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INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES

LION MEXICO CONSOLIDATED LP
Claimant

v.

UNITED MEXICAN STATES
Respondent

(ICSID Case No. ARB(AF)/15/2)

DECISION ON JURISDICTION

Members of the Tribunal
Juan Fernández-Armesto, President of the Tribunal
David J.A. Cairns, Arbitrator
Laurence Boisson de Chazournes, Arbitrator

Secretary of the Tribunal
Francisco Grob

Assistant to the Tribunal
Luis Fernando Rodríguez

Washington D.C., July 30, 2018

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GLOSSARY OF TERMS AND ABBREVIATIONS

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LIST OF CASES

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I. INTRODUCTION

1. On December 11, 2015, the International Centre for Settlement of Investment Disputes [“ICSID”] received a request for arbitration [the “RfA”] submitted by Lion Mexico Consolidated L.P. [“Lion” or “Claimant”], a company constituted under the laws of Quebec, Canada, against the United Mexican States [“Mexico” or “Respondent”].

2. The RfA was made pursuant to Arts. 1116, 1120, and 1122 of the North American Free Trade Agreement [“NAFTA”]¹. It included a request for approval of access to the Additional Facility of the Centre.

3. On December 23, 2015, the Secretary-General registered the RfA and approved access to the Additional Facility pursuant to Art. 4 of the ICSID Additional Facility Rules [“ICSID AF Rules”].

4. The Tribunal was officially constituted on July 26, 2016, after all the arbitrators accepted their appointments and the proceedings were deemed to have begun.

5. At the time of this Decision, the Tribunal is composed of three following members:

Mr. Juan Fernández-Armesto
Chairman – Spanish national
Appointed by agreement of the Secretary-General on July
20, 2016.
Armesto & Asociados
General Pardiñas, 102
28006 Madrid, Spain
Tel.: +34 91 562 16 25
E-mail: [email protected]

Mr. David J.A. Cairns
Co-Arbitrator – British/New Zealand national
Appointed by Claimant on March 10, 2016.
B. Cremades y Asociados
Goya, 18; Planta 2
28001 Madrid, Spain
Tel.: +34 91 423 7200
E-mail: [email protected]

Prof. Laurence Boisson de Chazournes
Co-Arbitrator – French/Swiss national
Appointed by Respondent on February 2, 2018.
University of Geneva, Faculty of Law

¹ RfA, para. 7. ↩

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40, boulevard du Pont-d’Arve
1211 Geneva 4 (Switzerland)
Tel.: +41 (0) 22 379 85 44
E-mail: [email protected]

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II. THE PARTIES

6. This arbitration takes place between Lion Mexico Consolidated L.P. (Canada) and the United Mexican States, a sovereign state.

1. CLAIMANT: LION MEXICO CONSOLIDATED L.P.

7. Claimant is Lion Mexico Consolidated L.P., a partnership incorporated and registered under the laws of the Province of Quebec, Canada. Its main place of business and unified domicile for notifications is the following:

1717 McKinney Avenue, Suite 1900
Dallas, Texas 75202
United States of America²

8. Claimant is represented in this arbitration by:

Onay Payne
Lion Mexico Consolidated L.P.
230 Park Avenue, 12th Floor
New York, NY 10169
T. 212.883.2507
Email: [email protected]

Robert J. Kriss
Mayer Brown LLP
71 S. Wacker Drive
Chicago, Illinois, 60606
Tel. +1 312 782 0600
Email: [email protected]

Dany Khayat
Alejandro López-Ortiz
José J. Caicedo
Mayer Brown
20, avenue Hoche
75008 Paris – France
Tel. +33.1.53.53.43.43
Emails: [email protected]
[email protected]
[email protected]

² RfA, para. 2, and Exh. C-1. ↩

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2. RESPONDENT: UNITED MEXICAN STATES

9. Respondent is the United Mexican States, a sovereign State.

10. The Respondent is represented in this arbitration by the following counsel:

Samantha Atayde Arellano
Directora General de Consultoría Jurídica de Comercio
Internacional
Email: [email protected]

Cindy Rayo Zapata
Directora General Adjunta de Consultoría Jurídica de
Comercio Internacional
Email: [email protected]

Gabriela Alcántara Torres
Email: [email protected]

Hugo Gabriel Romero Martínez
Email : [email protected]
Aristeo López Sánchez
Email: [email protected]

Secretaría de Economía
Av. Paseo de la Reforma 296, piso 25, Colonia Juárez,
Delegación Cuauhtémoc, C.P. 06600
Ciudad de México, México

J. Cameron Mowatt
J. Cameron Mowatt, Law Corporation
Email: [email protected]

Stephan Becker
Pillsbury Winthrop Shaw Pittman
Email: [email protected]

Alejandro Barragán
J. Cameron Mowatt, Law Corporation
Email: [email protected]

11. Henceforth, Claimant and Respondent will together be referred to as the Parties.

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III. PROCEDURAL HISTORY

1. THE REQUEST FOR ARBITRATION AND ACCESS TO ICSID ADDITIONAL FACILITY

12. On December 11, 2015, ICSID received Lion’s RfA against the United Mexican States, together with 20 factual exhibits³.

13. The RfA was made pursuant to Arts. 1116, 1120, and 1122 NAFTA⁴. It included a request for approval of access to the Additional Facility of the Centre.

14. On December 23, 2015 the Secretary-General registered the RfA and approved access to the Additional Facility pursuant to Art. 4 of the ICSID Additional Facility Rules. In accordance with Article 5(e) ICSID AF Rules, the Secretary-General invited the Parties to proceed as soon as possible to constitute an Arbitral Tribunal.

2. THE CONSTITUTION OF THE ARBITRAL TRIBUNAL

15. Article 1123 NAFTA specifies the number of arbitrators and the method of their appointment to constitute a Tribunal: unless the disputing parties agree otherwise, the Tribunal shall comprise three arbitrators, one arbitrator appointed by each party, and a presiding arbitrator appointed by agreement of the parties.

16. On March 10, 2016 the Claimant appointed Mr. David J. A. Cairns, a national of the United Kingdom and New Zealand, as an arbitrator in this case. Mr. Cairns accepted his appointment and provided his curriculum vitae.

17. On May 10, 2016 the Respondent appointed Mr. Ricardo Ramírez Hernández, a national of Mexico, as an arbitrator in this case. Mr. Ramírez Hernández accepted his appointment and provided his curriculum vitae.

18. After the Parties failed to reach an agreement on the presiding arbitrator, in accordance with Article 1124 NAFTA, the Secretary-General served as appointing authority. On July 20, 2016, the Secretary-General appointed Juan Fernández-Armesto, a national of Spain, as President of the Tribunal. Pursuant to Arts. 11(2) and 13 ICSID AF Rules, Mr. Fernández-Armesto accepted the appointment by letter of July 27, 2016, attaching his declaration of independence and impartiality.

19. On July 27, 2016, the Secretary-General confirmed the Arbitral Tribunal had been constituted and the proceedings were deemed to have begun. The Parties confirmed at the first session—held on September 26, 2016—that the Tribunal had been properly constituted

³ Exhs. C-1 to C-20. ↩
⁴ RfA, para. 7. ↩

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and neither had any objection to the appointment of its members⁵. Ms. Anneliese Fleckenstein, ICSID Legal Counsel was appointed to serve as the Secretary of the Tribunal.

3. FIRST PROCEDURAL ORDERS AND PRELIMINARY OBJECTION UNDER ART. 45(6)

20. On August 13, 2016 the Tribunal circulated a first draft Procedural Order No. 1.

21. On August 24, 2016 Mexico submitted a Preliminary Objection to the Tribunal’s Jurisdiction under Art. 45(6) ICSID AF Rules, together with 10 legal authorities⁶, on grounds that Lion’s claims were manifestly without merit.

22. On August 31, 2016 after receiving the Parties’ positions, the Tribunal issued a procedural schedule for the Parties to exchange rounds of pleadings on Mexico’s Preliminary Objection.

23. On September 26, 2016 the Parties and the Tribunal held the first session by telephone conference, during which the terms of the Procedural Order No. 1 were discussed.

24. On the same day, Lion submitted its Response to Mexico’s Preliminary Objection, attaching 4 factual exhibits⁷ and 108 legal authorities⁸.

25. On October 13, 2016 Mexico submitted its Reply to Lion’s Response on the Preliminary Objection.

26. On October 14, 2016 the Tribunal issued Procedural Order No. 1, after receiving the Parties’ comments⁹. The Order covered some procedural matters for the management of this case, inter alia, that the procedural language would be English and Spanish, basic rules on submission of pleadings and evidence, that the place of the proceeding would be determined in a separate order, and that Dr. Luis Fernando Rodríguez would serve as the Assistant to the Tribunal. Annex A to the Order set out the Procedural Calendar for this arbitration.

27. On October 31, 2016 Lion submitted its Rejoinder on Mexico’s Preliminary Objection, attaching 7 factual exhibits¹⁰ and 27 legal authorities¹¹.

28. On November 24, 2016 the Tribunal issued, after receiving the Parties’ positions, the Procedural Order No. 2, setting Washington D.C. as the place of this arbitration.

⁵ See PO 1, paras. 2.1. ↩
⁶ Exhs. RLA-1 to RLA-10. ↩
⁷ Exhs. C-21 to C-24. ↩
⁸ Exhs. CLA-1 to CLA-108. ↩
⁹ Lion’s and Mexico’s communications of September 12, 2016, and Lion’s communication of September 25, 2016. ↩
¹⁰ Exhs. C-25 to C-31. ↩
¹¹ Exhs. CLA-109 to CLA-136. ↩

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29. On December 12, 2016 the Tribunal issued a Decision, dismissing Mexico’s Preliminary Objection to the Tribunal’s Jurisdiction under Art. 45(6) ICSID AF Rules.

4. CLAIMANT’S MEMORIAL

30. On March 13, 2017 Lion submitted its Memorial, together with 120 factual exhibits¹², 200 legal authorities¹³, three witness statements (by Onay Payne, Jose Arechederra, and James Hendricks), and the first expert report on Mexican law, prepared by Rodrigo Zamora, which attached 122 authorities¹⁴.

5. BIFURCATION OF THE PROCEEDINGS

31. On April 4, 2017 Mexico filed a Request for Bifurcation, in which Mexico raised two objections to the Tribunal’s jurisdiction under Art. 45(2) ICSID AF Rules.

32. On May 4, 2017 Lion submitted its Response to Mexico’s Request for Bifurcation (which included 20 legal authorities¹⁵), opposing the request and demanding that Mexico’s objections to jurisdiction be heard together with the merits of the dispute.

33. On May 29, 2017 the Tribunal issued its Decision, bifurcating the proceedings in respect of only one of the objections raised, namely: that the Tribunal lacks jurisdiction ratione materiae because Lion did not make an investment in Mexico within the terms required by Arts. 1101 and 1139 NAFTA¹⁶.

6. JURISDICTIONAL PHASE

34. On June 30, 2017 the Tribunal issued Procedural Order No. 3, setting the procedural calendar for the jurisdictional phase, based on the Parties’ comments and agreements¹⁷.

35. On July 13, 2017 the Secretary of the Tribunal informed the governments of USA and Canada of the deadline for NAFTA signatories to make submissions on the interpretation of the treaty under Art. 1128 NAFTA.

36. On August 28, 2017 Mexico submitted a Memorial on Jurisdiction, together with 19 legal authorities¹⁸ and an expert report on Mexican law by René Irra Ibarra (which attached 20 authorities).

¹² Exhs. C-32 to C-151. ↩
¹³ Exhs. CLA-137 to CLA-336. ↩
¹⁴ Exhs. I-1 to I-122. ↩
¹⁵ Exhs. CLA-337 to CLA-356. ↩
¹⁶ Request for Bifurcation, paras. 5 and 7–9. ↩
¹⁷ Communications of June 14, 2017. ↩
¹⁸ Exhs. RLA-11 to RLA-29. ↩

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37. On October 30, 2017 Lion submitted a Counter-Memorial on Jurisdiction, together with five factual exhibits¹⁹, 136 legal authorities²⁰, and a second expert report on Mexican law by Rodrigo Zamora (which attached 28 authorities).

38. On November 30, 2017 the Tribunal, at the Parties’ request²¹, granted an extension for the filing of the second rounds of pleadings on jurisdiction.

39. On December 7, 2017 Mexico submitted its Reply on Jurisdiction, together with nine legal authorities²² and René Irra’s second expert report (which attached 22 more authorities).

40. On January 19, 2018 Lion submitted its Rejoinder on Jurisdiction, together with 47 legal authorities²³, and the third expert report on Mexican law, prepared by Rodrigo Zamora (which attached 19 authorities).

41. On January 22, 2018 the Tribunal and the Parties held a telephone conference to discuss the logistical, procedural, and administrative arrangements for the upcoming hearing on jurisdiction.

42. One day later, the Tribunal issued Procedural Order No. 4, on the organization of the hearing, based on the Parties’ comments and agreements.

7. REPLACEMENT OF ARBITRATOR RAMÍREZ

43. On January 25, 2018 Mexico-appointed co-arbitrator Mr. Ricardo Ramírez tendered his resignation. The following day Mr. Juan Fernández-Armesto and Mr. David J.A. Cairns considered the reasons for and consented to his resignation under Art. 14(3) ICSID AF Rules. By communication of the same date the Secretary of the Tribunal declared the suspension of the proceedings until Mexico appointed another arbitrator pursuant to Art. 16(2) ICSID AF Rules.

44. On February 2, 2018 Mexico designated Prof. Laurence Boisson de Chazournes, a French and Swiss national, as arbitrator in accordance with Art. 1123 NAFTA and Art. 17(1) ICSID AF Rules.

45. On February 6, 2018 Prof. Boisson de Chazournes accepted the appointment and submitted her declaration under Art. 13 ICSID AF Rules. The same day the proceedings resumed from the point reached at the time the vacancy occurred.

