Taking Back the Panama Canal

An Alternative Solution to the Neutrality Treaty

and Military Intervention

 

 

“The safest road to Hell is the gradual one – the gentle slope, soft underfoot, without sudden turnings, without milestones, without signposts.”

— C. S. Lewis

 

            Panamanian Law No. 5 may be such a road.  And the Hell it leads to is Communist China’s military and economic control of the Panama Canal and the Americas at the expense of U.S. security – not abroad, but here at home.  The longer the United States waits to turn away from this path, the more difficult and costlier in treasure, and perhaps blood, it will be. 

 

Unlike C. S. Lewis’ road, however, this one has signposts that demand careful interpretation.  The words of Panamanian Law No. 5 (PL-5) are not enough: they must be judged in the context of who spoke them.  As former Chairman of the Joint Chiefs Admiral Thomas Moorer said in testimony before the Senate’s Foreign Relations Committee on June 16, 1998, “We are on what I consider to be a collision course with disaster in the very near future. . . . I truly can’t remember a time when I have been more concerned about the security of the country.”[1]

 

Summary of a Sweetheart Deal

Arrived at under clouds of corruption and bid rigging, PL-5 is a state contract whereby the Republic of Panama gives the Panama Ports Company (PPC) complete control over two strategic port facilities at each end of the Canal, Cristobal on the Atlantic and Balboa on the Pacific. The length of this “lease” is for 25 years with an automatic additional 25 year option. (See Preamble and clauses 2.1, 2.2 and 2.9.) 

 

In return for surrendering control of these key ports, Panama received 10 percent of PPC’s stock and, subject to various contingencies, $22.2 million per year. (See clauses 2.3 and 2.4.)  Panama also agreed to give PPC a 15-year option that permits the company to develop the facilities and installations of Diablo and Telfers islands, thus considerably increasing PPC’s influence over the Canal beyond the two ports. (Clause 2.1.)

 

Under the contract, PPC will perform significant and critical roles associated with running a Canal port such as handling all cargo (bulk and general), passengers, roll on-roll off, transportation, container cargo stations and any other facilities associated with the general operation. (See Preamble and Clause 2.10.) 

 

Along with that right, PPC may exercise extensive and near sovereign control over the ports, including road construction, railroad construction, fixing and charging tariff rates, fees and payment “that it considers convenient” as well as establish the size and practice of the labor force.  (See Clause 210e-w.)  PPC also has the right to operate tug boats, work boats, a vessel repair service and piloting service. (See Clause 2.10c and Clause 2.12i-j.)

 

Most significantly, PPC has the right “to cede or transfer all or part of the rights and obligations arising from [this contract] or from the activities derived from said contract” to any third party, provided such third party makes the minimal effort of registering as a Panamanian corporation. (See Clause 2.8.)

 

In short, PPC has near sovereign control over the two strategic choke points of one of the world’s most important waterways, through which passes 15 percent of all goods entering or leaving the United States, including 40 percent of U.S. grain exports and about 670,000 barrels of oil per day.[2] 

 

By any standard, Panama Ports Company acquired a sweetheart deal that gives it enormous economic benefits and leverage with even greater potential in the future. This sweetheart deal, however, may be nothing more than a Trojan Horse.

 

As with anything, the devil is in the details, and those details, beyond obscure and obtuse legalese, reveal that PPC is at best heavily influenced by, and at worst controlled by, the People’s Republic of China (PRC).  President Bill Clinton, before his aides back-peddled, admitted as much when he said in November 1999 that the Chinese are “bending over backwards to make sure that they run [the Canal] in a competent and able and fair manner.”[3] Not PPC, but China – the nation whose military has publicly declared that its future enemy is the United States “hegemon,” the nation whose top general threatened to “rain down fire” on Los Angeles, and now the nation sitting in the catbird’s seat of the Panama Canal.

 

PPC is controlled by Hong Kong multi-billionaire Li Ka-Shing who, for a businessman and self-styled capitalist, “does show up in lots of group photos with Beijing’s Communist leader.”[4] So entwined and cozy is Li Ka-Shing with the Communists that U.S. Treasury regulators, who review investments by foreigners in American companies, announced on April 28, 2003 an investigation of Li Ka-Shing’s proposed purchase of the bankrupt Global Crossing.  “Members of Congress and some government regulators have raised concerns that national security could be compromised if a Chinese company were to purchase communications networks used by the federal government, as Global Crossing’s are.”[5] Global Crossing is a high-tech fiber optic cable operator.  Rather than submit to an investigation, Li Ka-Shing, however, dropped his bid on April 30, 2003.

