Tysoe reviewed the Aug. 30, 2000, NAFTA Tribunal award and ruling which
resulted from an arbitration of a dispute between a U.S. investor, Metalclad,
and the country of Mexico. He upheld the tribunal's finding that an Ecological
Decree passed by a lower state government in Mexico was tantamount to
an expropriation of the investor's property and required compensation
by the federal government of Mexico, pursuant to NAFTA.
Judge Tysoe struck down the tribunal's ruling that the refusal of a municipality
in Mexico to grant a permit was a measure tantamount to expropriation,
requiring compensation by the federal government of Mexico. But he made
this ruling because the alleged violation was based on the wrong section
Judge Tysoe held that there was a breach or violation of NAFTA by Mexico
when an ecological decree was pronounced in 1997 by the State of San Luis
Potosi in Mexico. Hence he upheld the requirement of Mexico to pay compensation
to Metalclad, but reduced the amount by excluding interest claimed prior
to Sept. 20, 1997, as well as compounding effects. (This amounts to a reduction
of about US$1 million to about US$15.9 million.)
Judge Tysoe struck down the tribunal's ruling that Mexico took a measure
tantamount to expropriation by permitting or tolerating the conduct of
the municipality in relation to Metalclad (which the tribunal had already
held was unfair and inequitable treatment) and by thus participating or
acquiescing in the denial to Metalclad of the right to operate the landfill.
The Judge held that Chapter 18, transparency, is not open to a direct challenge
by an investor.
The facts as accepted by the Court:
On Sept. 20, 1997, the governor of the state of San Lluis Potosi issued
an ecological decree declaring an area of 188,758 hectares of land within
the municipality of Guadalcazar to be an ecological preserve for protecting
species of cacti. This area included the site of Metalclad in issue. The
effect of this decree was to prevent Metalclad Corporation from ever operating
its site as a waste disposal plant.
The Court held that this amounted to an expropriation of the site, contrary
Between 1990 and 1997, a company wanted to use this land for toxic waste
transfer and then toxic disposal. The site and a company named Coterin
was initially owned by Mexican nationals who sold Coterin to Metalclad
In 1990, while operating a hazardous waste transfer station at the site
pursuant to an authority granted by the federal government of Mexico, Coterin
dumped 20,000 tons of waste, without treatment or separation, on the site
rather than transfer it out. The federal government closed the transfer
station until 1996.
In 1991, Coterin received three permits re a hazardous waste refill. Two
were environmental impact authorizations issued by the "Secretariat
of the Environment" re the construction and operation of the landfill.
One was a landfill permit issued from the state of San Luis Potosi.
In April 1993, Metalclad purchased Coterin, despite the fact that a condition
of purchase was that a municipal permit be issued (but no municipal permit
had issued to date and never did issue); or that a Mexican court ruled
that a municipal permit was not required (but none did so rule).
Construction began without the municipal permit.
In 1994, the municipality issued a stop work order which the company ignored.
In 1995, federal authorities issued a further construction permit authorizing
the final aspects of construction. The landfill facility was completed
by March 1995, at which time the company tried to hold a formal opening.
Demonstrators blockaded the site, preventing the opening celebrations.
Since then the company has not operated. (The court does not ever really
detail the role of the massive opposition or political response to the
Metalclad negotiated with the federal authorities re operating the landfill,
arriving at an agreement called the Convenio in November 1995 with departments
in the Secretariat of the Environment. Metalclad could operate the landfill
for five years but had to remediate the land. Federal authorities then
issued another permit and increased the capacity of operation from 36,000
tons to 360,000 tons.
On Dec. 5, 1995, the municipality formally denied the construction permit.
The reasons stated were that Coterin had been denied a construction permit
in '91/'92 but commenced construction anyway; and further, a great number
of inhabitants were opposed to the granting of the permit.
In January 1996, the municipality challenged the Convenio in the Mexican
federal courts and obtained an injunction re the Convenio. In May 1999,
this court process dismissed the municipality's case because they used
the wrong type of proceeding. (Instead of an amparo proceeding, they should
have used a Constitutional Controversy.)