¹⁹ Exhs. C-152 to C-156. ↩
²⁰ Exhs. CLA-357 to CLA-492. ↩
²¹ Communications of November 28 and 29, 2017. ↩
²² Exhs. RLA-30 to RLA-38. ↩
²³ Exhs. CLA-493 to CLA-539. ↩

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8. HEARING ON JURISDICTION

46. On February 19, 2018 the Parties agreed to reschedule the jurisdictional hearing for March 22 and 23, 2018.

47. On February 28, 2018 ICSID notified the Parties and the NAFTA Parties of the new venue, dates, and starting time of the hearing.

48. On March 2, 2018 the Tribunal issued Procedural Order No. 5, a revised and updated version of Procedural Order No. 4 on the organization of the hearing.

49. A hearing on jurisdiction was held at the World Bank Headquarters in Washington D.C. on March 22 and 23, 2018 [the “Hearing”]. The following individuals attended the Hearing:

Tribunal
Prof. Juan Fernández-Armesto President
Dr. David J.A. Cairns Arbitrator
Prof. Laurence Boisson de Chazournes Arbitrator

Assistant to the Tribunal
Dr. Luis Fernando Rodríguez

ICSID Secretariat
Ms. Catherine Kettlewell

For Claimant
Counsel:
Mr. Robert J. Kriss Mayer Brown
Mr. Dany Khayat Mayer Brown
Mr. Alejandro López Ortiz Mayer Brown
Mr. José Caicedo Mayer Brown
Ms. Patricia Ugalde Mayer Brown

Parties:
Ms. Onay Payne Lion Mexico Consolidated
Ms. Reneé Castro Lion Mexico Consolidated

Expert:
Mr. Rodrigo Zamora Galicia Abogados

For Respondent
Counsel:
Ms. Samantha Atayde Arellano Secretaría de Economía
Mr. Hugo Romero Martínez Secretaría de Economía

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Ms. Cindy Rayo Zapata Secretaría de Economía
Ms. Gabriela del Carmen Alcántara Secretaría de Economía
Torres
Mr. Aristeo López Sánchez Secretaría de Economía
Mr. Guillermo Malpica Soto Secretaría de Economía
Mr. J. Cameron Mowatt J. Cameron Mowatt, Law Corp.
Mr. Alejandro Barragán J. Cameron Mowatt, Law Corp.
Mr. Stephan E. Becker Pillsbury Winthrop Shaw Pittman LLP
Mr. Greg Tereposky Tereposky & DeRose LLP
Ms. Jennifer Radford Tereposky & DeRose LLP

Expert:
Mr. René Irra Ibarra Irra Ibarra
Mr. René Irra de la Cruz Assistant to Mr. René Irra Ibarra

50. On April 27, 2018 each Party submitted its Statement on Costs.

51. On June 12, 2018, the Centre informed the Parties and the Tribunal that Mr. Francisco Grob, ICSID Legal Counsel, would replace Ms. Anneliese Fleckenstein as Secretary of the Tribunal while she is on leave.

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IV. SUMMARY OF THE RELEVANT FACTS

52. This section describes the factual background of the transactions carried out by Lion in Mexico. The Tribunal has made no independent enquiry or investigation into the facts. The summary is based on Claimant’s account, which Mexico does not dispute: “Los hechos en sí mismos”, Mexico points out in its last submission, “no se encuentran en disputa”²⁴. It is the legal assessment of these facts that is at issue.

1. LION MEETS MR. CÁRDENAS

53. Claimant, Lion Mexico Consolidated LP, is a limited partnership constituted under the laws of Quebec (Canada), with its main place of business in Texas (USA). Lion was created and is managed by Clarion Partners, L.P. [“Clarion”], a real estate investment management company founded in New York in 1982, which manages real estate investments for institutional investors²⁵.

54. Lion has been making investments in Mexico for over ten years. Over that period, Lion has provided more than US $800 million of capital to entities doing business in Mexico, to be used in developing a wide array of real estate properties, such as hotels, office buildings, residences, warehouses, and resorts²⁶.

55. Clarion engaged Real Capital Investment Management to identify and present investment opportunities in Mexico²⁷, and through this channel Mr. Héctor Cárdenas Curiel, a Mexican businessman, was introduced to Lion and Clarion²⁸. Mr. Cárdenas was presented as a developer seeking funding for the development of two real estate development projects: the Nayarit Project and the Guadalajara Project.

2. MR. CÁRDENAS’S PROJECTS

56. The Nayarit Project [“Nayarit Project”] included an ocean-front residential and resort development in Bahía de Banderas, State of Nayarit²⁹. The development plan called for a mixed-use high-end resort to be anchored by a Ritz Carlton hotel, 1,500 luxury residential units, extensive amenities offerings, and two ocean-front golf courses, among other features to be developed on 855 hectares (2,100 acres) with 2.8 miles of ocean frontage³⁰.

²⁴ Reply on Jurisdiction, para. 14. ↩
²⁵ Exh. C-32. ↩
²⁶ Claimant’s Memorial, para. 6. ↩
²⁷ First Witness Statement of José Javier Arechederra Tovar, para. 6. ↩
²⁸ First Witness Statement of José Javier Arechederra Tovar, para. 9. ↩
²⁹ First Witness Statement of James Hendricks, para. 7. ↩
³⁰ Exh. C-33. ↩

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57. The Guadalajara Project [“Guadalajara Project”]³¹ consisted of two high-end mixed-use skyscrapers [“Américas I” and “Américas II”], which were to be built on approximately 15,000 m² (3.74 acres) in the city of Guadalajara, State of Jalisco³².

58. Mr. Cárdenas’s plans for the development of the Nayarit Project and the Guadalajara Project were preliminary and incomplete at the time he requested capital from Lion to acquire land and begin limited infrastructure development³³. Lion was willing to provide capital for the development of these projects subject to requirements including the following:

- The granting of mortgages to Lion over the land acquired by Mr. Cárdenas and on the subsequent improvements made on that land³⁴; and

- The issue of promissory notes to Lion as unconditional commitments to repay the money owed to Lion, with certain procedural privileges under Mexican law³⁵.

3. THE THREE SETS OF TRANSACTIONS

59. In February, June, and September 2007, Lion made three loans for financing the purchase of the properties for the Nayarit Project and the Guadalajara Project [“the Loans”], as well as working capital. Lion provided the Loans to two Mexican companies owned or controlled by Mr. Cárdenas [“the Borrowers”]:

- Inmobiliaria Bains, S.A. de C.V. [“Inmobiliaria Bains”],

- C&C Capital, S.A. de C.V. [“C&C Capital”].

60. The three Loans, with a principal amount of approximately US $32.8 million, were secured by three mortgages and the issue of three promissory notes.

61. The three promissory notes [the “Notes”] were all issued under Mexican law, drafted both in English and Spanish (with the Spanish version governing) and submitted to the exclusive and irrevocable jurisdiction of the courts of Mexico, D.F.

62. The three mortgages [the “Mortgages”] were signed before a notary public, in Spanish language and subject to Mexican law, namely, the applicable laws of the States of Jalisco [“Guadalajara Mortgages 1 and 2”] and Nayarit [“Nayarit Mortgage”]³⁶.

³¹ First Witness Statement of James Hendricks, para. 7. ↩
³² Exh. C-35 and Exh. C-36. ↩
³³ First Witness Statement of James Hendricks, para. 9, and Claimant’s Memorial, paras. 17 and 18. ↩
³⁴ Exh. C-33 and Exh. C-35. ↩
³⁵ First Witness Statement of James Hendricks, para. 9. ↩
³⁶ Zamora II, paras. 144 and 147. ↩

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3.1. THE FIRST SET OF TRANSACTIONS

63. The first loan took the form of a “Credit Agreement” between Lion (as Lender), Inmobiliaria Bains (as Borrower) and C&C Ingeniería (another company of Mr. Cardenas) as joint and several obligor. It was signed on February 27, 2007. The loan was for the amount of US $15,000,000, plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25% [the “First Loan”].

64. The contract provided for the granting of a mortgage (clause four) and the issue of a non-negotiable promissory note (clause two, 2.2(5)) to secure the loan. It enclosed an Exhibit A (with the “Form of Mortgage”) and an Exhibit B (with the “Form of Note”).

65. The Credit Agreement was written in English and governed by the laws of Mexico³⁷.

A. The First Note

66. One day after the signing of the Credit Agreement, on February 28, 2007, Inmobiliaria Bains issued the first promissory note in favor of Lion for US $15,000,000, plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25% [“First Note”].

67. The original maturity date of the First Note was August 28, 2008. The First Note was substituted four times, resulting in a final maturity date as of September 30, 2009³⁸.

B. The Nayarit Mortgage

68. About one month after the signing of the Credit Agreement, on April 2, 2008, Inmobiliaria Bains granted in favor of Lion the Nayarit Mortgage over the Nayarit Project property, located in the Municipality of Bahía de Banderas³⁹.

69. The Nayarit Mortgage in its final form secured all the three Loans, including both principal and interest.

70. The Nayarit Mortgage was recorded at the Office of the Public Property Registry of Bucerías, Nayarit, on May 19, 2008⁴⁰.

³⁷ Exh. C-8. ↩
³⁸ Exh. C-153 (Versions of the First Note dated February 28, 2007; August 28, 2008; January 20; 2009; March 31, 2009; and July 7, 2009. The initial version of the First Note was signed in two separate promissory notes for US$9,177,020.25 and US$5,822,979.75 (totaling US$15 million), respectively, with the same original maturity date for both of them (August 28, 2008). All subsequent versions of the First Note were issued in a single promissory note for US$15 million. ↩
³⁹ Exh. C-10. ↩
⁴⁰ The Nayarit Mortgage replaced two previous mortgages in favor of Lion, which were subsequently cancelled: a mortgage issued on February 28, 2007, and another on June 13, 2007. While on February 28, 2007, the mortgage only secured the First Loan, it was subsequently replaced to also cover the Second Loan (on June 13, 2007) and Third Loan (on April 2, 2008), respectively, Protocol Mortgage No. 92.496 of April 2, 2008, recorded under Book 285, ↩

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3.2. THE SECOND SET OF TRANSACTIONS

71. The second loan also took the form of a “Credit Agreement”, between Lion (as Lender), C&C Capital (as Borrower) and Inmobiliaria Bains (as joint and several obligor). It was signed on June 13, 2007, around three months after the first set of transactions. The loan was for the amount of US $12,450,000 plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25% [the “Second Loan”]⁴¹.

72. The contract provided for the granting of a mortgage (clause four) and the issue of a non-negotiable promissory note (clause two, 2.2(2)) to secure the loan. It also enclosed an Exhibit A (with the “Form of Mortgage”) and an Exhibit B (with the “Form of Note”).

73. The Credit Agreement was again written in English and governed by the laws of Mexico⁴².

A. The Second Note

74. The day after the signing of the Credit Agreement, on June 14, 2007 C&C Capital issued the second note [“Second Note”] in favor of Lion for US$12,450,000 plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25%⁴³.

75. The original maturity date of the Second Note was September 14, 2007. The Second Note was substituted seven times, leading to a final maturity date of September 30, 2009⁴⁴.

B. The Guadalajara Mortgage 1

76. The Guadalajara Mortgage 1 secured the Second Loan, including both capital and interest. It was granted on June 13, 2007, the date of execution of the Credit Agreement, by Bansi S.A., as trustee, as per the instruction of C&C Capital, as founder and beneficiary of the trust, in favor of Lion, over one of the properties pertaining to the Guadalajara Project⁴⁵.

77. The Guadalajara Mortgage 1 was recorded at that Public Property Registry about five months later, on November 23, 2007.

section II, A-13 of the Public Property and Commercial Registry of Bucerías, Nayarit on May 19, 2008 / April 2, 2008. See Exh. C-10.
⁴¹ Exh. C-12. ↩
⁴² Exh. C-8. ↩
⁴³ Exh. C-12. ↩
⁴⁴ Exh. C-154 (Copy of the versions of the Second Note dated June 14, 2007; September 12, 2007, December 25, 2007; March 30, 2008; September 30, 2008; January 20, 2009; and July 7, 2009). The 6th modified version of the Second Note (issued on March 31, 2009 and cancelled on July 7, 2009) is not available. ↩
⁴⁵ Exh. C-14 (Protocol Mortgage No. 7.820 of June 13, 2007 over a property located in Guadalajara, Jalisco, recorded under Sheet 117,850 of the Public Property Registry of the City of Guadalajara, Jalisco on November 23, 2007 / June 13, 2007). ↩

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3.3. THE THIRD SET OF TRANSACTIONS

78. The third loan again took the form of a “Credit Agreement” between Lion (as Lender), C&C Capital (as Borrower) and Inmobiliaria Bains (as joint and several obligor). It was signed on September 26, 2007. The loan was for the amount of US $5,355,479 plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25% [the “Third Loan”]⁴⁶.

79. The contract provided for the granting of a mortgage (clause four) and the issue of a non-negotiable promissory note (clause two, 2.1(5)) to secure the loan. It again enclosed an Exhibit A (with the “Form of Mortgage”) and an Exhibit B (with the “Form of Note”).

80. The Credit Agreement was written in English and governed by the laws of Mexico⁴⁷.

A. The Third Note

81. C&C Capital issued the Third Note [“Third Note”] on September 26, 2007, the date of execution of the Credit Agreement, in favor of Lion for US $5,355,479 plus ordinary interest at a rate of 18% per year, capitalized every three months, and in the event of a default, a default interest rate of 25%. Inmobiliaria Bains signed as joint and several obligor⁴⁸.

82. The original maturity date of the Third Note was December 25, 2007. The Third Note was substituted six times, resulting in a final maturity as of September 30, 2009⁴⁹.

B. The Guadalajara Mortgage 2

83. The Guadalajara Mortgage 2 secured the Third Loan, including both capital and interest. It was granted on the day of execution of the Credit Agreement, September 26, 2007, by Bansi S.A., as trustee, as per the instruction of C&C Capital as founder and beneficiary of the trust, in favor of Lion, over one of the properties pertaining to the Guadalajara Project⁵⁰.

