TABLE OF CONTENTS
- I. INTRODUCTION AND SUMMARY OVERVIEW
- II. FACTUAL BACKGROUND
- A. From 1922 to 1997, Peru Created One of the World's Most Polluted Sites: The La Oroya Complex.
- 1. In the 1970s, Peru Expropriated the Decades-Old La Oroya Complex.
- 2. Peru's Mining Sector Operated with Little or No Regulatory Oversight
- B. During the Early 1990s, Peru Was Unable to Privatize Centromin as a Whole because of the La Oroya Complex's Environmental Legacies and Obsolete Condition.
- 1. Peru's Attempt to Auction Centromin to Foreign Investors Failed Because of Potential Investors' Concerns about Environmental Liability and the Costs of Upgrading the Complex.
- 2. Peru Revised Its Privatization "Strategy" Such That Peru Would Sell the Complex but Retain Liability for Environmental Remediation and Third-Party Claims Relating to Environmental Contamination
- 3. Peru Adopted Measures Intended to Bring the Complex into Compliance with New Environmental Standards.
- a. Centromin's Preliminary Environmental Evaluation of the La Oroya Complex Highlighted Significant Environmental Issues
- b. Peru's Independent Environmental Expert Advised that Ten Years Was Not Sufficient to Meet the New Air Quality Standards, Recommended Flexibility in Implementation of the PAMA and Recommended Setting Reasonable Goals 16
- c. The La Oroya PAMA Provided Ten Years to Complete 16 Projects, but Did Not Address Key Issues.
- C. The Renco Consortium Purchased the La Oroya Complex from Centromin on October 23, 1997, with a Guaranty Agreement from Peru for All of Centromin's Contractual Obligations.
- D. As It Learned More about What Really Needed to Be Done, DRP Significantly Expanded Its Efforts, Engaged in Numerous Complementary Projects to Address Public Health Issues, and Focused on Helping the Local Population.
- 1. DRP Expanded Its PAMA Obligations
- 2. DRP Identified Lead Contamination as a Public Health Risk and Engaged in Numerous Activities Outside the Scope of the PAMA to Address It
- 3. DRP Engaged in Numerous Additional Social and Public Health Projects to Help the Community
- E. In 2006, the MEM and DRP Agreed, as Did the MEM's Independent Outside Consultant, that an Extension of Time for DRP to Complete the Sulfuric Acid Plants PAMA Project Was Necessary
- 1. The MEM Granted DRP an Extension to Complete the Sulfuric Acid Plants PAMA Project.
- 2. The MEM's Extension Imposed Onerous Conditions and Significantly Expanded the Cost and Complexity of DRP's PAMA Obligations, While Granting Only an Additional Two Years and Ten Months.
- F. By December 2008, DRP Had Completed All PAMA Projects Except One of the Three Sulfuric Acid Plants, and Had Dramatically Reduced the Complex's Environmental Impacts
- G. In 2009, Peru Treated DRP Unfairly and Inequitably by Granting - and Then Undermining - an Extension of Time to Finish the Sulfuric Acid Plant Project for the Copper Circuit
- 1. The Global Financial Crisis Prevented DRP from Finishing the Copper Circuit Sulfuric Acid Plant Project by the October 2009 Deadline.
- 2. The Peruvian Congress Granted DRP's Force Majeure Request for a 30-Month Extension, and the MEM Thereafter Undermined the Extension
- 3. Peru Launched a Smear Campaign against DRP, Making DRP's Task of Securing Financing Even Harder
- H. Peru Wrongfully Took Control of the Bankruptcy by Asserting a Meritless Credit, Becoming DRP's Largest Creditor.
- I. Peru Expropriated Renco's Investment through the Bankruptcy Process and then Reopened the Complex.
- J. Despite No Evidence of Wrongdoing, Baseless Criminal Charges Were Pursued against Officers of Renco and Doe Run Resources.
- III. THE TRIBUNAL HAS JURISDICTION OVER THIS DISPUTE.
