REDACTED VERSION ICSID CASE No ARB AF 04 05 INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES ADDITIONAL FACILITY RULES BETWEEN ARCHER DANIELS MIDLAND COMPANY and TATE LYLE INGREDIENTS AMERICAS INC Claimants THE UNITED MEXICAN STATES Respondent AWARD Before the Arbitral Tribunal constituted under Chapter Eleven of the North American Free Trade Agreement and comprised of Mr Bemardo M Cremades President Mr Arthur W Rovine Mr Eduardo Siqueiros T Secretary of the Tribunal Mr Gonzalo Flores Date of dispatch to the Parties November 21 2007 REDACTED VERSION TABLE OF CONTENTS Paragraphs Introduction The Panies Procedural history Factual background High Fructose Corn Syrup Sugar h Mexican Beverage Sweerenn Market Suear Corn and HFCS m the NAI-TA Neeohadons The 1993 Exchange of Letters between e United States and Mexico Regarding the Sugar Provisions of NAFTA The Mexican Sugar and Beverage Sweetener Markets in the Early Years ofNAFTA Mexico imposes Anti-Dimpiing Dutics and Import Licensing Requirements Mexico initiates the NAFTA Chaptcr XX State-to-State Dispute Resolution Procedures Tie IEPS Amendment The WTO Dispute Settlement Roceedings The July 2006 MexicoNnited States Understanding Regarding the Bilateral Sweetenm Trade - jj k The legal position of the Parties The Respondent's Countermeasures Defense General jurisdictional issues Lex specialis Customary International daw on Comtmneasures Whether the Tax was enacted in response to the alleged U S breaches and was intended to h b c e U S compliance with its NAFTA obligations Roportionalily The question of independent rights The Respondent's request for suspension of the proceedings The Claimants' NAFTA Claims a b c Ix Damages X Costs XI Award National Treatment Performance Requirements Expropriation AWARD - ICSW CASE No ARB AF 04 05 REDACTED VERSION L INTRODUCTION 1 - The Claimants in this arbitration allege that an amendment by the Respondent of its tax legislation breaches Chapter Eleven of the North American Free Trade Agreement NAFTA 2 - On December 30 2001 with effect from January 1 2002 the Mexican Congress amended Articles 1 2 3 and 8 of the Ley del Impuesto Especial sobre Producci6n y Servicios the LEPSAmendment hereinafter imposing a 20 percent excise tax on soft drinks and syrups and the same tax on services used to transfer and distribute soft drinks and syrups This tax only applied to soft drinks and syrups that used any sweetener other than cane sugar such as high fructose corn syrup C Soft drinks and syrups sweetened exclusively with cane sugar were taxexempt The tax was repealed as of January 1 2007 For purposes of the present Award the excise tax measures affecting soft drinks and sugar resulting from the IEPS Amendment will hereinafter be referred to as the Tax 3 - The Claimants seek damages and related relief alleging that the IEPS Amendment and resulting imposition of the Tax had a direct impact on Claimants' investment in HFCS production and distribution facilities causing ALMEX substantial loss or damage in violation of the following provisions of Chapter Eleven of the NAFTA i Article 1102 National Treatment ii Article 1106 Performance Requirements and iii Article 1110 Expropriation 4 - Mexico denies these allegations and contends that the Tax amounted to a legitimate countermeasure in accordance with customary international law because the United States allegedly breached its NAFTA obligations regarding i US market access for Mexican sugar exports and ii the State-to-State dispute settlement provisions of the NAFTA by blocking the appointment of panelists under Chapter XX 5 - Mexico further defends by maintaining that it did not breach any of Articles 1102 110601 1llOoftheNAFTA AWARD - ICSW CASE No ARB AF 04 05 REDACTED VERSION 11 THE PARTIES 6 - The Claimants in this arbitration are ARCHER DANIELS MIDLAND COMPANY ADM hereinafter and TATE LYLE INGREDIENTS AMERICAS INC TUX hereinafter 7 - ADM is incorporated under the laws of the State of Delaware United States of America with its principal place of business at 4666 Faries Parkway Decatur Illinois 62525 United States of America TLIA is incorporated under the laws of the State of Delaware United States of America with its principal place of business at 2200 E Eldorado Street Decatur Illinois 62525 United States of America 8 - ALMIDONES MEXICANOS S A de C V ALMEXn hereinafter is a company organized under the laws of Mexico and incorporated in the State of Jalisco ALMEX is a joint venture that ADM and TLIA wholly own and control The Claimants claim on their own behalfpursuaut to Article 1116 of the NAFTA and on behalf of ALMEX pursuant to Article 1117 9 - In these proceedings the Claimants are represented by ARCHER DANIELS MIDLAND COMPANY Mr Warren E Connelly AKW GUMP STRAUSS HAUER FELD LLP Washington D C and TATE LYLE INGREDIENTS AMERICAS INC Mr Stanimir A Alexaudrov SLDLEY AUSTIN BROWN WOOD LLP Washington D C 10 - The Respondent is the Government of Mexico It is represented by Lic Luis Alberto Gonzdez and Lic Alejandra G Trevbio Secretaria de Economia Mtxico D F AWARD - ICSW CASE No ARB AE IO4105 REDACTED VERSION Messrsr J Christopher Thomas and J Cameron Mowatt THOMAS PARTNERS Vancouver and Messrs Stephan E Becker and Sanjay J Mullick PILLSBURY WBWHROP SHAW PITIhlAN LLP Washington D C 11 - For purposes of the present Award the Claimants and the Respondent are collectively referred to as the Parties 12 - In the elaboration of the present Award the Arbitral Tribunal has considered analyzed and evaluated all arguments of the Parties including all their claims and defenses documents witness statements expert reports and all other evidence submitted before the Tribunal rendering its decision on the basis of the following procedural history factual background and legal position of the Parties 13 - On October 14 2003 the Claimants delivered to Mexico a Notice of Intent to Submit a Claim to Arbitration in accordance with Article 1119 of the NAFTA thereby instituting proceedings on their own behalf pursuant to Article 1116 of the NAFTA and on behalf of ALMEX pursuant to Article 1117 Subsequently the Claimants delivered to Mexico a written consent and waiver in compliance with Article 1121 2 a and @ of the NAFTA 14 - On October 21 2003 Corn Products International ''CPI filed a Request for Institution of Arbitration Proceedings before the International Centre for Settlement of Investments Disputes ICSID or the Centre hereinafter under ICSID's Additional Facility Rules On January 24 2004 ICSID informed the parties that it had approved access to the Additional Facility and registered the case under reference ARB AF O4 I 15 - On August 4 2004 and pursuant to Article 1120 of the NAFTA ADM and TLIA filed a Request for the Institution of Arbitration Proceedings with ICSID and requested the Secretary-General of ICSID to approve and register its application and to permit access to the ICSID Additional Facility The Request for the REDACTED VERSION Institution of Arbitration Proceedings was filed after the expiration of the sixmonth period of time addressed in Article 2103 6 for the competent authorities to agree that the alleged measures do not constitute an expropriation under the NAFTA 16 - On September 8 2004 Mexico submitted to ICSID pursuant to Article 1126 of the NAFTA a request for the consolidation of the claims submitted to arbitration by CPI and those submitted jointly by ADM and TLIA and accordingly requested the appointment of an Arbikal Tribunal to determine whether the CPI and ADM TLIA claims should be consolidated 17 - On September 29 2004 the Secretary-General of ICSID informed the parties that the requirements of Article 4 2 of the ICSID Additional Facility Rules had been fulfilled and that the Claimants' application for access to the Additional Facility was approved The Secretary-General issued a Certificate of Registration of the Request for the Institution of Arbitration proceedings on that same day 18 - On January 7 2005 Mexico informed ICSID that the Parties and CPI had reached an agreement as to the composition of the Tribunal the Consolidation Tribunal hereinafter The Parties and CPI agreed that the Consolidation Tribunal would be composed of Mr Bemardo M Cremades a national of Spain Mr Arthur W Rovine a national of the United States and Mr Eduardo Siqueiros a national of Mexico 19 - On April 8 2005 the Claimants the Respondent and CPI jointly submitted a Confurnation of Agreement of the Disputing Parties Regarding Consolidation regarding the membership and mandate of the Consolidation Tribunal stating that all proceedings of the Consolidation Tribunal were to be governed by the ICSID Additional Facilily Arbitration Rules as modified by the procedural requirements of NAFTA Chapter 11 Subsequently the Consolidation Tribunal asked the Parties to file their submissions on the question of consolidation 20 - The Parties and CPI presented written submissions before the Consolidation Tribunal on April 12 2005 and oral arguments through their counsel at a hearing held at the seat of the Centre in Washington D C on April 18 2005 Representatives from the Governments of Canada and the United States also attended the hearing 21 - The question before the Consolidation Tribunal was whether the Article 1120 claims submitted by CPI on one hand and ADMKLI 4 on the other should be consolidated in whole or in part considering whether the claims had a question AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION of law or fact in common If that requirement is met the Tribunal may in the interests of fair and efficient resolution of the claims issue a consolidation order Article 1126 2 22 - On May 20 2005 the Consolidation Tribunal issued an Order rejecting Mexico's request for consolidation of the claims submitted by CPI and the Claimants The Order of the Consolidation Tribunal in its material part reads as follows 5 The question before this Tribunal is whether the Article 1120 claims submitted by CPI on the one hand and ADMi Tate Lyle on the other should be consolidated in whole or in part In order to issue an order of consolidation the Consolidation T n i a l must k t be satisfied that the claims have a question of law or fact in mmmon If that requirement is met the Tribunal may ''in the interests of fair and efficient resolution of the claims issue a consolidation order Article 1126 2 6 The Consolidation Tnibmal accepts that the claims submitted to arbitration do have certain questions of law or fact in common for purposes of Amcle 1126 2 The Tribunal must therefore consider whether in the interests of the fair and efficient resolution of the claims it should grant or refuse the consolidntion order 7 In this regard the Tnbunal notes first and fornost that the pnrties do not dispute that CPI and the ALMEX shareholders are direct and fierce competitors Mexico has maintained that these parties could coordinate their respective Chaaa 11 claims against Mexico but has not disputed that CPI and the ALMEX shanholders are global competitors As such each company emphasized that it cannot make h o r n to the other before an arbimtion tribunal or anywhere details as to the nabne of its investments business strategies production costs plant design the effect of the tax on their investors and investments and other data that must be put to a tribunal engaged in oramioing whether or not there has been discrimination illegal performance requirements or an expropriation within the meaning of Chapter 11 8 The direct and major competition betwea the claimants and the consequent reed for complex confidentiality measures throughout the arbitration process would render consolidation in thrs case in whole or in part extremely difficult The parties would not be in a position to work together and share infomation The process including essmtial confidentiality agreements discovery written submissions and oral arguments would have to be carried out in substantial measure on separate tracks The consolidation of the claims of direct and major competitors would necessarily result in complex and slow proceedings in order to protect the confidentialityof sensitive information 9 The Tribunal considers that the competition between the claimants will adversely affect their ability in a consolidated proceeding to be fully able to present their cases Due process is fundamental to any dispute resolution procedure and the parties should not have to calculate which items of information evidence documents and arguments they can share with their competitors and which ones they cannot share The tribunal hearing the claims should not have to require separate procedures to accommodate the competitive sensitivity of the evidence and submissions of the different claimants Under such cireurnstances a consolidation order cannot be in the AWARD - ICSID CASE No ARB AF IO4 05 REDACTED VERSION interests of fair and efficient nsolution of the claims Two tribunals can handle two separate cases more fairly and efficiently than one tribunal where the two claimants an dinct and major competitors and the claims raise issues of competitive and commemial sensitivity I 20 For the foregoing reasons Mexico's requcst for consolidation is rejected 23 - On June 14 2005 Mexico sent a letter to ICSID confirming that the Parties had reached an agreement as to the constitution of the Arbitral Tribunal The Parties agreed that the Arbitral Tribunal would have the same composition as the Consolidation Tribunal Mr Bemardo M Cremades as presiding arbitrator and Mr Arthur W Rovine and Eduardo Siqueiros as co-arbitrators Subsequent to the Tribunal's acceptance of its mandate in accordance with Rule 13 1 of ICSID Additional Facility Arbitration Rules the proceedings began on August 11 2005 24 - The first session of the Tribunal with the Parties was held on October 7 2005 at the seat of the Centre in Washington D C At this session the Parties confirmed their agreement that the Tribunal had been duly constituted pursuant to the relevant provisions of ICSID Additional Facility Arbitration Rules and Chapter Eleven of the NAFTA It was decided that the place of arbitration would be the City of Toronto in Ontario Canada and that the venue for each hearing would be determined by the Tribunal in consultation with the Parties English and Spanish were agreed as the languages of the proceedings The Claimants would file their submissions in English and the Respondent would file its submissions in Spanish It was decided that the Tribunal would render its decision in both languages A schedule for the filing of pleadings was agreed between the Parties and the Tribunal 25 - In compliance with the schedule agreed at the Tribunal's hearing on October 7 2005 the Claimants submitted on December 21 2005 a Memorial on the Merits with accompanying exhibits A copy of the Memorial and exhibits was sent to each member of the Tribunal the Centre and the Respondent 26 - On January 24 2006 the Parties requested the Arbitral Tribunal to issue an order recording the Parties' agreement regarding the protection of confidential information that either party might include in its pleadings to the Tribunal 27 - On April 10 2006 the Centre informed the Parties of the Tribunal's decision to invite the Governments of the United States of America and Canada to file submissions under Article 1128 by June 9 2006 AWARD - lCSID CASE NO ARB AF 04 05 REDACTED VERSION 28 - In compliance with the schedule agreed at the Tribunal's hearing on October 7 2005 the Respondent submitted on May 15 2006 a Counter-Memorial with accompanying exhibits A copy of the Counter-Memorial and exhibits was sent to each member of the Tribunal the Centre and the Claimants 29 - On June 19 2006 the Parties informed the Centre that they had agreed on a modification of the briefing schedule Pursuant to that agreement Claimants would submit their Reply on July 10 2007 and the Respondent would submit its Rejoinder on August 25 2006 30 - By letter of July 7 2006 the Centre informed the Parties that the U S State Department and Canada's Trade Law Bureau had declared that their respective govemments did not intend to file NAFTA Article 1 128 submissions at that point but r e s e t dtheir right to attend the hearings 31 - On July 10 2006 the Claimants submitted their Reply on the Merits with accompanying documentation A copy of the Reply and exhibits was sent to each member of the Tribunal the Centre and the Respondent 32 - On July 21 2006 the Arbitral Tribunal issued Procedural Order No 1 Concerning Confidential Information which might be included in the pleadings and the evidence of the Parties The terms of the Order were as follows 1 Any document including a file in electronic form submitted by the Parties during the course of the proceeding that contains Confidential Information shall be designated as confidential by the submitting paw All such docuroats the Confidential Documents and all information derived there from but not 6om any source independent of the Con6dential Documents are to be treated as confidential pursuant to the terms present Order Confidential Documents and information derived therefrom shall be subject to this Order except if they i are already in the public domain at the time of designation ii subsequently become public through means not in violation of this Order or iii are disclosed to the receiving party by a third party who is not bound by any duty of confidentiality and who has the right to make such disclosure 2 All Confidential Documents and any infomation derived therc6om shall be used solely in the context of the present arbitration and shall not be used for any other purpose 3 Prior to the receipt of Confidential Documents or any information derived there- from any person authoriscd under paragraph 4@ c and d below shall execute a declaration substantially in the form of the declaration annexed hereto as Exhibit A 4 Confidential Documents or the infomation contained therein may b e disclosed or described only to the following persons REDACTED VERSION a The T n i a l and its staff including the staff of the International Centre for Settlement of Inveslment Disputes ICSID b Attorneys counsel paralegals and other staff of counsel for each Party c Representatives of the Parties including in the case of Respondent govemment officials and employees who arc actively engaged in or who arc responsible for decision-making in connection with the present arbitration and d Fact witnesses and consulting or testifying experts of the Parties 5 All Confidential Documents shall be marked clearly on each page CONFIDENTIAL Confidential Information contained in documents submitted to the Tribunal shall be placed within brackets 6 The Parfies shall designate information as confidential in good faith and not in an arbitrary manner Confidential information is i business confidential information of the Claimants that is protected form public disclosure under U S statutes such as the antihust and trade remedy e g antidumping and countervailing duty laws and i information in the possession of the Mexican government that is protected from the public disclosure under Mexico's Ley Federal de Transparencia y Acceso a la InformaciQ Nblica Gubernamental and applicable privacy statutes Legal argumentation presented to the Tribunal is not Confidential Information If a Party does not agree that information designated by the other Party as ConfidentialInfom tion meets these criteria it may request that the Tribunal issue a mling on whether the information at issue is covered by this Order 7 Each party shall be responsible for preparing a public version of its documents containing Confidential information h m which such information has been redacted 8 AU Confidential D o c m a t s and all information derived therefrom shall be securely stored by the persons mthorised under p a r a w h 4 of the present Order when not actively in use in such manner as to safeguard their confidentiality and to ensure they arc accessible only to those persons 9 If the Tn'btmal makes use of Confidential Documents or information derived therefrom in any decision including an arbitral award it shall designate the portions relating to such document or information as confidential and place them between brackets the portions so designated shall not be disclosed by either party or any person authorised under paragraph 4 of the present Order 10 Within 30 days after the final wnclnsion of the dispute including any appeals or settlement counsel for each Party shall destroy and shall certify in wribng to counsel of the other Party that it has destroyed all Confidential Documents and any copies thereof as well as any information derived therefrom in whatever form and that no p r s m anthoorired under paragraph 4@ c and d of the present Order remains in possession of such document or information The Tribunal and its staft excluding the staff of ICSID shall destroy such documents and information within the same period of time without prejudice to the provisions of paragraph 7 33 - On August 25 2006 the Respondent requested a one-week extension of time for submission of its Rejoinder on the Merits until September 1 2006 On August 29 2006 the Centre advised the Parties that the Tribunal had agreed to the requested AWARD - ICSD CASE No ARB AF 04 05 34 35 - 36 - extension Subsequently on September 1 2006 the Respondent submitted its Rejoinder with accompanying documentation On September 11 2006 the Arbitral Tribunal consulted with the Parties regarding their proposals for the conduct of the hearing including the question of whether the hearing would deal with both liability and damages or liability only On September 22 2006 the Tribunal issued Procedural Order No 2 scheduling the hearing for October 9 until October 16 2006 subsequently postponed to March 19 - March 26 2007 The Tribunal informed the Parties that the Hearing would include all matters at issue including all questions regarding liability and damages and that the Hearing and transcript of the meetings would be covered by the provisions of Procedural Order No 1 dated July 21 2006 regarding the protection of business con dential information CPI a separate Claimant against Mexico in connection with the Tax requested permission from the Arbitral Tribunal to attend the hearing but the Claimants objected to the request The Tribunal noted that the competition between CPI and the Claimants the commercially sensitive nature of the evidence presented in the arbitration and the dif culties of protecting business con dential information were amongst the grounds for the rejection of the consolidation of the present proceedings with the CPI Arbitration Accordingly the Arbitral Tribunal declined application to attend the hearing The hearing took place over six days at the seat of the Centre in Washington DC from Monday March 19 2007 to Saturday March 24 2007 The parties were represented during the hearing as follows Attending on behalf of the Claimant ADM Mr Warren E Connely AKJN GUMP STRAUSS HAUER FELD L L P Also on behalf of ADM Mr James Shatter Mr Dennis Riddle Ms Shannon Herzfeld Mr David Smith Attending on behalf of the Claimant TLIA Mr Daniel M Price Mr Stanimir A Alexandrov Ms Marinn Carlson Ms Amelia Porges 11 AWARD - ICSID CASE No REDACTED VERSION Mr Patricio Grane SIDLEY AUSTIN BROWN WOOD L L P Also on behalf of TLIA Mr J Patrick Mohan On behalf of ALMEX Mr Jaime Hennosillo Mr Luis CasiUas Attending on behalf of the Respondent Lic Florinda Pasquel Peart Lic Luis Alberto G o d l e z Direccibn General de Consultoria Juridica de Negociaciones Secretaria de Economia Prof James Crawford Mr J Christopher Thomas Mr J Cameron Mowatt THOMAS PMTNERS Mr Stephan E Becker Mr Sanjay Mullick Mr Jonathan Mann PULSBURY WINTHROPSHAWP m L L P Lic Salvador Behar Embassy of Mexico in Washington D C Ms Yannick Mondy attended the hearing on behalf of the Government of Canada 37 - The Arbitral Tribunal heard the testimony of the following witnesses andlor experts all of whom were subject to direct and cross-examination On behalf of the Claimant Mr John Nichols Mr Edward Haijehausen MI Lynn Grider Mr James Fry Mr M Alexis Maniatis AWARD - ICSID CASE No ARB AF W OS REDACTED VERSION On behalf of the Respondent Mr Luis de la Calle Pardo Mr Ildefonso Guajardo Villareal Mr bagel Villalobos Rodriguez Mr Jos6 Ignacio Huerta Mr Gabriel Rarnirez Nambo Mr Jorge Mario Soto Romero Mr Pablo Ri6n Santisteban 38 - Transcripts in English and Spanish of the Hearing were prepared and distributed to the Parties and members of the Tribunal IV - FACTUAL BACKGROUND a High Fructose Corn Syrup EEFCS 39 - The Claimants and AI MEX manufacture and distribute HFCS a hctose syrup made from yellow corn which is first milled to produce slurry starch and then refined and further processed to produce fructose It is a capital intensive multistage production process HFCS is widely used in the beverage industry as a sugar substitute One particular type of HFCS called HFCS-55 was developed to replace sugar as closely as possible in soft drink production HFCS-55 was designed to have a neutral taste to be exactly as sweet as sugar and to work well in complicated formulas for Coca-Cola and Pepsi-Cola 40 - The United States soft drink industry switched to HFCS a s their sweetener of choice during the late 1970s and 1980s In the United States HFCS has consistently been available at a significant discount to the sugar price HFCS also has advantages over sugar in that it is provided to bottlers in liquid form and the bottlers using HFCS can avoid the warehouse storage costs for sugar liquefaction as well as the extra equipment maintenance required to avoid microbiological contamination when bottling with sugar 41 - The Claimants pioneered the development of HFCS as an alternative sweetener in the 1970s and 1980s and today are two of the largest corn refining companies in the world The Claimant ADM has several corn wet milling plants and is one of the largest producers of HFCS in the United States The Claimant TLIA manufactures HFCS at their wet milling plants in the United States AWARD - ICSW CASE No ARB AF 04 05 REDACTED VERSION 42 - The Claimant TLIA first invested in ALMEX in 1968 ALMEX owned a corn wet milling plant in Guadalajara Mexico that produced basic and modified starches TLIA acquired 100 % ownership of ALMEX in 1990 Subsequently TLIA sold 50% of its shareholding in ALMEX to ADM in 1993 The h c t o s e produced at ALMEX's wet corn milling plant WCS-42 is blended with an imported hctose WCS-90 to produce HFCS for sale to soft drinks bottlers 43 - HFCS is obtained principally from yellow corn In Mexico white corn predominates which is used primarily for human consumption and is less apt for tbe production of HFCS Accordingly HFCS in Mexico is produced from yellow corn imported from the United States b Sugar 44 - There are more than 120 sugar producing nations in the world Sugar is sold internationally as either raw sugar refined sugar or as a semi-refined sugar called standard sugar Sugar is a highly protected product Many nations including the United States and Mexico restrict sugar access to their domestic markets in order to support domestic prices International sugar prices can fluctuate dramaticaIly 45 - The sugar industry is characterised by a high degree of interdependence between the growers and the sugar mills that refine the sugar Sugar mill profits are based on the 'refining margin' or the difference between the sale price of refined sugar and the cost of raw sugar The high capital investment costs for a refining plant and the lengthy pfoduction cycles for cane sugar mean that the sugar industry is not able to respond flexibly to changes in the prices of sugar or of competing crops 46 - The United States and Mexico produce a