(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000\u20132010<\/em><\/a>; republished on this website on October 18, 2018. Read more here.<\/a>)<\/p>\n Award available at\u00a0https:\/\/www.italaw.com\/cases\/1087<\/a><\/p>\n Environmental measures, expropriation, fair and equitable treatment,\u00a0interpretation, legitimate expectations, proportionality, \u201csole effects\u201d test<\/p>\n Request for Arbitration: 28 July 2000<\/p>\n Constitution of Tribunal: 13 March 2001 [The Tribunal was reconstituted on 17 December 2001 after the Respondent\u2019s initial appointee,\u00a0Mr. Aguilar Alvarez, resigned due to the fact that he was also involved in another arbitration\u00a0involving related legal matters (paras. 13\u201314 , 17).]\n Award: 29 May 2003<\/p>\n Dr. Horacio A. Grigera Naon (president)<\/p>\n Prof. Jos\u00e9 Carlos Fernandez Rozas (claimant appointee)<\/p>\n Mr. Carlos Bernal Verea (respondent appointee)<\/p>\n International Centre for Settlement of Investment Disputes (ICSID<\/span>)<\/p>\n ICSID Additional Facility Rules<\/p>\n Spain\u2013Mexico Bilateral Investment Treaty (BIT<\/span>)<\/p>\n In February 1996, Tecnicas Medioambientales Tecmed S.A. (\u201cTecmed\u201d), a subsidiary of the Spanish claimant, purchased an existing hazardous waste landfill (\u201cthe Landfill\u201d) and related assets from a Mexican agency for cash and other consideration worth roughly 34 million Mexican pesos (paras. 35, 78\u201391). Tecmed subsequently obtained the permit (\u201cthe Permit\u201d) necessary to operate the Landfill from the federal agency in charge of Mexico\u2019s national policy on ecology and environmental protection, referred to in this summary as the Environmental Protection Agency (para. 36). Tecmed\u2019s Permit, however, differed from the permit that had been issued to the previous owner\/operator: although Tecmed\u2019s Permit was a renewable one-year permit, the prior owner\/operator\u2019s permit was valid for an indefinite duration (para. 36). Despite that difference, which later proved significant, when the permit was issued Tecmed did not protest or otherwise raise the issue of the Permit\u2019s duration with relevant Mexican authorities (paras. 58, 92).<\/p>\n In connection with its operation of the Landfill and the transport of waste to and from other facilities in Mexico, Tecmed[1]<\/a>\u00a0breached some terms of the Permit and applicable regulations, conduct for which it was investigated and fined by the Federal Environmental Protection Attorney\u2019s Office, an agency that, like the Environmental Protection Agency, addressed environmental issues, but that had different powers and responsibilities for ensuring compliance with relevant laws (para. 43).<\/p>\n Concerned by those violations and other issues, community groups mounted strong opposition to continued operation of the Landfill (para. 43). In addition to protesting Tecmed\u2019s improper conduct in connection with its operations at the Landfill and other waste\u2013transport activities, civil society groups protested the Landfill\u2019s close proximity to the population center of Hermosillo\u20148 kilometres\u2014which was less than the 25-kilometre distance between urban centers and such landfills that Mexican regulations, enacted after the Landfill\u2019s 1988 construction, required (para. 106). Due to this community opposition, Tecmed and municipal, state and federal authorities began exploring in 1997 options to relocate the Landfill; Tecmed committed to provide the funds necessary for that move (para. 147, 160, 162).<\/p>\n After Tecmed\u2019s first year operating the Landfill, the Environmental Protection Agency granted Tecmed\u2019s request to renew the Permit, extending its duration to November 1998 (para. 38). When Tecmed sought a second renewal in November 1998, however, the agency denied that request and ordered Tecmed to close the facility (para. 39). In support of its decision denying renewal and ordering closure of the Landfill, the Environmental Protection Agency cited various factors, including (1) the wastes contained at the Landfill exceeded limits authorized by the Permit, (2) the Landfill temporarily stored waste destined for another facility without the authority to serve as such a \u201ctransfer center,\u201d (3) the Landfill received liquid and biological\u2013infectious wastes despite lacking the necessary permit to do so, and (4) Tecmed had agreed to, but had not accomplished, relocation of the Landfill to a site farther away from Hermosillo\u2019s urban center (para. 99).<\/p>\n Tecmed initiated this case on the grounds that municipal, state and federal actions including, in particular, the decision by the Environmental Protection Agency to deny renewal of the Permit and order the Landfill\u2019s closure, violated Mexico\u2019s obligations under the governing bilateral investment treaty (BIT) between Spain and Mexico (para. 93). More specifically, Tecmed argued Mexico violated its obligations to (1) promote admission of investments, (2) provide full protection and security, (3) accord the investment fair and equitable treatment (FET<\/span>), (4) provide the investment treatment no less favourable than treatment provided to nationals and investors from other foreign states, and (5) refrain from expropriating the investment without paying appropriate compensation (paras. 