BEFORE THE INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES RAILROAD DEVELOPMENT CORPORATION Claimant v. THE REPUBLIC OF GUATEMALA Respondent ICSID Case No. ARB 07/23 CLAIMANT’S REPLY TO RESPONDENT’S COUNTER- MEMORIAL ON THE MERITS 24 March 2011 TABLE OF CONTENTS I. INTRODUCTION AND SUMMARY OF ARGUMENTS..............................................1 II. REPLY TO RESPONDENT’S FACTUAL SUMMARY.................................................6 A. The Government’s Usufruct Bidding Rules .................................................................6 B. Respondent Accepted Claimant’s Business Plan and Economic Offer Without Qualification or Revision...............................................................................................7 C. Contract 402 Did Not Obligate FVG to Complete Either Phase II or III Within a Specified Time Frame....................................................................................................9 D. FVG’s Performance Under Contract 402 Was Conditional Upon FVG Obtaining Use of the Necessary FEGUA Railway Equipment...................................14 E. FVG’s Use of the Railway Equipment Despite Respondent’s Failure to Obtain Executive Approval of Contract 41.............................................................................16 F. Contract 143 was Negotiated and Executed at the Behest of FEGUA to Replace Contract 41 ....................................................................................................19 G. Guatemalan Law Did Not Require that Contract 143 be Approved by Executive Resolution or be Awarded Pursuant to a New Public Bid .........................................23 H. FEGUA did not Inform FVG of any Legal Defects with Regard to Contracts 143/158 Related in the April 2004 Exchange of Correspondence Between Mr. Senn and Dr. Gramajo .........................................................................................27 I. Discussions Between FEGUA and FVG Starting in 2004 Did Not Concern the Validity of Contracts 143 and 158 or Whether the Contracts Were “ Lesivo ” ....28 J. FVG’s Financial Situation in 2004 and 2005 was Stable and on the Verge of Profitability...................................................................................................34 K. Potential Investors were Unwilling to Commit to the South Coast Railway Project Because of the Government’s Unwillingness to Remove Squatters ..............35 L. Ramón Campollo Expresses Interest in Investing in the South Coast and Enlists Claimant’s Advice and Assistance on the Railroad He Owns and Operates in the Dominican Republic ....................................................................................................38 M. Mr. Campollo Was Interested in Investing in the Guatemalan Railway, But Only if Claimant Was Willing to Surrender Its Rights and Control of the Usufruct to Him ..........................................................................................................................41 i N. The 2005 Squatter Commission and FVG’s Simultaneous Dealings with Ramón Campollo/Héctor Pinto................................................................................................48 O. After Mr. Campollo Informs FVG and the Squatter Commission that He was no Longer Interested in Partnering with FVG, Dr. Gramajo Immediately Proceeds to Request Meetings and Legal Opinions on Whether Contracts 143 and 158 are Lesivo ............................................................................................................................57 P. FVG Initiates Local Breach of Contract Arbitrations Against FEGUA While Respondent Secretly Obtains Legal Opinions Regarding Contracts 143/158 ...........62 Q. President Berger Calls for a High-Level Railroad Commission in March 2006 to Resolve Outstanding Issues Between FVG and FEGUA............................................65 R. None of the High-Level Commission Meetings Concerned or Addressed Any Alleged “Legal Defects” in Contracts 143/158 or the Government’s Secret Plan to Declare Such Contracts Lesivo .......................................................................67 S. The Government Avoids Engaging in Negotiations With FVG After the May 11, 2006 High-Level Commission Meeting While Continuing to Proceed With the Declaration of Lesividad .................................................................72 T. Respondent Uses the Statutory Deadline for Issuing the Lesivo Declaration Against Contracts 143/158 in an Attempt to Force FVG to Surrender its Rights Under the Other Usufruct Contracts..........................................................................75 U. Respondent Continues to Exhibit Bad Faith in Its Negotiations with FVG After Lesivo was Declared ...........................................................................................78 V. The Lesivo Resolution, Not FVG, Emboldended Squatters and Vandals and Caused the Government to Disregard FVG’s Usufruct Rights .................................82 W. There is no Evidence that FVG’s Loss of Business After the Lesivo Resolution is Attributable to FVG’s Rehabilitation, Maintenance or Operation of the Railway...88 X. FEGUA’s Purported Concerns About the Railroad Equipment Assets as the Historical and Cultural Patrimony of Guatemala Were Never Conveyed to FVG.101 Y. Freddie Pérez’s Testimonial Volte-Face ...................................................................104 Z. Claimant’s Press Release Regarding the Lesivo Resolution did not Cause Damage to FVG’s Business .......................................................................................108 AA.The Contencioso Administrativo Proceeding has not Afforded Claimant Due Process and Remains Unresolved to this Day ...................................................112 ii III. LEGAL ARGUMENTS.............................................................................................117 A. Respondent Misstates and Mischaracterizes the Nature of the Law of Lesividad in Guatemala.............................................................................................................118 B. Guatemala Has Indirectly Expropriated Claimant’s Investment............................119 1. Respondent’s Five-Point “Effects Test” is Not Found in or Supported by the Plain Text of CAFTA or Customary International Law..............................120 2. Claimant Possesses Rights in the Usufruct Contracts That Were Indirectly Expropriated........................................................................................................128 3. The Lesivo Resolution Directly Interfered With Claimant’s Investment ..........132 4. The Lesivo Resolution and Subsequent Acts in Furtherance of the Resolution Substantially Deprived Claimant of the Reasonably Expected Economic Benefits of Its Investment ....................................................................................134 5. Respondent Interfered with Claimant’s Distinct, Reasonable, Investment-Backed Expectations ........................................................................139 6. The Lesivo Resolution was the Basest Kind of Government Action Conducted at the Highest Levels and is Not Entitled to Any Deference............148 7. The Lesivo Process Does Not Accord Due Process..............................................151 8. The Shufeldt Claim is on All Fours With the Present Case ................................159 9. Claimant’s Indirect Expropriation Was an Unlawful Expropriation Under CAFTA .....................................................................................................162 10. Conclusion............................................................................................................164 C. Guatemala Failed to Afford Claimant’s Investment Fair and Equitable Treatment in Accordance With CAFTA Article 10.5 ..............................................165 1. Fair and Equitable Treatment Under CAFTA and NAFTA..............................167 2. The Relevant Period for Assessing Respondent’s Conduct................................176 3. Guatemala Acted in Bad Faith Under Customary International Law ..............177 4. Guatemala Denied Claimant Due Process of Law..............................................185 5. Guatemala’s Lesivo Resolution and Subsequent Actions Were Arbitrary and Discriminatory.............................................................................193 iii 6. Guatemala Frustrated Claimant’s Legitimate Expectations and Failed to Provide Transparency and Stability to Claimant’s Investment.........................199 7. Conclusion............................................................................................................207 D. Guatemala Breached Its Obligation to Provide Full Protection and Security to Claimant’s Investment ..........................................................................................208 E. Guatemala Has Breached Its National Treatment Obligation Under CAFTA Article 10.3...................................................................................................215 1. Claimant and Campollo Were Investors in “Like Circumstances” at the Time of the Lesivo Resolution. ..................................................................215 2. Claimant Received Less Favorable Treatment Than Domestic Investors in Like Circumstances .........................................................................................217 IV. REPLY ON DAMAGES AND COSTS.....................................................................224