First, two points concerned with the question of the applicable law under NAFTA Article 1131:
a) What is the role, if any, of national law, and in particular (i) Texas law, and (ii) Article 27 of the Constitution of the Republic of Mexico?
b) What is the role, if any, of principles of private international law?
Second, what is the meaning and significance in this case of the term "investment" in NAFTA Article 1139, and in particular the meaning and significance of NAFTA Article 1139(g), and specifically the word "property"?
Third, what is the meaning and significance in this case of the term "in the territory of the Party" in NAFTA Article 1101?
a) that the claim falls outside the scope of NAFTA in light of NAFTA’s object and purpose and of the nature of the treaty;
b) that the claim is untimely and thus inadmissible;
c) that there are deficiencies in the individual claims, in respect of the proof of the eligibility of each claimant.
The Respondent, referring to NAFTA Articles 102, 201, 301, 501, 901, 1213, 1601, 1701, and 1802, among others, argued that NAFTA is based upon a territorial principle of jurisdiction.5 It pointed in particular to NAFTA Article 1101,6 which reads in material part as follows:
"Article 1101. Scope and Coverage.
1. 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..."
"...the phrase ‘relating to’ in Article 1101(1) NAFTA signifies something more than the mere effect of a measure on an investor or an investment and... requires a legally significant connection between them... "7
The Respondent referred10 to the definition of an investment in NAFTA Article 1139, which reads in material part as follows:-
(g) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes;
investment of an investor of a Party means an investment owned or controlled directly or indirectly by an investor of such Party;
investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of such Party, that seeks to make, is making or has made an investment."
The Respondent argued that the Claimants do not and cannot have property rights in Mexico in the waters of the Rio Bravo / Rio Grande or its tributaries, even if they have ownership rights in the water when it is within the United States'11
"the only basis the Claimants could have for any expectation of receiving any volume of water from the Mexican tributaries of Rio Bravo is the Bilateral Treaty of 1944, and it is precisely the alleged non-compliance with that international agreement on which the claimants assert a purported breach of the NAFTA."14
In relation to the 1944 Treaty the Respondent quoted the United States’ Reply Memorial in the Methanex case:
"Numerous treaties, many of which have either no mechanism for resolving disputes between States or highly specialized mechanisms, are in effect among the NAFTA Parties. The limited consent to arbitration granted in Chapter Eleven cannot reasonably be extended to the international law obligations embodied in those treaties."19
And the Respondent said that "[t]he same can be said with respect to the claimed breaches of Articles 1102 and 1110 based on alleged breaches of the Water Treaty."20
"2. An investor may not make a claim if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage."
Moreover, Claimants argued that under the 1944 Treaty Mexico had relinquished ownership of the Claimants’ irrigation water, and that this water was an investment located in Mexico and within the scope of NAFTA Article 1(1)(b).33 They said that the water rights were "transferred from Mexico to the United States in 1944, and from the United States to Claimants under the national law of the United States."34
"which flows within courses of the six... Mexican tributaries before reaching the Rio Grande, where it is stored in Falcon and Amistad reservoirs, sold on the Water Market, and delivered through a complex of irrigation works, is clearly a good or product in commerce".37
"The 1906 Water Convention equitably distributes the surface waters of the Rio Grande above Fort Quitman. Other than the waters to which it is entitled under the 1906 Water Convention, Mexico has waived all claims to the waters of the Rio Grande for any purpose...... Rights to utilize the water resources within the boundaries of each nation are controlled by their respective domestic laws."38
"the United States has the right to determine who owns the water rights allocated to it by Mexico in the 1944 treaty (in this case, employing the law of Texas), and that Mexico has the same right with respect to the water rights it owns. When Mexico relinquished these water rights by treaty, it relinquished the right to dictate who owns them, but retained the right to decide who owns its share of those rights, as well as the 1.5 million acre-feet per year allotted to Mexico from the Colorado River under the same treaty."69
On 27 November 2006 the United States made a submission pursuant to NAFTA Article 1128. In that submission it addressed the question of the scope of the protections afforded to investors and investments by Articles 1102 and 1105 of NAFTA. It argued that
"all of the protections afforded by the 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."76
In support of this view it pointed to the role of NAFTA Article 1101 as the ‘gateway’ to the dispute resolution provisions of Chapter Eleven.77 It noted the statement in Article 1101(1)(b) that Chapter Eleven applies to measures adopted or maintained by a Party relating to "investments of investors of another Party in the territory of the Party" that has adopted or maintained those measures, and said that this defined the scope of the protection of investments in Article 1105.78 While the scope of Article 1102, in protecting "investors", is not expressly limited to the protection of investors with respect to investments in the territory of the State adopting the measures of which complaint is made, the United States submitted that it is clear that Article 1102 is so limited and that any other conclusion would be absurd.79 It would, for example, result in situations where there was an obligation to accord national treatment to an investor even though there was no obligation to accord national treatment to the investment itself.80 The United States’ submission noted that Canada had taken the same position on the interpretation of Chapter Eleven in the S D Myers case.81
Further, Claimants said that the omission from NAFTA Article 1101(1)(a) of an explicit territorial limitation, such as is found in Article 1101(1)(b) and (c), has a similar effect.84 They said that both those protections afforded to ‘investors’ and those protections afforded to ‘investments’ by Chapter Eleven apply to the Claimants, and that this is in accordance with the design and purpose of NAFTA which, in their view is to eliminate economic boundaries between Mexico, Canada and the United States.85
The Respondent’s Post-Hearing Submission on Jurisdiction reaffirmed the Respondent’s view the Claimants may present a claim against Mexico under NAFTA Chapter Eleven only if they have made an investment in Mexico.90 In particular, it was argued that under NAFTA Article 1101(1)(a) an ‘investment’ is protected only if it is an investment of an investor of another NAFTA Party in the territory of the NAFTA Party applying the measure. Further, because an ‘investor’ is defined by Article 1139 as one who "seeks to make, is making or has made an investment", it follows that an ‘investor’ under Article 1101(1) is one who seeks to make, is making or has made an investment in the territory of another NAFTA Party, because only those investments are covered by Chapter Eleven.91 The Respondent observed that its interpretation of these provisions of the NAFTA conforms to the interpretations adopted by the United States and Canada, and argued that this interpretation is in conformity with the purposes of the NAFTA.92
The jurisdiction of the Tribunal to adjudicate upon the merits of this claim is created by, and accordingly limited by, the NAFTA. The right to initiate claims is established in Section B of Chapter Eleven of the NAFTA. Articles 1115 and 1116 read as follows:-
Article 1115: Purpose
Without prejudice to the rights and obligations of the Parties under Chapter Twenty (Institutional Arrangements and Dispute Settlement Procedures), this Section establishes a mechanism for the settlement of investment disputes that assures both equal treatment among investors of the Parties in accordance with the principle of international reciprocity and due process before an impartial tribunal.