 

Accordingly, Panamanian Law No. 5’s clauses and giveaways must be read in view of what PPC and Li Ka-Shing are.  In that light, Law No. 5 becomes more than disturbing – it becomes frightening.  More important, it may violate American treaty rights.

 

 

           

 

The Parties Involved: Powerful Ties to Beijing

Ultimately, an agreement is measured by its parties.  A cursory look at the Panama Ports Company should give one pause; a deeper look should cause consternation.  In either case, PPC is not the sort of organization the United States can trust to operate one of the Western Hemisphere’s strategic assets.

 

            First off, PPC won the highly lucrative contract with the Panamanian government after what even Clinton Principle Deputy Assistant Secretary of State for Western Hemisphere Affairs Lino Gutierrez described as an “unorthodox” bidding process.[6]  Others are more blunt.  According to The Schlafly Report:

 

In order to cash in on the cash-rich Chinese, Panama manipulated the bidding process, holding repeated rounds of bids….. [PPC] had come in only fourth in the bidding, after the Japanese firm Kawasaki/I.T.S., the U.S. firm Bechtel, and the Panamanian American company M.I.T.  For exclusive control of the two ports, [PPC] agreed to pay $22.5 million a year plus what one Panamanian called “bucket loads of money” under the table, and Panama’s [Law No. 5] was passed on January 16, 1997 to confirm the deal.[7]

 

As then-Congressman Bob Barr of Georgia observed on the PBS News Hour, “[it's] a classic example of how [the Chinese] operate. They move in fairly slowly, pass a lot of money around and bring their people in and get them into positions of influence…”[8] At the end of these various machinations, PPC won the contract to run Balboa and Cristobal.

 

But, what is PPC? Figuring that out is likeng a Russian Matryoshka doll – the shell does not reflect what’s inside and is often surprising.  Unlike the dolls, the surprise is not amusing.

 

PPC is the Panamanian alias for Hong Kong International Terminals, otherwise known as “HIT.”  HIT, in turn, is a subdivision of the huge Hong Kong based conglomerate, Hutchinson-Whampoa Ltd. (“Hutchinson”), which operates port facilities around the world.[9]  From this point, however, the character of Hutchinson and HIT and their dealings and liaisons become murkier and more ominous.  Former Senate Majority Leader Trent Lott was not simply politically grandstanding when he described Hutchinson as “an arm of the People’s Liberation Army.”[10]

           

Li Ka-Shing is Hutchinson’s major shareholder.  He is the sixth richest man in the world with extraordinarily close ties to the Communist leadership of the PRC.[11]  Li Ka-Shing was a business and political intimate of the late Deng Xiaoping and now has the same close relationship with current PRC president Jiang Zemin.[12]  Indeed, Li Ka-Shing and Jiang Zemin’s son are jointly developing property inside Tiananmen Square for the communist government.[13]  According to an August 1999 cable from the U.S. Embassy in Hong Kong, “Li [Ka-Shing] is reputed to have a close business relationship with key figures in Beijing,” and “is a leading member of Hong Kong’s ethnic Chinese business elite, a tycoon who is no democrat.”[14]

 

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Furthermore, Li Ka-Shing is directly and deeply involved with the Chinese military through the military’s great number of front companies, such as weapons maker Poly Technologies Inc.[15] A 1997 Rand Corporation Report, documenting Li Ka-Shing’s direct business contacts with the Chinese military industry, observed, “Hutchison-Whampoa of Hong Kong, controlled by Hong Kong billionaire Li Ka-Shing, is also negotiating for PLA wireless system contracts, which would build upon his equity interest in Poly-owned Yangpu Land Development Company, which is building infrastructure on China's Hainan Island.[16]”  The Report also noted that Li Ka-Shing’s “China International Trust Investment Company (CITIC), which he formed with two leading members of the Asian Triad organized crime families, has acted as a front for Poly Technologies, Inc.” – the arms manufacturer, which is owned directly by the PLA.[17]

 

Although Poly Technologies, Ltd. was founded in 1984 as a subsidiary of CITIC, it has been exposed as the primary commercial arm of the PLA General Staff Department’s Equipment Sub-Department.[18] Poly Technologies was more recently accused of having conspired with China North Industries Corporation's representative, Richard Chen, and a number of businessmen in California to import illegally semi-automatic weapons into the United States.[19] In 1996 the Empress Phoenix, a container vessel of the China Ocean Shipping Company (COSCO) fleet, attempted to smuggle 2,000 AK-47 assault rifles into the San Francisco Bay area – resulting in the largest single seizure of illegal weapons in U.S. history.  These weapons were bound for street gangs in San Francisco and Los Angeles headed by illegal Asian immigrants.

