Metalclad Corporation and Subsidiaries
Pro forma Condensed Consolidated Balance Sheet(Unaudited)
as of June 30, 2000
<TABLE><S> <C> <C> <C>
As reported in form 10-Q Pro Forma
as of Pro Forma as of
June 30, 2000 Adjustments June 30, 2000
------------------------ ------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 307,882 $ - $ 307,882
Accounts receivable, net 2,530,693 - 2,530,693
Inventories 180,323 - 180,323
Receivables from related parties 58,859 583,248(4) 642,107
Other current assets 479,237 - 479,237
Note receivable -- sale of assets 779,402 - 779,402
Accounts receivable -- NAFTA award - 16,685,000(1) 16,685,000
--------- ---------- ----------
Total current assets 4,336,396 17,268,248 21,604,644
Property, plant and equipment, net 372,512 - 372,512
Net assets of discontinued operations 4,870,172 (4,870,172)(2) -
Other assets 25,086 - 25,086
--------- ---------- ----------
$9,604,166 $12,398,076 $22,002,242
========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,572,606 $ - $ 1,572,606
Other accounts payable--discontinued
operations 151,657 1,000,000(3) 1,151,657
Accrued expenses/income taxes 374,384 200,000(6) 574,384
Other current liabilities 22,418 - 22,418
Current portion of long term debt 56,795 - 56,795
Convertible zero coupon notes 2,188,950 - 2,188,950
--------- ---------- ----------
Total current liabilities 4,366,810 1,200,000 5,566,810
Long term debt, less current position 135,462 - 135,462
Convertible subordinated debentures 360,000 - 360,000
--------- ---------- ----------
Total liabilities 4,862,272 1,200,000 6,062,272
Shareholders' equity:
Common stock 515,050 - 515,050
Additional paid in capital 65,235,348 - 65,235,348
Accumulated deficit (58,869,833) 9,059,405(1)(2)(3)(5)(6) (49,810,428)
Officers' receivable (583,248) 583,248(4) -
Accumulated other comprehensive income (1,555,423) 1,555,423(5) -
--------- ---------- ----------
4,741,894 11,198,076 15,939,970
--------- ---------- ----------
$9,604,166 $12,398,076 $22,002,242
========= ========== ==========
</TABLE>
Metalclad Corporation and Subsidiaries
Pro forma Condensed Consolidated Statement of Operations (Unaudited)
for the Six Months Ended June 30, 2000
<TABLE><S> <C> <C> <C>
As reported in form 10-Q Pro Forma
for the six months ended Pro Forma for the six months ended
June 30, 2000 Adjustments June 30, 2000
------------------------ ------------- ------------------------
Revenues:
Contract revenues $ 8,084,152 $ - $ 8,084,152
Material sales 51,111 - 51,111
Other income 9,269 - 9,269
---------- --------- ----------
8,144,532 - 8,144,532
Operating Costs and Expenses:
Contract costs and expenses 7,099,180 - 7,099,180
Cost of materials sales 30,587 - 30,587
Selling, general and administrative 720,999 - 720,999
---------- --------- ----------
7,850,766 - 7,850,766
Operating income (loss)-Insulation business 293,766 - 293,766
Corporate expense (872,673) - (872,673)
Costs associated with NAFTA arbitration
decision - (7,425,595)(2)(3)(5) (7,425,595)
---------- --------- ----------
Operating profit (loss) (578,907) (7,425,595) (8,004,502)
Interest (expense)/income (130,906) - (130,906)
Other income (expense) 9,627 - 9,627
Other income - NAFTA award - 16,685,000(1) 16,685,000
---------- --------- ----------
Loss from continuing operations
before income taxes $ (700,186) $ - (700,186)
Loss from discontinued operations before
income taxes (63,187) 9,259,405 9,196,218
Income taxes - (200,000)(6) (200,000)
========== ========= =========
Net income (loss) $ (763,373) $9,059,405 $8,296,032
========== ========= =========
Weighted average number of shares 5,119,575 5,119,575 5,119,575
Gain(loss) per share of common stock,
continuing operations--basic and diluted $(0.14) $ - $(0.14)
===== ==== =====
Gain(loss) per share of common stock,
discontinued operations--basic and
diluted $(0.01) $1.77 $1.76
===== ==== ====
Gain(loss) per share of common stock--
basic and diluted $(0.15) $1.77 $1.62
===== ==== ====
</TABLE>
Metalclad Corporation and Subsidiaries
Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements
Note 1 Unaudited Pro Forma Adjustments:
(1) Record NAFTA award of $16,685,000.
(2) To write-off the balance of Net Assets of Discontinued
Operations due to the transfer of title condition of the final NAFTA
award. These assets are comprised of capitalized landfill costs in the US
in the amount of $2,185,950, fixed assets recorded in Mexico in the amount
of $2,215,638 and US goodwill net of accumulated Mexican entity losses of
approximately $468,584. This $4,900,000 is net of approximately $15.5
million in previously expensed costs associated with the facility.
(3) To accrue certain legal and administrative costs, of
$1,000,000 associated with the NAFTA award.
(4) Reclass officer's note's receivable from Equity to Receivables
from Related Parties.
(5) Adjustment to record the removal of the accumulated foreign
currency translation associated with the net assets included in NAFTA
Arbitration decision.
(6) To accrue estimated income taxes.
INTERNATIONAL CENTRE FOR CASE No.
ARB(AF)/97/1
SETTLEMENT OF INVESTMENT DISPUTES
(ADDITIONAL FACILITY)
B E T W E E N:
METALCLAD CORPORATION
Claimant
and
THE UNITED MEXICAN STATES
Respondent
--------------------------
AWARD
-------------------------
Before the Arbitral Tribunal constituted
under
Chapter Eleven of the North American Free
Trade Agreement, and comprised of:
Professor Sir Elihu Lauterpacht, QC, CBE
President
Mr Benjamin R. Civiletti
Mr Jose Luis Siqueiros
Date of dispatch to the parties:
August 30, 2000
TABLE OF CONTENTS
-----------------
Paragraph
I. INTRODUCTION 1
II. THE PARTIES 2-5
A. The Claimant 2-4
B. The Respondent 5
III. OTHER ENTITIES 6
IV. PROCEDURAL HISTORY 7-27
V. FACTS AND ALLEGATIONS 28-69
A. The Facilities at Issue 28-29
B. Metalclad's Purchase of the Site 30-36
and its Landfill Permits
C. Construction of the Hazardous 37-44
Waste Landfill
D. Metalclad is Prevented from 45-69
Operating the Landfill
VI. APPLICABLE LAW 70-71
VII. THE TRIBUNAL'S DECISION 72-112
A. Responsibility for the conduct of 73
state and local governments
B. NAFTA, Article 1105: 74-101
fair and equitable treatment
C. NAFTA, Article 1110: 102-112
Expropriation
VIII. QUANTIFICATION OF DAMAGES OR 113-129
COMPENSATION
A. Basic Elements of Valuation 113-125
B. "Bundling" 126
C. Remediation 127
D. Interest 128
E. Recipient 129
IX. COSTS 130
X. AWARD 131
I. INTRODUCTION
1. This dispute arises out of the activities of the Claimant,
Metalclad Corporation (hereinafter "Metalclad"), in the Mexican
Municipality of Guadalcazar (hereinafter "Guadalcazar"), located in
the Mexican State of San Luis Potosi (hereinafter "SLP"). Metalclad
alleges that Respondent, the United Mexican States (hereinafter
"Mexico"), through its local governments of SLP and Guadalcazar,
interfered with its development and operation of a hazardous waste
landfill. Metalclad claims that this interference is a violation of
the Chapter Eleven investment provisions of the North American Free
Trade Agreement (hereinafter "NAFTA"). In particular, Metalclad
alleges violations of (i) NAFTA, Article 1105, which requires each
Party to NAFTA to "accord to investments of investors of another Party
treatment in accordance with international law, including fair and
equitable treatment and full protection and security"; and (ii) NAFTA,
Article 1110, which provides 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 tantamount to
nationalization or expropriation of such an investment
('expropriation'), except: (a) for a public purpose; (b) on a
non-discriminatory basis; (c) in accordance with due process of law and
Article 1105(1); and (d) on payment of compensation in accordance with
paragraphs 2 through 6". Mexico denies these allegations.
