In broad terms, natural resource contracts involve the allocation of resource exploration and/or development rights to an investor, in exchange for considerations such as revenues, employment or infrastructure development. That said there is tremendous diversity in contractual practice. Contract formulations vary extensively, partly reflecting diversity in the relevant sectors (e.g. agriculture, mining and petroleum) and commodities (sugar cane, oil palm and rubber, for example). Diversity of contractual formulations also reflects differences in applicable national law and in the preferences of the contracting parties. The parties themselves vary, though in many jurisdictions the state plays an important role in natural resource contracts.
In addition, there is variation in the role the contract plays in governing natural resource investments: national law can establish a level-playing field for all investments sharing similar characteristics, and some states have moved towards standardised licences and greater reliance on national law, rather than fully negotiated contracts; but negotiated contracts are commonly used in many other countries, particularly low and middle-income ones.Footnote 16 In all cases, national and international law shape the foundations upon which any natural resource contract rests. The notions of sovereignty, ownership and consent are particularly important elements of these foundations. The legal contours of those notions affect who has the legal authority to enter into the contract, and through what process. They also affect the terms that those with the authority to conclude the contract can or must agree to.
Under international law, states have permanent sovereignty over the natural resources located within their jurisdiction. This principle was enshrined in United Nations General Assembly Resolution 1803 of 1962,Footnote 17 and as an application of the wider principle of territorial sovereignty, it reflects customary international law.Footnote 18 The concept of sovereignty is susceptible of multiple legal constructions, and its normative content has long formed the object of ambiguities and contestation.Footnote 19 Among other things, there has been debate about the actors with which sovereignty is vested. Inconsistent formulations, even within the same legal instrument, have created interpretive challenges. Key parts of Resolution 1803 refer to undefined “peoples and nations”,Footnote 20 and international human rights instruments vest with “peoples” the arguably related but distinct right to freely dispose of natural resources.Footnote 21
However, while human rights jurisprudence has consistently applied to peoples, including groups within states, the human right to freely dispose of natural resources,Footnote 22 international treaties explicitly frame sovereignty over natural resources as being the preserve of states.Footnote 23 More generally, the “Westphalian” configuration of international law has traditionally connected sovereignty to statehood.Footnote 24 One way to reconcile these complexities involves recognising that, at one level, sovereignty ultimately resides in the peoples, as explicitly affirmed in numerous national constitutions,Footnote 25 and is constituted through peoples exercising their right to self-determination; but that states provide the organisational structures through which sovereignty is held and exercised in international legal relations. The right to make laws has long been recognised as a key attribute of sovereignty,Footnote 26 and states have the right to regulate natural resources within their jurisdiction—including the modalities for allocating resource rights to commercial projects.
Contemporary international law configures state sovereignty as involving both rights and duties. Some such rights and duties reflect concerns about relations that transcend national boundaries, while others primarily regulate the relation between each state and its people. International environmental norms provide examples of the former. Article 3 of the Convention on Biological Diversity—a multilateral treaty ratified by the overwhelming majority of states—places in states both “the sovereign right to exploit their own resources pursuant to their own environmental policies”, and “the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction”.Footnote 27
