinion on the interpretation of local mining laws to help assess whether the terms of the treaty would be applicable in the particular circumstances, or a damages expert can assess whether the value of an asset became substantially worthless before or after the date that the relevant investment treaty became effective;
• the merits phase: for example, environmental experts can assess whether there were legitimate environmental concerns that justified the respondent’s decision to shut down a mineral project; and
• the damages phase: for example, damages experts, relying upon evidence from technical mining experts, can quantify the loss suffered by the claimant due to the alleged wrongful acts of the respondent.

The most common type of appointment for experts in international arbitration is as party-appointed experts.^[2] When acting as a party-appointed expert, it is imperative that the expert is independent and objective and understands that his or her role is not to try and ‘win’ the case for his or her client. Rather, the role of an independent expert is to communicate his or her findings and opinions on complex technical concepts in lay terms, to assist the tribunal with its analysis of these issues.

For example, according to the Chartered Institute of Arbitrators, ‘[a]n expert’s opinion shall be impartial, objective, unbiased and uninfluenced by the pressures of the dispute resolution process or by any Party’, and ‘[a]n expert’s duty, in giving evidence in the Arbitration, is to assist the Arbitral Tribunal to decide the issues in respect of which the evidence is adduced’.^[3] Similarly, according to the International Bar Association Rules on the Taking of Evidence in International Arbitration, a report produced by a party-appointed expert must include a ‘statement of his or her independence from the Parties, their legal advisors and the Arbitral Tribunal’.^[4]

Issues surrounding the independence of expert witnesses arise often in mining disputes. For example, in Tethyan Copper v. Pakistan, the respondent questioned the independence of one of the claimant’s expert witness due to his previous involvement with the subject mineral property prior to the arbitration. The tribunal found that based on the specific circumstances, the expert’s prior involvement with the project would not taint his ability to give an independent opinion on the quality and reasonability of the feasibility study that was previously prepared for the mineral project.^[5] In the same case, an issue was raised regarding the independence of the damages expert appointed by the claimant, due to his prior relationship with one of the arbitrators on an unrelated matter. Ultimately, the other two members of the tribunal found that the prior relationship between the damages expert and the third member of the tribunal did not present an independence issue in this case.^[6]

In addition to being party-appointed, an expert witness can also be jointly appointed by both parties, appointed by the tribunal, appointed to the tribunal as an arbitrator or retained as a non-independent consulting expert by one of the parties. A non-independent consulting expert is essentially an extension of the party itself and therefore could not be called upon to present expert evidence at the arbitration hearing. However, consulting experts can be useful to ensure that unsupported or unreasonable claims are not submitted by the party in the first place, and to ensure that technical details put forward by the independent experts are not misrepresented in the parties’ pleadings.^[7]

A key requirement of expert evidence is for the expert to ensure that he or she only provides an opinion on issues that are within his or her area of expertise.^[8] This is particularly important in mining disputes given the multifaceted nature and complexity of a mining project. For example, a financial expert should not provide an expert opinion on the geology of a mine and an environmental expert should not provide an expert opinion on the appropriate discount rate to use to calculate the net present value of a mineral project. In Churchill v. Indonesia, the tribunal noted that ‘[w]hen assessing the weight of expert evidence, the Tribunal also takes into consideration the knowledge and experience of each expert’.^[9] In Quiborax v. Bolivia, the tribunal noted ‘[t]he Tribunal finds it difficult to rely on evidence from a financial expert to assess a geological fact, such as the existence and extent of presence of a mineral’.^[10]

Generally, there are three main audiences of an expert report: the tribunal, the parties and their respective counsel, and the opposing experts. Therefore, the expert must present his or her opinion in a clear and sufficiently detailed manner that would allow readers from these three audiences, with varying levels of technical background, to follow his or her logic and replicate the analysis. For example, technical mining terms such as ‘ore reserves’, ‘mineral resources’ and ‘cut-off grade’ should be clearly defined and explained in lay terms in the expert report to ensure that all readers will understand the report. Further, authoritative source documents should be cited for all facts and figures contained within the expert report and accompanying schedules.^[11]

In our experience, it is also becoming increasingly common for experts to produce their financial models in native Excel format along with their reports, to make it easier for the tribunal (and the opposing expert) to follow his or her detailed calculations. When an Excel model is produced, it is important to include appropriate referencing for the source of any hardcoded^[12] figures contained within the financial model.

