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NAFTA—arbitration—scope ofjurisdiction to arbitrate—requirement of transparency—expropriation resulting from withholding governmental permits and imposing new environmental restrictions— damages for expropriation—enforcement of arbitral award

Published online by Cambridge University Press:  27 February 2017

Bernard H. Oxman  and
William S. Dodge
William S. Dodge
Affiliation:
University of California, Hastings College of the Law
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Extract

Metalclad Corporation v. Mexico. ICSID Case No. ARB(AF)/97/l. 40 ILM 36 (2001), available at <http://www.worldbank.org/icsid/cases/awards.htm>.

NAFTA Chapter 11 Arbitral Tribunal, August 30, 2000.

Mexico v. Metalclad Corporation. 2001 B.C.S.C. 664, available, at <http://www.courts.gov.be.ca>.

Supreme Court of British Columbia, May 2, 2001.

In 1993, Metalclad Corporation purchased the Mexican company Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (COTERIN) in order to build and operate a hazardous-waste transfer station and landfill in Guadalcazar, San Luis Potosi. Although the federal government of Mexico and the state government of San Luis Potosi had granted COTERIN permits to construct and operate the landfill, the municipality of Guadalcazar denied a municipal construction permit, and the governor of San Luis Potosi subsequently declared an area encompassing the landfill to be an ecological reserve.

Type
International Decisions
Information
American Journal of International Law , Volume 95 , Issue 4 , October 2001 , pp. 910 - 919
Copyright
Copyright © American Society of International Law 2001

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References

1 North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 ILM 289 & 605 (1993) [hereinafter NAFTA].

2 Metalclad Corp. v. Mexico (NAFTA Ch. 11 Arb. Trib. Aug. 30, 2000), 40 ILM 36 (2001), at <http://www.worldbank.org/icsid/cases/awards.htm> [hereinafter Arbitral award]. The members of the arbitral tribunal (Tribunal) were Elihu Lauterpacht (president), Benjamin R. Civiletti, and José Luis Siqueiros.

3 Mexico v. Metalclad Corp., 2001 B.C.S.C. 644 (B.C. Sup. Ct. May 2, 2001), at <http://www.courts.gov.bc.ca> [hereinafter Supreme Court judgment].

4 Arbitral award, supra note 2, paras. 28–36, 40 ILM at 41–42.

5 Id., paras. 37–56, 40 ILM at 42–44.

6 Id., paras. 58–63, 40 ILM at 44.

7 Id., para. 73, 40 ILM at 47. See NAFTA, supra note 1, Art. 105, 32 ILM at 298 (“The Parties shall ensure that all necessary measures are taken in order to give effect to the provisions of the Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments.”).

8 NAFTA, supra note 1, Art. 1105 (1), 32 ILM at 639.

9 Id., Art. 102(2), 32 ILM at 297.

10 Arbitral award, supra note 2, para. 70, 40 ILM at 46 (citing NAFTA, 102(l)(c)). The text of Article 102(1) provides, in relevant part: “The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most–favored–nation treatment and transparency, are to . . . (c) increase substantially investment opportunities in the territories of the Parties . . . .” NAFTA, supra note 1, Art. 102(1), 32 ILM at 297. The Tribunal also quoted paragraph 6 of NAFTA’s preamble, which says that the parties resolve to “ENSURE a predictable commercial framework for business planning and investment, ” and Article 1802 (1), which provides that “[e]ach Party shall ensure that its laws, regulations, procedures and administrative regulations of general application respecting any matter covered by this Agreement are promptly published or otherwise made available in such a manner as to enable interested persons and Parties to become acquainted with them.” See Arbitral award, supra note 2, para. 71, 40 ILM at 46.

11 Arbitral award, supra note 2, para. 76, 40 ILM at 47.

12 Id., 40 ILM at 47.

13 Id., para. 80, 40 ILM at 48.

14 Id., paras. 82–86, 40 ILM at 48. The Tribunal also inferred from the municipality’s challenge of the Convenio that the municipality itself lacked confidence in its right to deny permission for the landfill solely by denying a municipal construction permit. Id., para. 94, 40 ILM at 49.

