-14-

Assurances which was provided as a condition subsequent under the Heads of Agreement. The
Heads of Agreement expressly provides that the GOJ’s obligations thereunder will continue as
long as Josco has an interest in JSPI. After the privatization, the GOJ was no longer a
shareholder of JSPI, and due to import liberalization and pursuant to agreement with JSPI, the
GOJ’s responsibilities as a supplier of beans and marketer of JSPI’s products were also
terminated. Therefore, any continuing obligations that the GOJ was required to fulfill under
the Heads of Agreement were in its capacity as a sovereign government, and this exclusion is
not applicable.

C. Procedural Issues

There are no procedural issues that require discussion in connection with this claim
determination

D. Investor's Duties. Except for Section 9.01.4 that is hereby waived, the Investor has
complied with its duties under the OPIC Contract. _

1. Ownership and Eligibility (Section 9.01.2). Section 9.01.2 requires the Investor to
remain at all times the beneficial owner of the insured investment. Although the Investor has
assigned its ownership interest in J SPI to the Joseph Family 1994 Irrevocable Trust as an estate
planning matter, the Joseph Family 1994 Irrevocable Trust is owned beneficially by the same
USS. citizen beneficial owners of the Investor. Therefore, OPIC has determined that the Investor
has complied with the requirements of Section 9.01.2.

2. Self-Insurance (Section 9.01.3). The Investor has continued to bear the risk of loss of
at least 10% of its interest in the foreign enterprise.

3. Assignment (Section 9.01.4). Section 9.01.4 prohibits any assignments of the OPIC
Contract without the prior written consent of OPIC. The Investor transferred its interest in the
OPIC Contract to the Joseph Family 1994 Irrevocable Trust without seeking OPIC’s prior
written consent. Because the same individual owners of the Investor beneficially own such trust,
OPIC has determined that it will waive the requirements of Section 9.01.4.

4. Accounting Records (Section 9.01 .6). Section 9.01.6 requires the Investor to maintain
in the United States certain accounting records for the foreign enterprise necessary to compute
and substantiate compensation, as well as to prepare financial statements in United States dollars
in accordance with principles of accounting generally accepted in the United States (including
principles of currency conversion). Although OPIC has identified certain deficiencies in the
accounting records and financial statements submitted by Josco, Josco has undertaken that it will
correct such deficiencies as necessary for OPIC to compute and substantiate compensation.

5. Reports and Access to Information (Section 9.01.7). Section 9.01.7 requires the
Investor to furnish OPIC with such information related to the Project as OPIC may reasonably
request. The Investor has satisfactorily complied with the requirements of Section 9.01.7.


5:

Full implementation of the privatization of JCTC caused drastic changes to the operations
and financial condition of JSPI. As of October 1993, JCTC was no longer responsible for soya
bean, soya meal or soya oil imports, having turned over all remaining commercial purchasing
activities to the private sector. All purchases of beans, meal and oil were thereafter made by
JSPI, the feed manufacturers, SEPROD or anyone else interested in so doing. Thus. JSPI’s
customers were no longer obligated to purchase from JSPI and could freely import soya bean
products. ”

Josco initially alleged that, after the privatization, the GO] radically altered the tariff
regime applicable to soya bean meal and soya bean oil imports that competed with JSPI’s
products. With respect to soya bean meal, competing imports were permitted to enter Jamaica
under the classification “soya bean residue” with no tariff, instead of the previously used
classification “soya bean meal,” which carried a 35% duty.'* It may be more accurate to say that
this duty-free classification apparently existed in the Jamaican tariff rates well before the
privatization, but was somehow discovered and utilized by JSPI’s customers after JCTC
relinquished its import monopoly functions. With respect to soya bean oil, the Prime Minister
exercised his discretion to reduce the duty applicable to imports of soya oil for further
processing, allowing such oil to enter Jamaica with a 5% duty, or in some cases, a zero duty.

The financial condition of JSP] began to deteriorate as JSPI’s sales of soya bean meal and
soya bean oil both declined due to the increasing imports from producers in the United States,
Trinidad and Tobago and elsewhere that were entering Jamaica with zero or low tariffs and
displacing JSPI’s production.'* These producers enjoyed significant economies of scale and
therefore sold their products at lower prices than those JSPI could offer. These conditions
ultimately forced the closure of JSPI’s soya bean crushing operations in November 1995," JSPI
continued construction of the Project through completion in January 1996, and operated the new
refinery for less than a year before running out of raw materials.'” Josco has indicated that
project completion was necessary because, by the time the tariff reductions were identified,
contractual commitments for the Project had been made. Apparently the sale of oil from the
refinery did not go as well as expected, as consumers were slow in accepting the new concept of
tetra-packed (long life) oil used by JSPI.'8 The refinery operations are now closed.

“} By mutual agreement, after privatization, the GO) and JSPI also discontinued the marketing arrangement and
various other forms of GOJ support to JSPI, such as the guaranteed lines of credit. JSPI began to market its product
to its customers directly and through its majority shareholder, Lasco. Josco has not asserted that the withdrawal of
this form of support by the GOJ was wrongful.
"4 4 report by the USDA states, “In practical effect the two commodities are interchangeable”. USDA/FAS at p. 9
(1996).
15 JSPI’s financial statements indicate losses as of March 1995 of JS9.1 million. and as of February 1996 of J$64
million. In contrast, the financial statements indicate profits for the prior three years as follows: year ending March
31, 1992 - J$21.5 million; year ending March 31, 1993 - 3831.9 million; and year ending March 31, 1994 — $J62.8
million.
46 Josco further contends that the investment it made in the Project out of JSPI’s retained earnings stripped the
company of working capital that could have been used once profitable operations ceased.
" USDA/FAS at p. 6 (1997). The principal raw materials used in the refinery operations were the crude and once-
refined soybean oil produced as a byproduct of the bean crushing operations, which ceased in November 1995.

