Deep-sea mining activities in the seabed and ocean floor beyond national jurisdiction are governed by the UN Convention on the Law of the Sea (UNCLOS) regime, and in particular by the International Seabed Authority’s (ISA) exploitation regulations.
The ISA has successfully developed exploration regulations and has been working on exploitation regulations since 2014.
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Actors in the deep-sea mining regime will not only need to abide by this regime but will also be required to comply with the provisions of several other agreements such as, for example, the exploitation contract between the ISA and the contractor, the sponsorship agreement between the sponsoring state and the contractor, the sponsoring state’s national laws and general international law.
This complex regulatory regime presents different dispute resolution processes for deep-sea mining actors depending on the type of dispute arising. This three-part series explores the different agreements and dispute settlement options available to the different actors.
Under UNCLOS, a contractor – such as a corporation, entity or individual – wishing to extract minerals from the seabed and ocean floor beyond national jurisdiction (referred to here as the ‘area’) may do so only based on an exploitation contract concluded with the ISA. However, a contractor can only apply for the right to exploit the minerals in the area once it is sponsored by a state party to UNCLOS.
The main purpose of this framework is for the sponsoring state to ensure that the contractor complies with the terms of its exploitation contract with the ISA. In this article, we dive into the agreement governing the relationship and the respective rights and obligations of the sponsoring state and the contractor: the sponsorship agreement.
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By GlobalDataSponsorship agreements: protecting contractors’ investment and sponsoring states’ regulatory powers
Whilst the ISA’s regulations set out the rights and obligations of the contractor and the sponsoring state, it is the sponsorship agreement that will govern the relationship between the contractor and the sponsoring state. The contractor and sponsoring state will seek to prioritise and protect their interests in the sponsorship agreement. This section provides an overview of the important provisions from both perspectives.
From the contractor’s perspective, the terms of the sponsorship agreement should adequately protect the contractor’s investment (for instance, the rights to exploitation as set out under the exploitation contract):
- The terms of the sponsorship agreement should protect the contractor in the event of a change of national laws impacting its exploitation activities. The contractor should negotiate for sufficient time to comply with any new or amended laws and for adequate compensation for any negative impacts on its activities.
- Similarly, the contractor should aim to include a renegotiation clause to effectively reinstate the rights and obligations of the contractor when there is a discriminatory change in sponsoring state law which materially increases the benefits to be given to the sponsoring state and conversely decreases the contractor’s benefits.
- The terms of the sponsorship agreement should clearly set out the events giving rise to a material breach of the agreement and which are capable of triggering termination.
- The sponsorship agreement will also include provisions for mineral recovery payments. The contractor should ensure these payments commence after commercial production has begun, with the amount payable to be revised and adjusted based on inflation and fluctuations in the market price of the relevant minerals.
From the sponsoring state’s perspective, the sponsorship agreement should protect the sponsoring state’s regulatory powers to ensure compliance with the ISA’s regulations and international law, as well as granting the sponsoring state sufficient rights to intervene in case of non-compliance on the contractor’s part:
- The sponsoring state should retain flexibility to regulate deep-sea mining activities, particularly to enact regulations to incorporate its international obligations and sponsorship obligations under the ISA’s exploitation regulations.
- The sponsorship agreement should set out compliance, monitoring and inspection requirements to record the contractor’s compliance with the ISA’s exploitation regulations, as sponsoring states have the duty of ensuring that the contractor complies with the terms of its exploitation contract with the ISA.
- In the event of a material breach of the contractor’s obligations under the ISA’s regulations or a breach of the agreement, the sponsorship agreement would give the sponsoring state the right to temporarily suspend the exploitation activities. During this suspension, the sponsoring state can work with the contractor to ensure that the breach is remedied and, in the event this is not possible, the sponsoring state should have the right to compensation. This is of particular importance given sponsoring states can be ultimately responsible for damage caused by the contractor.
- Indemnity clauses requiring the contractor to indemnify the sponsoring state for any claims and proceedings by the ISA and any expenses suffered concerning it.
- Assignment should require the prior consent of the sponsoring state, not to be unreasonably withheld.
- The proposed revision mechanisms of any mineral recovery payments also benefit the sponsoring state. A hike in commodity prices benefitting the contractor may lead the sponsoring state to feel that it should benefit from the payments to a greater extent.
Important considerations about jurisdiction
Under the UNCLOS regime and the ISA’s regulations, the contractor must be an entity incorporated or effectively controlled by individuals having the sponsoring state’s nationality.
Therefore, in light of the dispute resolution clause, given the sponsoring state and the contractor share the same nationality, the sponsoring state will likely push for the applicable jurisdiction and governing law to be those of the sponsoring state.
However, based on a review of the current companies having exploration licences, it is more likely that the ultimate investor and/ or parent company will have a different nationality to the contractor entity. For example, NORI-D and Tonga Offshore Mining have exploration licences from the ISA and are respectively sponsored and incorporated in Nauru and Tonga while the ultimate parent company is Canadian with majority Omani and Cypriot shareholders. UKSR holds two exploration licences from the ISA, and is sponsored and incorporated in the UK, but the parent company is Norwegian.
In such cases, it is in both parties’ interest to include a neutral governing law and jurisdiction. Parties can then choose a mature legal system, with developed precedents, which should provide predictability and certainty for any contractual disputes. Furthermore, a neutral forum, with vast experience on international law and mining disputes, would offer reassurance to both parties in the event of a dispute.
The sponsorship agreement is a central pillar of the framework for deep-sea mining activities in areas beyond national jurisdiction, governing the relationship between contractor and state while incorporating and respecting the wider UNCLOS regime.
The sponsorship agreement is, however, ancillary to the main contract between the private entities, the contractor and the ISA, the exploitation contract. As will be explored in the second part of this series, it is this contract that confers the right to conduct extractive activities and which is governed by the international dispute settlement mechanisms under UNCLOS.
