Pac Rim Cayman LLC v. Republic of El Salvador

Pac Rim Cayman LLC v. Republic of El Salvador (ICSID Case No. ARB/09/12)

by Thomas Brom (2011)

The issue of the case is an investor-state arbitration between a Canadian gold mining company and the Republic of El Salvador. The proceeding was held at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. (Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12).

Standing at a lectern before a three-member arbitration panel, lawyers for Pac Rim alleged that El Salvador’s delay in issuing environmental and mining permits amounted to a “de facto” gold mining ban, expropriating the company’s investment in violation of the Dominican Republic-Central American Free Trade Agreement of 2005. Lawyers for El Salvador defended the government’s right to respond to local environmental concerns about gold mining, and alleged that Pac Rim had recently reincorporated in Nevada to gain jurisdiction under DR-CAFTA, to which Canada is not a party.

With little case law for guidance, the attorneys devoted hours to defining DR-CAFTA treaty terms and parsing its “abuse of process” and “denial of benefits” provisions. More time was spent attempting to define a “measure” under the ICSID Convention and determine when a dispute between investors and El Salvador was “born” or “crystallized.”
The tribunal has yet to decide whether to accept jurisdiction. But the hearing’s significance was its transparency–the ability to watch it live, and realize that private parties in such informal, ad hoc proceedings could actually be awarded millions of dollars in compensation for the legal actions of sovereign states.

Until early 2011, investor-state arbitrations (ISAs) were held in secret, with no official transcript, no access to documents or a written opinion, and no appeal. As treaty proceedings under international law, they are conducted at ICSID facilities or at the Permanent Court of Arbitration in The Hague. Unless the parties agree to publication, you may never know an ISA occurred.

From its founding in 1961 through the end of 2010, the ICSID had registered 331 cases. Most were filed in the past decade, and nearly two-thirds fall under bilateral investment treaties (there are more than 3,500 such pacts). The North American Free Trade Agreement, which became effective in 1994, was the first multinational agreement to provide investors with private rights of action against host governments. DR-CAFTA modified NAFTA’s article 11 to create a presumption that nondiscriminatory regulations are outside the class of prohibited indirect expropriations.

But the secrecy of ISA panels still looked bad, and several infamous outcomes–including a $16.7 million award against Mexico for a state government’s actions preventing construction of a foreign-owned hazardous waste landfill–looked worse (Metalclad Corp. v. United Mexican States, ICSID Case No. ARB (AF)/97/1, reviewed 89 BCLR 3d 359 (Br. Colum. Sup. Ct. 2001)).

In April 2006, ICSID amended its rules to give arbitration panels discretion to accept amicus briefs from third parties, hear oral testimony, publish results with consent of the parties, and provide video streaming of high-profile cases.

“ICSID has concerns for the perception of its legitimacy,” says Stuart G. Gross, a San Francisco sole practitioner who represents a coalition of El Salvadoran community organizations in the Pac Rim arbitration. “It specifically provides for amici, but not as full participants in the case. And reporting still varies panel to panel–not all opinions are available.”

Gross, working with counsel for the Center for International Environmental Law and Forum Nobis in Washington, D.C., successfully petitioned the Pac Rim panel to accept an amicus brief, filed in May. It argued that “the real locus of the dispute” was between Pac Rim and local Salvadoran communities that had opposed mining and forced the state to change policy. But these groups, the brief stated, “have no right to appear to defend their position, but rather appear pursuant to this Tribunal’s good graces.”

It’s a tough argument to win, challenging the neat distinction between investors and host governments. Pac Rim’s attorneys did not oppose acceptance of the brief, but they objected to third-party oral testimony. “Claimant … is not willing to accept the inequality of arms that would result from being forced to face two separate opponents in the context of a live oral proceeding,” Theodore R. Posner, a partner at the Washington, D.C., office of Crowell & Moring, responded in a brief.

A second unusual aspect of the Pac Rim case is the respondents’ abuse-of-process allegation. “If ICSID accepts jurisdiction,” Gross says, “it means that a company can shop for any treaty the host country is a party to, and then move assets to invoke the treaty’s arbitration clause.” He says such “flag of convenience” use of the ICSID Convention would permit investors to freeload on bilateral trade agreements, thereby undermining the mercantile trade-offs negotiated by the treaty parties.

“Treaty-shopping–creating shell corporations to gain entry to trade agreements–comes under scrutiny as a questionable practice,” says Michael D. Nolan, a partner in the Washington, D.C., office of Milbank, Tweed, Hadley & McCloy who recently defeated a $1 billion claim brought by Russian mining companies against Mongolia. “Increasingly, tax structuring and treaty-shopping are coming together.”

In a pending arbitration between ExxonMobil and Venezuela, the oil company was able to freeze $12 billion in assets of a state-owned oil company after claiming the protection of the Netherlands-Venezuela bilateral investment treaty. In fact, because the Netherlands has one of the few bilateral investment treaties with China, a Baker & McKenzie advisory recently suggested that U.S. companies structure their Chinese investments to access the Netherlands-China treaty. “Even if treaty-shopping is business as usual, that doesn’t make it proper,” Gross complains.

The perception that ISAs are fundamentally unfair recently prompted Ecuador and Bolivia to withdraw from ICSID membership. This at a time when the U.S. Congress is debating ratification of bilateral trade agreements with Panama, Columbia, and Korea and the Obama administration has embarked on the Trans-Pacific Partnership Agreement, a multilateral trade treaty among nine nations from around the Pacific Rim.

One of those nations is Australia, which has already tossed a spanner in those works. In April, the Australian government announced it would no longer seek ISAs in trade agreements with developing countries. “If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries,” a government report stated.
“This,” Gross says, “is the chickens coming home to roost.”