LAW REVIEW

Journal of legal and academic research, theory and practice

2014 .4(50)

CONTENTS
ARTICLES
Legal Advice and Comparative Law
Yoshiki Kurumisawa

Legal Regulation of Mining Activities in Mongolia: Current Issues

of Policy and Law
Amarsanaa Batbold, and Idesh Ivshin

10

Investment Environment of Developing Countries Dependent on

Extractive Industries The fate of Mongolia?
Munkhtselmeg Nyamsuren

21

Ad hoc Arbitration in Mongolia: A Procedural Overview

Ganzaya Tsogtgerel, and Minjae Baek

38

Taking Security in Mongolia Issues and Challenges

Solongoo Bayarsaikhan

46

International Legal Personality of International Organizations:

International Law Perspective
Tuulaikhuu Enkhee

49

Icelands Meltdown and Revival: A Lesson in Rebounding

Joe Bannister

54

ESSAYS AND COMMENTS

Memorandum of Advice to the Ministry of Justice:
On the Criminal Liability of Corporations for Death and
Injury in the Workplace under Mongolian Law
Benjamin Lindner

59

Commodities Futures Market in Mongolia

Altansukh Dugaraa

70

EDITORIAL BOARD
J.Amarsanaa

Chairman, Constitutional Court of Mongolia, Academician

B.Amarsanaa

LL.D, Vice Director of the National Legal Institute

A.Bakei Chairman, Standing Committee on State Structure of State

Great Hural of Mongolia
B.Bayarsaikhan

Ph.D

D.Bayarsaikhan

Ph.D

J.Bayartsetseg

State Secretary, Ministry of Justice of Mongolia

J.Byambadorj

Chief Commissioner, National Human Rights Commission

of Mongolia

D.Ganbat Chairman, the Standing Committee on Legal Policy of State

Great Hural of Mongolia
B.Gunbileg

Ph.D

D.Dorligjav

Minister of Justice

Ts.Zorig Chief Justice, Supreme Court of Mongolia

V.Oyumaa

Ph.D

Ch.Unurbayar

Legal Advisor to the President of Mongolia, Ph.D

Kh.Temuujin

Member of the State Great Hural of Mongolia

B.Temuulen

Dean, School of Law, National University of Mongolia

P.Tsagaan

Head, the Office of the President

R.Chinggis

Chief, General Police Department of Mongolia

Ch.Enkhbaatar

Sc.D

A.Erdenetsogt

Ph.D
Editor-in-Chief
Kh.Nomingerel
Executive Editor-in-Chief
I.Idesh
Acting Assistant Editor
D. Nyambayar
Designed by
B.Tserenlkham

State Registration Number:279

ISSN: 2226-9185
The National Legal Institute
publishes this law review five
times per year.

Address: Ulaanbaatar-46, Chingeltei

District, Chinggis khaan Square -7
Phone:+(976)-11-315735
Fax: 315735
Website: www.legalinstitute.mn
E-mail: lawjournal@legalinstitute.mn

Articles

LEGAL ADVICE AND COMPARATIVE LAW

Prof. Yoshiki Kurumisawa,

Director of Institute of Comparative Law,
Waseda University,Tokyo

that justified? What is the best method

of legal technical assistance? A notable
example is Professor Rolf Knieper, who
led Germanys legal assistance. The
professor explored methodologies of legal
technical assistance through dialogues
with scholars of recipient countries,
amid tense relationships with legal
system implementation work.1 Scholars
involvement in legal assistance projects has
led such assistance itself to be studied as
an academic subject, furthering analyses
of the universal validity of law across
societal and national boundaries, and
encouraging study of the context unique
to the society of each recipient country.
One can say that todays comparative
law scholars confront theoretical issues
posed by legal assistance that is a handson effort.

1. War of Advice to Transformation

Countries and Study of Legal
Assistance as an Academic Subject
After the dissolution of the Soviet
Union following the revolutions of Eastern
Europe, many former Soviet satellite
states elected the shift of regime to a
capitalist society, rather than maintaining
the socialist system. The path these
states chose was to reconstruct society by
introducing market relationships and thus
becoming connected to the rest of the
world. As a market system could not have
been introduced without building legal
infrastructure, many former satellite states
asked developing capitalist countries for
assistance in building a legal system.
Capitalist countries literally competed with
each other to transplant their own legal
system to these states, because such
transplant would enable the countrys
banks, corporations, law firms, and
other entities to secure competitiveness
supported by the system. The situation
was dubbed a war of advice by the
media.
Countries providing infrastructure
development assistance are constantly
exposed to the temptation of using such
assistance as a tool to control the economy
of the recipient country. That is the reason
why, when taking part in assistance,
scholars are compelled to concurrently
pursue research on issues related to the
fundamentals and theories of jurisprudence,
which include such questions as: Can law
be transplanted in the first place? Why is

2.
Rationale
Justifying
the
Transplant and Universal Validity of
Law
Professor Knieper stands on the
recognition that legal universalism, which
advocates that law demands its universal
validity, is neither an axiom nor a principle
with timeless applicability, but a theory
that is valid only in a particular phase
of the world historythat is, presentday society where capital and labor are
invested to produce goods that are traded
at markets in exchange for money. A
society like this has a structure in which
private domains are created through the
legitimate pursuit of personal interests
Rolf Knieper, Juristische Zusammenarbeit: Universalitt und Kontext [Judicial cooperation: universality
and context] (Wiesbaden: GTZ, 2004); and Knieper,
Rechtsreformen entlang der Seidenstrae [Legal reform along the Silk Road] (Berlin: BWV, 2006).

LAW REVIEW

2014 4 (50)

universal validity with the context of each

country. But, in what method should we
understand such context?
A precondition of transplanting law is
to link a society to which law is transplanted
with the global economy that is based on
market mechanisms. Therefore, what is
crucial for understanding the societys
context is to know what resistance the
recipient society may show and what
change it may undergo when introducing
market relationships and becoming
connected to the global market. It is
important to pay attention to these points
when working to grasp the context of the
society.
When examining the best way to
build market mechanisms into a society,
there are at least two points to consider.
The first is how to combine the allocation of
social wealth through market relationships
with distribution through nonmarket
relationships, such as nations and
communities. The other is how to arrange
the individual components of a market,
that is, a place in which transactions are
conducted to satisfy demand (buying for
use or consumption) and a place in which
transactions are conducted to increase
value (buying for selling). These two points
are likely to be dictated by the societys
context, and providing legal assistance
without regard to them will probably cause
frictions. Even in a society where the
majority of social wealth is allocated in the
form of articles of commerce, it is not that
all the social wealth is commercialized.
Each society more or less has its own
mechanism by which some categories of
wealth are allocated through nonmarket
social relationships. A factor instrumental
in considering the context of a particular
society is what categories of wealth
have been allocated through nonmarket
relationships or have been subject to
restrictions on commercialization. Also,
when based on the premise that law
represents the very social relationship
mediating markets, one can say that
forcibly applying law to nonmarket social

and supplemented by the public and

national domains. In such a society,
various principles demand universal
validityincluding private ownership, the
protection of free contract, free business
activities, obligation to pay taxes, as well
as the principles corresponding to them,
such as the nations obligation to build
infrastructure, the government authoritys
obligation to comply with the rule of
law, and the protection of the socially
vulnerableand such universal validity
justifies the provision of legal assistance
across national boundaries. Accordingly,
the purpose of providing legal assistance
to a post-regime-change country is not
to develop the underdeveloped society,
but to help the country fulfill the general
duty of developing a legal system in a
real-world environment where a society
cannot be sustained unless integrated into
the global economy through goods and
capital transactions. This is predicated on
two conditions, one being the existence
of a market economy system and the
other being need for a legal system in
order to maintain markets. In other words,
law represents a social relationship that
mediates economic relationships of
producing and trading goods (i.e., markets),
and as such is valid for social relationships
in general in a market economy. It can be
confirmed that herein lies the rationale
justifying the universal validity of law, that
from here derives the transplantability of
law, and that herein exists the rationale
justifying legal assistance.
3. Need for and Methods of
Understanding Context
On the other hand, a recipient
countrys society does not exist as tabula
rasa or a blank slate on which anything
can be drawn; it exists as a society with its
own history and unique context. In order
for legal assistance to be successful, it
is essential to clarify such context and
examine over a long period of time the
applicability of law to that context. The
key is how to reconcile laws demand for

Articles

relationships will cause frictions.

4. Commercialization of Land as a
Case Study
(1) Nations Responses to the
Commercialization of Land
Originally, articles of commerce
were ones produced by human labor.
Land, to which this definition does not
apply, has been commercialized through
processes unique to each society and
nation. Professor Takeshi Mizubayashi, a
legal history scholar, defines a historical
phase in which land itself becomes an
article of commerce as a society with land
market economy, a society with a unique
socio-economic structure that is no longer
feudalism but is yet to be capitalism.2
In China, during the Qin and the Han
Dynasties, communities were dissolved
and the national system was changed
from feudal to province-county one,
while land became traded as an article of
commerce. These developments triggered
the annexation of land and the dissolution
of peasantry. However, under the national
system of a society with land market,
China adopted the policy of banning the
free trade of land to protect small farmers
and prevent peasantry from breaking up by
prohibiting excessive ownership of land.
This policy was clearly aimed at building
an equitable society on a national scale. In
France, the trend of commercializing land
caused each region to codify customary
law (law on the recovery of real estate by
relatives) in opposition to the trend. At the
same time, going against that movement,
the theory of contract law was formed
within the citizen law system, denying
the law on the recovery of real estate by
relatives, accepting the commercialization
of land, but denying the uncontrolled
accumulation of land inconsistent with the
principle of justice.
(2) Japans Experience as a Country
to Which Law Was Transplanted

Unlike
China,
where
the
commercialization of land was tried
to be banned, and France, where
commercialization was accepted but
purchasing land for selling was legally
controlled, Japans shift from communities
to a society with land market did not
occur spontaneously but progressed in an
extremely short period of time pressured
by Western powers. For a national
system corresponding to this shift, a
modern system of absolute ownership
was introduced from abroad, which led to
the denial of the real-estate redemption
system, the denial of the principle of laesio
enormis, and the approval of trading of land
as commercial transactions. As a result,
the title to farmland was transferred from
the hands of cultivators to the landlord. A
parasitic landlord system was established,
under which the exploitation of tenant
farmers managing farmland became the
norm. It was not until the postwar land
reform that the government confronted
evils resulting from the commercialization
of land and succeeded in establishing the
land law system as social law to relieve
cultivators from such evils. The land
reform transformed the economic order
of agricultural villages into the one under
which the fruits of labor go to farmers.
To support this new economic order,
the Agricultural Land Act was enacted,
abolishing the landlord-type ownership of
land that guaranteed the possession of
anothers labor, and instead introducing
farmers ownership of land based on own
labor.
(3) Universal Validity of Law and
Context in the Land Law Field
In not a few recipient countries, the
main source of social wealth is land (in
particular, farmland). Land law is therefore
among the legal fields of greatest interest
to recipient countries. They have a strong
tendency to try to develop the land law
system based on the recognition that
the way to derive the greatest economic
value from land is to immediately privatize

Takeshi Mizubayashi, Tennosei shiron [An analysis

of the history of the Emperor system] (Tokyo: Iwanami Shoten, 2006).

LAW REVIEW

2014 4 (50)

system, under the framework of advanced

cooperatives that were collective farms.
This policy was designed to promote a
shift from a cooperative-based agricultural
production system to a family-based
agricultural management system, backed
by farmers dynamism and willingness to
engage in production at farms managed
personally, not collectively. In other
words, the breakup of collective farms
was triggered directly by farmers earnest
desire to engage in physical labor and
management at the same time. On the
other hand, when breaking up collective
farms, the land was divided extremely
equally, thanks to the communal principle
traditional to small villages that had not
been completely wiped out even after
the formation of socialist collectives. This
shows that two trends actually coexisted
in the nations agricultural society, one
being the personalization of management,
the other being equal allocation of land in
accordance with the communal principle.
Against this backdrop, the nations first
land law was enacted, recognizing land
as a means of production. The 1987 Land
Law permitted exclusive use of farmland
as a means of production, and disallowed
the trading of farmland. Then, the 1993
Land Law permitted land use rights to be
traded within the possession limit of three
hectares. The land law up to that stage
can be said to have been predicated on
a farmland market participated by farmers
on the basis of a small farmer system. In
contrast, developments leading to the 2003
Land Law are seen as having crossed
the line of the universal validity principle
regarding farmland transactions, not only
by enabling farmland to be accumulated
via rental transactions over the limit of
possession of land use rights and thereby
accelerating the dissolution of peasantry,
but also by allowing nonfarmer business
groups to acquire land use rights. One
can say that these measures have been
instituted in view of the land market
leading to the breakup of the small farmer
system.

state- or community-owned land and

allow it to be freely traded in markets.
Insofar as recipient countries regard land
as an investment option, legal technical
assistance will be provided to realize
the deregulation and liberalization of
land transactions. However, Japans
experience as a country to which law
was transplanted serves as an eloquent
reminder of the consequences such
assistance will bring.
As for farmland, it is necessary to
start with recognizing that holders of the
right to farmland should be the people
who have resided and engaged in farming
there. The next step has two options: one
is to establish the right to farmland only as
a use right for the purpose of production;
and the other is to establish it as a right
that can be disposed of. The appropriate
option will depend on the context of the
society concerned. When choosing the
latter option, i.e., a system that allows
farmland to be traded in markets, universal
validity should be considered to exist in
the legal principle that a person who is
responsible for farmland management and
resides in that area to engage in farming
full-time should become an entity to
obtain the right (the concept common, for
example, to Selbstbewirtschafterprinzip(t
he principle of people producing on their
own) seen in the Swiss law on farmers
land and Austrian state laws concerning
the trading of farmland and forests, and to
the cultivator principle adopted in Japans
Agricultural Land Act). This will enable the
fruits of labor to go to cultivators, while
ensuring comprehensive relationships
are sustained between producers and
land that is the foundation for both their
production activities and lives. As a result,
land will be cultivated in a manner not
exploiting its potential and succeeded to
the next generation.
(4) Case 1: Vietnam
Aiming to build market socialism,
Vietnam allocated land to farm households
by introducing a contract production

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combining their vouchers. The reason

why this method was taken is that,
whereas vegetable production could have
been managed by family farms, wheat
production needed a larger farming scale,
requiring the production facilities and
machinery corresponding to that scale;
and it was not feasible to divide such
property on a family basis. It was to those
private companies that land possessory
rights under the Law on Land of 1994
were granted according to their size. As
these rights were not granted to individual
farmers, they staged protests with tractors,
demanding that the government reallocate
farmland possessory rights. In 2003, the
government set a 3,000-hectare upper
limit on the possessory rights obtainable
for land to be used for grain and feedstuff
production. As a result, companies
possessing land in excess of 3,000
hectares were obligated to return to the
government their possession exceeding
the limit, and the returned land possessory
rights were decided to be granted gratis,
preferentially to citizens engaging in
farming for five years or longer. The area
to be granted was determined to be less
than 100 hectares for grain production and
less than five hectares for potatoes and
other vegetables. In 2008, however, the
government reversed its 2003 decision
and raised the upper limit on possessory
rights obtainable. For land to be used for
grain and feedstuff production, the upper
limit was raised from 3,000 hectares to
20,000 hectares; and for land to be used
for producing potatoes, vegetables, and
other plants, the upper limit was raised
from 50 hectares to 200 hectares. This
decision was made against the backdrop
of the emerging situation in which mining
and other nonagricultural companies
invested in the agriculture business and
started operating large-scale farms with
tens of thousands of hectares of land.
The Law on Mongolian Citizens
Ownership of Land of 2002 introduced
private ownership of farmland, which was

(5) Case 2: Mongolia

In Mongolia, whose territory was
once used almost entirely for nomadic
herding, land was not anybodys property
but the common asset of which anyone
could use any part. However, the nations
shift to a market economy called for nonpastureland to be used for economic
purposes in order to help the nations
economic development. This was
because there were thought to be no
resources other than land that were able
to produce economic benefits. Then, to
enable land to be freely traded in markets,
the government started enacting laws
promoting private ownership of land. The
first was the Law on Land promulgated in
1994. This law stipulated, first of all, that
all the land be owned by the nation, and
then that the nation grant it to citizens.
The 1994 law, however, did not go so far
as to immediately grant land ownership
to citizens; instead, it established a
scheme under which the nation concluded
contracts with private citizens that allowed
them to use land for a certain period of
time (maximum of 60 years) depending
on their purposes. The right granted there
was provided for as a possessory right
(ezemshikh), which was different from
ownership. That way, the nation aimed
to create an environment where citizens
were able to make profits from land,
before granting land ownership to citizens
by enacting a law permitting private
ownership of land (which was realized in
2002).
During the socialist period, farmland
belonged to large state-run farms that
were managed on a soum (district) basis.
Privatization of those state-run farms,
which covered grain and vegetable
production and livestock raising, began
in 1991 by way of dividing the production
means other than land in the following
manner: state-owned property, including
state-run farms, was distributed to citizens
in the form of vouchers; then citizens joined
hands to establish a private company by

LAW REVIEW

2014 4 (50)

introduction of a market economy, social

infrastructure development projects have
focused on the capital and other large
cities, causing herders to move to the
central area that offers better access to
markets. These trends have resulted in an
imbalance between the area of meadows
and the number of farm animals raised
there, creating a vicious cycle by which
grass growth has been further hampered.
To address the situation, pilot projects
have been undertaken by the Millennium
Challenge Corporation and other foreign
aid bodies, aimed at ensuring the efficient,
rational, and sustainable use of grass
and encouraging a shift from inefficient
nomadic herding to settled herding with
higher productivity, by setting areas in
pastureland that are exclusively used and
managed by particular groups of herders.
The draft Pastureland Law is to promote
such strategies by establishing a legal
framework. Some members of parliament
representing aimags (provinces) with
unfavorable conditions, however, are
opposing the draft law. We need to carefully
watch how this matter will progress.
For herding in an arid or semiarid region like Mongolia, the scope of
movement is not limited to a certain area,
but affected by rainfall as well as natural
disasters including snow damage and
drought. A pattern of movement is neither
fixed nor clear, which inevitably makes
boundaries of resource use unclear, too.
Groups formed by herders are equally
varying, multilayered, fluid, and changeful.
Based on such conditions, over a long
period of time herders have developed
ethics for resource use, including the
flexible use of resources and reciprocity
(helping each other at times of difficulty),
along with social norms dictating
pastureland use and its coordination.
In the light of such traditional norms
gradually losing their effectiveness these
days, the proposal has been made to
change the form of nomadic herding itself.
The issue here, i.e., whether nomadic

decided to be granted for a consideration,

preferentially to those having farmland
possessory rights. In reality, however,
private ownership of farmland has not
been realized due to extremely high prices.
Although granting private ownership of
farmland gratis has also been proposed,
making it reality will require introducing
regulations on farmland transactions
at the same time. Such regulations will
be needed to ensure that farmland will
be owned by local farmers who actually
engage in farming full-time and bear
responsibility for farm management. On
the other hand, as possessory rights are
nontransferable, they can be regarded as
constituting a legal framework that helps
stabilize relationships between farmers
and farmland.
While managing grain production
in Mongolia does not suit family farms,
management through cooperation among
residents can be said to accord to the
cultivator principle that has universal
validity. Therefore, priority should be given
to increasing and supporting mediumsized farms managed by local residents,
as opposed to nonagricultural entities
mega farms where management and
labor are separated and people working
there live somewhere else. In the land law
field, it is important to provide technical
assistance from that perspective.
Under the Constitution, pastureland
can be neither possessed nor owned. It is
a space open and available to any herder.
Nevertheless, the national parliament
has recently been discussing a draft
Pastureland Law, which is designed to
introduce possessory rights to pastureland
(especially in suburban areas) and promote
settled herding. This movement has been
triggered by multiple developments.
The first is changing natural conditions
under which decreased rainfall has led
to deterioration in grass growth. This,
in turn, has caused the trend of herders
moving to and concentrating in areas with
better conditions. Furthermore, with the

Articles

herding should be extinct or not, is nothing

less than a fundamental question about
civilization.3 Even the cultivator principle
that has universal validity cannot apply
to pastureland as it does not have the
historical context of land ownership.

Going forward, legal technical

assistance is expected to shift its focus
from enactment to enforcement of law.
This will likely necessitate long-term
joint research projects where the sociology
of law will be studied jointly with scholars
of recipient countries, and analyses
will be made of societys reactions
adaptation, resistance, and rejectionto
the law transplanted. What is required of
comparative law scholars in the future is to
go beyond studying and comparing each
countrys substantive law and to employ
a method of the sociology of comparative
law, whereby relationships between law
and society as a whole are compared on
a country-by-country basis.

5. A Method of Comparative Law:

Comparative Law and Society
As discussed above, legal technical
assistance that is a hands-on effort calls
for scholars of legal theories to take on
the challenge of searching for the legal
principles that should be universally
valid across national boundaries and of
analyzing each countrys society and its
historical context.

---o0o---

Katsuhiko Tanaka, Nomonhan senso: mongoru to

manshukoku [Nomonhan War: Mongolia and Manchukuo] (Tokyo: Iwanami Shoten, 2009).

LAW REVIEW

2014 4 (50)

LEGAL REGULATION OF MINING ACTIVITIES IN

MONGOLIA: CURRENT ISSUES OF POLICY AND LAW

B. Amarsanaa, LL.D,
Vice-Director of the National Legal Institute of
Mongolia (NLI)

I.Idesh, Ph.D,
Head of Legal Research Center of the NLI

1. Introduction
Mongolia is a mineral-rich country
landlocked between Russia, China and
Kazakhstan. Almost three times the size
of France and with a population of only
2.9 million, Mongolia has one of the
lowest population of densities of any
country in the world. Because of its size
and geographical location, Mongolia is
hampered by distance from major markets
and distance of many citizens from centers
of social and economic activity.
The
Mongolian
economy
is
dependent on the mining sector and
agriculture which have a direct impact,
both on economic policy and on the
conditions for foreign direct investment.
For example, in 2013 the mining sector
accounted for over 82.80% of export,
18.50 of GDP1. Mining and construction

begin only in late March and livestock

births peak in the second quarter. There
is only a short, single harvest late in the
third or early forth quarter.
These factors make Mongolia more
vulnerable to external shocks than other
transition economies and developing
countries. The decline in certain commodity
world prices could lead to overspending
and high inflation and trigger large swings
in real exchange rate that undermine
export performance and growth. To avoids
this, Mongolia needs to follow expendituresmoothing policies while actively pursuing
diversification. The national mineral policy
of Mongolia thus is aimed at increasing
the sustainability of mining sector through
the promotion and development of exportoriented industries. Consequently, the
Government of Mongolia has adopted
a number of long-term programs for the
exploration of potential mineral deposits,
especially of gold, silver and copper since
1991.

1
N. Algaa. Building a stable legal environment of mineral resources is the basis of economic development.
Paper presented to the International Workshop on
Legal Regulation of Market Economic Relations:
Conflict of Interests and its Consequences. Shikhi
Khutag Law School. Ulaanbaatar. 2014. p.140

10

Articles

For the above reasons, the legal regime

for mining activities has been developing
at rapid pace since the adoption of the
existing Constitution of Mongolia in 1992.
The Parliamant of Mongolia has enacted
laws on land, surface, petroleum, minerals,
environmental impact assessment and
investments since the adoption of the first
Mineral Law in 1994. Mongolia has also
enacted legislation dealing with the issue
of exploration and mining of radioactive
substances. In addition to these legislative
acts, the Parliament of Mongolia adopts
various policy papers and programmes
dealing with the issue of national policies
in particular economic sectors. A good
example of such policy instruments is the
new State Policy in Mineral Resources
Sector /2014-2025/.2
The new State Policy in Mineral
Resouces defines mining sector specific
objectives and priorities and its key goal is
to accelerate the development of mining
industry and increase private sector
participation in the Mongolian economy.
In this context, the Government identifies
private investment as a vital source
of much needed capital, technology,
management now-how and access to
international markets. Foreign investment
and direct participation in a wide range
of mining related industries are actively
encouraged.
Such
involement
is
particularly encouraged in connection with
the exploration, extraction and processing
of mineral resources.
In this article the authors address
the issue of the development of mineral
policy of the Government of Mongolia,
legal regime for mining activities in
Mongolia. The authors first describe the
role of mining sector in the economic
development of
Mongolia and then
outline the national mineral policy and
main provisions of the existing Mineral
Law. Also the authors address current

issues of mineral policy and law which

mining license holders are likely to enter
in any Mongolian project.
2.
National mineral policy of
Mongolia and its implications on the
economic development of the country
2.1.The role of the mining sector
in the economic development of
Mongolia
Up to 1990 Mongolia was integrated
into COMECON (Council for Mutual
Economic Assistance) markets and the
subsidies it received from the former Soviet
Union helped to offset its geographical
disadvantages. The assistance of the
COMECON
member-countries
had
played a vital role in the development of
the Mongolian economy. As a World Bank
study put it: From the 1950s until 1990,
the Soviet Unoin, along with other CMEA
countries, provided a generous volum of
financial assistance to Mongolia in the
form of grants and low interest loans.
Over the second half of the eighties,
for instance, foreign source transfers
averaged 30 percent of GDP each year.
These helped to finance Mongolias
imports of equipment, consumer goods
and energy. All the petroleum products
consumed came from the Soviet Union,
which was also principle purchaser of
Mongolias exports of copper concentrate,
wool, leather goods, and meat. Between
them the CMEA countries absorbed 97
percent of Mongolias exports and much
of this period , the main transport link with
the outside world ran through Western
Siberia into the Soviet Union3.
Then, however, the economic
slowdown and collapse of the Soviet
Union and other COMECON countries in
the late 1980s and early 1990s brought
about a sharp decline and later a virtual
cessation of financial and technical
assistance to Mongolia. By that time nearly
all production and distribution activities
were concentrated in large scale state-

The State Policy in the Minerals Sector /20142025/ was adopted by the Resolution # 18 of the
State Great Hural of Mongolia on 16 January, 2014.
www. legalinfo.mn

World Bank, Developing Mongolia, Washington,

D.C., 1991, p.1.

