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Tecnicas Medioambientales Tecmed SA v The United Mexican States, ARB(AF)/00/2, Award, 29 May 2003

WRITE AS THE CLAIMANT!!

Please focus on the concept and type of expropriation claimed, by examining the parties’ arguments on whether the measures that the host state took constituted an expropriation of the foreign investment, and approach critically the tribunal’s findings. Please limit your pleadings to (no less than) 5′ each.

International Centre for Settlement of Investment Disputes

TECNICAS MEDIOAMBIENTALES TECMED S.A.

v.

THE UNITED MEXICAN STATES

CASE No. ARB (AF)/00/2

AWARD

President: Dr. Horacio A. GRIGERA NAON

Co-arbitrators: Prof. José Carlos FERNANDEZ ROZAS
Mr. Carlos BERNAL VEREA

Secretary to the Tribunal: Ms. Gabriela ALVAREZ AVILA

Date of dispatch to the parties: May 29, 2003

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TABLE OF CONTENTS

Para.

A. Introduction……………………………………………………………..… 1-3

B. Procedural History……………………………………………………….. 4-34

C. Summary of Facts and Allegations……………………………..………… 35-51

D. Preliminary Matters………………………………………………………. 52-92

I. Jurisdiction of the Arbitral Tribunal……………………………………. 53-71

II. Timely submission by Claimant of its
claims against Respondent……………………………………………… 72-74

III. Scope of the Purchase Transaction……………………………………… 75-92

E. The Merits of the Dispute…………………………………………………. 93-201

I. Expropriation…………………………………………………………… 95-151

II. Fair and Equitable Treatment…………………………………………… 152-174

III. Full Protection and Security and other Guarantees under the

Agreement………………………………………………………………. 175-181

F. Compensation. Restitution in Kind……………………………………….. 182-200

G. Decision……………………………………………………………………… 201

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THE TRIBUNAL

Constituted as indicated above,

Having conducted its deliberations,

Issues the following award:

A. Introduction

1. The Claimant, Técnicas Medioambientales, TECMED S.A., is a commercial
company organized under Spanish law, domiciled in Madrid, Spain. It is represented in
this arbitration proceeding by:

Mr. Juan Carlos Calvo Corbella
Técnicas Medioambientales TECMED S.A.
Albasanz 16 – 1a planta
28037 Madrid, Spain

Ms. Mercedes Fernández
Mr. Juan Ignacio Tena García
Jones, Day, Reavis & Pogue abogados
Velázquez 51 – 4a planta
28001 Madrid, Spain

2. The Respondent is the Government of the United Mexican States, represented in
this arbitration proceeding by:

Mr. Hugo Perezcano Díaz
Consultor Jurídico
Dirección General de Consultoría Jurídica
de Negociaciones Comerciales
Subsecretaría de Negociaciones Comerciales Internacionales
Secretaría de Economía
Alfonso Reyes No. 30, piso 17
Colonia Condesa
Mexico, D.F., C.P. 06179, Mexico

3. This Award decides on the merits of the dispute between the parties in accordance
with Article 53 of the Arbitration Additional Facility Rules (Arbitration Rules) of the
International Centre for Settlement of Investment Disputes.

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B. Procedural History

4. On July 28, 2000, the Claimant filed with the Secretariat of the International Centre for
Settlement of Investment Disputes (“ICSID”) an application for approval of access to the
Additional Facility and a request for arbitration against the Respondent in accordance with
the Additional Facility Rules for the Administration of Proceedings by the Secretariat of the
International Centre for Settlement of Investment Disputes (hereinafter referred to as the
“Rules”) and under the provisions of the Agreement on the Reciprocal Promotion and
Protection of Investments signed by the Kingdom of Spain and the United Mexican States
(hereinafter referred to as the “Agreement”). The Agreement entered into force for both
countries on December 18, 1996. The Claimant is the parent company in Spain of
TECMED, TECNICAS MEDIOAMBIENTALES DE MEXICO, S.A. de C:V. (“Tecmed”),
a company incorporated under Mexican law, and holds over 99% of the shares of such
company. Additionally, Tecmed holds over 99% of the shares of CYTRAR, S.A. DE C.V.
(“Cytrar”), a company incorporated under Mexican law through which the investment
giving rise to the disputes leading to these arbitration proceedings was made.