II. THE PARTIES
A. The Claimant
2. Metalclad is an enterprise of the United States of America,
incorporated under the laws of Delaware. Eco-Metalclad Corporation
(hereinafter "ECO") is an enterprise of the United States of America,
incorporated under the laws of Utah. ECO is wholly-owned by
Metalclad, and owns 100% of the shares in Ecosistemas Nacionales, S.A.
de C.V. (hereinafter "ECONSA"), a Mexican corporation. In 1993,
ECONSA purchased the Mexican company Confinamiento Tecnico de Residuos
Industriales, S.A. de C.V. (hereinafter "COTERIN") with a view to the
acquisition, development and operation of the latter's hazardous waste
transfer station and landfill in the valley of La Pedrera, located in
Guadalcazar. COTERIN is the owner of record of the landfill property
as well as the permits and licenses which are at the base of this
dispute.
3. COTERIN is the "enterprise" on behalf of which Metalclad has, as
an "investor of a Party", submitted a claim to arbitration under
NAFTA, Article 1117.
4. In these proceedings, Metalclad has been represented by:
Clyde C. Pearce, Esq.
Law Offices of Clyde C. Pearce
1418 South Main Street
Suite 201
Salinas, California 93908
USA.
B. The Respondent
5. The Respondent is the Government of the United Mexican States.
It has been represented by:
Lic. Hugo Perezcano Diaz
Consultor Juridico
Subsecretaria de Negociaciones Comerciales
Internacionales
Direccion General de Consultoria Juridica de
Negociaciones
Secretaria de Comercio y Fomento Industrial
Alfonso Reyes No. 30, Piso 17
Colonia Condesa
Mexico, Distrito Federal, C.P 06149
Mexico.
III. OTHER ENTITIES
6. The Town Council of Guadalcazar, SLP, is the municipal
government of Guadalcazar, the site of the landfill project. While
neither Guadalcazar nor SLP are named as Respondents, Metalclad
alleges that Guadalcazar and SLP took some of the actions claimed to
constitute unfair treatment and expropriation violative of NAFTA.
IV. PROCEDURAL HISTORY
7. On October 2, 1996, Metalclad delivered to Mexico a Notice of
Intent to Submit a Claim to Arbitration in accordance with NAFTA,
Article 1119, thereby instituting proceedings on behalf of its wholly
owned enterprise, COTERIN, for purposes of standing under NAFTA,
Article 1117. On December 30, 1996, Metalclad delivered to Mexico a
written consent and waiver in compliance with NAFTA, Article
1121(2)(a) and (b).
8. On January 2, 1997, and pursuant to the NAFTA, Article 1120,
Metalclad filed its Notice of Claim with the International Centre for
Settlement of Investment Disputes (hereinafter "ICSID"),[1] and
requested the Secretary-General of ICSID to approve and register its
application and to permit access to the ICSID Additional Facility.
9. On January 13, 1997, the Secretary-General of ICSID informed the
parties that the requirements of Article 4(2) of the ICSID Additional
Facility Rules had been fulfilled and that Metalclad's application for
access to the Additional Facility was approved. The Secretary-General
of ICSID issued a Certificate of Registration of the Notice of Claim
on that same day.
10. On May 19, 1997, the Tribunal was constituted. The Secretary-
General of ICSID informed the parties that the Tribunal was "deemed to
have been constituted and the proceedings to have begun" on May 19,
1997, and that Mr. Alejandro A. Escobar, ICSID, would serve as
Secretary of the Tribunal. All subsequent written communications
between the Tribunal and the parties were made through the ICSID
Secretariat.
11. The first session of the Tribunal was held, with the parties'
agreement, in Washington, D.C. on July 15, 1997. In accordance with
Article 21 of the ICSID Arbitration (Additional Facility) Rules
(hereinafter "the Rules"), the Tribunal then determined that the place
of arbitration would be Vancouver, British Columbia, Canada. The
parties accepted that determination by the Tribunal.
12. Numerous requests for production of documents were exchanged by
the parties, some of which were allowed, and some of which were
disallowed, particularly those that came later in the proceedings.
Through instructions given by its President,[2] the Tribunal issued a
ruling on April 27, 1999, relating to Mexico's April 14, 1999 Request
for Production of Documents. The President of the Tribunal indicated
that he could not, at that stage of the case, decide the extent to
-------------------
[1] Under NAFTA, Article 1120(1)(b), a disputing investor may submit
its claim to arbitration under the Additional Facility Rules of ICSID
provided that either the disputing Party whose measure is alleged to
be a breach referred to in Article 1117 (in this case, Mexico) or the
Party of the investor (in this case, the United States of America),
but not both, is a party to the ICSID Convention. The United States
of America is a party to the ICSID Convention; Mexico is not. Hence
the Additional Facility Rules of ICSID appropriately govern the
administration of these proceedings.
[2] At the first session of the Tribunal, of July 15, 1997, the
parties agreed that the President of the Tribunal should have the
power to determine procedural matters.
which the requested documents and materials might be relevant to the
case, but ordered Metalclad to produce the documents at issue and
noted that Metalclad might seek an award of costs related to the
production should the requests be adjudged unreasonable or improper.
No such finding has been made.
13. On September 10, 1997, pursuant to NAFTA, Article 1134 providing
for interim measures of protection and Article 28 of the Rules
providing for Procedural Orders. Mexico filed a Request for a
Confidentiality Order seeking a formal order that the proceedings be
confidential. Metalclad filed its response on October 9, 1997. On
October 27, 1997, the Tribunal issued a determination, which in its
material part reads as follows:
"There remains nonetheless a question as to whether there
exists any general principle of confidentiality that would
operate to prohibit public discussion of the arbitration
proceedings by either party. Neither the NAFTA nor the ICSID
(Additional Facility) Rules contain any express restriction on
the freedom of the parties in this respect. Though it is
frequently said that one of the reasons for recourse to
arbitration is to avoid publicity, unless the agreement between
the parties incorporates such a limitation, each of them is still
free to speak publicly of the arbitration. It may be observed
that no such limitation is written into such major arbitral texts
as the UNCITRAL Rules or the draft Articles on Arbitration
adopted by the International Law Commission. Indeed, as has been
pointed out by the Claimant in its comments, under United States
security laws, the Claimant, as a public company traded on a
public stock exchange in the United States, is under a positive
duty to provide certain information about its activities to its
shareholders, especially its involvement in a process the outcome
of which could perhaps significantly affect its share value.
"The above having been said, it still appears to the
Arbitral Tribunal that it would be of advantage to the orderly
unfolding of the arbitral process and conducive to the
maintenance of working relations between the Parties if during
the proceedings they were both to limit public discussion of the
case to a minimum, subject only to any externally imposed
obligation of disclosure by which either of them may be legally
bound".
14. On October 14, 1997, Metalclad filed its Memorial. On December
17, 1997, Mexico filed a Request for an Extension of Time for the
filing of its Counter-memorial. Metalclad filed an Opposition to the
requested extension, Mexico filed a Reply and Metalclad filed a
Rejoinder. On January 7, 1998, the Tribunal granted Mexico's request
for an extension and ordered that Mexico's Counter-Memorial be filed
February 17, 1998.
15. On February 17, 1998, Mexico filed its Counter-Memorial without
objection. Certain exhibits of Mexico's Counter-Memorial were filed
May 22, 1998, and Mexico's translations of certain exhibits were filed
with the Claimant on July 17, 1998 and with the Secretariat on July
20, 1998.
16. On February 20, 1998, Metalclad filed a Motion for Sanctions
regarding Mexico's "untimely" filing of its Counter-Memorial.
Metalclad objected to Mexico's failure to submit translations of all
pertinent documents with the Counter-Memorial on the date due and set
by previous Order of the Arbitral Tribunal. Mexico filed an
Opposition to the Motion for Sanctions, to which Metalclad filed a
Reply and Rejoinder, to which Mexico filed an additional Opposition.
On March 31, 1998, the Tribunal denied Metalclad's Motion for
Sanctions and stated that non-acceptance of the Counter-Memorial
and/or the exclusion of certain documents from consideration would be
excessive under the circumstances. The Tribunal further stated that
it had been "unable to identify significant, if any, harm suffered by
the Claimant by reason of the delay in the filing of the
translations."
17. On April 6, 1998, Metalclad filed a Request to Submit a Reply to
Mexico's Counter-Memorial, to which Mexico filed an Opposition. On
April 20, 1998, the Tribunal granted Metalclad's Request to Submit a
Reply, and ordered Metalclad to file the same by June 30, 1998. In
its Order, the Tribunal noted that the date for Mexico's Rejoinder
would be set after the Tribunal had considered the Reply.
