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
v.
THE UNITED MEXICAN STATES
Respondent
AWARD
Before the Arbitral Tribunal constituted
under Chapter Eleven ofthe North
American Free Trade Agreement, and
comprised of:
Mr. Bernardo M. Cremades, President
Mr. Arthur W. Rovine
Mr. Eduardo Siqueiros T.
Secretary ofthe Tribunal:
Mr. GOIrZalo Flores
Date ofdispatch to the Parties: November 21, 2007
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
x.
XI.
TABLE OF CONTENTS
Introduction
The Parties
Procedural history
Factual background
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
High Fructose Com Syrup.
Sugar.
The Mexican Beverage Sweetener Market.
Sugar, Com and HFCS in the NAFTA Negotiations.
The 1993 Exchange of Letters between the United States
and Mexico Regarding the Sugar Provisions ofNAFTA.
The Mexican Sugar and Beverage Sweetener Markets in
the Early Years ofNAFTA.
Mexico imposes Anti-Dumping Duties and Import
Licensing Requirements.
Mexico initiates the NAFTA Chapter XX State-to-State
Dispute Resolution Procedures.
The IEPS Amendment.
The WTO Dispute Settlement Proceedings
The July 2006 MexicolUnited States Understanding
Regarding the Bilateral Sweeteners Trade.
The legal position ofthe Parties
The Respondent's Countermeasures Defense
a)
b)
c)
d)
e)
f)
General jurisdictional issues.
Lex specialis.
Customary International Law on Countermeasures.
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.
Proportionality
The question of independent rights
The Respondent's request for suspension ofthe proceedings
The Claimants' NAFTA Claims
a)
b)
c)
Damages
Costs
Award
National Treatment
Performance Requirements
Expropriation
AWARD - ICSID CASE No. ARB(AF)/04/05
Paragraphs
1-5
6 -12
13 -38
39-99
39-43
44-49
50-56
57-62
63-68
69-71
72-76
77-79
80-84
85 -96
97 -99
100-109
110 -180
111-112
113 -123
124-133
134-151
152 -160
161-180
181- 184
185-252
185 - 213
214-227
228 -252
253 - 300
301- 303
304
2
I. 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 ofthe Ley del Impuesto Especial sobre Producci6n
y Servicios, (the "[BPS Amendment" 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
(HFCS). 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,
1106 or 1110 ofthe NAFTA.
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ll. THE PARTIES
A) THE CLAIMANTS
6.- The Claimants in this arbitration are ARCHER DANIELS MIDLAND
COMPANY ("ADM" hereinafter) and TATE & LYLE INGREDIENTS
AMERICAS, INC ("TLIA " 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. ("ALMEX" 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 behalfpursuant to Article 1116 of the NAFTA, and
on behalfofALMEX pursuant to Article 1117.
9.- In these proceedings, the Claimants are represented by:
ARCHER DANIELS MIDLAND COMPANY
Mr. WarrenE. Connelly
AKIN GUMP STRAUSS HAUER & FELD LLP, Washington, D.C.
and
TATE & LYLE INGREDIENTS AMERICAS, INC
Mr. Stanimir A. Alexandrov
SIDLEY AUSTIN BROWN & WOOD LLP, Washington, D.C.
B) THE RESPONDENT
10.- The Respondent is the Government ofMexico. It is represented by:
Lic. Luis Alberto Gonzalez and
Lic. Alejandra G. Trevmo
Secretaria de Economia
Mexico, D.F.
AWARD - ICSID CASE No. ARB(AF)/04/05
4
Messrsr. J. Christopher Thomas and
J. Cameron Mowatt
THOMAS & PARTNERS, Vancouver
and
Messrs. Stephan E. Becker and
Sanjay J. Mullick
PILLSBURY WINTHROP SHAW PITTMAN 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.
III. PROCEDURAL mSTORY
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 behalfpursuant 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 (b) ofthe NAFTA.
14.- On October 21, 2003, Corn Products International ("CPl'~ 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)/04/1.
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
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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 Arbitral Tribunal to determine whether the CPI and
ADM/TLIA claims should be consolidated.
17.- On September 29,2004, the Secretary-General ofICSID 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 ofArbitration 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. Bernardo M. Cremades, a national of Spain,
Mr. Arthur W. Rovine, a national of the United States, and Mr. Eduardo
Siqueiros, a national ofMexico.
19.- On April 8, 2005, the Claimants, the Respondent and CPI jointly submitted a
"Confirmation of Agreement of the Disputing Parties Regarding Consolidation"
regarding the membership and mandate ofthe Consolidation Tribunal, stating that
all proceedings of the Consolidation Tribunal were to be Cl ••• governed by the
ICSID Additional Facility Arbitration Rules, as modified by the procedural
requirements ofNAFTA Chapter 11. JJ Subsequently, the Consolidation Tribunal
asked the Parties to file their submissions on the question ofconsolidation.
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 ADM/TLIA on the other, should be
consolidated in whole or in part, considering whether the claims had "a question
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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 ofthe 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 ADM! Tate & Lyle on the other,
should be consolidated in whole or in part. In order to issue an order of
consolidation, the Consolidation Tribunal must first be "satisfied" that the
claims have "a question 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)).
6. The Consolidation Tribunal accepts that the claims submitted to
arbitration do have certain questions of law or fact in common for purposes
of Article 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 consolidation order.
7. In this regard, the Tribunal notes first and foremost that the parties do not
dispute that CPI and the ALMEX shareholders are direct and "fierce
competitors." Mexico has maintained that these parties could coordinate
their respective Charter 11 claims against Mexico, but has not disputed that
CPI and the ALMEX shareholders are global competitors. As such, each
company emphasized that it cannot make known to the other, before an
arbitration tribunal or anywhere, details as to the nature 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 examining 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 between the claimants, and the
consequent need for complex confidentiality measures throughout the
. arbitration process, would render consolidation in this case, in whole or in
part, extremely difficult. The parties would not be in a position to work
together and share information. The process, including essential
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 confidentiality of 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 circumstances, a consolidation order cannot be in the
AWARD - ICSID CASE No. ARB(AF)/04/05
7
interests of fair and efficient resolution of the claims. Two tribtmals can
handle two separate cases more fairly and efficiently than one tribunal where
the two claimants are direct and major competitors, and the claims raise
issues of competitive and commercial sensitivity. [...]
20. For the foregoing reasons, Mexico's request 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. Bernardo 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 ofthe 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.
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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 ofthe Counter-Memorial and exhibits was sent to
each member ofthe 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 briefmg 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
governments did not intend to file NAFTA Article 1128 submissions at that point,
but reserved their 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 ofthe 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 ofthe Parties. The terms ofthe Order were as follows:
1. Any document (including a file in electronic form) submitted by the Parties
during the course ofthe proceeding that contains Confidential Information shall
be designated as confidential by the submitting party. All such documents (the
"Confidential Documents") and all information derived there from, but not
from any source independent of the Confidential 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
ofconfidentiality and who has the right to make such disclosure.
2. All Confidential Documents and any information derived therefrom shall be
used solely in the context ofthe 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 authorised under paragraph 4(b), (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 information contained therein may be disclosed
or described only to the following persons:
AWARD - ICSID CASE No. ARBCAF)/04/05
9
a) The Tribunal and its staff, including the staff of the International Centre
for Settlement ofInvestment 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,
government officials and employees) who are actively engaged in, or
who are responsible for decision-making in connection with, the present
arbitration; and
d) Fact witnesses and consulting or testifying experts ofthe 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 Parties shall designate information as confidential in good faith and not in
an arbitrary manner. Confidential information is (i) business confidential
information ofthe Claimants that is protected form public disclosure under U.S.
statutes such as the antitrust and trade remedy (e.g. antidumping and
countervailing duty) laws, and (ii) information in the possession ofthe Mexican
government that is protected from the public disclosure under Mexico's Ley
Federal de Transparencia y Acceso a la Informacion Publica Gubemarnental
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 Confidential Information meets these criteria, it
may request that the Tribunal issue a ruling 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 from which such information has been
redacted.
8. All Confidential Documents and all information derived therefrom shall be
securely stored by the persons authorised under paragraph 4 of the present
Order when not actively in use, in such manner as to safeguard their
confidentiality and to ensure they are accessible only to those persons.
9. If the Tribunal 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 ofthe present Order.
10. Within 30 days after the [mal conclusion of the dispute (including any appeals
or settlement), counsel for each Party shall destroy (and shall certify in writing
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 person authorised under paragraph 4(b), (c) and (d)
of the present Order remains in possession of such document or information.
