INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
in the Matter of the Arbitration between
AWARDMEMBERS OF THE TRIBUNAL
Dr. Andrés Rigo Sureda, President
Honorable Stuart E. Eizenstat, Arbitrator
Professor James Crawford, ArbitratorSECRETARY OF THE TRIBUNAL
Natali SequeiraREPRESENTING THE CLAIMANT:
Mr. C. Allen Foster
Mr. Kevin E. Stern
Ms. Ruth Espey-Romero
Greenberg Traurig, LLP
Mr. Juan Pablo Carrasco de Groote
Díaz-Durán & Asociados Central-Law
Ms. Regina K. Vargo
Greenberg Traurig, LLPREPRESENTING THE RESPONDENT:
Hon. Larry Mark Robles Guibert
Attorney General of the Republic of Guatemala
Hon. Sergio de la Torre
Minister of Economy of the Republic of Guatemala
Hon. Marvin Gustavo Lau López
Under Secretary General of the Office of the President
Lic. Carlos Samayoa Flores
Administrator of Ferrocarriles de Guatemala
Mr. David Orta (until April 26, 2012)
Mr. Whitney Debevoise
Mr. Daniel Salinas Serrano (until May 7, 2012)
Ms. Margarita R. Sánchez, Ms. Giselle Fuentes
Ms. Dawn Yamane-Hewett, Ms. Mallory Silberman
Arnold & Porter LLPDATE OF DISPATCH
: June 29, 2012
On June 14, 2007, Railroad Development Corporation (“RDC” or “Claimant”) filed before the International Centre for Settlement of Investment Disputes (“ICSID” or the “Centre”) a Request for Arbitration against the Republic of Guatemala (“Respondent’, “Guatemala” or the “Government”) on its own behalf and on behalf of Compañía Desarrolladora Ferroviaria, S.A., a Guatemalan company which does business as Ferrovías Guatemala (“FVG”) and is majority-owned and controlled by RDC. The Request was brought under the Dominican Republic – Central America – United States of America (“United States”) Free Trade Agreement (“CAFTA” or the “Treaty”). ICSID registered the Request for Arbitration on August 20, 2007. 2.
Pursuant to CAFTA Article 10.19.1, Claimant appointed the Honorable Stuart E. Eizenstat (United States of America); Respondent appointed Professor James Crawford (Australia). Pursuant to Article 10.19.3, the Acting Secretary-General of ICSID appointed Dr. Andrés Rigo Sureda (Spain), as President of the Tribunal. The Arbitral Tribunal was constituted on April 14, 2008. (“CAFTA” or the “Treaty”). ICSID registered the Request for Arbitration on August 20, 2007.3.
On May 29, 2008, Respondent requested that the Tribunal consider, on an expedited basis, an objection to the jurisdiction of the Tribunal pursuant to CAFTA Article 10.20.5. As required by Article 10.20.5, the Tribunal suspended the proceedings on the merits. The parties exchanged written submissions and a hearing on jurisdiction was held on October 10, 2008 in Washington D.C. The parties were represented by their counsel. Pursuant to CAFTA Article 10.21 the hearing was open to the public.4.
On November 17, 2008, the Tribunal issued its Decision on Objection to Jurisdiction under CAFTA Article 10.20.5 (“First Decision on Jurisdiction”). In that decision the Tribunal held:4
“(a) That the reservation included in the waivers submitted by the Claimant pursuant to Article 10.18.2 is of no consequence for purposes of their validity. [and] (b) [t]hat the waivers submitted by the Claimant pursuant to Article 10.18.2 are valid in respect of the claim arising from the Lesivo Resolution and from subsequent conduct of the Respondent pursuant to the Lesivo Resolution and, therefore, fulfill the Respondent’s consent to arbitration onditions under Article 10.18 in respect of that claim.”
On December 12, 2008, Respondent filed a request for clarification of the First Decision on Jurisdiction. Claimant filed comments on December 19, 2008. On January 13, 2009, the Tribunal issued a Decision on Clarification of the First Decision on Jurisdiction.6.
On January 6, 2009, the Tribunal issued a procedural order establishing the procedural calendar on the merits phase of the proceedings, fixing May 24, 2009 as the deadline for the submission of the Memorial on the Merits, and a two-week deadline after the date of submission of the Memorial on the Merits for "Respondent [to] inform the Tribunal and Claimant of any intention to raise preliminary objections.”7.
By Claimant’s letter of May 5, 2009 and Respondent’s letter of May 7, 2009, the parties informed the Tribunal of their agreement to modify the schedule for the submissions of pleadings set forth in Procedural Order No. 2 and sought the Tribunal’s approval of the agreed procedural schedule. By letter of May 8, 2009, the Tribunal approved the parties’ proposal. According to the new calendar, Claimant’s Memorial was to be submitted on June 26, 2008 while Respondent’s notice of any jurisdictional objections was scheduled for July 25, 2009. Accordingly, Claimant filed its Memorial on the Merits on June 26, 2009.8.
On July 24, 2009, Guatemala filed a notice of intent to raise preliminary objections, as it had reserved the right to do under CAFTA, Article 10.20.4. Claimant objected on August 4, 2009.9.
On August 24, 2009, Tribunal issued a procedural order suspending the proceeding on the merits. 610.
On September 24, 2009, Guatemala filed its Memorial on Objections to Jurisdiction under Article 10.20.4 of CAFTA and Article 25 of the ICSID Convention. Claimant filed its Counter-Memorial on Jurisdiction on October 26, 2009.11.
On November 3, 2009, the Tribunal informed the parties that a second round of pleadings was not necessary.12.
The second hearing on jurisdiction was held from March 1 to March 3, 2010 at the seat of the Centre in Washington, D.C. Pursuant to CAFTA Article 10.21 the hearing was open to the public. Representatives of the United States and the Republic of El Salvador (“El Salvador”) attended the hearing as CAFTA non-disputing parties. The parties were represented by their respective counsel who made presentations to the Tribunal.13.
During the hearing, on March 3, 2010, the representatives of the United States and El Salvador made oral statements reserving their right to make written submissions as non-disputing parties under CAFTA Article 10.20.2 and requesting the Tribunal to fix a dateline for filing them.14.
On March 5, 2010, the Tribunal sent a communication to all non-disputing parties fixing March 19, 2010 as the time limit to file submissions under CAFTA Article 10.20.2.15.
On March 10, 2010, the Tribunal requested the parties to file post-hearing briefs on specific questions not later than March 31, 2010.16.
On March 18, 2010, the United States informed the Tribunal that it would not file a non-disputing party submission pursuant to CAFTA Article 10.20.2.17.
On March 19, 2010, El Salvador filed a submission as a non-disputing Party under CAFTA Article 10.20.2.18.
On March 23, 2010, the Tribunal invited the views of the parties on the submission of El Salvador.19.
On March 31, 2010, the parties filed their replies to the Tribunal’s questions and their observations on El Salvador’s submission.720.
On May 18, 2010, the Tribunal issued its Second Decision on Objections to Jurisdiction pursuant to CAFTA Article 10.20.4 and Article 25 of the ICSID
Convention (“Second Decision on Jurisdiction”). In this Decision the Tribunal: (i) rejected Respondent’s objections ratione temporis and ratione materiae to its
jurisdiction; and (ii) confirmed that its jurisdiction was limited to the Lesivo Resolution and the conduct subsequent to this Resolution, which may include acts r omissions by Respondent related to squatters, but only to the extent that these result from the Lesivo Resolution. 21.
On June 7, 2010, after consultation with the parties, the Tribunal issued a procedural order fixing the time limits for the proceedings on the merits.22.
On October 5, 2010, Respondent filed its counter-memorial on the merits. Claimant filed its reply on the merits on March 24, 2011. Respondent filed a rejoinder on the merits on October 21, 2011.23.
The hearing on the merits was held from December 8 to December 16, 2011 at the seat of the Centre in Washington, D.C. Pursuant to CAFTA Article 10.21.2 the hearing was open to the public and, with the consent of the parties, was transmitted via live internet feed. Representatives of the United States and El Salvador attended the hearing as CAFTA non-disputing parties. The parties were represented by their respective counsel who made presentations to the Tribunal.24.
Present at the hearing were:Tribunal
Dr. Andrés Rigo Sureda, President
Prof. James Crawford, SC, Arbitrator
Hon. Stuart E. Eizenstat, ArbitratorICSID Secretariat
Ms. Natalí Sequeira
Assistant to Hon. Stuart E. Eizenstat
Mr. Alex Berengaut8Claimant
Mr. C. Allen Foster, Greenberg Traurig, LLP
Mr. Kevin Stern, Greenberg Traurig, LLP
Ms. Ruth Espey-Romero, Greenberg Traurig, LLP
Ms. Regina Vargo, Greenberg Traurig, LLP
Mr. P. Nicholas Caldwell, Greenberg Traurig, LLP
Ms. Precious Murchinson, Greenberg Traurig, LLP
Mr. Juan Pablo Carrasco, Díaz-Durán & Asociados
Mr. Adrian F. Snead, Greenberg Traurig, LLP
Ms. Verónica Sofía González, Díaz-Durán & Asociados
Ms. Lisa Aldana, Díaz-Durán & Asociados
Mr. Robert Pietrandrea, Railroad Development Corporation
Mr. Andrew Biller, Railroad Development Corporation
Mr. Agustin M. Posner, Railroad Development Corporation
Mr. Pablo Alonzo, Ferrovías Guatemala
Ms. Kimberly L.A. Linebarger, Dr. Shannon Pratt´s Assistant
Mr. Daniel Carey, Courtroom technicianWitnesses for the Claimant:
Mr. Henry Posner III
Mr. Jorge Senn
Mr. William J. Duggan
Mr. Carlos Franco
Ms. Mabel Hernández
Mr. Máximo Jiménez9
Mr. Inngmar Iten
Mr. Ricardo Spiegeler
Mr. Héctor Valenzuela
Mr. Mario Fuentes
Ms. Olga de ValdezExperts for the Claimant:
Dr. Eduardo Mayora
Mr. Louis Thompson
Mr. Robert MacSwain
Dr. Shannon PrattRespondent
Mr. Larry Robles, Attorney General of the Republic of Guatemala
Mr. Carlos Samayoa, Overseer, Ferrocarriles de Guatemala (FEGUA)
Mr. Aníbal Samayoa Salazar, Deputy Secretary General of the Presidency
Mr. Fernando de la Cerda, Embassy of Guatemala, Washington, D.C.
Mr. José Lambour, Embassy of Guatemala, Washington, D.C.
Mr. Mynor René Castillo, Ministry of Economy
Mr. Joaquín Romeo López Gutiérrez, Ministry of Economy
Mr. Saúl Oliva, Office of the Attorney General of Guatemala
Ms. Silvia Cabrera Estrada, Office of the Attorney General of Guatemala
Mr. David M. Orta, Arnold & Porter, LLP
Mr. Whitney Debevoise, Arnold & Porter, LLP
Mr. Daniel Salinas Serrano, Arnold & Porter, LLP
Ms. Margarita R. Sánchez, Arnold & Porter, LLP10
Ms. Giselle K. Fuentes, Arnold & Porter, LLP
Ms. Dawn Y. Yamane Hewett, Arnold & Porter, LLP
Ms. Mallory B. Silberman, Arnold & Porter, LLP
Mr. José Antonio Rivas, Arnold & Porter, LLP
Mr. José Bernard Pallais, Arnold & Porter, LLP
Ms. Camila Valenzuela, Arnold & Porter, LLP
Mr. Hans H. Hartell, Arnold & Porter, LLP
Mr. Kelby Ballena, Arnold & Porter, LLP
Mr. César Payés, FEGUA Legal Advisor
Mr. Patrick J. O’Connor, Harper Meyer Perez Hagen O'Connor Albert & Dribin LLP(counsel for Mr. Ramón Campollo)
Ms. Amy Endicott, Arnold & Porter, LLP
Mr. Pedro Soto, Arnold & Porter, LLP
Ms. Nicole Ann Aaronson, Arnold & Porter, LLPWitnesses for the Respondent
Mr. Arturo Gramajo Mondal
Mr. Richard Aitkenhead
Mr. Juan Esteban Berger Widmann
Mr. Ramón Campollo
Mr. José Miguel Carrillo
Mr. Miguel Ángel Samayoa
Mr. Andrés Porras Castillo
Mr. Mario Marroquín11Experts for the Respondent
Mr. Juan Luis Aguilar
Mr. Pablo SpillerCAFTA non-disputing Parties:On behalf of El Salvador:
Mr. Enilson Solano, Embassy of the Republic of El Salvador
Mr. Luis Parada, Dewey & LeBoeuf
Mr. Tomás Solís, Dewey & LeBoeuf
Ms. Erin Argueta, Dewey & LeBoeufOn behalf of the United States:
Mr. Neale Bergman, Attorney- Adviser, U.S Department of State
Mr. David Bigge, Attorney- Adviser, U.S Department of State
Ms. Alicia Cate, Attorney- Adviser, U.S Department of State
Ms. Kimberley Claman, Senior Director, U.S Trade Representative
Ms. Lisa Grosh, Deputy Assistant Legal Advisor, U.S Department of State
Ms. Karin Kizer, Attorney- Adviser, U.S Department of State
Mr. Jeffrey Kovar, Assistant Legal Advisor, U.S Department of State
Mr. Patrick Pearsall, Attorney- Adviser, U.S Department of State
Mr. Jeremy Sharpe, Attorney- Adviser, U.S Department of State25.
During the hearing, the representatives of the United States and El Salvador reserved their right to make submissions under CAFTA Article 10.20.2 and
requested the Tribunal to fix a calendar for the submissions of non-disputing Parties. 26.
On December 21, 2011, the Tribunal sent a communication to all non-disputing Parties fixing January 31, 2012 as the deadline to file submissions under CAFTA Article 10.20.2.1227
. On January 31, 2012, El Salvador and the United States filed written submissions on the interpretation of CAFTA pursuant to Article 10.20.2. On that date, the Republic of Honduras (“Honduras”) expressed its intention to file a submission as a non-disputing party and requested an extension of the time limit. The Tribunal granted a ten-day extension and Honduras filed its submission on February 10, 2012.28.
At the invitation of the Tribunal, the parties filed observations on the CAFTA non-disputing Parties’ submissions on February 24, 2012.29.
On April 25, 2012, the Tribunal ordered the closure of the proceeding.
It will be useful to recount here the basic facts as they were stated in the Second Decision on Jurisdiction. RDC is a privately-owned railway investment and management company which in 1997 won, through international public bidding, the use of the infrastructure and other rail assets to provide railway services in Guatemala (the “Usufruct”). Only two bids were submitted and RDC’s bid was the only one considered responsive by Respondent. RDC’s bid consisted of a staged plan to rebuild the rail system, which had been closed since March 1996, with an investment program of about ten million U.S. dollars. Although the bidding conditions did not include rolling stock, RDC included in its bid a rehabilitation plan for the rolling stock that would be required for the operation of the railroad (Section 4.2, “Rehabilitation Plan for Locomotives and Freight Cars”). The Usufruct that was awarded to RDC consisted of a 50-year right to rebuild and operate the Guatemalan rail system and did not include rolling stock. On November 25, 1997, FVG signed the Usufruct Contract of Right of
Way (the “Usufruct Contract”, “Contract 402” or “Deed 402”) with Ferrocarriles de Guatemala (“FEGUA”), a state-owned company established in 1969 which is responsible for providing certain railway transport services and managing the rail equipment and real estate assets. The Usufruct and the Usufruct Contract were ratified by the Congress of Guatemala by Decree 27-98, published in the Official Gazette on April 23, 1998, and came into force on May 23, 1998.13
The Usufruct covers a 497-mile narrow gauge railroad and includes the right to develop alternative uses for the right of way, such as pipelines, electricity transmission, fiber optics and commercial and institutional development. In return for the right-of-way Usufruct, RDC (through FVG) agreed to make certain payments to FEGUA.32.
In November 1997 Guatemala invited bids for the use of the FEGUA rail equipment in onerous usufruct. On December 11, 1997, FVG submitted its bid and won the rail usufruct on December 16, 1997. FEGUA and FVG signed Usufruct Contract No. 41, dated March 23, 1999 (“Contract No. 41”), which granted FVG “the use, enjoyment, repair and maintenance of railway equipment owned by FEGUA for the purposes of rendering railway transportation services.” This contract never went into force because it was never approved by acuerdo gubernativo. Such approval is required under Guatemalan Administrative Law and Clause 6.4 of the bidding conditions for Contract No. 41. No explanation was offered to the Tribunal of why the government approval was not given.33.
Since Contract No. 41 had not entered into force, FVG and FEGUA entered into Contract No.143 on August 28, 2003. The circumstances and effect of
Contract No. 143 are a matter of controversy between the parties and the Tribunal simply registers the fact that FVG and FEGUA signed this contract and modified it in October 2003 by deed No. 158 (”Contract 143/158”).34.
