In a decision on jurisdiction issued on 1 June 2012, an arbitral tribunal composed of Professor Brigitte Stern, Dr. Guido Santiago Tawil and V.V. Veeder Q.C. (the “Tribunal”) declined jurisdiction over claims brought by Pac Rim Cayman LLC (“Pac Rim Cayman”) against the Republic of El Salvador (“El Salvador”) under the Dominican Republic-Central America-United States Free Trade Agreement (“CAFTA”). However, the Tribunal upheld its jurisdiction over Pac Rim Cayman’s claims under El Salvador’s investment law (the “Investment Law”). This means that the proceedings will move to the merits phase. The dispute is being heard under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID”).
In April 2002, Pacific Rim Mining Corporation, a Canadian company, merged with Dayton Mining Corporation, also Canadian, thereby acquiring the latter’s wholly owned El Salvadorian operating company, which was thereafter renamed Pacific Rim El Salvador. Pacific Rim El Salvador held mineral exploration rights in various licensed areas in El Salvador. In November 2004, Pacific Rim Mining Corporation vested sole ownership rights in Pac Rim El Salvador in its subsidiary, Pac Rim Cayman, a company incorporated in the Cayman Islands and the Claimant in this case.
In 2004, Pac Rim Cayman discovered substantial gold ore deposits in El Salvador and it applied for the necessary exploitation licenses and environmental permits to extract the gold. According to Pac Rim Cayman, the El Salvadorian Mining Authority failed to grant these licenses and permits in due time, notwithstanding the fact that all conditions were fully satisfied, and thereafter ceased all official communications with Pac Rim Cayman.
In March 2008, El Salvadorian President Elías Antonio Saca González (“President Saca”) publicly announced an upcoming reform of the legal framework that regulates mining operations in El Salvador. Pac Rim Cayman cited President Saca’s speech as evidence to show that El Salvador intentionally delayed issuing the required authorisations to stop Pac Rim Cayman’s mining operations. Consequently, in April 2009, Pac Rim Cayman initiated ICSID arbitration proceedings under both CAFTA and the Investment Law.
El Salvador’s Jurisdictional Objections
Following the Tribunal’s decision of 2 August 2010 in which it rejected El Salvador’s preliminary objections, El Salvador submitted further objections to jurisdiction under ICSID Arbitration Rule 41(1). El Salvador requested that the Tribunal dismiss the arbitration claims on four grounds, each of which touched on the issue of Pac Rim Cayman’s corporate restructuring in December 2007:
Pac Rim Cayman committed an abuse of process by changing its nationality on 13 December 2007, when it registered in Nevada, USA;
El Salvador validly denied benefits of CAFTA to Pac Rim Cayman under Article 10.12.2 CAFTA;
Pac Rim Cayman did not qualify as an investor of a party to CAFTA and the measures allegedly in breach of CAFTA predated both Pac Rim Cayman’s change of nationality and CAFTA’s entry into force;
The Investment Law did not contain El Salvador’s consent to ICSID arbitration and Pac Rim Cayman did not qualify as a foreign investor under the Investment Law.
The Tribunal’s Decision
Denial of benefits
The dispositive CAFTA provision on the question of the Tribunal’s jurisdiction over the CAFTA claims was CAFTA Article 10.12.2, which permits a CAFTA party to deny the benefits of CAFTA protection, including access to ICSID arbitration, to an investor that:
“[H]as no substantial business activities in the territory of any Party, other than the denying Party, and persons of non-Party, or of the denying Party, own or control the enterprise [making the investment]”.
This is the first time an arbitral tribunal has been called upon to interpret the denial of benefits provision of CAFTA. The Tribunal determined that CAFTA Article 10.12.2 required El Salvador to establish two conditions:
that Pac Rim Cayman had no substantial business activities in the territory of the USA; and
that Pac Rim Cayman was either owned or controlled by persons of a non-CAFTA party.
As to the first condition, Pac Rim Cayman argued that it did have substantial business activities in the USA, whether considered separately as a single holding company managed from Nevada or as part of a group of Nevada-based companies. The Tribunal rejected this approach, reasoning that “the relevant question [was] whether [Pac Rim Cayman] by itself had substantial business activities in the USA from 13 December 2007 onwards.” Pac Rim Cayman could thus not “aggregate to itself the separate activities of other natural or legal persons to increase the level of its own activities”.
Based on the evidence adduced in the proceedings, the Tribunal concluded that Pac Rim Cayman did not have any substantial business activities whatsoever and was “a passive actor both in the USA and the Cayman Islands both before and after December 2007, with no material change consequent upon its change of nationality.” The Tribunal clarified that traditional holding companies could still meet the conditions set out in CAFTA. However, in this case, it was the particularly tenuous scale of Pac Rim Cayman’s activities which 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” (e.g. no bank account, employees or board of directors).
As to the second condition set out above, Pac Rim Cayman argued that this was met because the ultimate owners and controllers of Pac Rim Cayman were persons of the USA, who owned a majority of the shares in Pacific Mining Corporation (the Canadian parent). El Salvador countered that the fact that the ultimate owners or controllers of Pac Rim Cayman had postal addresses in the USA was insufficient for them to qualify as persons of the USA under CAFTA. CAFTA Annex 2.1 provides that for the USA, natural persons mean nationals of the USA, i.e. American citizens or persons who owe permanent allegiance to the USA, as per the requirements of the US Immigration and Nationality Act.
The Tribunal accepted El Salvador’s application of CAFTA Annex 2.1 and held that Pac Rim Cayman was owned by Pacific Rim Mining Corporation, a Canadian entity. The Tribunal thus avoided discussing whether it was appropriate to pierce the corporate veil in order to find indirect control by American investors.
Jurisdiction under the El Salvador Investment Law
El Salvador asserted that the Investment Law’s dispute resolution clause (Article 15) did not provide proper consent to ICSID arbitration. El Salvador also contended that the waiver provision of CAFTA precluded Pac Rim Cayman from bringing claims under the Investment Law in tandem with its CAFTA claims.
The Tribunal focused its analysis on the wording of the Investment Law to conclude that it provided foreign investors with a clear and unambiguous option to submit disputes over their investments in El Salvador to either the local courts or ICSID.
As to the waiver issue, the Tribunal found “no juridical difficulty in having an ICSID arbitration based on different claims arising from separate investment protections”.
This is the first decision by an arbitral tribunal on the application of CAFTA Article 10.12.2. It also offers a reminder of the dangers of belated corporate restructuring in order to benefit from investment treaty protection. Any such restructuring must take place before any dispute with the host State has arisen.
In addition, the case brought up what was referred to by the Tribunal as “an uncomfortable controversy”: the submission of a witness statement by one of El Salvador’s own counsel. He submitted a witness statement to support his client’s contention that Pac Rim Cayman was already contemplating ICSID arbitration prior to its December 2007 restructuring. He testified that during a business lunch in November 2007, Pac Rim Cayman’s counsel had told him that “if El Salvador did not grant the concession, they would start ICSID arbitration against El Salvador.” However, the Tribunal’s application of CAFTA Article 10.12.2 obviated the need to reach a decision on this “uncomfortable” issue.