While this provision refers to a “responsibility” rather than a “duty”, the International Court of Justice has recognised that a “general obligation of States to ensure that activities within their jurisdiction and control respect the environment of other States or of areas beyond national control is now part of the corpus of international law relating to the environment”.Footnote 28 Another explicit statement of both rights and duties is contained in the United Nations Convention on the Law of the Sea: “States have the sovereign right to exploit their natural resources pursuant to their environmental policies and in accordance with their duty to protect and preserve the marine environment”.Footnote 29 In relation to investor-state disputes, arbitral tribunals have also elaborated on the notion that the sovereign right to regulate meets “boundaries” established by international obligations.Footnote 30
This coexistence of both rights and duties in the contemporary framing of sovereignty is at the centre of relations between states and their people. The range of relevant relations is broad. Firstly, these relations link the state to the universality of its citizens. Centralised resource control has often enabled kleptocratic capture of natural wealth,Footnote 31 in patterns that involve not only “grand” corruption at high political levels but also more diffuse networks of rent-seeking and patronage.Footnote 32 Therefore, one relevant issue concerns the mechanisms whereby citizens can hold authorities to account for the way they manage natural resources.Footnote 33 Secondly, resource projects can test relations between states and identifiable groups within the national polity, who are holders of human rights (including the right to freely dispose of natural resources, where applicable) and are affected by project implementation. Tensions in these latter relations have found their way into growing human rights jurisprudence.Footnote 34
In these regards, General Assembly Resolution 1803 affirms that permanent sovereignty over natural resources “must be exercised in the interest of […] national development and of the well-being of the people of the State concerned”.Footnote 35 Similar provisions have featured in subsequent resolutions.Footnote 36 On one level, this formulation seems coextensive with the affirmation of sovereignty. Written at the time of decolonisation, it signalled a shift away from natural resource policies that primarily responded to the interests of the colonial power: in the post-colonial configuration, national development and the wellbeing of the people in the newly independent state would be the sole criteria for the exercise of sovereignty over natural resources.Footnote 37 In addition, features of this provision seem inscribed in a logic of deference to sovereign space: the notion of wellbeing is not defined, and—by virtue of their sovereignty—states are well placed to determine their national development priorities and pursue the wellbeing-enhancing strategies that are most relevant to their contexts.
However, the plain language of a provision affirming that sovereignty must be exercised in the interest of the wellbeing of the people signifies more than simply deferring to the development priorities identified by states themselves. That language affirms both a sovereign right (to ultimate authority over natural resources) and a sovereign duty (to use that authority in the interest of the people). As decolonisation via the exercise of peoples’ right to self-determination underpinned the emergence of a more truly universal system of international law, and as the notion of sovereignty was redeployed from a colonisation tool to a means for emancipation,Footnote 38 the solemn affirmation of permanent sovereignty over natural resources placed people at centre-stage, and framed sovereignty as involving ab initio both rights and duties that, in effect, put states at the service of their people.Footnote 39
The “people”, of course, is not a straightforward concept, whether philosophically or sociologically, given the conceptual complexities of political community and the substantial differentiation of interests, values and aspirations that may exist within that community. What constitutes the “well-being of the people” in any given situation, what policy measures can enhance it most effectively, and how to navigate the often inevitable distributive trade-offs can form the object of intense contestation.Footnote 40 As a matter of legal principle, however, the framing of Resolution 1803 means that a state that deliberately acted against its own people would violate its sovereign duties—even though, in practice, the undefined contours of those duties at first did not establish clear parameters for reviewing the legality of state conduct.
