El Salvador loses on three out of four counts, as anti-environment and anti-development case launched under CAFTA drags on

El Salvador lost three out of four of its major arguments in last Friday’s Pac Rim Cayman LLC v. El Salvador jurisdictional ruling. Even though it narrowly won dismissal of its CAFTA case, the underlying claims will proceed at World Bank-based hearings as a challenge under El Salvador’s domestic Investment Law.

The lowlights?

• El Salvador lost on three out of four counts, and Pac Rim Cayman LLC's attack on El Salvador's mining policies will proceed. The government may still have to pay millions in tribunal and legal costs for the CAFTA portion that was dismissed.
• CAFTA's extraordinary investment protections kick in for existing investments even without a firm making any new investments after CAFTA went into effect.
• Government actions that predate CAFTA - but continue after it went into effect – can be a "continuing omission" that can keep governments on the hook years later. In this case, Pacific Rim's mining permit was presumptively denied before CAFTA went into effect, but the firm and the government continued to discuss it and the permit remained not granted to date. Following this logic through, a company’s failure to meet a regulatory requirement in the year 1800 can constitute a “continuing omission” attributable to the government (as if it were a contract) for centuries to come, provided the government is nice enough to continue to talk about it. 
• The dismissal of CAFTA jurisdiction was on worryingly narrow grounds: had the firm reorganized its corporate structure so that its pre-existing U.S. corporate entity obtained ownership of the Salvadoran mining interest (rather than Pacific Rim's Cayman subsidiary that owned those assets being reincorporated as a new U.S. entity to pursue the CAFTA case), El Salvador could have been held liable for a CAFTA violation on the basis of a dispute that actually started before CAFTA, just because the governmental authorities were kind enough to keep speaking to the company about their permits.
• Through this narrow dismissal of the CAFTA complaint, the tribunal practically laid out a road map for future aggressive nationality planning companies to abuse the investor-state system to attack environmental policies.

Please find the official docs in this case here, our earlier statement from Saturday here, and our earlier backgrounder on the case here. (See here for our analysis of the closely related Commerce Group v. El Salvador case.)

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As the complainant’s name implies, Pac Rim Cayman LLC started out as a Cayman Islands company. The firm was a subsidiary of Pacific Rim Mining Corp., a Canadian company, that had sought but failed (as of March 2005) to qualify for a gold exploitation license, after having made a tepid but ultimately failed attempt (as of December 2004) to secure the necessary environmental permits.

In March 2006 – long after these facts – the U.S.-Central America Free Trade Agreement (CAFTA) went into effect. CAFTA provides certain outrageous benefits to U.S. investors to challenge El Salvadoran environmental and health measures for cash compensation, outside of Salvadoran courts for acts or omissions that would not be violations of Salvadoran law. The Cayman subsidiary reincorporated in the U.S. state of Nevada in December 2007. In March 2008, El Salvador’s then-president Elias Antonio Saca, gave a speech that various foreign investors deemed as announcing a ban on gold mining. In April 2008, Pac Rim Cayman LLC began threatening to launch a CAFTA claim as an allegedly “U.S.” investor, which they did formally in December 2008. (Canadian investors in El Salvador, in contrast, would not generally be protected by CAFTA.)

 

One of El Salvador’s submissions from October 2010 (page 15) helpfully replicates the timeline: 

The ruling was issued by a three-member arbitral panel at the World Bank’s International Center for Settlement of Investment Disputes (ICSID). Pac Rim Cayman LLC picked an Argentine arbitrator (Guido Santiago Tawil), El Salvador picked a French arbitrator (Brigitte Stern), and the two parties agreed on a famous British arbitrator (V.V. Veeder) to preside over the panel.

El Salvador raised four main objections to Pac Rim Cayman LLC’s case. We’ll explore these in turn, and show how El Salvador lost three of them, and narrowly won only one.

First, El Salvador claimed that the nationality shifting was opportunistic and an abuse of process under international law. Its second argument was closely related: that the tribunal did not have jurisdiction because the alleged violations predated CAFTA’s entry into effect (rationae temporis argument). (Its third argument, detailed further below, were that CAFTA allows El Salvador to deny benefits to an allegedly “U.S.” investor that has no “substantial business activities” in the U.S. and is controlled or owned by non-U.S. persons. Its fourth argument, also detailed further below, is that El Salvador’s domestic Investment Law would not allow Pac Rim Cayman LLC’s challenge.)

