By McCarthy Tétrault’s Mining Practice Group From McCarthy Tétrault LLP

In this appeal from an arbitrator’s award, the Ontario Superior Court of Justice (ONSC) looked at whether a right of first offer had been breached, and in so doing shed some light on the question of when an interest has been “disposed.”

In 2004, Minera Meridian Peru S.A.C. (Meridian) and Minera Del Suroeste S.A.C. (Misosa) simultaneously applied for two mining concessions being auctioned by the Peruvian government. Instead of bidding against each other, they entered into letters of understanding (LOUs), which provided if either was the successful bidder, then it would hold the concessions 50% for itself and 50% for the other party. The LOUs also detailed the terms of ownership and development of the concessions and contained a right-of-first-offer clause, effective if either party wanted to “dispose” of its interest in the concessions. Ultimately, Meridian was the successful bidder and became the registered owner of the concessions.

In 2009, Meridian’s ultimate parent company announced that it was offering the shares of Meridian for sale. A third party, Concorcio Minero Horizonte S.A. (Horizonte) was the successful bidder and Meridian’s parent companies entered into an Options and Operations Agreement (Agreement) with Horizonte pursuant to which Horizonte was granted an option to acquire shares in Meridian’s parent company by, among other things, making payments and performing work on the concessions. The Agreement also contemplated that Horizonte would enter into a 36-month “cesión minera” with Meridian (a type of assignment of a mining concession) in order to provide it with the right, under Peruvian law, to perform its obligations as operator. The parties entered into the cesión minera on December 22, 2009.

Misosa’s parent company viewed the cesión minera as a breach of the LOUs, since Misosa had not been given a right of first offer on Meridian’s interest in the concessions.

The dispute initially went to arbitration. The arbitrator found, among other things, that Meridian’s decision to enter into the cesión minera did trigger the right of first offer, and ordered that Misosa be offered the rights that were “disposed of” to Horizonte on substantially equivalent terms as in the Agreement. He also ordered that the cesión minera be cancelled.

Meridian and its parent company appealed to the ONSC, arguing that the term “dispose of” in the right of first offer required an element of finality to it, and that the temporally limited cesión minera did not qualify. The Court rejected this submission, finding the relevant question to be whether entering into the cesión minera amounted to ceding control of the concessions. Relying on a finding of fact by the arbitrator that the cesión minera assigned all rights and obligations in the concessions to Horizonte on an exclusive basis, the Court determined that Meridian had, in fact, ceded total control over the concessions, such that the right of first offer had been breached. While the Court upheld that aspect of the arbitral award, it found that the arbitrator’s remedy was not rationally connected to the breach and remitted the matter back to the arbitrator for determination of the terms on which the cesión minera alone had been offered to Horizonte.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.