93\u201394). Tecmed also argued that even though the governing BIT only came into force on December 18, 1996, afteroriginal issuance of the one-year renewable Permit, the BIT\u2019s most favoured nation (MFN<\/span>) clause required retroactive application of Mexico\u2019s international law obligations to Spanish investors so that those obligations would run concurrently with Mexico\u2019s obligations to investors from other countries (para. 69).<\/p>\n After rejecting Tecmed\u2019s argument that the MFN clause extended the BIT\u2019s temporal coverage (which would have extended the BIT to apply to issuance of the less-favourable Permit), the Tribunal held that Mexico had both expropriated Tecmed\u2019s investment and violated the FET standard. Based on those two violations, the Tribunal ordered Mexico to pay Tecmed approximately 5.3 million Mexican pesos, with interest accruing from the date of the Environmental Protection Agency\u2019s resolution denying the Permit\u2019s renewal (para. 201).<\/p>\n This decision has multiple and varied implications for the interaction between investment law and sustainable development. Most obviously, it illustrates that non-discriminatory measures taken by states to respond to public concerns about threats to health and environmental protection may constitute expropriations and\/or violate the FET standard. It also sets forth an expansive interpretation of the FET standard as imposing broad obligations on governments to act transparently and consistently in development and pursuit of their goals and regulations. The decision, however, also illustrates tribunals may take public interests into account and balance them against the rights of investors when assessing whether there has been a breach of the applicable BIT. Also notable is that this decision supports incorporation of principles from other areas of law in the context of interpreting obligations under investment treaties\u2014a practice that could permit tribunals to consider issues of sustainable development when assessing parties\u2019 claims and defences. The text below elaborates upon each of these points.<\/p>\n Tecmed argued that the Environmental Protection Agency\u2019s decision to refuse renewal of the Permit and order closure of the Landfill effected an indirect expropriation of Tecmed\u2019s investment in owning and operating the Landfill for the duration of the facility\u2019s life (paras. 95\u201396). In response, Mexico contended that its decision did not amount to an expropriation because it was a legitimate regulatory action taken by a government agency consistent with its discretionary authority and in compliance with the \u201cState\u2019s police power\u2026in the highly regulated and extremely sensitive framework of environmental protection and public health\u201d (para. 97). Mexico further argued that Tecmed had no legitimate expectations that it would be able to operate the Landfill for the entirety of its useful life, given that the Permit was subject to renewal each year (para. 149).<\/p>\n The Tribunal began its assessment of the parties\u2019 contentions by stating that to determine whether a measure amounted to an expropriation, it had to first look at the effects<\/em>of the measure (para. 116). It explained that a measure would only be expropriatory if it \u201cpermanent[ly] and irreversib[ly]\u201d \u201cneutralized or destroyed\u201d the \u201ceconomic value of the use, enjoyment or disposition of [the investor\u2019s] assets or rights\u201d (para. 116). If the measure had those effects, the Tribunal then had to assess whether the measure was proportional in light of the public interest at stake and the impacts on the protected investment (paras. 118, 122). The Tribunal further noted that in weighing those interests it had to, on the one hand, give \u201cdue deference\u201d to the state\u2019s identification of the issues it deemed important, as well as the appropriate means for protecting and furthering those interests (para. 122); on the other hand, it had to take account of the investor\u2019s legitimate expectations (para. 122).<\/p>\n Applying those principles to the case before it, the Tribunal found that, notwithstanding the explicit one-year term of the Permit, the consideration Tecmed paid for the investment demonstrated Tecmed legitimately expected it had secured \u201ca long-term investment\u201d in the Landfill extending over \u201cits entire useful life\u201d (para. 149). The Tribunal further held that the Environmental Protection Agency\u2019s decision on non-renewal of the Permit and closure of the Landfill, which appeared to be legitimate under domestic Mexican law (para. 120), permanently neutralized the value of the investment and therefore met the \u201ceffects\u201d portion of the expropriation test (para. 139). With respect to the proportionality analysis, the Tribunal concluded that the facts of the case and justifications offered for the agency\u2019s decision indicated that Tecmed\u2019s breaches of the Permit\u2019s terms and environmental regulations were generally minor and did not, even according to relevant Mexican authorities, \u201ccompromise public health, [or] impair ecological balance or protection of the environment\u201d (para. 124; see also paras. 127, 130\u201332). Thus, according to the Tribunal, there were no weighty health or environmental concerns warranting the decision to deny renewal of the Permit or to require that the Landfill be closed. The Tribunal also considered whether public opposition to the Landfill had generated \u201ca genuine social crisis\u201d or \u201cpublic emergency\u201d justifying non-renewal of the Permit (paras. 