Espíritu Santo Holdings, LP and L1bre Holding, LLC v United Mexican States - ICSID Case No. ARB/20/13 - Reply on the Merits - 4 November 2022
Country
Year
2022
Summary
Source: icsid.worldbank.org
CLAIMANTS' REPLY MEMORIAL
4 November
TABLE OF CONTENTS
I. Introduction and Executive Summary
A. Lusad Was Fully Prepared to Install the L1bre System in Mexico City's 138,000 Taxis
B. Mexico's Defense is Built on Unsubstantiated Allegations
C. Mexico Must Pay Compensation Commensurate to the Total Value of the Concession Under the DCF Method
D. Reservation of Rights Arising from Mr. Zayas's Pre-Trial Detention
E. The Remaining Structure of This Reply Memorial
II. Comments on the Factual Background
A. The Concession Was Validly Issued, and Mexico Repeatedly Recognized Its Legality and Binding Nature
B. Lusad Complied with All Conditions of the Concession, and Mexico Recognized That the L1bre System Was Ready to Launch
C. Mexico Unlawfully Suspends the Concession
D. Mexico Attempts to Cover Its Tracks by Falsifying Documentary Evidence
E. Mexico's Slander and Criminal Retaliation Against Claimants' Witnesses
III. The Conditions for Jurisdiction Under the Treaty Have Been Met
A. ES Holdings Owned 100% of Lusad at All Relevant Times
B. Mexico's Objection to the Tribunal's Jurisdiction Ratione Personae Is Baseless, As Claimants Are "Investors" Under NAFTA
C. Mexico's Objection to the Tribunal's Jurisdiction Ratione Materiae Is Both Factually and Legally Baseless
IV. Mexico Has Not Rebutted Claimants' Demonstration of Mexico's Several Breaches of NAFTA and International Law
A. Mexico Expropriated Claimants' Investments in Mexico
B. Mexico Breached Its Obligation to Accord Claimants' Investments with Fair and Equitable Treatment in Accordance with International Law
C. Mexico Discriminated Against Claimants' Investment in Violation of Its National Treatment Commitment
V. Mexico Is Required to Compensate Claimants to Wipe Out All Consequences of Its Unlawful Conduct
A. Claimants Are Entitled to Compensation Based on the Full Reparation Standard Calculated by Reference to the Fair Market Value of Their Investments on 27 October 2018
B. Computing Damages by Reference to Lusad's Foregone Cashflows More Than Satisfies Claimants' Burden and Standard of Proof
C. Claimants' DCF Valuation Requires No Adjustments as a Result of Mexico's Observations
D. Mexico's Valuation Based on Investment Costs is Inconsistent with the Full Reparation Standard
E. A Fully Compensatory Award Must Grant Claimants Compound Interest at a Rate Commensurate to Their Opportunity Cost
F. Conclusion on Damages
VI. Request for Relief
Claimants Espíritu Santo Holdings, LP ("ES Holdings") and L1bre Holding LLC ("L1bre Holding" and together with ES Holdings, "Claimants") serve this Memorial on the United Mexican States ("Mexico" or "Respondent") pursuant to Article 1120 of the North American Free Trade Agreement ("NAFTA" or the "Treaty"), Rule 31 of the Arbitration Rules of the International Centre for Settlement of Investment Disputes ("ICSID Rules") and the Tribunal's Procedural Order No. 1 dated 29 March 2021 and amended procedural calendar, and submit the following requests to the Tribunal:
Requests:
(i) A declaration that Mexico breached Articles 1102, 1105, and 1110 of the Treaty;
(ii) An order directing Mexico to compensate Claimants for their losses, and those suffered by Lusad, resulting from Mexico's breaches of the Treaty and international law in an award of damages not less than USD $2.109 billion; such compensation to be paid without delay, be effectively realizable and be freely transferrable, and bear post-award interest at a compound rate sufficient to fully compensate ES Holdings for the loss of the use of this capital as from the date of Mexico's breaches of the Treaty;
(iii) A declaration that the award of damages and interest be made net of all Mexico's taxes, and that Mexico may not deduct taxes in respect of the payment of the award of damages and interest;
(iv) An order that Mexico reimburse Claimants for all costs, expenses, expert fees, and reasonable attorneys' fees incurred or paid by Claimants in connection with this arbitral proceeding, plus interest; and
(v) An order granting any further relief as the Tribunal considers appropriate.
Claimants reserve their right to alter, amend, and/or supplement their claims as necessary and in accordance with the applicable rules during the course of this arbitral proceeding. Claimants reserve the right to request the Tribunal's permission to supplement this Reply Memorial with additional fact witness testimony and accompanying documentary evidence if and when Claimants are provided appropriate access to Mr. Zayas. Given Mexico's obstruction of Claimants' access to Mr. Zayas, Claimants also ask that the Tribunal make negative inferences against Mexico, crediting Mr. Zayas's first declaration in its entirety and disregarding all of Mexico's allegations regarding Mr. Zayas in its Counter-Memorial. Claimants reserve all rights regarding relief they have sought or may seek in connection with access to Mr. Zayas and his ongoing pre-trial detention and the conditions to which he is being subjected at the Reclusorio Sur, as well as with their pending motion to compel.
