Tecnicas Medioambientales Tecmed S.A - Case Study Example

Tecnicas Medioambientales Tecmed S.A. Introduction Tecnicas Mediombientales Tecmed involves a dispute before the ICSID tribunal between Tecnicas Medioambientales, TECMED S.A., the plaintiff and a Spanish company and the Government of Mexico, the respondent. The plaintiff’s claim arises out of an investment placed in the purchase of a landfill in Sonora, Mexico. The auction involved the sale of assets relative to Cytrar, a hazardous industrial waste landfill. The landfill came with a renewable license that the Mexican government refused to renew beyond 1998 and ordered the shutdown of the landfill in the midst of local protests about the environmental threat posed by the landfill. The plaintiff submitted the matter to arbitration on the grounds that the Mexican government’s action contravened the bilateral agreement between Spain and Mexico, Mexican law and customary international law in that the government did not accord the plaintiff fair and equitable treatment. Ultimately, the plaintiff alleged that the refusal to issue the extension was tantamount to the expropriation of the claimant’s investment. II. Analysis of the Arbitral Tribunal’s Decision on the Merits of the Dispute A. Expropriation The tribunal ruled that expropriation can be de facto or indirect as long as the conduct operates to deprive the investor of returns on its investment. At international law, the term indirect expropriation is not specifically defined and bilateral investment treaties (BIT) usually fail to define indirect expropriation.1 As a result, international tribunals tend to exercise a wide discretion in the interpretation of the term indirect expropriation. In this regard, they typically determine whether or not BITs codify the law on expropriation or expand it by making allowances for indirect expropriation.2 Direct expropriation defined at customary international law as the “coercive appropriation by the State of private property”.3 In Tecnicas there was no direct appropriation of property, but there were administrative measures that forced the closure of the property invoking questions of whether or not the conduct of the government was proportionate to the damages incurred by the plaintiff. Essentially, the tribunal took a position that focused on the effect of the government’s conduct to the extent that the government’s treatment was unfair and therefore rendered the plaintiff’s investment worthless.4 In this regard, the tribunal weighed the reasons for the government’s action against the proportionality of the harm to the claimant. Essentially, the tribunal weighed whether or not environmental concerns canvased by the community justified deprivation of the claimant’s permit. Certainly, there was damage to the environment as the landfill was exporting waste to a location near an urban area. On the other hand, the claimant had no further use for the landfill once it was ordered to close the facility down. Therefore the claimant could not use the land for any other purpose and could not sell it as a viable real estate investment. B. Fair and Equitable Treatment The BIT in this case only required that fair and equitable treatment be accorded pursuant to international law. The Vienna Convention on the Interpretation of Treaties require that words be given their plain meaning. The tribunal therefore interpreted the term to infer a duty to act in good faith and to act bona fide.5 At customary international law, the standard of fair and equitable treatment has typically meant a minimum standard of treatment in terms of investor protection from the arbitrary conduct of states.6 The foreign investor is entitled to expect that the host state will remain committed to the “basic expectations that were taken into account by the foreign investor” when he/she decided to make the investment.7 Under the principles of good faith bona fide conduct the foreign investor is at liberty to expect the host state not to arbitrarily revoke or rescind permits or rules/regulations that the foreign investor depended on when making the investment. Expecting consistency may not be justifiable because governments and agencies change and so do policies and public interests.8 It therefore begs the question of whether or not an investor who invests in activities that can damage the environment has a reasonable expectation that environmental policies will not respond to the perception of harm as it intensifies. The tribunal ruled that the respondent acted arbitrarily in that its resolution was not made transparently. Other tribunals have held that requirement for transparency is not necessarily an element of fair and equitable treatment in international law and ruling otherwise exceeds an arbitral tribunal’s jurisdiction unless it is expressly provided for in the BIT.9 The tribunal made it clear that no such definition was contained in the BIT and relied on customary international law in the interpretation of fair and equitable treatment. In any event the