Gold mining arbitration to commence in Washington, D.C.

On El Salvador’s Independence Day, September 15, the country will face a major challenge to its actions in placing a moratorium on gold mining in the country.   Five years after it began, the international arbitration between Pacific Rim (now owned by OceanaGold) and the government of El Salvador starts its final hearing next week in Washington, D.C.  The legality of the mining moratorium and its impact on foreign gold mining companies will be judged by an arbitration panel of international legal experts.  The hearing will begin on Monday and last for six days through the following Saturday.     

Here is a primer to help you understand the proceeding which will be unfolding this week:

  

 


Who are the parties?

The official parties to the arbitration are the government of El Salvador and Pac Rim Cayman, LLC.   Pac Rim Cayman is ultimately owned and controlled by OceanaGold, an Australian gold mining company which purchased Pacific Rim Mining Corp. in 2013.    

Who are the lawyers representing each side?

Both sides are represented by large US law firms.  The government of El Salvador is represented by Foley Hoag LLP, a Boston based firm.  Pac Rim is represented by Crowell & Moring, LLP, a firm based in Washington, D.C.   Both firms are well-respected and expensive.

Who are the arbitrators?

The arbitration is being conducted under the auspices of the International Centre for the Settlement of Investment Disputes. From Wikipedia:

The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution which facilitates arbitration and conciliation of legal disputes between international investors. The ICSID is a member of the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1966 as a multilateral specialized dispute resolution institution to encourage international flow of investment and mitigate non-commercial risks. Although the ICSID is a member of the World Bank Group and receives its funding from the World Bank, it was established as an autonomous institution by a separate treaty drafted by the International Bank for Reconstruction and Development's executive directors and signed by member countries.[1][2] The ICSID is contracted with and governed by its member countries, but has its own Secretariat which carry out its normal operations. The center facilitates arbitration and conciliation proceedings, allowing independent tribunals and arbitration mechanisms to hold proceedings under its rules, and all contracting member states agree to enforce and uphold arbitral awards in accordance with the ICSID Convention 

El Salvador is a party to the international treaty which created the ICSID.

The panel of arbitrators consists of three lawyers with extensive experience in international commercial arbitration.   The panel members are:

• V.V. Veeder (British, president of panel)
• Brigitte Stern (French)
• Guido Santiago Tawil (Argentine)

Click on their names to read their bios.

Why is this case in an international arbitration?

Pac Rim started this action under the DR-CAFTA trade agreement which has provisions allowing foreign investors in Central American countries to bring international arbitration claims against those governments if those investors are treated unfairly.  The arbitration panel rejected Pac Rim's attempt to use DR-CAFTA, because it found that Pac Rim was a Canadian company, and Canada is not one of the parties to DR-CAFTA.  There is a good overview and analysis of this decision at the Public Citizen Eye on Trade blog.  

There was another basis for the arbitration, however.   In 1999, El Salvador’s National Assembly passed an Investment Law, and that law has a provision allowing the country to be sued in international arbitration.  Article 15 of the Investment Law states: 

In the case of disputes arising between foreign investors and the State, regarding their investment in El Salvador, the investors may submit the dispute to: (a) the International Center for Settlement of Investment Disputes (ICSID), in order to settle the dispute by means of conciliation and arbitration, in accordance with the Convention on Settlement of Investment  Disputes  Among  States  and  Nationals  of  other  States  (ICSID  Convention)(emphasis supplied). 

The ICSID applied the plain meaning of this Salvadoran law which states that foreign investors can bring lawsuits against El Salvador in that forum.    This is the case which will be heard beginning September 15.

Provisions like the one in the Investment Law to permit international arbitration of such disputes are not uncommon.   Countries adopt such laws to encourage foreign investors who might be concerned with the fairness or the corruption in local court systems.   Investors feel more comfortable investing knowing that they have the option to choose a tribunal of supposedly neutral international arbitrators rather than the local judiciary.

The International Investment Law was adopted in 1999 during the right wing ARENA government of president Francisco Flores.   Flores is currently under house arrest in El Salvador for corruption charges related to his receipt of more than $10 million in funds from the government of Taiwan.

What are the issues to be decided?