124\u2013133). Finding that the opposition did not rise to the level of an \u201cemergency situation,\u201d and that the opposition that did exist was due largely to the location of the Landfill rather than to wrongful conduct by Tecmed, the Tribunal held Mexico\u2019s \u201csocio-political\u201d interests were likewise not sufficiently weighty to support the Environmental Protection Agency\u2019s decision (paras. 139, 142, 147).<\/p>\n In sum,\u00a0 the\u00a0 Tribunal\u00a0concluded\u00a0 that\u00a0 although\u00a0the\u00a0 Environmental Protection Agency\u2019s resolution on Permit non-renewal and Landfill closure was apparently legitimate under domestic law, the measure permanently stripped Tecmed of the value of its investment, was not sufficiently justified by public interest concerns and, consequently, indirectly expropriated Tecmed\u2019s property in violation of the BIT.<\/p>\n A particularly noteworthy aspect of this decision is the Tecmed <\/em>Tribunal\u2019s application of the \u201cproportionality\u201d test, which was the first time such a test had been used in modern investment treaty arbitration.[2]<\/a> The proportionality test differs from the \u201csole effects\u201d test used by some other tribunals to determine whether a regulatory measure or measures constitute an expropriation.[3]<\/a>\u00a0The \u201csole effects\u201d test, as its name indicates, seems to leave little or no room for tribunals to consider the purpose of, or public interests underlying, challenged measures. In contrast, the proportionality test may enable tribunals to strike a better balance between investor rights and domestic environmental, health or other concerns when interpreting and applying BIT provisions.<\/p>\n Another notable aspect of this decision\u2014and one for which it is frequently cited[4]<\/a>\u2014is the Tribunal\u2019s broad interpretation of the FET standard. The Tribunal read that BIT provision as requiring the state parties (including their various levels of domestic government) to act consistently, transparently and without ambiguity toward foreign investors and their investments (paras. 154\u2013156). The Tribunal found that Mexico violated these obligations because, in particular, the Environmental Protection Agency failed to \u201creport, in clear and express terms\u2026its position as to the effect of [Tecmed\u2019s] infringements on the renewal of the Permit\u201d and to provide \u201cclear signs\u201d of its intention to deny renewal (para. 162). What seemed to concern the Tribunal more than a general failure by the agency to affirmatively disclose its intentions, however, was the Tribunal\u2019s belief that the agency was using environmental and health issues as pretexts for a decision that was essentially driven by social and political concerns (para. 157). As the Tribunal stated, Tecmed\u2019s \u201cfair expectations\u2026were that the Mexican laws applicable to [its] investment\u2026would be used for the purpose of assuring compliance with environmental protection, human health and ecological balance goals,\u201d and not for the purpose of \u201cclos[ing] down a site whose operation had become a nuisance for political reasons\u2026\u201d (paras. 157, 164). The Tribunal further noted that even though the Environmental Protection Agency\u2019s actions appeared to be consistent with national law, this did not prevent them from constituting a violation of international law under the BIT (paras. 120\u2013121, 182).<\/p>\n To support its use of the proportionality test in determining whether the Environmental Protection Agency\u2019s decision not to renew the Permit effected an expropriation, the Tecmed<\/em>Tribunal relied entirely on four different decisions of the European Court of Human Rights (paras. 122\u2013123). This approach signals that tribunals can look to and rely upon other fields of law, such as human rights, labour law and environmental law, when relevant to interpreting parties\u2019 rights and obligations under international investment agreements.<\/p>\n [1]<\/a> For purposes of simplicity, this summary uses the term \u201cTecmed\u201d to refer to Tecmed as well as to its corporate affiliates, such as its corporate parent (the claimant in this action) and its subsidiary, Cytrar, which held Tecmed\u2019s rights and obligations under the Landfill sale and which ran the Landfill operations (para. 35).<\/p>\n [2]<\/a> See A. K. Hoffman (2008),\u201cIndirect expropriation,\u201d in Reinisch (Ed.), Standards of Investment Protection.<\/p>\n [3]<\/a> See, e.g., Biloune v. Ghana, Award, 27 October 1989, 95 ILR 183, 209 (1989).<\/p>\nKeywords<\/h3>\n
Key dates<\/h3>\n
Arbitrators<\/h3>\n
Forum and applicable procedural rules<\/h3>\n
Applicable treaty<\/h3>\n
Alleged treaty violations<\/h3>\n
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Other legal issues raised<\/h3>\n
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1.0 Case Summary<\/h2>\n
1.1 Factual background<\/h3>\n
Terms of the transaction<\/h4>\n
Regulatory violations and community opposition<\/h4>\n
Revocation of the permit<\/h4>\n
1.2 Summary of legal issues and award<\/h3>\n
2.0 Select Legal Issues<\/h2>\n
2.1 Expropriation: Looking beyond the \u201csole effects\u201d of the measure to examine the proportionality between public interests involved and the impacts on the investment<\/h3>\n
2.2 Fair and\u00a0 Equitable Treatment: Broadly reading the standard to require states to act consistently, transparently and\u00a0 without ambiguity<\/h3>\n
2.3 Tools of interpretation: Referring to principles set forth by\u00a0 the European Court of Human Rights<\/h3>\n
\nNotes<\/h3>\n