5. On August 28, 2000, the Acting Secretary-General of ICSID, pursuant to Article 4 of the
Rules, notified the Claimant that access to the Additional Facility Rules had been approved
with respect to this case and that the notice of institution of arbitration proceedings had
been registered; he then sent the certificate of registration to the parties and forwarded
copies of the notice of institution of arbitration proceedings to the Respondent.

6. On October 2, 2000, the Claimant notified the Centre of the appointment of Professor
José Carlos Fernández Rosas as arbitrator and of its consent for the Parties to appoint as
arbitrator a person of the same nationality of the Party making the proposal.

7. On November 7, 2000, the Respondent notified the Centre of the appointment of Mr.
Guillermo Aguilar Alvarez as arbitrator and nominated Mr. Albert Jan van den Berg as
President of the Arbitral Tribunal.

8. On November 29, 2000, the Claimant objected to the nomination of Mr. van den Berg
and proposed instead that the Parties request their designated arbitrators to appoint the
President of the Arbitral Tribunal, which was accepted by the Respondent.

9. On January 30, 2001, the ICSID Secretariat informed that Mr. Fernández Rosas and Mr.
Aguilar Alvarez had appointed Dr. Horacio A. Grigera Naón as President of the Arbitral
Tribunal. On February 2, 2001, the Claimant confirmed its agreement to this appointment
and, in its communication dated February 22, 2001, the Respondent notified the Centre of
its agreement to the President’s appointment.

10. On March 13, 2001, the Centre’s Acting Secretary-General informed the parties that, as
from that date, the Arbitral Tribunal was deemed to have been constituted and the
proceedings to have begun.

11. The first session of the Arbitral Tribunal with the parties was held in Paris, France on
May 7, 2001. During the course of the session, procedural rules applicable to these

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proceedings were established and the schedule for the submission of memorials by the
Parties was fixed, among other things.

12. On September 4, 2001, the Claimant filed its memorial.

13. On November 16, 2001, the Respondent made certain observations regarding opinions
alleged to have been given by Mr. Aguilar Alvarez in another arbitration proceeding which,
in the Respondent’s view, also involved legal matters to be debated in this arbitration
proceeding.

14. On November 16, 2001, Lic. Aguilar Alvarez submitted his resignation as arbitrator in
these proceedings, upon which, in a letter of the same date, the ICSID Secretariat served
notice of the suspension of the proceedings until the vacancy created by Mr. Aguilar
Alvarez’s resignation was filled.

15. On November 20, 2001, the Arbitral Tribunal accepted the resignation of Mr. Aguilar
Alvarez.

16. On December 14, 2001, the Respondent served notice of the appointment of Mr. Carlos
Bernal Verea in replacement of Mr. Guillermo Aguilar Alvarez.

17. On December 17, 2001, the ICSID Secretariat informed that Mr. Carlos Bernal Verea
had accepted his appointment by the Respondent to serve as arbitrator in these proceedings
and as from such date deemed the Arbitral Tribunal to have been reconstituted and the
arbitration proceedings to have resumed.

18. On January 22, 2002, the Arbitral Tribunal issued a procedural order deciding certain
procedural matters raised by the Parties and extended the deadline for the submission of the
Respondent’s counter-memorial until February 4, 2002.

19. Following a new request by the Respondent in its written communication of January 31,
2002, on February 1, 2002, the Arbitral Tribunal extended the deadline for the submission
of the Respondent’s counter-memorial until February 11, 2002.

20. The Respondent’s counter-memorial was received on February 11, 2002. On February
19, 2002, the Respondent enclosed a list of the facts alleged in the memorial that were
recognized by the Respondent in its counter-memorial and those that were not.

