View
4
Download
0
Category
Preview:
Citation preview
- 1 -
TEAM: TARASSOV
THE LONDON COURT OF INTERNATIONAL ARBITRATION
IN THE PROCEEDINGS BETWEEN
VASIUKI LLC
(CLAIMANT)
V.
REPUBLIC OF BARANCASIA
(RESPONDENT)
LCIA ARBITRATION NO 00/2014
MEMORANDUM FOR RESPONDENT
- 2 -
CONTENTS
PART ONE: JURISDICTION OF THE TRIBUNAL AND ADMISSIBILITY OF CLAIMS - 17 -
I. INTRA-EU BIT JURISDICTIONAL OBJECTION ...................................................................... - 17 -
II. THE BIT HAS BEEN TERMINATED PURSUANT TO ARTICLE 59(1) OF THE VCLT - 18 -
a. Both the BIT and the TFEU Relate to the Same Subject Matter .................................................... - 19 -
b. Subjective Test: Barancasia and Cogitatia Intended the BIT to Be Superseded By the TFEU .. - 22 -
c. Objective test: the BIT Is Incompatible With the TFEU in Its Entirety ....................................... - 23 -
III. TERMINATION PROCEDURE LAID DOWN BY THE VCLT HAS BEEN FULLY
COMPLIED WITH ......................................................................................................................................... - 26 -
IV. THE TRIBUNAL LACKS JURISDICTION BASED ON ARTICLE 30(3) OF THE VCLT .. -
28 -
V. THE TRIBUNAL HAS NO JURISDICTION DUE TO THE LACK OF RESPONDENT’S
CONSENT TO ARBITRATE ...................................................................................................................... - 29 -
VI. THE PRESENT INVESTMENT DOES NOT FULFIL ITS ELEMENTAL
CHARACTERISTIC OF ASSUMPTION OF RISK................................................................................ - 31 -
VII. THE CLAIMS RAISED IN THE CASE AT HAND ARE INADMISSIBLE...................... - 32 -
PART TWO: MERITS...................................................................................................................................... - 37 -
VIII. RESPONDENT HAS ACCORDED CLAIMANT´S INVESTMENTS FAIR AND
EQUITABLE TREATMENT ....................................................................................................................... - 37 -
IX. CONTENT OF THE FET STANDARD IN BARANCASIA-COGITATIA BIT .............. - 37 -
X. RESPONDENT HAS MET INVESTOR’S BASIC REASONABLE AND LEGITIMATE
EXPECTATIONS ........................................................................................................................................... - 39 -
a. Claimant's Expectation with Regard To Alfa Project Cannot Be Built Upon the Lre ................. - 39 -
b. Claimant's Expectations That LRE or FiT Would Not Be Subject to Change Are not Legitimate
And Reasonable ................................................................................................................................................ - 39 -
XI. THE LRE AMENDMENT WAS A JUSTIFIED ACT IN THE PUBLIC INTEREST ..... - 41 -
XII. RESPONDENT HAS ACTED WITH TRANSPARENCY ..................................................... - 44 -
XIII. REJECTION OF PROJECT ALFA DOES NOT GIVE RISE TO BREACH OF THE BIT .. -
45 -
XIV. RESPONDENT’S ACTIONS ARE EXEMPT UNDER THE ESSENTIAL SECURITY
PROVISION OF THE BIT ........................................................................................................................... - 47 -
XV. ESSENTIAL SECURITY INTEREST IS CONTAINED IN ARTICLE 11 OF THE BIT- 47 -
XVI. NPM CLAUSE ENCOMPASSES ECONOMIC CRISES ........................................................ - 48 -
XVII. THE CRISIS IN BARANCASIA CLASSIFIES AS THREAT TO THE ESSENTIAL
SECURITY INTERESTS AND ADOPTED MEASURES ARE EXEMPTED FROM BREACHING
THE BIT ............................................................................................................................................................ - 49 -
XVIII. TAKEN MEASURES WERE NECESSARY AND NON-CONTRIBUTION
REQUIREMENT WAS FULFILLED ........................................................................................................ - 51 -
PART THREE: RESTITUTION AND QUANTUM .............................................................. - 53 -
- 3 -
XIX. JUDICIAL RESTITUTION IS NOT A SUITABLE KIND OF REMEDY IN THE
CURRENT DISPUTE WITH REGARD TO JURISPRUDENCE ...................................................... - 53 -
XX. IT IS NOT LEGALLY PERMISSIBLE TO ORDER JUDICIAL RESTITUTION IN THE
CASE AT HAND ............................................................................................................................................ - 55 -
XXI. JUDICIAL RESTITUTION AWARD MIGHT NOT BE ENFORCEABLE ...................... - 56 -
XXII. MONETARY RESTITUTION IN THE FORM OF ORDERING RESPONDENT TO
continue to pay the pre-2013 feed-in tariff IS NOT LEGALLY PERMISSIBLE ................................ - 57 -
XXIII. CLAIMANT’S CALCULATIONS FOR DAMAGES ARE ILL-SUPPORTED AND
BASED ON FALSE AND INCORRECT LEGAL AND FACTUAL ASSUMPTIONS ................ - 59 -
a. Calculation Related to Project Alfa Provided By Claimant Is Overrated ....................................... - 59 -
b. Calculation Concerning Project Beta Is Not Accurate ...................................................................... - 60 -
c. Calculation Related To Lost Value of Land ........................................................................................ - 61 -
d. Calculation Related To Future Profits .................................................................................................. - 61 -
RELIEF SOUGHT ............................................................................................................................................ - 64 -
- 4 -
LIST OF AUTHORITIES
CITED AS AUTHORITY
ALLEN Allen, B. E. Performance as a Remedy, Chapter 18, JurisNet, LLC,
2011.
BAETENS Baetens, F. ed. Investment law within international law: integrationist
perspectives, Cambridge University Press, 2013.
BJORKLUND Bjorklund, A. Yearbook on International Investment Law & Policy 2013-
2014, Oxford University Press, 2015.
BOUTE Boute, A. “Challenging the Re-Regulation of Liberalized Electricity
Prices Under Investment Arbitration” in: Energy Law Journal, vol.
32, no. 2, 2011.
BOTTINI Bottini, G. “Protection of Essential Interests in the BIT Era” in
Investment Treaty Arbitration and International Law, vol. 1, 2008.
BURKE-WHITE &
VON STADEN
Burke-White W. Von Staden A, “Investment Protection in
Extraordinary Times: The Interpretation and Application of Non-
Precluded Measures Provisions in Bilateral Investment Treaties” in:
Virginia Journal of International Law, vol. 48, no. 307, 2008.
CLODFELTER Clodfelter, Mark A. “The Future Direction of Investment
Agreements in the European Union” in: Santa Clara Journal of
International Law, vol. 12, no. 1, 2014.
CONFORTI Conforti, B., Lobelia, A. “Invalidity and Termination of Treaties:
the role of national courts” in: The Italian Yearbook of International
Law, vol. 14, no.1, 2004.
CORTEN & KLEIN Corten, O. and Klein, P. ed. The Vienna Conventions on the Law of
Treaties. Volume I, Part II: Conclusion and Entry into Force of Treaties,
Oxford University Press, 2011.
DIEHL Diehl, A. The Core Standards of International Investment Protection: Fair
and Equitable Treatment, Kluwer Law International, 2012.
DIMOPOULOS Dimopoulos, A. “The Validity and Applicability of International
Investment Agreements between EU Member States under EU
and International Law” in: Common Market Law Review, vol. 48, no.
1, 2011.
DOLZER &
SCHREUER
Dolzer, R. and Schreuer, S. Principles of International Investment Law,
2nd ed. Oxford University Press, 2012.
- 5 -
DÖRR &
SCHMALENBACH
Dörr, O., Schmalenbach, K. Vienna Convention on the Law of Treaties:
A Commentary, Springer, 2012.
FERNANDO Fernando, R. “State Contracts and Oil Expropriations: The
Aminoil-Kuwait Arbitration” in: Virginia Journal of International Law,
vol. 24, no. 32, 1984.
FORJI Forji, A. G. “Drawing the Right Lessons from ICSID
Jurisprudence on the Doctrine of Necessity” in: The International
Journal of Arbitration, Mediation and Dispute Management, vol. 76, no. 1,
2010.
FONTAINE & DE LY Fontaine, M., De Ly, F. Drafting International Contracts, Transnational
Publishers, 2009.
GARNER Garner, B. A. Black's Law Dictionary, 10th ed. Thomson Reuters,
2014.
GALLUS Gallus N. “The influence of the host State’s level of development
on international investment treaty standards of protection” in:
Journal of World Investment and Trade, 2005.
GAZZINI Gazzini, T., “Foreign Investment and Measures Adopted on
Grounds of Necessity: Towards a Common Understanding” in
Transnational Dispute Management, vol. 7, no 1, 2010.
GEIGER et al. Geiger, R., Khan, D.E., Kotzur, M. European Union Treaties: Treaty
on European Union, Treaty on the Functioning of the European Union, C.H.
Beck, 2015.
HINDELANG Hindelang, S. “Circumventing Primacy of EU Law and the CJEU's
Judicial Monopoly by Resorting to Dispute Resolution
Mechanisms Provided for in Inter-Se Treaties? The Case of Intra-
EU Investment Arbitration” in: Legal Issues of Economic Integration,
vol. 39, no. 2, 2012.
