INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
in the Matter of the Arbitration between
AWARD
MEMBERS OF THE TRIBUNALDr. Andrés Rigo Sureda, President
Honorable Stuart E. Eizenstat, Arbitrator
Professor James Crawford, Arbitrator
SECRETARY OF THE TRIBUNALNatali Sequeira
REPRESENTING 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, LLP
REPRESENTING 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 LLP
DATE OF DISPATCH: June 29, 2012
[...]
3AWARD
1. 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
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“(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.”
5. 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:
TribunalDr. Andrés Rigo Sureda, President
Prof. James Crawford, SC, Arbitrator
Hon. Stuart E. Eizenstat, Arbitrator
ICSID SecretariatMs. Natalí Sequeira
Assistant to Hon. Stuart E. Eizenstat
Mr. Alex Berengaut
8ClaimantMr. 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 technician
Witnesses for the Claimant:Mr. Henry Posner III
Mr. Jorge Senn
Mr. William J. Duggan
Mr. Carlos Franco
Ms. Mabel Hernández
Mr. Máximo Jiménez
9Mr. Inngmar Iten
Mr. Ricardo Spiegeler
Mr. Héctor Valenzuela
Mr. Mario Fuentes
Ms. Olga de Valdez
Experts for the Claimant:Dr. Eduardo Mayora
Mr. Louis Thompson
Mr. Robert MacSwain
Dr. Shannon Pratt
RespondentMr. Larry Robles,
Attorney General of the Republic of GuatemalaMr. Carlos Samayoa,
Overseer, Ferrocarriles de Guatemala (FEGUA)Mr. Aníbal Samayoa Salazar,
Deputy Secretary General of the PresidencyMr. 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 EconomyMr. Joaquín Romeo López Gutiérrez,
Ministry of EconomyMr. Saúl Oliva,
Office of the Attorney General of GuatemalaMs. Silvia Cabrera Estrada,
Office of the Attorney General of GuatemalaMr. David M. Orta,
Arnold & Porter, LLPMr. Whitney Debevoise,
Arnold & Porter, LLPMr. Daniel Salinas Serrano,
Arnold & Porter, LLPMs. Margarita R. Sánchez,
Arnold & Porter, LLP10Ms. Giselle K. Fuentes,
Arnold & Porter, LLPMs. Dawn Y. Yamane Hewett,
Arnold & Porter, LLPMs. Mallory B. Silberman,
Arnold & Porter, LLPMr. José Antonio Rivas,
Arnold & Porter, LLPMr. José Bernard Pallais,
Arnold & Porter, LLPMs. Camila Valenzuela,
Arnold & Porter, LLPMr. Hans H. Hartell,
Arnold & Porter, LLPMr. Kelby Ballena,
Arnold & Porter, LLPMr. César Payés,
FEGUA Legal AdvisorMr. Patrick J. O’Connor,
Harper Meyer Perez Hagen O'Connor Albert & Dribin LLP(counsel for Mr. Ramón Campollo)Ms. Amy Endicott,
Arnold & Porter, LLPMr. Pedro Soto,
Arnold & Porter, LLPMs. Nicole Ann Aaronson,
Arnold & Porter, LLPWitnesses for the RespondentMr. 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 Marroquín
11Experts for the RespondentMr. Juan Luis Aguilar
Mr. Pablo Spiller
CAFTA 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 & LeBoeuf
On 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 State
25. 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.
30. 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
ofWay (
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
31. 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
ofContract 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
14Deed 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 Opinion stated:
“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.”
36. 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.
38. 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)
39. 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)
41. It is
the contention
of Claimant that Respondent indirectly expropriated Claimant’s investment. Claimant analyzes
the Lesivo Resolution against
therequirements
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)
43. 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:
(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 FVG;
(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.” (para. 133)
1744. 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
18aim. 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
19any 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
20exploit
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
21
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)
56. 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
22including 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
23interest 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.
63. 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 externally
24acknowledged 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
theGovernment’s bad faith motivation behind
the Lesivo Resolution.” (para. 2)
65. 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
25Coast 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
theGovernment’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)
69. 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
27below
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.
28Respondent 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.
79. 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
(“expropriation”), except:
(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.”
80. 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.”
81. 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
30economic impact on Claimant’s investment. To
the extent necessary,
the Tribunal will complement
the summary
of the parties’ arguments on specific matters.
82. 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
31
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.
32
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.”
83. 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
85. 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.
88. 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
34a 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
therequirements
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 35Government; 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.
93. 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
36Berger 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 Ramón
37[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.
107. 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
39pursuing
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.
111. 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.
112. 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 under
40Deed 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)
116. 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)
118. 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
42and 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)
120. 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
43was 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
44Second 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.
124. 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
FVG;
(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
45
(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)
125. 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
46interference 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
theAdministrative 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 from
48before
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)
139. 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
50arises” 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 [...].”
144. 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
52the 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 lesivo
53process 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 three
55contracts, as evidenced by
the settlement offer
of August 24, 2006 and
the negotiations that ensued before
the Attorney General filed
the lesivo claim with
theAdministrative 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 v
56Argentina, 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.
153. 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
the57transportation
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.
156. 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)
158. 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’s
59business 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)
159. 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
the61State 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
the62railroad 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
63General 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
64full 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 on
Annulment 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, that
65Contract 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 good
67faith 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 would
68be 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.
185. 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
70conduct 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 rights
71under
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 iuris, they do
72not 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
73November 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,
thecontract 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
75contends 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 76documents 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
78discussed 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.
207. 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
79Treatment’ 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.
80
212. For purposes
of easy reference, it will be useful to reproduce here
the terms
of Article 10.5
of CAFTA on
the minimum standard
of treatment:
“1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and
full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of
treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide:
(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in
accordance with the principle of due process embodied in the principal legal systems of the world; and
(b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.
3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish
that there has been a breach of this Article.”
A footnote to this article directs
the Tribunal to interpret it in accordance with Annex 10-B on customary international
law:
“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.”
213. The Tribunal refers also to
the Preamble
of the Treaty where
the State parties declare that have concluded CAFTA, inter alia, to:
“ENSURE a predictable commercial framework for business planning and investment;
PROMOTE transparency and eliminate bribery and corruption in international trade and investment;
81
SEEK to facilitate regional trade by promoting efficient and transparent customs procedures that reduce costs and ensure predictability for their importers and exporters.” (Emphasis added by the Tribunal)
214. Article 1.2(1) on Objectives which applies to
the entire agreement provides that:
“The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favored-nation
treatment, and transparency [...]” (Emphasis added by the Tribunal)
215. The following paragraph states:
“2. The Parties shall interpret and apply the provisions of this Agreement in the light of its objectives set out in paragraph 1 and in accordance with
applicable rules of international law.”
