CHAPTER 11 ENFORCEABILITY OF ROYALTIES UNDER LATIN AMERICAN LEGISLATIONS
| Jurisdiction | United States |
ENFORCEABILITY OF ROYALTIES UNDER LATIN AMERICAN LEGISLATIONS
Partner
Philippi Prietocarrizosa Ferrero DU & Uria
Santiago
Sandra Manrique
Partner
Philippi Prietocarrizosa Ferrero DU & Uria
Bogotá
María Paz Pulgar
Attorney
Philippi Prietocarrizosa Ferrero DU & Uria
Santiago
Hernán Torres
Philippi Prietocarrizosa Ferrero DU & Uria
Lima
Adriano D. Trindade
Of Counsel
Pinheiro Neto Advogados
Brasilia
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JUAN PAULO BAMBACH is a Partner with Philippi Prietocarrizosa Ferrero DU & Uria, in Santiago. His practice area is Natural Resources. Mr. Bambach is Counsel of the Chilean Bar Association and Arbiter of Chilean Chamber of Commerce. He holds an undergraduate diploma in Taxation Planning of Universidad Católica de Chile (2002); a Postgraduate diploma in Mining Law, Universidad de Atacama (1997); a Master in Law, University of Wurzburg, Germany (1993); and a Law Degree, Universidad de Chile 1988. He is Professor of: Mining Law and Real Estate LL.M, Universidad de Los Andes; Post Graduate Program in Natural Resources and Energy Law, Universidad Católica de Chile; LL.M in Regulatory Law, Universidad Católica.
SANDRA MANRIQUE is a Partner at Philippi, Prietocarrizosa Ferrero DU & Uría in the Bogotá office. She joined the firm in 2005 and was made Partner in 2012. Her legal practice focuses on Energy, Mining and Natural Resources and Public Law. She advises on matters involving the laws governing energy products and public utilities, and on various corporate and labor issues. Sandra has a Law Degree from Universidad Libre de Colombia (1999). She also has a Post-graduate degree in Public Utilities from Universidad Externado de Colombia (2001), a Post-graduate degree in Labor law from Universidad Libre de Colombia (2002), and a Course in Portfolio Management and Financial Risk in the Natural Gas Industry from Alberta School of Business, Edmonton, Canada (2002). She also has a degree in International Management of the Oil and Gas Business from Universidad de Los Andes and a Master in Business Law from Universidad Francisco Victoria, Madrid, Spain (2004).
MARÍA PAZ PULGAR is a Chile-based mining and natural resources attorney. She is Senior Associate and Coordinator of the Natural Resources Department of the law firm Philippi, PrietoCarrizosa, Ferrero, DU & Uria. Prior to this, she worked for over 10 years at the international law firm of Baker & McKenzie. She has been professor of Mining Law in the Master of Law LL.M Program and in the Administrative Law Diploma of Pontificia Universidad Catolica de Chile, and professor of Mining Law in undergraduate and postgraduate programme of Universidad Los Andes, among other academic activities. She has also been a speaker at various seminars on Environmental Law at the Universidad de Chile and co-author of publications on environmental law. She is a member of the Rocky Mountain Mineral Law Foundation (RMMLF), the Prospectors and Developers Association of Canada (PDAC), and Women in Mining (WIM).
HERNÁN TORRES is a partner at Philippi, Prietocarrizosa Ferrero DU & Uría in the Perú office. He joined the firm in 2016. He has 14 years of experience in legal practice focusing on mining. He advises on matters involving mining projects in all stages, as well as matters related to land access and social license. He also provides advice on various corporate, real, and civil law issues. Hernan has a law degree from Pontificia Universidad Catolica del Peru (2001), and a post-graduate degree in Natural Resources and Environmental Law and Policy from the University of Denver (2008). Hernan is a professor of mining law and contract law at the University of Lima, Universidad Peruana de Ciencias Aplicadas - UPC, and Universidad de Piura, and has authored several publications on mining and civil law. He is a member of the Rocky Mountain Mineral Law Foundation (RMMLF), the Instituto Nacional de Derecho de Minería, Petróleo y Energía (INDEMIPE), and the Sociedad de Minería, Petróleo y Energía (SNMPE).