FVG restored commercial service between El Chile and Guatemala City on April 15, 1999. In December 1999, commercial service was restored between
Guatemala City and the Atlantic ports of Puerto Barrios and Puerto Santo Tomás. Tonnage gradually increased until 2005 but declined in 2006.35.
On June 26, 2005, FVG initiated two domestic arbitration cases against FEGUA for breach of contract. The Claimant alleged that Guatemala through FEGUA failed to remove squatters from the rail right of way and to make agreed payments to the Trust Fund. The Claimant further alleged that, in anticipation of FVG’s filings, FEGUA requested the Attorney General to investigate the circumstances surrounding the award of the Usufruct and to issue an opinion on the validity of Deed 143 and 14
Deed 158. The Attorney General issued Opinion No. 205-2005 on August 1, 2005 (“Lesivo
Opinion”), and recommended that Guatemala declare Contract 143/158 void as not in the interest of the country. As translated by the Claimant, the Lesivo
“Lesion was caused in this case because there is a violation to rules and procedures that should have been applied in order to execute the agreement in due form and with legal validity. The relevant contract breaks the Government Contracting Law and other laws that govern the process to grant FEGUA’s property in usufruct.
There is pecuniary lesion by executing an Onerous Usufruct Contract to grant the State’s property in usufruct to be exploited by a private entity, in exchange of one point twenty-five percent (1.25%) of the gross income as a result of rendering transportation services.”
On January 13, 2006, FEGUA issued Opinion 05-2006, in agreement with the Attorney General’s opinion, arguing that Contract 143/158 was not awarded as a result of a public bid.37.
Claimant and FVG made numerous attempts to reach an understanding.Claimant met the President of the Republic, Mr. Oscar Berger, on March 7, 2006. The President set up a high level commission to work with RDC and FVG, on which FEGUA was represented. This commission met a number of times but after about three months the meetings were suspended. It is the contention of the Claimant that, in parallel, the Government was preparing a resolution to declare the usufruct of the rolling stock injurious to the interests of the State. Such a resolution (“Lesivo
Resolution” or “Lesivo
Declaration”) was adopted by the Government on August 11, 2006 and published on August 25, 2006.
In its First Decision on Jurisdiction, the Tribunal decided:15
“(a) That the reservation included in the waivers submitted by the Claimant pursuant to Article 10.18.2 is of no consequence for purposes of their validity.
(b) That the waivers submitted by the Claimant pursuant to Article 10.18.2 are valid in respect of the claim arising from the Lesivo Resolution and from
subsequent conduct of the Respondent pursuant to the Lesivo Resolution and, therefore, fulfill the Respondent’s consent to arbitration conditions under
Article 10.18 in respect of that claim.” (para. 76)
In its Second Decision on Jurisdiction the Tribunal decided to reject Respondent’s objections ratione temporis and ratione materiae, and to confirm that its jurisdiction is limited to the Lesivo Resolution and conduct subsequent to this Resolution, which may include acts or omissions of Respondent related to squatters, but only to the extent that these result from the Lesivo Resolution.40.
In the reasoning leading to its decision, the Tribunal concluded that: “there is a dispute between Claimant and Respondent which began on the date the Lesivo Resolution was published in the Official Gazette. Having reached this conclusion, the Tribunal does not need to determine whether a tribunal under CAFTA has jurisdiction over disputes which began before the date the Treaty entered into force and which continued after such date. It merely notes that CAFTA is expressed to apply ‘to measures adopted or maintained by a Party’ (Article 10.1.1), and that it was not until the Lesivo
Resolution was finally published that it could be considered a ‘measure’”. (para.136)
It is the contention of Claimant that Respondent indirectly expropriated Claimant’s investment. Claimant analyzes the Lesivo
Resolution against the
requirements of Article 10.7.1 of CAFTA for a lawful expropriation and argues that the Lesivo
Resolution does not meet them.1642.
Claimant denies that the expropriation was for a public purpose. It rebuts the suggestion that its purpose could be to protect the cultural and historical patrimony, since no rolling stock was ever designated as such. The argument that the canon fee was too low ignores the fact that the effective rate in the Usufruct Contracts was 11.25%. Further, the integrated character of the Usufruct Contracts “makes ridiculous the contention that another round of public bidding on the rolling stock would have produced a serious competing bid or made any difference in the ‘award’ of Deed 143.” (para. 108). Claimant denies that lesivo was a non-discriminatory measure since the Government had the intention to act against Claimant in favor of Mr. Ramón Campollo or other nationals. Claimant contends that the lesivo procedure lacked due process, basing itself on Professor Riesman’s opinion that:
“In this idiosyncratic Guatemalan lesivo regime, the President of the Republic in Cabinet Council can freely decide what such interests of the State are, and,
due to the lack of standards for review, the administrative court which is then asked to confirm his decision will have a hard time articulating any reasons to
counteract the President’s judgment. In particular, the interests of the State which are adduced may not even amount to illegalities of contract formation
and content. The private party to whom the resolution is directed has no opportunity to be heard – to be informed of and respond to the charges prior to
the issuance of the decree. Under Article 584 of the Procedural Code, the Government is even prohibited from desisting from a lesivo claim once it has been filed.” (para. 111)
Claimant then refers to the indirect expropriation factors in Annex 10-C of CAFTA. In Claimant’s view, the Lesivo Resolution had a devastating effect:
It caused a critical number of FVG’s railway customers to refuse to continue to do business with FVG;
It caused FVG’s principal suppliers of goods, services and short-term financing to significantly reduce or eliminate their credit terms and/or
services to FVG;
Potential new customers, lenders, investors and joint venture partners immediately backed away from negotiations and discussions with FVG after
having previously expressed interest in doing business with FVG; and
Local courts, police and municipalities consistently relied upon the Lesivo Resolution as a basis to deny protection to, issue rulings against and allow
theft of and vandalism against FVG’s Usufruct property.” (para. 133)
According to Claimant, the Lesivo Resolution interfered with Claimant’s reasonable investment-backed expectations: the rolling stock was an express
component of the award of the 50-year Usufruct to operate the railroad, and RDC had the expectation that each of the Usufruct Contracts would be awarded, executed and approved in accordance with Guatemalan law.45.
Claimant contends that for nine years prior to the Lesivo Resolution RDC had a reasonable investment-backed expectation that the financial terms of Contract 143/158 were sufficient, adequate and not harmful to the interests of Guatemala and that Respondent represented them as legal and proper, Deed 143 included. (para 119)46.
Prior to the Lesivo Resolution, RDC had no reason to believe that it was not adequately protecting Guatemala’s “historical and cultural patrimony” interest in certain rolling stock and rail equipment. FVG had no notice of what specific rolling stock the Government had designated as cultural patrimony because the Government never officially declared or designated under its Cultural Patrimony Law any of the FEGUA rolling stock. Claimant refers (i) to Guatemala’s own description of the condition of the railway operation as “in a state of obsolescence” and in a “terrible state”, (ii) to the fact that, by 2003, Guatemala was so pleased with FVG’s rehabilitation and restoration of the railroad equipment that it entered into an agreement with FVG to display several FVG-restored historical locomotives and rail cars at the national railroad museum, and (iii) to an award that in 2005, approximately a year and a half prior to the Lesivo Resolution, was presented by FEGUA’s Overseer to FVG’s Chairman on behalf of the FEGUA-affiliated Railroad Museum for “the rescueand restoration of the Historic Railway Patrimony of Guatemala.”
(para. 120. Emphasis added by Claimant)47.
According to Claimant, an indirect expropriation can occur even though the investor still retains nominal or legal ownership of the investment or investment assets. Furthermore, a State’s actions can constitute an indirect expropriation under international law even where such actions are determined to be legitimate or in compliance with the host State’s domestic laws. Whether or not it was lawful under Guatemalan law, the Lesivo Resolution was completely disproportionate to its stated 18
aim. In Claimant’s opinion Guatemala could have taken less extreme actions that would not have destroyed RDC’s investment if it had been truly interested in protecting the public interests upon which it purports to rely to justify the Lesivo Resolution.48.
Claimant also alleges that Respondent is in breach of the minimum tandard of treatment under Article 10.5 of CAFTA. According to Claimant, when
applied against a foreign investor the lesivo procedure does not conform with this obligation because it is a procedure that lacks foundation under substantive
Guatemalan law, affords no due process to the investor; in practice, as was the case here, Respondent may use its lesivo power in order to avoid or force the renegotiation of valid administrative contracts without compensating the investor. According to Claimant: “The Government here specifically demanded that, in order to avoid a declaration of lesivo, FVG had to agree, for no consideration, to modify significantly the economic terms of the Usufruct Contracts, drop its local arbitrations for breach of contract, and release undeveloped railway segments to other interested parties (i.e., Ramon Campollo). The Government did this because it knew and understood that, once a lesivo resolution is issued against an administrative contract, that contract is, as a practical matter, rendered worthless even if the resolution has no legal or factual basis.” (para. 145)49.
Claimant alleges that Respondent acted maliciously because it issued the Lesivo Resolution to accomplish improper and discriminatory goals. It points to the following specific grounds: “(i) Basing the Lesivo Resolution on grounds that are directly contrary to the facts and prior actions, representations and agreements of the Government; (ii) Basing the Lesivo Resolution on grounds that were entirely the fault of the Government and easily within the Government’s control to address and correct (if even necessary) through less extreme measures; (iii) Issuing the Lesivo Resolution just prior to the expiration of the three-year limitation period after FVG refused the Government’s demands that it agree, for no consideration (other than the Government abandoning the Lesivo Resolution), to modify the economic terms of the Usufruct Contracts to the Government’s benefit and surrender substantial rights under the Contracts; (iv) Declaring Deeds 143/158 detrimental or injurious to the interests of the State when no demonstrable injury to the State existed; (v) Failing to provide FVG with 19
any due process to challenge or contest the Lesivo Resolution before an independent and neutral decision maker prior to or even shortly after its issuance; and (vi) failing to act in good faith towards RDC and its investment by implementing a measure with intent to discriminate and knowledge of the unlawfulness of such implementation.” (para. 149)50.
Claimant argues that the minimum standard of treatment includes the concept of transparency; Respondent failed to ensure a transparent and predictable framework and with the Lesivo Resolution undermined legitimate investment-backed expectations of Claimant based on representations, promises and actions of Respondent over more than nine years.51.
Claimant also alleges breach of Respondent’s obligation to provide full protection and security to its investment under Article 10.5.1 of CAFTA. Claimant
bases this allegation on the fact that, after the Lesivo Resolution was issued, the local authorities determined that there was no need to protect an investment declared harmful to the State’s interests. Consequently, local people stole 65 kilometers of rails, track materials, cross-members of three major bridges and set up living quarters along the tracks and in station yards. Claimant also alleges that these actions, in some instances, were done by or in collaboration with local authorities who also intervened in legal actions brought by FVG, to argue that FVG no longer had any enforceable contract rights and no legal standing. Claimant explains that FVG reported to the Public Ministry every theft, act of vandalism or squatter invasion but is not aware of any action taken in response to FVG’s reports.52.
Claimant further alleges breach of the national treatment standard of CAFTA Article 10.3. According to Claimant, RDC and Ramón Campollo are foreign
and domestic investors in “like circumstances”: both are competitors in the same economic sector since they have been competing to invest and operate the railroad and in leasing and developing the railroad’s assets. Claimant refers to offers directly or indirectly made to RDC by Mr. Campollo. According to Claimant: “In these proposals, Campollo demanded that he be allowed, without compensating FVG, to take over the Usufruct in whole or in part and be granted the exclusive right to use, develop and 20
exploit the Usufruct assets, particularly along the South Coast corridor whereCampollo’s sugar business and other business interests and investments are
concentrated. Direct competition could hardly be clearer.” (para. 162)53.
Claimant contends that the discriminatory measure of Respondent was the Lesivo Resolution because direct and circumstantial evidence demonstrates that one of the principal motivations of Respondent in issuing the resolution was to help facilitate the takeover of the FVG’s usufruct by Mr. Campollo. Claimant also contends that in any case “even absent the complicity between the Government and Mr. Campollo, Guatemala discriminated against RDC when it sought to coerce RDC into surrendering unrestored rail segments in favor of ‘other [interested] investors’ in exchange for the Government abandoning the Lesivo Resolution.” (para. 165)54.
As to damages, Claimant argues that the damages that RDC should recover must be determined by international law and must be the fair market value of its investment including: “(i) the adjusted amount of the investment as of the date of expropriation and other substantive violations of CAFTA – in this case as of 2006; (ii) consequential damages of lost profits from that date to the terminal date of the Usufruct; and (iii) compound pre-award interest at a commercially reasonable rate.” (para. 172) As calculated by Claimant the aggregate of these three items comes to $64,035,859.55.
Claimant requests that the Tribunal determine:
“a. That Claimant is an “investor of a Party” protected by CAFTA;
b. That Claimant’s “covered investments” under CAFTA include (i) income generated under the Usufruct, (ii) investment capital and loans committed by RDC to FVG under the Usufruct, and (iii) the value of FVG as the business enterprise operating the Usufruct;
c. That the Lesivo Resolution and subsequent conduct of the Republic of Guatemala pursuant to the Resolution described herein constitute an indirect expropriation of Claimant’s rights in the Usufruct, in violation of CAFTA Article 10.7.1;
d. That through these measures, the Republic of Guatemala violated the minimum standard of treatment of CAFTA Article 10.5 by failing to provide, in accordance with customary international law, fair and equitable
treatment and full protection and security to Claimant’s covered investments;
e. That the Republic of Guatemala has violated the national treatment standard of CAFTA Article 10.3;
f. That the Republic of Guatemala shall pay Claimant $64,035,859 in damages plus compound pre-award interest at the average interest rate paid by Guatemala on its private commercial debt; and
g. That that the Tribunal, pursuant to its power under CAFTA Article 10.26, award Claimant its costs and attorneys’ fees incurred in prosecuting its CAFTA claims.” (para. 248)
According to Respondent, Claimant promised to rehabilitate Guatemala’s entire railway system and deliver a modernized state‐of‐the‐art railway, but did not deliver. It ran its investment through FVG, but had losses every year since its inception because it did not invest the funds necessary to give the railway project a fair opportunity to succeed. It rehabilitated the first phase very poorly and realized that the only investment that could be profitable would be the rehabilitation and successful operation of the railway on the Southern Coast.57.
Respondent explains that this part of the rehabilitation would cost approximately $100 million and Claimant was not able to raise the funds or provide
them itself. By that time, FVG already was on notice that Contract 143/158 had been questioned by FEGUA and it was negotiating with that agency over the terms of a new equipment contract that would cure the defects in the existing one, as well as a number of other contractual disputes. Respondent affirms that these negotiations faltered at about the same time that FVG realized that it could not raise the funds to build the railway in the Southern Coast.58.
Respondent presents the current arbitration as part of a strategy undertaken when Claimant realized that its investment was in a shambles. According
to Respondent: “Claimant’s first step, initiating two local arbitrations against FEGUA – one of which sought to blame the Government for failing to remove squatters from the right of way notwithstanding that FVG had a long‐standing practice of charging rent to these very same squatters, thereby perpetuating the problem of which it complained and despite that the Government was cooperating with the eviction of the squatters 22
including designing a detailed plan to evict squatters along the portion of the right of way that encompassed the Southern Coast.” (para. 6)59.
Respondent refers to a round of negotiations in 2006 after a meeting of Claimant with President Berger. According to Respondent, Claimant and FVG were not prepared or willing to negotiate in good faith because they had no real solution to their failed business venture, and when “they caught wind from an internal government source that the Government was going to declare their equipment contract lesivo to the interests of Guatemala, they initiated their planning for this exit strategy; i.e., this arbitration.” (para. 7)60.
Respondent points out that the very first business day after the publication of the Lesivo Declaration, Claimant and FVG took out a paid advertisement in all of the principal Guatemalan newspapers read by the general public, branding FVG as a “dead man walking” and manufacturing the harm they allege in this case. Furthermore, according to Respondent, Claimant unilaterally abandoned Guatemala and repudiated its obligations under the Usufruct Contracts when it announced on July 6, 2007 that it was discontinuing rail service as of October 1, 2007 and withdrawing financial support from FVG. (Respondent claims that Guatemala had legitimate reasons for initiating the lesividad process, that this process was not the cause of Claimant’s alleged damages, that the lesividad process at issue in this case was initiated after four separate and independent entities had undertaken an objective legal analysis of Contract 143/158, and that the initiation of this internal, administrative process was not in response to pressure from the Guatemalan businessman Ramón Campollo or to favor other national investors at the expense of a foreign investor. According to Respondent, “the Lesivo Declaration was issued in response to the contracts’ inherent illegalities and Claimant’s unwillingness to correct those illegalities in good faith, through a negotiated settlement.” (para. 11)61.