⁴⁶ Exh. C-152 (Third Loan agreement for US$5,355,479 granted by LMC to C&C, September 26, 2007). This Exh. C-152 contains the signature of Lion and the correct original “Due Date” of 90 days at Clause 1.1(7) complements Exhibit C-16. There is no dispute between the Parties on this maturity date of 90 days: it is the one indicated at the RfA, para. 34(c), and was acknowledged by Mexico at Mexico’s Preliminary Objection, paras. 40 and 41. ↩
⁴⁷ Exh. C-16. ↩
⁴⁸ Exh. C-152 (Third Loan agreement for US$5,355,479 granted by Lion to C&C, September 26, 2007). Exh. C-152 contains the signature of Lion and the correct original “Due Date” of 90 days at Clause 1.1(7) complements Exhibit C-016. There is no dispute between the Parties on this maturity date of 90 days: it is the one indicated at the RfA, para. 34(c), and was acknowledged by Mexico at Mexico’s Preliminary Objection, paras. 40 and 41. ↩
⁴⁹ Exh. C-155 (Copy of the versions of the Third Note dated December 25, 2007; March 30, 2008; September 30, 2008; January 20, 2009; and July 7, 2009). The initial (issued on September 26, 2007 and cancelled on December 25, 2007) and 5th modified version (issued on March 31, 2009 and cancelled on July 7, 2009) of the Third Note are not available. ↩
⁵⁰ Exh. C-156 (Protocol Mortgage No. 7.895 over a property located in Guadalajara and recorded under Sheet 2,000,954 of the Public Property Registry of the City of Guadalajara, Jalisco on December 6, 2007 / September 26, 2007). Exh. C-156 complements Exh. C-18, which did not include the annexes of the protocol. ↩

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84. The Guadalajara Mortgage 2 was recorded at that Property Public Registry on 6 December 2007.

4. THE DEFAULTS

85. The initial deadlines for repayment of all three Loans were not met. Mr. Cárdenas requested and obtained a series of time extensions: from March 2008 through July 2009, Lion signed maturity date extensions on the First Loan four times⁵¹, on the Second Loans seven times⁵², and on the Third Loan six times⁵³.

86. The last payment date on the three transactions was, ultimately, September 30, 2009, and the debtors failed to satisfy the outstanding amounts by that date. All three Loans were declared in default and interest at the default rate began to accrue on October 1, 2009.

87. Lion sent its first invoice to Mr. Cárdenas for the outstanding principal and interest payments due on April 16, 2010⁵⁴. The amounts due on that invoice, calculated and dated as of March 31, 2010, totaled US $26,618,972 for the Nayarit Project and US $29,649,835 for the Guadalajara Project.

88. Subsequent invoices were sent on July 14, 2010⁵⁵; October 11, 2010⁵⁶; February 14, 2011⁵⁷; April 12, 2011⁵⁸, and July 29, 2011⁵⁹.

89. The amounts due on the latest invoices sent, calculated and dated as of June 30, 2011, were US $36,041,328.45 for the Nayarit Project and US $40,065,210.38 for the Guadalajara Project.

90. According to Lion, no payments were ever made.

5. LATER DEVELOPMENTS

91. In view of the defaults, in February 2012 Lion sought to enforce its rights judicially. In the following years Lion repeatedly filed legal actions before the Mexican courts. Lion submits that the Mexican courts and public registries engaged in improper conduct, allowing a fraud based upon a forged loan restructuring agreement, which resulted in the unlawful cancellation of Lion’s Mortgages and Notes. In its words at the hearing⁶⁰.

⁵¹ Exh. C-11. ↩
⁵² Exh. C-15. ↩
⁵³ Exh. C-19. ↩
⁵⁴ Exh. C-37. ↩
⁵⁵ Exh. C-38. ↩
⁵⁶ Exh. C-39. ↩
⁵⁷ Exh. C-40. ↩
⁵⁸ Exh. C-41. ↩
⁵⁹ Exh. C-42. ↩
⁶⁰ HT, Day 1, 38:14 – 38:21. ↩

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“Unfortunately, Cárdenas failed to move forward with these Projects as planned and didn’t repay the capital as required under the Contract with [Lion]. As you know, [Lion] has alleged that it was wrongfully stripped off its Mortgages and Notes by the fraudulent conduct of various Mexican courts and public registries over a period of three years ...”

92. Lion has brought this arbitration against Mexico under NAFTA to address the unlawful taking of its property (allegedly, a violation of Art. 1110 NAFTA) and Mexico’s failure to provide fair and equitable treatment and full protection and security (Art. 1105 NAFTA). Lion is asking the Tribunal to issue an award for damages representing the value of its investment, lost as a result of Mexico’s breach of NAFTA.

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V. RELIEF SOUGHT

93. In its Memorial, Lion submitted the following request for relief⁶¹:

“The Claimant respectfully request the Tribunal:

a) To declare that Mexico has breached its obligations under Articles 1110 and 1115 of NAFTA and international law;

b) To order Mexico to pay the Claimant the loss caused by the cancellation of the Mortgages in the amount of US $76,343,347.00 or, alternatively, US $74,706,873;

c) To order Mexico to pay the Claimant the additional loss caused by cancellation of the Notes in an amount to be determined at a later stage;

d) To order Mexico to pay the Claimant the legal fees incurred in the Mexican court proceedings in an amount of US$ 1,262,650;

e) To order Mexico to pay interest on the amounts under (b) to (d) at the Mexican Legal rate provided by Article 362 of the Mexican Commercial Code compounded monthly, through the date of full and effective payment of those amounts or, alternatively, at the monthly interest rate of the 28-day Interbank Equilibrium Interest Rate (TIIE);

f) To order Mexico to reimburse Claimants all their reasonable legal costs and fees in connection with this arbitration; and

g) Any other remedies that the Tribunal consider appropriate in the circumstances given Mexico’s breaches”.

94. In its Rejoinder on Jurisdiction, Lion asked the Tribunal for the following relief⁶²:

“140. For the reasons discussed above, the Claimant respectfully requests the Arbitral Tribunal to issue a decision on jurisdiction rejecting Mexico’s Jurisdictional Objection and declaring that the Mortgages and Notes are indeed investments under NAFTA Article 1139; and, consequently that it has ratione materiae jurisdiction to adjudicate the claims brought by the Claimant; thus ordering the proceedings to continue and the Respondent to file the Respondent’s Counter-Memorial in the period remaining, according with the Amended Timetable.

141. The Claimant also requests the Arbitral Tribunal to order the Respondent to pay all of the costs of the arbitration including the costs of representation associated with the Respondent’s Request for Bifurcation and with the jurisdictional phase”.

⁶¹ Claimant’s Memorial, para. 495. ↩
⁶² Rejoinder on Jurisdiction, paras. 140 and 141. ↩

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95. Mexico presented its Memorial, requesting the Tribunal the following relief⁶³:

“174. A la luz de lo anterior, la Demandada solicita al Tribunal que desestime esta reclamación en virtud del Artículo 45(2) del Reglamento del Mecanismo Complementario, sobre la base de que la Demandante no ha demostrado haber realizado una inversión en México conforme a la definición del Artículo 1139 del TLCAN y, por lo tanto, carece de competencia ratione personae y ratione materiae.

175. La Demandada solicita al Tribunal que ordene a la Demandante reembolsar totalmente los costos de arbitraje y costos de representación legal de la Demandada”.

96. Mexico ended its Reply on Jurisdiction with the following request⁶⁴:

“152. La Demandada solicita al Tribunal desechar la reclamación de conformidad con el Artículo 45(2) de las Reglas de Arbitraje del Mecanismo Complementario del CIADI sobre la base de que la Demandante no ha establecido haber hecho una inversión en México conforme a la definición del Artículo 1139 del TLCAN y, por lo tanto, que este Tribunal carece de jurisdicción ratione personae y ratione materiae.

153. La Demandada solicita, además, que el Tribunal ordene a la Demandante indemnizar por completo a la Demandada por los costos del arbitraje y los costos de representación legal, incluyendo los honorarios de sus expertos y viáticos de los testigos y abogados que participen en la audiencia”.

⁶³ Memorial on Jurisdiction, paras. 174 and 175. ↩
⁶⁴ Reply on Jurisdiction, paras. 152 and 153. ↩

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VI. POSITION OF THE PARTIES

97. Under Art. 45 of the Arbitration (Additional Facility) Rules “the Tribunal shall have the power to rule on its competence”.

98. Mexico asks the Tribunal to rule that it lacks jurisdiction ratione materiae and ratione personae, arguing that Lion never made an investment in Mexico within the terms required by Art. 1139 NAFTA and consequently failed to qualify as a protected investor under the Treaty.

99. The definition of investment under Art. 1139 NAFTA reads as follows⁶⁵:

⁶⁵ Exh. C-20. ↩

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100. It is undisputed that the three Loans that Lion made to Inmobiliaria Bains and to C&C Capital, two companies not affiliated with the investor (Lion), do not qualify as investments under the NAFTA: Art. 1139(d) requires that loans to unaffiliated enterprises have an original maturity of “at least three years”⁶⁶. And none of the Loans meets this threshold.

101. Claimant’s argument is different. The Loans, documented in the Credit Agreements, were additionally secured by the Mortgages and formalized in the Notes (pagarés no negociables). Lion says that the Mortgages and the Notes by themselves qualify as protected investments:

- the Mortgages under Art. 1139(g), as “intangible real estate”, and

⁶⁶ Exh. C-20. ↩

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- the Notes under Art. 1139(h), which extends coverage to “interests arising from the commitment of capital”⁶⁷.

102. Mexico disagrees and avers that Lion only made three short-term Loans, which constitute a single economic transaction that does not meet the three-year maturity threshold for the inclusion of loans as an investment within the meaning of Art. 1139(d). The fact that Lion chose to secure the Loans by the issue of the Notes, and the granting of the Mortgages does not, in Mexico’s submission, change the conclusion: there is one single economic transaction and one single investment.

103. The Tribunal will first summarize Respondent’s (1.) and Claimant’s (2.) positions, and then briefly address the experts’ opinions (3.).

1. RESPONDENT’S POSITION

104. Mexico says that Claimant made no valid investment under Art. 1139 NAFTA and therefore the Tribunal lacks ratione personae and ratione materiae jurisdiction to hear Lion’s claims.

105. Mexico’s position turns on the following arguments:

- Lion’s actual investment was to lend three short-term loans only (1.);

- The Notes, Mortgages, and Loans are part of a single legal transaction (2.);

- The Mortgages and Notes do not qualify as investments under Art. 1139 NAFTA (3.).

1.1. LION’S ACTUAL INVESTMENT WAS TO MAKE THREE SHORT-TERM LOANS ONLY

106. The sole economic operation carried out by Lion was to make three short-term loans to Mexican entities, an operation that does not qualify as a protected investment under Art. 1139 NAFTA, as acknowledged by Claimant⁶⁸. The three Loans were documented through three instruments, with the sole purpose of securing payment of the debt – this is their raison d’être⁶⁹ – and they cannot be considered as separate investments⁷⁰. The definition of “loans” in Art. 1139(d) NAFTA includes loans documented in notes and secured by mortgages. Since the Loans in the present case have a maturity date of less than three years, they do not constitute investments. This should be the end of the analysis⁷¹.

107. The following facts and legal arguments support this conclusion:

⁶⁷ Exh. C-20. ↩
⁶⁸ Reply on Jurisdiction, para. 8. ↩
⁶⁹ Reply on Jurisdiction, para. 83. ↩
⁷⁰ Reply on Jurisdiction, para. 3. ↩
⁷¹ HT, Day 1, 27:13 – 28:17 ↩

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108. First, Lion did not intend to invest in promissory notes or mortgages. The language of the Credit Agreements makes clear that the Notes and the Mortgages were an express condition to grant each Loan⁷². In fact, each Loan was implemented through a Credit Agreement, a Note, and one or more Mortgages⁷³.

109. Second, the definition of “Credit Documents” under the Credit Agreements expressly includes not only the Credit Agreements, but also the Mortgages and the Notes⁷⁴. Each Loan was subject to the conditions set out in the Credit Agreements, and “any other applicable conditions ... under any other Credit Documents”, which include its respective Note and Mortgage - Credit Agreements, Notes and Mortgage are therefore deemed to be part of the same operation⁷⁵.

110. Third, the terms of the Notes and of the Mortgages just mirror the terms of the Credit Agreements as to their parties, date of execution, amount of principal, due date, ordinary interest rate, default interest rate, etc. These Notes and Mortgages provide Lion with an additional mechanism to recover the debt generated by the Loans. Accordingly, the Notes cannot constitute a separate or independent debt⁷⁶.

111. The several extensions granted by Lion to their debtors confirm the fact that the Notes only document the debt created by the Loans. Each extension was implemented through the amendment of the Credit Agreements, which required the cancellation and delivery of the Notes to the creditor and the execution of a new Note in the terms established in the relevant Credit Agreement⁷⁷.

1.2. MORTGAGES, NOTES, AND LOANS: ONE SINGLE LEGAL TRANSACTION

112. If the Loans did not exist, the Notes and the Mortgages would not exist either, as their existence and economic value depends on the Loans⁷⁸. The validity and enforceability of a promissory note or a mortgage depends on the existence of the debt or obligation guaranteed. Once the loans are paid back, the security right of mortgage and the promissory note lose their purpose and become unenforceable⁷⁹. In this case, the Mortgages were mere accessory contracts⁸⁰.

113. In fact, the subject matter of the debtor’s obligation is the same in the three legal acts: formalizing or securing the repayment of the Loans. This confirms the link between the three legal acts in such a way that it is not possible to talk about three independent

⁷² Memorial on Jurisdiction, paras. 14 to 20 and Reply on Jurisdiction, paras. 4 and 8. ↩
⁷³ Memorial on Jurisdiction, paras. 21 to 30 and Reply on Jurisdiction, para. 16. ↩
⁷⁴ Reply on Jurisdiction, para. 16. ↩
⁷⁵ Reply on Jurisdiction, para. 16. ↩
⁷⁶ Reply on Jurisdiction, paras. 11 and 16. ↩
⁷⁷ Reply on Jurisdiction, para. 16. ↩
⁷⁸ Reply on Jurisdiction, para. 83. ↩
⁷⁹ Reply on Jurisdiction, paras. 24 and 66. Irra II, paras. 19, 20, 55 and 64. ↩
⁸⁰ Irra II, para. 48 and Reply on Jurisdiction, para. 30. ↩

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transactions or negotia with independent economic value. The fact that each legal act is governed by a different legal regime does not change this conclusion. To find otherwise would amount to conclude that three different debts exist⁸¹.