KANTOR KANTOR, M. Valuation for Arbitration, Kluwer Law International,
2008.
LUZI Luzi R. J., Luzi A., “BITs & Economic crises: Do States have carte
blanche?” Juris Publishing, 2008.
MAUPIN Maupin, J. A. “Transparency in International Investment Law: The
Good, the Bad, and the Murky” in: Transparency in International Law,
Cambridge University Press, 2013.
- 6 -
MARBOE Marboe, I. Calculation of Compensation And Damages in International
Investment Law, Oxford University Press, 2009.
MOON Moon, W. J. “Essential Security Interest in International
Investment Agreements” in Journal of International Economic Law,
vol.15, no. 481, 2012.
MUCHLINSKI Muchlinski, P. “Caveat investor’? The relevance of the conduct of
the investor under the fair and equitable treatment standard” in:
International and Comparative Law Quarterly, 2006.
MUSURMANOV Musurmanov, I. U. “The Implications of Romak v Uzbekistan for
Defining the Concept of Investment” in: Australian International
Law Journal, vol. 20, no. 1, 2013.
TUDOR Tudor, I. The Fair and Equitable Treatment Standard in the Law of
Foreign Investment, Oxford University Press, 2008.
ORTOLANI Ortolani, P. “Intra-EU Arbitral Awards vis-à-vis Article 107
TFEU: State Aid Law as a Limit to Compliance” in: Journal of
International Dispute Settlement, vol. 6, no. 1, 2015.
RADU Radu, A. “Foreign Investors in the EU – Which ‘Best Treatment’?
Interactions Between Bilateral Investment Treaties and EU Law”
in: European Law Journal, vol. 14, no. 2, 2008.
REINISCH Reinisch, A. “The Relevance of the UNIDROIT Principles of
International Commercial Contracts in International Investment
Arbitration” in: Uniform Law Review, vol. 19, no. 4, 2014.
SABAHI SABAHI, B. Compensation and restitution in investor-state arbitration:
principles and practice, Oxford University Press, 2011.
SCHNEIDER &
KNOLL
Schneider, M. E. and Knoll, J. Performance as a Remedy, JurisNet,
LLC, 2011.
SCHREUER Schreuer, Ch. “Fair and Equitable Standard: Interaction with Other
Standards” in Transnational Dispute Management, vol. 17, no. 5, 2007.
SORNARAJAH Sornarajah, M. Resistance and Change in the International Law on Foreign
Investment, Cambridge University Press, 2015.
VILLIGER Villiger, M. Commentary on the 1969 Vienna Convention on the Law of
Treaties, Martinus Nijhoff Publishers, 2009.
YANNACA-SMALL Yannaca-Small, K. “Fair and Equitable Treatment Standard:
Recent Developments” in: ICSID Review – Foreign Investment law
Journal, vol. 16, no. 2, 2011.
- 7 -
LIST OF CASES AND ABRITRAL AWARDS
CITED AS DETAILS OF THE CASE
ADF Group Inc. ADF Group Inc. v. United States of America, Award, ICSID Case
No. ARB (AF)/00/1.
AFT v Slovak Republic Alps Finance and Trade AG v. The Slovak Republic, Award,
UNCITRAL.
Amoco Amoco International Finance Corp. v. The Government of the Islamic
Republic of Iran, Partial Award No. 310-56-3, 15 Iran-U.S.
C.T.R. 189.
Arif Mr. Franck Charles Arif v. Republic of Moldova, Award, ICSID
Case No. ARB/11/23.
Arrest Warrant case Case Concerning the Arrest Warrant of 11 April 2000 (Democratic
Republic of the Congo v Belgium), Judgment, I.C.J. Reports 2002.
Azurix Azurix Corp. v. The Argentine Republic, Award, ICSID Case No.
ARB/01/12.
Bayindir Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of
Pakistan, Award, ICSID Case No. ARB/03/29.
BIVAC Bureau Veritas, Inspection, Valuation, Assessment and Control,
BIVAC B.V. v. Republic of Paraguay, Decision on Jurisdiction,
ICSID Case No. ARB/07/9-
CMS CMS Gas Transmission Company v The Argentine Republic, Award,
ICSID Case No ARB/01/08.
Commission v Austria Case C-205/06, Commission of the European Communities v Republic
of Austria [2009] ECR I-01301.
Commission v Italy Case C-531/06, Commission of the European Communities v Italian
Republic [2009] ECR I-04103.
Continental Continental Casualty Company v. The Argentine Republic, Award,
ICSID Case No. ARB/03/9.
Duke Energy Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of
Ecuador, Award, ICSID Case No. ARB/04/19.
Eastern Sugar Eastern Sugar B.V. (Netherlands) v. The Czech Republic, Partial
Award, SCC Case No. 088/2004.
- 8 -
Eco Swiss Case C-126/97 Eco Swiss China Time Ltd. v. Benetton International
NV [1999] E.C.R. I-3055.
EDF EDF (Services) Limited v. Romania, Award, ICSID Case No.
ARB/05/13.
EDF International EDF International S.A., SAUR International S.A. and León
Participaciones Argentinas S.A. v. Argentine Republic, Award,
ICSID Case No. ARB/03/23.
ELSI Elettronica Sicula S.p.A. (ELSI) v. Italy, Award of July 20 1989,
ICJ, General List No. 76.
Enron Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic,
Award, ICSID Case No. ARB/01/3.
Eureko Achmea B.V. v. The Slovak Republic, Award on Jurisdiction,
Arbitrability and Suspension, UNCITRAL, PCA Case No.
2008-13 (formerly Eureko B.V. v. The Slovak Republic).
Francovich Joined cases C-6/90 and C-9/90, Andrea Francovich and Danila
Bonifaci and others v Italian Republic
[1991] ECR I-05357.
Goetz Antoine Goetz et consorts v. République du Burundi, Award, ICSID
Case No. ARB/95/3.
Gottardo Case C-55/00. Judgment of the Court of 15 January 2002.
Elide Gottardo v Istituto nazionale della previdenza sociale (INPS).
Iberdrola Iberdrola Energia S.A. v. Republic of Guatemala, ICSID Case No.
ARB/09/5, Award, 17 August 2012 [Spanish].
LG&E LG&E Energy Corp., LG&E Capital Corp., and LG&E
International, Inc. v. Argentine Republic, Decision on Liability,
ICSID Case No. ARB/02/1.
LIAMCO LIAMCO v. The Government of the Libyan Arab Republic, Award,
ad hoc arbitration 1997.
Matteucci Case C- 235/87 Annunziata Matteucci v. Communaute Francaise de
Belgique (French Regional Council of Belgium) and Another [1988] I-
5589.
Metalclad Metalclad Corporation v. The United Mexican States, Award, ICSID
Case No. ARB(AF)/97/1.
Micula Ioan Micula, Viorel Micula and others v. Romania, Award, ICSID
Case No. ARB/05/20.
- 9 -
Mondev Mondev International Ltd. v. United States of America, Award,
ICSID Case No. ARB (AF)/99/2.
MOX Plant Case C-459/03 Commission v. Ireland [2006] ECR I-4635.
MTD MTD MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of
Chile, Award, ICSID Case No. ARB/01/7.
National Grid National Grid P.L.C. v. Argentina Republic, Award, UNCITRAL.
Noble Ventures Noble Ventures, Inc. v. Romania, Award, ICSID Case No.
ARB/01/11.
Nordsee Case C-102/81, Nordsee Deutsche Hochseefischerei v. Reederei Mond
Hochseefischerei und Reederei Friedrich Busse Hochseefischerei Nordstern
[1982] ECR 1095.
Occidental (LCIA) Occidental Exploration and Production Company v. The Republic of
Ecuador, Final Award, LCIA Case No. UN3467.
Occidental Petroleum Corp. Occidental Petroleum Corporation and Occidental Exploration and
Production Company v. The Republic of Ecuador, ICSID Case No.
ARB/06/11.
Parkerings Parkerings-Compagniet AS v. Republic of Lithuania, Award, ICSID
Case No. ARB/05/8.
Petroleum Frontier Petroleum Services Ltd. v. Czech Republic, Final Award,
UNCITRAL.
Romak Romak S.A. (Switzerland) v The Republic of Uzbekistan, Award,
UNCITRAL, PCA Case No. AA280.
S.D. Myers S.D. Myers Inc. v. Government of Canada, Award, UNCITRAL,
Partial Award.
Saint-Gobain Case C-307/97 Compagnie de Saint-Gobain, Zweigniederlassung
Deutschland v Finanzamt Aachen-Innenstadt [1999] ECR I-06161.
Saluka Saluka Investments BV (The Netherlands) v. The Czech Republic,
Partial Award, UNCITRAL/PCA.
Sapphire Sapphire International Petroleums, Ltd. v. National Iranian Oil
Company, Award, 35 ILR 136 (1963).
Sempra Sempra Energy International v. Argentine Republic, Award, ICSID
Case No. ARB/02/16.
- 10 -
SGS SGS Société Générale de Surveillance S.A. v. Republic of Paraguay,
Decision on Jurisdiction, ICSID Case No. ARB/07/29.
SOABI Société Ouest Africaine des Bétons Industriels v. Senegal, Award,
ICSID Case No. ARB/82/1.
Tecmed Técnicas Medioambientales Tecmed, S.A. v. United Mexican States,
Award, ICSID Case No. ARB(AF)/00/2.