I. INTRODUCTION AND EXECUTIVE SUMMARY
1. Mexico breached numerous provisions of NAFTA and destroyed Claimants' business in Mexico, causing Claimants to suffer substantial damages, which is readily evident based on the record in this Arbitration. Mexico granted, to Claimants' subsidiary, Servicios Digitales Lusad S. de R.L. de C.V. ("Lusad"), an exclusive concession for a period extendable to 30 years for the replacement, installation and maintenance of taximeters in Mexico City's taxi fleet and for the development of a remote ride-hailing application (the "Concession"). The Concession itself acknowledged that it was required to address, inter alia, the need to afford taxi users a "transparent" billing system and to ensure "certainty, efficiency and security" for passengers
2. Claimants and Lusad subsequently invested substantial sums in building a business in Mexico that met the requirements under the Concession. Then, after Lusad obtained all necessary government approvals, passed two testing periods, and was on the precipice of launching full-scale revenue-producing operations, Mexico indefinitely suspended the Concession because--in its own words--of a "political change" brought about by the election of a new mayoral administration in Mexico City. Mexico's breaches of NAFTA are manifest. The only relevant question in dispute ought to be the value of the Concession and the amount of compensation necessary to make Claimants whole for the damages they have suffered.
3. Before addressing Mexico's attempts to avoid liability in its Counter-Memorial, it bears recalling the basic circumstances giving rise to the claim.
A. Lusad Was Fully Prepared to Install the L1bre System in Mexico City's 138,000 Taxis
4. In June 2016, Mexico City's Adjudication Committee for Concessions for Public Transport ("Adjudication Committee") decided to grant Lusad a Concession to install a digital taximeter system across all of Mexico City's taxis, which were in drastic need of technological improvement and digitalization. The Adjudication Committee reviewed Lusad's proposal, as well as seven others that it had received to deliver the services envisaged by the Concession, and decided that Lusad best fulfilled the Adjudication Committee's requirements with its L1bre- branded digital taximeter system (the "L1bre System"). There was substantial government oversight of the granting of the Concession to Lusad because the Adjudication Committee was comprised of a number of high-ranking officials, including (i) Mexico City's Secretary of Mobility, (ii) Secretary of Housing and Urban Development, (iii) Secretary of the Environment, (iv) Secretary of Public Works, and others. Lusad and Mexico City's Secretariat of Mobility ("Semovi") subsequently signed the Concession on 20 June 2016, and it was then amended in January 2017.
5. Under the terms of the Concession, Lusad assumed substantial risk and committed to make a large capital investment in developing new taximeters and a ride-hailing application for Mexico City's taxis. In addition to incurring the financial risk of developing the technology, Lusad committed to: (i) bear the cost of the acquisition, installation, maintenance, and reparation of all necessary equipment, (ii) maintain the technology and its operation in good condition, (iii) update the technology as required, (iv) guarantee global positioning satellite ("GPS") service 24 hours per day, every day of the year, for all of the taximeters, (v) operate the service according to the technical feasibility study that Lusad had submitted, and (vi) maintain appropriate control systems to guarantee the quality of the service. In exchange for taking on the risk of these technological developments and the associated substantial investment required, Lusad was entitled to recover a fees associated with every taxi ride in Mexico City involving a taxi using the L1bre System taximeter, and any taxi ride hailed through its mobile application. Aside from the benefits associated with an improved taxi service in Mexico's most important city, Mexico City would also derive direct economic benefits from the Concession, as it would share in Lusad's revenues despite having made no capital investment of its own.
6. Upon executing the Concession in June 2016, Lusad proceeded immediately with implementing it. With an experienced technology team directing software development, Lusad expended millions of dollars developing scaled-up versions of its software programs, namely: a program to run on the driver tablet in the front of the taxi, a program to run on the passenger tablet in the back of each taxi, and a smartphone application. Lusad also developed an e-wallet, which allowed passengers to pay by credit card and would automate payment of the fees due to Lusad for each ride. Finally, Lusad developed back-end software to integrate all of these programs together and connect them with government services and servers. Each of Lusad's software programs had to be individually developed and then integrated together to function seamlessly across the different pieces of hardware. One of the most significant aspects of the software development was the process of connecting the L1bre System's panic button to Mexico City's Command, Control, Computing, Communication, and Citizen Contact Center (known as the "C5"). Once connected, taxi drivers and passengers would have an instantaneous and direct line to Mexico City's central emergency services. The panic button's connection to C5 was a critical element of the L1bre System because it was a means to ensure safe taxi rides for passengers and drivers within a service that had historically been plagued by insecurity for passengers.