In cases involving multiple experts from different disciplines, it is important for each expert to understand which other expert or experts are relying upon their opinions. For example, the ‘life of mine’ model that is produced in a technical mining expert’s report is often relied upon as an input to a discounted cash flow (DCF) analysis that is presented within a damages expert’s report. Thus, these experts must coordinate and work together to ensure their reports are consistent and properly cross-referenced.

The experts retained by the opposing parties on related issues will often have the opportunity to meet and discuss the differences between their reports prior to the arbitration hearing. In these cases, the experts typically submit a joint expert report to the tribunal in which they summarise the key areas of agreement and disagreement between their reports, and briefly explain their respective reasons for why they disagree on these issues. In our experience, joint expert meetings can be very constructive and can result in the experts reaching agreement on certain aspects of their reports that they had previously disagreed upon. Further, the production of a joint report helps to identify and rank the remaining areas of differences by level of importance, which allows the tribunal and counsel to conduct the arbitration hearing more efficiently.^[13] The ability to prepare a joint expert report is especially helpful in mining disputes due to the various technical issues that arise in these types of cases.

Expert roles by discipline

The types of experts typically required in mining arbitrations follow the types of issues that give rise to these disputes, including legal, environmental, technical, social, economic and political issues. We have separated our discussion on the types of expert roles in mining disputes into the following three groups: legal experts, technical experts and financial experts.

Legal experts

Each jurisdiction has its own specific laws and a mineral code that governs the mineral rights for a given mineral project. Because there can be different interpretations of these laws, legal experts are often required to give evidence to assist the tribunal with these issues.

Legal experts may also be retained to provide interpretations and opinions with respect to international law and investment treaties. They are often practising lawyers or law professors that work in the jurisdiction in which the mine is located and are thereby well versed in the local laws and customs that are relevant to the dispute. Their expertise may be relied upon to address issues that relate to jurisdiction, liability or damages.

• In Tethyan Copper v. Pakistan, a legal expert provided evidence on damages issues including the burden of proof for the existence of damages, the standard of proof, the standard of compensation, the applicability of case law on damages, appropriate damages approaches and valuation methods.^[14]
• In Bilcon v. Canada, a legal expert provided an opinion on the governmental decision-making process and whether a government had a reasonable basis for refusing the approval of a project without evidence of significant adverse environmental effects.^[15]
• In Anglo v. Venezuela, legal experts opined on whether certain assets reverted to the government upon the expiry of a mining licence, the legal interpretation of the term ‘mining activities’, the notion of utilisation and whether an asset is ‘integral to the concession from a legal point of view’.^[16]
• In Cortec v. Kenya, legal experts provided evidence on Kenyan law with respect to the granting of prospecting rights, the approach a mining commissioner should have taken based on the prevailing laws and the legal significance of non-compliance on the mining commissioner’s powers.^[17]
• In Gold Reserve v. Venezuela, legal experts provided opinions as to whether a concessionaire has an automatic legal right to the extension of its mining interest under the law, among other issues.^[18]

Technical experts

Technical experts address specific technical disciplines in mining or other disciplines in which issues may arise in a mining dispute. Technical experts typically have deep hands-on experience in their field and as a result may not have experience providing expert testimony in disputes (although there are also many that do). Thus, they may require assistance with the arbitration process, the rules of evidence and with preparing their reports and testifying at the hearing.