The Tribunal and its staff (excluding the staff of ICSID), shall destroy such
documents and information within the same period oftime, without prejudice to
the provisions ofparagraph 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
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extension. Subsequently, on September 1, 2006, the Respondent submitted its
Rejoinder with accompanying documentation.
34.- 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 ofthe meetings would be covered by
the provisions of Procedural Order No. 1 dated July 21, 2006, regarding the
protection ofbusiness confidential information.
35.- CPl, 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 CPl and
the Claimants, the commercially sensitive nature of the evidence presented in the
arbitration, and the difficulties of protecting business confidential information
were amongst the grounds for the rejection of the consolidation of the present
proceedings with the CPl Arbitration. Accordingly, the Arbitral Tribunal declined
CPI's application to attend the hearing.
36.- 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 ofthe Claimant, ADM:
Mr. Warren E. Connely, AKIN GUMP STRAUSS HAUER & FELD, LL.P.
Also on behalfofADM:
Mr. James Shafter
Mr. Dennis Riddle
Ms. Shannon Herzfeld
Mr. David Smith
Attending on behalfofthe Claimant, TLIA:
Mr. Daniel M. Price
Mr. Stanimir A. Alexandrov
Ms. Marinn Carlson
Ms. Amelia Porges
AWARD - ICSID CASE No. ARBCAF)/04/05
11
Mr. Patricio Grane,
SIDLEY AUSTIN BROWN & WOOD, L.L.P.
Also on behalf of TLIA:
Mr. 1. Patrick Mohan
On behalfofALMEX:
Mr. Jaime Hermosillo
Mr. Luis Casillas
Attending on behalf ofthe Respondent:
Lic. Florinda Pasquel Peart
Lic. Luis Alberto Gonzalez,
Direcci6n General de Consultoria Juridica de Negociaciones
Secretaria de Economia
Prof. James Crawford
Mr. 1. Christopher Thomas
Mr. 1. Cameron Mowatt,
THOMAS & PARTNERS
Mr. Stephan E. Becker
Mr. Sanjay Mullick
Mr. Jonathan Mann
PILLSBURY WINTHROP SHAW PITTMAN, L.L.P.
Lic. Salvador Behar,
Embassy ofMexico 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 and/or
experts, all ofwhom were subject to direct and cross-examination:
On behalf ofthe Claimant:
Mr. John Nichols
Mr. Edward Harjehausen
Mr. Lynn Grider
Mr. James Fry
Mr. M. Alexis Maniatis
AWARD - ICSID CASE No. ARB(AF)/04/05
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On behalfofthe Respondent:
Mr. Luis de la Calle Pardo
Mr. Ildefonso Guajardo Villareal
Mr. Angel Villalobos Rodriguez
Mr. Jose Ignacio Huerta
Mr. Gabriel Ramirez 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 ofthe Tribunal.
IV.- FACTUAL BACKGROUND
a) High Fructose Corn Syrup (HFCS)
39.- The Claimants and ALMEX manufacture and distribute HFCS, a fructose syrup
made from yellow com, 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 ofHFCS, 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 as 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 ofHFCS as an alternative sweetener in
the 1970s and 1980s, and today are two of the largest com refming companies in
the world. The Claimant ADM has several com 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.
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42.- The Claimant TLIA fIrst invested in ALMEX in 1968. ALMEX owned a com 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 fructose produced at
ALMEX's wet com milling plant (HFCS-42) is blended with an imported fructose
(HFCS-90) to produce HFCS for sale to soft drinks bottlers.
43.- HFCS is obtained principally from yellow com. In Mexico, white com
predominates, which is used primarily for human consumption and is less apt for
the production of HFCS. Accordingly, HFCS in Mexico is produced from yellow
com 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-refmed 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 dramatically.
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 refmed sugar
and the cost of ra~ sugar. The high capital investment costs for a refming plant,
and the lengthy production 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 industry has had an
important social impact in rural 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 nationalized 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
14
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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 influence 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 fructose 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 terms 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 soft 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 SUS 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.
15
AWARD - ICSID CASE No. ARB(AF)/04/05
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
refmeries, vertically integrating an important aspect of the beverage sweetener
market. There are estimates that in 2000 the soft drinks industry consumed 33%
ofMexican annual sugar deliveries.
53.- ALMEX began to sell imported HFCS in Mexico in 1994 and commenced
domestic production of HFCS in December 1995. HF~ew to become
ALMEX's most important product, accounting in 2001 for_of its total sales
and.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 ofthis vital input for the
soft drink industry.
55.- From the perspective of United StateslMexican bilateral sweetener trade, the
HFCS penetration of the Mexican soft drink sweetener market involved three
distinct commodities: (a) HFCS, which was imported from the .United States to
Mexico (as well as manufactured locally); (b) yellow com, which was imported
from 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 from HFCS. In both Mexico and the United
16
AWARD - ICSID CASE No. ARB(AF)/04/05
States sugar enjoyed a State supported price, was a politically active industry, and
ofconsiderable social significance in certain parts ofeach 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 refmed 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, tbe 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 ofthe three Parties.
58.- The North American Free Trade Agreement establishes a free trade zone pursuant
to Article XXIV 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 Goods, 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 VII.A.
59.- Article 302 ofthe NAFTA (TariffElimination) provides in general terms:
1. Except as otherwise provided in this Agreement, no Party may increase
any existing customs duty, or adopt any customs duty, on an originating
good.
2. Except as otherwise provided in this Agreement, 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 good when approved by
each such Party in accordance with its applicable legal procedures.
1 Art XXIV.S of GATT states: "5. Accordingly, the provisions of this Agreement shall not prevent, as
between the territories ofcontractingparties, theformation ofa customs union or ofafree-trade area..... "
17
AWARD - ICSID CASE No. ARB(AF)/04/0S
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 restrictive effects on imports
additional to those caused by the imposition ofthe tariffrate quota.
5. On written request of any Party, a Party applying or intending to apply
measures pursuant to paragraph 4 shall consult to review the administration
ofthose measures.
In addition, Annex 302 provides for the staged reduction ofexisting 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 be eliminated entirely and such goods shall be dutyfree,
effective 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-free, effective January 1,
1998;
c) duties on goods provided for in the items in staging category C in a
Party's Schedule shall be removed in 10 equal annual stages beginning on
January 1, 1994, and such goods shall be duty-free, 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 1,
2008; and
e) goods provided for in the items in staging category D in a Party's
Schedule shall continue to receive duty-free treatment.
Mexico and the United States agreed that sugar was to be subject to a fifteen year
tariff elimination period.
Annex 703.2 in Chapter vn 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 shall consult by July 1 of each of the first 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
year; and
b) has been a net surplus producer in any marketing year beginning after
the date of entry into force of this Agreement, including the current
marketing year.
14. For each of the first 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 qualifying goods
not less than the greatest of:
a) 7,258 metric tons raw value;
AWARD - ICSID CASE No. ARB(AF)/04/05
18
b) the quota allocated by the United States for a non-Party within the
category designated "other specified countries and areas" under paragraph
(b)(i) of additional U.S. note 3 to chapter 17 of the Harmonized Tariff
Schedule ofthe 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 accordance with Appendix 703.2.A.13.
15. Subject to paragraph 16, the duty-free quantity of sugar and syrup
goods under paragraph 14(c); shall not exceed the following ceilings:
a) for each ofthe 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
entry into force ofthis Agreement;
b) for the previous and current 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 Party was not a net
surplus producer for that year.
17. Mexico shall, beginning no later than six years after the date of entry
into force of this Agreement, apply on a most- favored-nation (MFN) basis
a tariff rate quota for sugar and syrup goods consisting of rates of customs
duties no less than the lesser ofthe corresponding:
a) MFN rates of the United States in effect on the date that Mexico
commences to apply the tariffrate quota; and
b) prevailing MFN rates ofthe United States.
18. When Mexico applies a tariffrate quota under paragraph 17, it shall not
apply on a sugar or syrup good that is a qualifying 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 defmes 'net production surplus' as meaning "...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 this Section ..., "
and 'sugar' as meaning "...raw or refined sugar derived directly or indirectly
from sugar cane or sugar· beets, 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 tariffwas set at a high level (approximately $USO.36 per
kilo).
19
AWARD - ICSID CASE No. ARB(AF)/04/05
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 ofthe NAFTA defmition.
