Region rues growing use of investor suits


El Tambor has drawn opposition since work on it began in 2012. (Photo by James Rodríguez)

When the Supreme Court of Guatemala in 2016 ordered the closure of the Progreso VII Derivada gold mine in the hills north of Guatemala City, activists leading a years-long struggle to halt the operation knew better than to declare victory. That’s because the owner of the mine, U.S.-based Kappes, Cassiday and Associates, had another card to play. And in December 2018, the company played it.

KCA sued the state of Guatemala for US$300 million at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), arguing that Guatemala had discriminated against the company and failed to provide security for its investment. The claim catapulted the case from the Guatemalan court system into the high-stakes world of investor-state dispute settlement, where trios of arbitrators hand down judgments that can run from millions of dollars to more than a billion. 

The claim is one of two-dozen suits brought by mining companies against Latin American states under the investor-state dispute settlement system, or ISDS, a mechanism for adjudicating conflicts that has been sewn into hundreds of trade and investment agreements worldwide since the 1990s. The growing number of such claims has raised concern among some experts that investors are abusing the once rarely utilized mechanism to squeeze governments for hefty payouts or to scale back environmental regulations. KCA’s claim against the Guatemalan state is “part of a pattern,” says Manuel Pérez-Rocha, an associate fellow of the Institute for Policy Studies in Washington, D.C. 

According to an analysis by Pérez-Rocha and MiningWatch Canada, a mining-policy watchdog, mining companies have filed 24 claims against Latin American states since 2010, and four more have threatened to sue. The pace of the litigation stands in stark contrast to the period 1998-2010, when there were only nine such claims in the region.

Many of the cases are weak, Pérez-Rocha says, but companies risk little more than legal fees and often have funding for those from outside sources such as litigation-finance companies, which take a portion of any settlement. Says Pérez-Rocha: “The companies don’t lose anything by trying.”

The dispute over the Progreso VII Derivada mine, commonly known as El Tambor, hinges on a grievance all too familiar in Latin America: indigenous communities near the mine say they were not consulted about plans for mining on their land. Indigenous communities’ rights to such consultation is protected under the International Labor Organization (ILO) Convention 169, to which Guatemala is a signatory.

The conflict began in early 2012, when Exploraciones Mineras de Guatemala (Exmingua), a local mining company owned by KCA, started construction at the El Tambor site. The mine, in the municipalities of San Pedro Ayampuc and San José del Golfo some 18 miles northeast of Guatemala City, combined open-pit and underground mining, and has projected gold resources of about 58,000 ounces.

Residents of San Pedro and San José, who live in Guatemala’s “dry belt,” a region increasingly afflicted by drought since the beginning of this century, worried that the mine would pollute and deplete their scarce water supply. Ana Sandoval, one of the leaders of the resistance, which is known as La Puya, says that the rains farmers depend on to grow corn, beans and peppers in San José have become erratic over the past few years. Some residents have wells, she says, while others rely on mains that are turned on once or twice a week. “The mine can afford to just dig deeper and deeper for water,” says Sandoval. “We can’t.”

Ongoing vigil at El Tambor
Community members blocked access to the mine in March 2012 and have maintained a 24-hour vigil ever since, sitting, eating and sleeping in their encampment in shifts. Despite the ongoing opposition, construction began in 2012 and by Dec. 2014 the mine was in “full production,” according to the company.

Over the years, activists have faced threats and riot police, and the attempted murder in 2012 of one of their leaders, Yolanda Oquelí. Protesters also have been imprisoned after being accused of attacking mine workers. In 2014, police forcibly cleared the mine entrance of demonstrators, who nevertheless have continued to maintain a presence nearby. KCA has denied asking the police or army to break up the blockade, and has called for an investigation into the shooting. 

Meanwhile, lawyers representing La Puya have filed suits in several courts. One alleged the local government had allowed KCA to build on the mining site without proper construction permits. Another said the Ministry of Energy and Mines had failed to consult with local communities as required under ILO Convention 169.

The Guatemalan Supreme Court in November 2015 provisionally suspended Exmingua’s mining license for El Tambor on grounds the government failed to carry out proper community consultations. Citing the Supreme Court ruling, the government in May 2016 suspended Exmingua’s rights to mine at El Tambor, and a month later found the company to be violating the order. The government then suspended the company’s export license in May 2016. In a raid of the mine the next month, the National Police tweeted photographs of possible Mayan artifacts amid sacks of ore. Then—also in June 2016—the Supreme Court issued a definitive suspension of Exmingua’s mining rights, at which point, Exmingua appealed the ruling before the Constitutional Court, where the case is pending.

