Odyssey Marine Exploration, Inc. v. United Mexican States, ICSID Case No. UNCT/20/1, Award, September 17, 2024

Odyssey v Mexico appears to be the first-ever reported ISDS case dealing with seabed-mining activities. The dispute arose from a seabed phosphates mining project off the coast of Mexico’s Baja California Peninsula. The case was submitted under NAFTA Chapter 11 and administered by ICSID pursuant to the UNCITRAL Arbitration Rules.

Background

The claim was brought by Odyssey Marine Exploration (Odyssey), a company incorporated in the state of Nevada (U.S.) on its own behalf and on behalf of ExO, a Mexican company in which Odyssey holds a majority interest via intermediary holding companies.

Starting on June 28, 2012, ExO secured several mining concessions for prospecting and coring off the coast of the Baja California Peninsula for an initial duration of 50 years, with the possibility of extension for another 50 years.

Due to alleged environmental concerns, the Secretariat of Environment and Natural Resources (SEMARNAT) eventually denied ExO’s environmental impact statement (MIA), the first step in the environmental impact assessment process, a mandatory procedure under Mexican law. ExO’s MIA was denied on two occasions. The first, on April 7, 2016, was reversed by the Federal Administrative Tribunal. The subsequent resubmission was then denied on October 12, 2018. At the time of the tribunal’s award, the action to challenge this second denial was still pending before the Federal Administrative Tribunal.

The claimant asserted that these actions amounted to violations of the minimum standard of treatment (MST), the full protection and security obligation, and the national treatment obligation and that they constituted an indirect expropriation. They sought approximately USD 3.54 billion in damages.

Canada and the United States filed non-disputing party submissions. Additionally, two non-governmental organizations, CIEL and the Cooperativa, filed an amicus curiae submission, which the majority of the tribunal rejected for lack of significant interest in the case (Procedural Order 6).

Jurisdiction

Mexico’s main challenge was directed to the jurisdiction ratione personae of the tribunal. ^[1] Relying on NAFTA Article 1117, the respondent argued that the ownership by Odyssey of the holding companies through which it claimed direct or indirect ownership or control of ExO was insufficient to demonstrate the control or ownership required to bring a claim on behalf of another company. Specifically, Odyssey held 53.89% of a Panamanian company through which it asserted indirect control over ExO.

The tribunal dismissed Mexico’s jurisdictional challenge, ruling that majority ownership creates a rebuttable presumption of control (para. 181). While Mexico cited several circumstances to dispute this presumption, such as Odyssey allegedly pledging or selling some of its assets in ExO (para. 182), the tribunal found this insufficient unless it could be demonstrated that “these transactions included such a specific effect, which has not been demonstrated” (para. 183). Accordingly, the tribunal unanimously affirmed jurisdiction, finding that Mexico failed to provide sufficient evidence to refute Odyssey’s control over ExO.

Merits: FET as the MST under customary international law

Odyssey claimed that Mexico breached the FET standard by denying its environmental permit, a denial it deemed “manifestly arbitrary, conducted in bad faith and in blatant disregard of due process” (para. 211).

The majority first clarified the relationship between FET and MST under customary international law. Referring to the 2001 binding Notes of Interpretation of the NAFTA Free Trade Commission, it concluded that NAFTA Article 1105(1) “must be understood as referring to the standard under customary international law” (para. 296).

To determine the content of MST, the majority relied on Waste Management v. Mexico (II), focusing specifically on state conduct that is:

(ii) “arbitrary, grossly unfair, unjust or idiosyncratic, … discriminatory and expos[ing] the claimant to sectional or racial prejudice, or involve[ing] a lack of due process leading to an outcome which offends judicial propriety”(para. 300).

The majority focused its analysis on two grounds: ^[2]

Arbitrary conduct

The majority considered that although this standard is not meant to prevent a state from regulating, there are limits to the exercise of policy choices. Relying on the Lauder and Mondev cases, the majority stated that while a “mere violation of local law not necessarily and of itself amount to arbitrariness” (para. 306), a state acts arbitrarily where its decision “was not founded on reason or fact, nor on the law or was clearly improper and discreditable” (para. 307).

