Expropriation by painting: the first potential application of the FTA Mexico-CACM?

Introduction

This post considers the potential application of the 2011 Free Trade Agreement between Mexico and the Central American Common Market (FTA Mexico-CACM) to an ongoing investment dispute between Tomza (a Mexican Gas company) and Nicaragua (a Member-State of the CACM along with Guatemala, Honduras, El Salvador, and Costa Rica).

Factual Background

In April 2021, the Guatemalan subsidiary of the Mexican Group Tomza has denounced that its Liquid Petroleum Gas bottling plant in Tipitapa (30 km away from Managua) was illegally expropriated and confiscated by Nicaragua’s Government. The creeping expropriation process took several years.

In 2015, Tomza was granted the permits to build and operate an LPG bottling plant in Nicaragua with the view of distributing 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 previously granted permits. Afterwards, the plant was placed under the custody of the Public Prosecutor General and company’s personnel was expelled from the country. While the company was attempting to reactivate the permits, it found out 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 found out about this silent expropriation only in March of this year when parts of its plant were repainted in green, the colors identifying the Nicaraguan Petroleum Company (PETRONIC). Reportedly, Tomza’s expropriated assets in Nicaragua amount to 4 million US dollars in sunk costs. Obviously, Tomza’s investment in Nicaragua would have yielded much more, had it not been confiscated.

Potential Investment Claim

In light of these circumstances, the Mexican company may consider invoking the FTA Mexico-CACM to initiate an 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), in case of opting for an ICSID arbitration, this proceeding would be conducted under the ICSID Convention with the inherent advantages of a self-contained and self-executing system.

In this international arbitration, Tomza may claim restitution of its plant or compensation for this creeping expropriation, including loss of future profits. Nicaragua’s expropriatory measures 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 like the one at hand. The same Article defines an expropriation as unlawful when it lacks public purpose, is discriminatory, is not carry out in accordance with due process of law, and does not fully compensate the foreign investor. Namely, such compensation shall be paid without delay, fully realizable, and freely transferable.

The Government of Nicaragua breached Article 11.11 of the FTA Mexico-CACM, chiefly because it failed to compensate Tomza for the nationalization of its plant and in the process disregarded the due process of law, as it even failed to notify Tomza about such taking. For the same reason (i.e., the failure to uphold the due process of law), Nicaragua may have breached also Article 11.3 of the FTA Mexico-CACM which obliges the Contracting Parties to accord fair and equitable treatment (FET) to foreign investors.

Since Nicaragua committed an unlawful expropriation and breached the FET standard, Tomza may claim a full compensation based on the fair market value of its investment as expressly set in Article 11.11(2) of the FTA Mexico-CACM. Therefore, the determination of such compensation should take into account not only the sunk costs of the investment, but also the future revenue that the investment would have likely generated.

Pursuant to Article 11.22 of the FTA Mexico-CACM, Tomza would have 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 in 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 an international arbitration to settle the same dispute. Article 11.20(4) is phrased in a particularly strict way because it expressly considers the foreign investor’s decision on the forum where to litigate its investment dispute as final. Accordingly, Tomza should pay attention not to bring this dispute before Nicaraguan domestic courts if it does not want to lose the recourse to an international arbitration. The latter has many advantages over domestic litigation, inter alia, the impartiality of the arbitral tribunal, its speed in addressing the dispute, and the possibility to enforce the final arbitral award basically worldwide.

Conclusion

Interestingly, the 2011 FTA Mexico-CACM has never been invoked so far, despite the high volume of Mexican investments in the region of the Central American Common Market, on one hand, and the elevated political risk of the area, on the other. Tomza may be the first Mexican company to benefit of the investment protection provided by this international instrument.