7. Semovi and Lusad were in constant communication regarding the implementation of the Concession. Many milestones were achieved over the course of the subsequent two years. For example, during 2016, Lusad installed initial versions of the L1bre System across 1,100 taxis in Mexico City and provided Semovi with data about those installations. Semovi carried out an inspection and, in March 2017, confirmed that the inspection generated "favorable and satisfactory" results.2 Lusad later updated these installations, again under Semovi's supervision, with Semovi confirming that all installations were completed to its satisfaction.3 In February 2018, Semovi confirmed that the panic button connected to Mexico City's C5 was functioning satisfactorily.4 Then, on 17 April 2018, as Lusad had completed all of its obligations under the Concession, Semovi issued a Mandatory Installation Notice requiring taxi drivers to install the L1bre System by March 2019 into all of 138,000 Mexico City taxis.5 Lusad was ready to deliver on the installations, as it had already acquired the necessary tablet hardware, contracted for substantial installation capacity at a number of sites across Mexico City, developed training and installation manuals, and developed a plan to scale and expedite installations
8. Everything was in place for Lusad to begin collecting revenue under the Concession, but Semovi did not fulfill its end of the bargain. Under the Concession, Semovi was required to launch a reservation platform for taxis to have the L1bre System installed (by Lusad), but it never did. Instead, soon after the publication of the Mandatory Installation Notice, the Concession became the subject of political rhetoric and threats during campaigns for Mexico City's forthcoming mayoral election. Then-candidate Claudia Sheinbaum campaigned on an agenda that included ending the Concession. Semovi reacted to this by suspending the mandatory installation of the L1bre System. On 30 May 2018, Semovi wrote to Lusad to effectuate this suspension, pointing to the "electoral period [in] Mexico City" and observing that the "suspension is not attributable to [Lusad] since. . . the concessionaire has fully complied with its rights and obligations."7 A few weeks later, in early July 2018, Ms. Sheinbaum won the election.
9. Lusad had no reason to believe that the temporary suspension would extend beyond the "electoral period [in] Mexico City" and so it did not stand idly by. Among other productive activities, Lusad engaged Goldman Sachs to evaluate Lusad's value and its rights under the Concession and lead a process for the sale of a minority stake in Lusad to fuel Claimants' planned continued growth in other markets in Mexico and elsewhere in Latin America.8 Goldman Sachs prepared an initial valuation in June 2018. It was then given access to a large data room, conducted due diligence on Lusad, began outreach to potential investors and, on 4 October 2018, provided a more informed valuation. Goldman Sachs valued Lusad's rights under the Concession, using the discounted cash flow ("DCF") methodology, at USD $ 2.43 billion.
10. On 28 October 2018, weeks before Mayor Sheinbaum was to take office, Semovi sent a letter notifying Lusad that the Concession would be suspended because of the recent "political change in the leadership of the Major of the Government of Mexico City."10 Not a single other reason was cited in Semovi's 28 October 2018 suspension letter, nor in any other subsequent communication with Semovi or Mayor Sheinbaum's office. Mexico wiped out a business independently valued at USD $2.43 billion on the basis of political preference
11. A few months later, in summer of 2019, Mayor Sheinbaum's administration announced that the Mexico City government would launch its own mobile ride-hailing smartphone application for Mexico City's taxi fleet. The Mexico City government boasted that its application had many of the features that Lusad had developed for the L1bre System.
12. It is because of these facts, all well supported by documentary evidence, that Claimants forcefully maintain that Mexico's breaches of NAFTA are manifest. In bringing an end to the Concession and Claimants' business in Mexico, Mexico did not even bother inventing an ostensibly lawful or justifiable reason. The new administration simply decided that the Concession that had been signed and in respect of which Claimants and Lusad had invested substantial sums, was no longer "politically" convenient, and that it preferred to launch its own ride-hailing mobile application for Mexico City's taxis. Mexico's conduct amounts to an unlawful expropriation of Claimants' investments contrary to NAFTA Article 1110, unfair and inequitable treatment contrary to NAFTA Article 1105, and treatment inconsistent with the national treatment standard contrary to NAFTA Article 1102.
B. Mexico's Defense is Built on Unsubstantiated Allegations
13. Mexico could not possibly contend, on the facts of this case presented in Claimants' Memorial, that its conduct amounted to anything other than a breach of its obligations under NAFTA. Instead of taking on the facts, Mexico deflects attention elsewhere. Mexico spends a substantial portion of its Counter-Memorial avoiding a discussion of the Concession and the government's suspension of it, and focuses instead on arguments that have nothing to do with the events giving rise to the dispute. Mexico's Counter-Memorial reads instead as a regrettable and unfortunate smear campaign against Claimants' witnesses who were involved in Lusad winning the Concession and developing the L1bre System. And, when Mexico finally turns to facts relevant to the dispute, it relies on inference and innuendo, not evidence, in its unfounded attempts to generate a dark cloud over the Concession and its award to Lusad. Mexico's arguments reflect a transparent effort to distract at all costs and read as an acknowledgement that the actual facts of the case are stacked against it. Mexico's own articulation of its arguments shows that they are not made with any conviction. That is because there is nothing behind Mexico's most salacious allegations. Not a shred of evidence.
14. Mexico's arguments are addressed comprehensively throughout this Reply Memorial. For purposes of the present introduction, a few of Mexico's allegations deserve special mention as being particularly indicative of Mexico's modus operandi, namely (i) its allegations of wrongdoing and bribery, (ii) its allegations of forgery, (iii) its focus on irrelevant judicial proceedings involving third parties, and (iv) its confused arguments regarding when the Concession was granted and its suspension.
