Pac Rim v. El Salvador
Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12
(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 18, 2018. Read more here.)
Decisions and Award are available at https://www.italaw.com/cases/783
Mining, national investment law
Request for Arbitration: April 30, 2009
Constitution of Tribunal: November 18, 2009
Decision on the Respondent’s Jurisdictional Objection: June 1, 2012
Award: October 14, 2016
Decision on the Respondent’s Request for a Supplementary Decision: March 28, 2017
V. V. Veeder (president)
Brigitte Stern (respondent appointee)
Guido Santiago Tawil (claimant appointee)
Forum and Applicable Procedural Rules
International Centre for Settlement of Investment Disputes (ICSID)
ICSID Rules of Procedure for Arbitration Proceedings
Dominican Republic–Central America–United States Free Trade Agreement (CAFTA), Investment Law of El Salvador
Alleged Treaty Violations
- Prohibition of arbitrary and discriminatory measures
- Right to appropriate treatment
- Right to efficient legal procedures
- Right to protection of property
Other Legal Issues Raised
- Amicus Curiae
- Denial of Benefits clause
1.0 Importance for Sustainable Development
The Pac Rim case attracted much attention from the media because several civil society groups organized opposition against the mining company. The government of El Salvador had refused to grant a mining concession in response to strong public concerns that the mine could contaminate a major source of drinking water. The case fed into the general controversy of states’ right to regulate, and specifically the right to regulate of smaller and economically weaker states that possess important natural resources, as is the case of El Salvador.
An amicus curiae submission by the Center for International Environmental Law (CIEL), six local communities and other organizations supported El Salvador’s decision to deny the mining concession. It underlined the human right to a healthy environment and stressed the potential risks of the investment activities for the local population and the environment. It also pointed to the importance of community participation in the context of investment activities relating to the exploitation of natural resources, indicating that the state’s permanent sovereignty over its natural resources finds both its legitimacy and its limits in the public interest. Moreover, it indicated that community participation is a crucial element of sustainable development and part of international environmental law, expressing the right of people to participate in decisions that affect them.
The amicus brief sought to bring the local community perspective into the arbitration process to sensitize the tribunal to the social and environmental risks related to the investment. Unfortunately, the Pac Rim tribunal did not elaborate on the issue of community participation. It found that the disputing parties did not consent to disclose important evidence of the arbitration to CIEL and that, in order for it to decide the case, it was not necessary to specifically consider the arguments advanced by CIEL. Consequently, the tribunal refused to address the amicus brief.
Effective participation in the proceedings also includes access to all relevant documents, which can, however, be barred by the disputing parties that refuse to grant access. Accordingly, the Pac Rim case demonstrates the difficulties that civil society and others face in having their voices heard in international arbitration proceedings.
Pac Rim brought the case under the CAFTA’s investment chapter as well as under El Salvador’s investment law. The tribunal declined jurisdiction based on CAFTA but accepted jurisdiction under El Salvador’s investor–state dispute settlement (ISDS) clause in its investment law. Therefore, when assessing the legality of El Salvador’s measure, it did not apply the same standards typically included in investment treaties, but instead applied the principle of proportionality (enshrined in the country’s constitution) to the examination of the requirements under El Salvador’s mining law. If the CAFTA had been applicable, one might question whether the tribunal would have arrived at the same decision on the merits by applying treaty standards such as fair and equitable treatment (FET).
Finally, it is interesting to highlight that all three ISDS cases initiated against El Salvador so far have been based on the country’s national investment law. The Pac Rim case thus also shows that such investment laws enhance the risks of countries being sued in case the applicable legislation contains advance consent to ISDS.
2.0 Case Summary
2.1 Factual background
Pac Rim Cayman LLC (later acquired by Oceana Gold) was a Canadian gold miner investing in El Salvador at a time when the country was promoting foreign investments to develop its mining industry and boost its economy. Between 2002 and 2008 Pac Rim acquired mining licences to conduct exploratory and pre-mining activities in various concession areas. It discovered high-grade gold reserves in the El Dorado project situated in Cabañas. Hence, Pac Rim’s subsidiary Pac Rim El Salvador (PRES) applied for the necessary exploitation concessions in 2004 (para. 6.13, award).