62.- HFCS and com 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 com to Mexico were subject to a tariff
elimination period of fifteen years, and a tariff-free quota of 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 Serra 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 extraordinary importance. In response to
my concerns, you asked that I set out in writing the nature ofthe 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 fructose com syrup (HFCS). HFCS is a sugar syrup
that clearly is a complete substitute for sucrose syrups, particularly in uses
such as soft drinks. The ambiguity arises, however, because the appendix
considers sugar for production to be "all sugar and syrup goods derived
from sugar cane or sugar beets grown in a Party's territory." Annex 703.2,
Section C provides a similarly narrow definition of sugar "for imports" into
each country, "for purposes ofthis Annex."
AWARD - ICSID CASE No. ARB(AF)/04/05
20
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 refmed sugar, and high fructose com 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
opportunity.
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
industry (Camara Nacional de las Industrias Azucarera y Alcoholera)
representatives advised the Mexican trade officials that an agreement had been
reached with the United States' sugar industry.
Respetable Senor Secretario:
Me permito informarle que los representantes de la Industria Azucarera
Mexicana hemos llegado a un acuerdo con nuestra contraparte
estadounidense, en dos sentidos:
1.- Ha quedado debidamente clarificada la ambigiiedad pre-existente
en la definicion de autosuficiencia.en endulzantes, para deterrninar los
excedentes de exportacion. Es decir, que el concepto de autosuficiencia
involucra, sumatoriamente, azlicares de cana y remolacha yalta fructosa de
matzo
2.- Tambien hemos decidido solicitar a nuestros respectivos
gobiemos que se amplie la cuota de exportacion de 150,000 a 250,000
toneladas el primer ano en que se obtenga la autosuficiencia, a partir del
septimo ano de entrada en vigor del Tratado de Libre Comercio. Esto, con
el principal proposito de ampliar las posibilidades de exportacion de
azlicares mexicanos.
Todo 10 anterior en confrrmacion y abundancia de 10 que hoy Ie
expresamos verbalmente los representantes industriales que nos
entrevistamos con Usted.
On the same date, draft letters in English and Spanish were prepared to record the
agreement ofthe 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
21
AWARD - ICSID CASE No. ARBCAF)/04/05
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 trade 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 ofthese letters read as follows:
The Honorable Jaime Serra Puche
Secretary of Commerce and Industrial Development
Alfonso Reyes 30, Piso 10
Colonia Condesa
06140 Mexico D.F.
Dear Dr. Serra:
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 ("NAFTA").
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 "trade 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 producer. ''Net surplus producer" is defined as a Party that has a
net production surplus.
''Net production surplus", in turn, is defmed 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
ofAnnex 703.2]"
High fructose corn syrup is readily substitutable for sucrose sugar syrups,
particularly in such uses as soft drinks. Such substitution could result in
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 ofAnnex 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 ofAnnex 703.2 shall not apply.
I would also like to take this opportunity to affirm the provisions in
paragraph 6 of Section A of Annex 703.2 which provide that each Party
may count 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 Uruguay Round of multilateral trade 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
22
NAFTA for the United States and Mexico and to remain in effect through
the fourteenth marketing year for such time as they remain parties to the
NAFTA.
Sincerely,
Michael A. Kantor
Embajador Michael A. Kantor
Representante Comercial de los
Estados Unidos de America
600 Seventeent Street, N.W.
Washington, D.C. 20006
Estimado Embajador Kantor:
Tengo el honor de confmnar el siguiente entendimiento alcanzado entre las
delegaciones de los Estados Unidos Mexicanos y los Estados Unidos de
America en relaci6n con la aplicaci6n del Anexo 703.2 del Tratado de
Libre Comercio de America del Norte ("TLC").
La Secci6n A del Anexo 703.2 del TLC establece algunas disposiciones en
materia de acceso a mercado entre los Estados Unidos Mexicanos y los
Estados Unidos de America con respecto al "comercio de azu.cares y
jarabes". En general, el texto dispone, de manera reciproca para Mexico y
Estados Unidos, que el acceso al mercado de arucares 0 jarabes depende,
en cierta medida, de que los dos paises deterrninen que uno de enos ha side
o estima que sera un productor superavitario. Productor superavitario
significa que una Parte tiene un excedente de producci6n neto.
"Excedente de producci6n neto", a su vez, esta definido como "la cantidad
de la producci6n nacional de azUcar de una de las Partes que excede a su
consumo total de azUcar durante un ano comercial", calculado de acuerdo
con la Secci6n A del Anexo 703.2.
La fructosa de maiz puede facilmente sustituir a los azUcares,
particularmente para la elaboraci6n de refrescos. Dicha sustituci6n podria
tener resultados no deseados por las Partes. En consecuencia, los Estados
Unidos Mexicanos y los Estados Unidos de America, acuerdan que la
determinaci6n de "excedente de producci6n neto" inc1uira, para efectos de
la Secci6n A del Anexo 703.2, fructosa de maiz, descrita en la subpartidas
1702.40 y 1702.60 del Sistema Armonizado.
Ademas, no obstante 10 dispuesto en el parrafo 15(b) y (c) de la Secci6n A
del Anexo 703.2, el limite para cada uno de los mos comerciales del
septimo al decimo cuarto, sera de 250,000 toneladas metricas valor crudo,
y no aplicara el parrafo 16 de la Secci6n A del Anexo 703.2.
Quisiera tambien aprovechar esta oportullidad para confmnar 10 dispuesto
en el parrafo 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 los compromisos sobre cantidades dentro de las cuotas
adoptados por la Parte como resultado del las negociaciones comerciales
multilaterales de la Ronda Uruguay del Acuerdo General sobre Aranceles y
Comercio.
AWARD - ICSID CASE No. ARB(AF)/04/05
23
Tengo el honor de proponer que esta carta, que es autentica en espanol, y
su carta de respuesta que la confinne, constituyan un entendirniento entre
nuestros dos gobiemos, con efectos a partir de la entrada en vigor del TLC
para Mexico y Estados Unidos, y que pennanezca en vigor hasta que
concluya el decimo cuarto ano comercial, mientras Mexico y Estados
Unidos sean Partes del TLC.
Atentamente
Dr. Jaime Serra Puche
Secretario de Comercio y
Fomento Industrial
The reference to Harmonized System subheading'1702.50' was added by hand in
the fourth paragraph ofthe 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 surplus' (Annex 703.2.A.26); (ii) The figure for the
ceiling of the duty free quantity or sugar for the seventh marketing year (Annex
703.2.A.15(b); 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 (<<for the purposes ofsection A ofAnnex 703.2 shall include
consumption of high fructose corn syrup ...») differs from the Spanish text
(<<...incluira, para efectos de la Seccion A del Annex 703.2, fructosa de maiz...»)
in that the English text includes only the consumption ofhigh fructose com syrup
in the definition. The effect of this difference on the NAFTA defmition of 'net
production surplus' (<<the quantity by which a Party's domestic production of
sugar exceeds its total consumption ofsugar during a marketingyear, 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 ofboth 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.l6 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 Serra Puche
Secretary of Commerce and Industrial Development
Alfonso Reyes 30, Piso 10
Colonia Condesa
AWARD - ICSID CASE No. ARB(AF)/04/05
24
06140 Mexico D.F.
Dear Dr. Serra:
As you know, we need to complete before January 1 a formal exchange of
letters confirming the understandings we reached on November 3 involving
the sugar and frozen 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 ofletters.
In your fax ofNovember 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 confirmed when I checked the texts initialled by
Herminio Blanco and Rufus Yerxa, 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 October 26. However, during our meeting at Dulles Airport
on October 28, you rejected both the orange juice and sugar proposals we
had asked you to consider. Subsequent to that meeting, 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 ofthe text).
On behalf of Mexico, Dr. Jaime Serra Puche signed and returned a letter in
Spanish dated November 4, 1993 which differed from the draft previously
initialled in that the statement in the fifth paragraph that paragraph 16 of Annex
1703.2.A would not apply ("y no aplicara el parrafo 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 from the
seventh marketing year in the event that one of the Parties was a 'net surplus
producer'), was inoperative, and (ii) whether the definition of 'net production
25
AWARD - ICSID CASE No. ARB(AF)/04/05
surplus' in Annex 703.2.A.26 included consumption and production ofHFCS, 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
theNAFTA
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 ofthe surplus. Mexico made its calculation ofthe 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. Serra 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 ofHFCS imported from the United States
or made locally from American com. Mexican sugar producers saw themselves
prejudiced in the imbalance of commercial flows in sugar on the one hand, and
HFCS and com 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 mis del
250 por ciento durante los ultimos 12 meses. El cien por ciento de estas
importaciones provienen de EE.UU. En contraste, Mexico solamente ha
participado marginalmente en los cupos de importaci6n de azucar de su
pais, a pesar de sus crecientes necesidades (las importaciones de azt'tcar
mexicana representaron menos del 1.5 por ciento de las importaciones
AWARD - ICSID CASE No. ARB(AF)/04/05
26
totales de EE.UU. en el ciclo 96-97). Incluso, en marzo y mayo de este
ano, su pais asign6 cuotas adicionales por un total de 400,000 toneladas sin
que Mexico resultara beneficiado por esta asignaci6n. Las reducidas
posibilidades de acceso del azu.car mexicano al mercado de EE.UU. aunado
a las crecientes importaciones de fructosa de maiz, podrian traducirse en
fuertes excedentes que afectarian seriamente a cientos de miles de
campesinos mexicanos.
