EXHIBIT 10.22
IN THE MATTER OF AN ARBITRATION
UNDER THE RULES OF ARBITRATION OF THE
INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES, THE
CENTRAL AMERICA - UNITED STATES - DOMINICAN REPUBLIC FREE TRADE
AGREEMENT AND THE FOREIGN INVESTMENT LAW OF EL SALVADOR
COMMERCE GROUP CORP, )
)
Claimant, )
)
vs. )
)
REPUBLIC OF EL SALVADOR, >
)
Respondent. )
NOTICE OF ARBITRATION
The claimants, Commerce Group Corp. and San Sebastian Gold
Mines, Inc., by their attorneys, Machulak, Robertson & Sodos, S.C.,
hereby request arbitration of a dispute with the respondent,
Republic of El Salvador, under the ICSID Convention and the ICSID
Rules of Procedure for Arbitration Proceedings, as follows:
1. This is a request pursuant to Article 36 of the Convention
on the Settlement of Investment Disputes Between States and
Nationals of Other States ("ICSID Convention"), Articles
10.16(1)(a), 10.16(l)(b), and 10.16(3)(a) of the Central America -
United States - Dominican Republic Free Trade Agreement
("CAFTA-DR"), and Article 15(a) of the Ley de Inversiones of El
Salvador ("Investment Law") for arbitration under the ICSID
Convention and the ICSID Rules of Procedure for Arbitration
Proceedings.
2. The underlying claim is a legal dispute arising directly
out of the claimants' investment. It is a dispute between a
Contracting State, El Salvador, and nationals of another Contracting
State, Commerce Group Corp. and San Sebastian Gold Mines, Inc.
3. The Republic of El Salvador is a Contracting Party to the
ICSID Convention, which it signed on June 9, 1982. The ICSID
Convention entered into force in El Salvador on April 5, 1984. The
United States of America is a Contracting Party to the ICSID
Convention. It signed the Convention on August 27, 1965 and the
Convention entered into force in the United States of America on
October 14, 1966. is a "national of another Contracting State" for
purposes of the ICSID Convention.
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4. Pursuant to Article 10.27 of CAFTA, service of this Notice
of Arbitration may be made on El Salvador using the following address:
Republic of El Salvador
Direccion de Administracion de Tratados Comerciales
Ministerio de Economia
Alameda Juan Pablo II y Calle Guadalupe, Edificio C 1-C2
Plan Maestro Centro de Gobierno
San Salvador El Salvador
5. The claimant, Commerce Group Corp. ("Commerce") is a
United States corporation organized under the laws of the State of
Wisconsin which has investments in the Republic of El Salvador.
Commerce was organized in 1962 and its common shares have been
publicly traded since 1968. Commerce's address in the United
States is 6001 North 91st Street, Milwaukee, Wisconsin 53225.
Commerce is a "national of another Contracting State" for purposes
of the ICSID Convention.
6. The claimant, San Sebastian Gold Mines, Inc. ("Sanseb") is
a United States corporation organized under the laws of the State
of Nevada on September 4, 1968 which has investments in the Republic
of El Salvador. Commerce owns 82 1/2% of the authorized and issued
common shares of Sanseb. Sanseb's address in the United States is
6001 North 91st Street, Milwaukee, Wisconsin 53225. Sanseb is a
"national of another Contracting State" for purposes of the ICSID
Convention.
7. On September 22, 1987, Commerce and Sanseb entered into a
joint venture agreement (named the "Commerce/Sanseb Joint Venture")
to formalize the relationship between them. The Commerce/Sanseb
Joint Venture is registered as an operating entity authorized to do
business in the State of Wisconsin, U.S.A. and in the Republic of El
Salvador, Central America. The joint venture agreement authorizes
Commerce to execute agreements on behalf of the Commerce/Sanseb
Joint Venture. The Commerce/Sanseb Joint Venture is a "national of
another Contracting State" for purposes of the ICSID Convention.