18. On June 22, 1998, Metalclad filed a Motion for Additional Time
to File its Reply, to which Mexico filed a Response. On June 29,
1998, the Tribunal granted Metalclad's Motion for Additional Time and
ordered the Reply to be filed August 6, 1998. On July 28, 1998, the
Tribunal granted the Claimant's request for a further extension of
time period for filing its Reply until August 21, 1998.
19. On August 21, 1998, Metalclad filed its Reply without objection.
Transcriptions of portions of the American Appraisal Associate's
("AAA") Expert Report were filed September 3, 1998. Translations of
the Reply were filed September 22, 1998 and translations of the AAA
Expert Report were filed September 28, 1998.
20. On October 5, 1998, Mexico filed Observations regarding
Metalclad's Reply. Metalclad filed a Reply to the Observations, to
which Mexico filed a Reply. On November 13, 1998, the Tribunal denied
Mexico's requests for exclusion of certain information submitted with
the Reply and for the award of costs at that point in time. The
Tribunal ordered Mexico to file its Rejoinder by March 19, 1999.
21. On February 22, 1999, Mexico filed a Request for an Extension of
Time for the Filing of its Rejoinder. On March 4, 1999, the Tribunal
granted Mexico's Request for an Extension of Time and ordered Mexico
to file the Rejoinder by April 19, 1999. In the same Order, the
Tribunal set the pre-hearing conference for the marshaling of the
evidence for July 6, 1999 in Washington, D.C. The Tribunal also
ordered the parties' witness lists to be filed by June 11, 1999,
together with an outline of each witness's testimony and an estimate
of time for each party's presentation of its case and for the
examination of witnesses. The Tribunal further set the hearing on the
merits for August 30, 1999.
22. On March 11, 1999, Mexico filed a Request for Production of
Documents. Metalclad filed a Response to Mexico's Request, to which
Mexico filed a Reply. On April 14, 1999, Mexico then filed a request
for an extension of one month in the time for filing its Rejoinder.
On April 16, 1999, the Tribunal granted in part Mexico's Request for
an Extension and ordered that the Rejoinder by filed by May 3, 1999.
The Tribunal further extended the time for the parties to submit their
marshaling of the evidence briefs to June 18, 1999. On May 3, 1999,
Mexico filed its Rejoinder.
23. During the written phase of the pleadings, statements from the
following persons were submitted by the Parties: by Metalclad --
American Appraisal Associates, Augustina Armijo Bautista, Kevin C.
Brennan, Gustavo Carvajal Isunza, Francisco Castillo Ayala, Centro
JURICI, Ramon Chavez Quirarte, Anthony Dabbene, Daniel de la Torre,
Jorge de la Torre, Lee A. Deets, William E. Gordon, Javier Guerra
Cisneros, Bruce H. Haglund, Jaime E. Herrera, Ambassador James R.
Jones, Grant S. Kesler, Ariel Miranda Nieto, Paul Mitchener, T. Daniel
Neveau, Herbert L. Oakes Jr., Sandra Ray-Baucom, David Robinson,
Sergio Reyes Lujan, Humberto C. Rodarte Ramon, Mario Salgado de la
Sancha, Leland E. Sweetser, Anthony Talamantez, Mike Tuckett, Roy
Zanatta; by Mexico -- Luis Manuel Abella Armella, Sergio Aleman
Gonzalez, Rene Altamirano Perez, Salomon Avila Perez, Antonio Azuela
de la Cueva, Fernando Bejarano, Alan Borner, John C. Butler III, Julia
Carabias Lillo, Juan Carrera Mendoza, Jose Ramon Cossio Dias, Pablo
Cruz Llanez, Kevin Dages, Jaime de la Cruz Nogueda, Jose Mario de la
Garza Mendizabal, Carlos de Silva, Fernando Diaz-Barriga Martinez,
Hector Raul Garcia Leos, Jorge Adolfo Hermosillo Silva, Francisco
Enrique Hernandez Sanchez, Sergio Lopez Ayllon, Joel Milan, Pedro
Medellin Milan, Hermilo Mendez Aguilar, Angelina Nunez, Santiago Onate
Laborde, Rogelio Orta Campos, Jose Antonio Ortega Rivero, Praxedis
Palomo Tovar, Officials of PRODIN, Leonel Ramos Torres, Ronald E.
Robertson, Aurelio Romo Navarro, Juan Antonio Romo, Horacio Sanchez
Unzueta, Leonel Serrato Sanchez, Ulises Schmill Ordonez, Marcia
Williams, Ramiro Zaragoza Garcia, Mark Zmijewski.
24. As permitted by NAFTA, Article 1128, Canada made a written
submission to the Tribunal on July 28, 1999. Although Canada does not
have any specific commercial interest in the dispute in this case, the
submission addressed the interpretation of NAFTA, Article 1110
relating to expropriation and compensation. Specifically, Canada
rejected Metalclad's suggestion that NAFTA, Article 1110 is a
codification of the United States' position on the rules of
international law regarding expropriation and compensation.
25. With the agreement of the parties, a hearing was held in
Washington, D.C. from August 30, 1999 through September 9, 1999, at
which both parties appeared and presented witnesses. The Tribunal
directed that only those portions of the written submissions that were
disputed were to be introduced at the hearing. Witnesses called by
Metalclad for cross-examination were Julia Carabias Lillo, Horacio
Sanchez Unzuetta, Pedro Medellin Milan, Leonel Ramos Torres, Marcia
Williams and William Butler III; witnesses called for cross-
examination by Mexico were Grant S. Kesler, Gustavo Carvajal Isunza,
Anthony Dabbene, Lee A. Deets ad Daniel T. Neveau.
26. The Tribunal posed questions to the parties, which were
addressed by the parties in their post-hearing briefs submitted on
November 9, 1999. Full verbatim transcripts were made of the hearing
and distributed to the parties.
27. As permitted by NAFTA, Article 1128, the United States made a
written submission to the Tribunal on November 9, 1999. Although the
United States does not have any specific commercial interest in the
dispute in this case, the submission set forth the United States'
position that the actions of local governments, including
municipalities, are subject to NAFTA standards. The United States
also submitted that the NAFTA, Article 1110, term "tantamount to
expropriation" addressed both measures that directly expropriate and
measures tantamount to expropriation that thereby indirectly
expropriate investment. The United States rejected the suggestion
that the term "tantamount to expropriation" was intended to create a
new category of expropriation not previously recognized in customary
international law.
V. FACTS AND ALLEGATIONS
A. The Facilities at Issue
28. In 1990 the federal government of Mexico authorized COTERIN to
construct and operate a transfer station for hazardous waste in La
Pedrera, a valley located in Guadalcazar in SLP. The site has an area
of 814 hectares and lies 100 kilometers northeast of the capital city
of SLP, separated from it by the Sierra Guadalcazar mountain range, 70
kilometers from the city of Guadalcazar. Approximately 800 people
live within ten kilometers of the site.
29. On January 23, 1993, the National Ecological Institute
(hereinafter "INE"), an independent sub-agency of the federal
Secretariat of the Mexican Environment, National Resources and Fishing
(hereinafter "SEMARNAP"), granted COTERIN a federal permit to
construct a hazardous waste landfill in La Pedrera (hereinafter "the
landfill").
B. Metalclad's Purchase of the Site and its Landfill Permits
30. Three months after the issuance of the federal construction
permit, on April 23, 1993, Metalclad entered into a 6-month option
agreement to purchase COTERIN together with its permits, in order to
build the hazardous waste landfill.
31. Shortly thereafter, on May 11, 1993, the government of SLP
granted COTERIN a state land use permit to construct the landfill.
The permit was issued subject to the condition that the project adapt
to the specifications and technical requirements indicated by the
corresponding authorities, and accompanied by the General Statement
that the license did not prejudge the rights or ownership of the
applicant and did not authorize works, constructions or the
functioning of business or activities.
32. One month later, on June 11, 1993, Metalclad met with the
Governor of SLP to discuss the project. Metalclad asserts that at
this meeting it obtained the Governor's support for the project. In
fact, the Governor acknowledged at the hearing that a reasonable
person might expect that the Governor would support the project if
studies confirmed the site as suitable or feasible and if the
environmental impact was consistent with Mexican standards.
33. Metalclad further asserts that it was told by the President of
the INE and the General Director of the Mexican Secretariat of Urban
Development and Ecology (hereinafter "SEDUE")[3] that all necessary
permits for the landfill had been issued with the exception of the
federal permit for operation of the landfill. A witness statement
submitted by the President of the INE suggests that a hazardous waste
landfill could be built if all permits required by the corresponding
federal and state laws have been acquired.
