Michael Aldrich, Partner, Hogan Lovells, on the legal system governing foreign direct investment in Mongolia

I like to use the image of a glass of water to describe my views on Mongolia’s legal system and the current business climate for foreign investment. Depending upon one’s disposition, the glass is half full, providing an unusual opportunity for foreign investors in a legal system surprisingly light on approval procedures, contending approval authorities, and internal or classified regulations. Or is it half empty, woefully short of the transparency and predictability that are the hallmarks of a jurisdiction ready to enter the world stage?

As a transactional lawyer with more than two decades of experience in emerging and developed jurisdictions, I take the view that the glass is indeed half full. I believe the correct and fair point of reference in evaluating the Mongolian system is not the legal systems of Western industrialised states, which have the benefit of centuries of continual development, but other emerging jurisdictions. By that standard, Mongolia affords foreign investors a legal system that strives to be open and fair.

Consider Article 16.3 of the 1992 Constitution which reads, in part: “Illegal confiscation and requisitioning of private property of citizens shall be prohibited. If the State and its organs shall appropriate private property on the basis of exclusive public need, then there shall be a fair payment of compensation and costs.”

It is noteworthy that in the 19 years since the constitution came into effect, Mongolia has not gone back one inch in its dedication to this principle. Indeed, the contentious "Protected Areas Laws" of July 2009 threatened the revocation of mining licences in reserves in such locations. While this law demonstrated a lack of forethought and clarity of craftsmanship, it nevertheless still enshrined the principle of providing compensation in the event of any expropriation. It is precisely that reflection of this Mongolian constitutional principle that made the Prohibited Areas Law both implausible and unenforceable. Once the government realised that providing compensation for all of the licence holders earmarked for revocation would bankrupt the country, the state began a protracted policy of non-activity and half-hearted attempts at inspection, but ultimately did not abandon its responsibilities, as set out under Article 16.3.

The role of constitutionalism in Mongolia is not widely understood. The short-lived but highly publicised disagreement among a group of 20 parliamentarians with Rio Tinto and Ivanhoe Mines as foreign investors in the Oyu Tolgoi copper reserve amply illustrates this point. These parliamentarians raised the issue of whether the government should increase its shareholding in the Oyu Tolgoi project company by acquiring an additional 16% of the shares such that it held 50% of equity. It is beyond the scope of this brief note to parse all of the contending language in the investment agreement and important related governmental documents by which parliament gave the government a form of power of attorney. However, it suffices to say the legal complexities of a contract executed with the state are matters of both constitutional law as well as basic contract law. The old adage “a contract is a contract” proffered by foreign commentators is neither a sufficient basis nor a correct assertion to allege the unreasonableness of the parliamentarians. As common sense will tell you and as can be attested to by any practising lawyer, there are two sides to every dispute and seldom is one party to the disagreement completely justified. In the case of Oyu Tolgoi, all parties declared victory and set aside the legal complexities, including significant issues of Mongolian constitutional law, so that they could get on with business.

I do not mean to turn a blind eye to shortcomings of the Mongolian legal system. Legislation is too often drafted with vague or ambiguous terms. The futility of resorting to Mongolian courts for small to medium-sized foreign invested businesses is well known. Corruption crops up during the conduct of business or the resolution of legal disputes. Nevertheless, for a formerly isolated country in the middle of Central Asia, Mongolia has implemented laws both worthy of respect which provide a useful basis for foreign direct investment.