significant share of their sugar needs Mexico is the third largest sugar producer in the Americas behind Brazil and the United States Sugar has a significant importance both economically and socially and every Governmental decision affecting the sugar indushy has had an important social impact in nual Mexico Sugar production in Mexico is destined mostly for domestic consumption as opposed to other countries that rely on the international market The importance of sugar for the domestic market has resulted in the Government's commitment to this industry for social and political reasons This commitment has been manifested in a series of policies seeking to regulate the market for the benefit of mill and cane producers These policies led to direct management starting in the 1970s and expropriation of sugar mills on September 3 2001 when a presidential decree nationaliied 27 of the 60 sugar mills in Mexico which amounts to more than 55 per cent of the Mexican sugar industry These measures were a response to the likelihood that the sugar mills would not be able to honor their payment obligations to sugar cane growers nor to AWARD - ICSID CASENo ARB AF IO4 05 REDACTED VERSION finance the planting of the harvest year that was about to begin Sugar also plays an important role in the agricultural economy of the United States and has faced problems in recent years 47 - In both the United States and Mexico the price received by domestic sugar producers is directly or indirectly supported by their respective governments and there are barriers to international competition The Claimants in this arbitration have drawn attention to the political intluence of the Mexican sugar industry and the Respondent has noted the strong relationships between the U S sugar industry with U S legislators 48 - HFCS can replace sugar in various uses although not in all Both HFCS and cane sugar are nutritive sweeteners or sweeteners with a caloric content as opposed to non-nutritive or non-caloric sweeteners such as saccharine consisting of a combination of fiuctose and glucose Both have a similar appearance when dissolved for use in bottling and both have nearly the same chemical compositions As such both are completely interchangeable and may be used by means of an industrial process for the purpose of sweetening products such as soft drinks and syrups HFCS and cane sugar are similar in t e r n of smell and color both are odorless and when presented as liquids colorless The taste color and other physical characteristics of soft drinks and syrups sweetened with HFCS and cane sugar are indistinguishable 49 - When HFCS became available in Mexico as an alternative and cost-effective sweetener Mexican producers of soft drinks and syrups started substituting HFCS for cane sugar The Claimants estimate that from a zero percent market share as a sweetener for the Mexican sofl drink industry in 1991 HFCS had acquired a 25 percent market share by 1997 c The Mexican Beverage Sweetener Market 50 - Mexico has the world's highest per capita consumption of carbonated soft drinks and the world's highest per capita consumption of Coca-Cola The Mexican market for carbonated soft drinks was valued at almost $US 15 billion in 2001 and was forecasted to reach a value of $US 19 billion in 2006 51 - The Mexican soft drink bottling industry comprises basically three groups i the bottlers of Coca Cola account for over 70% of the Mexican soft drink market Its three major Mexican bottlers include Fensa Arca and Continental Panamco ii the bottlers of Pepsi-Cola which account for about 15% of the market The main bottlers are Pepsi Bottling Group and Geusa and iii other national and international soft drinks brands AWARD - ICSW CASE No ARB AF IWIOS REDACTED VERSION 52 - Mexican production of sweeteners for soft drinks and syrups is concentrated on cane sugar Traditionally the Mexican soft drink industry in both the national and international brands used exclusively sugar as its sweetener except in the case of its diet products When the sugar refining industry was privatised in the 1980s many bottlers directly or indirectly acquired shareholdings in sugar refineries vertically integrating an important aspect of the beverage sweetener market There are estimates that in 2000 the soft drinks industry consumed 33% of Mexican mual sugar deliveries 53 - ALMEX began to sell imported HFCS in Mexico in 1994 and commenced domestic production of HFCS in December 1995 HFCS ew to become A L m s most important product accounting in 2001 f o r d o f its total sales an-of its profits 54 - From the perspective of the Mexican soft drink industry HFCS had cost advantages over the State supported sugar price There was an initial capital investment in order to receive the sweetener in a liquid form requiring storage tanks and changes in the piping and modifications in the production processes The smaller brands had more flexibility in their choice between sugar and HFCS and were most influenced by the price differential The Coca-Cola and Pepsi bottlers moved more slowly because of the importance of maintaining a consistent flavour and because of their own ownership interests in sugar refineries Amongst the bottlers of Coca-Cola products for example there were three distinct approaches first to persist with the exclusive use of sugar because of the direct ownership of sugar refineries by the particular bottler secondly to persist in the exclusive use of sugar owing to doubts as to consumer reaction to a change to HFCS and the capital costs of the change and thirdly to use a combination of sugar and HFCS in proportions authorised by the Coca-Cola parent company Coca-Cola eventually favoured a blend of sugar and HFCS which was seen as a good balance between the two competing sweeteners meaning a cost saving exercising downward pressure on the sugar price and avoiding dependence on a single industry for the supply of this vital input for the soft drink industry 55 - From the perspective of United StatedMexican bilateral sweetener trade the HFCS penetration of the Mexican soft drink sweetener market involved three distinct commodities a HFCS which was imported fiom the United States to Mexico as well as manufactured locally @ yellow corn which was imported fiom the United States to Mexico as the raw material for the manufacture in Mexico of HFCS and c sugar which faced severe competitive pressure in the Mexican soft drinks beverage market fiom HFCS In both Mexico and the United AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION States sugar enjoyed a State supported price was a politically active industry and of considerable social significance in certain parts of each country 56 - HFCS was an aggressive competitor of sugar in Mexico and the United States However HFCS was also an indirect beneficiary of the support programmes for sugar These programmes maintained a high sugar price in the United States and Mexico enabling HFCS to compete in the soft drinks sector on price The price of HFCS in both Mexico and the United States was consistently above the international price for refined sugar although below domestic prices The HFCS manufacturers therefore had an incentive to support the protection and therefore higher domestic prices for sugar The Respondent alleges that the Claimants are active members of the American Sugar Alliance the sugar industry lobby group in the United States d Sugar Corn and HFCS in the NAFTA Negotiations 57 - The formal negotiations of the NAFTA Agreement began in December 1991 and officially concluded in August 1992 The NAFTA was signed by the Heads of State of Canada the United States and Mexico on December 17 1992 which was followed by approval by the legislatures of the three Parties 58 - The North American Free Trade Agreement establishes a fiee trade zone pursuant to Article X IV of the General Agreement on Tariffs and Trade of 1994 the 'GATT' hereinafter ' Chapter III of the NAFTA is entitled National Treatment and Market Access for Good and deals with the principles of market access in general Certain sectors are subject to separate treatment in the NAFTA The special rules relating to Agriculture are set out in Chapter W A 59 - Article 302 of the NAFTA Tariff Elimination provides in general terms 1 Except as othewise provided in this Agreemen no Party may increase any existing customs duty or adopt any customs duty on an originabhg good 2 Except as otherwise provided in this Agreemenf each Party shall progressively eliminate its customs duties on originating goods in accordance with its Schedule to Annex 302 2 3 On the request of any Party the Parties shall consult to consider accelerating the elimination of customs duties set out in their Schedules An agreement between two or more Parties to accelerate the elimination of a customs duty on a good shall supersede any duty rate or staging category determined pursuant to their Schedules for such gwd when approved by each such Party in accordance with its applicable legal procedures 1 Art XXN 5 of GATI states 5 Accordingly the provisions of this Agreement shall not prevent as between the territories of coniractingpm lm leses theformotion of a customs union or of afree-trade ara AWARD - ICSID CASE No ARB AF O4 05 17 REDACTED VERSION 4 Each Party may adopt or maintain import measures to allocate in-quota imports made pursuant to a tariff rate quota set out in Annex 302 2 provided that such measures do not have trade resaictive effects on imports additional to those caused by the imposition of the tariff rate quota 5 On written request of any Party a Party applying or intending to apply measures pursuant to paragraph 4 shall consult to raview the administration of those measuns In addition Annex 302 provides for the staged reduction of existing tariffs between the Parties 1 Except as otherwise provided in a Party's Schedule attached to this Annex the following staging categories apply to the elimination of customs duties by each Party pursuant to Article 302 2 a duties on goods provided for in the items in staging category A in a Party's Schedule shall he eliminated entirely and such goods shall be dutyfie dfective January 1 1994 b duties on goods provided for in the items in staging category B in a Party's Schedule shall be removed in five equal annual stages beginning on January 1 1994 and such goods shall be duty-he effective January 1 1998 C duties on goods provided for in the ilems in staging category C in a Party's Schedule shall be m o v e d in 10 equal annual stages beginning on January 1 1994 and such goods shall be duty-kc effective January 1 2003 d duties on goods provided for in the items in staging category C in a Party's Schedule shall be removed in 15 equal annual stages beginning on January 1 1994 and such goods shall be duty-free effective January I 2008 and e goods provided for in the items in staging categoly D in a Party's Schedule shall continue to receive duty-he treatmat Mexico and the United States agreed that sugar was to be subject to a fifteen year tariff elimination period Annex 703 2 in Chapter VII contains special provisions relating to the bilateral trade in agricultural goods between Mexico and the United States Annex 703 2 A 13-22 deal with Trade in Sugar and Syrup Goods Annex 703 2 A 13-18 read as follows 13 The Parties s h d c o d t by July 1 of each of the firm 14 years beginning with 1994 to determine jointly in accordance with Appendix 703 2 A 13 whether and if so by what quantity either Party a is projected to be a net surplus producer of sugar in the next marketing y m and b has been a net surplus producer in any marketing year beginning after the date of enfly into force of this Agreement including the current marketing year 14 For each of the h t 14 marketing years beginning after the date of entry into force of this Agreement each Party shall accord duty-free treatment to a quantity of sugar and syrup goods that are qualifyiog goods not less than the greatest of a 7 258 metric tons raw value AWARD - ICSID CASE NO ARB AF W O5 REDACTED VERSION b the quota allocated by the United States for a non-Party within the carcgoj dcs gmted other specified countncs and areas undn parapph b i of adhnonal U S note 3 to chapter 17 of the H a r m o m d Tanff Schedule of the United States and c subject to paragraph 15 the other Party's projected net production surplus for that marketing year as determined under paragraph 13 and adjusted in acwrdance with Appendix 703 2 A 13 15 Subject to paragraph 16 the duty-free quantity of sugar and syrup goods under pmgmph 14 c shall not exceed the following ceilings a for each of the first six marketing years 25 000 metric tons raw value b for the seventh marketing year 150 000 metric tons raw value and c for each of the eighth through 14th marketing years 110 percent of the previous marketing year's ceiling 16 Beginning with the seventh marketing year paragraph 15 shall not apply where pursuant to paragraph 13 the Parties have determined the exporting Party to be a net surplus producer a for any two consecutive marketing years beginning after the date of enhy into force of this Agreement b for the pnvious and m e n t marketing years or c in the current marketing year and projected it to be a net surplus producer in the next marketing year unless subsequently the Parties determine that contrary to the projection the exporting Pmty was not a net surplus produccr for that year 17 Mexico shall beginning no later than six years after the date of entr into force of this Agreemen apply on a most- favored-nation basis a tariff rate quota for sugar and syrup goods consisting of rates of customs duties no less than the lesser of the corresponding a MFN rates of the United States in effect on the date that Mexico commences to apply the tariff rate quota and b prevailtug MFN rates of the United Sutrs 18 When Mexico applies a tariff rate quota under paragraph 17 it shall not apply on a sugar or synrp good that is a qualifymg good a rate of customs duty higher than the rate of customs duty applied by the United States on such good Annex 703 2 A 26 defines 'net production surplus' as meaning thequantity by which a Party's domestic production of sugar exceeds its total consumption of sugar during a marketing year determined in accordance with this Section and 'sugar' as meaning raw or refned sugar derived directly or indirectly @om sugar cane or sugarbeets including liquid refined sugar There is no definition in Annex 703 2 A of 'syrup goods' In addition to these bilateral provisions Mexico and the United States established a customs union in respect of sugar by applying the same tariff to imports from any other countries This tariff was set at a high level approximately %US0 36per kilo AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION 60 - The NAFTA scheme for the sugar trade between Mexico and the United States can be summarised as follows i staged tariff elimination between Mexico and the United States over fifteen years ii an annual minimum tariff-free quota iii an increase in the tariff-free quota if any Party produced a 'net production surplus' and iv a common tariff at a high level for sugar imports from other countries 61 - At the time of the execution of the NAFTA both the United States and Mexico were net importers of sugar and so produced no 'net production surplus' within the meaning of the NAFTA definition 62 - HFCS and corn are subject to less complex bilateral arrangements between Mexico and the United States under the NAFTA HFCS was subject to a ten year tariff elimination period by equal annual reductions beginning from a base rate of 15 per cent meaning that the tariff was eliminated completely from January 1 2004 The imports of United States corn to Mexico were subject to a tariff elimination period of fifteen years and a tariff-free quota o f 2 5 million tons increasing at 3 percent per annum e The 1993 Exchange of Letters between the United States and Mexico Regarding the Sugar Provisions of the NAFTA 63 - During 1993 the United States raised with Mexico the question of 'ambiguities' in the sugar provisions of the NAFTA By letter dated July 26 1993 the United States Trade Representative Michael Kantor wrote to the Mexican Secretary of Commerce and Industrial Development Jaime Sera Puche in the following terms Dear Jaime It was a pleasure to meet with you last week in Mexico One of the issues I raised was the ambiguity in the sugar provisions of the NAFTA This issue has assumed extraordinq importance In response to my concerns you asked that I set out in writing the nature of the ambiguity and how we believe it could be resolved In brief Appendix 703 2 A 13 of the NAFTA defines sugar for domestic consumption as all sugar and syrup goods a definition that would properly include high h c t o s e corn syrup HFCS HFCS is a sugar syrup that clearly is a complete substitute for sucrose symps particularly in uses such as soft drinks The ambiguity arises however because the appendix considm sugar for production to be all sugar and syrup goods derived fromsugar cane or sugar beets grown in a Party's territory Annex 703 2 Section C provides a similarly narrow definition of sugar for imporW into each country for purposes of this Annex AWARD - ICSID CASE No ARB AF IWOS REDACTED VERSION To resolve this ambiguity and assure a common and equitable definition of sugar I propose that we exchange side letters to clarify that in determining a party's net production surplus status sugar will be considered to include raw or refined sugar derived directly or indirectly from sugar cane or sugar beets liquid refined sugar and high fructose corn sweetener With this clarification the NAFTA will continue to provide for accelerated removal of restrictions should either party become a net surplus producer of sugar The clarification would prevent inequitable results if a multiplicity of definitions were used of if either party were considered to become a net surplus producer of sugar without an actual increase in sugar production I would appreciate your reaction to this proposal at the earliest possible oppo ty Trade officials in the United States and Mexico as well as representatives of the sugar industries in both countries subsequently discussed this issue 64 - On November 3 1993 one day before President Clinton would formally submit the NAFTA to the United States Congress for its approval the Mexican sugar i n d m Cbmara Nacional de las Industrias Azucarera y Alcoholera representatives advised the Mexican trade officials that an agreement had beem reached with the United States' sugar industry Me permito informarle que 10s representantes de la Industria Azucarera Mexicana bemos Uegado a un acuerdo con nuestra contrapsrte estadounidense en dos sentidos Ha quedado debidamente clariiicada la ambigiledad pre-existente definici6n de autosuficiencia m endulzantes para determinax 10s excedentes de eicpoltaci6n Es b i r que el concept0 de autosuficiencia involucra sumatoriamente cares de c y remolacha y alta fructosa de maiz 1 - 5 la 2 Tambikn hemos decidido solicier a nuestros respectivos gobiernos que se amplie la w t a de exportaci6n de 150 000 a 250 000 toneladas el primer 8 60 cn quc so obtcnga la autodcienci% a partir del septimo ado de eneada en vigor del Tratado dc Libre Comercio Esto con el principal prop6sito de ampliar las posibilidades de exportaci6n de nzhcarcs mexicanos Todo lo anterior en mnfinnaci6n y abundancia de lo que hoy le cxpresamos verbalmente 10s representantes industriales que nos enhenstarnos con Usted On the same date draft letters in English and Spanish were prepared to record the agreement of the Parties These letters were intended to be signed by the respective Ministers Jaime Serra Puche on the part of Mexico and Michael Kantor on the AWARD - ICSID CASENO ARB AF 04 05 Ll REDACTED VERSION part of the United States However on the evening of November 3 1993 the Spanish and English texts both expressed to be authentic were initialled by the chief bade negotiators of each country Dr Herminio Blanco on the Mexican side and Ambassador Rufus Yerxa on behalf of the United States The English and Spanish texts of these letters read as follows The Honorable Jaime Scrra Puche Secretary of C o r n m e and Industrial Development Alfonso Reyes 30 F'iso 10 Colonia Condesa 06140 Mexico D F Dear Dr Serm I have the honor to confirm the following understanding reached between the delegations of the United States of America and the United Mexican States with respect to the implementation of Annex 703 2 of the North American Free Trade Agreement 'WAFTA' Section A of Annex 703 2 of the NAFTA provides in part for market access between the United States of America and the United Mexican States with respect to ' ' h h in sugar and syrup goods The text generally provides reciprocally for the United States and Mexico that market access in sugar and syrup goods depends to a certain extent on whether the two countries have determined whether either has been or is projected to be a net surplus produca 'Wet surplus producer is defined as a Party that has a net production surplus 'Wet production sutplus in nun is defined as the quantity by which a Party's domestic production of sugar exceeds its total consumption of sugar during a marketing year determined in accordance with Section A of Annex 703 21 High fructose corn syrup is readily substitutable for sucrose sugar syrups particularly in such uses as soft drinks Such substitution could result m effects not intended by either Party Accordingly the United States of America and the United Mexican States agree that the determination of net production surplus for purposes of Section A of Annex 703 2 shall include consumption of high fructose corn syrup provided for in Harmonized System subheadings 1702 40 1702 50 and 1702 60 In addition notwithstanding the provisions of paragraph 15 b and c of Section A of Annex 703 2 the ceiling for each of the seventh through 14th marketing years shall be 250 000 metric tons raw value and paragraph 16 of Section A of Annex 703 2 shall not apply I would also like to take this opporhaity to affirm the provisions in paragraph 6 of Section A of Annex 703 2 which provide that each Party may wunt the in-quota quantity under a NAFTA tariff rate quota toward the satisfaction of in-quota quantity commitments undertaken by the Party as a result of the Umgt ayRound of multilateral esde negotiations under the General Agreement on Tariffs and Trade I have the honor to propose that this letter which is authentic in English and your letter of confirmation in reply constitute an agreement between our two governments to enter into effect upon the entry into force of the AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION NAFTA for the United States and Mexico and to remain in effect through the fourteenth marketing year for such time as they remain pllrties to the NAFrA Sincerely Michael A Kantor Embajador Michael A Kantor Representante Comercial de 10s siadosUnidos de h h i c a 600 Seventeen1 Suen N W Washington D C 20006 Estimado Embajador Kantor Tengo el honor de confirmar el siguiente entendimiento alcanzado entre las delegaciones de 10s Estados Unidos Mexicanos y 10s Estados Unidos de Amkica en relacibn con la aplicacibn del Anexo 703 2 del Tratado de Libre Comercio de America del Norte C'TLC ' La Seccibn A del Anexo 703 2 del TLC establece algunas disposiciones en materia de acceso a mercsdo enue 10s Estados Unidos Mexicanos y 10s Estados Unidos de Amtrica con respecto al wmercio de azf caresy jatabes En general el texto dispone de manera reciproca para Mkxico y Estados Unidos que el acceso a1 mercado de mes o jarabes depende en cima medida de que 10s dos paises determinen que uno de ellos ha sido o estima quc sera un pmductor supmvitario Productor supcravitario significa quc una Pane time un excedcnte dc producci6n nncto Exccdente de produccion nneto a su v q esta defmido como la cantidad dc la producci6n nacional de a z i a de r una dc las Partes que excede a su consumo total de car d m t e un aio ccomrcial calculsdo de acuerdo con la Seccibn A del Anexo 703 2 La hctosa de maiz puede facilmente sustiluir a 10s cares particularmente para la elaboracibn de refxscos Dicha sustituci6n podria tener resultados no deseados por las Partcs En consecuencia 10s Estados Unidos Mexicanos y 10s Estados Unidos de Amkriur acuerdan que la detenninacibn de excedente de produccibn neto incluirb para efectos de la Seccibn A del Anexo 703 2 fructosa de maiz descrita en la subpartidas 1702 40 y 1702 60 del Sistemahonizado Ademas no obstante lo dispuesto en el panafo 15@ y c de la Secci6n A del Anexo 703 2 el limite para cada uno de 10s afios comerciales del s $ i i o a1 dtcirno cuarto seri de 250 000 toneladas m icas valor cmdo y no aplicara el psrrafo 16 de la Seccibn A del Anexo 703 2 Quisiera tambih aprovechar esta oportunidad para wnfirmar lo dispuesto en el p h d o 6 de la Secci6n A del Anexo 703 2 que establece que cada Parte puede contar la cantidad dentro de la cuota de un arancel cuota del TLC para satisfacer 10s com rarnisossobre cantidades dentro de las cuotas adopkdos por la Pwe corn resultado dcl las ncgoclac onescomcrc ales mulnlatcralrs de la Ronda Uruguay del Acuerdo General jobre Aranceles y Comercio AWARD - ICSID CASENo ARB AF IO4 05 REDACTED VERSION Tmgo el honor de proponer que esta carta que es autentica en espafiol y su carta de nspuesta que la confume constihlyan un entendimiento entre nucstros dos gobiernos con efectos a partir de la mbada m vigor del TLC para Mexico y Estados Unidos y quc permnnezca en vigor hasta que concluya el dbcimo cum a Iocomercial mientras Mexico y Estados Unidos sean Partes del TLC Dr Jaime Serm Puche Secrebuio de Comercio y Fommto Industrial The reference to Harmonized System subheading '1702 50' was added by hand in the fourth paragraph of the typewritten English text 65 - These draft letters affected the provisions of Annex 703 2 A of the NAFTA relating to Trade in Sugar and Syrup goods in the following respects i The definition of 'net production su plus' Annex 703 2 A 26 ii The figure for the ceiling of the duty fiee quantity of sugar for the seventh marketing year Annex 703 2 A 15@ and iii The removal of the ceiling for the duty free quantity of sugar beginning from the seventh marketing year in the event that one of the Parties was a net surplus producer Annex 703 2 A 16 66 - In respect of the definition of 'net production surplus' the English and Spanish texts differ The amendment to the NAFTA definition of 'net production surplus' in the English letter cgor the purposes of section A of Annex 703 2 shall include consumption of high fivctose corn syrup differs from the Spanish text incluirci para efectos de la Seccidn A del Annex 703 2 fructosa de maiz in that the English text includes only the consumption of high fructose com syrup in the definition The effect of this difference on the NAFTA definition of 'net production surplus' ccthe quantiry by which a Pariyk domestic production of suxar exceed its total consumption of sugar during a marketing year determined in accordance with this Section is that the English text includes fructose only in the calculation of consumption whereas in the Spanish text fructose is included in the calculation of both consumption and production Further after these draft letters had been initialled on November 3 1993 Mexico complained of the clause in both the Spanish and English texts that rendered Annex 703 2 A 16 inoperative on the basis that this had not in fact been part of the agreement between the Parties The United States responded to Mexico in a letter dated December 8 1993 which read as follows The Honorable Jaime Serm Puche Secretary of Commerce and Industrial Development