Id. at p.1.


-10-

the Restatement of Foreign Relations Law.2° The Restatement Second of Contracts further states
the general contract law principle on reliance that “a promise which the promisor should
reasonably expect to induce action or forbearance on the part of the promisee or a third person
and which does induce such action or forbearance is binding if injustice can be avoided only by
enforcement of the promise.”””

The central issue presented is whether the alleged change in tariff treatment after Josco
made an additional equity investment constituted such unfair and unreasonable treatment that the
exercise of the GOJ’s legitimate state action, together with its failure to take remedial action,
constituted a violation of international law. Josco’s argument is that the GOJ failed to disclose
critical information regarding prospective tariff changes or its inability to provide continuing
support for JSP] through some alternative mechanisms that would have been material to Josco’s
decision to invest additional monies in the Project. OPIC finds this argument persuasive.

Under Section 9 of the Heads of Agreement, Josco, as the holder of the Class B shares of
JSPI, had veto power over certain significant actions of the Board of Directors and shareholders
of JSPI, including the non-distribution of profits and acquisition of substantial assets, if such
acquisition required further investment on the part of Josco. Josco thereby contends that it had
the power to block the privatization, since the Project was a condition to the GOJ’s sale of shares
to Lasco under the Share Sale Agreement, and Josco’s willingness to apply retained earnings to
the Project was critical to Lasco’s purchase decision. Josco further contends that it had the
power to block the privatization, since no private investor would purchase the GOJ shares in a
company with a dissenting minority shareholder.

As noted above, both Josco and Lasco (whose shareholders previously served as the
GO3J's appointees on the JSPI board of directors) fully understood that JSP] could not compete
in the international marketplace, and would not survive, without the continuing protections of
the GOJ pursuant to the Heads of Agreement. At the time of the privatization, JCTC had
already relinquished its import monopoly, and the obvious mechanism to be used to maintain
the protected economic environment would be the protective tariffs, which were already in
place. Faced with public knowledge of the broader trade liberalization plans being
implemented by the GOJ, and the potential for decreasing tariffs, on several occasions Josco
and Lasco sought and received explicit oral assurances from various officials of the GOJ that
the existing tariff regime would be maintained. Josco asserts that the clarifications and
assurances it received from the GO) representatives were, at best, misleading and that it
reasonably relied, to its detriment, on this materially misleading information in not exercising
its veto power to block the privatization.

OPIC has determined that Josco’s reliance on the GO] assurances was reasonable.
Josco has represented that oral assurances were provided by the President of the NIBJ, the
entity charged with selling the GOJ’s shares in JSPI, and by an official of the Ministry of
Industry and Commerce. In the context of its positive history in resolving disputes with the

% See Id. at §712, Reporters’ Note 8: See also, Id. At §712. Comment i (“An alien enterprise that has been lawfully
established is protected by international law against changes in the rules governing its operations that are

discriminatory... or are so completely without basis as to be arbitrary in the international sense, i.¢., unfair.”)
27 See Restatement (Second) of the Law of Contracts 2d §90 (1981).


“1

directly caused such loss; and (4) whether the expropriatory effect has continued for the requisite
six-month period.

1. The acts are attributable to a foreign governing authority, which is in de facto
control of the part of the country in which the project is located.

The identity of the foreign governing authority in control of Old Harbour, Jamaica, is not
in question in this case. Instead, the issue in the present case is whether the acts that are the basis
of the claim were attributable to such foreign governing authority.

OPIC has determined that the expropriatory acts were attributable to the GOJ, the foreign
governing authority in control of Old Harbour, Jamaica. The expropriatory action consists of a
change in tariff treatment following the privatization of JSPI in violation of the GOJ’s continuing
contractual obligation to preserve pricing margins, coupled with the failure of the GOJ to
implement alternative relief measures.” First, the changes in the tariff treatment were authorized
and implemented by the GOJ. Second, JCTC (previously JNH), a corporation wholly owned by
the GOJ, was party to the Heads of Agreement and the Share Sale Agreement, and the GOJ in its
sovereign capacity provided Josco with the Letter of Assurances as a condition subsequent to the
Heads of Agreement. Lastly, the letter denying responsibility for any losses or damages to JSP]
arising from the failure to apply, enforce or reinstate tariffs or to substitute alternative relief came
from the Permanent Secretary in the Office of the Prime Minister.

2. The acts are violations of international law (without regard to the availability of local
remedies) or material breaches of local law.

According to the Restatement (Third) of the Foreign Relations Law of the United States
(the “Restatement of the Foreign Relations Law”), a state is responsible under international law
for injury resulting from: “... (2) a repudiation or breach by the state of a contract with a national
of another state (a) where the repudiation or breach is (i) discriminatory, or (ii) motivated by
noncommercial considerations, and compensatory damages are not paid, . . .or (3) other arbitrary
or discriminatory acts or omissions by the state that impair property or other economic interests
of a national of another state”.”?

