Legal experts say the ruling, handed down by a three-person tribunal in Washington, DC, is believed to be the first legal victory favoring a US investor under the 1994 North American Free Trade Agreement. It could also force the Mexican government to do a better job of sticking to written contracts and international laws, which at times have been broken by local officials in Mexico.

"This is a groundbreaking decision in international law," says Jack J. Coe Jr., a lawyer for plaintiff Metalclad who also teaches law at Pepperdine University in Malibu. "It's huge. The NAFTA system appears to be working."

Metalclad is a Newport Beach, CA-based provider of construction services and specializes in handling toxic material. The case began in 1993, Coe says, when Metalclad began building a $20-million landfill for hazardous waste about 250 miles northwest of Mexico City.