21. On March 7, 2002, the Arbitral Tribunal issued Procedural Order No. 1, fixing the week
of May 20, 2002 for the Evidentiary Hearing to be held in Washington, D.C., USA,
dispensing with the submission of a reply and rejoinder by the Parties, establishing
guidelines for holding the hearing and setting June 28, 2002 as the deadline for the Parties
to submit their closing statements after the hearing.

22. Following new requests and exchanges between the Parties in the notes of the
Respondent and Claimant dated March 13 and 21, 2002, respectively, the Arbitral Tribunal
issued its Procedural Order No. 2, which —in addition to specifying certain additional

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matters in relation to the hearing scheduled for the week of May 20 – provided that, at the
end of the hearing on May 24, 2003, the Parties could address the Arbitral Tribunal orally,
and extended the deadline for the submission of closing statements until July 15, 2002.

23. On April 29, 2002, the Secretariat of ICSID notified the Parties of the agenda issued by
the Arbitral Tribunal for the conduct of the hearing.

24. The hearing was held in Washington, D.C., at the seat of ICSID. It began in the
morning of May 20, 2002, and ended on May 24, 2002, after the Parties addressed the
Arbitral Tribunal orally.

25. A stenographic transcript of the hearing was made, which lists the following persons as
having been present at the hearing:

Members of the Arbitral Tribunal

1. Dr. Horacio A. Grigera Naón, President

2. Prof. José Carlos Fernández Rozas

3. Mr. Carlos Bernal Verea

Secretary of the Arbitral Tribunal

4. Ms. Gabriela Alvarez Avila

Técnicas Medioambientales TECMED S.A.

5. Mr. Juan Carlos Calvo Corbella

6. Ms. Mercedes Fernández

7. Mr. José Daniel Fernández

The United Mexican States

8. Mr. Hugo Perezcano Díaz

9. Mr. Luis Alberto González García

10. Ms. Alejandra Treviño Solís

11. Mr. Sergio Ampudia

12. Mr. Carlos García

13. Mr. Rolando García

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14. Cameron Mowatt, Esq.

15. Stephen Becker, Esq.

16. Sanjay Mullick, Esq.

17. Ms. Jacqueline Paniagua

18. Lars Christianson, Engineer

19 Ms. Ruth Benkley

20. Francisco Maytorena Fontes, Engineer

21. Christopher Thomas, Esq.

26. The hearing was held in accordance with the agenda fixed by the Arbitral Tribunal and
within the time limit set for the Parties in Procedural Order No. 2 for the examination of
witnesses and experts.

27. The following witnesses and experts were heard at the hearing after the opening
statements made by the Claimant and the Respondent, respectively.

Offered by the Claimant

José Luis Calderón Bartheneuf

Javier Polanco Gómez Lavin

Enrique Diez Canedo Ruiz

José María Zapatero Vaquero

Jesús M. Pérez de Vega

Luis R. Vera Morales

José Visoso Lomelín

Offered by the Respondent

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Alfonso Camacho Gómez

Cristina Cortinas de Nava

Jorge Sánchez Gómez

Lars Christianson

28. During the course of the hearing, the Arbitral Tribunal decided to agree to the inclusion
of documents introduced by either the Respondent or the Claimant during the hearing. It
further decided —after dismissing the Respondent’s objections in this regard— to agree to
the inclusion of certain documents submitted in support of the statement made by Mr. Jesús
M. Pérez de Vega as an expert proposed by the Claimant; nevertheless, it gave the
Respondent an opportunity to examine such documents and exercise its right to question
the expert once the inclusion of such documents had been decided. However, the
Respondent declined to exercise such right.

29. At the end of the hearing, the Arbitral Tribunal heard the oral presentations made by the
Parties, each of which was allowed 90 minutes.

30. On August 1, 2002, the Claimant and the Respondent submitted their respective closing
statements.

31. In a note dated July 31, 2002, the Respondent had explained the reasons why it was
annexing to its closing statement a “Declaration of Lars Christianson, Engineer”,
accompanied by exhibits.

32. In a note dated August 2, 2002, the Claimant objected to the inclusion of such
declaration and exhibits.

33. In its procedural order of August 12, 2002, the Arbitral Tribunal decided to agree to the
inclusion of such statement and exhibits, not as part of the evidence offered and produced,
but as part of the Respondent’s closing statement.

