## Facts

- Metalclad Corporation, a U.S. company, entered Mexico’s hazardous-waste sector by forming/acquiring a Mexican enterprise to develop and operate a hazardous-waste landfill site at La Pedrera in the municipality of Guadalcázar, State of San Luis Potosí.
- Before Metalclad completed the investment, federal and state officials indicated that the project would receive the permits needed to proceed.
- Mexico issued federal authorizations for construction and operation, and the State of San Luis Potosí issued a state-level operating permit.
- Metalclad completed construction of the landfill, despite local opposition to the project.
- Guadalcázar’s town council refused to issue a municipal construction permit, citing environmental concerns and alleged geological unsuitability; Metalclad did not receive prior notice of the council meeting at which the permit decision was taken.
- Metalclad contended that the municipality lacked authority over hazardous-waste matters in light of the federal and state approvals; Mexico argued the municipality had lawful authority to require and deny a construction permit.
- Metalclad sought relief in Mexican courts without obtaining an effective remedy.
- Metalclad commenced arbitration against Mexico under NAFTA Chapter 11 through the ICSID Additional Facility, alleging violations including NAFTA Articles 1105 (minimum standard of treatment) and 1110 (expropriation).
- After the landfill was blocked from operating, the Governor of San Luis Potosí issued an ecological decree affecting the site, reinforcing the prohibition on the landfill’s operation.

## Issues

1. Whether Mexico was internationally responsible under NAFTA for actions and omissions of state and municipal authorities that interfered with Metalclad’s landfill project.
2. Whether Mexico breached NAFTA Article 1105(1) by failing to accord Metalclad fair and equitable treatment and full protection and security in connection with the permitting and regulatory process.
3. Whether the refusal of municipal approvals and the ecological decree amounted to an indirect expropriation or a measure “tantamount to expropriation” under NAFTA Article 1110, requiring compensation.
4. If liability was established, what compensation and interest were owed under NAFTA’s compensation standard.

## Decision

- The tribunal treated the conduct of the municipality of Guadalcázar and the State of San Luis Potosí as conduct attributable to Mexico for purposes of NAFTA responsibility.
- The tribunal found Mexico breached NAFTA Article 1105(1), reasoning that Metalclad faced an unclear and nontransparent permitting process and that the handling of approvals across levels of government failed to provide a stable, knowable set of requirements for the investment.
- The tribunal found Mexico breached NAFTA Article 1110, holding that expropriation under NAFTA includes not only direct takings but also interference that deprives an investor, in whole or in significant part, of the use or reasonably expected economic benefit of the investment; the municipal permit denial and the ecological decree were treated as measures that effectively made the landfill unusable.
- The tribunal awarded Metalclad US$16,685,000 in damages, plus interest at 6% compounded monthly after 45 days from the date of the award on any unpaid amount.
- In subsequent judicial review in British Columbia (the supervisory jurisdiction for the arbitration), the court set aside parts of the award connected to the tribunal’s Article 1105 reasoning (including aspects framed as a broad “transparency” obligation) while leaving the core Article 1110 expropriation finding and the damages award in place, subject to modification of interest calculations tied to the timing of the expropriatory measure.

## Legal Principles

- A NAFTA Party may be held responsible for treaty breaches arising from acts of its organs at different levels of government, including municipal and state entities; internal allocations of authority do not bar international responsibility.
- Under NAFTA Article 1110, an indirect expropriation may be found where state measures, including regulatory and permitting actions, substantially deprive an investor of the use or reasonably expected economic benefit of its investment, even without a formal transfer of title.
- A host state’s environmental or land-use measures can still constitute expropriation under NAFTA if their effect is to deprive the investor of the investment’s value or use, triggering the treaty’s compensation requirement.
- Under NAFTA Article 1105(1), treatment must meet the international law minimum standard; tribunal approaches that extend this standard through expansive theories of transparency may face limits on judicial review where they exceed what was submitted or authorized.
- Monetary relief for expropriation under NAFTA is generally tied to the investment’s value immediately before the expropriatory measure, with interest tied to the date the compensable injury is found to have occurred.

## Conclusion

In *Metalclad Corp. v. United Mexican States*, the NAFTA tribunal held Mexico responsible for state and municipal conduct that prevented operation of Metalclad’s hazardous-waste landfill, found breaches of Articles 1105 and 1110, and awarded US$16,685,000 plus interest; on later court review in British Columbia, parts of the Article 1105 analysis were set aside while the expropriation-based result and damages were largely maintained with adjustments related to interest.


Metalclad Corp. v. United Mexican States, Case No. ARB(AF) 97/1 (2000)