Pac Rim v. El Salvador: all claims dismissed; OceanaGold to pay US$8 million in costs

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

On October 14, 2016, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed on their merits all claims by Pac Rim Cayman LLC (Pac Rim) against El Salvador. The tribunal ordered the mining company—currently owned by Australian-Canadian OceanaGold—to pay US$8 million towards El Salvador’s legal costs.

Factual background

Between 2002 and 2008, two Salvadoran subsidiaries of Pac Rim acquired various mining exploration licences in El Salvador. Pac Rim’s largest activity was the El Dorado project, in Cabañas, one of the country’s poorest regions. Having verified that the area contained significant high-grade gold reserves, Pac Rim’s subsidiary Pac Rim El Salvador (PRES) applied in December 2004 to convert its exploration licences—which were to expire in January 2005—into an exploitation concession.

The application failed to include certain documents required under El Salvador’s Mining Law, such as the environmental permit and the consent of the landowners of property located in the surface area of the requested concession.

In late 2005, Salvadoran authorities proposed an amendment to the Mining Law to expressly limit the required documentation to the area affected by the mine’s infrastructure; if approved, the amendment would reduce the number of documents PRES needed to obtain. Though supporting PRES in the hope that the amendment would be approved, the authorities also formally requested that PRES submitted missing documents required by law.

However, PRES never submitted them, and El Salvador’s legislature rejected the amendment in February 2008. On March 10, 2008, Salvadoran President Antonio Saca said that he was in principle against granting new mining exploitation permits; a year later, he stated that Pac Rim would not be granted a concession.

Claims and decision on jurisdiction

On April 30, 2009, Pac Rim—on its own behalf and in respect of its subsidiaries—initiated arbitration against El Salvador under the country’s Investment Law and the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA).

Asking for damages exceeding US$314 million, it claimed that the denial of the El Dorado concession resulted from El Salvador’s alleged de facto ban on metallic mining, in breach of the country’s obligations under Salvadoran and international law. El Salvador submitted that Pac Rim was not entitled to an exploitation concession, and that the state did not breach any obligations and was therefore not liable for any damages.

In its decision on jurisdiction of June 1, 2012, the tribunal dismissed the claims under CAFTA, but affirmed its jurisdiction under El Salvador’s Investment Law.

Tribunal overlooks case advanced by amicus curiae CIEL

In a non-disputing party submission, the Center for International Environmental Law (CIEL) argued that El Salvador’s measures regarding El Dorado were supported by its international obligations on human rights and the environment. However, the tribunal considered it unnecessary to address CIEL’s case, because the disputing parties did not consent to disclose the factual evidence to CIEL, and because the tribunal’s decisions “do not require the Tribunal specifically to consider the legal case advanced by CIEL: and, in the circumstances, it would be inappropriate for the Tribunal to do so” (para. 3.30).

Tribunal rejects El Salvador’s additional jurisdictional objections

El Salvador argued that claims based on international law and the Salvadoran Constitution fell outside the scope of the consent to arbitrate contained in Article 15 of the Investment Law. The tribunal dismissed the objection. Noting that the applicable law was not specified in the Investment Law or in any agreement between the parties, the tribunal invoked ICSID Convention Article 42(1) to decide that Salvadoran law (including the Constitution) and the applicable rules of international law applied to the arbitration.

According to El Salvador, the consent to international arbitration under Article 15 was trumped by other provisions of Salvadoran law, as the Investment Law specifically subjects subsoil-related investments to the Constitution and secondary laws, and the Mining Law refers disputes involving mining exploration licences or exploitation concessions to the exclusive jurisdiction of Salvadoran courts. The tribunal, however, held that El Salvador’s interpretation was not binding, and refused to “apply other legislative provisions that would override an expression of jurisdictional consent that is valid, clear and unambiguous as a matter [of] international law” (para. 5.68).

El Salvador also invoked the Salvadoran Civil Code to argue that certain claims were time-barred. The tribunal rejected the objection by recalling: “the fact that a provision of Salvadoran legislation provides the consent to arbitration does not mean that the Tribunal’s decisions on jurisdiction are governed by Salvadoran law” (para. 5.71). It also held that investment tribunals do not necessarily need to apply domestic statutes of limitations.

Award focuses on El Dorado project

In determining whether Pac Rim was entitled to the El Dorado concession, the tribunal focused on two aspects: the legal interpretation of Mining Law Article 37(2)(b) and the claim of estoppel or actos propios. Both are summarized as follows.

Pac Rim had also pleaded ancillary claims regarding five other mining areas, but the tribunal dismissed them, finding that the investor failed to establish liability, causation and injury.

Article 37(2)(b) interpreted adversely to Pac Rim’s case

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.” For Pac Rim, this merely required documentation for the area (likely) to be directly affected, while El Salvador understood it as requiring documentation for the entire surface area of the requested concession. The tribunal rejected Pac Rim’s argument based on three factors.

The first factor was the acquiescence by Pac Rim and PRES: although knowing that the state’s interpretation of Article 37(2)(b) was not in their favour, they relied on the possibility of an amendment, and did not pursue any other plan: “They were confident that amending legislation would see them right. In this regard, they were mistaken” (para. 8.30).

Second, the tribunal deferred to El Salvador’s interpretation of the provision, holding: “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).

Finally, the tribunal looked at a third, teleological factor. Applying the proportionality principle under the Salvadoran Constitution, it concluded that Article 37(2)(b) required consent from surface owners or occupiers facing potential or actual risks—beyond those directly affected by the activity—and concluded that Pac Rim did not fulfill the requirement.

Tribunal rejects claim based on estoppel or actos propios doctrine

Pac Rim also argued that El Salvador had made “clear and unequivocal representations” that the Article 37(2)(b) issue would not lead to a denial of the concession, and that Pac Rim had relied in good faith on those representations; El Salvador would thus be, under international law or Salvadoran law, estopped or precluded from stating otherwise. However, the tribunal did not find any representation by El Salvador to the effect that, absent the amendment to the provision, PRES would have been deemed in compliance with the requirement, or that the concession would be granted even without such compliance.

Notes: The ICSID tribunal was composed of V. V. Veeder (President appointed by the parties, British national), Guido Santiago Tawil (claimant’s appointee, Argentinian national) and Brigitte Stern (respondent’s appointee, French national). The award is available in English at http://www.italaw.com/sites/default/files/case-documents/italaw7640_0.pdf and in Spanish at http://www.italaw.com/sites/default/files/case-documents/italaw7641_0.pdf.

 

Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.