Mexico's Approach to Expropriation Disputes in the Face of Investment Globalization
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THE RULE OF LAW: MEXICO'S APPROACH TO EXPROPRIATION DISPUTES IN THE FACE OF INVESTMENT GLOBALIZATION Patrick Del Duca A new constitutional design is emerging in Mexico to address investment and expropriationdisputes. Assurance of the rule of law, understood as independ- ent legal process to resolve disputes, is a key element. Although the rule of law assumed growing importance as Mexico's historical expropriations progressed, questions persisted as to its effective application. Mexico's opening to global com- petition for investment in the 1990s demanded a greater basis for trust in such application. Mexico accordingly provided by treaty to defer investment and expropriationdisputes with treaty country investors to binding internationalarbi- tration. To address rule of law concerns more broadly, Mexico reformed its Constitution in 1994 to increase its federal judiciary's independence. More recently, federal judicial review has benefited from the Mexican Constitution's increased rigidity consequent to the fading of single party rule. Recent cases, including the resolution of the Metalclad internationalarbitration, the Supreme Court's declaration of the constitutionalposition of treaties relative to legislation, and the Court's resolution of a constitutionaldispute between Congress and the President with implicationsfor private investment in the electricity sector, deline- ate the emerging design and associated, innovative judicial doctrine. 1. EMERGING CONSTITUTIONAL DESIGN .............................................................. 36 A. Historical Evolution Towards the Rule of Law ......................................... 41 B. Recent Developm ents ................................................................................. 44 C. Inventory of Topics Addressed ................................................................... 48 II. EXPROPRIATIONS ................................................................................................ 49 A . Expropriation Law ..................................................................................... 49 1. Property and Private Economic Activity ........................................... 51 2. Property and State Responsibility ........................................................ 53 3. Expropriation of Property ................................................................... 54 * Ph.D European University Institute, J.D. Harvard Law School, DEA Universit6 de Lyon II, laurea in giurisprudenza UniversitA di Bologna, B.A. Harvard College. Lecturer in law, UCLA Law School; partner, Manatt, Phelps & Phillips, LLP. The author thanks Jeffery Atik, Louis Del Duca, Francisco Fuentes Ostos, Stephen Gardbaum, Kenneth Karst, Randall Peerenboom, Felippe Ribbeck, Linda Robinson, Keith Rosenn, Arthur Rosett, David Shirk, Cristi~n Vallejo, and Rodrigo Zamora Etcharren for comments on the manuscript. The author expresses appreciation for participation in the Pacific Council on International Policy's Mexico Study Group, and thanks John Wilson of the Hugh and Hazel Darling Law Library at UCLA, and Amber Lee Smith of the Los Angeles County Bar Library, for bibliographic assistance. 36 51 UCLA LAW REVIEW 35 (2003) B. Evolution and Pattern ............................................................................... 56 C . Real Property .............................................................................................. 57 1. Ecclesiastical Property ......................................................................... 58 2. Com m unal A gricultural Land ............................................................. 62 D . Railroads ........................................ ........................... ........ 65 E. O il .......................................................................................................... 68 1. 1922 Supreme Court Ruling-Texas Oil Co ....................................... 70 2. 1927 Supreme Court Ruling-Mexican Petroleum Co ........................ 72 3. Expropriation ...................................................................................... 73 4. 1938 Supreme Court Ruling-Huasteca Petroleum Co ....................... 75 F. Electricity .................................................................................................... 76 G . Sulfur Extraction ........................................................................................ 80 H . Banks ............................................................................................................ 82 I. M etalclad ..................................................................................................... 85 1. N A FTA Chapter 11 ............................................................................ 86 2. A rbitral A ward .................................................................................... 89 3. Judicial A ppeal .................................................................................... 91 III. M EXICO'S FEDERAL JUDICIARY .......................................................................... 93 A . Independence .............................................................................................95 B. Judicial Review ........................................................................................... 97 1. W rit of A mparo .................................................................................... 98 2. Constitutional Disputes ......................................................................... 105 3. A bstract Constitutional Review ........................................................... 105 4. N ewly Rigid Constitution ...................................................................... 106 IV. CONSOLIDATION OF THE RULE OF LAW: INTERNATIONAL OPENING .................... 111 A . Treaties .......................................................................................................... 111 B. International Arbitration W ith Treaty Country Investors ........................... 114 C . M onism and Dualism ..................................................................................... 116 1. Pre-1934 Dualism ................................................................................... 116 2. 1934-1999 M onism ...............................................................................117 3. Post-1999 Dualism ................................................................................. 121 4. Supranational Im plications .................................................................... 124 V . SPACE FOR CONTRARIAN VOICES ......................................................................... 128 A. Expropriatory Pressure at the Rule of Law's Edge: Toll Roads ............................................................................................ 128 B. The Rule of Law at Least Temporarily Frustrating Private Sector Electricity ............................................................................... 129 V I. PROSPECTS ............................................................................................................ 134 A . Investor Perspective ....................................................................................... 137 B. Judicial Perspective ........................................................................................ 139 I. EMERGING CONSTITUTIONAL DESIGN A challenge inherent to a country's participation in the global competi- tion for investment is to provide investors a basis to trust in the continuing The Rule of Law: Mexico's Approach to Expropriation Disputes 37 respect for the legal framework prevailing when an investment is made. In Mexico, a "new constitutional design... to confront the challenges and opportunities of globalization"' is emerging with respect to the management of investment and expropriation disputes. The design's key element to assure the necessary trust is the rule of law. In the present context, the rule of law means an independent legal process to resolve disputes.2 To provide context for the emerging constitutional design, this Article reviews Mexico's principal historical expropriations. It uses them as a case study to illustrate problems in the development of Mexico's legal system and in its application of the rule of law. The case study in particular illustrates the challenges to assurance of the federal judiciary's independence in politically charged investment and expropriation matters. With the benefit of Mexico's 1. "[ElI nuevo disefio constitucional que requiere el pafs para enfrentar los retos y oportuni- dades de laglobalizaci6n." Sergio L6pez-Ayll6n, La Jerarqufa de los Tratados Internacionales (Amparo en Revisidn 1475/98, Sindicato Nacional de Controladores de Trdnsito A&eo), in CUESTIONES CONSTITUCIONALES: REVISTA MEXICANA DE DERECHO CONSTITUCIONAL, July-Dec. 2000, at 208 (commenting on the Mexican Supreme Court ruling discussed infra in Part IV.C.3-4.) (author's translation). A 1997 dissent by four of Mexico's eleven Supreme Court justices, asserting that the Constitution should be read to mandate a pre-expropriation valuation hearing, echoed the theme of new constitutional design by arguing for an updated interpretation of the Constitution's expropriation provisions in light of land redistribution's completion and globalization's challenges, with: reconocimiento de que este pais no esti segregado ni ensimismado en sus propias mura- Ilas, sino que tiene que reconocer este fen6meno de laglobalizaci6n, fen6meno en el cual es importante que el Tribunal Supremo