Alfonso Reyes 30 Piso 10 Colonia Condesa AWARD - ICSW CASENo ARB AF W OS REDACTED VERSION 06140 Mexico D F Dcar Dr Sem As you h o w we need to complete before January 1 a formal exchange of letters confirming the understandingswe reached on November 3 involving the sugar and f r o m concentrated orange juice provisions of the North American Free Trade Agreement I am accordingly enclosing signed original letters to you on behalf of the United States Your response will constitute a formal exchange of letters In your fax of November 29 there was a note raising a question pertaining to paragraph 16 of Section A of Annex 703 2 of the NAFTA My recollection which was confinned when I checked the texts initialled by Herminio Blanco and Rufus Yma is that this language was indeed part of our understanding of November 3 I am also enclosing copies of the initialled letters which were also sent to the Congress as part of the NAFTA package As noted in your fax the provision on paragraph 16 was not in the proposal we sent you on Octoba 26 However during our meeting at Dulles Airpolt on October 28 you rejected both the orange juice and sugar proposals we had asked you to cansider Subsequent to that mccting we drafted new proposals on both sugar and orange juice Those were the ones we considered and which formed the basis for the agreement ultimately reached on November 3 I hope this clears up any Lingering confusion on this point Sincerely Michael A Kantor With this letter the United States enclosed a letter signed by Ambassador Michael Kantor and dated December 8 1993 in the exact terms of the draft initialled on November 3 1999 except that the handwritten reference to subheading 1702 50 in the fourth paragraph was now typed as part of the text On behalf of Mexico Dr Jaime Serra Puche signed and returned a letter in Spanish dated November 4 1993 which differed kom the draft previously initialled in that the statement in the fifth paragraph that paragraph 16 of A M X 1703 2 A would not apply y no aplicari el p b f o 16 de la Secci6n A del Annex 703 2 was deleted The Spanish text signed by Dr Serra Puche did however include a reference to subheading 1702 50 in the fourth paragraph making the English and Spanish texts consistent on this point 67 - The result was that there were two material uncertainties in the final exchange of letters by Mexico and the United States i whether Annex 703 2 A 16 relating to the removal of the ceiling for duty free quantity of sugar beginning ftom the seventh marketing year in the event that one of the Parties was a 'net surplus producer' was inoperative and ii whether the d e t i o nof 'net probction AWARD - ICSD CASE No ARB AF I04 05 25 REDACTED VERSION surplus' in Annex 703 2 A 26 included consumption and production of HFCS or simply consumption ' ' 68 - On January 1 1994 the NAFTA entered into effect f The Mexican Sugar and Beverage Sweetener Markets in the Early Years of the NAFTA 69 - From 1989-1994 Mexico was a net importer of sugar In 1995 Mexico became a surplus producer Annex 703 2 A 13 required the United States and Mexico to consult by July 1 of each year regarding whether either Party was a 'net surplus producer' as this term was defined in the NAFTA From 1995 the United States and Mexico agreed that Mexico was a surplus producer but they did not share the same calculation of the surplus Mexico made its calculation of the net production surplus on the basis of the definitions in Annex 703 2 A 26 and without regard to the 1993 exchange of letters Mexico took the position that the Parties had not reached any agreement in this exchange of letters and therefore the terms of the NAFTA Agreement applied without amendment The United States calculated the net production surplus on the basis of the English text of the letter from Ambassador Kantor to Dr S m Puche 70 - Mexican sugar production grew from 199411995 to 2000 2001 At the same time HFCS imports and domestic production grew substantially HFCS replaced sugar particularly in the soft drink industry thereby restraining domestic sugar consumption 71 - The Mexican sugar surplus during the period had negative effects on the Mexican sugar industry The Mexican producers saw the tariff-free export of surpluses to the United States as fundamental to their profitability particularly considering the impact on the Mexican sweetener market of HFCS imported from the United States or made locally £ram American corn Mexican sugar producers saw themselves prejudiced in the imbalance of commercial flows in sugar on the one hand and HFCS and corn on the other Mexican sugar access to the United States became a political issue of major importance that Mexico raised at all levels of trade negotiations including at the level of Heads of State President Zedillo of Mexico wrote to President Clinton of the United States on July 14 1997 This letter included the following paragraphs Las importaciones de fructosa de maiz en Mexico han aumentado mAs del 250 por ciento durantc 10s ultimos 12 meses El cien por ciento de estas importations provicnen de EE W En contraste MCxico solamentc ha participado marginaimente en 10s cupos de importacih de car de su pais a pesar de sus mcientes necesidades las importaciones de azi w mexicana representaron menos del 1 5 por ciento de las importaciones AWARD - lCSW CASE NO ARB AF 04105 REDACTED VERSION totales de EE W en el ciclo 96-97 Incluso en ma wy mayo de este d o su pais asign6 cuotas adicionales por un total de 400 000toneladas sin que Mexico rcsultara beneficiado pot esta asignaci6n Las reducidas posibilidades de acceso del azircarmexicano a mercado de EE W aunado a las crecimtes importaciones de hctosa de maiz podrian traducirsc en fucrtes excedentes que afectatian seriamente a cientos de miles de campesinos mcxicanos Estoy seguro que considerando que la fructosa de 10s Estados Unidos tiene ya un acceso sin nshiccioues cuantitativas a1 mercado mexicano si trabajamos juntos se podrin encontrar fomas de que el adcar mexicana pueda bcneficiarse de 10s aecientes cupos de importacibn de anicar que viene otorgando su pais Se trata de una opomnidad ID para continuar promoviendo la rim relacibn bilateral enke nueswos paises g Mexico imposes Anti-Dumping Duties and Import Licensing Requirements 72 - On January 14 1997 the C h r a Nacional de las Industrias Azucarera y Alcoholera requested an anti-dumping investigation against HFCS from the United States The investigation was carried out by the Secretaria de Comercio y Formento Industrial SECOFI and resulted in a f d decision dated January 23 1998 imposing anti-dumping duties on HFCS from the United States 73 - The Mexican HFCS anti-dumping duties were challenged in two distinct processes Firstly the United States challenged these duties under the dispute settlement procedures of the World Trade Organization WTO On February 24 2000 a WTO Panel found the Mexican anti-dumping detamhtion to be in violation of the WT0 Anti-Dumping Agreement in various respects 74 - On September 20 2000 SECOFI issued a re-determination revising its early antidumping determination The United States also challenged this re-determination before the WTO A WTO Panel found the Mexican re-detemhation was inconsistent with Mexico's obligations under the WTO Anti-Dumping Agreement and this decision was upheld by the WTO Appellate Body in a decision dated October 5 2001 see Mexico's Anti-Dumping Investigation of High Fructose Corn Syrup 7FCs from the United States Recourse to Article 21 5 of the DSU by the United States AB-2001-5 WTIDS 132IABiRW 22 October 2001 75 - Secondly involved parties United States exporters and Mexican importers challenged the SECOFI anti-dumping determination pursuant to Chapter 19 of NAFTA 'Review and Dispute Settlement in Antidumping and Countenrailing Duty Matters' The Chapter 19 Panel in its Final Decision dated August 3 2001 entitled Review of the Final Determination of the Antidumping Investigation on Impor of High Fructose Corn Syrup originating from The United States of AWARD - ICSW CASE No ARB AF 04 05 REDACTED VERSION America Case MEX-USA-98-1904-Ol required Mexico to terminate the antidumping duties and refund the duties collected since their imposition 76 - In 2001 Mexico also initiated a series of import restrictions on HFCS ALMEX challenged in the Mexican administrative courts a December 2002 import license requirement for HFCS which was found to be unconstitutional as it was considered to be contrary to Mexico's obligations under the NAFTA Accordingly AZ MEX cmently benefits from an amparo court order exempting it from the import licensing requirement for HFCS h Mexico initiates the NAFTA Chapter XX State -State Dispute Resolution Procedures 77 - On the basis of the Mexican interpretation of the effect of the 1993 exchange of letters that is that there was no agreement in the 1993 exchange of letters and so the NAFTA continued to apply in its original tern Mexican sugar producers would have an unrestricted right to duty free exports to the United States pursuant to Annex 703 24 and pparticularly paragraph 16 from October 2000 Before this date Mexico activated the State-to-State dispute resolution provisions of Chapter XX of the NAFTA In April 1998 the United States and Mexico held consultations pursuant to Article 2006 of the NAFTA In November 1999 there was a meeting of the Free Trade Commission pursuant to Article 2007 at Mexico's request but no satisfactory resolution was achieved As the 'seventh marketing year' approached Mexico moved to the next stage of the NAFTA State-to-State dispute resolution procedure On August 17 2000 Mexico requested the establishment of an arbitration panel pursuant to Article 2008 of the NAFTA 78 - In September 2000 the United States advised that the duty free quota for Mexican sugar for the 200012001 trade year would be 116 000 tons which was the amount of the Mexican surplus calculated in accordance with the English text of the 1993 letter Mexico considered its surplus to be approximately 500 000 tons In September 2001 the United States announced the duty free import quotas for Mexican sugar for 200112002 On the basis of its 1993 letter the United States granted a quota to Mexican sugar of 148 000 tons Mexico considered its surplus to be approximately 650 000 tons 79 - There were further negotiations without any resolution The arbitration panel pursuant to Article 2008 had still not been constituted when Mexico enacted the E P S Amendment AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION i The IEPS Amendment 80 - The IEPS Amendment originated as a proposal £rom certain members of the Mexican Congress to protect the domestic cane sugar industry from HFCS A report by the Committee on Treasury and Public Credit of the Mexican Congress -submitted by the Claim nts- describes the plan to enact the Tax with the objective of not causing a major injury to the sugar indusby C h a de 10s Diputados af oII No 6 December 31 2002 at p 692 In introducing the Tax proposal Representative Rahl Ramirez Avila noted We legislatom however are committed to protecting the domestic sugar industry because on it depends the subsistence of a great number of Mexicans To that effect it is proposed that h e tax on sift drinks apply only to those which for their production utilize fiructose in substitution fir cane sugar Claimants' Memorial on the Merits para 52 citing Minutes of Legislative Debate December 31 2001 atpp 711-712 81 - The Tax was approved on December 31 2001 and entered into force on January 1 2002 Articles 1 2 3 and 8 ofthe JEPS Amendment read as follows LEY del Impuesto Especial sobre ProducciC y Servicioa cArtleulo 1' EstBn obligacias a1 pago del impuesto establecido en esta Ley las personas 5sicas y las morales que rcalicen 10s actos o actividades siguientes I II La enajenacib en tenitorio nacional o en su caso la importxion delinitiva de 10sbienes s alados en esta Ley La prestaci6n de 10s servicios seiialados en estn Ley El impuesto se calculmi aplicando a 10sv a l m a que se refriere este ordenamiento la tasa que para cada bien o semcio establece el dculo 2' drl mismo Articulo 2' A1 valor de 10s actos o actividades que a continuacion se seflalan se aplicarh las Was siguientes I En la enajenaci6n o en su caso en la impoItacion do lo8 siguientes bienes G Aguas gasificadas o minera1es refrescos bebidas hidratantcs o rehidratantes cancentrados polvos jmbes esencias o exmtos de sabores que al diluirse prmitan obtencr rekescos bebidas hidratantes o rehidratantes que utilicen edulwrantes distintos del anicar de caiIa 20% El Jarabes o concentrados para preparar refrescos que se expendan en envases abiertos utilizando aparatos autom6 ticos eltctricos o mechicos que AWARD - ICSID CASENo ARB AF IMIOS 29 REDACTED VERSION utilicen edulcorantes distintos del anicar cafla 20% 11 de En la prestaci6n de 10s siguientes servicios A Articulo 3O Comisi611 mediacih agencia representacih correduria consignacibn y disbibucih w n motivo de la enajenacion de 10s bienes sdalados en 10s incisos A B C G y H de la f1acci6n I de cste afdculo En estos casos La tasa aplicable seri la que le corresponds a la enajenaci6n en tenitolio nacional I bien que se mte en 10s thminos que para tal efecto dispone esta Ley No se pagad el impuesto mando 10s servicios a que se refiere este inciso sean wn motivo de las enajenaciones bienes pot 10s que no se estd obligado al pago de este impuesto en 10s tkminos del articulo 8 de la misma Para 10s efectos de esta Ley se entiende por XV Refrescos las bebidas no fermentadas elaboradas con agua agua carbonatada exwnos o esencias de iiutas saborizantes o con nralquier otra materia prima gasificados o sin gas pudiendo contcnc Bcido citrico Bcido benzoico o Acido s6rbico o sus sales como conservadores siemprc que contengan fructosa XVI Bebidas hidratantes o rehidratantes las bebidns o soluciones que contienen agun y cantidades variables de carbohidratos o de electrolitos Articulo 8 L No se p el impuesto establecido en esta Ley Por l a enajenaciones siguientes d Las de cervwa bebidas refrescantes puros y okos tabacos labrados asi como las de 10s bienes a que se refieren 10s incisos G y H de la fracci6n I del artlculo 2' de esta Ley que se e f e d e n a1 phblibliu en general salvo que el enajenante sea fabricante productor envasador diskibuidor o importador de 10s bienes que enajene 0 Las de 10s bienes a que se re ierm 10s incisos G y H de la h c c i h I I articulo 2 de esta Ley siernpre que utilicen como edulcorante imicamente ar de caaa wnglish Translation LAW on the Special Tax on Production and Senices Physical and legal persons engaged in the following actions or activities are Article 1 required to pay the tax established in this Law I The 6nal wnsfer in national territory or as applicable tbe 6nal importation of goods identified in this Law AWARD - ICSID CASE No ARB AF 04 05 REDACTED VEKS OI I 11 The provision of services indicated in this Law The tax shall be calculated by applying the rate established in Article 2 herein to the value of each good or service Article 2 indicated I The rates given below shall apply to the value of the actions or activities On the transfa or as applicable importation of the following goods G Carbonated or mineral waters soft drinks hydrating or rehydrating drinks concentrates powders syrups essences ar extracts that can be diluted to produce soft drinks hydrating or rehydrating drinks that use sweeteners other than cane sugar 20% H Syrups or concentrates for preparing soft drinks sold m open containers prepared using automatic electric or mechanical equipment and containing sweeteners other than cane sugar 20% II On the provision of the following services A Article 3 Commissions dcalers agencies representation brokering consignment and distribution for the purpose of transferring goods indicated in subsections A B C G and H of this Article's Section I In these cases the applicable rate shall be the rate for domestic transfer of the good in question under terms provided by this Law The tax is not payable when services referred tom this section are for the transfer of goods not required to pay this tax m accordance with Article 8 herein For purposes of this Law the following definitions apply XV Soft drinks are unfermented beverages prepared with water carbonated water fruit extracts or essences flavourings or any other raw material carbonated and mcarbonated and may contain citric acid bemoic acid or sorbic acid or their salts as preservatives provided they contain fmctose XVI Hydrating or rehydrating drinks are beverages or solutions containing water and variable amounts of carbohydrates or electrolytes Article 8 I The tax established in this law shall not be paid On the following transfers AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION d f 82 - Those of be- coolers cigars and other processed tobaccos as well as those of the goods referred to in Article 20 G and H of this Law to the g m d public unless the transferor is the manufacturer producer bowler distributor or importer of the transferred goods Those for goods referred to in Article 20 G and H of this Law provided only cane sugar is used as a sweetener The Tax measures included i a 20 percent tax on the transfer and importation of soft drinks and other beverages that use any sweetener other than cane sugar ii a 20 percent tax on specific services commission mediation agency representation brokerage consignment and distribution when such services are provided for the purpose of transfening products such as soft drinks and other beverages that use any sweetener other than cane sugar and iii a number of requirements imposed on taxpayers subject to the sofl drink tax and to the distribution tax Therefore the Tax applied only to soft drinks that used sweeteners other than cane sugar Article 2G and 2H The definition in Article 3 XV requires soft drinks in order to be subject to the 20% tax to contain fructose Finally Article 8 1 f exempts from the tax soft drinks that use only cane sugar as a sweetener 83 - W i t h Mexico the IEPS Amendment was temporarily suspended by Presidential Decree On July 12 2002 the Mexican Supreme Court declared this suspension unconstitutional and reinstated the IEPS Amendment The IEPS Amendment was also the subject of an advisory ruling by the Mexican Comision Federal de Competencia The IEPS Amendment was also subject to constitutional challenge in the Mexican courts by individual taxpayers with the result that some soft drink bottlers but not others are exempt from the tax on the basis of successful amparo challenges 84 - Apart from these present NAFTA Chapter Eleven arbitration proceedings the IEPS Amendment was challenged by the United States in the WTO and was also the subject of proceedings before Mexican tribunals j The WTO Dispute Settlement Proceedings 85 - On March 16 2004 the United States requested consultations with Mexico regarding the IEPS Amendment pursuant to Articles 1 and 4 of the WTO Disputes Settlement Understanding These consultations were held in May 2004 The Parties failed to reach a satisfactory conclusion and on June 10 2004 the United States requested the establishing of a Panel pursuant to Article 6 of the Disputes Settlement Understanding AWARD - ICSID CASE No ARB AF 04 05 32 REDACTED VERSION 86 - The United States maintained that these taxes were inconsistent with Mexico's national treatment obligations under Article III of the GATT In particular they appeared to be inconsistent with Article lIk2 of the GAIT fist and second sentences and Article III 4of the GATT The relevant parts of Article III of the GATT provide as follows 1 The contracting patties recognize that intemal taxes and other internal charges and laws regulations and requirements affecting the intnnal sale offering for sale purchase transportation distribution or use of pmducts and internal quantitative regulations requiring the mixhne processing or use of products in specified amountn or proportions should not be applied to imported or domestic products so as to afford protection to domestic production 2 The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject directly or indirectly to internal taxes or other intanal charges of any End in excess of those applied directly or indirectly to like domestic products Moreover no contracting psrty shall otherwise apply inicmal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1 With respect to any existing intemal tax which is inconsistent with 3 the provisions of paragraph 2 but which is specifically authorized under a trade agreement in force on April 10 1947 in which the import duty on the taxed product is bound against increase the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time a s it can obtain release from the obligations of such trade agreement in order to pemit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax The products of the tnritory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of a l l laws regulations and requirements affecting their internal sale offering for sale purchnse transportation disnibution or use The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exchmively on the economic operation of the means of transport and not on the nationality of the product 4 87 - The dispute before the Panel was factually similar to the present arbitration The WTO dispute concerned the same tax measures -imposed through the IEPS Amendment- including i a 20 per cent tax on the transfer or as applicable the importation of soft drinks and other bevemges that use any sweetener other than cane sugar soft drink tax' ii a 20 per cent tax on specific servlces commissioq AWARD - ICSID CASENo ARB AF 04 05 REDACTED VERSION mediation agency representation brokerage consignment and dismiution when provided for the purpose of transferring products such as soft drinks and other beverages that use any sweetener other than cane sugar diseibntion tax and iii a number of requirements imposed on taxpayers subject to the soft drink tax and to the distribution tax Report of the Panel dated October 7 2005 Mexico Tax M e m r e s on Sojl Drinks and Other Beveragep WTiDS30308 R p m 2 2 - 88 - er Mexico's defences were twofold First Mexico contended that the U S complaint was linked to the dispute between the two countries arising under the NAFTA on the interpretation of Section 703 2 and Amex 703 2 32 Invoking these provisions Mexico argued that the United States had not provided Mexican cane sugar producers with the market access to which they allegedly had a right NAFTA allowed Mexico to sell its surplus sugar in the U S market free of any duties because Mexico qualified as a surplus producer under Section 703 2 and h e x 703 2 @aragraphs 13-22 The United States maintained that there was a limit on the amount of sugar Mexico could export duty fiee to the United States until free trade in sugar is established in 2008 The United States referred to the Side Letter of 1993 which provided that Mexico's domestic consumption of HFCS should be considered when calculating Mexico's net sugar market access to the U S market and that Mexico would be considered to be a net surplus producer only when production of sugar exceeded consumption of sweeteners including both sugar and HFCS The Side Letter further established a limit on Mexican sugar imports into the United States at a zero duty rate to 250 000 tons annually Mexico contested the applicability of the Side Letter because it was never signed by the competent authorities nor approved by the Mexican legislature 89 - Second Mexico contended that the Tax was a justified countermeasure under Article XX d of the GATT which provides one of the general exceptions that may justify any measure which is inconsistent with the GAlT ifnecessav to secure compliance with laws or regulation8 which are not inconsistent with the provisions of the G A W Furthermore Mexico argued that the United States could not avail itself of the fact that Mexico had not fulfilled its GATT obligation or had not had recourse to redress under the NAFTA because the United States had prevented Mexico fiom having recourse to the NAFTA Chapter XX dispute settlement mechanism The United States countered that the Tax was not necessary and the NAFTA is not a ''law or regulation within the meaning of Article X d 90 - The Panel Report dated October 7 2005 Mexico - Tar Measures on Soft Drinks and Other Beverages WT DS308 R - the 'Panel Report' hereinafter- found that AWARD - ICSID CASE No ARB AF I04105 34 REDACTED VERSION the IEPS Amendment was a breach of the national treatment obligations of Article m 2 first and second sentences and Article III 4 of the GATT 91 - In considering whether the Tax amounted to a breach of Mexico's national treatment obligation under Article III of the GATT the Panel analysed the issue of likeness between sugar and fructose GATT Article IE2 first sentence demands that products be like as does Article m 4 GAlT Article m 2 second sentence coupled with Article III l and Ad Article III Paragraph 2 the Interpretative Note enlarges the scope of covered products to include not only like ones but also directly competitive or substitutable ones A threshold question for the Panel was whether a soft drink sweetened with fructose is l i i one sweetened with cane sugar under Article m 2 first sentence and Article III 4 or possibly not like but directly competitive or substitutable with one sweetened with cane sugar under Article IE2 second sentence 92 - The Panel concluded that a With respect to Mexico's soft drink tax and distribution tax As imposed on sweeteners imported beet sugar is i subject to internal taxes in excess of those applied to like domestic sweeteners in a manner inconsistent with Article III 2 first sentence of the GATT 1994 As imposed on sweeteners imported HFCS is being ii taxed dissimilarly compared with the directly competitive or substitutable products so as to afford protection to the Mexican domestic production of cane sugar in a manner inconsistent with Article II1 2 second sentence of the GATT 1994 iii As imposed on sweeteners imported beet sugar and HFCS are accorded less favourable treatment than that accorded to like products of national origin in a manner inconsistent with Article IU 4 of the GATT 1994 As imposed on soft drinks and syrups imported soft drinks and syrups sweetened with non-cane sugar sweeteners including HFCS and beet sugar are subject to internal taxes in excess of those applied to like domestic products in a manner inconsistent with Article III 2 first sentence of the GATT 1994 With resuect tv Mexico's boohkee inereauirements As imposed on sweeteners imported beet sugar and HFCS are accorded less favourable treatment tban that accorded to like products of national origin in a manner inconsistent with Article l E 4 of the GATT 1994 panel Report para 9 2 original underlining iv @ - AWARD ICSID CASE No ARB AF 04 05 REDACTED VERSION 93 - The Panel dismissed Mexico's defence that the IEPS Amendment was justified pursuant to Article XX d of the GATT as a measure necessary to secure compliance by the United States with laws and regulations which are not inconsistent with the provisions of the GATT and recommended that the Dispute Settlement Body requested Mexico to bring the inconsistent measures into conformity with its obligations under the GATT 1994 94 - On 6 December 2005 Mexico notified the Dispute Settiement Body of its intention to appeal certain issues of law covered in the Panel Report and certain legal interpretations developed by the Panel pursuant to Article 16 4 of the DSU and on 13 December 2005 Mexico a e d an appellant's submission In its appeal Mexico challenged the Panel's ruling including the findings concerning Article XX d o f the GATT Mexico did not