After the venue of the arbitration. Facts of

After
further negotiations that were not successful to resolve the issues with
regards to the operation and construction permit of the landfill, Metalclad initiated
the arbitral proceedings against the Government of Mexico under Chapter Eleven
of the NAFTA on January 1997. The arbitration proceeding started when Metalclad
filed a Notice of Claim in January 1997 with the Secretariat of the
International Centre for Settlement of Investment Dispute (ICSID). This is the
second time on which Metalclad Corporation had brought proceedings in respect
of its claim. The first procedural hearing of the second proceedings, happened
at the seat of the World Bank in Washington D.C.

 

Case
No. ARB(AF)/97/1, Metalclad Corporation as a disputing investor versus The
United Mexican States, respondent state—agreed to have the forum on ICSID (International
Center for the Settlement of Investment Dispute).  The Tribunal was constituted by a three person
tribunal to decide the arbitration.  In line
with ICSID Arbitration Rules, The Tribunal decided that the place of
arbitration would be in Vancouver, British Columbia, Canada. Both parties
agreed with the Tribunal’s proposition about the venue of the arbitration.

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Facts
of the case  

Metalclad Corporation
is a US based enterprise, incorporated under the laws of Delaware. Confinamiento
Tecnico de Residuos Industriales, S.A. de C.V. or COTERIN is a Mexican
Corporation. COTERIN owns and operate a landfill located in the municipality of
Guadalcazar in the State of San Luis Potosi, Mexico since 1990. Due to some
violations, the federal ordered for its closure on September 1991. On the same
year, COTERIN applied to the Municipality for a permit to construct a hazardous
waste landfill, however, the application was denied in 1992 when the newly
elected municipal came into office.

 

In
1993, Metalclad purchase COTERIN with the condition that either a municipal
permit was issued to COTERIN or COTERIN had received a definitive judgment from
the Mexican courts that a municipal permit is not required for the construction
of the landfill. Metalclad completed its purchase of COTERIN however, neither
of the conditions was satisfied. The Tribunal found that the Mexican federal
officials gave an assurance to Metalclad that COTERIN had all the authorities
to undertake the landfill project.

 

COTERIN
began the construction site without the municipal construction permit.
Although, after the construction began, the federal authorities issued further
construction permit in January 1995, authorizing the construction of the final
aspects of the facility.

 

On
October 26, 1994, the Municipality issued a stop work order due to the absence
of a municipal construction permit. They applied for a municipal permit on
November 15, 1994 and continued the construction of the facility at the Site.
However, on December 5, 1995 the municipality officially denied their
application.

 

Metalclad
entered into a negotiation with the federal authorities regarding the operation
of the landfill facility. Metalclad and the federal authorities arrived with
the Convenio agreement. The agreement was entered by Metalclad together with
the two sub-agencies of the Secretariat of the Environment. The highlight of
the Convenio is that Metalclad would be permitted to operate the landfill for
an initial period of five years and that it would remediate the previous
contamination during the first three years of this period.

 

Shortly
after the Convenio was entered into, the Municipality formally denied
CONTERIN’s application for a construction permit on December 5, 1995. The first
consideration taken into account by the municipal council in denying the
application was COTERIN had been denied a construction permit in 1991/2.
Second, COTERIN had begun construction before applying for the permit and
finished the construction while the permit application was pending. Third, the
environmental concerns from the facility. And finally, the residents of the
Municipality do not agree with granting the permit.

 

Again,
CONTERIN requested from the Municipality for a reconsideration regarding their
construction permit application but the Municipality once more rejected their
request in April 1996. CONTERIN filed a writ of amparo in a Mexican federal
court in respect of the Municipality’s refusal to issue a construction permit.
The proceeding was dismissed on the basis that CONTERIN had not exhausted its
administrative remedies. CONTERIN appealed to the Mexican Supreme Court but
afterwards did not pursue the case as a sign of good faith to the Municipality
for the purpose of negotiations.

 

Since
both parties cannot arrived on an agreement, Metalclad delivered a Notice of
Intent to Submit a Claim to Arbitration under Article 1119 of the NAFTA to
Mexico in October 1996. The arbitration proceeding started by filing a Notice
of Settlement of Investment Dispute. Metalclad opted for Additional Facility
Rules of ICSID to govern the arbitration.

 

Before
the hearing in the arbitration was held, the Governor of the State of San Luis
Potosi issued an ecological decree—the “Ecological Decree” prior to the
expiration of the Governor’s term on September 20, 1997. As per the Ecological
Decree, an area of 188, 758 hectares within the Municipality—which included the
site, will be an ecological preserve for the stated purpose of protecting
species of cacti.

 

 

Relevant Issues

Metalclad
claims that Mexico wrongfully interfere to permit Metalclad’s subsidiary—COTERIN
to open and operate a hazardous waste facility that Metalclad had built in La
Pedrera, San Luis Potosi, Mexico, despite the fact that the project was
allegedly built in response to the assurance given by the Mexican authorities that
all the legal requirements have met by COTERIN to undertake the landfill
project.

