NAFTA Award in Thunderbird v. Mexico

Last week a NAFTA arbitration panel rendered an award in the case of International Thunderbird Gaming Corp. v. Mexico. The essential issue is whether an investment in certain gaming operations based on assurances given by Mexican authorities could give rise to a NAFTA claim when the government subsequently refused to permit such operations.

The key facts are as follows: A written request to Mexican officials for an opinion on the legality of the operations was submitted on August 3, 2000. (See para. 50). On August 15, 2000, these officials issued a formal response concluding that the proposed machines were skill machines and not gaming machines (i.e. slot machines). (See para. 55). Based on these assurances, Thunderbird made substantial investments. On October 10, 2001, the government declared the machines illegal “gambling equipment” and ordered closure of the facilities. So in short, the issue was if you receive an opinion letter from the government, and rely on it to your detriment, is there a remedy if the government subsequently prohibits activities pursuant to that investment?

There is far more in the case than space available to discuss here. I will just mention a couple of highlights.

First, a jurisdictional question arose over whether Thunderbird, a Canadian company with principal offices in California, could bring the claim based on its minority shareholding of various Mexican entities that operated the gaming facilities. If Thunderbird as a foreign investor did not control these Mexican entities, then the NAFTA panel lacked the authority to resolve these claims against Mexico. The panel ruled that minority shareholders that held de facto control over Mexican entities was sufficient. “The question arises whether ‘control’ must be established in the legal sense, or whether de facto control can suffice…. The term ‘control’ is not defined in the NAFTA. Interpreted in accordance with its ordinary meaning, control can be exercised in various manners. Therefore, a showing of effective or ‘de facto‘ control is … sufficient for the purposes of Article 1117 of NAFTA.” (paras. 105-06).

Second, on the doctrine of “legitimate expectations,” the panel summarized the requirements under international law and concluded that Thunderbird could not successfully invoke this doctrine. “Having considered recent investment case law and the good faith principle of international customary law, the concept of ‘legitimate expectations’ relates, within the context of the NAFTA framework, to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA Party of honour those expectations could cause the investor (or investment) to suffer damages. The threshold for legitimate expectations may vary depending on the nature of the violation alleged under the NAFTA and the circumstances of the case. Whatever standard is applied in the present case however–be it the broadest or the narrowest–the Tribunal does not find that the Oficio generated a legitimate expectation upon which EDM could reasonably rely in operating its machines in Mexico” (paras. 147-48).

The Separate Opinion of Thomas Wälde is significant for its much fuller discussion of the legitimate expectations doctrine under international law. In paragraphs 24-57 there is wonderful analysis of legitimate expectations under national laws and international law, as well as analysis of legitimate expectations as applied under the fair and equitable treatment doctrine of Article 1105. If you are interested in the issue, I am not aware of another arbitral opinion that provides greater depth of analysis.