Tehran Hostages case Case concerning United States Diplomatic and Consular Staff in Tehran
(United States of America v. Iran), I.C.J. Reports 1980.
Temple case Case concerning the Temple of Preah Vihear (Cambodia v. Thailand),
Merits, Judgement of 15 June 1962, I.C.J. Reports 1962.
Thunderbird – Dissenting
Opinion
International Thunderbird Gaming Corporation v. The United Mexican
States, UNCITRAL, Separate opinion of Thomas Wälde.
Thunderbird International Thunderbird Gaming Corporation v. The United Mexican
States, Award, UNCITRAL.
Wena Hotels Wena Hotels Ltd. v. Arab Republic of Egypt, Award, ICSID Case
No. ARB/98/4.
MISCELLANEOUS
CITED AS SOURCE
AICPA Statements
American Institute of Certified Public Accountants Statements on
Standards for Valuation Services, 2007. Available at:
http://www.aicpa.org/InterestAreas/ForensicAndValuation/R
esources/Standards/DownloadableDocuments/SSVS_Full_Ver
sion.pdf
DAMODARAN
Damodaran, A. Discounted Cash flow Valuation: Equity and Firm
Models, New York University, 2004. Available at:
http://people.stern.nyu.edu/adamodar/pdfiles/basics.pdf
Fitzmaurice Report Fitzmaurice G., “Second Report on the Law of Treaties”, 1957, UN
Doc. A/CN.4/107.
Press Release European Commission, “Commission asks Member States to terminate
their intra-EU bilateral investment treaties”, Brussels, 18 June 2015.
Peterson Peterson E.L. “Infringement proceedings initiated by European
Commission against five states over intra-EU BITs”. Available at:
http://www.iareporter.com/articles/infringement-proceedings-
- 11 -
initiated-by-european-commission-against-five-states-over-intra-
eu-bits-2/
Opinion 1/09 CJEU, Opinion 1/09, Opinion delivered pursuant to Article 218(11)
TFEU - Draft agreement - Creation of a unified patent litigation system -
European and Community Patents Court - Compatibility of the draft
agreement with the Treaties, 8 March 2011, ECR I-01137.
Policy Paper on
Retrospective Changes
European Renewable Energies Federation, Policy paper on
retrospective changes to RES support, Max 2013.
The European Single
Market
European Commission. The European Single Market. Available at:
http://ec.europa.eu/growth/single-market/index_en.htm
ILC Articles with
Commentaries
Draft Articles on Responsibility of States for Internationally Wrongful Acts,
with commentaries, 2001. Available at:
http://legal.un.org/ilc/texts/instruments/english/commentarie
s/9_6_2001.pdf
Guidelines on State Aid Communication from the European Commission. Guidelines on
State Aid for Environmental Protection and Energy 2014 – 2020,
2014/C 200/01.
Guidance for the design of
renewables support
schemes
Commission Staff Working Document. European Commission
guidance for the design of renewables support schemes, SWD (2013) 439
final.
UNCTAD Series II Fair and Equitable Treatment, UNCTAD Series on Issues in
International Investment Agreements II, UNITED NATIONS (2012).
VCLT Vienna Convention on the Law of Treaties, opened for signature 23
May 1969 (entered into force 27 January 1980).
Energy Sector Consumption Expenses to GDP, IBRD, available at:
http://data.worldbank.org/indicator/GCG.XPN.TOTL.GD.Z
S.
Public Spending Details for
2014
UK Public spending. “Public Spending Details for 2014”. Available
at:
http://www.ukpublicspending.co.uk/year_spending_2014UKbt
_15bc1n#ukgs302
- 12 -
LIST OF ABBREVIATIONS
ABBREVIATION MEANING
¶, para. Paragraph
Art(s). Article(s)
Article 2 Article 2 of the Barancasia-Cogitatia Bilateral Investment Treaty
Article 25 Article 25 of the ILC’s Articles on State’s Responsibility
Barancasia-Cogitatia
BIT/BIT
Agreement between the Republic of Barancasia and the Federal Republic of Cogitatia for the promotion and reciprocal protection of investments
BEA Barancasia Energy Authority
BIT Bilateral investment treaty
CCP Common commercial policy
CJEU Court of Justice of European Union
Contracting Party In relation to parties to the Barancasia-Cogitatia BIT
EU European Union
Extra-EU In relation to countries which are not Member States of the EU
FDI Foreign Direct Investment
FiT Feed-in-Tariff
Charter The Charter of Fundamental Rights of the European Union
Ibid. Ibidem / The same place
ICJ International Court of Justice
ICSID International Centre for Settlement of Investment Disputes
ILC Articles The draft articles on Responsibility of States for internationally wrongful acts, 2001.
- 13 -
Intra-EU In relation to countries which are Member States of the EU
ISDS Investor-State Dispute Settlement
LCIA The London Court of International Arbitration
LRE Law on Renewable Energy
NPM Non Precluded Measure
NT National Treatment
p. /pp. Page / Pages
PCIJ Permanent Court of International Justice
Problem 2015 FDI Moot Court Problem
PO Procedural Order
Regulation Regulation on the Support of Photovoltaic Sector
Statement of Uncontested
Facts
Facts
TEU Treaty on European Union
TFEU Treaty on the Functioning of the European Union
UNCITRAL United Nations Commission on International Trade Law
UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts 2010
VCLT Vienna Convention on the Law of Treaties
- 14 -
The present Memorial of the Republic of Barancasia (“Barancasia” or “Respondent”)
responds to the Request for Arbitration submitted by Vasiuki LLC (“Vasiuki” or “Claimant”)
in a dispute concerning Barancasia’s alleged breach of its obligations under the Agreement
between the Republic of Barancasia and the Federal Republic of Cogitatia for the Promotion
and Protection of Investments (“BIT”).
Respondent is represented by the Team Tarassov. All correspondence addressed to
Respondent shall therefore be delivered for the attention of the Team Tarassov.
- 15 -
STATEMENT OF FACTS
In 1998, Cogitatia and Barancasia entered into the BIT.1 Both States belong to the group of
European countries which later, in 2004, acceded to the European Union (“EU”).2 Since then,
primary as well as secondary EU law has been binding upon both Member States. Therefore,
Barancasia’s government reviewed its Intra-European Union bilateral investment treaties
(“Intra-EU BITs”) and found them redundant based on the fact that EU law regulates
investment flows within the European Union. In order to conform to EU law, in 2006,
Barancasia announced its intention to terminate all its Intra-EU BITs and later that year it
formally resolved to do so.3
Barancasia has become highly dedicated to the EU’s climate and energy targets,4 and in 2010
adopted the Law on Renewable Energy (“LRE”).5 The regime established by the LRE became
tremendously attractive to foreign investors, mainly due to Barancasia’s commitment to ensure
sustainable development of renewable technology sources as well as due to the pre-announced
percentage of investment return.6 During 2011, though, a ground-breaking technology was
invented, which made solar panels substantially cheaper to manufacture and dramatically
reduced the costs of development.7 Consequently, investors’ profitability increased sharply and
disproportionally. Eventually a phenomenon called ‘the solar bubble’ was created under which
the sole object of business was the unproportioned level of profit flowing from the feed-in
tariff (“FiT”). By then, Barancasia Energy Authority (“BEA”) received over 7,000 applications
for licences.8
As a result of this development, solar energy framework in many European countries including
Barancasia became unsustainable. During 2012 it started to be obvious that the pay-out of the
fixed feed-in tariffs does not fulfil the purpose and aim of the LRE.9 On the contrary, the LRE
became solely a ‘factory’ on investors’ excessive profits.10 The unsustainability of the support
scheme was undisputable. It represented a huge financial burden on Barancasia since the
1 BIT, Problem, Annex No. 1, p. 25. 2 Statement of Uncontested Facts, Problem, p. 20, ¶ 5. 3 Ibid., ¶ 6; Press Release, Problem, Annex No. 5, Problem, p. 36; Government Resolution, Problem, Annex No. 6, p. 37. 4 Statement of Uncontested Facts, Problem, p. 20, ¶ 7. 5 Statement of Uncontested Facts, Problem, p. 21, ¶ 14; LRE, Problem, Annex No. 2, pp. 32-33. 6 Statement of Uncontested Facts, Problem, p. 22, ¶¶ 15-17. 7 Statement of Uncontested Facts, Problem, p. 23, ¶ 25. 8 Ibid., ¶ 26. 9 Ibid., ¶ 28; LRE, Problem, Annex No. 2, p. 32. 10 Ibid., ¶ 28.
- 16 -
support was financed solely from the state budget; moreover, it was not even physically
possible to connect all new applicants to the national electricity grid.11 In addition, as this issue
started to be publicly discussed, national strikes were organized because of the inequality of
support between solar energy and the core values of society, such as education.12
The crisis emerged unexpectedly. It cannot be characterised as a result of accumulation of a
number of partial factors which in their entirety substantially influence the economic system.