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controlled monopolies.Consequently, this

led to distortions in resource allocation and
mounting internal and external imbalances.
The early 1990 saw the intensification of
social tensions, as shortages of consumer
goods became increasingly evident and
the countrys economy got into a crisis
situation. For these reasons Mongolia has
experienced an unprecendented decline
in real income since 1991. Economic
disruptions have included a huge budget
revenue loss, severe depreciation of the
tugrik resulting from monetary inflation,
and a shortage of basic commodities.
Also, the shortage of financial resource
flows from the former Soviet Union and
other COMECON countries has been the
essential cause of a sudden interruption
of most investment projects, of shortages
of key raw materials, petroleum, spare
parts, and equipment, and of a sharp drop
in consumer goods imports.
At the same time the collapse of
Mongolian trade with the COMECON
countries, accentuated by a significant
deterioration in the terms of trade, has left
the country no alternative to expand its
economic relations with western countries
and attract direct foreign investment.
Faced with a sharp deterioration in the
macroeconomic picture, the Mongolian
Government has taken a series of
changes along the lines set forth in the
1991-1993 economic program. Between
1991- 2000 the Government of Mongolia
has undertaken a bold reform agenda
aimed at stabilizing the economy,
strengthening the role of the private sector
and increasing the private investment
and attracting higher levels of foreign
investment to Mongolia. With the support
of a broad consensus for its reform
agenda, the Government implemented
tight monetary and fiscal policies, initiated
financial sector reform, eliminated tariffs,
introduced a value added tax (VAT)
and launched a large scale privatization
programme. In particular, the Parliament
of Mongolia passed the Mineral Law in

1994. Consequently, the adoption of the

new Minerals Law4 and other commercial
laws5 resulted in considerable progress in
macroeconomic stabilization at the end of
1990s.
Since 2000, the Government of
Mongolia has continued the measures
aimed at strengthening the role of
the private sector and improving the
environment for foreign investment.
Consequently, Mongolias economic
performance has improved gradually,
owing to macroeconomic policies. In
particular, inflows of FDI have increased
gradually since the first revision of the
Mineral Law of 1997 between 2000 and
2010.
Despite its isolation and distance
from export markets, private investment
in the Mongolian mining sector has been
dynamic in 2000s. This dynamic has been
aided in part by rich natural resources and
in part by the mineral legislation
and
co- production arrangements negotiated
by the Government of Mongolia.
Consequently, creating the conditions to
attract foreign mining companies6 to the
mining industry and to improve Mineral
Law have been important components
in national mineral policy and structual
The first Mineral Law was replaced by the secont
Mineral Law in 1997. For this issue see Introduction to Mineral Resources Law(2012), National Legal Institute of Mongolia, Anand Batzaya advocates,
Ulaanbaatar, pp 14-19
5
For example, the Foreign Investment Law was adopted in 1993. For an overview of the development
of the Mongolian foreign investment legislation see
I.Idesh Impact of International Law on the Development of the Mongolian Investment Legislation and
Its Legal Consequences (2012), Materials of International Workshop on Trends of the Development
of International Law in Mongolia, School of Foreign
Service of the National University of Mongolia, National Intelligence Academy, National Legal Institute
of Mongolia, Ulaanbaatar
6
Mongolia acceded to the WTO in 1996 and the
Government of Mongolia complies with trade related
investment measures (TRIMS) that specifically prohibits requirements, for example export performance
or local content requirements. Issues of obligations
and commitments of the Government of Mongolia
before the WTO are not considered in detail within
the framework of this article.
4

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Law in 1997 with a view of mainly

facilitating foreign direct investment and
creating more jobs. Among its provisions,
the Mineral Law reduced the rate of
royalties from mineral production by 10
percent. The new rate was established at
2.5 percent.
These
actions
resulted
in
considerable progress in the effectiveness
of the activities of mining companies and
and inflows of FDI have been increased in
2000s. The strong presence of the mining
sector in FDI can be explained in part of
the mineral law reform of the Government
of Mongolia in this period. In particular,
separate laws dealing with varoius issues
of mining activities including appropriate
legislation on licensing of economic
activities, taxation and environmental
impact assessment have been enacted or
amended. The Mineral Law of 1997 was
also revised in 2006 (the 2006 Mineral
Law). This act introduced a concept of
investment agreement and regulated
various issues of the development of
exploration and mining projects and
environmental aspects of mining activites.
The 2006 Mineral Law has also taken into
account the Constitution, other legislative
acts in force such as the Surface Law,
Petroleum Law, Land Law, Foreign
Investment Law and other laws. Following
the adoption of the 2006 Mineral Law, the
Government of Mongolia has declared
several mines including Oyu Tolgoi as
a deposit of strategic importance. The
Investment Agreement between the
Government of Mongolia and Ivanhoe
Mines and Rio Tinto plc for Developing
Oyu Tolgoi Gold- Copper Project was
signed in October 2009.
But Mongolias national policies on
foreign investment and mineral resources
and mineral legislation have been sharply
affected by a number of domestic and
international developments since 2009.
The adoption by the Parliament of Mongolia
of the Law on Regulaion of Foreign
Investments in the Economic Sectors of

reform since 1990. As a result of such

foreign investment policy and mineral
law reform in Mongolia, the mining sector
has become a major contributor to the
national economy and mineral policy of
the Government of Mongolia has played
a core role in the Mongolian economic
development. Therefore, the next section
addresses the policy issues relevant to
the mineral resources sector and mining
activities.
2.2. Overview of the recent
mineral policy of the Mongolia and
its implications on the economic
development of the country
As we have briefly noted in the
previous section of this article, in order to
create favourable conditions for mining
activities and promote foreign direct
investment the Government of Mongolia
has devoted considerable resources to
the development of its mineral legislation
since 1990. The first sources of mineral
legislation to be considered is the
Petroleum Law of Mongolia, adopted in
1991, which introduced to Mongolian law
a new type of agreement production
sharing agreement. The next important
legislative act which gave direction to the
further development of mineral legislation
was the Mineral Law of Mongolia of 30
September 1994 (the 1994 Mineral
Law). This Law introduced a concept of
strategic minerals and contained detailed
provisions on mining licenses, tender
bidding and license fees and legal status
of state administrative organs in charge of
mineral policy.
Following the adoption of the
1994 Mineral Law Mongolias economic
performance not only improved but also
led the Government to take a series of
economic measures. The Government
implemented tight monetary and fiscal
policies, initiated financial sector reform,
eliminated tariffs, introduced a value added
tax (VAT) and launched a large scale
privatization programme. The Parliament
of Mongolia thus passed the new Mineral

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Strategic Importance7 and other laws8 was

met with strong opposition from foreign and
domestic investors in Mongolia. The sharp
decline in the government revenues from
state owned mining companues which
produce copper, coal, and iron has placed
pressure on the Government of Mongolia
to institute compensatory measures
since 2012. These measures not only
included increases in rate of royalties
and the introduction of minimum cost of
exploration but also led to the revision of
the 2006 Mineral Law and adoption of the
new State Policy in the Mineral Resources
Sector in July, 2014 .
Thus, the legislative framework for
mining activities has expanded quickly over
recent years and Mongolia has adopted
a comprehensive Mineral Law and other
laws which belong to different branches of
law. The next part of this article deals with
the general legal framework for mining
activities in Mongolia.

principles of the legal regime applicable to

mining activitites and mining companies10.
The existing Mineral Law has the following
chapters:
Chapter One General Provisions;
Chapter Two State Regulation in
Minerals Sector;
Chapter Three Prospecting and
Exploration of Minerals;
Chapter Four Mining of Minerals;
Chapter Five Conditions for
Maintaining Eligibility to Hold a License
Chapter Six Obligations of a
License Holder;
Chapter Seven Transfer and
Mortgage of Licenses;
Chapter Eight Termination of
Licenses;
Chapter Nine Information, Royalty
Revenue Distribution, Reimbursement
and Specifics of Finance and Accounting;
Chapter Ten Resolution of Disputes
Arising in Connection with Licenses;
Chapter Eleven Liabilities.
The 2014 Mineral Law has 66
articles and covers various issues of the
development of exploration and mining
projects such as the ownership of mineral
resources, mining licenses, transfer
and pledge of licenses, termination and
revocation of licenses, environmental
protection and mine closure11. Below is

3. Legal framework for mining

actvities in Mongolia
The rules of public and civil law which
have been specially established for mining
activities apply to mining companies in
Mongolia. Among such rules, the 2014
Mineral Law which regulates various
issues of the development of exploration
and mining projects and environmental
aspects of mining activites is a key source
of mineral legislation in Mongolia.
As we have noted in the previous
part of this article, Mongolia last revised its
Mineral Law in July, 2014 and the existing
Mineral Law,9 sets forth the general

framework of this article.

10
At present, Mongolia has adopted separate laws
on petroleum and radioactive substances which
more typically regulate relations in the petroleum
and nuclear energy sectors and not mining. The
Petroleum Law was adopted in 1991 and last revised
by the Parliament of Mongolia in July, 2014. Issues
of importation, production, sales and transportation
of petroleum producs are regulated by the 1995 Petroleum Products Law. The Law on Nuclear Energy
was adopted in 2009. This Law contains provisions
that apply to mining and enrichment aimed at the
production of uranium and thorium. However, the
issues of exploration and mining of oil and uranium
are not considered in detail within the framework of
this article.
11
Majority of provisions of the 2006 Mineral Law
bearing the state regulation in minerals sector, pow-

This Law restricted foreign direct investment in

certain sectors of the Mongolian economy and then
was replaced by the Investment Law of Mongolia in
2013.
8
The laws which have prohibited to grant exploration
licences were adopted in 2011, 2012 and 2013.
9
Complementary provisions of mineral law are found
in other laws and regulations ( such as environmental law, foreign investment regulations). For example,
legal aspects of land use and environmental protection are regulated by the Land Law and Environmental Impact Assessment Law of 2001. However,
these issues are not considered in detail within the
7

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a brief summary of the main provisions of

the existing Mineral Law.
Purpose of the Law. The purpose
of the Mineral Law is to regulate the
prospecting, exploration and
mining
of mineral resources and protect the
environment12. The concept of mineral
is defined in Paragraph 4.1.1 of Article 4
of the Mining Law as any usable natually
occuring concentration that was formed on
the surface or in the subsoil as the result
of geological evolutionary processes13.
Ownership of mineral resources.
Legal aspects of ownerhip of natural
resources are regulated by the Constitution
of Mongolia14, Land Law, Mineral Law and
other laws15 and all minerals resources
occurring on and under the earths surface
in Mongolia are the property of the State.
The 2014 Mineral Law does not restrict
foreign investment in exploration and
mining license holders. However, this Law
imposes requirements for state equity

participation in mining license holders and

the State may own up to 50 percents of
participating interests in a private legal
person.16 The State may also own up
to 34% of the shares of an investment
to be made by a license holder in a
mineral deposit of strategic importance
when its proven reserves have not been
determined by the means of state budget
funded explorations.
Exploration and mining licenses
and eligibility of license holders.
Exploration and mining license holders
must be Mongolian legal entities and only
an exploration license holder is entitled to
apply for a mining license in the exploration
licensed area pursuant to Article 24.1 of
the Mineral Law. Exploration licenses
are issued for a period of three years. An
exploration license holder has the right
to obtain three extentions of the term of
an exploration license for three years
pursuant to Paragraph 1.5 of Article 21
of the Minearl Law. Exploration license
holder has priority rights to apply for and
obtain mining licenses provided that such
legal persons satisfy the requirements
set forth in the Mineral Law17. The criteria
to which the granting of an exploration
license has to be refused are contained in

ers of state administrative agency and local administrative agencies, procedures for submitting application to issue licenses, procedures for submitting
application to extend the term of exploration and
mining licenses and obligations of license holders
have been preserved in the existing Mineral Law.
12
See Article 1 of the Minerals Law of Mongolia .
www.legalinfo.mn
13
Provisions of the existing Mineral Law dont apply to petroleum, natural gas, radioactive substances
and common minerals. See Article 3.1 of the Mineral
Law. The Common Minerals Law was adopted in
January, 2014.
14
The Constitution of Mongolia provides expressly
that land, underground resources, air and water are
object of exclusive ownership by the people of Mongolia. See Article 6.1 of the Constitution of Mongolia. The Land Law provides for ownership of land by
Mongolian citizens and the State. See in detail the
Land Law of Mongolia www.legalinfo
15
Foreign nationals including foreign investors are
not permitted to own land. The same prohibition applies to legal entities, whether Mongolian, foreign or
jointly owned. Foreign mining companies in Mongolia are limited to acquiring land possession and use
rights. However, they may own property constructed
on the land such as building, factories, warehouses
and other structures. See Article 12.1 of the Investment Law of Mongolia. The amended Foreign Investment Law of 1993 was replaced by the Investment Law in 2013. Investment Law of Mongolia.
www.legalinfo.mn

This provision applies only to minerals deposits

of strategic importance where such deposits have
been discovered by the means of state funded exploration works. See Article 5.4 of the Minerals Law
of Mongolia
17
In addition to this right, an exploration license
holder has the following rights under Article 20 of the
Minerals Law:
1. to conduct exploration for minerals within the
boundaries of an exploration area;
2. to transfer the exploration license under the terms
and conditions of this law or surrender all or part of
the exploration license area with the permission and
under supervision of respective authority;
3. to have access to the exploration area and construct temporary structures with the purpose of conducting exploration work;
4. to pass through the land surrounding the exploration area for the purpose of entering the exploration
area;
5. to enter and pass through the land owned or possessed by other persons.
16

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Paragraph 2.1 of Article 19 of the Mineral

Law. This is especially the case when the
application and the attached documents
fail to meet the requirements set forth in
the Mineral Law.
Mining licenses are issued for a period
of 30 years. A mining license holder has
the right to extend the term of the mining
license two times for a period of twenty
years each depending on the reserve of
the mineral18. The criteria according to
which the granting of a mining license has
to be refused are contained in Article 26.3
of the Mineral Law. This is especially the
case when the application and attached
documents fail to meet the requirements
set forth in the Mineral Law.
Transfer and pledge of licenses.
The Mineral Law provides for the transfer
of exploration and mining licenses with
certain restrictions. An exlporation license
holder may transfer its license to another
legal person eligible to hold the license
only after providing evidentiary proof that
the materials and reports on prospecting
and exploration work have been sold
and taxes have been paid. A mining
license holder may transfer its license
after providing evidentiary proof that the
mine together its machnery, equipment
and documents have been sold and taxes

have been paid. The Mineral Resources

Authority records the transfer of license
within five business days following the
receipt of the transferors application.
Pledging of licenses is also allowed and
issues of pledge agreement are regulated
by the 2014 Mineral Law. Exploration and
mining license holders may pledge their
licenses to any banks or non-banking
financial organisations with a view of
financing their investments and mining
projects.
Termination and revocation of
licenses. Licenses may be terminated19
and revoked under grounds set forth in
the Mineral Law. In particular, licenses
may be revoked by the Mineral Resources
Authority on the following grounds
pursuant to Article 56 of the Mineral Law:
1. The license holder has failed to
meet the general requirements for mineral
exploration and mining operations;
2. The license holder has failed to
pay the license fees within the specified
period;
3. An exploration area or a mining
area has been designated as special
purpose territory and the license holder
has been fully compensated;
4. The exploration expenditures
of the particular year are lower than the
minimum cost of exploration set forth in
Article 33 of this Law;
5. The State central administrative
agency in charge of environment has
decided, based on a report of the local
administrative bodies that the license
holder had failed to fulfill its environmental
reclamation duties.
Environmental protection. License
holders may only start their operations on
receipt of permit from an environmental

In addition to this right, a mining license holder

has the following rights under Article 27 of the Minerals Law:
1. to engage in mining of minerals within the mining
claim;
2. to sell mineral products and minerals extracted
from the mining claim at international market prices
on foreign markets;
3. to conduct exploaration for minerals within the
mining area;
4. to transfer and pledge all or part of the mining license pursuant to procedure set forth in this Law;
5. to enter and pass through the mining area, construct necessary structures and use the mining area
in order to carry out mining activites;
6. to pass through the land adjacent to the mining
area;
7. to enter and pass through the land owned or possessed by other persons as approved by the owner
or possesser of the land in order to exercise the
rights provided by this Law;
8. to use land and water in compliance with applicable laws.

18

Pursuant to Article 53 of the Minerals Law, licenses may be terminated in the following cases:
1. expiration of the license term;
2. surrender by the license holder of the entire licensed area as set forth in Article 54;
3. revocation of the license by the state administrative agency.

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provide additional funds required for doing

so.
Mine closure. A mining license
holder has to inform the state central
administrative organ in charge of
environment of its intention to close its
mine or mining operations at least one
year prior to such closure. A mining
license holder has to take all necessary
measures to ensure safe use of the mine
area for the further public purposes and
reclamation of the environment. It also
removes all machinery, equipment and
other property from the mining area.
Mining license holders have to prepare
a detailed map showing dangerous or
potentially dangerous places created by
mining operations and submit such map
to the professional inspection agency and
the local Governor.
Therefore, the Mineral Law is a
key source of mineral legislation
and
contains detailed provisions on all
phases of mining activities and rights
and obligations of license holders and
other stakeholders. However, the existing
laws, governmental acts and decisions
of government agencies contain serious
violations of the Mineral Law and human
right legislation20. These problems usually
exist in the relationship with mining license
holders and foreign mining companies. In
particular many issues associated with
administration of laws, license fees and
royalties remain uncertain and unstable21.

authority. An exploration license holder

must prepare an environmetal protection
plan. An exploration license holder has
to submit its environmental protection
plan to the governors of soum or district
where the exploration area in question is
located. An exploration license holder also
has to deposit funds equal to 50 % of its
environmental protection budget for that
particular year in a special bank account
established by the Governor of the relevant
soum or district. Where a license holder
fails to fully implement the measures set
forth in its environmental protection plan,
the Governor of the relevant soum or
district may use such funds to implement
these measures and the license holder in
question has to provide additional funds
required for doing so.
A mining license holder must assess
environmental impacts and prepare an
environmental management plan. The
objective of environmental assessment
procedure set out in the existing Mineral
Law and Environmental Assessment Law
is to promote the identification, assessment
and consideration of environmental
impacts of the proposed mining activites.
Among its provisions an environmental
management plan provides measures
aimed at protecting air, water, humans,
animals and plants from various adverse
impacts of the mining operations.
A mining license holder has to submit
its environmental impact assessment and
environmental protection plan to the state
central administartive organ in charge of
environment. A mining license holder
has to deposit funds equal to 50 % of its
environmental protection budget for that
particular year in a special bank account.
Where a license holder fails to fully
implement the measures set forth in its
environmental protection plan, the state
central administartive organ in charge
of environment may use such funds to
get involve professional organisations to
perform the relevant reclamation works
and the license holder in question has to

Kh. Selenge. Obligation and Responsibility

Before Economics: Issues of Theory and Practice
(2013), Law Review Journal, Law School, National
University of Mongolia, Ulaanbaatar. p.15
21
There are 39 mining regulations and procedures
which have been adopted by the Ministry of Mining,
Ministry of Energy and Mineral Resources Authority
of Mongolia as of 1 December, 2014. These rules
and procedures regulate such issues of mining activities as the safety, open pit operations, issue of
mining licenses, submission of information and reports to the Mineral Authority and other government
agencies and other issues of mining operations. For
example, it is necessary to change the Implementing
Rules of the Mineral Law, adopted by the order of the
Chairman of the Mineral Resources Authority # 133
of 17 December, 2001 since the activities of mining
companies are affected by these Rules. Therefore, it
20

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Certain current issues of mineral policy

and law of Mongolia thus are addressed
in the next part of this article.

Besides that more than 1000 hectares of

soil have been damaged because of the
so called artisanal mining operations23.
In particular large coal and iron projects
are causing a considerable damage to
the local people and herders who lose
their paster land and water resources.
For these reasons, various civil society
organisations have emerged at the end
of 2000 and they are now invlolved in
various legislative drafting activites and
even have certain arrangements with
the main Mongolian political parties and
movements24.
Thus, the mineral legislation of
Mongolia still is developing under the
conditions of a harsh struggle between
various public groups, political parties and
movements. For example, in the Mongolian
parliament there are still diametrically
opposed approaches to solving problems
of right of ownership of land and surface
and principles of state regulation of the
economy and mining concessions. Thats
why only certain provisions of the Mineral
Law of 1997 were amended or modified
respectively in 2006 and 2014. These
provisions which mainly regulate license
fees and royalties and seriously affect the
economic and financial activities of mining
companies.

4. Current issues of mineral policy

and law of Mongolia
As we have described in the previous
part of this article, Mongolia has adopted
a comprehensive Mineral Law setting
out the legal regime for mining activities.
The 2014 Mineral Law regulates various
issues of the development of exploration
and mining projects such as the
ownership of mineral resources, mining
licenses, transfer and pledge of licenses,
termination and revocation of licences,
environmental protection and
mine
closure. Domestic and foreign investors
may obtain exploration and mining
licenses. The mining license entitles the
holder to exploit the extractable minerals
found in the mining area and conduct
ore prospecting in the mining area.
Mining license holders may also export
to foreign markets their mineral products
and minerals extracted from the mining
claim. These legal guarantees exist in
the context of the current legal regime for
mining activities and thus the 2014 Mineral
Law provides a liberal regime.
Although the importance of the
mining sector is growing for the economic
development of Mongolia it should be
noted that the on-going businesses and
mining operations do cause damage
to the Mongolian peoples health and
environment. As of 2011, 17000 hectares
have been exploited for mining activites in
15 provinces of Mongolia and only 5000
hectares of land have been reclaimed22.

In Mongolia issues of artisanal mining operations

are regulated by the governmental act and this current issue of mineral policy attracts the interests of
lawyers and legal scholars. For this current issue of
mineral policy and law see P. Munkhselenge Legal
issues in the Mining Sector of Mongolia (2013-2014),
N 03, Mongolian Law Review Journal, International
Law Committee, Mongolian Bar Association, Ulaanbaatar. However, environmental aspects of mineral
legislation of Mongolia are not considered in detail
within the framework of this article.
24
A good example of this kind of arrangement involving political parties and civil society groups
are the last two revisions of the the Minerals Law
of 1997. On the participation of civil society organizations in the mineral legislative drafting see in
detail . N.Algaa, Building a stable legal environment
of mineral resources is the basis of economic development. Paper presented to the International
Workshop on Legal Regulation of Market Economic
Relations: Conflict of Interests and its Consequences. Shikhi Khutag Law School. Ulaanbaatar. 2014.
P. 134- 138
23

is necessary to pay attention to the present practice

of government agencies in charge of environment,
mining and geology. However, these issues of mineral law are not considered in detail within the framework of this article.
22
M. Enkh-Amgalan The Resource Sector in Mongolia: Is It Time for Mongolia to Consider Embracing FSIs? Is Production Sharing Agreement a Better
Option for Mongolia? (2013-2014 /03/), Mongolian
Law Review Journal, International Law Committee,
Mongolian Bar Association, Ulaanbaatar, p.60

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License holders have to pay license

fees annually pursuant to Article 32 of
the Mineral Law. In addition to that the
2014 Mineral Law introduces a concept of
minimum cost of exploration and royalties.
An exploration license holder thus has to
perform exploration works with expenses
not less than the amounts specified below
per hectar of the license area pursuant to
Article 33.1.1 of the Mineral Law:
1. US$ 0.5 for each of the second and
third years of the term of the exploration
license;
2. US$ 1 for each of the fourth to
sixth years of the term of the exploration
license;
3. US 1.50 for each of the seventh to
ninth years of the term of the exploration
license.25
A mining license holder has to
pay the state budget royalties based
on values of all products extracted from
mining claim or sold or shipped for sale
or mined26. Thats why the 2014 Mineral
Law introduces a new concept of export
control over minerals extracted from the
mining area. This new control was met

with strong opposition from foreign and

domestic investors in Mongolia since the
2014 Mineral Law increases the cost of
transactions and production expenses of
license holders.
But the adoption of the 2014 Mineral
Law is not accompanies by the adoption
of the corresponding implementation rules
and procedures concerning minimum cost
of exploration and royalties. At the same
time the Parliament of Mongolia intends
to make amendments and modifications
to the existing Mineral Law and other laws
soon27. Besides that the third Chapter of
the State Policy in the Minerals Sector
2014 provides that the State will improve
the legislation dealing with the issues
of transfer of exploration and mining
licences, transfer of shares of mining
license holders and gold export control.28
Certainly Mongolia needs to amend
the existing Mineral Law and other laws
regulating environmental issues and other
At present the working group of the Ministry of
Industry has prepared a new draft of Trade Law
which provides that a mining companies may ship
its export products only after the relevant advance
payment has been transferred into its bank account
in Mongolia and the permit to ship the minerals to
foreign markets has been given to such mining company by the customs office in question. In my opinion, this law draft is aimed to increase the powers
of some government agencies such as the Mineral
Resources Authority, General Customs Department
and other inspection agencies. Therefore, various
negative legal consequences of provisions concerning export controls found in the existing Minerals Law and other acts are to be researched with a
view of improving the Mongolian mineral legislation
in future.
28
The current issues of mineral policy and law also
include such issues of mineral legislation as the human rights, environmental protection and public participation.However, these issues are not considered
in detail within the framework of this article. For these
issues see I.Idesh Issues of Public Participation in
the Mining Projects (2013), N4, Law Review Journal, Law School, National University of Mongolia,
Ulaanbaatar, Materials of Workshop on International
Law and Challenging Issues of Mining Sector , 14
June, 2013, Foreign Service School, National University of Mongolia, National Intelligence Academy,
National Legal Institute of Mongolia, Ulaanbaatar
27

Article 32.2 of the Minerals Law provides that exploration fees are payable for each hectar at the following rates: US$0.1 for the first year, US$ 0.2 for
the second year and US$ 0.3 for the third year of the
term of the exploration license ; US$ 1.00 for each
of the fourth to sixth years of the term of the exploration license; US$ 1.50 for each of the seventh to
ninth years of the term of the exploration license. In
respect of mining area, US$ 15.00 are payable for
each hectar under Article 32.3 of the Minerals Law.
26
Pursuant to Article 47.2 of the Minerals Law such
values are determined as follows:
1. In respect of products which have been exported,
values are determined on the basis of international
market prices of such products or similar products
and these prices are determined on the basis of
recognised principles of the average monthly calculation methodology of international trade;
2. In respect of products sold or utililised on the domestic market, values are determined on the basis
of the domestic prices of such products or similar
products;
3. In respect of products which have been sold on
international and domestic prices, market prices
are determined on the basis of sales revenue which
have been declared by a license holder where it is
impossible to determine such prices.
25

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current issues of mineral law mentioned in

Chapter 3 of the State Policy in the Mineral
Resources Sector in the nearest future. In
this connection it should be noted that first
of all, the most important issues of mineral
policy and law such as the minimum
cost of exploration and calculation of
royalties pursuant to Article 47.2 of the
Mineral Law are to be researched with a
view of avoiding various negative legal
consequences of export control over the
economic and financial activities of mining
licenses holders.