114. Furthermore, the mortgage is a security right created in real property that is never delivered to or owned by the creditor⁸², the only right conferred by the mortgage is a preferential right to get paid from the proceeds of the sale of the mortgaged property⁸³. This conclusion is not different even if, as in this case, the Civil Codes of Nayarit and Jalisco consider the mortgage as real property⁸⁴.

115. Finally, the fact that mortgages and promissory notes have each its own legal features is irrelevant; it just means that payment of the one debt can be obtained through different avenues before the courts in case of the debtor’s default⁸⁵. But it does not turn the Notes, the Mortgages, and the Loans into independent operations⁸⁶.

116. Consequently, as part of a single legal transaction, the Notes and the Mortgages are subject to the same legal requirements as the Loans to become a protected investment under Art. 1139(d); hence, the requisite of the three-year duration also applies to the Notes and Mortgages, as the instruments securing the Loans⁸⁷.

Correct interpretation of Art. 1139 NAFTA

117. A correct interpretation of Art. 1139 NAFTA further reinforces the above conclusion:

118. First, if the Notes and the Mortgages could be considered separately, that would allow protection of any loans – regardless of their original maturity – by just adding a security or an instrument. This was not the intention of NAFTA signatories⁸⁸. The parties to NAFTA sought to restrict the protection to those loans that fulfill the requirements of Art. 1139(d) NAFTA⁸⁹. Claimant’s interpretation would cause an absurd anomaly: unguaranteed loans would be subject to the three-year requirement, while guaranteed loans would not; and it would also allow the protection of loans to State enterprises (which are expressly excluded), provided they are guaranteed by a mortgage or another security right⁹⁰.

⁸¹ Irra II, para. 15; Reply on Jurisdiction, paras. 26 and 27; and Memorial on Jurisdiction, para. 69. ↩
⁸² Art. 2264 Código Civil de Nayarit and Código Civil de Jalisco (Docs. 127 and 128 submitted with the Second Expert Report on Mexican Law of Rodrigo Zamora Etcharren; the First, Second, and Third Expert Reports on Mexican Law of Rodrigo Zamora Etcharren are collectively referred to as the Zamora Reports); and Reply on Jurisdiction, para. 44. ↩
⁸³ Irra II, paras. 52 and 60 and Reply on Jurisdiction, para. 45 and 68. ↩
⁸⁴ Irra II, para. 57 and Reply on Jurisdiction, para. 56. ↩
⁸⁵ Reply on Jurisdiction, paras. 69, 71, 76 and 78. Irra II, paras. 38 to 41. ↩
⁸⁶ Reply on Jurisdiction, para. 72. ↩
⁸⁷ Reply on Jurisdiction, para. 86. ↩
⁸⁸ Reply on Jurisdiction, paras. 88 and 90. ↩
⁸⁹ Reply on Jurisdiction, para. 85. ↩
⁹⁰ Reply on Jurisdiction, para. 151, and Memorial on Jurisdiction, paras. 90 to 95. ↩

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119. Second, a consistent, comprehensive interpretation of Art. 1139 NAFTA under the principles of Art. 31.1 the Vienna Convention on the Law of Treaties [“VCLT”] demands to read the provision and its paragraphs (d), (g) and (h) jointly and therefore, to link and apply the three-year requirement to the Mortgages and the Notes as well⁹¹. This interpretation gives meaning collectively to the three paragraphs, whilst Lion’s interpretation suggests that paragraph (d) only refers to non-guaranteed loans, which is wrong as it adds language to the text⁹².

120. Summing up, a correct interpretation leads to the conclusion that the three-year restriction of paragraph (d) of Art. 1139 NAFTA also applies to security rights and promissory notes that guarantee loans. If a mortgage or promissory note is not linked to a loan, the three-year requirement is not relevant; but if the guaranteed asset is a loan, the correct interpretation requires that a consistent meaning is given to Art. 1139 NAFTA as a whole⁹³.

1.3. MORTGAGES AND NOTES ARE NOT INVESTMENTS UNDER ART. 1139 NAFTA

121. Even if the Mortgages and the Notes were considered as separate investments from the Loans, neither of them fits within the definitions of Arts. 1139(g) and 1139(h) NAFTA: the ordinary meaning of paragraphs (g) and (h) exclude the Mortgages and the Notes from their scope⁹⁴.

122. As for the Mortgages, they are not property but rights in rem. Due to its own nature, a mortgage cannot be considered “bienes raíces u otra propiedad tangible o intangible” under Art. 1139(g) NAFTA. Their purpose is to secure the payment of the loan up to the secured amount, and they are activated after the debtor’s default only. They are thus contingent rights⁹⁵.

123. Lion wrongly argues that the definition of “property” must be established under Mexican law⁹⁶. Yet the local law of a signatory cannot be used to interpret the Treaty: the interpretation must be carried out from the language itself of NAFTA, taking into account the ordinary meaning of the text and taking into account the context, object, and purpose of NAFTA and the principle of effet utile, as demanded by Art. 31 of VCLT⁹⁷.

⁹¹ Reply on Jurisdiction, para. 150. ↩
⁹² Reply on Jurisdiction, para. 127, and Memorial on Jurisdiction, paras. 80 to 85. ↩
⁹³ Reply on Jurisdiction, paras. 118 and 123, and Memorial on Jurisdiction, paras. 99-110. ↩
⁹⁴ Reply on Jurisdiction, paras. 8 and 85, and Memorial on Jurisdiction, paras. 111-150. ↩
⁹⁵ Reply on Jurisdiction, para. 95 and 96. ↩
⁹⁶ Reply on Jurisdiction, paras. 14-16. ↩
⁹⁷ Reply on Jurisdiction, paras. 99 and 100, and Memorial on Jurisdiction, paras. 151 to 166. ↩

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2. CLAIMANT’S POSITION

124. Lion contends that the Mortgages and the Notes constitute valid investments under Art. 1139(g) and Art. 1139(h) NAFTA, respectively. Therefore, the Tribunal has both ratione materiae jurisdiction and ratione personae jurisdiction to adjudicate the present dispute.

125. Lion’s position can be summarized as follows: under Mexican law, the Loans, the Notes, and the Mortgages constitute three different negotia (1.). It follows that Mortgages and Notes are “investments” under Art. 1139(g) and 1139(h) NAFTA (2.).

2.1. LOANS, NOTES, AND MORTGAGES CONSTITUTE THREE DIFFERENT NEGOTIA

126. Three different negotia were concluded in this case: the Loans, the Notes, and the Mortgages⁹⁸. The three negotia are related but still different and separate⁹⁹. Mexico’s reasoning is flawed for various reasons¹⁰⁰:

127. First, independence does not mean that notes or mortgages must each create a new obligation. The Notes and the Mortgages are separate negotia from the Loans, with different objects and different parties (in the case of the Mortgages) and separate legal regimes¹⁰¹. In fact, mortgages are a right in rem, effective erga omnes, which allows the creditor to follow the asset even if owned by a third party; this entirely transcends the personal obligation of the loans¹⁰².

128. Claimant does not dispute the fact that whenever there is a mortgage there is a loan (or any other underlying obligation), or that a guarantee is intended to secure a principal transaction. Whenever there is accessoriness, there are two assets: the principal and the accessory¹⁰³, as acknowledged by the Supreme Court and the Mexican legal authorities¹⁰⁴. And these interests require separate treatment for purposes of Art. 1139 NAFTA¹⁰⁵.

129. Second, Loans, Mortgages, and Notes do not have the same object, even if they refer to the same debt. A mortgage creates different property rights and economic interests compared to a loan. While loans have as their object a payment obligation, mortgages provide the possibility for the creditor to be paid from the sale of the mortgaged asset¹⁰⁶. But mortgages provide the creditor with much more than just a different procedural avenue to claim the underlying debt: mortgages create substantive rights that go beyond the right under a loan, because they allow the creditor to use a specific asset to obtain payment with full priority,

⁹⁸ Claimant’s Counter-Memorial, para. 19. ↩
⁹⁹ Rejoinder on Jurisdiction, para. 20. ↩
¹⁰⁰ Rejoinder on Jurisdiction, para. 22. ↩
¹⁰¹ Claimant’s Counter-Memorial, paras. 18, and 36 to 38. ↩
¹⁰² Zamora II, paras. 160, 169, 170, and 173; and Claimant’s Rejoinder, para. 22. ↩
¹⁰³ Claimant’s Counter-Memorial, para. 157. ↩
¹⁰⁴ Rejoinder on Jurisdiction, paras. 44 and 46, Claimant’s Counter-Memorial, para. 246, and Zamora III, para. 105. ↩
¹⁰⁵ Rejoinder on Jurisdiction, para. 43. ↩
¹⁰⁶ Zamora III, paras. 26-32; and Rejoinder on Jurisdiction, para. 22. ↩

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regardless of the solvency of the debtor; they also limit the powers of the owner over the asset and they grant the creditor power to protect the value of the asset¹⁰⁷.

130. Therefore, mortgages are autonomous and confer separate economic value¹⁰⁸. In contrast with the value of the loan, the economic value of the mortgage is unaffected by the debtor’s solvency and will remain equal to the value of the asset, as a consequence of the preference granted over the asset¹⁰⁹.

131. Third, while the debtor under a loan undertakes a “debt”, the owner of a mortgaged asset (which can be different from the debtor) assumes a “liability” under the mortgage: if the debtor breaches the guaranteed obligation, the owner will suffer the sale of the asset for the benefit of the creditor. No duplication or unjust enrichment takes place¹¹⁰.

2.2. MORTGAGES AND NOTES ARE “INVESTMENTS” UNDER ARTS. 1139 (G) AND 1139(H)

132. The Mortgages and the Notes can be characterized as “investments” under Art. 1139 NAFTA, separately and independently from the Loans¹¹¹. The Mortgages squarely fall within the categories “real estate or other property” provided by Art. 1139(g) NAFTA¹¹² (A.). The Notes fall within the category of “commitment of capital” under Art. 1139(h) NAFTA¹¹³ (B.). Furthermore, Mexico’s proposed interpretation of Art. 1139 NAFTA is mistaken (C.).

A. The Mortgages are “real estate” and “property”

133. NAFTA does not define the terms “real estate” or “property”. Therefore, and unless Mexico shows that the NAFTA State parties intended to refer to an autonomous understanding of the terms “real estate” and “property”, it is necessary to refer to municipal law where the property is located¹¹⁴.

Under Mexican law

134. Consistent with the above, NAFTA State parties and authors, opine that it is appropriate to look at the law of the host State (in this case, Mexico) for a determination of the definition

¹⁰⁷ Claimant’s Counter-Memorial, paras. 67 to 72 and 74. ↩
¹⁰⁸ Rejoinder on Jurisdiction, para. 25. ↩
¹⁰⁹ Rejoinder on Jurisdiction, para.14. ↩
¹¹⁰ Zamora III, para. 32; and Claimant’s Rejoinder, para. 22. ↩
¹¹¹ Rejoinder on Jurisdiction, para. 49. ↩
¹¹² Claimant’s Counter-Memorial, para. 134; and Rejoinder on Jurisdiction, para. 54. ↩
¹¹³ Claimant’s Counter-Memorial, Section IV.C; and Rejoinder on Jurisdiction, para. 54. ↩
¹¹⁴ HT, 45:19 – 48:1. Rejoinder on Jurisdiction, para. 56. ↩

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and scope of “real estate” and “property”¹¹⁵. Other international tribunals have seconded this view by holding as follows¹¹⁶.

“In order to determine whether an investor/claimant holds property or assets capable of constituting an investment it is necessary in the first place to refer to host State law. Public international law does not create property rights. Rather, it accords certain protections to property rights created according to municipal law”.

135. Under the Mexican civil codes that govern the Mortgages, all rights in rem are considered “real estate” (“bienes inmuebles”)¹¹⁷. Thus under Mexican law, mortgages are considered “real estate”, which is a protected category of “asset” under Art. 1139(g) NAFTA¹¹⁸. The Claimant notes that even Mexico and its expert have acknowledged so¹¹⁹.

136. Mexico’s NAFTA-based treaty practice shows that, with only one exception, mortgages are not considered as “related property rights”, but interchangeably as either “other tangible or intangible property”, “other rights in rem”, “autres droits réels” or “derechos reales”, “other rights”, “other property rights” or “otros derechos de propiedad” or, as in NAFTA, as an example of “tangible or intangible property”¹²⁰.