15. First, from the very first paragraphs of its Counter-Memorial, Mexico begins its smear campaign by accusing Claimants of procuring the Concession through "possible" acts of bribery. Mexico accuses Claimants and their personnel of "possible illicit acts" (¶ 1), expresses "serious concerns. . . in respect of unlawful acts regarding the `investment'" that is the subject of the dispute (¶ 2), contends that "there is evidence in this arbitration about: a possible collusion between individuals and certain public officials to obtain a concession" (¶ 3), contends that "Claimants' witnesses carried out unlawful acts to obtain a concession from the former Minister of Semovi" (¶ 3) and, finally, it claims that "evidence shows that Claimants' alleged `investment' was created or obtained through illicit acts" (¶ 4).12 In its Counter-Memorial, the only document that Mexico offers to support these salacious allegations is an "anonymous" letter that it says it received nearly three years ago, in November 2019, providing information regarding these "possible" acts.13 Notably, Mexico could not produce even one witness with contemporaneous knowledge to support that letter, nor to attest to the provenance of the letter, who received it, what envelope it came in and what steps its recipient took to ascertain its authorship. The copy of the letter that Mexico sent contains pagination that Mexico added to the letter but that begins on page "0004", suggesting that Mexico has withheld the first three pages of the document--which is also entirely unexplained.
16. Claimants deny in the strongest possible terms any wrongdoing of any kind and deny the contents of the anonymous letter, which includes sensationalist allegations including, inter alia, that Claimants bribed a Mexican government official to procure the Concession. Mexico's allegations--framed as "possible" infractions--are made without conviction and without any evidence aside from the anonymous letter. Yet, despite the importance that the anonymous letter plays in its defense, Mexico entirely fails to explain in its Counter-Memorial what, if any, action it has taken to investigate or verify the contents of the anonymous letter. Given the passage of time since the letter's receipt, Mexico should have been prepared to describe the results of any investigation in its Counter-Memorial. Mexico's silence in this regard is telling. Mexico's reliance on the "anonymous letter" at the heart of its defense (elevating it to the very first paragraphs of the Counter-Memorial) without providing any further information that was gathered in the intervening three years it had the letter before it submitted its Counter-Memorial undermines Mexico's credibility.
17. During document production, the Tribunal ordered (over Mexico's objection) that Mexico produce "all internal or external [c]orrespondence or [d]ocuments reflecting analysis prepared by or sent to or from Semovi related to the `anonymous complaint'. . . including any [c]orrespondence with the sender of that letter and any action taken by Semovi in response to that letter (including any internal investigations)."14 If responsive documents were helpful to its case, Mexico ought to have been keen to have these documents come to light; the fact that it instead objected is telling. In response to the Tribunal's order, Mexico produced only four letters. Two of the letters are a simple exchange in which a Semovi legal affairs representative is requested and then provides the file (expediente or legajo) relating to the Concession to a Semovi representative in Investigation Department B of Semovi's Internal Control Organ.15 In the third letter, a representative from Mexico City's mayor's office does nothing more than forward the anonymous letter to Mexico City's Secretario de la Contraloría (notably, Mexico only produced the cover letter and not the complete communication with the anonymous letter precisely in the form that it was received).16 In the final letter, dated 10 December 2019, the representative from the Contraloría sends the anonymous letter to Semovi's Internal Control Organ and directs it to carry out the "actions and diligence" required to investigate the contents of the anonymous letter and to report to the Contraloría "fortnightly" of any relevant evidence collected.17 No such reports or evidence were produced.
18. The lack of contemporaneous documents to support Mexico's arguments relating to an unsubstantiated letter is telling. Indeed, Mexico produced not a single other document responsive to Claimants' Request 26. It is irresponsible and inexcusable for Mexico to lodge allegations of bribery and corruption without any actual evidence. In the absence of such evidence, Mexico's reliance and emphasis placed on the "anonymous letter" ought to be considered as nothing more than a transparent ploy to distract from the substance of this case.
19. Second, Mexico's Counter-Memorial not only alleges bribery, but--in equally
tepid fashion--also alleges forgery. Mexico contends that a number of documents that Claimants
submitted with their Claim Memorial are the subject of "potential forgery."18 Mexico elaborates
Semovi allegedly looked for certain documents, "did not locate these documents in its records,
archives and files" and so Mexico concluded that the documents must have been forged
Mexico's allegations are without foundation and demonstrably incorrect. For instance, some
documents that Mexico contends were the product of fraud or forgery were later produced by
Mexico to Claimants in response to some of Claimants' document production requests.20 Others
exist in original form, and have been certified as authentic by Mexico's own officials in charge of
authenticating such documents.21 Claimants vehemently deny that they forged or doctored any
document at any time, including those documents that they submitted into evidence in this
arbitration. As described in more detail throughout this submission, Claimants' have confirmatory
evidentiary support for the documents that Mexico challenges.