216. The Tribunal notes that
the Mixed Commission in
the Neer case did not formulate
the minimum standard
of treatment after an analysis
of State practice. After reviewing commentaries by J.B. Moore, De Lapradelle and Politis,
the Mixed Commission stated: “Without attempting to announce a precise formula, it is in
the opinion
of the Commission possible to go a little further than
the authors quoted, and to hold (first) that
the propriety
of governmental acts should be put to
the test
of international standards, and (second) that
the treatment
of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to willful neglect
of duty, or to an insufficiency
of governmental action so far short
of international standards that every reasonable and impartial man would readily recognize its insufficiency. Whether
the insufficiency proceeds from deficient execution
of an intelligent
law or from
the fact that
the laws
of the country do not empower
the authorities to measure up to international standards is immaterial.” (
Neer, para. 4) It is ironic that
the decision considered reflecting
the expression
of the minimum standard
of treatment in customary international
law is based on
the opinions
of commentators and, on its own admission, went further than their views without an analysis
of State practice followed because
of a sense
of obligation. By
the strict standards
of proof
of customary international
law applied in
Glamis Gold, Neer would fail to prove its famous statement – “
the treatment
of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect
of duty, or to
82an insufficiency
of governmental action so far short
of international standards that every reasonable and impartial man would readily recognize its insufficiency” – to be an expression
of customary international
law.
217.
The Tribunal notes further that, as such, arbitral awards do not constitute State practice, but it is also true that parties in international proceedings use them in their pleadings in support
of their arguments
of what
the law is on a specific issue. There is ample evidence
of such practice in these roceedings. It is an efficient manner for a party in a judicial process to show what it believes to be
the law.
The problem, as
the Mixed Commission in Neer already recognized, rests in “[...]
the difficulty
of devising a general formula for determining
the boundary between an international delinquency
of this type and an unsatisfactory use
of power included in national sovereignty.” .
The difficulty in drawing this boundary is at
the origin
of the diversity
of decisions on
the minimum standard
of treatment.
218. The parties have taken opposite stands on whether
the minimum standard
of treatment has evolved since Neer’s formulation. This matter has been dealt with extensively by previous tribunals in cases under NAFTA.
The Tribunal refers positively in particular to
the ADF award which accepts
the evolution
of customary international
law noted in
Mondev and records
the NAFTA parties’ views in this respect: “[...] it is important to bear in mind that
the Respondent United States accepts that
the customary international
law referred to in Article 1105(1) is not ‘frozen in time’ and that
the minimum standard
of treatment evolves.
The FTC Interpretation
of 31 July 2001, in
the view
of the United States, refers to customary international
law ‘as it exists today’. It is equally important to note that Canada and Mexico accept
the view
of the United States on this point even as they stress that ‘
the threshold [for violation
of that
standard] remains high.’ Put in slightly different terms, what customary international
law projects is not a static photograph
of the minimum standard
of treatment
of aliens as it stood in 1927 when
the Award in
the Neer case was rendered. For both customary international
law and
the minimum standard
of treatment
of aliens it
83incorporates, are constantly in a process
of development.”
The Tribunal adopts this reasoning in ADF and shares
the conclusion that
the minimum standard
of treatment is “constantly in a process
of development,” including since Neer’s formulation.
219. Regarding
the content
of the standard,
the Tribunal refers to and adopts
the conclusion reached by
the tribunal in
Waste Management II in considering NAFTA Article 1105 standard
of review and after surveying NAFTA arbitral awards: “[...]
the minimum standard
of treatment
of fair and equitable treatment is infringed by conduct attributable to
the State and harmful to
the claimant if
the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes
the claimant to sectional or racial prejudice, or involves a lack
of due process leading to an outcome which offends judicial propriety—as might be
the case with a manifest failure
of natural justice in judicial proceedings or a complete lack
of transparency and candor in an administrative process. In applying this standard it is relevant that
the treatment is in breach
of representations made by
the host State which were reasonably relied on by
the claimant.”
The Tribunal finds that
Waste Management II persuasively integrates
the accumulated analysis
of prior NAFTA Tribunals and reflects a balanced description
of the minimum standard
of treatment.
The Tribunal accordingly adopts
the Waste Management II articulation
of the minimum standard for purposes
of this case.
220. The Tribunal will start with Claimant’s allegation that its rights to due process were breached when it was not heard before
the decision
of lesividad was
taken by acuerdo gubernativo. As explained by expert Aguilar
of Respondent, there is no right to be heard before
the President makes his decision:
“33. Since the administrative procedure for the issuance of the Acuerdo Gubernativo that finds the lesividad of an action or decision does not originate by the petition of the private party, nor does the declaration includes constitutive effects binding to the private party that deprive them of their rights, given that they are no part of the process for the issuance of the
84
acuerdo gubernativo, a hearing prior to the issuance of the same is not granted, nor should it be granted, to them.
34. Therefore, the lack of a hearing in the government process declaring the lesividad does not violate the due process principle, because the private
party is not part of the process, which is purely an internal process of the government, and the declaration to be issued will not prejudice or diminish
the exercise of their rights.“ (Aguilar, First Opinion. Emphasis in the original)
221. The Tribunal notes that in
the instant case FVG became a respondent once
the Attorney General filed
the claim
of lesivo with
the Administrative Tribunal. Hence
the private party is a party in
the subsequent proceeding even if
the declaration does not include “constitutive effects binding to
the private party”. Furthermore,
the other respondent party in
the lesivo proceeding before
the Administrative Tribunal is FEGUA,
the counterparty
of FVG in Contract 143/158. Not only has FEGUA been aware
of the overall
lesivo process but it took
the first step in this process by its letter to
the President on January 13, 2006.
The Tribunal considers that there is a lack
of equality-in-arms between
the two contractual parties and an element
of unfairness in
the process because
the private party has no right to be heard before
the President decides that an act
of the Government is
lesivo. On
the other hand, in
the circumstances
of this case, Claimant has fully participated in proceedings before
the Administrative Tribunal and, given
the fact that
the Tribunal has found a breach
of the minimum standard on other grounds,
the Tribunal finds it unnecessary to determine whether a breach
of due process has occurred on this ground.
222. Claimant has also argued that
the lesividad procedure is flawed because
of the vagueness
of the grounds to determine that a measure is “harmful to
the interests
of the State.” While
the Tribunal agrees that
the phrase is indeterminate and could be improved by adding guidance, like in Article 63
of the Spanish
Law adduced by Respondent as an example in these proceedings (RL-47),
the Tribunal also realizes that it may be difficult to list beforehand what may be harmful to
the interests
of the State. In any case, to allow
the Government to invalidate its own acts during a period
of three years since their occurrence is, by any standard, an extraordinary remedy which may be easily abused in its application. Whether it has been abused in
the instant case and to such an extent as constituting a breach
of the minimum standard
of treatment, are matters addressed next by
the Tribunal.
85223. The Tribunal will consider this question from
the perspective
of the uncertainty created by
the time elapsed since FVG started to use
the railway
equipment,
the understanding by Respondent
of the actions which it has considered to be harmful to its interests, and
the use
of lesivo in
the wider context
of the relationship
of Respondent with Claimant.
