Glamis Gold's Chapter 11 Suit Flops Canadian mining firm's failed NAFTA complaint sets precedent. By Luke Eric Peterson Published July 22, 2009

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Attorneys at the U.S. State Department heaved a sigh of relief last month when a long-awaited NAFTA arbitration verdict was handed down in favour of the U.S. Government.

Although a Canadian mining company was on the losing end of the case, you can be sure that there was similar relief at Fort Pearson, where a small battalion of DFAIT lawyers co-ordinate Canada's defence of similar NAFTA Chapter 11 lawsuits.

If the claim had been successful, you'd be reading a lot more about it. That's because Canadian mining company, Glamis Gold, was taking aim at a set of sensitive mining regulations introduced earlier this decade in the State of California.

The regulations were designed to mitigate the environmental and aesthetic damage from open-pit metals mining by forcing miners to re-fill and re-grade certain types of mine sites. Where mines are operated near Native American sacred sites, the new regulations obliged miners to clean up after themselves.

In 2003, Glamis (now owned by Goldcorp) turned to NAFTA seeking compensation for the alleged destruction of the company's investments in California.

For a time the claim was a cause célèbre, with environmental groups and members of the Quechen indigenous community urging the NAFTA arbitration tribunal to take sufficient account of environmental protection and indigenous rights.

However, for more than a year, all had been quiet on this file—as arbitrators took their time in crafting a ruling in the case.

Then, on June 8 of this year, a doorstopper of a verdict was handed down to the parties.

Assuming that the 350-plus-page document will not be on many summer beach reading lists, it's probably safe to give away its plot.

Arbitrators crunched the numbers and found that the new California regulations increased the cost of a Glamis project in the California desert near San Diego. However, the regulations did not come close to wiping out the entire value of the project. Accordingly, the arbitrators ruled out any possibility that California (and by extension the U.S. Government) was liable for expropriating Glamis's investments.

Because Glamis could still make a buck from the project, arbitrators did not have to decide whether the NAFTA requires that companies be compensated for the value of their destroyed investments even where such losses arise at the hands of important public welfare regulations.

Arbitrators also nixed a second argument by Glamis that California regulators, as well as U.S. Government officials, regulated the project in an unfair and inequitable manner.

In a ruling that will warm the hearts of DFAIT lawyers, the arbitration panel ruled that the bar is set very high in such NAFTA claims. A company making a cross-border investment would have to show that they suffered truly shocking or egregious treatment at the hands of foreign officials before a breach of the NAFTA could be found.

This reasoning is likely to give some comfort to the Government of Canada, which faces multiple NAFTA claims from U.S. investors—several of which centre upon health or environmental regulations.

In a pair of pending arbitrations, U.S. chemical companies, Chemtura and Dow Agrosciences are suing Canada over restrictions on the agro-chemical Lindane, and the pesticide ingredient 2,4-D—and the alleged mishandling of these files by government bureaucrats.

You can be sure that lawyers for the two companies are scrutinizing the recent ruling in the Glamis case, hoping to poke holes in the tribunal's reasoning. Dow and Chemtura may take some consolation from the fact that every NAFTA claim is heard by a separate panel, and there is no formal doctrine of precedent. So, panels can, and sometimes do, disagree with each other on key issues.

While the ruling in the Glamis case could reverberate here in Canada, it may have significance for governments in Central America as well.

Both Canada and the U.S. have wrapped up NAFTA-like treaties with the countries of Central America, and U.S. and Canadian investors have begun to turn to these legal protections when running into regulatory headwinds.

Perhaps the most contentious dispute to arise thus far pits the Pacific Rim mining company against the Republic of El Salvador. Pacific Rim, which has offices in Vancouver and Nevada complains that it was encouraged to spend tens of millions of dollars exploring for gold in El Salvador, but has been in limbo because government officials refuse to rule on a key permit application. For their part, Government regulators have been under fire from environmentalists and the powerful local Catholic Church who fear potential pollution of a key waterway.

You can be sure that lawyers for Pacific Rim and El Salvador also have the Glamis v. United States arbitration verdict on their respective summer reading lists.

Even if the Glamis case ended with a whimper, its outcome and logic are sure to be parsed and debated in countless other cross-border disputes for years to come.

Luke Eric Peterson is an Embassy columnist and the Editor of Investment ArbitrationReporter.com, a news service tracking cross-border investment lawsuits.

editor@embassymag.ca