Environmental Regulation and Investor State Dispute Settlement Clauses
Investor state dispute settlement (“ISDS”) clauses in bilateral and regional investment treaties enable foreign corporations to sue a host country regarding regulations, policies, or court decisions. ISDS clauses were originally included in trade agreements and investment treaties in order to protect businesses that invest in foreign jurisdictions where legal and political systems are not robust. The clauses were included so that investors would have international redress in the event of an unforeseen adverse impact on their business due to political instability.
However, ISDS clauses have been utilized for a wider variety of disputes than anticipated. Most recently, ISDS clauses are being called upon by investors facing environmental regulation. One dispute, between OceanaGold and El Salvador, is currently before the International Court of Settlement of Investment Disputes (“ICSID”) and brings up interesting environmental and jurisdictional issues. Pac Rim Cayman LLC v. Republic of El Salvador (ICSID Case No. ARB/09/12).
Pacific Rim, a Canadian company, originally discovered a gold mine site (“El Dorado”) along the Lempa River in 2002. The investor-friendly Salvadoran government (since voted out of power) allegedly encouraged the company to apply for a permit. However, public concern regarding El Dorado’s impact on El Salvador’s compromised water supply slowed the process. Pacific Rim filed a complaint in 2009 against El Salvador under the ISDS clause of the Dominican Republic-Central American Free Trade Agreement (“CAFTA”). While Canada is not a member of CAFTA, Pacific Rim created a United States subsidiary in 2009. The United States is a member of CAFTA.
In 2012, ICSID ruled that the arbitration could continue due to a provision in El Salvador’s investment law. That provision has since been amended to prevent future disputes of this kind. In November 2013, the Australian company OceanaGold purchased Pacific Rim. As of today, the El Dorado mine project is banned by the Salvadoran government. Salvadoran officials state that Pacific Rim failed to get government approval for its Environmental Impact Study, did not submit a required feasibility study, and did not meet land title and permission-to-mine requirements. From September 15-22, 2014, ICSID held a hearing regarding whether El Salvador must issue a gold mining license to OceanaGold. OceanaGold seeks either a green light for the El Dorado mine project or approximately US$300 million in compensation from the Salvadoran government. An ICSID decision is anticipated in early 2015.