In a May 2018 letter notifying the Guatemalan government of its intention to sue before the World Bank, KCA argues that it followed due process and that any mistakes were the fault of Guatemalan authorities. The company says it was “deprived of the use and enjoyment” of its investment and “subjected to a series of acts and omissions by the State that were arbitrary, unfair and contrary to due process” in contravention of the 2006 Dominican Republic-Central America Free Trade Agreement with the United States. 

Responding by email to questions from EcoAméricas, KCA owner Daniel Kappes said his company held “rather extensive consultations” with local communities and town hall meetings at many villages, where representatives explained the project and displayed a 3D model of the mine. Wrote Kappes: “Mining is an industry that can substantially improve the lives of the Guatemalan people, and we think people want these developments.”

But activists say that both KCA and the Guatemalan authorities knowingly shirked their obligations under ILO Convention 169 and ignored problems. In a six-page analysis published on the website of his U.S.-based consultancy before his death in 2017, Robert Moran, a geologist who specialized in water quality, called the project’s environmental impact assessment “the worst” he had seen in decades.

“They know the processes” for a consultation, says Isabel Solís, director of the Guatemala Human Rights Commission. “They don’t do them because they don’t want to.” 

Exmingua colluded with police to intimidate protesters and hired local thugs to pose as mine workers, human rights defenders and local activists say.  

“It’s pretty shocking, the level of abuses,” says Ellen Moore, International Mining Coordinator for Earthworks, an environmental nonprofit based in Washington D.C., who has monitored the case for years.  KCA, Moore says, “thought they could just steamroller people and it just spiraled.”  

Arbitration claims on rise
The fight over El Tambor is one of dozens of conflicts to erupt between mining companies and Latin American communities as investors chase the region’s valuable mineral deposits. The Observatory of Mining Conflicts in Latin America, an anti-mining collective based in Chile, puts the number of active conflicts in the region at 259, with the bulk concentrated in Mexico, Chile, Peru, Argentina and Colombia.

More such conflicts are leading to claims for arbitration, experts say. The number of cases is still low, but it is growing. In the past three years there have been six claims filed against Colombia; two against Mexico; two against Panama; and one each against Bolivia and Uruguay. The uptick comes as the United States and Canada phase out arbitration under their new trade agreement with Mexico, and concerns about the ISDS system have prompted discussions of reform in Europe and at the United Nations. 

Both wealthy and poor countries that have been stung by arbitration claims are dropping out of investment treaties that allow investors to sue. India has said it will terminate bilateral investment treaties with dozens of countries, and nations including Venezuela, Bolivia, South Africa and Indonesia have said they will do the same. 

Some countries are simply tired of being sued, experts say. Others worry that the system, with its closed-door tribunals, is not transparent, and that the arbitrators—lawyers who often represent international companies—are not impartial. 

“The concerns have never been greater than they are now,” says Nathalie Bernasconi-Osterwalder, an expert in economic law at the International Institute for Sustainable Development in Geneva. 

The United States-Mexico-Canada Agreement (USMCA)—unveiled in October as the successor to the North Atlantic Free Trade Agreement (Nafta)—phases out the use of the investor-state dispute mechanism for the U.S. and Canada. But the accord leaves a window for ISDS to be used in certain disputes between Mexico and the United States. The decision to drop the dispute-settlement system from USMCA is consistent with the Trump administration’s desire to keep American capital at home, says Bernasconi-Osterwalder. The administration, she says, sees no sense in being exposed to lawsuits from Canada and Mexico just so U.S. companies can invest more safely in those countries. 

Kathleen Claussen, a trade and investment expert at the University of Miami School of Law, says those advocating wholesale rejection of the investor-state dispute-settlement system overlook its importance in fostering a secure environment for foreign investors. But critics argue the system is being abused. While governments’ enthusiasm for ISDS may be waning, investors are making greater use of the system. Companies have filed an average of 61 claims for arbitration worldwide each year since 2010, compared to 35 per year in the previous decade, according to the United Nations Conference on Trade and Development.  

This is in spite of the fact that investors lose more cases than they win, notes Krzysztof Pelc, an associate professor of political science at McGill University in Montreal. Investors seem motivated more by the promise of deterring regulation than the prospect of a settlement, he says. 