In April 1996, the company filed a writ in a Mexican federal court. It
was dismissed because the company had not exhausted its administrative
remedies. The company appealed to the Mexican Supreme Court, abandoned
the appeal, tried further negotiations with the municipality, and then,
in October 1996, started their NAFTA lawsuit. That is, they submitted a
Claim to Arbitration under Article 1119 of NAFTA.
On September 1997, after the arbitration proceeding was started, but before
the arbitration was held, the San Luis Potosi Governor issued the ecological
decree, declaring the area to be an ecological preserve.
Pursuant to NAFTA, a three-person tribunal was constituted to decide the
arbitration. Vancouver was agreed to be the place of the arbitration proceedings.
Written witness statements and submissions were exchanged. An oral hearing
took place in Washington D.C., between Aug. 30 and September 1999. Further
written submissions were filed and the award was made last Aug. 30.
Relevant NAFTA provisions
Chapter 11 of NAFTA gives the right to corporations (investors) from Canada,
the U.S. or Mexico, to submit certain disputes to arbitration against the
foreign country of Canada, the U.S. or Mexico. For example, a corporation
from the U.S. or Mexico can submit a dispute to arbitration in a claim
that Canada breached an obligation under Chapter 11, causing the corporation
loss or damage by reason of the breach. An investor from its own country
cannot sue its own government under Chapter 11.
Chapter 11: Articles 1101 to 1114
Article 1105: Each Party (Mexico, Canada, U.S.) shall accord to investments
of investors of another Party treatment in accordance with the international
law, including fair and equitable treatment and full protection and security.
Article 1110 par 1: No Party may directly or indirectly nationalise or
expropriate an investment of an investor of another Party in its territory
or take a measure tantamount to nationalization or expropriation of such
an investment ("expropriation") except:
a) for a public purpose;
b) on a non-discriminatory basis;
c) in accordance with due process of law and Article 1105(1); AND
d) on payment of compensation in accordance with paragraphs 2 through 6.
Article 201: defines measure as "any law, regulation, procedure, requirement,
Article 102: sets out the objectives of NAFTA.
Para 1 reads, in part: The objectives of this agreement, as elaborated
more specifically through its principles and rules, including national
treatment, most-favoured-nation treatment and transparency, are to: . .
c) increase substantially investment opportunities in the territories of
the Parties . . .
Para 2 reads: The Parties shall interpret and apply the provisions of the
Agreement in the light of its objectives set out in paragraph 1 and in
accordance with applicable rules of international law.
Article 1131 provides that a tribunal in an arbitration pursuant to Chapter
11 is to decide the issues in dispute in accordance with the NAFTA and
applicable rules of international law.
Chapter 18 of NAFTA contains provisions promoting the concept of transparency:
- each Party is to designate a contact to facilitate communication;
- each Party is to ensure that its laws, regulations, procedures and administrative
rulings of general application are published or otherwise made available
to enable interested parties to become acquainted with them;
- each Party is to notify any other interested Party of a proposed or actual
measure that might materially affect the operation of the NAFTA or substantially
affect the other Party's interests under the NAFTA.
A threshold issue was which of two B.C. arbitration acts govern the B.C.
Court in its Review of the NAFTA Tribunal Award, the Commercial Arbitration
Act R.S.B.C. 1996 c.55 ( the "CAA"), or The International Commercial
Arbitration Act, R.S.B.C. 1996, c.233 ("the International CAA").
The B.C. acts were relevant because Vancouver, B.C., was chosen as the
place of arbitration. No Party challenged the jurisdiction of a B.C. domestic
Court to do the Review.
The distinction between the two statutes for the purpose of this review
is not based on the word "international" but rather "commercial":
Commercial Arbitration Act R.S.B.C. 1996 c.55 ( the "CAA")-allows
the Court to review points of law decided by the arbitral body. The International
Commercial Arbitration Act, R.S.B.C. 1996, c.233 ("the International
CAA")-is more restrictive.
The B.C. Court held that the review of the Award is governed by the provisions
of the International CAA. (i.e., restrictive, not open to review the points
of law decided by the Tribunal).