appeal the Panel's findings under Article m 95 - The Appellate Body Report dated March 6 2006 Mexico - Tax Measures on Soft Drinks and Other Beverages WTIDS308IABIR upheld the Panel's conclusions and recommended that the Dispute Settlement Body requests Mexico to bring the measures that were found in the Panel Report to be inconsistent with the General Agreement on Tariff and Trade 1994 into conformity with its obligations under that Agreement the 'Appellate Body Report' ' The Appellate Body reasoned inter alia that the phrase 'to secure compliance' in Article XY d does not apply to measures taken by a Member in order to induce another Member to comply with obligations owed to it under a non-WTO treaty Appellate Body Report para 60 69 quoting Panel Report para 8 181 96 - The United States and Mexico agreed that Mexico would have until 1 January 2007 to implement the WTO ruling On December 20 2006 the Mexican Senate voted to repeal the disputed measures and Mexico's qfficial Journal published notice o f the repeal a week later See the Panel Report in the case in Mexico - Tm Measures on Soft DrinkE and Other Beverages WTIDS308R issued 7 October 2005 adopted by the DSB as modified by the Appellate Body on 24 March 2006 complaint by United States with Canada China European Communities Guatemala and Japan as third patty participants para 85 and 86 AWARD - ICSID CASE No ARB AF 04 05 36 REDACTED VERSION k The July 2006 MexicoIUnited States Understanding Regarding the Bilateral Sweeteners Trade 97 - The repeal of the Tax effective as of January 1 2007 was part of an agreement of July 2006 reached between the United States and Mexico to achieve free trade in HFCS by January 1 2008 98 - On July 3 2006 the United States and Mexico advised the Chairman of the WTO Disputes Settlement Body that the Parties had mutually agreed on a reasonable time for Mexico to comply with the recommendations and rulings of the Disputes Settlement Body in the WTO proceedings relating to the IEPS Amendment 99 - On July 27 2006 there was an exchange of letters in identical terms between the Under Secretary for International Trade Negotiations on behalf of Mexico and the Chief Agricultural Negotiator on behalf of the United States This exchange of letters recorded the understandings reached between our Governments regarding trade in sweetener goods which are intended to promote an orderly transition to the elimination of tariffs on sugar and syrup goods and HFCS goods It was expressly stated that this exchange of letters shall constitute an agreement between our two GovernmentS 'constihyan un acuerdo entre nuestros dos gobiernos 3 The letters set out the respective agreements regarding the level of duty free treatment for Mexican sugar or syrup goods by the United States and for American HFCS by Mexico There is an explicit reference to the IEPS Amendment in paragraph 6 There are also some general provisions relating to the resolution of the bilateral dispute concerning trade in sweeteners and to preparation for tariff elimination on sugar or syrup goods and HFCS goods Paragraphs 6-9 of the MexicoNnited States 2006 Understanding read as follows Beverage tax Mexico and the United States confirm that on July 3 6 2006 they submitted a joint letter to the WTO Dispute Settlement Body WTDS308115 expressing their agreement that Mexico shall eliminate its tax measures on soft drinks and other beverages no later than January 1 2007 except that if the Mexican Congress approves the necessary legislation to eliminate these measures during the month of December 2006 Mexico shall eliminate its tax measures on soft drinks and other beverages no later than January 31 2007 7 Standstill Except as provided in this agreement or permitted under other agreements to which both countries are party Mexico shall not limit directly or indirectly imports of HFCS goods of the United States into AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION Mexico and the United States shall not limit directly or indirectly imports of sugar or syrup goods of Mexico into the United States including though the application or imposition of any tax or other internal measure that has the effect directly or indirectly of discrimbating against HFCS goods of the United States or sugar or syrup goods of Mexico ns the case may be 8 Consultations and dispute settlement Mexico and the United States recognize that there are ongoing disputes concerning trade in sweeteners which have not been resolved and that this agreement contributes to finding a resolution to those disputes Mexico and the United States further recognize that this agreement will facilitate an orderly transition to full tariff elimination on sugar and syrup goods and HFCS goods on January 1 2008 Mexico and the United States shall continue to consult on trade in sweetenen with a view toward facilitating that transition further liieraliziing trade in such goods and making further progress on the issues underlying those disputes Task force Mexico and the United States shall establish a joint indusuylgovernment task force to assist the government to prepare for tariff elimination on sugar or syrup goods and HFCS goods in January 2008 and to periodically review shipments of sugar or syrup goods and HFCS goods with a view toward ensuring prompt and full utilization of the tariff-rate quotas described in paragraphs 1 through 3 9 V THE LEGAL POSITION OF THE PARTIES 100 - The Claimants contend that the Tax was deliberately designed and structured so as to discriminate in favor of the Mexican cane sugar industry penalizing the use of HFCS so severely that it substantially affected the beverage market for HFCS manufacturers and distributors including ALMEX In particular the Tax destroyed the value of the substantial investment that the Claimants made through ALMEX in the production and distribution of HFCS in Mexico 101 - The Claimants allege that the Tax falls within the category of measures adopted or maintained by a Pariy relating to investors and investments of another Party within the meaning of Article 1101 of the NAFTA and that these measures amount to a breach by Mexico of its obligations under Section A of Chapter of Eleven of the NAFTA including Articles 1102 National Treatment 1106 3 Performance Requirements and 1110 Expropriation 102 - The essence of Claimants' denial of national treatment argument is that Mexico discriminated against ALMEX during the period the Tax was in force in violation of Article 1102 The Mexican legislature favored domestic users and distributors AWARD - ICSD CASE No AF' B AF l04IO5 REDACTED VERSION of products made with cane sugar over foreign producers of HFCS in Mexico as there is a complete exemption from the Tax for users and distributors of products sweetened exclusively with cane sugar Therefore the Tax treated HFCS producers less favorably than cane sugar producers discriminating against the Claimants and ALMEX in order to protect the domestic cane sugar industry 103 - The Claimants firther contend that the Tax amounts to an impermissible performance requirement in breach of Article 1106 3 of the N m A because the Tax confers advantages -i e exemption from the tax- to Mexican bottlers who exclusively buy domestic cane sugar punishing bottlers severely for using any amount of HFCS The essence of Claimants' position is that Article 1106 3 covers all investors regardless of nationality including Mexican investors Thus Mexico may not condition the grant of an advantage in connection with an investment of any investor on compliance with certain performance requirements The Claimants argue that they can challenge Mexico's imposition of performance requirements because the advantages conferred on Mexican investors had a direct impact on Claimants' investment in HFCS production and distribution facilities causing ALMEX substantial loss or damage in violation of Article 1106 104 - Ln addition the Claimants contend that the Tax amounts to an indirect expropriation of their investment within the meaning of Article 1110 as the Tax deprived them of the value and economic use of their investment in the production of HFCS in Mexico diminishing the reasonably expectcd economic benefits of their investment without compensation by Mexico The Claimants recognize that their assets or real property has not been seized but contend that the Tax harmed their investment substantially depriving them of the fair market value of their investment with the effect of an expropriation for purposes of Article 1110 of the NAFTA and international law 105 - Accordingly because Mexico breached its obligations under Chapter Eleven it is required to compensate the Claimants for all the damage that the Tax caused to their investment including any applicable interest 106 - The Respondent maintains that Mexico adopted the Tax as a countermeasure in response to violations by the United States of its obligations under the NAFTA Mexico contends that the Tax was adopted in response to the refusal by the United States i to respect NAFTA's provisions regarding Mexican sugar access to the U S market and ii to comply with the dispute settlement mechanism established in Chapter XX Additional defenses against the alleged violations of Articles 1102 1106 and 1110 include the following AWARD - ICSID CASE NO ARB AF lO4 05 REDACTED VERSION 107 - The Respondent contends that the Tax does not breach Article 1102 National Treatment because it did not target U S investors as such The Tax was not intended to i d i c t harm upon HFCS producers and manufacturers but was a reaction and compensatory measure to the restrictions adopted by the U S Government against Mexican sugar Therefore the Tax was not discriminatory but a measure which in essence corresponds to a suspension of the keaty-benefits pursuant to Article 2019 1 of the NAFTA 'Non-Implementation - Suspension of enefits Further the parties were not in like circumstances 108 - The Respondent alleges that Article 1106 3 Performance Requirements does not apply to the present case Article 1106 3 plainly addresses obligations imposed directly on an investment of an investor However the measure at issue was not imposed on the Claimants nor was the alleged advantage i e relief ffom the taxever available to the Claimants but was only in connection with the bottlers who have no identity of ownership interest with ALMEX 109 - Finally the Respondent counters that the expropriation claim is groundless because the alleged impairment was neither substantial nor permanent At all times the Claimants' maintained ownership and control of the investment and the economic effects of the Tax were of insufficient degree and duration to amount to a taking V1 - THE RESPONDENT'S COUNTERMEASURES DEFENSE 110 - A central defense asserted by the Respondent in this case is that the Tax in effect ffom January 1 2002 until December 31 2006 was a lawful countermeasure enacted as a response to alleged violations by the Government of the United States concerning its obligations to Mexico regarding access of Mexicanproduced sugar to the U S market and for failure to take part in the NAFTA Chapter Twenty dispute settlement process with respect to such obligations Therefore the Respondent maintains even if the Tax were a breach of Articles 1102 1106 or 1110 of Chapter Eleven no international responsibility would attach since the Tax was a countermeasure permissible under customary international law as applied in the NAFTA setting ' Article 2019 1 NAFTA I $in itsfinal report apanel has determined that a measure is inconsistent with the oblieations ofthis Ameement or causer nullification or im airmentin the sense ofAnnex 2004 and the Party c lnineb agaiGt fins not reached agreement withaany cowplaining par on a muhrally satisfactory resolution pursuant to Article 2018 1 wilhin 30 days of receiving the final report such complaining Parry may suspend the application to the Party complained against of benefits of equivalenr effect until such time as they have reachedngreement on a resolution of the dispute AWARD - ICSID CASE No ARB AF 04 05 40 REDACTED VERSION a General jnrisdictional issues - 111 - The initial question is whether this Tribunal has jurisdiction to decide on the validity of the defense The Respondent maintains that the Tax was enacted in accordance with customary international law The central jurisdictional point according to the Respondent is that pursuant to Article 1131 1 of the NAFTA the Tribunal has jurisdiction to apply a customary international law defense to any claimed breaches of Articles 1102 1106 and 1110 Article 1131 1 provides that a Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law The Tribunal agrees with the Respondent that this provision includes the application of rules of customary international law with respect to claimed breaches of Articles 1102 1106 and 1110 The parties did not dispute the matter 112 - In the alternative the Respondent maintains that if the Tribunal finds that in the absence of a Chapter Twenty panel report concerning Mexico's allegations of U S breaches of Chapter Twenty this Tribunal cannot make a determination of Mexico's customary international law rights thenif must stay this proceeding until the Chapter Twenty Panel resolves Mexico's grievances Mexico's Rejoinder p 32 para 106 113 - The Claimants maintain that theNAFTA Parties including Respondent have waived their right to resort to countermeasures under customary international law for alleged violatiom of NAFTA provisions Claimants' Reply para 9 Article 55 of the International Law Commission LC Articles on State Responsibility the LLC Articles hereinafter provides that the ILC Articles do not apply where the matter is governedby special rules of international law Responsibility of States for Internationally Wrongful Acts Report of the International Law Commission on the Work of its Fifty-third Session UN GAOR 56' session Supp No 10 The Claimants allege that the Commentary to the ILC Articles recognizes that Article 55 provides that in the context of State Responsibility the ILC Articles operatein a residual way Commentary to Article 55 para 2 and that these residual rules on countermeasures are excluded when a treaty provides A regime for dispute resolution to which States must resort in the event of a dispute especially if as with the W T O dispute settlement system it requires an authorization to take measures in the nature of conutemeasures in response to a proven breach Commentary to the ILC Articles on State Responsibility Commentary to Chapter 11 para 9 114 - The Claimants' position is that AWARD - ICSD CASE No ARB AF 04 05 REDACTED VERSION The NAFTA meets that criterion because it establishes the conditions for the existence of an internationally ulongful act under the fiee trade agreement and the legal consequences of such an act Chapters Nineteen and Twenty establish the regime for dispute resolution that governs the 'existence of an internationally wrongful act' and the 'content' of the international responsibility of the Parties in the event of a breach of their obligations under the NAFTA Claimants' Reply p 14 para 34 In the Claimants' view these provisions constitute lex specialis within the meaning of Article 55 and thus the residual rules in the Articles on State Responsibility do not apply to alleged breaches of NAFTA provisions In other words by signing the NAETA the Parties have deliberately forgone the residual right to take countermeasures under customary law Claimants' Reply p 15 p a 35 The Claimants also point out that Article 2005 of the NAFTA gives Parties a choice to have recourse to the dispute settlement system of either the WTO or the NAFTA if any matter arising under both this Agreement W T A and the General Agreement on Tsliffs and Trade may be settled in either forum at the discretion of the complaining Party Article 2005 of the NAFTA cited by the Claimants' Reply p 15 para 36 This is important according to Claimants because if the WTO dispute settlement regime is lex specialis as the Commentary on the Articles on State Responsibility clearly notes its NAFTA dispute settlement counterpart should also be considered lex specialis As such they preclude the application of the residual rules on countermeasures Claimants' Reply p 15 para 37 115 - The Respondent on the other hand maintains that aState parry cannot be bound by a ler specialis that has proved impossible to invoke Respondents' Rejoinder p 44 para 142 Respondent argues that Articles 2004 and 2019 on which the Claimants rely for their lex specialis argument logically presuppose the correct operation of the dispute settlement process If a respondent Party ignores Article 2004's injunction that Chapter Twenty 'shall apply with respect to the avoidance or settlement of all disputes between the Parties regarding the interpretation or application of this Agreement' and blocks the complainant Party's access to a panel Article 2019 which regulates the use of countermeasures in Chapter Twenty proceedings cannot apply Respondents' Rejoinder p 44 para 143 AWARD - ICSID CASE NO ARB AF 04 05 REDACTED VERSION 116 - The Tribunal acknowledges the fact that the ILC Articles are the product of over five decades of ILC work They represent in part the progressive development of international law -pursuant to its UN mandate and represent to a large extent a restatement of customary international law regarding secondary principles of state responsibility But the provisions of the L C Articles may be derogated from by treaty as expressly recognized in Article 55 in relation to lex specialis Lex specialis - These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the internal responsibility of a State are govemed by special rules of international law Accordingly customary international law does not affect the conditions for the existence of a breach of the investment protection obligations under the NAFTA as this is a matter which is specifically governed by Chapter Eleven 117 - The Tribunal finds that Section A of Chapter Eleven offers a form of lex specialis to supplement the under-developed standards of customary international law relating to the treatment of aliens and property In addition Chapter Eleven confers upon the investor a right of action under Section B -through arbitrationthat the dispute will be decided in accordance with the standards of Section A 118 - The customary international law that the L C Articles codify do not apply to matters which are specifically governed by lex specialis -i e Chapter Eleven of the NAFTA in the present case These matters also include the possibility of private claimants who are nationals of a NAFTA Member State invoking in an international arbitration the responsibility of another NAFTA Member State as it is a matter of the particular provisions of Chapter Eleven to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account This is confirmed by Article 33 2 of the JLC Articles which provides that the customary rules on state responsibility codified by the L C Articles operate without prejudice to any right arising from the international responsibility of a State which may accrue directly to any person or entity other than a State Customary international law -pursuant to which only sovereign States may invoke the responsibility of another State- does not therefore affect the rights of non-State actors under particular treaties to invoke state responsibility This rule is not only true in the context of investment protection but also in the human rights and environmentalprotection arena 119 - However the Claimants' position regarding the application of lex specialis is oversimplified in this arbitration Chapter Eleven of the NAFTA constitutes lex specialis in respect of its express content but customary international law continues to govern all matters not covered by Chapter Eleven In the context of AWARD - ICSD CASE No ARB AF I04105 REDACTED VERSION Chapter Eleven customary international law -as codified in the L C Articlestherefore operates in a residual way This is confirmed by Article 113 1 1 of the NAFTA endorsing the Tribunal's mandate to complement the provisions of Chapter Eleven and to decide the issues in dispute in accordance with the NAFTA and applicable tules of international law 120 - Chapter Eleven neither provides nor specifically prohibits the use of countermeasures Therefore the question of whether the countermeasures defence is available to the Respondent is not a question of lex specialis but of customary international law 121 - Under customary international law thewrongfulness of an act of a State not in conformiv with an international obligation towards another State is precluded fi and to the extent that the act constitutes a countermeasure Article 22 of the ILC Articles Countermeasures may constihite a valid defence against a breach of Chapter Eleven insofar as the Respondent State proves that the measure in question meets each of the conditions required by customary international law as applied to the facts of the case 122 - The only instance in which the NAFTA refers to countermeasures is under Article 2019 Under this provision non-compliance with a decision rendered in a Chapter Twenty State-to-State arbitration can lead to penalties In the event of such non-compliance the complaining State can retaliate by taking countermeasures suspending tariff concessions or other obligations under the treaty Outside Article 2019 the NAFTA makes no express provision for countermeasures Accordingly the default regime under customary international law applies to the present situation 123 - The Tribunal therefore agrees with Respondent that countermeasures may serve as a defence under a Chapter Eleven case as this is a matter not specifically addressed in Chapter Eleven but valid under customary international law if certain conditions are met c Customary International Law on Countermeasures - 124 - As noted a central defense for the Respondent in the instant case is that the Tax even if judged to be a breach of one or more Articles of Chapter Eleven is a countermeasure authorized under customary intemational law and imposed as a response to U S breaches of Chapter Twenty Thus Respondent maintains no international responsibility can properly attach as a result of the Tax AWARD - ICSID CASE No ARB AF IMIOJ REDACTED VERSION 125 - The Tribunal takes as an authoritative statement of customary international law on countermeasures the position of the International Court of Justice as confirmed by the ILC Articles Article 22 provides that the wron lness of an act of a State not in conformity with an international obligation towards another State is precluded fund to the extent that the act constitutes a countermeasure Article 49 of the International Law Commission's Responsibility provides at paragraphs 1 and 2 as follows Articles on State 1 An injured State may only take countermeasures against a State which is responsible for an internationally wrongful act in order to induce that State to comply with its obligations under Part Two 2 Counteimeasures are limited to the non-performance for the time being of international obligations of the State taking the measures towards the responsible State 126 - The International Court of Justice provided the test for the validity of countermeasures in the case concerning the Gabcikovo-NagymarosProject In order to be justifiable a countermeasure must meet certain conditions In the first place it must be taken in response to a previous international wrongful act of another state and must be directed against that State Secondly the injured state must have called upon the state committing the wrongful act to discontinue its wrongful conduct or to make reparation for it In the view of the Court an important consideration is that the effects of a countermeasure must be commensurate with the injury suffered taking account of the rights in question and its purpose must be to induce the wmngdoing state to comply with its obligations under international law and the measure must therefore be reversible Gabcikovo-Nawmaros Proiect ICJ Reports 1997 pp- 7 55-6 127 - While the written submissions of the parties varied in many respects on the questions involved in this context at the hearing the Claimants maintained and the Respondent did not dispute with the exception noted that for the Respondent to prevail on its countermeasure defense the Respondent was required to demonstrate each of the following cumulative conditions 1 The United States breached Chapter Three andlor Seven and Chapter Twenty Respondent did not agree with the conjunctive with respect to Chapter Twenty 2 The Tax was enacted in response to the alleged U S breaches and was intended to induce U S compliance with its NAFTA obligations concerning access of Mexican sugar to the U S market and concerning U S obligations pursuant to NAFTA Chapter Twenty AWARD - ICSID CASE No ARB AP 04 05 45 REDACTED VERSION 3 The Tax was a proportionate measure 4 The Tax did not impair individual substantive rights of Claimants 128 - With respect to the first listed item this Chapter Eleven Tribunal has no jurisdiction to decide whether the United States breached any of its international obligations under Chapter Three or Chapter Twenty of the NAFTA This Tribunal has before it a Chapter Eleven investment dispute comprising allegations of violations by the Respondent of Articles 1102 1106 and 1110 and not a Chapter Twenty dispute 129 - The Respondent acknowledges that Chapter Eleven tribunals lackauthority to address violatiom of other chapters of the NAFTA Mexico's Rejoinder para 132 However the Respondent maintainsthat this Tribunal has jurisdiction to find that Mexico's use of countermeasures is a matter hat precludes unlawfLlness in its conduct and hence precludes international responsibility Id 130 - The Respondent argued at some length that the WTO Panel that examined the same Tax considered it to be a countermeasure Respondents' Rejoinder para 132 Yet the WTO tribunal found that the Tax while a countermeasure was inconsistent with Mexico's obligations under Article I II of the GATT and had to be repealed which was done as of December 31 2006 The Panel reasoned that the Tax was not a valid countermeasure because the term to secure compliance in Article XX d of the GATT does not apply to measures taken by a Member State in order to induce another Member to comply with obligations owed to it under a non-WTO agreement Therefore the Panel dismissed the countermeasure defense not because the measure was in itself contrary to international law but because Mexico could not resort in the WTO proceedings to a countermeasuresdefense in relation to the alleged breach by the United States of a non-WTO treaty such as the NAFTA 131 - In the present case the Tribunal has no jurisdiction to decide whether the United States committed an internationally wrongful act which justified a countermeasure However there are other requirements as well for a valid countermeasure over which we do have jurisdiction and the Respondent must meet each of them if the Tribunal is to reach Respondent's request for a stay of the proceedings until a Chapter Twenty procedure is completed 132 - Both parties agree that the Tribunal has jurisdiction to decide any defense under Chapter Eleven including a countermeasures defense The Tribunal has indeed all the relevant information to reach a decision regarding whether or not the IEPS AWARD - ICSD CASE No ARB AF 04 05 REDACTED VERSION Amendment meets the test for a valid countermeasure under customary international law 133 - Customary international law provides the test for the validity of countermeasures As noted each of the requirements as applied to the facts of the instant