Decision Rendered in NAFTA Arbitration Appeal

From February 19, 2001 to March 2, 2001, Mr. Justice Tysoe of the Supreme Court of British Columbia heard the United Mexican States’ application for an order setting aside the award of an arbitral tribunal constituted under Chapter Eleven of the North American Free Trade Agreement (NAFTA). Chapter Eleven permits individual investors of a NAFTA party to require that certain investment disputes be resolved through arbitration.

Mexico’s application was the first to set aside an award made in a Chapter Eleven arbitration, and therefore the first to consider whether such an application was governed by the British Columbia Commercial Arbitration Act or the British Columbia International Commercial Arbitration Act, which implements the Model Law developed by the United Nations Commission on International Trade Law. It was also the first application to set aside an award issued in an arbitration conducted under the International Centre for Settlement of Investment Disputes (ICSID) Additional Facility Rules, and the first case in North America to consider judicial review of an investor-state arbitration arising out of an international treaty. The federal government and the Province of Quebec were granted leave to intervene in support of Mexico’s application.

The case arose from the efforts of an American corporation, Metalclad Corporation, to construct and operate a hazardous waste landfill in Guadalcazar, Mexico. Metalclad asserted that it understood that the federal government had provided all necessary permits to construct and operate the landfill, and that no municipal permit was required. The landfill was opposed by the municipality of Guadalcazar, however, which refused Metalclad’s subsequent application for a municipal permit. The landfill was constructed nevertheless. Legal proceedings ensued in Mexico between Metalclad and the municipality, and between the municipality and the federal government.

Metalclad eventually sought relief under Chapter Eleven of NAFTA, asserting that Mexico had (a) failed to provide fair and equitable treatment to it as an investor, contrary to Article 1105 of NAFTA; and (b) expropriated its investment without compensation, contrary to Article 1110 of NAFTA. An arbitral tribunal was constituted in Vancouver. Finding that Metalclad had established its claims, the tribunal ordered Mexico to compensate Metalclad for its expenditures on the landfill, less certain deductions for the costs of remediating earlier contamination of the site. The award amounted to over US$16.7 million plus interest.

On May 2, 2001, Mr. Justice Tysoe delivered his judgment on Mexico’s application to set aside the award, holding as a threshold matter that the British Columbia International Commercial Arbitration Act governed the application. With respect to the award under Article 1105 of NAFTA (fair and equitable treatment), he held that the tribunal made decisions on matters beyond the scope of Chapter Eleven, specifically by importing considerations of transparency that are not part of customary international law (and which are addressed elsewhere in NAFTA). Mr. Justice Tysoe accordingly held that the award should be set aside to the extent it was based on Article 1105.

Mr. Justice Tysoe similarly held that the tribunal exceeded the scope of the submission to arbitration by basing the award under Article 1110 (expropriation) upon its misstatement of the minimum standard contemplated by Article 1105. However, Mr. Justice Tysoe upheld the tribunal’s alternative finding that the proclamation of an ecological decree purporting to establish an environmental conservation area was tantamount to an expropriation of Metalclad’s investment, within the meaning of Article 1110.

Mexico was represented by Christopher Thomas of Thomas & Partners; Patrick G. Foy Q.C. and Robert J.C. Deane of Borden Ladner Gervais LLP; and Hugo Perezcano Diaz of the United Mexican States Secretariat of the Economy. Metalclad was represented by D. Geoffrey Cowper, Q.C., Henri Alvarez, Brook Greenberg and Michael Parrish of Fasken Martineau DuMoulin LLP. Representing the federal government were Joseph de Pencier of the Department of Justice and the Department of Foreign Affairs and International Trade. Quebec was represented by Jack Giles, Q.C. and Victoria Colvin of Farris, Vaughan, Wills & Murphy and Sylvie Scherrer of the Quebec Ministère de la Justice.