Respondent explains thus the lesividad process in Guatemala: it is “part of the Executive Branch’s inherent powers and of the country’s constitutional system of checks and balances which pre‐dated Claimant’s investment. It provides the executive branch with the power to declare an administrative act that is harmful to the public 23
interest lesivo, thereby opening the door for that executive branch determination to be tested in the courts. Private parties affected by the declaration may challenge it in the court proceeding and have the opportunity to convince the courts to reject the executive branch´s determination and to seek and receive compensation in the event that the court upholds that determination. Until the judiciary makes a determination that a particular contract or action is injurious to the interests of the State, the private party retains full rights in the contract notwithstanding the President’s Lesivo Declaration.” (para. 12)62.
It is Respondent’s contention that the Lesivo Declaration did not cause the harm that Claimant alleges since the declaration addressed only Contract 143/158 and not Contract 402 that, by Claimant’s own admission, was the core value of its investment. Respondent points out that any harm was attributable to Claimant’s own acts and Claimant cannot shift to Guatemala the responsibility for any customer alarm or confusion that they caused.
Claimant contests Respondent’s insistence that FVG breached its railway rehabilitation obligations under Contract 402 and points out that it misrepresents what those obligations were and ignores that FEGUA confirmed by official letter that FVG had complied with its rehabilitation obligations, that FVG’s lack of profitability was largely due to Respondent’s failure to fulfill its own contractual obligations, otherwise FVG would have been profitable on a cash flow basis, and that FVG’s failure to obtain sufficient financing and outside investment to rebuild and reopen the South Coast corridor was caused by Respondent’s failure to remove squatters from the South Coast right-of-way.64.
Claimant alleges that Respondent misrepresents the circumstances and motivations behind the process which culminated in the Lesivo Resolution. According to Claimant, the lesivo process was “secretly initiated and pursued by Respondent not out of concern about any alleged legal infirmities in the usufruct equipment contracts (Contracts 143/158), which the Government both internally and externally24
acknowledged were ‘in effect.’ Rather, as confirmed by Respondent’s own witnesses and records, the real story is that the alleged legal defects in Contracts 143/158 – which Respondent caused and could have easily resolved on its own without any need for ‘negotiation’ with FVG – were utilized by Respondent as a mere pretext to issue the Lesivo Resolution, which Respondent then proceeded to use as a means to try to coerce FVG to renegotiate and surrender its rights under the Usufruct Contracts. The Government’s non-negotiable demands to FVG in exchange for withdrawing the Lesivo Resolution included, inter alia, (i) requiring FVG to put up a $50 million investment to re-open the entire South Coast corridor or surrender its rights to ‘other [interested] investors’ such as Ramón Campollo; (ii) relieving the Government of its contractual obligations to remove squatters and make payments to the Railway Trust Fund; (iii) requiring FVG to drop its local breach of contract arbitrations against FEGUA; (iv) increasing the canon fee payments to the Government under the Usufruct Contracts; and (v) forcing FVG to surrender certain railway equipment that had been granted in usufruct. Indeed, Respondent’s witnesses in this case freely admit the
Government’s bad faith motivation behind the Lesivo Resolution.” (para. 2)
Claimant explains that it did not give in to the Government’s demands. Instead, like any responsible business would, Claimant issued a press release
protesting the Government’s hostile and improper action. Claimant argues that Respondent’s litigation-inspired theory ignores that: “in addition to Claimant’s press release, there were countless newspaper, television and radio reports in Guatemala concerning the Lesivo Resolution in the days and weeks after it was published. These reports did not once quote or rely upon Claimant’s press release, but, instead, reported the statements of President Berger, the Attorney General and other senior Government officials which trumpeted the Government’s action and implacable hostility to FVG. It was the Government’s Lesivo Resolution and accompanying public statements which poisoned and destroyed FVG’s relations with its existing and potential customers, suppliers, lessees, investors and bankers.” (para. 3)66.
According to Claimant, President Berger made clear in his public statements that “the reason he declared lesivo was not because of any legal defects in
the usufruct equipment contracts, but because FVG had not re-opened the South 25
Coast corridor. He and other Government officials also made clear that they were going to take away the railway usufruct from FVG unless FVG acceded to the
Government’s extortionate demands, including putting up $50 million within 90 days to re-open the South Coast corridor.” (para. 4)67.
Claimant argues that Mr. Campollo’s blanket denial of knowledge of or interest in the railway and Claimant’s Usufruct rights is not credible and is contradicted by: “(1) the several actions and statements of his acknowledged representative and agent, Héctor Pinto; (2) his financial and personal connections with the family of President Berger; and (3) the fact that, based upon his own business experience in operating a railroad and in the Guatemala commercial real estate sector, he was a direct competitor of Claimant.” (para. 5)68.
Claimant requests the Tribunal to determine:
“a. That the Lesivo Resolution and subsequent conduct of the Republic of Guatemala pursuant to and in furtherance of the Lesivo Resolution constitute
an indirect expropriation of Claimant’s covered investments, in violation of CAFTA Article 10.7;
b. That, through these measures, the Republic of Guatemala violated the minimum standard of treatment of CAFTA Article 10.5 by failing to provide, in
accordance with customary international law, fair and equitable treatment and full protection and security to Claimant’s covered investments;
c. That the Republic of Guatemala has violated the national treatmentstandard of CAFTA Article 10.3;
d. That the Republic of Guatemala shall pay Claimant $63,778,212 in damages plus compound pre-award interest at 9.34%; and
e. That the Tribunal, pursuant to its power under CAFTA Article 10.26, award Claimant its costs, attorneys’ fees and administrative expenses incurred in
prosecuting its CAFTA claims.” (para. 580)
Respondent recognizes the parties continue to disagree on many factual and legal issues, but affirms that the Tribunal, in discharging its Article 48(3) obligation need only decide fundamental issues. It attempts to limit its responses to the essential claims and defenses that the Tribunal must decide.2670.
According to Respondent, with respect to expropriation, the Tribunal must determine “whether Claimant has satisfied its burden of demonstrating that the preliminary determination by the Executive branch that Claimant’s equipment contract (“Contract 143/158”) was lesivo interfered with all of its contracts, to the extent that Claimant’s entire investment was ‘worthless’.” (para. 4, emphasis in the original omitted)71.
It is Respondent’s contention that Claimant has failed to demonstrate the link between the declaration of lesividad of Contract 143/158 and the real estate rights of Claimant under Contract 402, that the Claimant itself estimates to be the source of 92% of potential income. Absent this link, Respondent argues that Claimant cannot prove its assertion that the Lesivo Declaration has caused the financial and commercial decimation of Claimant’s real estate operations. Respondent points out that the evidence demonstrates that Claimant’s income under the real estate contracts it had before the Lesivo Declaration has increased since the issuance and publication of that Declaration.72.
Respondent rejects Claimant’s argument that the lesividad process was motivated by the intent to force Claimant to surrender its right under the Usufruct Contracts to benefit other investors, in particular Mr. Campollo. Respondent argues that there is no evidence to support that argument: “If Guatemala’s intention really was to take away Claimant’s rights under Contract 402, why would it use an option that did not target Contract 402 specifically? Or one — which Claimant characterizes as a ‘legal black hole’ — that had no immediate effect, could be overturned by the Contencioso Administrativo Court, and would leave the property in Claimant’s possession pending the Contencioso Administrativo Court decision?” (para. 6) In any case, points out Respondent, Claimant has retained possession of the right‐of‐way and the railway equipment both legally and factually and has continued to collect revenues from its right‐of‐way usufruct.73.
In terms of fair and equitable treatment, Respondent thus frames the question for the Tribunal’s decision: “whether, in light of the facts, information, and resources that Guatemala had at the time, the initiation of the lesividad process falls 27
below the minimum standard of treatment under customary international law” (para. 7, emphasis in the original omitted).74.
Respondent argues that Claimant articulates the incorrect legal standard under CAFTA and that it has failed to prove that Guatemala’s conduct fell below the correct standard of treatment as well as the heightened and inapplicable standard on which Claimant relied.75.
As to the obligation to afford the investment full protection and security, Respondent argues that the question to be determined is not whether Guatemala’s efforts with respect to interference would have been sufficient to satisfy its contractual obligations to clear the right‐of‐way of squatters, but whether “based on Guatemala’s resources, its legal framework, and the facts that were known at the time, the question is whether the measures that Guatemala took to protect Claimant’s investment were reasonable.” (para. 9 emphasis in the original omitted) Respondent contends that Claimant has failed to demonstrate that Guatemala’s actions fell short of its commitments under CAFTA. According to Respondent, the facts show that Guatemala has at all relevant times taken reasonable steps to protect Claimant’s investment, both before and since the Lesivo Declaration.76.
Respondent frames the question to be determined by the Tribunal in respect of national treatment as to “whether Claimant satisfied its burden ofproving that: (1) Claimant and Ramón Campollo were “in like circumstances;” and (2) whether Claimant actually received less favorable treatment as compared to Ramón Campollo.
If the Tribunal finds that Claimant has met its burden with respect to both of these points, it must also consider whether there were any reasons that could justify any proven disparate treatment” (para. 10)It is Respondent’s contention that Claimant has failed to prove that: (i) RDC, a commercial railroad operator in Guatemala, and Ramón Campollo, who is primarily in the business of sugar production, whose sugar operation in the Dominican Republic contained a non‐commercial, very small rail system for internal company use only, were competitors in the railroad business in Guatemala, and (ii) Mr. Campollo was RDC’s competitor for use of the real estate rights arising from the right‐of‐way usufruct. 28
Respondent argues further that there is no proof that Claimant received less favorable treatment as compared to Mr. Campollo in these sectors.77.
As to Claimant’s damages allegations, Respondent argues that Claimant attempts “to be placed not in the same position it would have been had the Lesivo Declaration never been issued, but in the position it would have been if it had not invested its money in FVG and instead had done so in a prosperous and profitable enterprise that generated a whopping 12.9% annual return on equity.” (para. 13) Respondent asserts that the question for the Tribunal to decide is “whether Claimant proved that: (1) it suffered quantifiable, compensable damages; and (2) whatever damages it suffered were proximately caused by the Lesivo Declaration.” (para. 13, emphasis in original omitted) Respondent contends that Claimant did not fulfill its burden of proof, and that the evidence shows that its investment in FVG was worthless long before the Lesivo Declaration was issued and that the Declaration had no legal or practical effect on Claimant’s investment.78.
Respondent concludes with the request that the Tribunal dismiss all Claimant’s claims.
For convenience of reference, it will be useful to reproduce here the relevant provisions of CAFTA:
“Article 10.7: Expropriation and Compensation
1. No Party may expropriate or nationalize a covered investment either directlyor indirectly through measures equivalent to expropriation or nationalization
(a) for a public purpose;
(b) in a non-discriminatory manner;
(c) on payment of prompt, adequate, and effective compensation in accordance with paragraphs 2 through 4; and
(d) in accordance with due process of law and Article 10.5.”
Article 10 must be interpreted in terms of Annexes 10-B and 10-C. Annex 10-B on “Customary International Law” provides:29
“The Parties confirm their shared understanding that “customary international law” generally and as specifically referenced in Articles 10.5, 10.6, and Annex
10-C results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 10.5, the customary
international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and
interests of aliens.”
Annex 10-C reads as follows:
“The Parties confirm their shared understanding that:
1. Article 10.7.1 is intended to reflect customary international law concerning the obligation of States with respect to expropriation.
2. An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property
interest in an investment.
3. Article 10.7.1 addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through
formal transfer of title or outright seizure.
4. The second situation addressed by Article 10.7.1 is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.
(a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation requires a case-by case, fact-based inquiry that considers, among other factors:
(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and
(iii) the character of the government action.
(b) Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”
The Tribunal will first consider Respondent’s argument that Claimant cannot claim expropriation of usufruct rights that FVG does not own. It will then
proceed to analyze the nature of the Lesivo Declaration, its public purpose, whether the Government interfered with reasonable investment backed expectations and their 30
economic impact on Claimant’s investment. To the extent necessary, the Tribunal will complement the summary of the parties’ arguments on specific matters.
Respondent has argued that Claimant cannot claim expropriation of usufruct rights that FVG does not own. For purposes of considering Respondent’s
argument it will be useful to recall the reasoning which led the Tribunal to the dismissal of the objection ratione materiae in the Second Decision on Jurisdiction:
“141. It is well established before this Tribunal that Contract 41 was legally tendered by the Government and that the only bid was submitted by FVG and
accepted by Respondent on December 16, 1997. Contract 41 was signed more than a year later, on March 23, 1999, but never approved by Acuerdo
Gubernativo and Congress, both approvals being conditions for Contract 41 to become effective.
142. Shortly after signature of Contract 41, on April 12, 1999, FEGUA authorized FVG by letter to use the towing and traction equipment at the request of FVG. The authorization was renewed in 2000 at FVG’s request. The letter of FVG, dated April 16, 2000, explains that the requested equipment is needed by FVG to fulfill its obligations under Contract 402 pending the approval of Contract 41, and then it states: ‘The use of the railway equipment we are hereby requesting is subject to the same terms and conditions as apply to the agreement mentioned in item b) above [Contract 41], and will not in any way amend or affect the agreement already mentioned.’
143. Thus notwithstanding that Contract 41 was never approved, FEGUA let FVG operate the equipment to the extent that, shortly after signature of Contract 41 and three days after FEGUA authorized the use of the railway equipment, on April 15, 1999, train service was established between
Guatemala City and El Chile. It is worth noting that at that time Contract 402 was not yet effective; it became effective more than a month later on May 23,
1999, which implies that the section Guatemala City-El Chile of the railway was rehabilitated before Contract 402 was effective. In December 1999 train
service was extended to Puerto Barrios and Puerto Santo Tomás. FVG used the equipment and paid the corresponding canon under the terms of Contract 41 as if it would have been in effect until signature of Contract 143. Afterwards, the equipment continued to be used and the higher canon provided for in Contract 143 was paid and accepted until after the publication of the Lesivo Resolution.
144. The Tribunal concludes that both parties to the Contract – FEGUA and FVG – conducted themselves substantially as if the terms of Contract 41 had been in effect – as they have done since the beginning of their relationship in the case of Contract 402. Contract 143 was entered into four years after Contract 41 when it was evident that Contract 41 would not come into effect. The reasons for declaring the Equipment Usufruct Contracts lesivo as stated in the “Exposición de Motivos” of the Lesivo Resolution are substantially the same as those that prevented Contract 41 becoming effective (lack of approval by Acuerdo Gubernativo and by Congress) or relate to the need to follow the procedures for public contracting that, notwithstanding the fact that they had already been followed by FVG and FEGUA in respect of the same equipment in the case of Contract 41, had been to no avail to secure the approvals entirely under the Government’s control.
145. Respondent has argued that FVG was fully aware of the approval conditions of Contract 143 when it entered into it since its objective was the same: the usufruct of the equipment. Respondent has denied that FEGUA and FVG entered into Contract 143 at the Government’s request. Who took the initiative to sign a new contract is irrelevant to the Tribunal’s conclusion. FEGUA and FVG were faced with a de facto situation which they tried to reflect in Contract 143, and FEGUA benefited from a 25% increase in the canon stipulated in Contract 41.
146. Even if FEGUA’s actions with respect to Contract 41/143 and in its allowance to FVG to use the rail equipment were ultra vires (not ‘pursuant to domestic law’), ‘principles of fairness’ should prevent the government from raising ‘violations of its own law as a jurisdictional defense when [in this case, operating in the guise of FEGUA, it] knowingly overlooked them and [effectively] endorsed an investment which was not in compliance with its law’
147. Based on these considerations, the Tribunal finds that Respondent is precluded from raising any objection to the Tribunal’s jurisdiction on the ground that Claimant’s investment is not a covered investment under the Treaty or the ICSID Convention.”
The Tribunal notes that Article 2 of the Lesivo Declaration instructs and authorizes the Attorney General of the Nation “to undertake and execute all legal measures required in order to cease the binding force of the contract identified above [Contract 143/158] and hold the relevant parties legally accountable, if applicable.” (Emphasis added by the Tribunal) The text shows that Respondent considered that Contract 143/158 was binding; otherwise there would have been no purpose in instructing the Attorney General in these terms. The Tribunal also notes that Respondent recognizes that this is the case in its Counter-Memorial: “[...] because Claimant’s alleged right to compensation is not yet ripe, because the Contencioso Administrativo court has not yet decided the matter and thus Contract 143/158 remains valid and in full force, Guatemala has not violated any duty to pay ‘prompt, adequate and effective compensation.’” (Para. 339) Respondent also states that the court may decide that Contract 143/158 is not lesivo and leave it permanently in effect. (para.265)84.
The Tribunal concludes that FVG’s rights under Contract 143/158 are in effect and could be expropriated by Respondent. Whether the Lesivo Declaration expropriated them and the extent to which it affected Claimant’s investment beyond Contract 143/158 are matters to which the Tribunal now turns. 33
On its face the Lesivo Declaration is a measure adopted by the executive branch where the Government agrees to declare Contract 143/158 lesivo because it causes harm to the State, and instructs and authorizes the Attorney General to take measures to cease its obligatory character. As instructed, the Attorney General filed a lesivo claim with the Administrative Tribunal.86.
