Tecnicas Medioambientales Tecmed Issues - Case Study Example

Tecnicas Medioambientales Tecmed S.A. v. The United Mexican s (ICSID Case No. ARB (AF)/00/2) - Award Introduction The instant case is brought by Tecnicas Medioambientales, TECMED S.A. (Claimant) against the United Mexican States (Respondent), for arbitration before the International Centre for Settlement of Investment Disputes. The arbitral tribunal members are Mr. Horacio Grigera Naón, (President), an Argentinian appointed by the two party appointed arbitrators; Prof. José Carlos Fernandez Rozas (Arbitrator), a Spanish national appointed by Tecmed; and Mr. Carlos Bernal Verea (Arbitrator), a Mexican national appointed by Mexico.2 The factual background is as follows: 3,4,5 Claimant is a company incorporated in Spain, which acquired property, buildings, facilities and other assets in Mexico pertaining to a controlled landfill of hazardous industrial waste. It was granted license to operate by the Mexican government, effective until 1998. In 1998, Tecmed’s application for permit renewal was rejected by respondent ostensibly based on certain minor breaches in landfill operation. Claimant felt that the refusal was arbitrary and politically motivate. Claimant incurred loss of profits and business opportunities, failure to fulfil contracted obligations, negative impact on company image, and failure to recover the cost of investments. 6 The issue is whether or not Mexico’s non-renewal of license for Claimant to operate the landfill constitutes violation of the Bilateral Investment Treaty between Spain and Mexico. 7 The legal basis relied upon is the Bilateral Investment Treaty (BIT) between Mexico and Spain, under the dispute settlement clause, pursuant to the ICSID Arbitration Rules. 8 2. Arbitral Tribunal’s views on the merits of the dispute. 2.1 On Expropriation: While formally an expropriation means a forcible taking by the Government of tangible or intangible property owned by private persons by means of administrative or legislative action, what the case contemplates is a de facto expropriation, where such actions deprive persons of their ownership over such assets, without allocating said assets to either third parties or to the Government. Such “indirect” or “creeping” expropriation was implied by the terms in the Agreement, when it referred to acts “equivalent to expropriation” or “tantamount to expropriation”. The Arbitral tribunal observed that the licensing agency’s decision not to renew the license meant that the landfill will be permanently and irrevocably closed, thus losing its economic value. 9 Furthermore, the Mexican authorities failed to maintain a reasonable proportionality between the interest protected (i.e., environmental welfare) and the protection of the rights of the investor, 10 when they gave disproportionately greater weight to the as yet speculative chance that the Tecmed landfill will in the future affect the adjoining communities located some distance from it.11 It was likewise found by the Tribunal that Tecmed’s alleged breaches of environmental regulation that the agency relied upon were not the true reason for non-renewal, but socio-political considerations that exerted pressure on authorities to relocate the landfill farther from the city. 12 It was therefore concluded by the Arbitral Tribunal that non-renewal of the license of the Claimant by the Respondent amounted to a de facto indirect expropriation when its actions permanently deprived Claimant of the economic value of its property, in violation of the provisions of the Agreement and of international law. 13 2.2 On Fair and Equitable Treatment Article 4(1) of the BIT assures “fair and equitable treatment according to international law” (the Fair and Equitable Treatment standard) to the investment of investors, to which standard the principle of good faith (bona fide) is indispensable. 14 By fair and equitable treatment, the law implies that standard established by international law that embodies the good faith principle, i.e., that the Contracting Parties provide to international investments such treatment that does not adversely affect the basic expectations that were relied upon by the foreign investor in committing to make the investment. This includes the expectation that the State shall not arbitrarily revoke pre-existing permits issued by the State, and upon which the investor counted upon in assuming its business commitments and planning its commercial activities. 15 In the case at bar, there was an agreement in good faith between the authorities and Claimant that operations at the existing landfill site would continued under the Permit for a reasonable time until relocation would have taken place, as evidenced by the words: “the current landfill shall be closed as soon as the new facilities are ready to operate.” 16 The subsequent actions of the Mexican authorities in shutting down operations therefore showed a lack of good faith and transparency, thereby violating its FET obligation. First, the authorities reassured Tecmed that it may continued operating the landfill until new land and the corresponding licenses would be provided to it by the government. 