8. Mineral San Sebastian, S.A. de C.V. ("Misanse") is an El
Salvadoran corporation formed on May 8, 1960, reinstated on January
25, 1975 and reincorporated on October 22, 1993. Commerce owns 52%
of the authorized and issued common shares of Misanse.
9. Starting in 1968, Commerce and Sanseb have been in the
business of the exploration, development, mining, and production of
precious metals in El Salvador at the San Sebastian Gold Mine near
Santa Rosa de Lima and at other locations.
10. Commerce and Sanseb began producing gold at the San
Sebastian Gold Mine site in 1968. In February, 1978, they suspended
operations because of the war in El Salvador. The
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mill which had been constructed on site at the San Sebastian Gold
Mine was destroyed during the war. In 1985, Commerce and Sanseb
returned to San Sebastian to resume operations and were able to
re-hire many of their former employees.
11. On July 23, 1987, in a ceremony officiated by former
Presidente Napoleon Duarte, Commerce and Sanseb were awarded the
exploitation concession for the San Sebastian Gold Mine. At this
time, the Commerce/Sanseb Joint Venture entered into an agreement
with Misanse to lease the 304-acre site of the San Sebastian Gold
Mine and develop the concession.
12. In 1993, Commerce/Sanseb acquired a mill for processing
gold and silver, known as the San Cristobal Mill and Plant. This
facility is located on the Pan American Highway west of the city of
El Divisadero. Commerce/Sanseb purchased the equipment on February
23, 1993 and signed a lease for the site with CORSAIN on November
12, 1993. The equipment required extensive retrofitting. Later,
Commerce/Sanseb purchased a crushing system to be operated at the
site of the San Sebastian Gold Mine.
13. In September 1993, Commerce/Sanseb expanded its mining
interests when it acquired the El Modesto Mine located near the city
of El Paisnal and about 19 miles north of San Salvador, with a view
toward future exploration and exploitation concessions.
14. Commerce/Sanseb produced 22,710 ounces of bullion
containing 13,305 ounces of gold and 4,667 ounces of silver at the
San Cristobal Mill and Plant from March 1995 through December 31,
1999. Commerce/Sanseb suspended production intending to expand the
facility from its then existing 200-ton-per-day capacity to a
500-ton-per-day operation.
15. On September 6, 2002, at a meeting held with the El
Salvadoran Minister of Economy and the Department of Hydrocarbons
and Mines, Commerce/Sanseb agreed to cancel the concession for the
exploitation of the San Sebastian Gold Mine obtained on July 23,
1987, in exchange for a new concession. On August 18, 2003
(delivered August 29, 2003) the Ministry of Economy issued a
twenty-year concession. On May 20, 2004 (delivered June 4, 2004)
the Government of El Salvador extended the exploitation concession
for a period of thirty (30) years.
16. Commerce/Sanseb applied for and received environmental
permits to mine gold ore at the San Sebastian Gold Mine site, and
process ore at the San Cristobal Mill and Plant. On October 15,
2002, the El Salvador Ministry of Environment and Natural Resources
("MARN") issued an environmental permit under Resolution 474-2002
for the San Cristobal Mill and Plant. On October 20, 2002, MARN
issued an environmental permit under Resolution 493-2002 for the new
San Sebastion Gold Mine exploitation concession. Financial security
bonds were submitted as required. This permit was later renewed for
a three-year period with the issuance of Resolution No.
3026-003-2006 dated January 4, 2006.
17. In connection with the new San Sebastian Gold Mine
concession, Commerce/ Sanseb provided a bond to protect third
parties against any damage caused from the mining
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operations. Also, on January 14, 2003, the Company entered into an
amended and renewed 30-year lease agreement with Misanse.
18. On March 3, 2003, the Government of El Salvador granted
Commerce/Sanseb a new exploration license for a 41-square kilometer
area (10,374 acres), which surrounded the site of the San Sebastian
Gold Mine and included three other formerly-operated mines (the "New
San Sebastian Exploration License").
