Metalclad v. Mexico

A Play In Three Parts

In: The Journal of World Investment & Trade
Author: Todd WEILER1
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  • 1 Todd Weiler, M.A., LL.B., LL.M., S.J.D. Candidate (University of Michigan, Ann Arbor), is a Research Fellow and Lecturer in International Law at the Centre for Energy, Petroleum and Mineral Law and Policy, Dundee, Scotland and an Adjunct Professor of Law at the Universities of Ottawa and Windsor, Canada. He has acted as counsel in numerous NAFTA investment disputes, primarily, but not exclusively, for foreign investors.

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  • Metalcladv.Mexico(Metaiclad), NAFTA/ICSID (AF), 40 ILM 55, 2001; also available at: «www.naftalaw.org».

  • 2 This recital of the relevant facts is culled from the arguments of the investor in its reply memorial and the findings made by the Tribunal and the judge hearing the judicial review application for this case.

  • 3 The remediation activities were undertaken in relation to ecological problems that had occurred before Metalclad invested in the facility and were fully known to government officials. � The refusal was communicated on 13 December 1995, over thirteen months after Metalclad had applied for the permit. The Tribunal found that there was no indication that the Municipality ever gave proper consideration to the application before denying it. It further noted that Metalclad's request to review this decision was summarily denied, that the Municipality did not have any established administrative procedure for making either decision, and that Metalclad was not even invited to make submissions to the town council when it apparently made its decision to deny the application.

  • ' To be more precise, NAFTA Article 1121 requires investors and their investments to waive their rights to seek compensation in any domestic proceeding before submitting their claim to arbitration under their choice of the Uncitrai. or Icsil) Additional Facility Rules (the ICSID Arbitration Rules will not be available until such time as Canada or Mexico ratify the IcsiD Convention). Investors and their investments can still maintain proceedings for extraordinary relief (such as injunctivc relief) while pursuing compensation through the NAFTA process. The ramifications of the NAFTA Partics having included what was essentially a trilateral investment agreement in their comprehensive regional free trade agreement are still just emerging. Since the obligations ran "three ways" among Mexico, Canada and the United States, the NAFTA became the first international investment agreement in place between two fully developed industrial economics. While one can be fairly certain about what kinds of investment disputes occur between developed and developing countries, it appears that the NAFTA negotiators did not give much thought to how its obligations would impact upon one of the closest and most highly advanced trading relationships in the world. Since the very first claim, lawyers for investors have been employing trade law arguments in relation to these investment obligations, which often share similar terms and objectives. The result has been a significant contribution to the coalescence of what can be referred to as "international economic law", which includes both trade and investment law obligations in a wider area of public international law that regulates all State behaviour relating to the business of individuals and finns.

  • NAFTA Article 105 provides that: "The Parties shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments,." In agreement with a U.S. submission on the matter before it, the Metalclad. Tribunal determined that Mexico could be held responsible for the actions of its lower levels of government, including municipalities, as a matter of customary international law; Metalcl,7d, �f�M, footnote 1, para. 73. Ibid., para. 74. 1 Vienna Convention on the Law of Treaties (1969), 1155 U.N.T.S. 331, in force 1980.

  • 1)Metalclad,supra, footnote 1, paras. 75-76. 10 Ibid., para. 88. 11 Ibid., para. 74.

  • 12 Ibid., para. 89: "Metalclad was entitled to rely on the representations of federal officials and believe that it was entitled to continue construction of its landfill." '3 Ibid., paras. 88 and 99. '4 Ibid., paras. 94-95. The Tribunal noted that if municipal officials were sure of their position, they would not have needed to proceed with their amparo application before Mexico's Federal Court in an attempt to prevent Metalclad's facility from being opened-resulting in an additional two years during which Metalclad was prevented from running its business based upon a "temporary" injunction that was eventually dismissed with the Municipality's application. 'S Ibid., para. 91. 1fi Ibid., paras. 92-93. The Tribunal noted that "the construction permit was denied without any consideration of, or specific reference to, construction aspects or flaws of the physical facility."

