• "Notice of Intent" refers to Thunderbird’s 21 March 2002 Notice of Intent to Submit a Claim to Arbitration;
• "Notice of Arbitration" refers to Thunderbird’s 1 August 2002 Notice of Arbitration and Statement of Claim;
• "PSoC" refers to Thunderbird’s 15 August 2003 Particularized Statement of Claim;
• "SoD" refers to Mexico’s 18 December 2003 Statement of Defence;
• "SoR" refers to Thunderbird’s 9 February 2004 Statement of Reply;
• "SoRej" refers to Mexico’s 7 April 2004 Statement of Rejoinder;
• "Tr." refers to the Transcript made of the 26-29 April 2004 Hearing;
• "C-PHB" and "R-PHB" refer to the Post-Hearing Briefs filed by Thunderbird and Mexico on 2 August 2004.
JÚAN JOSÉ MENENDEZ TLACATELPA, legal representative of ENTERTAINMENS DE MÉXICO, S.A DE C.V. which accredits his personality by a certified copy of a notarized document attached hereby, and who has as conventional address, for receiving and hearing any type of communication and documents, Plaza Inverlat piso 12, Blvd. M. Avila Camacho n/ 1, C.P. 1 1009, Mexico D.F., authorizes, for this purpose, Mr. Luis Ruiz de Velasco y P. and with all respects I appear before you to say:
By the means of these writings, I come to request from you that this Dirección General give an opinion about the activities that the party I represent is carrying out and which consist in the commercial exploitation of video game machines for games of skills and ability in accordance with the following:
 Entertainmens de México, S.A. de C.V., is a legal entity incorporated in accordance with the Laws of the Republic of Mexico with the public deed 38,765, which was issued and granted by the Public Notary Number 53, Mr. Rodrigo Orozco Perez, in Mexico D.F. as in proven by the attached notarial affidavit; and which is also registered in the Federal Registry of Taxpayers under the symbol EME-000405 -LQ7.
 The entity which I represent opened a business, at Av. de las Rosas N° 70-A, Colonia Jardin in the city of Matamoros, Tamaulipas, under the commercial name "La Mina de Oro", which operates video game machines for games of skills and ability, and complies with all Municipal requirements.
 The video game machines for games of skills and ability, which the entity I represent commercially exploits, are devices for recreation which have been designed for the enjoyment and entertainment of its users. In these games, chance and wagering or betting is not involved, but the skills and abilities of the user who has to align different symbols on the machine screen by touching the screen or pushing buttons in order to stop the wanted symbol from several other symbols which spin in a sequential manner in each of the lanes or squares of each video game. The user has to align symbols in an optimum combination to receive a ticket with points which can be traded for goods or services; as this is already done at different locations in the country.
 The video game machines for games of skills and ability which we operate, at this present time at the place indicated above on this writings, are trademark Bestco, model MTL19U-8L and S.C.I. model 17"UR; and the entity I represent is trying to place about 2,000 (two thousand) more machines at other locations in the Republic of Mexico and these machines are of the same identical mechanical nature and functioning as those described in point 3, above.
 For all I have declared above, I come to this Dirección General requesting your opinion about the commercial activities which hereby I have detailed, and, therefore, you can express your opinion about the video game machines for games of skills and ability, which we have referred hereby, in order to determine if these games are regulated by the Ley Federal de Juegos y Sorteos.
 We are requesting an opinion from this Dirección General so the entity I represent has the certainty that the commercial exploitation of video game machines for games of skills and ability is legal; after an analysis of the nature of our machines, and the legal dispositions, we have concluded that our machines are not bound by Ley Federal de Juegos y Sorteos and, therefore, are not regulated by Secretaria de Gobernación or any other federal authority since the activity which this company is engaged in is not found within the faculties foreseen in Article 73, of Constitution General de la República and which in its Fraction X clearly indicates that the Congress of the Union has exclusive authority to legislate, in the whole of the Republic, about games with bets, wagers and drawings, and that the Executive Federal has the authority to regulate these activities; but in entertainment where skills and ability is involved, it is logical that these are not under federal authority since La Constitución General de la República doesn’t indicate that the Congress of the Union can exclusively legislate in such matters. Consequently, the authority to regulate this type of entertainment is not granted exclusively to the Federation, and, therefore, this is excluded from la Ley Federal de Juegos y Sorteos.