(A) The GOJ violated a contractual agreement with Josco, giving rise to
an obligation to compensate Josco under international law or. local law.

The Heads of Agreement was entered into in 1974 between Josco and the predecessor of
JCTC (JNH), a corporation wholly owned by the GOJ, and contains various obligations and
undertakings of the GOJ. Although the GOJ was not a party to the Heads of Agreement, the
October 9, 1998 memorandum submitted to OPIC by the Solicitor General of Jamaica
acknowledges that the GOJ granted certain incentives under the Heads of Agreement that were

2 OPIC reiterates that the tariff modifications implemented by the GOJ were actions within the sphere of the GOJ’s
regulatory authority and, therefore, such actions alone did not constitute expropriation.
33 Restatement (Third) of the Foreign Relations Law of the United States §712 (1987).


-6-

After Josco became aware of the erosion of its sales by imports entering with reduced
tariffs, Josco initiated a dialogue with the GOJ beginning in August 1995, seeking the GOJ’s
acknowledgment of obligations with respect to JSPI.'° After an exchange of correspondence and
a series of meetings, on May 21, 1996, the Prime Minister’s Office wrote to JSPI informing the
company of its decision to deny damages for any losses allegedly caused by its actions or
inactions2° Josco asserts that this denial of responsibility for the injury caused to Josco by the
tariff liberalization constituted expropriation. For this reason, Josco has identified May 21, 1996,
as the date on which the expropriatory effect commenced for purposes of the OPIC Contract.

Although the GOJ has denied responsibility for the injury that Josco has allegedly
suffered through the financial decline of JSPI, the GOJ believes it has attempted to address
Josco’s concerns. First, an Inter-Ministerial Committee was established by the Office of the
Prime Minister to examine the charges of JSP]. With respect to the soya residue issue discussed
below, research and testing were conducted, and, due to the marginal differences between
products classified as soya meal and soya residue, approval was obtained from the Caribbean
Common Market (“CARICOM”) Council for Jamaica to impose a duty on soya residue.! To
date, no tariff has been imposed, as producers of animal/poultry feeds have objected to the
adverse impact such a tariff will have on their production costs and ultimately, consumer prices
for meat. In addition, in view of the loss of sales and financial difficulties experienced by JSPI,
the Inter-Ministerial Committee briefed two public lending institutions in Jamaica, the NIBJ and
the Export-Import Bank, to discuss possible solutions for JSPI. The GOJ has represented that the
Export-Import Bank failed to approve JSPI’s loan request, and an NIBJ debt-restructuring
program has not been finalized. In additional discussions with the GOJ led by Lasco, JSPI’s
local investor, who has threatened to file suit against the GOJ for breach of contract, JSPI
proposed that the GOJ finance two shipments of soya beans valued at US $3.5 million and make
an equity infusion of US $1 million into JSPI. The GO)J did not accept either proposal. Thus, all
efforts at reaching some form of settlement have been unsuccessful.

IV. DETERMINATIONS UNDER THE CONTRACT

A. The actions taken bv the Government of Jamaica with respect to Josco ‘s insured
investment in JSP] constitute total expropriation within the meaning of Section 4.0] of

the Contract of Insurance.

Four issues are presented by Section 4.01 of the Contract of Insurance, which sets forth
the requirements for total expropriation coverage: (1) whether the acts were attributable to a
foreign governing authority in de facto control of Old Harbour, Jamaica; (2) whether the acts
constituted a violation of international law or a material breach of local law; (3) whether Josco
was deprived of fundamental rights in the insured investment, and if so, whether the stated acts

'? See correspondence dating from August 1995 through present, at Annex 1, Tabs 610 16.

2° See Annex 1, Tab 14.

21 However, the GOJ did obtain confirmation from the World Congress Tariff Organization that its classification of
soya residue was appropriate. According to the GO], Jamaica would be the only CARICOM partmer that imposed a
tariff on soya residue.


-9-

absence of any evidence to the contrary, the fundamental obligation of the GOJ to maintain
pricing margins survived the privatization.

The obligation under the Heads of Agreement to maintain pricing margins did not specify
the particular mechanism to be used by the GOJ. OPIC recognizes that, absent an explicit
contractual undertaking, it would be unreasonable to require a sovereign entity to maintain a
particular regulatory regime to serve the economic interests of one enterprise, particularly in the
context of the global trend toward trade liberalization benefiting a broad array of consumers.
Therefore, the GOJ’s breach of the Heads of Agreement does not rest on the GOJ failure to alter
the tariff regime, but on the failure to provide continuing support to JSPI by tariff or equivalent
protections, such as subsidies, import quotas or negotiated purchase prices.

OPIC further finds that the GOJ’s breach of the Heads of Agreement was motivated by
noncommercial considerations. All relevant events leading up to the GOJ’s breach of the Heads
of Agreement, i.e., the relinquishment of the import monopoly, the privatization, and the
termination of purchasing and marketing functions, were all prompted by the GOJ’s trade
liberalization policy and not commercial considerations. Additionally, after the privatization, the
GOJ no longer maintained a commercial relationship with JSP], and the continuing contractual
obligation to provide support to JSP] under the Head of Agreement was in the GOJ’s capacity as

a sovereign government and not as a supplier or shareholder of JSPI.