  • 17 Ibid., para. 97. 1H The reasons for making this distinction will become more apparent when discussion shifts to the judicial review phase of this case which focused primarily on the "transparency" elements of the Tribunal's interpretation Of NAFTA Article 1105(1). 19 Metalclad, supra, footnote 1, para. 108. This finding was apparently made notwithstanding the fact that the Municipality had ultimately failed in its attempt to prevent COTERIN from operating its facilities under its federal and state permits, although the subject was rendered moot by the Governor's final decree. This finding would appear to contradict the conclusion of the Tribunal in Re: S.D. Myers, Inc. and Canada (Myers), NAFTA/UNCITRAL Tribunal, Final Merits Award, 13 November 2000, which concluded, at para. 287, that, because an export ban wrongfully imposed upon the investor and its investment was only in effect for fifteen months, it was not "permanent" enough to constitute an expropriation. This award can be found at: «www.naftalaw.orgo.

  • zoMetaklad, ibid., para. 109. 21 Ibid., para. 103. The Pope & Talbot Tribunal came to the same conclusion with its Interim Award; see Pope & Talbot, Inc. v. Canada, NnFrn/UNC�TRm Tribunal, Interim Merits Award, 26 June 2000, at para. 104, which can be found at: «www.naftalaw.org». 12 Metaklad, ibid., para. 111. This conclusion was also echoed by the Pope & Talbot Tribunal in its Interim Award, ibid., at paras. 95-105, by virtue of the fact that the issue of intention never arose in its analysis. 23 Metalclad, ibid., para. 103, although it might be noted that the "property" referred to by the Tribunal in its Award is actually referred to as "investment" under NAFTA Article 1110(1), which is a defined term under the NAFTA that includes a number of economic interests, including the intangible property that businesses hold in access to a market. See, for example, Pope fez Talbot, aura, footnote 21, paras. 97-98.

  • 21 Such provisions include the national treatment and MFN provisions, Articles 1102 and 1103, respectively. z5 Such provisions include NAFTA Articles 1102 and 1103, where both the investor and the investment are mentioned, as well as NAFTA Articles 1105, 1106 and 1110 in which only treatment of the investment (whatever form it may take) is at issue. zfi Metnlclad, supra, footnote 1, para. 3. 2' Ibid., para. 115. The Tribunal dismissed Metalclad's claim for damages that it had suffered as an investor, although not because of the limitations of NAFTA Article 1117. Instead, the Tribunal indicated-in an extremely abbreviated fashion-that it doubted that any of these damages could be causally related to the breach. That the Tribunal dismissed these claims with such brevity leads one to wonder what kinds of proof were offered by the claimant to establish their validity. However, the Tribunal did also reduce the amount of damages claimed for COTEIKIN prior to its acquisition by Metalclad in keeping with the argument that there was not sufficient causation to demonstrate the loss as it related to the investment of the investor (i.e. Metalclad). 28 Ibid., para. 120. 2'' Ibid., para. 121.

  • 3u Ibid., para. 122, citing: Germany v. Poland, Award on the Merits, P.C.IJ. Series A, No. 17 (1928), at 47. 31 Concerns have been expressed within the environmental NGO community that NAFTA Article 1110 has had a chilling effect on environmental regulation in North America, although to date these fears have not been demonstrated in any quantifiable manner. The same phenomena can also be seen in the politics of the European Energy Charter, which includes many BiT-stylc provisions. See, for example, T. Walde, C. Bamberger and J. Linehan, Energy Charter Treaty in 2000: In a New Phase, 18 JENRL, 2000, at 331-352. See also T. W51de, International Disciplines on National Environmental Regulation, with Particular Focus on Multilateral Investment Treaties, in Internatianal Investments and Protection of the Environment: The Role of Dispute Resolution Mechanisms, The Permanent �)t<'�MtMfM< jKt�Mfmfnt! <tH� Pro<<'f(MM o�thc EKf<mKmcH<: T?tf Rote <�DMpM<c R�(!<M<�K A�f/MKmtM, The Permanent Court of Arbitration/Peace Palace Papers, Vol. n, Kluwer, London, 2001, at 29-73. ;2 Metalclad, supra, footnote 1, para. 127. It should be noted that the Tribunal did not suggest that Mctalclad was in any way "to blame" for the remediation that was required at its La Pedrcra site (owing to the operation of Coremrr under its previous ownership). In fact, Metalclad invested in COTERIN with full knowledge that remediation of the site was required and worked with federal officials to ensure that rcmediation would be completed within the first few years of the facility's operation.

