NAFTA's Chapter 11 snare

[Carl Remick]

[The following is from the NY Times, Aug. 31.]

Mexico Is Ordered to Pay a U.S. Company $16.7 Million

By Anthony DePalma

An international tribunal that worked behind closed doors to arbitrate a 
cross-border dispute between a United States company and the Mexican 
government ordered Mexico to pay nearly $17 million in compensatory damages 
yesterday for failing to protect the company's rights as a foreign investor.

The tribunal, citing investor-protection measures in Chapter 11 of the North 
American Free Trade Agreement, found that the government's actions amounted 
to an expropriation because they prevented the Metalclad Corporation of 
Newport Beach, Calif., from making full use of a multimillion-dollar 
hazardous waste treatment and disposal site it built several years ago in a 
central Mexican state, San Luis Potosí.

Authorities in the state stopped the project, saying it was environmentally 
unsound, and eventually declared the area where it was situated an 
environmental reserve, preventing it from ever opening.

The Metalclad dispute, and the $16.7 million judgment, represent the latest 
unexpected turn in the way Nafta has been used since it took effect in 
January 1994. Several American and Canadian companies have used the 
agreement to challenge unfavorable actions of local governments. Coming 
after the large-scale protests against globalization in Seattle, and amid a 
growing backlash against trade that is seen as too free, the decision is 
likely to increase concern that trade accords could be used to circumvent 
local laws.

Mary E. Bottari, who tracks regulatory changes for Global Trade Watch, a 
Washington-based group aligned with Public Citizen, said: "Anytime any 
investment is infringed upon by regulation, anytime any worker safety 
protection puts any burden on a company, these companies may use this 
Chapter 11 system to directly sue sovereign governments -- it's crazy. This 
is a part of the hidden agenda of Nafta."

Clyde C. Pearce, the lawyer representing Metalclad, which did insulation and 
asbestos-removal work in Southern California before expanding into Mexico, 
said such thinking is "dead wrong."

"Metalclad met all federal and state environmental regulations," he said. 
"Besides, there is nothing stopping these governments from denying a 
landfill at any point, as long as they pay for it."

Under Nafta's Chapter 11 investor provisions, disputes of this type that 
cannot be settled through negotiation may be brought before the tribunal, 
the International Center for Investment Dispute Settlement, an obscure arm 
of the World Bank.

A three-person panel, composed of arbitrators picked by the opposing sides, 
operates with broad latitude and almost complete institutional secrecy. Its 
sessions are private, its actions cannot be appealed except in limited 
circumstances, and its decisions may not be publicized unless the principals 
involved choose to make them known.

Grant S. Kesler, president and chief executive of Metalclad, called the 
panel's decision in his company's favor "as Pyrrhic a victory as any I've 
experienced."

"This is a token amount of money that doesn't really reflect the value of 
the project," he said. The company had asked for $90 million in damages and 
estimated that it had spent more than $20 million in planning, permitting 
and construction.

"The biggest losers of all," Mr. Kesler added, "are the people of Mexico who 
continue to have to live in a country that produces 10 million tons of 
hazardous waste a year and has only one facility in the whole country to 
handle it."

Metalclad made its move into Mexico in 1991, opening waste transfer stations 
and collection sites in a dozen states. It then bought an existing but 
poorly prepared disposal site in San Luis Potosí, getting the necessary 
approvals from the national government to build a disposal plant capable of 
handling up to 360,000 tons of hazardous waste a year.

The site was ready to begin operation in March 1995 when Mexican citizens 
set up protests outside. The local governor brought in the police and 
effectively blocked Metalclad from operating.

Mr. Pearce, Metalclad's lawyer, said company officials tried for years to 
negotiate with the local authorities, agreeing to conduct $500,000 in 
additional environmental studies and working with the surrounding community.

But the governor continued to oppose the project, despite Mexico City 
approval. Mr. Pearce said federal studies all indicated that the site, 
originally selected by the authorities, was environmentally sound.

Metalclad filed its Nafta claim in January 1997. Hearings were held in 
Washington last summer, and nothing was heard from the tribunal until 
yesterday afternoon.

The Mexican government now has 45 days to begin making the $16.7 million 
payment to Metalclad. If it does not pay by then, 6 percent interest, 
compounded monthly, will be added to the award.

Mr. Pearce said the tribunal's ruling was the first time a sovereign nation 
had been found not to have provided foreign investors fair and equitable 
treatment. The impact, he said, could be significant because other countries 
are now put on notice that they will be expected to extend to foreign 
companies the openness and clear regulations those companies are entitled to 
at home.

He said the governor's obstruction "resulted in 'a state-of-the-art, fully 
completed hazardous waste facility that is just sitting there, while tons of 
dangerous materials are just dumped clandestinely all over Mexico."

Mexican officials said they were surprised by the panel's decision and might 
seek to have it nullified. They were particularly upset by the finding that 
Metalclad had not been treated fairly because it was led to believe that it 
had all the necessary permits to operate the hazardous waste site.

Luis de la Calle, Mexico's under secretary of commerce, said local 
jurisdiction over construction of such sensitive environmental projects was 
clear. He said he was not worried that the problems encountered by Metalclad 
might cause other United States companies to hesitate before investing in 
Mexico.

Several other North American business disputes have found their way to the 
Nafta arbitration process. In one, the Ethyl Corporation of Richmond took 
action against the Canadian government because of a ban on the importing of 
its gasoline additive. Canada was eventually forced to lift the ban.

Last year, the Methanex Corporation of Vancouver, British Columbia, filed a 
$970 million claim against the United States government because California 
had banned imports of its own gasoline additive. That claim is pending.

And the Loewen Group, a large funeral home operator throughout North America 
that is based in Canada, is trying to use Nafta to overturn a huge judgment 
against it for anticompetitive practices. A Mississippi state jury found 
that Loewen had tried to drive a local funeral establishment out of business 
and awarded the local company $500 million in compensatory and punitive 
damages. Loewen settled out of court for $150 million.

Loewen later brought a Nafta action against the United States on grounds 
that the Mississippi jury's damage award violated its rights as an investor 
in the United States. A decision has not yet been handed down.

[end]

Carl





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