20. Third, Mexico spends a considerable part of its Counter-Memorial attempting to further disparage Claimants' representatives, Eduardo Zayas Dueñas and Santiago León Aveleyra, by describing various lawsuits that have nothing to do with the present dispute and some of which do not even involve them as parties. Mexico emphasizes in particular allegations that were made in the course of those proceedings, which it characterizes as "extremely disturbing."22 Mexico then considers it noteworthy that "Claimants have not mentioned" those proceedings in their Memorial.23 Mexico contends that the Tribunal ought to make findings of fact from these allegations, including with respect to "serious accusations regarding illicit conduct[], including robbery, fraud and death threats."24 Mexico contends that "the cases Taxinet, Cosío Espinoso, and L1bero Partners demonstrate the unviability of the L1bre Project and the various illicit acts carried out by Messrs. Zayas and León."25
21. Given how Mexico heavily relies on those other proceedings, one would have expected them to have resulted in final judgments in which findings of fact were made supporting the salacious allegations Mexico derives from them. However, not a single one of the proceedings to which Mexico refers ever resulted in a final judgment with any finding of fact consistent with the conclusions and inferences that Mexico asks this Tribunal to draw. As discussed in further detail below, the Taxinet case was brought against Mr. León, and a final judgment was rendered in Mr. León's favor. The Cosío Espinoso trial was discontinued and, at any rate, was not brought against the Claimants, Mr. Zayas, or Mr. León. The L1bero Partners case, which involved a dispute for control of Lusad (which is not necessarily surprising given the substantial value associated with Lusad and the L1bre brand that was being developed in Mexico), was resolved amicably with Claimants remaining the sole indirect owners of Lusad's parent companies
22. Any rejected or subsequently withdrawn allegations of wrongdoing in those proceedings are legally irrelevant and of no value here. That Mexico resorts to relying not on findings of fact but on withdrawn allegations made in third-party judicial proceedings to advance its arguments in this case is a sign of its extreme desperation. Mexico has little to say on the substance of this dispute, and so it focuses on unproven and unsubstantiated allegations made in others.
23. Fourth, when Mexico does venture into matters that are relevant to these proceedings, its positions are confused and contradictory. This is most evident with respect to submissions it makes regarding the Concession and its suspension. Relevantly, Mexico denies the publicly reported award of a Concession to Lusad in 2016, yet acknowledges that a Concession was ultimately granted to Lusad, while disagreeing as to the terms that apply to the Concession, and provides a disorienting explanation for what ultimately happened to the Concession, oddly maintaining that it remains in force to this day (contending that "[i]n clear terms, Semovi has not suspended the Lusad Concession")
24. For instance, Mexico maintains that Lusad was not actually awarded the Concession in June 2016 but was instead awarded an opportunity to be awarded the Concession at some point in the future, which Mexico describes as a "proyecto de concesión." Again, Mexico cannot provide a single witness with contemporaneous knowledge to support this contention, which is in any case inconsistent with the applicable legal framework, which does not provide for the award of a "proyecto de concesión." Instead, Mexico relies on a document that it says are the "correct" minutes of the Adjudication Committee's meeting in June 2016 during which it discussed Lusad's proposal, proposals submitted by competing companies, and the Concession.28 Claimants submitted a different version of the minutes with their Memorial.29 Claimants' copy of the minutes states that the Adjudication Committee agreed to grant the Concession to Lusad ("otorgar la concesión"), whereas Mexico's version contends that Lusad was instead granted the opportunity for a concession if it fulfilled additional conditions (in Mexico's telling, Lusad was granted a "proyecto de concesión")
25. There are a number of reasons why the minutes on which Mexico relies in its Counter-Memorial are suspect. For present purposes, Claimants note simply that, during document production, Mexico produced to Claimants a copy of the Adjudication Committee's meeting minutes that are identical to the exhibit that Claimants submitted with their Memorial.31 This should put an end to Mexico's attempt to create doubt as to whether Lusad was awarded the Concession in June 2016, but--to be sure--there are a number of other contemporaneous documents--including both public media reports and government files-- corroborating Claimants' position that Lusad was indeed awarded the Concession at that time
26. Moreover, Mexico further argues that the Concession was never suspended, including the October 2018 indefinite suspension letter as one of the documents that Mexico suspects was "possibly forged."33 Incredibly, Mexico contends in these proceedings that the Concession remains entirely in force (which only further underscores how Mexico cannot possibly believe its allegations regarding bribery or wrongdoing because, if it did, it certainly would have sought to terminate the Concession on those grounds).34 While Mexico feigns ignorance regarding Mexico City's suspension of the Concession for purposes of these proceedings, it bears recalling that Mayor Sheinbaum had publicly promised during her campaign that she would put an "end" to the Concession.35 Since her election, and following the October 2018 suspension notice from Semovi put forward in Claimants' submissions, Mexico City's government officials have confirmed that they moved on from the L1bre System to their preferred, government-run Mi Taxi system. The reasons for this replacement were declared contemporaneously in media interviews:
During a press interview in September 2019, a representative from Mexico's Digital Agency of Public Innovation--the body charged with developing the Mi Taxi application--was asked "what happened with [the] contract with the company [Lusad], to which he responded that "the contract. . . took place with the last administration" and "the contract no longer has any effect." The reason cited was not any alleged corruption or any nullity of the Concession, but rather because of "problems it generated. . . in the media and with the cab drivers."36
In February 2020, in promoting the Mi Taxi application, Mayor Sheinbaum differentiated the offering as being a replacement to the "application of the prior administration."37
During a July 2020 interview in which she was asked about the alleged expropriation of Claimants' investment, Mayor Sheinbaum bemoaned that the concession was something that "had been made in the last administration" and explained that "what we said at that time was that if the cab drivers did not want it to be done in that way. . . it should not be done and from there we developed an application. . . through the Digital Agency for Public Innovation."38
27. Simply put, Mayor Sheinbaum promised on the campaign trail that she would put an end to the Concession, and since her election, her administration has repeatedly confirmed publicly that the L1bre System affiliated with the "old administration" has been replaced by the Mi Taxi system. As such, it is difficult to understand Mexico's contention that the Concession was never suspended and somehow remains in effect. Mexico's misinformed contentions regarding the circumstances in which the Concession was awarded and then suspended appear to be a consequence of its selection of fact witnesses: Mexico has not provided a witness statement from a single Semovi official who was at the agency either at the time the Concession was awarded, at any point during its implementation, or at the time it was suspended. It is not surprising, then, that Mexico and its witnesses are lacking as to the facts. In contrast, Claimants are submitting with this Reply Memorial a witness statement from Agustín Muñana Zúñiga, a government attorney who worked as Legal Director at Semovi during the relevant time period and who disagrees with many of Mexico's factual contentions regarding the Concession's award, implementation, and suspension.