  • 33 Robert Azinian and Others and The United Mexican States, NAFTA/IcslD Tribunal, Final Award, 1 November 1999; available at: «www.naftalaw.org». 3a Re: Waste Management, Inc. and The United Mexican States, NAFTA/IcslD Tribunal, Award on Jurisdiction, 2 June 2000; available at: «www.naftalaw.org». 35 Re: Ethyl Corporation and The Government of Canada (Ethyl Corp.), NAFTA/ICSID Tribunal, Award on Jurisdiction, 24 June 1998; available at: «www.naftalaw.org». 3� These are the conditions for enforcement of a claim heard under either the ICSID Additional Facility Rules or the UNCnr0.W Arbitration Rules. Cases brought under the IcsiD Convention would be restricted to the internal Icsil) review process, but because neither Canada nor Mexico have ratified the Icsm Convention, investors may not currently bring claims under the IcsW Arbitration Rules. As ratification would mean removal of the review process from domestic courts, it is submitted that it is highly unlikely that either Canada or Mexico will ratify the ICSID Convention in the near future. 37 Revised Statutes of British Columbia, 1996, c. 223. Mexico's attorneys had unsuccessfully attempted to have the review undertaken on the basis of the local Commercial Arbitration Act, which provides for a de facto appeal on issues of law. 38 R.S.B.C. 1996, c. 223, s. 34. 39 Judge Tysoe is apparently a bankruptcy law specialist with no particular background in international law.

  • au Jurisdictional game playing essentially consists of treating certain errors of law as so fundamental that they rob the decision maker of its right to make the decision. Such errors are apparently so fundamental because they normally involve the interpretation of contractual or statutory provisions from which the decision maker's authority is derived. The best Canadian examples of this discourse of judicial activism versus deference (within the administrative law context) were penned by Professor John Willis. As a friend who teaches Canadian administrative law once told me, the real test of "jurisdiction" (which Willis often branded a "weasel word") is "whether the dog catcher is attempting to take away your driver's licence. Anything less than such a decision is not 'patently unreasonable' and therefore falls within the tribunal's decision-making authority and beyond the scope of judicial review." The purpose of this kind of judicial deference is to ensure that the decision makers asked to make the decision under review (and who presumably have both the political legitimacy and expertise to do so) are the ones who actually make the decision. Judicial deference obviously also promotes finality and therefore ensures greater transparency and predictability in any legal regime. 41 William W. Park, Why Courts Review Arbihal Awards, in R. Briner et al. (eds.), Law of International Business nnd Dispute Settlement in the 21 Century: Liber Amicorum Karl-Heinz Bockstiegel, Carl Heymanns Vcrlag KG, 2001, 595, at 597-598. a= Quinette Coal Limited v. Nippon Steel Corporations, [1991] 1 W.W.R. 219 (B.C.C.A.). a3 Ibid., at 229.

  • °rUnitedMexicanStatesv.MetalcladCorporation(Mexicov.Metalclad), 2001 B.S.S.C., No. 664, 2 May 2001, at para. 51; available at: «www.naftalaw.orgr>. 45 The Tribunal was Chaired by Professor Sir Eli Lauterpacht, CBE, QC, and included as members former United States Attorney General Bcnjamin R. Civiletti, who appeared before the International Court ofjustice on the U.S./Irall Hostages case, and Jose Luis Siqueiros, President of the OAS Interaiiierican Juridical Committee and long-time international commercial arbitrator. °�� That Tribunal was considering the claim ofS.D. Myers Inc. v. Canada. A majority appears to have concluded that the discrimination visited upon an American investment by Canada was so discriminatory that it breached the standard offair and equitable treatment in international law. Canada's appointee dissented, concluding that Canada's treatment of the investment did not rise to the level required to breach this minimum international standard; Myers, supra, footnote 19, paras. 258-268. 47 Mexico v. Metaldad, supra, footnote 44, para. 62.

