Tecnicas Medioambientales - Case Study Example

Tecnicas Medioambientales TECMED S.A. v The United Mexican States I Introduction TITLE: Tecnicas Medioambientales TECMED S.A. v The United Mexican States, Case No ARB (AF)/00/02 DATE OF JUDGMENT: May 29, 2003 PARTIES TO THE CASE: TECMED, Complainant, and; the United Mexican States, Respondent. THE ARBITRAL TRIBUNAL: Dr. Horacio Grigera Naón, President; Prof. Jose Carlos Rozas, Member; Mr. Carlos Berea, Member, and; Ms. Gabriela Avila, Secretary. STATEMENT OF THE CASE: This is an arbitration proceeding seeking damages, with compensation for damage to reputation. FACTS: In 1988, a government-owned landfill was built in Las Viboras, within Hermosillo, Sonora. A license to operate it for 5 years was granted to Parques Industriales de Sonora although it was actually operated by another Sonora government agency. When ownership was eventually transferred by the national government to an Hermosillo agency, the original license was cancelled and a new one was granted in 1994 by the INE, a United Mexican States agency, for an indefinite period of time. In 1995, the said Hermosillo agency was dissolved and the landfill assets were transferred, through a deed of donation, to Promotora, a decentralised agency of the Hermosillo municipality, which Promotora auctioned it to TECMED. 1 TECMED, operating the landfill through Cytrar, a company specifically created for that purpose, requested the grant of a license to operate the landfill. INE granted a license to operate for a year, renewable every year at least 30 days before expiration. Before its expiration in 1998, TECMED filed for its renewal, but INE rejected it and instead, issued a resolution ordering TECMED to submit a program for the closure of the landfill. 2 ISSUES: (a) Whether or not the rejection of license renewal is tantamount to expropriation; (b) Whether or not the Respondent violated its obligation under the “fair and equitable” principle; (c) Whether or not the Respondent failed in its obligation to provide protection and full security of TECMED investments. THE TRIBUNAL’S DECISION: The Tribunal found the Respondent guilty of breaching Articles 4(1) and 5(1) of the Agreement. It ordered the Respondent to pay the Complainant the amount of US$ 5,533,017.12 plus interest at 6% pa from the date the application was refused. It ordered the Claimant to transfer the landfill and all its assets to the Respondent after the Respondent shall have paid the award amount. 3 RATIO DECIDENDI: In reaching its decision, the Tribunal deliberated on the following issues: alleged indirect expropriation; fair and equitable treatment, and; alleged breaches of the Agreement. On the matter of expropriation, it held that the Respondent’s acts, made through INE, were tantamount to an indirect expropriation because they have the effect of totally depriving the Claimant of its “economical use and enjoyment of investments” as if all their rights thereto had ceased, 4 since the landfill had become absolutely useless to it. Under international law, indirect de facto expropriation exists if the measures adopted by a state, has a permanent or irreversible effect and ceases the claimant from enjoying its assets. 5 In determining expropriation, it became important for the Tribunal to examine the legitimacy of the administrative acts of the Government agency to ensure proportionality between the means and the end employed. 6 The Tribunal concluded that the violations committed by Cytrar were minor and did not compromise the health, safety and well-being of the public nor warrant the penalty of permit refusal and closure.7 The Tribunal further found that the acts of INE, which are attributable to the Respondent, constituted a violation of the fair and equitable principle. 8 The Tribunal cited INE’s lack of transparency and forthrightness when it failed to respond to Cytrar’s urgent request for approval of the expansion of Cell 2 and Cell 3. Moreover, it did not inform the Claimant of possible reasons that could jeopardize its application. This Tribunal considered it a form of coercive measure to compel the Claimant to relocate despite the absence of proof that its operations posed immediate health and safety hazards. 9 Finally, on the issue of breach of the Respondent of its obligation to provide full protection and security and other guarantees to investments of Contracting Parties under the Agreement, 10 the Tribunal held that there is no sufficient evidence to warrant such a finding. This part of the decision stems from the allegation of the Claimant that the federal, state, national and municipal governments were remised in their duty to stop demonstrations against the landfill operation in Las Vibores and instead, abetted them. 11 II Analysis of the Arbitral Tribunal’s Views There are, at least, three significant issues placed before the Tribunal in this case: the issue of expropriation; the proportionality or fair and equitable issue, and the full protection and security issue. All these issues were considered in the light of the provisions of the Agreement previously entered into by Spain and the United Mexican States on June 23, 1995 and other pertinent laws and decisions of international courts (ECHR). The expropriation issue is particularly significant considering that the Tribunal has to balance between the rights of a state to the exercise of one of its inherent powers as against the right of an ‘outsider’ to impose itself upon that right to secure the continued viability of its existence in that state. It is also a case that entails a conflict between domestic and international law. TECMED is fortunate because expropriation cases decided by the ICSID, so far, have only 28% success rate, far lower than cases involving “fair and equitable” cases at 70% success rate. 12 Moreover, the pertinent provision relied upon by the Tribunal in the Agreement does not in any way define or describe expropriation. 