Disciplines in which a technical expert may be required, and issues they may address in a mining dispute, include the following:

• geology: mineral resource estimation and classification, assessment of technical studies against international mineral reporting standards and determining the stage or status of the project at given points in time;
• mineral engineering: assessment of mine design, mine production plans, mine development, construction plans, capital and operating cost estimation, and scheduling;
• metallurgy/processing: assessment of metallurgical tests, properties of the ore, processing plant design and performance and resulting metal recovery rates, and concentrate grades;
• environmental experts: assessing environmental studies, environmental best practices and environmental impact of mining activities on water, soil and air;
• medical experts: assessing the impacts of mining activities on human health;
• social licence: assessment of social programmes, community consultation, and documenting and assessing social issues;
• infrastructure: assessment of available infrastructure, and technical and economic feasibility of rail, port, roads, power, water and housing;
• logistics: issues regarding transportation from mine to processing site and to international markets;
• hydrogeology: issues relating to water supply (i.e., sufficiency or excess);
• equipment: issues relating to mining equipment availability, efficiency, failure and costs;
• human resources: hiring practices, availability of skilled labour and labour costs; and
• marketing: primary markets, penalty elements, offtakes and royalties.

Some of the key issues that are often addressed by mining experts with respect to economic damages relate to the preparation and critical analysis of the mineral project’s life of mine plan, which would typically include:

• reviewing available technical mining reports and the data upon which they are based, and providing comments and opinions about the volume, grade, classification/level of certainty of the mineral resource under international mineral resource reporting standards (i.e., proven reserves, probable reserves, measured, indicated or inferred resources) and any exploration potential. Although technical studies will often have been conducted by the mining company (or predecessor companies), these technical studies need to be reviewed given the passage of time, changing circumstances with the physical mine or simply as a due diligence step to ensure the technical studies prepared in the past meet the appropriate standards for the assessment of mining properties at the relevant date of the damages analysis;
• determining the capital and operating costs required to explore, prepare technical reports (i.e., scoping, pre-feasibility or feasibility studies) and construct and operate the mine;
• preparing the schedule or timing of the exploitation of the resources on an annual basis; and
• determining the mine’s rehabilitation and closure costs.

Mining experts that opine on mineral reserves and resources in an arbitration should be ‘qualified persons’ or ‘competent persons’ as defined under the international mineral reporting standards prepared by the Committee for Mineral Reserves International Reporting Standards (CRIRSCO),^[19] which are adopted into member organisations’ codes in many of the top mining jurisdictions globally, such as the Canadian Institute of Mining (the CIM Code), the South African Code for Report of Exploration Results, Mineral Resources and Mineral Reserves (the SAMREC Code) and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). These mineral codes must be followed by publicly traded mining companies listed in these jurisdictions.

For example, the JORC Code is a mandatory professional code of practice that sets minimum standards for the public reporting of mineral exploration results, mineral resources and mineral reserves for listing companies in Australia and New Zealand.^[20] JORC reports must be prepared by a competent person, a mineral industry professional who is a member or fellow of the Australasian Institute of Mining and Metallurgy or of the Australian Institute of Geoscientists, with a minimum of five years’ relevant experience in the style of mineralisation or type of deposit under consideration.^[21]

Some examples of how technical experts have been used in recent international arbitration cases include the following.

• In Cortec v. Kenya, the respondent’s mining expert provided an opinion on whether a feasibility study that had been prepared for the relevant mine was prepared in accordance with standard industry practice.^[22]
• In Quiborax v. Bolivia, the claimant’s mining expert provided an opinion on the amount of reserves and resources at the relevant mineral property and the expected length of the remaining mine life.^[23]
• In Rusoro v. Venezuela, the claimant’s mining expert provided an opinion on whether the claimant’s deviation from the previously prepared technical report was common in the mining industry.^[24]
• In Bear Creek v. Peru, the claimant’s mining expert prepared a life of mine model that was relied upon by the damages experts as an input to their DCF valuation.^[25]

Other areas of technical expertise that are frequently required to address important issues on liability and damages are experts in environmental issues and studies, and experts in social programmes for social licence issues.

