By the time this magazine is printed, an unusual case will have been considered by the British Columbia Supreme Court. The case deals with the relationship between the North American Free Trade Agreement (NAFTA) and a hazardous waste treatment, storage and disposal facility that, while constructed, has yet to be operated. The twist is that the facility is not located in British Columbia but rather in the Mexican State of San Luis Potosi. (See editorial, page 4)
Historically, hazardous waste in Mexico has not been treated in a manner that could in any way be considered environmentally friendly. The vast majority of the approximately 11 million tonnes of hazardous waste generated in the country each year is disposed of in clandestine dumps throughout the countryside. One proposed project that was thought to be a partial solution to the problem would have dealt with approximately 396,000 tonnes of hazardous waste annually. That proposed facility is now the subject of the court case in B.C.
In 1993, state and federal approvals were granted for the construction of the facility in San Luis Potosi. On the one hand, local residents were (by some accounts) in favour of the operation in part because it would have employed 200 local residents. On the other hand, a local environmental group later joined by Green Peace organized demonstrations in an attempt to keep the landfill from operating. There have been reports of threats of violence attributed to the opponents as well as the application of pressure on local officials.
Originally owned by the Mexican firm Coterin, the project was later purchased by the U.S. company Metalclad. Metalclad thought that all permits required for the facility were in place. Development continued and the $20-million “state-of-the-art” facility was completed in 1995. However, despite having entered into an agreement to allow the company to open and operate the landfill, Mexico’s federal agency responsible for hazardous waste has not allowed the facility to open.
The local government would not cooperate with Mexican federal authorities. Then-Governor Horatio Sanchez Unzuetta created a 60,000-acre ecological preserve that included Metalclad’s 2,200-acre facility. The governor also claimed that a local building permit was not attained. As a result of these actions, the facility could not operate.
The tribe has spoken
Citing the investor protection provisions in NAFTA, Metalclad sued the Government of Mexico for more than US$100-million, claiming that the actions of the local government effectively expropriated the property from Metalclad.
The case was heard in Washington, D.C., by a panel comprised of: Sir Elihu Lauterpacht, Q.C., of Cambridge, England; former U.S. Attorney General Ben Civeiletti; and, an international jurist from Mexico, Jose Luis Siquieros. After a lengthy battle before the NAFTA tribunal, Metalclad was awarded nearly US$17-million in damages. In a unanimous decision, Metalclad was awarded the value of the existing property. It was not, however, awarded the lost potential business as was claimed.
Implications for industry
The decision will be groundbreaking for a number of reasons. It was the first major ruling under NAFTA where the challenging investor (Metalclad) was victorious.
According to Metalclad lawyers, the ruling was based on two factors. First, Mexico had denied Metalclad “fair and equitable treatment” under the NAFTA and second, the accumulated actions of the Mexican government resulted in the wrongful taking of Metalclad’s investment.
The Mexican government, proceeding under NAFTA rules, is now appealing to a neutral court, in this case the B.C. Supreme Court. The appeal was heard on February 19 but the decision reserved.
Whether or not the Mexican government is successful in its appeal, the case is important for the North American waste management industry. As it stands, the case indicates that in certain circumstances NAFTA will protect investors from changes in circumstances in foreign jurisdictions when investments are made and later adversely affected by actions of local or federal authorities. If this decision is upheld, those investing in North American jurisdictions other than their own should be provided with some comfort that they would be protected from what may be described as capricious government actions that have significant negative impacts on such investments.
Environmental groups in all three NAFTA jurisdictions have expressed significant concern that investor rights are trumping (or trampling) environmental safety. They take the position that under NAFTA, despite local rules regarding waste management, if a foreign company wants to dump waste it can force you to pay compensation if it is prevented from doing so. The case is being cited as an example of how environmental controls are becoming impossible for local communities.
The tribunal decision is not public and as such it is difficult to know precisely the reasoning behind it. That being the case, it is difficult to know the precise implications. Was the environmental review process that resulted in the 1993 approvals and permits for the facility rigorous and comprehensive? Was there a capricious change of position of the Mexican government as a result of politically motivated support for the opponents to the facility’s operation? Without answers to questions such as these, it’s difficult to know whether a similar case involving investments in a Canadian landfill would have similar results.
Despite any ruling, future cross-border investments in the waste management sector will likely be the subject of increased scrutiny by both the investor and the environmentalist.