Estoy segura que, considerando que la fructosa de los Estados Unidos tiene
ya un acceso sin restricciones cuantitativas al mercado mexicano, si
trabajamos juntos, se podnin encontrar formas de que el azlicar mexicana
pueda beneficiarse de los crecientes cupos de importaci6n. de azlicar que
viene otorgando su pais. Se trata de una oportunidad mas para continuar
promoviendo la rica relaci6n bilateral entre nuestros paises.
g) Mexico imposes Anti-Dumping Duties and Import Licensing Requirements
72.- On January 14, 1997 the Camara Nacional de las Industrias Azucarera y
A1coholera 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 final 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 determination to be ill
violation ofthe WTO 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-determination 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 ofHigh
Fructose Corn Syrup (HFCS) from the United States: Recourse to Article 21.5 of
the DSU by the United States (AB..,2001-5; WT/DS 132/ABIRW 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 Countervailing
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
Imports of High Fructose Corn Syrup, originating from The United States of
27
AWARD - ICSID CASE No. ARB(AF)/04/05
America Case MEX-USA-98-1904-01), 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, ALMEX currently benefits from an amparo court order exempting it
from the import licensing requirement for HFCS.
h) Mexico initiates the NAFTA Chapter XX State-to-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 ofletters and so
the NAFTA continued to apply in its original terms), Mexican sugar producers
would have an unrestricted right to duty free exports to the United States pursuant
to Annex 703.2.A, and particularly 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 2000/2001 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
IEPS Amendment.
28
AWARD - ICSID CASE No. ARB(AF)/04/05
i) The IEPS Amendment
80.- The IEPS Amendment originated as a proposal from 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 Claimants- describes the plan to enact the Tax "...with the
objective a/not causing a major injU1y to the sugar industry... " (Camara de los
Diputados, ano II, No.6, December 31,2002, at p. 692). In introducing the Tax
proposal, Representative Raul Ramirez Avila noted:
We legislators, 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 the tax on
sift drinks apply only to those which for their production utilize
fructose 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 IEPS Amendment read as follows:
LEY del Impuesto Especial sobre Producci6n y Servicios.
«Articulo 1". Estan obligadas al pago del impuesto establecido en esta Ley, las personas
fisicas y las morales que realicen los actos 0 actividades siguientes:
I. La enajenacion en territorio nacional 0, en su caso, la importacion, definitiva, de
los bienes sefialados en esta Ley.
II. La prestacion de los servicios sefialados en esta Ley.
El impuesto se ca1culara aplicando a los valores a que se refiriere este ordenarniento, la tasa
que para cada bien 0 servicio establece el articulo 2° del mismo.
Articulo 2". Al valor de los actos 0 actividades que a continuacion se sefialan, se
aplicaran las tasas siguientes:
I. En la enajenacion 0, en su caso, en la importacion de los siguientes bienes:
G) Aguas gasificadas 0 minerales; refrescos; bebidas hidratantes 0 rehidratantes;
concentrados, polvos, jarabes, esencias 0 extractos de sabores, que al
diluirse permitan obtener refrescos, bebidas hidratantes 0 rehidratantes que
utilicen edulcorantes distintos del azUcar de
cafia.................................................................................... 20%
H) Jarabes 0 concentrados para preparar refrescos que se expendan en envases
abiertos utilizando aparatos automaticos, electricos 0 mecanicos, que
AWARD - ICSID CASE No. ARB(AF)/04/05
29
utilicen edulcorantes .distintos del azUcar de
carra............................................................20%
II. En la prestacion de los siguientes servicios:
A). Comision, mediacion, agencia, representacion, correduria, consignaclOn y
distribucion, con motivo de la enajenacion de los bienes serralados en los
incisos A), B), C), G) y H) de la fraccion I de este articulo. En estos casos,
la tasa aplicable sera la que Ie corresponda a la enajenacion en territorio
nacional del bien de que se trate en los terminos que para tal efecto dispone
esta Ley. No se pagara el impuesto cuando los servicios a que se refiere
este inciso, sean con motivo de las enajenaciones de bienes por los que no
se este obligado al pago de este impuesto en los terminos del articulo 8° de
la rnisma.
Articulo 3°. Para los efectos de esta Ley se entiende por:
I.
XV. Refrescos, las bebidas no fermentadas, elaboradas con agua, agua carbonatada,
extractos 0 esencias de frutas, saborizantes 0 con cualquier otra materia prima,
gasificados 0 sin gas, pudiendo contener acido citrico, acido benzoico 0 acido
sorbico 0 sus sales como conservadores, siempre que contengan fructosa.
XVI. Bebidas hidratantes 0 rehidratantes, las bebidas 0 soluciones que contienen agua y
cantidades variables de carbohidratos 0 de electrolitos.
Articulo 8°. No se pagara el impuesto establecido en esta Ley:
I. Porlas enajenaciones siguientes:...
(d) Las de cerveza, bebidas refrescantes, puros y otros tabacos labrados, asi
como las de los bienes a que se refieren los incisos G) y H) de la fraccion
I del articulo 2° de esta Ley, que se efecmen al publico en general, salvo
que el enajenante sea fabricante, productor, envasador, distribuidor 0
importador de los bienes que enajene.
(f) Las de los bienes a que se refieren los incisos G) y H) de la fraccion I del
articulo 2° de esta Ley siempre que utilicen como edulcorante linicamente
azlicar de cafia.»
[English Translation:
LAW on the Special Tax on Production and Services.
Article 1. Physical and legal persons engaged in the following actions or activities are
required to pay the tax established in this Law:
I. The fmal transfer in national territory or, as applicable, the fmal importation, of
goods identified in this Law.
AWARD - ICSID CASE No. ARB(AF)/04/05
30
II. 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:
The rates given below shall apply to the value of the actions or activities
I. On the transfer or, as applicable, importation ofthe following goods:
G) Carbonated or mineral waters; soft drinks; hydrating or rehydrating drinks;
concentrates, powders, syrups, essences or 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 in open containers,
prepared using automatic, electric or mechanical equipment and containing
sweeteners other than cane sugar: 20%
II. On the provision ofthe following services:
A) Commissions, dealers, 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 to in this section are for the transfer of goods not required
to pay this tax in accordance with Article 8 herein.
Article 3. For purposes ofthis Law, the following definitions apply:
I.
XV. Soft drinks are unfermented beverages, prepared with water, carbonated water, fruit
extracts or essences, flavourings or any other raw material, carbonated and
uncarbonated, and may contain citric acid, benzoic acid or sorbic acid or their salts
as preservatives, provided they contain fructose.
XVI. Hydrating or rehydrating drinks are beverages or solutions containing water and
variable amounts of carbohydrates or electrolytes.
Article 8. The tax established in this law shall not be paid:
I. On the following transfers:
AWARD - ICSID CASE No. ARB(AF)/04/05
31
(d) Those of beer, coolers, cigars and other processed tobaccos, as well as
those of the goods referred to in Article 2(1)(G) and (H) of this Law, to
the general public, unless the transferor is the manufacturer, producer,
bottler, distributor or importer ofthe transferred goods.
(f) Those for goods referred to in Article 2(I)(G) and (H) of this Law,
provided only cane sugar is used as a sweetener.]
82.- 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 transferring 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 soft 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.- Within 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 ofproceedings 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 ofthe 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.
32
AWARD - ICSID CASE No. ARB(AF)/04/05
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 III:2 of the GATT, first and second
sentences, and Article III:4 of the GATT. The relevant parts of Article III of the
GATT provide as follows:
1. The contracting parties recognize that internal taxes and other
internal charges, and laws, regulations and requirements affecting the
internal sale, offering for sale, purchase, transportation, distribution or use
of products, and internal quantitative regulations requiring the mixture,
processing or use of products in specified amounts 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 internal charges of any kind in excess of
those applied, directly or indirectly, to like domestic products. Moreover, no
contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.