Certainly, some of these challenging

issues will be met with the strong opposition
from many civil society organisations
and political movements. In our opinion,
this legal uncertainty may cause various
negative legal consequences in practice
since the 2014 Mineral Law applies to
the ongoing businesses and foreign
investment mining projects in Mongolia.
Therefore, Mongolia needs to have a
stable national policy in the mining sector
since this sector is crucial to the future
economic growth of Mongolia. In order to
attract investments more successfully to
the mining sector in Mongolia investments
do have a greater need for stability than
other short term industrial projects. In this
connextion it is necessary to establish
a stable legal environment for mining
activites because many current issues of
mineral policy and law remain uncertain.
Finally, it should be noted that the
creation of a stable legal regime for mining
activites is impractible without a wellthoughtout national mineral policy that is
supported by guarantees to domestic and
foreign investors set forth in the legislation.
Consequently, first of all it is necessary
to research such challenging issues of
mineral policy and law of Mongolia as
the transfer of exploration and mining
licences, transfer of shares of mining
license holders and gold export control in
the context of the improvement of mineral
legislation of Mongolia in future. For this
reason, the authors propose to study the
mining codes and regulations of some
extractive industry dependent countries
and to amend the most important aspects
of the 2014 Mineral Law.

5. Conclusion
The development of the Mongolian
mining sector has been dynamic since
1991. This dynamic has been aided in
part by rich natural resources and in
part by the mineral legislation and coproduction arrangements negotiated
by the Government of Mongolia. One
of important components in national
mineral policy and structual reform has
been and still remains is to create more
liberal legal regime for mining activites
in Mongolia. Mongolia last revised its
Mineral Law and other laws regulating
various mining activities in July, 2014 to
that effect. The new State Policy in the
Minerals Resources Sector (2014- 2025)
which provides a more comprehensive
and long term approach to mining sector
policy formation and implementation has
also been adopted by the resolution # 18
of the State Great Hural of Mongolia in
January 2014. Despite the last revision of
the Mineral Law and other laws, Mongolia
still needs to amend certain provisions
of the existing Mineral Law dealing with
the issues of transfer of exploration and
mining licences, transfer of shares of
mining license holders and gold export
control in future.

20

Articles

INVESTMENT ENVIRONMENT OF DEVELOPING

COUNTRIES DEPENDENT ON EXTRACTIVE INDUSTRIES
THE FATE OF MONGOLIA?

Munkhtselmeg Nyamsuren,
LL.M (Kyushu University, Japan)

Regulatory
competition
theory
assumes that companies have some
choice as to what regulatory law will
govern their activities and where they
will locate their activities. Different states
corporate law and tax law, as well as
other regulations, apply varying bases
for prescriptive jurisdiction, and accord
varying degrees of choice to companies.4
However, the threat of relocation is not
the only way companies can influence
the state; they have the following
options in regard to a potential change in
regulations5:
relocate production to a new
location;
lobby, educate, and litigate
regulations that reflect their interests;
mutually
accept
whatever
regulations come their way.
Over time, the preferences of firms
will shape state regulations.6 Governments
respond to firm behavior, as they balance
the interests of their constituencies and
their own interests. There is opportunistic
competition among governments, as with
firms. Government can:

1. Race to the top or race to the

bottom?
With the opening of borders since
the beginning of the globalization era, the
mobility of goods, services, capital and
labor, which enhances the possibility for
corporations to shift between countries,
has led to competition between countries
at the international level. This reduction in
border controls has brought more sharply
into focus the ways in which differences
in national arrangements including
regulatory systems, may act as non-tariff
barriers hindering cross border flows.1
Regulatory competition can be
described as the process in which
regulators deliberately engage in the
provision of a more favorable regulatory
environment in order to attract the benefits
associated with corporate activity.2 The
theory implies companies power in
shaping the governments regulatory
policy directly or indirectly. This idea of
private entities exercising power over the
state is controversial itself; however it is
a well-documented fact of the political
economy.3

Alfred D. Chandler with the assistance of Takashi

Hikino, Scale and Scope (1990).
4
Joel P. Trachtman, International Regulatory Competition, Externalization, and Jurisdiction, 34 Harv.
Intl L.J. 47, 60 (1993) (citation omitted).
5
Dale D. Murphy, The Structure of Regulatory Competition: Corporations and Public Policies in a Global
Economy 10 (International Economic Law Series,
2004).
6
See generally e.g. JOE S. BAIN, BARRIERS TO
NEW COMPETITION (1956); F. Modigliani & M. Miller, The Cost of Capital, Corporation Finance and the
Theory of Investment, 48(3) AM ECON REV 26197
(1958); MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION (1965); ALFRED D. CHANDLER
WITH THE ASSISTANCE OF TAKASHI HIKINO,
SCALE AND SCOPE (1990).

William W. Bratton, Joseph A. McCahery, Sol Picciotto& Colin Scott, Introduction: Regulatory Competition and Institutional Evolution,in International Regulatory Competition and Coordination, Perspectives
on Economic Regulation in Europe and the United
States 1 (William W. Bratton, Joseph A. McCahery,
Sol Picciotto& Colin Scott eds., 1996).
2
See generallyid.
3
See generallye.g. Joe S. Bain, Barriers to New Competition (1956); F. Modigliani & M. Miller, The Cost
of Capital, Corporation Finance and the Theory of
Investment, 48(3) Am Econ Rev 26197 (1958); Mancur Olson, The Logic of Collective Action (1965);
1

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unilaterally relax regulations to

lower production costs for domestic firms
(deregulation);
exert
pressure
on
foreign
countries to change regulations (influence,
diplomacy);
erect regulations that protect
domestic firms against foreign rivals.7
However, there can be other forms
of competition among states through
measures such as the circumvention of
existing laws and regulations. This can
be done through the creation of special
economic zone8 or by offering legal
protection to investors through bilateral
investment treaties and state contracts.9
Some scholars even argue that competition
pushes states to relax enforcement of the
existing laws and regulations.10
The first model of this theory was
introduced by Charles Tiebout who
argued that the promotion of competition
between local governments should lead
to an optimal balance between the level
of taxation and the provision of public
goods.11 According to his theory, rational
individuals being informed of available
choices will choose the preferred location
of specific public goods and a local public
goods equilibrium can be established if
local governments use their offerings to
attract citizen to their territory.
The theory has evolved considerably
since then and has been applied in
many different contexts with several
refinements and been applied to diverse
subjects. Because of the fact that the
7

theory of regulatory competition has been

developed in the United States on the
basis of federalism, its assertions were
first applied in the American context.
Nevertheless the lessons learned from
its application in the American context
are relevant at the international level12
despite the differences of political and
institutional contexts, though these do
present complications13.
It is, however, questionable whether
one can simply extend theTiebout model
to the international level and conclude
that regulatory competition produces
an efficient equilibrium.14 The efficiency
properties of international regulatory
competition depend on the absence of
both market and political failures. The
preconditions for efficiency are rare,
even in integrated markets. As Radaelli
has stated, It is hard to find regulatory
domains with full factor mobility, adequate
and symmetrical knowledge of the
characteristics of different jurisdictions, the
possibility of preventing other jurisdictions
from successful innovative regulatory
policies, wide choice of destination
jurisdictions, economies of scale, and
jurisdictional latitude in the selection of
regulatory laws.15
Hence the debate on regulatory
competition at the international level is
less interested in the efficiency properties
of the equilibrium and more interested in
See generally supra note 7. See alsoSimon J.
Evenett& Robert M Stern, Systemic Implications of
Transatlantic Regulatory Cooperation and Competition (2011).
13
See generally Yves Dezalay, Between the State,
Law, and the Market: The Social and Professional
Stakes in the Construction and Definition of a Regulatory Arena, inInternational Regulatory Competition
and Coordination, Perspectives on Economic Regulation in Europe and the United States 60 (William W.
Bratton, Joseph A. McCahery, Sol Picciotto& Colin
Scott eds., 1996).
14
See generally John D. Wilson Capital Mobility and
Environmental Standards: Is There a Theoretical Basis for a Race to the Bottom?inFair Trade and Harmonization: Pre-Requisites for Free Trade? 393 (Jagdish Bhagwati & Robert Hudec eds., vol I, 1996).
15
Claudio M. Radaelli, The Puzzle of Regulatory
Competition, 2, 24 JNL. PUBL. POL.1 (2004).
12

Id.

See Krishna ChaitanyaVadlamannati, Race to the

Top or Race to the Bottom? Competing for Investment Proposals in Special Economic Zones (SEZs):
Evidence from Indian States, 19982010 (working
paper, 2011), available at http://www.uni-heidelberg.
de/md/awi/professuren/intwipol/top_bottom.pdf (last visited
April, 19, 2012).
9
See Kyla Tienhaara, Mineral Investment and the
Regulation of the Environment in Developing Countries: Lessons from Ghana, 6 IEAPLE 371 (2006).
10
Eric Neumayer, Greening Trade and Investment: Environmental Protection Without Protectionism 148
(2001).
11
See generally Charles Tiebout, A Pure Theory of
Local Expenditures, 64 J Polit Econ 416 (1956).
8

22

Articles

the direction of regulatory races. Theories

concerning
regulatory
competition
disagree about what can be expected
from the interaction between governments
and markets in regulatory policy. Distinct
theories were born with notions of
races to the top and to the bottom16
in the academic discussion, and these
offered us bewildering conclusions on the
consequences of regulatory competition.
Many
support
international
regulatory competition as a necessary
tool to create businesses and jobs by
creating regulations that are more efficient
and less expensive which will benefit the
overall economy of the host country. They
argue that regulatory competition can be
important as it reduces the regulatory
costs imposed on companies, which will be
passed further on to consumers. Different
localities desires to attract businesses will
spur governments to devise regulations
that are efficient and find new ways to
improve older regulations.17 This is labeled
a race to the top18.
In the meantime, many scholars
have raised the criticism that international
regulatory competition lessens the
sovereign capacity of states to regulate
corporate behavior. More importantly,
they argue that the enhanced mobility
of companies puts them in a position of
bargaining power, and they dont hesitate
to use this advantage to extract regulatory
concessions from host governments.
These concessions may often not be
favorable to social welfare, especially in
the area of environmental protection of the
host country. Due to corporate migration in
response to looser regulations, states will
have no choice but to refrain from adopting
socially optimal regulations. Corporations
may engage in regulatory arbitrage,
playing off one government against

others. This effect is called the race to

the bottom19 theory in which states are
rendered helpless in countering the effect
of heightened corporate mobility.20
However, both theories have
conventional aspects which are perceived
as problematic and which offer their own
complications. There is little agreement on
the assessment of risks associated with
economic activity, the assessment of the
costs and benefits that would result from
restrictions, or the preferences for levels
and types of regulation.21 In short, neither
of the theories dominate.
2.
Structure
of
regulatory
competition
The race to bottom or race to top
theories are not necessarily mutually
exclusive. It is impossible to argue that
one theory is utter rubbish and other is
absolutely accurate. Rather it is safe to say
that either a race to top or a race to bottom
occurs depending on the circumstances.
The direction of the race depends
on the differing private sector interests
and state responses to them. Companies
interact in the context of specific economic
conditions when calculating the cost and
benefits of their regulatory choices.22
Murphy has outlined the structure
of regulatory competition in terms of
determining this direction. According to
him, the outcome of the race depends on
three related propositions:
This term was introduced by Cary in William L.
Cary, Federalism and Corporate Law: Reflection
upon Delaware, 83 Yale L. J. 663 (1974). See also
Ralph K. Jr. Winter, The Race for the Top Revisited, 89 Colum L Rev 1526 (1989).
20
See generally Richard J. Barnet & Ronald E.
Muller, Global Reach: The Power of Multinational
Corporations (1974).
21
See generally Radaelli, supra note15.
22
See generally Eric Brousseau& Fares Mhand,
Incomplete Contracts and Governance Structures,i
nInstitutions, Contracts and Organizations: Perspectives from New Institutional Economics, (C. Menard,
ed., 2000). See also Klaus Dieter Wolf, Nicole Deitelholf, & Stefan Engert, Corporate Security Responsibility, 42 Journal of Cooperation and Conflict
294, 299-300 (2007).
19

SeeId., at 4.
See Jennifer Smith-Bozek, Regulatory Competition: A Primer 1 (2007), available at http://cei.org/
pdf/6319.pdf (last visited April, 19, 2012).
18
See generally Dynamics of Regulatory Change:
How Globalization Affects National Regulatory Policies (David Vogel, Robert Kagan eds., 2004).
16
17

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LAW REVIEW

Process
regulations
market access regulations;
Industrial structure;
Specificity.23

2014 4 (50)

versus

revenues many convince governments to

keep process standards lax.
Market access restrictions, for
their part, are perceived as a form of
protectionism for domestic businesses.
Restriction on market access is an effective
barrier to entry against competitors.
Domestic business and labor may push for
a market access restriction to the extent
that it reflects their interests and in the
absence of common international action
against market access restrictions as de
facto trade barriers, sectorial interests
may seek to impose domestic product
regulations that improve their competitive
position.

a.
First proposition- Process
regulations versus market access
regulations
The first proposition implies a states
choice of restriction based on production
or market access. States may limit or
prohibit manufacturing or service industry
processes within their jurisdiction. These
are called process restrictions. Or
they may restrict the market access of
particular services or products. These are
called market access restrictions.24
Process restrictions restrict the way
in which a good or service is produced.
Without regulations, firms would generally
seek the lowest cost method of production;
hence process regulations are likely to
increase the cost of production. Domestic
business and labor in a state with costly
restrictions on manufacturing processes
tend to operate at a disadvantage with
respect to competitors in less highly
regulated countries.
In the absence of common
international action for a common higher
standard, both export oriented and import
competing sectorial interests will fight for
lax national restrictions to improve their
competitive position. In the case of costly
regulation or inexpensive relocation,
firms may move to less highly regulated
countries. The threat of industrial relocation
and the result of loss of jobs and tax

b. Second proposition - Industrial

structure
The second proposition is industrial
structure. This proposition enhances the
strength of the market-access-process
proposition. Powerful firms influence
states to achieve regulations that reflect
their particular interests. This influence
can be direct, indirect, or even imputed by
governments.25 Firms power may stem
from their revenues, employment, market
share, control of the media, personal
or historical ties to top state officials,
access to information, national security or
industrial policy relevance.
Concentrated markets facilitate
collective action and the ability to shape
regulations. Oligopolies have a greater
chance of achieving their regulatory goals
through lobbying, litigation, education, and
advertising.26 Also they have asymmetrical
access to information; indeed they
are often the only source of detailed
information to regulators. States are most
likely to respond to powerful firms both
as a result of lobbying pressures and to
improve their own political survival by
boosting employment and economic
growth.

See Murphy, supra note 5 at 11.

According to Murphy, this distinction is adapted
from the traditional product-process distinction. See
Murphy, supra note 5. See also e.g.Michael Porter
The Competitive Advantage of Nations (1990); David Vogel, Trading Up: Consumer and Environmental
Regulation in the Global Economy (1995);Craig Murphy, International Organization and Industrial Change
(1994); Anthony Ogus, Regulation: Legal Form and
Economic Theory (1994); Peter P. Swire, Symposium on Constructing New Federalism: Jurisdictional
Competence and Competition: The Race to Laxity
and the Race to Undesirability, 14 Yale J. on Reg.
67 (1996).
23
24

25
26

24

See Murphy,supra note 5, at 4.

See id. at 42.

Articles

c. Third proposition- Specificity

Specificity can include a whole range
of different factors. The investments may
include human, dedicated, physical, brand,
and site specificity.27 However, site/asset
specificity is most important in international
cases. Asset specificity means durable
investments that are undertaken in support
of particular transactions, and that would
lose considerable value if the transaction
were prematurely terminated28. There can
be three types of asset specificity: low,
international and domestic.
Low asset specificity means that
assets can be easily redeployed. Firms
with investments with low asset specificity
may relocate to less restrictive regulatory
environments. These firms have greater
mobility. Low asset specificity facilitates
a competition in laxity in which moves
by one state to attract or keep industry
through lax heterogeneous regulations
are matched by other states.
High asset specificity can occur both
on the international and domestic levels.
Domestic asset specificity occurs when
assets are specific to transactions in one
country. Firms with investments specific to
transactions only in the domestic market
fight against regulatory homogeneity that
threatens their investment. They support
heterogeneous regulations that protect
their investment.
When
asset
specificity
is
international, the firms assets are
specific to transactions in more than one
country. This includes assets dedicated
to particular export markets or dedicated
to greater production than the domestic
economy can absorb, as well as foreign
direct investments and other cross border
transactions. Firms with assets devoted to
cross border transactions seek regulatory
homogeneity on issues that affect
transaction costs. Firms oppose divergent

regulations that inhibit the effective use

of those assets and increase transaction
costs. Investments with high multinational
asset specificity create incentives for firms
to push for common regulatory outcomes
across borders.
According to Murphy when asset
specificity is high, firms need a more
complex structure to ensure credible
commitments
and
continuity.
He
argues that a movement away from lax
heterogeneous regulation toward stringent
homogenous regulation is analogous to a
movement away from market contracting
and toward a unified structure and that
more homogenous regulations act to
harmonize contracts.29
This
structure
of
regulatory
competition is helpful to see clearer
picture and gives us a chance to apply
it on the countries with dependency
on extractive industry. In the following
section, I will try to apply the structure of
regulatory competition on the countries
that are dependent on extractive industry
and identify the direction that the theory
implies.
3. Applying the propositions of
regulatory competition in developing
countries dependent on extractive
industries
As I have briefly noted in the
introduction, the investment climate comes
second when it comes to deciding where
to invest in the extractive sector. Only after
countries offer similar geological conditions
may competition be based on other factors
such as infrastructure, access to foreign
markets, the investment environment and
so on. As Omalu and Walde have stated,
any country with a favorable geology has
to combine this with an attractive mineral
investment regime to attract considerable
mineral sector investment.30

See generally Oliver E. Williamson, Economic Institutions of Capitalism (1985). See also, Oliver E.
Williamson, The New Institutional Economics: Taking Stock, Looking Ahead, 38 JEL 595 (2000).
28
See generally Oliver E. Williamson, Economic Institutions of Capitalism (1985) id.

30

See Murphy, supra note5, at 35.

See M. K. Omalu, T. Waelde, Key Issues of Mining Law: A Brief Comparative Survey as a Background Study for the Reform of Mining Law, 3-13
CEPMLP (1998), available at http://www.dundee.
ac.uk/cepmlp/journal/html/vol3/article3-13.html (last
visited March, 13, 2012).

29

27

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In this section, an overview of

extractive industry dependent developing
countries will be given. Against this
background, general assumptions will be
made and the propositions of regulatory
competition will be applied.

Since 2005, more than 75% of nonfuel, mineral-dependent countries have

become more dependent on minerals. In
14 of those countries, mineral dependence
has increased by more than 25 percentage
points since 2005. In Burkina Faso, for
example, the mining sector accounted
for 2% of exports in 2005, but by 2010 its
share had risen to 41%. Over the same
period, the relative size of the mining
sector in Laos more than doubled from
17% of exports to 45%.34 More and more
low and middle income countries have
become extractive industry dependent
due to the price boom since 2005.35
In these countries, the relative
importance of foreign companies in
production varies. Foreign affiliates
account for from fifty percent to up to
virtually one hundred percent in most
of the countries in the non-oil and gas
industry.36 In oil and gas industry, there is
a wide variation; while in west Asia foreign
affiliates output amounted to an average
of only three percent of production, in subSaharan Africa it amounted to 57 percent
on average.37
Both governments policies and
TNCs investment decisions are influenced
by the volatility of mineral markets.
Governments actively seek ways to
attract foreign investors while MNCs seek
natural resources. Studies found that
around 120 countries have reformed their
legal regimes for mining since 1985.38
Structural adjustment programs aimed at
shifting the mineral sector to the private
sector which were developed by the World
Bank/International Monetary Fund played
an important role in this field. And at the

i. Overview
In a number of low-income, mineralrich countries extractive industries
can represent a considerable share of
overall FDI entering the country, and
can contribute significantly to state
revenue. These countries have few other
industries that can attract significant FDI
due to their small domestic markets and
weak production capabilities and FDI in
extractive industries is deemed to be the
most important.
These countries are referred to as
extractive industry dependent countries.
The World Bank, in its report, used
standards of the average annual export
value of oil, gas, or mineral products
exceeding 15 percent of total exports to
determine what constitutes an extractive
industry dependent country.31 T
he World Bank found that there were
20 oil and gas dependent countries and
30 mining dependent countries in 2007.32
Another study shows that between
1996 and 2010, the number of low and
middle income countries that depend
on minerals increased by more than 30
percent from 46 to 61 countries. By 2010,
more than 80 percent of non-fuel, mineraldependent states was low- and middleincome countries, compared to about 70
percent of fuel-dependent countries.33
31
See OED, OEG & OEU, supra note 2 at X. This
standard has been chosen with reference to the
WBGs Poverty Reduction Sourcebook, which states,
A countrys mining sector can play an important role
in poverty reduction strategies if the approximate
share of the mining sector isgreater than 1025
percent of export earnings.
32
For a list of countries meeting this criterion, see
UNCTAD, supra note 1, figure 4 at 125.
33
See generally Dan Haglund, Blessing or Curse?
The Rise of Mineral Dependence Among Low- and
Middle-Income Countries, Oxford Policy Management Report (2011), available at http://www.opml.co.uk/

sites/opml/files/OPM%20Blessing%20or%20curse.pdf (last
visited June, 20, 2012).
34
Id., at 3.
35
Id.
36
See UNCTAD, World Investment Report 125
(2007), figure 4, at 125, available at http://unctad.
org/en/docs/wir2007_en.pdf (last visited July, 20,
2012).
37
See id., figure 5, at 126.
38
See generally James Otto & John Cordes, the Regulation of Mineral Enterprises: A Global Perspective
on Economics, Law and Policy (2002).

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Articles

turn of the millennium, more and more

geologically interesting countries with
acceptable legal and fiscal frameworks
became
available
to
international
investors.39
MNCs have been the most important
players in the global mineral market since
as early as the beginning of the twentieth
century. MNCs are typically originated
from international industries where there
are high barriers to entry and deploy in
domestic markets in developing countries
and economies-in-transition. In 2003,
according to the World Bank, the non-fuel
extractive industry was dominated by some
50 major mining and metals companies
operating globally and by origin these
were concentrated in four countries: the
United States, South Africa, Australia, and
Canada. The large scale mines of those
companies generated about eighty five
percent of the worlds whole production of
nonfuel minerals.40
Countries that depend on either
non-fuel or fuel minerals are also more
likely than other countries to suffer from
institutional governance problems such
as corruption and political instability. The
Transparency International Report shows
a high correlation between corruption and
the dominance of extractive sectors41.
Moreover, Haglund found that there is a

negative correlation between institutional

development as measured by the World
Banks Worldwide Governance Indicators,
and countries that are dependent on
either fuel or non-fuel minerals. In other
words, mineral dependence tends to
be associated with poor institutional
governance.42
Overall, the increased number of
countries that have become dependent
on extractive industry and increased
competition among developing countries
for extractive industry investment are
evident and there exists a negative
correlation between dependence on
extractive industries and host countrys
institutional governance.
Against this background, the following
assumptions are crucial for applying the
structure of regulatory competition to
extractive industry dependent countries.
ii. Assumptions
In order to apply the propositions
of regulatory competition, general
assumptions have to be made. FDI
mobility, the occurrence of competition
only amongst developing countries, host
governments and their political elites
rent seeking behavior are the main
assumptions.
For the developing economies that
are dependent on extractive industries, the
assumption of corporations being mobile
is most likely only in the case of MNCs.
Because of the fact that local businesses
tend to have stronger connections to local
markets and less possibility or capability to
change legislation, the discussion mainly
focuses on MNCs which possess greater
mobility.
Also, it has to be clear that we are
assuming that regulatory competition
occurs
only
between
developing
countries and not between developed and
developing countries. As Porter claims the
policies of all countries may not be equally
affected by the constraints of international
competition and the problem is not the

John P. Williams, Legal Reforms in Mining: Past

Present and Future, inInternational and Comparative
Mineral Law and Policy, Trends and Prospects 37, 38
(E. Bastida, T. Waelde, J.Warden-Fernandez, eds.,
2005).
40
Monika Weber-Fahr, John E. Strongman, RamaniKunanayagam, Gary McMahon & Christopher
Sheldon, Mining,inThe World Bank, Macroeconomic
&Sectoral Approaches 440, 441 (vol 2, 2003).
41
See generally Carlos Leite & Jens Weidmann,
Does Mother Nature Corrupt? Natural Resources,
Corruption and Economic Growth (IMF working paper, 1999) (arguing that natural resource abundance
creates opportunities for rent-seeking behavior and
is an important factor in determining a countrys level
of corruption), available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=259928(last visited March, 20,
2012); Transparency International, Corrupt Political
Elites and Unscrupulous Investors Kill Sustainable
Growth in its Tracks, Highlights New Index, press release, Berlin (2002). The index rated 26 of 32 mineral-dependent countries as corrupt or highly corrupt.
39

42

27

See Haglund,supra note 33, at 4.

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existence of a race to bottom in relatively

rich countries. The negative impacts
of competitiveness concerns are to be
found in relatively poor nations, many of
whom have been reluctant to enforce their
environmental standards out of fear that
their economies will suffer a competitive
disadvantage vis--vis other relatively
poor nations. The regulatory standards
of these countries, he claims, are stuck
at the bottom. Thus, they are dragging
down the regulatory standards not of rich
countries but of other poor ones.43 We
may also exclude some cases where the
countrys mineral dependency is based on
domestic corporations.
In the regulatory competition debate,
the assumption is often made that there is
full democracy. However, when there is a
clear negative correlation between mineral
dependency and institutional governance,
the rent seeking behavior of government
elites or political figures should be
included and it should be accounted for
as an important factor.

countries, especially among developing

countries have or are able to obtain the
resources needed for such investments,
and the sheer scale of the projects
frequently requires MNCs to co-invest.
Second according to some scholars,
the global regime governing investment
rests broadly on a principle of the more
the better in terms of FDI.45 The perception
that an increase in FDI might trigger
renewed protectionism has led to some
concern. However, this trend appears to
be confined to a relatively small number
of countries. In 2006, 147 policy changes
making host-country environments more
favorable to FDI were observed.46
Third, domestically rooted mining
companies generate only a small portion
of the worlds total mineral production.
Developing countries seem to care more
about making the market more accessible
and focus on FDI since domestic
companies mostly operate in small
scale mining and provide relatively small
revenue to countries economies.
In terms of environmental protection,
access restriction becomes important in
terms of the pollution halo or California
effect47. It is based on Porters hypothesis
suggesting that stronger environmental
policies can improve competitiveness in

iii. Applying the propositions

When the theory on the structure
of regulatory competition is applied to
developing countries dependent on
extractive industries several observations
can be made which are laid out in the
following subsections.
Process restriction versus market
access restriction
In terms of process regulations versus
market access regulations, there are
several factors that make market access
restrictions less important in the extractive
industries of developing countries.
First, developing countries lack
the financial capital, technology and
knowledge resources to extract nonrenewable natural resources.44 Few
43
Gareth Porter, Trade Competition and Pollution
Standards: Race to the Bottom or Stuck at the Bottom?, 8 (2) JED 133, 138 (1999).
44
UNCTAD, Transnational Corporations, Extractive
Industries and Development: Implications for Policies 9 (2006), available at http://archive.unctad.org/en/

28

docs/c2em20d2_en.pdf (last visited March, 20, 2012).