Contrary to its undertakings, the GOJ, virtually simultaneous with its sale of shares,
undertook action that undercut entirely its obligation of continuing support. While the
contractual obligation could not compel the government to change its sovereign acts, it could
require that the government answer in damages for its conduct. Therefore, OPIC has determined
that the GOJ had a continuing contractual obligation under the Heads of Agreement to.maintain a
protective environment for the operations of JSPI through protective tariffs or some other
mechanism. Failure to maintain such protection constituted a breach of contract and gave rise to
aright to compensation. The GOJ's decision not to compensate Josco thereby constitutes a
violation of international law.

B) The GOJ's misleading assurances with respect to the continuation
of the existing tariff regime. or its failure to make explicit its inability to
provide any assurances of continued support in response to direct
inquiries by Josco before the privatization and before Josco made an
additional equity investment in JSPI, constitutes a violation of
international law.

According to the Restatement of the Foreign Relations Law, a government may also be
liable under international law for other arbitrary or discriminatory acts or omissions by the state
that impair property or other economic interests of a national of another state.> “Arbitrary
economic injury” for these purposes refers to an act that is unfair and unreasonable, and inflicts
serious injury to established rights of foreign nationals, though falling short of an act that would
meet the more traditional standard of expropriation set forth in subsection (1) of Section 712 of

25 See Restatement (Third) of Foreign Relations Law of the United States §712(3) (1987).


‘a)

MEMORANDUM OF DETERMINATIONS

Expropriation Claim of Joseph Companies Incorporated of Minneapolis
Jamaica - Contract of Insurance No. E197

1. CLAIM

By letter dated July 17, 1996 (Annex 1), supplemented by letters dated October 16, 1996
(Annex 2), January 30, 1997 (Annex 3), and February 13, 1997 (Annex 4), Joseph Companies
Incorporated of Minneapolis (“Josco” or the “Investor”) filed an application under OPIC
Insurance Contract No. E197 (the “OPIC Contract”), a Form 234 KGT 12-85 (Second Revised)
NS equity contract, as amended (Annex 5), for compensation in the amount of U.S.$1,494,000.
The OPIC Contract covered an equity investment in the expansion of a vegetable oil processing
facility in Jamaica (the “Project”) owned and operated by Jamaica Soya Products Industries
Limited (“JSPI”). The claim is for the expropriation of the Investor's equity interest in the
Project.

In February 1996, Josco (through its legal counsel Richard Berryman) contacted OPIC
regarding the occurrence of the events described in Section III below. An informal exchange of
information and correspondence was maintained until July 17, 1996, when Josco filed a formal
application for compensation for the expropriation of the Project. OPIC requested additional
information, and, on the basis of these requests, subsequent amendments to the initial application
were filed by Josco on October 16, 1996, January 30, 1997, and February 13, 1997. OPIC also
conducted independent research of the facts underlying the claim through various sources,
including formal and informal communications with officials of the Government of Jamaica and
the U.S. Embassy in Kingston, Jamaica. In response to a formal request for information dated
February 7, 1997, OPIC received written responses and comments from the Jamaican Ministry of
Industry, Investment and Commerce dated May 15, 1997 and September 24, 1997, and the
Jamaican Ministry of Finance dated July 10, 1997.

OPIC issued a proposed Memorandum of Determinations (the “Proposed MOD”) on
October 24, 1997. Josco responded to the Proposed MOD by letters, a summary response
memorandum and a paragraph by paragraph analysis all dated January 21, 1998 (Annex 6).
Thereafter, additional factual research was conducted, including interviews with present and
former GOJ officials, and management of JSPI. OPIC received a Statutory Declaration of
Lascelles A. Chin, Managing Director of JSPI, dated April 16, 1998. OPIC also received a
memorandum of the Solicitor General of Jamaica dated October 8, 1998.

Based on all the information provided and certifications made by Josco (together, the
“Application”), OPIC finds that the claim is valid.


-12-

The financial statements of JSPI indicate that the company was financially sound prior to
the privatization and through March 31, 1994.28 Although Josco does not have direct access to
precise market information during the period of the GOJ’s ownership of JSPI, during which all
of JSPI’s product was purchased by JCTC for resale, it appears that sales of both soya bean meal
and soya bean oil by JSP] were steady for most years prior to the privatization. In the period of
1995-1996, sales began to decline, leading ultimately to plant closure in November 1995.

There are indications that during the later years of GOJ ownership in JSPI some of JSPI’s
major customers expressed dissatisfaction with the pricing, reliability and quality of its products
and threatened to use imports exclusively.2? However, it was only with the removal of import
restrictions, the use of the soya residue tariff classification, lower tariffs on soya oil and the
increased availability of foreign exchange, that these customers increasingly found it feasible to
import soya bean products.”° There is no evidence that these customer dissatisfaction issues
would have caused the closure of the plant. Moreover, OPIC must focus on the insured
investment in this case, i.e., the expansion of the JSPI plant.

Josco has represented that it would not have undertaken the additional equity investment
in the Project without the express oral assurances provided by the GOJ. Thus, not only would
the loss not have occurred if the GOJ assurances had been realized, but the investment would not
have been made in the absence of the GOJ assurances. It is the misleading nature of these
assurances that makes the GQJ action unfair. OPIC therefore determines that the GOJ’s failure
to maintain protective tariffs or some alternative mechanism to protect JSP] after making alleged
oral assurances to the contrary was the direct cause of the loss of the insured investment.