 

Such are Li Ka-Shing’s associates and their concern for American well being.

 

Li Ka-Shing is also part owner of a firm involved in the illegal transfer of missile technology to the Chinese army.[20]  Commerce Department documents show that Li owns one-third of Asia Satellite Telecommunications Holdings, “AsiaSat,” which in turn, is partly owned by the Chinese army.[21]  AsiaSat satellites regularly carry military communications traffic for PLA units and Chinese military-owned companies.  Because of dealing with AsiaSat, U.S. defense contractor Lockheed Martin had to plead guilty to 30 counts of illegal missile technology exports, specifically “kick-motor” rocket technology, and had to pay the U.S. government $13 million in fines.[22]

 

Li Ka-Shing’s relationship with the PLA and the PRC goes deeper still.  A Senate Foreign Relations Committee report revealed that Hutchinson’s subsidiary HIT – known in Panama as the PPC – has business ventures with COSCO, the China Ocean Shipping Company, which the PLA, owns.[23] As Panamanian educator and journalist Dr. Tomas Cabal testified before Congress, “COSCO is the merchant marine for the Chinese military and has shipped weapons of mass destruction technology and delivery systems to other countries.”[24]

 

An October 1999 “Intelligence Assessment” prepared by the U.S. military Southern Command, declared that Li Ka-Shing’s containerized shipping operations “in the Panama Canal, as well as the Bahamas, could provide a conduit for illegal shipments of technology or prohibited items from the West to the PRC, or facilitate the movement of arms and other prohibited items into the Americas.”[25] Furthermore, COSCO, with its direct links to Beijing and the PLA, has participated in drug smuggling and in transporting missiles and nuclear technology to such countries as Pakistan and Iran.[26]  Possessing friendly facilities at both ends of the Canal can only aid COSCO in its illicit activities that threaten the political and social stability of the Americas.

 

Li Ka-Shing’s relationship goes beyond business alliances with the PRC and the PLA, however; they are entwined, hand in glove.  A May 14, 1997 Senate Foreign Relations Committee staff report on the privatization of the Panamanian ports identified PPC, as being 10 percent owned by China Resources Enterprise (“CRE”), which is the commercial arm of China’s “Ministry of Trade and Economic Co-operation.”[27] Then-Senator Fred Thompson described the CRE during the Senate Governmental Affairs Committee hearings as “an agent of espionage – economic, military, and political – for China.”[28] In other words, a Chinese intelligence operation is part controller of the Western Hemisphere’s strategic waterway.

 

In short, Li Ka-Shing has had a direct, long term and obviously lucrative relationship with the PRC and the PLA.  At the very least, their fortunes, if not their futures, are joined.  This means that the PRC can, and can be expected to, influence Li Ka-Shing and PPC.  According to an April 22, 1998 article from the Defense Intelligence Agency, “Li is directly connected to Beijing and is willing to use his business influence to further the aims of Chinese government.”[29] This willingness, and with it the danger, can only grow in the coming years.

 

Given Li Ka-Shing’s track record, it is no wonder the Treasury Department balked at the potential security danger his proposed purchase of Global Crossing represented.  Treasury appreciated the risks that Li Ka-Shing’s clearly antagonistic and potentially hostile “business associates” presented to national security if they gained control of U.S. technology.  And yet, ironically, this same man, his company and associates, with hardly an official protest, now occupy strategic ports in America’s most important waterway.  This situation threatens to turn the Canal from an avenue of commerce to one of social economic instability for the region.  Unquestionably, if Treasury had the right to review Law No. 5, Li Ka-Shing would not be now holding two strategic ports in Panama.

 

This does not augur well.

 

The Neutrality Treaty: American Rights Guaranteed        

               Despite Panama, Li Ka-Shing and the PRC’s machinations and intrigues, the United States, nonetheless, has rights, recognized and accepted by Panama, under the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal, (the “Neutrality Treaty”).[30]  In essence, the Neutrality Treaty holds that the United States has the right to maintain and protect its national security as to the operation of the Canal.  This right, viewed in the light of who Li Ka-Shing and PPC are, may have been violated.