Since the adoption of General Assembly Resolution 1803, extensive developments in international law have brought greater clarity on the rights and duties associated with sovereignty over natural resources, providing more granular disaggregation of the relevant protected interests. Examples include the adoption of numerous human rights treaties and the incremental consolidation of international environmental norms. The relevance of these developments to the legal construction of sovereignty is corroborated by the international instruments that most recently reaffirmed the sovereignty of states over natural resources. For instance, Article 3 of the Convention on Biological Diversity explicitly links sovereignty to the Charter of the United Nations and to the “principles of international law”.Footnote 41 The UN Charter inscribes the promotion of human rights among the very objectives of the United NationsFootnote 42; and while there is debate about what was meant by “principles of international law”, international norms requiring states to use natural resources sustainably have been deemed to qualify.Footnote 43
By calibrating the interplay of rights and duties, developments in international human rights and environmental norms have reconfigured the parameters of sovereignty. Human rights norms illustrate this. Indeed, states cannot lawfully take measures that breach their international human rights obligations. Further, the International Covenant on Economic, Social and Cultural Rights (ICESCR) requires its states parties to advance the progressive realisation of the rights affirmed in the Covenant “to the maximum of [their] available resources”, which would include natural resourcesFootnote 44; and the notion of “well-being of the people”, which states are to realise in their exercising sovereignty, must arguably be interpreted in the light of internationally recognised human rights, including economic, social and cultural rights.Footnote 45 In addition, the right to (internal) self-determination that international instruments recognise to indigenous peoples points to a notion of “shared” sovereignty the exercise of which is disaggregated into multiple decision-making sites within a single state.Footnote 46
This brief examination of existing international law highlights that, in exercising permanent sovereignty over natural resources, states have both rights and duties. According to human rights norms, for example, states must: (1) in terms of process, ensure respect for human rights throughout public decision making relevant to the exercise of permanent sovereignty over natural resources, and (2) in substantive terms, ensure that public action upholds human rights, and take steps to maximise the contribution of natural resource development to realising human rights. This interplay of rights and duties has implications for natural resource contracts. The duties set external bounds, because states cannot lawfully conclude (or sustain private parties in concluding) contracts in ways that, in terms of content or process, would violate their international obligations. To comply with their duty not to harm the environment outside their jurisdiction, for example, states would have to ensure, through contractual provisions or national legislation, that investors adopt (or do not adopt) specified conducts that have a bearing on environmental impacts. The duties also establish internal parameters—that is, they affect “from within” the very purpose of the exercise of sovereign powers. For example, they require states to ensure that natural resource contracting promotes the progressive realisation of economic, social and cultural rights.
While sovereignty refers to political organisation and is inherently centred on the public sphere, issues of ownership are relevant to both privately and publicly held rights to use, manage and transact valuable resources. Patterns in resource ownership have a bearing on natural resource contracting. One reason is that, beyond the great diversity of national law regimes, it is commonly recognised that a contracting party cannot transfer rights that it does not hold.Footnote 47 Put differently, who holds the resource rights, and the substantive content of those rights, will affect the identity of the contracting parties and the nature of the transaction. Unlike sovereignty, resource ownership is primarily governed by national law, and as discussed the enactment of national regulation is an attribute of sovereignty. As a result, legal arrangements can vary significantly in different jurisdictions—more than is possible to do justice to in the limited space available here. Further, while this section refers to ownership as a shorthand, configurations of resource rights can be complex and multi-layered, and they can encompass very diverse tenure set-ups.
In many jurisdictions, national law vests ownership of mineral and petroleum resources with the state. Private (non-state) rights to subsoil resources do exist in some countries. This includes arrangements that legally recognise customary or indigenous rights to subsoil resources, which in some cases have paved the way to joint ventures or partnership agreements between investors and indigenous groups—for example in Canada and South Africa.Footnote 48 In most countries, however, commercial mining and petroleum projects primarily involve licences issued by the state, or contracts with the state or a state-owned entity. Trends in land ownership present greater diversity, and globally there is extensive experience with land-related contracts awarded by non-state actors. In many low and middle-income countries, however, states own a substantial part or even all of the land, or they otherwise hold rights giving them substantial control over public lands that cannot formally be owned or alienated. This trend partly reflects historical legacies, including in the colonial period.Footnote 49 Legal forms vary both within and between jurisdictions, encompassing concepts such as trusteeship, domaine public de l’état, domaine privé de l’état, and domaine foncier national, among others. But in general terms, the state in these jurisdictions has the legal authority to allocate land on behalf of its people, and land-based investments such as agribusiness ventures tend to involve long-term leases or concessions granted by the state.
