Renco Group Inc., a U.S. holding firm that owns a smelting complex in Peru, yesterday (April 7) commenced arbitration against the Peruvian government in the first ever investor-state case under the U.S.-Peru free trade agreement, according to an informed source.
Renco until now waited until factors played out that could affect how it argues the case, for which it filed a notice of intent to arbitrate in December 2010, the source said.
Those factors included DRP’s bankruptcy proceedings in Peru through a body known as INDECOPI, which could lead to the government of Peru taking over DRP if the company cannot secure new funds. The Peruvian government is seeking to prove that it is DRP’s top creditor, says Renco, which alleges that Peru’s claims are not legitimate.
These factors may change the way in which Renco handles the investor-state litigation, according to the source. He said that while relevant for parts of Renco’s legal claims, neither factor affects a third aspect of the case, which relates to Peru’s refusal to shield DRP and Renco from certain liability lawsuits.
According to the December notice, the company is seeking at least $800 million in damages for what it alleges are Peruvian government violations of the FTA requirement to extend “fair and equitable treatment” for foreign investors and live up to the terms for “expropriation” of assets.
Renco has asked the State Department and Treasury Department to intervene on its behalf in this dispute, according to a March 31 letter signed by four advocacy groups that urges the secretaries of those departments not to do so.
“We are writing to encourage you not to support Renco in this matter,” the advocacy groups said in a letter to Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner. The letter was signed by the Interamerican Association for Environmental Defense, the Peruvian Society for Environmental Law, Earthjustice, and Public Citizen.
“Many of the actions underlying the dispute are based on legitimate efforts of Peru to enforce environmental protection obligations against a company that has failed to uphold its commitment to complete environmental requirements,” they wrote.
As part of its 1997 agreement to purchase the smelting complex in La Oroya, Peru, DRP agreed to take part in an environmental rehabilitation program around La Oroya. The first prong of Renco’s arbitration claim is that it has been subject to unfair treatment under this rehabilitation program, known by the Spanish acronym PAMA.
The firm argues that the Peruvian government placed extra responsibilities on DRP under the rehabilitation program that were not foreseen in the original purchase agreement. In response, DRP said it requested extensions to fulfill PAMA’s mandates, but the Peruvian government refused to grant a third deadline extension that would have allowed it to complete a sulfuric acid plant.
According to Renco, this unfair treatment violates Article 10.5 of the Peru FTA, which states that each party shall provide “fair and equitable treatment” to investments of foreign companies.
Oxfam and the Peruvian civil society organization CooperAccion charge that the company has not been treated unfairly, and argue that it has dragged its feet in taking certain actions to protect the environment. They also claim that levels of contamination around the complex have in fact gotten worse since DRP took it over in 1997.
The letter sent to Clinton and Geithner also challenged Renco’s claim.
“The truth of the matter is that the Government of Peru took unprecedented steps, granting an extension not only once, but twice,” it said. “No other mining or smelting facility in Peru was accorded an extension to complete its PAMA requirements.”
This contradicts a second legal argument Renco is making: that the Peruvian government has treated DRP more harshly than Activos Mineros (formerly Centromin), a Peruvian company and the former owner of the complex. Activos Mineros retained some rehabilitation responsibilities under the PAMA even after it sold the complex to DRP in 1997.
Renco argues that while it went through extensive processes to request extensions, it was granted only one extension, despite being burdened with additional cleanup projects and subjected to daily inspections.
Meanwhile, Activos Mineros was granted a PAMA extension easily in 2000 and with little oversight, and did a poor job of securing an arsenic trioxide deposit, which to this day continues to leak a substantial amount of the toxic substance into a nearby river, the U.S. firm says.
According to Renco, this discriminatory treatment violates Article 10.3 of the Peru FTA, which contains language stating that each party shall accord to investors of the other party “treatment no less favorable than that it accords, in like circumstances, to its own investors.”
The third prong of Renco’s claim relates to the fact that DRP has lost financing for its operations, which has forced it to enter bankruptcy proceedings in Peru. Without financing, it cannot not pay its creditors. DRP is working to reach a repayment deal by securing new financing, but those talks are still ongoing.