224. Respondent’s expert Aguilar opines: “
The State
of Guatemala never awarded to, or acknowledged, Ferrovías any property right for
the usage
of railroad equipment as none
of the documents signed by Ferrovías and FEGUA’s Overseer gave Ferrovías a legitimate property right [...]” (Second Opinion, para. 31) Furthermore, “Ferrovías was not entitled to take possession, or usufruct,
of the railroad equipment owned by
the State
of Guatemala before
the President
of the Republic and his Cabinet approved Contract 41.” According to expert Aguilar, “
The State interests that were harmed in
the present case were
the loss
of usage and usufruct
of the railroad equipment owned by
the State
of Guatemala because
the equipment was appropriated by Ferrovías. This is acknowledged by Article 464, Civil Code, which reads:
‘Property is the right to enjoy and dispose of goods within the limits and, in compliance with, the obligations established by the law.’ In
the case
of Contract 143/158,
the particular State interest, as owner
of the railroad equipment, was to claim
the property illegally held by Ferrovías. This interest is not vague or ambiguous, and it is
the same interest that was expressed in
the Complaint filed before
the Contencioso AdministrativoCourt. (Second Opinion, para. 83. Emphasis in
the original)
225. The Tribunal finds it appropriate to recall that Contract 41, which never became effective due to lack
of acuerdo gubernativo and
acuerdo congresional(clause 3.6.4
of the Bidding Conditions), was signed on March 23, 1999. Claimant restored service in
the first phase
of the railroad project, at that time, with
the railway equipment subject to Contract 41, under exchanges
of letters between FVG and FEGUA and more than four years later under Contract 143/158. By
the time
the acuerdo gubernativo related to
the lesividad was signed on August 11, 2006, train service had been provided in
the said segment
of the railroad for more than seven years using that same railway equipment. Additionally, FEGUA had received payment
86for
the use
of the railway equipment as provided in Contract 41 and later in Contract 143/158.
226. Respondent was fully aware that FVG needed
the railway equipment under Contract 41 to provide
the train service under Contract 402, otherwise FVG had
the option to terminate Contract 402. For reasons which are to this day unknown, and for which
the Tribunal has received no satisfactory explanation, it failed to take
the next steps in order that Contract 41 could become effective. Furthermore,
the Overseer
of FEGUA recognized that FVG had fulfilled its obligations under Phases I and II
of Contract 402 for which it used that railway equipment. To say now that FVG appropriated
the railway equipment and harmed
the State by depriving it
of its property flies in
the face
of these facts and
of logic.
227. The Respondent’s settlement offer
of August 24, 2006 contradicts its legal arguments before this Tribunal in one important respect. It has been maintained by Respondent’s expert that “
The President
of the Republic
was obliged to issue, in Council
of Ministers,
the Declaration
of Lesividad of Contracts 143 and 158, because if he had failed to do so, there being reasonable grounds to do so, he would have incurred […]
joint and several liability; a declaration
of lesividad cannot be issued in a discretionary manner, which includes declaration
of lesividad of Contracts 143 and 158.” (First Opinion, para. 72. Emphasis in
the original) This opinion notwithstanding, Clause 3, paragraph B)
of the settlement offer provides that “Ferrocarriles de Guatemala –FEGUA–, through its Legal Representative, is bound to request
the Solicitor General’s Office as Representative
of the State
of Guatemala to fully waive to [sic]
the Claim under Administrative
Law identified with number-----filed before
the First Court
of Claims under Administrative
Law [...]”.This implies that
the process before
theAdministrative Tribunal may be withdrawn at
the request
of the Attorney General, which belies
the alleged inevitability
of the Lesivo process. This is further confirmed by
the minutes
of the meeting
of the round table, held on August 30, 2006, without FVG representatives. Point three
of the minutes reads in part: “Only
the governmental representatives were invited to
the meeting, which was held in order to hear
the Opinion
of the Attorney General
of Guatemala, who noted that according to
the law the PGN may not reverse
the procedures unless a direct order to that effect is issued by
87the President
of the Republic. He was informed that a discussion table had been assembled to address
the issue with
the parties involved. He agreed that he would not file any legal actions until
the discussion process was concluded.” (Ex. R-36) Thus, in
the settlement offer
the Overseer
of FEGUA would have committed himself to request
the Attorney General to waive
the lesivo claim and in turn he would have needed an order
of the President.
The Tribunal notes that these are Respondent’s documents, drafted by Respondent, and they contradict
the arguments made by Respondent and its expert that
the President has no discretion in matters
of lesividad. He has discretion and used it with
the approval
of his Government for a purpose different from that for which it was justified, namely, to obtain additional concessions, including further investments by Claimant, unrelated to
the basis for
the Lesivo Declaration. Respondent has not been able to show any example in support
of the alleged liability
of the President if he had not declared lesivo Contract 143/158.
228. As regards
the grounds (“
motivos”)
of the Lesivo Declaration, it is striking that four out
of a total
of five grounds are related to
the bidding conditions
of Contract 41.
The Tribunal will review and comment on each
of them:
Motivo a) considers that the right to discuss the terms of Contract 41 awarded to FVG by the bidding board is contrary to Article 19 of Respondent’s Procurement Law. The Tribunal finds it difficult to understand the relevance of this reason since it concerns the award of the non-ratified contract.
Motivo b) relates to the fourth clause of Contract 143/158 which permits that other property different from that listed in the inventory may be incorporated
in violation to the terms of Article 90 of the law on Government Contracting. The Tribunal recalls that this is what clause fourth of Contract 41 already
provided from the start: “This is a general description and the parties accept to include other property that by nature is incorporated to the aforesaid
equipment, owing to the nature and purposes of the contract as well as for its effectiveness.”
Motivo c) states that the sixth clause of Contract 143/158 contradicts item V of the first clause of that contract as well as clause 6.4 of the bidding
88
conditions of Contract 41. This ground is in turn contradicted by the terms of the next ground, Motivo d)
Motivo d) states that the parties applied the bidding conditions for a contract that they had terminated when they should have proceeded to a new
bidding. Evidently whether or not the parties applied the prior bidding conditions, reference to the bidding conditions of Contract 41 was a good
enough reason for the Respondent to motivate the Lesivo Declaration.
229. More significantly, several
of the provisions
of Contract 41 (
Motivos a) and b)) were considered nine years later contrary to Articles 19 and 90
of the Public Procurement
Law and, to
the extent that they had been incorporated in Contract 143/158, were grounds for
the Declaration
of lesivo. Further to
the Exposición de Motivos,
the whereas clauses (“
considerandos”)
of the Lesivo Declaration refer to
the legal opinions
of the Attorney General and
of FEGUA, and explain that they are
the basis for
the Declaration. Both opinions include, as part
of the reasons in support
of the lesividad of Contract 143/158, elements taken from Contract 41, such as for instance,
the duration
of the contract or
the frequency
of payment
of the canon. These examples show
the legal uncertainty inherent to
lesivo. Even if Contract 41 had been ratified, for a period
of three years
the Government may have found cause for declaring it
lesivo on
the grounds adduced nine years later in respect
of Contract 143/158.
230. The settlement offer was made on
the eve
of the publication
of the Lesivo Declaration. Respondent has argued that it sought to dispose
of all issues pending with Claimant.
The offer is evidence
of that, since it sets forth
the contentious issues between Respondent and Claimant in respect
of Contract 402, Contract 820 and Contract 143/158.
