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.
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Carl
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