On the contrary, the crisis was caused by one single factor – unforeseen technological
development. Barancasia found itself on the edge of a national crisis that had to be dealt with
immediately. Hence, it promised to examine its legislation in cooperation with representatives
of the industry, who were invited to present their views.13 As a result of mutual consensus,
Barancasia adopted an amendment of the LRE providing for an annual review of the tariffs.14
Subsequently, the Barancasia Energy Authority calculated and announced a new feed-in tariff
amounting to 0.15 EUR/kWh, applicable from 1 January 2013, while the same investment
return calculation was preserved.15
As has already been stated, the enactment of the LRE attracted a great deal of investors, inter
alia, Vasiuki LLC who apparently finds the subsequent conduct of Barancasia to be harmful
towards its investments. For this reason, it filed a Request for Arbitration with the London
Court of International Arbitration (“LCIA”), by which it initiated arbitration proceedings
against Barancasia, claiming the infringement of the fair and equitable treatment standard
(“FET”).16
11 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 12 Ibid., ¶¶ 28, 32. 13 Statement of Uncontested Facts, Problem, p. 24, ¶¶ 32, 34. 14 Ibid., ¶ 34; Amendment of Article 4 LRE, Problem, Annex No. 4, p. 35. 15 Statement of Uncontested Facts, Problem, p. 24, ¶ 35; Procedural Order No 2, Problem, pp. 59-60, ¶ 27. 16 See Request for Arbitration, Problem, pp. 3-6.
- 17 -
PART ONE: JURISDICTION OF THE TRIBUNAL AND
ADMISSIBILITY OF CLAIMS
I. INTRA-EU BIT JURISDICTIONAL OBJECTION
1. Respondent submits that the Tribunal lacks jurisdiction over the current dispute based on
the fact that as a result of the Respondent’s accession to the European Union, EU law
superseded the preceding BIT.
2. This statement may be, inter alia, evidenced by the wording of Article 2 of the 2004 Act
Concerning the Conditions of Accession, in which the new Member States accepted that
“[f]rom the date of accession, the provisions of the original Treaties and the acts adopted by the institutions
and the European Central Bank before accession shall be binding.”17
3. It will be argued below that the termination of the prior treaty, i.e. the BIT, occurred by
virtue of Article 59(1) of the Vienna Convention on the Law of Treaties (“VCLT”),
in eventum, that the Tribunal lacks jurisdiction pursuant to Article 30(3) of the VCLT.
4. Respondent considers it important to first address the issue of whether EU primary law is
to be considered as international public law in order to advocate the relevance of the VCLT
applicability.18 The BIT, as well as the Treaty on the Functioning of the European Union
(“TFEU”), Treaty on European Union (“TEU”) and Accession Treaties have been all
formed by the process and in form of a public international law treaty within the meaning
of Articles 1 and 2(1) of the VCLT.19 Article 54 of the TEU together with Article 357 the
TFEU20 clearly suggest that those treaties have been concluded within the realm of
international public law. Additionally, pursuant to Article 48 of the TEU, those treaties
may be altered only in accordance with the appropriate international public law procedure.
In this context, “[w]hile it is true that the TEU and TFEU […] go, in terms of integration, far
beyond what has been seen in respect of any other international organization, this does not render these
17 See Article 2 of the 2004 Act Concerning the Conditions of Accession. 18 Pursuant to Article 1 VCLT “[t]he present Convention applies to treaties between States.” Then, according to Article 2 (1) VCLT, “[f]or the purposes of the present Convention: (a) 'treaty' means an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.” 19 HINDELANG, p. 183. 20 Article 54 TEU and Article 357 TFEU both identically stipulate that “[t]his Treaty shall be ratified by the High Contracting Parties in accordance with their respective constitutional requirements. The Instruments of ratification shall be deposited with the Government of the Italian Republic.”
- 18 -
treaties an aliud, but ‘merely’ a ‘treaty plus’ compared to other public international law treaties.”21
Respondent therefore does not find that the ‘unique’ regime established by the European
Treaties excludes those instruments from regular sources of international public law. Based
on that it must be concluded that the VCLT is applicable when the matter of BIT-EU law
inconsistency is being considered.
II. THE BIT HAS BEEN TERMINATED PURSUANT TO ARTICLE
59(1) OF THE VCLT
5. According to Article 59(1) of the VCLT,
“[a] treaty shall be considered as terminated if all the parties to it conclude a
later treaty relating to the same subject-matter and
(a) it appears from the later treaty or is otherwise established that the parties
intended that the matter should be governed by that treaty; or
(b) the provisions of the later treaty are so far incompatible with those of the
earlier one that the two treaties are not capable of being applied at the same
time.”22
6. Respondent contends that the conditions imposed by Article 59(1) of the VCLT were met
and, as a consequence, the later treaty – the TFEU – prevails over the BIT. In other words,
based on Article 59(1), the BIT has been effectively terminated. If the Tribunal were not
to find the common intention of the contracting States to be present, then Respondent
still considers the alternative condition of incompatibility to be fulfilled.
7. The VCLT remains silent on whether the whole treaty or only its parts shall be terminated.
However, “[t]he text would indicate - and this is confirmed by the travaux préparatoires of Article 59
-that the term ‘treaty’ refers to the entire treaty, the later one substituting en bloc and, hence, abrogating the
earlier one.”23 There are therefore no doubts that in accordance with Article 59 of the VCLT,
the BIT shall be considered as terminated in its entirety.
21 HINDELANG, pp. 185-186. 22 See Article 59(1) VCLT. 23 VILLIGER, p. 725.
- 19 -
A. BOTH THE BIT AND THE TFEU RELATE TO THE SAME SUBJECT
MATTER
8. The determination of the same subject matter depends on the existence of conflicting
obligations with regard to the same subject matter; not on whether both Treaties provide
for the same rights.24
9. Respondent adopts a broad definition of the notion of the ‘same subject matter’ in the
sense that the fulfilment of the obligation under one treaty affects the fulfilment of the
obligation under another.25 Both the BIT and the TFEU cover foreign investment
activities, providing rules for the same aspects of foreign investment regulation, namely
their post-establishment treatment and operation, capital movements and limitations on
private property rights.26 The fact that EU law does not contain precisely the same
provisions as the BIT, e.g. in the form of the FET standard, rules on expropriation and
investor–state dispute resolution does not in any event mean that the performance of
Respondent’s obligations under the BIT does not affect fulfilment of obligations under
the TFEU and vice versa.
10. However, even if the narrow definition was adopted, the substantial similarity between
those successive treaties would have to be found. In this context, Respondent argues that
even though not precisely identical, both Treaties refer to the same issues in certainly not
minor or just incidental manner.27 “Indeed, even if there is no distinct chapter on investment in the
Treaties, there are provisions in the EU law that concern investment.”28 This statement is evidenced
by the following.
11. First, both Treaties serve the identical purpose to broaden and strengthen mutual
economic relationships and to promote the flow of capital and economic development of
the contracting parties. The preamble of the BIT makes it clear that it was concluded in
order “to develop economic co-operation to the mutual benefit of both Contracting Parties.”29 Similarly,
within the preamble of the TFEU, one can find dedications “to ensure the economic and social
progress of their States by common action to eliminate the barriers which divide Europe […] to strengthen
24 DIMOPOULOS, p. 74. 25 Ibid., p. 73. 26 DIMOPOULOS, p. 74. 27 Cf. Eureko, ¶ 242. 28 RADU, p. 239. 29 See Preamble of the BIT, Problem, p. 25.
- 20 -
the unity of their economies […]”30 One of the most important underlying purposes of the EU
as such is to create a functioning single market within its frontiers, by virtue of “providing a
regulatory framework that fosters the free movement of goods and the free movement of services, and enhances
competitiveness; removing existing barriers to intra-EU trade and preventing the creation of new ones;
promoting a business and consumer-friendly environment based on transparent, simple, and consistent rules
offering legal certainty and clarity.”31 Regarding this statement in the investment policy context,
it is evident that the EU supports promotion and protection of investments between the
Member States. To this end, the rules on the free movement of goods, services and capital
which effectively protect and promote investments in relations between the Member States
were adopted. In this regard, the former ECJ held that any restrictions in terms of internal
market rules being liable “to deter investors from other Member States from investing in their capital”32
shall be prohibited.
12. Second, rules on the free movement of capital can be found in both Treaties. The BIT
contains relevant provisions within its Article 6 guaranteeing transfer of payments in a
freely convertible currency without any restrictions and undue delay. Similarly, the TFEU
reflects this issue in Article 63. Under its paragraph 1, “all restrictions on the movement of capital
between Member States and between Member States and third countries shall be prohibited.”33 The
following paragraph makes clear that “all restrictions on payments between Member States and
between Member States and third countries shall be prohibited.”34 In Commission v Austria, the Court
of Justice of the European Union (“CJEU”) already acknowledged these stipulations on
transfer of capital as contained in the BIT and the TFEU as overlapping.35
13. Third, Respondent finds substantive standards of protection to be identical. Both Treaties
provide for rules on the establishment of the investments. Pursuant to Article 2(1) of the
BIT, “[e]ach Contracting Party shall encourage and create favourable conditions for investors of the other
Contracting Party to make investments in its territory and shall admit such investments in accordance with
its laws and regulations.”36 Establishment of investments is, however, also covered by the
TFEU within its Article 8, which by stating the aim to eliminate inequalities effectively
prohibits any restrictions preventing foreign investors’ access to the market in the territory
30 Ibid. 31 See The European Single Market. 32 Commission v Italy, ¶ 46. 33 See Article 63(1) TFEU. 34 See Article 63(2) TFEU. 35 Commission v Austria, ¶ 26. 36 See Article 2(1) BIT, Problem, p. 26.