The Tribunal understands that
the transaction proposed on August 24, 2006 would have consisted in a package
of concessions between
the two parties. What
the Tribunal finds objectionable is that Respondent links
the publication
of the Lesivo Declaration
of Contract 143/158 to a settlement
of issues unrelated to
the Declaration itself and to its justification, and that, in order to avoid its publication, Claimant had to agree to undertakings which would not necessarily cure
the “illegalities” or “irregularities”
of Contract 143/158.
89231. Respondent has indicated that there is no evidence that Respondent would not have agreed to limit
the undertakings required in
the settlement offer to Contract 143/158 if Claimant had not abandoned
the negotiations. This is speculative and there is no evidence in
the proceedings to show that at any point in time Respondent ever proposed to Claimant to correct what made Contract 143/158
lesivo without further conditions.
232. The fact that
the Respondent did not use
the Lesivo Declaration for its intended purpose is evident in Respondent’s own minutes
of the meeting
of the round table
of September 28, 2006: “
The Attorney General indicated that
the PGN is ready to file
the pertaining actions in
the case regarding
the lesivo declaration
of the Contract for Onerous Usufruct
of Railroad Equipment. He noted that such actions were deferred pending
the results
of the discussion table, but that he thinks that if no progress is made by
the discussion table
the actions should be brought without delay.
The Attorney General also believes that if
the PGN initiated
the legal procedures this would increase pressure to advance
the negotiations.” (para. 3
of the Minutes. Ex. R-36) As noted previously by
the Tribunal, President Berger was blunt in his statements as reported in
the press about what motivated
the Lesivo Declaration: “
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)
The statement substantially coincides with
the transcript
of the President’s broadcast on September 4, 2006. (Ex. C-132)
233. The Tribunal has already pointed out that
the lesivo procedure has characteristics which may be easily abused by
the Government.
The alleged
inevitability
of the process together with “illegality” having equal status with
lesividad mean that an extraordinary remedy may become routine once any “illegality”
of a Government act has been identified by
the Government itself. It is inconceivable that just any illegality would harm
the interests
of the State without
the President’s having to exercise his own judgment in
the matter. An investor in Guatemala would have no certainty that, at any time within three years
of its investment,
the State may declare
the investment lesivo, if a flaw is discovered by
the State in, for instance,
the 90authorization
of the investment, irrespective
of the flawless performance by
the investor
of its obligations as part
of such authorization. Unless such an extraordinary remedy is used in truly exceptional circumstances such as in cases
of corruption, to give an example
of concern to Respondent, it creates situations which have
the potential to violate
the minimum standard
of treatment
of aliens under customary international
law.
234. In
the circumstances
of this case,
the lesivo remedy has been used under a cloak
of formal correctness allegedly in defense
of the rule
of law, in fact for exacting concessions unrelated to
the finding
of lesivo. Even if FEGUA’s actions with respect to Contract 41/143 and in allowing FVG to use
the rail equipment were
ultra vires (not “pursuant to domestic
law”), which has not been convincingly established for
the Tribunal,
the Government should be precluded from raising violations
of its own
law as a defense when, for a substantial period
of time it knowingly overlooked them, obtained benefits from them, and it had
the power to correct them.
235. In
the Tribunal’s view,
the manner in which and
the grounds on which Respondent applied
the lesivo remedy in
the circumstances
of this case constituted a breach
of the minimum standard
of treatment in Article 10.5
of CAFTA by being, in
the words
of Waste Management II, “arbitrary, grossly unfair, [and] unjust.” In particular
the Tribunal stresses
the following facts, which taken together demonstrate
the arbitrary, grossly unfair, and unjust nature
of lesivo in this case, including by evidencing that lesivo was in breach
of representations made by Guatemala upon which Claimant reasonably relied: a)
the Government declared lesivo Contract 143/158 for
the use
of railway equipment for which FEGUA received rents without protest; b) that contract had been concluded at
the initiative
of FEGUA because
the 91Government itself failed, for unknown reasons, to ratify Contract 41 after FVG had won it through public bidding; c) failure
of Government ratification and lack
of public bidding for
the use under Contract 143/158
of the same equipment as under Contract 41, both under control
of the Government, and which it had
the power to remedy, were in part
the justification to declare
lesivo Contract 143/158; d) other grounds for
lesivo referred to terms
of Contract 41 that
the Government itself had proposed and FVG and FEGUA had copied in Contract 143/158; e)
the railway equipment in question had been used since
the initiation
of the rail service in 1998 with full knowledge
of the Government and without which Claimant could not have performed its obligations under Contract 402; f) FEGUA certified that such obligations under Phase I and II
of the railway rehabilitation had been performed satisfactorily by FVG, which had used
the very same railway equipment, first under
the exchanges
of letters between FEGUA and FVG and later under Contract 143/158; g)
the conditions proposed by
the government for not proceeding with lesivo were for
the most part unrelated to
the curing
of lesivo and
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.
236. What effect
the breach had on Claimant’s investment will be addressed by
the Tribunal as part
of its damages assessment.
237. Claimant’s remaining contention is that Respondent failed to afford Claimant’s investment full protection and security within
the meaning
of CAFTA Article 10.5. As set forth above in
the recitation
of the parties’ respective positions, Claimant supports this contention mainly by arguing that Guatemala failed to protect FVG’s right-
of-way from squatters. While
the issue
of squatters had been
the subject
of considerable dispute between
the parties prior to
the Lesivo Declaration, including
the formation
of a Presidential Squatters Commission in January 2005 and FVG’s initiation
92of a domestic arbitration in Guatemala later that year,
the Tribunal reiterates that its jurisdiction extends to “acts or omissions
of Respondent related to squatters, but only to
the extent that these result from
the Lesivo Resolution.” (Second Decision on Objections to Jurisdiction, para. 155).
238. Article 10.5(1)
of CAFTA reflects that “full protection and security” is a core component
of the minimum standard
of treatment. Without minimizing
the importance
of this protection to
the CAFTA framework,
the Tribunal concludes for reasons
of procedural economy that it is not necessary to reach Claimant’s allegation that Respondent failed to provide full protection and security from squatters.
The parties’ arguments on this issue raise factually complex questions, including
the extent to which
the harm complained
of by Claimant should be attributed to
the Lesivo Declaration, as opposed to
the pre-existing dispute between
the parties relating to
the squatters. Given that there was a continuous problem
of squatters – as reflected by
the Presidential Commission and ongoing arbitration – it is difficult on this record to isolate only those aspects
of the larger issue over which we have jurisdiction. At
the same time, even if
the Claimant were able to establish a breach
of this CAFTA protection, Claimant would be entitled to no greater relief than is already warranted by Respondent’s breach
of the minimum standard discussed above. Accordingly,
the Tribunal will not consider
the alleged breach
of full protection and security.
239. In its Memorial Claimant contends that
the damages should cover
the fair market value
of its investment, including
the adjusted amount
of the investment as
of the date
of the violations
of CAFTA, consequential damages
of lost profits from that date to
the end
of the Usufruct, and pre-award interest at a commercially reasonable rate, namely at
the rate paid by Respondent on its private debt obligations, compounded semi-annually.