45
Lyuba Zarsky, From Regulatory Chill to Deep
Freeze?, 6 IEAPLE 395, 396 (2006).
46
Torbjorn Fredriksson, Transnational Corporations,
Extractive Industries and Development (UNCTAD),
4(3) ATDF 41, 41 (2007).
47
The California Effect offers a model of firm behavior that is predicated on the existence of relatively
large, highly regulated markets in the worlds richest
countries. Firms seeking to export to these markets
must meet the latters relatively strict environmental
and consumer standards. Having been forced to adjust their exports to meet these standards, it is then
in their interest to have their home country adopt
similar standards, since this enables them to achieve
better economies of scale by producing more similar
products. Higher regulatory standards may also give
them some advantage vis--vis domestic competitors who havent geared up to meet the standards
of stringent regulation countries. Further, see David
Vogel & Robert A. Kagan, National regulations in a
global Economy, in Dynamics of Regulatory change:
How Globalization Affects National Regulatory Policies 6 (2002).

Articles

the marketplace by fostering innovation

and efficiency, therefore attracting
investors. However, this theory cannot be
applied to developing countries, because
it can only be applicable in cases where
domestic political or economic pressures
in a country with stringent environmental
regulation targets the environmental
practices of a particular sector of a less
green country, where countries with
production aspire to enter into green
country markets, or the production
is covered by an effectively enforced
multilateral environmental agreement.48
Also this only works in an industry that
produces a homogenous product with little
customer or brand name loyalty49.
In extractive industries, process
restriction is more relevant for the
following reasons. First, extractive
industries are heavily regulated. These
industries usually need more-than-usual
involvement of the state in the licensing
of mining companies, the regulation of the
sector, and fiscal and financial matters,
including taxation, fees, and investments
in supporting infrastructure. Even though,
starting from 1980s, privatization of state
owned assets to foreign investors and the
adoption of legal frameworks that are more
investor friendly in developing countries
has occurred, extraction industries remain
regulated.
Second, process restriction is also
important because the extractive industry
is a high footprint industry which has an
enormous impact on the host country. The
often substantial fiscal incomes derived
from mining can lead mineral-dependent
economies on a cycle of corruption and
inefficient governance. At the same time,
a dominant mining sector can lead to

Dutch disease50 effects on the non-mining

economy, endangering the promotion of
other sectors.
The environmental impacts are also
overwhelming; emission is not the only
pollution problem in extraction industries;
habitat destruction, water pollution, water
quantity loss, biodiversity loss, noise, dust
and other upstream problems (land and
ecosystem degradation, acid drainage,
slop failures, etc.) are the predominate
concerns51. These issues also adversely
affect food security and the health and
livelihood of the poor and vulnerable
groups with little mobility or means of
alleviating negative impacts.52 Mining
projects are often located in remote
areas where indigenous communities
are members of a distinct cultural group,
often a minority within a community of
minorities. Here, mining activities can
have a negative impact on the livelihood of
indigenous people, especially with regard
to issues concerning land tenure, often
causing socio-cultural conflicts within and
between communities.
Since it is now evident that process
restriction is more relevant to extractive
industry, we now turn to an analysis
of process restriction in the case of
developing countries.
The process restriction proposition
implies that in the case of high process
restrictions, the cost of production
is likely to be higher than the cost of
The Dutch disease hypothesis is that a positive shock (boom) to an important primary product
causes an appreciation of the real exchange rate.
This results in a movement of resources to the
non-tradable and the boom sectors and away from
tradable manufacturing and agricultural products.
The exchange rate shifts can cause problems in
promoting competitive diversification into non-commodity sectors. See in Monika Weber-Fahr, John E.
Strongman, RamaniKunanayagam, Gary McMahon
& Christopher Sheldon,supra note 40, at 465.
51
Alyson Warhurst, Environmental Degradation from
Mining and Mineral Processing in Developing Countries: Corporate Responses and National Policies 41
(OECD, 1994).
52
See Monika Weber-Fahr, John E. Strongman, RamaniKunanayagam, Gary McMahon & Christopher
Sheldon, supra note 40, at 443.
50

See generally David Vogel, Environmental Protection and Economic Integration, (Prepared for a
Workshop on Regulatory Competition and Economic
Integration: Comparative Perspectives, Yale Center
for Environmental Law and Policy, 2002) available
at http://iatp.org/files/Environmental_Regulation_and_Economic_Integrat.pdf(last visited March, 13, 2012).
49
See Otto & Vogel, supra note 38, at I-41.
48

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productions in less highly regulated

countries. Businesses in a state with
costly restrictions on processes tend to
operate at a disadvantage with respect
to competitors in less highly regulated
countries.
As discussed in the previous section,
when there is no international agreement
to set a common higher standard, export
oriented extractive industry interests
will fight for lax national restrictions to
improve their competitive position. In the
case of extractive industries, there is no
comprehensive international agreement;53
hence the process restriction proposition
suggests that the direction of the race is
towards laxity.

When the market is oligopolistic,

corporations enjoy greater bargaining
power over the state. Power of MNCs in
developing countries is widely discussed
in the academic literature.
They may lobby or educate host
governments ex-ante and ex-post
regulatory changes and their transaction
costs. They may even engage in activities
to push their home government to exert
pressure on the host government to
change policies.
Transaction that requires a firm to
make an asset specific investment makes
the firm vulnerable because the value of
the investment would be low if the intended
transaction does not go through. To induce
the firm to accept the risk of investing in
the economy, the host government can
offer a range of concession agreements
such as tax holidays.
The obsolescing bargain theory
however suggests that the bargaining
power shifts to the host state in resource
extraction industries after the investment
is sunk.56 The increased pressure from the
public on the host state to raise demands
on the investor and the ex post immobility
of the MNC create a situation where the
attractive agreement first carved out by
the corporation will become obsolete.
Theoretically, obsolescence can take the
form of renegotiated contracts, higher
taxes, expropriation of assets, or seizure
of the income stream of the firm.
Thus investors are concerned that
governments may exploit their initial
position or try to alter the terms of the initial
agreement. Powerful MNCs with highly
vulnerable investments will naturally seek
ways to protect their investment while
trying to keep the production costs low.
If Murphys arguments were suitable
for developing countries that are dependent
on extractive industries, MNCs would
push for common regulatory outcomes

Asset specificity
Companies with low asset specificity
may move to less highly regulated
countries in the face of costly regulation
or inexpensive relocation. However,
extractive industries are capital intensive
with high sunk costs and are site specific54.
Extractive industry assets are specific
to the extent that they cannot easily
be deployed elsewhere without losing
considerable value. Therefore, it is less
likely for companies to simply fly away and
relocate production to a new location.
They may use other options:
lobbying, educating, and litigating
regulations that reflect their interests, or
mutely accept whatever regulations come
their way. Mutely accepting the regulations
is, however, not a choice for MNCs in
oligopolistic markets. This relates to the
second proposition - industrial structure.
Industrial structure
The structure of the extractive
industries of developing countries is
oligopolistic with limited competition55.
See Maria Cecilia G Dalupan, Mining and Sustainable Development: Insights from International Law,
inInternational and Comparative Mineral Law and
Policy, Trends and Prospects, 149, 153 (E.Bastida,
T.Waelde, J. Warden-Fernandez, eds., 2005).
54
See Otto &Cordes, supra note38.
55
Id.
53

56
See generally Raymond Vernon, The Obsolescing
Bargain: A Key Factor in Political Risk,inThe International Essays for Business Decision Makers 281
(Mark B. Winchester ed., 1980).

30

Articles

across borders and stringent homogeneity

internationally. He has argued that higher
homogenous regulations act to harmonize
contracts and firms with multinational asset
specificity support these regulations57.
However, the direction is not towards
stringent homogeneity as Murphy claims.
Instead, MNCs have opted to contract
with host countries and there is still no
comprehensive international agreement
on mining.58 For the support of the MNCs,
the FDI source countries chose to protect
their investment by bilateral investment
agreements (BITs) (arguably because
of lobbying of MNCs) which put host
countries in disadvantage.59

It has been argued that international

arbitration may disadvantage developing
countries, due to the high cost of disputes63,
their lack of expertise and experience
in dealing with arbitration and structural
biases within the system.64
The second clause in BITs concerning
the mineral industry is the prohibition of
expropriation without compensation. It is
indeed fair to include the prohibition of
direct expropriation. However, one type of
indirect expropriation - regulatory taking
is becoming a particular point of concern
from the perspective of public policy.
Regulatory takings are those takings of
property that fall within the police powers
of a State, or otherwise arise from State
measures like those pertaining to the
regulation of the environment, health,
morals, culture or economy of a host
country.65
There is no comprehensive definition
of what constitutes a regulatory taking with
many tribunals and academics suggesting
that a determination as to the occurrence
of an expropriation can only truly be
undertaken on a case-by-case basis, in
light of all attending circumstances.66 If the
definition is too expansive, it could impose
potentially huge financial obligations
on governments, make them fearful of
potential litigation, create disincentives

4. Stimulation of the race to

the bottom contracting with host
governments
The contractual rationale behind
BITs and state contracts is to manage
the obsolescing bargaining problem: the
political risk they face60 and adverse
changes to the law are the most feared
legal risks of mining investors61.
BITs: The main purpose of these
treaties is to protect foreign investors in
developing countries.62 The clauses most
relevant to the extractive industries in
these treaties are those on international
arbitration and the prohibition of
expropriation without compensation.

Countries can expect an average tribunal cost

US$400,000 or more in addition to the US$1-2 million in legal fees. See UNCTAD, Investor-State Disputes and Policy Implications 7 (2005), available at
http://unctad.org/en/docs/c2d62_en.pdf (last visited June,
14, 2012).
64
See generally Carlos G. Garcia, All the Other
Dirty Little Secrets: Investment Treaties, Latin
America, and the Necessary Evil of Investor-State
Arbitration, 16 Fla. J. Intl L 301 (2004); Luke, E.
Peterson, All Roads Lead Out of Rome: Divergent
Paths of Dispute Settlement in Bilateral Investment
Treaties,inInternational Investment for Sustainable
Development: Balancing Rights and Rewards 123 (L.
Zarsky Ed., 2005).
65
See UNCTAD, Taking of Property 12 (2000), available at http://unctad.org/en/docs/psiteiitd15.en.pdf (last
visited march, 25, 2012).
66
See L. Yves Fortier, Stephen L. Drymer, Indirect
Expropriation in the Law of International Investment:
I Know It When I See It, or Caveat Investor, 19(2)
ICSID Rev/FILJ 293, 314 (2004).
63

See Murphy, supra note 5, at 35.

See generally Dalupan, supra note 53.
59
See Tienhaara,supra note9, at 376.
60
Political stability is one of the main concerns for
foreign investors with high asset specificity. See
Thomas W. Waelde& George Ndi, Stabilizing International Investment Commitments: International
Law Versus Contract Interpretation, 31 Tex. Intl L.J.
216 (1996).
61
See Robert Pritchard, Safeguards for Foreign Investment in Mining,inInternational and Comparative
Mineral Law and Policy: Trends and Prospects, 73,
80 (E. Bastida, T. Walde, & J. Warden-Fernandez,
Eds., 2005).
62
See generally Mary Hallward-Driemeier, Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bitand They Could Bite, (World
Bank Policy Research Working Paper, 2003), available at http://ssrn.com/abstract=636541 (last visited July,
04, 2012).
57
58

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to enact health and safety regulations,

and introduce multiple distortions and
social inefficiencies.67 On the other hand,
a definition that is too restrictive would
obliterate a key investment guarantee that
protects foreign investors.68
Huge financial obligations that could
be imposed on governments relate to
not only the legal costs associated with
defending a regulation in international
arbitration, which can be significant,
but also to the potential compensation
payments that can be awarded to the
investor if a tribunal determines that an
expropriation has occurred.69
State contracts: In addition to any
general commitments to investment
protection made by a state under
international agreements with other
states, there may also be specific
protections offered to mineral investors
through contracts made directly with
investors. In most developed countries
mining rights are based only on law and
regulation, however developing countries
have relied far more on agreements with
investors referred to as state contracts or
concession agreements.70
State contracts contain investor
protections which are not generally found
in international agreements. Since the
resource extraction sector has particularly
high asset specificity, and investments
have a greater need for stability than other

shorter-termed industrial projects71, one

method of managing the risk of adverse
change in law is the use, in national law
or state contracts, of stabilization clauses,
which seek to preserve the law of the host
country as it applies to the investment at
the time the state contract is concluded,
and which ensures that the future
changes to the law of the host country
are inapplicable to the foreign investment
contract.72
Quite extensive stabilization clauses
have emerged73 and include not only the
stability of the fiscal regime, but also the
imposition of new obligations by subsequent
regulation or by an administrative/judicial
ruling re-interpreting existing law. Such
clauses may be problematic from the
perspective of the regulator in terms of
environmental management.
This is a dynamic activity, responding
to growing knowledge concerning the
environment and anthropogenic threats
to it, as well as to changing perceptions
concerning the seriousness of these
threats. An added level of complexity
derives from the continuous development
of technologies designed to protect the
environment. As these technologies
become available, policy must adjust to
reflect new capabilities.74
Applying the constraints of stability
to the regulation, particularly in the
developing world, is thus a subject of
legitimate concern. Some authors have
questioned the binding character of
stabilization clauses, arguing that states
cannot waive their sovereignty in such a
manner.75 However, despite the academic

See Kevin, R. Gray, Foreign Direct Investment and

Environmental Impacts Is the Debate Over?, 11(3)
RECIEL 306, 311 (2002).
68 See generally Julie A. Soloway, Environmental
Expropriation under NAFTA Chapter 11: The Phantom Menace, in Linking Trade, Environment, and Social Cohesion: NAFTA Experiences, Global Challenges 131 (J. Kirton& V.W. MacLaren, Eds., 2002).
69
See Tienhaara, supra note 9, at 379 (citation omitted).
70
See UNCTAD, Management of Commodity Resources in the Context of Sustainable Development:
Governance Issues for the Mineral Sector 9 (1997),
available at http://archive.unctad.org/en/docs/poitcdcomd3.
en.pdf(last visited June, 20, 2012); UNCTAD, State
Contracts: Issues in International Investment Agreements 3 (2004), available at http://archive.unctad.org/en/
docs/iteiit200411_en.pdf(last visited June, 20, 2012).
67

71
Piero Bernardini, Investment Protection under
Bilateral Investment Treaties and Investment Contracts, 2 (2) J. World Inv. 235, 236 (2001).
72
See UNCTAD (2004), supra note 70, at 26.
73
See generally Waelde & NDi, supra note 60.
74
K. von Moltke, International Investment and Sustainability: Options for Regime Formation,inThe
Earthscan Reader on International Trade and Sustainable Development 347, 358 (K. Gallagher & J.
Werksman, Eds., 2002).
75
See Bernardini, supra note 71, at 242; M. Sornarajah, The International Law on Foreign Investment 408 (2nd ed., 2004).

32

Articles

debate, the crucial point is that tribunals

have frequently affirmed the validity of
such clauses.76
In some cases, stability clauses also
prevent countries from living up to their
other international obligations. Amnesty
Internationals description of the stability
agreements that Chad and Cameroon
entered into with a consortium of oil
companies illustrates this point. Amnesty
International argues that the agreements
could allow those countries to ignore their
human rights obligations by claiming that
they prevent them from taking measures
that would de-stabilize the financial
equilibrium.77
Another problem with multiple
investor-state agreements is that they
prevent host states from developing
consistent and coherent investment
policies. By entering into agreements
that supersede domestic legislation, host
states risk creating policy incoherence.78
This approach can have a negative impact
because it decreases the incentive to
develop local institutions. Tom Ginsberg
argues that in this way international
investment agreements can decrease the
quality of governance in host states.79
When governments are bound
by stability agreements and the risk of
international arbitration disputes, investors
have the option to challenge new, more
restrictive measures in international
arbitration. An investor should expect
some level of environmental regulation
and management in response to either

heightened environmental awareness or

the discovery of new ecological problems,
which must be internalized as a risk of
investment.80 Having an option to challenge
a new measure allows the investor to
reallocate the risk to the regulator, and
perhaps avoid the polluter pays principle
so that the general taxpayer bears the
burden.81
5.
Evidence from developing
countries
The above mentioned propositions
of concentrated industrial structure,
high asset specificity, the importance of
process restrictions and little or no market
access restrictions hypothetically suggest
that the direction of the race is towards
the bottom in developing countries with
a dependency on extractive industries.
Some scholars seem to agree that a race
to bottom may exist in certain sectors,
namely in the natural resources sector.82
We do, however, need evidence of this. In
the extractive industry, the most relevant
fields are taxation and environmental law.
a. Taxation law
Tax exemption policy is one of the
exploitative policies that are similar to
regulatory laxity or non-tariff subsidies
in terms of attracting foreign direct
investment.83 One study was conducted on
a dataset of corporate income tax regimes
in 50 emerging and developing economies
over the period 1996-2007 which analyzed
their impact on corporate tax revenues. It
argues that there is a partial race to the
bottom: while countries with standard tax

76
GaetanVerhoosel, Foreign Direct Investment and
Legal Constraints on Domestic Environmental Policies: Striking a Reasonable Balance Between Stability and Change, 29(4) Law &Poly Intl Bus 451,
456 (1998).
77
Amnesty International, Contracting out of Human Rights: The Chad-Cameroon Pipeline Project
(2005), available at http://www.amnesty.org/en/library/
info/POL34/012/2005 (last visited February, 14, 2012)
78
UNCTAD, Reserving Flexibility in IIAs: The use of
Reservations 5 (2006).
79
See generally Tom Ginsberg, International Substitutes for Domestic Institutions: Bilateral Investment
Treaties and Governance, 25 INTL REV. OF L. &
ECON. 107 (2005).

Waelde and Ndi note that the impositions of new

regulations or judicial decisions are indeed relevant
consideration for investors. See Waelde & Ndi, supra note 60, at 230.
81
SeeVerhoosel, supra note 76, at 456.
82
See generally, Gray, supra note 67.
83
Cooper identified different policy outcomes of interdependence: constructive, passive, defensive,
aggressive and exploitative. He mentioned flags of
convenience, lax disclosure requirements, foreign
subsidies and tax havens as examples of exploitative policies. See generally Richard N. Cooper,
Economic Interdependence and Foreign Policy in
the Seventies, 24(2) World Polit 160 (1972).
80

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regimes have developed corporate tax

systems in a similar fashion as advanced
economies, countries that have been
under pressure to lower tax rates in order
to lure and boost investment are sinking
to the bottom, most notably in the case
of Africa, creating effectively a parallel
tax system. It also states that developing
countries have made widespread use
of tax incentives granted under special
regimes, which has brought effective tax
rates close to zero in many countries.84
This study computes effective tax
rates to take account of complicated
special regimes, such as partial tax
holidays, temporarily reduced rates and
increased investment allowances. We
have to note that this study is not focused
on any particular industry. However, this
study offers an important conclusion:
when a special tax regime is used to
attract foreign direct investment, the race
is towards the bottom.
There are a few studies that have been
solely conducted in the mining industry of
developing countries. For example, one
study conducted in Ghana examined tax
incentive regimes and tax concessions
provided by the fiscal regime of the
mining laws and negotiated investment
agreements and stated that government
revenue generation is constrained by the
range of capital allowances, list of miningrelated equipment and items exempted
from customs and import duties, the
nonpayment of capital gain taxes, dividend
withholding taxes, corporate income
taxes, the huge offshore sales revenue
retentions and the payment of royalty at
the lowest allowable rate.85 UNCTAD
also confirmed in its 2006 report that

Ghana took particular measures aimed at

lowering corporate income taxes. In 2010,
Ghana became a major host country for
FDI in the oil industry.86 Egypt also took
measures to lower taxes and Egypt was
the leading recipient of FDI in Africa in the
projects of non-oil extractive industries.87
In Mali, mining law reform in 1999 led to
led to a reduction in benefits to the state
and increased advantages conceded to
the mining companies. These advantages
involve less government participation in
the capital of companies, lower taxes and
accelerated depreciation.88In Kyrgyzstan,
the government gave tax advantages
to foreign investors that they withheld
from local businesses driving many
local ventures out of business. This
created a political counter-current and
the government reacted by removing the
tax advantages which in turn drove away
a majority of the foreign investors.89 As
noted by Barberis, there is a trend towards
the overall reduction of taxation levels in
mining globally.90
b. Environmental law
There is an increasing view that weak
environmental protection regimes are a
form of subsidy to polluting producers.91
The failure to maintain environmental
protection at an appropriately high level
provides illicit subsidies to the business.
By absorbing the environmental costs
SeeUNCTAD, World Investment Reportxiii (2011),
available at http://www.unctad-docs.org/files/UNCTADWIR2011-Full-en.pdf(last visited June, 29, 2012).
87
See UNCTAD,supra note 36, at 114.
88
Seegenerally Gisele Belem, Mining, Poverty Reduction, the Protection of the Environment and the
Role of the World Bank Group in Mali, in Mining in
Africa: Regulation and Development 119 (B. Campbell, ed., 2009).
89
William F. Arnold, Mongolian Mining Sector Competitiveness and the Use of Stability Agreements
IV-4 (Economic Policy Reform and Competitiveness Project, US Agency for International Development, 2004), available at http://pdf.usaid.gov/pdf_docs/
Pnadb651.pdf(last visited June, 20, 2012).
90
See Daniele Barberis, Negotiating Mining Agreements: Past, Present and Future Trends 160 (1998).
91
SeeTrachtman, supra note 4, at 56 (citation omitted).
86

84
See generally Ali S. M. Abbas, Alexander Klemm,
Sukhmani Bedi & Junhyung A. Park, Partial Race to
the Bottom: Corporate Tax Developments in Emerging and Developing Economies (IMF working paper,
2012), available at http://www.imf.org/external/pubs/ft/
wp/2012/wp1228.pdf(last visited February, 10, 2012).
85
T. Akabzaa, Mining in Ghana: Implications for National Economic Development and Poverty Reduction, in Mining in Africa: Regulation and Development
25, 26 (B. Campbell, ed., 2009).

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Articles

of production, in a context where the

environmental costs of production might
otherwise be charged to the producer,
a country can assist its producers by
lowering their costs of competing in either
foreign or domestic markets.
In Zimbabwe, a country whose
mining sector is dominated by foreign
enterprises, the Mines and the Minerals
Act supersedes all other legislation
including statutes governing the protection
of the environment.92 The Moroccan
and Tunisian governments have shown
reluctance to upgrade the level of
regulation of the phosphate industry in
response to the possibility that these
companies may flee to countries having
less environmentally regulatory scope.93
The government of Ghana granted mining
licenses in forest reserve areas in the
belief that it risked losing investment and
being forced to compensate the involved
companies.94 In Zambia, foreign investors
are exempt from environmental liabilities
for past activities and can defer compliance
with environmental standards.95 Even in
the extractive industries of developed
countries, similar outcomes are evident:
before the introduction of federal laws,
US states with powerful coal industries
tended to ignore the environmental
consequences of coal mining.96
See Gray, supra note 67, at 309.
SeeVogel, supra note 24, at 34.
94
See Tienhaara, supra note 9, at 389. Tienhaara
conducted a confidential interview with a forestry
official of Ghana who said restoring the forest is a
myth: You fell tropical trees and in place you plant
grass and ornament trees- you fell mahogany and
plant cassia, it is not the same After mining the soil
is unable to sustain indigenous species.
95
See OECD, Foreign Direct Investment and the
Environment: Lessons from the Mining Sector 10
(2002), available at http://www.oecd.org/investment/investmentpolicy/44320363.pdf(last visited July, 01, 2012).
96
See generally Jonathan Rodden & Susan RoseAckerman, Does Federalism Preserve Markets?, 83
Va.L.Rev.1534 (1997). See also Kirsten Engel & Susan Rose-Ackerman, Environmental Federalism in
the United States: The Risks of Devolution,in Regulatory Competition and Economic Integration: Comparative Perspectives 135 (D. C. Esty & D.Geradin,
eds., 2001).

Also there is a view that special

economic zones are racing to the bottom97
since these zones are developed solely
for foreign investors to take advantage
of special legal regimes geared
towards export oriented production and
governments use various instruments
to attract investment and those are not
generally applicable to other parts of a
country.98 However there are similarities
between special economic zones and
extractive industries in developing
countries. Extractive industries in most
developing countries are export oriented
(excluding Russia, Brazil and China,
since they have huge domestic appetite
for primary commodities) and as we have
discussed before, in order to attract FDI,
host governments use different policy tools
than they do with domestic investment in
extractive industries.
Some
scholars
argue
that
environmental costs make up only a small
proportion of a companys total costs; they
will have a little impact on firms location
decisions.99 There is little evidence that
MNCs select their investment sites
based on low environmental standards.
Indeed investors usually do not include
environmental regulation as a substantial
factor when deciding on the location of
their investment.
However a race to the bottom is not
restricted to investors decision on where to
locate. It is acknowledged that established
companies may apply pressure to host
governments to lower, not raise, or not
enforce environmental regulations.100

92
93

See Gray, supra note 67, at 309.