137. Twelve out of the twenty-one investment treaties concluded by Mexico with an express mention of mortgages as investments characterize them as “rights in rem”¹²¹. Other treaties refer to “property rights” (“derechos de propiedad”)¹²² when referring to rights in rem such as usufructs and mortgages¹²³. Conversely, the expression “related property rights” is found

¹¹⁵ Claimant’s Response to Mexico’s Preliminary Objection pursuant to Article 45(6) of the ICSID Arbitration (Additional Facility) Rules, para. 95; Claimant’s Counter-Memorial, para. 10(c). ↩
¹¹⁶ Emmis International Holding BV v. Hungary, ICSID Case No. ARB/12/2, Award (16 April 2014), para. 162 (Exh. CLA-501); Garanti Koza LLP v. Turkmenistan, ICSID Case No. ARB/11/20, Award, (19 December 2016), para. 331 (Exh. CLA-502), and Koch Minerals Sarl and Koch Nitrogen International Sarl v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/19, (Exh. CLA-503). Claimant’s Rejoinder, para. 58. ↩
¹¹⁷ Claimant’s Response to Mexico’s Preliminary Objection pursuant to Article 45(6) of the ICSID Arbitration (Additional Facility) Rules, paras. 96-99; Claimant’s Counter-Memorial, paras. 56-59. ↩
¹¹⁸ HT, Day 1, 48:2 – 48:16. ↩
¹¹⁹ Rejoinder on Jurisdiction, para. 52, referring to the Reply on Jurisdiction, paras. 36 and 40. ↩
¹²⁰ Article 1(4)(e) of the Mexico-Spain BIT (10 October 2006) (“movable or immovable property, as well as mortgages, pledges, usufructs or other tangible or intangible property”). See Annex I to Claimant’s Counter-Memorial on Jurisdiction. ↩
¹²¹ Treaties concluded with Greece, Portugal, Belgium and Luxembourg, The Netherlands, Iceland, Czech Republic, Korea, Argentina, Germany, Italy, Switzerland and Cuba. See Annex I to Claimant’s Counter-Memorial on Jurisdiction. ↩
¹²² Reply on Jurisdiction, para. 43. The use of the plural shall be emphasized. It shows that Mexico’s strict understanding of “property” as referring solely to full ownership or “el derecho real de propiedad” as the necessary addition of the iura possidendi, utendi, abutendi and fruendi is wrong. ↩
¹²³ Treaties concluded with Denmark, Sweden, Finland, Panama, Central American countries, Australia. See Annex I to Claimant’s Counter-Memorial. ↩

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primarily in the treaties concluded by the United States and only in one of the Mexican bilateral investment treaties: the Mexico-Singapore BIT¹²⁴.

Under international law

138. The term “property” has a broad meaning under international law and includes rights in and over a property, i.e., in rem rights¹²⁵.

139. International tribunals that adopt an autonomous understanding of the term “property” have explained that¹²⁶.

“[p]roperty can be defined as those material things which can be possessed, as well as any right which may be part of a person’s patrimony; that concept includes all movable and immovable, corporal and incorporeal elements and any other intangible object capable of having value”.

140. Hence, the term “property” used in investment treaties may be understood to refer to both things and rights over such things. “Property” refers to a bundle of in rem rights¹²⁷. In contrast, Mexico seems to understand “property” as limited to the right of full ownership, implying that the words “related property rights” cover rights over things other than full ownership¹²⁸.

141. However, the ordinary meaning of “property” in the international arena encompasses or is inherently associated with the “rights” over a property, which includes mortgages¹²⁹.

“Property” may be broadly defined under international law as an entitlement of a person that is related to a thing. It consists of certain rights with regard to the thing that are usually effective against all other persons, that is, in rem rights”.

142. Therefore, “property” cannot reasonably mean just the thing, nor its full ownership. Full ownership of a thing is one such legal interest. There are other in rem legal interests, including mortgages¹³⁰.

¹²⁴ Treaties concluded with Denmark, Sweden, Finland, Panama, Central American countries, Australia. See Annex I to Claimant’s Counter-Memorial. Claimant’s Rejoinder, para. 82. ↩
¹²⁵ Rejoinder on Jurisdiction, para. 75. ↩
¹²⁶ Rejoinder on Jurisdiction, paras. 64 and 65. The Case of the Mayagna (Sumo) Awas Tingni Community v. Nicaragua, Inter-American Court of Human Rights, Series C no. 79 (Judgment) (31 August 2001), para. 144 (Exh. CLA-061). ↩
¹²⁷ Exh. CLA-165 (Jahangir Mohtadi and Jila Mothadi v. Iran, Iran-US Tribunal Award (2 December 1996), 32 Iran-USCTR 158, para. 103: “the Tribunal first turns to the so-called “bundle of rights” that make up the right of ownership. [...] the elements of this right traditionally are regarded to include: the right to use the property; the right to enjoy the fruits of it; the power to possess the property; the right to exclude others from the possession or use of the property; and the right to dispose of it. [...] Ownership is thus a comprehensive right”.) ↩
¹²⁸ Rejoinder on Jurisdiction, para.76. ↩
¹²⁹ Claimant’s Rejoinder, para. 77, and Exh. CLA-063 (John G. Sprankling, The International Law of Property, Oxford, 2014, p. 23). ↩
¹³⁰ Rejoinder on Jurisdiction, para. 80. ↩

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143. The term “property” in Art. 1139(g) NAFTA was used generically by the NAFTA Parties. It operates as an umbrella, covering, in addition to real estate, “other property” (tangible or intangible) recognized as such in the respective domestic laws of the NAFTA Parties, which, in the case of Mexico, include mortgages¹³¹.

***

144. It follows from the above that the lack of reference to mortgages or “related property rights” in Art. 1139(g) NAFTA does not prevent the Mortgages from been characterized as “real estate or other property” pursuant to the international usus loquendi of the term “property”¹³². Under such usus loquendi, the term “property” consists of certain rights with regard to a thing, including those arising from mortgages. The terms “biens”/“bienes” used in the French and Spanish versions of the NAFTA are understood as expropriable and appropriable movable and immovable elements, including rights in rem¹³³. Further evidence of the international usus loquendi can be found in the treaty practice of the NAFTA State parties, especially those treaties with a definition of “investment” based on Art. 1139 NAFTA. An examination of such treaties shows that, as per Mexico’s own usus loquendi:

- mortgages are treated within the paragraph defining property as an investment; and

- mortgages are treated separately from loans¹³⁴.

B. The Notes are a valid investment

145. The Notes are interests of economic nature arising as a result of the commitment of capital of Lion in Mexico and used for an economic activity; as such, they are also a protected investment under Art. 1139(h) NAFTA.

146. The Notes are “interests”:

- under Mexican law (“títulos de crédito”) containing a person’s (subscriber) unconditional promise to pay to another person (holder) a determined sum of money¹³⁵.

- following Canada’s understanding of the ordinary meaning of “interests”¹³⁶.

147. Furthermore, the destination of the commitment was clearly an “economic activity” in Mexico: the disbursements made by Lion were intended and used to provide Mexican

¹³¹ Rejoinder on Jurisdiction, para. 83. ↩
¹³² Rejoinder on Jurisdiction, para. 92. ↩
¹³³ Claimant’s Response to Mexico’s Preliminary Objection pursuant to Article 45(6) of the ICSID Arbitration (Additional Facility) Rules, paras. 89-93; Claimant’s Counter-Memorial, paras. 84 and 88; and Rejoinder on Jurisdiction, para. 52. ↩
¹³⁴ Claimant’s Counter-Memorial, paras. 213, 222, and 254; and Rejoinder on Jurisdiction, para. 52. ↩
¹³⁵ Claimant’s Counter-Memorial, para. 135. ↩
¹³⁶ Claimant’s Counter-Memorial, para. 134. ↩

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companies with the funds for the acquisition of land in Mexico and working capital to develop them¹³⁷.

C. Mexico’s interpretation of Art. 1139 NAFTA is ill-conceived

148. First, Art. 1139(d) NAFTA only refers to loans. There is no reference to mortgages, promissory notes or, more broadly, guarantees securing a loan¹³⁸. The ordinary meaning of the term “loan” in Art. 1139 does not include mortgages, something different and separate from a loan. A mortgage may not exist without an obligation, but an obligation (e.g., a loan) can certainly exist without a mortgage¹³⁹.

149. The term “loan” is used in three other provisions in Chapter 11 in addition to Art. 1139 NAFTA (i.e., Arts. 1108, 1109 and 1110). Under these provisions, loans are treated as separate and distinct from guarantees, and only as credits and monetary obligations¹⁴⁰. And it is used in seven provisions outside Chapter 11, only three being relevant and in two of them (Arts. 1001(5)(a) and 1201(2)(d)) loans are listed as separate assets from their guarantees¹⁴¹.

150. Similarly, there is no reference in paragraphs (g) and (h) to loans, nor is there any reference to a duration requirement of any sort. The fact that paragraphs (g) and (h) are self-standing is furthermore confirmed by the lack of cross-references to paragraph (d), in contrast to other categories listed as investment in Art. 1139 NAFTA¹⁴². The drafters of the NAFTA carefully¹⁴³ identified the paragraphs that were intertwined or connected¹⁴⁴; and yet nothing in paragraphs (g) and (h), or in any other paragraph of Art. 1139, indicates or implies that the qualification of a real-estate interest or interests arising from the commitment of capital as an investment is subordinated to other paragraphs of Art. 1139¹⁴⁵.

151. Second, the definition of “investment” under Art. 1139 NAFTA is constituted by eight paragraphs, based upon categories of property rights and economic interests, not business activities¹⁴⁶. But this does not mean that all the requirements, conditions, and exceptions included in each one of these eight paragraphs must be cumulatively complied with, under the pretext that the ordinary meaning of one those paragraphs shall be read in context. On

¹³⁷ Claimant’s Counter-Memorial, para. 134; and Rejoinder on Jurisdiction, para. 53. ↩
¹³⁸ Claimant’s Counter-memorial, paras. 186; and Rejoinder on Jurisdiction, para.106. ↩
¹³⁹ HT, 42:8 – 45:18. ↩
¹⁴⁰ Claimant’s Counter-Memorial, paras. 208-216; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁴¹ Claimant’s Counter-Memorial, paras. 221-223; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁴² Claimant’s Response to Mexico’s Preliminary Objection, paras. 28-29; Claimant’s Counter-Memorial, para. 205; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁴³ As explained by Canada: “The drafters of the NAFTA chose specific language, fully aware of the differences reflected in other provisions of NAFTA”. Methanex Corporation v. The United States of America, Second Submission of Canada Pursuant to NAFTA Article 1128 (30 April 2001), para. 14, Exh. CLA-120. ↩
¹⁴⁴ Subparagraph (f) excludes from the category under consideration the interests arising from the assets listed in subparagraphs (c) and (d) (debt security and loans). Subparagraph (i) and (j) refer to subparagraphs (d) and (a) to (h) to clarify which claims to money are protected. ↩
¹⁴⁵ Claimant’s Counter-Memorial, paras. 201-207; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁴⁶ HT, 41:5 – 42:7. ↩

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the contrary, the fact that a condition is included in one of the paragraphs, and not in the general heading that precedes the paragraphs, suggests that the condition in question is applicable to that paragraph and not to the others¹⁴⁷.

152. Since the language of paragraphs (g) and (h) of Art. 1139 NAFTA does not contain any reference to the three-year requirement found in other paragraphs of Art. 1139 NAFTA¹⁴⁸, as Mexico itself has noted, “sería una interpretación inadmisible dado que implicaría añadir una palabra al Párrafo ... que no se encuentra ah픹⁴⁹.

153. Third, Art. 1139 NAFTA is a definition by enumeration of the economic interests that can be considered to be a covered investment. Only three out of these eight categories include restrictions such as the three-year initial maturity duration for loans (paragraphs (c), (d) and (f))¹⁵⁰. The three-year requirement is thus an exception and must be interpreted restrictively, pursuant to the general principle exceptiones sunt strictae interpretationis¹⁵¹. This principle entails that a requirement such as the three-year original maturity cannot be applied to any other hypothesis except those to which the text of Article 1139 NAFTA expressly provides it applies¹⁵². In fact, the only limitation concerning “real estate” or “property” under paragraph (g) is that they shall be acquired or used for an “economic benefit or other business purpose”.

154. Fourth, given that the Mortgages qualify as an investment under paragraph (g) and the Notes under paragraph (h) of Art. 1139 NAFTA, such characterization must produce an effet utile¹⁵³.

155. The effet utile doctrine is generally understood as follows¹⁵⁴.

"This rule is sometimes invoked as a principle – according to which the interpreter has sometimes to presume that the authors of a treaty, by adopting the wording of a disposition, meant to give it a certain meaning in order for this disposition to receive an effective application".

156. The doctrine is not intended to give guidance in determining whether the asset under consideration is a loan, real estate or property or a commitment of capital. The doctrine simply states that the rules governing any of those categories shall be given their full effect

¹⁴⁷ Rejoinder on Jurisdiction, para. 103. ↩
¹⁴⁸ Rejoinder on Jurisdiction, para. 113. ↩
¹⁴⁹ Reply on Jurisdiction, para. 127. ↩
¹⁵⁰ Claimant’s Counter-memorial, para. 195; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁵¹ Claimant’s Counter-memorial, para. 186; and Rejoinder on Jurisdiction, para. 106. ↩
¹⁵² Rejoinder on Jurisdiction, para. 122. ↩
¹⁵³ Rejoinder on Jurisdiction, para. 127. ↩
¹⁵⁴ Exh. CLA-539, Jean Salmon, Dictionnaire de Droit International Public, Bruylant, 2001, p. 416: "Regle parfois invoquee au titre de principe – selon laquelle l'interprete doit presumer que les auteurs d'un traité en adoptant les termes d'une disposition, ont entendu leur donner une signification telle que cette disposition puisse recevoir une application effective".) ↩

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and meaning¹⁵⁵. This doctrine operates as a test to make sure that an interpretation is not conducted in bad faith or that it strips a provision of its useful meaning¹⁵⁶. In this case, nothing prevents an accessory right to be separately qualified as an investment, even when the main operation does not¹⁵⁷.

157. In conclusion, the Loans, the Mortgages, and the Notes fall within three different paragraphs under Article 1139 NAFTA, and shall be characterized separately, as acknowledged by other NAFTA tribunals¹⁵⁸. Nothing prevents that one asset is protected while another is not¹⁵⁹.

3. THE EXPERTS' POSITIONS

158. The Tribunal will first provide a summary of the expert opinion submitted by Respondent (1.) and then of the one produced by Claimant (2.).

3.1. THE IRRA OPINIONS

159. Respondent retained Lic. René Irra Ibarra to serve as expert on Mexican law in this arbitration. He submitted two reports with his opinions¹⁶⁰.