Article 1116: Claim by an Investor of a Party on Its Own Behalf
1. An investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation under:
(a) Section A or Article 1503(2) (State Enterprises), or
(b) Article 1502(3)(a) (Monopolies and State Enterprises) where the monopoly has acted in a manner inconsistent with the Party's obligations under Section A,
and that the investor has incurred loss or damage by reason of, or arising out of, that breach.
2. An investor may not make a claim if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.
The Tribunal accordingly has jurisdiction to adjudicate upon claims made by an investor of one NAFTA Party that another NAFTA Party has breached Section A (i,e., Articles 1101 - 1114) of Chapter Eleven of the NAFTA (and also of certain alleged breaches of Article 1503, which is not relevant here). It has no jurisdiction over claims that do not arise from such alleged breaches. In order to determine whether the claims fall within Articles 1115 and 1116 it is therefore necessary to determine whether the Claimants are ‘investors’, and whether their claims are within the scope and coverage of Chapter Eleven Section A.
NAFTA Article 1101 reads as follows:-
Article 1101: Scope and Coverage
1. 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.
No claim is made in this case in respect of NAFTA Articles 1106 or 1114, and Article 1101(c) is accordingly not relevant. The question is therefore whether, in the terms of Article 1101, the claim concerns
"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."
The Tribunal will at this stage assume for the sake of argument that the claims concern "measures adopted or maintained" by the Republic of Mexico. The claims concern alleged violations of NAFTA Chapter Eleven Articles 1102, 1105, and 1110.99 The first question is therefore whether the claims concern "(a) investors of another Party; and / or (b) investments of investors of another Party in the territory of the Party."
The definition of an "investor" for the purposes of NAFTA Chapter Eleven is set out in Article 1139. It reads as follows:
"investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of such Party, that seeks to make, is making or has made an investment."
"investment of an investor of a Party means an investment owned or controlled directly or indirectly by an investor of such Party;"
Article 1139 defines "investment" as follows:
(a) an enterprise;
(b) an equity security of an enterprise;
(c) a debt security of an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the debt security is at least three years,
but does not include a debt security, regardless of original maturity, of a state enterprise;
(d) a loan to an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the loan is at least three years, but does not include a loan, regardless of original maturity, to a state enterprise;
(e) an interest in an enterprise that entitles the owner to share in income or profits of the enterprise;
(f) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution, other than a debt security or a loan excluded from subparagraph (c) or (d);
(g) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and
(h) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under
(i) contracts involving the presence of an investor's property in the territory of the Party, including turnkey or construction contracts, or concessions, or
(ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise;
but investment does not mean,
(i) claims to money that arise solely from
(i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Party to an enterprise in the territory of another Party, or
(ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraph (d); or
(j) any other claims to money,
that do not involve the kinds of interests set out in subparagraphs (a) through (h)."
The Tribunal considers that those water rights fall within the definition of "property" in Article 1139 (g). It further considers that water rights acquired for agricultural purposes are "acquired in the expectation or used for the purpose of economic benefit or other business purposes".
Furthermore, it is plain that under the Mexican Constitution and Mexican law, the Claimants could have no such property rights in water in Mexican rivers. Article 27 of the Mexican Constitution stipulates that the ownership of waters within the boundaries of the national territory originally belongs to the Nation, and that water from its rivers and tributaries are the property of the nation. Exploitation or use of those waters can only be carried out through concessions granted by the Federal Executive. The Mexican Law of National Waters confirms the need for the grant of a concession for the exploitation or use of waters, and specifies that a concession does not guarantee the existence or permanence of the water that is the subject of the concession. And Mexico’s General Law of National Assets stipulates specifically, in Article 16, that concessions do not create ownership rights (derechos reales) but simply grant a right of use and exploitation, without prejudice to third parties, and subject to conditions imposed by law and by the concession.106
The Claimants sought, with arguments of considerable subtlety and ingenuity, to identify a supervening right that overcame all such problems, by saying that in the 1944 Treaty Mexico alienated or relinquished title to one-third of the waters in the ‘six rivers’, just as States sometimes relinquish land territory in treaties. According to this view, approximately one-third of the water in the ‘six rivers’ belongs to Mexico, and approximately two-thirds belongs to the United States - although who owns what cannot be accurately determined at any given moment because the sharing formula under Article 4 of the 1944 Treaty applies a combination of fixed amounts and percentage shares measured over periods of several years.
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