13 In the TECMED case, there was no actual taking or dispossession by the Respondent of the assets and property of the Claimant. Despite the vagueness of the issue, the Tribunal devoted the largest part of its rationalisation to the expropriation issue. The reason for this could be that comparatively, the TECMED case is more clear-cut than other cases involving indirect expropriation. While other cases alleging indirect expropriation involve partial removal of prior rights through regulation or alteration of conditions that left the conduct of the business untenable, the TECMED case involved a total destruction of the use of the investment assets and property because of the refusal of the government to grant it a new license to operate. In the former, intense debates on the extent of the destruction necessarily involving macroeconomic and microeconomic experts make them complicated usually ending in the Tribunal ruling against the expropriation allegation. The TECMED case was simpler because of the outright non-renewal of the permit making the operation of the investment completely untenable.14 The determination of the indirect expropriation issue was largely hinged on the proportionality principle, which is an absolute standard, that is – its legality is not dependent on the finding that it is discriminatory in nature, but rather on the existence of a parallel relationship between the means and the end. 15 Thus, in order to determine whether the INE measures were expropriatory in character, the Tribunal deliberated on whether the measures taken together pursued a legitimate goal of public interest and whether such measures were appropriate for the said goal. The basis for the “fair and equitable” allegation is underpinned by the Agreement provision that states: “Each Contracting Party will guaranty in each territory fair and equitable treatment, according to International Law, for the investments made by investors of the other Contracting Party.” 16 The Tribunal noted that the principle as applied to investments stems from good faith without qualifying whether such is a source of obligation or a governing principle in obligation creation underpinning “fair and equitable treatment.” 17 Accordingly, the rationalisation of the Tribunal in finding for a breach of the “fair and equitable treatment” principle by the Respondent expanded the definition of the principle to include the elements of transparency and consistency, which together with the Mondev case, 18 has elevated the principle as a customary international law, is setting concurrent trends in arbitration proceedings relative to bilateral investment treaties (BIT). 19 III Evaluation The TECMED case is significant because it reflects the present trend in the conflict between international law and domestic law in the regulation of investments within a state’s territory. On the one hand, there is the commitment of a state to abide by the treaty it entered into with another state and on the other; there is the obligation of the state to pursue measures to protect its citizens, its environment and itself from domestic socio-political pressures. The idea that regulatory measures that are so underpinned would be tied up to expropriation first became a concern after the emergence of the first NAFTA cases. The need to clearly define the area of expropriation as opposed to plain regulatory measures underpinned by public welfare is, therefore necessary. 20 Allowing the tie-up of the two measures would imply that for every regulatory measure imposed by the government, albeit legitimate; the state will have to pay for compensation to every investment affected by it. A further implication for this is that the state might dilly-dally before implementing a legitimate regulatory measure rather than act with dispatch. Indeed, BITs characteristically have negative implications for human rights because of their emphasis on investor and investment protection and rarely contain provisions that substantially deal with human rights. The compensatory requirements can engender a “regulatory chill” that could keep countries from asserting and adopting an aggressive attitude towards safety, environment and health issues if the same involves potential clash with investors and investments. 21 In the present case, albeit the Agreement did not, by itself, define expropriation, direct or indirect, the Tribunal rendered a ruling finding for a case of indirect expropriation on the basis of the ill effects of the measures on the investment’s viability. However, there is every justification for the Tribunal to render such a decision based on the mechanical interpretation of related provisions of the Agreement and international laws and precedents. Indeed, TECMED was not liable for serious violation of safety and health laws and the Agreement clearly provides for the protection of investors and their assets within the host country. Without a provision clearly defining and outlining the limits of expropriation, the Tribunal has no other alternative but find for TECMED. Furthermore, in determining the legitimacy of INE’s acts, the Tribunal breached into domestic territory justifying this intrusion as not proscribed by the Agreement and necessary to establish proportionality. Arthur Rovine remarked aptly that presently, a tendency for tribunals, “operating under the fair and equitable treatment rubric,” to deliberate both in the sphere of international law as well as the national law can be observed. In the latter case, tribunals assess the accuracy of the national government and its agencies in implementing its own laws whilst at the same time appraising the government’s conduct on the basis of the applicable international law or agreement. 22 In the present case, the Tribunal conducted and passed judgment on the legitimacy of INE’s actions, which is tantamount to infringing on domestic business. References: Agreement on the Reciprocal Promotion and Protection of Investments between Spain and Mexico. http://untreaty.un.org/unts/120001_144071/25/3/00020598.pdf. Carbonneau, T.E. & Mourra, M.H. (2008). Latin American Investment Treaty Arbitration: The Controversies and Conflicts. UK: Kluwer Law International. Davarnejad, L. (2008). Strengthening the Social Dimension of International Investment Agreements by Integrating Codes of Conduct for Multinational Enterprises Session. OECD. http://www.oecd.org/dataoecd/10/5/40352144.pdf. James and Others v The UK (21 Feb 1986) 50 ECHR. OECD (2005). International Investment Law: A Changing Landscape. OECD Publishing. OECD (2004). Indirect Expropriation and the Right to Regulate in International Investment Law. http://www.ilsa.org/jessup/jessup07/basicmats/oecd_report.pdf. Rovine, A. (2009). Contemporary Issues in International Arbitration and Mediation 2008: The Fordham Papers, Vol. 2. BRILL. Statute of the International Court of Justice. Tecnicas Medioambientales TECMED S.A. v The United Mexican States, Case No ARB (AF)/00/02 Weiler, T. (2005). International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law. London: Cameron May. Xiuli, H. (2007). The Application of Proportionality in TECMED v Mexico. http://chinesejil.oxfordjournals.org/content/6/3/635.full.pdf. Read More