Dispute Resolution in International Mining Contracts

By James Bremen

International mining companies, contractors, owners and developers probably feel they have enough to worry about when they commence negotiations for the construction and operation of a new mining project, without considering what might happen if the project does not run according to plan. Along with the construction of the mine, thought must also be given to its operation, maintenance and productivity. It is all too easy to pay little attention to the dispute resolution clause during the contract negotiation phase as no one wants to contemplate that the relationship between the mine developer or owner and contractor may turn sour. However, where the process is managed effectively, and careful consideration is given to the drafting, it can be beneficial to all parties concerned, and provide considerable cost-saving benefit in the long term.

A dispute resolution clause in an international mining contract needs to function effectively for the whole project, not just the individual contract in question. For example, where there are likely to be numerous suppliers and contractors from different countries involved in the project it is beneficial if the dispute resolution clauses are drafted to allow consolidation of disputes where necessary.

A well drafted dispute resolution clause in an international mining contract will consider the following issues.


A local court may not have the requisite experience in dealing with disputes of an international nature that relate specifically to the mining sector and this could lead to an unpredictable outcome. The parties ought to consider if they are willing to take this risk by giving local courts jurisdiction under the contracts. Local court procedure in a developing country may be slow or overly bureaucratic and there are often rules placing restraints upon the nationality of advocates in local courts. While international arbitral tribunals and courts in the United States and the United Kingdom may be less open to corruption, there is always a risk in less developed judicial systems, particularly where one of the parties is a local government or state run entity, that the tribunal may favor the local party.

Choice of Law

Where the parties agree to the choice of law of the country where the mine is located, the parties ought to seek local legal advice in respect of any particular issues this may cause. In the case of a mining contract this may be particularly relevant to the enforceability of liquidated damages for both performance and delay. In many Gulf states, for example, the English law position that liquidated damages become unenforceable if they are considered punitive or not a genuine pre estimate of the loss at the time the contract was entered into, does not apply. Instead, principles of “good faith” and fairness are over-riding so any liquidated damages the developer may consider itself entitled to might be reduced by a judge if it considers the amount too high. This position is also relevant in a number of North African countries.

Choice of Forum

Choice of forum is often a decision between arbitration or litigation. Usually an international mining company will prefer international arbitration as it is generally considered more reliable and is frequently quicker than litigation through a local court system.

International companies involved in mining projects will generally choose to opt for arbitration through an internationally recognized arbitration provider such as the ICC or UNCITRAL. These have the benefit of confidentiality, which generally is not the case with litigation and allows companies to protect their international reputations. Additionally and importantly, arbitrations generally allow each party to nominate one arbitrator, with the two nominated arbitrators then agreeing to the third. This provides comfort to firms seeking to ensure that an expert in mining and construction is present on the arbitration panel.

Where a local developer or owner may not be willing to adopt such an approach in terms of international arbitration, many countries now have arbitration bodies which retain some, if not all, of the benefits outlined above. For example the Qatar Chamber of Commerce and Industry provides an arbitration service, although its rules are less developed than that of the international arbitration bodies. Where arbitration is being considered as a dispute resolution mechanism it is important to ensure the relevant parties’ countries are signatories to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards in order that any award can be enforced internationally if necessary.

Alternative Dispute Resolution

It is increasingly common to draft a two tiered dispute resolution mechanism whereby the parties have an opportunity or obligation to at least consider the possibility of an alternative dispute resolution mechanism, prior to entering into arbitration or litigation. Where parties have, in the past, not necessarily recorded such an intention in the contract, instead agreeing at the time a dispute arises to use an alternative forum, King & Spalding encourages its clients to consider drafting an ADR clause into the contract because, where successful, it is invariably cheaper and quicker than a litigation or arbitration and often allows the parties to maintain relationships. This is particularly relevant in the mining sector where projects have a long duration.

Popular forms of ADR include negotiation and expert determination, although most commonly mediation is the form of ADR prescribed in international mining contracts. Often a one day mediation can lead to the settlement of disputes through a round table discussion and the power of this face-to-face process ought not be underestimated.