- 21 -
of another Member State. In more specific terms, the freedom of establishment is subject
to Article 49 of the TFEU, which stipulates that “restrictions on the freedom of establishment of
nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition
shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any
Member State established in the territory of any Member State.”37
14. Fourth, it is stipulated by virtue of Article 3(1) of the BIT that once the investment has
been admitted, the Host State “shall accord to investments and returns of investors of the other
Contracting Party treatment which is fair and equitable and not less favourable than that which it accords
to investments and returns of its own investors or to investments and returns of investors of any third State,
whichever is more favourable.”38 The subsequent paragraph sets forth that the treatment which
is no less favourable than that which the Contracting Party accords to its own investors
shall be accorded to the investors of the other Contracting Party as well.39 The reflection
of the National Treatment (“NT”) clause is clearly visible within Article 18 of the TFEU,
as it is undisputable that the purpose of the NT clause is mainly to prevent discrimination
towards investors. The first part of Article 18 of the TFEU lays down that “[w]ithin the
scope of application of the Treaties, and without prejudice to any special provisions contained therein, any
discrimination on grounds of nationality shall be prohibited.”40 For the sake of completeness,
Respondent submits that in accordance with Article 54 of the TFEU, the legal entities are
also beneficiaries of Article 18 of the TFEU.41
15. Finally, as both Treaties provide for the rules on the protection of investments carried out
within the EU internal market, they also establish remedy mechanisms based upon which
investors may seek compensation for damage caused by Member States (see the Francovich
case),42 contrary to what was wrongly concluded by the Eastern Sugar tribunal.43
16. With regard to the above, Respondent finds the fulfilment of the “same subject matter”
condition to be proven.
37 Article 49 TFEU. 38 See Article 3(1) BIT, Problem, p. 26. 39 See Article 3(2) BIT, Problem, pp. 26-27. 40 See Article 18 TFEU. 41 GEIGER et al., p. 240. 42 See Francovich. 43 See Eastern Sugar, ¶ 180.
- 22 -
B. SUBJECTIVE TEST: BARANCASIA AND COGITATIA INTENDED THE BIT TO
BE SUPERSEDED BY THE TFEU
17. Respondent asserts that both Barancasia and Cogitatia intended the TFEU to supersede
the BIT in question. This may be evidenced, inter alia, by the fact that no protocol or
declaration giving the priority to the BIT over EU law has been adopted. Respondent
believes that had parties not intended EU law to supersede the BIT, they could have made
a declaration or could have issued a protocol clarifying their position on that issue,
following the example of many acceding Member States.
18. To give evidence on such practice of new Member States, Respondent submits that Article
2 of the Protocol No. 20 to the TFEU states the following. “The United Kingdom and Ireland
may continue to make arrangements between themselves relating to the movement of persons between their
territories […] Nothing in Articles 26 and 77 of the Treaty on the Functioning of the European Union,
in any other provision of that Treaty or of the Treaty on European Union or in any measure adopted
under them, shall affect any such arrangements.”44 Another example is
51. Declaration by the Kingdom of Belgium on national Parliaments45 Belgium solely
clarified its position on which institutions act as components of the national parliamentary
system.
19. Furthermore, Respondent considers this conclusion to be justified by the wording of
Article 6(12) of the 2004 Act Concerning the Conditions of Accession, according to which
“[t]he new Member States shall take appropriate measures, where necessary, to adjust their position in
relation to […] those international agreements to which the Community or to which other Member States
are also parties, to the rights and obligations arising from their accession to the Union.”46 As both
Contracting Parties failed to do so, it clearly demonstrates their common approach
towards the redundancy of the BIT within the European legal order.
44 Article 2 of the Protocol No. 20 on the Application of Certain Aspects of Article 26 of the Treaty on the Functioning of the European Union to the United Kingdom and to Ireland. 45 51. Declaration by the Kingdom of Belgium on national Parliaments: “Belgium wishes to make clear that, in accordance with its constitutional law, not only the Chamber of Representatives and Senate of the Federal Parliament but also the parliamentary assemblies of the Communities and the Regions act, in terms of the competences exercised by the Union, as components of the national parliamentary system or chambers of the national Parliament.” 46 See Article 6(12) of the 2004 Act Concerning the Conditions of Accession.
- 23 -
20. All the above mentioned indicates the presence of the Contracting Parties’ common
intention to terminate the BIT by virtue of the later treaty, and thus Article 59(1)(a) of the
VCLT applies.
C. OBJECTIVE TEST: THE BIT IS INCOMPATIBLE WITH THE TFEU IN ITS
ENTIRETY
21. However, in the event that the Tribunal does not consider the arguments provided above
as persuasive, Respondent offers its arguments proving the incompatibility of the Treaties
to the extent that they cannot prevail over each other.
22. The incompatibility under Article 59(1)(b) of the VCLT occurs once the application of the
BIT leads to the violation of the TFEU and vice versa. “[T]he specific determination of whether the
different sets of rules in intra-EU BITs and in the EU Treaties are incompatible and place conflicting
obligations on the Member States presents the main condition that needs to be satisfied in order to consider
intra-EU BITs as terminated by EU law.”47 As has already been suggested above, both the
TFEU and the BIT cover the same subject matter. The BIT does so in a comprehensive
manner, whereas the TFEU deals with the issue of intra-EU BITs mainly by virtue of its
various stipulations on the internal market. Even though the subject matter is overlapping,
the BIT might be perceived as encompassing certain rights providing for a more specific
protection of the investors. However, this does not mean that the subject matter of the
BIT is narrower or different.48 Nonetheless, as those additional rights and benefits are only
available to investors of Barancasian and Cogitatian nationality, they breach the general
principle of non-discrimination on the basis of nationality.
23. Article 18(1) of the TFEU constitutes the guiding principle of the EU law and a necessary
precondition for the functioning of the single market.49 The prohibition of discrimination
has direct effect and grants subjective rights which may be invoked by the beneficiaries,
i.e. all EU citizens.50
47 DIMOPOULOS, p. 74. 48 Ibid., p. 74. 49 GEIGER et al., p. 237. 50 Ibid., p. 240.
- 24 -
24. Rights that might be perceived as additional are generally perceived to be the FET
standard, rules on expropriation and investor-state dispute settlement (Article 8(2)(b)–(d)
of the BIT). Respondent will address those areas in turn.
FAIR AND EQUITABLE TREATMENT
25. First of all, within the ambit of Article 2(2) of the BIT, the investments of investors of
either Contracting Party shall “at all times be accorded fair and equitable treatment in the territory of
the other Contracting Party”.51 The BIT itself does not contain a definition of the FET
standard. As a matter of fact, it is generally considered as a flexible, undefinable principle
dependent on a case-by-case analysis.52 The mere scope of the FET principle is therefore
extremely abstract, broad and non-unified. Yet, tribunals “must be disciplined by being based
upon state practice and judicial or arbitral case law or other sources of customary or general international
law.”53
26. Even though certain overlaps with the TFEU are present, e.g. the equitable treatment
standard pursuant to Article 18 of the TFEU, it can be concluded that EU law is by far
more rigid. In this sense, the FET clause may be regarded as providing an additional right
to Claimant and other investors from Cogitatia, which would be discriminatory towards
other nationals of other Member States.
EXPROPRIATION RULES
27. Article 5 of the BIT sets forth specific rules on expropriation. It stipulates that
expropriation of investment is prohibited without prompt, adequate and effective
compensation, unless it serves a public purpose.54 “Such compensation shall amount to the fair
market value of the investment expropriated immediately before expropriation or impending expropriation
became public knowledge, whichever is the earlier. The compensation shall carry interest from the date of
expropriation until the date of payment, be made without undue delay, be effectively realizable and be freely
transferable in a freely convertible currency.”55
28. In terms of EU law, the second sentence of Article 17(1) of the Charter of Fundamental
Rights of the European Union (“Charter”) stipulates the following. “No one may be deprived
51 Article 2(2) BIT, Problem, p. 26. 52 DOLZER & SCHREUER, pp. 132-133. 53 ADF Group Inc., ¶ 119. 54 Article 5(1) BIT, Problem, pp. 27-28. 55 See Article 5(1) BIT, Problem, pp. 27-28.
- 25 -
of his or her possessions, except in the public interest and in the cases and under the conditions provided for
by law, subject to fair compensation being paid in good time for their loss.”56 It is apparent that whereas
the BIT contains its own detailed rules, the Charter solely provides for a general legal
framework and in further details refers to particular national laws. Moreover, the personal
scope of the Charter’s application is considerably narrower.57
29. It must be reminded that the Charter enjoys the same legal force as the Treaties.58 Apart
from that, Article 17(1) of the Charter not only refers to particular national laws, but it
even lays down its own EU law standards in the form of ‘fair compensation’ and ‘good
time’, in case national laws are silent in this respect. It cannot be therefore held that the
EU primary law does not contain the rules on expropriation as such.
30. Since BIT rules on expropriation are much more extensive and detailed, they provide for
the additional protection of investment.
INVESTOR-STATE ARBITRATION
31. According to Article 8(2) of the BIT, in the case of non-settled controversy, investors are
allowed to opt for ICSID, ad hoc or LCIA arbitration. The investor–state arbitration is
not, on the other hand, replicated by EU law at all. It is not permissible for an EU national
to initiate arbitration proceedings against the Member States for a violation of the Treaties.