3. With respect to any existing internal tax which is inconsistent with
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 ofthe provisions ofparagraph 2
to such tax until such time as it can obtain release from the obligations of
such trade agreement in order to permit the increase of such duty to the
extent necessary to compensate for the elimination of the protective element
ofthe tax.
4. The products of the territory 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 all laws, regulations and requirements affecting their internal
sale, offering for sale, purchase, transportation, distribution or use. The
provisions of this paragraph shall not prevent the application of differential
internal transportation charges which are based exclusively on the economic
operation of the means of transport and not on the nationality of the
product.
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 beverages that use any sweetener other than cane sugar
("soft drink tax"); (ii) a 20 per cent tax on specific services (commission,
AWARD - ICSID CASE No. ARB(AF)/04/05
33
mediation, agency, representation, brokerage, consignment and
distribution), when provided for the purpose of transferring products such
as soft drinks and other beverages that use any sweetener other than cane
sugar ("distribution 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 Measures on Soft
Drinks and Other Beverages, WTIDS3081R, para. 2.2).
88.- 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 Annex 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
under the NAF IA. III particular, MeXICO argued that the 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 Annex 703:2
(paragraphs 13-22).
The United States maintained that there was a limit on the amount of sugar
Mexico could export duty free 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 GATT, "...ifnecessary to
secure compliance with laws or regulations which are not inconsistent with the
provisions of[the GATT] .... " 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 from 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 XX(d).
90.- The Panel Report dated October 7, 2005 (Mexico - Tax Measures on Soft Drinks
and Other Beverages; WTIDS308/R) - the 'Panel Report' hereinafter- found that
34
AWARD - ICSID CASE No. ARB(AF)/04/05
the IEPS Amendment was a breach ofthe national treatment obligations ofArticle
III:2 (first and second sentences) and Article ill:4 ofthe 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 ill:2 (first sentence)
demands that products be "like," as does Article III:4. GATT Article III:2 (second
sentence), coupled with Article ill: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 "like" one
sweetened with cane sugar (under Article ill:2, first sentence, and Article III:4),
or possibly not "like," but "directly competitive or substitutable" with one
sweetened with cane sugar (under Article III:2, second sentence).
92.- The Panel concluded that:
(a) With respect to Mexico's soft drink tax and distribution tax:
(i) As imposed on sweeteners, imported beet sugar is
subject to internal taxes in excess of those applied to
like domestic sweeteners, in a manner inconsistent
with Article III:2, fIrst sentence, ofthe GATT 1994;
(ii) As imposed on sweeteners, imported HFCS is being
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
ilI:2, second sentence, ofthe 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 ilI:4 of the GATT
1994;
(iv) 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, ofthe GATT 1994.
(b) With respect to Mexico's bookkeeping reguirements: 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 ilI:4 of the GATT 1994 (Panel Report, para. 9.2.,
original underlining).
AWARD - ICSID CASE No. ARB(AF)/04/05
35
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 Settlement 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 filed an appellant's submission. In its appeal,
Mexico challenged the Panel's ruling, including the findings concerning Article
XX(d) ofthe GATT. Mexico did not appeal the Panel's fmdings under Article Ill.
95.- The Appellate Body Report dated March 6, 2006 (Mexico - Tax Measures on Soft
Drinks and Other Beverages; WT/DS308/AB/R) 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 Tariffand 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 XX(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 Official Journal published
notice ofthe repeal a week later.
2 See the Panel Report in the case in Mexico - Tax Measures on Soft Drinks and Other Beverages,
WTIDS308/R (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 party participants) para. 85 and 86.
36
AWARD - ICSID CASE No. ARB(AF)/04/05
k) The July 2006 MexicolUnited States Understanding Regarding the Bilateral
Sweeteners Trade
97.- The repeal ofthe Tax, effective as ofJanuary 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 ofMexico, 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 ... " ('constituyan un acuerdo entre
nuestros dos gobiernos '). 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 ofthe MexicolUnited States 2006 Understanding read as follows:
6.- Beverage tax. Mexico and the United States confmn that on July 3,
2006 they submitted a joint letter to the WTO Dispute Settlement Body
(WTIDS308/15) expressing their agreement that Mexico shall eliminate its
tax measures on soft drinks and other beverages no later than January 1,
2007, except that ifthe 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
37
Mexico, and the United States shall not limit, directly or indirectly, imports
of sugar or syrup goods of Mexico into the United States, including through
the application or imposition of any tax or other internal measure that has the
effect, directly or indirectly, of discriminating against HFCS goods of the
United States or sugar or syrup goods ofMexico, as 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 flnding
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
sweeteners with a view toward facilitating that transition, further liberalizing
trade in such goods, and making further progress on the issues underlying
those disputes.
9. Task force. Mexico and the United States shall establish a joint
industry/government 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.
V. THE LEGAL POSITION OF THE PARTIES
A) THE CLAIMANTS
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 ofHFCS in Mexico.
101.- The Claimants allege that the Tax falls within the category of "...measures
adopted or maintained by a Party... " 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
38
AWARD - ICSID CASE No. ARBCAF)/04/05
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 further contend that the Tax amounts to an impermissible
performance requirement in breach of Article 1106.3 of the NAFTA 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 ofperformance
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 ofArticle 1106.
104.- In 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 ofthe value and economic use oftheir investment in the production
of HFCS in Mexico, diminishing the reasonably expected 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 ofthe
NAFTA and intemationallaw.
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.
B) THE RESPONDENT
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.
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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 inflict 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 treaty-benefits
pursuant to Article 2019(1) ofthe NAFTA ('Non-Implementation - Suspension of
Benefits).3 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 from the taxever
available to the Claimants, but was only in connection with the bottlers, who
have no identity ofownership 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.
VI.- THE RESPONDENT'S COUNTERMEASURES DEFENSE
110.- A central defense asserted by the Respondent in this case is that the Tax, in effect
from 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.
3 Article 2019(1) NAFTA: "1. Ifin its final report a panel has determined that a measure is inconsistent
with the obligations ofthis Agreement or causes nullification or impairment in the sense ofAnnex 2004 and
the Party complained against has not reached agreement with any complaining Party on a mutually
satisfactory resolution pursuant to Article 2018(1) within 30 days of receiving the final report, such
complaining Party may suspend the application to the Party complained against ofbenefits ofequivalent
effect until such time as they have reached agreement on a resolution ofthe dispute. "
40
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a) General jurisdictional 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 ofinternational 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 fmds 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, "...then it must stay this proceeding
until the Chapter Twenty Panel resolves Mexico's grievances" (Mexico's
Rejoinder, p. 32, para. 106).
b) Lex specialis.-
113.- The Claimants maintain that "...the NAFTA Parties, including Respondent, have
waived their right to resort to countermeasures under customary international
law for alleged violations of NAFTA provisions" (Claimants' Reply, para 9).
Article 55 of the International Law Commission (ILC) Articles on State
Responsibility (the "ILC Articles" hereinafter) provides that the ILC Articles do
not apply where the matter is "...governed by special rules ofinternational law"
("Responsibility of States for Internationally Wrongful Acts," Report of the
International Law Commission on the Work of its Fifty-third Session, UN GAOR,
56th
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 "...operate in 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 countermeasures in response to a proven breach
(Commentary to the ILC Articles on State Responsibility,
Commentary to Chapter II, para. 9).
114.- The Claimants' position is that
AWARD - ICSID CASE No. ARB(AF)/04/05
41
The NAFTA meets that criterion, because it establishes the
conditions for the existence of an internationally wrongful act under
the free 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 NAFTA, the Parties have
deliberately forgone the residual right to take countermeasures
under customary law (Claimants' Reply, p. 15, para. 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
NAFTAif:
...any matter arising under both this Agreement [NAFTA] and the
General Agreement on Tariffs and Trade...may be settled in either
forum at the discretion of the complaining Party (Article 2005 ofthe
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 " ...a State party cannot be
bound by a lex 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 ofthe
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
42
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"
ofinternational 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 ILC 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 governed by special rules ofinternational 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 fmds that Section A of Chapter Eleven offers a form of lex specia/is
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 ILC 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
ILC Articles, which provides that the customary rules on state responsibility
codified by the ILC Articles operate "...without prejudice to any right, arising
from the international responsibility ofa 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 environmental protection 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
43
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Chapter Eleven, customary international law -as codified in the ILC Articlestherefore
operates in a residual way. This is confirmed by Article 1131.1 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 rules ofinternational 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, "...the wrongfulness ofan act ofa State not in
conformity with an international obligation towards another State is precluded if
and to the extent that the act constitutes a countermeasure.... " (Article 22 of the
ILC Articles). Countermeasures may constitute 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 ofthe 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 international 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 ofthe Tax.