               The Neutrality Treaty clearly establishes that the United States has an important national interest in the continued operation and unfettered access to the Canal.  Significantly, the Amendment to Article IV of the Neutrality Treaty specifically declares that the United States has the right to protect the Canal’s operation, including military intervention.  It states:

Under the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal (the Neutrality Treaty), Panama and the United States have the responsibility to assure that the Panama Canal will remainand secure to ships of all nations. The correct interpretation of this principle is that each of the two countries shall, in accordance with their respective constitutional processes, defend the Canal against any threat to the regime of neutrality, and consequently shall have the right to act against any aggression or threat directed against the Canal or against the peaceful transit of vessels through the Canal.

               To assure proper protection of the Canal, Article VI of the Neutrality Treaty recognizes “the important contributions of the United States of America and of the Republic of Panama to the construction, operation, maintenance, and protection and defense of the Canal.” Thus it directs that naval ships of both nations “shall, notwithstanding any other provisions of this Treaty, be entitled to transit” the Canal “expeditiously.”  The amendment to Article VI is more explicit:

The Neutrality Treaty provides that the vessels of war and auxiliary vessels of the United States and Panama will be entitled to transit the Canal expeditiously. This is intended, and it shall so be interpreted, to assure the transit of such vessels through the Canal as quickly as possible, without any impediment, with expedited treatment, and in case of need or emergency, to go to the head of the line of vessels in order to transit the Canal rapidly.[31]

 

In other words, U.S. warships have priority over all shipping in times of a national emergency.

               To drive the point home, the Conditions to the Amendment again stresses that the United States possesses the right to intervene militarily if the operation of the Canal is jeopardized.  It reads in pertinent part:

Notwithstanding the provisions of Article V or any other provision of the Treaty, if the Canal is closed, or its operations are interfered with, the United States of America and the Republic of Panama shall each independently have the right to take such steps as each deems necessary, in accordance with its constitutional processes, including the use of military force in the Republic of Panama, to rethe Canal or restore the operations of the Canal, as the case may be.

 

            The implication and interpretation of these provisions are clear: the United States and Panama recognize that the United States has crucial national interests in the Canal and, more importantly, that the United States may safeguard those interests through military intervention.

           

If the purpose of the Neutrality Treaty is American confidence in and maintenance of its security, then the Panamanian Public Law No. 5 contradicts those goals – not because of what the contract says but who does the saying.  The threat lies not in the words but in the potential abuse of power that was awarded.  As shown, Li Ka-Shing and his associates are inconsistent if not hostile to the aims of the Neutrality Treaty.

 

For example, Clause 2.8 gives PPC the right “to cede or transfer all or part of the rights and obligations arising from [this contract] or from the activities derived from said contract” to any third party.  While the U.S. would not blink an eye if PPC assigned certain rights to British Petroleum, Exxon or Bechtel, given PPC’s track record, that is hardly likely.  The concern is that PPC might name such hostile states as Iran, Libya, North Korea or France as a third party.  Such countries would be clearly hostile, if not predatory towards, American interests.  Rights such as piloting, access to docks, uses of facilities, can all be abused if Li Ka-Shing decides to do so.

 

In the end, the words and clauses of Law No. 5 are in themselves not adverse to the interests of the United States, but a party to the contract most certainly is.  Unfortunately, as recent events with Global Crossing demonstrate so glaringly, the guiding hands of PPC and Hutchinson cannot be trusted with American security interests, and yet these same people are now situated at both ends of the Panama Canal.  One can hope that Chinese interests remain purely economic, but as Benjamin Franklin observed, “[he] who lives on hope will die fasting.”  Sadly, the words of another founding Father are more appropriate: “the price of liberty is eternal vigilance.”

 

More than 100 years ago, before the Panama Canal was even built, President Rutherford B. Hayes reflected on building a canal through Central America, which at the time, the French were attempting.  Replace the word “European” with “foreign,” and his words are as prescient today as they were then.