Pac Rim’s largest activity was the El Dorado project. However, El Salvador refused to issue the concession since Pac Rim failed to comply with the requirements under El Salvador’s mining law. Namely, it failed to submit an environmental permit and acquire the consent of the landowners of property situated in the concession area in question.
In 2005, Salvadoran authorities discussed amendments to the mining law. The amendments would limit the documents required for obtaining mining concessions. Pac Rim was collaborating with the competent ministry on the potential amendments and therefore optimistic of ultimately obtaining the concession (para. 6.64, award). However, the El Salvador legislature rejected the amendments in 2008 (para. 6.124, award). Also, Pac Rim at that point had yet to submit the missing documents required to comply with the application requirements. In March 2008, it was reported that the president of El Salvador stated that “in principle” he was against the granting of permits for new mining exploitations and was asking the parliament to review the issue in depth (para. 6.125, award). One year later, the president specifically stated that he would grant no mining concession to Pac Rim (para. 6.129, award), which finally dashed the expectations of the claimant to obtain the concession.
2.2 Summary of Legal Issues and Award
In April 2009, Pac Rim initiated international arbitration under the CAFTA and El Salvador’s Investment Law. It argued that the denial of the El Dorado concession resulted from a de factoban on metallic mining, and that this ban by El Salvador was in breach of the country’s obligations under Salvadoran and international law. Pac Rim asked for compensation of more than USD 314 million. El Salvador countered that Pac Rim’s project simply did not meet the requirements with respect to several material aspects and that therefore no damages should be granted.
In the 2012 Decision on the Respondent’s Jurisdictional Objection, the tribunal declined its jurisdiction over the claims based on CAFTA. However, the tribunal agreed to hear the claims based on El Salvador’s investment law. In its final award, the tribunal rejected all of Pac Rim’s claims against El Salvador. The tribunal awarded USD 8 million to El Salvador to cover a portion of its arbitration costs, which totalled USD 12 million. In 2017, the tribunal also granted El Salvador post-award interest.
3.0 Select Legal Issues
3.1 The Denial of Benefits Clause in CAFTA
The Pac Rim tribunal was the first to interpret the denial of benefits clause contained in CAFTA. Pac Rim argued that it was protected under CAFTA due to its incorporation in the U.S. state of Nevada. The CAFTA provision (Article 10.12.2) permits a CAFTA state party to deny the benefits of treaty protection, including access to ICSID arbitration, to an investor if two cumulative conditions are met. First, the investor has “no substantial business activities in the territory of any Party.” Second, persons of a non-Party to CAFTA own or control the enterprise that is making the investment.
Like the majority of international investment agreements, CAFTA does not define the notion of “substantial business activity.” Therefore, the tribunal had to assess the factual circumstances of the case. Based on the evidence presented to it, the tribunal concluded that Pac Rim did not have substantial business activities in the United States and was “a passive actor” there (para. 4.68, decision on jurisdiction). The tribunal added that traditional holding companies might still meet the conditions set out in CAFTA. However, in this case, the particularly tenuous scale of Pac Rim’s activities justified the tribunal’s conclusion that it was “more akin to a shell company with no geographical location for its nominal, passive, limited and insubstantial activities” (para. 4.75, decision on jurisdiction).
As to the second condition set out above, the tribunal accepted El Salvador’s argumentation and found that Pac Rim was owned by Pacific Rim Mining Corporation, which in turn is a Canadian entity. According to the tribunal, the fact that the ultimate owners or controllers of Pac Rim had postal addresses in the United States was insufficient for them to qualify as U.S. nationals under CAFTA (see Annex 2.1, CAFTA). CAFTA provides that for the United States, natural persons mean U.S. nationals, that is, American citizens or persons who owe permanent allegiance to the United States of America, as per the requirements of the U.S. Immigration and Nationality Act (para. 4.81, decision on jurisdiction). Consequently, the tribunal declined to exercise jurisdiction over Pac Rim’s CAFTA claims. However, it upheld its jurisdiction based on El Salvador’s investment law (para. 5.48, decision on jurisdiction).
