Mexico Appeals Decision on Metalclad

The Mexican government said Thursday it would appeal a landmark decision by a North American trade dispute panel that it had failed to protect an Orange County company’s investment in Mexico.

The panel ruled in Washington on Wednesday that the Mexican government must pay Metalclad Corp. of Newport Beach $16.7 million in damages for blocking it from opening its hazardous-waste treatment plant in the central state of San Luis Potosi.

It was the first ruling against a national government under the North American Free Trade Agreement’s mechanism for resolving disputes by foreign investors who feel their rights have been violated. NAFTA allows a body called the International Center for Investment Dispute Settlement in Washington to make arbitration judgments if the parties can’t negotiate a solution.

Mexico’s Commerce Ministry said the panel’s ruling would violate the constitutional powers of municipal governments. The town of Guadalcazar, site of the plant, blocked the plant from opening as scheduled in March 1995 after Metalclad had spent about $22 million to build it. The state and federal governments, which had approved construction of the facility, later bowed to local opposition and joined in blocking the plant from starting operations.

Deputy Commerce Secretary Luis de la Calle said Mexico would submit its challenge of the ruling to a court in Vancouver within three months. That court was designated by the tribunal as arbiter of any disputes over the outcome.

“We consider that the panel didn’t take into account Mexico’s arguments, and that the panel erroneously said that municipal permission is not required,” he said. “What interests us is the principle of the constitutional right of municipalities to require permission for what happens in their territory.”

Speaking by telephone from Newport Beach, Metalclad President and Chief Executive Grant S. Kesler said he was “disappointed but not surprised” by Mexico’s decision to appeal what was meant to be a binding arbitration decision.

He said the tribunal found that the company had obtained all required federal and state permits a year before building began, and that no local permits were required. Six months into construction, some townspeople came to the site saying work should stop until a local permit was issued. As a courtesy, Kesler said, the company applied.

Although a reply is required in 10 days, the town didn’t answer for 13 months; it then turned down the application after construction was completed.

Just before he left office in 1996, the state governor declared the site an ecological reserve, which would prevent the plant from ever opening. That prompted Metalclad to file the arbitration case, arguing that its asset had been expropriated.

“The tribunal found that never in 100 years had this community ever required a construction permit for anyone at any time,” Kesler said, “and they have no right to require one.”

Metalclad sued for $90 million--the amount it said it would have earned in subsequent years if the plant had opened as scheduled.

Kesler said Mexican citizens were the real losers because not a single hazardous waste plant had been built in the six years of President Ernesto Zedillo’s administration, and several foreign firms had pulled out.

He said the federal environment agency “identified more than 70 clandestine dump sites just in the state of San Luis Potosi that contain hazardous waste. The country produces 10 million tons of hazardous waste a year . . . but it can process just 1.2 million tons a year.”

Metalclad, which posted $14 million in sales last year, sold off its other Mexican operations in frustration over the Guadalcazar dispute.