 

The policy of this country is a canal under American control. The United States cannot consent to the surrender of this control to any European power.... The capital invested by corporations or citizens of other countries in such an enterprise must in a great degree look for protection to one or more of the great powers of the world. No European power can intervene for such protection without adopting measures on this continent which the United States would deem wholly inadmissible. If the protection of the United States is relied upon, the United States must exercise such control as will enable this country to protect its national interests.... An inter-oceanic canal across the American Isthmus ... would be the great ocean thoroughfare between our Atlantic and our Pacific shores, and virtually a part of the coastline of the United States. Our merely commercial interest in it is greater than that of all other countries, while its relations to our power and prosperity as a nation, to our means of defense, our unity, peace, and safety, are matters of paramount concern to the people of the United States.

            With Law No. 5, Li Ka-Shing, PPC and Hutchinson, the first steps down C.S. Lewis’ gradual sloping road have been taken.  It is now time to turn around.  Contracts are more than words; they are actors.  And the actors behind Law No. 5 are hostile to American Security as recognized under the Neutrality Treaty and common sense.  The situation calls for more than just vigilance – it calls for a willingness to act.

A Practical Alternative to Armed Intervention

The United States, under the terms of the Neutrality Treaty, has the right to armed intervention in Panama to safeguard its security interests in the Panama Canal. However, there is a peaceful solution – make it clear the United States is interested in contractually managing the Canal on behalf of Panama in the event the operational contract becomes “available” through expiration, cancellation or suspension. Of course, not wanting to wait a half-century for the former to happen, the key question becomes:

 

Can the Panamanian government break its contract, Panama Law No. 5, with the Panama Ports Company?

 

And has the Panama Ports Company (“PPC”) breached any obligation it owes to Panama under PL-5 that would give rise to a cause of early termination?

 

First, all sovereign states, based upon their rights to act in their publics’ welfare (i.e., a states’ police and condemnation powers), have the power to terminate contracts.  Acts of state generally cannot be challenged because of sovereign immunity. 

 

Second, the circumstances in which PL-5 came into existence indicate irregularities and potential fraud.  These factors could lead to the contract’s being void, voidable or terminated.  As previously noted, PPC won the lucrative contract PL-5 with the Panamanian government against a backdrop of allegations of bid rigging, bribery and unorthodox manipulations.

 

Third, the contract itself contains provisions that permit early termination under certain limited and prescribed situations.  Admittedly, these provisions, dealing with PPC’s bankruptcy and/or dissolution (See Clause 2.14.3.), have little practical application here.

 

Last but most importantly for breach of contract purposes, basic contractual principles still apply: parties can terminate their contract prior to the completion date if either party has failed to meet a substantial obligation under the contract.  (Under common law, only parties to the contract or third party beneficiaries have the right to bring suit for failure to perform the duties.) 

 

Again, as we have seen, under the contract PPC performs significant and critical roles associated with running a canal port. These rights under PL-5 provide PPC with wide ranging – arguably near sovereign – control at both ends of the Canal.

 

But along with that control come the responsibilities and duties PPC has to Panama as outlined in the contract – or else it’s cause for termination. So these obligations are worth examining in detail.

 

 

Key Contractual Provisions of PL-5 – PPC’s Obligations

Under the PL-5 clause 2.3.1, PPC must pay “an annual fee in the amount of [22.2 million] Balboas [Panamanian currency] payable in equal monthly payments at the end of the month, the first payment of which shall be due one month after the First Payment Date.[32]”  After six years from the first payment was due, the annual fee is to be revised based on the average of the consumer price index of the preceding five years up to a maximum adjustment of ten percent over the amount of the last annual fee paid.  Subsequent revisions will take place every five years.

 

Clause 2.3.2 directs that PPC shall also pay Panama on a monthly basis a variable amount amounting to ten percent of the gross income from all of the sources of income derived from PPC’s activities in the Existing Ports.

 

Under Clause 2.4, PPC must give Panama, in the name of the Minister of Finance, “fully paid shares equivalent to ten percent of the capital of” PPC.  In the event of increases in capital, PPC must make the necessary adjustments to ensure Panama maintains its ten percent participation in PPC.  Furthermore, Panama’s Executive Branch has the right to select a member of PPC’s Board of Directors.