34. Metalclad also asserts that the General Director of SEDUE told
Metalclad that the responsibility for obtaining project support in the
state and local community lay with the federal government.
-----------------
[3] SEDUE is the predecessor organization to SEMARNAP.
as a matter of course; and that the Municipality lacked any basis for
denying the construction permit. Mexico denies that any federal
officials represented that a municipal permit was not required, and
affirmatively states that a permit was required and that Metalclad
knew, or should have known, that the permit was required. 36.
Metalclad asserts it would not have exercised its COTERIN purchase
option but for the apparent approval and support of the project by
federal and state officials.
35. On August 10, 1993, the INE granted COTERIN the federal permit
for operation of the landfill. On September 10, 1993, Metalclad
exercised its option and purchased COTERIN, the landfill site and the
associated permits.
36. Metalclad asserts it would not have exercised its COTERIN
purchase option but for the apparent approval and support of the
project by federal and state officials.
C. Construction of the Hazardous Waste Landfill
37. Metalclad asserts that shortly after its purchase of COTERIN,
the Governor of SLP embarked on a public campaign to denounce and
prevent the operation of the landfill.
38. Metalclad further asserts, however, that in April 1994, after
months of negotiation, Metalclad believed it had secured SLP's
agreement to support the project. Consequently, in May 1994, after
receiving an eighteen-month extension of the previously issued federal
construction permit from the INE, Metalclad began construction of the
landfill. Mexico denies that SLP's agreement or support had ever been
obtained.
39. Metalclad further maintains that construction continued openly
and without interruption through October 1994. Federal officials and
state representatives inspected the construction site during this
period, and Metalclad provided federal and state officials with
written status reports of its progress.
40. On October 26, 1994, when the Municipality ordered the cessation
of all building activities due to the absence of a municipal
construction permit, construction was abruptly terminated.
41. Metalclad asserts it was once again told by federal officials
that it had all the authority necessary to construct and operate the
landfill; that federal officials said it should apply for the
municipal construction permit to facilitate an amicable relationship
with the Municipality; that federal officials assured it that the
Municipality would issue the permit
42. On November 15, 1994, Metalclad resumed construction and
submitted an application for a municipal construction permit.
43. On January 31, 1995, the INE granted Metalclad an additional
federal construction permit to construct the final disposition cell
for hazardous waste and other complementary structures such as the
landfill's administration building and laboratory.
44. In February 1995, the Autonomous University of SLP (hereinafter
"UASLP") issued a study confirming earlier findings that, although the
landfill site raised some concerns, with proper engineering it was
geographically suitable for a hazardous waste landfill. In March
1995, the Mexican Federal Attorney's Office for the Protection of the
Environment (hereinafter "PROFEPA"), an independent sub-agency of
SEMARNAP, conducted an audit of the site and also concluded that, with
proper engineering and operation, the landfill site was geographically
suitable for a hazardous waste landfill.
D. Metalclad is Prevented from Operating the Landfill
45. Metalclad completed construction of the landfill in March 1995.
On March 10, 1995, Metalclad held an "open house," or "inauguration,"
of the landfill which was attended by a number of dignitaries from the
United States and from Mexico's federal, state and local governments.
46. Demonstrators impeded the "inauguration," blocked the entry and
exit of busses carrying guests and workers, and employed tactics of
intimidation against Metalclad. Metalclad asserts that the
demonstration was organized at least in part by the Mexican state and
local governments, and that state troopers assisted in blocking
traffic into and out of the site. Metalclad was henceforth
effectively prevented from opening the landfill.
47. After months of negotiation, on November 25, 1995, Metalclad and
Mexico, through two of SEMARNAP's independent sub-agencies (the INE
and PROFEPA), entered into an agreement that provided for and allowed
the operation of the landfill (hereinafter "the Convenio").
48. The Convenio stated that an environmental audit of the site was
carried out from December, 1994 through March, 1995; that the purpose
of the audit was to check the project's compliance with the laws and
regulations; to check the project's plans for prevention of and
attention to emergencies; and to study the project's existing
conditions, control proceedings, maintenance, operation, personnel
training and mechanisms to respond to environmental emergencies. The
Convenio also stated that, as the audit detected certain deficiencies,
Metalclad was required to submit an action plan to correct them; that
Metalclad did indeed submit an action plan including a corresponding
site remediation plan; and that Metalclad agreed to carry out the work
and activities set forth in the action plan, including those in the
corresponding plan of remediation. These plans required that
remediation and commercial operations should take place simultaneously
within the first three years of the landfill's operation. The
Convenio provided for a five-year term of operation for the landfill,
renewable by the INE and PROFEPA. In addition to requiring
remediation, the Convenio stated that Metalclad would designate 34
hectares of its property as a buffer zone for the conservation of
endemic species. The Convenio also required PROFEPA to create a
Technical-Scientific Committee to monitor the remediation and required
that representatives of the INE, the National Autonomous University of
Mexico and the UASLP be invited to participate in that Committee. A
Citizen Supervision Committee was to be created. Metalclad was to
contribute two new pesos per ton of waste toward social works in
Guadalcazar and give a 10% discount for the treatment and final
disposition of hazardous waste generated in SLP. Metalclad would also
provide one day per week of free medical advice for the inhabitants of
Guadalcazar through Metalclad's qualified medical personnel, employ
manual labor from within Guadalcazar, and give preference to the
inhabitants of Guadalcazar for technical training. Metalclad would
also consult with government authorities on matters of remediation and
hazardous waste, and provide two courses per year on the management of
hazardous waste to personnel of the public, federal, state and
municipal sectors, as well as social and private sectors.
49. Metalclad asserts that SLP was invited to participate in the
process of negotiating the Convenio, but that SLP declined. The
Governor of SLP denounced the Convenio shortly after it was publicly
announced.
50. On December 5, 1995, thirteen months after Metalclad's
application for the municipal construction permit was filed the
application was denied. In doing this, the Municipality recalled its
decision to deny a construction permit to COTERIN in October 1991 and
January 1992 and noted the "impropriety" of Metalclad's construction
of the landfill prior to receiving a municipal construction permit.
51. There is no indication that the Municipality gave any
consideration to the construction of the landfill and the efforts at
operation during the thirteen months during which the application was
pending.
52. Metalclad has pointed out that there was no evidence of
inadequacy of performance by Metalclad of any legal obligation, nor
any showing that Metalclad violated the terms of any federal or state
permit; that there was no evidence that the Municipality gave any
consideration to the recently completed environmental reports
indicating that the site was in fact suitable for a hazardous waste
landfill; that there was no evidence that the site, as constructed,
failed to meet any specific construction requirements; that there was
no evidence that the Municipality ever required or issued a municipal
construction permit for any other construction project in Guadalcazar;
and that there was no evidence that there was an established
administrative process with respect to municipal construction permits
in the Municipality of Guadalcazar.
53. Mexico asserts that Metalclad was aware through due diligence
that a municipal permit might be necessary on the basis of the case of
COTERIN (1991, 1992), and other past precedents for various projects
in SLP.
54. Metalclad was not notified of the Town Council meeting where the
permit application was discussed and rejected, nor was Metalclad given
any opportunity to participate in that process. Metalclad's request
for reconsideration of the denial of the permit was rejected.
55. In December 1995, shortly following the Municipality's rejection
of Metalclad's permit application, the Municipality filed an
administrative complaint with SEMARNAP challenging the Convenio.
SEMARNAP denied the Municipality's complaint.
56. On January 31, 1996, the Municipality filed an amparo proceeding
in the Mexican courts challenging SEMARNAP's dismissal of its Convenio
complaint. An injunction was issued and Metalclad was barred from
conducting any hazardous waste landfill operations. The amparo was
finally dismissed, and the injunction lifted, in May 1999.
57. On February 8, 1996, the INE granted Metalclad an additional
permit authorizing the expansion of the landfill capacity from 36,000
tons per year to 360,000 tons per year.
58. From May 1996 through December 1996, Metalclad and the State of
SLP attempted to resolve their issues with respect to the operation of
the landfill. These efforts failed and, on January 2, 1997, Metalclad
initiated the present arbitral proceedings against the Government of
Mexico under Chapter Eleven of the NAFTA.