  • 4" He also concludes: "In using the words 'international law', Article 1105 is referring to customary international law which is developed by common practices of countries. It is to be distinguished from conventional international law which is comprised in treaties entered into by countries (including provisions contained in the NAFTA other than Article 1105 and other provisions of Chapter 11)." Id. The puzzling aspect of this conclusion is that Judge Tysoe appears to have confused the test for determining international legal principle-i.e. a comparative analysis of the domestic laws and practices of States-with the test for finding custom. He also referred to treaty law as somehow being "conventional international law", as if to contrast it against custom and international legal principles, which he appears to have decided arc something other than "conventional" international law. This description of "international law" does not appear to conform to the traditional sources of international law recalled in Article 38 of the Statute of the International Court of Justice, which itself is a part of the United Nations Charter. ty Pope & Talbot, Inc. v. Canada, NAF'rAyUNCITRA1. Tribunal, Final Merits Award, 10 April 2001; available at: «www.naftalaw.org». s" Ibid., para. 114, footnote 110. Judge Tysoe failed to address the "most-favoured-nation treatment" argument that appears to have buttressed the Tribunal's "fair and equitable treatment" analysis. This argument will be addressed in more detail below. 5� Mexico v. Metalrlad, supra, footnote 44, para. 68. judge Tysoc takes issue with the opinion of another arbitrator as to whether the principle of transparency can rightly be seen as an element of"intemational law" under NAFTA Article 1105. The full text of that arbitrator's separate opinion in the Myers claim can be found at: «www.naftalaw.org».

  • 52 These transparency-enhancing provisions include Articles 509 and 510, governing customs administration; Articles 718 and 719, mandating notice and comment obligations concerning sanitary and phytosanitary measures; Articles 909 and 910, mandating notice and comment obligations concerning technical barriers to trade; Articles 1008 to 1016, governing the government procurement process; and Articles 1306 of the telecommunications chapter and 1411 of the financial services chapter, both entitled "Transparency". 53 Metaldad, supra, footnote 1, paras. 70-71 and 74-76. 54 Mexico v, Metaltlad, supra, footnote 44, para. 71. NAFTA Articles 1116 and 1117 provide that investors may submit claims for breaches of Part A of Chapter 11 or certain breaches of NAFTA Chapter 15, which essentially codify the NAFTA Parties' customary international law responsibility for actions undertaken by designated monopolies and State enterprises. Thus, it would not be open to a tribunal to require compensation for a breach of a provision other than those mentioned in Articles 1116 or 1117. ss Ibid., at para. 78.

  • 51 Todd Weiler, A First Look at the Interim Merits Award in S.D. Myers, Inc. and Canada: It is Possible to Balance Legitimate Environment! Concerns with Investment Protection, 24 Hastings Int'l & Conip. L. Rev. 173, 2001. s� In traditional expropriation cases, the analysis was normally restricted to the loss of an enterprise or of real property. By contrast, the NAFTA Article 1139 definition of "investment" includes many kinds of economic interests, including intangible property. 11 This was the test articulated by the Tribunal in Pope & Talbot, at para. 102 of its Interim Merits Award, supra, footnote 21. s9 This finding was sufficient to confirm Metalclad's claim, but allowed interest to be calculated only from the date that the decree was issued. The Mexican government, on 4 June 2001, extended a settlement offer to Metalclad in the amount of US$ 15,626,260, which the company accepted on 1 June.

  • ''" Mexico v. Metaiclad, supra, footnote 44, para. 99. One can only puzzle as to how the definition of "expropriation" under NAFTA Article 1110 can be beyond the scope of judicial review when the definition of "international law" under NAFTA Article 1105 is simultaneously considered to be "fair game" by the same reviewer. It is also interesting to note that Judge Tysoc did not explicitly decide whether a "patently unreasonable" finding of fact or law could constitute an excess of jurisdiction under his reviewing statute, although he went on to make several findings that the Tribunal's far less detailed reasons for finding that the Governor's decree breached Article 1110 were not "patently unreasonable". To find out how the Judge really felt about this question, it is submitted that he simply be asked whether he thought the Tribunal's interpretation of NAFTA Article 1105 was "patently unreasonable". 61 It is also possible that there will be fewer NAFTA tribunals suggesting British Columbia as a possible situs for their arbitrations. Whether there might also be ramifications in the wider world of international commercial arbitration is a question for another day. Canada has appealed the Merits Award of the Myers Tribunal to its own Federal Court, although the damages phase has not yet been completed. Accordingly, it could be some time before that Court is in a position to conduct a review. "2 A copy of the Commission's Statement, issued 31 July 2001, can be found at: «www.naftalaw.org».

  • 63Pope&Talbot, Final Merits Award, supra, footnote 49, at paras. 105-118.