19. On May 25, 2004, the Government of El Salvador granted
Commerce/Sanseb a new exploration license for an additional 45
square kilometers of area (11,115 acres) to the North of and
abutting the New San Sebastian Exploration License area. This new
license area encompassed eight formerly-operated gold and silver
mines (the "Nueva Esparta Exploration License").
20. After receiving the New San Sebastian Exploration License
and the Nueva Esparta Exploration License, Commerce/Sanseb invested
resources for the exploration of these areas for precious metals
including explorations at the La Lola Mine, the Santa Lucia Mine,
the Tabanco Mine, the Montemayor Mine, and the La Joya Mine. This
was done with the expectation that Commerce/Sanseb would ultimately
receive exploitation concessions for these sites.
21. Then, on or about September 13, 2006, MARN delivered to
Commerce/Sanseb's El Salvadoran legal counsel its revocation of the
environmental permits issued for the San Sebastian Gold Mine
exploitation concession and the San Cristobal Mill and Plant,
effectively terminating Commerce/Sanseb's right to mine and process
gold and silver. This was done without justification or any
forewarning.
22. On December 6, 2006, Commerce/Sanseb's legal counsel filed
with the El Salvadoran Court of Administrative Litigation of the
Supreme Court of Justice two complaints relating to this matter, one
for the San Sebastian Gold Mine and the other for the San Cristobal
Mill and Plant. These legal proceedings have not been resolved.
23. On October 10, 2006, Commerce/Sanseb applied to MARN for
an environmental permit for its exploration in connection with the
New San Sebastian Exploration License and the Nueva Esparta License.
MARN did not respond to the request and on March 8, 2007,
Commerce/Sanseb applied to the El Salvador Ministry of Economy for
an extension of these exploration licenses, as was its right. On
October 28, 2008, the Ministry of Economy denied Commerce/Sanseb's
application citing Commerce/Sanseb's failure to secure an
environment permit.
24. On January 20, 2009, Commerce/Sanseb's legal counsel filed
a challenge in the Courts to the government's refusal to honor
Commerce/Sanseb's request to extend its exploration permits pursuant
to the terms of the 2002 permits. These legal proceedings have not
been resolved.
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25. The actions of the El Salvadoran government, through its
ministries, reflects an ongoing government policy since September
2006 to de facto deny foreign companies the right to develop mining
interests in the country of El Salvador.
26. This policy, as applied, discriminates against foreign
investment:
a. While the government of El Salvador asserts that the
current ban on gold and silver mining, and exploration
connected with such mining, stems from the government's
desire to protect the environment, the government permits,
for example, the operation of coffee beneficios which dump
liquid residue directly into rivers and other activities
which are more intrusive on the environment.
b. The government's ban on development of gold and silver
mines applies in practice exclusively to foreign companies.
c. The government does not enforce its stated policies
against native El Salvadorans engaged in gold and silver
production.
27. This policy, as applied, is arbitrary and irrational, and
has denied Commerce/Sanseb of its property rights and investment in
the country of El Salvador.
28. The government of El Salvador's continuing refusal to
permit Commerce Group to engage in any exploration or mining
activities despite proposals to ensure environmental protection and
compliance with the laws of El Salvador, is unreasonable and is in
violation of established international commerce law.
29. From 1969 forward, Commerce/Sanseb has provided
substantially all of the capital required to develop the mining
operation at the San Sebastian Gold Mine, to fund exploration, and
to acquire, refurbish and operate the San Cristobal Mill and Plant.
Commerce/Sanseb has continued to pay and incur expenses, has lost
opportunities to secure investment capital, and has been denied the
ability to develop and process an estimated 3.5 million ounces of
gold, pending its legal efforts to secure the right to develop its
investments in the Country of El Salvador. Commerce/Sanseb's
damages exceed the sum of $100,000,000.