Environmental experts may provide expert evidence on whether the development of a mineral project has been conducted in accordance with the relevant environmental standards. For example, in Crystallex v. Venezuela, both parties relied on reports prepared by environmental experts that addressed issues such as whether the claimant addressed potential flood risks in and around the proposed mine facilities, whether its environmental impact study (EIS) was inconsistent with its other mine plans and whether its biodiversity ‘baseline and impact’ studies conformed with international standards. The evidence provided by the environmental experts was a key consideration as to whether the respondent was legally justified in its decision to deny providing a mining permit to the claimant.^[26]

In Tethyan v. Pakistan, the respondent’s social licence expert provided opinions on the sufficiency of the claimant’s social programme and its EIS, noting that ‘[t]he information on baseline social conditions is completely inadequate’. The tribunal in this case was not convinced and concluded it had ‘[n]o basis to assume that a lender would have considered the cost that Claimant contemplated to spend on the community programs it had described insufficient’.^[27]

Financial experts

Financial experts come from many different backgrounds, including chartered professional accountants, chartered business valuators, chartered financial analysts, MBAs and economists. These experts will generally belong to professional organisations with codes of ethics and practice standards they must comply with.

Financial experts can address issues that relate to jurisdiction, liability or damages issues (or all three). For example, in South American Silver v. Bolivia, the damages expert’s opinions on the impact of the alleged breaches on the investment were also considered by the tribunal in its considerations for jurisdiction.^[28]

Valuation and damages experts are commonly retained in mining arbitrations to provide opinions on the economic damages sustained by a claimant, but many other types of financial experts may also be required in mining arbitrations, including the following:

• accounting experts: accounting standards, auditing and best practices;
• forensic accounting experts: forensic accounting investigations, fraud and asset tracing;
• financing experts/investment bankers: assessing whether or not a project was financeable at a given point in time, financing process, timeline and terms of financing;
• investment analysts: investment analyst procedures, independence, valuation approaches used and conclusions for a given asset;
• commodity price forecasting experts: forecasting methodologies, data sources and accuracy; and
• tax experts: corporate tax liabilities in different jurisdictions, tax ‘gross up’ elements and issues and withholding taxes.

Valuation and damages experts are often ‘professional experts’ in that their practice primarily focuses on providing expert witness services in disputes. Thus, in addition to having experience in the areas of valuation and the quantification of economic damages, they also have experience testifying in arbitrations and litigation and are familiar with the legal process. Given their experience as expert witnesses, these experts may also take on the role of coordinating the work of other technical experts on an engagement in terms of the scope, format and presentation of the work (but not the opinions themselves).

Valuation and damages experts will review the case documents to understand the evidence and both parties’ legal theories and, based on their review, will provide an opinion on the appropriate damages framework. The objective of a damages analysis in a mining arbitration (like any arbitration) is to determine the amount of money that will restore the claimant to the financial position that it would have occupied absent the alleged wrongful actions of the respondent. Damages may include the value of the entire mineral project (in the case of an expropriation), a reduction or impairment in the value of a mineral asset, a loss of past or future profits, or both (in the case of a breach of contract), incremental costs incurred due to a wrongful action, and excessive royalties or taxes incurred, among other issues.

As noted above, in many investor–state cases, a valuation of a mineral asset is required as part of the damages analysis. Because the valuation of mineral projects is a specialist area of valuation, it must be carried out by appropriately qualified individuals. In addition to having training and experience in general valuation principles and practices, a mineral property valuator must understand the mining industry and have experience with the valuation of mineral projects.

For example, the Canadian Institute of Mining Special Committee on Valuation of Mineral Properties defines a ‘qualified valuator’ as someone who:

(a) is a professional with demonstrated extensive experience in the Valuation of Mineral Properties, (b) has experience relevant to the subject Mineral Property or has relied on a Current Technical Report on the subject Mineral Property by a Qualified Person, and (c) is regulated by or is a member in good standing of a Professional Association or a Self-Regulatory Professional Organization.^[29]

Where a valuation of a mineral asset is required in a mining arbitration, in addition to international valuation standards and guidelines, such as those of the International Valuation Standards Counsel (IVSC), and any guidelines relevant to their professional designation, the valuation expert should refer to, and be guided by, international mineral valuation standards.

How tribunals use expert evidence in mining arbitrations

Based on our review of a number of recent mining arbitrations, tribunals appreciate the expert evidence provided to assist with their deliberations.

