Can a government sit on its hands for as long as it likes? That is a question that could be aired in an arbitration unfolding at the World Bank.

In a case that is being watched closely by legal observers, a US mining company is suing the government of El Salvador for its 'passive' refusal to issue permits that would allow a gold mining project to advance.

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Disputes between mining companies and their host countries are nothing new. When regulators introduce costly new environmental regulations or decide to levy a windfall tax on 'excess profits', investors and governments often end up in the courts or in private arbitration.

It is more unusual for a government to be sued for giving an investor the silent treatment.

But, Pacific Rim Mining Corp claims it has waited years for the government of El Salvador to issue permits required to develop a gold concession located some 65 kilometres from capital city San Salvador. The company began exploration in 2002, and applied in 2004 to begin exploiting the 'El Dorado' project. However, Pac Rim says it has been in regulatory limbo ever since.

Pac Rim turned to arbitration in 2009, pursuant to the US Central America Free-Trade Agreement (CAFTA), arguing that El Salvador’s de facto ban on mining has pushed the company to the verge of bankruptcy.

No one disputes that El Salvador has developed cold feet over mining activity in the tiny Central American country. A powerful coalition of environmental and religious groups have pressed the government to rethink its natural resources policy, pointing to the potentially catastrophic effect that a mining accident could have on the country’s rivers, which provide its drinking water supply.

One of many questions confronting arbitrators will be whether a government that sits on its hands, ostensibly to study the risks of mining activity, can be said to have 'refused' or 'rejected' a project.

If so, does this 'inaction' by the state amount to a breach of any legal protections contained in the CAFTA, including, for instance, treaty provisions that promise “fair and equitable treatment” for foreign investors?

The government questions whether Pac Rim has standing to pursue arbitration under a US treaty with Central America, given the company’s Canadian roots. Pac Rim counters that its Nevada-based subsidiary is perfectly entitled to the benefits of the US-CAFTA pact, and that the company’s Canadian roots pose no obstacle.

Arbitrators at the World Bank will convene in May for a critical set of hearings in the case. If the case is allowed to move forward, it could be another two to three years before a final ruling is issued.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com an online news service tracking and analysing legal disputes between foreign investors and host governments: http://www.iareporter.com