  • (,4 The case most often cited for such a proposition is Neer v. United Mexican States (1926), 4 R.I.A.A. 60 (Mexico-United States Claims Commission), which-unlike other chambers of the same body-proposed a very high threshold for finding State responsibility: "an outrage, bad faith, willful neglect of duty or insufficiency of governmental action so far short of international standards that every reasonable and impartial person would recognize its insufficiency." 65 Myers, supra, footnote 19, paras. 263-264. 66 Akoa Minerals cfJamaica, Inc. and Government cfJamaica (Jamaican Bauxite Case), (1979) IV Yearb. Comm. Arb. 206 (Preliminary Award made in 1975). 17 It did so in 1997 and 1999 Reports on the Issue of Nationality in Relation to Succession of States; see ,,http://www.un.org/law/ilc/reports/1997/chap 4.htni��, at para. (1) of its commentary and <<http://www.un.org/ law/ilc/reports/1999/english/chap4.htm,,, at para. (1) of its commentary.

  • bs Thanks go to Professor Rob Howse of the University of Michigan for assisting me in thinking about this line of argument. 69 Finally, it is not clear that the "customary international law" standard that the Ministers seek to enshrine docs not include expressions of "fair and equitable treatment" that go far beyond the very minimal protections advanced by government lawyers. This argument, which will be saved for another day, would be based upon the simple fact that customary international law, by definition, is not static, and that therefore the burgeoning field of international economic law, particularly as expressed in multilateral trade and bilateral investment treaties, has helped shape the customary international law requirements of protection for foreign investment in different ways that reflect the rise of post-industrial economies and the regulatory welfare State. �° See, for example, Ethyl Corp., supra, footnote 35, paras. SO-57; Myers, supra, footnote 19, paras. 196-204.

  • " See discussion earlier in this section. �2 The exceptio est strictissimae applicationis rule essentially requires that all exceptions to treaty obligations must be construed restrictively. See Interpretation of Article 79 �r the 1947 Peace Treaty (French/Italian Conciliation Commission) XIII, Unkiaa 397; Case Concerning Certain Merman Interests in Upper Silesia, P.c.I.)., Series A, No. 7, p. 56; and Free City of Danzig case, P.c.I.)., Series A/B, No. 65, at 71.

  • �3 Georg Schwarzenberger, The Most-Favoured-Nation Standard in British State Practice, British Yearbook of International Law, 1948, p. 96, at 99-100. �4 Emilio AAustin Ma�ezini and The Kingdom of Spain, (Maffezim), Case No. Arb/97/7, 25 January 2000, Decision of the Tribunal on Objections to Jurisdiction; «www.worldbank.com/icsid/cases/emilio_DccisiorJunsdiction.pd6�.

  • �5 Ibid., para. 56. 7ó In NAFTA Annex IV, each ofthc NAFTA Parties have taken reservations for obligations entered into under international agreements in force or signed prior to the date of entry into force of the NAFTA on 1 January 1994. They have also taken identical, sector-specific reservations concerning future international treaty obligations. Accordingly, in relation to all other international economic treaties not limited to, or pertaining exclusively to, those sectors, the NAFTA Parties will be required to provide MFN treatment-i.e. extend terms as favourable to the investors and investments of the other NAFTA Parties as they have extended to any other investor or investment since the NAFTA came into force. �� This scenario was actually alluded to by the Pope & Talbot Tribunal in its consideration of how the "fair and equitable treatment" standard should be considered "additive" to whatever level of treatment must be required under international law (which it did not address). The Tribunal apparently considered that if it did not adopt the interpretation of NAFTA Article 1105 that it chose, it was likely that Article 1103 could be used to bring about such a result anyway. Pope & Talbot, Final Merits Award, supra, footnote 49, at paras. 117-118.

  • 18 One of the apparent results of application of the Mfn obligation is that the Canadian government would not be required to treat investments in accordance with international law where to do so would mean refraining from breaching an international treaty obligation that caused harm to an investor (such as an intellectual property obligation under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights). By contrast, both the United States and Mexico would still need to provide such treatment, as it is countenanced in the basic concept of "treatment in accordance with international law" from which only Canada will have succeeded in exempting itself in the Commission's Statement and the BITS it has concluded since ratifying the NAFTA. w Keeping in mind that the NAFTA Parties are not required, under the NAFTA, to provide the investments of their own nationals with treatment in accordance with Article 1105, whatever that might be. 80 This result is perhaps the most ironic, as rumour has it that it was the United States that finally agreed to make these changes to Article 1105 in order to protect against claims that (because of the anti-retroactivity bias in customary international law) will likely be decided against the United States anyway.

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