Judge Tysoe held that the arbitration did not arise under an agreement
between Metalclad and the municipality in connection with regulatory matters,
but rather, the arbitration was between Metalclad and Mexico pursuant to
an agreement with the treatment of investors; i.e. NAFTA.
Metalclad qualified to make a claim against Mexico by way of arbitration
under Chapter 11 because it was an investor in Mexico. If Metalclad was
not considered to be an investor in Mexico, the arbitration claim by Metalclad
could not have taken place.
Standard of Review
The extent to which the BC Court could interfere with the international
commercial Arbitral award is limited by the provisions of the International
Commercial Arbitration Act (International CAA). Pursuant to S. 5 ss.34(2)
of the International CAA, an arbitral award may be set aside by the Supreme
Court only if
(a) the party making the application furnishes proof that . . .
(iv) the arbitral award deals with a dispute not contemplated by or not
falling within the terms of the submission to arbitration, or it contains
decisions on matters beyond the scope of the submission to arbitration
. . ., or
(v) the composition of the arbitral tribunal or the arbitral procedure
was not in accordance with the agreement of the parties..., or
(b) the court finds that . . .
(ii) the arbitral award is in conflict with the public policy in British
Article 1122 of NAFTA provides that each Party (in this case Mexico) consents
to the submission of a claim to arbitration under NAFTA.
ISSUE: The question which Metalclad posed was whether
Mexico had breached its obligations under Chapter 11 of the NAFTA "guaranteeing
national treatment; most favored nation treatment; minimum treatment in
accord with international law, fair and equitable treatment, and full protection
and security, prohibiting performance requirements; and depriving (Metalclad)
of its investment through (Mexico's) actions that directly and indirectly
resulted in, and were tantamount to, expropriation of that investment without
due process and full compensation".
Metalclad relied on the events which had occurred up to the commencement
of the arbitration proceeding and also on the ecological decree which was
announced after the arbitration process had been initiated.
Mexico argued, among other points, that the tribunal had improperly found
that Mexico had violated:
(1) Article 1105: Fair and Equitable Treatment. The tribunal based its
decision on findings of lack of "transparency" of municipal law and "improper"permit
denial by the municipality;
(2) Article 1110: Expropriation. The tribunal held that "expropriation" under
NAFTA includes "covert or incidental interference with the use of property
which has the effect of depriving the owner, in whole or in significant part,
of the use or reasonably-to-be-expected economic benefit of property even if
not necessarily to the obvious benefit of the host state. The tribunal held that
(a) the conduct of the municipality in the denial of the "right to operate
the landfill" was a measure "tantamount to expropriation", and
(b) the municipality's denial of the permit, without any basis in the proposed
physical construction, together with federal representations, and the municipality's
actions against the Convenio, and the absence of a timely or orderly denial,
amounted to an "indirect expropriation".
(3) the ecological decree barred forever the use of the landfill and was therefore
a further ground for a finding of expropriation.
The role of the B.C. Supreme Court was to determine whether the tribunal had
properly applied the NAFTA terms in arriving at these three findings.
Structure of Arbitration under NAFTA's Chapter 11
(Corporations are not Parties to NAFTA. Only Canada, Mexico, and the U.S.A. are
Parties to NAFTA. Normally, agreements are between Parties. Normally, in agreements
that provide for the use of arbitration as a way of settling disputes, it is
only the Parties to the agreement that can invoke the arbitration procedure.
So if NAFTA was like normal agreements, it would be only the governments of Mexico,
Canada and the U.S. that could say we want to go to arbitration as against each
other to resolve the dispute. In NAFTA, Chapter 11 allows corporations to sue
a foreign Party, Canada, Mexico, or the USA.)
(NAFTA's special new procedure embodied in Chapter 11 -- some of which is also
in the FTA and will be in FTAA, GATS etc.-- creates a separate arbitration tool
for Investors (corporations). Chapter 11 is totally foreign to usual mechanisms
in agreements because it gives a right to an outside body which is not a Party
to the agreement. Chapter 11 allows corporations of a NAFTA Party to make claims
against the NAFTA Parties by way of arbitration.)
