Internal Assessment 1

1. Issues:

1.1. Was there a valid investment by the Company in Mexico as per NAFTA?
1.2. Did the actions of the government violate any of the NAFTA Ch. XI Rights?
1.3. Was the action taken by the government justified and proportionate to the
alleged wrongs? Did it amount to expropriation?
1.4. Are the Government actions covered by an exception in NAFTA?
1.5. What award if any?

2. Analysis and Conclusion

2.1. Does the Company have a valid investment under the NAFTA?

2.1.1. Investment is defined under Article 1139 of NAFTA to include “an

enterprise that is an affiliate of the investor”. The Company having former
a wholly owned subsidiary in Mexico for mining purposes would be
entitled to bring this claim as the subsidiary Megatech Mexico would
qualify and meet the minimum threshold of an investment under the treaty.

2.2. The NAFTA under chapter XI contains many substantive rights protecting
investors from discriminatory and arbitrary actions of a State that is party to the
Agreement. The following may be taken note of:

2.2.1. Article 1102 of NAFTA mandates for Mexico to accord parity in treatment
to the Company in comparison to its national investors. Unless there is
evidence forthcoming that Mexico seals properties of all national investors
alleged to have indulged in corruption, the impugned action would be
violative of Article 1102 of NAFTA. It is common knowledge that Mexico
has a corrupt government as evidenced by multiple cases under Foreign
Corrupt Practices Act (US Law) pertaining to subsidiaries of American
companies. However, there is no evidence forthcoming that in all such
cases, the companies and their domestic partners that were subject of
FCPA sanctions and enquiries in the US faced a similar fate as the
Company did in the case at hand. Given the lack of transparency at hand,
the Tribunal will have to follow the decision in Marvin Roy Feldman’s
case, wherein the Party through its treasury department, was held to have
followed an inconsistent and non-transparent course of action and hence,
Mexico was liable to pay 1.9 Million USD for breach of Article 1102.

2.2.2. Article 1105 of NAFTA mandates a minimum standard of treatment in

accordance with international law including fair and equitable treatment
and full protection and security. This article would include the legitimate
expectation to be treated fairly as it was Mexico itself that had invited
 foreign investors on the assurance of an investor friendly environment.1
Given that no hearing was given to the company by the Commission, it is
to be held that the impugned action is violative of Article 1105 as
principles of natural justice have been violated herein which will constitute
the minimum threshold for fair treatment as per the Neer doctrine.2

2.3. Expropriation – Was the sealing of Company premises justified?

2.3.1. Article 110 of NAFTA prohibits both the direct and indirect expropriation
of investor’s investments. The pertinent question to be asked here is if the
act of sealing of Company premises without an opportunity of hearing and
without payment of compensation be justified?
2.3.2. Mexico through its provincial government hasn’t expropriated the
Company premises through ‘due process’ as no opportunity for hearing
had been provided and it was done in violation of Article 1102 of NAFTA.
2.3.3. On applying the sole effects test, there has been a subsanttial deprivation
of Company property. Albeit the police powers doctrine could come to the
rescue of the defendant, yet, on a further application of the proportionality
test, surely there could’ve been a better approach to balance the
Company’s interests along with the slated public purpose of preventing
corruption. On this ground also, the defendant fails in defending the
charges of expropriation.

2.4. In search of defenses: Is there one under chapter 21 of NAFTA?

4.4.1 The only Article under chapter 21 that could aid the defendant is Article 2102
being measures taken in the interest of national security. However, it is not possible on
a reading of the said article to come to the conclusion that the action taken by Mexico
through its provincial government was in the interest of protecting national security as
the impugned action was neither of the nature described in Article 2102(1)(b)(i) or
during a period as described in Article 2102(1)(b)(ii).

2.5. An award may be granted covering the initial investment of the Company as
well as the costs of litigation and loss of profits arising out of the impugned action.

1
In Glamis Gold v. United States, it was held by the Tribunal that prior representations to investor was
necessary for drawing flak of the legitimate expectation doctrine.
2
Neer v Mexico (1926) concerned the murder of US citizen in Mexico. The US-Mexico General Claims
Commission stated that “for treatment of an alien to constitute international delinquency it should amount to
outrage to bad faith to wilful neglect of duty or to an insufficiency of action so far short of international
standards that every reasonable and impartial man would readily recognize its insufficiency.” This standard has
been subsequently adopted in international customary law and has evolved to have higher benchmarks for
legitimate expectations in favour of aliens/foreign investors.