28. Mexico's arguments addressed above are not mentioned in this introduction because they are central to the resolution of the present dispute but rather because they are indicative of Mexico's approach to defending itself in this case. Mexico shows no restraint in making the most serious allegations of wrongdoing, even where it has no evidence. It posits a range of theories that are internally inconsistent. And Mexico is mostly intent on slandering the Claimants' witnesses by resorting not to evidence but instead to allegations from unrelated third- party disputes that never resulted in any findings whatsoever (let alone relevant ones) regarding the conduct of Claimants, Lusad, Mr. Zayas, or Mr. León.
29. In the circumstances, the Tribunal ought to have no difficulty in concluding that, in indefinitely suspending the Concession and subsequently launching the Mi Taxi service, Mexico breached its obligations under NAFTA.
C. Mexico Must Pay Compensation Commensurate to the Total Value of the Concession Under the DCF Method
30. Mexico is required under international law to pay Claimants compensation to wipe out the effects of its unlawful conduct. In that regard, the effect of Mexico's indefinite suspension of the Concession is clear and not in dispute. While Mexico feigns confusion as to the authenticity of the indefinite suspension letter of 28 October 2018, Mexico cannot dispute that the indefinite suspension wipes out all value associated with the Concession. Plainly, rights under the Concession that are permanently suspended to reflect the government's "political" preference have no value at all. Mexico accepts that conclusion, which is why it does not dispute that the suspension would have an expropriatory effect. Accordingly, to restore Claimants to the position they would have in all probability occupied but for the unlawful acts, Mexico must pay compensation commensurate to the total value of the Concession regardless of the NAFTA provision that Mexico is found to have breached because of (inter alia) its indefinite suspension of the Concession.
31. International law is clear that, by default (and without limitation), the correct date on which to compute damages flowing from an internationally wrongful act is the one coinciding with the unlawful act and the loss. Accordingly, Claimants instructed their valuation expert, Mr. Howard Rosen of Secretariat International ("Secretariat"), to compute damages as of 27 October 2018, i.e. the day prior to Semovi's 28 October 2018 indefinite suspension letter. International law is also clear that, where a State's unlawful conduct has totally wiped out or otherwise reduced the value of an investment, the correct measure of damages is the diminution in the fair market value of the investment.
32. The computation of the fair market value of Lusad's rights under the Concession is informed, necessarily, by the state of Lusad's preparedness to deliver on its obligations under the Concession just prior to its indefinite suspension. Here, several months prior to the indefinite suspension in October 2018, Lusad was fully prepared to deliver upon its Concession obligations and begin revenue-producing operations. Lusad had developed all the software and hardware required for the taximeters and accompanying mobile ride-hailing application. Lusad had stockpiled an inventory of custom tablets to be in a Mexico City warehouse ready for installation. Lusad contracted with installation sites and had substantial installation capacity to timely scale up the installation of taximeters across Mexico City's 138,000-vehicle taxi fleet. Lusad had firm contracts with its most important suppliers. Finally, Lusad had obtained from the government all necessary approvals for the full-scale launch of revenue-producing operations, including--most importantly--the government's publication in April 2018 of the Mandatory Installation Notice requiring that all of Mexico City's taxis arrange appointments for the installation of the L1bre System by no later than March 2019. There was nothing left for Lusad to do to prepare for the full-scale launch of revenue-producing operations under the Concession. Instead of permitting Lusad to proceed, however, the government instead brought everything to a halt through its indefinite suspension of the Concession.
33. The cashflows under the Concession of which Lusad was deprived because of the suspension can be estimated with a high degree of confidence and certainly well beyond the applicable standard of proof. As confirmed by the Mandatory Installation Notice, but-for Mexico's unlawful conduct, Lusad would have proceeded with the full-scale launch of revenue-producing operations under the Concession. The revenues of which Lusad was deprived can be estimated with ease because the Concession provided a predictable revenue stream based on (i) the fixed fees that Lusad could collect for every taxi ride in every Mexico City taxi (as every taxi was required to have the L1bre System installed) and (ii) reliable government-backed data on the number of taxi rides per day in Mexico City. Given Lusad's advanced stage of preparedness, its costs structure can also be reliably estimated.
34. In these circumstances, Secretariat considers that the appropriate calculation of the fair market value of Lusad's rights under the Concession is by reference to the DCF method. That is, given that Lusad's cash flows can be estimated with a high degree of confidence (among other relevant factors), Secretariat considers that the most appropriate way to determine the fair market value of the Concession is by projecting those cash flows for the duration of the Concession term and discounting them to a present value.