15 Id., paras. 86–87, 90–93, 40 ILM at 48–49. The Tribunal stated that its conclusion was not affected by the “environmental measures” provision of Article 1114. See NAFTA, supra note 1, Art. 1114(1), 32 ILM at 642 (“Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.”). The Tribunal reasoned that” [t]he conclusion of the Convenio and the issuance of the federal permits show clearly that Mexico was satisfied that this project was consistent with, and sensitive to, its environmental concerns.” Arbitral award, supra note 2, para. 98, 40 ILM at 49.

16 Arbitral award, supra note 2, para. 88, 40 ILM at 49.

17 NAFTA, supra note 1, Art. 1110(1), 32 ILM at 641 (“No party may directly or indirectly nationalize or expropriate an investment of an investor of another party in its territory or take a measure tantamount to nationalization or expropriation of such an investment... except: (a) for a public purpose; (b) on a non–discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation . . . .”).

18 Arbitral award, supra note 2, para. 103, 40 ILM at 50.

19 Id., para. 104, 40 ILM at 50.

20 Id., para. 107, 40 ILM at 50. The Tribunal found this case similar to Biloune v. Ghana Investments Centre, 95ILR 183, 207–10 (1989/90), in which the tribunal had found an indirect expropriation caused by a stop-work order based on the absence of a building permit when the investor had justifiably relied on the representations of a government-affiliated entity in beginning construction. Arbitral award, supra note 2, para. 108, 40 ILM at 50–51.

21 Arbitral award, supra note 2, paras. 109–11, 40 ILM at 51. Mexico argued that the decree was outside the Tribunal’s jurisdiction because it was enacted after the Notice of Intent to Submit a Claim was filed. The Tribunal, however, found that Metalclad’s claims regarding the decree were properly presented under Article 48 of the Additional Facility Rules of the International Centre for Settlement of Investment Disputes (ICSID), at <http://www.worldbank.org/icsid/facility/facility.htm>, which allows the addition of ancillary claims not later than the claimant’s reply. Arbitral award, supra note 2, paras. 64–69, 40 ILM at 45–46. “A contrary holding, ” the Tribunal noted, “would require a claimant to file multiple subsequent and related actions and would lead to inefficiency and inequity.” Id., para. 67, 40 ILM at 46.

22 Arbitral award, supra note 2, para. 111, 40 ILM at 51.

23 Id., para. 113, 40 ILM at 51.

24 Id., para. 121, 40 ILM at 52. Metalclad had claimed approximately $90 million in damages under a discounted cash-flow analysis. Id., para. 114, 40 ILM at 51.

25 Id., para. 122, 40 ILM at 52. The Tribunal subtracted amounts invested by Metalclad prior to 1993, the year COTERIN was purchased, id., para. 125, 40 ILM at 53, and “bundled” costs incurred on other sites in Mexico, id., para. 126, 40 ILM at 53.

26 Id., para. 128, 40 ILM at 53.

27 Id., para. 131, 40 ILM at 54.

28 Id., para. 11, 40 ILM at 38.

29 R.S.B.C. 1996, c. 233 [hereinafter ICAA].

30 UN Doc. A/40/17, Annex 1 (1985), reprinted in 24 ILM 1302 (1985). See Supreme Courtj udgmen t, supra note 3, paras. 39–56.

31 Supreme Court judgment, supra note 3, para. 46.

32 Id., para. 44. Justice Tysoe relied on Section 1(6) of the ICAA, which provides that “[a]n arbitration is commercial if it arises out of a relationship of a commercial nature including, but not limited to, the following: . . . (p) investing.” Supreme Courtjudgment, supra note 3, para. 41. He also relied on the UNCITRAL report on its Model Law on International Commercial Arbitration: “ [t]he term ‘commercial’ should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature.” Supreme Courtjudgment, supranote 3, para. 43 (quoting UN Doc. A/40/17, 24 ILM at 1302 n.**). He rejected Mexico’s argument that the award should be governed instead by British Columbia’s Commercial Arbitration Act, which would have allowed the court to review issues of law decided by the Tribunal. Id., para. 39.