case must be met If one fails the defense fails If all three over which the Tribunal has jurisdiction are met then the Tribuual is confronted with the Chapter Twenty allegations made by Mexico against the Government of the United States and those allegations being beyond our jurisdiction Mexico's request for a stay of the proceedings would need to be considered d Whether the Tax was enacted in response to the alleged U S breaches and was intended to induce U S compliance with its NAFTA obligations - 134 - One of the central issues to be decided with respect to the Respondent's countermeasures defense and which the parties debated at length is the question whether the Tax was enacted by Mexico in accordance with Article 49 of the ILC's Articles on State Responsibility and its Commentary in order to induce the United States to comply with its NAFTA obligations 135 - The Respondent maintains that the Tax was designed and had as its intent the goal of inducing the United States to comply with its NAFTA obligations concerning sugar access to the U S market and concerning U S obligations in the Chapter Twenty dispute resolution process The Claimants maintain that the Tax was enacted for the purpose of protecting the domestic Mexican sugar indus q against hctose imports from the United States 136 - In the Tribunal's view the period just prior to the enactment of the Tax is important in t e r n of the context for the passage of the tax and Mexico's intent in enacting it Mexico had imposed anti-dumping duties against HFCS for almost four and one half years prior to the Tax But beginning in 2001 Mexico lost a set of NAFTA and WTO cases on the legality of its anti-dumping measures Talk of a tax conceming fructose began to emerge Mr John Nichols President and Managing Director of ALMEX testified on behalf of the Claimants at the Hearing that he first heard in October 2001 about the possibility of the Tax and that members of the Mexican Congress had told him the concern was to protect the sugar industry 137 - The evidence on record before the Tribunal indicates that the most immediate relevant context in which the dispute over the Tax arose were the Mexican anti- dumping measures the WTO and NAFTA rulings against these measures and the order for their final repeal The evidence before us indicates that this was the AWARD - lCSID CASE No AREI AF 04 05 47 REDACTED VERSION setting for the enactment of the Tax rather than the dispute between Mexico and the United States over access to the U S market of Mexican-produced excess sugar a dispute that ripened in the year 2000 well after the imposition of the antidumping measures 138 - In tbeir Memorial on the Merits the Claimants describe a number of these pre-tax measures aimed at HFCS from the United States In June 1997 for example Mexico imposed provisional anti-dumping duties and in January 1998 Mexico imposed final anti-dumping duties at the trade-prohibitive rate of US$55$175 MT depending on the grade and the supplier As part of an investigation by the Mexican Ministry of the Economy then known as SECOFI Ministry of Trade and Industrial homotion the Claimants state that Respondent examined in detail the competitive relationship between HFCS and cane sugar in the Mexican marketplace particularly in the soft drink market SECOFI determined that the Mexican Sugar Chamber as the petitioner representing sugar refmers and growers represented producers of a like product to imported HFCS SECOFI's final determination of dumping and injruy concluded that HFCS and sugar arc like products because they have very similar characteristics and composition which allows them to fulfill the same functions and be commercially interchangeable Claimants' Memorial p 17 para 38 139 - The anti-dumping determinations were then challenged by the United States at the WTO On Februruy 24 2000 a WTO Panel determined that the anti-dumping measure was inconsistent with the WTO Anti-Dumping Agreement WTO Panel Report Mexico-Anti-Dumping Investigation of High Fructose Corn Synrp iFCs from the United States WT DS132 q Feb 4 2000 Mexico issued a revised anti-dumping determination but a subsequent WTO Panel and Appellate Body decided on November 21 2001 that the new determination was still not in compliance with Mexico's WTO obligations fWTO Appellate Body report - AntiDumping Investigation of High Fructose Corn Syrup from the United States Proceedings under Article 21 5 of the DSU WR DSl32 AB RW adopted on November 21 2001 para 135-136 140 - The final anti-dumping determination of 1998 was also challenged by U S exporters and Mexican importers under NAFTA Chapter Nineteen The NAFTA arbitrators determined on August 3 2001 that the measure was illegal under Mexico's law and implementing regulations Review of the Final Determination of the Anti-Dumping Investigation on Imports of High Fructose Corn Syrup Originating from the United States of America NAFTA Case MEX-USA-981904-01 August 3 2001 at para 824 The final NAFTA decision affuming its initial decision came on April 15 2002 ordering a repeal of the anti-dumping duties Final Decision Review of the Final Determination of the Anti-Dumping AWARD - ICSlD CASE No ARB AF 04 05 REDACTED VERSION Investigation on Imports of High Fructose Corn Syrup NAFTA Case MEXUSA-98-1904-01 April 15 2002 at 24 141 - Subsequently the WTO Panel Report -confirmed by the WTO Appellate Bodyprovides an in-depth analysis on the underlying intent of the Tax The WTO Panel confumed that theprotective effect of the measure on Mexican domestic production of sugar does not seem to be an unintended effect but rather an intentional objective Panel Report para 8 91 The Claimants maintain that there is no reason why this Tribunal should come to a different conclusion than the WTO Panel 142 - The Tribunal begins its review of the intent of the IEPS Amendment by first examining its text In the Tribunal's view the IEPS Amendment was the culmination of a series of measures adopted by the Respondent to protect the domestic cane sugar industry Nothing in the text of the IEPS Amendment indicates that it was enacted as a countermeasure against the United States Rather it was a device to protect domestic sugar producers from competition by the HFCS industry 143 - The Claimants have pointed out that neither the text of the IEPS Amendment nor the previous legislative debate in Congress mentioned the dispute with the United States Government on access of Mexican-grown sugar to the U S market or U S Chapter Twenty obligations Respondent has submitted only slim evidence to challenge this In the various documents relating to the legislative history of the Tax there is only one brief reference to the measure as a reaction to the sugar dispute see Exhibit R-58 at 32 and Exhibit 59 at 8 and there was no mention of countermeasures Except for such references there are no other contemporaneous documents from Mexico mentioning the dispute with the United States over sugar access or Cbapter Twenty as underlying reasons for the Tax 144 - The evidence on the record proves that the position of the legislature when enacting the IEPS Amendment was to protect the domestic cane sugar industry rather than inducing the United States to comply with the NAFTA 145 - The Claimants presented extensive evidence showing that the Mexican Government publicly acknowledged that the IEPS Amendment was aimed at protecting the Mexican sugar industry from HFCS as both sugar and HFCS are part of the same sector Officials of the Respondent have recognized that HFCS and sugar distributors and producers compete head-to-head in the domestic market and that the Tax was intended to discriminate against the HFCS industry and to protect the domestic sugar industry 49 AWARD - ICSID CASE No ARB AF W OS REDACTED VERSION 146 - The Mexican judiciary has also confumed that the design and operation of the Tax was to afford protection to Mexican production of cane sugar When President Fox of Mexico issued a decree on March 5 2002 suspending the application of the Tax the Supreme Court of Justice was asked by the Chamber of Deputies of the Mexican Congress on April 2 2002 to annul the exemption on the ground that it was unconstitutional The Supreme Court rendered a decision on July 12 2002 reinstating the Tax Suprema Corte de la Naci611 sentencia relativa a la controversia constitutional 32 2002 promovida por la Ccimara de Diputados del Concreso de la Unidn en contra del Titular del Ejecutivo Federal Diario Federal Primera Seccih 44 - 82 July 17 2002 147 - The Supreme Court considered the motivesthat prompted the legislature to extend the scope of subjects YO that tm the Law on the Tax on Production and Services to those who use sweeteners drrerent than cane sugar and determined that the Mexican Congress had a clear non-tar relatedpurpose the Tax was enacted for the purpose of protecting the Mexican sugar industry Mexican Supreme Court Decision Annulling the Suspension of the Tax July 17 2002 at p 80 In particular the Supreme Court held The legislator's intent when extending tbe ahmentioned tax to gasified waters soft drinks hydrating drinks and other taxed goods and activities when they use fructose in their production rather than cane sugar was that of protectiug the sugar industry Mexican Supreme Court Decisibn Annulling the Suspension of the Tax July 17 2002 at para 79 The Supreme Court fiuther held that the Government in its exemption decree violated not only the fiscal objective of the measure but also its extra-fiscal objective that was expressed in the legislative procedure that is theprotection of the domestic sugar industry Id 148 - If the Tax was not enacted to induce compliance by the United States witb its NAFTA obligations then the Tax was not a valid countermeasure within the meaning of Article 49 of the IU Articles on State Responsibility 149 - In sum there is insufficient evidence in the record before us to support Respondent's contention that Mexico intended the Tax to induce the United States to comply with its obligations concerning access of sugar to the U S market or its obligations concerning Chapter Twenty dispute resolution Save for the statement in passing during a legislative debate at the time the Tax was enacted there were no statements from Mexico that it was a countermeasure or a response to U S actions or inactions There were no indications from Mexico that the Tax would or could help resolve the sugar access dispute Yet there were government statements provided as evidence by the Claimants that the Tax was designed to AWARD - ICSW CASE No ARB AF 04 05 50 REDACTED VERSION protect Mexican sugar growers In particular Mexico's Minister of the Economy Ernesto Derbez stated that the law violates the NAFTA in the section about invesment protection and changes the rules of the game Also Undersecretary of Commerce Rocio Ruiz warned of claims against Mexico because we don't let HFCS producers sell their product in Mexico and according to the NAFTA and the World Trade Organization rules they can sue us 150 - Perhaps the Tax could have been enacted for both purposes i e protection of the domestic sugar industry in Mexico as well as inducing the U S Govenunent to comply with its NAFTA obligations But the evidence before us as well as the Respondent's statements in the instant case indicate that protection of the Mexican sugar industry was the true motive and intent underlying the enactment of the tax For a successful defense of inducement even coupled with protection the Tribunal would expect to see substantial evidence supporting inducement at the time of the enactment of the Tax But inducement when the Tax was enacted is not in evidence here The Tribunal emphasizes that its finding is one of fact It is not a determination of law The fact question is Mexico's intent in enacting the Tax 151 - Accordingly the Tribunal finds that the Respondent has neither proved that the Tax was enacted in response to the alleged U S breaches nor that the measure was intended to induce compliance by the United States with its NAFTA obligations 152 - Article 51 of the ILC Articles emphasizes the requirement of proportionality noting that countermeasures must be commensurate with the inju ysuffered taking into account the gravity of the internationally wrongful act and the rights in question Therefore proportionality plays a prominent role limiting the power of taking countermeasures in response to an international wrongful act Further as expressly stated in the Commentary of L C Article 51 7 Proportionality is concerned with the relationship between the international wrongful act and the countermeasure In some respects proportionality is linked to the requirement of purpose specified in article 49 a clearly disproportionate measure may well be judged not to have been necessary to induce the responsible State to comply with its obligations but to have had a punitive aim and to fall outside the purpose of countermeasures enunciated in article 49 153 - In the present case theTribunal has found that Mexico did not adopt the Tax to induce the US to comply with the NAFTA but to protect the domestic sugar industry Therefore the Tax was not necessary and reasonably connected with the aim purportedly pursued Indeed the Tribunal believes that even if the Tax was 51 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION enacted by the Respondent in response to an alleged violation of the NAFTA by the United States the measure was not appropriate for the particular purpose of securing compliance by the United States 154 - Proportionality requires not only employing the means appropriate to the aim chosen but implies an assessment of the appropriateness of the aim itself considering the structure and content of the breached rule Proportionality therefore must be assessed in the light of the proper function of the response as the International Court of Justice recognized in Gabcikovo-Nagvmaros Project ICJ Reports 1997 71 The Court considered that Hungary's failure to abide by its obligation under a bilateral treaty with Slovakia and its refusal to cany out a joint project of diversion and exploitation of the waters of the Danube could not justify the unilateral diversion of the river by Slovakia and the implementation of a project of exploitation carried out entirely on its territory Such measures amounted to a breach of the principle of equitable apportionment of resources between watercourse states and thus failed to meet the proportionality requirement 155 - In the present case the test of whether the countermeasure was appropriate to the particular purpose of securing compliance with the NAFTA by the United States requires a qualitative comparison between all the international obligations involved Section A of Chapter Eleven on the one hand and h e x 703 2 A regarding access of Mexican sugar to the United States and the state-to-state dispute resolution provisions of Chapter XX on the other hand 156 - The Tn%unal finds that the alleged breaches by the United States of certain obligations under Chapter Seven or Twenty -together with the fact that the Tax was not enacted to induce compliance by the US of those obligations- does not justify the enactment of the Tax in breach of Section A of Chapter Eleven In the Case Concerning the United States Diplomatic and Consular Staff in Tehran Judgment of 24 May 1980 ICJ Reports 1980 21 the United States brought a claim against Iran in response to the seizure by military revolutionaries of the U S diplomatic offices and persomel in Tehran Iran contended that the United States' application before the ICJ couldnot be examined by the Court divorcedfrom its proper context including more than 25 years of continual interference by the United States in the internal affairs of Iran ld at para 80 81 The Court dismissed the allegation finding that even f the alleged criminal activities of the United States in Iran could be considered as having been established they could not be regarded by the Court as constituting a justification of Iran's conduct and thus a defence to the United States ' claims Id at para 83 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION Iran had at its disposal other measures to put an end to the alleged wrongful acts by the United States and could have resorted to other means for obtaining cessation of those acts without impairing the function of diplomatic law The intrusion and seizure of the diplomatic premises revealed that Iran pursued a different aim which was not connected with the alleged breaches and thus disproportionate 157 - In the present case Annex 703 2 A is part of Chapter W of the NAFTA setting forth trade-related obligations between the Member States in relation to agricultural goods and to sanitwy and phytosanitary measures Article 701 of the NAFTA without establishing specific treatment-standards for qualified categories of nationals of the Member States Nor does Chapter Twenty endorse specific obligations whereby private individuals or non-state actors are the object or beneficiaries of those obligations However under Chapter Eleven investors from the Member State are the direct objects and beneficiaries of the standards endorsed under Section A notwithstanding the fact that they do not hold independent substantiverights 158 - Any of the obligations allegedly breached by the United States do not involve investment protection standards for private individuals and companies but only provide inter-state obligations concerning international trade and the settlement of state-to-state disputes However the IEPS Amendment resulted in the nonperformance by the Respondent of its obligations under Section A The adoption of the Tax was not proportionate or necessary and reasonably connected to the aim said to be pursued 159 - In the Tribunal's view Mexico's aim to secure compliance by the United States of its obligations under Chapter Seven and Twenty could have been attained by other measures not impairing the investment protection standards under Section A On the other hand the Tribunal has already decided that the Tax pursued a different aim rather than securing such compliance unconnected witb the breach by the United States of its obligations under the NAFTA 160 - Accordingly the Tribunal finds that the Tax does not meet the proportionality requirement for the validity of countermeasures under customary international law AWARD - ICSID CASE No ARB Af 04 05 REDACTED VERSION f The Question of Independent Rights - i Views of the Disputing Parties - 161 - Another issue relating to the validity of countermeasures is whether the Tax impaired individual substantive rights of the Claimants This question raises the issue of whether Chapter Eleven of the NAFTA provides a self-contained mechanism endorsing substantive and procedural rights for qualified investors and whether these rights are independent of the legal relationship between the Member States 162 - The Claimants' position is that qualified investors under Chapter Eleven are vested with direct independent rights and that they are immune from the legal relationship between the Member States The investor's cause of action is grounded upon substantive investment obligations which are owed to it directly A breach of these obligations does not therefore amount to a breach of an interstate obligation thus the general rules of state responsibility -including those regarding the circumstances precluding wrongfulness- cannot be presumed Accordingly investors are to be compensated for the negative effects that measures adopted in breach of Chapter Eleven may have on their investments including countermeasures between the Member States if those measures standing alone constitute a breach of any of the rights addressed in Section A of Chapter Eleven 163 - However if the substantive investment obligations under Section A remain interstate the issue of whether the host State breached any of these obligations vis-Avis qualified investors is to be considered in the context of the treaty relations with the other Member States This approach is supported by a traditional derivative theory -pursuant to which when investors trigger arbitration proceedings against a State they are in reality stepping into the shoes and asserting the rights of their home State- and an intermediate theory -whereby investors are vested only with an exceptional procedural right to claim state responsibility under Section B before an international arbikal tribunal decidmg the dispute in accordance with the rights and obligations defined under Section A which remain inter-state 164 - In the present case Mexico has never argued that the Claimants do not enjoy rights of action under Chapter Eleven Mexico's Rejoinder of September 1 2006 at p 55 para 185 but the substantive obligations are obligations that each NAFTA Party has assumed vis-d-vis the other Parties They do not cease to be interstate obligations just because an investor has been granted a right of action Mexico's Rejoinder of September 1 2006 at p 56 para 187 Therefore the Respondent maintained during the hearing that it is necessary to distinguish between procedure and substance and that the Claimants derive individual rights and obligationsfrom the outcome of Chapter Eleven - AWARD ICSID CASE No ARB AF IO4lO5 REDACTED VERSION proceedings Transcript of the hearing pp 191 - 192 The Respondent further argued that even investors' procedural rights are not indefeasible by referring to the Softwood Lumber Agreement between the United States and Canada where rights to bring proceedings under Chapter Eleven were suspended for investors 165 - The Claimants on the other hand maintain that NAFTA case law negotiating history and scholarly writings demonstrate that investors possess individual substantive rights that may not be superseded or diminished by countermeasures directed against a non-party to the dispute between Claimants and Mexico For example Claimants cite the 1993 U S Statement of Administrative Action for NAFTA which provides in part that NAFTA guarantees that U S investors in Mexico and Canada will be treated on an equal basis with locally-owned firms The NAFTA provides U S investors with the right to establish new firms acquire existing firms and receive the same treatment as domestic business with specified exceptions In addition the NAFTA gives U S industries in Mexico and Canada the right to repatriate profits and capital and to obtain hard c m c y and the right to international law protection against expropriation including the right to compensation equal to the fair market value of their investment Claimants also cite the United States Senate Report 107-139 on the Trade Promotion Act of 2002 which states inter alia Since the early 1980s the United States has entered into bilateral investment treaties BITS to secure the rights of U S investors abroad at p 12 mt is a priority for negotiators to seek agreements protecting the rights of U S investors abroad and ensuring the existence of an investor state dispute settlement mechanism atp 13 This should help ensure that investment agreements do not confer on foreign investors in the United States a right to compensation for expropriation that differs substantially fiom the right to compensation that U S citizens already enjoy at p 15 Claimants cite the case of Marvin Roy Feldman Karpa v United Mexican States ICSID Case No ARB AF 99 1 Award Oecember 16 2002 in which the Tribunal made the following statements a finding of expropriation depends in significant part on whether under the circumstances the measures are inconsistent with the Claimant's rights under NAFTA Article 1110 at para 128 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION The Chapter 11 scheme establishes a right to national treatment for investors and damages for breach thereof that is distinct from the right to damages from acts of expropriation at para 137 Mexico has violated the Claimant's rights to non-discrimination under Article 1102 of NAFTA at para 187 166 - The result of the direct theory supported by the Claimants is that there are two distinct legal relationships under an investment treaty the investor and the host State on one hand and the State Parties on the other hand Thus two types of disputes may arise in the application of an investment treaty between the Contracting Parties -over the interpretation and application of the treaty- or between the host State and the investor Investment treaties regulate these two types of disputes in separate provisions 167 - The Respondent has cited previous NAFTA jurisprudence scholarly writings and the position of the Member States in their intervention in other NAFTA Chapter Eleven proceedings in order to demonstrate that investment treaties provide a set of obligations which require the State to treat investments of qualified investors in accordance with the standards of the treaty but that these obligations are owed only to the State of the investors' nationality In particular the Respondent referred to Loewen Group Inc Raymond v United States of America Award ICSID Case No ARB AF 98 3 June 26 2003 where the Arbitral Tribunal was of the opinion that Chapter Eleven provides what in origin are the rights of the Member States regarding the treatment of their nationals' investments in the other Member States There is no w m t for transferring rules derived from private law into a field of international law where claimants are permitted for convenience to enforce what are in origin the rights of Party states at para 233 The U S Reply to the Counter-Memorial of the Loewen Group on Jurisdiction cited by the Respondent stated the position of the United States that investor rights under Chapter 11 are subject to the same rules as 'espoused claims' under diplomatic protection The Respondent also referred to Canada's pleadings before the Courts of Ottawa challenging the NAFTA Award in S D Myers Inc v Government of Canada stated the obligations listed in Section A of NAFTA Chapter Eleven are not owed directly to individual investors Rather the disputing investor must prove that the NAFTA Party claimed against has breached an obligation owed to another NAFTA Party under Section A Amended Memorandum of Fact and Law of the Applicaat the Attorney General of Canada The Attomev General of Canada v S D Myers Inc Court Fie No T-225-01 para 67 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION ii The Tribunal's Views on the Nature ofRights under Chapter Eleven 168 - For the reasons that follow the Tribunal believes that the approach supported by the Respondent respects the traditional structure of international law and the object and purpose of Chapter Eleven The Respondent is correct in its position that Section A of Chapter Eleven sets forth substantive obligations which remain inter-State without accruing individual rights for the Claimants 169 - Different doctrinal theories coexist regarding the nature of investors' rights under international investment agreements The derivative theory briefly described above supports the proposition that investment treaties provide a set of obligations which require the State to treat investments of quahfied investors in accordance with the standards of the treaty but these obligations are only owed to the State of the investor's nationality If a breach of any of these standards occurs the investor may bring the host State to an international arbitration in order to request compensation but the investor will be in reality stepping into the shoes and asserting the rights of the home State 170 - The Tribunal agrees with Claimants that international law may under specific circumstances confer direct rights on individuals the breach of which may amount to an international wrongful