59. On September 23, 1997, three days before the expiry of his term,
the Governor issued an Ecological Decree declaring a Natural Area for
the protection of rare cactus. The Natural Area encompasses the area
of the landfill. Metalclad relies in part on this Ecological Decree
as an additional element in its claim of expropriation, maintaining
that the Decree effectively and permanently precluded the operation of
the landfill.
60. Metalclad also alleges, on the basis of reports by the Mexican
media, that the Governor of SLP stated, that the Ecological Decree
"definitely canceled any possibility that exists of opening the
industrial waste landfill of La Pedrera".
61. Metalclad also asserts that a high level SLP official, with
respect to the Ecological Decree and as reported by Mexican media,
"expressed confidence in closing in this way, all possibility for the
United States firm Metalclad to operate its landfill in this zone,
independently of the future outcome of its claim before the Arbitral
Tribunals of the NAFTA treaty."
62. The landfill remains dormant. Metalclad has not sold or
transferred any portion of it.
63. Mexico denies each of these media accounts as they relate to the
Ecological Decree.
64. Mexico also maintains that consideration of the Ecological
Decree is outside the jurisdiction of the Tribunal because the Decree
was enacted after the filing of the Notice of Intent of Arbitration.
More particularly, Mexico argues that NAFTA, Article 1119, entitled
"Notice of Intent to submit a Claim", precludes claims for breaches
that have not yet occurred, relying on the language in that Article
which states that:
"The disputing investor shall deliver to the
disputing Party written notice of its intention to
submit a claim to arbitration at least 90 days
before a claim is submitted, which notice shall
specify:
* * *
(b) The provisions of [the NAFTA] alleged
to have been breached and any other relevant
provisions.
(c) The issues and factual basis for the
claim."
Mexico further invokes NAFTA, Article 1120 which requires that six
months elapse between the events giving rise to a claim and the
submission of the claim. On the basis of these two Articles, Mexico
argues that a claimant must ensure its claim is ripe at the time it is
filed. At the same time, Mexico does not exclude the possibility that
amendments to a claim may be made. Rather, Mexico initially asserted
that in order to ensure fairness and clarity, amendment of a claim or
the presentation of an ancillary claim within Article 48 of the
Additional Facility Rules should be the subject of a formal
application and the required amendment should be stated clearly.
Later, Mexico adjusted its position in its post-hearing brief in which
it argues that Section B of Chapter Eleven does not contemplate the
amendment of ripened claims to include post-claim events. Mexico
contends that Section B of Chapter Eleven modifies the Additional
Facility Rules as regards the amendment of claims and the filing of
ancillary claims, making Article 48 of the Additional Facility Rules
inapplicable.
65. Metalclad's position is that Mexico's analysis of Articles 1119
and 1120 is artificial, and that the six months rule merely sets forth
an initial rule for claim eligibility designed to foster exhaustion of
pre-arbitral methods of dispute resolution. In support of its
position, Metalclad invokes NAFTA, Article 1118, which provides that
disputing parties should first attempt to settle a claim through
consultation or negotiation. Metalclad further adduces policy reasons
in support of its right to base its claim on acts occurring after
submission of its Notice of Claim. First, Metalclad argues that
policies related to the administration of justice support its
position. In particular, it argues that an inability to rely on
post-Notice of Claim acts would deprive parties of redress concerning a
period during which a State might be most inclined to disregard its
treaty obligations. Second, Metalclad argues that requiring a
claimant to forego or defer the airing of subsequent, related,
breaches would be inconsistent with NAFTA's stated aim of creating
effective procedures for the resolution of its disputes. Such an
interpretation, Metalclad suggests, would create serious
inefficiencies by requiring the claimant to bring related actions
seriatim and that those actions would be subject to res judicata
principles to a Claimant's detriment. Metalclad also argues that
injustice would result because claimants will choose, for financial
and other reasons, not to start fresh NAFTA action and tribunals would
be unable to consider acts of bad faith occurring during the
arbitration. Third, Metalclad maintains that its view is consistent
with the ICSID Arbitral Tribunal's broad jurisdiction. Metalclad
points out that the texts mentioned in NAFTA, Article 1120, allow for
amendment of claims and cites Article 48 of the Rules as allowing for
incidental or additional claims provided that such claims are within
the scope of the arbitration agreement of the parties. Metalclad
concludes that the policies underlying NAFTA, Articles 1119 and 1120,
are fulfilled once the appropriate periods have passed prior to
submission of the claim and that the Respondent is not prejudiced by
the amendments, provided that they are made not later than the
Claimant's Reply and that the Respondent is permitted a Rejoinder.
66. The Tribunal accepts Mexico's contention that a case may not be
initiated on the basis of an anticipated breach. However, the
Tribunal cannot accept Mexico's interpretation and application of the
time limits set out in the NAFTA. Metalclad properly submitted its
claim under the Additional Facility Rules as provided under NAFTA,
Article 1120. Article 1120(2) provides that the arbitration rules
under which the claim is submitted shall govern the arbitration except
to the extent modified by Section B of Chapter Eleven. Article 48(1)
of the Rules clearly states that a party may present an incidental or
additional claim provided that the ancillary claim is within the scope
of the arbitration agreement of the parties.
67. The Tribunal does not agree with Mexico's post-hearing position
that Section B of Chapter Eleven modifies Article 48 of the Rules.
The Tribunal believes it was not the intent of the drafters of NAFTA,
Articles 1119 and 1120, to limit the jurisdiction of a Tribunal under
Chapter Eleven in this way. Rather, the Tribunal prefers Mexico's
position, as stated in its Rejoinder, that construes NAFTA Chapter
Eleven, Section B, and Article 48 of the rules as permitting
amendments to previously submitted claims and consideration of facts
and events occurring subsequent to the submission of a Notice of
Claim, particularly where the facts and events arise out of and/or are
directly related to the original claim. A contrary holding would
require a claimant to file multiple subsequent and related actions and
would lead to inefficiency and inequity.
68. The Tribunal agrees with Mexico that the process regarding
amendments to claims must be one that ensures fairness and clarity.
Article 48(2) of the Rules ensures such fairness by requiring that any
ancillary claim be presented not later than the Claimant's Reply. In
this matter, Metalclad presented information relating to the
Ecological Decree and its intent to rely on the Ecological Decree as
early as its Memorial. Mexico subsequently filed its Counter-Memorial
and Rejoinder. The Ecological Decree directly relates to the property
and investment at issue, and Mexico has had ample notice and
opportunity to address issues relating to that Decree.
69. The Tribunal thus finds that, although the Ecological Decree was
issued subsequent to Metalclad's submission of its claim, issues
relating to it were presented by Metalclad in a timely manner and
consistently with the principles of fairness and clarity. Mexico has
had ample opportunity to respond and has suffered no prejudice. The
Tribunal therefore holds that consideration of the Ecological Decree
is within its jurisdiction but, as will be seen, does not attach to it
controlling importance.
VI. APPLICABLE LAW
70. A Tribunal established pursuant to NAFTA Chapter Eleven, Section
B must decide the issues in dispute in accordance with NAFTA and
applicable rules of international law. (NAFTA Article 1131(1)). In
addition, NAFTA, Article 102(2) provides that the Agreement must be
interpreted and applied in the light of its stated objectives and in
accordance with applicable rules of international law. These
objectives specifically include transparency and the substantial
increase in investment opportunities in the territories of the
Parties. (NAFTA Article 102(1)(c)). The Vienna Convention of the Law
of Treaties, Article 31(1) provides that a treaty is to be interpreted
in good faith in accordance with the ordinary meaning to be given to
the terms of the treaty in their context and in the light of the
treaty's object and purpose. The context for the purpose of the
interpretation of a treaty shall comprise, in addition to the text,
including its preamble and annexes, any agreement relating to the
treaty which was made between all the parties in connection with the
conclusion of the treaty. (Id., Article 31(2)(a)). There shall also
be taken into account, together with the context, any relevant rules
of international law applicable in the relations between the parties.
(Id., Article 31(3)). Every treaty in force is binding upon the
parties to it and must be performed by them in good faith. (Id.,
Article 26). A State party to a treaty may not invoke the provisions
of its internal law as justification for its failure to perform the
treaty. (Id., Article 27).
71. The Parties to NAFTA specifically agreed to "ENSURE a
predictable commercial framework for business planning and
investment." (NAFTA Preamble, para. 6 (emphasis in original)). NAFTA
further requires that "[e]ach Party shall ensure that its laws,
regulations, procedures, and administrative rulings of general
application respecting any matter covered by this Agreement are
promptly published or otherwise made available in such a manner as to
enable interested persons and Parties to become acquainted with them."