 The nature of video game machines for games of skills and ability is not games of chance or games with bets, wagers or drawings, since, in the operation of these machines, the player seeks entertainment and is playing with our machines assuming an active position where his intelligence, his willpower, his experience and his skills to optimally answer to specific stimulus with the object of finding a combination, effect or boast on the machine, intervene; which can only be possible with ability, experience and control over the machine, and all of this is for the purpose of entertainment and enjoyment, and at the time, the player can receive points that he can trade for a prize as a reward for the skills achieved and in no way as the result of chance.
 For this, it is clear to us, that is the skills and ability of the person who produces the effect over the videogame machine, and it is not the chance, the possibility, the fortune, or bet since the determinant to get results is the skills and ability of players; something very different from games of bets and wagers where there is a previous pact or covenant between the company and the user and, therefore, there is an agreement to handle an amount of money or any other thing, and all of this depends on a chance, on the unforeseen, or is not subject to the willpower or control of the user.
 For that declared above, we have concluded that our operation is not of the type prohibited by la Ley Federal de Juegos y Sorteos since our video game machines do not use chance, bets or wagers, and these video games are only for the purpose of entertainment in which the users can obtain prizes for their skills and abilities, and I’m requesting from this Dirección General your opinion about this.
 Regarding your letter dated August 3, 2000, received on August 8, 2000 by the Directorate of Games and Sweepstakes, entity that depends from this Directorate, whereby you request this entity to issue a response regarding your representative’s exploitation of machines that operate under the concept of ability and skilfulness of its users, please be advised as follows:
 As you may be aware, the Federal Law of Games and Sweepstakes, establishes with precision diverse dispositions that prohibit gambling and luck related games within the Mexican territory. Article I of such law establishes that "... - All gambling and luck related games are prohibited within the Mexican territory, under the disposition of this law."
 Likewise, Article 3 of such law establishes that, "The federal executive branch, by means of the Ministry of State, shall supervise the regulation, authorization, control and vigilance of all games when such games contact gambling of any kind; as well as the sweepstakes, with the exception of the National Lottery, which shall be governed by its own law."
 In the same light, Article 4 of such law establishes that "in order to establish or operate any open or closed place, in which gambling games or sweepstakes take place, the Ministry of State shall authorize such establishments or operations, specifying the corresponding requirements and conditions to be fulfilled in every case."
 According to the above mentioned, the provisions established under the Federal Law of Games and Sweepstakes are enforceable legal dispositions that specifically prohibit gambling and luck related games within the Mexican territory; notwithstanding the above mentioned, according to your statement, the machines that your representative operates are recreational video game devices for purposes of enjoyment and entertainment of its users, with the possibility of obtaining a prize, without the intervention of luck or gambling, but rather the user’s ability and skilfulness.
 In this light, it is important to clarify that, if the machines that your representative exploits operate in the form and conditions stated by you, this governmental entity is not able to prohibit its use, in the understanding that the use of machines known as "coins-swallowers", "token-swallowers" or "slot machines", in which the principal factor of the operation is luck or gambling and not the user’s ability of skilfulness as you stated, could constitute any of the hypothesis described under the Federal Law of Games and Sweepstakes, with the corresponding legal consequences that may be derived therefrom, under article 8 of such law.
 In that view, and based on articles 27, section XXI of the Organic Law of the Federal Government; 1, 2, 3, 4, 5, 7, 8 and other articles related and applicable to the Federal Law of Games and Sweepstakes; as well as articles 8 and 14, Section XVII of the Interior Regulations of the Ministry of State, thus Directorate, in accordance with the faculties previously conferred for such effect; warns you that in the machines that your representative operates there shall be no intervention of luck or gambling; warning that will not be in effect if the machines to be operated are video game devices that operate under the concept of ability and skilfulness.
 Please be advised that, even though the machines of your representative operate under the concept of the user’s ability and skilfulness, it is necessary that the obligations and requirements set by the laws and regulations of each state and/or municipality be met.
As requested, we hereby give you our opinion with respect to the official letter dated August 15, 2000, (the "Official Letter") issued by the Mexican Ministry of Interior (" Secretaria de Gobernación") in favour of Entertainmens de México, S.A. de C.V. ("EDM"), and which refers to the operation in Mexico of video game skill machines. Copy if the Official Letter and the English translation thereof is attached hereto.
Based on the principal terms of the Official Letter, the Ministry of Interior states that it does not have any jurisdiction over the operation of said machines, since in accordance with the representations made by EDM in its application, the video games skill machines to be operated by EDM do not fall into the classification of "slot machines", which are forbidden in Mexico pursuant to the applicable laws, in view of the fact that they are considered to be gaming and/or betting machines.
Furthermore, under the Official Letter the Ministry of Interior emphasizes that EDM can operate the video games skill machines as long as they do not become, in any manner whatsoever, as gaming or betting machines; provided; however, that EDM complies with the states and/or municipal laws or regulations in Mexico.