160. Lic. Irra testified at the Hearing and ratified the main arguments established in his reports. In particular, he developed the following arguments¹⁶¹:

• Lic. Irra identified as his main disagreement with Claimant's expert that in his view there are not three different negotia; there is just one negotium, evidenced by three legal acts, which are separate, because a mortgage is not a promissory note, and neither of them is a loan; but the existence of three legal acts does not imply that they are different negotia¹⁶².
• The Loans are the underlying transaction that gave rise to the other legal acts: the Notes and the Mortgages; Lic. Irra acknowledged that under Mexican law each of the three acts is regulated by a different set of laws; but he rejected that the differences in regulation imply the existence of different negotia; the differences are mainly

¹⁵⁵ Exh. CLA-105, Application of the Interim Accord of 13 September 1995 (the former Yugoslav Republic of Macedonia v. Greece), Judgment (5 December 2011), I.C.J. Reports 644 (2011), p. 673, para. 92. ↩
¹⁵⁶ Rejoinder on Jurisdiction, para. 131. ↩
¹⁵⁷ Claimant's Rejoinder to Mexico’s Preliminary Objection pursuant to Article 45(6) of the Arbitration (Additional Facility) Rules, paras. 7 and 8. See Exh. CLA-109 (ATA Construction, Industrial and Trading Company v. Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2, Award (18 May 2010), paras. 103 and 117). ↩
¹⁵⁸ Claimant's Counter-Memorial, para. 52; Grand River Enterprises Six Nations, Ltd., et al. v. United States of America, UNCITRAL, Award (12 January 2011), paras. 90-122, Exh. CLA-117. ↩
¹⁵⁹ Rejoinder on Jurisdiction, para. 134. ↩
¹⁶⁰ Irra I, dated August 29, 2017 and Irra II, dated December 7, 2017. ↩
¹⁶¹ HT, Day 1, 77:14 – 132:13. ↩
¹⁶² HT, Day 1, 83:17 – 84:9. ↩

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• procedural: loans, notes, and mortgages empower the lender to use distinct court actions to enforce its rights¹⁶³, without creating separate transactions¹⁶⁴.
• Mortgages and notes require the existence of a loan that is being secured or formalized¹⁶⁵; the borrower assumes a single obligation, to repay the money lent, plus interest, and this is the only obligation that the creditor can enforce, either through the loans, the notes or the mortgage¹⁶⁶.

3.2. THE ZAMORA OPINIONS

161. Claimant retained Lic. Rodrigo Zamora Etcharren to serve as expert on Mexican law in this arbitration. He submitted three reports on the matter¹⁶⁷.

162. Lic. Zamora testified at the hearing and ratified the main arguments from his reports, in particular¹⁶⁸.

• There are essential differences between the Loans, the Mortgages, and the Notes, which go beyond furnishing three procedural actions: there are three negotia that confer different rights, include different parties, and create different procedural actions¹⁶⁹.
• Each negotium is a commercial asset that confers its own set of rights: creditors have different rights under a loan agreement, under a note and under a mortgage¹⁷⁰.
• The three negotia give rise to different procedural actions, which may be brought simultaneously; a creditor can claim under the note, under the mortgage or under the loan; this does not mean, however, that a creditor can recover the principal of the loan three times; the principal is owed only once, and Mexican procedural law provides for mechanisms to avoid such result¹⁷¹.

¹⁶³ HT, Day 1, 79:5 – 80:12. ↩
¹⁶⁴ HT, Day 1, 81:15 – 82:4. ↩
¹⁶⁵ HT, Day 1, 83:10 – 83:16. ↩
¹⁶⁶ HT, Day 1, 87:11 – 87:20. ↩
¹⁶⁷ Zamora I, dated March 6, 2017, Zamora II, dated October 23, 2017 and Zamora III, dated January 18, 2018. ↩
¹⁶⁸ HT, Day 1, 135:11 – 169:5. ↩
¹⁶⁹ HT, Day 1, 136:6 – 136:20. ↩
¹⁷⁰ HT, Day 1, 137:5 – 137:19. ↩
¹⁷¹ HT, Day 1, 142:2 -142:10. ↩

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VII. DISCUSSION

163. The Tribunal is called to decide a discrete question: whether non-negotiable promissory notes formalizing, or mortgages securing short-term loans, can still qualify as NAFTA protected investments under Arts. 1139(h) or 1139(g), even if the loans fail the three-year maturity test under Art. 1139(d).

164. In their submissions, the Parties have not referred to any previous decision by any court or tribunal deciding on this very question¹⁷². The Tribunal is also unable to rely on the opinion of the United States of America or Canada: although both States were entitled to submit their opinion under Art. 1128 NAFTA, both decided not make use of such right. Nor has the NAFTA Commission approved any binding interpretation (under Art. 1131(2) NAFTA) shedding light on the issue.

165. In absence of any guidance, the Tribunal must apply the governing law mandated by Art. 1131(1) NAFTA: the Tribunal

"shall decide the issues in dispute in accordance with this Agreement [i.e. the NAFTA] and applicable rules of international law”.

166. Applying such governing law, the Tribunal will in due course dismiss Claimant's submission that the Notes qualify as protected investments (1.), while finding that the Mortgages do indeed qualify as “intangible real estate” for the purposes of Art. 1139(g) NAFTA (2.).

1. THE NOTES DO NOT QUALIFY AS INVESTMENTS

167. Claimant's case is that the Notes qualify as protected investments under Art. 1139(h) NAFTA:

“(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

¹⁷² Claimant has only drawn the attention of the Tribunal to one international law precedent where mortgages were protected as separate investments. Many Americans had mortgages on property taken by Yugoslavia. The Yugoslav Claims Agreement of 1948 did not include any provision concerning mortgages. Notwithstanding the above, the Commission allowed claims for mortgages on the ground that the taking of the encumbered property effectively took from the mortgagee the right to foreclose. Moreover, under the laws of Yugoslavia, a real property mortgage was considered as real property – see "Foreign Claim Settlement Commission of the United States", Decisions and Annotations; CLA-511, p. 62; the best known decision is Erna Lina Klein, CLA-69. ↩

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(ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise".

168. In Claimant's view, the Notes constitute “interests arising from commitment of capital”. Lion submits that the concept of “interests", as used in this provision, includes titles, and the Notes qualify as titles. “Interests” also cover “cosas mercantiles”, and under Mexican law the Notes are “cosas mercantiles”. Finally, the other requirements are also met: the source of the Notes is Lion's “commitment of capital” and the destination of the capital is an “economic activity” in Mexico¹⁷³.

169. Mexico disagrees. In its submission, the requirements of Art. 1139(h) are not met. Lion made no contribution of capital under the Notes – the only contribution of capital was made under the Loans. Notes are simply instruments which evidence the existence of a debt created by the Loans and facilitate collection of the amounts due¹⁷⁴.

170. The Tribunal – without hesitation – sides with Respondent.

171. The Notes clearly do not constitute protected investments under Art. 1139(g) NAFTA. To support its conclusion, the Tribunal will briefly explain the nature of promissory notes under Mexican law (A.), and then will reason why promissory notes do not meet the requirements under Art. 1139(h) (B.).

A. Promissory notes under Mexican law

172. The three Credit Agreements entered into between Lion as Lender, and Inmobiliaria Bains and C&C Capital as Borrowers, required that each “Credit Drawdown will be documented in a non-negotiable Note"¹⁷⁵. Complying with this contractual obligation:

• on February 28, 2007 Inmobiliaria Bains issued the First Note, undertaking to pay to Lion US$15 million, plus interest, with final maturity date September 30, 2009¹⁷⁶.
• on June 14, 2007 C&C Capital issued the Second Note in favor of Lion for US$12.45 million (plus interest), with final maturity date September 30, 2009¹⁷⁷; and
• on September 26, 2007 C&C Capital issued the Third Note, again in favor of Lion, for US$5,355,479 (plus interest), with final maturity as of September 30, 2009¹⁷⁸.

173. All three Notes share several characteristics:

¹⁷³ Claimant’s Counter-Memorial, para. 135. ↩
¹⁷⁴ Memorial on Jurisdiction, paras. 117 and 118. ↩
¹⁷⁵ Exh. C-8. ↩
¹⁷⁶ Exh. C-153. ↩
¹⁷⁷ Exh. C-12. ↩
¹⁷⁸ Exh. C-154. ↩

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• The Notes are defined as “pagarés” subject to Mexican law;
• The Notes incorporate the issuer's unconditional promise to pay Lion the stated amount, plus ordinary and penalty interest;
• The Notes are expressly stated to be “no negociable[s]";
• Payments are to be made in Lion's designated U.S. bank account, in freely available funds;
• The issuer submits to the jurisdiction of the Courts of Mexico's Distrito Federal.

174. Under Mexican Law pagarés are a special category of títulos de crédito¹⁷⁹. And títulos de crédito (also known as títulos valor) are defined by the Ley General de Títulos y Operaciones de Crédito [“LGTOC"] as¹⁸⁰:

“documentos necesarios para ejercitar el derecho literal que en ellos se consigna”.

175. The legal definition underlines the basic trait of a título de crédito: a document signed by the issuer, which grants its holder the rights literally mentioned (“incorporados”, to use the technical expression) in the document.

176. Pagarés are one of the basic sub-groups of títulos de crédito: documents that formalize the issuer's unconditional promise to pay to the holder a certain amount of money on a certain due date¹⁸¹. To be legally considered as a pagaré, the document must necessarily include the word "pagaré”.

177. Pagarés are issued to formalize an underlying monetary obligation. Normally, this obligation arises from a contract (contrato subyacente) entered into between issuer of the pagaré and its first holder. In the present case, the contratos subyacentes are the three Credit Agreements signed between Lion and Inmobiliaria Bains/C&C Capital. Under these contracts the borrowers owe certain amounts of principal and interest to Lion, and these obligations are “incorporated” into the three Notes, issued by the borrowers, designating Lion as beneficiary, and which the borrowers delivered to Lion.

178. The relationship between a pagaré and its contrato subyacente can be “abstracto" or "causal”¹⁸².

179. (i) In the first case, the law, seeking to protect third parties that acquire pagarés in good faith by endorsement, creates a separation between the underlying contract and the payment obligation incorporated in the pagaré. If the initial holder of the note endorses the pagaré

¹⁷⁹ Mexican law uses the concept títulos de crédito. Other Spanish-speaking jurisdictions use the equivalent expression títulos valor. ↩
¹⁸⁰ Art. 5 LGTOC. ↩
¹⁸¹ Art. 170 LGTOC. ↩
¹⁸² Irra I, para. 15 and Zamora II, para. 110. ↩

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to a third party (for instance, a bank), such secondary holder is entitled to request that the issuer pay the stated amount on maturity, while the issuer is prohibited from invoking “excepciones personales”, i.e. defenses arising from the contrato subyacente between the issuer and the first holder¹⁸³. A pagaré that has been endorsed and against which excepciones personales are not admitted is said to be “abstract”.

180. (ii) In the second case, the link between contrato subyacente and pagaré is not severable: the issuer may deny payment invoking the same defenses that could have been used to reject payment under the contrato subyacente. Pagarés that have not been endorsed, and especially pagarés which are stated to be no negociables (i.e., where endorsement is prohibited) are always considered títulos de crédito causales¹⁸⁴.

181. Pagarés no negociables, as are the Notes issued in the present case, do not provide the holder with an abstract right to collect. The right incorporated into the note is identical to the right arising from the underlying contract. The main advantage conferred by a pagaré no negociable is procedural: the holder can enforce the right against the issuer through an acción ejecutiva, an expedited procedure that permits the preliminary attachment of the issuer's assets¹⁸⁵.

B. Pagarés no negociables do not meet the requirements of Art. 1139(h)

182. Art. 1139 NAFTA offers a sophisticated and precise definition of protected investments: the provision lists eight categories of “interests” which are considered as investments, and two categories which are excluded¹⁸⁶.

183. The eight categories of interests that qualify as investment are in its turn divided into two groups:

184. The first group comprises paragraphs (a) through (f) plus sub-paragraph (h.ii) of Art. 1139. These six categories of interests all relate to situations where the foreign investor owns or finances "enterprises” located in the host state.

185. The situations where the foreign investor finances an enterprise in the host state are developed in paragraphs (c) and (d) and in sub-paragraph (h.ii):

• Paragraphs (c) and (d) cover "debt securities” bought or “loans” granted by the foreign investor, and specifically require that the financing, if granted to an enterprise which is not affiliated to the investor, has a maturity of at least three years;

¹⁸³ See Art. 8 LGTOC; Irra I, para. 15. ↩
¹⁸⁴ Irra I, para. 28. ↩
¹⁸⁵ Zamora II, para. 134. ↩
¹⁸⁶ The provision gives the overarching concept of “interests” to the ten categories to which it refers – see last line of the definition. ↩

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• Sub-paragraph (h.ii) adds a different type of financing: contracts where the investor commits capital (or other resources), and the remuneration depends “substantially on the production, revenues or profits of an enterprise”; provided that this requirement is met, NAFTA does not additionally require a minimum three-year maturity.

186. The second group of protected investments are those defined in paragraph (g) and sub- paragraph (h.i). These provisions cover two distinct situations:

• Paragraph (g) refers to “real estate or other property, tangible or intangible”, acquired or used by the foreign investor for economic benefit or for business purposes; while
• Sub-paragraph (h.i) extends the concept of investments to contracts in which the investor commits capital (or other resources) to economic activity in the host state, "including turnkey or construction contracts or concessions”.

a. The Tribunal's decision

187. The basic facts of the case are not in dispute:

• The lender of the financing was Lion, a Canadian company;
• The Borrowers were two unaffiliated enterprises located in Mexico;
• The maturity was less than three years;
• The contract was formalized in three Credit Agreements;
• The Borrowers' repayment obligations were additionally formalized in three non- negotiable pagarés;
• The remuneration for the Loans and the pagarés was a fixed-interest rate, without any link to the revenues or profits of the Borrowers.

188. In the Tribunal's opinion, Lion's interest deriving from these financings – be it the Credit Agreements or the Notes – does not meet the requirements to be considered as a protected investment under any of the categories defined in Art. 1139 NAFTA:

189. (i) Art. 1139(d) NAFTA¹⁸⁷:

"(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,

¹⁸⁷ Exh. C-20. ↩

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but does not include a loan, regardless of original maturity, to a state enterprise”.