33 Supreme Courtjudgment, supra note 3, paras. 53–54. In Canada, the pragmatic and functional approach applies tojudicial review of domestic administrative tribunals. See Pushpanathan v. Canada, [1998] 1 S.C.R. 982. Canada sought leave to intervene because, as a party to NAFTA, it has an interest in NAFTA’s interpretation.

34 Supreme Courtjudgment, supra note 3, para. 67; see id., para. 50.

35 Id., para. 72.

36 See S. D. Myers, Inc. v. Canada, Partial Award (NAFTA Ch. 11 Arb. Trib. Nov. 13, 2000), at <http://www.dfaitmaeci.gc.ca/tna-nac/NAFTA-e.asp>.

37 Pope & Talbot, Inc. v. Canada, Merits, Phase 2 (NAFTA Ch. 11 Arb. Trib. Apr. 10, 2001), at <http://www.dfaitmaeci.gc.ca/tna-nac/NAFTA-e.asp>.

38 Supreme Courtjudgment, supra note 3, paras. 60–65. See NAFTA, supra note 1, Art. 1105 (1), 32 ILM at 639 (“Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.”)

39 Supreme Court judgment, supranote 3, para. 62. Onjuly 31, 2001, the NAFTA parties exercised their authority under Article 1131 (2) to issue a binding interpretation of Chapter 1 l’s text. This interpretation confirms both that ‘“fair and equitable treatment’ . . . do[es] not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment, ” and that” [a] determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).” NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, at B(2)–(3) (July31, 2001), at <http://www.dfait-maeci.gc.ca/ma-nac/NAFTA-Interpr-e.asp>.

40 Supreme Courtjudgment, supra note 3, para. 68.

41 Id., para. 71.

42 Id., para. 78. Justice Tysoe also found that the Tribunal did not independendy rely on the award in Biloune v. Ghana Investments Centre, 95 ILR 183 (1989/90), and that Biloune was distinguishable. Supreme Courtjudgment, supra note 3, para. 80.

43 Supreme Court judgment, supra note 3, paras. 81–105. Justice Tysoe agreed with the Tribunal that Article 48 of the ICSID Additional Facility Rules, supra note 21, allowed Metalclad to add this claim after submitting its claim to arbitration. Id., paras. 86–91.

44 Supreme Court judgment, supra note 3, para. 99; see supra note 18 and accompanying text.

45 Supreme Court judgment, supra note 3, para. 99.

46 Id., para. 100. Mexico had argued that the court could set aside an award under the ICAA if the award was “patently unreasonable.” While expressing some doubt about whether the domestic “patendy unreasonable” test applied under the act, Justice Tysoe found it unnecessary to decide the question because the Tribunal’s decision was not “patently unreasonable.” Id., para. 97.

47 Mexico alleged that Metalclad had bribed a Mexican federal official, one of its chief witnesses, regarding representations that Mexican federal officials made to Metalclad, and that Metalclad had tried to deceive the Tribunal by claiming as damages expenses unrelated to the landfill. Justice Tysoe found that the first allegation had not been proven, id., paras. 110–12, and that the Tribunal had not relied on the unrelated expenses in making its award, id., paras. 113–17.

48 Article 53 (1) of the ICSID Additional Facility Rules, supra note 21, states: “The award shall be made in writing, shall deal with every question submitted to the Tribunal and shall state the reasons upon which it is based.” Rejecting Mexico’s reliance on annulment–committee decisions interpreting an analogous provision in the International Convention on Settlement of Investment Disputes Between States and Nationals of Other States, Mar. 18, 1965, 17 UST 1270, 575 UNTS 159 [hereinafter ICSID Convention], Justice Tysoe said that “[i]t is not reasonable to require the tribunal to answer each and every argument which is made in connection with the questions which the tribunal must decide.” Supreme Courtjudgment, supra note 3, para. 122. He further noted that setting aside an award under the ICAA was discretionary and that, because Mexico had failed to ask the Tribunal itself to address questions omitted from the award (as permitted by Article 58 of the ICSID Additional Facility Rules), he would not exercise his discretion to set the award aside on that basis. Id., paras. 131–32.