In these respects, natural resource contracting is connected to the realm of public law, presenting specificities compared to purely private, commercial transactions.Footnote 50 These public law dimensions flow not only from the role of states in managing natural resources, but also from the fact that states perform that role for the benefit of their people rather than as private owners—a circumstance that many national constitutions and laws explicitly affirm,Footnote 51 and that is meant to provide the basis for relations of accountability between the authorities and the people in whose interest those authorities are required to act.Footnote 52 In many other countries, however, part or most of the land is owned by actors located outside the sphere of government, ranging from private landowners to traditional authorities. This situation affects contractual arrangements: in jurisdictions where private land ownership is prevalent, land-based investments often involve private-to-private transactions; and where traditional authorities control a significant part of the land (in Ghana or Sierra Leone, for example), many commercial land leases are signed with those authorities.Footnote 53
Even where the land is owned by non-state actors, the state sometimes plays a role in land contracts. First, eminent domain is widely considered an attribute of sovereignty, and national law typically empowers the government to compulsorily acquire land for a public purpose provided that certain conditions are met. While activating compulsory acquisition for commercial investments raises fundamental questions about the contours of “public purpose”, some national laws expressly allow this,Footnote 54 and in practice states have made extensive use of compulsory acquisition to allocate rights to commercial projects. Second, where non-state actors, rather than government authorities, allocate resource rights directly to investors, separate contractual arrangements may govern relations between the investor and the state, covering issues such as tax incentives or legal stability. As a result, the connections with the sphere of public law are relevant to these situations as well. Contracts concluded by non-state actors can themselves present public law dimensions: depending on applicable law, traditional authorities may owe legally defined responsibilities towards the landowning community,Footnote 55 and their historical socio-political evolution or contemporary legal status may not be fully independent of the administrative apparatus of government.Footnote 56
Ownership, under national law, of the resource at stake does not exhaust the full spectrum of rights and claims relevant to natural resource contacting. A few examples illustrate this point. Firstly, state ownership of subsoil resources may coexist with privately held rights to land and surface resources, which extractive industry contracts can affect. Secondly, even where the land is itself owned or controlled by the state, national law may protect rights to use and manage that land—for example, based on occupation, indigenous or customary rights, or stated-issued land leases. Depending on the context, these rights may be held by small-scale farmers, pastoralists, fisherfolk, forest dwellers or local residents, for example—including groups who qualify as indigenous peoples under international law. While in some national legal systems these use and management rights can pave the way to direct land transactions between right holders and external investors, in others local actors cannot allocate commercial contracts to investors directly,Footnote 57 or else the rights they can allocate would fall short of commercial needs in terms of tenure security, transferability or mortgageability,Footnote 58 so the state plays a key role in the transaction. Thirdly, small-scale farmers, pastoralists, fisherfolk, forest dwellers or local residents may claim resource rights that are perceived to be socially legitimate at the local level but are not recognised or adequately protected by national law.
In all such situations, investment contracting can affect the claimed or legally recognised resource rights of third-party actors. This circumstance creates specific challenges compared to purely private contracts that transact resource rights between two parties alone, and is often among the root causes of conflicts associated with natural resource projects. International instruments provide guidance on how to navigate these challenges. The Voluntary Guidelines on the Responsible Governance of Land, Fisheries and Forests in the Context of National Food Security (VGGT) are an international soft-law instrument endorsed in 2012 by the Committee on World Food Security, which is the top United Nations body in food security matters. In tying land and natural resources to food security and human rights, the VGGT call on states and investors to respect all “legitimate tenure rights”, including indigenous and customary tenure rights, and including socially legitimate rights that are “not currently protected by law”.Footnote 59 The VGGT provide guidance on handling resource rights issues in investment processes, including through local consultation and partnerships with local tenure right holders.Footnote 60