32. It has been suggested by the CJEU that incompatibilities created by the additional rights
provided only to certain EU citizens may be cured by unilaterally extending these rights to
all the other EU nationals.59 Nevertheless, “whether such unilateral extension of BIT rights is
compatible with EU law depends on whether it respects the primacy of EU law.”60 Respondent,
though, highlights the fact that the possibility of unilateral extension is not a feasible
option, since it does not actually cure the ‘incompatibility in its entirety’. Particularly,
Article 18 of the TFEU would not be complied with simply because the favourable regime
of one of the intra-EU BITs has been extended. On the contrary, in order to comply with
56 See Article 17(1) Charter. 57 The wording of Article 17 of the Charter is, although narrow, fully consistent with Article 345 TFEU laying down that Treaties shall not prejudice the rules in Member States governing the system of property ownership, and also with the 1. Declaration concerning the Charter of Fundamental Rights of the European Union stating that “[t]he Charter does not extend the field of application of Union law beyond the powers of the Union or establish any new power or task for the Union, or modify powers and tasks as defined by the Treaties.” 58 See Article 6 TEU. 59 Gottardo, ¶ 34. 60 DIMOPOULOS, p. 85.
- 26 -
EU law, all the intra-EU BITs would have to be unilaterally extended.61 Since no other
Member States is a party to the present arbitration proceedings, ordering effective
unilateral extension cannot be achieved at this point. Furthermore, Member States would
never be able to extend the additional rights contained in the BITs to their own nationals
as those simply cannot be beneficiaries of the BITs.
33. The above is also without any prejudice to the misleading position of the Eastern Sugar
tribunal, stating that if particular investors / EU citizens feel that the additional rights of
the particular BIT should be extended to their benefit, they should claim their rights under
Article 18 of the TFEU individually.62 This conclusion is clearly erroneous and it fails to
grasp the true objective of Article 18.
34. However, even if it is accepted that additional substantive rights might be legitimately
extended to other EU nationals, the same could not be held regarding the additional
procedural right to initiate investor-state arbitration, as it collides with the principle of
primacy and autonomy of EU law.63 In this context, Dimopoulos considers that “unilateral
extension of the right to initiate investor-state arbitration to all EU nationals does not present a viable
solution. It would only result in […] the breach of the exclusive jurisdiction of the Court of Justice.”64 In
any case, the existence of such a dispute resolution mechanism still violates Article 18 of
the TFEU, as it discriminates against other EU citizens.
35. Overall, it has been shown that pursuant to Article 59(1)(b) of the VCLT, there are serious
incompatibilities causing the BIT to be terminated in its entirety. Hence, the Tribunal has
no jurisdiction to hear the current dispute.
III. TERMINATION PROCEDURE LAID DOWN BY THE VCLT HAS
BEEN FULLY COMPLIED WITH
36. In addition, Respondent highlights the fact that the termination procedure established by
virtue of Article 65 of the VCLT has been fully complied with.
37. Under this Article, the party invoking termination of the treaty must notify the other party
of the claim and such notification shall indicate the measure proposed to be taken with
61 See judgements in Saint-Gobain, Matteucci and Gottardo. 62 See Eastern Sugar, ¶ 170. 63 For further details, see Chapter on Admissibility of this Memorandum, p. 31. 64 DIMOPOULOS, p. 91.
- 27 -
respect to the treaty and reasons thereof.65 In accordance with Article 67(1) of the VCLT,
the notification shall be made in writing, while Article 67(2) of the VCLT sets forth that
the notification must be carried out through an instrument communicated to the other
party.
38. Respondent notified Cogitatia by Notification from 29 June 2007, where it specified the
measure to be taken (i.e. termination).66 Cogitatia then confirmed the acceptance of the
notification on 28 September 2007,67 whereby the conditions set by Article 78(b) and (c)
have been met and the notification should thus be deemed perfected.
39. Concerning the reasons for the termination, those have been publicly announced. For
instance, in Daily News published on 15 November 2006, the Prime Minister stated
Respondent’s intention to terminate intra-EU BITs “as there is no more necessity for these
instruments of public international law within the legal framework of the new European Union.”68
Indeed, Article 67(2) of the VCLT lays down that the notification including the reason
thereof must be correctly communicated; nonetheless, it is generally accepted by
distinguished scholars and supported by the wording of the Article in question that the
communication may also be informal.69 In any event, according to Krieger “[i]f a State does
not comply with the formal requirements, the acts will take no effect unless the other States Parties accept
the validity of the notification and declaration of termination explicitly or tacitly.”70 Therefore,
Respondent contends that even if its notification was initially considered imperfect, such
flaw was corrected by Cogitatia’s subsequent implicit consent with the termination.
40. Respondent maintains that Cogitatia accepted the validity of the notification when it failed
to object pursuant to Article 65(2) of the VCLT. This Article expressly stipulates that “[i]f,
after the expiry of a period which […] shall not be less than three months after the receipt of the notification,
no party has raised any objection, the party making the notification may carry out in the manner provided
in article 67 the measure which it has proposed.”71 In the current dispute, Cogitatia failed to raise
any objections to the Barancasia’s intention to terminate the BIT. “Failure to raise an objection
65 Article 65(1) VCLT. 66 Annex No. 7.1, Problem, p. 39. 67 Annex No. 7.2, Problem, p. 40. 68 Annex No. 5, Problem, p. 36. 69 See VILLIGER, p. 844; see also KRIEGER in DÖRR & SCHMALENBACH, p. 1170, ¶ 11. 70 KRIEGER in DÖRR & SCHMALENBACH, p. 1171, ¶ 15; see also FITZMAURICE, p. 34. 71 See Article 65(2) VCLT.
- 28 -
thus qualifies as a form of tacit acquiescence in a unilateral claim.”72 Respondent therefore proposes
that the relevant procedure has not only been initiated, but also successfully concluded.
41. Based upon the above, the BIT must be considered as effectively terminated on the basis
of the implicit consent of Cogitatia and, hence, the Tribunal lacks jurisdiction for
substantial reasons set out in Article 59(1) of the VCLT and procedural reasons under
Articles 65, 67 and 78 of the VCLT.
IV. THE TRIBUNAL LACKS JURISDICTION BASED ON ARTICLE
30(3) OF THE VCLT
42. In case the Tribunal finds Article 59 of the VCLT to be inapplicable, Respondent suggests
to examine the current issue in light of Article 30(3) of the VCLT, pursuant to which
“[w]hen all the parties to the earlier treaty are parties also to the later treaty
but the earlier treaty is not terminated or suspended in operation under Article
59, the earlier treaty applies only to the extent that its provisions are compatible
with those of the later treaty.”73
43. Analogously to the previous argumentation concerning the application of Article 59(1)(b)
of the VCLT,74 Respondent finds serious incompatibilities between Article 18(1) of the
TFEU and the additional rights contained in the BIT, since those are provided only to the
investors from Barancasia or Cogitatia.
44. Moreover, since this incompatibility cannot be cured by way of unilateral extension,75 it
must be held that under Article 30(3) of the VCLT, Article 8 of the BIT shall not be
applied, as its potential application would necessarily violate the non-discrimination
principle honoured by the TFEU. Hence, the Tribunal lacks jurisdiction.
45. Finally, Respondent briefly introduces the EU law perspective on the clash of international
public law and EU law. In Commission v Italy, the CJEU stated that matters governed by the
EU Treaties take precedence over bilateral agreements concluded between Member States
before their accession to the EU. This rule applies where a conflict arises from the
provisions of the EU Treaties themselves or, more frequently, from secondary legislation.
72 VILLIGER, p. 809; see also FITZMAURICE, p. 34. 73 See Article 30(3) VCLT. 74 See Chapter on Objective test of this Memorandum, p. 23. 75 Ibid.
- 29 -
V. THE TRIBUNAL HAS NO JURISDICTION DUE TO THE LACK
OF RESPONDENT’S CONSENT TO ARBITRATE
46. Pursuant to Article 13(2) of the BIT, the agreement shall remain in force for the period of
10 years. Thereafter it shall remain in force until the expiration of a twelve-month period
from the date either party notifies the other in writing of its intention to terminate the BIT.
47. Article 54 of the VCLT, though, stipulates that
“[t]he termination of a treaty or the withdrawal of a party may take place (a)
in conformity with the provisions of the treaty; or (b) at any time by consent of
all the parties after consultation with the other contracting States.”76
48. Concerning the possibility of terminating a treaty anytime, Villiger makes clear that “[t]reaty
parties are the masters of their own treaty and may at any time – contrary to any time-limit or other
conditions stipulated by the treaty, and even if the treaty is silent – agree to its termination or in maiore
minus the withdrawal of a particular State.”77
49. Respondent terminated the BIT by the official notice made on 29 June 2007,78 effective as
of 30 June 2008, which was executed prior to its contractual termination period.79
However, pursuant to Article 54(b) of the VCLT, Respondent does not consider this
termination as premature or invalid. By the notification of the BIT termination,
Respondent clearly expressed its intention and will to terminate the BIT. Cogitatia then
officially confirmed the acceptance thereof by failing to give any relevant statement on the
matter of the notification, i.e. the termination of the BIT. By confirming the acceptance of
the termination, all conditions prescribed by Article 78 of the VCLT have been met and
thus the notification must be considered as legally perfected.