240. In its Counter-Memorial Respondent recalls
the provisions
of CAFTA on compensation in
the case
of an expropriation. It notes that CAFTA does not establish a standard
of compensation for breaches
of other obligations under
the treaty and that
93the principle
of reparation under customary international
law would apply to such breaches. Respondent refers to Claimant’s statements to show that
the railway equipment was not a required component
of its investment or was
of secondary priority, contends that there is no causal nexus between
the publication
of the Lesivo Declaration and any damage or loss suffered by Claimant or, if there was, it was FVG’s own doing by its press campaign or by mismanaging its business well before
the Lesivo Declaration was published.
241. Respondent points out that Claimant has engaged in double-counting by requesting damages for lost profits and lost investment and calculating its damages based on a discounted cash flow analysis (“DCF”). Respondent contends that FVG had no profits during its operation and its assessment
of future lost profits is speculative and unsubstantiated. Respondent explains that Claimant’s net capital contribution (“NCC”) approach to calculating damages is inappropriate because this method is used in cases where
the alleged expropriation took place shortly after
the investment was made and prevented
the investor from exploiting its investment. Respondent argues that by
the time
the Lesivo Declaration was issued,
the viability
of FVG was in question and no buyer would base
the value
of the business on
the amount
of the historical investment without reference to actual results. Respondent disputes
the discount rate use by Claimant in its calculations as being grossly underestimated and contends that an appropriate analysis shows that, at
the time
of the Lesivo Resolution, FVG had a negative fair market value and Claimant has not suffered any damages.
242. As regards pre-award interest, Respondent argues that compound interest as claimed by Claimant need to be justified on
the facts
of the particular case since
the traditional principle that compound interest is not allowed continues to apply.
243. In its Reply Claimant contends that
the appropriate standard for measuring compensation in
the case
of an illegal expropriation is not
the fair market
value prescribed in CAFTA but
the customary international
law standard
of full
94reparation set forth in
Chorzów. According to Claimant, this is also
the standard to apply for breaches
of the minimum standard
of treatment and national treatment obligations.
244. Claimant contends that, under
the full reparation standard, it is entitled to recover
the amount invested and
the lost profits. Claimant also contends that
the possibility
of double counting is avoided by amortizing its sunk costs over
the life
of the usufruct after
the Lesivo Declaration.
245. Claimant disputes that FVG was not profitable as affirmed by Respondent. Claimant explains that “
the future cash flows to be discounted consist not
of future profits or earnings but
of future cash flow: gross income less
the expenses necessary to produce that income.” (Reply, para. 487) Furthermore, according to Claimant, accounting results must be adjusted to reflect
the rents that were not paid into
the railway trust. Claimant adds that: “it is axiomatic that a respondent cannot rely upon its own breaches or fault in order to argue that a claimant has not met
the standards for proving entitlement to recovery.” (Reply, para. 489)
246. Claimant also contends on
the basis
of Article 36(2)
of the ILC Articles that even if FVG had not shown profitability prior to
the Lesivo Resolution, international
law does not require prior profitability to recover damages on account
of lost profits and it is possible to justify an award
of damages on grounds
of the track record
of successful investments in similar circumstances. Claimant disputes Respondent’s argument that
the real estate valuations or utility easement projections are speculative. Furthermore, according to Claimant, even if lost profits are not awarded by
the Tribunal, there is no authority to support
the contention
of Respondent’s expert that recovery
of the net capital contribution is only appropriate when
the expropriation takes place close to
the time
of the original investment. Claimant finds support for this contention in
Vivendi II and
Phelps Dodge.95247. Claimant argues that Respondent’s Weighted Average Cost
of Capital (“WACC”) is inflated and unreasonable because,
inter alia, it is assumed that Claimant would have borrowed funds in Guatemala and that
the WACC should be computed with a 50/50 weighting between railroad cost
of capital and real estate cost
of capital. According to Claimant, this weighting does not correspond to
the factual situation
of an 8% contribution by
the railroad and a 92% contribution by real estate.
248. Claimant contends that it can recover
the amount it invested and
the amount invested by
the minority shareholders. For its contention, Claimant relies on Article 10.16.1
of CAFTA and
the explanation given by
the United States as a nonparty submission in
the GAMI arbitration in respect to parallel Article 1117
of NAFTA.
249. Claimant argues that it has established causation for its damages. According to Claimant, “It is irrelevant that FVG would not have needed
the FEGUA
equipment for
the eventually restored South Coast right-
of-way; if FVG did not have
the FEGUA equipment, it could not fulfill its performance obligations under Contract 402 because there was not a sufficient inventory
of replacement narrow gauge rolling stock available elsewhere in
the world that could be obtained at a reasonable cost.” (Reply, 569) Claimant then refers to
the devastating
de facto effect
of the Declaration on
the value
of Claimant’s investment as if it had declared
the entire usufruct harmful to
the interests
of the State, disputes
the effect
of its own press release and affirms that “Respondent has not presented any evidence that any current or prospective customer, supplier, lender or lessee first learned about
the Lesivo Declaration from Claimant’s press release or took any action as a result
of it.” (Reply, para. 572)
250. Claimant submits a revised claim
of $63,778,212 after deducting $2,704,310 on account
of revenues obtained since
the Declaration
of Lesivo in an
effort to mitigate its damages. As to compound interest, Claimant argues that there is no reason for simple interest taking into account
the compensatory function
of the interest awarded and ignores
the financial reality in which businesses operate. Claimant also refers to
the increasing tendency
of arbitral tribunals to award compound interest as Respondent itself has recognized.
96251. In its Rejoinder Respondent disagrees with
the interpretation given to Article 10.7.2
of CAFTA by Claimant. Respondent points out that
the words “lawful” and “unlawful” do not appear in Article 10.7, and that to apply
the Claimant’s reasoning would ignore
the State parties’ decision to measure damages as provided in this article.
The fair market value
of the investment is sufficient to wipe out
the effects
of the Lesivo Declaration and it is
the appropriate measure
of damages in accordance with
the Chorzów criteria. According to Respondent,
the way in which Claimant applies Chorzów compensates it twice for its investment.
252. Respondent insists on
the speculative character
of Claimant’s future profits claim. Respondent acknowledges that lost profits decrease from $36.16 million in
the Memorial to $22.19 million in
the Reply, but Respondent contends that
the lost profits claim continues to be unsubstantiated and extremely optimistic whether lost profits relate to
the operation
of the railroad or to
the real estate leasing and development rights. Respondent also insists that
the correction introduced by Claimant to reduce double counting is not enough because
the net present value
of the amortizations deducted from future cash flows is substantially lower than
the amount computed as lost investment.
253. Respondent explains that
the historical approach
of considering that Claimant possessed an asset, with a fair market value approximately equal to
the sum
of the amounts invested in FVG, is not appropriate because a portion
of these amounts were used to cover operational losses
of FVG. For this reason, an alternative historical approach would be to look at
the value
of FVG’s equity as reflected in its books just prior to
the Lesivo Declaration (US$4.2 million as
of December 2006), as this method would take into account both
the capital contributions and
the accumulated losses. However, Dr. Spiller [Respondent’s expert] also explained in his First Report that, given FVG’s severe financial distress prior to
the Lesivo Declaration, this figure would result in an overestimation
of FVG’s fair market value at that time. (Rejoinder, para. 367)
254. Respondent disputes that
the amount claimed for business termination was used for such purpose and, according to
the evidence submitted by Claimant,
97Respondent points out that only $119,235 was spent in severance payments out
of a total
of $1.35 million claimed by Claimant.