17 Secondly, instead of abiding by this promise, Mexican authorities denied renewal of the license, for which reason Tecmed could not operate the landfill contrary to the authorities’ promise. 18 Thirdly, other circumstances were found by the Tribunal to be indicative of Mexico’s wrongful and ambiguous manner. 19 2.3 Full Protection and Security and Other Guarantees under the Agreement Claimants allege that the Respondents failed to afford it the protections promised by the BIT obligation expressed in Article 3(1) of the Agreement.20 The Arbitral Tribunal notes that no evidence has been furnished to prove the claim that Respondents in any way participated in the community protests and political movements against the Claimant’s landfill operations. Furthermore, the Tribunal observes that the guarantee of full protection and security cannot be absolute as it does not impose a strict liability upon the State granting such protection. The Tribunal’s view of the actions of the Mexican authorities have been perceived as within reason, in reaction to the circumstances then unfolding, and consistent with the constraints inherent in a democratic state in response to the actions conducted by the protesters. 21 The claim, therefore, of violation of the full protection, security, and other guarantees to foreign investments. 22 3. Evaluation: 3.1 Expropriation Under public international law, it is possible that the state may adopt measures that, prima facie, are a lawful exercise of governmental powers, but which may considerably and substantially affect foreign interests. For instance it is possible for foreign assets to be made the subject of taxation, or licenses and quotas used to restrict trade. Under bona-fide non-discriminatory laws, and barring extraordinary circumstances, subjecting foreign assets to such restrictions or even to economic injury is not unlawful and may not be classified as expropriation.23 Where, however, when the application of the law is discriminatory, resulting in actual injury to the foreign asset’s owner with the intention to harm the foreign enterprise, to the unfair advantage of national entities. 24 Compañia del Desarrollo de Santa Elena v Costa Rica is instructive in the Tecmed case. The claimant was established solely to purchase Santa Elena, a 30-km terrain in Costa Rica, and develop it to be a tourist resort. Subsequently, Costa Rica issued an expropriation decree for Santa Elena and declared it a preservation site. The case was finally resolved by an ICSID panel, which ruled that despite the taking being legitimate and for a public purpose, this does not affect the nature or measure of the compensation to be paid. “Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains” 25. Consistent with the Santa Elena decision, the TECMED ruling gave importance to the expropriatory character of the denial of the permit to operate the landfill. Such acts call for an award of compensation to the private party deprived of the value of their assets, notwithstanding the reliance by the respondent State on environmental preservation as its justification for the permit denial. 3.2 Fair and equitable treatment In public international law, five elements are held to comprise fair and equitable treatment; these are: (1) stability, predictability, and consistency in the law; (2) protection of legitimate expectations; (3) administrative and procedural due process and prohibition of denial of justice; (4) transparency; and (5) reasonableness and proportionality.26 On the other hand, parties’ obligation to provide “fair and equitable treatment” in investment agreements has been attributed different interpretations. Mainly, the issue focuses on whether it is measured against the standard treatment in customary international law as a minimum, or measured against a broader international law standard including investment protection obligations, or even established as a separate standard from international law altogether. “Fair and equitable treatment” may differ among the treaties where it appears; the appropriate construction is conveyed by the specific wording, context, history of negotiations, and other indications of the true intent of the parties. 27 In Mondev International Ltd. v United States of America, 28 the Claimant was a subsidiary of a Canadian real-estate developer. It brought action against the City of Boston for breach of contract to develop a shopping mall in the city. Claimant won in trial court but the decision was reversed by the State’s Judicial Court, on the basis of which Mondev submitted its claim against the US on the strength of the NAFTA investment charter. The Tribunal discussed “fair and equitable treatment” and “minimum standard of treatment”, stating that the standard based on current customary international law is a constantly evolving one, the content of which is moulded by the continuous stream of bilateral investment treaties as well as treaties of friendship and commerce. There is thus not one, static, interpretation of the standard, although a Tribunal does not have the discretion to attribute to it its own subjective interpretation. Tribunals are bound