34. By note dated April 9, 2003, the Secretariat of ICSID notified the Parties that the
Arbitral Tribunal had declared the proceedings closed in accordance with Article 45 of the
Rules.

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C. Summary of Facts and Allegations presented by the Parties

35. The Claimant’s claims are related to an investment in land, buildings and other assets in
connection with a public auction called by Promotora Inmobiliaria del Ayuntamiento de
Hermosillo (hereinafter referred to as “Promotora”), a decentralized municipal agency of
the Municipality of Hermosillo, located in the State of Sonora, Mexico. The purpose of the
auction was the sale of real property, buildings and facilities and other assets relating to
“Cytrar”, a controlled landfill of hazardous industrial waste. Tecmed was the awardee,
pursuant to a decision adopted by the Management Board of Promotora on February 16,
1996. Later on, the holder of Tecmed´s rights and obligations under the tender came to be
Cytrar, a company organized by Tecmed for such purpose and to run the landfill operations.

36. The landfill was built in 1988 on land purchased by the Government of the State of
Sonora, in the locality of Las Víboras, within the jurisdiction of the Municipality of
Hermosillo, State of Sonora. The landfill had a renewable license to operate for a five-year
term as from December 7, 1988, issued by the Ministry of Urban Development and
Ecology (SEDUE) of the Federal Government of Mexico to Parques Industriales de Sonora,
a decentralized agency of the Government of the State of Sonora. During this period, the
landfill operator was not this agency but another entity, Parque Industrial de Hermosillo,
another public agency of the State of Sonora. Ownership of the landfill was then
transferred to a decentralized agency of the Municipality of Hermosillo, Confinamiento
Controlado Parque Industrial de Hermosillo O.P.D.; in this new phase, it had a new
authorization to operate for an indefinite period of time. Such authorization had been
granted on May 4, 1994, by the Hazardous Materials, Waste and Activities Division of the
National Ecology Institute of Mexico (hereinafter referred to as INE), an agency of the
Federal Government of the United Mexican States within the Ministry of the Environment,
Natural Resources and Fisheries (SEMARNAP), which cancelled the previous
authorization, granted on December 7, 1988. INE —both within the framework of SEDUE
as well as of its successor SEMARNAP— is in charge of Mexico’s national policy on
ecology and environmental protection, and is also the regulatory body on environmental
issues.

37. Upon the liquidation and dissolution of the above-mentioned decentralized agency,
ordered by the Governor of the State of Sonora on July 6, 1995, in mid-1995, the assets of
the landfill became the property of the Government of the State of Sonora. Subsequently,
on November 27, 1995, through a donation agreement entered into between that
Government and the Municipality of Hermosillo, the property was transferred to
Promotora.

38. In a letter dated April 16, 1996, confirmed by letters of June 5, August 26 and
September 5, 1996, Tecmed made a request to INE for the operating license of the landfill
—then in the name of Confinamiento Controlado Parque Industrial de Hermosillo O.P.D.—
to be issued in the name of Cytrar. The Municipality of Hermosillo supported this request
in its note to INE dated March 28, 1996, requesting INE to provide all possible assistance
in connection with the name change procedure in the operating license in favor of Tecmed
or of the company organized by it. In an official letter of September 24, 1996, INE notified

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Cytrar, in connection with the application to change the name of the entity from Promotora
to Cytrar, that Cytrar had been registered with INE. The official letter was then returned by
Cytrar to INE as requested by INE after having been issued, and replaced by another one of
the same date to which the authorization relating to the landfill was attached, dated
November 11, 1996, stating the new name of the entity. Such authorization could be
extended every year at the applicant’s request 30 days prior to expiration. It was so
extended for an additional year, until November 19, 1998.

39. The arbitration claim seeks damages, including compensation for damage to reputation,
and interests in connection with damage alleged to have accrued as of November 25, 1998,
on which date INE rejected the application for renewal of the authorization to operate the
landfill, expiring on November 19, 1998, pursuant to an INE resolution on the same date,
whereby INE further requested Cytrar to submit a program for the closure of the landfill.
Subsidiarily, the Claimant has requested restitution in kind through the granting of permits
to the Claimant enabling it to operate the Las Víboras landfill until the end of its useful life,
in addition to compensation for damages.