44
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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 wrongfulness of an act of a
State not in conformity with an international obligation towards another State is
precluded ifand to the extent that the act constitutes a countermeasure.... "
Article 49 of the International Law Commission's Articles on State
Responsibility, provides at paragraphs 1 and 2 as follows:
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. Countermeasures 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-Nagymaros Project:
In order to be justifiable, a countelUleasure 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
countelUleasure must be commensurate with the injury suffered,
taking account of the rights in question... [and] its purpose must be
to induce the wrongdoing state to comply with its obligations under
international law, and... the measure must therefore be reversible
(Gabcikovo-Nagymaros Project, 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 ofthe following cumulative conditions:
1. The United States breached Chapter Three and/or 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.
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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 "...lack authority to
address violations ofother chapters ofthe NAFTA ... " (Mexico'S Rejoinder, para.
132). However, the Respondent "...maintains that this Tribunal has jurisdiction
to find that Mexico's use of countermeasures is a matter that precludes
unlawfulness 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 III 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 countermeasures defense 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
46
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Amendment meets the test for a valid countermeasure under customary
internationa11aw.
133.- Customary internationa11aw provides the test for the validity of countermeasures.
As noted, each ofthe requirements, as applied to the facts ofthe instant case, must
be met. If one fails, the defense fails. If all three over which the Tribunal has
jurisdiction are met, then the Tribunal 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
industry against fructose imports from the United States.
136.- In the Tribunal's view, the period just prior to the enactment of the Tax is
important in terms ofthe 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 halfyears prior to the Tax. But beginning in 2001, Mexico lost a set
ofNAFTA and WTO cases on the legality of its anti-dumping measures. Talk of
a tax concerning fructose began to emerge. Mr. John Nichols, President and
Managing Director ofALMEX, testified on behalf ofthe 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 antidumping
measures, the WTO and NAFTA rulings against these measures, and the
order for their [mal repeal. The evidence before us indicates that this was the
47
AWARD - ICSID CASE No. ARB(AF)/04/05
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 ofthe antidumping
measures.
138.- In their Memorial on the Merits, the Claimants describe a number ofthese 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$175IMT,
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 Promotion) 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 injury concluded that
"HFCS and sugar are 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 February 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 Syrup
(HFCS) from the United States, WT/DS132IR, 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 (WTO Appellate Body report - AntiDumping
Investigation of High Fructose Corn Syrup from the United States Proceedings
under Article 21.5 of the DSU, WRlDS132/AB/RW, adopted on
November 21, 2001, para. 135-136).
140.- The fmal 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-98-
1904-01, August 3,2001, at para. 824). The final NAFTA decision, affirming 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
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Investigation on Imports of High Fructose Corn Syrup, NAFTA Case: MEXUSA-98-1904-01,
Apri115, 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 confIrmed that "...the protective effect ofthe 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 Chapter 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.
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146.- The Mexican judiciary has also confinned 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 ofthe 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 Nacion, sentencia
relativa a la controversia constitucional 3212002, promovida por la Camara de
Diputados del Concreso de la Union, en contra del Titular del Ejecutivo Federal,
Diario Federal, Primera Seccion, 44 - 82, July 17,2002).
147.- The Supreme Court considered the "....motives that prompted... " the legislature
"to extend the scope ofsubjects to that tax [the Law on the Tax on Production and
Services] to those who use sweeteners different than cane sugar" and determined
that the Mexican Congress had a clear "...non-tax related purpose...;" 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 the aforementioned 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 ofprotecting the sugar industry
(Mexican Supreme Court Decision Annulling the Suspension of
the Tax, July 17,2002 at para. 79).
The Supreme Court· further 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 the protection of
the domestic sugar industry" (leI).
148.- If the Tax was not enacted to induce compliance by the United States with its
NAFTA obligations, then the Tax was not a valid countermeasure within the
meaning ofArticle 49 ofthe ILC 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 countenneasure, 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
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protect Mexican sugar growers. In particular, Mexico's Minister ofthe Economy,
Ernesto Derbez, stated that "...the law violates the NAFTA in the section about
investment protection and changes the rules ofthe 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. Government 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
ofthe 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 fmding is one offact. It
is not a determination of law. The fact question is Mexico's intent in enacting the
Tax.
151.- Accordingly, the Tribunal fmds 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.
e) Proportionality.-
152.- Article 51 of the ILC Articles emphasizes the requirement of proportionality,
noting that countermeasures must be commensurate with the injury suffered,
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 ofILC Article 51:
(7) Proportionality is concerned with the relationship between the
international wrongful act and the countenneasure. 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, the Tribunal 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
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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-Nagymaros Project
[ICJ Reports (1997) 7]. The Court considered that Hungary's failure to abide by
its obligation under a bilateral treaty with Slovakia, and its refusal to carry 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 Annex 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 Tribunal 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 ofthe 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) 2] the United States
brought a claim against Iran in response to the seizure by military revolutionaries
of the U.S. diplomatic offices and personnel in Tehran. Iran contended that the
United States' application before the ICJ "...could not be examined by the Court
divorcedfrom its proper context... "including "...more than 25 years ofcontinual
interference by the United States in the internal affairs ofIran ... " (Id. at para. 80,
81). The Court dismissed the allegation, finding that "... even if the alleged
criminal activities ofthe United States in Iran could be considered as having been
established... " they could not "...be regarded by the Court as constituting a
justification ofIran's conduct and thus a defence to the United States' claims" (Jd
at para. 83).
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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 VII of the NAFTA, setting
forth trade-related obligations between the Member States in relation to
"...agricultural goods and to sanitary and phytosanitary measures... " (Article
701 ofthe 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 substantive rights.
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 with the breach by the
United States ofits 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.
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f) The Question of Independent Rights.(i)
Views ofthe 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 NAFTAprovides 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 ofthe treaty relations with
the other Member States. This approach is supported by a traditional derivative
theory -pursuant to which when investors trigger arbitrationproceedings 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 arbitral tribunal, deciding the dispute in accordance with
the rights and obligations defmed 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-a-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]
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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 filmS. The NAFTA provides U.S.
investors with the right to establish new filmS, acquire existing filmS,
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
currency...and the right to international law protection against
expropriation, including the right to compensation equal to the fair
market value oftheir investment.
Claimants also cite the United States Senate Report 107-139 on the Trade
Promotion Act of2002, 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).
[I]t 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 (at p. 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 from the right to compensation
that U.S. citizens ah'eady enjoy (at p. 15).
Claimants cite the case of Marvin Roy Feldman Kmpa v. United Mexican States
[ICSID Case No. ARB(AF)/99/1, Award (December 16, 2002)] in which the
Tribunal made the following statements:
a fmding 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
55
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 ofNAFTA (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 ofdisputes 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 ofAmerica [(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 warrant 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 ofCanada, 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 Applicant, the
Attorney General of Canada, The Attorney General of Canada v. S.D.
Myers, Inc.,Court File No. T-22S-01, para. 67)
AWARD - ICSID CASE No. ARB(AF)/04/05
56
(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 qualified investors in
accordance with the standards ofthe 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 ofthe 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
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obligations regarding 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 1131 of the NAFTAnot
only the provisions of Section A, but all customary intemationallaw 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" ofinvestors 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 ofthe United States during the Loewen arbitration proceedings
-pursuant to Article 1128 - reveals the contrary as regards interpretation of
Chapter Eleven.
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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 ofinvestors.
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 the
United States of America to the June 27 and July, 2002 Submission of
the Governments of Canada and Mexico pursuant to NAFTA Article
1128 at p. 8).
Regarding the NAFTA arbitration Metalclad v. Mexico [ICSID Case No.
ARB(AF)/9711] the Attorney 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 ofNAFTA Parties have the extraordinary 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. Myers, Inc. v. Government of
Canada... (Outline 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 ofMethanex 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 ofChapter Eleven:
When interpreting the NAFTA, tribunals should recall that the
NAFTA is a treaty among three Parties, 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. They are not owed directly to individual investors.