(Not just Chapter 11 but all of NAFTA seriously breaches the Canadian constitution-illegality
of NAFTA -- because corporations are elevated to a status greater than Canadian
citizens, enshrining in the corporation a life and capacity that is not contemplated
in Canada's Constitution nor probably in the constitutions of Mexico or the USA.
It gives non-human entities rights greater than live human beings. But this issue
was not part of the Review conducted by Justice Tysoe in the Mexico vs Metalclad
(Chapter 20 of NAFTA is a general section in NAFTA which does provide for the
normal way of invoking the arbitration procedure between the Parties; i.e., government
to government. So if the government of Mexico is unhappy about something happening
in Canada which is contrary to the terms of NAFTA, Mexico could use Chapter 20
to command an arbitration procedure to resolve the issue, nation to nation. Or
Metalclad, a U.S. corporation, could have asked the U.S. government to go to
arbitration on its behalf, claiming Mexico's municipality, and hence Mexico,
violated Chapter 18, transparency. Then the complaints against the municipality
would have been upheld as per transparency requirements.
The Court did not strike down theTransparency section of NAFTA. IT clarified
that that section cannot be invoked directly by the corporation, only by a Party.)
(The right of an investor to submit a claim to arbitration is limited to alleged
breaches of an obligation under Section A of Chapter 11 and two articles contained
in Chapter 15. Chapter 11 does not enable investors to arbitrate claims in respect
of alleged breaches of other provisions of NAFTA This is why Judge Tysoe did
not uphold Metalclad's claim re lack of transparency involving the municipality,
pursuant to Chapter 18 of NAFTA. Tysoe ruled that Chapter 18 is not available
to investors directly, only to parties, i.e. Mexico, Canada or the U.S.. If an
investor of Mexico, Canada or the U.S. feels aggrieved by the actions of another
of Mexico, Canada or the U.S. in relation to its obligations under the NAFTA,
other than the obligations imposed by Section A of Chapter 11 and the two articles
of Chapter 15, the investor would have to prevail upon its own country to espouse
an arbitration on its behalf against the other Party.
So, Metalclad could have gone to the U.S. and convinced the U.S. to take this
application re transparency of municipal law to arbitration on behalf of Metalclad.
Metalclad is considering if it has a right to appeal this part of the decision
of Justice Tysoe.)
(Citizens should not have expected that this review by a Canadian Court of a
NAFTA Tribunal would strike down NAFTA, or invalidate it in any way. There was
no challenge in this review to the legitimacy of NAFTA or of any of its provisions.
The challenge was only to determine if the tribunal properly applied the NAFTA
terms to the relationship between Mexico -a NAFTA Party-, and Metalclad -an investor
from and in a NAFTA Party. This was a first opportunity for a domestic court
of a NAFTA Party to interpret NAFTA in its application by a tribunal.)
Chapter 11 Articles
Articles 1102 and 1103 compare the way a NAFTA Party treats other investors.
Article 1105 is framed in absolute terms -- how a Party treats other investors
is not a relevant factor.
ARTICLE 1102: "national treatment". A NAFTA Party must treat the investors
of another NAFTA Party and their investments no worse than it treats its own
investors and their investments.
ARTICLE 1103: "most-favored-nation treatment". A Party must treat the
investors of another Party and their investments no worse than it treats the
investors of any other Party or of a non-party and their investments.
ARTICLE 1105: minimum standard clause. A Party may not treat investments of an
investor of another Party worse than this standard irrespective of the manner
in which the Party treats other investors and their investments. Judge Tysoe
adopted the reasoning of the Tribunal in the S.D. Myers vs Canada case for interpreting
(1)The "minimum standard" is a floor below which treatment of foreign
investors must not fall, even if a government were not acting in a discriminatory
manner. (Para.259, Myers)
(2) The proper approach to the interpretation of Article 1105 is: In order to
qualify as a breach of Article 1105, the treatment in question must fail to accord
to international law. Treatment may be perceived as unfair or inequitable, but
it will not be a breach unless it is treatment which does not accord with international
law. International law means customary international law which is developed by
common practices of countries. This is different from conventional international
law which is comprised in treaties entered into by countries (including provisions
contained in NAFTA other than Article1105 and other provisions of Chapter 11.)
