Canceled Permits, Green Paint, and a Stolen Plant
By Danilo Ruggero Di Bella
This article considers the potential application of the 2011 Free Trade Agreement between Mexico and the Central American Common Market (also known as the FTA Mexico-CACM) to an ongoing investment dispute between Mexican gas company Tomza and Nicaragua, a Member-State of the CACM along with Guatemala, Honduras, El Salvador, and Costa Rica.
In April 2021, a Guatemalan subsidiary of Tomza denounced allegations that its Liquid Petroleum Gas (LPG) bottling plant in Tipitapa, a city 30 kilometers outside of the Nicaraguan capital Managua, was illegally expropriated and confiscated by Nicaragua’s government. The slow and gradual expropriation of the company’s assets took several years.
In 2015, Tomza was granted permits to build and operate an LPG bottling plant in Nicaragua with a view to distribute gas to the local market. On 7 June 2016, when construction of the plant was 92% complete, Nicaragua’s Ministry of Environment and Natural Resources withdrew the permits it had previously granted. From that point on, the plant was placed under the custody of the Public Prosecutor General, and company’s personnel were expelled from the country.
While the company was attempting to reactivate its permits, it found that its plant had been officially confiscated in November 2020 by Decision No. 350-2020 of the National Confiscations Review Commission. Tomza was not notified of the confiscation. The company discovered this silent expropriation had occurred four months later, in March 2021, when parts of its plant were repainted green -the color that identifies the Nicaraguan Petroleum Company (PETRONIC). Reportedly, Tomza’s expropriated assets in Nicaragua amount to 4 million US dollars. Tomza’s investment in Nicaragua would have been extremely likely to yield much more than the USD 4 million the site took to build, had it not been confiscated.
In light of these circumstances, the Mexican company may consider invoking the FTA Mexico-CACM to initiate investment arbitration against Nicaragua, either before an ICSID tribunal (pursuant to the ICSID Convention or the ICSID Additional Facility Rules) or an UNCITRAL tribunal. As both Mexico and Nicaragua are contracting parties to the ICSID Convention (Mexico became a Party relatively recently in 2018), if Tomza were to opt for ICSID arbitration proceedings, they would be conducted under the ICSID Convention – with the inherent advantages of a self-contained and self-executing system. Being a self-contained process, ICSID awards are insulated from the risk of being challenged or set aside by domestic courts. Further, thanks to their self-executing feature, ICSID awards are like any other international arbitral award in that they can skip the exequatur procedure and jump more directly to enforcement.
Interestingly, the FTA Mexico-CACM has never thus far been invoked, despite the high volume of Mexican investments in the region of the Central American Common Market and the elevated political risk in the area. Tomza may well become the first Mexican company to benefit from the investment protection provided by this international instrument.
In this form of international arbitration, Tomza may be able to claim restitution of its plant or compensation for the Nicaraguan government’s expropriation of its property, including loss of future profits. Nicaragua’s actions are indeed in clear breach of Chapter 11 on investment protection contained in the FTA Mexico-CACM.
Specifically, Article 11.11 of the FTA Mexico-CACM forbids Nicaragua to unlawfully expropriate or nationalize foreign investment. The same article defines expropriation as unlawful when it lacks public purpose, is discriminatory, is not carried out in accordance with due process of law, and does not fully compensate the foreign investor. Regarding this final requirement, such compensation must be paid without delay, fully realizable, and freely transferable.
The Government of Nicaragua breached Article 11.11 of the FTA Mexico-CACM, in part because it failed to compensate Tomza for the nationalization of its plant, and in the process disregarded the due process of law as it failed to even notify Tomza about its actions. Due to its failure to uphold the due process of law, Nicaragua may have also breached Article 11.3 of the FTA Mexico-CACM, which obliges contracting parties to provide fair and equitable treatment (FET) to foreign investors.
If it can be proven that Nicaragua committed an unlawful expropriation and breached the FET standard for foreign investors, Tomza may be able to claim full compensation based on the fair market value of its investment, as expressly provided in Article 11.11(2) of the FTA Mexico-CACM. The determination of such compensation should take into account not only the sunk costs of the investment, but also the future revenue the investment would likely have generated.
Pursuant to Article 11.22 of the FTA Mexico-CACM, Tomza has three years to file an investment arbitration against Nicaragua as of the date it became aware or should have become aware of Nicaragua’s violations of the FTA Mexico-CACM. Hence, if we take the National Confiscations Review Commission’s Decision No. 350-2020 of November 2020 as the final act of Nicaragua’s creeping expropriation in breach of the relevant FTA, Tomza’s deadline to submit this dispute to an investment arbitration will expire in November 2023. Alternatively, if we consider that Tomza gained material knowledge of the unlawful expropriation only this March when its plant was repainted green by the Nicaraguan Petroleum Company, then Tomza’s time period to bring an arbitral claim will elapse in March 2024.
Importantly, Article 11.20(4) of the FTA Mexico-CACM has a strict fork-in-the road provision. This provision provides that, once a foreign investor has decided to resolve an investment dispute before the national courts of the host-country, the foreign investor cannot then resort to international arbitration to settle the same dispute. This article is phrased in a particularly limited way in that it expressly states that the foreign investor’s decision on the forum in which to litigate its investment dispute is final. Tomza must not bring this investment dispute before Nicaraguan domestic courts if it does not want to lose its opportunity to pursue the much more transparent and favorable terms available to it in international arbitration. The latter has many advantages over domestic litigation, including the impartiality of an arbitral tribunal, the tribunal’s speed in addressing the dispute, and the likelihood that any final award would also be enforceable across much of the globe.
Danilo Ruggero Di Bella is an attorney-at-law, a member of the Madrid Bar and the Canadian Institute for International Law Expertise (CIFILE), and head of the boutique law firm Bottega DI BELLA. He holds a master’s degree in law from Alicante University and an LLM in Investment Treaty Arbitration from Uppsala University. Danilo graduated with a law degree from Florence University, during which time he also obtained a specialization in public international law from Radboud University Nijmegen. He can be reached at email@example.com.