• In Gold Reserve v. Venezuela, the tribunal ‘[f]ound the oral evidence provided at the hearing and the Parties’ post-hearing briefs useful in distilling the key areas of difference between experts’.^[30]
• In Pac Rim v. El Salvador, the tribunal found both experts in Salvadoran law were ‘impressive witnesses’ and noted, with respect to the seven expert witnesses that gave expert evidence on legal interpretation, that ‘[t]he Tribunal is deeply grateful for the scholarship and industry of all these expert witnesses’.^[31]
• In Bilcon v. Canada, the tribunal considered the expert positions on pre-award interest provided them with ‘helpful guidance’.^[32]

Tribunals carefully consider each expert’s opinions and determine whether they find it convincing, based on the available evidence. In certain cases, they have found one expert’s evidence to be more convincing; for example, in the following cases.

• In Gold Reserve v. Venezuela, the tribunal found that ‘[w]hile all experts were well qualified on the issues at hand, the Tribunal found . . . [the experts for the claimant] to be more convincing on the mine plan issues. Respondent’s experts, as might be expected, challenged certain aspects . . . but . . . some of these challenges were formulated in a general way without providing any supporting analysis as to the specific effect of the alleged impact on the overall calculation’.^[33]
• In Tethyan Copper v. Pakistan, the tribunal considered the damages and legal experts’ evidence on the damages approach and relied on the claimant’s expert for the appropriate valuation methodology and damages framework.^[34]
• In Churchill v. Indonesia, the tribunal weighed the evidence from opposing experts on document authenticity and forgery and preferred the evidence of the respondent’s expert.^[35]

With respect to damages, tribunals may also accept portions of an expert’s analysis but make adjustments to arrive at their damages award.

• In Crystallex v. Venezuela, the tribunal took the average of two figures derived from the claimant’s expert’s analysis and made certain adjustments to the conclusions of the claimant’s damages expert.^[36]
• In Gold Reserve v. Venezuela, the tribunal also found it appropriate to ‘[m]ake certain adjustments to the DCF valuation to account for some of the no-layback specific valuation issues’. As a result, the tribunal made adjustments that reduced the claimant’s expert’s DCF calculation of US$1.3 billion to an award of US$700 million.^[37]

However, in Khan Resources v. Mongolia, the tribunal did not adopt any of the methodologies presented by the parties’ damages experts, and rather proceeded to prepare its own calculation of damages based on offers that had been made to acquire an ownership interest in the project during the relevant period.^[38] Similarly, in Copper Mesa v. Ecuador, the tribunal decided not to accept any of the several valuation methods advanced by the parties’ experts and selected the claimant’s alternative damages method of ‘proven expenditure’.^[39]

In some cases, tribunals have also found that certain expert opinions were not convincing.

• In Tethyan Copper v. Pakistan, the tribunal rejected the damages opinion of the respondent’s damages expert as it found that a negative valuation for the asset in that case was not reasonable as ‘[t]he tribunal also considered it unlikely that the claimant would have proceeded with the venture if it had become uneconomic’.^[40]
• The tribunal in Gold Reserve v. Venezuela similarly found that the respondent’s expert’s negative valuation conclusion was not convincing.^[41]
• In Crystallex, the tribunal did not accept one of the claimant’s expert’s valuation approaches as it considered it ‘[w]as based on too “aggressive” and unrealistic assumptions which find little, if any, reflection in the Claimant’s own contemporaneous mining studies’.^[42]

Finally, as part of its role to assist the tribunal, the independent damages expert should consider providing alternative damages calculations for the tribunal to consider based on different potential legal or factual findings, scenarios or approaches. For example, in Tethyan Copper v. Pakistan, the respondent’s expert did not provide its own DCF calculation, therefore the tribunal only had the claimant’s expert’s figure to consider for its damages award.^[43]

Conclusion

Expert evidence is a crucial component of the mining arbitration process, which assists the parties and tribunals in understanding the complex issues that arise across many disciplines in mining disputes. This includes technical mining issues involving mineral resources and mine plans, legal issues, environmental issues, social issues and economic issues. Based on our review of recent mining awards, tribunals clearly appreciate and carefully weigh the expert evidence presented to them in mining arbitrations to determine what reliance, if any, they will place upon this evidence in their decisions. However, expert evidence that is not well supported, is not found to be convincing or that does not address the specific legal or factual alternative that the tribunal determines to be appropriate, will likely not impact the decision.

Footnotes