40. The Claimant further argues that the successive permits granted by INE to Cytrar in
connection with the operation of the landfill constitute a violation of the conditions on
which the Claimant made its investment because (i) such permits, both as regards their
duration as well as the conditions to which they were subject, were different from the
permit given for operation of the landfill at the time the investment was made; and (ii) the
price paid by Cytrar included the acquisition of intangible assets which involved the
transfer to Cytrar of existing permits to operate the landfill and under which such landfill
was being operated at the time of making the investment, and not the ones ultimately
granted to it. The Claimant argues that such a violation of conditions also involves a
violation of, among other provisions, Articles 2 and 3(1) of the Agreement and a violation
of Mexican law. However, the Claimant states that it is not seeking in these arbitration
proceedings a pronouncement or declaration regarding the lawfulness or unlawfulness,
legality or illegality of acts or omissions attributable to the Respondent in connection with
permits or authorizations relating to the operation of the Las Víboras landfill prior to the
INE resolution of November 19, 1998, which terminated Cytrar’s authorization to operate
the landfill, considered in isolation, although it highlights the significance of such acts or
omissions as preparatory acts for subsequent conduct attributable to the Respondent which,
according to the Claimant, is in violation of the Agreement or facilitated such conduct.

41. The Claimant argues that the refusal to renew the landfill’s operating permit, contained
in the INE resolution of November 25, 1998, constitutes an expropriation of its investment,
without any compensation or justification thereof, and further constitutes a violation of
Articles 3(1), 3(2), 4(1), 4(5), 5(1), 5(2) and 5(3) of the Agreement, as well as a violation of
Mexican law. According to the Claimant, such refusal would frustrate its justified
expectation of the continuity and duration of the investment made and would impair
recovery of the invested amounts and the expected rate of return.

42. The Claimant alleges that the conditions of the tender and the invitation to tender, the
award or sale of the landfill or of the assets relating thereto and the investment made by the
Claimant were substantially modified after the investment was made for reasons

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attributable to acts or omissions of Mexican municipal, state and federal authorities. The
Claimant claims that such modifications, with detrimental effects for its investment and
which allegedly led to the denial by the Federal Government of an extension to operate the
landfill, are, to a large extent, due to political circumstances essentially associated to the
change of administration in the Municipality of Hermosillo, in which the landfill is
physically situated, rather than to legal considerations. Specifically, the Claimant attributes
such changes to the result of the election held in Mexico in July 1997, one of the
consequences of which was the taking of office of a new Mayor of the Municipality of
Hermosillo and similar changes in other municipal governments in the State of Sonora.
According to the Claimant’s allegations, the new authorities of Hermosillo encouraged a
movement of citizens against the landfill, which sought the withdrawal or non-renewal of
the landfill’s operating permit and its closedown, and which also led to confrontation with
the community, even leading to blocking access to the landfill. The authorities of the State
of Sonora, where the Municipality of Hermosillo is located, are alleged to have expressly
supported the position adopted by the Municipality.

43. The Claimant argues that the Federal Government yielded to the combined pressure of
the municipal authorities of Hermosillo and of the State of Sonora along with the
community movement opposed to the landfill, which, according to the Claimant, led to the
INE Resolution of November 25, 1998, referred to above. This Resolution denied Cytrar
authorization to operate the landfill and ordered its closedown. The Claimant argues that
INE’s refusal to extend the authorization to operate the landfill is an arbitrary act which
violates the Agreement, international law and Mexican law. It further denies any
misconduct or violation on its part of the terms under which the landfill permit was granted
and which could justify a refusal to extend the authorization. The Claimant alleges that
certain breaches of the conditions of the permit that expired on November 19, 1998, which
was subsequently not extended by INE, did not warrant such an extreme decision. The
Claimant points out that such breaches had been the subject matter of an investigation
conducted by the Federal Environmental Protection Attorney’s Office (“PROFEPA”),
which, like INE, is an agency within the purview of SEMARNAP, but with powers, among
other things, to monitor compliance with federal environmental rules and to impose
sanctions, which may include a revocation of the operating license. It also stresses that
PROFEPA had not found violations of such an extent that they might endanger the
environment or the health of the population or which justified more stringent sanctions than
the fines eventually imposed on Cytrar by PROFEPA as a result of its investigations.