Due process

The majority first clarified that the FET’s due process requirement applies “not only to acts of the judiciary but also to acts of other branches of the government, including administrative decisions” (para. 309). It further noted that due process may be violated if “an investor is denied a permit based on reasons that are unrelated to specific existing requirements for issuing that permit” (para. 310).

On the requirement from Waste Management (II), that a conduct must reach a certain threshold, the majority determined that “the applicable threshold requires a breach to be of a serious nature … which is to be determined on a case-by-case basis, having regard to the evidence” (para. 324).

Applying these principles to the facts at issue, the majority found that Mexico breached FET by denying the permit at the instruction of Rafael Pacchiano, SEMARNAT’s Secretary (para. 333). This finding was based primarily on the testimonies of Alfonso Flores and Alberto Villa, former SEMARNAT officials, who stated that their hierarchical superior, Pacchiano, instructed them to reject ExO’s project for personal reasons. According to their testimonies, they would have otherwise issued the permit, but the rejection was driven by Pacchiano’s “personal or idiosyncratic reasons and his own personal interest” (para. 435). Thus, the denial “was not based on scientific and legal grounds but rather on mere pretexts” (para. 389). Therefore, the majority concluded that the conduct of Pacchiano and SEMARNAT’s top management was in breach of NAFTA Article 1105 (1)’s FET standard by subjecting ExO to a treatment that was “seriously arbitrary and non-transparent, manifestly unreasonable and capricious, and [in violation of] the administrative due process” (para. 437).

It also rejected Mexico’s argument that its conduct was within the ambit of the legitimate exercise of its regulatory powers in light of its conclusion that the denial of the permit lacks any objective basis. In an obiter dictum, it affirmed that “attempts to legitimately exercise regulatory powers should be encouraged; conduct that constitutes an abuse of regulatory powers should be sanctioned” (para. 447).

Regarding the threshold required to establish a violation of FET, the tribunal found that the rejection was not simply an “administrative error.” Instead, it was deemed “an improper and discreditable decision, lacking transparency and candor, and violating the administrative due process” to the extent that it offended “judicial propriety” (para. 440).

In respect of the additional claims raised by Odyssey (national treatment, full protection and security, and unlawful expropriation), the majority concluded, for reasons of judicial economy, that its previous conclusion regarding the violation of FET rendered irrelevant the analysis of these claims.

Valuation of damages

The tribunal determined that the fair market value standard should be used for damages. Regarding the determination of the relevant date for the valuation, the parties disagreed on whether the valuation should assume that the MIA would have been granted in the “but-for” scenario so that its issuance could be reflected in the investment’s value. The majority decided that the fair market value of the investment should be assessed under the assumption that the MIA would have been granted, reasoning that otherwise, the investment’s value would be reduced, allowing the state to take advantage of its own wrongdoing (para. 568).

The majority also considered the risk of double recovery in two ways. First, Odyssey did not clarify whether it was claiming damages for itself or on behalf of ExO. To address this, the tribunal assumed that the damages requested corresponded to those suffered by ExO (para. 589). Second, there was a possibility that the second denial of the MIA could be overturned by the Mexican courts, allowing ExO to resume its activities. However, the tribunal decided that the damages should not be reduced based on this hypothetical outcome. It also took into account that Odyssey had committed during the proceedings not to pursue double recovery (paras. 591–592).

Parties disagreed on the valuation method. The majority rejected the income approach (Discounted Cash Flow – DCF, and Real Options Valuation -ROV) as well as the market approach due to the uncertainties surrounding the project and the factors taken into account by these methods (paras. 623 and 722–724). Instead, the majority considered using the sunk costs method to calculate the damage because it is the most commonly used approach and that “sunk costs can be ascertained with a reasonable degree of certainty and ensure that the claimant is fully compensated for its non-recoverable costs” (para. 733). The majority thus came to the conclusion that the sunk costs of ExO amounted to the sum of USD 37.1 million with interest.