act if attributable to the State in question Thus the responsibility of a State may be invoked not just by other States but also in certain areas such as foreign investor protection human rights and environmental protection where there may be a significant role for individuals and non-state entities to assert state responsibility before international dispute settlement bodies 171 - However the proper interpretation of the NAFTA does not substantiate that investors have individual rights as alleged by the Claimants Nor is the nature of investors' rights under Chapter Eleven comparable with the protections conferred by human rights treaties Chapter Eleven may share under Section B with human rights treaties the possibility of granting to non-State actors a procedural right to invoke the responsibility of a sovereign State before an international dispute settlement body But the fundamental difference between Chapter Eleven of the NAFTA and human rights treaties in this regard is besides a procedural right of action under Section B that Chapter Eleven does not provide individual substantive rights for investors but rather complements the promotion and protection standards of the rules regarding the protection of aliens under customary international law 172 - The NAFTA provides two separate set of obligations under Chapter Eleven On one hand Section A of Chapter Eleven establishes substantive protection AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION obligations regard'mg investments of the other Member States On the other hand a breach of these obligations will trigger a procedural obligation of that State under Section B of Chapter Eleven to submit the dispute to investor-to-State arbitration -as provided under Article 1115- in which the host State conduct will be decided in accordance with the adjudicative standards addressed in Section A 173 - In the Tribunal's view the obligations under Section A remain inter-state providing the standards by which the conduct of the NAFTA Party towards the investor will be assessed in the arbitration All investors have under Section B is a procedural right to trigger arbitration against the host State What Section B does is to set up the investor's exceptional right of action through arbitration that would not otherwise exist under international law when another NAFTA Party has breached the obligations of Section A 174 - Section B of Chapter Eleven endorses an irrevocable offer under Article 1122 for investors of the NAFTA Member States to submit the investment dispute to arbitration The investor accepts the host State offer to arbitration upon filing of the request for arbitration and at that moment the investor may waive its procedural rights This is not the nature of the substantive investment obligations under Section A because they remain at the inter-state level and cannot be waived Upon the filing of the request for arbitration accepting the host State's offer the two parties -the State and the investor- enter into a direct legal relationship in the form of an arbitration agreement Therefore the only right of the investor is that under Section B to invoke the responsibility of the host State in an international arbitration according to the promotion and protection standards addressed in Section A These standards include -by virtue of Article 113 1 of the NAFTAnot only the provisions of Section A but all customary international law rules not covered by the lex specialis under Chapter Eleven 175 - The Claimants argue that Section A of Chapter Eleven sets forth rights which are owed directly to individual investors as confirmed by United States legislator the Feldman case supra page 55 and scholarly writings which refer to rights of investors In particular the Claimants cite the 1993 U S Statement of Administrative Action for NAFTA and the United States Senate Report 107-139 on the Trade Promotion Act of 2002 which refer to the rights of investors under the NAFTA The Tribunal finds that the Claimants' literal-wording approach does not provide sufficient evidence to sustain the proposition of direct rights under Chapter Eleven While the U S Senate generally referred to the rights of investors under the NAFTA without specifically addressing the nature of Section A the intervention of the United States during the Lomen arbitration proceedings -pursuant to Article 1128 - reveals the contrary as regards interpretation of Chapter Eleven 58 AWARD - ICSID CASE No ARB AF I04 OS REDACTED VERSION 176 - The position of the NAFTA Parties in their intervention in other Chapter Eleven proceedings -pursuant to Article 1128 of the NAFTA- reveals indeed the Member States' view that investors do not enjoy individual substantive rights under Chapter Eleven and that the rights under Section A are therefore inter-State rather than direct individual rights of investors The position of the United States in its Reply to the Counter-Memorial of the Loewen Group on Jurisdiction cited by the Respondent provided as follows Mexico is correct that 'the right of direct access conferred by Section B of the NAFTA does not in any way alter the interpretation of the Treaty's substantive rights and obligations which exist at the international plane between the States inter se' Response of tbe United States of America to the June 27 and July 2002 Submission of the Governments of Canada and Mexico pursuant to NAFTA Article 1128 atp 8 Regarding the NAFTA arbitration Metalclad v Mexico ICSID Case No A RB AF 97 1 the Attomey General of Canada made the following statement during the appeal of the award in the domestic appellate court of British Columbia The NAFTA is an international agreement between three State Parties Investors of NAFTA Parties have the exhaordbq and limited right to seek damages for a Party's alleged breach of a Chapter Eleven obligation But investors are not parties to the NAFTA The obligations under the NAFTA are owed by the three State parties to each other There is no privity between NAFTA investors and the Parties to the Agreement a s was summarised by the NAFTA Chapter Eleven Tribunal in S D Myen Inc v Government of Canada Outhe of Argument of Intervenor Attorney General of Canada in United Mexican States v Metalclad at para 8 Canada's written submissions at the jurisdictional stage of Methanex v the United States of America pursuant to Article 1128 of the NAFTA reveals Canada's understanding that individual investors do not directly enjoy rights from Section A of Chapter Eleven When interpreting the NAFTA tribunals should recall that the NAFTA is a treaty among h e P h c s namely the sovereign states of the United Mexican States the United States and Canada The obligations undertaken by the three Parties including those under NAFTA Chapter Eleven obligations are owed by the Parties to one another and are subject to the dispute settlement procedures in NAFTA Chapter Twenty Thev are not owed directlv to individual investors of which thev are nationals Rather the disputing investor must prove that the Party claimed against has breached an obligation owed to another Party under Section A Second Submission of Canada of April 30 2001 para 9 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION 177 - The procedural obligation under Section B of Chapter Eleven to submit the investment dispute to arbitration -which may arise fiom the breach of the primary obligations of the host State addressed in Section A- is owed directly to the beneficiary of the obligation in this case the investors who have opted in the present case as a secondary right holder to commence international arbitration proceedings under Chapter Eleven The power to bring international arbitral proceeding under Section B makes the investor the holder of a procedural right irrespective of whether this right may be suspended by the NAFTA Parties 178 - Other investor-to-State arbitrations pursuant to Chapter Eleven have indirectly referred to the nature of investors' rights under the NAFTA The Feldman arbitration cited by the Claimants does not support the proposition that Section A of Chapter Eleven provides direct individual rights for investors The Tribunal agrees as referred to in the Feldman case that the Chapter Eleven scheme establishes rights regarding the treatment of investors but these rights are not owed by the host State to the investors but to the investors' home State Therefore the rights provided by Section A only exist at the international plane between the NAFTA Parties Investors are the objects or mere beneficiaries of those rights Accordingly under Chapter Eleven the Member States have an obligation to treat investors of the other NAFTA Parties under the standards addressed in Section A but this obligation is only owed to the state of the investor's nationality 179 - It therefore follows that the only individual rights investors enjoy under Chapter Eleven is the procedural right under Section B to invoke the responsibility of the host State In particular Article 1116 1 gives investors the right to bring a claim on its own behalf while Article 1117 1 specifies that an investor of a Party that owns or controls either directly or indirectly an enterprise in the territory of another NAFTA Party may advance a claim on behalf of that enterprise The Arbitral Tribunal believes that the countermeasure did not impair the Claimants' procedural right to bring a claim against the Mexican State as the countermeasure had no relation whatsoever with the Respondent's offer to submit the present dispute to arbitration 180 - Notwithstanding the Tribunal's finding that investors' do not enjoy individual or independent rights under Section A of Chapter Eleven -and that the countmeasure did not affect the Claimants' procedural right under Section Bthe Tribunal believes that the Tax was not a valid countermeasure because it was not adopted to induce US' compliance with the NAFTA nor does the Tax meet the proportionality requirements under customary international law AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION M THE RESPONDENT'S REQUEST FOR SUSPENSION OF THE PROCEEDINGS 181 - Mexico contends that if the answer to the validity of the countermeasures defence requires a finding that the United States breached the NAFTA and the Tribunal considers that this is a matter for a Chapter 20 Tribunal Mexico requests the suspension of the proceedings pending a determination of a Chapter 20 Tribunal as to the validity of the countermeasures 182 - As noted the Tribunal considers that the Tax does not amount to a valid countermeasure in accordance with customary international law because it was not adopted to induce the United States to comply with its obligations under the NAFTA nor did it meet the proportionality requirement 183 - The Tribunal does not need to suspend the proceedings because the validity of the countermeasures defense does not require a finding that the United States breached the NAFTA Therefore even if the United States breached any of its NAFTA obligations vis-A-vis the Respondent the Tax would still not amount to a legitimate countermeasure 184 - For the above reasons the Respondent's request for suspension of the proceedings is denied VIlI THE CLAIMANTS' NAFTA CLAIMS 185 - The relevant part of Article 1102 of the NAFTA National Treatment reads as follows 1 Each Party shall accord to investors of another Party eeatment no less favorable than that it accords in like circumstances to its own investors with respect to the establishment acquisition expansion management conduct operation and sale or other disposition of investmenfs 2 Each Party shall accord to investments of investors of another Party eeatment no less favorable than that it accords in like circumstances to investments of its own investors with respect to the establishment acquisition expansion management conduct operation and sale or other disposition of investments AWARD - ICSID CASE No ARB AF l04 05 REDACTED VERSION 3 Thc treatment accorded by a Party under paragraphs 1 and 2 means with respect to a state or province treatment no less favorable thao the most favorable treabnent accorded in like circumstances by that state or province to investors and to investments of investors of the Party of which it forms a part i Views of the disputing Parties 186 - The essence of the Claimants' National Treatment claim is that Mexico's enactment and maintenance of the Tax favors domestic investors and investment over their foreign competitors Therefore under Article 1102 Mexico was obliged to accord the Claimants and to ALMEX the best treatment that Mexico gave to the domestic cane sugar industry 187 - The Claimants argue that Article 1102 guarantees equal competitive opportunities between foreign and domestic investors in like circumstances prohibiting defacto discrimination such as the Tax The Claimants request the Tribunal to follow a three step analysis in determining whether a de facto discrimination has taken place in the present case determining first whether the 'treatment' relates to the establishment acquisition expansion management conduct operation or sale or other disposition of the investment in question Second the Tribunal must determine whether manufacturers and producers of HFCS in Mexico -all of them U S investors- are in like circumstances with the Mexican industry that manufactures and distributes cane sugar and third the Tribunal must determine whether the treatment accorded to the foreign investor is less favorable than the best treatment accorded to the domestic investor in like circumstances 188 - The first step in the analysis of Article 1102 requires that the Tax relate to the expansion management conduct and operation of the Claimants' investment The Tribunal finds that the Tax by reducing AT MEX's profits on the sale of HFCS particularly in the early years of the Tax did impair to a certain extent the ability of ALMEX to conduct or expand operations to satisfy the domestic demand for HFCS in Mexico 189 - The Claimants contend that the HFCS and the sugar industries are in like circumstances in Mexico as both industries operate in the same sector and compete with each other as recognized by Mexico's own administrative and judicial dings Furthermore a binational panel convened under Chapter XM of the NAFTA to examine the challenge to Mexico's anti-dumping determination on HFCS agreed that sugar and HFCS are like products and that a WTO Panel Report dated October 7 2005 found that HFCS and cane sugar are competitive or substitutable products As the like products test is more restrictive than the like circumstances test under Article 1102 HFCS and cane sugar producers and AWARD - ICSID CASE No ARB AF 04 05 62 REDACTED VERSION distributors can in the present case be considered to be in like circumstances thus meeting the second requirement of Article 1102 190 - Finally the Claimants stress that the Tax discriminates against HFCS manufacturers importers and distributors thereby treating the Claimants and ALMEX less favorably than cane sugar producers in order to protect the domestic cane sugar industry In particular the Tax imposes sharply different tax treatment on the domestic cane sugar industry as compared with the U S -owned Mexican HFCS industry The best treatment available under the Tax is the exemption from the tax The protectionist motivation behind the adoption of the Tax was recognized by the Mexican Supreme Court i e the legislature's intent underlying the Tax was to protect the domestic sugar industry Mexican Supreme Court Decision Annulling the Suspension of the Tax July 17 2002 Furthermore Mexico's top trade officials publicly acknowledged the tax was designed to protect the domestic sugar industry and admitted that it may violate Chapter Eleven of the NAFTA In addition the WTO had ruled that the tax was discriminatory as it was imposed so as to afford protection to Mexican domestic production of cane sugar This Tribunal agrees that the intent of the measure was to protect the domestic cane sugar industry see paras 134 to 160 of the present Award regarding the intent of the Tax 191 - The Claimants contend that Mexico's breach of its national treatment obligation under Article 1102 caused ALMEX and its U S investors to lose significant existing and potential business in HFCS thereby substantially d i s h i n g the value of the Claimants' investment in the production and distributio'n of HFCS in Mexico 192 - The Respondent contends that the Tax was a countermeasure not directed to HFCS manufacturers or distributors but to the United States as a NAFTA Party although Respondent also said at the hearing that the Tax was aimed at a product i e HFCS Mexico did not target U S investors as such but the tax was a reaction and measure of compensatory nature to the restrictions adopted by the U S against Mexican sugar The Respondent contends that the tax was not intended to iuflict harm upon HFCS producers the essence of which is no different than the suspension of treaty-benefits pursuant to Article 2019 1 of the NAFTA In addition the Respondent mainthat the fact that sugar and HFCS are similar or like products for the purposes of an antidumping investigation or a WTO Panel does not establish that the Claimants are in like circumstances to those of the sugar industry in Mexico as there are no grounds to import the concept of ''like products under the GATT into the context of Article 1102 While likeness in products is relevant it is not the only aspect to consider in establishing whether the parties in question are in like circumstances which - AWARD ICSID CASE No ARB AF 04 05 REDACTED VERSION requires more than a comparison of the goods that are produced or the investors' circumstances that are affected by the measure In particular Mexico contends that the Claimants were not in similar or like circumstances to those of Mexican investors of the sugar industry nor was ALMEX in similar circumstances to Mexican sugar producers because fructose had a growing share of the Mexican sweetener market while Mexican sugar faced significant restrictions in gaining access to the U S market in breach of the NAFTA and Mexican sugar producers were severely harmed by national HFCS consumption affecting the conditions of competition within Mexico i The Tribunal's decision regarding Article 1102 193 - Article 1102 requires the Member States to accord investors and investments of the other Member States treatment that is no less favorable than that given to domestic investors and investments in like circumstances The basic function of this provision is to protect foreign investors vis-his internal regulation affording more favorable treatment to domestic investors The national treatment obligation under Article 1102 is an application of the general prohibition of discrimination based on nationality including both de jure and de facto discrimination The former refers to measures that on their face treat entities differently whereas the latter includes measures which are neutral on their face but which result in differential treatment 194 - Pursuant to Article 1131 1 the Arbitral Tribunal is to decide all the issues in dispute in accordance with the provisions of Chapter Eleven and the applicable rules of international law 195 - The starting point for interpreting any provision of the NAFTA is therefore the Viema Convention on the Law of r e a t i e s which codifies customary international law Methanex Corporation v United States of America UNCITRAL Final Award August 7 2005 Part IV Chapter B para 29 As such it forms part of the customary rules of interpretation of public international law which the Arbitral Tribunal has been directed by Article 1131 1 of the NAFTA to apply in seeking to clarify the provisions of Chapter XI That direction reflects a recognition that the NAFTA is not to be read in isolation fiom public international law Article 31 1 of the Vienna Convention on the Law of Treaties provides as follows A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose 'Vienna Convention on the Law of Treaties done in Vienna on 23 May 1969 1155 U N T S 331 8 I L M 679 64 AWARD - ICSD CASENo ARB AF IO4 05 REDACTED VERSION 196 - Pursuant to the ordinary meaning of Article 1102 the Arbitral Tribunal shall i identify the relevant subjects for comparison ii consider the treatment each comparator receives and iii consider any factors that may justify any differential treatment The logic of Articles 1102 1 and 1102 2 thus suggests that the Arbitral Tribunal does not need to compare the treatment accorded to ALMEX and the Mexican sugar producers unless the treatment is being accorded in like circumstances Therefore it is necessary to consider the question of liie circumstances before the question of no less favorable treatment because if the circumstances are not like no obligation arose for the Respondent State to accord Claimants' HFCS investment the best treatment accorded to Mexican cane sugar investments I Like Circumstances 197 - In order to determine the meaning of the expression in liie circumstances in Article 1102 paragraphs 1 and 2 we examine these words in their ordinary meaning in their context and in light of the object and purpose of Article 1102 Article 3 1 1 of the Vienna Convention on Law of Treaties The ordinary meaning of the word circumstances under Article 1102 requires an examination of the surrounding situation in its entirety Methanex supra page 63 at para 37 Accordingly the application of the national treatment standard involves a comparative measure and all circumstances in which the treatment was accorded are to be taken into account in order to identify the appropriate comparator The dictionary meaning of the word circumstance refers to a condition fact or event accompanying conditioning or determining another or the logical surroundings of an action 198 - As regards the Mexican argument that they are not in like circumstances because of the situation sugar producers faced concerning access to the U S market this is not a relevant factor in determining whether two companies are in l i e circumstances As confvmed in S D M e r s v The Government of Canada UNCITRAL NAFTA Final Award on the Merits November 13 2000 para 2511 the domestic entities in like circumstances whose treatment should be compared are those firms operating in the same sector which should be interpreted broadly to include the concepts of economic sector and business sector Also in Pope Talbot v The Government of Canada mCITRAL NAFTA Interim Award June 26 2000 l the Arbitral Tribunal focused on the relevant business and economic sector as the appropriate comparator holding that the investor had established differential treatment of entities in like circumstances AWARD - ICSW CASE No AXB AF 04 05 REDACTED VERSION 199 - Considering the object of Article 1102 -to ensure that a national measure does not upset the competitive relationship between domestic and foreign investors- other tribunals convened under Chapter Eleven have focused mainly on the competitive relationship between investors in the marketplace 200 - In Feldman the Tribunal's view was that the 'universe' of firms in like circumstances are those foreign-owned and domestic-ownedfirms that are in the same business Feldman supra page 55 Award at para 171 Mr Feldman initiated arbitration proceedings on behalf of Corporaci6n de Exportaciones Mexicanas S A de C V CEMSA a Mexican company which Mr Feldman owned and controlled The dispute arose out of the Mexican tax authorities' refusal to rebate excise taxes applied to tobacco products exported om Mexico by CEMSA and the refusal of such authorities to recognize CEMSA's right to a rebate of such taxes regarding prospective exports Feldman alleged that the Mexican Government's measures discriminated against exporters of cigarettes by permitting only exporters who produced the exported cigarettes to claim tax rebates while exporters who were only resellers of exported cigarettes could not claim the same treatment The Tribunal found that the companies in like circumstances were trading companies those in the business of purchasing Mexican cigarettes for export 201 - ALMEX and the Mexican sugar industry are in like circumstances Both are part of the same sector competing face to face in supplying sweeteners to the soft drink and processed food markets The competitive relationship between them was confirmed by Mexico's administrative and judicial authorities when the Government initiated anti-dumping investigations in 1997 on HFCS based on a petition filed by the Sugar Chamber In addition Mexico's Federal Competition Commission has confirmed that HECS is a substitute of sugar and that both products compete in the same market Comisi6n Federal de Competencia Informe Anual1993-94 202 - Notwithstanding the fact that fructose and cane sugar producers are not identical comparators even though they compete face-to-face in the same market it is the Tribunal's view that when no identical comparators exist the foreign investor may be compared with less like comparators if the overall circumstances of the case suggest that they are in like circumstances This was the specific situation in Methanex where the State of California issued an order that banned the use of the gasoline additive methyl tertiary-butyl ether MTBE Methanex does not manufacture MTBE but it is one of world's largest producers and marketers of methanol the principal ingredient of MTBE The gist of Methanex's Article 1102 claim was that California intended to favor domestic producers of ethanol by discriminating against foreign producers of methanol and that the two products should be considered like because they both compete in the oxygenate market After considering the arguments of both Parties the Arbitral Tribunal determined AWARD - ICSID CASE No ARB AF IO4 05 REDACTED VERSION that Methanex was not in like circumstances as domestic producers of ethanol because there were also identical comparators in the United States other producers of methanol which were subject to the same treatment as Methanex Furthermore looking at the circumstances of competition between methanol and ethanol in the market for fuel additives the tribunal found the circumstances of methanol and ethanol to be different because d i e ethanol methanol itself is not usable as a gasoline additive 203 - The Claimants argues that the facts in the present case differ from the Methonex case because there is no Mexican-owned HFCS industry Claimants' Memorial at paras 84 - 85 and Claimants' Reply at para 72 The evidence on the record does not show that there were identical Mexican-owned HFCS producers when the Tax was adopted Only U S investors -including ALMEX and CPL manufactured and distributed HFCS in Mexico Therefore the f m s they can be compared with are the domestic sugar producers with which at the time the Tax was in force shared the market competing directly in supplying sweeteners to soft drink bottlers and processed food firms in Mexico 204 - Accordingly the appropriate subjects for comparison in the present case are the Mexican cane sugar producers as they compete face-to-face with the Claimants in supplying sweeteners to the industry producing beverages and syrups subject to the Tax 2 Discriminatey Treatment 205 - Article 1102 prohibits treatment which discriminates on the basis of the foreign investor's nationality Nationality discrimination is established by showing that a foreign investor has unreasonably been treated less favorably than domestic investors in like circumstances Accordingly Claimants and their investment are entitled to the best level of treatment available to any other domestic investor or investment operating in like circumstances including the domestic cane