255. Respondent also disagrees with
the interpretation given by Claimant to Article 10.16.1 and to
the jurisprudence applying
the related Article 1117
of NAFTA. According to Respondent, Article 10.16.1(b) “only speaks
of a claimant’s ability to seek compensation for damages suffered
by the enterprise it owns or controls. What is more, CAFTA Article 10.26.2(b) and (c) specifically require that any damages awarded under CAFTA Article 10.16.1(b) be awarded and paid directly to
the enterprise, not
the individual claimant-investor.” (Rejoinder, para. 375. Emphasis added by Respondent) Furthermore, Respondent points out that all other FVG minority shareholders are Guatemalan and do not qualify as claimant or investor
of a party to CAFTA.
256. Respondent reiterates its disagreement with
the discount rate applied by Claimant, that before
the Lesivo Declaration FVG was worthless, and that Claimant has failed to prove a causal connection between
the damages it claims and
the Lesivo Declaration.
257. Respondent argues that, in case
of any damages awarded to Claimant by
the Tribunal,
the Tribunal “should condition Guatemala’s obligation to pay on Claimant’s first renouncing and forfeiting all
of the rights it has under
the usufruct contracts (402, 143/158 and 41), returning all lands and equipment covered by those contracts to Guatemala.” (Rejoinder, para. 398)
258. As to compound interest, according to Respondent, Claimant has failed to show
the existence
of special circumstances that would justify compounding in this case and there is equally no justification for applying
the “coerced loan” rationale to arrive at
the interest rate proposed by Claimant. Respondent proposes instead to apply a pre-award interest rate
equivalent to six-month LIBOR plus two percentage points.
259. The Tribunal observes that CAFTA’s provisions on compensation refer only to compensation in case
of expropriation.
The Tribunal has concluded that
the 98investment has not been expropriated.
The question arises
of the compensation standard to be applied in
the case
of breaches
of CAFTA other than expropriation.
260. CAFTA directs
the Tribunal to interpret Article 10.5 on
the minimum standard
of treatment in accordance with Annex B on customary international
law. Under customary international
law as reflected in
the ILC Articles, “
The responsible State is under an obligation to make full reparation for
the injury caused by
the internationally wrongful act.” (Article 31.1)
The Tribunal needs to determine
the amount
of compensation to be paid on account
of the injury suffered by Claimant as a consequence
of the breach
of the minimum standard
of treatment.
The Tribunal has determined that Claimant’s investment was not expropriated because it continued to enjoy its contractual rights under Contract 143/158 and it has remained in possession
of the equipment covered under that contract.
The Tribunal has also determined that
the Lesivo Declaration had a significant effect on Claimant’s overall investment but it has recognized that Contract 402 continues to be in force and that FVG continues to receive rents from
the real estate appurtenant to
the right-
of-way. Therefore,
the issue is how to assess
the compensation on account
of a measure which has an injurious effect, falling short
of expropriation on assets which continue in possession
ofClaimant.
261. Before turning to
the assessment
of compensation,
the Tribunal needs to address two preliminary matters: (a)
the renunciation by Claimant to its rights under
the Usufruct Contracts in case compensation is awarded by
the Tribunal, and (b)
the interpretation
of Article 10.16.1
of CAFTA.
262. On
the first
of these matters Respondent has argued that, “if
the Tribunal awards any damages to Claimant for Guatemala’s alleged breaches
of its obligations under CAFTA, it should condition Guatemala’s obligation to pay on Claimant’s first renouncing and forfeiting all
of the rights it has under
the usufruct contracts (402, 143/158 and 41), returning all lands and equipment covered by those contracts to Guatemala” (Rejoinder, para. 398). At
the hearing, in answer to a question
of the Tribunal, counsel to Claimant stated: “[...] if you awarded full reparation, however you define that, if you awarded full reparations, whether its for whatever State action that
99violates international
law, once you award full reparations, then
the payer
of those reparations,
the State, is subrogated to all
of our rights under
the Contract, its Contract, it seems to me. And therefore, it seems to me that
the fashioning
of your Award to
the extent that you'd concluded that what you were awarding were full reparations, fashioning it in that fashion you would automatically cause Guatemala to be subrogated to our rights under
the leases.” (December 16, day eight, p. 2134
of transcript)
263. The return
of investment assets conditional on payment
of the award is not uncommon in indirect expropriation cases. Thus in
ADC v. Hungary,
the claimant on receipt
of compensation was required to transfer to
the respondent its shareholding in
the relevant investment vehicle. Similarly, in
Tecmed v. Mexico,
the claimant was required to take all necessary steps to transfer to
the respondent or its nominee
the assets comprising
the hazardous landfill which was
the focus
of the dispute. It is less obviously appropriate in cases involving breach
of the fair and equitable treatment standard, but it is not unknown. In
CMS v. Argentina, for example,
the claimant was a US company which owned a 29.42% share in an Argentine gas utility company. Following regulatory action by
the respondent in
the wake
of the Argentine fiscal crisis
of the early 2000s,
the tribunal found that
the fair and equitable treatment standard
of the relevant BIT had been breached.
The tribunal awarded
the claimant compensation conditional on
the transfer
of its shareholding in
the utility to
the respondent.
264. In
the present case only Contract 143/158 was directly affected by
the Lesivo Resolution, and it could be argued that
the remedy should concern only that contract.
The Tribunal does not agree, for three reasons. First and most important, neither Party has taken this point (see paragraphs 54-5, 69 and 79-80 above). On
the contrary, both contemplate a Tribunal award which fully resolves
the dispute by ensuring that
the parties do not need to persist in a relationship which has become antagonistic and acrimonious. Secondly,
the Claimant has effectively made its
100election, withdrawing from Guatemala following
the passing
of the Lesivo Resolution, and
the Tribunal considers that its conduct in that respect was reasonable. Thirdly,
the investment concerned
the renovation and running
of a railway as a whole.
265. The Tribunal is also concerned that to restrict
the scope
of the remedy to Contract 143/158 would be to create an undesirable risk
of double recovery, e.g. through
the sale
of Claimant’s shares in FVG to a third party which might then acquire a right to litigate with respect to
the same conduct considered by this Award.
The Tribunal notes that it has
the capacity to render an award tailored so as to minimize
the risk
of double recovery between
the parties. In
the circumstances this situation is best resolved by requiring Claimant, on
the full and effective payment
of the prescribed compensation by Respondent, to transfer to Respondent or its nominee all
the Claimant’s shares in FVG.
