The hidden economy of international arbitration: Opportunities for banks and investors in mining and resources companies

It is well known that international arbitration is the primary means for resolving cross-border disputes, and is used by thousands of investors every year – in disputes with each other, or with a host government.  The value of international arbitrations is significant:  US$184 million is the average amount in dispute in an ICC arbitration.

Investors win claims against host governments on average about 60% of the time.  Those claims are for a variety of actions: delays in granting or renewing licenses, additional royalty or tax demands, changes to local production or ownership rules, and loss of access to essential infrastructure.

Two features have made international arbitration a mainstay in the infrastructure and resources sectors, and put companies in a strong position when dealing with their host government and other partners in international projects: (1) International arbitration enables the parties to have disputes determined by neutral arbitrators chosen by them, in an international forum; and (2) the parties may design the procedure of the arbitration, which can reduce costs and time.

But a perhaps less well-known feature provides an added incentive for lenders to seriously consider: international arbitrations and awards are financial investments.  Awards record a debt owed between the parties. Awards are assignable, and can be bought and sold, or borrowed against.  This gives lenders a number of ways to monetise arbitral awards, in some case allowing them to bolster in-country and offshore asset security which may otherwise have been at risk.

The near-universal enforceability of international arbitration awards increases the likelihood of recovery and ensures the award’s commercial value. Awards can be discharged against assets of the host government held around in the world. ICSID Awards are enforceable in over 160 jurisdictions. Arbitrations subject to the New York Convention are enforceable in 172 jurisdictions. Awards are generally enforceable as if they were a judgment of the local court and displace barriers to recovery like sovereign immunity. 

The enforceability of arbitral awards has led to a secondary market in which awards are sold by award-creditors at a discount, to buyers who take on the role of enforcing the full award. 

Banks and other lenders can also utilise awards in other ways.  For example, the possibility of a future award can enhance the security package for the financing of a mine or infrastructure project by including as financing conditions: 

(a) that the borrower have an arbitration agreement with its counterparty or the host State; and
(b) a power for the lender to compel the borrower to commence arbitration in particular circumstances (and a power of attorney to do so in their name if they refuse), 

and by securing the debt against any future award, either as primary security for the debt or alternative security at the election of the lender.  In each case, the secured asset can be structured to pass from the borrower to the lender either as an outright assignment or in conjunction with an elevation clause.  

Lenders would do well to consider including these arrangements in financing agreements for infrastructure and resources projects, particularly in emerging markets. And if the lender does not want to take on the trouble of enforcing an award, the loan documents can account for a discounted sale of an award on the secondary market.