Id. Article 1802.1.
VII. THE TRIBUNAL'S DECISION
72. Metalclad contends that Mexico, through its local governments of
SLP and Guadalcazar, interfered with and precluded its operation of
the landfill. Metalclad alleges that this interference is a violation
of Articles 1105 and 1110 of Chapter Eleven of the investment
provisions of NAFTA.
A. Responsibility for the conduct of state and local
governments.
73. A threshold question is whether Mexico is internationally
responsible for the acts of SLP and Guadalcazar. The issue was
largely disposed of by Mexico in paragraph 233 of its post-hearing
submission, which stated that "[Mexico] did not plead that the acts of
the Municipality were not covered by NAFTA. [Mexico] was, and remains,
prepared to proceed on the assumption that the normal rule of state
responsibility applies; that is, that the Respondent can be
internationally respnsible for the acts of state organs at all three
levels of government." Parties to that Agreement must "ensure that
all necessary measures are taken in order to give effect to the
provisions of the Agreement, including their observance, except as
otherwise provided in this Agreement, by state and provincial
governments". (NAFTA Article 105) A reference to a state or province
includes local governments of that state or province. (NAFTA Article
201(2)) The exemptions from the requirements of Articles 1105 and 1110
laid down in Article 1108(1) do not extend to states or local
govenments. This approach accords fully with the established position
in customary international law. This has been clearly stated in
Article 10 of the draft articles on state responsibility adopted by
the International Law Commission of the United Nations in 1975 which,
though currently still under consideration, may nonetheless be
regarded as an accurate restatement of the present law: "The conduct
of an organ of a State, of a territorial government entity or of an
entity empowered to exercise elements of the governmental authority,
such organ having acted in that capacity, shall be considered as an
act of the State under international law even if, in the particular
case, the organ exceeded its competence according to internal law or
contravened instructions concerning its activity". (Yearbook of the
International Law Commission, 1975, vol. ii, p.61).
B. NAFTA Article 1105: Fair and equitable Treatment
74. NAFTA Article 1105(1) provides that "each Party shall accord to
investments of investors of another Party treatment in accordance with
international law, including fair and equitable treatment and full
protection and security". For the reasons set out below, 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(1).
75. An underlying objective of NAFTA is to promote and increase
cross-border investment opportunities and ensure the successful
implementation of investment initiatives. (NAFTA Article 102(1))
76. Prominent in the statement of principles and rules that
introduces the Agreement is the reference to "transparency" (NAFTA
Article 102(1)). The Tribunal understands this to include the idea
that all relevant legal requirements for the purpose of initiating,
completing and successfully operating investments made, or intended to
be made, under the Agreement should be capable of being readily known
to all affected investors of another Party. There should be no room
for doubt or uncertainty on such matters. Once the authorities of the
central government of any Party (whose international responnsibility
in such matters has been identified in the preceding section) become
aware of any scope for misunderstanding or confusion in this
connection, it is their duty to ensure that the correct position is
promply determined and clearly stated so that investors can proceed
with all appropriate expedition in the confident belief that they are
acting in accordance with all relevant laws.
77. Metalclad acquired COTERIN for the sole purpose of developing
and operating a hazardous waste landfill in the valley of La Pedrera,
in Guadalcazar, SLP.
78. The Government of Mexico issued federal construction and
operating permits for the landfill prior to Metalclad's purchase of
COTERIN, and the Government of SLP likewise issued a state operating
permit which implied its political support for the landfill project.
79. A central point in this case has been whether, in addition to
the above-mentioned permits, a municipal permit for the construction
of a hazardous waste landfill was required.
80. When Metalclad inquired, prior to its purchase of COTERIN, as to
the necessity for municipal permits, federal officials assured it that
it had all that was needed to undertake the landfill project. Indeed,
following Metalclad's acquisition of COTERIN, the federal government
extended the federal construction permit for eighteen months.
81. As presented and confirmed by Metalclad's expert on Mexican law,
the authority of the municipality extends only to the administration
of the construction permit, "...to grant licenses and permits for
constructions and to participate in the creation and administration of
ecological reserve zones...". (Mexican Const. Art. 115, Fraction V).
However, Mexico's experts on constitutional law expressed a different
view.
82. Mexico's General Ecology Law of 1988 (hereinafter "LGEEPA")
expressly grants to the Federation the power to authorize construction
and operation of hazardous waste landfill. Article 5 of the LGEEPA
provides that the powers of the Federation extend to:
V. [t]he regulation and control of activities considered
to be highly hazardous, and of the generation, handling
and final disposal of hazardous materials and wastes
for the environments of ecosystems, as well as for the
preservation of natural resources, in accordance with
[the] Law, other applicable ordinances and their
regulatory provisions.
83. LGEEPA also limits the environmental powers of the municipality
to issues relating to non-hazardous waste. Specifically, Article 8 of
the LGEEPA grants municipalities the power in accordance with the
provisions of the law and local laws to apply:
[l]egal provisions in matters of prevention and control
of the effects on the environment caused by generation,
transportation, storage, handling treatment and final
disposal of solid industrial wastes which are not
considered to be hazardous in accordance with the
provisions of Article 137 of [the 1988] law. (Emphasis
supplied).
84. The same law also limits state environmental powers to those not
expressly attributed to the federal government. Id., Article 7.
85. Metalclad was led to believe, and did believe, that the federal
and state permits allowed for the construction and operation of the
landfill. Metalclad argues that in all hazardous waste matters, the
Municipality has no authority. However, Mexico argues that
constitutionally and lawfully the Municipality has the authority to
issue construction permits.
86. Even if Mexico is correct that a municipal construction permit
was required, the evidence also shows that, as to hazardous waste
evaluations and assessments, the federal authority's jurisdiction was
controlling and the authority of the municipality only extended to
appropriate construction considerations. Consequently, the denial of
the permit by the Municipality by reference to environmental impact
considerations in the case of what was basically a hazardous waste
disposal landfill, was improper, as was the municipality's denial of
the permit for any reason other than those related to the physical
construction or defects in the site.
87. Relying on the representations of the federal government,
Metalclad started constructing the landfill, and did this openly and
continuously, and with the full knowledge of the federal, state, and
municipal governments, until the municipal "Stop Work Order" on
October 26, 1994. The basis of this order was said to have been
Metalclad's failure to obtain a municipal construction permit.
88. In addition, Metalclad asserted that federal officials told it
that if it submitted an application for a municipal construction
permit, the Municipality would have no legal basis for denying the
permit and that it would be issued as a matter of course. The absence
of a clear rule as to the requirement or not of a municipal
construction permit, as well as the absence of any established
practice or procedure as to the manner of handling applications for a
municipal construction permit, amounts to a failure on the part of
Mexico to ensure the transparency required by NAFTA.
89. Metalclad was entitled to rely on the representations of federal
officials and to believe that it was entitled to continue its
construction of the landfill. In following the advice of these
officials, and filing the municipal permit application on November 15,
1994, Metalclad was merely acting prudently and in the full
expectation that the permit would be granted.
90. On December 5, 1995, thirteen months after the submission of
Metalclad's application -- during which time Metalclad continued its
open and obvious investment activity -- the Municipality denied
Metalclad's application for a construction permit. The denial was
issued well after construction was virtually complete and immediately
following the announcement of the Convenio providing for the operation
of the landfill.
91. Moreover, the permit was denied at a meeting of the Municipal
Town Council of which Metalclad received no notice, to which it
received no invitation, and at which it was given no opportunity to
appear.
92. The Town Council denied the permit for reasons which included,
but may not have been limited to, the opposition of the local
population, the fact that construction had already begun when the
application was submitted, the denial of the permit to COTERIN in
December 1991 and January 1992, and the ecological concerns regarding
the environmental effect and impact on the site and surrounding
communities. None of the reasons included a reference to any problems
associated with the physical construction of the landfill or to any
physical defects therein.
93. The Tribunal therefore finds that the construction permit was
denied without any consideration of, or specific reference to,
construction aspects or flaws of the physical facility.
94. Moreover, the Tribunal cannot disregard the fact that
immediately after the Municipality's denial of the permit it filed an
administrative compliant with SEMARNAP challenging the Convenio. The
Tribunal infers from this that the Municipality lacked confidence in
its right to deny permission for the landfill solely on the basis of
the absence of a municipal construction permit.
95. SEMARNAP dismissed the challenge for lack of standing, which the
Municipality promptly challenged by filing an amparo action. An
injunction was issued, and the landfill was barred from operation
through 1999.