Nor do investors derive any rights from obligations owed to the Party
of which they 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
59
177.- The procedural obligation under Section B of Chapter Eleven to submit the
investment dispute to arbitration -which may arise from 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 ofwhether 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
countermeasure 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.
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VII. 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 ofthe 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 ofthe proceedings
is denied.
VIll. THE CLAIMANTS' NAFTA CLAIMS
A) NATIONAL TREATMENT
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 treatment 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 ofinvestments.
2. Each Party shall accord to investments of investors of another Party
treatment 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 ofinvestments.
AWARD - ICSID CASE No. ARB(AF)/04/05
61
3. The treatment accorded by a Party under paragraphs 1 and 2 means, with
respect to a state or province, treatment no less favorable than the most
favorable treatment 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 de facto
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 fmds that the Tax, by reducing ALMEX'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 rulings. Furthermore, a binational panel convened under Chapter XIX 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
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distributors can in the present case be considered to be in like circumstances, thus
meeting the second requirement ofArticle 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 ofthe measure was
to protect the domestic cane sugar industry (see paras. 134 to 160 of the present
Award, regarding the intent ofthe 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 diminishing the
value ofthe Claimants' investment in the production and distribution 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 inflict 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 maintains that the fact that sugar and HFCS are
similar or like products for the purposes of an anti-dumping 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
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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 ofthe NAFTA; and Mexican sugar producers
were severely harmed by national HFCS consumption, affecting the conditions of
competition within Mexico.
(li) 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-a.-vis 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 ofinternational law.
195.- The starting point for interpreting any provision of the NAFTA is therefore the
Vienna Convention on the Law of Treaties,4
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 from
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 ofits object and purpose.
4 Vienna Convention on the Law ofTreaties, done in Vienna on 23 May 1969, 1155 UN.T.S. 331, 8 LL.M.
679.
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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 "like
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.
(1) Like Circumstances
197.- In order to determine the meaning of the expression "in like 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 31.1 ofthe Vienna Convention on Law ofTreaties).
The ordinary meaning ofthe 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
ofthe situation sugar producers faced concerning access to the u.S. market, this is
not a relevant factor in determining whether two companies are in like
circumstances. As confIrmed in S.D. Myers v. The Government of Canada
[UNCITRAL, NAFTA Final Award on the Merits (November 13, 2000) para.
251] 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 [UNCITRAL,
NAFTA Interim Award (June 26, 2000)] 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.
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199.- Considering the object ofArticle 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.Y. (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 from 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 HFCS is a substitute of sugar and that both
products compete in the same market (Comisi6n Federal de Competencia,
Informe AnualI993-94).
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
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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 unlike ethanol, methanol itself is
not usable as a gasoline additive.
203.- The Claimants argues that the facts in the present case differ from the Methanex
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 CPImanufactured
and distributed HFCS in Mexico. Therefore, the firms 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) Discriminatory 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 soft 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 oflike 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
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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, discriminating 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.
211.- The effect ofthe Tax was that U.S. producers and distributors ofHFCS 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:
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AWARD - ICSID CASE No. ARBCAF)/04/05
Dissimilar taxation imposed on directly competltIve or
substitutable imports (HFCS) 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 III:2, 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 industry, 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 ofthe 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 territory of 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;
(b) to purchase, use or accord a preference to goods produced in its
territory, 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 ofHFCS.
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 ofperformance requirements
because the advantages conferred upon the Mexican investor had a direct impact
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on Claimants' investment in HFCS production and distribution facilities, causing
ALMEX substantial loss or damage in violation ofArticle 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 investment" 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 territory, i.e., Mexico;
whereas the Respondent contends that Article 1106.3 refers to performance
requirements imposed directly on investors ofthe other Member States.
(li) The Tribunal's decision regarding Article 1106 ofthe NAFTA
219.- Article 1106.3 prohibits a Party from according an advantage in connection with
an investment in its territory of an investor of a Party or of a non-Party contingent
on compliance with any of the listed requirements, including "(a) to achieve a
given level or percentage of domestic content; (b) to purchase, use or accord a
preference to goods produced 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 ofits object and purpose.
221.- In the Tribunal's view, Article 1106.3 should be interpreted in connection with
Article 1101.1 ofthe NAFTA: .
This Chapter applies to measures adopted or maintained by a Party
relating to: (a) investors of another Party; (b) investments of investors
of another Party in the territory of the Party; and (c) with respect to
Articles 1106 and 1114, all investments in the territory 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
territory of a Party.
AWARD - ICSID CASE No. ARB(AF)/04/05
70
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 (b) of Article 1106.3: " ...to achieve a given level or
percentage ofdomestic content; ...or to purchase, use or accord a preference to
goods produced in its territ01y.... " 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 refmeries 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 fmancial support of those in dire situations
to salvage the cane sugar industry, resulting in the Presidential Decree of
September 3, 2001, expropriating large parts ofthe 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 2003/04 at 5.517 million metric
tons, raw value, whereas imports during 2003 amounted to approximately 512,312
metric tons, which represents 0.01 per cent ofthe total domestic production.
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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 ofthe NAFTA.
C) EXPROPRIATION
228.- The relevant part of Article 1110 of the NAFTA (Expropriation and
Compensation) provides as follows:
1. No Party may directly or indirectly nationalize or expropriate an
investment of an investor of another Party in its territory or take a
measure tantamount to nationalization or expropriation of such an
investment ("expropriation"), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process oflaw 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 ofthe NAFTA and intemationallaw.
231.- The BRATTLE GROUP REpORT, presented by the Claimants, estimates that ALMEX
suffered damages in the form of lost profits as a result of the Tax, including lost
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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 harm 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 oftheir investment, based on Mexico's obligations under Chapter XI and
the Idaquim Agreement between the Mexican Government and the CORN WET
MILLERS ASSOCIATION, allowing free imports of yellow com 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 ofthe Mexican Supreme Court 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 oftheir investment in ALMEX, and interfered
with the effective enjoyment and economic benefit ofthe 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 ofthe 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
ownership and control of their investment in ALMEX; (ii) the investors remained
in full . and of their' . of
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236.- Furthermore, 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 ofHFCS -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 oftheir Article 1110 claim ((Respondent's Rejoinder, para. 78).
(ll) 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 from another Member State, or taking measures
tantamount thereto, except in accordance with the conditions listed in Article
1110(1)(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 1131 ofthe NAFTA.
238.- Of course, a taking ofproperty 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 doctrine 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.
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241.- There is extensive international jurisprudence recogmzmg 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. Int'l Arb. Awards 307; Certain German Interests in the Polish
Upper Silesia Case (1926) PCIJ Ser. A No.7]. 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 Y.B. Int 'I L. 307 (1962), at p. 311].
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 ofLG&E v. Argentina, the Arbitral Tribunal held that
"...generally, expropriation must be permanent, that is ta say, it cannot have a
temporary nature, unless the investment's successful development depends on the
realization of certain activities at specific moments that may not endure
variations" [ICSID Case No. ARB/02/1, Award (October 3, 2006) p. 58, para.
193].
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:
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[T]he Investor remains in control of the Investment, it directs the day-today
operations of the Investment, and no officers or employees of the
investment have been detained by virtue of the Regime. Canada does not
supervise the work ofthe officers or employees ofthe Investment, does not
take any of the proceeds of company sales (apart from taxation), does not
interfere with management or shareholders' activities, does not prevent the
Investment from paying dividends to its shareholders, does not interfere
with the appointment of directors 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, Interim 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 ofthe 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 taking" that 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.
Using the abovementioned test, the tax was not sufficiently restrictive to support a
conclusion that the Tax had effects similar to an outright expropriation. ALMEX
facilities after the . the
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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 ofthe local municipality, expropriated the property of
a U.S. investor that had secured all required permits from 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 ofthe [investment] and negated the possibility ofany 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 Metalc1ad'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 com. 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 ofHFCS 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 from 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 oftime.
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
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AWARD - ICSID CASE No. ARB(AF)/04/05
discriminatory and also interfered with their legitimate and reasonable
expectations regarding the economic benefit to be obtained from the use and
enjoyment 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 discriminatory character 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 ofArticle
1110 ofthe NAFTA.
IX.- DAMAGES
a) Views of the Disputing Parties
253.- The Claimants contend that the Tax:
...deprived ALMEX ofvery substantial sales ofHFCS (both its own
production and imports) to Mexican bottler customers, and in tum
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 ofthe
NAFTA, which provides as follows:
1. Where a Tribunal makes a fmal 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)/04/05
78
2. Subject to paragraph 1, where a claim. is made under Article
1117(1):... (b) an award of monetary damages and any applicable
interest 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 ALMEX in their capacity as investors, but also for damages
suffered in their capacity as exporters offructose into Mexico, submitting that an
investment was made by ADM and by TLIA in the distribution facilities located
in San Jose lturbide, 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
distribution system, but also those assets involving testing, quality control and
movement.
