After the venue of the arbitration. Facts of

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Last updated: December 22, 2019

Afterfurther negotiations that were not successful to resolve the issues withregards to the operation and construction permit of the landfill, Metalclad initiatedthe arbitral proceedings against the Government of Mexico under Chapter Elevenof the NAFTA on January 1997. The arbitration proceeding started when Metalcladfiled a Notice of Claim in January 1997 with the Secretariat of theInternational Centre for Settlement of Investment Dispute (ICSID).

This is thesecond time on which Metalclad Corporation had brought proceedings in respectof its claim. The first procedural hearing of the second proceedings, happenedat the seat of the World Bank in Washington D.C. CaseNo. ARB(AF)/97/1, Metalclad Corporation as a disputing investor versus TheUnited Mexican States, respondent state—agreed to have the forum on ICSID (InternationalCenter for the Settlement of Investment Dispute).  The Tribunal was constituted by a three persontribunal to decide the arbitration.  In linewith ICSID Arbitration Rules, The Tribunal decided that the place ofarbitration would be in Vancouver, British Columbia, Canada. Both partiesagreed with the Tribunal’s proposition about the venue of the arbitration.

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  Factsof the case   Metalclad Corporationis a US based enterprise, incorporated under the laws of Delaware. ConfinamientoTecnico de Residuos Industriales, S.A. de C.V. or COTERIN is a MexicanCorporation.

COTERIN owns and operate a landfill located in the municipality ofGuadalcazar in the State of San Luis Potosi, Mexico since 1990. Due to someviolations, the federal ordered for its closure on September 1991. On the sameyear, COTERIN applied to the Municipality for a permit to construct a hazardouswaste landfill, however, the application was denied in 1992 when the newlyelected municipal came into office. In1993, Metalclad purchase COTERIN with the condition that either a municipalpermit was issued to COTERIN or COTERIN had received a definitive judgment fromthe Mexican courts that a municipal permit is not required for the constructionof the landfill. Metalclad completed its purchase of COTERIN however, neitherof the conditions was satisfied. The Tribunal found that the Mexican federalofficials gave an assurance to Metalclad that COTERIN had all the authoritiesto undertake the landfill project.

 COTERINbegan the construction site without the municipal construction permit.Although, after the construction began, the federal authorities issued furtherconstruction permit in January 1995, authorizing the construction of the finalaspects of the facility. OnOctober 26, 1994, the Municipality issued a stop work order due to the absenceof a municipal construction permit. They applied for a municipal permit onNovember 15, 1994 and continued the construction of the facility at the Site.

However, on December 5, 1995 the municipality officially denied theirapplication. Metalcladentered into a negotiation with the federal authorities regarding the operationof the landfill facility. Metalclad and the federal authorities arrived withthe Convenio agreement. The agreement was entered by Metalclad together withthe two sub-agencies of the Secretariat of the Environment. The highlight ofthe Convenio is that Metalclad would be permitted to operate the landfill foran initial period of five years and that it would remediate the previouscontamination during the first three years of this period. Shortlyafter the Convenio was entered into, the Municipality formally deniedCONTERIN’s application for a construction permit on December 5, 1995. The firstconsideration taken into account by the municipal council in denying theapplication was COTERIN had been denied a construction permit in 1991/2.Second, COTERIN had begun construction before applying for the permit andfinished the construction while the permit application was pending.

Third, theenvironmental concerns from the facility. And finally, the residents of theMunicipality do not agree with granting the permit. Again,CONTERIN requested from the Municipality for a reconsideration regarding theirconstruction permit application but the Municipality once more rejected theirrequest in April 1996. CONTERIN filed a writ of amparo in a Mexican federalcourt in respect of the Municipality’s refusal to issue a construction permit.The proceeding was dismissed on the basis that CONTERIN had not exhausted itsadministrative remedies. CONTERIN appealed to the Mexican Supreme Court butafterwards did not pursue the case as a sign of good faith to the Municipalityfor the purpose of negotiations.  Sinceboth parties cannot arrived on an agreement, Metalclad delivered a Notice ofIntent to Submit a Claim to Arbitration under Article 1119 of the NAFTA toMexico in October 1996. The arbitration proceeding started by filing a Noticeof Settlement of Investment Dispute.

Metalclad opted for Additional FacilityRules of ICSID to govern the arbitration.  Beforethe hearing in the arbitration was held, the Governor of the State of San LuisPotosi issued an ecological decree—the “Ecological Decree” prior to theexpiration of the Governor’s term on September 20, 1997. As per the EcologicalDecree, an area of 188, 758 hectares within the Municipality—which included thesite, will be an ecological preserve for the stated purpose of protectingspecies of cacti.  Relevant IssuesMetalcladclaims that Mexico wrongfully interfere to permit Metalclad’s subsidiary—COTERINto open and operate a hazardous waste facility that Metalclad had built in LaPedrera, San Luis Potosi, Mexico, despite the fact that the project wasallegedly built in response to the assurance given by the Mexican authorities thatall the legal requirements have met by COTERIN to undertake the landfillproject.

