Metalclad Corporation v Mexico

Year of the award: 2000
Forum: ICSID
Applicable investment treaty: NAFTA

Arbitrators:
Prof Sir Elihu Lauterpacht - President
Mr Benjamin R. Civiletti
Mr José Luis Siqueiros

Executive summary

Metalclad, a U.S. corporation operating through its Mexican subsidiary (investment), received from the Mexican federal government the permit to construct a hazardous waste landfill in Guadalcazar, Mexico. Five months after construction began, Metalclad was notified by the Municipality of Guadalcazar that it was unlawfully operating without a municipal construction permit. Metalclad applied for a municipal permit and, in the meantime, completed construction of the landfill.

The Municipality turned down Metalclad's application effectively barring the operation of the completed facility. In addition, later the Governor issued an Ecological Decree declaring a protected natural area which encompassed the landfill site and thus permanently closed the landfill.

Before the ICSID Tribunal, Metalclad claimed violations of NAFTA Articles 1105 ("Minimum Standard of Treatment") and 1110 ("Expropriation") and requested compensation.

The Tribunal determined that Metalclad was denied fair and equitable treatment by Mexico because the municipal government had no authority to deny the construction permit on environmental grounds and also because of the absence of clear rules and procedures governing the municipal construction permit which amounted to a failure on the part of Mexico to ensure transparency required by NAFTA. The Tribunal also found that the same actions of the local government amounted to an indirect expropriation. Further, the Tribunal held that the Ecological Decree alone also constituted an act of expropriation.

The Tribunal determined that Metaclad's investment was completely lost as a result of Mexico's actions and proceeded to estimate the fair market value of the investment. The Tribunal held that the award of lost profits was not appropriate in this case because the landfill had never started its operations. The amount of compensation was determined on the basis of the actual investment made by Metalclad, as evidenced by Metalclad's tax filings and independent audit documents. The damages were estimated at US$ 16.7 million, including 6% interest (compounded annually) up to the date of award. Post-award interest was to be compounded monthly.

The Tribunal's award was reviewed by the British Columbia Supreme Court which set aside the Tribunal's findings on Article 1105 and partly on Article 1110. However, the award was upheld on the basis of expropriation resulting from the Ecological Decree and in terms of compensation was left virtually unchanged.