3.2 Interpretation of Article 37(2)(b) of the Mining Law
The central question of the case was whether Pac Rim was actually entitled to the El Dorado concession. In determining whether this was the case, the tribunal focused on the legal interpretation of El Salvador’s mining law and not on the state’s investment law. Article 37(2)(b) requires that the applicant for an exploitation concession submit “the property title for the real estate or authorized permissions, in legal form, from the landowner.” Pac Rim understood this provision to merely require documentation for the area (likely) to be directly affected, while El Salvador interpreted it as requiring documentation for the entiresurface area of the requested concession.
The tribunal rejected Pac Rim’s interpretation and relied on three specific factors. First, it found that Pac Rim knew very well that the state’s interpretation was not the same as Pac Rim’s own understanding of the law. In fact, it considered that instead of elaborating an alternative plan, Pac Rim relied on a prospective amendment of the legislation, which turned out to be a mistake (para. 8.30, award). Second, the tribunal underlined that as a general approach “deference should be given by an international tribunal to the unanimous interpretation of its own laws given in good faith by the responsible authorities of a State at a time before the emergence of the parties’ dispute” (para. 8.31, award). Thus, in the present case, the tribunal found that there was no reason to prefer Pac Rim’s “non-authoritative” interpretation over El Salvador’s. Third, the tribunal approached the provision in question through a teleological interpretation. According to the tribunal, the law would not fulfill its purpose if only applied to surface installations. What mattered were instead the potential risks posed to landowners and occupiers of the area. In order to sustain this assumption, the tribunal referred to the principle of proportionality under Salvadoran constitutional law and held that there is a rational relationship between the means and ends of the requirement in light of the interpretation given by El Salvador. In other words, potential risks are sufficient in order to require consent from surface owners and occupiers.
In conclusion, the tribunal held that Pac Rim had never complied with the requirements for its exploitation concession to be granted and that El Salvador had committed no breach in failing to grant it (para. 8.44, award).
3.3 The Issue of Estoppel or Actos Propios
Pac Rim submitted an alternative argument of estoppel, claiming that El Salvador made a clear statement that Article 37(2)(b) of the mining law would not result in a refusal to grant the concession. The tribunal found that the application of the principle of estoppel, both under international and Salvadoran law, required an “unequivocal statement by the Respondent,” and reliance on this by the investor (para. 7.53, award). However, it found no evidence that El Salvador had made any statement that the concession application would be approved regardless of the investor’s compliance with the mining law. Especially, it clarified that there could be no representation from the executive that the legislature would amend the law, since this representation would be unlawful under Salvadoran law. Thus, the tribunal rejected this claim.
3.4 The Amicus Curiae submission of the Center for International Environmental Law (CIEL) and others
CIEL and others filed an application as a non-disputing party pursuant to the ICSID Convention. In its amicus curiaebrief, CIEL argued that El Salvador’s measures regarding Pac Rim’s mining project find support in the country’s international obligations on human rights and environmental protection. In particular, human rights obligations relating to the environment require that El Salvador put in place a legal framework to ensure the full enjoyment of fundamental rights of its communities that are threatened by hazardous activities of third parties. CIEL also underlined that the national legislation was aimed at implementing the rights of access to information, participation and justice in environmental matters, enshrined in Principle 10 of the Rio Declaration on Environment and Development, requiring in the present case the dialogue between mining operators and local communities.
Unfortunately, the tribunal declined to consider CIEL’s case. It did so for two reasons. First, the tribunal emphasized that the disputing parties did not consent to disclose factual evidence of the arbitration to CIEL. Second, it found that in order to decide the case, it was not necessary to specifically consider the arguments advanced by CIEL. According to the tribunal, it would be “inappropriate” for it to do so in such circumstances (para. 3.30, award).
 See United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Regional Agreement on Access to Information, Public Participation, and Justice in Latin America and the Caribbean, adopted March 4, 2018.