See generally W. Ge, The Dynamics of Export Processing Zones (UNCTAD discussion paper, 1999),
available at http://archive.unctad.org/en/docs/dp_144.
en.pdf(last visited May, 10, 2012).
99
See generally CHARLES P. OMAN, POLICY COMPETITION FOR FOREIGN DIRECT INVESTMENT:
A STUDY OF COMPETITION AMONG GOVERNMENTS TO ATTRACT FDI (2000).
100
See Zarsky,supra note 45, at 395. Zarsky notes
that MNCs do not actively seek out a pollution haven butif local environmental regulation is weak
create one through their operations. See also N. Mabey& R. McNally, Foreign Direct Investment and the
97
98

35

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2014 4 (50)

OECD reported that the avoidable

impacts of extractive industries, such
as biodiversity loss, waste disposal
and discharge have occurred in many
developing countries due to regulatory
failures in the environmental field. Weak
governance and in particular in the areas
of environmental regulations and their
administering institutions has enabled
substandard mining to occur.
Even when governments adopt more
stringent rules, they may lack motivation
to enforce these rules. These rules are
either too costly for their capacity or
other factors, such as the rent seeking
behavior of government (or government
officials and political figures) or lobbying
of interest groups may effectively hinder
their implementation. For example, after
the breakdown of the former Soviet Union
and the transition to a more democratic
political system, and the emergence
of market economies in Central and
Eastern Europe, nearly all governments
in the region adopted more stringent
environmental regulations based on
US and Western Europe standards.
However, few governments in the region
have adequate financial resources to
clean up the environmental damage that
has occurred or to enforce these new
environmental regulations effectively.101
Sub-Saharan
African
countries
are currently enacting, or have recently
enacted,
environmental
protection
legislation. In some cases, however,
regulations defining the application of the
law have yet to be drafted or promulgated.
The delays may be several years, inhibiting
enforcement efforts. For example, in
Cameroon environmental legislation was
enacted in 1996 but the implementing

regulations have yet to be drafted.102

Regulatory competition has taken
a toll on those countries which failed to
include the costs to the businesses that
should be internalized. Externalization
not only occurs on a broad base in
the territory of the state that maintains
weak environmental regulation. The
environmental degradation may have
effects on specific groups which is mostly
the case with the effects of extractive
industries. In this selective externalization,
the polluting industry is able to externalize
the costs to the affected groups and
costs are borne by the local community.
Because of the fact that externalization
is often selective in extractive industries
and tax revenues are often not channeled
to communities in the regions where
investment takes place, a cost and benefit
analysis undertaken at the national level
is unlikely to show such inequalities at
the local level and fail to internalize costs
related to pollution.
Extractive
industries
remain
inherently
problematic
from
an
environmental point of view, even though
there seems to be a good understanding
of its direct environmental impacts.
It is a well-established fact that host
governments for do not always establish
appropriate environmental regulations or
assure their robust enforcement.
6. Conclusion
As discussed above, the structure of
regulatory competition implies a race to
the bottom in developing countries with
a dependency on extractive industries.
This paper has argued that competition
among developing countries dependent
on extractive industries is leading to a
race to the bottom. Competition among
host governments to attract investment
may lead to a lax regulatory environment,
a reluctance to enforce existing laws
and regulations, and self-strangling
agreements with MNCs and FDI home
countries.

Environment:From Pollution Haven to Sustainable

Development (WWF, 1999), available athttp://www.
oecd.org/dataoecd/9/48/2089912.pdf(last visited June,
11, 2012).
101
See generally Denis A. Rondinelli&GyulaVastag,
Private Investment and Environmental Protection in
Central and Eastern Europe: ALCOA-Kofems strategy in Hungary, 16(4) EMJ 422 (1998).

102

36

See OECD,supra note95, at 41.

Articles

has led to a relaxation of regulations,

the circumvention of existing legal
frameworks, potential future changes in
the legal framework protecting investors
through bilateral investment treaties and
state contracts that inevitably limit the
adjusting capability of domestic policy and
arguably the relaxation of enforcement of
the existing laws and regulations.
However, its important to note that
every country has its own unique conditions
which inevitably affect its investment
environment. Mongolia, the situation is
not necessarily a race to bottom, rather
there are fluctuating changes in the
legal framework of mining. Case study
on Mongolia shall be deemed important,
though this paper does not include part of
my research on Mongolia. Indeed, its an
open subject for researchers for the future
exploration.

The
propositions
of
product
restriction and industrial structure support
this conclusion. The asset specificity
proposition, however, offered different
implications than those which are
conventionally suggested and also seems
to support the race to bottom notion in
developing countries with a dependency
on extractive industries.
Exclusive factors attributable to
mining industry dependent developing
countries such as the overall low level of
governance of host countries, the nature
of the commodity, industrial structure,
the priority area of FDI, the governments
dependence on extractive industry
revenue, the impact on the environment
and society support the theoretical
implication.
Increasing
competition
amongst developing countries with a
dependency on extractive industries

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37

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AD HOC ARBITRATION IN MONGOLIA:

A PROCEDURAL OVERVIEW

arbitral proceedings, and more. However,

there are certain aspects of arbitration
that are less desirable than those found
in a traditional court system. In most
arbitration proceedings, parties do not
have theright to appeal a final award
even if the parties believe the arbitral
tribunal was mistaken in its decision.
Nevertheless, in terms of efficiency and
flexibility in dispute resolution, arbitration
has advantages over litigation. As such,
it is important to understand the role of
arbitration in Mongolias judicial system. In
particular, we consider the role of ad hoc
arbitration in an effort to provide readers
with an overview of existing procedures
which govern the process in Mongolia.

Ganzaya Tsogtgerel,
Legal Specialist, Anderson & Anderson LLP, and
Minjae Baek, J.D Handong International Law
School

Preamble
In recent times, disputes arising from
private relations have greatly increased
and have become more complex as each
countrys market economy becomes more
closely intertwined with other foreign
countries due to globalization. Methods
of dispute resolution have also evolved.
No longer is dispute resolution limitedonly
to litigation, but haschanged and
developedto be more suitable and flexible
for parties in handling complex disputes.
Arbitration is one suchform of alternative
dispute resolution which occurs outside
the traditional court system, and which
has become increasingly widespread in
the practice of law.

Differences between Institutional

and Ad Hoc Arbitration in Mongolia
The Arbitration Law, Article 5.1 states
that, in Mongolia, arbitration shall be either
institutional or ad hoc.1Article 4.1.1 defines
institutional arbitration as arbitration, set
up for the purpose of conducting arbitral
proceedings permanently.2 Ad hoc
arbitration is defined by Article 4.1.2 as
arbitration, set up for settling a particular
dispute, at one time, between the parties.3
With regard to institutional arbitration,
Article 5.2 states that institutions such as
the Mongolia International and National
Arbitration Center (MINAC) or other
non-governmental organizations and their
associations, may undertake institutional
arbitration.4
Once
parties
engage
such institutions to handle institutional
arbitration, the procedures for arbitration

Introduction
Compared to litigation, the parties
to arbitral proceedings play more active
roles in choosingthe rules, forum, and
procedures of dispute resolution. For
example, parties choose procedural rules
and may also select arbitrators and the
number of them. Parties may also choose
the location of arbitration, the language of

Arbitration Law, art. 5.1 (2003) (Mong.).

Id. at art. 4.1.1.
3
Id. at art. 4.1.2.
4
Id. at art. 5.2.
1
2

38

Articles

and the list of arbitrators that may be

utilized are regulated by the stipulated
rules and procedures (e.g., the Charter)
of the chosen institution, pursuant to the
Arbitration Law,Articles 5.4 and 5.5.5
On the other hand, the Arbitration
Law, Article 5.7 provides thatad hoc
arbitration may be set up and procedural
rules chosen by the parties via written
agreement.6 For example, the parties
may choose their own arbitrators without
restriction, except for those that are
prohibited by law. Moreover, Article 5.8
states that the parties to ad hoc arbitration
shall have the same rights as parties to
institutional arbitration.7 These rights, as
stated above, include choosing arbitrators
and appointing authorities, designating
the location and language of arbitration,
and so forth. Parties are free to choose the
place of arbitration either in institutional
or ad hoc proceedings pursuant to the
Arbitration Law, Article 24.8 Thus, ad
hoc arbitration, while guaranteeing the
same rights as institutional arbitration,
presents a more flexible alternative to
parties who wish to manage the process
of arbitration.

are free to choose UNCITRAL Rules,

Mongolian Arbitration Law, or any other
arbitration rules they deem fit, such
as ICC Rules, and also to choose the
location to settle thedispute.11 In other
words, there is no restriction on choosing
foreign or international arbitration rules
underMongolian law, unless the parties
agree to chooseMongolias Arbitration
Law. If, for example, the parties choose
Korean arbitration law to govern arbitral
proceedings in Mongolia, the Korean law
shall govern the procedural process over
such a dispute. Conversely,if the parties
in Mongolia choose UNCITRAL Rules
and the Korean Commercial Arbitration
Boardas the locus, the ad hoc arbitration
will be held in Korea and will be governed
by UNCITRAL Rules. If parties agree on
UNCITRAL Rules and the place of ad hoc
arbitration to beMongolia, the proceedings
shall be governed by UNCITRAL Rules
while the ad hoc arbitration will occur in
Mongolia. In the latter case, parties may
still request assistance from MINAC, if the
parties so choose.
Ad Hoc Arbitration Procedures in
Mongolia

Relationship between UNCITRALRules

and Mongolian Arbitration Rules in Ad
Hoc Proceedings
In accordance with the Arbitration
Law, Article 5.7, the parties set up ad hoc
arbitration via a written agreement.9The
Arbitration Law,Articles23.1 and 24
specifically state that the parties are free
to agree upon the place of arbitration
and the procedural rules to be followed
by an arbitral tribunal when conducting
arbitration.10 Although the Arbitration
Law,Article 3.1 states that the law will be
applied within the territory of Mongolia,
whenever arbitration is proposed to
settle a dispute, parties in Mongolia

Drafting Contractual Provisions

As stated, the Arbitration Law, Article
5.7 provides that parties may set up ad
hoc arbitration through written agreement.
In other words, parties may decide upon
procedural process and rules of arbitration
when drafting arbitration provisions under
contract.12 For example, parties may
agree to choose (1) either the Arbitration
Law,UNCITRAL Rules, or other preferred
rules, (2) the appointing authority, (3) the
number of arbitrators, (4) the location of
arbitration, and (5) the language to be
used in arbitral proceedings.
A sample ad hoc arbitration clause
may appear as follows:
This Agreement shall be subject to
the laws of Mongolia and shall be deemed
to be made in Ulaanbaatar, Mongolia. Any

Id.at arts. 5.4, 5.5.

Id.at art. 5.7.
7
Id.at art. 5.8.
8
Id. at art. 24.
9
Id.at art. 5.7.
10
Id.at arts. 23.1, 24.
5
6

11
12

39

Id.at art. 3.1.

Id.at art. 5.7.

LAW REVIEW

2014 4 (50)

With the exception of the aforementioned

persons, the parties to arbitration are free
to choose any local persons as arbitrators
in Mongolia. However, if a foreign party
selects a local Mongolian individual as an
arbitrator, there can be some impediments.
Particularly, there are few arbitrators in
Mongolia who have experience in dealing
with international arbitration and are able
to speak English fluently. This can be
disadvantageous to parties who choose
to conduct arbitral proceedings in English
as they may require the services of a
professional English translator.
In addition to those described above,
there is another distinction between the
UNCITRAL Rules and Arbitration Law. This
distinction occurs when one party fails to
choose the second arbitrator within thirty
days after such party receives the other
partys request to appoint an arbitrator,
or when two appointed arbitrators fail to
agree on the third arbitrator within thirty
days of their appointments. According
to the UNCITRAL Rules, Article 9, the
parties or arbitrators may request the
appointing authority to select the second
arbitrator or the presiding arbitrator.17
Should the parties or arbitrators fail to do
so, the UNCITRAL Rules,Article 6 state
that any institution or person, including the
Secretary-General of the Permanent Court
of Arbitration at Hague, can be designated
as the appointing authority, unless the
parties have already agreed upon the
choice of the appointing authority.18 On
the other hand, the Arbitration Law,
Article 15.5 specifically states that upon
the parties request,selection of the
appointing authority shall be made by
the Mongolian Court of Appeals.19In the
case of a sole arbitrator and according to
UNCITRAL Rules, Article 8.1, the parties
should agree upon the appointment of
the sole arbitrator, with the designated
appointing authority providing this service
in the event the parties are unable to

dispute, controversy, or claim arising out

of or relating to this Agreement, or breach,
termination or invalidity thereof, shall be
resolved by ad hoc arbitration, before a
single arbitrator, pursuant to UNCITRAL
arbitration rules at the office of Anderson &
Anderson LLP in Mongolia. The language
of arbitration shall be English.
Selecting Arbitrators and Appointing
Authorities
According to the Arbitration Law,
Articles 14.1, 14.2, and 14.3, parties
are free to compose an arbitral tribunal
consisting of a sole arbitrator or panel
of arbitrators.13 If the parties fail to make
this determination in contract, the number
of arbitrators shall, by default, be three.
This is consistent with the UNCITRAL
Rules, Article 7.1, which more specifically
provide the parties thirty days within which
to determine the makeup of an arbitral
panel.14 In the case of three arbitrators,
the UNCITRAL Rules, Article 9 and the
Arbitration Law, Article 15.3 state that
each party shall appoint one arbitrator
and the two arbitrators shall thereafter
appoint a third arbitrator as the presiding
arbitrator.15
With regard to the choice of
arbitrators, there is a distinction between
UNCITRAL Rulesand the Arbitration Law
requirements. While UNCITRAL Rules do
not state any qualifications for potential
arbitrators, the Arbitration Law, Articles
15.1 and 15.2 impose restrictions that
potential arbitrators may not be members
of the Mongolian Constitutional Court, a
judge, a prosecutor, a case registrar, a
detective, an officer of court enforcement,
an advocate or notary who had previously
worked with/for any of the parties, or other
officials who are prohibited to conduct work
which isnot related to their legal duties.16
Id.at arts. 14.1, 14.2, 14.3.
UNCITRAL, United Nations Commission on International Trade Law, art 7.1, G.A. Res. 65/22, U.N.
Doc. A/RES/65/22 (revised 2010) [hereinafter UNCITRAL].
15
Id. at art. 9; Arbitration Law, art. 15.3 (2003)
(Mong.).
16
Arbitration Law, arts. 15.1, 15.2 (2003) (Mong.).
13
14

UNCITRAL, supra note 14 at art. 9.

Id. at art. 6.
19
Arbitration Law, art 15.5 (2003) (Mong.).
17
18

40

Articles

agree.20 However, the Arbitration Law,

Article 15.6 stipulates that if the parties are
unable to reach an agreement regarding
the appointment of an arbitrator, the sole
arbitrator shall be appointed by the Court
of Appeals based on the requests of the
interested parties.21
As the differences between the
Arbitration Law and UNCITRAL Rules
have demonstratedabove, the UNCITRAL
Rules are arguably more advantageous
and more flexible and manageable for
parties than the Arbitration Law. For
example, if the parties select UNCITRAL
Rules to guide arbitral proceedings, the
parties may choose a Mongolian judge
or any other person as an arbitrator.
This process is more restrictive under
Mongolias Arbitration Law. Moreover,
with regard to the choice of appointing
authorities, the UNCITRAL Rules are
far more flexible in that they impose no
restrictions on the selection of appointing
authorities. Under the Arbitration Law,
on the other hand, the Court of Appeals
must play a role as the appointing
authority upon the parties request and
will appoint arbitrators if the parties fail to
agree on such appointments. Therefore,
in terms of flexibility and independent
decision-making, the UNCITRAL Rules
are more preferable for parties to ad hoc
arbitration.

communicated to the parties.23 If any party

fails to produce documentary evidence,
the arbitral tribunal may continue with the
proceedings and make a decision and
award based on the evidence that was
presented before it in accordance with the
Arbitration Law, Article 29.1.3.24
Alternatively, the UNCITRAL Rules
do not impose upon parties the requirement
to communicate to the other party with
regard to the exchange ofevidence.The
UNCITRAL Rules instead require each
party to bear the burden of proving the facts
relied on to support its claim or defense
pursuant to Article 27.1.25Compared to
the UNCITRAL Rules, the Arbitration Law
provides better opportunities for parties
to prepare for arbitration proceedings in
that they are required to communicate
all evidence to eachother. This assistsa
partyto understandwhat the other party is
going to argue inarbitration and provides
the parties with the opportunity to better
prepare argumentsprior to a hearing.
The Request for Production of
Evidence and Interim Measures
As stated, if any party fails to produce
documentary evidence, the arbitral
tribunal may continue with proceedings
and make a decision and award based on
the evidence that was presented before
it, pursuant to the Arbitration Law,Article
29.1.3.26Additionally, in accordance with
the Arbitration Law, Article 33, the arbitral
tribunal or a party with the approval
of the arbitral tribunal, may request
assistance in gathering evidence from
the Mongolian Court of Appeals.27 The
Court of Appealsmay execute such a
request in compliance with the Code of
Civil Procedure,Article 46.28Furthermore,
pursuant to the Arbitration Law, Article 21,
the arbitral tribunal may order any party
to take interim measures of protection, if
necessary, and also may require any party to

The Exchange of Evidence

In regard to the exchange of
evidence, the Arbitration Law, Article
27.5 states that parties may submit all
relevant documents, including references
to the documents and evidence, with their
statements.22 In addition, pursuant to the
Arbitration Law,Article 28.4, all statements,
documents, or other information supplied
to the arbitral tribunal by one party shall
be communicated to the other party;any
expert reports or evidentiary documents
that may be used in proceedings
by the arbitral tribunal shall also be

Id. at art. 28.4.

Id. at art. 29.1.3.
25
UNCITRAL, supra note 14 at art. 27.1.
26
Arbitration Law, art. 29.1.3 (2003) (Mong.).
27
Id. at art. 33.
28
Id.
23
24

UNCITRAL, supra note 14 at art. 8.1.

Id. at art. 15.6.
22
Arbitration Law, art 27.5 (2003) (Mong.).
20
21

41

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provide appropriate security in connection

with such measures.29According to the
Arbitration Law, Article 13.1,a party may
request the Court of Appeals to order
interim measures of protection before or
during arbitration proceedingsand ajudge
may undertake such interimmeasures as
per the Code of Civil Procedure, Article
69.30
Similarly, UNCITRAL Rules, Article
27.3, state that the arbitral tribunal may
require the parties to produce documents,
exhibits or other evidence at any time
during the arbitral proceedings within
such a period of time as the arbitral
tribunal shall determine.31 However,
the UNCITRAL Rules do not provideany
avenues through which a party may obtain
evidence by asking for assistance from a
court of law. In regard to interim measures
related toevidence, the UNCITRAL Rules,
Articles 26.1 and 26.2(d) clearly state
that anarbitral tribunal may grant interim
measures in order to [p]reserve evidence
that may be relevant and material to the
resolution of the dispute.32UNCITRAL
Rules,Article 26.6 further states that the
arbitral tribunal may alsorequire the
party requesting an interim measure to
provide appropriate security in connection
with the measure.33 In addition, a
request for interim measures addressed
by any party to a judicial authority shall
not be deemed incompatible with the
agreement to arbitrate, or as a waiver
of that agreementunder UNCITRAL
Rules,Article 26.9.34

arguments, or whether the procedures

shall be undertaken based on documents
and other materials, without an oral
component.35 In addition, according to the
Arbitration Law, Article 28.2, the arbitral
tribunal shall hold a hearing if requested by
one of the parties unless the parties have
agreed that no hearings shall be held.36 In
regard to the notice of hearings, the parties
must be provided sufficient advanced
notice of any hearings and of any meetings
of the arbitral tribunal, especially when the
arbitral tribunal carries out inspections on
goods, property, or documents pursuant
to the Arbitration Law,Article 28.3.37
According to UNCITRAL Rules,Article
28.1, in the event of an oral hearing,the
arbitral tribunal shall give the parties
adequate advanced notice of the date, time
and place of any proceedings.38Unlike the
Arbitration Law, UNCITRAL Rules, Article
28.3 requires that [h]earings shall be
held in camera unless the parties agree
otherwise.39The UNCITRAL Rulesalso
provide articles relating tothe closure and
re-openingofhearings. Pursuant to Article
31.1,[t]he arbitral tribunal may inquire
of the parties if they have any further
proof to offer or witnesses to be heard
or submissions to make and, if there
are none, it may declare the hearings
closed.40According to Article 31.2,
[t]he arbitral tribunal may, if it considers
it necessary owing to exceptional
circumstances, decide, on its own initiative
or upon application of a party, to reopen
the hearings at any time before the award
is made.41

Hearings
With regard to hearings, the
Arbitration Law,Article 28.1 states that
subject to any contrary agreement by the
parties, the arbitral tribunal shall decide
whether it will hold an oral hearing for
the presentation of evidence or for oral

Briefings
If the parties to arbitration agree
to utilize the Arbitration Law, the
partiesarbitration briefs must comply
with the provisions set forth in Article 27
of the law. According to the Arbitration
Arbitration Law, art. 28.1 (2003) (Mong.).
Id. at art. 28.2.
37
Id. at art. 28.3.
38
UNCITRAL, supra note 14 at art. 28.1.
39
Id. at art. 28.3.
40
Id. at art. 31.1.
41
Id. at art. 31.2.
35

Id. at art. 21.

30
Id. at art. 13.1.
31
UNCITRAL, supra note 14 at art27.3.
32
Id. at arts. 26.1, 26.2.
33
Id. at art. 26.6.
34
Id. at art. 26.9.
29

36

42

Articles

Law,Articles 27.1 and 27.2, a statement

of claim must be in writing and signed
by the claimant or its representative.42
The requirements for the statement of
claim are the same as those stipulated
in the Code of Civil Procedure,Article
62, unless the parties have agreed
otherwise.43 In a statement of claim, the
claimant must state the facts supporting
claim, the points at issue, and the relief
or remedy sought, while the respondent
should state his or her defense(s) to the
claims raised in accordance with the
Arbitration Law,Article 27.5.44 In regard to
the respondents rights, the respondent
may choose to agree and perform the
claim requirements to settle the case, or
the respondent may deny the claims and
submit a counterclaim, pursuant to the
Arbitration Law, Articles 27.3 and 27.4.45
Finally, the Arbitration Law,Article 27.6
states that either party is able to amend
or supplement its claim or defense during
the course of arbitral proceeding, unless
the arbitral tribunal disagrees in order to
prevent the delays that may be involved
with making such amendments.46

defense in writing to the claimant and

to each of the arbitrators within a period
of time to be determined by the arbitral
tribunal.49Additionally, pursuant to Article
21.3, [i]n its statement of defense, or at
a later stage in the arbitral proceedings if
the arbitral tribunal decides that the delay
was justified under the circumstances, the
respondent may makea counterclaim or
rely on a claim for the purpose of a setoff provided that the arbitral tribunal has
jurisdiction over it.50

Under theUNCITRAL Rules, Article

20.1, the claimant is responsible to
communicate its statement of claim in
writing to the respondent and to each of
the arbitrators within a period of time to
be determined by the arbitral tribunal.47In
accordance with Article 20.2(a)-(e), the
statement of claim should include the
following: the names and contact details
of the parties; a statement of the facts
supporting the claim; the points at issue;
the relief or remedy sought; and the
legal grounds or arguments supporting
the claim.48The UNCITRAL Rules have
similar requirements for the respondent
under Article 21.1: [t]he respondent
shall communicate its statement of

Enforcement
In order to enforce an arbitral
award in foreign countries, it does not
matter whether a party chooses to use
the Arbitration Law or UNCITRAL Rules.
Rather, it is a matter of whether an
enforcing country is a signatory of the
New York Convention.51The UNCITRAL
Rules do not include provisions regarding
the enforcement of arbitral awards;
however, the United Nations, in an
effort to promote the use of international
arbitration in commercial-related dispute
resolution,established the Convention
on the Recognition and Enforcement of
Foreign Arbitral Awards (also referred to as
the New York Convention)in 1958.52Since
its entry into force in 1959, most United
Nations member states have adopted the
New York Convention,and are bound by
its provisions.
Mongolia is one suchsignatory to
the New York Convention. This means
that one hundred fifty-one countries
shouldrecognize and enforce Mongolian
arbitral awards, with exceptions. In
addition, arbitration decisions rendered in
Mongolia maybe sent to aforeign authority
designated for arbitration enforcement,
so long as that state is also a member of
the New York Convention and therefore
bound to recognize Mongolian arbitral

Arbitration Law, arts. 27.1, 27.2 (2003) (Mong.).

Id. at art. 27.2.
44
Id. at art. 27.5.
45
Id. at arts. 27.3, 27.4.
46
Id. at art. 27.6.
47
UNCITRAL, supra note 14 at art. 20.1.
48
Id. at art. 20.2.

Id. at art. 21.1.

Id. at art. 21.3.
51
New York Convention, the Convention on the
Recognition and Enforcement of Foreign Arbitral
Awards, 330 UNTS 38, 21 UST 2517, 7 ILM 1046
(1958) [hereinafter New York Convention].
52
Id.