PPC is also required under Clause 2.4 to make certain investments and developments in Cristobal and Balboa.  PPC has agreed to invest in these ports during the first five years of the contract no less than fifty million Balboas.  Such investment is to include self financing, financing through debts with third parties, financial leasing, operational leasing or any other source of credit that can be obtained for the purpose of investment, excluding operation and maintenance costs of the company.  PPC may invest “directly or indirectly through its subsidiaries or affiliates or any other investor or investors or through external financing through banks or other financial institutions.”   These investments shall include the following:

 

a.       condition the Port of Balboa for access by Panamax-type vessels;

b.      repairing of the cranes in the port of Cristobal to return them to their normal level of
operation, pursuant to manufacturer’s specifications (all the container
cranes shall have sufficient support equipment to have the capacity to
perform at least twenty five (25) container movements per hour/crane);

c.       PPC shall provide the additional equipment that may be necessary in
accordance with the development program of The Ports; and

d.      develop directly, indirectly, or through third parties, a passenger terminal for cruise
ships in The Ports.

Under Clause 2.6.2, PPC must advance Panama an interest-free loan in an amount of up to thirty million Balboas. This amount is to be used exclusively towards payment of the compensations of port workers displaced because of PPC’s acquisition of The Existing Port.

            Clause 2.6.3 directs PPC to establish a training program for those employees identified as necessary for the operation of the Existing Port.

            PPC is also obligated under Clause 2.7 to purchase from Panama, “free from taxes, debts and/or fees and paid in full, all of the equipment existing in The Existing Port, for the total amount of ten million Balboas.” 

            PPC’s obligations in operating and administering The Existing Ports are governed by clause 2.11. They are:

a.       initiate modernization of The Existing Ports in the first year of administration, subject to the submission of a program to be approved by the National Port Authority within thirty calendar days (and which may not be disapproved without reasonable justification);

b.      allow third parties to use The Existing Ports, in accordance with the standards and regulations of PPC, which may charge the fees it deems convenient on a commercial basis. However, when it concerns a concession previously granted by the National Port Authority for assistance or service to vessels, PPC shall determine if a fee is applicable for the additional services it may provide;

c.       apply for and obtain the necessary permits from national or municipal authorities regarding the construction of civil works in The Existing Ports and payment of the corresponding rights;

d.      allow the use of the installations in The Existing Port by United States Army vessels in accordance with The Panama Canal Treaty until the expiration of said treaty at the beginning of the year 2000, and by those vessels covered by technical assistance and cooperation international agreements, provided such use does not interfere with PPC’s daily business operations in The Existing Port.  These vessels shall be exempt from the payment of berthing and demurrage fees in The Existing Port, but PPC shall have the right to charge for the services provided at the same commercial rates applied to its clients.

e.       carry out corrective, maintenance and repair projects.  Said maintenance includes dredging projects to be conducted by PPC in the marine area of The Existing Port and the marine access to the Panama Canal (this area is detailed in Annex I, which is unavailable) that will allow PPC to charge fees for moorage and anchorage.  At PPC’s option, it may replace any facility or installation for technical and/or economic reasons.

f.        maintain The Existing Ports operating in good operating and utilization condition; and

g.       guarantee compliance of its obligations under the contract by means of a performance bond in favor of Panama in the amount of five hundred thousand Balboas.

 

Analyzing the Breach of Contract Scenario

As a threshold matter, it must be emphasized that Panama is a sovereign nation and as such, under customary international law, has legal immunity for actions that constitute legitimate exercises of its sovereign prerogatives, i.e., police power and condemnation.  See, e.g., the Foreign Sovereign Immunities Act (28 U.S.C.A. §§ 1330, 1391(f), 1441(d), and 1602 et seq.) 

          In other words, it is very likely that Panama through a legitimate exercise of its sovereign power could terminate its contract with PPC and not be held liable.  Naturally, the reasons for this termination cannot be capricious but must stem from a sovereign concern, such as defense or national well being.  After all, no nation will remain in a contract that becomes a suicide pact. 

            Accordingly, if the PPC’s behavior and its relationship to Li Ka-Shing and the People’s Republic of China are determined to be contrary to Panama’s national security interests, then Panama can easily break the agreement.  The fact that PPC has ties to the PRC is probably not enough since many nations, including this one, has entered into contractual relationships with the PRC.  A specific threat must be ascertained.

            Still, such a threat need not amount to a national security threat.  Other sovereign concerns that Panama, like all nations, must have may be used as a foundation to terminate PL-5.  For example, states have obligations to protect their population’s health and welfare.  Such broad stroke concerns (environmental, for example) may justify a variety of actions against PPC’s activities.  Accordingly, further investigation of Panama’s laws regarding sovereign immunity and powers must be done, including the question whether such sovereign termination carries with it a right of compensation to the terminated party. 

