Metalclad Corp. v. United Mexican States

Brief Fact Summary.

Plaintiff created a Mexican subsidiary to build hazardous-waste landfill in Guadalcazar, which is located in State of San Luis Potosi. The State and the Mexican government, Defendant, told Plaintiff all requisite permits would be issued. Nonetheless, Guadalcazar refused to issue a municipal construction permit. Plaintiff initiated this action against Defendant under Chapter 11 of the North American Free Trade Agreement.

Synopsis of Rule of Law.

When a country fails to keep a promise that all required project permits will be issued, the country has violated the foreign investment treaty.

Facts.

Metalclad Corporation, Plaintiff, is a United States corporation. Plaintiff created a Mexican subsidiary to build a hazardous-waste landfill in the Guadalcazar, a municipality located in the State of San Luis Potosi (State). Before Plaintiff purchased the subsidiary, the Mexican government, Defendant, and the State told Plaintiff that they would issue all the necessary permits for the landfill. Defendant issued the federal construction and operating permits for the landfill, and the State issued the state-operating permit. Despite the fact that locals opposed the project, the construction was finalized. Thereafter, Guadalcazar’s town council declined to issue a municipal construction permit because he claimed the project had adverse environmental impacts and that the location was not geologically proper for a landfill. Plaintiff was not previously notified of the council meeting. Plaintiff unsuccessfully tried to seek litigation in Mexican courts before initiating the arbitration proceeding against Defendant under Chapter 11 of the North American Free Trade Agreement (NAFTA). Plaintiff alleged that Guadalcazar did not have authority over hazardous-waste issues. On the contrary, Defendant claimed that Guadalcazar did have lawful authority to issue such permits.

Issue.

Whether a country has violated the foreign investment treaty when a country fails to keep a promise that all required project permits will be issued.

Held.

Yes, a country has violated the foreign investment treaty when a country fails to keep a promise that all required project permits will be issued.

Discussion.

When a country fails to keep a promise that all required project permits will be issued, the country has violated the foreign investment treaty. Based on NAFTA’s principle of transparency, all legal requirements that impact investments must be disclosed to all affected investors to eliminate uncertainty. In this case, assuming arguendo that a municipal construction permit was required, Defendant had the controlling authority over hazardous-waste assessments. In contrast, Guadalcazar’s authority over such assessments were only for matters related to the landfill’s physical construction or site deficiencies. When Defendant’s issued the federal permits, Defendant demonstrated that it was satisfied that the project, despite its sensitivity to environmental concerns. Moreover, the permit was denied at a meeting for which Plaintiff was never given any notice of. Additionally, the denial was founded upon the projects environmental concerns, not problems regarding physical defects. Because Defendant failed to provide a transparent and foreseeable framework for Plaintiff’s investment, Plaintiff was not treated fairly or equitably, as required under NAFTA Article 1105. Further, Defendant and Guadalcazar’s actions resulted in indirect expropriation without just compensation, as required under NAFTA Article 1110. Under Article 1110, no party to NAFTA may directly or indirectly expropriate an investment unless it is for a (1) public purpose, (2) on a nondiscriminatory basis, (3) in compliance with due process of law, and (4) with payment of just compensation. In this case, Guadalcazar’s denial of the permit, due to environmental considerations, caused an indirect expropriation because Guadalcazar did not have the authority to issue such denial. Likewise, Defendant represented himself in a manner in which Plaintiff relied upon, and Defendant did not provide Plaintiff a basis for the denial in a timely or orderly fashion. Lastly, Plaintiff is authorised to seek damages based on its investment costs, but Plaintiff may not recover future profits, as those damages are too speculative. Overall, Defendant is liable to Plaintiff in the amount of $16,685,000, and 6 percent interest, compounded monthly, for any unpaid portion of the award.