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When the first claim ever filed under the North American Free Trade Agreement (NAFTA) was settled last month, neither side was exulting — even though one party walked away with $16 million. “I was in way over my head,” confessed the president of the company that was awarded the money, though he is also a lawyer with litigation experience. The dispute was between Metalclad Corp., a Newport Beach, Calif., company that built a hazardous waste landfill in Mexico and the Mexican government. Metalclad’s claim was that Mexico had indirectly expropriated its business by making it impossible for the company to operate the landfill, while Mexico countered that the company failed to obtain necessary permits. The settlement came after a five-year battle that included an international arbitration in Washington, D.C., and an appeal in Canada — all part of a legal process laid down by NAFTA to handle disputes among the three signatories: Mexico, the United States and Canada. The issue at the center of the controversy is NAFTA’s Chapter 11, which includes the expropriation article. The chapter has sparked a surprising number of disputes, according to several lawyers interviewed. The challenge that NAFTA faces, illustrated by this case, is protecting investors’ interests without infringing on a country’s right to regulate commerce and the environment. It is likely, the lawyers said, that representatives of the 34 countries that will negotiate the Free Trade Agreement of the Americas in the coming year will carefully review Chapter 11 and cases like Metalclad. THE BACKGROUND After Grant Kesler, Metalclad’s president, decided to build the hazardous-waste landfill in the state of San Luis Potosi, he received intermittent support from Mexican officials. But, finally, when it was completed, he realized he would not be allowed to open it. In 1996, Metalclad filed a NAFTA claim for the fair-market price of its business, which it valued at $90 million. Kesler said his years as a Utah assistant attorney general had not prepared him for litigating against a country. Metalclad was accused of bribery and corruption, among other allegations later discounted by the arbitrators and the judge. “I had no idea Mexico would react with such vehemence,” he explained. “It’s like Danny DeVito taking on Arnold Schwarzenegger.” Metalclad’s lead lawyer, Clyde Pearce of Salinas, Calif., said Mexico had several times their number of lawyers. The only equalizer, he said, was inexperience, since it was the first NAFTA case for everyone. Three years of discovery and briefs ensued. The governor of San Luis Potosi declared land that included Metalclad’s site an ecological preserve. The purpose, he explained, was to protect rare cacti. In 1999, the parties had their arbitration hearing before a British law professor, a Mexican law professor and former U.S. Attorney General Benjamin Civiletti. The panel unanimously held that Mexico “failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment,” violated NAFTA’s Article 1105(1) and indirectly expropriated its investment, in violation of NAFTA Article 1110(1). The tribunal, declining to base compensation on the value of a business that had never operated, awarded Metalclad the amount it invested — $16.7 million. Mexico’s appeal was argued last February in British Columbia’s trial court in Vancouver. The judge set aside the tribunal’s findings concerning transparency obligations, but affirmed the award based on the governor’s ecological decree. Both parties initially sought to appeal before finally settling. Mexico’s lead lawyer in the case, Hugo Perezcano, from Mexico’s Secreteriat of the Economy, said his country decided to settle “because NAFTA as an institution is much more important for the Mexican government than just this specific case.” He criticized the tribunal’s opinion for failing even to acknowledge many of Mexico’s arguments. In this respect, he was much happier with the Canadian court’s opinion. “Mexico can live with adverse results,” he said, “if a tribunal does its job properly.” As for Kesler, he called the settlement a Pyrrhic victory. He estimated his costs were $2 million, doubled if you add executive time. But he harbors no ill will toward Mexico. “I hate the way one man treated me, but it hasn’t diminished my respect for the country.”

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