International human rights instruments also have a bearing on this issue. The close connections between resource rights and human rights are widely recognised.Footnote 61 Examples of most obviously relevant human rights include the rights to property, to housing, to food (where people depend on natural resources for their food security), to enjoy one’s own culture (where traditional cultures are connected to land and resources), to freely dispose of natural resources, and to self-determination, as well as indigenous peoples’ rights to their ancestral territories—to name but a few internationally recognised human rights. That said, all human rights are interdependent and interrelated, so the interface between resource rights and human rights encompasses all internationally recognised human rights.Footnote 62 Regional human rights courts have consistently held that international law protects resource claims even if they are customary in nature and not recognised as ownership under national law.Footnote 63 Human rights jurisprudence has also identified the limits of eminent domain, for example by requiring, in relation to indigenous peoples, that states conduct environmental impact assessments, promote benefit sharing and seek free, prior and informed consent.Footnote 64
The upshot is that diverse resource ownership patterns translate into different combinations of public and private elements in natural resource contracting, and considerable variation across sectors and jurisdictions. Privately held resource rights can underpin contracts led by non-state actors, but in many jurisdictions natural resource contracts involve the state or a state-owned entity. Even where the state formally owns the relevant resource under national law, however, authorities are not entirely free to transact resource rights. International instruments create spaces for other resource right holders to have their voices heard in contracting, and—depending on the jurisdiction—national law may establish comparable safeguards. So while resource ownership can enable public authorities to play an important role in contracting, this role coexists with a wider range of relevant resource right holders and affected actors, and it is subject to both internal and external parameters—because authorities must manage the resources in the interest of the people, and because they must come to terms with resource rights protected under national or international law.
While rules vary across jurisdictions, a contract is typically binding by virtue of the consent manifested by the parties. In natural resource contracts, consent is connected to issues of sovereignty and ownership. In relation to contracts between investors and states, international arbitral tribunals have clarified that, in expressing its consent to be bound by the contract, a state exercises its sovereignty.Footnote 65 In addition, the right to transact or alienate an asset is widely considered an attribute of ownership,Footnote 66 although restrictions may apply including to publicly owned assets. Conversely, the parameters of sovereignty and ownership limit the manifestation of consent. This is not only because, as discussed, a contracting party cannot transfer resource rights it does not hold. Wide-ranging legal obligations, including under international law, have further knock-on effects on consent.
It is commonly accepted in contract law that external bounds delimit the realm of the parties’ consent. In transnational commercial transactions, for example, it is recognised that freedom of contract—that is, freedom to enter into a contract and determine its content—is restricted by the application of “mandatory rules, whether of national, international or supranational origins, which are applicable in accordance with the relevant rules of private international law”.Footnote 67 Over a long-term historical trajectory, national laws in diverse areas such as rentals, labour and consumer protection have reconfigured the classical notion of freedom of contract,Footnote 68 and often extensive legal requirements shape what the contracting parties can lawfully agree. Comparably, in natural resource contracts the sovereign duties of states affect the range of commitments that states can lawfully consent to, and the safeguards that states must establish for the manifestation of consent in contracts between private parties.
Human rights obligations illustrate this point. Under international law, states have a duty to respect human rights—that is, to refrain from infringing on those rights; as well as a duty to protect human rights from interference by third parties, including business entities in the context of natural resource investments.Footnote 69 Failure to uphold these duties in natural resource investments has been found to violate human rights treaties.Footnote 70 It is worth recalling that businesses, for their part, have the responsibility to respect human rights—that is, “they should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved”.Footnote 71 Therefore, expressions of consent for a natural resource contract between a state and a business entity would engage, at the same time, the duties of the state to respect and protect human rights, and the responsibility of businesses to respect those rights. In this context, a state could not lawfully consent to contractual provisions that are inconsistent with its duty to respect and protect human rights. In addition, states must provide the regulatory framework to ensure that any contracts between non-state actors respect human rights.