Pac Rim is suing over the government of El Salvador's refusal to give it a permit to begin mining at its El Dorado site in north central El Salvador.   The refusal came after Pac Rim had spent years exploring and preparing the site and was ready to actually begin construction of a mine.  Pac Rim claims that it complied with all provisions of Salvadoran law and that this action which destroyed the value of its investment in the gold mine was illegal.   El Salvador asserts, in contrast, that Pac Rim had not fulfilled all the requirements to obtain an exploitation permit and that the actions of the country in placing a moratorium on new exploitation permits was legal and justified because of concerns and uncertainty over the environmental and social impact of permitting gold mining.   

The legal briefs filed by the parties in the arbitration go into hundreds and hundreds of pages of details about their arguments.  From Pac Rim’s Reply on Merits and Quantum:

In support of these claims, Claimant demonstrated its substantial and good faith investment  in  the  El  Dorado  Project  made  in  accordance  with  the  laws  of  El  Salvador  between 2002 and 2008: an investment that marked a significant step along a lengthy trajectory towards the development of a modern mining industry in El Salvador.  As borne out by hundreds of factual and legal exhibits, this trajectory marked a path that had been consciously chosen and consistently implemented by the Salvadoran State since its first days as an independent republic,  and certainly for many years before an experienced group of mining industry professionals came together to form the group of companies now known in this arbitration as Pac Rim…. 

Pac Rim’s investment in El Salvador included: expending tens of millions of dollars in-country, to the direct benefit of the local  economy;  completing  confirmatory  mineral  exploration  drilling  and  detailed  technical studies  which  demonstrated  the  economic  and  environmental  feasibility  of  mining  the  Minita deposit; doubling the mineral resources associated with the El Dorado Project; and harnessing the  success  of  its  high-quality  technical  studies  and  exploration  efforts  to  attract  international financing for development of the mine.   In addition, Pac Rim implemented a series of highly progressive  environmental  and  social  programs  which  were  calculated  to  ensure  that  the Department of Cabañas – as well as the [Government of El Salvador] itself – would receive direct and lasting benefits… 

Then, in March 2008, then President Saca declared a ban on all metallic mining projects in the country, abruptly and effectively nullifying the valid legal and regulatory regime upon which Claimant had relied in making its investment.   The result of this gross misuse of authority by the Executive Branch of Government is a “de facto ban” or indefinite moratorium on metallic mining in El Salvador, which continues to date, and consequently the destruction of Claimant’s investment, and the frustration of its legitimate expectations to develop active mining operations at El Dorado.  

From El Salvador’s Counter-Memorial on the Merits:

This case is about a Canadian mining company that purchased exploration rights in El Salvador when time was running short to apply for a mining exploitation concession. The company then decided to make a big gamble and failed. 

 Instead of accepting the consequences of its decisions, the company started this arbitration to try to force the Government to grant it a gold mining concession to which it never had any right. It is now trying to convince this Tribunal to order the people of E1 Salvador to pay for the company‘s failed gamble and, in fact, to pay it a windfall from the national treasury by awarding "lost profits" based on property rights the company never had…. 

What Pacific Rim still fails to understand is that it was obligated to comply with the laws of E1 Salvador and neither El Salvador nor any other country in the world has a legal obligation to change its laws to accommodate a foreign investor. As established in another ICSID case in which El Salvador was a respondent and prevailed, it is the foreign investor who has the legal obligation to make its investment in accordance with the laws of the host State. This self-evident principle is also recognized in the text of the Investment Law of El Salvador, the sole instrument under which this arbitration proceeds…. 

This case is simple.  In fact, the key issue to be decided in this arbitration has been defined and answered since 2010, when El Salvador filed its Preliminary Objections to bring to bring an early end to a claim that, in El Salvador’s view, is devoid of legal merit:  Pac Rim was not legally entitled to a mining exploitation concession and has no rights in the exploration licenses included in its claims. El Salvador breached no legal duty toward Pac Rim and is not liable for any alleged damages as a result of not granting the concession and not granting new environmental permits for exploration.

All the briefs and other documents filed in the case can be downloaded from this site maintained by the Salvadoran government. 

Can local environmental organizations participate directly in the hearing?

Environmental activists and the anti-mining movement do not have a voice at the hearing beyond the arguments which will be made by the government of El Salvador and its lawyers.   The Center  for International Environmental Law filed a friend of the court brief on behalf of the El Salvador National Roundtable on Mining, a coalition of environmental and civil society groups opposed to metallic mining in the country.  

The government of El Salvador supported the panel’s consideration of the Roundtable's arguments in a submission filed on September 2.   Not surprisingly, Pac Rim rejected all the arguments of the National Roundtable.

When will a decision be issued?

This is not a rapid process.   I would not expect a decision for several months.