Performance Bond

In addition to the dispute resolution clause this article considers the forms of security which an owner or developer may wish the contractor to provide and any security a lender may require in the event a project is project financed.

A performance bond will often be required by owners as security that construction will be completed and that the mine will be operational as specified in the contract. In the event the contractor fails to deliver (generally for specified reasons, for example, because it goes insolvent), the owner is entitled to call the bond which will compensate it for the lack of performance. Often the value of a performance bond is linked to the stages of construction. Upon the satisfactory completion of each stage of construction the value of the bond is reduced accordingly. This has the benefit to the contractor of reducing the cost, which can be high, of maintaining the bond with the bank.

Traditionally, owners or developers were happy for contractors to obtain a bond from any bank with an international reputation. However, in the current economic climate it may be that owners look to a number of bonds from different providers to further secure their position either by way of a “confirming” bank or simply by splitting the bonded sum into separate portions. This is likely to make the provision of a bond more expensive for contractors who may try to resist such requests. Developers are also generally requesting that contract miners provide bonds from banks of a particular credit rating and including an obligation that the contractor replace the bond should the bondsman’s rating fall below that level.

Performance bonds can be “on demand” or subject to conditions. An on demand bond is more desirable to a developer/owner as it allows them to receive bond money without the requirement to fulfil any criteria to the bank. A contractor is more likely to want to provide a bond that is subject to the fulfilment of certain conditions such as the developer proving a breach to the bank before the bank allows the bond to be called.

Performance bonds are generally considered an excellent level of security for owners and developers but the cost of providing a bond can be prohibitive for many smaller contractors. When negotiating the bond an additional issue will be the governing law of the bond itself. In Latin American countries for example there are a number of ways in which courts may attempt to restrain a party from calling on a bond which ought to be expressly addressed in the bond itself in order to ensure the bond’s integrity.

Advance Payment Bond

In international mining contracts there are often a large number of long-term lead in items (primarily the mining fleet) which need to be purchased and transported, often to remote areas, which can be very expensive. In addition, personnel accommodation, facilities and transport links may have to be provided prior to construction on the mine commencing. Where this is the case, any advance payment to the main contractors can be exceedingly high. Again, developers may look for security in the form of an advance payment bond in order to protect this initial outlay of capital.

Parent Company Guarantee

Parent Company Guarantees are less expensive for contractors to provide but may provide less comfort to an owner or developer of an international mining project. From the owner or developer’s perspective the important aspect of a Parent Company Guarantee is to ensure it is provided by the ultimate parent of a contractor. The wording of the parent company guarantee ought to be strongly drafted to provide the maximum comfort that the parent will indemnify the owner in the event the subsidiary fails to perform its obligations under the contract. Governing law in Parent Company Guarantees is also critical to ensure their reliability.

Direct Agreements

Lender security is chiefly provided in the form of direct agreements which entitle the lenders to step in and seize control of the project documents in the event the project company fails to fulfill its obligations or goes insolvent. This allows the lenders to endeavor to prevent the project from failing and maximize their prospects of recovering the monies advanced. The contractor will be required to agree to sign the relevant documentation to allow novation of the lender into the position of the project owner.

Lenders often also require that the relevant project documents (for example project mining agreements) have a consistency of governing law (for example English law).

The key to successfully dealing with disputes in international mining agreements is to think about the issues at the drafting stage. Where the parties understand the purpose of the dispute resolution clause and spend time recording the process at the contract negotiation stage it will save time and costs should a dispute ultimately occur.

 Bremen is a partner in the projects and construction department at King & Spalding, a full service, global law firm. The projects and construction team performs both transactional and contentious work and advises on all aspects of international mining projects, including project development, project finance (including Islamic finance), procurement, drafting and negotiating construction documents, contract administration and close out, claims management and dispute resolution. He can be reached at: jbremen@kslaw.com or +44 (0) 7717 341 058.