35. There is a valuable sense-check confirming the correctness of Secretariat's use of the DCF method to value Lusad's rights under the Concession. As stated above, just weeks prior to the government's indefinite suspension of the Concession, Goldman Sachs delivered to Lusad a valuation in connection with Lusad's plan to attract an additional minority investor. Goldman Sachs is not only one of the world's foremost leading investment banking firms, but it also has top expertise in technology transactions and technology-enabled transportation transactions. Can therefore provide highly credible input not only on valuation results, but also on the appropriate valuation methodology that the market would use to determine the monetary value of Lusad's rights under the Concession. Therefore, Goldman Sachs's analysis confirms the correctness of Secretariat's use of the DCF valuation method, as well as the conservative nature of Secretariat's pre-interest valuation of USD $1.747 billion (compared to Goldman Sachs's valuation of USD $2.43 billion).39 There can be no better indication of the method that the market would use to value Lusad's business than a valuation, close in time to the valuation date, from one of the world's most qualified market participants.
36. Mexico focuses its attention in its Counter-Memorial on the valuation date and the valuation methodology, but misses the mark on both.
37. On the valuation date, Mexico contends that Claimants' valuation date of 27 October 2018 is incorrect because it disregards the value-depressing effects that the COVID- 19 pandemic would have had. Mexico contends that the Tribunal should compute damages as of the date of the award so that Claimants are not over-compensated. Mexico's position is unsupported by international law. Aside from Mexico not having quantitatively established the effect of the COVID-19 pandemic on Mexico City's taxi industry, the pandemic was not at all foreseeable as of the indefinite suspension of the Concession in October 2018 when Claimants suffered their loss. It is Mexico and not Claimants that bear the risk of changed market conditions that negatively affect the value of an investment after it is expropriated, and Mexico cannot point to a single case or legal authority to support its position that Claimants' damages should be reduced in the way that Mexico suggests. Mexico also plainly does not believe in its own submission on the correct valuation date because it did not even instruct its valuation experts at Credibility International ("Credibility") to use the date of the award for valuation purposes. Mexico's arguments on valuation date cannot be taken seriously.
38. As for valuation methodology, Mexico and Credibility argue against the DCF method simply because Lusad had not yet begun collecting revenue. Mexico and Credibility revert to the default position so commonly taken by States: they argue that Claimants should be compensated for no more than a portion of the investment costs associated with Lusad and the L1bre enterprise. On that basis, Mexico and Credibility contend that Claimants should be compensated no more than USD $ 70 million. However, in reflexively arguing against the DCF method, Mexico and Credibility avoid engaging at all with the facts showing that Lusad was fully ready to begin collecting revenue and that, but for the unlawful suspension of the Concession, Lusad would have launched revenue-producing operations by installing the L1bre System in Mexico's taxis pursuant to the government's universal installation mandate. Most importantly, Mexico and Credibility ignore the high degree of confidence with which Lusad's cash flows can be estimated. Mexico and Credibility also disregard without reason the most reliable evidence that exists that shows how the market would value Lusad's rights under the Concession: the Goldman Sachs valuation of October 2018.
39. Mexico and Credibility, however, do proceed to provide observations on the inputs that Secretariat uses in its DCF valuation, with a view to providing "sensitivities." In doing so, Mexico and Credibility take erroneous positions at every turn. This starts with the very first input: the number of registered taxis in Mexico City, which corresponds to the number of taxis that would have had the L1bre System installed but-for Mexico's unlawful conduct. The Concession itself, as well as Mexico's own Declaration of Necessity published in Mexico City's Official Gazette, states that Mexico City had 138,000 taxis,40 and numerous sources, including government sources, support that figure (or a higher one).41 Ignoring this evidence and in an attempt to drive down the computation of Lusad's foregone cashflows, Mexico contends that the "real" number is much lower. Mexico's position is undermined by a number of documents, including the government's own statistics. Mexico's arguments on the other inputs to Secretariat's DCF valuation are not any more credible. They all lack in substance and evidentiary support, as explained further in this Reply Memorial.
40. Secretariat has closely reviewed and considered all of Mexico and Credibility's observations and does not consider the need to make any further adjustments to its already conservative valuation.
D. Reservation of Rights Arising from Mr. Zayas's Pre-Trial Detention
41. Claimants note that, as a consequence of Mexico's actions, this Reply Memorial is being filed without the support and without further witness testimony from Claimants' fact witness and representative Mr. Zayas, which has prejudiced Claimants' ability to fully present their case.
42. As explained in his witness statement submitted with Claimants' Claim Memorial,
Mr. Zayas was involved from the outset in building Claimants' business in Mexico.42 It is evident
from his witness statement and the Claim Memorial that he is of great importance to Claimants'
case. Mexico has also made Mr. Zayas a central part of its defense, naming him more than
times in its Counter-Memorial and accusing him of a litany of wrongful acts.