190. The Credit Agreements do not meet the requirements under Art. 1139(d).

191. Whilst it is true that the Credit Agreements qualify as “loans” to an unaffiliated enterprise, as Claimant itself acknowledges, the Loans by themselves cannot constitute protected investments, because they do not pass the three-year maturity test required by Art. 1139(d)(ii).

192. (ii) Art. 1139(c) NAFTA¹⁸⁸:

"(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".

193. The Notes fail to qualify as “debt security” under Art. 1139(c).

194. The Tribunal shares the Claimant's opinion that pagarés no negociables do not fit within the definition of “debt security” set forth in paragraph (c)¹⁸⁹: debt securities are tradeable, while endorsement of pagarés no negociables is prohibited by law.

195. Be that as it may, even if it were accepted that the pagarés no negociables can be considered as “debt securities”, the Notes would not qualify: having been issued by an unaffiliated enterprise, they must pass, but fail, the three-year-maturity threshold.

196. (iii) Art. 1139(h.i) and (h.ii) NAFTA¹⁹⁰:

"(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".

197. The Notes also fail to meet the requirements under sub-paragraphs (h.i) and (h.ii).

¹⁸⁸ Exh. C-20. ↩
¹⁸⁹ Claimant’s presentation at its closing argument (“H-2”), p. 11. ↩
¹⁹⁰ Exh. C-20. ↩

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198. Sub-paragraph (h.i) only covers contracts involving “the presence of an investor's property in the territory” of the host state; and to clarify its meaning, the provision provides three examples (turnkey contracts, construction contracts and concessions). This category bears no relationship with the case under discussion: pagarés no negociables, where the underlying contract is a loan, do not imply the presence of an investor's property in the host state, and have no relationship with turnkey contracts, construction contracts, and concessions.

199. Sub-paragraph (h.ii) also fails to grant protection to the Notes. It refers to contracts where the investor commits capital, provided that the remuneration depends substantially on the production, revenues or profits of an enterprise located in the host state – a requirement which the fixed-interest Notes do not satisfy.

b. Claimant's counter-arguments

200. Claimant argues that the Notes are protected, by referring simply to the chapeau of paragraph (h), and excluding any reference to the examples provided in sub-paragraphs (i) and (ii). In Claimant's submission, the Notes qualify as “interests arising from the commitment of capital [...] to economic activity" and consequently are protected¹⁹¹.

201. The argument is unconvincing – as Mexico has correctly argued¹⁹².

202. In the present case, Lion formalized the commitment of capital contractually – by signing the Credit Agreements. Additionally, Claimant requested and obtained pagarés no negociables issued by the Borrowers. The delivery of this causal (i.e., non-abstract) título de crédito, intrinsically bound to the Credit Agreement, does not change the nature or the scope of the legal relationship between Lender and Borrowers: their legal relationship continues to be governed by the Credit Agreements, and – for the purposes of Art. 1139 NAFTA – such legal relationship continues to be a "loan" subject to paragraph (d); a loan which does not meet the three-year maturity test. Contrary to Claimant's view, the delivery of this título de crédito does not constitute a separate and severable commitment of capital.

203. Claimant puts the focus of its analysis on the chapeau of paragraph (h) and submits that any “interests arising from the commitment of capital” are protected.

204. This is not so.

205. The chapeau cannot be read by itself. The NAFTA does not extend protection to any “commitments of capital”, but only to those which exhibit certain features so as to give rise to "interests". These features are defined through two illustrative examples in sub- paragraphs (h.i) and (h.ii). Both sub-paragraphs share a common feature: both refer to “contracts”. Thus, it is safe to conclude that a minimum requirement of “commitments of

¹⁹¹ Claimant’s Counter-Memorial, para. 135. ↩
¹⁹² Memorial on Jurisdiction, para. 116. ↩

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capital" protected by paragraph (h) is to be formalized as contracts. The pagarés no negociables do not meet this test: they are títulos de crédito, not contracts.

206. There is a further argument.

207. The contracts that underlie the pagarés no negociables – short-term, fixed-interest loans – do not share any traits with the contracts described in sub-paragraphs (h.i) and (h.ii), which serve as illustrative examples of protected “commitments of capital”. Sub-paragraph (h.i) covers construction contracts and concessions, and sub-paragraph (h.ii) contracts with variable remuneration. The ordinary meaning of a term in a treaty must be read in its context, as Art. 31.1 VCLT mandates. And in this case the context provided by sub-paragraphs (h.i) and (h.ii) shows that “commitments of capital” to be protected under paragraph (h) must show some additional, defining feature, which simple short-term fixed-interest loans lack. Loans are specifically governed by Art. 1139(d) NAFTA – and only protected provided that the requirements set forth in that provision are met.

2. THE MORTGAGES QUALIFY AS INVESTMENTS

208. Having concluded that the Credit Agreements and the Notes do not qualify as NAFTA protected investments, the Tribunal must now address Claimant's final argument: that the Mortgages qualify as “intangible real estate or other property" acquired by Lion "for the purpose of economic benefit” under paragraph (g) of Art. 1139.

209. Claimant maintains that under Mexican law mortgages are considered “real estate" and under international law, as “other property”¹⁹³.

210. Claimant does not dispute that mortgages are accessory transactions, which secure rights deriving from the Loans, but considers that the three-year minimum maturity required by paragraphs (c) and (d) is inapposite¹⁹⁴, because the Loans and the Mortgages are separate negotia, with different objects, different parties, and separate legal regimes. Mortgages are rights in rem, effective erga omnes, allow the creditor to follow the asset even if owned by a third party, and the value of the mortgage differs from the value of the loan: it is unaffected by the debtor's solvency and will remain equal to the value of the asset¹⁹⁵.

211. Mexico disagrees. It says that mortgages are accessory, and that the only economically relevant transaction was the granting of three short-term loans that did not qualify as an investment. Claimant did not invest in mortgages. The definition of “loans” in paragraph (d) includes loans secured by mortgages. Since the Loans in the present case have a maturity date of less than three years, they do not constitute an investment¹⁹⁶.

¹⁹³ HT, Day 1, 48:17 – 51:4. ↩
¹⁹⁴ HT, Day 1, 51:5 – 52:19. ↩
¹⁹⁵ Claimant’s Counter-Memorial, para. 74 and 75. ↩
¹⁹⁶ HT, Day 1, 27:14 – 28:18 ↩

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212. Mexico adds that the mortgage is a security right created over real property, and the real estate is never delivered to nor owned by the creditor; the only right conferred by the mortgage is a preferential right to get paid from the proceeds of the sale of the mortgaged property, and this does not amount to “real estate or other property" under paragraph (g)¹⁹⁷.

213. Finally, Mexico argues that if the Mortgages are considered separately, that would allow protection of any loans – regardless of their original maturity – by just adding a security. This was not the intention of NAFTA signatories¹⁹⁸.

214. The Tribunal will analyze the nature of mortgages under Mexican law (1.), and then will reason why the Mortgages in the present case constitute protected investments under Art. 1139(g) NAFTA, without such protection extending to the Loans or the Notes (2.).

2.1. MORTGAGES UNDER MEXICAN LAW

215. Lion obtained three mortgages as a security for the Loans:

• On June 13, 2007 Bansi S.A., as trustee, and as per the instruction of C&C Capital, as founder and beneficiary of the trust, granted in favor of Lion the Guadalajara Mortgage 1, which encumbered certain properties of the Guadalajara Project, and secured the principal and interest owed under the Second Loan¹⁹⁹;
• On September 26, 2007, Bansi S.A, again acting as trustee, as per the instruction of C&C Capital, granted in favor of Lion the Guadalajara Mortgage 2, which encumbered certain properties of the Guadalajara Project²⁰⁰, and secured the principal and interest owed under the Third Loan;
• On April 2, 2008 Inmobiliaria Bains granted the Nayarit Mortgage over the Nayarit Project, located in Bahía de Banderas, securing the three Loans, including principal and interest²⁰¹.

216. Under Mexican law, mortgages are regulated by the Civil Code of the states where the real estate is located, regardless of the nature of the obligation which is being secured. In the present case, the Guadalajara Mortgages 1 and 2 are subject to the Civil Code of Jalisco [“CC Jalisco”], and the Nayarit Mortgage to the Civil Code of Nayarit [“CC Nayarit”]²⁰².

¹⁹⁷ Memorial on Jurisdiction, paras.121 to 150. ↩
¹⁹⁸ HT, Day 1, 29:14 – 33:2. ↩
¹⁹⁹ Exh. C-14. ↩
²⁰⁰ Exh. C-156. ↩
²⁰¹ Exh. C-10. ↩
²⁰² Zamora II, paras. 144-147. ↩

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A. Mortgages are derechos reales

217. Arts. 2517 CC Jalisco and 2264 CC Nayarit define mortgages in similar terms²⁰³:

“Artículo 2517.- Es contrato de hipoteca aquél por virtud del cual se constituye un derecho real sobre bienes inmuebles o derechos reales que no se entreguen al acreedor, para garantizar el cumplimiento de una obligación y su grado de preferencia en el pago”²⁰⁴.

“Artículo 2264.- La hipoteca es una garantía real constituida sobre bienes que no se entregan al acreedor, y que da derecho a éste, en caso de incumplimiento de la obligación garantizada, a ser pagado con el valor de los bienes, en el grado de preferencia establecido por la Ley”²⁰⁵.

218. Mortgages are defined as derechos reales that encumber real estate (or other derechos reales), affording the mortgagee the right, if the guaranteed obligation is breached, to be paid with the price resulting from the sale in public auction of the asset. The encumbrance follows the asset: if the mortgagor transfers the asset to a third party, the beneficiary's rights over the real estate remain unaffected²⁰⁶.

219. Mortgages do not imply that the mortgagee acquires the possession or ownership over the asset. The mortgagee does not enjoy the full set of traditional rights granted to the owner of real estate (ius utendi, ius fruendi, ius abutendi), but only a right of preference: if the secured obligation is not paid, the mortgagee can force the sale of the asset, and the price obtained is used to satisfy the secured obligation²⁰⁷ – provided that the mortgage has been documented in a notarial deed and registered in the Public Registry²⁰⁸.

220. As derechos reales de garantía, mortgages always secure an underlying obligation, where the mortgagee is the creditor and the mortgagor, the debtor (or a third party willing to provide a guarantee). Although mortgage and underlying obligation are separate negocios jurídicos, created by declarations of intent of different persons, and formalized in separate documents, mortgages are said to be “accessory”²⁰⁹. Accessoriness implies that payment or voidness of the underlying obligation provokes the extinction of the mortgage – but not that both legal relationships are identical²¹⁰.

221. The value of the mortgage and that of the underlying obligation also do not have to coincide, neither at the time of creation or thereafter: the value of the main obligation fluctuates with

²⁰³ Zamora II, para. 149 ↩
²⁰⁴ Doc. 127 to Zamora Reports. ↩
²⁰⁵ Doc. 128 to Zamora Reports. ↩
²⁰⁶ Art. 2546 CC Jalisco and Art. 2265 CC Nayarit (Docs. 127 and 128 to Zamora Reports). ↩
²⁰⁷ Zamora II, paras. 153-154. ↩
²⁰⁸ Zamora II, para. 188. ↩
²⁰⁹ Irra II, para. 48. ↩
²¹⁰ See Rocío Diéguez Oliva, El principio de accesoriedad y la patrimonialización del rango, Cuadernos de Derecho Registral, 2009, Exh. CLA-455. ↩

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the solvency of the debtor, while the value of the mortgage depends on the worth of the mortgaged real estate (and the legal preference granted to mortgages)²¹¹.

B. Mortgages are bienes inmuebles

222. The CCs of Jalisco and of Nayarit distinguish between “bienes inmuebles” and “bienes muebles".

223. Under Art. 799 CC Jalisco and Art. 738 CC Nayarit, the definition of “bienes inmuebles" extends not only to tangible assets but also to certain intangible rights:

• Tangible real estate is labelled as “inmuebles por naturaleza”, and is defined by the fact that such assets “no pueden trasladarse de un lugar a otro”;
• But both CCs, following a long tradition, also extend the concept of bienes inmuebles to certain intangible rights over real estate (the so-called “bienes inmuebles intangibles o incorporales”).

224. Picking up on this tradition, Art. 799 XII CC Jalisco and Art. 738 XII CC Nayarit provide that "los derechos reales sobre inmuebles" are also to be considered as bienes inmuebles. The derechos reales sobre inmuebles are certain defined categories of rights in rem, including but not limited to mortgages²¹².

225. The necessary corollary is that, under the relevant municipal law, the Mortgages constitute bienes inmuebles (and more specifically bienes inmuebles incorporales o intangibles).

2.2. MORTGAGES MEET THE REQUIREMENTS OF ART. 1139(G)

226. Under Art. 1139(g) NAFTA, protected investments include (inter alia) “intangible real estate", provided that the investor uses the asset for “economic benefit or other business purpose".

227. Claimant says that the definition of “intangible real estate” must be established applying the lex situs, in this case the CCs Jalisco and Nayarit, and that under such rules mortgages indeed qualify as intangible real estate. Lion adds that the second requirement is also met: the Mortgages were granted for economic benefit.

228. The Tribunal concurs. It will first explain its reasoning (A.), and then will analyze Mexico's counter-arguments (B.)

²¹¹ H-2, p. 70. ↩
²¹² Docs. 127 and 128 to Zamora Reports. ↩

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A. The Tribunal's reasoning

229. Under Art. 1139(g) NAFTA an asset, to be considered as a protected investment, must meet two requirements: it must constitute “intangible real estate" and it must be used for economic benefit or other business purpose.

230. The Mortgages satisfy both requirements.

231. (i) NAFTA does not offer a definition of the term “intangible real estate” used in its Art. 1139(g). Absent such definition, to determine whether an investor holds “intangible real estate", it is necessary to refer to the law of the host state. As the tribunal stated in Emmis²¹³:

“Public international law does not create property rights. Rather, it accords certain protections to property rights created according to municipal law".