266. As to
the interpretation
of Article 10.16.1
of CAFTA,
the Tribunal notes a certain inconsistency in
the way Claimant has pleaded its case. On
the one hand, Claimant filed its arbitration request both on its own behalf and on behalf
of FVG. On
the other hand, Claimant has pleaded that compensation be paid by Respondent to Claimant. Article 10.16.1(a) covers submission to arbitration
of a claimant on its own behalf. Article 10.16.1(b) provides for submission to arbitration by a claimant on behalf
of “an enterprise
of the respondent that is a juridical person that
the claimant owns or controls directly or indirectly.” As pointed out by Respondent, Claimant ignores Article 10.26.2’s requirement that, where a claim is submitted to arbitration under Article 10.16.1(b), an award
of monetary damages shall provide that
the sum be paid to
the enterprise. In
the instant case,
the minority shareholders
of FVG are all nationals
of Respondent and do not qualify as investors under CAFTA. For these reasons
the amounts awarded for its loss from its investment should be paid to Claimant and be
101calculated on
the basis
of the percentage
of the total amount invested by FVG’s shareholders, which was contributed by Claimant.
267. To summarize, for
the reasons that have been given,
the Tribunal considers that reparation is due to Claimant to compensate it fully for
the injury
suffered. It further considers that, in
the circumstances
of the case and to resolve
the dispute between
the parties,
the payment
of the amount awarded should be subject to Claimant relinquishing its rights under all
the contracts, i.e. Contracts 402 and 143/158. As noted, Respondent has pleaded that payment
of the award be on condition that Claimant return
the right
of way and equipment to Guatemala. Since FVG and not Claimant is
the party to
the Usufruct Contracts,
the Tribunal considers that
the effect sought by Respondent would be appropriately achieved from a legal stand point by conditioning payment
of the award upon
the transfer
of Claimant’s shares in FVG to Respondent.
268. Turning now to
the assessment
of damages,
the Tribunal recalls that
the parties disagree on
the amount, on
the applicable method
of calculation, on
the discount rate to apply, and on
the components to be included in
the calculation. In
the Tribunal’s view,
the diverging results in
the calculation
of damages performed by
the parties’ experts show
the malleability and uncertainty
of such calculations.
269. The Tribunal agrees with Respondent that, given
the past performance
of FVG,
the claim
of lost profits is speculative. To say
the least, it has not been proved that after eight years
of operation a sharp improvement in FVG’s performance was in
the offing, as Claimant’s experts have assumed. However, there are in
the experts’ considerations certain known quantities related to
the amount invested and
the actual rents received from leases
of the real estate.
The Tribunal will anchor its assessment to these certainties, which have
the additional merit
of arguably representing benefits which may be considered to accrue to Respondent on payment
of the amount awarded to Claimant.
270. In
the Tribunal’s view, quantum in
the present case has three elements. First, it is unquestioned that Claimant invested funds in
the rehabilitation and operation
102of the railway sufficient to complete Phases I and II. As revised in
the Reply, $19,025,321 represents
the total amount invested in FVG by Claimant and local
shareholders,
of which $15,108,861 (79%) were contributed by Claimant. A portion
of these funds claimed as investment, viz. $10.8 million, was invested by FVG’s shareholders to cover
the losses
of FVG (Counter-Memorial, para. 615, First Report,
of Dr. Spiller, Respondent’s expert, para. 82 and Exhibit C-27);
of this, $8,532,000 corresponds to
the 79% contributed by Claimant.
The Tribunal considers that
the funds invested by Claimant to cover these losses represent
the risks Claimant took when investing in Guatemala and cannot be attributed to any action
of Guatemala contrary to CAFTA. Furthermore,
the railway equipment in FVG’s possession is considered valuable property by Respondent.
The Respondent’s Attorney General has pleaded before
the Administrative Tribunal that
the railway equipment is “
un patrimonio millonario”. Part
of the funds invested by FVG’s shareholders were used to restore
the railway equipment necessary to bring trains back into service. While Respondent has contended that
the railway equipment has not been well maintained, approximately a year and a half prior to
the Lesivo Resolution FEGUA’s Overseer presented to FVG’s Chairman on behalf
of the FEGUA-affiliated Railroad Museum an award for “
therescue and restoration
of the Historic Railway Patrimony
of Guatemala” (Memorial, para. 120). Based on these considerations,
the Tribunal awards Claimant $6,576,861 ($15,108,861 minus $8,532,000).
271. Second, FVG receives rents for leasing
the real estate. These rents at
the time
of the Lesivo Declaration amounted to $716,316 per year (Reply, para. 520). Over
the 42 years left
of the Usufruct and as calculated by Claimant,
the net present value (“NPV”)
of these leases is $10,751,437. Respondent disputes
the discount rate applied by Claimant as being too low at 12.9%. Respondent claims that a rate
of 18.75% would be more appropriate. Claimant explains that
the difference between
the two rates arises from three factors:
(a)
Respondent’s expert assumes that Claimant would have borrowed in Guatemala rather than in the United States, which has an impact on the
rate of 1.8 percentage points.
103
(b)
The size premium of Morningstar used by Respondent’s expert is based on “category 10b” data rather than “category 10” data, which increases
the discount rate by a further 2.66 percentage points. Dr. Pratt, Claimant’s expert, explains that, when calculating the cost of equity for a company using the Morningstar categories, the category 10 size premium should be utilized and not the category 10b premium, which includes “an abundance of distressed companies”. He further explains that Category 10 reflects the bottom 10 percent of the combined stock on the NYSE, ASE and NASDAQ, while 10b includes the bottom 5 percent of the combined stocks on these exchanges.
(c)
Respondent’s expert assumes a 50/50 weighted railway cost of capital and real estate cost of capital instead of the actual 8% contribution by
the railroad and the 92% contribution by the real estate, which increases the rate by a further 1.5 points.
272. On
the other hand, Dr. Spiller, Respondent’s expert, has insisted in that “it is not standard valuation practice to assign a cost
of debt to a company operating in a particular developing country, experiencing substantial operational and financial difficulties, as if it was a successful and profitable company operating in
the US and other jurisdictions, as assumed by Dr. Pratt.” (Second Report, para 85). On
the issue
of the size
of the premium, Dr. Spiller argues that, (a) “[g]iven that
the size
of FVG places it in
the 10b group, whether under Claimants’ own experts’ assessment, or my own, there is no credible reason to use any other category for selecting
the size premium” (Ibid. para. 91); (b)
the same troubled companies are also included in
the 10 group only that their effect on
the premium is diluted; and (c) FVG needs to be compared with companies in a similar situation and FVG had shown negative results during
the seven years prior to its valuation (ibid. paras. 88 and 89). As to
the relative weights
of the railway cost
of capital and
the real estate cost
of capital, Dr. Spiller explains that, “Railroad activities account for an average 50% contribution to FVG’s EBITDA over
the remaining years
of the concession, while real estate exploitation
104represents
the remaining 50%. However, when calculated as net present value, railroad activities’ contribution to EBITDA increases to 60%
of the total, leaving
the remaining 40% to real estate activities. Since railroad activities have a higher WACC rate, I judged
the 50/50 distribution more conservative and thus adopted it for our combined WACC rate” (Ibid. para. 97)
273. The Tribunal considers that, as to
the first factor, FVG’s cost
of capital should be used to value FVG assets, including
the income stream from
the real estate leases.