 OnAugust 30, 2000, the Metalclad tribunal issued an award in favor of theinvestor amounting to $16.7 million, although Metalclad sought for the notice damagesof 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 awardon the grounds that a patently unreasonable error can amount to an excess of itsjurisdiction and that enforcing the award would violate public policy.  The British Columbia court set aside theaward in part.  Dispute and therelevant rule of LawMetalcladCorporation—a Delaware Corporation claims that the Mexican local governments ofSan Luis Potosi and Guadalcazar, interfered with its development and operationof a hazardous waste landfill.

Apparently, the dispute between Metalclad and thegovernments of San Luis Potosi and Guadalcazar arose as the local government ofSan Luis Potosi and Guadalcazar was purporting to exercise a regulatory function.The primary  MetalcladCorporation’s claims that the interference of the governments of San LuisPotosi and Guadalcazar violated Chapter 11 of the investment provisions ofNAFTA (North American Free Trade Agreement). According to Metalclad, thefollowing are the provisions from NAFTA were violated by the United MexicanStates. First, Article 1105 which required each Party to NAFTA to “accord toinvestments of investors of another Party treatment in accordance withinternational law that includes fair and equitable treatment and fullprotection and security”, and second, Article 1110, states that “no Party toNAFTA may directly or indirectly nationalize or expropriate an investment of aninvestor of another Party in its territory or take a measure that wouldtantamount to nationalization or expropriation of an investment, except: for apublic purpose, on a non-discriminatory basis, in accordance with the dueprocess of law and on payment of compensation in accordance with paragraphs 2 through6 or Article 1110. However,the United States of Mexico denies all the allegations. Basedfrom the provision of Chapter Eleven of NAFTA, Section B must address theissues in dispute in accordance with NAFTA—Article 1131 and applicable rules ofinternational law. Further, Article 102 paragraph two of NAFTA states that theAgreement must be interpreted and applied in line with its objectives and the relevantand applicable rules of international law.

 Theobjectives refers to the transparency and the significance of investmentopportunities in the territories of the Parties. According to Article 1131paragraph one of the Vienna Convention on the Law of Treaties, states that atreaty is to be interpreted in good faith and in accordance with the ordinarymeaning to be given to the terms of the treaty ‘s object and its purpose.  Article 26, states that every treaty in forceis binding upon the parties to it and must be performed by them in good faith.

 Accordingto NAFTA Preamble, paragraph 6, the Parties associated to NAFTA explicitlyagreed to ensure a predictable commercial framework for business planning andinvestment. Further,  both parties shallensure that its laws, regulations, procedures, and administrative rulings ofgeneral application respecting any matter covered by this Agreement are publishedon time or otherwise made available in International Centre for Settlement ofInvestment Dispute review—foreign investment law journal such a manner as toenable interested persons and Parties to become acquainted with them”. The Tribunal’sDecisionThe Tribunal made a decision according to the criteriaof responsibility for the conduct of state and local governments, NAFTA Article1105: Fair and equitable Treatment and NAFTA, Article 1110: Expropriation. With regards to the responsibility for the conduct ofstate and local governments, the relevant question   is whetherMexico is responsible for the acts of the local government of San Luis Potosiand Guadalcazar. This approach concurs completely with the establishedsituation in customary international law. As stated in Article 10 of the draftarticles on state responsibility adopted by the International Law Commission ofthe United Nations in 1975, the action of a body of a State, of a government entityor any entity that can exercise its authority shall be considered as an act ofthe State under international law even if the that body of State exceeded its abilityto internal law or broke the rule concerning its activity.

 NAFTA Article 1105: Fair and equitable Treatment. TheTribunal finds that Metalclad’s investment was notaccorded fair and equitable treatment in accordance with international law, andthat Mexico has violated NAFTA Article 1105 paragraph 1. As per NAFTA Article102 paragraph 1, the underlying objective of NAFTA is to promote andincrease cross-border investment opportunities and ensure the successfulimplementation of investment projects. It is explicitly specified in thestatement of principles and rules that introduces the Agreement is thereference to “transparency” as per Article 102 paragraph 1 of NAFTA.  Another point considered by the Tribunal in the casewas if a municipal permit for the construction of a hazardous waste landfillwas required.

Metalclad had been misled by federal authorities that the federaland state permits issued to COTERIN allowed for the construction and operationof the landfill. Further, Tribunal sided with Metalclad, when they were told bythe federal that municipality would have no legal basis for rejecting thepermit to construct the facility if they submitted an application to the Municipality.The Tribunal found that rejection of the construction permit by theMunicipality 

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