On costs (fees and expenses of the tribunal and ICSID’s administrative fees), the tribunal decided that Mexico should bear these costs, taking into account that “damages awarded are substantially lower than those claimed by Claimant, and in light of the broad discretion the Tribunal has in the apportionment of the cost” (para. 818).

Dissenting opinion

Philippe Sands dissented on the merits, based on the consideration that the case was one that called for the diligent application of Mexico’s obligation to protect the environment by taking a precautionary approach, especially because of the nature of the project and the untested methods suggested by ExO. He noted that “The system of international investment law does not exist in a vacuum” (para. 15 Dissenting opinion). Therefore, the VCLT requires tribunals to consider all relevant rules of international law applicable in the relations between the parties, which in the present case includes customary obligations on the protection of biodiversity and the marine environment, as codified in treaties such as the 1992 Convention on Biological Diversity and the UNCLOS. For Sands, the existence of these obligations called for a precautionary approach, which the majority should have considered in assessing Mexico’s liability. He also criticized the majority for giving too much weight to the testimonies of the Flores and Villa, which he found “of a quality and credibility that is questionable” ^[3] instead of rigorously engaging with the environmental concerns invoked by SEMARNAT in denying the permit (paras. 19–20, 28 Dissenting opinion). Sands also disagreed with the majority’s valuation approach, arguing that Odyssey failed to establish actual losses beyond the cost of resubmitting the MIA application (para. 48, Dissenting Opinion).

Conclusion

This case underscores the tension between environmental protection and investment protections. As the majority’s analysis shows, while states have legitimate environmental regulatory powers, they might not be successful in invoking such concerns as a blanket justification for any treatment of investors. However, as the dissenting arbitrator emphasized, “at a time when states are finally beginning to recognise the challenges and complexities of taking decisions that have significant impacts on the environment” (para. 59 Dissenting opinion), a precautionary approach is increasingly necessary.

This is particularly relevant in novel and untried sectors such as deep-sea mining, where both the technology and its long-term environmental impact remain uncertain. The tribunal’s reasoning raises questions about whether sufficient weight was given to the fact that the investor had little to no prior experience in deep-sea mining, especially considering that the most established phosphate producers in the world, despite obtaining concessions to exploit the deposit, were hesitant to proceed with commercial operations (para. 637). The outcome of the case suggests a potential strategic use of ISDS as a “heads I win, tails you lose” mechanism and a tool for financial speculation (Odyssey’s costs were partly funded through TPF), which the majority seemed aware of in drastically reducing the amount claimed by Odyssey.

Ultimately, this case highlights the need for a more nuanced balance between investment protection and environmental governance, particularly in industries where regulatory caution is paramount. The growing calls for a moratorium on or outright ban of deep-sea mining reflect a genuine concern about safeguarding vulnerable marine ecosystems from its potential risks.

Note

The arbitral tribunal was composed of Felipe Bulnes Serrano (national of Chile, president as of March 3, 2020), Stanimir Alexandrov (national of Bulgaria, claimant’s appointee) and Philippe Sands (national of France, United Kingdom, and Mauritius, respondent’s appointee). Jan Paulsson (national of Sweden and France) acted as president of the tribunal until February 12, 2020

Author

Mihnzou Yannick Kouassi is an LL.M. candidate at the Geneva Master in International Dispute Settlement.

^[1] It seems that Mexico later withdrew this challenge. See Mexico’s Rejoinder, October 19, 2021, para. 310.

^[2] The majority briefly touched upon legitimate expectations, but it ruled that this finding was not central to its analysis in light of its previous conclusion (para. 444).

^[3] Sands’ concerns were partly based on the fact that these witnesses were paid by the claimant for the time they devoted to the preparation of their witness statements and time spent attending the hearings. The witnesses did not initially disclose the payments.