- A. Renco Complied With the Treaty's Requirements to Commence an Arbitration
- B. Renco is an Investor that Made an Investment in Peru
- C. The Tribunal Has Jurisdiction Over Renco's Claims that Peru Has Breached Section A of the Treaty
- IV. LEGAL ARGUMENT
- A. Peru's Mistreatment of DRP In Connection With Extension Requests to Complete the Final PAMA Project, Based on Economic force Majeure, and DRP's Proposed Restructuring Plans, Violated the Treaty's Fair and Equitable Treatment Standard
- 1. The Content of the Fair and Equitable Treatment Standard under Customary International Law.
- a. Customary International Law Has Evolved to Provide for a Heightened Level of Protection Under the Fair and Equitable Treatment Standard
- b. Claimant Does Not Have to Prove Bad Faith in order to Establish a Violation of the Fair and Equitable Treatment Standard Under Customary International Law.
- c. The Current Content of the Fair and Equitable Treatment Standard Under Customary International Law.
- 2. Peru's Mistreatment of DRP In Connection with the Economic Force Majeure Extension Requests and Proposed Restructuring Plans Violated Article 10.5's Guarantees of Fair and Equitable Treatment.
- a. The MEM's Mistreatment of DRP in Connection With the Extension Requests and Proposed Restructuring Plans Was Grossly Unfair and Arbitrary.
- i) Peru's Own Environmental Consultant Recognized that Achieving Compliance with Peru's Existing SO2 Standards Would Take More Than Ten Years.
- ii) DRP's Undertaking to Improve the Environmental Performance of the Complex and the Health of the Local Population Was Radically Transformed During the Period from 1997 to 2009.
- iii) DRP's Actual Investments in Its PAMA Projects Exceeded the Required Investment by Over US$ 200 Million
- iv) The Global Financial Crisis and Steep Decline in World Metals Prices Constituted an "Extraordinary Economic Alteration" Excusing DRP's Inability to Finish the Copper Circuit Sub-Project
- v) Peru Sought to Extract Concessions from DRP as Conditions to Granting the PAMA Extension to Which DRP Was Clearly Entitled under the Economic Force Majeure Clause in the Stock Transfer Agreement.
- vi) By Imposing the Trust Account Requirement inter alia, the MEM Violated Peruvian Law
- vii) Peru's Unfair Treatment of DRP Continued with the MEM's Insistence on an Unreasonably Short Period to Foreclose on DRP's Proposed Asset Guarantees.
- viii) Peru's Unfair Treatment of DRP Continued with Its Refusal to Approve DRP's Restructuring Plans.
- b. The MEM's Mistreatment of DRP in Connection With the Extension Requests and Proposed Restructuring Plans Frustrated Renco's Legitimate Expectations.
- c. The MEM's Mistreatment of DRP in Connection With the Extension Requests and Proposed Restructuring Plans Involved a Complete Lack of Transparency and Candor 102
- d. The MEM's Imposition of the Trust Account Requirement, and Other Erroneous Conditions, Was Not a Proportionate Response.
- e. The MEM's Undermining of the Extension Was Inconsistent with the Actions of Congress and the Technical Commission
- f. Peru Coerced and Harassed Renco and DRP
- B. Peru Expropriated Renco's Investment, Doe Run Peru, in Breach of Article 10.7 of the Treaty
- 1. The Legal Standards for Direct and Indirect Expropriation.
- 2. Peru Expropriated Renco's Investments
- 3. Peru's Expropriation of Renco's Investments Was Unlawful.
- a. Peru's Expropriation of DRP Was Not "For a Public Purpose".
- b. Peru's Expropriation of DRP Was Discriminatory
- c. Peru Has Not Compensated Renco for the Investments It Expropriated
- d. Peru's Expropriation of Doe Run Peru Was Not in Accordance with Due Process of Law and Article 10.5. .119
- C. Peru's Failure to Invalidate the MEM's Bogus Credit Against DRP Constitutes a Denial of Justice, In Breach of Article 10.5 of the Treaty. 120
- 1. The Denial of Justice Standard under International Law
- 2. The Peruvian judiciary's failure to strike down the MEM's bogus credit constitutes a clear denial of justice.