After the second hearing on jurisdiction the Tribunal asked the parties, inter alia: “(a) On the assumption (which it is understood is in dispute) that a
declaration of lesividad involves a measure of judgment or discretion, can it really be said that a contract subsequently declared lesivo is unlawful ab initio; (b) Can a contract be declared lesivo as a result of facts occurring after its conclusion? [...]”87. To the first question Respondent replied that a contract declared lesivo by the competent judicial authority is deemed unlawful ab initio. According to Respondent, Guatemala cannot unilaterally declare a contract lesivo and cease performance; the governmental agency concerned must continue to operate under the contract until the Administrative Tribunal declares the contract unlawful ab initio; if it does so, the Administrative Tribunal orders that the parties restore things to their respective positions before the agreement was entered into, thus avoiding any unjust enrichment due to the partial de facto performance of the contract declared lesivo.
Claimant drew a distinction between the concepts of “legality” and “harmfulness to the interests of the State”. Claimant explains that the lawfulness of a
contract is a matter of the law of contracts and not lesividad. According to Claimant, a contract may comply with Guatemalan law and still be harmful to the interests of one of the parties; the legality of a usufruct contract is regulated by the civil law on contracts while the lesividad is a procedure regulated by the Ley de lo Contencioso Administrativo. It is the view of Claimant that “[t]he availability to the State of separate and distinct remedies in the civil and administrative courts to declare a contract void ab initio or voidable due to various legal defects demonstrates that Guatemalan law draws 34
a clear distinction between the ‘legality’ of a contract and ‘lesividad’ of a contract.” Claimant concludes by affirming that the declaration of lesivo should not be based on the technical defects of a contract which can be otherwise remedied but because, in the judgment of the President of Guatemala, “the announced interests of the State upon which the contract is based were capricious or because the terms of the contract were not reasonably related to those announced interests.”89.
Respondent replied to the second question in the negative and explained that “lesividad is determined by legal defects and illegalities relating to the contract’s formation and the terms of the contract as such, and not by supervening causes or subsequent conduct by the parties. This helps to explain why a contract declared lesivo is deemed unlawful ab initio.”90.
Claimant replied substantially in similar terms. According to Claimant, “the nature of lesivo itself and the structure of the procedures concerning the declaration of lesividad, […] indicate that independent facts occurring subsequent to the formation of the contract cannot be considered as a ground for lesivo.” Claimant considers that this view is confirmed by the fact that “the statute of limitations on declaring lesividad runs three years from the date of the contract, not from some subsequent event”, and by the fact that none of the declarations of lesivo over the last 20 years have relied on independent post-execution facts.91.
The Tribunal concludes that: (a) lesivo is unrelated to the performance of either party under the contract declared lesivo; (b) it leaves the rights of the parties unaffected; (c) it is a process that applies only to contracts with the State and its agencies; (d) a declaration of lesivo may or may not be accepted by the Administrative Tribunal; (e) if the declaration is accepted, the defendant would have the possibility to appeal the decision to the Supreme Court; and (f) if the lesivo declaration is confirmed, a lesivo contract is void ab initio.92.
The parties dispute a number of issues: the relationship between legality or irregularity and lesividad;, whether the power to declare lesivo meets the
requirements of due process because the affected private party in an administrative contract is not heard or informed before a declaration of lesividad is adopted by the 35
Government; and whether the President has any discretion once an illegality has been brought to his attention, but to declare it lesivo. The Tribunal will consider these questions in due course.
Claimant has alleged that the intent of Respondent was not to expropriate for a public purpose but to award Claimant’s usufruct rights to Mr. Ramón Campollo or other investors. On the other hand, Respondent has denied any connection between its actions in respect of Claimant’s investment and Mr. Campollo or any other investors. The Tribunal will proceed by recalling the timeline of events and contemporary documentary evidence in its consideration of the disputed facts and the contradictory allegations of the parties.94.
Mr. Campollo and Messrs. Duggan and Senn met in Miami in the offices of counsel to Claimant on December 3, 2004. Both parties agree that the purpose of the meeting was to discuss Mr. Campollo’s potential interest in investing in the railway and rebuilding the South Coast corridor. The meeting was also attended by Juan Esteban Berger, son of the then President Berger. Prior to that meeting, at the request of Mr. Campollo, RDC, through Mr. Duggan, had advised Mr. Campollo on the operation of the railway in his sugar plantation in the Dominican Republic.95.
On February 17, 2005, Mr. Héctor Pinto, who was a member of the Squatters Commission representing the sugar industry and who, according to
Claimant, acted on behalf of Mr. Campollo, sent a letter to FVG with a proposed agreement. Claimant has been unable to locate a copy of the letter and has submitted an email from Mr. Duggan to Mr. Senn which attaches a rough translation in English (Ex C-97). The letter was sent on behalf of Desarrollos G which Claimant considers to be a company owned by Mr. Campollo. Claimant also considers that this proposal is a follow-up to the discussions at the Miami meeting.96.
On March 9, 2005, Mr. Pinto sent by email to FVG a draft contract to be entered into between FVG and Desarrollos G. The email was copied to Juan Esteban 36
Berger and, according to Claimant, the meta-data contained in this document reveals that the last author of the draft was JEB (Juan Esteban Berger).97.
On March 15, 2005, Messrs. Posner, Duggan, Senn and RDC’s President Robert Pietandrea met with Mr. Pinto. According to the testimony of Messrs. Posner, Duggan and Senn, Mr. Pinto stressed that if FVG chose not to collaborate with Mr. Campollo in accordance with the option sent by Mr. Pinto, then Mr. Campollo would take the business with or without FVG. Mr. Pinto was informed that RDC had no interest in Mr. Campollo’s proposal but would be willing to consider Mr. Campollo buying into FVG as an investor or business partner.98.
On April 5, 2005, Mr. Pinto called Mr. Senn and on April 6, 2005, Mr. Pinto sent to Mr. Posner a letter by email attaching a draft contract, supposedly the same document that FVG had already received on March 9. The transmittal letter of Mr. Pinto explains that, as a follow up to the recent meeting during Mr. Posner’s visit to Guatemala, “le envío para su estudio y consideración la propuesta de intención que se ha discutido con Ferrovías durante más de cuatro meses, tiempo durante el cual se adelantaron gestiones preparativas para el restablecimiento del Ramal Sur o Corredor Pacífico, que pretende conectar Puerto Quetzal a [sic] el centro inter modal de transporte de Ciudad del Sur en Santa Lucía Cotzumalguapa.” According to Mr. Pinto, it was of paramount importance to know the opinion on the attached proposal since it was “muy importante iniciar los estudios técnicos de prefactibilidad y la estrategia de desalojo de invasores.”99.
The record of the conversation between Mr. Senn and Mr. Pinto was summarized by Mr. Senn in an email to Mr. Posner on April 6, 2005. Mr. Senn writes: “Héctor called me yesterday saying that regardless of what we decide about signing this document, it can’t be signed now, may be later [...] because of illegalities in our contract.” In the email Mr. Senn characterizes Mr. Pinto as being “obviously Ramón37
[Campollo’s] dirty-jobber” and advises that a counter-proposal be done “directly to Ramón and no-one else to avoid falling in his misunderstandings game.” The message also explains that “Ramón plays a key role within the local sugar industry and he already sent someone last Friday to talk to Freddie Pérez of Expogranel (General Manager of the sugar export terminal at Puerto Quetzal). His message was to hold the project until we finish discussing some illegalities...I felt Freddie [was] a little concerned about the issue but finally [he] agreed to keep moving forward with our project, FVGExpogranel, while handling carefully the relation with Ramón.” (Ex C-100) Mr. Posner advised Mr. Senn to reconfirm RDC’s lack of interest in the proposal sent by Mr. Pinto, but that RDC is open to discuss the counterproposal RDC made at the March 15 meeting.(Ibid)100.
A further meeting of Messrs. Duggan and Senn with Mr. Pinto took place on April 12, 2005.101.
On the same date Dr. Gramajo informed the Legal Coordinator of the Ministry of Communications of the legal issues in respect of Contracts 402, 143/158 and 820.102.
On April 13, 2005, Mr. Pinto informed Mr. Gandara, Vice-Minister of Communications, that the negotiations between the company he represented and FVG had been unsuccessful and requested to be excused from attending further meetings of the Squatter Commission.103.
On April 15, 2005, Messrs. Senn and Duggan met with Mr. J.E. Berger. 104. On the same date, Mr. Campollo informed FVG that he had decided not to participate in the project proposed to him by RDC in Miami. According to Mr. Campollo’s testimony, he signed the letter in front of Mr. Pinto and instructed him not to contact or negotiate with FVG on his behalf.105.
Mr. Gramajo, Overseer of FEGUA at the time, testified that, upon receipt of Mr. Pinto’s letter, he decided not to move forward with the plan to remove squatters from the South Corridor because the sugar industry withdrew its support, including the company represented by Mr. Pinto.38106.
Notwithstanding Mr. Campollo’s instruction, Mr. Pinto continued to contact FVG. On February 28, 2006, a week before the March 7, 2006 meeting with President Berger, Mr. Pinto contacted FVG expressing interest in having a meeting on the use of the railway to connect the planned Ciudad del Sur industrial park development in Santa Lucía with Puerto Quetzal. The last email of Mr. Pinto on this topic is dated July 26, 2006.
On July 28, 2006, Messrs. Montano and Melville separately informed Mr. Duggan and Mr. Posner, respectively, that there was a push within the government to cancel the usufruct and to declare the concession lesivo. According to Claimant, both attributed the action to the doing of Mr. Campollo or that after the concession was cancelled it would be awarded to Mr. Campollo.108.
On September 5, 2006, Mr. Pinto wrote to Emmanuel Seidner, an official working for the Competitiveness Commissioner, informing him that railway service between Puerto Quetzal to Ciudad del Sur would be restored shortly in order to transport sugar to the port. He sent a blind copy to Mr. Senn. The authenticity of this communication has been questioned by Respondent but Claimant has produced the original email from Ms. Váldez, Mr. Pinto’s secretary, to Mr. Senn, attaching Mr. Pinto’s letter to Mr. Seidner. (Ex C-116) Claimant has argued that Ciudad del Sur was a project of Mr. Campollo. Mr. Campollo has testified that by that time this project had been abandoned for more than a year.109.
The Tribunal observes that it has not had the benefit of Mr. Pinto’s testimony because he is now deceased. The contemporaneous documents written by Mr. Pinto or its interlocutors show his persistent interest in the Southern Corridor whether acting on behalf on Mr. Campollo or on his own account. He was aware of the thinking of FEGUA on the illegalities of Contract 143 before Mr. Gramajo wrote to the Legal Coordinator at the Ministry of Communications. It is evident from Mr. Gramajo’s testimony that he regarded Mr. Pinto at least as a representative of the sugar industry, if not of Mr. Campollo. The evidence also shows that Mr. Campollo had an interest in the South Corridor and RDC’s representatives met him in Miami when seeking interested parties in restoring that segment of the railroad. He later desisted from 39
pursuing the matter further as stated in his letter of April 15, 2005 (Respondent, Exhibit R-173) and acknowledged by FVG on April 18, 2005 (Respondent, Exhibit R-174). It is significant in this respect that the Usufruct Contracts continue to be in effect more than five years after the Lesivo Declaration without any attempt by Respondent to hand over the railway concession to Mr. Campollo.110.
To conclude, notwithstanding the emphasis placed by Claimant on Mr. Campollo being the mover behind the scenes who allegedly would ultimately benefit from the demise of the Usufruct Contacts, the Tribunal is not persuaded by the evidence produced in support of Claimant’s allegations. That the purpose of the Lesivo Declaration was to deprive Claimant of its usufruct rights for the benefit of Mr. Campollo has not been proven.
On the other hand, it is clear from the President Berger’s statements that Respondent was dissatisfied with the lack of further investment in the railroad by Claimant and that the Lesivo Declaration was used as a tactic to pressure Claimant to invest more, irrespective of its obligations under Contract 402, or forfeit its investment in favor of other unspecified investors. This is a matter that the Tribunal will address when considering the alleged breach of the minimum standard of treatment.
Claimant asserts that the Lesivo Declaration has undermined, inter alia, the following expectations: “(i) RDC’s expectation that FVG would have the exclusive right to use the rolling stock during the entire 50-year term of the Usufruct; (ii) RDC’s expectation and understanding that Deed 143 was awarded, executed and approved in accordance with Guatemalan law; (iii) RDC’s expectation and understating that the economic terms of Deeds 143/158 were acceptable to the Government; (iv) RDC’s expectation and understanding that Deeds 143/158 adequately protected the Government’s purported ‘historical and cultural patrimony’ interests in the rolling stock; (v) RDC’s expectation that the Government would, pursuant to its obligation under40
Deed 402, not ‘hinder the rail and non-rail activities of [FVG]’, and ‘protect the exercise of [FVG’s] rights against third parties that may intend to have or want to exercise a right on the real estate granted as onerous usufruct’; (vi) RDC’s expectation and understanding that any disputes between it or FVG and the Government would be addressed and resolved through negotiation or binding arbitration rather than unilateral Government action; and (vii) RDC’s expectation and understanding that Guatemala would not take any precipitous or arbitrary actions against it that would serve to harm RDC’s investment or FVG’s business, especially where there is no contention that FVG has breached any obligation under the Usufruct Contracts and there is no evidence that Deeds 143/158 were injurious to the interests of the State.” (Memorial, para. 153)113.
Respondent argues that Claimant could not expect that Contract 143/158 would not be challenged under Guatemalan law. Respondent refers to the experience of Claimant with public contracting in Guatemala and to the fact that all three contracts – 402, 820 and 41– were subject to public bidding. Respondent asserts that “Claimant was acutely aware that the lack of Executive approval could lead to the invalidity of a Contract, this being the very reason why Contract 41 never entered into force; a fact that Claimant concedes. That it entered into Contract 143/158 and, in violation of Guatemalan law, tried to contract away this legal requirement cannot create a legitimate expectation that the absence of this legal requirement would not later be challenged by the Government using a legal remedy that existed when Claimant entered into this Contract.” (Rejoinder, para. 58)114.
Respondent contends that “performance of a contract cannot preclude Guatemala from utilizing pre-existing measures, within their time limits, to remedy legal defects under that contract. A bright-line ruling that a State is precluded from questioning the validity of a contract because it had performed under that contract - which, when taken to the extreme, could prevent even contracts initiated under coercion or through bribery- would severely and improperly restrict State sovereignty.” (Rejoinder, para. 60)41115.
Respondent insists that the question for the Tribunal is not whether Contract 143/158 is lesivo but whether the Government acted reasonably in reaching the conclusion that it was lesivo and in issuing the Declaration. Respondent contends that “even if these officials [Government officials who studied whether Contract 143/158 was lesivo] in good faith reached an incorrect legal determination about whether this contract was lesivo – which Guatemala contends they did not – that does not constitute an expropriation under CAFTA or a violation of any legitimate expectation Claimant may have. Claimant cannot have a legitimate expectation that the Government would make no mistakes in assessing Claimant’s legal rights under the subject contract (Rejoinder, para. 64)
It is reasonable to argue that an investor, or any party to a contract, may not have legitimate expectations that a government would not make mistakes in assessing one’s legal rights. This is not the issue. The question is whether, if mistakes are made, other parties who had acted on such mistakes in good faith and to their own detriment, should have the right to expect that the party who made the mistake would bear the consequences.117.
In the instant case Claimant participated in the bidding for three contracts which it won. The first two were approved by acuerdo gubernativo while the third, Contract 41, was signed but never approved. At the second objections to jurisdiction phase, the Tribunal asked the parties:
“(e) Why was Contract 41 never approved? Why did each side proceed under Contract 41 (and then Contracts 143 and 158) as though there was a legal contract in place?” (Second Decision on Jurisdiction (para. 91)
Respondent replied that the reasons for the lack of approval of Contract 41 “remain essentially unclear based on the evidence of record.” Respondent noted that “Ferrovías never utilized the legal remedies open to it in such circumstance. Respondent emphatically denies that the parties ever considered that Contract 41 entered into force or operated as if it were in force. On the other hand, Contracts 143 42
and 158 are “technically in force and must be observed by the parties – notwithstanding its [sic] illegalities – at least until such time as the Contencioso
Administrativo court decides whether those Contracts are lesivo and should be declared null ab initio”. (Second Decision, para. 104)119.