49 Supreme Court judgment, supra note 3, paras. 134–35.

50 Id., para. 137.

51 Metalclad Corp., Press Release (May 24, 2001).

52 Metalclad Corp., Press Release (June 13, 2001).

53 Shortly after the Metalclad Award, a second NAFTA tribunal found a breach of “fair and equitable treatment” in S.D. Myers, Inc. v. Canada. See supra note 36 and accompanying text.

54 United Nations Centre on Transnational Corporations, Bilateral Investment Treaties 41–45(1988). The obligation of fair and equitable treatment is also found in Article 1 of the Organization for Economic Cooperation and Development Draft Convention on the Protection of Foreign Property, 7 ILM 117, 119 (1968) (“Each party shall at all times ensure fair and equitable treatment to the property of the nationals of other Parties.”). The commentary to Article 1 states: “The phrase ‘fair and equitable treatment’, customary in relevant bilateral agreements, indicates the standard set by international law for the treatment due by each State with regard to the property of foreign nationals.” Id. at 120.

There has been some dispute about whether the provision for “fair and equitable treatment” in bilateral investment treaties extends beyond the protections of customary international law. F. A. Mann maintained that it did, and opposed efforts to equate “fair and equitable treatment” with an international minimum standard. Mann, F. A., British Treaties for the Promotion and Protection of Investments, 52 Brit. Y.B. Int’l L. 241, 244 (1981)Google Scholar, reprinted in F. A. Mann, Further Studies in International Law 234, 238 (1990) (“The terms ‘fair and equitable treatment’ envisage conduct which goes far beyond the minimum standard and afford protection to a greater extent and according to a much more objective standard than any previously employed form of words.”). The NAFTA parties, however, have now clarified that as used in Article 1105, the phrase “fair and equitable treatment” does not go beyond the requirements of customary international law. See supra note 39.

55 See supra note 10 and accompanying text. This analysis reminds one of the World Trade Organization (WTO) Appellate Body’s interpretation in United States—Import Prohibition of Certain Shrimp and Shrimp Products, WTO Doc. DS58/AB/R (1998), reprinted in 38 ILM 118, 172–74 (1999), of Article XX’s similarly general phrase “arbitrary discrimination” as requiring transparency in light of other provisions of the General Agreement on Tariffs and Trade. See generally Gregory, Shaffer, Case Report: United States—Import Prohibition of Certain Shrimp and Shrimp Products, 93 AJIL 507 (1999)Google Scholar.

56 Supreme Court judgment, supra note 3, para. 67; see supra notes 35–41 and accompanying text.

57 Supreme Court judgment, supra note 3, para. 62.

58 Supreme Court judgment, supra note 3, paras. 68–72.

59 Article 1105 provides: “Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” 32 ILM at 639. The Tribunal’s discussion strongly suggests that it read “international law” to include treaty law, see, e.g. Arbitral award, supra note 2, paras. 70–71, 40 ILM at 46; id., paras. 74–76, 40 ILM at 47, but the award never addresses the issue explicitly. Onjuly 31, 2001—after both the Tribunal’s award and Justice Tysoe’sjudgment—the NAFTA parties issued an Article 1131 (2) interpretation of Article 1105, limiting it to violations of customary international law, see supra note 39.

60 Cf. Supreme Courtjudgment, supra note 3, para. 99 (noting that “the definition of expropriation is a question of law with which this Court is not entitled to interfere under the International CAA”).

61 Id., para. 68.

62 See, e.g., Amco v. Indonesia (Resubmitted Case) (1990), 1 ICSID Rep. 569, 604–05 (1993) (holding that procedural irregularities in the revocation of an investment license made the revocation unlawful regardless of whether substantive grounds for its revocation might have existed); Biloune v. Ghana Investments Centre, 95 ILR 183, 207–10 (1989/90) (holding that Ghana could not rely on the absence of a building permit where the investor had justifiably relied on government representations that no permit was necessary); Owners of the Tattler (United States) v. Great Britain, 6 R.I.A.A. 48, 49–51 (1920) (holding that a lack of clarity in Canadian laws governing the licensing of U.S. fishing vessels required the British government to pay an indemnity).

