O.C. Firm Files 1st Mexico NAFTA Claim

A small Orange County company with a big presence in Mexico has become the first U.S. business to file an arbitration claim against the Mexican government under the North American Free Trade Agreement.

Metalclad Corp., which is seeking $90 million in damages, alleges in a 1,000-page complaint that the Mexican state of San Luis Potosi illegally seized a $22-million hazardous-waste site that the Newport Beach company developed there in 1995.

“We’re a tiny little company, but someone was going to have to test this system,” said Anthony C. Dabbene, Metalclad’s chief financial officer. “We have to stand up for our rights.”

Only two other investment loss claims under NAFTA’s investment protection rule are pending, and both were filed after Metalclad’s.

In one case, three Los Angeles investors who say they were unfairly removed from a Mexican waste-disposal business they had started in a suburb of Mexico City are seeking $14 million in damages from the Mexican government.

The second case involves a claim by gasoline additives maker Ethyl Corp., which has said it will seek $250 million in damages from the Canadian government for passing a law that bars the sale in Canada of one of the company’s additives.

Metalclad, which started as an insulation installer and asbestos-removal firm, branched into hazardous-waste disposal in 1993 when it purchased an already approved site in San Luis Potosi in central Mexico and began developing it.

However, when the landfill was ready to open in March 1995, then-Gov. Horacio Sanchez Unzueta sent state police to block entrance to the facility.

Since then, the Mexican state has kept the landfill from opening, Metalclad says in its filing with the International Center for Settlement of Investment Disputes in Washington.

And three days before he left office when his 6-year term expired at the end of September, Sanchez Unzueta included the Metalclad landfill in a protected ecological zone that encompasses 600,000 acres.

“We consider it expropriated,” said Dabbene. Metalclad’s claim for $90 million covers the development costs, estimated revenue losses over the past 30 months and the value of the site if it could be sold as an ongoing business, he said.

A spokesman for the present governor, Fernando Silva Nieto, confirmed that Sanchez Unzueta established the ecological zone and included the Metalclad landfill within it. The spokesman declined further comment.

The 1993 free-trade agreement established an arbitration process for resolving disputes over foreign investment, but suing Mexico’s federal government is the only recourse for companies such as Metalclad. Individual Mexican states cannot be sued.

Metalclad President Grant Kesler was vacationing and could not be reached for comment Tuesday. However, he has said in the past that while helpful and “understanding,” Mexico’s federal government says the issue is within the jurisdiction of the state government of San Luis Potosi.

Still, Metalclad notified Mexican officials in January that it intended to seek arbitration, and in July the International Center heard arguments by Metalclad and Mexican federal officials. Metalclad was given 90 days to prepare and file its written claim.

Dabbene declined to discuss the hearing, saying both sides agreed to keep it confidential.

The NAFTA arbitration process now gives Mexican officials until mid-January to respond to Metalclad’s claim. After that, a three-member arbitration panel can issue a binding decision, schedule another hearing or ask for more written information.

The panel is chaired by an arbitrator from Great Britain and has one U.S. and one Mexican member.

Dabbene said that Metalclad remains active in Mexico. The company operates seven other waste collection sites in Mexico and has another landfill under development. “We are not giving up on the country,” he said. The San Luis Potosi situation is the only negative experience Metalclad has had in Mexico, he said.

Metalclad employs about 180 construction and waste collection site workers in Mexico. The company, which recorded about $15 million in sales last year, has a total of 25 employees at its Newport Beach corporate office and its insulation and asbestos removal subsidiary in Anaheim. Dabbene said the inability to use the San Luis Potosi landfill has hurt the company financially.

The company’s loss grew to $2.3 million for the first six months this year, compared to a $1.8-million loss in the first half last year. Revenue for the first half was $4.8 million, down from $6.9 million for the first half of 1996. Metalclad lost $6.8 million in 1996, $15.4 million in 1995 and $4.9 million in 1994.

The company identified the Mexican market as a key one for hazardous-waste disposal. The country produces more than 8 million tons of hazardous waste each year, and only about 20% of it is treated and made safe, according to environmental analysts’ reports cited in Metalclad’s claim. In addition to the Metalclad site in San Luis Potosi, there are only two hazardous-waste disposal facilities in the entire country.

Metalclad stock, traded on the Nasdaq Small Cap market, fell 19 cents a share Tuesday to close at $1.53.