42

49

43

50

43

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2014 4 (50)

awards.The enforcement of a foreign

arbitraldecision in Mongolia is regulated
by the Law on Enforcement of Court
Decisions.According to Article 7.3.3, if
MINAC receivesa request for enforcement
of a foreign arbitral award, MINAC will send
this award decision to MongoliasOffice of
Court Decision Enforcement, which will
be responsible for processing the request
and initiating enforcement procedures.53
According to the Arbitration Law,
Article 42.5, the party applying for the
enforcement of an arbitral award in
Mongolia mustsubmit the following
documents with its application: a duly
authenticated original award or a duly
certified copy thereof; the original
arbitration agreement or a duly certified
copy thereof; receipt of payment of the
State Stamp Fee; and a request to enforce
the arbitral award.54If the award is not made
in the official language of the Mongolian
state (i.e., Mongolian), the requesting
partyshould also furnisha certified
Mongolian translation of the decision in
accordance with the Arbitration Law,Article
42.6.55 If the Office of Court Decision
Enforcement finds that the request for
enforcement is reasonable, it will confirm
the arbitral award and issuea writ of
execution in accordance with the Code of
Civil Procedure,Article 184.3.56The Code
of Civil Procedure,Article 184.3 states that
within seven days, upon examination of
the arbitration award, ajudge shall confirm
the award by his/her order.Once the judge
has confirmed the award, he/she shall
also issue a writ of execution and deliver
it to the claimant and respondent within
seven days.57
Generally, enforcement of an
arbitral award ismandatory for signatory
countriesof the New York Convention.58
Whether a request from Mongolia for

enforcement of an award outside the

country is sent via MINAC or through
alternative meansshouldnot influence
the binding nature of thearbitral award. In
other words, whether enforcement of an
arbitral award is mandatory or not will not
depend on the party who sentthe request
to a foreign authority. However, in nonsignatory countries, award enforcement
will largely depend on the sender, subject
matter, and more.59 For non-signatory
states, the process for sending requests
for enforcement may be governed by
existing bilateral treaties. If a country is not
a signatory of the New York Convention,
the requesting party needsfirst to check
whether there is a bilateral treaty between
the country from which the request is
originating and the enforcing country.60In
regard to Mongolian bilateral treaties,
the Ministry of Justice or the Mongolian
Supreme Court arethe main authorities
whichhandlearbitration award requests
from non-signatory states.61 For example,
the 2008 Treaty on Judicial Assistance
in Civil and Commercial Matters
between Mongolia and the Republic of
Korea,Article 4.2 states that parties shall
send their requestsfor legal assistance to
a foreign authority through the Supreme
Court of the state, andthat the Supreme
Court will be the main authority to connect
the requisite government agencies.62
Although Mongolia and the Republic of
Korea are both signatories to the New York
Convention, it is a bilateral treaty similar
in nature to the one above that should be
referenced in the case of arbitral award
enforcement in a non-signatory state.
In practice, if a party wants to
enforce an arbitral award in Mongolia
from a signatory nation of the New
Mongolian International National Arbitration Center,
http://en.mongolchamber.mn/index.php/business-services/mongolian-national-arbitration-center.
60
Ministry of Justice, http://www.pmis.gov.mn/pmis_
eng/.
61
Id.
62
Treaty on Judicial Assistance in Civil and Commercial Matters between Mongolia and the Republic
of Korea(2008), available at http://www.mongolembassy.com/downloads/09.pdf.
59

Law on Enforcement of Court Decisions, art. 7.3.3

(amended 2007) (Mong.)
54
Arbitration Law, art. 42.5 (2003) (Mong.).
55
Id. at art. 42.6.
56
Code of Civil Procedure, art. 184.3 (revised 2002)
(Mong.).
57
Id.
58
New York Convention, supra note 51.
53

44

Articles

York Convention, the partymay send its

request to the Office of Court Decision
Enforcement by him/herselfor via MINAC.
If the party wants to enforce an arbitral
award in a non-signatory country of New
York Convention, the party needs first
check the existence of a bilateral treaty
with that country in order to find out which
authority has the power to communicate
with the foreign authority responsible for
enforcement.
In the case of ad hoc arbitration
which occurs in Mongolia, with an award
that will be enforced domestically, a similar
procedure to the one described above
should be followed. In the event the party
against whom an award has been issued
fails to comply with the arbitral award, the
party seeking enforcement may submit
a request to the Court of Appeals. The
request for enforcement should include the
original arbitral award, or a notarized copy
thereof, and a receipt demonstrating the
partys payment of the State Stamp Fee.
These documents are to be submitted to
the Court of Appeals who will thereafter
issue a writ of execution to the Office of
Court Decision Enforcement.

the provisions within theCivil Code, an

arbitral body may restore the limitation
period. Thus we can conclude that
the aforementioned articles governing
Mongolias statute of limitations will apply
to arbitral proceedings. For example, if
a claim related to obligations is due to
be performed within a fixed time, but
the parties do not file a claim before the
court or in accordance with the contracts
arbitration clause, then after three years
the claim may not be able to be pursued
given that the statute of limitations period
has passed.
Conclusion
Ad hoc arbitration provides parties
with more independence in arbitral
proceedings, including providing greater
flexibility in terms of choosing tribunals
or procedural rules than that found in
institutional arbitration. Ad hoc arbitration
also provides the parties with the ability
to avoid potential biases in Mongolias
institutional arbitration. If the parties
agree to commence ad hoc arbitration
in Mongolia, parties may freely choose
UNCITRAL Rules, Mongolian Arbitration
Law, or any other foreign arbitration
procedural rules. UNCITRAL Rules are
often used in ad hoc arbitration due to their
greater uniformity and legal predictability,
which are in-line with global standards.
If parties choose UNCITRAL Rules, the
parties may select domestic or foreign
appointing authorities, qualified arbitrators
of their choice, and the preferred location
for arbitral proceedings. Thus, in the
jurisdiction of Mongolia, the choice of
ad hoc arbitration conducted pursuant
to UNCITRAL Rules, at the parties
preferred location and in the decided
upon language, may be a preferable
choice for international and/or domestic
parties when considering various forms of
dispute resolution to govern commercial
transactions within the country.

Statute of Limitations Issues

There may be questions regarding
whether Mongolias statute of limitations
applies in arbitral proceedings where
theparties have chosen to begoverned
by the laws of Mongolia.In regard to the
statute of limitations, the Civil Code,
Article 74.1states that the right to
demand a party to take any action shall
have a limitation period, unless the
law specifically stipulates the limitation
period is irrelevant.63 Since the laws
language includes any action, the
statute of limitations will likely include
arbitration proceedings. In addition, the
Civil Code,Article 82.4 states that [i]f
the expiration of the limitation period is
justifiable, a court or arbitration body
may restore it and protect the breached
rights.64 This means that, according to
63
64

Civil Code, art. 74.1 (revised 2002) (Mong.).

Id. at art. 82.4.

45

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2014 4 (50)

TAKING SECURITY IN MONGOLIA ISSUES AND

CHALLENGES

over immovable and movable property,

as well as proprietary rights such as
intellectual property rights. In almost all
cases, the creation of a security interest
by way of entering into a relevant pledge
agreement will equate to the perfection of
the same. The exception is a pledge over
immovable property, which is perfected
upon registration with the relevant state
authority.
Although it is theoretically possible
to register security interests created over
other assets such as movable property
and shares in private companies, there
are no enabling regulations governing the
process for this. The Ministry of Justice is
cooperating with the International Finance
Corporation to introduce a new law on
the registration of movable properties
and proprietary rights as well as security
interests created over the same, but
the question remains as to whether the
adoption of new law would be sufficient to
provide a reliable and predictable security
regime.

Solongoo Bayarsaikhan,
Associate, Hogan Lovells, (Mongolia) LLP

In recent years, the Mongolian

economy has become heavily dependent
on the mining sector. The development
of this capitalintensive sector and its
associated
infrastructure
requires
sponsors to have access to funds. Due
to the under-developed capital market
with low liquidity, the vast majority of
financing comes through conventional
debt financing.
Financing costs are
comparatively high in Mongolia,where
interest rates are in the double digits.
In addition, borrowers must provide
an adequate level of security to ensure the
repayment of funds extended by financial
institutions. However, in Mongolia thepool
of assets that could provide reliable and
enforceable security is limited. This makes
financing more difficult and less accessible
tosmall and mid-sized companies. This is
due to the shortcomings of the existing
regulatory regime, as further discussed
below.

2. Registrable Securities
2.1.Immovable Properties
(including land)
It is possible to create security over
land possession rights and land ownership
rights (the former may be issued to wholly
Mongolian legal and natural persons
whereas the latter are only issued to
Mongolian natural persons) as well as
overbuildings (the ownership rights over
which are separate to land rights).
The registration of security interest
over buildings equates to the perfection
of such security interest and failure to
registermeans that the security is invalid

1. Introduction
The principal form of security interest
is a pledge. Under Mongolian law, in
principle it is possible to take a pledge

46

Articles

and unenforceable against a pledger.

The registration system for security
over immovable properties is relatively
well-developed and maintained by the
Mongolian Property Rights Registration
Office.

However, state registration of
security interests over buildings and
lands is not publicly accessible and as
such searchesof the same require the
cooperation of the property owner.

One of the most common types of

movable property that Mongolian mining
companies have in their possessionis
vehicles and these can be substantialin
value. However, it appears that the
Mongolian vehicle registration system
does not currently allow the registration
of security over the same. Instead,as a
way around this, lenders often request the
transfer of ownership of vehicles into their
name until the secured obligations have
been fully repaid.

2.2.Mineral Licenses
Under Article 51 of the Minerals Law,
it is possible for banks and non-banking
financial institutions to take security over
mineral and mining licenses provided that
this is also accompanied by the relevant
documents relating thereto, such as
exploration data and reports, feasibility
studies, and other relevant pledgeable
assets. This means that a mineral/mining
license by itself is not a securable asset.
The Minerals Resources Authority of
Mongolia is in charge of registration.

2.5.Shares in joint stock companies

Shares in publicly-traded companies
are registered with the Securities Central
Depository and Clearing House (SCDCH)
and it is possible to register security over
such shares with the SCDCH. There is
a relatively well-developed registration
mechanism in place, however due to the
low liquidity of shares at the Mongolian
Stock Exchange, this option is not open
for most companies seeking funding, as it
is not particularly attractive to lenders.

2.3. Trademarks
Under the Law of Mongolia on
Trademarks and Geographical Indications,
security over trademarks is subject to
registration with the Intellectual Property
Office of Mongolia. Although the law
appears to require mandatory registration,
there are no enabling regulations detailing
the registration mechanism and application
procedure. From Hogan Lovells own
experience, we understand that in order
to pledge trademarks a holder of the same
must first have the trademark evaluated
and a report commissioned.
Given
the early stage of practice in this field
and relative absence of recognition and
valuable Mongolian corporate trademarks,
it remains unlikely that companies have
access to significant levels of funding by
way of securing their trademarks.

2.6.Shares in private companies

One of the most common types of
securable assets are shares in private
companies. However, there exists no
registration mechanism for shares in
private companies, nor for security over
the same.
In practice, the registration of a private
company and its shareholders with the
Legal Entities Registration Office (LERO)
evidences the shareholders ownership
rights over shares in such company,
however no legislative act in Mongolia
confirms this. Rather, the Company Law
of Mongolia provides that ownership
rights over shares are evidenced by a
register of shares/members maintained by
companies. Mongolian companies often
do not generally maintain such register
and as such shareholders rely on the
details set out in company charters and
state registration with LERO. LERO does
not register security over shares in private

2.4.Vehicles

47

LAW REVIEW

2014 4 (50)

companies and therefore lenders are left

with no choice other than to rely on the
contractual arrangements with a pledger.

Overall, companies without valuable

immovable properties have limited ability
to raise funding from international banks
who are able to provide considerably
cheaper finance than Mongolian banks.
If there was sufficient support and
the political will, a mandatory mechanism
for the registration of security interests
over most asset typescould be created
without too much effort. However, such
mechanism needs to gain the trust of
the public by ensuring reliability and
accessibility. The creation of trust is a
rather more difficult process than just
creating an enabling environment.
The State has several options it could
consider in creating a reliable security
regime. Firstly, the existing legislation on
taking security could be amended so as to
create a reliable registration mechanism
for pledges over movable assets and
proprietary rights, including shares over
private companies. However, these
options are not limited to passing of
new laws on the registration of security
interests. It would also be possible to
create a self-reporting system where
companies were obliged to maintain a
register of security interests provided
by them to lenders. Failure to maintain
incorrect or false registration would have
financial or other penalties. Such a selfreporting system would develop reliability
and trustworthiness and would beless
costly for the State in terms of creation
and enforcement.
Such registration systemswould
provide assurance and comfort for lenders
in extending loans facilities to Mongolian
companies, and may potentially reduce
financing costs. The increased pool
of assets over which reliable security
interests can be given wouldprovide
more funding opportunities to Mongolian
companies, which in turn should result
in business growth and the economic
development of Mongolia.

2.7.Other assets
There is no registration system
available for registration of security over
other types of assets or proprietary rights.
Although technically it is possible
under Mongolian law to take floating
charges, there are no detailed regulations
in relation to the same. Further, Mongolian
companies do not maintain aregister
of pledges which would evidence the
existence of security interests generally.
Despite the absence of enabling
regulations, there are cases where
borrowershave successfully registered
pledges over certain high-value movable
assets and trademarks. However, such
registrationsare considered to be isolated
incidents and required a great deal of effort
and use of connections and influence on
the part at the borrowers.
2.8.Way Forward
As discussed there is no established
system for registering security interests
over assets other than those detailed
above-mentioned. This applies to pledges
of shares in limited liability companies,
movable assets, receivables, and the
other more general assets of companies.
The absence of a publicly searchable
and established registration system
makes it difficult for lenders to get
comfortablewith the risks associated with
extending loans in Mongolia and therefore
to provide funding. Having received the
benefits of warranties and covenants
under the relevant pledge agreements,
lenders are left with no assurance other
than relying on pledgees to comply with
their contractual obligations. The lack of a
registration system also makes it difficult
for lawyers to opine (without substantial
qualifications) on the ranking of security
interests as it is not possible to confirm the
existence of a prior pledge.

48

Articles

INTERNATIONAL LEGAL PERSONALITY OF

INTERNATIONAL ORGANIZATIONS: INTERNATIONAL
LAW PERSPECTIVE
of international organizations and the
criteria of international legal personality
(in particular, those of international
organizations) in order to answer the
questions of whether international
organizations possess international legal
personality under international law or
whether international organizations can
exercise their functions without having
international legal personality.
Tuulaikhuu Enkhee,
Policy researcher, the National Legal Institute
of Mongolia

Introduction
The legal subjects in any legal
system are not necessarily identical in
their nature or in the extent of their rights,
and their nature depends upon the needs
of the community. Throughout its history,
the development of international law has
been influenced by the requirements of
international life, and the progressive
increase in the collective activities of
States has already given rise to instances
of action upon the international plane by
certain entities which are not States.1 In
principle, international organizations2 are
quite different from States because of the

Abstract
In traditional concept of international
law, States were only subjects of
international law. Accordingly, the criteria
applicable to subject of international law
were mostly dedicated to States. This
concept dominated until the end of the
19th century. In the beginning of the
20th century, new actor as international
organization
appeared
institutionally
in international relations. Naturally, the
requirements of international life have
influenced the development of international
law, and the increasing cooperation
among States has led to appear non-state
actors in international plane.
Basically, this article is intended
to introduce general framework of
international
legal
personality
of
international organization as one of the
current main actors in international law.
This is the fundamental issue in connection
with the existence of international
organization in international relations. In
this article, I will analyze three theories
regarding international legal personality

1
ICJ Advisory opinion, Reparation for injuries suffered in the service of the United Nations (April 11th,
1949), p.178. Available at http://www.icj-cij.org/docket/files/4/1835.pdf.
2
There is no generally-recognized definition on international organization. In a broad sense, the term
international organization covers intergovernmental
organizations, international non-governmental organizations, international tribunals, international public
corporations, and even multinational enterprises
established by the law of the particular State. In a
narrow sense, it means intergovernmental organizations. In this respect, Vienna Convention on the Law
of Treaties (1980) provides that international organization is intergovernmental organization (Article 2
(i)). The former is a quite disputable issue among international law scholars. Although the latter expresses traditional concept of international organizations
in international law, in fact, it cannot fully encompass
diversity among international organizations.

49

LAW REVIEW

2014 4 (50)

fact that they do not possess a general

competence and have been established
in order to exercise specific functions.3
States possess common rights and duties
recognized by international law whereas
the rights and duties of international
organizations depend upon their purposes
and functions expressed or implied in
their constitutions and developed practice
in this matter. For this reason, the fact
that international organization is an
international legal person does not mean
that it is in the same position as a state
in international law. Therefore, to be an
international legal person means only to
be capable of bearing rights and duties.4
This short article seeks to answer
two basic questions: whether international
organizations
possess
international
legal personality under international law
or whether international organizations
can exercise their functions without
having international legal personality. In
order to accomplish this purpose, main
theories for international legal personality
of international organizations, and the
general and specific criteria applicable
to international legal personality of
international organizations will be briefly
explored in this article. Consequently,
that international legal personality is an
indispensable feature for existence of
international organizations in international
relations will bedetermined. In addition
to this, some questions that need to be
answered will be arisen. Substantially, this
article focuses on only general framework
for international legal personality of
international organizations. I will consider
domestic legal personality and legal
responsibility of international organizations
separately in my next articles.
This is called as the principle of specialty. It
means international organizations are established
in order to exercise specific functions. See the UN,
International Law Commission, Draft Articles on the
Responsibility of International Organizations, with
commentaries (2011), p.3
4
Henry G. Schermers and Niels M. Blokker, International Institutional Law: Unity within Diversity (5th
revised edition; Leiden, Boston: Martinus Nijhoff
Publishers 2011), p.993

Why is international legal

personality important to international
organizations?
The priority questions in this regard
are whether international organizations
possess international legal personality5
under international law or whether
international organizations can exercise
their functions without having international
legal personality6. In this respect, it is
deemed an entity that is not a subject of
international law or an international legal
person7 is not able to be a party to treaties,
present claims against other international
persons, possess other international
rights and duties, or otherwise exist with
relative autonomy in the legal sphere.8
There are fundamental three theories
regarding international legal personality of
international organizations.
The first theory was generally
developed by socialist scholars, such
as G. I. Tunkin9 and etc.,. This theory
assumed that constitutions (in other
words, headquarter agreement) of
German legal scholar Gottfried Wilhelm Leibniz first
used the term international legal person (persona
jure gentium) in his Codex Iuris Gentium diplomaticus (1693). See J.H.W. Verzijl, International Law
in Historical Perspective, Volume II: International
Persons (1969), at 2, and Janne Elisabeth Nijman,
The Concept of International Legal Personality: An
Inquiry Into the History and Theory of International
Law (2004), p.29
6
C.F.Amerasinghe, Principles of the institutional law
of international organizations (2nd revised edition),
Cambridge University Press 2005, p.67
7
According to the treatises of most legal scholars
(Jose E. Alvarez, and Henry G. Schermers and Niels
M. Blokker, etc.,), the terms subject of international
law or an international legal person are used interchangeably.
8
Jose E. Alvarez, International Organizations as
Law-makers, Oxford University Press 2005, p.129.
See also Henry G. Schermers and Niels M. Blokker,
International Institutional Law: Unity within Diversity
(5th revised edition; Leiden, Boston: Martinus Nijhoff
Publishers 2011), p.985 and C.F.Amerasinghe, Principles of the institutional law of international organizations (2nd revised edition), Cambridge University
Press 2005, p.68
9
See J.I. Tunkin, The Legal Nature of the United Nations, 119 RdC (1966 III), pp. 20-25
5

50

Articles

international organizations expressly

stated that these organizations have
international legal personality. Henry
G. Schermers and Niels M. Blokker
argued that such provisions oblige the
members to accept the organization as a
separate international person, competent
to perform act that under traditional
international law could only be performed
by states.10 Thus, according to this theory,
the most important precondition for
possessing international legal personality
under international law by the particular
international organizations are the
provisions on the international legal status
of that organization in its constitution.
However, in fact, most constitutions
contain no explicit such provisions. Indeed,
in a view of the first theory, the question to
how to resolve international organizations
in which have no expressed provisions on
having international legal personality of
these organizations in their constitutions
remains uncertain.
The second theory emphasizes the
concept of objective legal personality
of
international
organizations.11
Objective legal personality contains two
different arguments. Firstly, international
organization is a separate legal person
from its constituencies, such as member
States and Organizations, or it does
not depend on the (subjective) will of
its members.12Secondly, international
organization has the objective legal
personality in its relation with non-

Members13.Objective legal personality

was first expressed in the case of
Reparation for Injuries suffered in the
service of the United Nations resolved
by the International Court of Justice
(ICJ) in 1949.14 The ICJ held that the
United Nations possesses an objective
legal personality distinct from that of its
members in this case. As the second
argument, main ground of its advisory
opinion is that fifty States, representing
the vast majority of the members of the
international community, had the power, in
conformity with international law, to bring
into being an entity possessing objective
international personality and not merely
personality recognized by them alone,
together with capacity to bring international
claims.15 However, the issue of how many
member States at a minimum are required
to international organization with objective
personality was not an issue before the
Court and was not decided by it.16
In this case, the court concluded
that:
In the event of an agent of the United
Nations in the performance of his duties
suffering injury in circumstances involving
the responsibility of a Member State and
a State which is not a member, the UN
as an Organization has the capacity to
bring an international claim against the
responsible de jure or de facto government
with a view to obtaining the reparation due
in respect of the damage caused to the
UN.17

Henry G. Schermers and Niels M. Blokker, International Institutional Law: Unity within Diversity (5th
revised edition; Leiden, Boston: Martinus Nijhoff
Publishers 2011), p.988
11
Main representative of this theory is Finn Johannes
Seyersted. He wrote several books on international
personality of international organizations, such as
Objective International Personality of Intergovernmental Organizations (published in 1964), The Legal
Nature of International Organizations (published in
1982), Common Law of International Organizations
(published in 2008).
12
Henry G. Schermers and Niels M. Blokker, International Institutional Law: Unity within Diversity (5th
revised edition; Leiden, Boston: Martinus Nijhoff
Publishers 2011), p.989
10

Nneoma Chigozie Udeariry, To What Extent do International Organizations Possess International Legal Personality? (September 15, 2011), p.11. Available at SSRN: http://ssrn.com/abstract=2052555 or
http://dx.doi.org/10.2139/ssrn.2052555
14
Ibid., p.12
15
ICJ Advisory opinion, Reparation for injuries suffered in the service of the United Nations (April 11th,
1949), p.187
16
C.F.Amerasinghe, Principles of the institutional
law of international organizations (2nd revised edition), Cambridge University Press 2005, p.87
17
ICJ Advisory opinion, Reparation for injuries suffered in the service of the United Nations (April 11th,
1949), p.185
13

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2014 4 (50)

According to the third theory,

international
organizations
are
international legal persons, explicitly (their
constitutions stipulate that they have
international legal personality), or implicitly
(in reality, international organizations
could not exercise and enjoy, functions
and rights, including conclude treaties,
exchange representatives and mobilize
international forces, without possessing
international personality).18 Possessing
legal personality is an indispensable
prerequisite for the existence of
international organizations in international
relations in idea of this theory. Currently,
the third theory may be the most recognized
idea of legal personality of international
organization.
Generally, these three theories
illustrates that international organizations
possess international legal personality and
they cannot accomplish their purposes
and exercise their functions without
having international legal personality.
Nonetheless, legal status of international
organizations are not the same as States.
Purposes and functions of international
organizations are limited by their
constitutions. For this reason, the criteria
applicable to international organizations
are differentiated from those of States.
Article 1 of Montevideo Convention on the
Rights and Duties of States (1933)19 states:
the State as a person of international
law should possess the following
qualifications: a) a permanent population;
b) a defined territory; c) government; d)
capacity to enter into relations with the
other States. Obviously, these criteria are
not applicable in determination of legal
personality of international organizations.
This situation was led to create new

criteria for international organizations.

In Reparation case, the ICJ held that
the UN as international legal person
is capable of possessing international
rights and duties, and has capacity to
maintain its rights by bringing international
claims.20 Although having capability
of possessing international rights and
duties, and capacity to maintain its rights
by bringing international claims should be
common criteria for all international legal
persons, some scholars had determined
specific requirement
for international
organizations. For example, the detailed
criteria for legal personality of international
organizations were determined by
Professor Ian Brownlie. He suggested
that the following criteria are required to
having legal personality by international
organizations:
a) a permanent association of states,
with lawful objects, equipped with organs;
b) a distinction, in terms of legal
powers and purposes, between the
organization and its member states;
c) the existence of legal powers
exercisable on the international plane and
not solely within the national systems of
one or more states.21
Professor Brownlies such criteria
are not only applicable in international
law, but also in domestic law.
Conclusion
This
article examines only
international
legal
personality
of
international organizations. It does not
cover domestic legal personality and legal
responsibility of international organizations.
By virtue of examining three theories on
international personality of international
organizations, it is clear that international
organizations possess international legal
personality under international law or
international organizations can exercise

See Henry G. Schermers and Niels M. Blokker,

International Institutional Law: Unity within Diversity
(5th revised edition; Leiden, Boston: Martinus Nijhoff
Publishers 2011), p.989
19
This Convention was signed at Montevideo, Uruguay, on December 26, 1933, during the Seventh
International Conference of American States. The
Convention may be used as norms of customary international law.
18

ICJ Advisory opinion, Reparation for injuries suffered in the service of the United Nations (April 11th,
1949), p.179
21
Ian Brownlie, Principles of Public International
Law, 4th edition, Oxford University Press, 1990, p.
681-2
20

52

Articles

their functions by the way of possessing

international legal personality.
International
organizations
are
subject to the principle of specialty.
Therefore, international organizations
should possess international legal
personality when they exercise their
functions in order to fulfill their purposes
in their constitutions. Nonetheless, there
are several priority questions that need
to be answered due to the fact that

diversity of international organizations

is getting more difficult to determine
whether international organizations have
international legal personality. Defining
international organization is the first
considerable question in this regard.
Next question is what kind of criteria
(common or specific) are applicable to
determining international legal personality
of international organizations.

---o0o---

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ICELANDS MELTDOWN AND REVIVAL:

A LESSON IN REBOUNDING
with a population today of 325,000.
Icelandsprincipal natural resources are
sheep, fish, thermal energy, and aluminum.
Following the occupation of Denmark
by Germany in 1940, the Icelanders
severed their ties with the Danish Crown.
Barely a month after that occupation, the
British army took over Iceland and the
country developed as a major staging
post. Following the end of World War II,
Iceland was a nation with strong currency
reserves.
These reserves developed
and consolidated very largely through the
construction of a major American airbase
at Keflavik, now the site of Reykjavik
international airport.
Iceland developed into a state
controlled and socialist economy in the
years following World War II. A small
number of long established and wealthy
families gained control over the islands
transport routes, at the heart of which lay
the Eimskip Shipping Company, formed
in 1914. The two principal families within
this group which was known as the
Octopus were the Engey family and
the H. Bens clan. These and the other
families within the Octopus were not a
formal group. They operated informally
but wielded great, albeit covert, influence
over many aspects of Icelandic trading
activity.
All that began to change from 1991
when the Icelanders elected the former
major of Reykjavik, David Oddsson, as
their prime minister. Oddsson was a
staunch Thatcherite. He came to power
on a mandate of privatising and opening
up the Icelandic economy. Oddsson
set about this task by persuading
the Icelanders that their country had
diminished in significance and needed a
radical overhaul if it was to develop and

Joe Bannister,
Partner, Hogan Lovells International LLP

Introduction
Icelands collapse even today should
be sending out warnings to countries with
over-extended banking sectors, such as
Denmark and Sweden1.
In the autumn of 2008, Icelands
three major banks, Glitnir, Landsbanki
and Kaupthing were overwhelmed by
the failure of the Lehman Group and
the resultant global financial crisis. The
Icelandic government first stepped in
to nationalize these three banks. Then
it transferred good assets to three
successor banks and although the
cashpoint machines kept humming, the
Icelandic economy ground to a halt. In
days, the complex business empires
and household names underpinning that
economy, such as Baugur and Bakkevoor
came under pressure and Iceland became
a pariah in global financial circles.
So, what lessons can be learned
from Icelands experience?
Boom times and before
Iceland
is
a
small

country

Page 6, Meltdown Iceland Roger Boyes 2009

Bloomsbury Publishing
1

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Articles

The Gathering Storm

By 2005, Icelandic credit was
growing at in excess of 30% annually.
The current account deficit had expanded
to 15% of GDP in the same year and net
external debt had reached more than
400% of current external receipts. Faced
with an urgent need to raise capital,
Glitnir, Landsbanki and Kaupthing moved
into the British market. Each offered to
prospective depositors interest rates that
looked and which ultimately turned out to
be too good to be true. Kaupthing Bank
had purchased Singer and Friedlander, a
long established, British bank. Numerous
major British institutions not to mention
many individuals then went on to deposit
material sums with the London banking
operations of the Icelandic banks. These
included Cambridge University - 11 million,
Oxford University - 30 million and 116
local authorities. These local authorities,
between them, deposited 858 million in
Icelandic banks. All these depositors had
been lured by the favorable interest rate
terms made available to them.

thrive in the modern trading environment.

