Tecnicas Medioambientales Tacmed S.A.(“Tecmed”) v. Mexico

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Citation. Int’l Centre for Settlement of Investment Disputes, ICSID Case No. ARB (AF)/00/2, Award, 43 I.L.M. 133 (2004).

Brief Fact Summary. A suit was filed against Mexico (D) by Technicas Medioambientales Tecmed S.A. (Claimant) (P) a Spanish company, on the premise that its investment in Tecmed, Technicas Medioambientales de Mexico, S.A, a Mexican company, which also owned Cytrar, S.A. de C.V. (Cytrar) a Mexican company too, was expropriated by Mexico (D) by refusing to renew Cytrar’s annual license to run a hazardous industrial waste landfill (the “Landfill”).

Synopsis of Rule of Law. 1) Where a non-national denial is based on political considerations that do not constitute a social emergency, then the denial by a state of a permit to a non-national to operate property for its intended use is an expropriation of property.
(2) In a situation whereby a state conduct frustrates an investor’s fair expectations, deprives the investor of clear guidelines as to the investor’s required actions, and fails to provide the investor with any alternatives other than a complete loss of its investment, such a state as violated its duty of fair and equitable treatment.
(3) Where a state neither participates in nor promotes adverse actions against an investor and reacts to such adverse actions reasonably in accordance with the parameters inherent in a democratic state, such a state has not contravened a guarantee of full protection and security.

Facts. Technicas Medioambientales Tecmed S.A. (Claimant) (P), a Spanish company, was the parent company of Technicas medioambientales Mexico, S.A. de C.V. (Tecmed), a company incorporated under Mexican law. The parent company owned 99 percent of the shares of Tecmed, who in turn held over 99 percent of the stock of Cytrar, S.A. de C.V. (Cytrar,) also a Mexican company. Tecmed had organized Cytrar to run a hazardous industrial waste landfill (the Landfill) in the municipality of Hermosillo, which is located in the State of Sonora, Mexico. Cytrar was issued a license for its operation by the Mexican agency for hazardous waste known as the INE in 1996. This license was issued at the request of Tecmed. Subsequently, the license was to be renewed yearly at the request of the applicant. The license was renewed each year till 1998 when INE relying on a resolution (the “Resolution”) refused to renew the license and instead sought to have Cytrar close the Landfill. The action taken by the INE was due to the political change of government of the Municipality of Hermosillo. The claimant alleged that the not renewing the license constitutes expropriation and on this premise, sought damages and compensation for damage to reputation and interest in connection with damages alleged to have accrued as at the date INE rejected the renewal application. Also, permit to operate the Landfill until the end of its useful life was also sought by the plaintiff who later brought a claim for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) under its Rules and under the Agreement on the Reciprocal Promotion and Protection of Investments (the “Agreement”) between Spain and Mexico (D). This agreement was meant to protect foreign investors and their investments from whatever form of expropriation such as measures which are tantamount to direct expropriation. On this ground, the claimant claimed that the action of INE constituted a denial of benefits associated with the operation of the Landfill. All these allegations brought against Mexico (D) was countered by Mexico (D) on the premise that the INE had discretionary powers to grant and deny permits and that such issues, with the exception of special cases, are exclusively governed by domestic and not international law. Mexico (D) also affirmed that the INE was operating within its powers and its Resolution was neither arbitrary nor discriminatory but constituted a regulatory measure which was issued in compliance with the state’s police power.

Issue. (1) Where a non-national denial is based on political considerations that do not constitute a social emergency, does the state denial of permit to a non-national to operate property for its intended use an expropriation of property?
(2) In a situation whereby a state conduct frustrates an investor’s fair expectations, deprives the investor of clear guidelines as to the investor’s required actions, and fails to provide the investor with any alternatives other than a complete loss of its investment, as such a state violated its duty of fair and equitable treatment?
(3) Where a state neither participates in nor promotes adverse actions against an investor and reacts to such adverse actions reasonably in accordance with the parameters inherent in a democratic state, as such a state contravened a guarantee of full protection and security?

Held. (1)    Yes. Where a non-national denial is based on political considerations that do not constitute a social emergency, then the denial by a state of a permit to a non-national to operate property for its intended use is an expropriation of property. Though “expropriation” was not defined in the agreement, it can be defined as the forcible takeover of property owned by private persons, although it can also cover a de facto taking where Government actions or laws transfer assets to third parties, or where such actions or law transfer assets to third parties, or where such actions or laws deprive persons of their ownership over such assets, without transfer to third parties or the government. It is based on the last meaning ascribed to expropriation that is referred to in the applicable sections of the Agreement and is sometimes referred to as “indirect” or “creeping” expropriation. Looking at the event surrounding the case, the factors which propelled the INE Resolution were political and not environmental, and the community’s desires were not so great as to lead to social crisis or public unrest, so that the public interest did not outweigh the Claimant’s (P) loss of value, and therefore, the Resolution was not proportionate to the deprivation of rights sustained by the Claimant (P). Accordingly, the Resolution and its effect resulted in expropriation in violation of the Agreement and International law.
(2)    In a situation whereby a state conduct frustrates an investor’s fair expectations, deprives the investor of clear guidelines as to the investor’s required actions, and fails to provide the investor with any alternatives other than a complete loss of its investment, such a state as violated its duty of fair and equitable treatment. As stipulated in the Agreement, the requirement of fair and equitable treatment is an expression of the bona fide principle of international law, under which states must provide to international investments treatment that does not affect the foreign investor’s basic expectations used in making the investment. The action taken by the INE by not renewing Cytrar’s license frustrated Cytrar’s  fair expectations and negatively affected the generation of clear guidelines that would allow the Claimant (P) or Cytrar to direct its actions or behaviors to prevent the non-renewal of the permit, or weakened its position to enforce rights or find ways to maintain the permit by relocating. Mexico’s (D) behavior thereby resulted in losses and damages to the Claimant (P) and constituted a contravention of the duty to accord fair and equitable treatment to the Claimant (P) and its investment.
(3)    No. Where a state neither participates in nor promotes adverse actions against an investor and reacts to such adverse actions reasonably in accordance with the parameters inherent in a democratic state, such a state has not contravened a guarantee of full protection and security. The Claimant (P) alleged that the Mexican government officials at all levels failed to act promptly to prevent the community’s adverse conduct toward the Landfill and Cytrar’s staff, and this action constituted a breach of full protection and security provided in the Agreement. But there was no cogent evidence o portray that the officials reacted to the adverse activities in a manner that was not in consonance with the parameters inherent in a democratic state.

Discussion. Unlike nationals, non-national are more vulnerable to domestic legislation because they have not played any part in the election or designation of its authors nor have consulted in its adoption. Hence, interference with a non-national property rights is an indirect expropriation and this would necessitate compensation. Therefore, the Claimant (P) was awarded compensation to the tune of over $5.5 million plus interest by the tribunal