When a mining company first began exploring for gold in Cabañas, a northern province of El Salvador, in 2002, locals were enticed by the promise of jobs and an infusion of cash. El Salvador, still struggling with the twin legacies of civil war and neocolonialism, needed economic development to build up civil society institutions, bolster democracy, and lift its people out of poverty. 

It did not take long, however, for local support for the company -- Canada’s Pacific Rim -- to dissipate. Pacific Rim had begun exploratory mining near the Lempa River, El Salvador’s largest water source, and those living near the river soon reported depleted and polluted water, with associated health and environmental problems. By the state’s estimate, due to mining, agricultural runoff, and poor sewage treatment, 90 percent of the country’s surface water was already contaminated. Opposition to mining quickly garnered widespread support, including from the Catholic Church and politicians across the political spectrum. By 2007, more than 62 percent of Salvadorans opposed metal mining. And in 2008, Elías Antonio Saca, president of El Salvador at the time, announced a de facto mining ban that has continued under current President Salvador Sánchez Cerén. 

Pacific Rim, for its part, said in 2009 that the El Salvador government was obligated to issue the company a mining permit anyway, as the company had already spent time and money exploring the region. The government countered that Pacific Rim had not complied with the requirements for a permit, including acquiring land titles for the area encompassing its proposed mines, obtaining the appropriate environmental authorizations, and submitting environmental impact assessments and a project feasibility study. Instead of litigating the dispute in El Salvador’s domestic courts, in 2009, Pacific Rim decided to bring suit against the government in a little-known arbitration tribunal run by the International Center for Settlement of Investment Disputes, part of the World Bank Group. As part of the ongoing suit, Pacific Rim is seeking $314 million in damages, a figure that amounts to nearly two percent of El Salvador’s GDP.

To establish that the tribunal had jurisdiction over the suit, Pacific Rim argued initially that El Salvador’s government had violated foreign investment protections under the U.S. trade treaty with Central America, the Dominican Republic–Central America Free Trade Agreement (DR-CAFTA). The tribunal dismissed this tack, however, claiming that Pacific Rim, a Canadian company, did not have standing under the agreement. Pacific Rim had transferred its subsidiary shell company from the Cayman Islands to Nevada in 2007 -- in preparation for the suit, some say, since the United States is a party to DR-CAFTA -- but the tribunal declined jurisdiction. The tribunal did, however, allow the suit to proceed under El Salvador’s now outdated investment law, which granted foreign tribunals the ability to arbitrate disputes such as this one.

The suit quickly triggered an avalanche of protest. More than 300 national and international civil society organizations, including Oxfam and the AFL-CIO, wrote an open letter to World Bank President Jim Yong Kim this April, arguing that the tribunal had allowed Pacific Rim to “undermine the public interest laws and regulatory structures in countries of the Global South.” Thousands have signed petitions demanding that Pacific Rim drop the suit, and hundreds staged protests outside the tribunal on September 15, the first day of hearings and El Salvador’s independence day.

A BROADER PROBLEM 

The Pacific Rim case is emblematic of a growing and worrisome trend: companies are increasingly using international arbitration tribunals for disputes involving extractive industries in the developing world. The Institute for Policy Studies, a Washington, D.C.–based think tank, reported that as of 2013, 169 such cases were pending at the World Bank tribunal. Of these, more than one-third were oil, mining, or gas disputes. And all of the 2012 cases were filed against developing countries -- Latin American countries in particular. Two suits against Ecuador, for example, one brought by the Occidental Petroleum Corporation, in 2012, and one by Chevron, in 2010, required the Ecuadorian government to pay nearly $2.5 billion, or roughly three percent of the country’s GDP, to the plaintiffs. A previous suit against El Salvador, this one brought by another mining company, the Commerce Group Corporation, was dismissed but nevertheless cost the country $800,000 in legal fees.

By circumventing the state’s domestic laws, this system of dispute resolution grants control of national policymaking to foreign tribunals. The tribunals cannot order a state to alter its laws, but they can award damages that are onerous for struggling economies. At the same time, legal fees, which typically run into the millions, deplete national coffers, taking away money that could have been used for other expenditures. And since corporations, which tend to be richer than the governments they sue, have the upper hand, the threat of reputational damage often puts pressure on countries to capitulate. In addition, the World Bank tribunal has faced criticism. It is not bound by precedent and is staffed by a rotating panel of three adjudicators who come with different perspectives and experiences and can issue diverging opinions on similar claims. Moreover, the proceedings are held behind closed doors, undermining transparency. International arbitration tribunals, in general, lack an appeals process to contest decisions and often enforce decisions inconsistently. 

By bringing suit via the tribunals, corporations are able to undercut a state’s rights to regulate labor, keep its citizens healthy, and protect its environment. As the Washington, D.C.–based Center for International Environmental Law argued in an amicus brief filed in the Pacific Rim case, El Salvador, in denying mining permits, acted responsibly, in accordance with its obligation to protect its citizens. In the open letter to Kim, the signatories argued that Pacific Rim used the tribunal to “subvert a democratic nationwide debate over mining and environmental health in El Salvador.” They continued: “When it comes to such issues, democratic institutions should prevail, not foreign corporations seeking to exploit natural resources.”

A decision in favor of Pacific Rim -- allowing its corporate profits to trump El Salvador’s domestic safeguards -- would set a dangerous precedent about who has the power to dictate the terms of development for emerging economies. Corporations, concerned primarily with maximizing profit, should not be able to subvert the will of sovereign countries, especially those whose poverty requires them to seek outside investment. Compounding the problem, developing countries often submit to bilateral investment treaties and free trade agreements whose terms usually grant jurisdiction to international tribunals. The dominant development orthodoxy of the past several decades has pressured countries to make concessions to attract foreign capital by implementing neoliberal reform packages, including austerity measures, privatization, and deregulation. In practice, this has often meant gutting labor, health, and environmental standards. Foreign tribunals, which further expand corporate prerogatives while limiting the ability of states to protect their citizens, are another step in the wrong direction.

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  • LAUREN CARASIK is Clinical Professor of Law and Director of the International Human Rights Clinic at Western New England University School of Law.
  • More By Lauren Carasik