(3) The level of treatment which violates Article 1105 : The determination of
whether a breach is so unjust and arbitrary as to rise to the level unacceptable
from the international perspective must be made in the light of the high measure
of deference that international law generally extends to the right of domestic
authorities to regulate matters within their own borders, and consider any specific
rules of international law that are applicable to the case.
Judge Tysoe held that the Mexico vs Metalclad Tribunal did make some decisions
on matters beyond the scope of Chapter 11.
Judge Tysoe found that after discussing the facts and concluding that the municipality's
denial of the construction permit was improper, the tribunal stated its conclusion
which formed the basis of its finding of a breach of Article 1105; namely, Mexico
had failed to ensure a transparent and predictable framework for Metalclad's
business planning and investment. Hence the tribunal made its decision on the
basis of transparency. Judge Tysoe held that to do so was a matter beyond the
scope of the arbitration
because there are no transparency obligations in Chapter 11. Corporations cannot
directly invoke Chapter 18, but the USA could have on behalf of Metalclad.
Judge Tysoe declined to decide whether the tribunal's decision created obligations
beyond the NAFTA's transparency provisions or to decide whether the tribunal
was incorrect in its understanding that Mexico had conceded that Metalclad was
not required to exhaust its local remedies before resorting to the arbitration.
ARTICLE 1110- PRE ECOLOGICAL DECREE
The tribunal's statement that Mexico permitted or tolerated the conduct of the
municipality is a clear reference to the tribunal's view that Mexico failed to
ensure a transparent and predictable framework for Metalclad's business planning
and investment. The tribunal relied on the absence of a timely, orderly and substantive
basis for the denial of the construction permit by the municipality in making
its statement that there had been indirect expropriation. This is a reference
to a lack of transparency.
Judge Tysoe said that in finding a breach of Article 1105 on the basis of a lack
of transparency, the tribunal decided a matter beyond the scope of the submission
to arbitration. In relying on the concept of transparency, at least in part,
to conclude that there had been an expropriation within the meaning of Article
1110, the tribunal decided a matter beyond the scope of the Corporation's submission
ARTICLE 1110- POST ECOLOGICAL DECREE
Judge Tysoe held that it was correct for the tribunal to consider the ecological
decree as being a violation of NAFTA. Judge Tysoe concluded that the tribunal
did find the ecological decree to amount to an expropriation of the site. Metalclad's
claim based on the ecological decree was a claim as required by Article 48 that
fell within the scope of the agreement to arbitrate as contained in section B
of Chapter 11 of NAFTA.
The tribunal's conclusion with respect to the ecological decree stands on its
own and is not based on a lack of transparency or on the tribunal's finding of
a breach of Article 1105. The tribunal considered the decree in isolation of
its other findings of breaches of the NAFTA. It specifically identified the issuance
of the decree as a further ground for a finding of expropriation.
(Municipalities and Provinces take note): Judge Tysoe found that 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 or incidental interference with the use of property. This has the effect
of depriving the owner, in whole or in significant part, of the use or reasonably-
to- be-expected economic benefit of property. This definition is sufficiently
broad to include a legitimate rezoning of property 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 CAA.
Was the tribunal's decision unreasonable?
Judge Tysoe held that the tribunal's conclusion that the issuance of the decree
was an act tantamount to expropriation is not patently unreasonable. Judge Tysoe
concluded that there is no ground under s.34 of the International CAA to set
aside the award as it relates to the conclusion that the issuance of the ecological
decree amounted to an expropriation of the Site without compensation.
Metaclad's improper acts
Judge Tysoe held that it should not interfere with the determination of the tribunal
in its determination that there was good faith and no corruption. He concluded
that it had not been established that there were any improper acts on behalf
of Metalclad which put the award in conflict with the public policy in British
Failure to address all questions
Judge Tysoe held that any errors of the tribunal in the interpretations of Articles
1105 and 1110 which are questions of law are not reviewable under the International
CAA. The only potential basis for setting aside an arbitral award under the International
CAA for failure to deal with all questions is s.34(2)(a)(v) that "the arbitral
procedure was not in accordance with the agreement of the parties." In so
far as he had a discretion, Judge Tysoe declined to exercise it.