In turn Claimant replied that:
“it is not correct to state that Contract 41 was never “approved” by the Government since the Government had approved and published the bidding
terms and conditions. At most, according to Claimant, it can be argued that Contract 41 was not ratified by the President. Claimant also observes that,
“Despite the Government’s purported position that such ratification was necessary and essential, it never provided FVG with any reason or explanation as to why it did not or could not obtain ratification […] Even to this day, FVG does not know or understand why the Government never obtained Executive ratification of Contracts 41 and 143, and Respondent’s witnesses have certainly not offered any logical or credible explanation for the Government’s failure to do so.” (Second Decision, para. 105. Footnotes omitted)
To this day the Tribunal has not been given any explanation for the absence of ratification of Contract 41 by the Respondent. Absent such an
explanation, in its view, in a situation where three contracts are let that relate to the same operation, an investor who had won all three, two of which had been approved by the Respondent or its agencies, could reasonably expect that the third contract would also be ratified. In this respect the Tribunal observes, as it did in its Second Decision on Jurisdiction, that notwithstanding that Contract 41 was never ratified by acuerdo gubernativo, FEGUA let FVG operate the equipment to the extent that, shortly after signature of Contract 41 and three days after FEGUA authorized the use of the railway equipment by an exchange of letters with FVG, on April 15, 1999, train service 43
was established between Guatemala City and El Chile. It is also worth noting that at that time Contract 402 was not yet effective; it became effective more than a month later on May 23, 1999, which indicates that the section Guatemala City-El Chile of the railway was rehabilitated before Contract 402 was effective. This factual context shows that both parties moved to implement the rehabilitation of the railroad and restoration of service once the contracts were awarded and signed.121.
The arrangement to use the equipment through exchanges of letters lasted until 2003 when Contract 143 was signed. According to Respondent, Claimant was aware of the need of the acuerdo gubernativo because of its participation in the bidding of Contract 41 and, therefore, could not have a legitimate expectation that the contract would not be declared lesivo because of lack of compliance with Guatemalan law.122.
The Tribunal notes that Claimant has argued that, while the bidding conditions required the ratification of Contract 41 by acuerdo gubernativo, it does not follow that for the type of equipment covered in Contract 143 and given that FEGUA is an autonomous, decentralized agency, Guatemalan law actually requires ratification by acuerdo gubernativo. Respondent disagrees and the Tribunal does not need to decide between the two positions, it nevertheless notes that there are credible arguments based on the laws of Guatemala to suggest that Contract 143 may not have required acuerdo gubernativo. The Tribunal further notes that, although the Government never bothered to ratify Contract 41, it benefited from the re-opening of the railway service with the equipment leased through the exchanges of letters on Contract 143/158, and FEGUA accepted payment of the canon for the use of the equipment without protest. The Attorney General’s opinion of August 1, 2005 points out the special situation of FEGUA as an institution subject to the State’s control for purposes of contract
approvals: “[...] in accordance with the Government Contracts Law [Ley de Contrataciones del Estado], the prior contract [Contract 41] should have been
approved by the Board of Directors, but given that the entity is being overseen, we face a sui generis case not provided for in the Procurement Law.” (Ex. R-15, para a)) In this situation it is a reasonable analogy to consider that the Overseer of FEGUA replaced FEGUA’s Board, rather than the President of Guatemala doing so. (Mayora 44
Second Opinion, para. 3.4.3) As for the lack of public bidding, the equipment covered by Contract 143 was substantially the same as that included in Contract 41, and FVG had squarely won the bid for this contract. Respondent was well aware that the railway equipment was needed to run the railroad. Notably because of the narrow gauge of the railroad track, the equipment could not be used anywhere else nor was it practical or economically feasible to bring suitable equipment from somewhere else. Respondent also accepted and approved at the highest level (including Congress) Contract 402, by which FVG reserved its right to opt out of this contract if it did not get the railway equipment. FVG needed the equipment to fulfill its obligations under Contract 402 and FEGUA confirmed that it had fulfilled its obligations under that contract providing service with equipment leased under the exchange of letters. In those circumstances,
in the Tribunal’s view, it was legitimate for the investor to believe that its actions and those of its counterpart were not harmful to the interest of the State. The investor was providing a service which at the highest levels Government had decided to privatize and which in state hands had already irretrievably broken down. There was nothing, at the time the contracts were concluded, to suggest that they were contrary to the interests of Guatemala. On the contrary, they were procured through competitive bidding, the terms of which were prepared by the Government itself.123.
In the Tribunal’s view, the expectation of Claimant to have a legally valid contract was not misplaced. It was created by the actions of Respondent and of its agency, FEGUA.
Claimant describes the impact of lesivo as follows:
(i) It caused a critical number of FVG’s railway customers to refuse to continue to do business with FVG;
(ii) It caused FVG’s principal suppliers of goods, services and short-term financing to significantly reduce or eliminate their credit terms and/or services to
(iii) Potential new customers, lenders, investors and joint venture partners immediately backed away from negotiations and discussions with FVG after
having previously expressed interest in doing business with FVG; and
(iv) Local courts, police and municipalities consistently relied upon the Lesivo Resolution as a basis to deny protection to, issue rulings against and allow theft
of and vandalism against FVG’s Usufruct property.” (Memorial, para. 133)
Respondent disputes that the Declaration had any such effects and indicates that, in any case, the Declaration affected only Contract 143/158 and not
Contract 402 which Claimant considered to be the core of its investment. Respondent recalls that FVG could terminate Contract 402 only if it could not acquire the railway equipment pursuant to a separate bidding process and as a consequence would not be able to comply with the purposes of that contract. Respondent presumes that this would require Claimant to show that it could not acquire the equipment elsewhere. Respondent concludes in respect of Contract 402 that Claimant’s argument that it could no longer operate under Contract 402 if it lost the right to use FEGUA’s equipment is without merit and the Lesivo Declaration had no effect on Contract 402.126.
According to Respondent, the mere initiation of the lesividad process did not interfere with Contract 143/158 in law or in fact and, if Claimant suffered damage, it was due to Claimant’s own actions in publicizing the Declaration. Respondent points out that it did not hold press conferences or take out pre-prepared press releases in all the popular Guatemalan newspapers.127.
Respondent maintains that it negotiated in good faith to cure the defects of Contract 143/158 and that Claimant squandered those opportunities. In particular Respondent refers to FEGUA’s proposal to FVG of August 24, 2006. (Ex. C44) In addition, Respondent asserts that Claimant bears responsibility for publishing statements that pre-judged the result of the judicial review of Contract 143/158 before it began. Respondent concludes on this point that “to the extent Claimant suffered any damages or lost business as a result of the Lesivo Declaration, it was a result of its own misguided public relations strategy, and without any encouragement or help from Guatemala. In essence, Claimant created a self-fulfilling prophecy by repeatedly informing the country and its investors that it was ‘dead man walking’, and risky business partner” (Counter-Memorial, para. 273).128.
Respondent argues that even if the Tribunal were to find that the Lesivo Declaration and subsequent acts interfered with Claimant’s investment such 46
interference was not substantial. Referring to the abundant case-law on this subject, Respondent contends that the measures equivalent to expropriation must be not mere restrictions but of “such magnitude as to ‘annihilate’ the investment, ‘radically deprive’ Claimant of the economic use and enjoyment of its investment, ‘neutralize’ the benefits, economic value of the use enjoyment or disposition of the investor’s property, render Claimant’s property rights ‘useless’ due to a ‘substantially complete deprivation’ of the economic use and enjoyment of rights to property or ‘destroy’ the business in question” (Counter-Memorial, para. 317, footnotes omitted). Respondent affirms that Claimant has not shown that the Lesivo Declaration had any of these effects.129.
Respondent refers to Claimant’s own statements in the Memorial to the effect that “RDC’s investment in the rehabilitation of the railroad was wholly
unconnected to the profits FVG would have earned over the life of the Usufruct from its program to lease the right of way and adjacent real estate parcels for non-railway purposes”, and concludes that the claim of substantial interference is unsustainable because the Lesivo Declaration did not deprive Claimant of its rights under the most lucrative component of its investment, Contract 402. Furthermore, as defined by Claimant, the investment comprises Contracts 402, 41, 820 and 143/158 and therefore the Lesivo Declaration relates to only a small portion of its investment.130.
Respondent insists that any loss of railway customers was due to Claimant’s press campaign, and to the fact that it ended railway service in 2007.
Respondent points out that all agencies and branches of the Government have acted consistently with the understanding that Contract 143/158 was still in effect. Respondent refers to several examples: the Administrative Court declined a request in 2007 and in 2008 to grant injunctive suspension of Contract 143/158, “thereby recognizing that FVG retained its rights under that agreement.” (Counter-Memorial, para. 325); and the police and municipalities have continued “to uphold the validity of Contract 143/158 (and 402) and have continued to evict squatters from the land.” (ibid.)47131
. Respondent adds that, if Claimant suffered any interference, it is not irreversible or irrevocable and, therefore, not permanent because the Lesivo
Declaration has not been confirmed by the Administrative Tribunal. Respondent reiterates that the Lesivo Declaration is devoid of legal effect and only the
Administrative Tribunal has the power to declare Contract 143/158 null and void for lesividad. Respondent emphasizes that Claimant retains full ownership and
possession of the rights granted pursuant to each of the Usufruct Contracts and remains in possession of the railway equipment contemplated under Contract 143/158.132.
Claimant points out that Respondent linked the issuance of the Resolution to the alleged failure to comply with its rehabilitation obligations under
Contract 402 and its unwillingness to surrender substantial rights under that contract. Claimant argues that the fact that it would not need FEGUA’s equipment for the South Coast segment is irrelevant because, if FVG did not have that equipment, it could not fulfill its performance obligations under Contract 402 and “had the Government taken away the FEGUA equipment from FVG, FVG could have immediately exercised its right under Clause 18 of Contract 402 to terminate that contract without further liability or obligation” (Reply, para. 261).133.
Claimant argues that Respondent did not, in the weeks after the issuance of the Lesivo Declaration, disavow any of its statements regarding its intent to use the Declaration to force FVG to amend Contract 402 – under the threat of terminating the Usufruct Contracts and taking the entire railway – because FVG would not be able to provide railway services. According to Claimant this is how the action of Respondent was perceived by current and potential customers, suppliers and lenders.134.
Claimant recalls that the case law requires substantial deprivation or impairment of the investor’s economic rights or reasonably expected economic
benefits. Claimant argues that the fact that FVG continues to earn income from one long-term property lease and four right-of-way easements does not show that Claimant has not been substantially deprived of the expected economic benefits of its investment. Claimant emphasizes that both the lease and easements date back from48
before the Lesivo Declaration and that it has not been able to secure any additional ones.135.
Claimant denies that its press release caused or contributed to any losses of FVG and contends that the evidence shows that the actions and public statements of the President, the Attorney General and other high officials caused FVG to be perceived as a dead man walking.136
. Respondent insists in its Rejoinder that Claimant has failed to show that Guatemala substantially interfered with its investment. Respondent points out that Claimant had conceded in its Reply that the bulk of its income came from real estate rights granted pursuant to Contract 402, that RDC’s investment in the rehabilitation of the railroad was unconnected to the profits FVG would earn over the life of the usufruct from real estate leases, that the records show that real estate income has increased since the Lesivo Declaration, that the equipment covered by Contract 143/158 could be used only within Phase I of the project. Furthermore, Respondent points out to the limited evidence, as stipulated by Claimant’s counsel, supporting the allegations of Claimant in respect of the effect of the Lesivo Resolution on customers, suppliers or lenders whether current or potential. Respondent also points out that Claimant’s customers continued to do business with Claimant or would have done business with Claimant, if Claimant had not voluntarily ceased operations in 2007.137.
Respondent insists on the possibility of the Lesivo Declaration being overturned, and the fact that in the meantime the railway equipment remains in the hands of FVG to support its argument that the Declaration had no permanent or lasting effect. According to Respondent, “Claimant’s argument boils down to a suggestion that the multi-year length of the proceedings is alone sufficient to prove its claim.” (Rejoinder, para. 82) Respondent also insists in the lack of a causal link between the Lesivo Declaration and the alleged damage to Claimant’s investment.138.
According to Respondent, “it is not unreasonable to conclude, and is likely a higher probability, that FVG was pleased to seize on the Lesivo Declaration as an excuse to close an unprofitable business. As far back as the annual report for 2002, FVG made clear that the fiber optic contracts that it anticipated in its business plan had 49
not materialized (due to no fault of Guatemala), leaving a large hole in its revenues from leasing activity – activity that Claimant says represented 92 percent of the expected benefits from its investment. And as made clear in the Counter-Memorial, the writing was on the wall that Claimant’s investment was doomed to fall well before the Lesivo Declaration was published, because, Respondent argues, Claimant itself acknowledged that it needed approximately US$100 million to restore the railway in the Southern corridor of Guatemala in order to make its venture profitable and that it did not have any viable source of funding to obtain this capital. Without this investment, Claimant was doomed to more years of continuous losses, and needed capital infusions by the shareholders of FVG to keep the company from sinking into bankruptcy. If ongoing capital infusions from FVG were needed since profits from the railroad business were non-existent, as they were in fact, Claimant’s economic incentive was to close railway operations as rapidly as possible.” (Rejoinder, para. 98)
The Tribunal will first consider the link between the availability of the equipment and Contract 402; then the extent to which Respondent linked the issues of Contract 143/158 to the overall investment notwithstanding that the Lesivo Declaration addressed only Contract 143/158; and lastly the effect of the Declaration on Claimant’s investment.140.
It is a fact that the right-of-way and the equipment contracts were bid separately. Clause 10(e) of Contract 402 provides for the right of FVG to “Acquire railway and non-railway equipment owned by FEGUA, as it may be convenient for its operations, under the terms of the bidding conditions from which this contract arises.” (Claimant’s translation) Rule 4.1.6 of the bidding rules for Contract 402 in relevant part provides that: “Bidders may inspect the railway equipment and equipment not directly related to the railway owned by FEGUA. Said equipment shall be auctioned at a future date after the adjudication of the Railway Usufruct Contract and the contractor shall have the opportunity to acquire the equipment which he considers appropriate for his operations.” (Translation of the Tribunal) Therefore, the phrase in Clause 10(e) of Contract 402 “under the terms of the bidding conditions from which this contract 50
arises” simply means that the bidder who won the railroad usufruct contract would have the opportunity to bid for the equipment in the future as would other interested parties.141.
In case Claimant could not obtain the railway equipment of FEGUA, Clause 18 of Contract 402 enabled Claimant to terminate it: “III In the event that COMPAÑIA DESARROLLADORA FERROVIARIA, SOCIEDAD ANONIMA is unable to exercise the conferred rights it is entitled to with regards to the railway equipment according to the contract and bidding terms referred to in the second clause of this contract, or notwithstanding, having exercised them, it is not able to acquire the railway equipment in accordance with what is established in the tenth clause of this contract and as a consequence it is not able to comply with the purposes of this contract, for reasons not attributable to it, then it may terminate this contract without any responsibility on its part.” (Claimant’s translation) Respondent has argued that, in the situation foreseen in this Clause, Claimant would need to show that it could not acquire the equipment somewhere else. Claimant has disputed that this is the case. As the Tribunal understands it, the consequence of not fulfilling the purpose of the contract is
directly related to the inability to acquire FEGUA’s equipment, and to no other contingency.142.
The concern of Claimant for a way out in the event described was understandable in light of the terms of Clause 16 of Contract 402: “The Usufructuary’s failure to begin railway restoration and failure to render cargo transportation services under the terms of sections two, three, four, five, and six of the THIRTEENTH CLAUSE of this contract: In the event that the USUFRUCTUARY fails to restore the railway and fails to render cargo transportation services under the terms of sections two, three, four, five, and six of the THIRTEENTH CLAUSE hereof, the Usufructuary shall surrender to FEGUA the real property where the railway yet to be restored is located, and any such property shall no longer be subject to this usufruct.” To comply with its obligations under Contract 402 Claimant needed the equipment of FEGUA, given the narrow gauge of the railroad track and the difficulty of obtaining this narrow gauge equipment elsewhere. Notwithstanding the vicissitudes related to the use of FEGUA’s railway equipment, FVG has never exercised the option of surrender.51143.
Contrary to Respondent’s argument, the facts show that Respondent itself considered the equipment of FEGUA an important element in the negotiation of the alleged illegalities surrounding Contract 143/158. Respondent on numerous occasions in its pleadings has manifested how it has negotiated with Claimant and has made every effort to solve any illegalities. However, this effort came with strings attached which went beyond any such illegalities. In this respect, the Tribunal finds it useful to recall its considerations on the ratione temporis objection in the Second Decision on Jurisdiction:
“133. The lesivo process proceeded in parallel to negotiations of FEGUA with FVG regarding issues in dispute in the local proceedings; to the extent that Claimant was aware of such process, which is disputed by Claimant, it was used to negotiate other pending issues. Suffice here to mention that, in the
settlement proposal communicated to FVG by FEGUA in the meeting of August 24, 2006, of seven items, only the seventh is related to the Equipment Usufruct Contracts. More importantly, the Lesivo Resolution in the “Exposición de Motivos” does not list items such as the conservation of the
historic and cultural patrimony of railway equipment, nor does it list the other six items part of the settlement proposed by Respondent on August 24, 2006.
134. Expressed differently, the grounds for the Lesivo Resolution (“Exposición de Motivos”) even if they had been cured by FVG, would not have satisfied
the conditions of the settlement proposed on August 24, 2006. While this confirms, as argued by Claimant, the use of the lesividad process as an element of pressure to achieve other results which seem unrelated to the lesividad declaration, this does not make the dispute in connection with the Lesivo Resolution and the subsequent conduct of Respondent an integral part of other disputes which may have existed or may still exist in the local arbitration proceedings [...].”