256.- Respondent contends that"...theTribunal has nojurisdiction to accept the claims
ofADMand TLIAfor profits they 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. Myers (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 ofAmerica concluded in its submission in that case as follows:
... if, for example, a NAFTA party adopts a measure prohibiting
the export of certain goods (or services) 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 territory of the party 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 - ICSID CASE No. ARB(AF)/04/05
79
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 anyone or more of the above cited rights
because the effect ofthe 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 standardfor
measuring compensation for breaches ofother investor protections that result in
deprivation ofvalue.... " (Claimants Memorial on the Merits, para. 193, at p. 86).
The Claimants' position is that compensation should be calculated
258.-
259....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 ofthe 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).
The BRATTLE GROUP REpORT, present~estimates that ALMEX
suffered lost profits for the amount o~between January 2002
31, 2005; and that ALMEX would suffer an additional_
. 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, and distributed or used in the manufacture of
other products, in the amount plus additional damages as
the Tax continued in effect. are "...based on the value of the
foregone revenues that their property, and the going concern that uses that
property (ALMEX), would have generated in the absence ofthe Tax" (Claimants'
Memorial on the Merits at paras. 186 - 196 and Claimants' Reply at para. 129).
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):
First, it includes the actual lost profits of ALMEX as a result of the
HFCS Tax, from January 1,2002 effective 1,
2005 (so-called 'past damages') which total in
current dollar (end-200S) terms. (The Tax to ....,"'_".LL.LV"~
31, 2006.) Second, it includes the projected future lost profits of
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AWARD - ICSID CASE No. ARB(AF)/04/05
ALMEX resulting from the continued application of the HFCS Tax,
adjusted to ~ January 1, 2006 ('future damages'),
which total~(Claimants Memorial on the Merits,
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 Maniatis of THE BRATTLE GROUP was thus amended and
revised to reach a total claim 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
(Respondent Rejoinder, para. 244, p. 70).
262.- Even though Respondent agreed that lost profits is a proper approach to the
calculation of damages, Respondent rejected the damages
Alexis Maniatis of THE BRATTLE GROUP on the n"t"r,n1'1rl
263~
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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 ofproduct. According to the
Respondent, this would confirm the implicit incentive of these groups to utilize
sugar and to combine the use of sugar and fructose as sweeteners to manage
supply.
265.-
266.-
267.-
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268.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 ofNAFTA 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 TLIA.
a) The Tribunal's Jurisdiction to AwardDamages.-
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
territory ofthe Respondent State.
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AWARD - ICSID CASE No. ARB(AF)/04/05
271.- In Bayview Irrigation District, et al. vs. the United Mexican States [ICSID Case
No. ARB (AF)/05101] 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 territory of another NAFTA Party, or to
investors of a NAFTA Party that seek to make, are making or have
made an investment in the territory of another NAFTA party.
[Paragraph 3 ofthe submission).
The United States ofAmerica added:
Even though, in addressing the scope of Chapter Eleven with respect
to measures relating to investors of another Party, Article
llOl(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 investments located in the territory of the investor, nor
investments located outside the territory 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)(b) 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
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AWARD - ICSID CASE No. ARB(AF)/04/05
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 NAFTAJ and applicable rules
ofinternational law." A breach of an international obligation of the state will be
deemed to be an "international wrongful 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 (ILC Article
31). A breach by a state party to an investment treaty is "an internationally
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 fmal 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 ofrestitution.
A Tribunal may also award costs in accordance with the applicable
arbitration rules.
277.- Under Article 1117(1) in! -and under Article 1116(1) in! - an investor of a
NAFTA Party may submit to arbitration against another Party, on their own
behalf or of an enterprise -the Claimants and ALMEX in the present situation- 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, "...the only detailed measure
of damages specifically provided in Chapter 11 is in Article 1110(2-3), 'fair
market value, ' which necessarily applies only to situations thatfall within Article
1110" (Feldman, supra page 55, Award at para. 194, p. 81).
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AWARD - ICSID CASE No. ARB(AF)/04/05
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 NAFTA intended to leave it open
to tribunals to determine a measure of compensation appropriate to
the specific circumstances of the case, taking into account the
principles of both international 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. Myers 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 NAFTA (Feldman, supra page 55, Award at para.
197).
280.- Chapter II of the ILC Articles on State Responsibility addresses the different
forms of reparation for injury, spelling out the general principle under Article 31
ofthe 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~ State.
Article 34 of the ILC Articles further 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 ofthe ILC Articles.
281.- Article 36 of the ILC Articles addresses compensation for damage caused by an
internationally wrongful act:
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AWARD - ICSID CASE No. ARB(AF)/04/05
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 fmancially assessable
damage including loss ofprofits 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 ofprofits may be appropriate.
282.- Any determination of damages under principles of international law require a
sufficiently clear direct link. 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 ofmoney.
283.- The standard of compensation that is due in cases of expropriation ofproperty, the
standard contended for by Claimants under Article 1110 (2) ofthe 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:
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AWARD - ICSID CASE No. ARB(AF)/04/05
...an anticipated income stream has attained sufficient attributes to
be considered a legally protected interest of sufficient certainty to be
compensable. This has normally been achieved by virtue of
contractual arrangements or, in some cases, a well-established
history of dealings (JAMES eRAWFORD, The International Law
Commission's Articles on State Responsibility (2002) at p. 228,
commentary to Article 36).5
c) The quantum ofdamages
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.
288.-
289.-
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290.-
291.-
292.-
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 ofUS$33,510,091 dollars.
d) Interest.-
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
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AWARD - ICSID CASE No. ARB(AF)/04/05
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) until 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. Ifpayment is made in a G7 currency, compensation shall include interest
at a commercially reasonable rate for that currency from the date of
expropriation until the date of actual 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 currency at the
market rate of exchange prevailing on that date, shall be no less than if the
amount of compensation owed on the date of expropriation had been
converted into that G7 currency 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 date of expropriation until the date ofpayment.
296.- The Tribunal agrees with the Respondent that Article 1110(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 Campania del Desarrollo de Santa Elena, S.A. v. the Republic of
Costa Rica [ICSID Case No. ARB/96/1 (February 17,2000) Award] the Tribunal
analyzed the international 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 oflaw 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:
Even though there is a tendency in international jurisprudence to award
only simple interest, 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 excluded where it is
warranted 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
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AWARD - ICSID CASE No. ARB(AF)/04/05
treatment and performance requirements, the result of which was that the
Claimants suffered loss ofprofits during the period oftime 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 "...entitled to interest on the amount awarded,
at a rate based approximately on the amount that it would have been able to earn
had it had the funds available to invest in a form of commercial investment in
common use in its own country... " [14 Jran.U.S.C.T.R 224 (1987) at para. 66,
citing Sylvania Technical Systems v. Iran, 8 Iran.US.C.T.R 298 (1985) at 320-
24]. 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 Claimants 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$33,51O,09l 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 US. Dollars, the simple interest rate for US.
Treasury bills is appropriate.
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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 Tribunal shall decide how
and by whom the fees and expenses ofthe members ofthe 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 that 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 Tribunal pursuant to paragraph (1) of this
Article shall form part ofthe 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 ofvictory and loss
had no measurable effect on the cost ofthe arbitration.
303.- Accordingly, the Tribunal fmds that it is equitable in this matter for each party to
bear half ofthe costs ofthe arbitration, including fees and expenses ofthe 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.
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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 ofinternational law;
4.- Orders the Respondent to pay to the Claimants the sum of US$33,51O,091 dollars
(THIRTY THREE MILLION FIVE HUNDRED AND TEN DOLLARS AND NINETY ONE CENTS
OF THE UNITES STATES OF AMERICA) as principal;
5.- Orders the Respondent to pay to the Claimants 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.
[signature]
Arthur W. Rovine
Arbitrator
Date: September 9, 2007
(subject to the attached
partial dissenting opinion
pursuant
to Article 52(2) ofthe
Additional Facility Rules)
THE ARBITRAL TRIBUNAL
[signature]
Bernardo M. Cremades
President ofthe Tribunal
Date: September 26, 2007
[signature]
Eduardo Siqueiros T.
Arbitrator
Date: September 24, 2007