96. In 1997 SLP re-entered the scene and issued an Ecological Decree
in 1997 which effectively and permanently prevented the use by
Metalclad of its investment.
97. The actions of the Municipality following its denial of the
municipal construction permit, coupled with the procedural and
substantive deficiencies of the denial, support the Tribunal's
finding, for the reasons stated above, that the Municipality's
insistence upon and denial of the construction permit in this instance
was improper.[4]
98. This conclusion is not affected by NAFTA Article 1114, which
permits a Party to ensure that investment activity is undertaken in a
manner sensitive to environmental concerns. The conclusion of the
Convenio and the issuance of the federal permits show clearly that
Mexico was satisfied that this project was consistent with, and
sensitive to, its environmental concerns.
99. Mexico failed to ensure a transparent and predictable framework
for Metalclad's business planning and investment. The totality of
these circumstances demonstrates a lack of orderly process and timely
disposition in relation to an investor of a Party acting in the
expectation that it would be treated fairly and justly in accordance
with the NAFTA.
100. Moreover, the acts of the State and the Municipality -- and
therefore the acts of Mexico -- fail to comply with or adhere to the
------------------
[4] The question of turning to NAFTA before exhausting local remedies
was examined by the parties. However, Mexico does not insist that
local remedies must be exhausted. Mexico's position is correct in
light of NAFTA Article 1121(2)(b) which provides that a disputing
investor may submit a claim under NAFTA Article 1117 if both the
investor and the enterprise waive their rights to initiate or continue
before any administrative tribunal or court under the law of any Party
any proceedings with respect to the measure of the disputing Party
that is alleged to be a breach referred to in NAFTA Article 1117.
requirements of NAFTA, Article 1105(1) that each Party accord to
investments of investors of another Party treatment in accordance with
international law, including fair and equitable treatment. This is so
particularly in light of the governing principle that internal law
(such as the Municipality's stated permit requirements) does not
justify failure to perform a treaty. (Vienna Convention on the Law of
Treaties, Arts. 26, 27).
101. The Tribunal therefore holds that Metalclad was not treated
fairly or equitably under the NAFTA and succeeds on its claim under
Article 1105.
C. NAFTA, Article 1110: Expropriation
102. NAFTA Article 1110 provides that "[n]o party shall directly or
indirectly . . .expropriate an investment . . .or take a measure
tantamount to . . .expropriation . . .except: (a) for a public
purpose; (b) on a non-discriminatory basis; (c) in accordance with due
process of law and Article 1105(1); and (d) on payment of compensation
. . . ." "A measure" is defined in Article 201(1) as including "any
law, regulation, procedure, requirement or practice".
103. Thus, expropriation under NAFTA includes not only open,
deliberate and acknowledged takings of property, such as outright
seizure or formal or obligatory transfer of title in favour of the
host State, but also covert or incidental interference with the use of
property which has the effect of depriving the owner, in whole or in
significant part, of the use of reasonably-to-be-expected economic
benefit of property even if not necessarily to the obvious benefit of
the host State.
104. By permitting or tolerating the conduct of Guadalcazar in
relation to Metalclad which the Tribunal has already held amounts to
unfair and inequitable treatment breaching Article 1105 and by thus
participating or acquiescing in the denial to Metalclad of the right
to operate the landfill, notwithstanding the fact that the project was
fully approved and endorsed by the federal government, Mexico must be
held to have taken a measure tantamount to expropriation in violation
of NAFTA Article 1110(1).
105. The Tribunal holds that the exclusive authority for siting and
permitting a hazardous waste landfill resides with the Mexican federal
government. This finding is consistent with the testimony of the
Secretary of SEMARNAP and, as stated above, is consistent with the
express language of the LGEEPA.
106. As determined earlier (see above, para 92), the Municipality
denied the local construction permit in part because of the
Municipality's perception of the adverse environmental effects of the
hazardous waste landfill and the geological unsuitability of the
landfill site. In so doing, the Municipality acted outside its
authority. As stated above, the Municipality's denial of the
construction permit without any basis in the proposed physical
construction or any defect in the site, and extended by its subsequent
administrative and judicial actions regarding the Convenio,
effectively and unlawfully prevented the Claimant's operation of the
landfill.
107. These measures, taken together with the representations of the
Mexican federal government, on which Metalclad relied, and the absence
of a timely, orderly or substantive basis for the denial by the
Municipality of the local construction permit, amount to an indirect
expropriation.
108. The present case resembles in a number of pertinent respects
that of Biloune, et al. V. Ghana Investment Centre, et al., 95 I.L.R.
183, 207-10 (1993) (Judge Schwebel, President; Wallace and Leigh,
Arbitrators). In that case, a private investor was renovating and
expanding a resort restaurant in Ghana. As with Metalclad, the
investor, basing itself on the representations of a government
affiliated entity, began construction before applying for a building
permit. As with Metalclad, a stop work order was issued after a
substantial amount of work had been completed. The order was based on
the absence of a building permit. An application was submitted, but
although it was not expressly denied, a permit was never issued. The
Tribunal found that an indirect expropriation had taken place because
the totality of the circumstances had the effect of causing the
irreparable cessation of work on the project. The Tribunal paid
particular regard to the investor's justified reliance on the
government's representations regarding the permit, the fact that
government authorities knew of the construction for more than one year
before issuing the stop work order, the fact that permits had not been
required for other projects and the fact that no procedure was in
place for dealing with building permit applications. Although the
decision in Biloune does not bind this Tribunal, it is a persuasive
authority and the Tribunal is in agreement with its analysis and its
conclusion.
109. Although not strictly necessary for its conclusion, the Tribunal
also identifies as a further ground for a finding of expropriation the
Ecological Decree issued by the Governor of SLP on September 20, 1997.
This Decree covers an area of 188,758 hectares within the "Real de
Guadalcazar" that includes the landfill site, and created therein an
ecological preserve. This Decree had the effect of barring forever
the operation of the landfill.
110. The Tribunal is not persuaded by Mexico's representation to the
contrary. The Ninth Article, for instance, forbids any work
inconsistent with the Ecological Decree's management program. The
management program is defined by the Fifth Article as on of diagnosing
the ecological problems of the cacti reserve and of ensuring its
ecological preservation. In addition, the Fourteenth Article of the
Decree forbids any conduct that might involve the discharge of
polluting agents on the reserve soil, subsoil, running water or water
deposits and prohibits the undertaking of any potentially polluting
activities. The Fifteenth Article of the Ecological Decree also
forbids any activity requiring permits or licenses unless such
activity is related to the exploration, extraction or utilization of
natural resources.
111. The Tribunal need not decide or consider the motivation or
intent of the adoption of the Ecological Decree. Indeed, a finding of
expropriation on the basis of the Ecological Decree is not essential
to the Tribunal's finding of a violation of NAFTA Article 1110.
However, the Tribunal considers that the implementation of the
Ecological Decree would, in and of itself, constitute an act
tantamount to expropriation.
112. In conclusion, the Tribunal holds that Mexico has indirectly
expropriated Metalclad's investment without providing compensation to
Metalclad for the expropriation. Mexico has violated Article 1110 of
the NAFTA.
VIII. QUANTIFICATION OF DAMAGES OR COMPENSATION
A. Basic Elements of Valuation
113. In this instance, the damages arising under NAFTA, Article 1105
and the compensation due under NAFTA, Article 1110 would be the same
since both situations involve the complete frustration of the
operation of the landfill and negate the possibility of any meaningful
return on Metalclad's investment. In other words, Metalclad has
completely lost its investment.
114. Metalclad has proposed two alternative methods for calculating
damages: the first is to use a discounted cash flow analysis of future
profits to establish the fair market value of the investment
(approximately $90 million); the second is to value Metalclad's actual
investment in the landfill (approximately $20-25 million).
115. Metalclad also seeks an additional $20-25 million for the
negative impact the circumstances are alleged to have had on its other
business operations. The Tribunal disallows this additional claim
because a variety of factors, not necessarily related to the La
Pedrera development, have affected Metalclad's share price. The
casual relationship between Mexico's actions and the reduction in
value of Metalclad's other business operations are too remote and
uncertain to support this claim. This element of damage is,
therefore, left aside.
116. Mexico asserts that a discounted cash flow analysis is
inappropriate where the expropriated entity is not a going concern.
Mexico offers an alternative calculation of fair market value based on
COTERIN's "market capitalization." Mexico's "market capitalization"
calculations show a loss to Metalclad of $13-15 million.