30. By its conduct, the Republic of El Salvador has breached
its obligations under Section A of CAFTA-DR, including Article 10.3
(National Treatment), Article 10.4 (Most-Favored Nation Treatment),
Article 10.5 (Minimum Standard of Treatment), and Article 14.7
(Expropriation and Compensation).
31. Commerce and Sanseb are hereby seeking compensation from
the government of El Salvador for its losses incurred as a result of
the government of El Salvador's violation of its obligations under
CAFTA-DR with respect to treatment of foreign investors, including:
1. Payment of compensation from the government of El Salvador
to Commerce Group in an amount of not less than
$100,000,000 for its losses; and
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2. Granting of permits allowing Commerce Group to resume its
mining activities in the Country of El Salvador subject to
reasonable and appropriate environmental protection
conditions.
3. Such other relief as may be available, including payment
for the costs of these proceedings.
32. Pursuant to CAFTA Article 10.16(2), on March 17, 2009,
Commerce and Sanseb served a written notice of its intent to submit
a claim to arbitration (the "Notice of Intent") on the respondent
Republic of El Salvador. More than ninety (90) days have elapsed
between the service of this Notice of Intent and the submission of
this claim.
33. At least six (6) months have passed since the events
giving rise to the claimants' claim, as required by Section B of
CAFTA Chapter 10 (Article 10 16(3)).
34. The claimants consent to submit the present dispute to
arbitration under the auspices of ICSID in accordance with the
procedures set out in CAFTA. This Notice of Arbitration signifies
the claimants' consent pursuant to Article 10.18.2(a) of CAFTA.
35. Pursuant to Article 10.18.4 of CAFTA, the claimants affirm
that they have not previously submitted any of the breaches alleged
in the present Notice of Arbitration to any other binding dispute
resolution procedure for adjudication or resolution.
36. As required by Article 10.18.2(b)(ii) of CAFTA, the
claimants hereby waive their rights to initiate or continue any
domestic proceeding with respect to any measure alleged to
constitute a breach for purposes of the present Notice of
Arbitration. Notwithstanding the foregoing, pursuant to Article
10.18.3 of CAFTA, the claimants reserve the right to initiate or
continue any proceedings for injunctive relief not involving the
payment of damages before any administrative or judicial tribunal of
the Republic of El Salavador, for the purposes of preserving their
rights and interests during the pendency of this arbitration.
Copies of the waivers are attached as Exhibit "A" and Exhibit "B".
37. The Republic of El Salvador's consent to submit the
present dispute to arbitration under the auspices of ICSID is
contained in Article 10.17 of CAFTA, as well as in Article 15 of the
Investment Law.
38. The claimants are represented in this arbitration by their
attorneys, Machulak, Robertson & Sodos, S.C., 1733 North Farwell
Avenue, Milwaukee, Wisconsin 53202. Copies of letters authorizing
the representation are attached as Exhibit "C" and Exhibit "D".
39. In accordance with CAFTA Article 10.16(6), the claimants
hereby appoint Professor Christopher Greenwood, CMG QC, a national
of Great Britain, to serve as arbitrator in this arbitration.
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40. Mr. Greenwood's contact details are as follows:
Prof. Christopher Greenwood, CMG QC
Professor of International Law, London School of Economics
DATE OF ISSUE: MACHULAK, ROBERTSON & SODOS, S.C.
July 2, 2009
By: /s/ John E. Machulak
____________________________________
John E. Machulak
Machulak, Robertson & Sodos, S.C.
1733 North Farwell Avenue
Milwaukee, Wisconsin 53202
(414) 271-0760
machulak@lawmessage.com
SERVED ON:
Republic of El Salvador
Direccion de Administracion de Tratados Comerciales
Ministerio de Economonia
Alameda Juan Pablo II y Calle Guadalupe, Edificio C1-C2
Plan Maestro Centro de Gobierno
San Salvador - El Salvador
Ambassador Rene Antonio Leon Rodriguez
Embassy of El Salvador
1400 16th Street, NW., Suite 100
Washington, D.C. 22036
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