According to Renco, the Peruvian government is trying to become the company’s top creditor in the interim by claiming that DRP owes it money due to the fact that DRP has not completed PAMA’s mandates. Now that DRP is in bankruptcy proceedings, the government could take it over if it becomes the top creditor, Renco alleges.
Renco argues it never agreed to pay Peru in the event of non-completion. If Peru were to seek to expropriate the facility, this would violate Article 10.7 of the FTA, it argues.
That article states that neither the United States nor Peru “may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization,” with certain exceptions.
Those include expropriation for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate and effective compensation; or in accordance with due process of law.
If DRP obtains financing and emerges from bankruptcy proceedings, that could render some aspects of its legal challenge unnecessary. However, this would do nothing to affect the final part of its case, which is why Renco is likely to proceed with arbitration no matter how the other factors play out, the informed source said.
The final part of Renco’s case relates to Peru’s refusal to shield DRP and Renco from lawsuits related to the environmental contamination caused by its metallurgical facility.
According to Renco, the Peruvian government and Activos Mineros “accepted and assumed liability for any and all claims that third parties might bring” when DRP purchased the facility. But when Peruvian children from La Oroya filed a personal injury lawsuit in 2007, the Peruvian government did not intervene (see box).
Renco claims that the refusal by Peru to accept liability amounts to a violation of Article 10.4 of the Peru FTA. That article obligates each FTA party to accord to investors and investments of the other FTA party “treatment no less favorable” than it accords, in like circumstances, to investors and investments from other third countries.
Peru has violated Article 10.4 of the FTA in light of the fact it, in the context of bilateral investment treaties with other third countries, has agreed to observe “any obligation into which it has entered” with regard to investments of nationals from these other countries, Renco argues.
But Emma Gomez Moreno, an activist with CooperAccion, said contamination around La Oroya reached its highest level in 2007, citing a report from an independent Peruvian environmental health authority called DIGESA. She said the fact that DRP has contributed to the pollution of La Oroya since 1997 debunks Renco’s claims that it is not liable.
The informed source said the Peruvian government’s agreement to accept liability was a key aspect of the purchase agreement because of the scale of the pollution prior to DRP buying the facility. “Nobody would buy into this without that assurance,” the source said.
In a related development, Renco has engaged in broad lobbying campaign in Washington, hiring the services of five lobbying firms and spending $245,000 since December last year, according to public records.
The firms comprise Monument Strategies, Royer & Brooks, Jones Walker, Mayer Brown and Capitol Counsel. According to fourth-quarter filings for the four firms other than Monument Strategies, they were all hired to lobby Capitol Hill on issues related to Renco’s Peru investment.
Monument Strategies did not submit a fourth-quarter filing because its effective lobbying registration date was not until Feb. 1.
Damages Suits In Missouri Key Part Of Renco Case
A key part of Renco’s argument in its investor-state case is that the Peruvian government has refused to shield the company from third-party liability lawsuits — like the cases currently pending in a Missouri federal court — as Peru allegedly agreed to do under a 1997 investment deal.
In 2007, 137 Peruvian children filed a personal injury lawsuit with the help of Catholic nuns in a Missouri state court against Doe Run Resources, Renco and its owner Ira Rennert, among others. Doe Run Resources is headquartered in Missouri and owned by Renco.
The children alleged that they were injured by exposure to lead and other substances released by the DRP complex, according to a court document. Beth Wilkins, a lawyer for the plaintiffs at Schlichter Bogard & Denton, said all of them are ill and some are dying from cancer caused by the pollution.
Since the initial filing, the defendants have taken a number of extraordinary steps to delay the case, Wilkins charged. In 2008 the defendants sought to “misrepresent” the case as a class-action suit to be heard jointly because it involved more than 100 people, Wilkins said.
She explained, however, that the plaintiffs intended for their cases to be considered on their own merits. In response, the plaintiffs voluntarily dismissed the case. They have yet to refile.
In August 2008, another 35 children from La Oroya filed 11 separate damages cases. Wilkins said there has been a protracted battle with the defendants over where those cases should be heard, with the defendants trying to move them to a federal court.
Most recently, Wilkins’ firm on March 21 submitted additional comments to a federal court on the firm’s motion to remand the cases back to the state court — where it believes they will be handled more quickly. The federal court’s decision is pending.