(B) Josco was deprived of fundamental rights in the insured investment.

Not all of the investor’s rights with respect to the insured investment need be affected for
an Investor to be fundamentally deprived of the benefits of its investment. In determining
whether total expropriation has occurred, OPIC will examine the significance of the rights in
question in the context of the overall investment arrangement.

In the present case, shortly after completing construction of the plant expansion, the
entire plant closed due to lack of working capital. The principal reason for this working capital
shortage was a significant decline in revenues following the influx of imports eroding JSPI’s
customer base, entering Jamaica at low or zero duties.

Josco (together with its equity partner, Lasco) retains full control of the assets of the
plant, including the assets constructed as part of the Project. These assets remain dormant
because, without protective tariffs or equivalent protections, such as subsidies, import quotas or
negotiated purchase prices, J SPI’s products are not competitive. In addition, the destructive
effects of import competition have totally depleted JSPI’s sources of working capital necessary
for operation. Based on a balance sheet prepared for JSPI as of March 31, 1996, the value of

28 Annex 2, Tab 7.
29 See e.g., USDA/FAS at p. 7 (1996).
id. at p. 4.


“lle

GO] and its positive overall investment history in Jamaica. Josco was comfortable in relying on
the oral assurances given by the governmental entities, which had been its partners for nearly
twenty years. Josco was not a new investor in Jamaica and had established a basis for relying
on oral assurances provided to it. A basic unfairness was worked on Josco by the GOJ’s
misleading assurances with respect to the continuation of the existing tariff regime.

OPIC acknowledges that, according to some reports, trade liberalization had been
occurring in Jamaica since the 1980s, and significant changes in the tariff regime as applied to
the vegetable oil market could be seen by 1991. OPIC further acknowledges the greater social
good effected by the GOJ in not implementing tariffs on soya residue, as higher tariffs would
affect the price of poultry feed and would likely ultimately be reflected in higher priced poultry
being sold to the Jamaican consumer. Thus, the merits of the specific GOJ policy and related
actions or inaction that caused injury to Josco are not in question. Rather it was the misleading
failure of the GOJ in response to direct questions by Josco to disclose the prospective tariff
changes to Josco, or at least to make explicit the GOJ’s inability to provide any assurances of
continued support, that constituted unfair and unreasonable governmental action. Josco
reasonably relied on this governmental action to its detriment in not exercising rights it had to
block the privatization.

(C) Summary.

OPIC finds that the GOJ breached a contractual obligation to maintain margin protection
support through the existing tariff regime or some alternative mechanism, and the failure to
provide adequate compensation for such breach constitutes a violation of international law.
OPIC further finds that the GOJ’s misleading assurances with respect to continuation of the
existing tariff regime, or the GOJ’s failure to at least make explicit its inability to provide any
assurances of continued support in response to direct inquiries by Josco before the privatization
and before Josco made an additional equity investment in JSPI, was fundamentally unfair action
that constituted an independent violation of international law.

3. The acts deprived the Investor of fundamental rights in the insured investment.

A determination under Section 4.01(c) of the OPIC Contract raises two issues: (1) the
issue of causation; and (2) whether Josco was substantially deprived of fundamental rights in the
Project.

(A) The GOJ's failure to disclose prospective changes in the tariff
treatment was the cause of Josco's loss.

To establish direct causation, Josco must demonstrate that the loss was not the result of
exogenous factors, such as the failure to derive benefits from the marketplace. Relevant
questions in establishing causation are (i) whether JSP1 was financially sound prior to the
government action, and (ii) whether the loss would have occurred even in the absence of the
government action.


-8-

within its power to grant and fulfill2* The Letter of Assurances provides further support for the
acknowledgement of the GOJ’s express undertakings under the Heads of Agreement. Therefore,
we conclude that the Heads of Agreement, together with the Letter of Assurances, creates
obligations of the GOJ to Josco.

It was well understood by the parties that the 300 metric ton per day capacity soya
processing plant desired by the GOJ to serve local requirements would not provide a sufficient
economic base to compete in the world market. Consequently, pursuant to the Heads of
Agreement, a protective environment was created for the formation and operations of JSPI. A
critical component for ensuring the maintenance of this protected environment was Section 20 of
the Heads of Agreement, which provided that JSPI would sell crude oil and meal in Jamaica at a
price (subject to the laws of Jamaica) in accordance with a basic formula for determining pricing
margins set forth in an exhibit attached thereto. The express terms of the Heads of Agreement
provide that the benefits therein would continue for as long as Josco maintained its interest in
JSPI.

Delivery of the Letter of Assurances was a condition subsequent under the Heads of
Agreement, and, being executed by a higher government official, served as further evidence of
the GOJ’s awareness of, and general support for, the joint venture and the obligations incurred
by the GOJ. In the Letter of Assurances, the GOJ undertook to use its best efforts to ensure that
“all the facilities necessary for the viability and profitability of the venture [were] made available
to [Josco] on normal commercial terms in so far as they [were] obtainable within the capacity of
the [GOJ]”.