117. Mexico also suggests a direct investment value approach to
damages. Mexico estimates Metalclad's direct investment value, or
loss, to be approximately $3-4 million.
118. NAFTA, Article 1135(1)(a), provides for the award of monetary
damages and applicable interest where a Party is found to have
violated a Chapter Eleven provision. With respect to expropriation,
NAFTA, Article 1110(2), specifically requires compensation to be
equivalent to the fair market value of the expropriated investment
immediately before the expropriation took place. This paragraph
further states that "the valuation criteria shall include going
concern value, asset value including declared tax value of tangible
property, and other criteria, as appropriate, to determine fair market
value".
119. Normally, the fair market value of a going concern which has a
history of profitable operation may be based on an estimate of future
profits subject to a discounted cash flow analysis. Benvenuti and
Bonfant Sri v. The Government of the People's Republic of Congo, 1
ICSID Reports 330; 21 I.L.M. 758; AGIP SPA v. The Government of the
People's Republic of Congo, 1 ICSID Reports 306; 21 I.L.M. 737.
120. However, where the enterprise has not operated for a
sufficiently long time to establish a performance record or where it
has failed to make a profit, future profits cannot be used to
determine going concern or fair market value. In Sola Tiles, Inc. V.
Iran (1987) (14 Iran-U.S.C.T.R. 224, 240-42; 83 I.L.R. 460, 480-81),
the Iran-U.S. Claims Tribunal pointed to the importance in relation to
a company's value of "its business reputation and the relationship it
has established with its suppliers and customers." Similarly, in
Asian Agricultural Products v. Sri Lanka (4 ICSID Reports 246 (1990)
at 292), another ICSID Tribunal observed, in dealing with the
comparable problem of the assessment of the value of good will, that
its ascertainment "requires the prior presence on the market for at
least two or three years, which is the minimum period needed in order
to establish continuing business connections".
121. The Tribunal agrees with Mexico that a discounted cash flow
analysis is inappropriate in the present case because the landfill was
never operative and any award based on future profits would be wholly
speculative.
122. Rather, the Tribunal agrees with the parties that fair market
value is best arrived at in this case by reference to Metalclad's
actual investment in the project. Thus, in Phelps Dodge Corp. V. Iran
(10 Iran-U.S. C.T.R. 121 (1986)), the Iran-U.S. Claims Tribunal
concluded that the value of the expropriated property was the value of
claimant's investment in that property. In reaching this conclusion,
the Tribunal considered that the property's future profits were so
dependent on as yet unobtained preferential treatment from the
government that any prediction of them would be entirely speculative
(Id. At 132-33). Similarly, in the Biloune case (see above), the
Tribunal concluded that the value of the expropriated property was the
value of the claimant's investment in that property. While the
Tribunal recognized the validity of the principle that lost profits
should be considered in the valuation of expropriated property, the
Tribunal did not award lost profits because the claimants could not
provide any realistic estimate of them. In that case, as in the
present one, the expropriation occurred when the project was not yet
in operation and had yet to generate revenue. (Biloune, 95 I.L.R. at
228-229). The award to Metalclad of the cost of its investment in the
landfill is consistent with the principles set forth in Chorzow
Factory (Claim for Indemnity) (Merits), Germany v. Poland, P.C.I.J.
Series A., No. 17 (1928) at p.47, namely, that where the state has
acted contrary to its obligations, any award to the claimant should,
as far as is possible, wipe out all the consequences of the illegal
act and reestablish the situation which would in all probability have
existed if that act had not been committed (the status quo ante).
123. Metalclad asserts that it invested $20,474,528.00 in the
landfill project, basing its value on its United States Federal Income
Tax Returns and Auditors' Workpapers of Capitalized Costs for the
Landfill reflected in a table marked Schedule A and produced by
Metalclad as response 7(a)A in the course of document discovery. The
calculations include landfill costs Metalclad claims to have incurred
from 1991 through 1996 for expenses categorized as the COTERIN
acquisition, personnel, insurance, travel and living, telephone,
accounting and legal, consulting, interest, office, property, plant
and equipment, including $328,167.00 for "other."
124. Mexico challenges the correctness of these calculations on
several grounds, of which one is the lack of supporting documentation
for each expense item claimed. However, the Tribunal finds that the
tax filings of Metalclad, together with the independent audit
documents supporting those tax filings, are to be accorded substantial
evidential weight and that difficulties in verifying expense items due
to incomplete files do not necessarily render the expenses claimed
fundamentally erroneous. See Biloune, 95 I.L.R. at 223-24.
125. The Tribunal agrees, however, with Mexico's position that costs
incurred prior to the year in which Metalclad purchased COTERIN are
too far removed from the investment for which damages are claimed.
The Tribunal will reduce the Award by the amount of the costs claimed
for 1991 and 1992.
B. "Bundling"
126. Some of the subsequent costs claimed by Metalclad involve what
has been termed "bundling". "Bundling" is an accounting concept where
the expenses related to different projects are aggregated and
allocated to another project. Metalclad has claimed as costs related
to the development at La Pedrera earlier costs incurred on certain
other sites in Mexico. While not taking any decision in principle
regarding the concept of bundling as it may be applicable to other
situations (for example in the oil industry where the costs in
relation to a "dry hole" may in part be allocated to the cost of
exploring for a developing a successful well), the Tribunal does not
consider it appropriate to apply the concept in the present case. The
Tribunal has reduced accordingly the sum payable by the Government of
Mexico.
C. Remediation
127. The question remains of the future status of the landfill site,
legal title to which at present rests with COTERIN. Clearly,
COTERIN's substantive interest in the property will come to an end
when it receives payment under this award. COTERIN must, therefore,
relinquish as from that moment all claim, title and interest in the
site. The fact that the site may require remediation has been borne
in mind by the Tribunal and allowance has been made for this in the
calculation of the sum payable by the Government of Mexico.
D. Interest
128. The question arises whether any interest is payable on the
amount of the compensation. In providing in Article 1135(1) that a
Tribunal may award "monetary damages and any applicable interest",
NAFTA clearly contemplates the inclusion of interest in an award. On
the basis of a review of the authorities, the tribunal in Asian
Agricultural Products v. Sri Lanka (4 ICSID Reports 245) held that
"interest becomes an integral part of the compensation itself, and
should run consequently from the date when the State's international
responsibility became engaged" (ibid. P.294, para. 114). The Tribunal
sees no reason to depart from this view. As has been shown above,
Mexico's international responsibility is founded upon an accumulation
of a number of factors. In the circumstances, the Tribunal considers
that of the various possible dates at which it might be possible to
fix the engagement of Mexico's responsibility, it is reasonable to
select the date on which the Municipality of Guadalcazar wrongly
denied Metalclad's application for a construction permit. The
Tribunal therefore concludes that interest should be awarded from that
date until the date 45 days from that on which this Award is made. So
as to restore the Claimant to a reasonable approximation of the
position in which it would have been if the wrongful act had not taken
place, interest has been calculated at 6%, p.a., compounded annually.
E. Recipient
129. As required by NAFTA, Article 1135(2)(b), the award of monetary
damages and interest shall be payable to the enterprise. As required
by NAFTA, Article 1135(2)(c), the award is made without prejudice to
any right that any person may have in the relief under applicable
domestic law.
IX. COSTS
130. Both parties seek an award of costs and fees. However, the
Tribunal finds that it is equitable in this matter for each party to
bear its own costs and fees, as well as half the advance payments made
to ICSID.
X. AWARD
131. For the reasons stated above, the Tribunal hereby decides that,
reflecting the amount of Metalclad's investment in the project, less
the disallowance of expenses claimed for 1991 and 1992, less the
amount claimed by way of bundling of certain expenses, and less the
estimated amount allowed for remediation, plus interest at the rate of
6% compounded annually, the Respondent shall, within 45 days from the
date on which this Award is rendered, pay to Metalclad the amount of
$16,685,000.00. Following such period, interest shall accrue on the
unpaid award or any unpaid part thereof at the rate of 6% compounded
monthly.
Made as at Vancouver, British Columbia, Canada, in English and
Spanish.
/E. Lauterpacht/
Professor Sir Elihu Lauterpacht, CBE, QC
Date: 25 August 2000
/Benjamin R. Civiletti/ /J. Siqueiros/
Mr. Benjamin R. Civiletti Mr. Jose Luis Siquieros
Date: 8/22/2000 Date: 21-VIII-2000