Based upon the foregoing, we are of the opinion that EDM is allowed to operate in Mexico the video game skill machines as long as EDM complies with the administrative requirements set forth by the state or municipal laws and regulations in Mexico.
Evenmore, in the event the Ministry of Interior intends to close down EDM’s operations, EDM will be able to appeal; in the understanding, that EDM must comply at all times with each and everyone of the requirements set forth by the competent authorities where the machines are operating.
Should you have any questions, please do not hesitate to contact us.
1. What is the applicable law for resolving each of the Issues mentioned below?
2. Which of the Parties has the burden of proof for each of the Issues mentioned below?
B. Jurisdiction and/or admissibility
3. Does Thunderbird "own or control directly or indirectly" at the relevant times any of the companies listed below (the "EDM Companies") that would entitle it to submit to arbitration a claim on behalf of them under Article 1117 Nafta? If not, what are the consequences thereof?
(a) Entertainmens de Mexico S. de R. L. de C.V. ("EDM-Matamoros")
(b) Entertainmens de Mexico Laredo S. de R. L. de C.V. ("EDM-Laredo")
(c) Entertainmens de Mexico Reynosa S. de R. L. de C.V. ("EDM-Reynosa")
(d) Entertainmens de Mexico Puebla S. de R. L. de C.V. ("EDM-Puebla")
(e) Entertainmens de Mexico Monterrey S. de R. L. de C.V. ("EDM-Monterrey")
(f) Entertainmens de Mexico Juarez S. de R. L. de C.V. ("EDM-Juarez").
4. Does the filing by Thunderbird of waivers on behalf of EDM-Puebla, EDM-Monterrey and EDM-Juarez on 15 August 2003 comply with the requirements of Article 1121 Nafta? If not, what are the consequences thereof?
Subject to the answers to Issues 3 and 4, the Issues regarding the merits are:
C. Merits - General
5. What is the role, if any, of Chapter Eleven of the Nafta in the present case? Specifically:
5.1 Does Chapter Eleven of the Nafta recognize and protect the right of a Contracting Party to regulate a certain conduct that it considers illegal?
5.2 If so, does the Ley Federal de Juegos y Sorteos of 31 December 1947 form part of Mexico’s law to regulate a certain conduct that it considers illegal, and what are the consequences thereof?
5.3 What is the role and jurisdiction of the Tribunal in relation to the Mexican judicial system regarding the subject matter of Thunderbird’s claims in the present case?
5.4 If and to what extent do administrative proceedings of SEGOB form part of Issue 5.3?
6. Is the functionality of the machines, technically or otherwise, operated by the EDM Companies relevant in the present case?
6.1 If so, is that question to be determined under the Ley Federal de Juegos y Sorteos of 31 December 1947 and/or on some other basis?
6.2 If so, by whom should that question be determined? In particular, is the Tribunal to defer to the determination by SEGOB? And if so, was that opinion relevant for the dispute?
(a) before 15 August 2000;
(b) between 15 August 2000 and 10 October 2001; and/or
(c) after 10 October 2001?
6.3 Assuming that the question is to be determined by the Tribunal, what are the relevant criteria for such a determination? Specifically:
(a) Were the machines in question skill machines or slot machines?
(b) Is there a "uniqueness for Mexico," as is contended by Thunderbird, and if so, is it relevant for such determination?
6.4 Assuming that the question is to be determined by the Tribunal and in light of the answer to Issue 6.3, did the machines in question meet the applicable criteria?
7. Was a legitimate expectation created by SEGOB’s letter of 15 August 2000 to the effect that it brings Thunderbird’s claims in the present case under Article 1102, 1105 and/or 1110 Nafta? Specifically:
7.1 If and to what extent is a legitimate expectation legally relevant under Article 1102, 1105 and/or 1110 Nafta?
7.2 What are the standards for a legitimate expectation in that respect?
7.3 What is the meaning and legal status of the SEGOB letter of 15 August 2000, and what is the relevance thereof?
7.4 Did EDM fail to disclose relevant facts, in particular in its Solicitud of 3 August 2000, as it is alleged by Respondent, and if so, what is the relevance thereof?
