Renegotiating a long term investment contract : the case of mining contracts in DRC

Abstract

The flexibility of long-term investment contracts is a benefit to both an investor and the state for mitigating the effect of an unforeseeable event which negatively impacts on the viability of the contract. However, the aspect of sanctity of contract has often prompted rigid provisions with the underlying rationale that this gives investors security and predictability. In contrast, by virtue of the principle of fundamental change of circumstances, new trend has come to life in the field of extractive industries consisting of inclusion in the contract a provision that provides for renegotiation or adaptation of the existing agreement. The reasoning behind the adoption technique is that parties should not be obliged to carry on a performance which would be unjustly onerous or fruitless due to a supervening unregulated event. The main criticism of this approach is that the claim for renegotiating an existing agreement which contains no renegotiation clause or insistence on a third party intervention for adapting such a contract amount to an undue interference. However, the manner in which contracts are negotiated in countries that exhibit poor governance or situation of army conflict challenges this view. The question asked is whether an unfair contract concluded with unelected government or leaders of military factions and subject to corruption can be allowed to survive without being revised. The DRC, realizing this problem, undertook to renegotiate some of its mining contracts with specific objectives, such as; investor respect of legislation, use of local resources, social responsibility clauses, and evaluation of the input of the partners taking into account the equity shareholding with the public party holding not less than 51%. This has resulted in the termination and cancellation of certain contracts. Aggrieved investors filed several proceedings, but they dropped them, privileging an amicable settlement. Besides, the outcome of the renegotiation suggests that Congolese negotiators have not fully achieved the objectives set out at the start of the process. Against this backdrop, the dissertation found that the Congolese mining sector is governed by a broad range of regulations and corresponding supervisory bodies. Constant suspicions of illegally mining exploitation prevail on the sector as a result of the ill enforcement of the aforesaid regulations, corruption and mismanagement. This study also found that renegotiating an existing agreement is a common practice in commercial contracts. Major systems of law have dealt with when they confronted with the issue related to the non-performance of a contractual obligation. The stability of the contractual terms is must but, at the same time, a certain degree of flexibility is necessary to allow parties to adjust their relationship in case of imperfections, cultural differences or supervening of unforeseen events. However, to be effective, the renegotiation mechanism must be regulated for not fuelling unlimited demand of adaptation, therefore, instability of the contract. The renegotiation of mining contacts in DRC was extremely politicised. However, both investor and Congolese sides have benefited from that differently. The Congolese government gave preference to short-term profits result to the expenses of the long-term improvements. By comparison, the majority of investors have secured their assets. Others have even increased them. An examination of the amended agreement that have been disclosed so far reveals that a lot issues remain unresolved, particularly with regard to the reasons that prompted the renegotiation. Moreover, parties to the aforesaid process did not attempt to regulate future demands of adaptation. Based on these findings, the recommendation of the dissertation is that future mining agreements should include a renegotiation clause and regulate the intervention of a third party. The Congolese government should endeavour to lessen political interference throughout mining contract negotiations. It should also build negotiation skills among its representatives involved in that process. Investors should increase among them awareness of corporate social responsibility standards for preventing illegal exploitation of mining resources which, ultimately, results in triggering unilateral contract adjustment. The remaining issues in connection with the amended agreements should be resolved amicably for this approach is more likely to bring mutual satisfaction to both the Congolese state and investors.