Respondent has asked rhetorically why would it choose the lesivo process if it had other means more certain and straight forward to terminate the rights of Claimant. Only Respondent can answer that question. The fact is that it chose to link 52
the alleged illegalities or irregularities which motivated the Lesivo Resolution to other matters in dispute related to Contracts 402 and 820. The Lesivo Declaration itself focused on Contract 143/158 and without the equipment provided under this contract the train service could not be carried on.145.
Each party blames the other for statements made in the press following the publication of the Lesivo Declaration, which allegedly added to the impact of the Declaration on FVG. Respondent has focused in particular on the paid press release of FVG published on September 4, 2005. It was addressed to FVG’s customers, suppliers, collaborators and the public and reads in part as follows: “This is now more than an investment for us; it is a struggle for justice. Although we have lost faith in the Guatemalan legal and political systems, we remain convinced that the railway plays an important role in a country that abandoned its railway in 1996 and currently does not depend on either unrealistic schemes or government subsidies. For this reason, we will not only continue to advocate for implementation of our business plan as we originally conceived it, but also to fight for the right to do so against a government that has gone out of its way to obstruct our progress by violating the terms of the railroad infrastructure trust and begin something that will ultimately result in the expropriation of our usufruct. This is a commitment we have to our 62 shareholders, our customers and our employees.” (Ex R-105) The statement expressed disappointment but also a willingness to move ahead notwithstanding the difficulties. The news had already been in the press for a few days when FVG’s press release was published. Thus El Periódico published an article on August 30, 2006, with the title “Ferrovías de Guatemala is left without trains” where both Mr. Gramajo and Mr. Senn are quoted, but they spoke in more measured terms than what the title gives to understand and none said what the FVG was left without trains.(Ex. R-104) In fact, the statements by the President and other officers of the Government as reported in the press could be construed to be as damaging as any that Claimant may have issued.146.
To put this matter in perspective, the Tribunal observes, first, that the existence of a dispute between the Government and FVG was known before the issuance of the Lesivo Declaration; for instance, the article in the Siglo XXI edition of September 8, 2006 (Ex. C-136) speaks of a worsening dispute. Second, the lesivo53
process is not a routine procedure and its extraordinary character would have been of interest to the press; it would have been news per se. Third, the statements of President Berger are clear and consistent in linking lesividad to the overall investment of Claimant. Thus on September 5, 2006, the Diario de Centro América reported that the previous day the President had explained that “the declaration of lesividad arises from the fact that the US$50 million investment under said contract did not occur. However, he added, Ferrovías [FVG] has a 90-day term to enter into dialogue with the corresponding authorities.” (Ex. C-131) Similarly in a speech transmitted by El Independiente, Third Broadcast of September 8, 2006 President Berger said: “[...] I am
worried about the size of the company; my concern is that it does not have the financial resources. We do not mean to harm anybody; if it [the company] came today to tell us that it will invest the US$50 million and make the wide gauge work from Tecún Umán to Santa Lucía Cotzumalguapa, which for strategic purposes would move what we sell to Mexico, what comes from Mexico, and what goes to our ports, we would sit at the table. I am surprised because that was the 90-day arrangement and (unintelligible 01:18), they can invest, and we fully supported them. [...]” (Ex. C-132) The 90-day term – at least in the statement quoted first – is clearly related to the 90- day period that the Government has to file the lesivo claim with the Administrative Tribunal from the day of publication of the Lesivo Declaration.147.
Respondent has played down the effects of the Declaration because Claimant to this day retains the equipment concerned and its rights under Contract 402. But the President’s declaration that a contract which is an integral part of an investment is harmful to the interests of the State is a powerful tool that creates at least uncertainty in the minds of users, existing or potential. The negative connotation of being associated with a company whose contract with the Government is considered lesivo by agreement of all members of that Government cannot be discounted. Furthermore, the uncertainty created by the Lesivo Declaration may last for a considerable period of time. Even if the claim of lesivo would eventually be dismissed, it would be, from a business point of view, difficult, if not impossible, to return to the situation ex ante.54148.
Claimant has placed particular emphasis on the similarities of the Shufeldt case with the dispute before the Tribunal. In Shufeldt a concession contract was terminated by legislative decree signed by the President of Guatemala because it was harmful to the interests of the State. According to Claimant, the grounds for the measure taken by Guatemala to terminate the concession after six years of having benefited from it, bear remarkable similarity to those adduced by Respondent in the case of Contract 143/158 -inter alia, lack of authority of the Minister of Agriculture to enter into the concession contract, lack of approval by the National Assembly, no public bidding, etc.- Respondent has pointed out that the legislative decree once signed and published brought the concession contract to an end and Mr. Shufeldt was deprived of all his contract rights, which is not the effect of the Lesivo Declaration in respect of Contract 143/158. Respondent has further explained that Guatemala’s main arguments in the Shufeldt case “related to the nullity ab initio of the contract due to
lack of legislative approval and lack of Government authority to enter into a contract which violated its tax laws. In the present case, however, while similar arguments may have been a principal defense involved at the jurisdictional phase, they have been accorded no such status in terms of Guatemala’s expropriation defense. Guatemala has consistently argued that the lack of effect (let alone substantial effect) upon Claimant’s investment is the determinative defense to Claimant’s expropriation claim.” (Rejoinder, para. 128) Leaving aside that this is a misstatement of Respondent’s overall position, the Tribunal agrees that the Lesivo Declaration is different in character from the legislative measure taken by Respondent in the case of Shufeldt. The question for the Tribunal is whether notwithstanding the differences, the measure here had equivalent effects on the investment. 149.
Respondent was fully aware of the powerful effect of a lesivo declaration when it chose to use its publication to renegotiate all issues in respect of the three55
contracts, as evidenced by the settlement offer of August 24, 2006 and the negotiations that ensued before the Attorney General filed the lesivo claim with the
Administrative Tribunal. Respondent’s argument that Claimant would have been glad to seize on this opportunity to close a loss-making business, does not jibe with the fact that FVG continued to provide the service for more than a year after the Lesivo Declaration was published until, October 1, 2007. It would not have been in its interest to make matters worse. Furthermore, if, as Respondent argues, the economic interest of Claimant relies on the right-of-way and real estate associated with the railroad, Claimant would have an interest in preserving the service even at a loss, lest it be deprived of the real estate rights for not rendering its service.150.
The effect of the Lesivo Declaration is evident in the drop in the volume of freight carried by the railroad post-lesivo as compared with the previous year, in the fact that suppliers refused FVG credit, in the reluctance of customers to enter into long-term arrangements with FVG, and in the increase in squatters, industrial or otherwise. The perception created by the Declaration is evident in the decision of the municipality of San Antonio La Paz to install a water pipeline in the right-of-way without requesting authorization from FVG because due to lesivo FVG could not grant it (Ex. C-50) and in the paving of the right-of-way by the Municipality of Puerto Barrios, the port to be served by the restored section of the railroad.151.
The question here is whether in the circumstances there was an expropriation of the railway enterprise. The authorities on expropriation are numerous and largely depend on their own facts. A common theme is that an effect of the measures is that the claimant is deprived substantially of the use and benefits of the investment. Thus the statements to this effect in cases such as, inter alia, Metalclad Corporation v United Mexican States, Pope and Talbot, Inc v Canada, Técnicas Medioambientales Tecmed SA v United Mexican States, CMS Gas Transmission v56
Argentina, Telenor Mobile Communications SA v Republic of Hungary and Fireman’s Fund Insurance Company v United Mexican States.152.
As to the circumstances here, the Tribunal would note: (a) that more than five years after the publication of the Lesivo Declaration, Contract 143/158 and Contract 402 remain in effect; (b) Claimant continues to be in possession of the railway equipment; (c) Claimant continues to receive rents associated with its real estate rights under Contract 402; and (d) such rents amount to 92% of revenues of FVG. For these reasons, the Tribunal concludes that the effect on Claimants’ investment does not rise to the level of an indirect expropriation.
The Tribunal turns to the allegation that Respondent breached Article 10.3 of CAFTA. The Tribunal has already concluded that Claimant has not shown that the purpose of the Lesivo Resolution was to favor Mr. Campollo. It is on this premise that Claimant has in great measure based its allegation under Article 10.3. As noted by the Tribunal, more than five years after the Lesivo Resolution, Claimant continues to have its contractual rights to the right-of-way and to remain in possession of the railway equipment. This by itself is sufficient basis for rejecting Claimants’ allegation that Respondent treated Claimant differently from Mr. Campollo. Furthermore, the Tribunal considers that Respondent has failed to show that Claimant and Mr. Campollo are foreign and domestic investors in “like circumstances.” According to Claimant, both are competitors in the same economic sector since they have been competing to invest and operate the railroad and in leasing and developing the railroad’s assets. Claimant supports this statement by citing the fact that Mr. Campollo has certain interests in the sugar industry in the Dominican Republic, and operates a railroad there purely for the57
transportation of the produce of his estate. In the Tribunal’s view, the obvious difference in scale between the railroad for the exclusive exploitation of the sugar
plantation of Mr. Campollo in the Dominican Republic and the railway operation of Claimant in Guatemala defeats the “like circumstances” argument.154.
Claimant contends that, in any case, “even absent the complicity between the Government and Mr. Campollo, Guatemala discriminated against RDC when it sought to coerce RDC into surrendering unrestored rail segments in favor of ‘other [interested] investors’ in exchange for the Government abandoning the Lesivo Resolution.” (Memorial, para. 165) The Tribunal will address the substance of this contention under the minimum standard of treatment. As to the expression “other investors”, without further substantiation (which Claimant has failed to provide), it is too vague to state a separate basis of claim. The Tribunal is in no position to determine who these investors are and whether they are in “like circumstances”, nor has the Tribunal been presented with evidence of the identity of these investors.155.
To conclude, the Tribunal finds that the allegation of breach by Respondent of its obligations under Article 10.3 of CAFTA is without merit.
Claimant argues that Respondent did not treat it fairly and equitably, contrary to Article 10.5 of CAFTA. Claimant refers to this standard of treatment as
understood by arbitral tribunals in Waste Management II and Tecmed.According to Claimant, this standard requires the State to respect the reasonable expectations that were taken into account and reasonably relied upon by the foreign investor; in that regard the conduct of the State must be transparent, consistent, non-discriminatory and not based on unjustifiable or arbitrary distinctions. According to Claimant, this is an objective standard unrelated to whether the State has had any deliberate or malicious intention or manifested bad faith. 58157.
Claimant relates the breach of this standard to the Lesivo Resolution. Claimant contends that the lesivo procedure does not define what makes a contract detrimental to the interests of the State and, therefore, the Government can declare such contract lesivo for reasons unsupported by the facts and within the control of the Government regardless of whether a contract is in truth harmful to the State’s interests. According to Claimant, the lesivo procedure does not afford due process since it does not allow the investor an opportunity to contest or respond to the Government’s allegations before the declaration is issued. Claimant argues that as applied in this case the lesivo procedure was “arbitrary, grossly unfair, unjust or idiosyncratic, [was] discriminatory [and] involve[d] a lack of due process leading to an outcome which offends judicial propriety”. Claimant proceeds to list the actions which allegedly breached Respondent obligations under the fair and equitable treatment standard:
“(i) Basing the Lesivo Resolution on grounds that are directly contrary to the facts and prior actions, representations and agreements of the Government;
(ii) Basing the Lesivo Resolution on grounds that were entirely the fault of the Government and easily within the Government’s control to address and correct (if even necessary) through less extreme measures;
(iii) Issuing the Lesivo Resolution just prior to the expiration of the three-year limitations period after FVG refused the Government’s demands that it agree, for
no consideration (other than the Government abandoning the Lesivo Resolution), to modify the economic terms of the Usufruct Contracts to the Government’s
benefit and surrender substantial rights under the Contracts;
(iv) Declaring Deeds 143/158 detrimental or injurious to the interests of the State when no demonstrable injury to the State existed.
(vi) Failing to act in good faith towards RDC and its investment by implementing a measure with intent to discriminate and knowledge of the unlawfulness of such implementation.” (Memorial, para. 149)
Claimant also contends, citing Tecmed and Metalclad, that the fair and equitable treatment standard includes the concept of transparency. Claimant alleges that Guatemala failed to ensure a transparent and predictable framework for FVG’s59
business and with the Lesivo Declaration undermined RDC’s reasonable and legitimate investment-backed expectations such as:
“(i)RDC’s expectation that FVG would have the exclusive right to use the rolling stock during the entire 50-year term of the Usufruct;
(ii) RDC’s expectation and understanding that Deed 143 was awarded, executed and approved in accordance with Guatemalan law;
(iii) RDC’s expectation and understating that the economic terms of Deeds 143/158 were acceptable to the Government;
(iv) RDC’s expectation and understanding that Deeds 143/158 adequately protected the Government’s purported “historical and cultural patrimony” interests
in the rolling stock;
(v) RDC’s expectation that the Government would, pursuant to its obligation under Deed 402, not “hinder the rail and non-rail activities of [FVG],” and
“protect the exercise of [FVG’s] rights against third parties that may intend to have or want to exercise a right on the real estate granted as onerous usufruct”;
(vi) RDC’s expectation and understanding that any disputes between it or FVG and the Government would be addressed and resolved through negotiation or
binding arbitration rather than unilateral Government action; and
(vii) RDC’s expectation and understanding that Guatemala would not take any precipitous or arbitrary actions against it that would serve to harm RDC’s
investment or FVG’s business, especially where there is no allegation or contention that FVG has breached any obligation under the Usufruct Contracts
and there is no evidence that Deeds 143/158 were injurious to the interests of the State.” (Memorial, para. 154)
Respondent stresses that under CAFTA the obligation of fair and equitable treatment requires only the minimum standard of treatment under customary international law and does not create additional substantive rights. Respondent asserts that Claimant carries the burden of proof that the standards of conduct it invokes as part of its fair and equitable treatment claim are indeed part of the minimum standard of treatment under customary international law. Furthermore, according to Respondent, Claimant may not rely on the definition of fair and equitable treatment provided by international tribunals that were not similarly bound by the minimum standard of treatment of customary international law. 60160.
Respondent refers with approval to the statement in the Glamis Gold Award that arbitral awards do not constitute State practice and thus cannot create or prove customary international law, and argues that, in order for Claimant to meet its burden, Claimant may only rely on treaties that require or jurisprudence that interprets the “customary international law” standard of treatment.161.
Respondent argues that “Claimant has failed to demonstrate that the three alleged standards of treatment –non-arbitrariness, transparency and adherence to an investor’s legitimate expectations- are elements of the minimum standard of treatment.” (Counter-Memorial, para. 354. Emphasis in the original) According to Respondent, even if Claimant had succeeded in doing so, it still failed to demonstrate that Guatemala breached this standard. Respondent recalls that customary international law places a heavy burden upon a claimant to demonstrate that a State has breached an applicable standard of conduct and refers to the large amount of deference accorded by arbitral tribunals to respondent States in determining whether their action violates the fair and equitable treatment standard.162.
Respondent refers with approval to how the minimum standard of treatment was described by the arbitral tribunals in Waste Management II,
GAMI, Thunderbird and Genin and asserts that Claimant has completely failed to demonstrate that Guatemala’s conduct fell short of the minimum standard of treatment required by customary international law.163.
Respondent affirms that Guatemala acted at all times in good faith in respect of Claimant’s investment. It refers to the description in Waste Management II of the two elements of acting in good faith (which Respondent accepts is one of the obligations comprised in the minimum standard of treatment). The first element, whether the State acted “improperly or “without justification”, is a requirement that the61
State act rationally in accordance with its own laws. The second element requires that the State acted ‘deliberately” or “consciously” in order to destroy the relevant investment.164.
According to Respondent, “[...] Guatemala has acted rationally, in accordance with its own laws, and without malicious or improper intent. … Guatemala applied the lesividad procedure consistently with the letter and spirit of its laws, acting in good faith. At no point in time did the Government act with “intent to discriminate and knowledge of the unlawfulness” of its conduct. In fact, there was no unlawfulness, much less a known unlawfulness; Guatemala sought, and ensured, the faithful and good faith application of its extant laws concerning lesividad.” (Counter-Memorial, para. 371)165.
Respondent explains that: “Once the illegalities of Contract 143/158 were raised, each of the Government’s agents acted pursuant to Guatemalan law and all concluded that the contract must be declared lesivo; and that is what the President did. The Acuerdo Gubernativo which instructed the Attorney General to initiate proceedings before the Contencioso Administrativo court was signed by all of the required Ministers and the President, and was published in the Official Gazette within the three‐year statute of limitations period. The Attorney General filed the case within the 90‐day period required under Article 23 of the Ley De Lo Contencioso Administrativo. The Contencioso Administrativo courts have also acted consistently with their mandate, offering Claimant an opportunity to be heard, and even rejected the provisional measures requested by the Attorney General to suspend the validity of Contract 143/158 pending the final decision regarding its lesividad.” (Counter-Memorial, para. 373. Footnotes omitted)166.