By October 2008, the Icelandic
economy was at the height of its powers.
The three chief banks, Glitnir, Kaupthing
and Landsbanki had between them
funded an explosion of investment within
the local and overseas economies. In the
United Kingdom, Icelandic businesses
such as Baugur acquired substantial
stakes in a number of iconic UK retailers.
The highest profile examples were House
of Fraser, Moss Bros and the flagship
toyshop, Hamleys. The West Ham football
team also fell into Icelandic hands. The
purchase and sale of fishing quotas made
dollar millionaires of many ship owners.
These new entrepreneurs had to a large
extent purchased substantial properties
and premium motor vehicles, funded by
foreign currency mortgages. That funding
was storing up a time bomb, as the
earnings and interests of these dollar fish
quota millionaires and business magnates
were to a large extent generated and
measured by reference to the Icelandic
Kroner.
Glitnir, Kaupthing and Landsbanki
were privatised. Landsbanki was taken
over by the Independence Party loyalist,
Bjoerglfur Gudmundsson. Kaupthing
fell to a group of investors led by Olafur
Olafsson, with affiliations to some of the
countrys more progressive politicians.
These banks all lent to each other, while
Glitnir in particular lent to the purchasers
of fishing quotas. Many of the acquisitions
of the UK businesses referred to above
were funded by these three banks.
When it came to unravelling their affairs,
valuing and providing for the fishing quota
transactions within Glitnir proved to be an
especially challenging aspect of the bank
reconstruction process.
It is fair to say that by the end of 2007,
many City lawyers and other advisors
coveted these financial institutions and
the management of their loan books as
clients. Hindsight is indeed a wonderful
thing.

Meltdown
In autumn of 2007, the British bank,
Northern Rock, had fallen into difficulty
after becoming unable easily to raise
finance on the money markets. Three
BNP mortgage vehicles also encountered
difficulties and BNP Paribas stopped
withdrawals from them, citing a complete
evaporation of liquidity as the reason
for doing so. In March 2008, JP Morgan
bailed out the American bank, Bear
Stearns. Far worse was to come when on
15September 2008, the US investment
bank, Lehman Brothers entered into
Chapter 11 bankruptcy proceedings in the
US and equivalent insolvency procedures
in numerous other jurisdictions. Those
proceedings included the administration
of Lehman Brothers International Europe,
the principal English Lehman group
company.

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Crisis
The failure of the Lehman Group in
September 2008 produced cataclysmic
reverberations within the Icelandic banking
system. In September 2008, Glitnir had
sought US$820 million of liquidity. On 28
September 2008, it had been proposed
that the Icelandic Central Bank would inject
US$750 million into Glitnir in return for a
75% stake. At the same time, Landsbanki
sought a US$200 million liquidity loan. That
was turned down by the Central Bank. On
5 October 2008, the Icelandic government
passed the Emergency Powers Act
Act 129/2008. On 7 October 2008, the
Icelandic government nationalised Glitnir
and Landsbanki.
That nationalisation marked the
beginning of the real crisis in Iceland. The
Icelandic government made clear that it
would not stand behind the liabilities of
these banks to overseas depositors. It
also became apparent that unlike the
governments in Ireland and the UK, the
Icelandic government would be unable to
stand fully behind the rights and liabilities
of Glitnir and Landsbanki, let alone
Kaupthing and other financial institutions.
There followed tense exchanges between
the Icelandic government and the British
chancellor, Alastair Darling. The upshot
of those exchanges was that the Icelandic
government made clear that it lacked
the means of supporting the liabilities
to overseas depositors of Glitnir and
Landsbanki. Instead, the government
would guarantee only these banks
liabilities to Icelandic depositors.
The
reaction of the British
government
was immediate and
arbitrary. It decided that Heritable Bank,
a subsidiary of Landsbanki was no longer
able to meet its liabilities. Heritable along
with Kaupthing Singer & Friedlander, the
UK subsidiary of Kaupthing Bank, went into
administration. On the same day, Alastair
Darling passed the Landsbanki Freezing
Order 2008. That Freezing Order applied
to both the UK assets of Landsbanki and

those belonging to the Icelandic Central

Bank and the Government of Iceland.
The UK government had made that
freezing order in reliance on anti-terrorist
legislation.
Although these actions were arbitrary
and difficult to justify legally, they further
underlined the political difficulties facing
Gordon Browns government as a result of
the Icelandic collapse. Those difficulties
stemmed in turn from the extent to which
private individuals and public institutions
faced the destruction of their finances
through the failure of Icelandic institutions
that had promised them interest rates that
had indeed proved too good to be true.
Over the ensuing months, the
sanctions were progressively removed
and on 24 October 2008, the Icelandic
government, on legal advice, formally
asked the IMF for help. That resulted in
an IMF loan to Iceland of US$2.1 billion.
On 15
November, Iceland announced
that it would comply with the EU Deposit
Guarantee Scheme directive guaranteeing
compensation for up to 20,877 for
each Icelandic savings account. The
arrangement was that Britain would
compensate 300,000 depositors in
Iceland and Iceland would reimburse
Britain following the making of the IMF
loans referred to above.
In the meantime, the Icelandic
government realised that it would be
unable to underwrite the liabilities of Glitnir,
Landsbanki and Kaupthing. It therefore
used the emergency powers legislation
to take control of each institution. The
result was that the Icelandic financial
services authority (the FME) established
successor banks to each of Glitnir,
Kaupthing and Landsbanki. These new
banks contained within them the domestic
operations of their predecessors together
with local Icelandic deposits.
The old banks were the insolvent
shells of Glitnir, Landsbanki and Kaupthing.
These banks contained within them
assets and liabilities in foreign branches

56

Articles

and subsidiaries, together with derivative

transactions. Five member resolution
committees were appointed to each of
Landsbanki and Glitnir on 7 October 2008.
The following day, resolution committees
were appointed to Kaupthing Bank.
Under the emergency powers
legislation,
the old banks gained
the benefit of a moratorium, akin to
that operating in US or UK bankruptcy
or administration proceedings.
That
moratorium prevented litigation against
the old banks. It also created time for
the relevant stakeholders to hammer
out a composition which lead to the
successor banks paying the shells of
Glitnir, Landsbanki and Kaupthing for the
assets transferred to them. The payments
so made were then to be applied in
compositions creditor compromises
to give a return to the bondholder and
other creditors of the old banks. In
many ways, this process is similar to
the bail-in procedures that are currently
in negotiation between the European
Union and European Union governments
pursuant to the Bank Resolution and
Recovery Directive.

inter-relationship between the Icelandic

resolution committee process, Icelandic
moratorium (bankruptcy) proceedings for
the old banks and the effect of those
proceedings on the assets of the old
banks outside Iceland. Hogan Lovells
evaluated the legitimacy under EU law
of various Icelandic proposals to pay
compensation to overseas depositors with
Kaupthing, Glitnir, Landsbanki and their
subsidiaries.
The result of this work was that
by the beginning of 2009, the Icelandic
government was in a position to restructure
its banking system. The government
appointed a former Scandinavian banking
executive to supervise that work. Once
again, the government tendered for
credible international advisers.
Both
Hogan Lovells and Hawkpoint Partners
were appointed to provide legal and
financial advice on the recapitalisation
process.
Part of our work involved us assisting
the resolution committees for each of
the old banks, Glitnir, Landsbanki and
Kaupthing in deriving value from the
various successor banking institutions
for the assets transferred to them. That
process involved working with the
creditors committees of each old bank
and representatives of the UK depositors
who had lost out following the collapse in
October 2008. The most difficult aspect
of the work was agreement of the basis of
the further valuations carried out by Oliver
Wyman to underpin and as appropriate
correct the preliminary valuations carried
out at the time of the establishment of the
newbanks in 2008. The intention was that
the new banks would pay the resolution
committees of Glitnir, Landsbanki and
Kaupthing for the difference between
the value of the assets and liabilities
transferred to them as verified by Oliver
Wyman and the preliminary valuations
undertaken in 2008.
The payment mechanism ultimately
agreed led to the issue of bonds by the

picking up the pieces

The use of anti-terrorist legislation

to freeze the UK assets of the Icelandic
government and banks polarised opinion.
It also acted as a clarion call to the Icelandic
government. The result was that Hogan
Lovells and a number of Icelandic law
firms were appointed to act as legal and
financial advisors. Between October 2008
and the beginning of 2009, we provided
advice to the Icelandic government on
the effect of the Landsbanki freezing
order together with the potential merits
of seeking a judicial review of this order
and possible damages claims against the
British government.
Hogan Lovells also provided advice
on the operation of inter-bank payments
in relation to the new banks. We also
assisted the government in addressing the

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selves.

new banks together with options for the

resolution committees of the old banks
to acquire control of each new bank.
The result of that process was to be the
creation of a fund that could be distributed
to the creditors of the old banks
through the use of Icelandic composition
proceedings.

Lessons Learned
Certainly, there is no one size fits
all solution when a country encounters
economic difficulties. However, Icelands
experiences can be useful in noting potential
danger signals which a government can
then meet head-on. In Icelands case,
foreign currency mortgages obtained in
the United Kingdom were a time bomb
that ought to have been defused early
on rather than left to wishful thinking.
Certainly, if a proposal offers rewards
that are too good to be true, costly
experience shows that such rewards are
illusory and remedial measures painful if
not taken promptly. Once the Icelanders
realized the urgent need to raise capital in
a weakened economy, they exacerbated
the problem by moving into the British
market offering overly optimistic interests
to potential depositors.
When the Icelandic government
called upon Hogan Lovells for assistance,
there was no text book solution. We
performed the role of an interlocutor
among many stakeholders and created
solutions based upon local and English law
as well as international banking practices.
In many cases, we were pioneering into
an area where Icelandic law often did
not present immediate solutions and we
needed to come up with creative ideas in
order to meet the emergency at hand. We
did, and it looks like Iceland is well on the
road to recovery.

Outcome
On the surface, Icelands economy
appears to have recovered. The fact
that the currency is not linked to the
Euro means the economy has recovered
faster than many of its European cousins.
Unemployment has fallen to 4% and
Icelands cashpoint machines continue
to function. On the debt side, however,
capital controls remain in place. The old
banks have yet to resolve the claims of
their creditors, on account of the valuation
issues discussed earlier in this note.
Additionally, output in Iceland is around
10% below its pre-crisis peak. Inflation
stood at 2.4% in May 2014. Furthermore,
the Kroner is now at a rate of around 157
Kroner per Euro compared with an average
rate of 88 Kroner per Euro in 2007, a year
before the financial collapse. In short, it
remains to be seen whether Iceland is
now on the road to a full recovery. The
one certainty, however, is that the easy
credit and tightly inter-related business
conglomerates that contributed so greatly
to Icelands prosperity and ultimately its
downfall are now a shadow of their former

---o0o---

58

Essays and Comments

MEMORANDUM OF ADVICE TO THE MINISTRY

OF JUSTICE:On the Criminal Liability of
Corporations for Death and Injury in the
Workplace under Mongolian Law1
The author wrote this comment when he was a visiting scholar in the National Legal Institute (July 21, 2014August 22, 2014).

On the Criminal Liability of

Corporations for Death and Injury in
the Workplace under Mongolian Law1

conditions to protect health and life of

employees at work, and improving the
legal environment to protect workers from
occupational hazards. The State Great
Hural adopted the law on Occupational
Safety and Health on 22 May, 2008 (11th
Report on Human Rights and Freedoms
in Mongolia, Human Rights Commission
of Mongolia, Ulaanbaatar, 2012, p.50, my
emphasis).
Despite introducing Labor inspection
reforms in 2010, there are businesses
and organizations which lack adequately
developed labor relations. An examination
by the Ministry of Social Welfare and Labor
and the General Agency for Specialized
Inspection revealed that a number of
businesses have failed to create an
enabling environment for occupational
health and safety. (11th Report on Human
Rights and Freedoms in Mongolia,
Human Rights Commission of Mongolia,
Ulaanbaatar, 2012, p.51).
The statistics incorporated in
the 11th Report of the Human Rights
Commission of Mongolia demonstrate the
unacceptably high death and injury rate
among Mongolian workers. As industries
such as mining and construction continue
to develop apace, the legislatures focus
upon ensuring workplace safety ought to
be even more vigilant.
The above statistics (at 11th Report,
p53) include the most severe breaches
of occupational safety regulations.
According to the inspections and research
results conducted over recent years large
companies with foreign investments like
Rio Tinto and Energy Resources adhere
to international safety standards, whereas
small businesses by and large, fail to

W. Benjamin Lindner, Barrister-at-Law

LL.M, LL.B. (Hons)

Between 2006 and 2010, an average

of 100 Mongolian workers per year died as
a result of workplace incidents. Another
2000 workers on average per year lost
the ability to work due to occupational
illness or incidents. (statistics cited in 11th
Report on Human Rights and Freedoms
in Mongolia, Human Rights Commission
of Mongolia, Ulaanbaatar, 2012, p.52)
Introduction:
The safety of Mongolian workplaces
is not only good for business, but is also
a recognized Human Right enshrined
in the Constitution: it asserts a Right
tofavorable conditions of work. The
Government has approved a national
programme To improve occupational
health and safety. (byresolution 75 of
2005) . The programme aims to introduce
a culture of prevention regarding
occupational health and safety, reducing
occupational illness and production
injuries, creating all the necessary
The author wrote this comment when he was a visiting scholar in the National Legal Institute (July 21,
2014- August 22, 2014).

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rationales for doing so.

Before moving to discuss the
approach to legislative change required
by the introduction of criminal liability for
corporations, it is necessary to review, in
short compass, the current legal framework
regulating workplace health and safety,
and its relationship to the Criminal law of
Mongolia.
Mongolian Labor Safety and
Hygiene Law
In Mongolia, the law regulating
safety in the workplace since 22 May,
2008 is the Labor Safety and Hygiene
Law. It makes no reference to the criminal
liability of bodies corporate. Can this
legislation be rendered more effective by
extending to corporate entities criminal
liability in certain circumstances for the
death or serious injury of its workers? Or
should there be a separate offence of,
for example, corporate manslaughter?
Arguably, there is an important deterrent
value in extending to a corporation criminal
responsibility for serious breaches of the
work safety law, or for gross negligence,
which results in injury or death.
In this paper, I will compare the
Mongolian legislation to the approach taken
in Victoria, Australia and Great Britain,
discuss the rationales for introducing
criminal corporate responsibility in
Mongolia, and the possible approaches
that might be adopted in implementing
such legislation in the Mongolian legal
system.

comply with them. (at 11th Report, p.54).

However workplace deaths and injuries
occur in all organizations, large and small.
The law on occupational health and safety
should apply equally to all corporations
employing workers whatever the size and
complexity of the commercial operation.
Due to the significant increase in
mining and construction in Mongolia
in recent years, the Human Rights
Commission concluded that it has become
imperative to refine the relevant laws and
regulations regarding occupational safety
and health, enhance States control over
law implementation, improve the legal
environment regulating the provision
of compensation to workers who lost
their ability to workFurthermore, it is
necessary to tighten the responsibility and
accountability of employers and enhance
the role and responsibility of State control
institutions in ensuring strict adherence
to standards relating to occupational
health and safety. (11th report, p58, my
emphasis).
In this memorandum, it is contended
that these laudable aims and objectives
can, and should, be met with the
implementation of legislation designed
to render corporations criminally liable
for the deaths and injuries of its workers,
where the corporation itself has displayed
gross negligence regarding the safety of
its deceased or injured worker. This paper
seeks to discuss the approaches that may
be adopted in sheeting home criminal
responsibility to corporations, and the

60

Essays and Comments

employer (Art. 36.1). A judge or State

Inspector has the power to impose a larger
fine if the industrial accident or poisoning
occurred on two or more occasions.
Higher fines may be imposed by a judge
or safety inspector if the organization
does not maintain labor safety and
hygiene requirements where there is
joint ownership and use of buildings and
facilities (Arts. 36.4 & Art 8.1). A judge
or State Inspector also has the power to
fine officials and organizations if they do
not give permission to install appropriate
safety equipment.
Therefore, where a death occurs
due to a violation of the Labor Safety
legislation, the only penalty imposed
on an organization is an administrative
penalty being a fine of a mere 200
250,000 tugrugs; and only double that if
the industrial building and facilities where
the death occurred was jointly owned. If
there is more than one industrial accident
resulting in death, an organization may
be fined only 1,500,000 3,000,000
tugrugs. These fines bear no relationship
to the degree of negligence that caused
the death or injury. Nor is there any
account taken of the size and structure of
a corporation which may be responsible
for a death or injury. As these fines are
regarded as administrative fines only,
significantly, they do not carry the stigma
of a criminal conviction.
The principles of punishment that
apply in the criminal law- such as general
deterrence and specific deterrence
are not expressly taken into account
under the Labor and Safety Law. Other
punitive measures that might deter other
corporations from failing to properly ensure
workplace safety are adverse publicity
orders and orders requiring improvements
to be made. These penalties arise from
invoking criminal sanctions against
corporations- they are not to be found in
the current law in Mongolia either in the
Labor safety legislation or in the Criminal
Code. The Criminal Code of Mongolia is

The Mongolian Labor Safety and

Hygiene law has as its stated purpose
to regulate the relations with respect to
maintain safety and hygiene requirements,
and standards of state organizations
management, inspector system and
workplace, develop the condition for the
citizen for working in a healthy and safe
environment (Art. 1.1). Chapter Two
provides for safety and hygiene standards
to be established. Chapter Three sets out
the rights and responsibilities of workers,
including the right to work in a workplace
that meets labor safety and hygiene
requirements (Art. 1.8.1.1). Chapter Four
sets up organizations at various levels
of government which are tasked with the
responsibility of implementing the labor
safety and hygiene policies. It sets up
institutions at all levels of government from
Parliament (Art. 21) through to Aimag,
Soum, Capital and District Citizens
representative Meetings (Art. 24) and
Governors (Art. 25).
Chapter Five requires the Director/
owner or employer of business entities
and organizations to be responsible for
maintaining labor safety (Art. 27.1) with
the employers rights and responsibilities
set out in Art.28.1. Chapter Six imposes
certain requirements upon employers in
the event of an industrial accident or acute
poisoning (Art. 29).
Chapter Seven provides for the
various levels of government and
business to implement labor Safety and
Hygiene law (Art. 32). Provision is made
for State Inspectors on labor and hygiene,
providing them with a range of powers
including terminating the business of an
employer who violates the labor safety and
hygiene legislation on several occasions
(Art.33.4.9).
Finally, Chapter Eight sets out the
penalties for the violation of the Labor
and Hygiene legislation. A State Inspector
can impose an administrative fine on
an employer if the industrial accident or
poisoning occurred due to the fault of the

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2014 4 (50)

It is an offence under the Victorian

Act to recklessly engage in conduct that
places another person in danger of serious
injury- this attracts a maximum fine of
A$260,000 (453,112,256 tugrugs) for a
natural person (or up to 5 years goal), or,
for a body corporate, it attracts a maximum
fine of A$1,323,000 (T 2,290,456,756
tugrugs). The duties of employers to
consult with employees (part 4) in the
Victorian act is very similar to the provisions
on that matter in the Mongolian legislation.
In anticipation of an investigation, after an
incident resulting in death, the site where
it occurred must not be disturbed, or
contaminated, until an Inspector arrives to
investigate. Another feature that is similar
to the Mongolian law, is the requirements
that employees be organized into work
groups to represent employees on work
safety issues. Another common aspect is
the appointment of safety inspectors (Part
9) appointed to enforce the provisions
of the legislation. They have the power
to enter a workplace, inspect things and
documents and also to seize anything
or document that may be evidence of an
offence against the Act (section 99).
Although there is a power under
the Victorian law to inspect documents,
does a corporation, like a natural person,
have a right to silence? In other words,
can it exercise a privilege against selfincrimination by preventing documents
in its possession being used as evidence
against it in a criminal proceeding? The
power to require a corporation to produce
documents which may incriminate itself
came under scrutiny in the High Court
of Australia in Environment Protection
Authority v Caltex Refining Co Pty Ltd
(1993) 178 CLR 477, which decided that,
unlike a natural person, a corporation is
not entitled to exercise a privilege against
self-incrimination.
In other words, a
corporation cannot rely upon a right to
silence as could a natural person when
faced with questioning as a suspect in a
criminal proceeding. If required to do so,

the repository of criminal liability of natural

persons, and in very limited circumstances,
of bodies corporate. Under the proposed
Criminal Code amendments, the only
circumstances under which a corporation
can be criminally liable is in relation to
Terrorism offences (Article 178.2) and
Money Laundering (Article 166).
Before turning to the manner in
which criminal liability might attach to
corporations for serious breaches of Labor
safety laws, I will discuss the approaches
taken in Victoria, Australia, and in the
United Kingdom.
Occupational Health and Safety
Act, 2004 (Victoria)
In Victoria, Australia, labor safety laws
are governed by the Occupational Health
and Safety Act, 2004. That legislation is
similar in many respects, both in structure
and substance, to the Mongolian Labor
Safety and Hygiene law. Part 1 of the
Victorian legislation sets out the objects of
the Act, inter alia, to secure the health,
safety and welfare of employees and other
persons at work and to eliminate the risks
to the health and safety of employees and
other persons at work. In the definition
section of the Act, references to a person
includes both a natural person and a body
corporate (s.5). Consequently, its scope
for operation is wider in that respect than
its Mongolian counterpart.
The Act imposes duties on persons,
including corporations, to require that
corporations have systems in place that
ensure, and promote, health and safety
in the workplace. As with the equivalent
Mongolian laws, the Victorian Act also sets
out the duties of employers to employees
(section 21), and the duties of employees
(section 25).
Penalties attaching to
the breach of duties by employers are
expressed to apply to (i) a natural person
and (ii) a body corporate. Typically,
the maximum fine specified for a body
corporate is at least five times the amount
to which a natural person is liable.