7.5 What are the consequences of the answers to the foregoing Issues 7.1 -7.4?
D. Merits - Articles 1102,1105 and 1110 Nafta
8. Did Respondent breach the "National Treatment" standard under Article 1102 Nafta?
8.1 Which of the following tests as postulated by the disputing parties is the test to be applied under Article 1102 Nafta? Specifically:
(a) As it is contended by Thunderbird, is the Tribunal to apply a three-part test, being:
(i) identification of the relevant subjects of the national treatment comparison (the basis being the likeliness of comparators);
(ii) consideration of the relative treatment received by each comparator (the basis being the best level of treatment available to any other domestic investor operating in like circumstances); and
(iii) consideration whether factors exist which could justify any difference in treatment so found (to be construed narrowly and the burden of proof shifting to Respondent)?
(b) Or, as it is contended by Respondent, is the Tribunal to apply Article 1102 in the sense that it is directed only to nationality-based discrimination and proscribes only demonstrable and significant indications of bias and prejudice on the basis on nationality, which are to be proven by Thunderbird, "the like circumstances" of Article 1102 requiring an adequate comparison on the basis of the facts, thereby taking into account, in particular, compliance with local law relating to illegal conduct?
8.2 On the basis of the test to be applied, did Respondent actually breach Article 1102? Specifically, and to the extent relevant under the test to be applied:
(a) Does the fact that Guardia and de la Torre are allegedly operating machines essentially identical to the machines operated by the closed EDM Companies mean that Respondent has not accorded to the EDM Companies treatment no less favourable than that it accords, in the like circumstances, to its own investors under Article 1102?
(b) Are other "skill game" operators that have resorted to local remedies and that have obtained injunctive relief pending a final disposition of the legality of Gobemacion's closure order against them ‘in like circumstances’ to the EDM companies, as contended by Thunderbird?
(c) Did SEGOB take action against facilities of the kind of the EDM Companies, including those owned by Guardia and de la Torre, as it is alleged by Respondent, and if so, what is the relevance thereof?
(d) What is the relevance, if any, of the fact that EDM abandoned judicial redress in Mexico against the closure of its facilities?
9. Did Respondent breach the "Minimum Standard of Treatment" under Article 1105 Nafta?
9.1 What does the "Minimum Standard of Treatment" under Article 1105 Nafta mean and how is it to be applied by a Nafta arbitral tribunal?
9.2 Subject to the answer to Issue 7 and 9.1 above, was there a detrimental reliance by Thunderbird on SEGOB’s letter of 15 August 2000, also in light of Thunderbird’s solicitud of 3 August 2000, and if so, did it constitute a breach of Article 1105 Nafta?
9.3 Subject to the answer to Issue 9.1 above, was there a failure to provide due process, constituting an administrative denial of justice, in the proceedings relating to the ruling of 10 October 2001, and if so, did it constitute a breach of Article 1105 Nafta?
9.4 Subject to the answer to Issue 9.1 above, was there manifest arbitrariness in administration, constituting proof of an abuse of right, in the proceedings before SEGOB, and if so, did it constitute a breach of Article 1105 Nafta?
10. Did Respondent engage in an expropriation in violation of Article 1110 Nafta?
10.1 Does the fact that Thunderbird did not submit to arbitration a claim on its own behalf under Article 1116 Nafta, but rather on behalf of the EDM Companies under Article 1117 Nafta, preclude it from obtaining compensation under Article 1110?
(a) In this connection, should, as it is requested by Thunderbird at pages 69-70 of its SoR, leave be granted to Thunderbird to amend its PSoC to include, in the further alternative, a claim for 100% of the damages caused to the businesses of each EDM Company as a result of Respondent’s alleged breach of Article 1110, using Article 1116 Nafta?
(b) Does a breach of Article 1110 Nafta also constitute a breach of Article 1105 Nafta, as it is contended by Thunderbird?
(i) In this connection, what is the relevance, if any, of Section B.3 of the Notes of Interpretation of Certain Chapter 11 Provisions by the Nafta Free Trade Commission of 31 July 2001 ("A determination that there has been a breach of another provision of the Nafta, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1)")?
(c) Does Article 1110 Nafta impose an obligation of Respondent vis-à-vis the EDM Companies?
10.2 Subject to the answer to Issue 10.1 above, and having also regard to Issue 10.3 below, is it relevant to determine which is or are the expropriation standard or standards to be applied under Article 1110 Nafta? If so, which is that standard or are those standards?
10.3 Subject to the answers to Issues 7, 10.1 and 10.2 above, did any rights legitimately acquired by the EDM Companies exist in the businesses conducted by them? Specifically:
(a) Did the EDM Companies operate on the basis of a business undertaking that is unlawful under Mexican law?
(b) Did the EDM Companies operate on the basis of a legitimate expectation, being similar to the detrimental reliance as alleged by Thunderbird under Article 1105?