Respondent insists that: “Guatemala’s sole intent and motivation was to apply its laws, and obtain a functioning railroad system. Rather than turn the railroad over to Ramón Campollo upon publishing the Lesivo Declaration, as Claimant’s conspiracy theory suggests, Guatemala continued to meet with Claimant after the Lesivo Declaration was published, to negotiate a contract that would enable the62
railroad to operate. Negotiations ended when FVG stated that it had no interest in entering into new equipment contracts. Despite Guatemala’s efforts to negotiate, Claimant ceased railway operations in 2007, and left Guatemala without an operational railroad.’ (Counter-Memorial, para. 374. Footnote omitted)167.
Respondent rejects the claim that it denied Claimant justice or due process of law. First, Respondent argues that the lesividad process “affords due
process to the private party and ensures that the Executive follows a process of submitting its determinations to the courts in order to revoke its administrative acts that it believes are injurious to the public good, rather than simply allowing the Government to unilaterally revoke those acts [...], and affords private parties not only an opportunity to be heard, but an opportunity to overturn the initial declaration of lesividad, recourse for declarations that were improperly issued, and, if a contract is declared null and void after the administrative phase, the ability to file an indemnity claim for work that had previously been completed.”(Counter-Memorial, para. 381.)168.
According to Respondent, in determining whether a particular procedure affords due process tribunals do not second guess State actions. Tribunals have held that no violation of due process occurs when the State applies a pre-existing law that is fair on its face, and “tribunals have explained that initial decisions that have the potential to be overturned upon further review do not generally violate the fair and equitable treatment standard under customary international law.” (Counter-Memorial, para. 387) Respondent contends that Claimant’s assertion that the lesividad procedure does not accord due process is contrary to each of these three rules and affirms that Guatemala has been transparent and strictly observed established procedure to declare Contract 143/158 lesivo: “[...] the process started upon request by FEGUA’s overseer, followed by legal opinions from all concerned Ministries and FEGUA, as well as the President’s Secretary General, and culminated with the decision by the President to declare the equipment contracts lesivo. Although not required to do so by
law, the Government even informed Claimant of the process and halted it in order to accommodate negotiations in the hopes of reaching a compromise. Since a negotiated solution was impossible, the Lesivo Resolution was published in accordance with the law within the established time period to do so. Following publication, the Attorney 63
General filed its complaint before the Contencioso Administrativo
Court, where the process remains pending [...]” (Counter-Memorial, para. 197).169.
Respondent affirms that mere arbitrariness does not constitute a breach of the fair and equal treatment standard under CAFTA, and that the Lesivo Declaration was not arbitrary by any objective standard: “In light of the five legal opinions from independent agencies and outside counsel, each of which concluded that Contract 143/158 must be declared lesivo. In view of Claimant’s indifference toward negotiation, and the pending statute of limitations deadline, the President’s decision to declare Contract 143/158 lesivo was not only reasonable, but required. Under these circumstances, Guatemalan law affords the President no discretion; he must initiate the lesividad process via Acuerdo Gubernativo [...]” (Counter-Memorial, para. 408)170.
Respondent denies that it discriminated against Claimant. According to Respondent, the existence of a discriminatory measure requires a fact-based inquiry and a comparison of the complainant to a similarly-situated person. Claimant has not explained how the lesividad process is discriminatory and has not provided “the Tribunal with a proper basis of comparison, describe a distinction between itself and domestic investors, and demonstrate that the State action was unreasonable.” (Counter-Memorial, para. 405) In any case, Respondent argues that there was no discriminatory effect because a tribunal would make the final decision.171.
Respondent re-affirms that Claimant has not satisfied its burden of demonstrating that to act transparently is an element of the customary international law minimum standard of treatment and its belief that it acted transparently: “Claimant was aware of each aspect of the lesividad process. First, [...] Claimant was aware of the illegalities in Contract 143/158, and participated in negotiations with Guatemalan officials to cure these deficiencies. Second, Claimant was aware that Guatemala was considering initiating the lesividad process. As counsel for Claimant stipulated for the record at the Hearing on Jurisdiction, there was a document regarding the lesividad of Claimant’s concession contracts that was being circulated among Government Ministers for signature in May 2006 [...]” (Counter-Memorial, para. 420. Footnotes omitted) Furthermore, “Claimant has also been given notice and has been afforded a 64
full opportunity to be heard in its own defense in further proceedings before the Contencioso Administrativo
court. True to Guatemalan law, the ContenciosoAdministrativo
courts have reinforced the principle that a lesivo declaration itself has no effect upon the validity of a contract. On two separate occasions, the Contencioso Administrativo
courts declined to temporarily suspend Contract 143/158 while the final decision regarding the validity of that contract was pending. What is more, Guatemalan courts have ruled that the Lesivo
Declaration had no effect upon Claimant’s investment or rights under Contract 402, and police and other authorities continue to recognize the validity of Claimant’s entire investment [...].” (Counter-Memorial, para. 422. Footnotes omitted)172.
Respondent also argues that Claimant has not demonstrated that the doctrine of “legitimate expectations” is part of the minimum standard of treatment. According to Respondent, the cases on which Claimant relies – Sempra, Tecmed and Waste Management II
–-address “the more narrow contours of the minimum standard of treatment under customary international law, to determine if that minimum standard itself requires that a State act according to an investor’s legitimate expectations.” (Counter-Memorial, para. 211) Respondent refers to the warning in the MTD Decision
that “The obligations of the host State towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have.
A tribunal which sought to generate from such expectations a set of rights different from those contained in or enforceable under the BIT might well exceed its powers, and if the difference were material might do so manifestly [...]” (Counter-Memorial, para. 427) Respondent also relies on the fact that the Glamis Gold
tribunal accorded no weight to the claimant’s argument based on legitimate expectations and concluded that not living up to expectations cannot be sufficient to find a breach of NAFTA.173.
In any case, according to Respondent, Claimant’s expectations were not legitimate and Claimant was aware, given its previous experience in Guatemala, that65
Contract 143/158 was plagued by formation defects: “Because Contract 143/158 did not comply with the formation requirements of which Claimant was well‐aware -having previously been awarded two contracts as a result of a public bid, and having admitted that Contract 41 never entered into force because it never received the requisite approval- Claimant could not have generated any legitimate expectations based on the terms of Contract 143/158. Hence, these expectations are unreasonable.” (CounterMemorial, para. 435) Claimant could not expect that Guatemala would not enforce its laws.174.
Respondent adds that, even if Claimant’s expectations were considered reasonable, Respondent has not frustrated them since Claimant remains in full possession of the railway equipment, has initiated more than 50 legal proceedings relating to the theft of rails and more than 50 legal proceedings to dislodge squatters along the right of way granted under Contract 402. Furthermore, Respondent argues that Claimant could not expect that, because there are arbitration clauses in the contracts, Respondent would refrain from upholding its own laws, and denies that it took any precipitous or arbitrary action on the part of Guatemala.175.
Respondent addresses the argument that the process of lesividad
is as such contrary to the minimum standard: acceptance of this argument would undermine the requirement that fair and equitable treatment be determined by a case-specific, fact-based inquiry, and would violate notions of comity and sovereignty. Respondent refers to its previous arguments that the lesivo
process is not inherently unfair, unreasonable or inequitable exercise of State power but “a judicially recognized constitutional and reasonable measure designed to uphold the rule of law.” (CounterMemorial, para. 449)176.
Finally, Respondent asserts that the factual allegations made by Claimant (Memorial, para. 149) are either false or do not constitute a breach of the fair and equitable treatment standard. It was not true that the Lesivo
Declaration was taken on grounds directly contrary to the Government’s representations or that the Lesivo
Declaration was predicated upon a situation that was entirely the fault of the Government. It was not contrary to the minimum standard of treatment to issue the 66Lesivo
Declaration on the last day that it could be issued or to request that Claimant comply with its obligations under Contract 402. To presuppose that Contract 143/158 was not actually injurious to the State mischaracterizes the effect of the Lesivo
Declaration. That Declaration merely demonstrates that the President and his Cabinet had enough evidence to submit the question whether the contract was lesivo
to the Administrative Tribunal.177.
In its Reply Claimant observes that the terms of CAFTA and NAFTA are essentially the same in describing the fair and equitable obligation and considers that arbitral awards in NAFTA cases are particularly relevant to this Tribunal. After a review of NAFTA awards since 2001, Claimant concludes that Glamis Gold
is an outlier in its formulation of the minimum standard of treatment and notes that all these tribunals held that customary international law may evolve over time. Claimant refers in particular to Mondev
and Merrill & Ring
for the care they took to establish this evolution and notes that there is agreement among NAFTA tribunals that fair and equitable treatment can only be discerned when applied to the facts of each case.178.
Claimant then considers the period for assessing Respondent’s conduct. According to Claimant, it is permissible to refer to conduct of Respondent prior to CAFTA’s entry into force in support of its claims; acts or omissions by Respondent may be relevant in determining whether the State has subsequently committed a breach of its obligations. Claimant asserts that Guatemala had an obligation to refrain from acts that would defeat the object and purpose of CAFTA from the date it signed this treaty. In a footnote Claimant explains that Article 28 of the Vienna Convention provides “an appropriate lens for viewing Respondent’s conduct in the period between CAFTA’s signing and entry into force, consistent with customary international law.” (Reply, para. 341, footnote 800)179.
According to Claimant, it is well established that fair and equal treatment encompasses the obligation of the State to act in good faith and failure to act in good67
faith is proof of a breach of the fair and equitable treatment standard under customary international law. Claimant refers to examples of violations of good faith identified in arbitral awards in the investment context which exist in the instant case: “(i) situations of coercion and harassment directed at the investor; (ii) a deliberate conspiracy to defeat the investment; (iii) use of threats of rescission to bring a concessionaire to the re-negotiation table; and (iv) termination of an investment for reasons other than the one put forth by the government [...]” (Reply, para. 343)180.
Claimant points out that the defects in Contract 143/158 were entirely within the Government’s control to fix and that it never made an offer to fix them because Respondent was never concerned about these defects except to use them as a threat instrument. According to Claimant, the lesivo strategy was first set forth in Mr. Gramajo’s Options Paper of April 2005 where it is proposed “seeking the ‘nonamicable Termination’ of Contract 143 and … using the lack of Executive approval of this contract as a basis for renegotiating the terms of the Contracts 402 and 820 to relieve FEGUA of its outstanding $2 million debt to the Railway Trust Fund, its obligation to make further contributions to the Trust Fund and its obligation to remove squatters. Notably missing from the Options Paper was the 'good faith option' of simply securing Executive approval for the Contract.” (Reply, para. 347)181.
Claimant observes that the Attorney General’s opinion of August 1, 2005 stated that Contract 143/158 was lesivo but this infirmity could be resolved by means other than lesividad
such as early termination, annulment or mutual agreement and notes that when on January 13, 2006 Mr. Gramajo requested the President to declare Contract 143/158 lesivo he ignored the other options and cited as irregularities provisions copied from Contract 41.182.
Claimant disputes Respondent’s assertion that the High-Level Railroad Commission was a good faith exercise. Claimant argues that the opposite was true because in parallel the Government was preparing the Lesivo
Declaration. Claimant refers to the fact that President Berger signed the Lesivo
Declaration on August 11, 2006, but that Respondent waited until the week of August 21 to tell Claimant that if it would not agree to changes in the Usufruct Contracts, a declaration of lesividad
be issued. Respondent alleges that the offer it received at the meeting of August 24 would have altered the economic terms of FVG’s concession to its detriment; in that offer there was only a minor reference to the equipment contracts in order to rectify the terms deemed to cause lesion to the interests of the State. Claimant maintains that only learned then, for the first time, that the Lesivo
Declaration was directed to Contract 143/158.183.
Claimant questions the inevitability of the lesivo
process and the alleged lack of discretion of the President: the legal opinions of Respondent contemplated other solutions and in fact the grounds for lesividad
were under the Government’s control. Claimant points out that in the various legal opinions of Respondent the only substantial harm to the State’s interests is that Respondent was denied the benefit of other potential bidders for the equipment who may have offered a higher price. Claimant finds the proposition ludicrous given that FVG had the exclusive right to the only narrow gauge railway in Guatemala and in 1997 FVG had been the only bidder.184
. In support of its argument that the Respondent acted in bad faith Claimant refers to President Berger’s statement that the Lesivo Resolution was issued not because of the defects in Contract 143/158 but because FVG failed to rebuild and reopen the South Coast corridor and that FVG had 90 days to guarantee a USD50 million investment or otherwise he would take away the railway concession and call for a new bidding process. Claimant also refers to the secret minutes of the discussion tables after the Lesivo Declaration which show that the Attorney General used the timing of the lesivo action in the Administrative Tribunal to “increase pressure to advance the negotiations’. In this respect, Claimant explains that: “Negotiations between FVG and the Government ended not because FVG was unwilling to enter into a new usufruct equipment contract -the Government never made such a stand-alone offer -but because FVG was unwilling to accede to the Government’s extortionate demands to surrender its fundamental rights under the Usufruct Contracts.” (Reply,
para. 354) Claimant concludes by referring to the holding of the tribunal in Waste 69Management II
that deliberately setting out to destroy or frustrate the investment by improper means is a breach of the minimum standard of treatment.
Claimant asserts that Respondent denied Claimant due process of law and rebuts Respondent’s defenses in respect of the lesivo process. Claimant explains that the question is not whether lesividad
process is constitutional under Guatemalan law but whether it accords with due process requirements of international law. Claimant contends that there are no defined legal criteria or precedent that the Administrative Tribunal may use to perform a meaningful review of the President’s action and the process has been pending for years when it should have been completed within six months. Claimant asserts that the publication of the Lesivo
Resolution had drastic consequences even if, as claimed by Respondent, it was only the first step in the initiation of a court process. Claimant also contends that it is absurd to affirm that it is reasonable that the Government make an initial decision in a purely internal deliberation when the Lesivo
Declaration is a public declaration by the President of the Republic and his Cabinet. Claimant adds that during to the entire process leading to the Lesivo
Resolution the internal and outside legal opinions were kept from Claimant and Claimant was not notified of the alleged technical and legal grounds for the Lesivo
Resolution until May 15, 2007, six months after Respondent had commenced its action in the Administrative tribunal.186.
Claimant disputes that it has the opportunity to obtain recourse if the Declaration is held by the Administrative Tribunal to have been issued improperly. According to Claimant, the governing law does not provide for declaratory relief or damages. Moreover the focus would be on whether Government agencies complied with the procedural requirements, because there are no substantive requirements with which to comply or for the Administrative Tribunal to assess.187.
Claimant disputes Respondent’s contention that the obligation to refrain from acting arbitrarily is not an element of the minimum standard of treatment. While Claimant recognizes that CAFTA – as it is also the case for NAFTA – does not contain a separate provision on arbitrary treatment, “NAFTA tribunals have reviewed a State’s
conduct for arbitrariness or otherwise acknowledged that arbitrary actions are prohibited by the obligation to provide fair and equitable treatment under customary international law minimum standard of treatment [...]” (Reply, para. 373) The issue is what is the standard to be applied. Claimant refers to Waste Management II
which speaks of conduct “arbitrary, grossly unfair, unjust or idiosyncratic.” Claimant admits that mere arbitrariness may not be sufficient but few NAFTA tribunals have required the manifest arbitrariness that Respondent seeks to require in this proceeding. On the other hand, Claimant states that, even if the standard of manifest arbitrariness is to be applied, to which it said it had no objection, ”it is not difficult to divine such arbitrariness in Respondent’s conduct.” (Reply, para. 374)188.
According to Claimant, “[...] the Lesivo
Resolution as applied in this case was arbitrary and violated the fair and equitable treatment obligation in CAFTA Article 10.5 because it was not based on any defined legal standards, but on the Executive’s personal whim and discretion; it did not serve any legitimate public purpose; and it was taken for reasons other than those put forward by the Government.” (Reply, para. 381)189.
On Respondent’s contention that Claimant has not met its burden of proof on whether legitimate expectations are part of fair and equitable treatment, Claimant refers to Waste Management II
’s statement that in applying the standard of review under customary international law minimum standard of treatment “it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.” Claimant also refers to the Glamis Gold
tribunal’s statement that Article 1105(1) of NAFTA “requires the evaluation of whether the State made any specific assurance or commitment to the investor so as to induce its expectations.”190.
Claimant refers to Respondent’s assertion that Claimant should have known the law of the country including the law on lesivo, and states that: “Claimant had every reason to expect that Guatemala would not use the lesivo process as a strategy and means to force Claimant to renegotiate and surrender substantial rights71
under the Usufruct Contracts to benefit the Government and the mutual economic interests of Ramón Campollo and President Berger’s family.” Reply, para.394) As to Respondent’s assertion that Claimant’s legitimate expectations had not been frustrated because Claimant retains possession of the equipment, Claimant reiterates that this is nothing more than form over substance and that “[b]y itself, the Lesivo
Resolution rendered Claimant’s possession of such equipment worthless
because it destroyed FVG’s railroad business.” (Reply, para. 396. Emphasis in the original)191.