sugar producers 206 - In the present case the Tax was indirectly imposed on non-cane sugar sweeteners as it subjects the distribution of a certain group of sol7 drinks -including those containing fructose but not cane sugar to the payment of a 20 percent ad valorem tax Therefore HFCS was taxed in excess of like domestic products cane sugar Cane sugar was the only sweetener exempted from the Tax 207 - The Tax clearly established a different regime for two groups of soft drinks and syrups One group of soft drinks and syrups is subject to the payment of a 20 percent excise tax while the other group is exempted from the Tax The criterion AWARD - IcSm CASE No ARB AF 04 05 REDACTED VERSION established by the Mexican legislation for the division of soft drinks and syrups into these two groups is whether the soft drinks and syrups are sweetened with cane sugar or with non-cane sugar sweeteners such as beet sugar Therefore the Tax created a situation in which HFCS was liable to higher taxes than those applied to cane sugar disciminating between one and the other 208 - The Tax did not distinguish between foreign or Mexican cane sugar it simply exempted from the Tax products sweetened exclusively with cane sugar and with the aim of protecting the Mexican cane sugar industry The Tax was designed from the outset to afford protection to the Mexican cane sugar industry as discussed above regarding Mexico's countermeasures defense and affected the production and distribution of HFCS as opposed to domestic investors in like circumstances cane sugar producers Mexican production of sweeteners for soft drinks and syrups is concentrated on cane sugar whereas the HFCS industry in Mexico is controlled by U S investors including ALMEX and the Claimants 209 - In establishing whether the Tax affords less favorable treatment to the Claimants previous Tribunals have relied on the measure's adverse effects on the relevant investors and their investments rather than on the intent of the Respondent State S D Myers First Partial Award para 254 In the present case both the intent and effects of the Tax show the discriminatory nature of the measure 210 - The Tribunal has reviewed the underlying intent of the Tax its consideration of Respondent's countermeasures defense reaching the conclusion that the Tax was enacted for the purpose of protecting the domestic Mexican sugar industry from foreign competitors who produce HFCS 21 1 - The effect of the Tax was that U S producers and distributors of HFCS in Mexico received treatment less favorable than that accorded to Mexican sugar producers The imposition of a 20 percent tax on the transfer and distribution of soft drinks and other beverages containing HFCS favors the domestic sugar market because it exempts from that tax any beverages sweetened exclusively with cane sugar Producers of HFCS and cane sugar compete in the Mexican sweeteners market but the former do not receive the best treatment which was accorded to cane sugar producers 212 - The evidence on the record shows the Tax discriminated between sugar and HFCS designed to afford protection to the production of cane sugar which is in line with the measures taken by Mexico before the imposition of the Tax The WTO Panel and Appellate Body Report held that AWARD - ICSD CASE No ARB AF 04 05 REDACTED VERSION Dissimilar taxation imposed on directly competitive or substitutable imports IIFCS and domestic products cane sugar is applied in a way that affords protection to domestic production and that the tax measures are therefore inconsistent with Article J II Z second sentence of the GATT 1994 WTO Panel Report p 132 para 8 96 In the present case the Tribunal also finds that the IEPS Amendment imposed dissimilar taxation on directly competitive products HFCS and cane sugar which is discriminatory and contrary to the national treatment principle under Article 1102 The Tax was applied in a way that afforded protection to the domestic cane sugar in dust targeting the HFCS industry which is largely owned by foreign U S investors including the Claimants 213 - For the reasons stated above the Arbitral Tribunal concludes that the Tax denied national treatment to the Claimants and their investment in violation of Article 1102 of the NAFTA B PERFORMANCE REQUIREMENTS 214 - The relevant part of Article 1106 3 of the NAFTA Expropriation and Compensation provides as follows No Party may condition the receipt or continued receipt of an advantage in connection with an investment in its territo yof an investor of a Party or of a non-Party on compliance with any of the following requirements a to achieve a given level or percentage of domestic content @ to purchase use or accord a preference to goods produced in its temto y or to purchase goods from producers in its territory i Views of the Disputing Parties 215 - The Claimants contend that the Tax amounts to impermissible performance requirements in breach of Article 1106 3 because it confers advantages i e exemption from the tax on Mexican bottlers who use domestic cane sugar punishing bottlers severely for using any amount of HFCS 216 - The essence of the Claimants' position is that Article 1106 3 covers all investors regardless of nationality including Mexican investors Thus Mexico may not condition the grant of an advantage in connection with an investment of any investor on compliance with certain performance requirements The Claimants contend that they can challenge Mexico's imposition of performance requirements because the advantages conferred upon the Mexican investor had a direct impact AWARD - ICSID CASE No ARB AF W OS REDACTED VERSION on Claimants' investment in HFCS production and distribution facilities causing ALMEX substantial loss or damage in violation of Article 1106 217 - The Respondent counters that Article 1106 3 does not apply to the present case as the Tax was not imposed on the Claimants nor was the alleged advantage i e relief from the tax ever available to the Claimants but was only in connection with the bottlers who have no identity of ownership interest with ALMEX 218 - The Respondent does not deny that the Tax provided advantages to bottlers of beverages sweetened exclusively with cane sugar but argues that the advantage is not provided in connection with an investmenf' within the meaning of Article 1106 3 Therefore the essence of the Parties' dispute over the application of Article 1106 3 to the present case relates to the interpretation of this provision The Claimants believe that Article 1106 3 is intended to reach performance requirements connected with all investments in a Party's temtory i e Mexico whereas the Respondent contends that Article 1106 3 refers to performance requirements imposed directly on investors of the other Member States ii The Tribunal's decision regarding Article 1106 of the NAFTA 219 - Article 1106 3 prohibits a Party from according an advantage in connection with an investment in its temtory of an investor of a P e or of a nonParty contingent on compliance with any of the listed requirements including a to achieve a given level or percentage of domestic content @ to purchase use or accord a preference to goodsproduced in its territory 220 - Again the starting point for interpreting Article 1106 3 is Article 31 1 of the Vienna Convention on the Law of Treaties Accordingly this provision is to be interpreted in good faith in accordance with its ordinary meaning its context and in the light of its object and purpose 221 - In the Tribunal's view Article 1106 3 should be interpreted in connection with Article 1101 1 oftheNAFTA This Chapter applies to measures adopted or maintained by a Party relating to a investors of another Party @ investments of investors OF another Party in the tenito yof the Party and c with respect to Articles 1106 and 1114 all investments in the temtory of the Party The obligations contained in Article 1106 3 are thus not limited to investments of the other Member States but to all investments in the temtory of a Party AWARD - ICSID CASE No ARB AF IO4105 REDACTED VERSION Therefore Article 1106 3 prohibits Member States from imposing performance requirements upon any investor from the NAFTA region including Respondent's own investors 222 - The Respondent conferred advantages upon the cane sugar industry in Mexico by levying a 20 percent tax on soft drinks and syrups that use any sweetener other than cane sugar such as HFCS exempting from the Tax soft drinks and syrups sweetened exclusively with cane sugar Therefore the Mexican legislature conferred an advantage -the tax exemption- conditioned upon the use of cane sugar instead of any other sweetener placing the Claimants at a competitive disadvantage vis-a-vis sugar producers in Mexico 223 - The performance requirement in the present case consists of the requirement to use cane sugar instead of the Claimants' HFCS in order to benefit from the tax exemption which qualifies within the two requirements addressed in subparagraphs a and @ of Article 1106 3 to achieve a given level or percentage of domestic content or to purchase use or accord apreference to good produced in its territoly Therefore paragraph 3 of Article 1106 3 on performance requirements prohibits specific performance requirements linked to receipt of an advantage including a tax advantage 224 - Notwithstanding the fact that the Tax conferred advantages on the sugar industry generally without distinguishing between domestic and foreign investors in the sugar industry the reality shows that the sugar industry in Mexico is essentially domestic 225 - Many of the sugar refineries in Mexico are owned and controlled by the Government Sugar cane fields and sugar refineries are spread throughout the country Although an effort was made to privatize all sugar mills during the early 1990's and most were sold to private investors the sugar crisis a decade later lead the Mexican Government to seek the hancial support of those in dire situations to salvage the cane sugar industry resulbng in the Presidential Decree of September 3 2001 expropriating large parts of the cane sugar industry in Mexico 226 - Similarly consumption of non-Mexican cane sugar during the period the Tax was in force is basically non-existent The evidence on the record reveals the reduced amount of domestic consumption of sugar imported from third countries during the 2002 - 2006 as demonstrated by figures provided by the U S Department of Agriculture USDA on domestic production and sugar imports For example he USDA estimated Mexican sugar production for 2003104 at 5 517 million metric tons raw value whereas imports during 2003 amounted to approximately 5 12 312 metric tons which represents 0 01 per cent of the total domestic production REDACTED VERSION 227 - Accordingly the Tribunal's view is that both the structure of the Mexican sugar industry in Mexico and the underlying intent of the Tax conferred advantages on the sugar industry in Mexico These advantages - consisting of an exemption from the Tax- were provided in connection with the Claimants' investment in Mexico because they had a detrimental effect on the profitability of the investment As these advantages are conditioned on the exclusive use of cane sugar -which the Tribunal believes is essentially domestic- and discriminate against the HFCS industry in which Claimants have made their investment the Tax is inconsistent with Article 1106 3 of the NAFTA 228 - The relevant part of Article 1110 of the NAFTA Expropriation and Compensation provides as follows 1 No Paty may directly or indirectly nationalize or expropriate an investment of an investor of another Patty in its territory or take a measure tantamount to nationalization or expropriation of such an investment expropriation except a for a public purpose @ on a non-dischinatory basis c in accordance with due process of law and Article 1105 1 and d on payment of compensation in accordance with paragraphs 2 through 6 i Views of the Disputing Parties 229 - The essence of Claimants' claim is that the imposition of the Tax amounts to an indirect expropriation of their investment defined in the Request for Arbitration as the Enterprise of the Claimants or ALMEX' Claimants' Request for Arbitration p 2 para 6 230 - The Claimants argue that the Tax deprived them of the fair market value and economic use of their investment in the production of HFCS in Mexico diminishing the reasonably expected economic benefits of their investment without compensation by Mexico Claimants' Memorial on the Merits at para 127 Therefore the Claimants contend that the HFCS was an expropriatory measure under Article 1110 of the NAFTA and international law E REPORT presented by the Claimants estimates that ALMEX 23 1 - The B R A GROUP suffered damages in the form of lost profits as a result of the Tax including lost AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION sales of HFCS that ALMEX would have imported marketed and distributed or used in the manufacture of other products Claimants' Memorial on the Merits at paras 186 - 196 and Claimants' Reply at para 129 232 - The Claimants contend that the substantial economic h a m suffered is sufficient to establish that an expropriation had occurred In addition the Claimants contend that the Tax interfered with their legitimate and reasonable expectations regarding the economic benefit to be obtained from the use and enjoyment of their investment which confirms the expropriatory nature of the measure The Claimants state that they expected not to suffer discriminatory treatment or to be deprived of their investment based on Mexico's obligations under Chapter XI and the Idaquim Agreement between the Mexican Government and the CORNWm MILLERSASSOCIATION allowing free imports of yellow corn from the United States Moreover the Claimants contend that the discriminatory character of the Tax further demonstrates that the tax amounts to a taking Top Mexican officials acknowledged the discriminatory intent of the tax subsequently confirmed by a pronouncement of the Mexican Supreme Conrt and a WTO Panel Report 233 - In Claimants' view a host State measure not need be permanent in order to be expropriatory Since its enactment on December 31 2001 the Tax substantially deprived the Claimants of the value of their investment in ALMEX and interfered with the effective enjoyment and economic benefit of the investment 234 - The Respondent counters that the expropriation claim is groundless because the alleged impairment was neither substantial nor permanent At all times the Claimants' maintained ownership and control of the investment and the economic effects of the Tax were of insufficient degree and duration to amount to a taking Respondent's Rejoinder para 74 - 75 235 - The degree of interference caused by the Tax on the Claimants' investment does not amount to an indirect expropriation because i the investors remained in full ownershiv and control of their investment in ALMEX ii the investors remained AWARD - ICSLD CASE No ARB AF 04 05 REDACTED VERSION 236 - Furtbermore it is the Respondent's view that the substantial deprivation test under Article 1110 cannot be considered in the abstract and applied to the Claimants' sales of HFCS -calculated in the form of lost profits- as these do not constitute an investment under Chapter XI or the investments identified by the Claimants for the purposes of their Article 1110 claim Respondent's Rejoinder para 78 ii The Tribunal's decision regarding Article 1110 of the NAFTA 237 - Article 1110 prohibits a host State from nationalizing or expropriating the investment of an investor b m another Member State or taking measures tantamount thereto except in accordance with the conditions listed in Article 1110 l a to d The key terms in Article 1110 - nationalization expropriation and measures tantamount thereto - are not defined in the NAFTA The interpretation of these terms requires an analysis of the applicable rules of international law in accordance with Article 113 1 of the NAFTA 238 - Of course a taking of property may be understood in a strict sense -when there is a direct transfer of the property title but it also applies just as obviously to indirect expropriation - i e to State measures not directly aimed at the expropriation of an investment but which have equivalent effects Expropriation may take place through State measures other than direct taking of tangible property such as taxation When such interference occurs the legal title to the property remains in the owner but as a result of the host State measure the investor's rights to use of the property are rendered nugatory or lack the economic value they previously had 239 - The Claimants rely on the effects of the Tax which allegedly deprived them of the economic value of the investment and interfered with their reasonable expectations The discriminatory character of the Tax is for the Claimants a further indication that the Tax is an expropriatory measure Claimants' Memorial on the Merits pp 65 - 70 240 - The test on which other Tribunals and dochine have agreed -and on which the Claimants' rely- is the effects test Judicial practice indicates that the severity of the economic impact is the decisive criterion in deciding whether an indirect expropriation or a measure tantamount to expropriation has taken place An expropriation occurs if the interference is substantial and deprives the investor of all or most of the benefits of the investment There is a broad consensus in academic writings that the intensity and duration of the economic deprivation is the crucial factor in identifying an indirect expropriation or equivalent measure AWARD - ICSW CASE No ARB AF l04 05 REDACTED VERSION 241 - There is extensive international jurisprudence recognizing that an indirect expropriation may take place as result of a government measure which results in the effective loss of management use or control or significant loss or depreciation of the value or the assets of the foreign investment In the Norwegian Shipowners' Claims 1922 and Polish Upper Silesia 1929 decisions the test for expropriation was based on the impact the government measures had on the property at issue Norwegian Shipowners' Claims Norway v United States 1 Rep Infl Arb Awards 307 Certain German Interests in the Polish Upper Silesia Case 1926 PCU Ser A No 71 The decisive element was whether the government measure interfered with property rights to an extent that these rights were rendered so useless that they must be deemed to have been expropriated Christie G C What Constitutes a Taking of Property under International Law British rB Int'lL 307 1962 atp 3111 242 - Notwithstanding the fact that previous cases are not identical and that certain considerations and decisions have not been uniform a common principle may be extracted only loss of control over the investment or substantial loss of its economic value may amount to an indirect expropriation 243 - In the recent ICSID Award of LG E v Argentina the Arbitral Tribunal held that generally expropriation must be permanent that is t'o say it cannot have a temporary nature unless the investment's successfir1 development depend on the realization of certain activities at specific moments that may not endure variations PCSID Case No ARB 02 1 Award October 3 2006 p 58 para 1931 244 - As to the intensity of the measure a first indication is whether the investor lost control of the investment by losing rights of ownership or management even if the legal title was not disturbed 245 - In Pope Talbot supra page 65 the Tribunal applied the effects test by examining whether the conduct of the host State had substantially deprived the investor of the control of its investment The Claimant argued that the host State measures interfered with its ability to export lumber to the United States which resulted in reduced profits The Claimant alleged that the lost profits constituted an expropriation and that every decrease in its company export quota was a further expropriation In analyzing these allegations the Tribunal considered that the alleged interference did not rise to the level of expropriation By examining various factual indicia -including whether notwithstanding the measure the investor was still able to use enjoy or dispose of the property- the Tribunal concluded that there had not been substantial interference AWARD - ICSID CASE No ARB AP IO4105 REDACTED VERSION m h e Investor remains in control of the Investment it directs the day-today operations of the Invesmcnt and no officers or employees of the investment have bem detained by virtue of the Regime Canada does not supervise the work of the officers or employees of the Investment does not take any of the proceeds of company sales apart om taxation does not intexfcre with mansgcment or shareholders' activities does not prevent the hvcstmmt from paying dividends to its shareholders does not interfere with the appointment of tors or management and does not take any other actions ousting the Investor from full ownership and control of the Investment Pope Talbot v The Government of Canada Intelim Award 26 June 2000 para 100 In Feldman supra page 55 the Tribunal reached the conclusion that there was no expropriation considering the relevant factors of the case including the fact that the investment was at all times under the complete control of the investor In the present case there was no expropriation of physical assets Nor was there any indirect expropriation of the Claimants' investment i e the Enterprise or ALMEX The Tax did not deprive the Claimants of fundamental rights of ownership or management of their investment The Claimants have remained in full title and possession of their investment controlling at all times ALMEX's production sales and distribution of its products 246 - An alternative criterion regarding intensity is whether the host State measure affects most of the investment's economic value or renders useless the most economically optimal use of it In Pope Talbot supra page 65 the sole takingggthat the investor identified was the host State interference with the investment's ability to carry on its business of exporting lumber to the United States which resulted in lost profits for the investor Applying the ordinary meaning of expropriation under international law the Tribunal considered that the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been 'taken' from the owner The Tribunal concluded that the degree of interference with the investment's operations did not give rise to an expropriation In the present case the object of the alleged expropriation is the profits that ALMEX would have generated from January 1 2002 to December 31 2006 in the absence of the Tax including their profits on lost sales of HFCS in Mexico Usine the abovementioned test the tax was not suflicientlv restrictive to suuuort a AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION 247 - In the NAFTA context the only case in which the Arbitral Tribunal concluded that an expropriation had occurred was Metalclad The Tribunal found that Mexico through the actions of the local municipality expropriated the property of a U S investor that had secured all required permits om the Mexican federal authorities to construct and operate a hazardous waste facility The Tribunal reasoned that the government's measure in breach of the investor's expectations was expropriatory because it resulted in a complete frustration of the operation of the investment and negated the possibility of any meaningful return of Metalclad's investment In other words Metalclad had completely lost its investment Metalclad supra page 58 Award at para 113 Because the result of the government measure forever barred Metalclad's investment there was no doubt for the Tribunal that Mexico expropriated Metalclad's assets In the present case Mexico's conduct by enacting the Tax is not tantamount to expropriation of the enterprise as such within the approach endorsed in Metalclad The tax did not frustrate the complete operation of ALMEX activities in Mexico After the Tax entered into force ALMEX continued to produce and distribute its products derived from wet milling of corn Today ALMEX continues to operate and has resumed its production and distribution of HFCS in Mexico The agreement of July 27 2006 -eliminating the Tax- and the establishment of a NAFTA free trade area for sweeteners as of January 1 2008 will enhance free movement of HFCS within the NAFTA Member States 248 - It follows that the test for expropriation under Article 1110 cannot be considered in the abstract or based exclusively on the Claimants' loss of profits which is not necessarily a sufficient sole criterion for an expropriation 249 - In order to sustain an expropriation claim the Claimants must have established that the effects of the measures were both of the intensity and duration as indicated above As the required intensity of the effects resulting kom the Tax has not been established -and the alleged expropriatory measure is no longer in force- it is not necessary for the Tribunal to analyze whether Mexico interfered with the investment for a significant period of time 250 - Other factors may be taken into account together with the effects of the government's measure including whether the measure was proportionate or necessary for a legitimate purpose whether it discriminated in law or in practice whether it was not adopted in accordance with due process of law or whether it interfered with the investor's legitimate expectations when the investment was made 251 - In the Tribunal's view this is not an expropriation case The Claimants contend that the expropriatory nature of the Tax is confirmed by the fact that the Tax was - AWARD ICSID CASENO ARB AF O4 05 77 REDACTED VERSION discriminatory and also interfered with their legitimate and reasonable expectations regarding the economic benefit to be obtained from the use and e$oyment of the investment However no expropriation occurs unless the measure's degree of interference is substantial which is not the case in the present situation where the Claimants remained at all times in control of their investment producing and distributing HFCS in Mexico Accordingly the loss of benefits or expectation or the alleged discrirninato ycharacter of the Tax standing alone- is not a sufficient criterion for an expropriation 252 - For the foregoing reasons there is nothing in the instant case which could be described as an expropriation by Mexico of the Claimants' investment in ALMEX or a measure tantamount to expropriation within the meaning of Article 1110 of the NAFTA M -DAMAGES a Views of the Disputing Parties 253 - The Claimants contend that the Tax deprived ALMEX of very substantial sales of HFCS both its own production and imports to Mexican bottler customers and in turn damaged Claimants' ability to distribute HFCS through their investment in ALMEX Claimants' damages are readily measured by the profits that ALMEX and the Claimants have lost and will continue to lose as a direct consequence of the HFCS Tax's interference with the economic activity of Claimants' investment Claimants Memorial on the Merits p 83 at para 186 254 - The Claimants contend that because Mexico breached its obligations under Chapter Eleven Mexico is required to compensate the Claimants for all of the damage the Tax caused to their investment in accordance with Article 1135 of the NAFTA which provides as follows 1 Where a Ttibunal es a h a l award against a Party the Tribunal may award separately or in combination only a monetary damages and any applicable interest A tribunal may also award costs in accordance with the applicable arbitration rules AWARD - ICSID CASE No ARB AF i04 05 REDACTED VERSION 2 Subject to