44. The Claimant stresses the commitment of Cytrar, with the support of Tecmed, as from
July 3, 1998, to relocate the hazardous waste landfill operation to another site on the basis
of agreements reached with federal, state and municipal authorities as of such date, and
denies the allegation that the fact that such relocation had not yet taken place at the time the
extension of Cytrar’s permit was refused could be validly argued among the grounds
referred to by INE in its resolution of November 1998 denying the extension. The Claimant
points out that Cytrar, with the support of Tecmed, subsequently added to its commitment
to relocate the landfill another commitment to pay the costs and economic consequences
involved in such relocation, and further denies that the delay or failure to relocate was
attributable to it. The Claimant insists that the only condition to which Cytrar subjected its
relocation commitment was that, pending such relocation, operation by Cytrar of the Las

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Víboras landfill and the relevant operating permit should continue, and that such condition
is a part of the relocation agreement entered into with the federal, state and municipal
authorities of the Respondent. At any rate, the Respondent argues that Cytrar
unsuccessfully applied to INE for a limited extension of its permit to operate the Las
Víboras landfill (five months as from November 19, 1998), in order to come to an
agreement, within such term, on the identification of the site to which the landfill operation
would be relocated and to carry out the relocation.

45. According to the Claimant, the expropriation act and other violations of the Agreement
which it deems to have suffered, have caused the Claimant to sustain a complete loss of the
profits and income from the economic and commercial operation of the Las Víboras landfill
as an on going business. Therefore the damage sustained includes the impossibility of
recovering the cost incurred in the acquisition of assets for the landfill, its adaptation and
preparation and, more generally, the investments relating to or required for this kind of
industrial activity, including, but not limited to, constructions relating to the landfill; lost
profits and business opportunities; the impossibility of performing contracts entered into
with entities producing industrial waste, thus leading to termination of such contracts and to
possible claims relating thereto; and the injury caused to the Claimant and to its
subsidiaries in Mexico due to the adverse effect on its image in that country, with the
consequent negative impact on the Claimant’s capacity to expand and develop its activities
in Mexico.

46. The Respondent, after pointing out that it does not consider that the powers of INE to
deny the landfill’s operating permit are regulated but discretionary, denies that such denial
was a result of an arbitrary exercise of such discretionary powers. The Respondent claims
that denial of the permit is a control measure in a highly regulated sector and which is very
closely linked to public interests. Accordingly, the Respondent holds that such denial seeks
to discourage certain types of conduct, but is not intended to penalize. The Respondent
stresses that the matters debated in these arbitration proceedings are to be solved in a
manner consistent with the provisions of the Agreement and of international law.

47. The Respondent denies that the subject matter of the tender and subsequent award to
Tecmed was a landfill, understood as a group or pool of tangible and intangible assets
including licenses or permits to operate a controlled landfill of hazardous waste. The
Respondent argues that the assets tendered and sold by Promotora solely include certain
facilities, land, infrastructure and equipment, but no permits, authorizations or licenses.
With regard to the documents signed by Promotora, Tecmed and Cytrar in connection with
the public auction of the assets relating to the landfill, the Respondent further argues that (i)
the obligation or responsibility to obtain permits, licenses or authorizations to operate the
landfill was vested in Cytrar; (ii) Promotora did not attempt to obtain or provide such
permits, licenses and authorizations for the benefit of or in the name of Cytrar, of the
Claimant or of Tecmed, nor did it guarantee that they would be obtained; (iii) Promotora’s
only commitment in this regard was to ensure that Cytrar could operate the landfill under
the existing permits, authorizations or licenses, which remained vested in Confinamiento
Parque Industrial de Hermosillo …