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The purpose of this briefing is to prospect indirectly expropriation and state compensation by analysing the case of Metalclad Corporation v. The United Mexican States. With the growing economic globalization, larger flows of foreign investment occur from industrial countries to non-industrial countries. During the international investment practice, there is bound to be conflicts of interests between exporters of capitals and importers of capitals. How to avoid this problem on the basis of gaining profits becomes the main concern of investors.
Metalclad Corporation, a US company, in order to establish a waste landfill in the Mexican Municipality of Guadalcazar, acquired a landfill by buying COTERIN, the owner of record of the landfill property as well as the permits and licenses. In May 1994, under SLP’s agreement to support the project, Metalclad started to construct the landfill. However, the state government and local bodies opposed the project on mandatory environmental safety requirements. As a result, the company was asked to apply for a municipal construction permit. The company applied for a permit and completed the landfill in 1995. But the Municipality of Guadalcazar refused Metalclad’s application for a permit and consequently the Governor of the State issued an ecological decree prohibiting the use of waste landfill. At the NAFTA Tribunal, the company argued that Mexico breached Articles and 1110 of NAFTA. The Tribunal decided that Mexico had breached obligations and awarded $16.7 million in damages to Metalclad in August 2000.

International litigation may frustrate the parties by taking years to resolve, costing a great deal of money, and destroying the commercial relationship. For this reason, dispute resolution that does not take place in the courts of any country is a popular option for the settlement of commercial disagreements (Nicholson 360).
Arbitration has emerged as the favoured form of Alternative dispute resolution for international trade disputes (Nicholson 361) because of some advantages over litigations. a. It may be cheaper than litigation; b. Pre-trial discovery is more limited, hence cheaper and less time consuming; c. Arbitration is often faster; d. An arbitral award is more easily enforced in foreign countries than is a judgment; e. More private; f. The proceedings are less adversarial and may be less destructive to relationship of the parties; and g. There is limited right to appeal in arbitration.
Because of the advantages of arbitration mentioned above, there has been a remarkable shift in recent years away from commercial litigation in the courts to alternative forms of dispute resolution. For those reasons, Metalclad choose to submit the matter to arbitration instead of proceeding with litigation.
The three levels of Mexico government involved in this case are Federal government, the municipal government of Guadalcazar and local government of SLP.
“Bundling” is an accounting concept where the expenses related to different projects are aggregated and allocated to another project. Metalclad has claimed as costs related to the development at La Pedrera earlier costs incurred on certain other sites in Mexico.the Tribunal does not consider it appropriate to apply the concept in the present case. The Tribunal has reduced accordingly the sum payable by the Government of Mexico.
Since the international investment is operated and developed in local area, the local government should provide investors with services like roads, electricity, and water. As sub-units increasingly enter into the regulatory domain in matters such as environmental protection, consumer safety, public health, and land use (Herman), when making a decision of foreign investment, it is a very urgent step to make sure the investment activity is under the permit of not only state government but also of local government. In the investment field, NAFTA panels have made it clear that the national governments of the State bear responsibility for actions of their sub-national units, since the sub-units are not treaty parties and are not subject to the international legal obligations. If the activities of local government violate the treaties because of the conflicts between local government and state government, disputes will inevitably emerge between foreign investors and state government. And data prove that there is a trend that this kind of disputes are increasingly more in recent years due to the acceleration of globalization.
In this case, Metalclad did get the formal approval to operate the facility since it owned COTERIN, an enterprise which owns a state land use permit to construct the landfill. But it lacks the permit from federal government to operate the landfill. As to informal approvals, Metalclad met with the Governor of SLP to discuss the project on June 11, 1993 and Metalclad asserts that at this meeting it obtained the Governor’s support for the project. On August 10, 1993, the INE granted COTERIN the federal permit for operation of the landfill. Since Metalclad purchased COTERIN, it owned the permit from the federal to operate the landfill.
Metalclad alleged breaches of NAFTA Articles 1102, 1103, 1104, 1105, 1106(1) (f), 1110 and 1111. Mexico failed to provide Metalclad’s fair and equitable treatment in accordance with international law, as required by Article 1105(1). The tribunal decided that even if a municipal permit were necessary, the municipality exceeded its power when it denied the permit on environmental grounds because environment regulation is a power of the federal government. The tribunal linked Mexico’s lack of transparency in contravention of Article 102(1). Metaclad had relied on the representations of the federal government, which failed to make clear the actual requirements and procedures.

For business persons who intend to make foreign investment that depend heavily on land, mining, or other immovable assets, some considerations should be made. Firstly, to make sure whether the investment practice can get all permits required; secondly, is it the investment welcomed by local government and citizens. Last but not least, to make sure the investment is under the protection of treaties.

1, Mary Jo Nicholson, Legal Aspects of International Business: A Canadian Perspective. Toronto: Emond Montgomery Publications Ltd. 2007. Print.
2, Mary Jo Nicholson, Legal Aspects of International Business: A Canadian Perspective. Toronto: Emond Montgomery Publications Ltd. 2007. Print.
3, Lawrence L. Herman. “Federalism and international investment disputes”, Investment Treaty News, July 12, 2011, Nov 22, 2011.

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