232. The municipal law in this case are the legal systems of the Mexican states of Nayarit and Jalisco, since the encumbered real estate is located in these jurisdictions and both legal systems embrace the lex loci rei sitae principle:

“Artículo 14.- Los bienes inmuebles ubicados en el Estado y los bienes muebles que en él se encuentren, se regirán por las disposiciones de este Código”²¹⁴.

“Artículo 15.- La determinación del derecho aplicable se hará conforme a las siguientes reglas: . . .

V. Los bienes inmuebles ubicados en el Estado de Jalisco y los bienes muebles que en él se encuentren, se regirán por las disposiciones de este Código”²¹⁵.

233. Applying the CCs of Nayarit and Jalisco, the Tribunal has already concluded that both civil law systems explicitly and unequivocally include mortgages within the legal category of derechos reales, which in their turn constitute bienes inmuebles, and more specifically bienes inmuebles intangibles or intangible real estate.

234. The Mortgages thus constitute intangible real estate, and meet the first requirement under Art. 1139(g) NAFTA.

235. There is a small discrepancy between the terminology used in the Civil Codes of Nayarit and Jalisco, and the one used in the Spanish version of the NAFTA: while the Civil Codes refer to bienes inmuebles, the Spanish version of the NAFTA refers to bienes raíces. Both expressions are synonyms in Spanish²¹⁶. The same conclusion, that there is no difference between bienes inmuebles and bienes raíces, is reached by comparing the terminology used

²¹³ Emmis International Holding BV v. Hungary, ICSID Case No. ARB/12/2, Award (16 April 2014), para. 162. Exh. CLA-501. ↩
²¹⁴ Doc. 128 to Zamora Reports. ↩
²¹⁵ Doc. 127 to Zamora Reports. ↩
²¹⁶ See, Diccionario del Español Jurídico, Real Academia Española, entry “bien raíz”; available at http://dej.rae.es/#/entry-id/E41960. ↩

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in the three equally authentic texts of the Treaty²¹⁷: the French text uses the expression “biens immobiliers” as equivalent to “real estate” in English and “bienes raíces” in Spanish.

236. (ii) The second requirement established by Art. 1139(g) is also met: Lion acquired the Mortgages for economic benefit and with a business purpose. Lion is an investment company, and the purpose of the Mortgages was to secure commercial loans, granted to two Mexican enterprises, with the purpose of earning interest (and eventually to invest in certain real estate projects situated in Mexico).

237. For these reasons, the Tribunal is satisfied that the ordinary meaning of “real estate or other property, tangible or intangible” in Art. 1139(g) includes the Mortgages.

Consistent treaty practice

238. The conclusion that the Mortgages constitute protected investments is confirmed by Mexico's treaty practice. Investment treaties signed by Mexico frequently include derechos reales as a category of protected investments, and refer to mortgages as specific derechos reales which are contained within the scope of protection.

239. The treaty practice starts with Mexico's proprietary Model of Investment Promotion and Protection Agreement, which in its Art. 2 provides a list of investments, and specifically extends protection to “any other right in rem, such as mortgages"²¹⁸.

"[...] immovable property, acquired in the expectation or used for the purpose of economic benefit or business purposes, as well as any other right in rem, such as mortgages, liens, pledges, usufructs and similar rights".

240. There are at least 22 BITs signed by Mexico, which follow the same structure, and confirm that in Mexico's understanding hipotecas (mortgages) fall within the category of bienes inmuebles intangibles²¹⁹. The first was the BIT between Mexico and Spain, executed back in 1995, whose Art. 1 (4) (e) extended protection to

“la propiedad de bienes muebles o inmuebles, así como hipotecas, derechos de prenda, usufructos u otra propiedad tangible o intangible [...] adquiridos para actividades económicas u otros fines empresariales”.

241. The language of the Treaty shows that, in Mexico's understanding, hipotecas form part of the general category of “propiedad intangible” and, more specifically, of “propiedad intangible de bienes inmuebles”.

²¹⁷ See Art. 2206 NAFTA, Exh. C-20. ↩
²¹⁸ See Carlos García Fernández, The Mexican Model of Investment Promotion and Protection Agreement. ¿Hay algo nuevo bajo el sol?, in Jorge A. Vargas, Mexican Law: A Treatise for Legal Practitioners and International Investors, Vol. 4, West Group, 2001, p. 68, Exh. CLA-129. ↩
²¹⁹ See a list in Claimant’s presentation at its opening argument, p. 12. ↩

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242. There are good reasons why mortgages should constitute a category of protected investment of their own. Mortgages are also inextricably linked with the piece of real estate that they burden. And the value of this right in rem can be affected by measures adopted by the host state, targeted at such piece of real estate (e.g., expropriation) or specifically at the mortgage (e.g., dilution of preference). The purpose of treaties, when they include mortgages among the protected assets, is to extend the scope of protection to this type of situations.

243. Summing up: the Mortgages – i.e. the derechos reales de garantía – granted to Lion, meet the two conditions required by Art. 1139(g) to qualify as investments protected by the NAFTA.

B. Mexico's counter-arguments considered

244. Mexico raises several counter-arguments.

245. First, Mexico says that Claimant did not invest in mortgages; the only economically relevant transaction was the granting of three short-term Loans²²⁰. The Mortgages in this case are accessory to and form an integral part of the Loans, and the definition of "loans" in paragraph (d) including loans secured by mortgages. Since the Loans have a maturity date of less than three years, they do not constitute investments²²¹.

246. The Tribunal is not convinced.

247. Lion provided funds to Inmobiliaria Bains/C&C Capital, and in exchange obtained two sets of rights:

• personal rights against the borrowers deriving from the Credit Agreements (and the Notes), plus
• rights in rem (derechos reales) over certain real estate assets located in Jalisco and Nayarit.

248. Art. 1139 NAFTA does not define “investment” as an abstract notion. It simply states that “investment means” one of eight categories of assets or “interests”, each defined in a separate paragraph, and each subject to specific requirements. The technique followed by Art. 1139 has an important implication: to be considered as a protected investment, an asset or interest must meet the requirements of one of the eight categories. If an investor holds several interests, and all qualify under different paragraphs of Art. 1139, each interest will be protected. And if some of these interests meet the requirements, and others do not, those compliant will still enjoy protection: an investor cannot be denied protection for compliant interests simply because he or she also holds non-compliant assets.

²²⁰ Reply on Jurisdiction, paras. 90-93. ↩
²²¹ HT, Day 1, 27:14 – 28:18. ↩

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249. In the present case, Lion holds three interests that fall into two categories:

• Credit Agreements and Notes: these interests are not protected, because the Notes do not fall under paragraph (h) (as already explained) and under paragraph (d) loans to unaffiliated borrowers require a minimum maturity of three years – a condition which is not met;
• Mortgages: in accordance with municipal law, mortgages constitute “intangible real estate"; under paragraph (g), “intangible real estate” is protected, provided that the asset was acquired for economic benefit or business purposes – a requirement that Lion does comply with.

250. Art. 1139 NAFTA does not provide that an investor holding distinct interests, some of which individually qualify as a protected investment while others fail, should be denied protection, simply because one or more assets fail the test. Consequently, the Tribunal sees no reason to deny protection to the Mortgages under paragraph (g), simply because its Credit Agreements and Notes fall short of the standards under paragraphs (d) and (h).

251. Mexico has tried to circumvent this conclusion, arguing that the Mortgages are ancillary transactions, and that Loans and Mortgages must be considered as one and the same transaction.

252. Contrary to Mexico's submission, the Mortgages, albeit ancillary, are not and never were integral parts of the Loans. Loans and Mortgages resulted from separate declarations of consent, made by different persons, at different times, and in different documents:

• The Loans were formalized in the Credit Agreements, the contracts in which Lion consented to lend and the Borrowers undertook to repay principal and interest; while
• The Mortgages were created thereafter, in three separate notarial deeds, in which the mortgagors unilaterally consented to the encumbrance of their property as a security for the Loans.

253. From an economics point of view, there is also no identity between Loans and Mortgages: the value of the Loans is the dependent on the borrowers' solvency and capacity to pay, while the value of the Mortgages hinges on the price which the encumbered real estate will attain in a public auction and on the legal preference afforded to the mortgagee.

254. Second, Mexico adds that a mortgage is a security right created in real property that is never delivered to or owned by the creditor; the mortgage only confers a preferential right to the proceeds of the sale of the mortgaged property. Mexico concludes that mortgages are not “real estate or other property" under paragraph (g)²²².

²²² Memorial on Jurisdiction, paras. 121-150. ↩

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255. The Tribunal concurs with Mexico that mortgages are indeed security rights in real estate, and that possession of the asset does not pass to the mortgagee. But Mexico's suggested consequence is a non sequitur.

256. As the Tribunal has already explained, under municipal law mortgages are considered derechos reales, which by law constitute bienes inmuebles intangibles, and Art. 1139(g) expressly extends protection to this category of assets. The ordinary meaning of “intangible real estate” in paragraph (g), which the Tribunal has established by applying Mexico's own municipal law, does not support, but rather contradicts, Mexico's argument that mortgages are to be excluded.

257. Finally, Mexico argues that if the Mortgages are considered separately, that would allow protection of any loan (regardless of its maturity) by just adding a security – a result said to be contrary to the intention of the NAFTA signatories²²³.

258. Mexico's counter-argument is based on a misconception: the Respondent assumes that, if the mortgage constitutes a protected investment, the protection is automatically extended to the loan. This is not so.

259. Loan and mortgage constitute separate categories of interests, with separate sets of requirements to become protected investments. This implies that in certain situations the mortgage may constitute a protected investment, while the underlying loan will not. In those cases, the Treaty protection afforded to the mortgage is not extended to the loan. The scope of protection which the investor enjoys, will depend on the measures adopted by the host state in breach of the Treaty. If such measures affect the mortgage or the encumbered real estate asset, the investor will be entitled to invoke NAFTA protection. If the measures target the loan, no such protection will be forthcoming. To provide a simple example: an investor holding a mortgage, which secures an underlying loan that does not meet the three-year maturity requirement, is protected against an improper expropriation of the real estate, which destroys the value of the mortgage²²⁴ – but not for a measure which specifically targets the transfer of funds deriving from loans²²⁵.

3. CONCLUSION

260. In its Rejoinder on Jurisdiction, Lion asked the Tribunal for the following relief²²⁶:

"140. For the reasons discussed above, the Claimant respectfully requests the Arbitral Tribunal to issue a decision on jurisdiction rejecting Mexico's Jurisdictional Objection and declaring that the Mortgages and Notes are indeed investments under NAFTA Article 1139; and, consequently that it has ratione materiae jurisdiction to adjudicate the claims brought by the Claimant; thus ordering the proceedings to continue and the

²²³ HT, Day 1, 29:14 – 33:2. ↩
²²⁴ In breach of Art. 1110 NAFTA. ↩
²²⁵ E.g., a breach of the right to transfer under Art. 1109 NAFTA. ↩
²²⁶ Rejoinder on Jurisdiction, para. 140. ↩

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Respondent to file the Respondent's Counter-Memorial in the period remaining, according with the Amended Timetable."

261. Mexico ended its Reply on Jurisdiction with the following request²²⁷:

“152. La Demandada solicita al Tribunal desechar la reclamación de conformidad con el Artículo 45(2) de las Reglas de Arbitraje del Mecanismo Complementario del CIADI sobre la base de que la Demandante no ha establecido haber hecho una inversión en México conforme a la definición del Artículo 1139 del TLCAN y, por lo tanto, que este Tribunal carece de jurisdicción ratione personae y ratione materiae".

262. The Tribunal has come to the following conclusions:

• The Notes do not qualify as investments under Art. 1139 NAFTA, for the reasons established in Section VII.1 above;
• The Mortgages do qualify as investments under Art. 1139(g) NAFTA and the Tribunal has ratione materiae and ratione personae jurisdiction to adjudicate the claims brought by Lion based on measures adopted by Mexico that affect the Mortgages, for the reasons set forth in Section VII.2.

263. In accordance with section 16 and the latest version of the Amended Timetable (Annex A) of the Procedural Order No. 1, as well as para. 13 of the Decision on Bifurcation, the suspension of the proceedings is hereby lifted. Respondent still has 78 days from the date of the issue of this Award to the Parties to file its Counter-Memorial in the period remaining²²⁸.

264. The Tribunal will shortly convene the Parties to discuss the continued progression of the arbitration.

265. The decision on costs is reserved.

²²⁷ Reply on Jurisdiction, paras. 152 and 153. ↩
²²⁸ See communication of the Tribunal’s Secretary dated April 27, 2017, issuing an updated calendar and taking note of March 21, 2017 as the agreed-upon date in which Claimant’s Memorial is deemed submitted. ↩

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VIII. DECISION

266. For the foregoing reasons, the Tribunal decides as follows:

1. DECLARES that the Mortgages qualify as investments and that the Tribunal has jurisdiction ratione materiae and ratione personae to adjudicate claims brought by Lion based on measures adopted by Mexico which affect the Mortgages;
2. DECLARES that the Notes do not qualify as investments and that the Tribunal lacks jurisdiction ratione materiae and ratione personae to adjudicate claims brought by Lion based on measures adopted by Mexico which affect the Notes.
3. RESERVES the decision on costs for a future determination.

267. In accordance with section 16 and the latest version of the Amended Timetable (Annex A) of the Procedural Order No. 1, as well as para. 13 of the Decision on Bifurcation, the suspension of the proceedings is hereby lifted. Respondent still has 78 days left to file its Counter-Memorial in the period remaining²²⁹.

268. The Tribunal will shortly convene the Parties to discuss the continued progression of the arbitration.

Place of arbitration: Washington D.C. (USA)

Date: July 30, 2018

²²⁹ See communication of the Tribunal’s Secretary dated April 27, 2017, issuing an updated calendar and taking note of March 21, 2017 as the agreed-upon date in which Claimant’s Memorial is deemed submitted. ↩

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[Signed]

Prof. Juan Fernández-Armesto
President of the Tribunal

Date: July 19, 2018