Metalclad NAFTA Dispute Is Settled

Metalclad Corp. announced Wednesday that Mexico had agreed to pay $15.6 million to end a dispute that became the centerpiece in the battle about property rights between private companies and governments in the new world of free trade.

Although some of the details need to be resolved, Metalclad President Grant Kesler said in a telephone interview that Mexico had agreed to abide by terms set last month by a Canadian Supreme Court judge in a case filed under the North American Free Trade Agreement. “It feels good to see the end is in sight,” he said.

Officials contacted in Mexico City would say only that they were exploring a resolution. However, participants confirmed the hard part was finished. A final agreement, which includes damages, interest and legal fees, is not expected for several weeks, Kesler said.

The Newport Beach firm had accused Mexico of wrongfully expropriating a hazardous-waste facility in San Luis Potosi by refusing to issue a construction permit and declaring the site an ecological reserve. Residents had opposed the project. The company was one of the first to seek such damages under NAFTA.

Even with the final details pending, the apparent resolution of Metalclad’s legal battle was welcomed by investors, who gave the company’s share price a 26% boost, from $1.65 to close at $2.07 on Wednesday.

Although this could signal an end to Metalclad’s legal limbo, it is not yet clear what impact the outcome will have on future investor disputes. The Metalclad case was one of several high-profile cases being waged under a controversial provision of the North American Free Trade Agreement that gives private investors the right to sue governments for alleged trade violations.

Critics of globalization say these trade agreements give private firms too much power and undermine the ability of governments to protect their citizens’ health and safety. They point to several Chapter 11 cases in which firms have filed multimillion-dollar damage claims accusing NAFTA governments of trade violations that often involve environmental restrictions. Even the Canadian government has asked for a review of the Chapter 11 process.

But businesspeople argue that they need these legal protections, particularly when they invest in foreign countries with weak judicial systems.

The Metalclad outcome is murky because the judicial decision was split. In its original 1997 Chapter 11 claim, Metalclad had demanded more than $130 million in damages. A NAFTA tribunal upheld the firm’s claim last August and pared back the damages to $16.7 million, but Mexico appealed the decision. The case was heard in British Columbia because it was a neutral venue.

In his May ruling, British Columbia Supreme Court Judge David Tysoe agreed that Metalclad’s investor rights were violated. But he also overturned several key elements of the tribunal’s decision, arguing that it had interpreted the rights of private investors under NAFTA too broadly.

NAFTA requires that government regulatory decisions be made in an open manner. Tysoe ruled that those obligations do not apply to private investment disputes under NAFTA. He reduced Metalclad’s damages to the amount announced in Wednesday’s agreement.

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Jim Smith of The Times’ Mexico City bureau contributed to this report.