For almost twenty years after the execution of the Heads of Agreement, the gross bean
crushing and refining margins provided by this formula were maintained by the GOJ with
numerous adjustments for fluctuations in the rate of exchange, inflation or other conditions
prevailing in the market place. The pricing margins were implemented by JCTC in the ordinary
course through the combination of the import monopoly, purchasing of beans for JSPI, then
marketing and selling the JSPI’s soya products to Jamaican consumers. Although protective
tariffs were in place on soya meal and soya oil during this period, the Jamaican consumers were
not free to import soya products. After the GOJ’s relinquishment of the import monopoly, it was
generally understood by all concerned that tariff protection would remain as the principal
mechanism for ensuring protection of the margins necessary for JSPI’s survival.

No document executed by Josco and the GOJ during the course of the privatization
expressly or implicitly terminates the Heads of Agreement and all GOJ obligations thereunder.
Outside of JCTC’s marketing functions, which were terminated by mutual agreement after the
privatization, the GOJ’s principal obligation to preserve margin protection was never terminated.
In fact, the Share Sale Agreement incorporates the terms of the Heads of Agreement by
reference. In addition, Josco sought and received oral confirmation that the protections provided
by the Heads of Agreement would be continued following the GOJ’s divestiture of JSP. In the

4 The GOJ argues, however, that the inclusion of express provisions regarding incentives under an investment law,
and the absence of provisions relating to tariff protection, leads to the conclusion that the Heads of Agreement did
not contemplate undertakings with respect to tariff protections.


4

[provided] the economic conditions prevailing at the time of the Agreement
continue or improve throughout the ensuing four (4) year period, [Lasco] will
undertake to upgrade and expand the Plant at an estimated cost of THREE
MILLION EIGHT HUNDRED THOUSAND UNITED STATES DOLLARS
(US$3.8M)....'°

The proposed expansion would enable JSPI to (i) produce fully refined soya bean oil, (ii) reduce
its reliance on a single major oil producer customer (SEPROD), (iii) refocus the company’s
orientation away from meal to the more profitable oil production, and (iv) produce the higher
grade (48% protein) soya bean meal demanded by certain significant customers for JSPI’s soya
bean meal.!! Although Josco, which was not a party to the Share Sale Agreement, had no
contractual obligation to invest in the Project, it nevertheless contributed its pro rata portion of
the Project costs, or approximately U.S.$1,660,000, in the form of reinvested retained earnings.
This is the investment that was insured under the OPIC Contract.

In an effort to ensure the continuation of the margin and other protections provided to
JSPI under the Heads of Agreement, Lasco negotiated Section 4(i) of the Share Sale Agreement,
which provides that the terms and conditions of the Heads of Agreement are incorporated therein
by reference. With the relinquishment of the import monopoly, and an anticipated termination of
JCTC’s marketing functions, it was assumed by Lasco and Josco that the GOJ would perform its
obligations under the Heads of Agreement by providing support in the form of tariff protection
or some other protective device. Lasco represents that its decision to acquire the shares was
based on its contractual assurance of the continued effectiveness of the GOJ obligations under
the Heads of Agreement, and the absence of any statement of intent made by-any of the
negotiating parties acting on behalf of the GOJ to change the prevailing economic environment,
i.e., the existing tariff regime, to the detriment of JSPI.

As part of its due diligence in committing the additional equity investment to the Project,
Josco sought and claims to have received specific oral assurances from various GOJ officials
regarding the continued tariff protection that JSPI’s products would enjoy following
privatization. According to Josco, such express assurances were provided at a meeting on
August 31, 1992 with officials of the National Investment Bank of Jamaica (the “NIBJ”), a
corporation wholly owned by the GOJ. which acted as the GOJ’s agent in selling the
Government owned shares in JSPI. Josco also represents that an official of the Ministry of
Industry and Commerce (currently the Permanent Secretary in the Office of the Prime Minister),
provided oral assurances to both Josco and Lasco regarding continued tariff protection. Josco
represents that at no time did any representative of the GOJ disclose or indicate that there would
be any impending changes in the tariff rates applicable to imported soya bean meal and soya
bean oil.

1 The actual cost of construction was approximately U.S.$4,150,067.

"| The production of oil, though more profitable, was a secondary activity at JSP] where the focus was on producing
soya bean meal for the animal feed industry until the new oil refinery was completed.

® The prospectus issued by the NIBJ to potential investors in JSPI on behalf: of the GOJ did not mention a
prospective liberalization of the tariff regime for soya bean products.


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6. Compulsory Notice ( Section 9.01.8). Josco initially notified OPIC of events
potentially constituting expropriation in February 1996, three months after the closure of the
plant in November 1995. Since this initial contact, OPIC has been kept well informed of
developments regarding JSP] and discussions with Josco.

Arguably, in not providing notice of the deterioration of JSPI’s financial condition until
three months after the plant’s closure, Josco failed to provide OPIC with prompt notice of events
potentially constituting expropriation. However, Josco has stated that it did not receive notice of
the tariff changes for a significant period of time, and discovered the changes only as a result of
investigating the causes of JSPI’s declining sales.

OPIC notes that there is correspondence among JSPI, Josco and the GOJ dating from
early 1995, in which JSPI and Josco complained of imports entering duty free. Nevertheless,
Josco assumed that this was a temporary problem, like others such as smuggling and inflation
that would be corrected promptly by the GOJ upon request from Josco. It was only after its
entreaties for assistance failed to produce any response that Josco determined that action had
occurred that might constitute expropriation under the OPIC Contract. OPIC determines that the .
delay in Josco’s notice to OPIC was reasonable and that Josco provided prompt notice within the
meaning of the OPIC Contract.