The fact that RDC borrowed funds in
the United States, rather than Guatemala, does not detract from this conclusion. To
the extent that RDC borrowed funds in
the United States and then used those funds to finance FVG, this was in effect a subsidy that would be inappropriate to incorporate into
the valuation analysis
of a FVG asset. As regards Morningstar categories 10 and 10b, in
the Tribunal’s view,
the size premium for companies in group 10b is justified given
the size and uncertain financial condition
of FVG. As regards
the calculation
of the WACC,
the Tribunal accepts
the weight given by Claimant to
the railway cost
of capital (8%) and
the real estate cost
of capital (92%) because it reflects
the actual situation.
274. To conclude and based on
the preceding considerations,
the Tribunal finds that a discount rate
of 12.9% plus 2.66 percentage points (
the effect
of using
the 10b instead
of the 10 size premium) plus 1.8 percentage points (
the effect
of using FVG’s cost
of capital), for a total
of 17.36%, would be an appropriate discount rate to calculate
the NPV
of existing leases.
275. Thirdly, as for future leases, while
the Tribunal does not deny that such leases could have materialized,
the Tribunal considers that after eight years
ofoperation Claimant had secured only
the leases taken into account here. They show
the difficulty
of Claimant in enlarging its real estate lease portfolio as registered in FVG’s annual reports and pointed out by Respondent (p. 293 and ff.
of CounterMemorial). Hence, only
the leases in place at
the time
of the Lesivo Declaration have been taken into account.
276. Claimant has also included as part
of its claim
the lost revenues from Tecún Umán trans loading operations. This segment
of the railroad connects México
105to Tecún Umán and was disrupted by hurricane Stan. According to Claimant, at
the time
of filing
the Reply it was scheduled to resume operations in 2011 (Reply, para. 521). Since
the service at Tecún Umán was interrupted long before
the Lesivo Declaration through no fault
of Guatemala and
the Tribunal has no evidence
of service resumption in 2011,
the Tribunal has not included future revenues
of the Tecún Umán trans loading operations in its assessment
of damages.
277. To sum up and based on these considerations,
the Tribunal determines that Claimant is entitled to: (a) $6,576,861 on account
of its investment in Phases I and II; (b) $1,350,429 for operating
the railroad for another year after
the Lesivo Declaration which permitted an orderly closure
of the railroad service (Reply, para. 550); and (c) 82% (
the percentage
of shares in FVG held by Claimant, and which will be transferred to Respondent after full payment
of the Award by Respondent)
of $4,121,281.62 (which is $3,379,450.93),
the NPV
of the existing real estate leases measured over their remaining life as
of the date
of Lesivo, minus 82%
of rents paid to FVG under such leases post-
Lesivo and until payment by Respondent
of the awarded compensation, at which point Respondent will receive Claimant’s shares in FVG. Because
the Tribunal cannot determine at this time when Respondent will pay
the award, there will be a need for a final calculation
of this amount.
278. Claimant has argued for compound interest at a rate
of 9.34% based on
the rate that Respondent paid to private and public creditors in 2006 and on
the notion
of a coerced loan from Claimant to Respondent. Respondent has suggested a preaward interest rate
equivalent to six-month LIBOR plus two percentage points.
The Tribunal disagrees with
the coerced loan rationale
of Claimant to arrive at
the proposed rate
of interest.
The rationale for pre-award interest rests on a claimant’s loss for not being able to dispose
of the funds awarded from
the moment
the breach
of an international obligation has been determined in
the award. Claimant would not have been able to obtain
the rate
of interest claimed in its normal course
of business nor would have paid such rate for funds borrowed to replace those due for
the breach
of an obligation by Respondent.
106279. The Tribunal considers that
the rate proposed by Respondent is a commercially reasonable rate and determines that this is
the interest rate that shall
apply to
the awarded funds from
the date
of the Lesivo Declaration until such funds are paid.
280. The parties disagree on whether compound interest is applicable. Claimant relies on an increasing number
of precedents that have awarded compound interest. Respondent pleads that compound interest needs to be justified on
the basis
of special circumstances which Claimant has failed to show exist in its case.
281. The Tribunal observes that
the determination
of whether or not a compound interest rate is applicable needs to be justified by
the Tribunal as any other determination. Given
the length
of these proceedings because
of two jurisdictional phases in which
the jurisdictional objections
of Respondent were rejected, and several postponements in
the procedural calendar at
the Government’s request,
the Tribunal determines that compound interest is justified.
282. Each party has pleaded that it be awarded counsel fees and expenses as well as
the administrative expenses
of ICSID and
the fees and expenses
of the Tribunal. CAFTA Article 10.26.1 permits
the award
of costs and attorney’s fees in accordance with that section and
the applicable arbitration rules.
The ICSID Arbitration Rules only require that
the award contain “any decision
of the Tribunal regarding
the cost
of the proceeding” (Rule 47). On
the basis
of the discretion bestowed on
the Tribunal by CAFTA and
the applicable arbitration rules,
the Tribunal determines that they shall be responsible for their own counsel fees and expenses. As to administrative expenses
of ICSID and
the fees and expenses
of the Tribunal,
the Tribunal distinguishes between
the jurisdictional phases and
the merits phase
of the proceedings. Given that Respondent’s objections to jurisdiction were twice rejected in an unusually protracted process, Respondent shall be responsible for
the administrative expenses
of ICSID and fees and expenses
of the Tribunal related to
the two jurisdictional phases. Each party shall be responsible for 50%
of the administrative
107expenses
of ICSID and 50%
of the fees and expenses
of the Tribunal related to
the merits phase.
283. On
the basis
of the preceding considerations
the Tribunal has unanimously decided as follows:
1.
That Respondent breached the minimum standard of treatment under Article 10.5 of CAFTA in respect of Claimant’s investment.
2.
That Respondent shall pay Claimant: a) $6,576,861 on account of its investment in Phases I and II; b) $1,350,429 for operating the railroad for another year after the Lesivo Declaration which permitted an orderly closure of the railroad service; and c) 82% (the percentage of shares in FVG held by Claimant) of $4,121,281.62 ($3,379,450.93) – the NPV of the existing real estate leases measured over their remaining life as of the date of Lesivo – minus 82% of rents paid to FVG under such leases postlesivo and until payment by Respondent of the compensation here awarded. Because the Tribunal cannot determine at this time when Respondent will pay the award, there will be a need for a final calculation of this amount.
3.
That, on payment of the awarded compensation, Claimant shall forfeit and renounce all its rights under the Usufruct Contracts and transfer to Respondent Claimant’s shares in FVG.
4.
That the awarded amount of compensation shall carry compound interest at a rate equivalent to six-month LIBOR plus two percentage points as from the date of the Lesivo Declaration to the date of payment.
5.
That Respondent shall be responsible for the administrative expenses of ICSID and fees and expenses of the Tribunal related to the two jurisdictional phases. As calculated by the ICSID Secretariat, such fees and expenses amount to $384,854.01. Since each party has advanced 50% of the amounts requested by the ICSID Secretariat to finance these
108
proceedings, Respondent shall pay Claimant $192,427.00. Such amount shall carry interest at the rate set forth in sub-paragraph 4 above.
6.
That each party shall be responsible for 50% of the remainder of administrative expenses of ICSID and of the fees and expenses of the Tribunal.
7.
That each party shall be responsible for its own counsel fees and expenses.
8.
That all other claims are dismissed.
Done in Washington, D.C.