- a. The MEM asserted a bogus credit claim which is patently improper under Peruvian law
- b. Peru's First Instance Constitutional Court and INDECOPI's Bankruptcy Commission both recognized that the MEM credit could not possibly constitute a credit under Peruvian bankruptcy law
- c. The MEM appealed the Bankruptcy Commission's decision to the INDECOPI Chamber No. 1, which recognized the MEM's patently improper credit.
- d. DRP challenged the INDECOPI Chamber No. 1 decision by presenting a demanda contencioso administrativa, which was assigned to a transitory court that was dissolved shortly after it rejected DRP's challenge.
- e. DRP and DRCL appealed the transitory court's decision, but on the scheduled day for oral argument, DRP's lawyers were refused entry to the courthouse and the case was transferred to another court, causing even more delays
- f. DRP and DRCL appealed to the Supreme Court, which dismissed the appeal on baseless technical grounds and never addressed the merits of the appeal.
- V. CONCLUSION
I. INTRODUCTION AND SUMMARY OVERVIEW
1. This investment dispute arises from Respondent Republic of Peru's sale in 1997 of its State-owned smelting and refining complex in La Oroya, Peru (the "La Oroya Complex" or the "Complex") to a consortium led by Claimant The Renco Group, Inc., and Respondent's subsequent mistreatment of Claimant and its investments relating to the Complex when Claimant's locally- incorporated subsidiary Doe Run Peru requested a reasonably--and contractually permitted-- extension of time to complete a final environmental modernization project. Peru's initial denial of that reasonable extension request and its related conduct thereafter constitute breaches of Peru's obligations under the Treaty and resulted in substantial losses for Claimant, including the expropriation of Claimant's investments.
2. When the Republic of Peru declared in late 1991 that it would promote private investment and privatize its mining sector, there was little reaction from the investment community. Peru's first effort to sell its State-owned mining operations in 1994 failed--without prospective investors submitting even a single bid--in large part because of the substantial risk of liability associated with third-party claims from injury resulting from seventy-five years of historical environmental contamination and dilapidated existing infrastructure that continued to pollute. As Peru later reported in an official White Paper, the smelting and refining complex in La Oroya was particularly problematic, because of its visually obvious and well-known environmental problems,2 as depicted in the 1994 NEWSWEEK article quoted above.
3. Undeterred in its desire to sell the La Oroya Complex and other mining operations held by State-owned Empresa Minera del Centro del Peru ("Centromin"), Peru revised its privatization strategy in 1996, with the stated goal that private investors would undertake to modernize the infrastructure at the Complex with projects that would reduce its environmental impact over time pursuant to a Programa de Adecuación y Manejo Ambiental, or Environmental Remediation and Management Program (the "PAMA"). Under the revised privatization strategy, Peru would retain and assume responsibility to remediate the existing environmental contamination and also retain and assume broad liability for claims of third parties arising both before and after the sale.3 Peru advised prospective investors during a written question and answer period conducted prior to the sale that Centromin (and Peru through a guaranty) would accept responsibility for all the contamination and related claims until the end of the period allowed for the investor to modernize the smelting Complex outlined in the PAMA, with limited exceptions.
4. After Peru held a second public auction for the Complex on April 14, 1997, Claimant and its affiliate Doe Run Resources Corporation (the "Renco Consortium") were awarded the right to negotiate a Stock Transfer Agreement to acquire the La Oroya Complex.4 Peru required that the Renco Consortium create a local Peruvian entity as the acquisition vehicle, which it did in the form of Doe Run Peru S.R. Ltda ("Doe Run Peru" or "DRP"). The Renco Consortium negotiated the Stock Transfer Agreement with State-owned Centromin, and the parties executed the Stock Transfer Agreement on October 23, 1997 as well as a Guaranty issued by Peru
2 Exhibit C-104, Government of Peru, White Paper concerning the Fractional Privatization of Centromin, 1999 at 6 (hereinafter "1999 White Paper").
3 Exhibit C-104, 1999 White Paper at 62 (explaining that under the new privatization strategy formulated in 1996, Centromin, as seller would retain responsibility "to remediate the environmental problems accumulated in the past, as well as the claims of third parties in relation to environmental liabilities....").