            The facts suggest other avenues that may lead to terminating PL-5.  First off, the question is raised whether Panama actually obeyed its own laws when it entered the contract with PPC.  Although PL-5 recites that the legal basis for the contract rests in Paragraph 3 of Article 195 and Article 153 of the Political Constitution of the Republic of Panama, which authorizes, respectively, the Council of the Cabinet and the Legislative Assembly, the previously cited “unorthodox” circumstances strongly suggest that the contractual process was corrupted.

            Thus, if Panama failed to follow its own procurement laws, PL-5 may be void ab initio. 

            Accordingly, it is necessary to analyze whether articles 195 and 153’s requirements were met.  If not, perhaps the State can claim that the contract was void due to fraud or lack of legal capacity.  The more time passes without protest, however, the issues of the limitations (waiving of rights because of time limitations) and latches (due to implicit consent) arise.  Again, fraud and procurement irregularities and their effect upon contractual obligations must be researched under Panamanian law.  Furthermore, under general contractual and legal principles, only parties to the contract and losing bidders may bring an action.  Panama officials could blame former officials for ‘irregularities’ in either the contract process or the passage of PL-5.

            The most straightforward route for Panama to terminate its contract with PPC is by showing that PPC breached a substantial obligation of the PL-5.  Simply stated, did PPC perform the duties as outlined above?

            Of course, the answer may not be that simple. If American contract law is any indication, not all breaches of contract necessarily lead to automatic termination.  Therefore, once it has been established that PPC has breached one or more substantial duties, that breach must be researched under Panamanian law to ascertain whether it warrants termination of a contract. 

            As indicated, PL-5’s early termination clauses, , provide little practical help.  Under limited circumstances, Panama can terminate the contract before its term, but these circumstances are outside Panama’s control or discretion. 

            Clause 2.14.3 directs that Panama may “terminate this contract if [PPC] fails to comply with the substantial obligations acquired through this contract, or in the event that any of the following administrative causes for termination occur, as specified in article 104 of Law 56 of 1995 currently in effect.”  Those administrative causes include PPC’s bankruptcy and/or dissolution. 

            Clause 2.14.4 cites reasons for early termination stemming from Force Majeure or Accident.  The contract defines Force Majeure or accident as “those events or conditions over which [PPC] has not been able to exercise a reasonable control and because of its nature, delays, restricts or impedes the appropriate compliance by [PPC] of the obligations it has contracted by virtue of this contract.” 

            In particular PL-5 defines accidental situations to include: “epidemics, earthquakes, land slides or displacements of other materials, storms, flooding, other adverse climatic conditions or any other event or act, whether or not of the type indicated, over which [PPC] is not able to exercise a reasonable control...” 

            As for cases of Force Majeure, they shall include: “wars, revolutions, insurrections, civil disturbances, blockades, embargoes, strikes, restrictions or limitations of materials necessary for the construction and operation of The Ports, closures, riots, explosings [sic], orders or instructions by any legal or de facto government, and any other causes, whether or not of the type indicated over which [PPC] is not able to exercise reasonable control....”

            Force Majeure or accidents, however, do not provide an automatic out.  Clause 2.14.4 continues, “[it] is understood that neither of the parties may claim as a Force Majeure, its own actions or omissions, or those of its agencies or branches.” (Emphasis added.)  Furthermore, “If the execution of any activity that should be carried out by virtue of this contract, is delayed or impeded because of an accidental situation or Force Majeure, then the stipulated time frame for its execution, as well as the duration of this contract, shall be extended by the same amount of time as the delay, and [PPC] shall have the right to suspend all the payments to [Panama] until the delay is over...”

            The party that is unable to comply with its obligations because of an accidental situation or Force Majeure, must notify the other party in writing as soon as possible, specifying the causes, and both parties agree to do everything that is reasonably possible to end the causes.

 

Conclusion

            Under the facts presented, there are several theoretical avenues available to Panama to terminate its contract with PPC.  First, like all sovereigns, Panama possesses the right and power to terminate contracts that contravene its national interests.  Accordingly, if PL-5 is seen to harm Panama – i.e., security, environmental, etc. – then Panama has the right to terminate the contract.  Second, PL-5 may be vulnerable because the circumstances of its creation may, in fact, have violated Panama’s laws.  And, if PPC has violated any of its significant obligations, such as maintenance and repairs, then that breach may lead to early termination.  Finally, under threat of any of the above issues, the current contract could be assigned to the United States government, or other any designee identified by the Panamanians.