Tuvalu cancels its sponsorship: the role of international law.

Opinion/Editorial by Alberto Pecoraro

Alberto Pecoraro is a PhD Fellow at the Law & Development Research Group of the University of Antwerp (Belgium). His research concerns the international legal protection of deep seabed mining investments.

Tuvalu’s recent decision to cancel its sponsorship of Circular Metals Tuvalu Ltd. may entail far-reaching international legal consequences.

On the 14th of April 2022, Tuvalu has announced that it was rescinding its sponsorship of Circular Metals Ltd, for the exploration of polymetallic nodules in the international seabed. Tuvalu’s sponsorship had allowed Circular Metals Tuvalu Ltd. to apply for an exploration contract from the International Seabed Authority, on the 21st of December 2021. Very few information is available on Circular Metals, although it was alleged that it is somehow connected to the Metals Company.

This is the very first unilateral termination of state sponsorship for deep seabed mining activities in the Area. When explaining this decision, Tuvalu’s Foreign Minister stated that sponsorship had been reversed after “concerns by the government as well as within particularly the foreign ministry.” He also explained that “the part that we can play is to ensure that we set very high standards or the environmental issues that are involved in requirements, which could then hopefully discourage companies from pursuing it, because it’ll be very costly.” Hence, the reversal was based at least in part on concerns over the environmental impact of deep seabed mining, and Tuvalu’s ability to govern activities in the Area.

The question addressed in this short piece is whether Tuvalu could face any legal consequence out of its decision to cancel sponsorship. The Law of the Sea does not set the consequences for termination of sponsorship, except that “termination of sponsorship shall take effect six months after the date of receipt of the notification [done by the state] by the Secretary-General” and that in such event the contractor shall obtain another sponsor within those six months (polymetallic nodules regulations, regulation 29). Neither UNCLOS nor the regulations of the International Seabed Authority appear to qualify the state’s power to end its sponsorship if it deems it necessary or desirable.

On the other hand, national deep seabed mining legislations place important limits on the state’s regulatory powers. That is especially the case for Tuvalu’s Seabed Minerals Act 2014, a law which protects the stability of the legal relationship between the state and the sponsored entity. Indeed, section 97 restricts the state’s right to suspend and revoke a sponsorship certificate to certain specific situations. According to its terms:

“The Authority may vary, suspend or revoke any Sponsorship Certificate— where the variation or revocation is in the reasonable opinion of the Authority necessary to: (i) prevent serious risk to—(a) the safety, health or welfare of any persons; or (b) the Marine Environment; or (ii) avoid a conflict with any obligation of Tuvalu arising out of any international agreement or instrument in force for Tuvalu…” [emphasis added]

Hence, the Seabed Minerals Act 2014 allows termination of sponsorship when reasonably necessary to protect an essential public interest. But that is not the only protection applicable to the rights acquired by Circular Metals under the law of Tuvalu. Indeed, section 94 of the same law binds state authorities “to not impose unnecessary, disproportionate, or duplicate regulatory burden on Sponsored Parties.” Obligations of proportionality are also evoked in section 13, which mentions “the principles under which regulatory activities should be proportionate, accountable, consistent, transparent and targeted only at cases in which action is needed” [emphasis added]. Proportionality is laid down as a principle of public law in many countries; it is also used and applied in the practice of international tribunals. As stated by an international tribunal:

“Proportionality requires that a… state’ measure i) pursues a legitimate goal (public purpose); ii) is suitable to achieve that goal, iii) is necessary to achieve that goal in the sense that less intrusive, but equally feasible and effective measures do not exist; and iv) is proportionate stricto sensu, that is, that the benefit for the public of the measure in question stands in an adequate acceptable relationship to the negative impact of the measure on the investment” (Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentine Republic, Award, para 351)

International legal definitions of proportionality are very much relevant to Tuvalu’s deep seabed mining legislation which requires state action to be “consistent with existing requirements imposed by, the UN Convention on the Law of the Sea, the Rules of the ISA and other applicable standards of international law” (section 94). Law of the sea tribunals have affirmed that the exercise of state power is limited by criteria of reasonableness, proportionality and necessity. Thus, the tribunal in Duzgit Integrity (Malta v. Sao Tomé and Principe) argued that:

“The exercise of enforcement powers by a (coastal) State in situations where the State derives these powers from provisions of the Convention is also governed by certain rules and principles of general international law, in particular the principle of reasonableness. This principle encompasses the principles of necessity and proportionality” (para 209)

Also, the Seabed Disputes Chamber, in its 2011 Advisory Opinion, affirmed that “reasonableness and non-arbitrariness must remain the hallmarks of any action taken by the sponsoring state” (para 230).

Moreover, the role of international law is bolstered by the dispute settlement clause contained in Tuvalu’s Seabed Minerals Act 2014: under section 126, disputes may be referred to “arbitration to be conducted by arbitration by the International Centre for Settlement of Investment Disputes established under Convention on the Settlement of Investment Disputes between States and Nationals of other States” (or the ICSID Convention). ICSID tribunals have an inherent power to apply rules of international law in addition to the respondent state’s domestic law. Pursuant to article 42 of ICSID, they will not apply a national rule if that would permit, for example, an uncompensated expropriation prohibited by international law. Having said this, the ICSID Convention contains its own jurisdictional requirements: the existence of a foreign-owned investment within the territory of Tuvalu. In this regard, activities in the Area are premised on the existence of rights granted under the sponsoring state’s national law – a local subsidiary, a certificate of sponsorship or a sponsorship agreement – which may (or may not) cumulatively constitute an investment within that sponsoring state (see here for more detailed commentary). 

What are the consequences of these legislative stipulations? First, that state authorities may not terminate sponsorship upon a whim. The legislation of Tuvalu subjects state action to criteria of proportionality whereby the state must offer a reasonable explanation for proposed changes in the regulatory framework. Accordingly, state authorities must be able to point to a legitimate objective and that there must be some “evidential basis for a measure, if it is not to be considered as arbitrary or disproportionate” (see Harrison, at p. 498). In another ICSID case, Crystallex v. Venezuela, the denial of a mining permit was held to violate international law because it was based upon reasons that had not been raised before by the state, whilst ignoring the scientific evidence that had been submitted by the mining company (see paras 591 – 597).

Secondly, Tuvalu’s deep seabed mining law allows Circular Metals Ltd to seek reparation, against the state, before an international tribunal. In this regard, ICSID tribunals may apply rules of international investment law – such as the prohibition on uncompensated expropriation. By virtue of article 42 in the ICSID Convention “the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.” This “will not involve the confirmation or denial of the validity of the host State’s law, but may result in not applying it where that law, or action taken under that law, violates international law” (Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, Award, para 84.)

An international legal claim may expose Tuvalu to burdensome and unwanted financial expenses. However, in my opinion, suing Tuvalu is probably not in Circular Metals’ best interest. First, the end of sponsorship intervened at a very early stage of the project. It is possible that the resources spent by Circular Metals up to this point are inferior to the costs of ICSID proceedings. Indeed, ICSID tribunals periodically request parties to the proceedings to make advance payments to cover the costs of the proceedings, including a first advance payment that is usually in the order of US$100,000 – US$150,000 per party. Secondly, the publicity generated by such litigation could be counterproductive as it may frighten the governments of other sponsoring states.  However, the more important point is that there are risks for sponsoring states which alter too abruptly their policies on activities in the Area.

Featured image: Aerial view of Tuvalu’s capital, Funafuti, 2011. Photo: Lily-Anne Homasi / DFAT