43. Since December 2021, months before Mexico submitted its Counter-Memorial, Mr. Zayas has been held in pre-trial detention at a prison in Mexico, the Reclusorio Sur. Claimants maintain that he is being held there on trumped up charges that are being prosecuted in retaliation for Mr. Zayas's participation in the present arbitration.43 Concerned about how Mr. Zayas's pre- trial detention would affect the procedural integrity of these proceedings, Claimants sought from the Tribunal provisional measures relating to Mr. Zayas's pre-trial detention. In Procedural Order No. 3, the Tribunal ordered that Mexico was "to take all appropriate steps to ensure that Mr. Eduardo Zayas Dueñas' freedom of movement is not unduly restricted and that he will be able to mee with counsel and render testimony not only in conditions similar to the ones he would have normally experienced, but without any fear that may affect his free testimony."44 In Procedural Order No. 7, the Tribunal "not without some hesitation" credited Mexico's "assurances. . . that it is willing to provide the Claimants with reasonable opportunities to meet with Mr. Zayas."45
44. As explained at the procedural hearing held on 25 October 2022, despite Claimants'
counsel's best efforts to meet with Mr. Zayas at the Reclusorio Sur on 4 October 2022, Mexico
failed to comply with Procedural Order Nos. 3 and 7. In particular, Mexico failed to provide
Claimants or Mr. Zayas with "conditions similar to the ones [Mr. Zayas] would have normally
experienced" for purposes of meeting with counsel.46 Moreover, as Claimants explained at the
October 2022 hearing and as had previously been reported to the Tribunal by letter on 7 October
2022, Mr. Zayas has been the subject of threats to his physical integrity.47 When concerns over
his well-being were reported to the Tribunal, he was then confronted at the prison a few days later,
on 11 October 2022, without his attorney present and forced to sign a declaration regarding his
well-being. Claimants immediately brought the matter to the Tribunal's attention that same day,
but only received a copy of the declaration from Mexico weeks later (and after the 25 October
2022 procedural hearing). It is scribbled on a blank piece of paper and screams of impropriety
The two-sentence, hand-written declaration is addressed to "who it may concern" and states that
Mr. Zayas has not had any threats against his physical integrity, directly contradicting what he
reported to Claimants' counsel when they met at the Reclusorio Sur, and what Claimants' counsel
then reported to the Tribunal, the week before:49
45. It is inconceivable that Mr. Zayas decided, of his own volition, to scribble the two- sentence declaration on a blank piece of paper and provide it to a prison representative at the Reclusorio Sur. Its mere existence makes clear that Mr. Zayas is not free from threats to his person as he participates as a witness in the present proceedings.
46. Based on the circumstances described above, Claimants submitted a renewed
request for the Tribunal to order provisional measures relating to Mr. Zayas's pre-trial detention
Since the ruling on Claimants' request is pending, Claimants reserve the right to seek the
Tribunal's permission to supplement this Reply Memorial with additional fact witness testimony
and accompanying documentary evidence if and when Claimants are provided appropriate access
to Mr. Zayas. Given Mexico's obstruction of Claimants' access to Mr. Zayas, Claimants also ask
that the Tribunal make negative inferences against Mexico, crediting Mr. Zayas's first declaration
in its entirety and disregarding all of Mexico's allegations regarding Mr. Zayas in its Counter-
Memorial. Claimants reserve all rights regarding relief they have sought or may seek in connection
with access to Mr. Zayas and his ongoing pre-trial detention and the conditions to which he is
being subjected at the Reclusorio Sur.
E. The Remaining Structure of This Reply Memorial
47. The remainder of this Reply Memorial is structed as follows. In Section II, Claimants' address the relevant factual background to the dispute, and addresses Mexico's factual contentions. In Section III, Claimants explain why Mexico's jurisdictional objections are unmeritorious and can be dismissed summarily. In Section IV, Claimants address why Mexico's conduct amounts to a breach of NAFTA and addresses Mexico's legal arguments. In Section V, Claimants set out their response to Mexico's arguments on damages. Section VI contains Claimants' Request for Relief.
48. This Reply Memorial is accompanied by the Second Witness Statement of Santiago León Aveleyra, the Witness Statement of Eduardo Herrera de Juana (Lusad's Manager of Corporate Affairs), the Witness Statement of Agustín Muñana Zúñiga (former Semovi Legal Director), the Second Expert Report of Howard Rosen of Secretariat, the Expert Report of Marco Antonio de la Peña Sánchez (on issues of Mexican law), and the Expert Report of Joshua Mitchell (on Lusad's L1bre application source code). This Reply Memorial is also accompanied by fact exhibits C-0157 to C-0315 and legal authorities CL-0146 to CL-0208.
...
VI. REQUEST FOR RELIEF
Claimants submit the following requests: Requests:
(i) A declaration that Mexico breached Articles 1102, 1105, and 1110 of the Treaty;
(ii) An order directing Mexico to compensate Claimants for their losses, and those suffered by Lusad, resulting from Mexico's breaches of the Treaty and international law in an award of damages not less than USD $2.109 billion; such compensation to be paid without delay, be effectively realizable and be freely transferrable, and bear post-award interest at a compound rate sufficient to fully compensate ES Holdings for the loss of the use of this capital as from the date of Mexico's breaches of the Treaty;
(iii) A declaration that the award of damages and interest be made net of all Mexico's taxes, and that Mexico may not deduct taxes in respect of the payment of the award of damages and interest;
(iv) An order that Mexico reimburse Claimants for all costs, expenses, expert fees, and reasonable attorneys' fees incurred or paid by Claimants in connection with this arbitral proceeding, plus interest; and
(v) An order granting any further relief as the Tribunal considers appropriate.
...
Footnotes omitted