The threshold issue should have been whether Pac Rim Cayman LLC’s move to Nevada was motivated in order to take advantage of CAFTA. The claimant had plainly told the tribunal that this was in part true. However, this fact was not dispositive for the tribunal’s abuse of process decision.

A key matter in this debate was what actions Pac Rim Cayman LLC was really complaining about: was it the failure in 2004-05 to secure the environmental and exploitation permits, was it the alleged ban allegedly announced on March 2008, or some combination thereof?

The tribunal said that, if the claim was only in respect of the 2004-05 measures, then “the Tribunal would be minded to accept the submissions of the Respondent” (para 2.82). But the tribunal went on to note that El Salvador’s ongoing communications with Pac Rim Cayman LLC after March 2005 “led the Claimant reasonably to understand that even though deadlines had been missed by these authorities, [the] applications for a permit and a concession remained under consideration by the Salvadoran authorities” (para 2.83). The Tribunal also claimed, “although there were deadlines fixed under Salvadoran law for the granting of the permits and the concession, the Claimant understood that the Salvadoran authorities themselves did not treat these deadlines as definitive…” (para 2.91)

In other words, therefore, El Salvador’s willingness to discuss the application with Pac Rim Cayman LLC should be read as tantamount to a willingness on the part of governmental authorities to break El Salvadoran law. I may have missed something, but I saw nothing to indicate the El Salvador’s authorities ever communicated that.

Of course, this conclusion still fails to establish how a CAFTA violation could have occurred, given the timing. So the tribunal elaborated a theory likening the “failure to grant a license and concession” as an ongoing “omission”:

“In the Tribunal’s view, on the particular facts of this case as pleaded by the Claimant, an omission that extends over a period of time and which, to the reasonable understanding of the relevant party, did not seem definitive should be considered as a continuous act under international law. The legal nature of the omission did not change over time: the permits and the concession remained non-granted. The controversy began with a problem over the non-granting of the permits and concession; and it remained a controversy over a practice of not granting the mining permits and concession.” (para 2.92)

The tribunal drew an analogy from another investment arbitration case (SGS v. Philippines) that involved a failure to pay a debt (an “omission lasts as long as the debt remains unpaid”) to say that a failure to grant permits was like failure to pay a debt. (para 2.93)

The tribunal made a huge error here: the difference between these two cases is that one involves a contractual obligation that was not performed (debt), whereas the Pac Rim case involved a company’s failure to qualify for a permit and a concession. Following this logic through, a company’s failure to meet a regulatory requirement in the year 1800 can constitute a “continuing omission” attributable to the government (as if it were a contract) for centuries to come, provided the government is nice enough to continue to talk about it. (This line of argument turns the Pope & Talbot case under NAFTA on its head, where Canada was held liable because a bureaucrat dealing with the firm's timber permits was unpleasant and did not engage with the investor in a manner the tribunal deemed met expected international standards.)

But none of this resolves the concrete question: how did a March 2008 speech by Saca connect to complaints that go back to 2004-05? Are these two really part of the same “continuing omission”? Is this at all credible? Luckily, Pac Rim Cayman LLC saved the Tribunal of really parsing this question on the merits, by arguing that “Claimant is alleging damages only from the period from March 2008 forward and not from any other period.” (para 2.108-2.111)

In other words, a complainant can get out of an abuse of process charge by committing an abuse of pleading. It’s like asking, “Yes, your honor, I am alleging that a denial of a permit in 1800 violated my rights, but only to the extent that my family continued to suffer from lost opportunities after the year 2012.” If this doesn’t erase the utility of abuse of process protections, I don’t know what does.

As for the rationae temporis argument, the tribunal noted that the investment protections in CAFTA do not require any new investments after CAFTA. (para 3.18) The tribunal noted that it was only considering damages from the “ongoing omission” after March 2008, at which point Pac Rim Cayman LLC was a U.S. “investor” as far as the definition in CAFTA was concerned. (para 3.37)

El Salvador had also made much of an argument that a separate CAFTA tribunal – Commerce Group v. El Salvador – had dismissed jurisdiction. The two cases related to virtually identical sets of events, and both placed much emphasis on the March 2008 Saca speech. The tribunal noted, however, that the Commerce Group case was thrown out not because El Salvador’s policies were found to be permissible under CAFTA, but because Commerce Group had not stopped pursuing local remedies in El Salvador. (para 3.43)

The rationae temporis finding raises two serious concerns about CAFTA: first, that its investment protections are afforded to investors irrespective of whether or not their investments are new or lead to economic development in the country. Second, that two tribunals can decide closely related cases in different and even contradictory ways.