50. With regard to consent of both parties to terminate, Respondent asserts that Article 54(b)
of the VCLT “does not state that the consent of the parties must be established explicitly […] it will
normally suffice if some or all of the parties implicitly consent to the termination or withdrawal.”80 In this
76 Article 54 VCLT. 77 VILLIGER, p. 686; see also GIEGERICH in DÖRR & SCHMALENBACH, p. 957, ¶ 37. 78 See Annex No. 7.1, Problem, p. 39. 79 In accordance with Article 13(1) BIT, it entered into force on the date of the last written notification through diplomatic channels of the fulfilment by the Contracting Parties of all the necessary internal procedures for bringing the BIT into force. As the last written notification occurred on 1 August 2002, pursuant to the Art 13 (2) BIT, it might have been terminated from August 2, 2012 whereby it was supposed to remain in force until the expiration of 12 month period from the written notification of intention to terminate the BIT. 80 GIEGERICH in DÖRR & SCHMALENBACH, p. 958, ¶ 40.
- 30 -
context, Respondent considers undoubtable that Cogitatia consented tacitly when it did
not object within 3 months of the notification pursuant to Article 65(2) of the VCLT.81 If
one was to interpret the above-mentioned conversely, the potential State’s conduct in mala
fide, e.g. if the State deliberately did not react to the official communication of the other
State seeking to terminate a treaty, could never be ‘punished’ in the field of international
public law. In other words, once a State behaves diligently “it needs to know that, absent any
objection, the right it possesses under Article 65 to carry out the proposed action will not later be
contested.”82
51. Despite being unusual, tacit consent to terminate an international treaty has already been
acknowledged as a valid form of termination in a number of cases, for instance in the
judgment of the Reichsgericht of 23 May 1925, which found that the Brest-Litovsk treaty
had been terminated by a declaration of the Soviet Government and by the absence of
protest from the German side. Furthermore, the same was concluded in the judgement of
the Arnhem Court of Appeals of 23 March 1971 and in the administrative decision of the
Crown of 22 March 1975, whereby the latter dealt with termination “for tacit mutual consent
in connection with agreements between the Netherlands and Indonesia unilaterally denounced by Indonesia
with subsequent acquiescence by the Netherlands.”83
52. Hence, according to Article 54(b) of the VCLT in connection with Article 65(1) and (2),
Article 67 and Article 78 of the VCLT,84 the BIT has been effectively terminated as of
30 June 2008, which is the date of termination determined by Respondent in its
notification.85 For the sake of completeness, Respondent asserts that the given time of
termination also fully corresponds with the time limit set in Article 65(2) of the VCLT.
53. Respondent is aware that the above is without any prejudice to Article 13(3) of the BIT,
containing the sunset clause. According to that Article, “[i]n respect of investments made prior
to the termination of this Agreement, the provisions of this Agreement shall continue to be effective for a
period of ten years from the date of its termination.”86
81 This conclusion is also reached by number of other scholars, e.g. see VILLIGER, p. 809. 82 CORTEN & KLEIN, p. 1503. 83 CONFORTI, p. 59. 84 For further details see Chapter on Termination Procedure of this Memorandum. 85 Annex No. 7.1, Problem, p. 39. 86 Article 13(3) BIT, Problem, p. 31.
- 31 -
54. However, as Claimant has purchased land plots for the purpose of realising its first Alfa
Project (“Alfa”) in the territory of Respondent during May 2009,87 there was no qualified
investment at the time of the BIT termination and therefore the sunset clause is not
applicable.
55. To conclude, Respondent believes that the Tribunal lacks jurisdiction over the present
dispute due to the fact that Respondent effectively terminated the BIT and so its consent
to be a party to arbitration proceedings is missing.
VI. THE PRESENT INVESTMENT DOES NOT FULFIL ITS
ELEMENTAL CHARACTERISTIC OF ASSUMPTION OF RISK
56. Article 1(1) of the BIT gives a definition of the term ‘investment’ and provides a non-
exhaustive list thereof. According to this Article the investment “shall comprise every kind of
asset invested in connection with economic activities by an investor of one Contracting Party in the territory
of the other Contracting Party in accordance with the laws and regulations of the latter”88 and shall
include, inter alia, movable and immovable property (a), and the rights conferred by the
LRE and any licenses pursuant to the LRE (e).89
57. Notwithstanding the fact that the BIT enshrines its own definition of ‘investment’, there
are other additional elements inherent to the notion of investment which must be present
in order for the investment to be considered protected under the BIT.
58. In particular, Respondent seeks to highlight a decision on jurisdiction in Salini. Respondent
refers to this decision in spite of the fact that it was rendered under the auspices of the
ICSID Convention, since some other (non-ICSID) tribunals also adopted the Salini test,
although in a revised form.90 In Romak, the three-member tribunal operating under the
UNCITRAL Rules, stated the following: “The Arbitral Tribunal therefore considers that the term
‘investments’ under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSID
or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time
87 Statement of Uncontested Facts, Problem, p. 21, ¶ 12. 88 Article 1(1) BIT, Problem, pp. 25-26. 89 Ibid. 90 Revised, inter alia, in Lesi-Dipenta v Algeria (Consortium Groupement L.E.S.I.- DIPENTA v. République algérienne démocratique et populaire, ICSID Case No. ARB/03/) and Pey Casado v Chile (Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2). See Romak, ¶¶ 202-203.
- 32 -
and that involves some risk.”91 Similar conclusion has been reached by the tribunal in AFT.92
Respondent thus considers Salini’s definition of investment in its modified version to be
fully applicable before the LCIA tribunal as well.
59. Hence, it may be concluded that one of the undisputed elements of an investment is an
assumption of risk. Nevertheless, the element of risk must be of certain quality.
Respondent suggests that mere commercial risk is inherent in any commercial activity and as
such is not sufficient for the investment to avail itself of the protection provided by the
BIT. Political risk is an equally insufficient ground for qualification of an investment. The
alteration of legislation is a sovereign right of any State and may also affect any field of
commercial activities, i.e. both protected and unprotected investments by the BIT. The
correct assumption is that the risk must be perceived as an investment risk. Investment risk
is present when the success and failure is uncertain and dependent on the investor itself.
In other words, the investor must have some control over the final profitability of the
investment.
60. However, such investment risk was not present in the current dispute. It is obvious that
the LRE established a regime which established a favourable environment for investors
by enacting the feed-in tariffs termed for 12 years to guarantee a stable income. The
element of risk is therefore missing; consequently the investments in question (Alfa, Beta
and subsequent 12 projects) cannot be considered as qualified investment and so they
cannot benefit from the BIT protection regime.
VII. THE CLAIMS RAISED IN THE CASE AT HAND ARE
INADMISSIBLE
61. Finally, Respondent submits that regardless of the final decision on jurisdiction, the claims
raised in the case at hand are inadmissible. All claims introduced by Claimant refer to the
post-accession period, therefore the interpretation of EU law is necessary. As already
mentioned above, the Tribunal is actually obliged to apply EU law as it belongs to the
body of international public law.93
91 Romak, ¶ 207. 92 The tribunal in AFT held that “when the asset arises from a contract, the contract itself should qualify as an investment. For that purpose the contract must meet certain minimum characteristics, such as duration, contribution and risk.” (See MUSURMANOV, pp. 122-123.) 93 See Chapter on Intra-EU Jurisdictional Objection of this Memorandum, p. 17.
- 33 -
62. Article 267 of the TFEU reads that
“[t]he Court of Justice of the European Union shall have jurisdiction to give
preliminary rulings concerning: (a) the interpretation of the Treaties; […]
Where such a question is raised before any court or tribunal of a Member State,
that court or tribunal may, if it considers that a decision on the question is
necessary to enable it to give judgment, request the Court to give a ruling thereon.
Where any such question is raised in a case pending before a court or tribunal
of a Member State against whose decisions there is no judicial remedy under
national law, that court or tribunal shall bring the matter before the Court.”94
63. Moreover, Article 344 of the TFEU stipulates that “[m]ember States undertake not to submit a
dispute concerning the interpretation or application of the Treaties to any method of settlement other than
those provided for therein”,95 and according to Article 19(1) of the TEU “[t]he Court of Justice of
the European Union […] shall ensure that in the interpretation and application of the Treaties the law
is observed.”96
64. Undisputedly, the above-mentioned provisions safeguard the autonomy of EU law by
conferring the exclusive competence on the CJEU which renders final rulings, providing
binding guidance on the interpretation of EU law.
65. With regard to the current dispute, it is undoubtable that EU law must be interpreted.
Nonetheless, the case would not eventually reach the CJEU, since arbitral tribunals are
generally not considered courts or tribunals within the meaning of Article 267 of the
TFEU. Furthermore, the scrutiny of national courts of Member States (and therefore the
CJEU) is sufficiently circumvented since the seat of arbitration is located outside of the
EU.97 Finally, one cannot hold that the case at hand would reach national court during the
enforcement proceedings since this phase is not obligatory and may never be initiated. For
all of the reasons stated above, there is a considerable threat that a potentially wrong or
even completely arbitrary interpretation of EU law by the Tribunal may never be cured by
the CJEU, and the autonomy of EU law is thus jeopardised.
94 Article 267 TFEU. 95 Article 344 TFEU. 96 Article 19(1) TEU. 97 DIMOPOULOS, p. 88; Procedural Order No. 1, Problem, p. 17.