63 Arbitral award, supra note 2, para. 103, 40 ILM at 50.

64 Supreme Court judgment, supra note 3, para. 99.

65 See Pope & Talbot, Inc. v. Canada, Interim Award (NAFTA Ch. 11 Arb. Trib. June 26, 2000), para. 99, 23 Hastings Int’l & Comp. L. Rev. 455, 480 (2000), available at <http://www.dfait-maeci.gc.ca/tna-nac/NAFTAe.asp> (“A state is responsible as for an expropriation of property . . . when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien’s property or its removal from the state’s territory” (quoting Restatement (Third) of Foreign Relations Law §712, cmt. g (1987))). Elsewhere, the Pope & Talbot interim award requires that the deprivation of economic benefit be “substantial.” See id., paras. 96, 102, 23 Hastings Int’l & Comp. L. Rev. at 479, 481–82. A third Chapter 11 tribunal seems to have read the notion of expropriation in Article 1110 more narrowly. See S.D. Myers, Inc. v. Canada, Partial Award, paras. 280–81 (NAFTA Ch. 11 Arb. Trib. Nov. 13, 2000), at <http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-e.asp> (“In general, the term ‘expropriation’ carries with it the connotation of a ‘taking’ by a government-type authority of a person’s ‘property’ with a view to transferring ownership of that property to another person The general body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA, although the Tribunal does not rule out that possibility.”).

66 The award alternates between the phrase “measure tantamount to expropriation” and “indirect expropriation.” Compare Arbitral award, supranote 2, paras. 104, 111, 40 ILM at 50–51, with id., paras. 107, 112, 40 ILM at 50–51. See also Supreme Courtjudgment, supra note 3, para. 77 (“It is unclear whether the Tribunal equated a measure tantamount to expropriation’ with ‘indirect expropriation’ or whether it made two separate findings of expropriation.”). Other Chapter 11 tribunals have agreed with the three NAFTA governments that Article 1110 is meant to codify, rather than to expand upon, customary international law. See Pope & Talbot, Interim Award, paras. 96, 103–04, 23 Hastings Int’l & Comp. L. Rev. at 479, 482; S.D. Myers, paras. 285–86.

67 Arbitral award, supra note 2, para. 109, 40 ILM at 51.

68 See Supreme Courtjudgment, supra note 3, para. 100 (“In my view, the Tribunal’s conclusion that the issuance of the Decree was an act tantamount to expropriation is not patently unreasonable.”).

69 See supra notes 29–34 and accompanying text.

70 Supreme Court judgment, supra note 3, para. 99.

71 Id. para. 62.

72 William, S. Dodge, Case Report: Waste Management, Inc. v. Mexico, 95 AJIL 186, 191–92 (2001)Google Scholar.

73 See supra notes 29–35 and accompanying text.

74 But see supra note 60 and accompanying text.

75 The WTO Appellate Body has authority to review panel decisions for errors of law but not of fact. Understanding on Rules and Procedures Governing the Settlement of Disputes, April 15, 1994, Art. 17(6), Marrakesh Agreement Establishing the World Trade Organization, Annex 2, The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts 404, 418 (1994), reprinted in 33 ILM 1226, 1236 (1994).

76 See supra notes 36–38, 63–66, and accompanying text. For discussion of other interpretative issues on which Chapter 11 tribunals have differed, see Dodge, supra note 72, at 190–91.

77 Interpretive consistency may also be achieved through Article 1131 (2), which allows the three NAFTA parties to issue binding interpretations of the text. This provision was used for the first time on July 31, 2001. See supra note 39.

78 There are few judges in national courts whose knowledge of international law can compare with that of the arbitrators in Metalclad, see supra note 2.

79 See Canada Appeals NAFTA Chapter 11 Case, Arguing That Panel Exceeded Its Jurisdiction, 18 Int’l Trade Rep. 273 (Feb. 15, 2001).

80 An alternative method of review would be the annulment procedure under Article 52 of the ICSID Convention. ICSID Convention, supra note 48, Art. 52. Chapter 11 contemplates that awards made under the ICSID Convention would be subject to this procedure, see NAFTA, supranote 1, Art. 1136(3) (a), 32 ILM at 646, but since neither Canada nor Mexico is a party to the ICSID Convention, this method of review is currently unavailable. ICSID’s annulment procedure would provide expertise and neutrality, but it could not provide the interpretive consistency of an appellate body.