7. Preservation, Transfer and Continuing Cooperation (Section 9.01 .9). Section 9.01.9
requires the Investor, in consultation with OPIC, to take all reasonable measures to preserve
property, to pursue available administrative and judicial remedies, and to negotiate in good faith
with the GOJ. In consultation with OPIC, Josco has pursued negotiations with the GOJ and has
taken all other reasonable measures to preserve property. Josco will assign rights as required by
Section 8.02 prior to payment of compensation and will take all actions that may be reasonably
requested by OPIC in preserving such rights.

8. Other Agreements (Section 9.01 .10). The Investor has not entered into any agreement
with a foreign governing authority with respect to compensation for any acts within the scope of
coverage.

9. Worker Rights (Section 9.01.11). The Investor has not taken any actions in violation
of the worker rights requirements of the OPIC Contract.

10. Maintenance of Retained Earnings (Section 10.03). Because Josco’s equity
investment in the Project consisted of reinvested retained earnings that were not represented by
additional shares of stock issued to Josco, OPIC required Josco to represent and warrant in
Section 10.03 that it would cause JSPI to maintain an amount of retained earnings of which
Josco’s share was at least equal to the amount of the equity investment for each period during the
OPIC Contract. Section 10.03 further provided that any reduction in the level of reinvested
retained earnings maintained by the Investor below the amount of the investment would
constitute a return of capital.

Josco’s compliance with these requirements will be discussed in a later determination
covering the compensation amount for this claim.


prohibitive levels to protect local production.* Section 27 of the Heads of Agreement provides
that its terms shall continue in full force and effect “...so long as Josco shall maintain a capital
financial interest in [J]SP1.”

As part of the inducement for Josco to make its original investment (which is no longer
insured by OPIC), and as a condition subsequent to the Heads of Agreement,’ then Minister of
Industry, Commerce and Tourism, the Honorable P.J. Patterson, who is now Prime Minister of
Jamaica, provided a formal letter of assurances to Josco, dated as of July 24, 1974 (the “Letter of
Assurances”). Although the Letter of Assurances contains no specific undertakings from the
GOI, it substantiates the intent of the parties in undertaking the venture in a manner that would
ensure that JSP] would operate in a protected environment.®

During most of the period in which the GOJ maintained an ownership interest in JSPI
(from 1974 to 1993), the combination of the GOJ import monopoly and high tariffs preserved a
favorable environment for JSP1 and protected the gross margins on JSPI’s products. The GOJ
also offered other forms of support to JSPI during the period from 1974 to 1993, including the
guaranty of bank lines of credit for JSPI. JSPI remained profitable, and Josco believed that it
was able to work together with the GOJ amicably to resolve problems that threatened JSPI’s
profitability.”

The process of trade liberalization in Jamaica, which had begun in 1987, was accelerated
during the early 1990s. Consequently, as of December 31, 1991, all monopoly rights of JCTC
were relinquished as the GOJ began plans to divest itself of numerous parastatal companies
including JSPI. The privatization of JSPI was ultimately accomplished in March 1993 when the
GOJ sold its majority equity interest in JSPI to Lasco Processors Limited (the “Purchaser” or
“Lasco”), owned by a group of Jamaican private investors including the former chairman and
other GOJ appointees on the JSP] Board of Directors. The principal terms of the sale of the
GOJ’s interest in JSP] were set forth in the Agreement for Sale of Shares, dated March 24, 1993,
between the GOJ and Lasco (the “Share Sale Agreement”), which required that:

5 tn 1974, the Jamaican agricultural markets were highly protected, as the GOJ maintained import monopolies and
high tariffs on imports of competing products. Without this protection, JSPI would not have been able to compete
with imports enjoying the benefits of significant economies of scale.

® Heads of Agreement, Section 24(i), PMD, Annex 1, Tab 2.

7 The Letter of Assurances provides in pertinent part that “the Government of Jamaica will use its best endeavors to
ensure that all facilities necessary for the viability and profitability of the venture are made available to (JSPI] on
normal commercial terms in so far as they are obtainable within the capacity of the Government of Jamaica, as
determined by its policies from time to time;”.

8 See Annex 2 (October letter, page 3) (“Out of an abundance of caution, Josco requested that the profit assurance
mechanism and other points of agreement reached in negotiations with intermediate level Government personnel be
endorsed by more senior political level officials. This was provided in the form of a letter of assurance from a
senior Minister, the Honorable P.J. Patterson, then Minister of Industry, Commerce and Tourism, now Prime
Minister of Jamaica.”).

° The adverse effects on JSPI’s business from factors such as increased inflation and devaluation were addressed by
the GO) to Josco’s satisfaction through adjustments of the prices on JSPI’s products. A more substantial problem of
alleged bribery of customs officials, which resulted in soya bean oil entering Jamaica duty free, was remedied by
replacement of the management of the customs organization in Jamaica following protests by Josco to the GOI.


I. THE INSURANCE CONTRACT

In March 1993, Josco filed a registration with OPIC for coverage of the Project.
OPIC received Josco’s application for insurance for the Project on October 24, 1994. On June
23, 1995, OPIC executed the OPIC Contract, which provided coverage against the risks of
inconvertibility, expropriation, and political violence. The OPIC Contract covered Josco’s
equity in the Project, contributed in the form of reinvested retained earnings.’