As to transparency, Claimant recalls that CAFTA’s preamble includes an explicit objective to “PROMOTE transparency...in international trade and investment” and argues that the following actions demonstrate a fundamental lack of transparency: “(i) the lack of any objective standards for a declaration of lesividad
in Article 20 of the Ley De Contencioso Administrativo
; (ii) Respondent’s deliberate withholding of its intention to declare Contracts 143/158 lesivo until the day before the deadline to publish the declaration; and (iii) Respondent’s deliberate withholding from Claimant of the asserted legal grounds for declaring Contracts 143/158 lesivo
until months after its action was formally filed in the Contensioso Administrativo
court [...]” (Reply, para. 397)192.
In its Rejoinder Respondent argues that Claimant has failed to prove that the standard of fair and equitable treatment imposes: “(a) a duty to refrain from acting in bad faith; (b) an obligation to afford due process; (c) a duty to refrain from engaging in arbitrary or discriminatory conduct; (d) an obligation to refrain from frustrating an investor’s legitimate expectations; and (e) a duty to provide transparency and stability to foreign investments.” (para. 132). According to Respondent, Claimant has tried to satisfy its burden of proof by citing previous awards and by relying on the 2000 plus BITs in existence; but, this is not sufficient evidence. Relying on Glamis Gold
, Respondent reiterates previous affirmations that they do not constitute state practice and cannot create or prove customary international law. As to the BITs, it is Respondent’s opinion that, even if such treaties could demonstrate opinio iuri
s, they do 72
not define the standard and do not establish State agreement with respect to the individual types of conduct invoked in this case.193.
Respondent also contends that Claimant has failed to establish that Guatemala’s conduct fell short of the minimum standard of treatment. First, there is no evidence to support Claimant’s conspiracy theories underlying the intention behind the issuance of the Lesivo
Declaration. Second, Respondent disputes that the Options Paper demonstrates a bad faith strategy on the part of the Government; this paper does not reflect the use of lesividad
as a pressure mechanism to take away Claimant’s rights under Contracts 402 and 820 or to force a renegotiation of those agreements. Third, Respondent insists that FEGUA negotiated with FVG “in good faith and with the intent to address the illegalities contained in Contract 143/158 and the hope that the parties could simultaneously address issues related to other aspects of the relationship.” (Rejoinder, para. 165) Respondent adds that: “Pursuant to Guatemalan law, Guatemala could not have solved the problems related to Contract 143/158 by itself. It needed FVG’s -and therefore the Claimant’s- cooperation, which it never obtained.” (ibid.)194.
Respondent refers to the letter of Mr. Senn to Vice-Minister Díaz and stresses its importance for the following reasons: “First, it demonstrates that, as of November 2004, Claimant was aware that Contract 143/158 had legal defects. Second, it expressly confirms that Claimant was aware that the Government did not recognize the validity of Contract 143/158 due to these illegalities. Third, it serves as contemporaneous evidence of Claimant’s awareness that some sort of remedy was in order, and shows that, rather than refuse to negotiate because the defects in Contract 143/158 “were entirely within the Government’s control to resolve and that they could easily be resolved without any ‘negotiation’ with Claimant,” FVG chose to negotiate with FEGUA in an attempt to resolve the Contract 143/158 problem by “presenting an amendment to the contract, or a new contract, before the end of the year.” Fourth, and finally, it offers contemporaneous insight into FVG’s impression of its negotiations with FEGUA. While Claimant’s witnesses now purport to recall that the Government’s “explicit” agenda was to “coerce Claimant into either substantially giving up its property rights or forcing it to abandon its investment without any compensation,” Claimant’s 17 73
November 2004 letter gave no such indication. Nor did it discuss a fear that Guatemala would terminate FVG’s rights in order to favor Ramón Campollo”
(Rejoinder, para. 171. Footnotes omitted).195.
Respondent insists that it was prepared to make reciprocal concessions when it proposed a draft settlement in August 2006: “This would necessarily include a path to conduct a new public bid and to provide that any new railway contract would be approved by the President, as required by Guatemalan law. These were some of the principal defects that had been identified by the Attorney General and other agencies, and necessarily ones that would need to be corrected; the Government acknowledged in the drafts presented to FVG that the legal defects with the railway equipment contract would need to be remedied as part of any negotiated solution. FVG, however, refused to negotiate, sending to the meeting only Mr. Senn, who indicated that he did not have a power of attorney or authority to reach an agreement on behalf of FVG. The Government therefore published the Lesivo
Declaration on the last possible day before the statute of limitations would expire.” (Rejoinder, para. 173. Footnotes omitted) 196.
Respondent addresses the issue of publishing the Lesivo Declaration on the last day before the three-year statutory term expired and explains that, contrary to what Claimant argues, it shows its good faith in making a last-minute attempt to solve the pending issues after a lengthy negotiation process. Respondent also affirms that “there is no proof whatsoever that the Government would have been unwilling to stop the Lesivo Declaration if Claimant had agreed to negotiate a path forward to resolve the legal defects in Contract 143/158 prior to the publication of that resolution, even if the parties could not reach agreement on the others issues set forth in the settlement draft.
However, there is ample proof that the Government would have been willing to do so, as demonstrated by its willingness in 2004 and 2005 to attempt to negotiate a resolution of these defects as well as by the language included in the draft agreement presented to FVG on 24 August 24 2006 wherein the Government made clear that it wanted FVG to agree to a path that would remedy these defects, and by the Government’s continued efforts to negotiate a path forward to cure the defects in the equipment contract even after the Lesivo
Declaration was issued.” (Rejoinder, para. 176. Emphasis in the original; footnotes omitted)74197.
Respondent argues that Claimant cannot convert a standard bargaining situation into bad faith and a treaty violation and insists that Guatemala negotiated in good faith to resolve all issues that were of concern to the parties including the legal defects of Contract 143/158 but did not use the defects to threaten Claimant and force its hand. In Respondent’s opinion, “Lesividad
also was the least intrusive
solution to the problem for Claimant, in that requesting a final determination from the Contencioso Administrativo
Court would fulfill the Government’s obligation to seek a remedy for the illegalities of Contract 143/158, and provide adequate safeguard for Claimant’s investment, while at the same time permitting Claimant to retain possession of the equipment pending the Court’s decision. If the Contencioso Administrativo
Court decided that Contract 143/158 was not, in fact, lesivo to the interests of the State, the
contract would be validated despite its illegalities.” (Rejoinder, para. 181. Footnote omitted, emphasis in the original) Respondent refers to the holding of the Tribunal in its Second Decision on Jurisdiction that “principles of fairness should prevent the government from raising violations of its own law as a defense when [in this case, operating in the guise of FEGUA, it] knowingly overlooked them and [effectively] endorsed an investment which was not in compliance with its law.” (Rejoinder, para. 185) Respondent argues that the Tribunal cannot adopt in the merits context as a finding that initiating the lesividad
process was “unfair” or “inequitable.” According to Respondent: “A finding that Guatemala would be precluded by CAFTA to question the validity of a contract within the processes available under domestic law, simply because it had performed under that contract for a period of time, would severely and improperly restrict State sovereignty. Taken to the extreme, a bright‐line rule that a State is estopped from exercising pre‐existing domestic remedies to question the validity of a contract simply because the State had operated under that contract for a period of time could prevent a State from terminating a contract initiated by bribery or corruption.” (Ibid)198.
According to Respondent, the facts do not support the preliminary conclusion of the Tribunal in the Second Decision on Jurisdiction to the effect that
FEGUA “knowingly overlooked [the legal defects in Contract 143/158] and [effectively] endorsed an investment which was not in compliance with its law”. Respondent 75
contends that the more developed record shows that Mr. Gramajo informed FVG as soon as it learned of the legal defects and that FEGUA negotiated with FVG while at all times maintaining that Contract 143/158 was invalid. Responded argues that FEGUA did not accept payments under Contract 143/158 and allowed FVG to use the railway equipment pursuant to the prior authorizations issued by the predecessor of Mr. Gramajo as shown by Mr. Gramajo’s letter of April 12, 2004 to G. Zachrisson. FEGUA did not endorse Contract 143/158 as proven by the letter of FVG to the ViceMinister of Communications dated November 15, 2004. In Respondent’s opinion Claimant should not be entitled to rely on equitable arguments because no one can benefit from his own wrong and “FVG and Claimant knew what the legal requirements were for the equipment contract and sought to evade them by entering into back-dated lease agreements and later Contract 143/158.” (Rejoinder, para. 187)199.
As to denial of justice or due process, Respondent argues that “the Court has amply demonstrated both its independence and its willingness to uphold
Claimant’s rights in this very case. Thus, although the Attorney General sought a provisional suspension from the Contencioso Administrativo
Court which would temporarily suspend Contract 143/158, the Court rejected the Attorney General’s request, and rejected his subsequent petition to reconsider the initial rejection. Similarly, in 2010, the Contencioso Administrativo
Court overturned an initial declaration of lesividad.” (Rejoinder, para. 190. Footnotes omitted) Respondent adds that the Administrative Tribunal is competent to consider the formal and substantial aspects of a declaration of lesividad
, and if the focus of the proceedings has been on the procedural requirements of the law, it is because Claimant chose to challenge the Lesivo
Declaration on procedural rather than substantive grounds. Respondent concludes this is a failure of Claimant’s litigation strategy rather than of Guatemala’s judicial system.200.
Respondent recalls that Claimant has had the opportunity to be heard by the Constitutional Court and this Court decided that the amparo
action filed by Claimant was untimely. According to Respondent, Claimant has failed to prove its case based on the length of the contencioso administrativo
process as demonstrated by the 76
documents filed in or issued by the Administrative Tribunal in respect of the lesividad of Contract 143/158.201.
Respondent contends that the Lesivo
Declaration and subsequent actions were not arbitrary or discriminatory, and ”encourages the Tribunal to adopt the standard articulated by the NAFTA tribunal in International Thunderbird
and by the International Court of Justice in ELSI, both of which considered the severity of an arbitrary measure. In International Thunderbird
, the tribunal discussed a breach in terms of ‘manifest arbitrariness falling below acceptable international standards.’ In ELSI, the ICJ stated that arbitrariness under customary international law ‘is not so much something opposed to a rule of law, as something opposed to the rule of law...It is a wilful [sic] disregard of due process of law
, an act which shocks
, or at least surprises, a sense of juridical propriety [...]’” (Rejoinder, para. 204. Footnotes omitted, emphasis added by Respondent)202.
Respondent takes issue with the reasons given by Claimant in support of its submission that the Lesivo
Declaration was arbitrary. The first reason adduced by Claimant is that the Declaration was not based on defined legal standards, did not serve a public purpose and was taken for reasons other than those put forward by the Government. According to Respondent, the Declaration was based on fact and reason and the absence of a list of pre-ordained circumstances that are harmful to the interests of the State does not equate with the absence of any legal standard on which to objectively assess the matter; the lesivo process serves the legitimate public purpose of upholding the law, “to ensure that the Government is not bound to perform contracts which violate its laws, and to ensure that the Government is not bound ad eternum
to perform a contract which is, or may become, harmful to the public interest” (Rejoinder, para. 211); and the record shows that the actions before and after the Lesivo
Declaration were proper to remedy the legal defects of Contract 143/158.203.
Respondent insists at every turn that Claimant has failed to show the elements it claims that are covered in the minimum treatment standard and to rely on arbitral awards to prove State practice. Thus, in the context of whether frustrating Claimant’s legitimate expectations or failing to provide transparency and stability is in breach of the obligation to accord fair and equitable treatment, Guatemala states: 77
“Though Claimant alleges that Guatemala ‘apparently missed the point that the tribunal in Waste Management II
was putting forward a standard of review for fair and equitable treatment under the customary minimum standard, having first conducted a comprehensive review of other NAFTA cases that had applied this standard
,’ it appears that it is Claimant that has missed Guatemala’s point: decisions by international tribunals ‘do not constitute State practice and thus cannot create or prove customary international law.’” (Rejoinder, para. 217. Footnotes omitted, underlining added by Respondent)204.
Respondent argues that the obligation of transparency is limited to the investor having the opportunity to know the rules and regulations that will govern its investment. Respondent first points out the contradiction in Claimant’s argument in respect of the Lesivo
Declaration: it affirms at the same time that it had kept the issuance of the Declaration secret and that it was used as a threat instrument. Then Respondent asserts that the extent of the standards and the standards themselves were readily available to Claimant at the time it invested.205.
As to legitimate expectations, Respondent affirms that Claimant has failed to prove that they were legitimate or that Guatemala has frustrated them. Respondent argues that there is no evidence that the lesivo
process was used to force Claimant to renegotiate and surrender its rights under the Usufruct Contracts to benefit the Government and the mutual economic interests of Ramón Campollo and/or President Berger’s family. Respondent refers to the Second Decision on Jurisdiction and explains that “It is understandable that the Tribunal in its Second Decision on Objections to Jurisdiction, based on the limited record then before it, may have jumped to the conclusion that Guatemala may have used the Lesivo
Declaration as a pressure instrument given the comment made by the then‐Attorney General in this 28 September meeting, but the full record simply does not bear out this is what occurred. It is important to note that this was an internal Government meeting that took place at the end
of the many months of negotiations between the Government and FVG to try and sort out the disputes between them. There was record of only one meeting between parties after this internal meeting, which took place on 4 October 2006, and there is no indication at all that the Contencioso Administrativo
proceeding was even 78
discussed in that meeting, let alone used as a pressure tool.” (Rejoinder, para. 237. Footnotes omitted)206.
Respondent confirms that it has used lesividad in conformity with its “normal function” from a procedural and substantive point of view and affirms that the question for this Tribunal must be limited to procedure since Claimant has failed to establish that lesividad was used as part of a conspiracy to give Claimant’s investment to Ramón Campollo and the question of whether it was correct to issue the Lesivo
Declaration is irrelevant and beyond the Tribunal’s jurisdiction. Respondent asserts that it met all procedural requirements under the relevant laws.
Three non-disputing State parties -the United States, El Salvador and Honduras- filed submissions on the minimum standard of treatment of aliens. The United States refers to Article 10.5(1) and (2) and explains: “These provisions demonstrate the CAFTA-DR Parties’ express intent to incorporate the minimum standard of treatment required by customary international as the standard for treatment in CAFTA-DR Article 10.5. Furthermore, they express an intent to guide the interpretation of that Article by the Parties’ understanding of customary international law, i.e., the law that develops from the practice and opinio iuris of States themselves, rather than by interpretations of similar but differently worked treaty provisions. The burden is on the claimant to establish the existence and applicability of a relevant obligation under customary international that meets these requirements.”208.
After considering the provisions of Article 10.5, El Salvador concludes: “the proper interpretation of the requirement to provide ‘Fair and Equitable Treatment’ as part of the minimum standard of treatment under customary international, as required by CAFTA, can only be derived from the analysis of general and consistent State practice resulting from a sense of legal obligation. International awards are relevant to the determination of the appropriate interpretation under CAFTA, but only if and to the extent they actually examine State practice resulting from a sense of legal obligation. Therefore, international arbitral awards that refer to ‘Fair and Equitable’ as an autonomous standard, as well as investment treaties that use ‘Fair and Equitable 79
Treatment’ without reference to customary international law, are not relevant for purposes of the interpretation of the standard under CAFTA Article 10.5”209.
El Salvador notes that the interpretation of the standard of minimum treatment by NAFTA tribunals has not always been clear and uniform and states: “El Salvador considers that, in most respects, the interpretation and reasoning of the arbitral tribunal in the NAFTA arbitration between Glamis Gold and the United states of America correctly reflects the interpretation of the requirement to provide ‘Fair and Equitable Treatment’ as part of the minimum standard of treatment under customary international law, and therefore, under CAFTA Article 10.5. Thus in El Salvador’s view, to violate the minimum standard of treatment under customary international law included in CAFTA Article 10.5, a measure attributable to the State ‘must be sufficiently egregious and shocking -a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons- so as to fail below accepted international standards.”210.
El Salvador considers that Article 10.5 does not include obligations of transparency, reasonableness, refraining from mere arbitrariness, or not frustrating investors’ legitimate expectations. El Salvador informs the Tribunal that its interpretation is consistent with that expressed by the United States during the Glamis Gold
arbitration and concludes: “El Salvador considers that the customary international law minimum standard of treatment articulated in Neer v. Mexico
has not changed significantly over time. El Salvador agrees with the view expressed by the United States in the Glamis Gold
arbitration that the recognition that customary international law may evolve over time does not require that any particular standard must have evolved within a certain amount of time.” (Footnotes omitted)211.
In its submission Honduras observes that Article 10.5 bears the title of “Minimum Standard of Treatment” and not of “Fair and Equitable Treatment”, which is only a “concept” included in the minimum treatment, and coincides in substance with the submissions of the United States and El Salvador.
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