tribunal ruled that, whether or not the respondent had hoped that by forcing the closure of the landfill would put pressure on the claimant to relocate was immaterial as it amounted to coercion and was therefore not consistent with the principle of bona fide or good faith. The fact remains, the respondent closed the landfill abruptly without compensation and without giving the claimant sufficient time to relocate. Any unbiased or neutral observer could not help but come to the conclusion that the respondent acted in bad faith and arbitrarily. In the final analysis, the ruling relative to fair and equitable treatment invokes an extension of the minimum standard of treatment to include due process. The ambit of fair and equitable treatment as it arises under various BITs can be characterized as including good faith, due process, estoppel, unjust enrichment and adhering to agreements.10 II. Analysis of the Arbitral Tribunal’s Views on the Merits of the Dispute According to McRae the arbitration tribunal’s broad statement of the foreign investor’s “legitimate expectations” in relation to the principles of good faith, are “often used as a precedent” by other international arbitration tribunals.11 However, some adjudicators have warned against “taking” the legitimate expectations “too far”. 12 The award relative to exporpriatory conduct is difficult to accept as it emphasizes the effect of the regulatory conduct rather than the substance of the regulation. It therefore rules out the possibility that a government can pass regulations for the protection of the environment if those regulations damage the foreign investor’s investment substantially.13 The decision in Tecnicas only exemplifies the controversy that surrounds drawing a line between indirect expropriatory conduct and the host government’s legitimate exercise of its “regulatory power”. 14 Undoubtedly, it has been acknowledged that public pressure and the public interest can impact a government’s regulatory power.15 The Tecnicas tribunal’s broadening of the test relative to regulatory powers and expropriatory conduct invoked protests by NGOs in that the decision unnecessarily widened the definition of expropriation so that it compromises the host state’s regulatory powers.16 Overall, the primary ruling in the Tecnicas case was the finding that expropriation could be indirect. This however, is a growing trend among ICSID tribunals where 28 percent of claims alleging expropriation are successful .17 For example in Compania de Aguas del Aconquija the arbitration tribunal concluded that although property was not actually taken by the government had a “devastating impact on the foreign investor’s investment.18 Even so, there has been a growing concern among scholars and observers that predates the ICSID tribunals’ decisions such as the Tecnicas award where expropriation is given such a broad meaning. The concern has been whether or not environmental regulations should be constrained by foreign investment within the ambit of international law.19 Obviously, the Tecnicas arbitral award merely furthers this controversy. In Weiler’s discussion of the Tecnicas’s award, the case is characterized as fueling the “regulatory chill”.20 Previously, the overwhelming thought was that police powers could not give rise to compensatory damages as police powers tended to be a manifestation of valid government regulatory power.21 Fair and equitable treatment as discussed by the tribunal in the Tecnicas case goes back to the Havana Charter 1948. Today fair and equitable treatment forms a part of thousands of bilateral investment treaties.22 The standard has been examined in a large number of arbitral awards giving rise to confusion over just how the standard should be interpreted and applied.23 Tecnicas however has been followed by a number of cases relative to its standard for fair and equitable treatment.24 In this regard, the tribunal in CMS Gas Transmission Co.,25 Occidental Expl. And Prod. Co.26 and Waste Management Inc.27 are following a precedent that was first articulated in Tecnicas. This is the concept that fair and equitable treatment is measured by virtue of investor expectation and government transparency. The fact is, this standard first articulated by the Tecnicas tribunal has been closely followed by a large number of tribunals.28 In the final analysis, the impact of the arbitration tribunal decision in Tecnicas is twofold in its contribution to precedents in international law. First, it added to the confusion relative to the definition of expropriation and thereby adds a new dimension to the international community’s difficulty with establishing a uniform definition of expropriation.29 Secondly, it articulated a standard for fair and equitable treatment of foreign investors by the host state in such a way that it has been followed widely and represent a precedent itself. The result is that tribunals in following Tecnicas are prepared to consider the reasonable and legitimate expectations of foreign investors .30 Read More