62

Essays and Comments

conduct engaged in on behalf of the body

corporate by an employee, agent or officer
of the company acting within the scope
of his or her employment or within his or
her authority is deemed to be conduct
also engaged in by the body corporate
(section 143). It should also be noted
that Government and semi-government
corporations are also subject to the
provisions of the Victorian Occupational
Health and Safety Act, 2004.
Both the Victorian and Mongolian
legislation give inspectors the power to
prohibit an activity in the workplace where
there is a reasonable belief that the activity
involves an immediate risk to the health
or safety of a person (i.e. section 112 and
Article 33.4.10).
In Victoria, apart from prosecutions
arising from the Occupational Health and
Safety Act, 2004, a body corporate may
be charged with offences arising from the
Crimes Act, 1958 (Vic), or the common law.
Such offences may include manslaughter
and negligently causing serious injury.
When these offences are charged against
a natural person, they require proof of
a particular state of mind. What is the
mind of a corporation, and how is it to be
proven? Generally, criminal liability can
be sheeted home to a corporation only
upon proof that what is done (or omitted to
be done), and the mental state with which
the act was done (or omission made), are
within the scope of the authority conferred
by the corporation upon the person or
persons on whose act, omission, or
state of mind the corporations criminal
liability is said to depend. (Environment
Protection Authority v Caltex Refining Co
Pty Ltd(1993) 178 CLR 477, per Mason
CJ. And Toohey J.)
This traditional
formulation presents problems for the
conviction of corporations - I will now turn
to those issues, and suggest an alternative
approach to avoid the pitfalls of the past.

a corporation must produce documents

and other things which may provide
evidence against the company of the
crime as alleged. It should be noted that
the Criminal Procedure Law of Mongolia,
Article 13.2 states that the Presumption
of Innocence applies to all suspects and
defendants. To avoid the problems raised
in EPA v Caltex, it would be appropriate to
amend Article 13.2 to exclude corporate
suspects and corporate defendants
from its operation. In other words, when
charged with a criminal offence, any
amendments to Mongolian law should not
allow bodies corporate to rely either on
the right to silence or on the presumption
of innocence.
After an injury or death is investigated
by a safety inspector (who has taken
witness statements, seized documents,
taken photos and obtained other evidence
as required by the investigation), under
the Victorian law, legal proceedings may
be commenced in court (section 130)
either by (i) a safety Inspector or (ii) for
indictable (serious) offences, the Office of
Public Prosecutions (i.e. The office which
is responsible of all criminal prosecutions
of serious offences in Victoria).
The existing Criminal Procedure
Law in Mongolia appears to be well suited
to carrying out investigations against
corporate defendants. Articles 29, 30,
183, and 193-195 set out the powers of
a procurator (defined in Article 5.1.7.-as
a prosecuting party) and also the powers
to carry out Investigations by a group
of investigators, Heads of Inquiry and
Investigative agencies. These Articles,
collectively, provide a sufficient legislative
basis for investigating corporate criminal
activity. In practice, it would be important
for procurators and investigators to work
closely with safety inspectors in order to
properly gather and assess the evidence
relating to a workplace death or injury.
What conduct, or omission, is deemed
to be that of the body corporate? For the
purposes of the Victorian legislation, any

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Rationale
and
Problems:
Attributing Criminal Responsibility to
the Body Corporate
It has long been recognized that
there is a fundamental difference between
human (natural persons) and corporate
defendants, resulting in problems when
attributing criminal responsibility to
corporations. At common law, general
principles governing criminal liability
are designed to prove, first, the mental
element (i.e. criminal intent, or mens rea)
and, secondly, the criminal act (actus
reus). These concepts were developed
with natural persons, not corporations, in
mind.
A corporation lacks the mental
characteristics attributable to a natural
person, but acts through its employees,
officers
or
agents.
Traditionally,
corporations are considered to be legal
persons which are represented through
the minds and wills of its directors.
However, in relation to safety issues in
the workplace, managers, employees
and officers of the corporation are usually
vested with that responsibility, not the
directors. So, in order to fix criminal
liability on the corporation, one must look
to the actions (or omissions) of those
authorized by the corporation to ensure
safety, and not necessarily the acts (or
omissions) of the directors. This can be
problematic because decision-making
about workplace safety can occur in a
diverse way, by a range of persons acting
within the company.
Where it can be shown that a death
occurred due to a corporate failure to
ensure a workplace is safe, the corporation
itself should be criminally liable, rather
than particular employees, officers or
agents of the company. There is no place
for vicarious criminal liability to attach
to individuals within an organization. In
sentencing, the corporation itself should
be the subject of denunciation and
deterrence, not the managers within it.
In other words, while Labor laws play an

important part in discouraging practices

that lead to workplace deaths and injury,
the importance of the criminal law cannot
be underestimated. It can denounce a
corporations conduct, or, as is often the
case, the corporations negligence (or
omission to act) to ensure the safety of
its workers. Furthermore, the criminal
law can punish and deter the corporation
(specific deterrence) involved as well
as deterring other corporations from
engaging in offending conduct (general
deterrence).
When a corporation fails to provide
for an effective system of safe work
practices, and death results, it may be
charged with manslaughter, i.e. where
death is the result of unintentional acts or
omissions. In Victoria, manslaughter can
be committed by the criminal negligence
of a corporation. Criminal negligence
requires proof of such a gross departure
by the defendant from the standard of
care expected of a reasonable person as
to require criminal punishment. Therefore,
where a corporation has greatly fallen short
of the standard of care of a reasonable
person, it should be liable to be convicted
of the offence of manslaughter, by criminal
negligence.
For a corporation to be charged with
manslaughter, by criminal negligence,
such an offence must be included in the
criminal law. In the Criminal Code of
Mongolia (Revised) (English translation,
as at July, 2014), the offence which is
equivalent to manslaughter by criminal
negligence is Negligent Homicide
in Article 94. Article 94 states Killing
committed by negligence shall be
punishable by imprisonment for a period
of 4 years. This crime applies only to
physical persons (see Article 8.1). For this
offence to apply to a corporation would
require three amendments to the Criminal
Code: 1) amending Article 8.1 to apply to
bodies corporate;
2) provision for the imposition
of a fine, as a corporation cannot be

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Essays and Comments

In more recent times, the leading

case in common law jurisdictions on the
application of the identification principle
is the decision of Tesco Supermarkets Pty
Ltd v Nattrass [1972] AC 153 (Tesco). In
that case, the court had to decide whether
the identification principle could be applied
to a store manager who was said to have
been responsible for ensuring the correct
prices on articles for sale. The corporation,
Tesco Supermarkets P/L, was charged
with a breach of the Trade Description
Act 1968(UK). The issue was whether
the corporation was responsible for the
actions (omission) of a store manager.
The House of Lords held that the store
manager was not a person of sufficiently
important stature within the corporate
structure to be identified as the company
for this purpose.
The problem with the Tesco
approach is that the failure of a corporation
to ensure safe work practices is more often
the result of actions (or omissions) of a
number of individuals within a corporation,
rather than identifiable negligence of an
individual, whatever their status within the
company. The Tesco test was applied in
a Victorian case, where a company and
two of its employees were charged with
manslaughter, and negligently causing
serious injury, after a tank explosion
occurred during a welding operation.
One worker was killed and another
seriously injured. The court (R v A.C
Hatrick Chemicals Pty Ltd [1995] 152 A
Crim R 384) held that the two managers
did not embody the guiding mind of
the company and their actions were not
grossly negligent, resulting in the acquittal
of the corporation. It was further held that
it was unacceptable to invoke vicarious
liability as the basis for a manslaughter
conviction.
Both English and Australian common
law continue to rely on the identification
principle for corporate liability for
manslaughter. This is often difficult to prove
where, particularly in large organizations,

imprisoned; and
3) in order to distinguish civil
negligence from criminal negligence,
the criminal offence should be in terms
of gross negligence, that is a gross
departure from the standard of care
expected of a reasonable corporation so
as to attract punishment by the criminal
law.
In addition, the introduction of criminal
liability of corporations would require
amending the Criminal Procedure law of
Mongolia (in particular Article 5.1.6.) to
redefine parties to include both natural
persons and bodies corporate.
Proving
corporate
criminal
negligence
How is the offence of criminal
negligence of a corporation to be proved?
As a corporation doesnt have the mental
state of a natural person, traditionally,
courts have reacted to this problem by
adopting the identification principle.
That principle identifies the mind of the
corporation with the most proximate
person to the events that caused the
workplace death. That is, the identification
principle of corporate liability finds proof of
an act, or omission, by the most proximate
natural person acting (or failing to act)
with the authority of the corporation. It
considers those acts (or omissions) to
be attributable to the directing mind and
will of the corporation itself. The principle
has been sated as follows: Corporation
is an abstraction. It has no mind of its
own; its active and directing will must
consequently be sought in the person of
somebody who for some purposes may
be called an agent, but who is really the
directing mind and will of the corporation;
the very ego and centre of the personality
of the corporation. (Lennards Carrying Co
Ltd. v Asiatic Petroleum Co Ltd [1915] AC
705 per Viscount Haldane). It provides for
the criminal liability of a corporation only
where one of its most senior officers have
individually acted with the requisite fault
i.e. gross negligence.

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individuals may not have access to all the

information upon which a court can base a
finding of criminal negligence. In contrast,
the Federal Courts in the United States of
America have accepted an aggregative
model of liability which allows the acts
and mental states of individuals within
a corporation to be combined to satisfy
elements of the crime (see United States
v Bank of New England, 821 F2d 844,
855 (1987)). In that case, it was found
that
corporations
compartmentalize
knowledge, subdividing the elements of
specific duties and operations into smaller
components. The aggregate of those
components constitutes the corporations
knowledge of a particular operation.
Due to its reliance on the
identification principle, Australian courts
have been unsuccessful in prosecuting
corporations for manslaughter over deaths
in the workplace. Statutory reforms,
and proposals, have occurred in some
Australian States (namely Queensland,
New South Wales, South Australia, Western
Australia, Tasmania and Victoria). In 2002,
the Victorian Government attempted to
introduce into law an offence of corporate
manslaughter but the Bill was defeated in
Parliament. Although it was unsuccessful,
the Victorian Bill had beneficial provisions,
providing a useful model for the crime of
corporate manslaughter. It provided that
a corporation would be guilty of corporate
manslaughter if its conduct fell short of
the standard of care that a reasonable
body corporate would exercise in the
circumstances and posed such a high
risk of death or really serious injury as
to warrant criminal punishment.(Clause
14B of the Crimes (Workplace Deaths
and Serious Injuries) Bill (Vic), 2002).
The offence of corporate manslaughter
was defined as: A body corporate that
by negligence kills (a) an employee in
the course of his or her employment by
the body corporate; or (b) a worker in
the course of providing services to, or
relating to, the body corporate- is guilty

of corporate manslaughter and liable to a

fine not exceeding 50,000 penalty units (ie.
A$5,000,000 or 8,600,000,000 tugrugs).
Significantly, the Bill would have allowed
the court to consider the conduct of the
corporation as a whole, by aggregating the
negligence of any number of employees,
agents and officers of the corporation
to determine the criminal liability of the
corporation (clauses 14B(4) and (5) of the
(Workplace Deaths and Serious Injuries)
Bill (Vic), 2002). Thus, negligence by
the corporation could be demonstrated
by, for example, inadequate supervision
and control of employees, inadequate
internal systems of communication, or the
failure to respond to dangerous situations
of which an employee/officer/agent has
actual knowledge.
The Victorian Bill therefore, required
that, for a corporation to be held criminally
responsible for the conduct of any of its
employees, agents or functionaries, it
would have to be shown that, viewed as a
whole, the corporations modus operandi,
its culture or ethos, was such as to allow
a finding of criminal intent sufficient
to constitute criminal negligence. It did
not require the actions causing a death
in the workplace be due to the guiding
mind and will of the corporation; in other
words it did not require that the individual
said to be responsible for the death must
be in a sufficiently senior position in the
corporation that he or she can be said to
represent the companys directing mind
and will (see Tescos case above) at
the time the death occurred. Under the
provisions of the Bill, for example, evidence
of corporate criminal negligence might be
found in the fact that an Improvement
Notice under the Occupational Health and
Safety Act, 2004, had been served on the
corporation and that the corporation had
done nothing to positively redress the
situation - resulting in a death which could
have been avoided had the Improvement
Notice been complied with.

66

Essays and Comments

United
Kingdom
legislative
reform
In recent years, the United Kingdom
Parliament has embarked on statutory
reform, and has now created a specific
corporate homicide offence to replace
the common law offence of manslaughter
by gross negligence, for corporate
offenders.
The Corporate Manslaughter and
Corporate Homicide Act, 2007 (UK) came
into force in April, 2008. It establishes a
specific corporate manslaughter offence
applicable only to corporations and other
listed organizational types. The offence
retains the gross negligence elements
of manslaughter but seeks to relocate
this negligence in the way in which an
organization is managed rather than by
analogy with the mind of a natural person.
This formulation is likely to permit a more
substantial aggregation of responsibility
than previously possible in the English
common law.
The
offence
of
corporate
manslaughter is defined in section 1(1) of
the UK Act as follows:
(1)
An organization to which this
section applies is guilty of an offence if the
way in which its activities are managed or
organized(a) causes a persons death, and
(b)
amount to a gross breach of
a relevant duty of care owed by the
organization to the deceased
The UK legislation balances the
potential width of section (1) by imposing a
limitation in section 1(3) An organization
is guilty of an offence under this section
only if the way in which its activities are
managed or organized by its senior
management is a substantial element in
the breach referred to in subsection (1).
Senior management is defined to
mean the persons who play significant
roles in (i) the making of decisions about
haw the whole or a substantial part of its
activities are to be managed or organized

or (ii) the actual managing or organizing

of the whole or a substantial part of those
activities.
The more general focus upon senior
management represents a substantial
break from the restrictive identification
principle at common law. Despite its
wider scope, the UK legislation may
not be adequate to render corporations
criminally liable for the acts and omissions
contributing to gross negligence that
occurred substantially, but not entirely,
by
decision-makers
below
senior
management. In that respect, it is less
effective than the approach taken by the
Victorian Bill discussed above.
Thus, neither attempts in Australia,
nor the UK legislation, comprehensively
tackle the core problems of aggregating
fault at all layers of corporate activity.
Collective organizational failure does not
always occur at the levels of directors, or
senior management- it may arise from the
accumulation of relatively minor instances
of individual negligence which combine to
produce gross criminal negligence on the
part of the corporation as a whole. Legal
reform should include fixing liability on a
corporation by allowing evidence of an
aggregation of negligent acts- so the fault
of the corporation may be regarded as
greater than the sum of the individual acts
and omissions. The individual human
actors ought not be subjected to any form
of vicarious liability themselves for each
others actions. The rationale for such an
approach is that whilst aggregation is a
totally unacceptable means of establishing
criminal liability for individuals, it is uniquely
appropriate for bodies corporate, which
themselves are uniquely placed to ensure
workplace safety, and the prevention of
deaths or injury at work.
Alternative
Sentences
for
Corporate criminal offences, including
corporate manslaughter
By imposing criminal sanctions upon
corporations, the court can articulate
its denunciation of criminally negligent

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Conclusion
There is undoubtedly a need, and
desirability, for corporations to be held
responsible for their organizational
failures which result in death or injury in
their workplaces. There is a need for both
procedural and substantive law reform
if corporations in Mongolia are to be
subjected to the criminal law for offences
committed in the workplace. It is not just
a matter of enhancing the Human Right to
a safe workplace, but I would contend that
it is also in the interests of corporations
to maintain safe workplaces in order to
maximize productivity.
It should not be the case that, when
deaths occur in the workplace, which
amount to corporate manslaughter by
gross negligence, that corporations are
practically and legally above the law.
Currently, in Mongolia, corporations are
outside the jurisdiction of the criminal
law. Mongolias State Great Hural is
now presented with an opportunity
it can draw on the experience of other
jurisdictions to create a legal environment
in which corporations can be rendered
criminally liable for the aggregate criminal
negligence of its employees, from its
directors to its senior management down
to all persons responsible for ensuring
workplace safety. Subjecting corporations
to the criminal law provides them with a
great incentive to enhance safety in the
workplace, to avoid deaths and injuries
by giving higher priority to occupational
health and safety.
If corporations can be charged with
criminal offences arising from workplace
deaths and injuries, attracting significant
penalties,
and
public
opprobrium,
unnecessary deaths of Mongolians
working in dangerous circumstances will
be avoided; corporations will have the
incentive to invest in the safety of their
workers increasing work satisfaction and
there fore productivity, and corporate
profits. It is the refore in everyones
interests, including the corporations

corporate conduct. Courts can also

impose significant fines to deter the
corporation, and others from failing to
secure the workplace against dangers to
its employees. Injunctive orders may be
required to preserve the status quo and
prevent a corporation dissolving or winding
up to avoid paying a financial penalty.
Other types of penalties that may
be invoked include disqualifying a
company from a particular geographical
area, revocation of a particular license
or disqualification from tendering for
particular contracts.
Adverse publicity orders should also
be available as a sentencing alternative,
or in addition to other penalties. Such
orders would require corporations to
publicize their crime and the penalty
imposed. That, in itself, should act as a
strong deterrent for corporations who rely
heavily upon their reputation in the market
place.
Community service orders may
be appropriate to be imposed in some
circumstances, so that the corporation
can itself make amends by contributing to
the wider communitys safety.
Compulsory compensation orders
against the corporation may also be
appropriate where, for example, a death
or injury has caused the victim or their
family to suffer loss or damage.
And finally, the Criminal Procedure
Law of Mongolia allows for the imposition
of Orders for Costs in criminal proceedings.
Pursuant to Article 99, corporations
convicted of a criminal offence can be
ordered to pay costs; in addition to any
fine, or other sentence imposed. Unlike
many natural person defendants, who
would not be in a position to meet any
costs order, corporations should ordinarily
be ordered to pay costs as part of the
Sentencing Orders.

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Essays and Comments

systemic failures by a corporation to

establish safe systems of work should
render the corporation criminally liable for
the death - like any other unintentional
homicide committed by a natural person,
when committed by a corporation acting
with criminal negligence, severe sanctions
should apply, together with the sigma of
criminal conviction.
5. Prosecutions should be in the
hands of a specialist group of procurators
within the office of prosecutions, Mongolia,
who work closely with the inspectors who
investigate incidents under the Labor and
Hygiene Laws, and with any specialist
homicide police.
6. Prosecutions may be instituted
against both domestic and international
corporations which conduct business
operations in Mongolia- in the fields of
mining, construction and related fields,
deaths should be investigated with a
view to prosecuting both domestic and
international corporations, if the evidence
justifies it. No corporation, however large,
should be immune to being prosecuted
for workplace manslaughter or other
offences which result in death, or injury.
7.
Severe sanctions should be
imposed in the appropriate case, together
with adverse publicity orders and costs.

themselves to be vigilant to improve

workplace safety practices of for all
employees. It is not only a matter of
international and national Human Rights,
but it would prove to be an effective way
of developing a culture of prevention
regarding occupational health and safety
in the workplace for all Mongolians.
Conclusions and Summary:
1. Too many Mongolians die (or
are injured) in the workplace as a result
of dangerous workplaces, where safety
precautions are not followed to an
adequate standard by corporate employer/
s.
2.
Mongolia
has
international
treaty obligations, national Constitutional
obligations and has articulated national
legal Human Rights priorities to ensure
safety in the workplace for all employees.
3.
Bodies corporate should be
subject to the criminal law, by introducing
an offence of corporate manslaughter in
relation to deaths in the workplace.
4. In fixing criminal liability on a
corporation, the identification principle
should be avoided- it too narrowly defines
the range of officers/ employees in a
corporation capable of contributing to
corporate liability. Deaths caused by

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COMMODITIES FUTURES MARKET IN MONGOLIA

Mongolian Parliament approved the Law
on Commodities Exchange of Agricultural
and Raw Materials (LCEARM) which
was adopted prior to the new Securities
Market Law.
In this essay letter, we will try
to present basic information on the
commodities markets in Mongolia on how
said markets are developing.

Altansukh Dugaraa /B.A, A.A/,

Legal Specialist, Anderson & Anderson LLP

Preamble
There is a Mongolian phrase
meaning time does not stand still, namely,
things constantly change. Because of
the importance of commodities to the
Mongolian economy one of the changes
that Mongolians are looking forward
to is the continuing development of
commodities markets in Mongolia.
Introduction
Since
the
1990
democratic
revolution,
Mongolia
has
been
incorporating international
standards
into its marketplace, for example in the
securities market. While the securities
exchange in Mongolia is a nascent
institution, the Mongolian State Property
Committee and London Stock Exchange
Group have signed an exclusive strategic
partnership agreement to develop and
structure the Mongolia Stock Exchange.
In May 2013, Mongolia revised its
Securities Market Law, which came into
force on 1st January 2014.In 2011, the

70

Commodities Exchange
Whilethe Mongolian Parliament
adopted the LCEARM in 2011, the
actual history of Mongolias commodities
exchange began on 1st March 2013
with the establishment of the Mongolian
Agricultural
and
Raw
Materials
Commodities Exchange (Commodities
Exchange). Pursuant to LCEARM, Article
7 only certain trading instruments may
be sold on the Commodities Exchange,
namely spot contracts, forward contracts,
futures contractsand options.
Since the Commodities Exchange
commencedits operations, it has only been
trading spot contracts, which are defined
as trading contracts for tangible goods
and raw materials. Persons in charge of
the Commodities Exchange has indicated
that it is only trading spot contractsat this
time because it has not yet prepared other
contracts for futures, options, and forward
contracts. The spot contracts traded
on the exchange are done so online
according to the General Regulations of
the Commodities Exchange(General
Regulation). General Regulations Article
7.1 states that Payment of contracts
traded on the Commodities Exchange
shall be transferred by Clearing and
Payment Unit through the banks of
Mongolia, pursuant to Mongolian law.

Articles

According to the LCEARM, Article 4.5

in order to be traded on the Commodities
Exchange, commodities have to be
approved by a member of government
in charge of the related field, namely
in this case the Ministry of Industry and
Agriculture. As of now, the Commodities
Exchange is only trading cashmere,
sheeps wool, camel wool, molt wool,
wheat, and oil plant(rapeseed), all of which
require approval of the Ministry of Industry
and Agriculture. From 3rd January 2014 to
2nd May 2014,the Commodities Exchange
had sixty-one trades worth 227.3 billion
Mongolian Tugrik (approximately US
$12.3 million).1 In order to participatein
trading,a person or legal entity has
to be a member of the Commodities
Exchange, as specified in the LCEARM,
Article 10.1.Parties
may participatein
commodities trading on a permanent
or non-permanent membership basis.
However, pursuant to the LCEARM, Article
10.8, foreign citizens and legal entities may
1

only participate in commodities trading as

permanent members of the Commodities
Exchange. A permanent member has right
to aseat, rights of trade, rights to clearing
of trade but non-permanent members can
only participate in the commodities trade
according to General Regulations Article
4.3.1. On 6thMay 2014, there were thirtyfive permanent members listed on the
website of the Commodities Exchange2.
Non-members of the Commodities
Exchange can obviously buy or sell
contracts traded on the exchange, but they
cannot trade them except to a member of
the exchange.
The Commodities Exchange futures
market is divided into two types: hard and
soft commodities. Hard commodities are
typically natural resources that must be
mined or extracted (gold, copper, etc.),
whereas soft commodities are agricultural
products or livestock products (wheat,
2
http://www.mce.mn/pageContents.
aspx?pageID=38

http://mce.mn/Documents/2014.5.2pdf

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wool, cashmere, etc.)3. In Mongolia, both

types of commodities can be successfully
traded as Mongolia is rich in resources and
has the potentialfora large commodities
market and to compete on an international
scale. This is especially true of hard
commodities likecoal, copper, and iron.
These commodities potentially can help to
create a large commodities exchange in
Mongolia, even by international standards.
The countrys current OyuTolgoiand
TavanTolgoi mining projects may form
a large part of this development. The
TavanTolgoi project has atotal estimated
resource of 6.4 billion tons, one quarter of
which is high quality coking coal. One of
the world largest mine.4The OyuTolgoi
project promises to yield 3.3 billion tons of
iron ore, 31.1 million tons of copper, 1,328
tons of gold, and 7,601 tons of silver5.
As stated above, Mongolia is rich
in mining resources and in time those
mineral resources will make their way to
the domestic market place. To this end, it
may be worthwhile to consider the creation
of a mining commodities exchange, to
coincide with the current agricultural
Commodities Exchange. According to the
newly-amended Securities Market Law,
Article 3.3 the law was amended, in part,
to provide general regulations in respect
of the issues and trading of derivative
financial instruments, basedon goods and
commodities.

instruments.6 Through this article, the

law provided guidelines as to who may
trade derivatives, who may issue and
approve derivatives,and what entity will
issue the regulations that determine the
condition, requirements, and criteria to be
imposed on issuers of derivative financial
instruments7. The newly-amended law
also defined futures contracts and option
contracts as follows:
Article 4.1.10 option contract
means a derivative financial instrument
which creates for one party a right, but not
anobligation, in respect of a counterparty
to buy or sell a certain number of assets
being the subject of the contract at an
agreed price at pre-determined time and
creates a corresponding obligation for the
counter party8; and
Article 4.1.11 futures contract
means a contract or derivative financial
instrument that creates for relevant parties
the obligation to buy or sell a certain
number of assets being the subject of
the contract at an agreed price at a predetermined time.9
One amendment of the Securities
Market Law that may potentially open
Mongolias futures market to international
investors is found in Article 63.1.10,
which states the Financial Regulatory
Commission has authority to register
securities
and
derivative
financial
instruments of a domestic or foreign legal
entity for public offer and for trading in the
territory of Mongolia, giving permission
to commence trading on the primary and
secondary securities markets, suspending
or invalidating trading activity for certain
securities and canceling the registration of
certain securities.10 Through this article,

Futures Contracts
The newly-amended Securities
Market Law came into force on 1st January
2014. Some of the most important articles
of which relate to the futures market.The
Securities Market Laws new amendments
include articles regarding derivatives such
as Article 19[i]ssuing derivative financial

6
Securities Market Law /http://www.legalinfo.mn/
law/details/9243?lawid=9243
7
Securities Market Law /http://www.legalinfo.mn/
law/details/9243?lawid=9243
8
Securities Market Law / http://www.legalinfo.mn/
law/details/9243?lawid=9243/
9
Securities Market Law / http://www.legalinfo.mn/
law/details/9243?lawid=9243/
10
Securities Market Law / http://www.legalinfo.mn/

3
http://www.investopedia.com/terms/c/commoditiesexchange.asp
4
www. ot.mn
5
http://www.mongolianminingjournal.com/content/45701.shtml

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Articles

the law provides an avenue through

which foreign legal entities may enter the
futures market. Prior to the passing of the
laws amendments, the LCEARM was
adopted and the Commodities Exchange
had already begun trading, but only spot
contracts.The Commodities Exchange is
still developing, so more time is needed
to prepare other types of contracts,
such as futures and options. However,
in order to trade futures contracts, the
Commodities Exchange would need
to have a standardized contract. The
authority to create a standard contract
forfutures trading is vested in the Financial
Regulatory Commission and the relevant
securities trading organizations via the
new Securities Law,Article 19.3.11 Thus,
it is the responsibility of organizations like
the Financial Regulatory Commission to
prepare standardized contracts for use
of commodities already registered on
the Commodities Exchange, since only
standardized contracts can be traded.

interest rates, and an equity index.12 All

categories are regulated by one institute,
the commodities exchange.
In Mongolia, there is only one
Commodities Exchange, which trades
agricultural
commodities
pursuant
to theLCEARM. Compared to other
international commodities exchanges,
the Mongolian Commodities Exchange
is a new exchange, created only in
2011. According to the LCEARM, Article
4.6, in order to export commodities that
are approved to trade at Commodities
Exchange,they must be traded on the
Commodities Exchange. In addition,
the LCEARM, Article 4.7 provides that
a bonus should be given to partners,
agricultural industry persons, and legal
entities, if their commodities are traded
on the Commodities Exchange.13 These
kinds of inducements can be found in
other developing countries legislation as
they are beneficial to farmers.
Currently Mongolia is only trading
soft commodities; in order to trade hard
commodities like metals, the LCEARM
must be amended, since pursuant to
the Securities Law, Article 3.3 it requires
promulgation of general regulations with
regard to the issue of trading commodities.
Detailed regulationsare to be provided in
specific laws and regulations14.

Commodities Being Traded

Some developed countries have
awell-developed futures market, like the
Singapore Commodities Exchange, the
Chicago Mercantile Exchange Group
(CME Group), and the EurasianTrade
System Commodities Exchange of the
Republic of Kazakhstan. All of these
exchange strade both soft and hard
commodities via futures contracts. This
arguably strengthens these institutions
and provides an environment
for
increased development. For example,the
CME Group has ten different categories for
exchanges, which are agriculture, energy,
weather, metals, options, real estate,

Conclusion
The futures market was a new
concept in Mongolia until 2011, just as the
commodities futures market was a novel
idea until the early eighteenth century in
the United States of America. Currently,
the development of the commodities
futures market is now underway in
Mongolia.The Commodities Exchange
of Mongolia is aiming to organize its
first futures contract trading in 2014,

law/details/9243?lawid=9243/
11
SecuritiesLaw article 19.3 The relevant securities
trading organization and the FRC shall determine
the conditions, requirements and criteria to be imposed on issuers of derivative financial instruments,
the standards applicable to derivative financial instruments and the procedures for trading the same.

http://www.cmegroup.com/
http://www.legalinfo.mn/law/details/567?lawid=567
14
Securities Law, http://www.legalinfo.mn/law/details/
9243?lawid=9243
12
13

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2014 4 (50)

according to the Exchanges official web

page. The first objective to begin trading
commodities futures is to draft a standard
futures contract and specific rules for
futures trading. These documents are
already in the process of finalization, but
the first draft is not yet available to the
public. The Commodities Exchange is
definitely taking the first big step towards
development of Mongolias futures market
and the Commodities Exchange will

bekey in this development. It has been

three years since Mongolian Parliament
adopted the LCEARM and revised the
Securities Law; and the Commodities
Exchange is trying to accelerate the
development of the commodities market
in Mongolia. With natural resources like
coal, copper, molybdenum, iron, uranium,
and gold, the Commodities Exchange can
be a very busy organization.

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