ADRIANO D. TRINDADE is Of Counsel at Pinheiro Neto Advogados in Brasília, Brazil. He has been providing legal advice for years to clients in connection with the mining sector, including regulatory matters, mining policy, M&A, contracts and communities, among other mining-related subjects. Mr. Trindade is also a Lecturer at the Law School of the University of Brasília (UnB) and a researcher of the Natural Resources Law Group (GERN) of that same University, where he coordinates the mining law research area. Mr. Trindade graduated from the University of Brasília and obtained his Masters degree (Distinction) in Natural Resources Law and Policy from the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP) at the University of Dundee, United Kingdom. He has published articles and delivered conferences and training courses in Mining Law issues in Brazil and abroad. JOSÉ CARLOS UGAZ is Chairman of Transparency International. Based in Lima, Mr. Ugaz is a lawyer who was special state attorney in one of the biggest corruption cases in Latin American history. He was ad-hoc state attorney of Peru for several corruption cases against the criminal network of former Peruvian President Alberto Fujimori. Fujimori fled the country in 2000 after allegations of systematic and widespread abuse of power. From 2000-2002, Mr. Ugaz's office opened more than 200 cases against 1,500 government officials and other associates of Fujimori. Under his mandate, US$205 million in assets were frozen abroad and US$75 million were recovered. In 2002, Mr. Ugaz became President of Proetica, Transparency International's national chapter in Peru. He was an official at the World Bank's anti-corruption unit from 2004-2006. He became an individual member of Transparency International in 2008 and has served on Transparency International's Board of Directors since 2011. He is a teacher of criminal law at the Universidad Católica del Perú since 1986.
It is not surprising to state that mining activity is a capital-intensive business with uncertain results. Specially, considering green-field exploration projects. Therefore, to value the purchase price of mining concessions without sufficient geological information can be considerably complex. Having a variable price or part of the price is a helpful tool to reach an understanding for the acquisition agreement.
In this scenario, royalties are frequently used around the world. These formulas have been developed in common-law legal systems, being later adopted in Latin America and other civil-law system countries. The substantial differences between both legal systems create relevant distortions when implementing royalties in those jurisdictions.
For decades, royalties have been used for mining transactions (purchase and option agreements mainly and project finances to a lesser extend). However, civil law in some jurisdictions does not recognize royalties as rights in rem, but only as rights in personam or personal obligations. In other words, it is not the good (mining concession in this case) obliged to make the payment of the royalty, but the individual or entity who took the obligation.
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Due to royalties are not rights in rem, it is necessary to analyze its real legal nature under civil law in order to determine their local effects, specially its enforceability. It is necessary to keep in mind that royalties will be enforced where the goods are located, and therefore under local legislations. The difference of legal nature of the concept under local legislation may have tremendous consequences: (i) if royalties follow the asset or not; (ii) their enforceability against third parties; (iii) if they are subject to statutes of limitation, whether for their enforceability or the claim of legal remedies; and (iii) if royalties are considered as price, and its consequences.
We are not stating that royalties are not enforceable in Latin America in absolute terms. However, it is highly advisable having a clear understanding of the local law in order to adjust royalties, obtaining this way a strong legal title instead of relying on an encumbrance with the appearance of enforceability.
Our paper will identify potential conflicts between royalties and Latin American legislations, with special focus in Brazil, Chile, Colombia and Peru, analyzing their legal nature, how they are treated by different legislations, legal consequences of said qualifications, other relevant legal considerations and some economic consequences. Finally, our study will describe some suggestions to avoid those unwanted consequences of dispute between royalties and local Latin American legislations.
I. Brazil
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1.1. Royalty's Legal Nature
Mining royalties are common in the Brazilian marketplace. In addition to projects at the exploration or development stages over which royalties have been created but are still not payable - usually as part of the purchase price, options or farm-out mechanisms - there are several Brazilian operating mines where royalties are regularly paid to third parties.
Interestingly, legislation has not followed the pace of the market and so far there is no legal provision for the payment or creation of contractual royalties. Apart from (a) statutory royalties (that are dealt with in Laws Nos. 7990/1989 and 8001/1990) due to the Government, (b) royalties payable to landowners (which are equivalent to 50% of the amount payable to the Government), and (c) inspection "fees" created by certain States (such as Minas Gerais, Pará and Amapá) which are tantamount to a royalty, no other mining royalties are provided for in Brazilian laws.
This legislative gap has not prevented the creation and existence of mining royalties. However, the same gap has implications in terms of the legal nature of the royalty and its...
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