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In comparison with the first and second arguments, the tribunal’s reasoning on El Salvador’s third and fourth objections was relatively straightforward.

On the denial of benefits question, Pac Rim Cayman LLC’s key witnesses admitted that they had no substantial business activities in the Cayman Islands, and that they hadn’t changed the nature of their operations when incorporating in Nevada. (CAFTA's Denial of Benefits provision sets out when the investor protections do and do not apply to specific investors. For more background on these denial of benefit or "subsidiary loophole" provisions, see the final section of this report: http://www.citizen.org/documents/tpp-investment-fixes.pdf)

Accordingly, there were no substantial business activities in the U.S. – a key requirement for CAFTA protection when denial of benefits provisions are invoked by the respondent government. (see paras 4.68-4.75) As for the ownership/control question (a second denial of benefits plank that can be used to root out claims from investors that are not meant to have protection under a given treaty), El Salvador pointed out that the Pacific Rim Mining Corp. parent company was Canadian and controlled Pac Rim Cayman LLC. Pac Rim Cayman LLC argued that many of the shareholders of Pacific Rim Mining Corp. lived in the U.S. But the tribunal noted that Pac Rim Cayman LLC had not proven that these supposed U.S. shareholders were in fact American citizens (rather than mere owners of U.S. post office boxes). (para 4.81)

On these bases, the tribunal found that El Salvador was able to deny the benefits of CAFTA to Pac Rim Cayman LLC. However, it is worth noting that these denial of benefits provisions are actually not all that strong. First, consider that Pac Rim Cayman LLC tried to rely on the fact that other members of its corporate family did have substantial business activities in the U.S.. The tribunal was not convinced, but under the tribunal’s logic, the overall claim could have proceeded had the company filed ownership papers so that its substantial U.S. subsidiaries owned Pac Rim Cayman LLC, and then listed that U.S. “parent” company as the Claimant in the CAFTA case. (As shown in the table below, if Dayton Mining Corp. or Pacific Rim Exploration Inc. was placed above Pac Rim Cayman LLC in the corporate chart, and then been listed as the Claimant in the CAFTA case.) Moreover, if Pac Rim Cayman LLC had done a better job of documenting the U.S. citizenship of the shareholders of Pacific Rim Mining Corp., the case might have also proceeded.

 

 

Table taken from here. 

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On the final objection, the tribunal noted that El Salvador’s domestic Investment Law (passed in 1999) placed essentially no nationality or other requirements that would keep an international tribunal at ICSID from interpreting and applying that law to this case. Accordingly, the Pac Rim Cayman LLC v. El Salvador case will continue, just not under CAFTA (for the time being) but under the Investment Law.

This finding is deeply unfortunate, as it illustrates how right-wing governments can undermine domestic sovereignty not only through treaties/agreements like CAFTA, but through unilaterally signing away their countries’ rights to apply and interpret domestic law. This is tantamount to an outsourcing of the most normal judicial function: interpreting and applying national law. I’m betting a lot of Salvadorans are wishing they had not voted for the Flores government in 1999 (which signed the Investment Law) and Saca a few years later (who signed CAFTA).

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In conclusion, it’s worth considering what this jurisdictional ruling leaves open: El Salvador may still be liable for costs under this CAFTA claim. It still may be found that its permitting and concession practices violate the Investment Law. It could also be found that El Salvador’s normal regulatory process should be read as a ban on mining, even when this was never announced (or at least in a timeframe to make it relevant to these cases.) And let’s just say, for the sake of argument, that El Salvador has banned mining (which the country argues it has not): all of these CAFTA cases leave open the possibility that a non-discriminatory ban on mining could constitute a trade law violation. If it weren’t for some pretty lazy corporate planning and evidence gathering by Pac Rim Cayman LLC and Commerce Group, a CAFTA tribunal might have been considering that question right now.

Moreover, if Pac Rim Cayman LLC had a bit more forethought – and bothered to better organize its corporate structure and document the nationalities of its allegedly U.S. shareholders – El Salvador could have been held liable for a CAFTA violation on the basis of a dispute that actually started before CAFTA, just because the governmental authorities were kind enough to keep speaking to the company about their permits.

Finally, Pac Rim Cayman LLC (like Commerce Group before it) may apply to have yesterday’s jurisdictional ruling annulled. In that case, a new tribunal could have a new shot at allowing the CAFTA case to go forward.

In sum, this nightmare it not over yet.