by the construction of minimum standard as established in State practice, in the jurisprudence of arbitral tribunals, and other authoritative sources of law. 29 These arguments support the decision in the TECMED case, where the tribunal ruled that compliance by the host state with such pattern of conduct that is consistent with the basic expectations of the investor in making his investment, determines the state’s compliance with the fair and equitable treatment principle, and is crucial to exclude the possibility that the state’s action be characterised as arbitrary30. In effect, the twin attributes of consistency with current custom, and basis in source of law contained in the BIT, are present. Footnotes: 1: Tecnicas Medioambientales TECMED S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, at 1 (2003) 2: Id. at 1 3: See G. A. Avila, Tecnica Medioambientales Tecmed, S.A. v United Mexican States, Case Summary, International Centre for Settlement of Investment Disputes (ICSID) 4 (2003) 4: See D.M. McRae & International Law Association, Canadian Branch. The Canadian Yearbook of International Law 2006, vol. 45. University of British Columbia, Vancouver, BC (2007) at 56. 5: See J. Crawford & K. Lee, ICSID Reports. 135 (Cambridge University Press, 2006) 6: See Avila, supra., at 5 7: See TECMED v Mexico, supra. at 16 par. 58 8: Id. at 34 par. 93 9: Id. at 38 par. 105 10: Id. 11: European Court of Human Rights, In the case of James and Others, judgment of February 21, 1986, 50, pp.19-20, http://hudoc.echr.coe.int 12: See Crawford & Lee, supra. at 136 13: Id. 14: See TECMED v Mexico, supra. at 61 par. 152 15: Id. at 61 par. 154 16: Id. at 63 par. 160 17: Id. at 52 par. 133, 135 18: Id. 19: Id. 21: Id. at 43 par. 114 22: Id. at 43 par. 115 23: Ian Brownlie, “Public International Law”, Oxford University Press, 6th Edition, 2003 at 509. 24: “Restatement of the Law Third, the Foreign Relations of the United States,” American Law Institute ,Volume 1, 1987, Section 712. 25: See James v. United Kingdom, 98 Eur. Ct. H.R. (ser. A) at 9, 37 (1986). 26: J. Bering, T., Braun, R., Stephan Schill, Christian Tams and Christian Tietje. International Law Association, German Branch. “General Public International Law – A Research Sketch on Selected Issues. 27: See Organisation for Economic Co-operation and Development (OECD). “Fair and Equitable Treatment Standard in International Investment Law. (September 2004) 28: See Mondev International LTD v. United States of America, ICSID Case No. ARB(AF)/99/2 (Award) (11 October, 2002). 29: See Mondev vs USA par 119 30: See TECMED v Mexico at 61 par. 154 31: See American Manufacturing & Trading, Inc. (US) v. Republic of Zaire, ICSID case No. ARB/93/1 Award (February, 1997) Wordcount – 2,050 excluding title References: Avila, G A 2003 Tecnica Medioambientales Tecmed, S.A. v United Mexican States, Case Summary, International Centre for Settlement of Investment Disputes (ICSID) Ayala, Y S 2009 Restoring the Balance in Bilateral Investment Treaties: Incorporating Human Rights Clauses. Revista de Derecho, Universidad del Norte Colombia, Barranquilla Bering, J; Braun, T R; Lorz, R A; Schill, S; Tams, C; & Tietje, C 2009 “General Public International Law and International Investment Law – A Research Sketch on Selected Issues”, Essays on Transnational Economic Law, International Law Association, German Branch / Working Group. Martin Luther University Halle-Wittenberg, Universitätsplatz 5, Halle. Crawford, J & Lee, K 2006 ICSID Reports. Cambridge University Press, UK Escarcena, S L 2010 The Elements of Fair and Equitable Treatment in International Investment Law: Policy Brief No. 14 – April 2010. Leuven Centre for Global Governance Studies, Catholic University of Leuven. Leuven, Belgium. Khatiwada, A 2008 Indirect Expropriation of Foreign Investment, Unpublished paper. Accessed 26 October 2010 from http://www.ksl.edu.np/cpanel/pics/indirect_expropriation_apurba.pdf McRae, D M & International Law Association, Canadian Branch. 2007 The Canadian Yearbook of International Law 2006, vol. 45. University of British Columbia, Vancouver, BC Mostafa, B 2008 The sole effects doctrine, police powers and indirect expropriation under international law. Australian International Law Journal, Annual, 2008. Accessed 26 October 2010 from http://findarticles.com/p/articles/mi_7247/is_0_15/ai_n32098686/pg_13/?tag=content;col1 Netherlands Institute of Human Rights 2010 In the case of Matos e Silva, Lda., and Others v Portugal. Utrecht School of Law. Accessed 26 October 2010 from http://sim.law.uu.nl/SIM/CaseLaw/hof.nsf/2422ec00f1ace923c1256681002b47f1/78f4145943d2f20ec1256640004c3088?OpenDocument Organisation for Economic Co-operation and Development (OECD) 2004 Indirect Expropriation and the Right to Regulate in International Investment Law, September. Accessed 26 October 2010 from http://www.oecd.org/dataoecd/22/54/33776546.pdf Ripinsky, S & Williams, K 2008 Damages in International Investment Law, British Institute of International and Comparative Law (BIICL) U.S. Department of State 2010 Pope & Talbot, Inc. v. Government of Canada. Accessed 26 October 2010 from http://www.state.gov/s/l/c3747.htm Read More