4 Exhibit C-105, Contract of Stock Transfer between Empresa Minera del Centro del Peru S.A., Doe Run Peru S.R. Ltda., The Doe Run Resources Corporation, and The Renco Group, Inc., October 23, 1997 (hereinafter the "Stock Transfer Agreement" or "STA").
on November 21, 1997,5 by which Peru guaranteed all of Centromin's "representations, securities, guaranties and obligations" under the Stock Transfer Agreement.
5. Peru has not disputed that the PAMA approved by Peru's Ministry of Energy and Mines (the "MEM") prior to DRP's acquisition of the Complex grossly underestimated the scope of work that needed to be done at the Complex, and the time and cost of completing the PAMA projects.6 An outside environmental consultant that Centromin retained in 1996 concluded that completion of the PAMA would take "in excess of the ten year implementation schedule being considered by the Ministry" and that "considerable flexibility in the implementation and application of the new standards will be necessary."7 It was against this backdrop, and after assurances of flexibility by Peru, that the Renco Consortium agreed to enter into the Stock Transfer Agreement.
6. The Government allocated the PAMA projects between DRP (modernization and updating the Complex itself) and Centromin (remediation of existing contamination).8 However, Peru treated Centromin more favorably than DRP by deferring Centromin's remediation obligations far into the future while mistreating DRP, despite the fact that DRP went well above and beyond its obligations under the Stock Transfer Agreement and PAMA.9 At the same time it was working on its PAMA modernization projects, DRP focused intensely on public health issues and on helping the local communities.10 However, when DRP requested a four-year extension in 2006 to finish the sulfuric acid plant project, the MEM gave it only two years and ten months, despite the opinion of its own consultants that more time likely was needed.11 The MEM also unilaterally foisted many additional projects and onerous conditions upon DRP, significantly expanding the complexity (and cost) of the work that DRP was required to perform within the timeframe.12 Despite this, by the end of 2008, DRP had completed all of its PAMA projects except for the sulfuric acid plant project, which was over 50% completed even though it had been totally redesigned in 2006.13 DRP already had spent over US$ 300 million (three times the approximate US$ 107 million estimated by Centromin) on its PAMA projects and additional projects to benefit the community.14
7. At the end of 2008, the global financial crisis severely impacted DRP and its ability to operate, and essentially wiped out the profits of the Cobriza mine which constituted DRP's main source of funding for the PAMA projects. DRP lost its US$ 75 million credit facility and its lenders refused to extend credit without an official statement by the Peruvian Government extending time for DRP to complete the remainder of its final PAMA modernization project (the sulfuric acid plants project). Although the financial crisis constituted an economic force majeure condition, a specifically negotiated term that warranted an extension under the Stock Transfer Agreement, Peru repeatedly denied DRP's extension requests.15 The Peruvian Government also demanded concessions from DRP in exchange for the extension, while refusing to sign a Memorandum of Understanding that the parties had negotiated,16 or provide information to DRP regarding the length of any extension.
8. At the same time these demands were being made by Peru, Government officials were making public statements that DRP would receive only a three-month extension or no extension at all, and President Garcia, seeing DRP's precarious state, passed an Emergency Decree in May 2009 restricting participation of related creditors in bankruptcy proceedings.17 9. In July 2009, after having been forced to shut down the Complex the month prior due to the Government's refusal to grant the extension, DRP submitted a final, comprehensive request for an extension.18 As Dr. Partelpoeg explains, this request "was reasonable and necessary given the project's complexity, particularly at the [La Oroya Complex]; the insufficient completion time Peru had previously provided, as I had noted in 2006; and the global financial crisis and the resulting impact on metal prices."19 The Peruvian Government formed a technical commission to study DRP's request (the "Technical Commission").20 On September 12, 2009, more than six months after DRP's initial request, the Government's Technical Commission recommended that DRP be given a significant extension to obtain financing, restart the Complex and complete the remainder of the sulfuric acid plants project.21 On September 26, 2009, Congress passed a law granting DRP a 30-month extension (ten months to obtain financing and restart the Complex, and twenty months after that to complete the remainder of the final PAMA project - until March 27, 2012).22
10. However, the MEM quickly undermined the extension by issuing a Supreme Decree on October 27, 2009, which imposed onerous regulations, including requiring DRP to channel 100% of its revenues from any source into a trust controlled by the MEM (the "MEM Trust"). As Dr. Partelpoeg explains, these demands "directly interfered with DRP's ability to complete the PAMA projects in the time provided" and were "the kiss of death for DRP's effort to complete its project to modernize the copper circuit and construct the sulfuric acid plant."23 The Supreme Decree made the extension that DRP had received worthless because DRP could not obtain financing to complete the remainder of the final PAMA project if it did not have any cash flow from which to repay its creditors.24 Finally, less than two months before DRP was to have obtained financing and restarted the Complex pursuant to the extension that the MEM undermined, the MEM issued an amended decree reducing the 100% trust requirement to 20%.25 However, this was too little too late, because it was not possible for DRP to obtain financing and restart the Complex in less than two months.
