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Tribunal rules that mining company failed to waive local court proceedings, thus precluding CAFTA arbitration against El Salvador; hearings in a parallel case loom
publication date: Mar 15, 2011
By Luke Eric Peterson
An arbitration claim brought by a U.S. mining company under the Central American Free Trade Agreement (CAFTA) has been dismissed following preliminary objections by the respondent, the Republic of El Salvador. In an Award* dated March 14, 2011, arbitrators held that Wisconsin-based Commerce Group had failed to comply with a waiver requirement contained in the CAFTA when the company neglected to discontinue litigation in El Salvador’s courts before turning to international arbitration. Commerce Group complains that a revocation of certain environmental permits, as well as an alleged “de facto ban” on mining in El Salvador, has harmed the company’s investments and breached protections found in the CAFTA. When Commerce Group initiated its CAFTA arbitration it made a formal written waiver of claims that had been filed earlier in El Salvador’s domestic courts in relation to the revoked permits. However, arbitrators held that the company was under a further duty to discontinue the domestic litigation altogether. Commerce Group had argued that it was obliged only to formally waive the litigation, and that it fell to El Salvador to demand the termination of the domestic proceedings. Arbitrators disagreed with the claimant’s position and ruled that the onus lay on Commerce Group to “give material effect to their formal waiver”. De facto mining ban policy not a "measure" for purposes of CAFTA? In their recent decision, arbitrators also examined whether some portion of Commerce Group’s claims might not be affected by this waiver problem. Commerce Group contended that its claims related to a “de facto ban” on mining were not before any domestic court, and that they should be permitted to proceed before the CAFTA tribunal. However, the tribunal held that this latter claim was “part and parcel of their claim regarding the revocation of the environmental permits”. Of particular interest, the tribunal added that “even if the de facto mining ban policy and the revocation of the permits could be teased apart, the Tribunal is of the view that the policy does not constitute a ‘measure’ within the meaning of CAFTA. At most – at least based on the Tribunal’s evaluation of this particular case – the ban is a policy of the Government as opposed to a “measure” taken by it.” This assessment is likely to be parsed and debated in another pending CAFTA arbitration where the “de facto mining ban” is being contested. (See next section). The tribunal also rejected arguments by Commerce Group that jurisdiction should be upheld over separate claims under El Salvador’s domestic investment statute (which contains no waiver requirement similar to that of CAFTA). On this point, the tribunal noted that the claimant had not particularized claims under the investment law, or articulated clear causes of action thereunder. Despite dismissing Commerce Group’s claims, arbitrators ordered that each side should bear half of the arbitration costs, as well as their respective legal fees. The tribunal held that Commerce Group’s claims were not “frivolous”, and that only where they were frivolous could arbitrators shift costs onto a claimant under the terms of CAFTA’s preliminary objections process. Arbitrators in the case are Horacio Grigera Naon (claimant’s nominee), J. Christopher Thomas (El Salvador’s nominee), and Albert Jan van den Berg (President). For our past reporting on the case, see this report.** Hearings slated for next week in PacRim claim against El Salvador Hearings in a separate claim brought against El Salvador by a Nevada-based mining company, are slated to begin on March 23rd in Washington, D.C. The ICSID facility has announced that the proceedings will be streamed live on the internet.*** Pac Rim complains of the same “de facto” mining ban cited by Commerce Group (see above). PacRim says that it is the victim of Salvadoran authorities’ “passive refusal to issue a decision on the Company's application for environmental and mining permits” for a gold mining project where exploration began in 2002. Sides joust over nationality-change, denial of benefits, and investment statute In the latest written pleadings**** exchanged in the case, PacRim and El Salvador have jousted over the government’s allegation that the company has engaged in an abuse of process as a result of the shifting of its ownership of the El Salvadoran investment from a Caymans-based company to a U.S. based subsidiary, PacRim Cayman LLC, in order to avail themselves of CAFTA arbitration over a “pre-existing dispute”. (The claimant’s parent company is a Canadian entity, Pacific Rim Mining Corporation; until 2007, the Canadian firm’s investments in El Salvador were routed via a Caymans-based company, rather than the Nevada-based PAcRim Cayman LLC). El Salvador has also objected to PacRim’s claims by invoking the denial of benefits clause in the CAFTA. (The government disagrees with PacRim that there is any need to notify an investor prior to relying on the denial of benefits defence.*****) In response, Pac Rim has laid emphasis upon its U.S. roots, observing that “Pac Rim Cayman and its investments in El Salvador are substantially owned and controlled by individual U.S. shareholders of Pac Rim Cayman’s parent, who are the persons ultimately entitled to the economic value Pac Rim Cayman generates. To deny jurisdiction without regard to these facts would ignore economic reality.” The two sides also disagree with respect to whether a national statute (El Salvador’s national investment law) also provides a separate basis for jurisdiction in the case. PacRim points to an earlier ICSID arbitration where a (different) tribunal found that it had jurisdiction under that law. Meanwhile, El Salvador criticizes the earlier decision for its lack of reasoning, and suggests that Article 15 of the law in question does not express El Salvador’s consent to ICSID arbitration. Indeed, the government argues that its Constitution makes clear that consent to arbitration can only be expressed in treaties or contracts with investors. Of further interest, El Salvador also argues that the CAFTA’s waiver requirements forbid the ICSID tribunal from hearing CAFTA claims and claims under El Salvador’s domestic investment law. El Salvador contends that this would amount to two sets of claims related to the same measure, and would run afoul of the same waiver requirements that felled a parallel claim by Commerce Group (see above). NGOs submit amicus curiae brief In the lead-up to the jurisdictional hearings, a group of 8 Salvadoran non-governmental organizations opposed to minerals mining in that Central American nation have petitioned an ICSID arbitral tribunal for permission to present written and oral arguments in the PacRim case. In a written brief submitted to arbitrators, the groups echo El Salvador’s complaint that PacRim is engaging in an abuse of process by suing El Salvador pursuant to the U.S.-Central American Free Trade Agreement (CAFTA).****** The NGOs also contend that Pac Rim’s real quarrel is not with El Salvador, but with a boisterous domestic political opposition to minerals mining. Having seemingly come out on the losing end of a domestic political battle, Pac Rim is accused by it NGO-critics of using international investment law to “hang a price tag on its opponents’ successes in domestic public policy debates”. In their written brief, the NGOs argue that arbitrators should decline jurisdiction over Pac Rim’s claim on the grounds that there is no cognizable “legal dispute” or government “measure” at issue. Instead, the NGOs say that the The NGOs contend that an expansion of mining activity in the tiny Central American country could imperil the country’s water supply, and wreak other environmental damage. They blame Pac Rim’s efforts to win over members of the local community for exacerbating tensions, and contributing to a climate which has seen a series of violent and sometimes fatal attacks by mining proponents against local critics. In past statements, PacRim has disavowed any responsibility for political violence in El Salvador, and has argued that it would operate with a high degree of environmental stewardship. In its latest financial statement, the company acknowledged the ongoing difficulty of financing its ongoing ICSID arbitration, and reaffirmed that it may seek “traditional or alternative financing arrangements during the remainder of fiscal 2011 and beyond, specifically ear-marked for legal expenses.”*******
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