 

On
August 30, 2000, the Metalclad tribunal issued an award in favor of the
investor amounting to $16.7 million, although Metalclad sought for the notice damages
of US$43,125,000 “plus damages for the value of the enterprise taken”.
Mexico appealed to the Supreme Court of British Columbia to set aside the award
on the grounds that a patently unreasonable error can amount to an excess of its
jurisdiction and that enforcing the award would violate public policy.  The British Columbia court set aside the
award in part.

 

 

Dispute and the
relevant rule of Law

Metalclad
Corporation—a Delaware Corporation claims that the Mexican local governments of
San Luis Potosi and Guadalcazar, interfered with its development and operation
of a hazardous waste landfill. Apparently, the dispute between Metalclad and the
governments of San Luis Potosi and Guadalcazar arose as the local government of
San Luis Potosi and Guadalcazar was purporting to exercise a regulatory function.
The primary

 

Metalclad
Corporation’s claims that the interference of the governments of San Luis
Potosi and Guadalcazar violated Chapter 11 of the investment provisions of
NAFTA (North American Free Trade Agreement). According to Metalclad, the
following are the provisions from NAFTA were violated by the United Mexican
States. First, Article 1105 which required each Party to NAFTA to “accord to
investments of investors of another Party treatment in accordance with
international law that includes fair and equitable treatment and full
protection and security”, and second, Article 1110, states that “no Party to
NAFTA may directly or indirectly nationalize or expropriate an investment of an
investor of another Party in its territory or take a measure that would
tantamount to nationalization or expropriation of an investment, except: for a
public purpose, on a non-discriminatory basis, in accordance with the due
process of law and on payment of compensation in accordance with paragraphs 2 through
6 or Article 1110.

 

However,
the United States of Mexico denies all the allegations.

 

Based
from the provision of Chapter Eleven of NAFTA, Section B must address the
issues in dispute in accordance with NAFTA—Article 1131 and applicable rules of
international law. Further, Article 102 paragraph two of NAFTA states that the
Agreement must be interpreted and applied in line with its objectives and the relevant
and applicable rules of international law.

 

The
objectives refers to the transparency and the significance of investment
opportunities in the territories of the Parties. According to Article 1131
paragraph one of the Vienna Convention on the Law of Treaties, states that a
treaty is to be interpreted in good faith and in accordance with the ordinary
meaning to be given to the terms of the treaty ‘s object and its purpose.  Article 26, states that every treaty in force
is binding upon the parties to it and must be performed by them in good faith.

 

According
to NAFTA Preamble, paragraph 6, the Parties associated to NAFTA explicitly
agreed to ensure a predictable commercial framework for business planning and
investment. Further,  both parties shall
ensure that its laws, regulations, procedures, and administrative rulings of
general application respecting any matter covered by this Agreement are published
on time or otherwise made available in International Centre for Settlement of
Investment Dispute review—foreign investment law journal such a manner as to
enable interested persons and Parties to become acquainted with them”.

The Tribunal’s
Decision

The Tribunal made a decision according to the criteria
of responsibility for the conduct of state and local governments, NAFTA Article
1105: Fair and equitable Treatment and NAFTA, Article 1110: Expropriation.

 

With regards to the responsibility for the conduct of
state and local governments, the relevant question   is whether
Mexico is responsible for the acts of the local government of San Luis Potosi
and Guadalcazar.

This approach concurs completely with the established
situation in customary international law. As stated in Article 10 of the draft
articles on state responsibility adopted by the International Law Commission of
the United Nations in 1975, the action of a body of a State, of a government entity
or any entity that can exercise its authority shall be considered as an act of
the State under international law even if the that body of State exceeded its ability
to internal law or broke the rule concerning its activity.

 

NAFTA Article 1105: Fair and equitable Treatment. The
Tribunal finds that Metalclad’s investment was not
accorded fair and equitable treatment in accordance with international law, and
that Mexico has violated NAFTA Article 1105 paragraph 1. As per NAFTA Article
102 paragraph 1, the underlying objective of NAFTA is to promote and
increase cross-border investment opportunities and ensure the successful
implementation of investment projects. It is explicitly specified in the
statement of principles and rules that introduces the Agreement is the
reference to “transparency” as per Article 102 paragraph 1 of NAFTA.

 

Another point considered by the Tribunal in the case
was if a municipal permit for the construction of a hazardous waste landfill
was required. Metalclad had been misled by federal authorities that the federal
and state permits issued to COTERIN allowed for the construction and operation
of the landfill. Further, Tribunal sided with Metalclad, when they were told by
the federal that municipality would have no legal basis for rejecting the
permit to construct the facility if they submitted an application to the Municipality.
The Tribunal found that rejection of the construction permit by the
Municipality

 

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