In order to have this Court set aside the award in its entirety, Mexico was required
to successfully establish that all three of the tribunal's findings of breaches
of Articles 1105 and 1110 of the NAFTA involved decisions beyond the scope of
the submission to arbitration, or that the award should be set aside in view
of Metalclad's allegedly improper acts, or the tribunal's alleged failure to
answer all questions submitted to it. Although Mexico succeeded in challenging
the first two of the tribunals' findings of breaches of Article 1105 and 1110,
it was not successful on the remaining points. Accordingly, the award should
not be set aside in its entirety.
Judge Tysoe refused to set aside the breach in relation to issuance of the ecological
decree without compensation. He ordered compensation, including interest, be
paid from the date of the decree.
Judge Tysoe said: "Although I have concluded that the Tribunal made decisions
on matters outside the scope of the submission to arbitration when it found the
first two breaches of Articles 1105 and 1110, I should not be taken as holding
that there was no breach of Article 1105 and no breach of Article 1110 until
the issuance of the ecological decree. The function of this Court is limited
to setting aside arbitral awards if the criteria set out in s 34 of the International
CAA are shown to exist. I express no opinion on whether there was a breach of
Article 1105 or a breach of Article 1110 prior to the issuance of the Decree
on grounds other than those relied upon by the tribunal."
Municipalities should take no comfort in this decision by Tysoe as protecting
them from NAFTA challenges. If future Tribunals feel compelled to follow Tysoe's
decision, the Investor itself cannot use the concept of transparency under Chapter
18, but its own government can- and it is not clear yet if they will feel so
compelled because all of this is so new. Further, the investor can make a claim
against the municipality under Chapter 11 that fits Chapter 11. He just has to
craft his complaint differently. This decision also is instruction by the Court
to tribunals on how to fashion their reasons to comply with NAFTA more accurately
to obtain the result they wish to find.
Our provinces should be gravely concerned because the Court upheld the tribunal's
ruling that the provincial government level of intervention was a violation of
NAFTA. Herein is a violation of Canada's Division of Powers between our federal
and provincial governments -- two watertight compartments of our Constitution.
So, if we keep NAFTA, gone is the power of our provinces or our municipalities
to step in to protect us in response to citizen protest. If you are unhappy with
the excuse of governments, "It is beyond our control", "It
is someone else's fault", well gear up for more and bigger whining and no
clout for us. The provinces and the municipalities have a duty to defend their/our
Why all of this process is so problematic is that a new international legal regime
has been set in place without citizen participation, understanding, consent,
or rights. It is functioning and unfolding in ruling after ruling before or without
people really having any idea of what the impacts are. In the first place, none
of our own elected politicians seem to care that all of this violates our Constitution,
i,e.,discards rights that belong to the citizens, including the division of power
in Canada between the feds and provinces, and including our constitutionally
guaranteed right to our own legal regime in our own control.
Each citizen in a democracy has a right to be a sovereign citizen. Sovereign
means having the capacity to make decisions to protect yourself; or that our
elected representative has the power to make decisions, create laws, to protect
our interest as human beings; and that our judicial system operates in the interest
of people and the Public Good in our own domestically created, open, accountable,
Treaties like NAFTA destroy those rights.
It is wrong to fool the public that elimination of Chapter 11 of NAFTA will restore
our sovereignty. It will not. The whole process of creating a new regime of law
in the interests of giving corporations priority to human
beings (whether or not the corporation can claim directly or only through its
government) is contrary to the public good or the public interest. It is immoral,
and it is undemocratic. There is no freedom for people in such a regime. There
is only freedom for corporations.
A "level playing field" for corporations means no playing field for
It is not too late to take that field back for people. Give the six months' notice
to abrogate NAFTA! That is a political decision, not a legal one.