In Colombia, for instance, the decision in 2016 by the Constitutional Court to ban mining in the country’s high-lying wetlands, or páramos, has prompted three claims for international arbitration. Galway Gold and Red Eagle Exploration, both Canadian mining companies with mining interests in the Vetas district of northern Colombia, sued the Colombian government for $196 million and $40 million respectively in 2018; Eco Oro, a Canadian mining company with concessions to mine in the Santurbán region of northern Colombia, filed a claim for $764 million in 2016. The cases are pending.
Awards for future profits
Meanwhile, the legal concept of “indirect expropriation,” which allows investors to seek compensation not only for sunk costs, but also for the loss of future profits, has in some cases led to awards of staggering size. A tribunal in 2016 ordered Venezuela to pay Canadian mining company Crystallex US$1.2 billion for cancelling the company’s contract to operate a huge gold mine in the country’s southeast. On the other hand, a tribunal in 2017 ordered Peru to pay Canadian mining company Bear Creek US$18 million, based on sunk costs, for revoking a mining license due to civil unrest. Bear Creek had sued, based on projected profit, for US$522 million. 

The possibility of suing for projected profits has engendered speculative claims, says Pérez-Rocha. According to his analysis, more than half the mining companies suing Latin American countries—for sums that range from $94 million to over $16 billion—have yet to begin mining. In the case of El Tambor, the prospect of losing $300 million apparently rattled the Guatemalan government. The Ministry of Energy and Mines did not return calls seeking comment, but Economy Minister Acisclo Valladares told a congressional hearing in February that the government saw the KCA case as “a risk” and “an uphill struggle.”

Environmentalists and rights activists, meanwhile, question Guatemalan President Jimmy Morales’ commitment to defend decisions made by his country’s judiciary. The president clashed with Guatemala’s Constitutional Court in January when it blocked his order to expel the UN-sponsored International Commission Against Impunity in Guatemala, which investigated high-level cases of corruption and has accused Morales of campaign-finance violations. He chided the Constitutional Court publicly, and called its decision to halt mining and hydroelectric projects an “abuse of power,” according to news reports. 

Environmental activists worry that if Guatemala settles with KCA to avoid arbitration or lets the company reopen the mine, other claims will follow. Conflicts in the mining sector have multiplied in recent years as the country has tried to exploit reserves of silver, gold, copper, cobalt, nickel, zinc and other metals. 

The Supreme Court in July 2018 suspended the license of Tahoe Resources, a Canadian mining company, to operate the Escobal silver mine—one of the world’s largest—about 50 miles southeast of Guatemala City. The court ruled that the mine must remain closed until the nearby Xinca community has been adequately consulted, a decision upheld in September by the Constitutional Court. Ahead of those rulings, the International Law Institute, a U.S.-based educational nonprofit run by Georgetown University, submitted an amicus brief to the Guatemalan Constitutional Court signaling that Tahoe might take the case to international arbitration, according to press reports. 

The University of Miami’s Claussen says that while the arbitration system is imperfect, governments need not fear arbitration if they have followed the law. “The company should not win when the country is doing everything right,” she says. The problem with a case like KCA’s, say activists and experts, is that both parties are in the wrong. The government can be faulted for approving a shoddy impact study and failing to ensure proper community consultation, they say. And the company, they assert, can be blamed as well for the inadequate consultation and also for mining when its license had been suspended. And if KCA prevails, the price will be paid by Guatemalan taxpayers. The possibility that the government would let the company resume mining is a worry, they say. 

“If the government lets the company back in, it would have to do so with all the correct procedures,” says Solís. “Without those, the conflict will just get worse.”

- Victoria Burnett

Index Photo: Banner placed by mining opponents at El Tambor reads: “Life is worth more than gold. No to mining.” (Photo by Jen Moore, MiningWatch Canada)

Nathalie Bernasconi-Osterwalder
International Institute for Sustainable Development (IISD)
Geneva, Switzerland
Tel: +(41 22) 917-8683
Kathleen Claussen
School of Law
University of Miami
Miami, FL, United States
Tel: (305) 284-6646
Ellen Moore
Washington, D.C., United States
Tel: (202) 887-1872
Krzysztof Pelc
McGill University
Montreal, Canada
Tel: (514) 398-4400
Manuel Pérez-Rocha
Institute for Policy Studies
Washington, D.C., United States
Tel: (202) 234-9382
Isabel Solís
Guatemalan Human Rights Commission
Guatemala City, Guatemala
Documents & Resources
  1. Exmingua Environmental Impact Assessment: Link

  2. KCA’s notice of intent to file: Link

  3. Summary of KCA claim: Link