El Salvador is an impoverished country, but its citizens live above riches: the country has an estimated 1.4m ounces of gold buried underground, as well as silver and copper.

It may be surprising, then, that no mining is allowed. In 2008, after mining operations polluted the water supply in San Sebastián, sparking a clean water crisis, then-president Antonio Saca stopped issuing new mining permits. Its legislature has considered and failed to pass an official moratorium or permanent ban on mining since then, but the government has continued to deny all permit applications.

Environmentalists want to keep El Salvador mining-free. As the smallest country in Central America, and one that is densely populated, El Salvador is particularly vulnerable to environmental degradation. The outcome of a high-profile case between the country and a Canadian mining company, due any day now, may serve to move the government in one direction or another. The judgement comes at the same time that the El Salvadoran government is struggling to decide whether it should continue to protect water as a human right.

In the mid-2000s, Canada-based mining giant Pacific Rim began exploring for gold in El Salvador. The company was granted exploratory permits and was on track to receive extraction permits when the government put an official halt to mining. El Salvador wanted to wait until it could determine whether it was possible to mine without causing irreparable environmental damage.

Pacific Rim, saying it had done its due diligence on environmental impacts, pleaded with the government to reconsider. When the country wouldn’t budge, Pacific Rim sued.

That’s not as crazy as it might sound. More than 3,000 free-trade agreements govern international investor-state disputes, many with clauses that are open to interpretation when it comes to whether or not a government has violated a company’s rights. In the absence of system-wide reform, some countries have attempted to tackle this issue by introducing more specific language into free trade agreements.

“Most modern free trade agreements give significantly less room for interpretation,” Burgstaller says. “You’re seeing requirements for transparency in any tribunal proceedings, certain requirements for arbitrators used in those proceedings, including approved lists of arbitrators to choose from, and more specific language around which factors would constitute a violation of the treaty.”



While such language could improve the investor-state dispute process, Pedro Martinez-Fraga, partner and co-leader of the international arbitration team at international law firm Bryan Cave, points out that each trade agreement is still setting out its own definitions of the process, creating a complicated web of what he calls “custom international law,” that’s difficult for most governments to navigate.

The phrase “fair and equitable treatment” is used in the vast majority of trade agreements to describe what a company can reasonably expect of a host country, but each company and government has their own interpretation of what constitutes “fair and equitable”.

Any two countries entering into a bilateral treaty can decide for themselves what “fair and equitable treatment” means, completely disregarding any definitions of those terms in previous treaties if they so choose, says Pedro Martinez-Fraga, partner and co-leader of the international arbitration team at New York law firm Bryan Cave.

The majority of the trade agreements currently in place also include a clause that requires any dispute between a foreign investor and a government to be decided via international investor-state arbitration.

In the arbitration process, which is initiated by an investor, a tribunal of typically three international law experts hears arguments from both sides and then decides whether the state in question has breached either a trade agreement or its own laws – and, if so, the monetary value of that breach. In some cases, the proceedings and relevant documents are made public, but in others they are kept secret.

“I have acted in a number of [United Nations Commission on International Trade Law] cases where very little information was in the public domain and people would not know what the dispute was about and pleadings would not be known,” says Markus Burgstaller, a partner in New York law firm Hogan Lovells’ international arbitration group.

The Pacific Rim case, which has been ongoing since 2009, has been a mix of public and private. Pacific Rim initially claimed that El Salvador had violated the Central American Free Trade (Cafta) treaty. The tribunal proceedings for the case were streamed on the internet and all documents were posted to the World Bank International Centre for the Settlement of Investment Disputes website.



Then in 2012, the tribunal found that Pacific Rim, as a Canadian company, could not invoke Cafta. The company changed its claim, accusing El Salvador instead of violating its own investment law.

At that point, the arbitration proceedings became less transparent, according to Marcos Orellana, a senior attorney and director of the human rights and environment program for the Center for International Environmental Law, and a consultant on the El Salvador case.

OceanaGold, the Australian mining company that bought Pacific Rim in 2013, isn’t giving up its hopes of mining in the country. Despite the arbitration process, Andrea Atell, a spokeswoman for Oceana, says the company’s “strong preference is to negotiate an outcome to the permitting impasse”.

To that end, Atell says the company is continuing to engage with local stakeholders in El Salvador and support a range of community programs focused on education, health, sustainability and capacity building. Meanwhile, El Salvador has spent $6m arguing its case in arbitration proceedings, and is on the hook for $301m – nearly 2% of the country’s gross domestic product – if it loses.

All in favor of reform

Because they initiate arbitration, investors get to decide which set of rules they want to use: those drafted by the United Nations Commission on International Trade Law, which require less transparency, or the World Bank’s International Centre for Settlement of Investment Disputes.

Then there’s the conflict of interest inherent in a system that allows an individual to act as both an arbitrator and an attorney.



“If you sit as an arbitrator in one case where you helped develop a law and then act as counsel in another case, that may be a problem,” Burgstaller says. “The independence or impartiality of arbitrators may be compromised.”

The bigger issue for many is the lack of clarity or consistency in the language of treaties, and the role of precedents.

Charles Gordon, an arbitrator with global mediation firm Jams International, said he’d like to see binding precedents used in arbitrations, and tighter language used across treaties. “I think that the language in many treaties is too vague in respect of investor rights and existing and future treaties should have much tighter language, which would limit the range of claims that can be brought under ISDS processes,” he says.

Finally, there’s the issue of sovereign governments and their domestic laws. “Corporations are entitled to certain rights – with respect to property, for example – but only after exhausting domestic jurisdiction,” Orellana says.

Negotiating a compromise

Meanwhile, every actor in the current system has a different idea of what a better international legal system might look like. Gordon would like to see more arbitrators suggest mediation as a way of avoiding tribunal hearings altogether. Orellana would like to see both vastly improved transparency and a requirement that companies exhaust domestic legal systems before heading to international court. Martinez-Fraga envisions a centralized international investment law system, akin to the international criminal court system.

“It’s challenging to implement but much less challenging than an international criminal court, which we’ve done,” Martinez-Fraga says. “I think we are headed in that direction, but as with all aspirations, first you have to go through the pain and suffering of systems that don’t work. You need to touch bottom and have a realization of the limitations of these systems before you can gather the energy to move in a different direction.”

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