I. FACTUAL SUMMARY

In 1974, Josco (then the 1.S. Joseph Company, Incorporated) entered into a joint venture
agreement (the “Heads of Agreement”) with Jamaican Nutrition Holdings Limited (“JNH”), a
corporation wholly owned by the Government of Jamaica (the “GOJ”), to build an oilseed
crushing plant and related primary oilseed refinery. Pursuant to the Heads of Agreement, JNH
acquired sixty percent (60%) of the equity of the foreign enterprise, JSPI, and Josco acquired
forty percent (40%) of JSPI’s equity.” JSPI was created under the Heads of Agreement as a small
oilseed crushing facility intended to serve principally the domestic market for soya bean meal
and soya bean oil. The Heads of Agreement set forth the parameters of a protected environment
in which JSPI could operate productively for the benefit-of the Jamaican people and without
being swamped by offshore competitors.

Pursuant to the Heads of Agreement, JNH, and later the Jamaica Commodity Trading
Corporation Limited, the successor in interest to JNH under the Heads of Agreement (“JCTC”),
tried to maintain a policy of producing all of the country's meal requirements through JSPI. It
was the responsibility of JCTC to purchase sufficient quantities of soybeans for crushing by JSPI
to satisfy local meal requirements. JSPI crushed the soybeans and sold the meal back to JCTC at
prices and with margins based on a formula that was specified in the Heads of Agreement.‘
JCTC then resold the product to privately-owned Jamaican animal feed manufacturers. The
crude and once-refined soybean oil produced by JSPI was a byproduct of the bean crushing
operations and was sold to SEPROD Limited (a Jamaican oil refinery and the principal consumer
of the soya bean oil sold by JSP!) through JCTC for final refining. The animal feed
manufacturers and SEPROD had no alternative but to purchase soya bean meal and oil from

JSPI, as imports were monopolized by the GO) through JCTC, and import duties were set at

Although $1,660,000 represents the contribution amount, the insured investment amount is $1,494,000, reflecting
the 10% statutory risk retention requirement.

2 OPIC also provided coverage for Josco’s initial investment in JSP, which coverage has expired.

3 See Annex 2 (October letter, p. 5.) “[T]he company from its inception was designed and built as a strictly Jamaican
market entity and not as an international competitor...JSPI’s 300 ton per day plant was no match for the 3,000 tons
per day and greater processing capacities of competitors in North and South America...”.

* The original formula was subsequently adjusted to reflect such factors as iricreased inflation and devaluation in
another Heads of Agreement dated May 25, 1977 (the “Second Heads of Agreement”), a marketing agreement dated
November 25, 1982 (the “Marketing Agreement”), and later, by periodic exchange of letters between the two
companies.


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Josco’s total investment in JSP] was J$139 million (approx. US$3.4 million)! JSPI estimates
that it would need at least J$325 million (approx. US$8.45 million) during the first 24 months of
a start up of its operations.” Moreover, JSPI is currently in debt to the National Commercial
Bank and other creditors in the amount of J$558 million (approx. US$14.5 million). Although
Josco has continually sought remedial action from the GOJ over the past several years, no relief
has been granted to date.

For these reasons, OPIC has determined that Josco has been deprived of fundamental
rights in the insured investment.

4. The violations of law are not remedied and the expropriatory effect continues

for six months.

Although Josco and JSPI have maintained a dialogue with the GOJ since May 21, 1996,
the date on which Josco maintains the alleged expropriatory action commenced, the GOJ has not
taken any action that would provide relief or compensation. During this time, Josco has not
obtained any compensation from other sources. Therefore, OPIC finds that the alleged violations
of law have not been remedied and the alleged expropriatory effect has continued for the
requisite six-month period.

B. Section 4.03 Exclusions.

The OPIC Contract exclusions do not apply to this claim. However, the Section 4.03(b)
“Government Action” exclusion is worthy of a brief discussion.

Section 4.03 Exclusions. No compensation for expropriation shall be payable if:
(b) Government Action The action is taken by the foreign governing authority in its capacity or
through its powers as a purchaser, supplier, creditor, shareholder, director or manager of the
foreign enterprise. :

There is no question that the changes in Jamaica’s tariff regime were undertaken by the
GOJ acting in its sovereign capacity. However, the expropriatory action determined to have
been taken is not the change in tariffs, but the breach by the GOJ of its continuing contractual
obligation to protect JSPI from external competition and to ensure the maintenance of certain
pricing margins through tariffs or some other mechanism. In this context, the issue is whether
this contractual undertaking was an obligation of the GOJ in its capacity as shareholder of the
foreign enterprise or in its capacity as a sovereign government.

The GOJ’s obligation to maintain pricing margins is pursuant to the Heads of
Agreement, which was executed by JNH in its capacity as a shareholder of JSPI, and
established other purchasing, marketing and other relationships that the GOJ would have with
JSPI. The GOJ’s acknowledgement of its obligations was evidenced through the Letter of

3! Counsel to Josco has informed OPIC that due to the declining financial condition of JSPI, no financial statements
were prepared for any period after March 31, 1996.

22 Even if JSPI received this amount for working capital, SPI could not return to commercial viability without some
mechanism to protect it from import competition.


9 Vv. CONCLUSION

For the foregoing reasons, OPIC concludes that the claim of the Investor is valid. The
amount of compensation for the claim will be covered in a separate determination document.

OVERSEAS PRIVATE INVESTMENT CORPORATION

By:
Geor,
Pregidént and Chief Execupve Officer