Mexico v. Metalclad - Reasons for Judgement

On May 2, the Mr. Justice Tysoe, of the BC Supreme Court, released his decision in the appeal by Mexico of an award for more than $16 US million that had been made against it and in favour of a US hazardous waste company. Mexico’s offence was to have allowed a local municipality to deny the company a building permit for a large hazardous waste dump on land that was already badly contaminated by toxic waste.

This judgement was the first to review an award made pursuant to NAFTA’s draconian investment rules. As we know, these are the rules that give foreign corporations the unilateral right to sue governments for damages if they “interfere” with the very broadly framed rights NAFTA affords them.

The Background

The Tribunal that decided Metalclad’s damage claim, ruled that the local community had no right to deny the company a permit just because of environmental and public health concerns, or because the company had built first and asked for permission second. By doing so, the Tribunal concluded that Mexico had actually expropriated the company’s investment in building a facility it had never operated.

Ignoring the evidence of Mexican constitutional experts, including the ex-chief justice of Mexico’s Supreme Court, the Tribunal concluded that licensing hazardous waste plants was the federal government’s business, not the local municipalities’. Mexico would have to pay up. The fact that a Mexican court had granted an injunction to stop construction of the site, didn’t phase the Tribunal either.

The Tribunal also objected to a decision by the state government to establish an ecological preserve that included the company’s site. This, it concluded only added insult to the injury that Metalclad had already suffered when the local community had the temerity to turn down its permit application.

However outrageous the Tribunal’s award, the importance of Mexico’s appeal overshadowed the particular circumstances of Metalclad’s claim. In appealing the award against it, Mexico was providing the very first opportunity for a court in any NAFTA jurisdiction to consider extraordinary and unprecedented provisions of NAFTA’s investment rules.

The Judgement

The case represented a critical test of how Canadian courts would deal with NAFTA based arbitral awards. How would our courts view the rights of corporations to invoke secretive international arbitral processes to enforce rights accorded by a treaty to which they were neither parties nor under which they owed any obligation. Unfortunately, Mr. Justice Tysoe’s judgement is far from reassuring.

While the Judge had some critical things to say about the way the Tribunal went about its work, he ultimately found in favour of the company and sustained the damage award made in its favour subject to a relatively modest adjustment.

The most troubling aspect of the Mr. Justice Tysoe’s decision had to do with his willingness to judge the Metalclad award by the same limited standards that would apply to an arbitral award arising from private dispute between parties to a commercial contract. But NAFTA investor claims aren’t private matters, and their fall-out will often have profound and far reaching impacts on our communities, environment and society.

In fact, Mr. Justice Tysoe was so deferential to the arbitral process, that he declined to hold that he could set aside a Tribunal’s decision even if it was “patently unreasonable.”

Particularly problematic was the judge’s conclusion that he had no authority to review the Tribunal’s decision that the state government had expropriated Metalclad’s investment by creating an ecological preserve.

This is how the judge described the Tribunal’s interpretation of NAFTA’s expropriation provision:

The Tribunal gave an extremely broad definition of expropriation for the purposes of Article 1110. In addition to the more conventional notion of expropriation involving a taking of property, the Tribunal held that expropriation under the NAFTA includes covert of 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. This definition is sufficiently broad to include a legitimate reasoning by a municipality or other zoning authority. However the definition of expropriation is a question of law with which this Court is not entitled to interfere under the International Commercial Arbitration Act.

The case obviously casts an ominous shadow over the actions of governments at all levels, and will no doubt invite other NAFTA based claims by corporations. To succeed, they need only establish that they would have been able to make a lot more money if only governments hadn’t put obstacles like zoning bylaws, or environmental laws in their way.

That’s the worst news.

Also disturbing however, is the way in which Mr. Justice Tysoe dealt with Mexico’s allegations of corruption and bribery against the company. The judge acknowledged Mexico’s allegations that the company had made very substantial payments ($US 150,000 in stock, and $US 20,000 in cash) to the wife of a key federal official that had testified for the company. But he went to find that the evidence was less than conclusive that these payments were actually bribes paid on behalf of Metalclad, again deferring to the Tribunal’s judgement about the credibility of the federal official.

That’s the ugly news – and the failure of the Judge to deal more thoroughly with Mexico’s extremely serious and extensive allegations sends a dubious message about the conduct expected of foreign investors, including those seeking large damage awards under NAFTA investment rules because of alleged government wrongdoing.

There are however some aspects of Mr. Justice Tysoe’s judgement that are welcome. Of particular importance is his decision to overrule the Tribunal’s interpretation of Article 1105 of NAFTA. This is the rule that entitles foreign investors to treatment in accordance with international law, a standard so ill-defined and open ended that this obligation has emerged as one of NAFTA’s most pernicious requirements. Every award that has found in favour of a foreign investor had found a breach of this Article.

The Tribunal had used this rule to substantially broaden the scope for private enforcement of NAFTA rules by awarding damages to Metalclad for a purported breach of transparency obligations that had nothing to do with the treaty’s investment rules.

Had the Tribunal’s ruling on this point been upheld, foreign investors would have been able to make claims concerning any NAFTA rule, not just those set out in its investment chapter. There is no doubt that this would have opened the floodgates of foreign investor claims.

The judge further decided that the Tribunal’s erroneous interpretation of Article 1105 also tainted its criticism of the municipality’s failure to issue a construction permit to Metalclad. This effectively overruled the Tribunal’s decisions concerning the actions of the local municipality.

But having let the local government off the hook, the Judge upheld the Tribunal’s findings concerning the ecological preserve. Thus, subject to a minor adjustment concerning the date from which interest would accrue, the judge upheld the very substantial damage award that had been made in the company’s favour.

Mr. Justice Tysoe’s conclusions should put to rest any notion that NAFTA investment rules can be reconciled with the democratic principles upon which our legislative and judicial institutions depend. It needs to be widely discussed and understood, and it needs to be appealed.

Steven Shrybman

Sack Goldblatt Mitchell

May 6, 2001

Mexico v. Metalclad - Reasons for Judgement

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