paragraph 1 where a claim is made under Article 1117 1 @ an award of monetary damages and any applicable intenst shall provide that the sum be paid to the enterprise 255 - The Claimants argue that they should be compensated not only for damages allegedly suffered by A L m X in their capacity as investors but also for damages suffered in their capacity as exporters offnrctose into Mexico submitting that an investment was made by ADM and by TLIA in the distribution facilities located in San Jose Iturbide Guanajuato Mexico to facilitate those sales of U S origin HFCS and hence the Tax severely impaired the value of such investments Claimants Reply paragraph 323 at 136 Claimants also maintained that the investment should not be viewed simply as the physical assets that constitute the disbibution system but also those assets involving testing quality control and movement 256 - Respondent contends that theTribunal has no jurisdiction to accept the claims of ADM and EL for profits thgy claim to have lost directly as such losses arise in connection with their ability to engage in cross-border trade Rejoinder para 219 p 65 Therefore if the Tribunal believes that the Tax breaches any of the provisions of Chapter Eleven damages should only apply with respect to certain investments and not with regard to losses that could potentially be suffered in respect to cross border trade in goods or services The Respondent's position is that compensation should not encompass profits lost or diminished on the sale of goods produced in the United States Mexico refers to the written submission of the United States in the S D Mvers Respondent's Counter Memorial on the Merits paragraph 302 at 95 When an investor files a claim under Article 1116 for direct losses suffered by it only those losses that were sustained by that investor in its capacity as an investor are recoverable The United States of America concluded in its submission in that case as follows if for example a NAFTA party adopts a measure probibiting the export of certain goods or senices all entities that import those goods or services from the NAFTA party are likely to sustain losses as a result of that measure whether or not those entities also have an investment for example in a marketing subsidiary in the territory of the party that adopted the export restrictions Accordingly it was acknowledged that losses resulting from reduced imports into the tenitory of the p a q would normally be suffered in an entity's capacity as an importer of goods or services and not in the entity's capacity as an investor AWARD - ICSJD CASENo ARB AF M 05 REDACTED VERSION 257 - The Claimants maintain that the damages caused by the Tax are the same regardless of whether the Tax is found to be an uncompensated expropriation a violation of Mexico's national treatment obligations or an impermissible performance requirement or all of the above since there is no basis to calculate damages differently for violations of any one or more of the above cited rights because the effect of the Tax is identical Claimants Memorial on the Merits para 192 at p 86 The Claimants contend that the standard of compensation addressed in Article 1110 i e the fair market value is a valid standard for measuring compensationfor breaches of other investor protections that result in deprivation of value Claimants Memorial on the Merits para 193 at p 86 The Claimants' position is that compensation should be calculated by reference to ALMEX's and Claimants' lost profits on HFCS sales they would have made 'but for' the HFCS Tax The diminution in the fair market value of the Claimants' investment can and should be calculated on the basis of the lost profits approach because the fair market value of an investment is measure by its ability to generate profits Claimants Memorial on the Merits para 194 at p 87 The Claimants argue that this method of calculating damages is consistent with the S D Myers decision in which the Tribunal determined that Canada was required to compensate the Claimants for the loss of net income stream S D Myers Secondpartial Award paragraphs 96 and 100 GROUPREPORT presented b the Claimants estimates that ALMEX 258 - The BRATTLE suffered lost profits for the amount ob e t w e e n January 2002 and December 31 2005 and that ALMEX would suffer an additionali n lost profits in the future as the tax continued In addition the Report estimates that the Claimants suffered lost sales of HFCS that ALMEX would have imported marketed and distributed or used in the manufacture of p l u s additional damages as other products in the amount o the Tax continued in effect These figures are based on the value of the foregone rcvenues that their property and the going concern that uses that property A L W would have generated in the absence of the Tax Claimants' Memorial on the Merits at paras 186 - 196 and Claimants' Reply at para 129 259 - The calculation of damages caused to ALMEX -half of which is claimed by the Claimants' ownership in ALMEX- has two major components Claimants Memorial on the Merits para 207 at p 92 m t it includes the - actual lost profits of ALMEX as a result of the HFCS Tax from January 1 2002 effective date until December 3 1 2005 so-called 'past damages' which total in current dollar end-2005 terms The Tax continued to December 31 2006 Second it includes the projected future lost profits of m AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION ALMEX resulting 6om the continued application of the HFCS Tax adjusted to resent value as of Jmuary 1 2006 'future damages' which t o t D C l a i m a n t s Memorial on the e r i t s para 207 at p 92 260 - When Mexico repealed the Tax as of January 1 2007 Decree published in the Diario Oficial de la Federaci6n on December 27 2006 the Claimants on March 6 2007 reduced their claim for damages to those accruing only during the period from January 1 2002 the date on which the Tax was enacted through December 31 2006 on which date the Tax ceased to have effect The expert report presented by Mr Alexis Maniaus of THE RRATTLEGROUPwas thus amended-and revised to reach a total claim o d o l l a r s plus interest 261 - The position of the Respondent is that there is a different regime under Section A of Chapter Eleven regarding compensation in case of expropriation and compensation for any other breach of a substantive obligation under Section A In the present case there is no expropriation As regards the alleged breaches of Article 1102 and 1106 Mexico does not dispute that a going concern valuation can be an appropriate valuation criterion provided that the tribunal is not required to engage in speculation to assess future profits @espondent Rejoinder para 244 p 70 262 - Even thounh Respondent agreed that lost profits is a proper approach to the - AWARD ICSlD CASE No ARB AF 04 05 REDACTED VERSION 264 - The Respondent presented evidence of multiple acquisitions of sugar refineries by various soft drink bottling groups in Mexico to ensure sources of supply and stable prices of refined sugar used in the processing of product According to the Respondent this would confirm the implicit incentive of these groups to utilize sugar and to combine the use of sugar and hctose as sweeteners to manage supply AWARD - ICSD CASE No ARB AF 04 05 82 REDACTED VERSION b The Tribunal's Decision on Damages 269 - The Tribunal has determined that the Tax constitutes a breach of Mexico's obligations under Articles 1102 and 1106 of NAFTA Chapter Eleven Insofar as this conduct caused harm to ADM and TLIA by injuring their investment in ALMEX Mexico must pay compensation to ADM and TLU a The Tribunal S Jurisdiction to Award Damages - 270 - The Arbitral Tribunal has jurisdiction to award damages which include loss of profit suffered by ALMEX but it does not accept the claims of ADM and TLIA for the profits they claim to have lost on the sale of HFCS produced outside the temtory of the Respondent State 83 AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION 271 - In Bayview Irrigation District et al vs the United Mexican States PCSID Case No ARB AF 105 01 the United States of America filed written submissions pursuant to article 1128 of the NAFTA confirming the scope of coverage of Chapter Eleven -also addressed in Article 1101 all of the protections afforded by NAFTA's investment chapter extend only to investments that are made by an investor of a NAFTA party in the tenitory of another NAFTA Party or to investors of a NAFTA Party that seek to make are making or have made an investment in the tenitory of another NAETA party Paragraph 3 of the submission The United States of America added Even though in addressing the scope of Chapter Eleven with respect to measures relating to investors of another Party Article 1101 l a does not expressly limit that scope to measures relating to investors with respect to investments in the territory of the State it is clear that it is so limited Indeed any other conclusion would be absurd Paragraph 8 272 - Canada shares the same position stating in the S D Myers case that its understanding is that Chapter Eleven applies only to investors that have or are seeking to make investments in the territory of the disputing party S D Myers Counter Memorial paragraph 218 52 Chapter Eleven aided by the interpretation of the three NAFTA Parties leads to the conclusion that protection does not apply to invedments located in the territory of the investor nor investments located outside the temtory of the State that violated the rights afforded to investors under the NAFTA 273 - Chapter Eleven of the NAFTA applies to measures adopted or maintained by a Party relating to inter alia investments of investors of another Party in the territory of the Party and pursuant to Article 1101 1 @ only measures relating to investments that are within the scope of Chapter Eleven should be covered This means that the protection applies only to measures relating to investments of investors of one Party that are in the territory of the party that has adopted or maintained such measures In a case such as the one at bar this would exclude investments of ADM and TLIA located outside of Mexico even if such investments are destined to promote fructose sales in Mexico 274 - The Tribunal has jurisdiction only to award compensation for the injury caused to Claimants in their investment made in Mexico through ALMEX Therefore the Claimants are not entitled to recover the lost profits on HFCS they would have AWARD - ICSD CASE No ARB AF 04 05 84 REDACTED VERSION produced in the United States and exported to Mexico but for the Tax as these losses were not suffered in their capacity as investors in Mexico b The Principles on which compensation should be awarded - 275 - Article 1131 1 of the NAFTA provides that Chapter Eleven Tribunals shall decide the issues in dispute in accordance with the NAFTA and applicable rules of international law A breach of an international obligation of the state will be deemed to be an international wrongll act International Law Commission Articles on State Responsibility Art 2 and that states are required to make full reparation for any injury caused by an internationally wrongful act @ C Article 31 A breach by a state party to an investment treaty is an intanationally wrongful act that triggers the obligation to make full reparation for the injury caused These rules are applicable under customary international law as well 276 - In this respect the three States party to the NAFTA confirmed under Article 1135 of the NAFTA the principle of compensation upon a violation of the rights granted to a national of another Party 1 Where a Tribunal makes a final award against a Party the Tribunal may award separately or in combination only a monetary damages and any applicable interest b restitution of property in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution A Tribunal may also award costs in accordance with the applicable arbitration rules 277 - Under Article 1117 1 in f -and under Article 1116 1 in f - an investor of a NAFTA Par@ may submit to arbitration against anothe Party on their own behalf or of an enterprise -the Claimants and ALMEX in the present s i t u a t i o a claim that the other Party breached its obligations of national treatment and preclusion of performance requirements and that the enterprise has incurred loss or damage by reason of or arising out of that breach The NAFTA provides no further guidance as to the proper principles to measure damages and compensation As the Feldman Tribunal observed lheonly detailed measure of damages specijically provided in Chapter I1 is in Article IllO 2-3 yair market value ' which necessarily applies only to situations that fall within Article 1110 Feldman supra page 55 Award at para 194 p 81 AWARD - ICSID CASE No ARB AF 104105 REDACTED VERSlOTy' 278 - In the instant case the principles upon which compensation should be awarded derive from the applicable international law rules The Tribunal in S D Myers concluded that by not identifying any particular methodology for the assessment of compensation in cases not involving expropriation the Tribunal considers that the drafters of the NAlTA intended to leave it open to tribunals to determine a measure of compensation appropriate to tbe specific circumstances of the case taking into account the principles of both intemational law and the provisions of the NAFTA SD Myers supra page 65 First Partial Award at para 309 279 - Accordingly Chapter Eleven Tribunals have considerable discretion in establishing the methodology to determine damages because the NAFTA does not provide for a specific measure of compensation in breaches that do not involve actual takings of property In Feldman the Tribunal also concluded in considering the S D Mers and Pope Talbot cases that It is obvious that in both of these earlier cases which as here involved non-expropriation violations of Chapter 11 the tribunals exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAlTA Feldman supra page 55 Award at para 197 280 - Chapter II of the ILC Articles on State Responsibility addresses the different fonns of reparation for injury spelling out the general principle under Article 3 1 of the ILC Articles 1 The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act 2 Injury includes any damage whether material or moral caused by the internationally wrongful act of a State Article 34 of the ILC Articles l r t h e r provides the different forms of reparation restitution compensation and satisfaction- which separately or in combination will discharge the obligation to make full reparation for the injury caused as addressed in Article 31 of the ILC Articles 281 - Article 36 of the L C Articles addresses compensation for damage caused by an internationally wrongful act AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION 1 The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby insofar as such damage is not made good by restitution 2 The compensation shall cover any financially assessable damage including loss of profits insofar as it is established Accordingly compensation encompasses both the loss suffered damnum emergens and the loss of profits lucrum cessans Any direct damage is to be compensated In addition the second paragraph of Article 36 recognizes that in certain cases compensation for loss ofprofitsmay be appropriate 282 - Any determination of damages under principles of international law require a sufficiently clear direct liuk between the wrongful act and the alleged injury in order to trigger the obligation to compensate for such injury A breach may be found to exist but determination of the existence of the injury is necessary and then a calculation of the injury measured as monetary damages This Tribunal is required to ensure that the relief sought i e damages claimed is appropriate as a direct consequence of the wrongful act and to determine the scope of the damage measured in an amount of money 283 - The standard of compensation that is due in cases of expropriation of property the standard contended for by Claimants under Article 1110 2 of the NAFTA is that it should be equivalent to the fair market value of the expropriated investment immediately prior to the measure and valuation criteria are to include going concern value asset value including declared tax value of tangible property and other criteria as appropriate to determine fair market value However for the reasons abovementioned the fair market value or going concern value of ALMEX is not an appropriate criterion to calculate damages as it is only applicable to cases of expropriation which is not the present case 284 - In the present case as noted the Claimants continued with their possession and operation of the business and the property has not been seized or expropriated But the Claimants allege that they suffered lost profits while the Tax was in force In addition the Claimants estimate that they suffered lost sales of HFCS that ALMEX would have imported marketed and distributed or used in the manufacture of other products 285 - In the Tribunal's view lost profits are allowable insofar as the Claimants prove that the alleged damage is not speculative or uncertain - i e that the profits anticipated were probable or reasonably anticipated and not merely possible 286 - Generally lost profits have been awarded where the Claimants prove that AWARD - ICSID CASE No ARB AF 04 05 REDACTED VERSION an anticipated income stream has attained sufficient attributes to be considered a legally protected interest of sufficient certainty to be cornpensable This has normally been achieved by virtue of contractual arrangements or in some cases a well-established history of dealings JAMES CRAWFORD The International Luw Commission's Articles on Stare Responsibility 2002 at p 228 commentary to Article 36 c The quantum of damages 287 - The loss of profits in the instant case was triggered by a loss of sales and the Claimants have submitted sufficient evidence in these proceedings to reflect the sharp drop in sales of HFCS immediately following the date on which the Tax took effect on January 1 2002 Based on the evidence presented the Tribunal concludes that the introduction of the Tax adversely affected the business of Claimants The issue becomes the quantum of damages which in the present case will depend on the amount of lost profits that have been proved AWARD - ICSID CASENo ARB AF IOUOS REDACTED VERSION 293 - In light of the above the amount of damages to compensate Claimants for the injury caused as a consequence of the breach by Mexico of its obligations under the NAFTA for the period 2002 - 2006 reaches in the Tribunal's judgment the sum of US$33 510 091 dollars 294 - Claimants correctly maintain that any award of damages should include the applicable interest in accordance with Article 1135 of the NAFTA pursuant to which the Tribunal may award monetary damages and any applicable interest Claimants contend that the interest should be awarded at the rate of 5 5 AWARD - ICSID CASENo ARB AF M 05 REDACTED VERSION per cent compounded annually as this is the current government bond rate on U S dollar-denominated debt of Mexico The Claimants contend that the interest should be assessed from the date on which damages are calculated December 31 2005 uatil the date of payment by Mexico Claimants' Memorial on the Merits para 212 pp 93 - 96 295 - The Respondent's position is that the simple interest rate paid on U S Treasury Bills is a reasonable rate for an award denominated in U S dollars Mexico points out that the NAFTA does not stipulate the rate that should be applied to estimates of damages for breaches of Article 1102 National Treatment and 1106 Performance Requirements Nevertheless Article 1110 in relation to expropriation provides in relevant part as follows 4 If payment is made in a G7 currency compensation shall include interest at a commercially reasonable rate for that cwency 6om the date of expropriation until the date of achlal payment 5 If a Party elects to pay in a currency other than a G7 currency the amount paid on the date of payment if converted into a G7 cmency at the market rate of exchange prevailing on that date shall be no less than if the amaunt of compensation owed on the date of expropriation had been conveacd into that G7 nmency at the market rate of exchange prevailing on that date and interest had accrued at a commercially reasonable rate for that G7 currency from the datc of expropriation until the date of payment 296 - The Tribunal agrees with the Respondent that Article 11lO 4 and 1110 5 provide guidance for calculating the applicable interest rate in the present case Compensation should include interest at a commercially reasonable rate The Tribunal believes that only simple interest rather than compound should be awarded In Compaiia del Desarrollo de Santa Elena S A v the Republic of Costa Rica ICSID Case No ARB19611 February 17 2000 Award the Tribunal analyzed the intemational arbitration case law in relation to the question whether compound interest should be awarded The Tribunal found in regard to the parties' dispute over interest in that case that no uniform rule of law had emerged in international arbitral practice as to the applicability of simple or compound interest in any given case The Arbitral Tribunal decided to award compound interest on the following grounds Evcn though there is a tendency in international jurisprudence to award only simple intcresf this is manifested principally in relation to cases of injury or simple breach of contract The same considerations do not apply to cases relating to the valuation of property or property rights In cases such as the present compound interest is not excludcd where it is wananted by the circumstances of the case Santa Elena supra Final Award at para 97 In the present case the Claimants' assets were not seized directly or indirectly The Respondent breached Chapter Eleven of the NAFTA as regards national AWARD - ICSID CASE NO ARB AF' 04 05 REDACTED VERSION treatment and performance requirements the result of which was that the Claimants suffered loss of profits during the period of time the Tax was in force 297 - In Santa Elena the Tribunal referred to the jurisprudence of the Iran-U S Claims Tribunal as a persuasive reference regarding the standard for the assessment of interest This Tribunal agrees In Sola Tiles v Iran the Arbitral Tribunal considered that the Claimant was entitledto interest on the amount awarded at a rate based approximately on the amount that it would huve been able to earn had it had the fun available to invest in a form of commercial invesfment in common use in its own counhy 14 Iran U S C T R 224 1987 at para 66 citing Sylvania Technical Systems v Iran 8 h U S C T R 298 1985 at 320241 Therefore if an investment would have generated certain cash flows and profits the investor is entitled to an investment rate of interest The purpose of this interest is to ensure that the compensation awarded is appropriate in all circumstances 298 - The Claimants' investment would have generated a certain cash flow and profits for ALMEX However since this is not an expropriation case but rather concerns the appropriate compensation to be paid to Claimants for the injury caused as a result of the Respondent's breach of the national treatment and performance requirements obligations under Chapter Eleven the Tribunal's view is that simple interest is appropriate in the present case 299 - Interest may be awarded from the date of the unlawful measure in question i e the date the Tax was adopted However the Claimmts maintain that it should be calculated from the date on which damages were calculated December 31 2005 until the date of payment by Mexico As the Respondent does not question this date for the calculation of interest the Tribunal finds that the Claimants should receive compensation from the Respondent in the amount of US$33 510 091 as principal plus interest from the date the damage was calculated December 31 2005 and for the damages claimed for 2006 as from the end of such year until the payment is effectively made 300 - The interest shall be calculated for each month of the period December 31 2005 until payment is made at a rate equivalent to the yield for the month at the interest rate which is more closely connected with the currency of account in which the award of compensation is made See S D Myers v the Government of Canada Second Partial Award para 304 As compensation in the present arbitration is to be awarded in U S Dollars the simple interest rate for U S Treasury bills is appropriate - AWARD ICSID CASE No ARB AF 104 OS REDACTED VERSION X COSTS 301 - Regarding the costs of the proceedings Article 58 of the Arbitration Additional Facility Rules applies to the present arbitration 1 Unless the parties otherwise agree the Tnbunal shall decide how and by whom the fees and expenses of the members of the Tribunal the expenses and charges of the Secretariat and the expenses incurred by the parties in connection with the proceeding shall be borne The Tribunal may to tbat end call on the Secretariat and the parties to provide it with the information it needs in order to formulate the division of the cost of the proceeding between the parties 2 The decision of the Tnbunal pursuant to paragaph 1 of this Article shall form part of the award 302 - The proceedings were expeditiously and efficiently conducted by the representatives of both Parties both of whom seek an award of costs and fees Both parties have partly won and partly lost but the percentage of victory and loss had no measurable effect on the cost of the arbitration 303 - Accordingly the Tribunal finds that it is equitable in this matter for each party to bear half of the costs of the arbitration including fees and expenses of the Arbitral Tribunal and the expenses and charges of the Secretariat as billed by ICSID In addition each party shall bear its own legal fess and costs in connection with this arbitration REDACTED VERSION XI AWARD 304 - For the foregoing reasons the Arbitral Tribunal renders unanimously the following decisions 1 - Finds that the Respondent breached Article 1102 National Treatment and Article 1106 Performance Requirements with regard to the Claimants' investment in Mexico 2 - Finds that the Respondent did not violate Article 1110 Expropriation with regard to the Claimants' investment in Mexico 3 - Finds that the Tax adopted by the Respondent does not amount to a valid countermeasure under the NAFTA and the applicable rules of international law 4 - Orders the Respondent to pay to the Claimants the sum of US$33 510 091 dollars THIRTY THREEMILLIONFIVE HUNDRED AND TENDOLLARS AND NINETY ONECENTS OF THE UNITESSTATES OF AMENCA as principal 5 - Orders the Respondent to pay to the Clahmts interest on the sum referred to in paragraph 4 above for each month of the period from the date the damage was calculated December 31 2005 and for the damages claimed for 2006 as from the end of such year until the payment is effectively made at a rate equivalent to the yield for the month at the simple interest rate paid on U S Treasury Bills 6 - Denies all other claims for compensation 7 - Orders that each party shall bear its own costs and shall bear equally the expenses of the Tribunal and the Secretariat Made as at Toronto Canada in English and Spanish both versions being equally authentic REDACTED VERSION THE ARBITRAL TRIBUNAL signature Arthur W Rovine Arbitrator Date September 9 2007 subject to the attached partial concurring opinion pursuant to Article 52 2 of the Additional Facility Rules signature Bernard M Cremades President of the Tribunal Date September 26 2007 signature Eduardo Siqueiros T Arbitrator Date September 24 2007