(c) Assuming that the answers to Issues (a) and (b) of the present Issue 10 are in the affirmative, do the actions of SEGOB amount to expropriation within the meaning of Article 1110 Nafta?
E. Merits - Damage
11. If the answer to Issues 8 and/or 9 and/or 10 above is in the affirmative, is Thunderbird entitled to damages, and if so for what amount?
11.1 What are the compensation principles to be applied to damages in the present case?
(a) Are these principles different with respect to breaches of Articles 1102, 1105 and 1110 Nafta, and if so, what are the differences?
(b) Does a distinction arise from whether the act complained of is lawful or unlawful?
(c) At which date are the damages to be determined?
11.2 Is there a sufficient causal link between the breach and the damages claimed by Thunderbird?
11.3 Are the damages claimed by Thunderbird a reasonably foreseeable consequence of the act that constituted the breach by Respondent?
11.4 Subject to the answers to Issues 11.1 - 11.3 above, should the damages be valued on the basis of a fair market value of the EDM Companies calculated for anticipated future profits by a discounted cash flow ("DCF") method, as contended by Thunderbird?
11.5 To the extent that it is not addressed under Issues 11.1 -
11.4 above, has Thunderbird proven the damages as claimed by it?
11.6 Subject to the answers to the foregoing Issues 11.1-11.5, what is the amount of damages?
11.7 As regards interest with respect to the damages:
(a) What is the rate of interest to be applied, and which is the currency to be taken into account in that respect?
(b) Is interest to be compounded?
(c) For which period of time is interest to be applied?
12. What are the costs of the arbitration and which party shall bear those costs or in which proportion shall those costs be allocated between the parties?
The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:
(a) international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;
(b) international custom, as evidence of a general practice accepted as law;
(c) the general principles of law recognized by civilized nations;
(d) subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.
Each party shall have the burden of proving the facts relied on to support his claim or defence.
2. A disputing investor may submit a claim under Article 1117 to arbitration only if both the investor and the enterprise:
(a) consent to arbitration in accordance with the procedures set out in this Agreement; and (b) waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1117, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.
3. A consent and waiver required by this Article shall be in writing, shall be delivered to the disputing Party and shall be included in the submission of a claim to arbitration.
As to the standard of protection for legitimate expectations, Thunderbird argues that if an investor or investment reasonably relies on the representations of government officials and suffers damages because of such reliance, the responsibility of the State is engaged under international law. Thunderbird cites a number of cases in this regard6, arguing that detrimental reliance arises from the general international law principle of good faith and the customary international standard of fair and equitable treatment. Through its ratification of the Nafta, Thunderbird contends, Mexico authored a set of legitimate expectations upon which an investor or investment could reasonably rely.
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 of investments.
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 of investments.
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 of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraphs 2 through 6.
The claim has failed in its entirety. The Respondent has been put to considerable inconvenience. In ordinary circumstances it is common in international arbitral proceedings that a losing claimant is ordered to bear the costs of the arbitration, as well as to contribute to the prevailing respondent’s reasonable costs of representation. This practice serves the dual function of reparation and dissuasion.
In this case, however, four factors militate against an award of costs. First, this is a new and novel mechanism for the resolution of international investment disputes. Although the Claimants have failed to make their case under the Nafta, the Arbitral Tribunal accepts, by way of limitation, that the legal constraints on such causes of action were unfamiliar. Secondly, the Claimants presented their case in an efficient and professional manner. Thirdly, the Arbitral Tribunal considers that by raising issues of defective performance (as opposed to voidness ab initio) without regard to the notice provisions of the Concession Contract, the Naucalpan Ayuntamiento may be said to some extent to have invited litigation. Fourthly, it appears that the persons most accountable for the Claimants’ wrongful behaviour would be the least likely to be affected by an award of costs; Mr. Goldenstein is beyond this Arbitral Tribunal’s jurisdiction, while Ms. Baca - who might as a practical matter be the most solvent of the Claimants - had no active role at any stage.
1) Finds that Mexico did not breach Articles 1102, 1105 or 1110 of the Nafta or otherwise;
2) Dismisses Thunderbird’s claims in their entirety;
3) Determines the costs of the arbitration referred to in 221 above at US$505,252.08, and further determines that these costs are to be shared by the Thunderbird and Mexico on a 3/4-1/4 basis, and are to be paid out of the deposits made by the Parties;
4) Determines that Thunderbird shall reimburse Mexico in the amount of US$ 1,126,549.38 in respect of the costs of legal representation and US$126,313.02 in respect of the deposits made by Mexico for the fees and disbursements of the Arbitral Tribunal.
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