11. After DRP was forced into bankruptcy due to the Peruvian Government's actions in 2010, Peru continued its campaign against DRP. The MEM improperly injected itself into the bankruptcy proceedings by asserting a bogus claim of US$ 163 million (the "MEM Credit") alleging that US$ 163 million would be required to finish the final sulfuric acid plant, and that this amount was a bankruptcy "credit" running from DRP to the MEM.26
12. Using the bogus MEM Credit, the MEM ensured that the committee of creditors in the bankruptcy, largely comprised of other governmental entities (SUNAT and OSINERGMIN) and mining companies, traders and suppliers beholden to MEM for their continued operations, rejected DRP's restructuring plans, even though the plans provided for US$ 200 million in financing, payment of creditors, completion of the final PAMA project, and the ultimate survival of DRP.27 In opposing DRP's plans of restructuring, the MEM steadfastly refused to permit DRP to operate the Complex while completing the final PAMA project, and demanded that DRP comply with all current environmental regulations, including the 80 µg/m3 SO2 standard (one of the lowest in the world) on the day that DRP restarted operations.28
13. The MEM's demands were inconsistent with (i) the letter and spirit of the original PAMA, (ii) the terms and context of the Stock Transfer Agreement and Guaranty, which included an agreement that DRP would be operating the Complex while completing its PAMA projects, and that by the end of the PAMA period the Complex would be in compliance with the environmental standards in place at the time the Stock Transfer Agreement was executed in 1997 (and that DRP would be given additional time like all other companies to reach current standards to the extent they were different), and (iii) the 2006 and 2009 PAMA extensions.
14. Peru's arbitrary and unfair treatment of DRP in connection with its extension requests and its abusive use of the patently improper MEM Credit in the DRP bankruptcy proceedings resulted in substantial losses, including the expropriation of Claimant's investments, and constitutes multiple violations of the Treaty.
327. For the reasons set forth herein, Claimant requests an award, inter alia, granting it the following relief:
- A declaration that Peru has violated the fair and equitable treatment standard under Article 10.5 of the Treaty, as a result of (i) Peru's unwarranted delay in granting, and subsequent undermining of, DRP's extension of time to finish its final PAMA project; and (ii) Peru's mistreatment of Claimant in connection with DRP's restructuring plans.
- A declaration that Peru has violated Article 10.7 of the Treaty by unlawfully expropriating Renco's investments.
- A declaration that Peru has violated Article 10.5 of the Treaty due to its failure to invalidate the MEM's patently improper US$ 163 million credit against DRP, which constitutes a denial of justice.
- All costs of this proceeding, including Claimant's attorneys' fees, expert fees, and expenses.
- Pursuant to section 2 of Procedural Order No. 3 dated September 17, 2020, Claimant expressly reserves its right until the damages phase of this proceeding to seek an award of compensation for any and all damages it has suffered and will suffer, for moral damages arising from harm to Claimant's reputation resulting from Peru's unlawful acts, an award of pre-and-post-award interest until the date of Peru's final satisfaction of the award, compounded quarterly, and any other form of recoverable damages or relief to be developed and quantified in the course of the damages phase.
Dated: New York, New York
January 25, 2021
KING & SPALDING LLP