Besides setting external bounds for the manifestation of consent, the duty of states to exercise sovereignty and manage publicly owned resources in the interest of their people also establishes internal parameters that qualify consent from within. This configuration outlines even more far-reaching qualifications to the classic principle of freedom of contract. In private transactions, freedom of contract is mainly qualified through the external boundaries established by mandatory rules, so in principle the parties can autonomously determine their contracting objectives as long as legal requirements are complied with. In contracts involving the exercise of sovereignty, on the other hand, the manifestation of consent is inherently tied to the pursuit of public policy goals advancing the interest of the people that public authorities represent. For example, the duty of ICESCR states parties to progressively realise economic, social and cultural rights to the maximum of their available resources, discussed above, requires those states to take steps to maximise the contribution that natural resource development provides to the realisation of human rights.
This duty of states to act in the interest of the people also has implications for the actors and processes involved in the formation and expression of consent. In investor-state contracts, national law may establish channels for parliament and citizens to influence public decisions underpinning the state’s consent. Process-related parameters relevant to investor-state contracts are also established by international human rights law, including via political rights such as the right to vote and freedom of expression and association, and the rights of consultation and participation pertaining to indigenous peoples. These parameters disqualify possible manipulations of the framing delineated in General Assembly Resolution 1803, because public authorities cannot claim to advance the “well-being of the people” on the basis of paternalistic visions that take little account of the concerns and aspirations of those whose interests they are meant to pursue.
Besides framing the formation and manifestation of a state’s consent in investor-state contracts, the parameters of sovereignty and ownership—including the links that connect resource rights to human rights—provide the normative basis for multi-actor processes whereby the contract rests, at least in part, on the consent of relevant resource right holders. In this context, the notion of consent has been deployed to advance interests not associated with state sovereignty that, in legal terms, may—or may not—involve formal resource ownership.
Free, prior and informed consent (FPIC) is a case in point. It features prominently in international instruments concerning indigenous peoples.Footnote 72 While the specifics vary depending on the instrument and the issue, the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) calls on states to recognise the rights to the land, territories and resources that indigenous peoples own, occupy, use or possessFootnote 73; and to consult indigenous peoples “in good faith” and “in order to obtain their free, prior and informed consent” before adopting measures or approving projects that may affect those peoples or their lands, territories or resources.Footnote 74 The International Labour Organisation’s Convention No. 169 contains broadly comparable provisions.Footnote 75 Further, the UNDRIP provides more stringent parameters of consent for situations that involve relocating indigenous peoples.Footnote 76
The notion of FPIC has also been developed in international human rights jurisprudence. In cases concerning commercial or development projects in the ancestral territories of indigenous or tribal peoples, the Inter-American Court of Human Rights has cited the UNDRIP and/or Convention 169 to configure FPIC as one element of the human right to collective property.Footnote 77 Although some judgments have referred more generally to the “right to consultation” rather than specifically to FPIC,Footnote 78 the Inter-American Court has clarified that consultation must be in good faith and “with the aim of reaching an agreement or obtaining consent”.Footnote 79 Further, the Inter-American Court of Human Rights has deemed this duty to consult indigenous peoples to be a general principle of international law, applicable irrespective of any treaty obligations.Footnote 80
These international norms have implications for natural resource contracts, because FPIC can affect the contracting process, and because FPIC exercises may themselves lead to partnership agreements.Footnote 81 It must be noted that FPIC has been at the centre of intense debates, partly owing to concerns that its application might undermine the ability of states to award resource concessions they deem necessary to promote national development. Different positions in these debates are reflected in diverse interpretations of what FPIC means in practice, ranging from a full-fledged “right to veto” (often advanced by indigenous movements and NGOs) to bureaucratic or box-ticking consultation exercises (often in the perspectives of governments and businesses, respectively).Footnote 82 In terms of positive law, jurists have noted that the duty to consult in good faith in order to obtain consent establishes “more than a mere right to be informed and heard but less than the right of veto”Footnote 83; though as discussed the UNDRIP sets more stringent FPIC requirements for cases involving relocation. Rather than undermining the exercise of sovereign powers, FPIC seems consistent with a pluralist construction of sovereignty that rests on both rights and duties and recognises spaces for decentralised exercise of public authority.Footnote 84