- 34 -
66. Therefore, Respondent argues that with regard to its duty to respect the exclusive
competence of the CJEU to interpret EU law, the only acceptable forum where the present
dispute could be heard is represented by Barancasia’s national courts.
67. As to the legal nature of Article of the 344 TFEU, Claimant, led by conclusions from the
Mox Plant, case may argue that this Article is solely applicable in cases between two
Member States.98 However, in this regard Respondent highlights the words of Mark
Clodfelter, who stated that: “[t]he ECJ decision in Mox Plant certainly concerned an inter-State
dispute, but it nowhere suggested that Article 344 is limited to cases involving only State parties. Moreover,
the text of Article 344 itself is manifestly silent in this respect and the absence of any limitation to inter-
State disputes could very well suggest instead that any submission by a Member State, regardless of the
character of the counter-party to the dispute, to a non-EU treaty forum violates the obligation of Article
344.”99
68. At this point, Respondent would like to draw Tribunal’s attention to the orbiter dictum in
the Eastern Sugar partial award. The defendant similarly argued that post-accession damages
should not be dealt with within arbitration, since they fall within the exclusive jurisdiction
of the CJEU according to Article 344 of the TFEU. The tribunal noticed that the
European Commission (”Commission“) did not start infringement proceedings against
the Netherlands and the Czech Republic for failing to terminate their BITs as it would
have been expected if the BIT had been incompatible with Article 344 of the TFEU.100
Defendant’s argument that the BIT had been implicitly superseded by EU law when the
Czech Republic acceded to the European Union was rejected. It must be held that the
inaction of the Commission and the parties has been interpreted by the arbitral tribunals
as a tacit endorsement of compatibility. However, in light of the recently initiated
infringement proceedings, the Commission has left no space for doubting the European
position not just on the incompatibility of intra-EU BITs’ substantial provisions with EU
law, but also in its legal standing towards the right to initiate investor-state arbitration in
disputes with Member States.101
69. Investment arbitration originated from the necessity of delocalisation and independence
of national courts. However, it should be taken into consideration that after the accession
98 Cf. DIMOPOULOS, p. 87. 99 CLODFELTER, p. 179, emphasis added. 100 See Eastern Sugar, ¶ 121. 101 See Press Release and Peterson.
- 35 -
to the EU, the mistrust towards national courts of Member States has become highly
unfounded. In Eureko, the Commission stated that “[c]ontinued resort to outside dispute
settlement mechanisms by EU subjects based on intra-EU BITs also reveals mistrust in the courts of EU
Member States. This has no place in the current post-enlargement context, which is rooted in mutual trust
between Member States and founded on the development of a common favourable investment environment.
Mutual trust in the administration of justice in the European Union is one of the principles regarded as
necessary by the European Court of Justice for the sound operation of the internal market.”102
70. Claimant may also likely argue that the CJEU itself waived its exclusive jurisdiction over
the interpretation of EU law executed by arbitral tribunals, as evidenced, for instance, by
the ruling in Nordsee. However, this objection must be strictly rejected since the cases of
commercial and investment arbitration differ substantially. Commercial arbitration is being
regularly constituted by consent within the submission contract or arbitration clause,
which in both cases are of purely private law character. Private parties are not responsible
for correct interpretation of EU law. It is therefore obvious why the CJEU is not as
concerned with the potential EU law misinterpretation in terms of commercial arbitration.
On the other hand, in the latter case, the consent of a State to arbitrate is included within
the regular source of law, i.e. the international bilateral agreement. Thus, bearing in mind
that States are the primary subjects of EU-law duties and only they are bound by Article
344 of the TFEU, it may be concluded that the CJEU never rejected its jurisdiction over
investment disputes as such.
71. In this context, Respondent also points at the CJEU’s opinion on the creation of the
European Patent Court, where it held that it was incompatible with the EU law. The
European Patent Court would necessarily be called upon to interpret and apply EU law.
The CJEU thus concluded its opinion by the following: “[c]onsequently by conferring on an
international court which is outside the institutional and judicial framework of the European Union an
exclusive jurisdiction to hear a significant number of actions brought by individuals […] and to interpret
and apply European Union law in that field, would deprive courts of Member States of their powers in
relation to the interpretation and application of European Union law and the Court of its powers to reply,
by preliminary ruling, to questions referred by those courts and, consequently, would alter the essential
character of the powers which the Treaties confer on the institutions of the European Union.”103
102 Eureko, ¶ 185. 103 Opinion 1/09, ¶ 89.
- 36 -
72. Needless to emphasize that the current dispute puts identical demands on the Tribunal –
it is also called upon to interpret EU law, while the potential authority of the CJEU is
excluded. Respondent therefore finds the consideration presented in the CJEU’s Opinion
as fully applicable to the case in question.
73. In sum, since the Tribunal is not permitted to submit a preliminary question before the
CJEU and the national courts of Member States are unreachable, Respondent objects
inadmissibility of the claims raised before the Tribunal.
- 37 -
PART TWO: MERITS
VIII. RESPONDENT HAS ACCORDED CLAIMANT´S INVESTMENTS
FAIR AND EQUITABLE TREATMENT
74. In the Request for Arbitration, Claimant asserts that denial of the licence for the Alfa
project and subsequent changes to Barancasia’s renewable energy laws amounted to
violation of Article 2 of the BIT.104 However, Respondent contends that the amendment
of LRE did not result in breach of any obligations of Barancasia arising under the BIT, as
will be shown it the following paragraphs. In particular, Respondent did not breach any
legitimate expectations of Claimant (Part I.) nor the guarantees of stability and due process
(Part II.) encompassed by the FET standard.
IX. CONTENT OF THE FET STANDARD IN BARANCASIA-
COGITATIA BIT
75. In order to determine whether a breach of the BIT has in fact occurred, it is necessary to
first interpret its provisions. However, the wording of the FET clause does not reference
to customary international law or the minimum treatment standard as to a source of
interpretation, neither does it by itself reveal the intentions of the Contracting Parties with
regard to contents or conditions of the protection.
76. Given this omission, Respondent submits to adopt an interpretation offered by the tribunal
in EDF according to which the FET requires an interpretation under which investor’s
expectations are be balanced against needs for governmental action in time of crisis.105
77. Despite the controversies with the definition and scope of application of the FET, several
tribunals have recurrently identified several elements which are protected under the
standard:106
a. legal stability and legitimate expectations;107
b. protection against denial of justice;108
104 Request for Arbitration, Problem, p. 5. 105 EDF International, ¶ 1005. 106 YANNACA-SMALL, p. 118; DOLZER & SCHREUER, passim. 107 Sempra, ¶ 300. 108 Iberdrola, ¶¶ 443-444.
- 38 -
c. freedom from coercion;109 and
d. compliance with contractual obligations;110
while none of those was violated in the present case.
78. Based on the assertions of Claimant,111 the Tribunal is likely to consider some or all of the
elements in the form of the following issues:
a. whether Respondent met Claimant’s reasonable and legitimate expectations;
b. whether the LRE Amendment was a justified act in the public interest;
c. whether Respondent acted with transparency;
d. whether Respondent breached the FET by denying Claimant the licence for its Alfa
project.
79. In assessing these issues, Respondent submits that not any breach of one of the elements
of the FET is sufficient to prove the breach the BIT. Every minor state misconduct could
otherwise mean a breach of an international obligation. However, such conclusion must be
rejected. In the words of the tribunal in S.D. Myers, the standard is breached only by
“treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable
from the international perspective.”112 In addition, Claimant has the burden of “bringing sufficient
proof that it did not receive treatment which was fair and equitable.”113
80. Alternatively, if the Tribunal was to conclude the FET standard in the BIT differs from
offered notion, then Respondent submits that regardless of whether the phrase ‘fair and
equitable’ carries an autonomous meaning or is conjoined with the minimum standard of
protection under customary international law, the substantive elements required to be
satisfied by Respondent may likely be the same.114 However, Respondent has satisfied its
responsibilities regardless of which standard is adopted.
109 DOLZER & SCHREUER, p. 147. 110 SGS, ¶ 146. 111 Request for Arbitration, Problem, pp. 5-6. 112 S.D. Myers, ¶ 263. 113 TUDOR, p. 138. 114 See, e.g., SCHREUER, p. 17; CMS, ¶ 284, Saluka, ¶ 291; Azurix, ¶ 361.
- 39 -
X. RESPONDENT HAS MET INVESTOR’S BASIC REASONABLE
AND LEGITIMATE EXPECTATIONS
81. Investment tribunals have confirmed that FET “protects the reasonable expectations of the investor
at the time it made the investment.”115 A crucial element of the resulting test is whether
Claimant's expectations, in the words of the Saluka tribunal, “[rose] to the level of legitimacy
and reasonableness in light of the circumstances.”116
82. Therefore, the focus of the Tribunal should be on whether Claimant’s expectations were
reasonable and legitimate and if so, whether Respondent had a reasonable justification for
not fulfilling them.
A. CLAIMANT'S EXPECTATION WITH REGARD TO ALFA PROJECT CANNOT
BE BUILT UPON THE LRE
83. As mentioned above, FET protects reasonable expectations of an investor at the time it
made the investment.117 Since Claimant launched its initial investment in form of Alfa
project in May 2009,118 relevant circumstances of this period have to be taken into account
in order to fully understand the contents of the legitimate expectations with respect thereof.
84. Barancasia adopted the LRE in May 2010119 and on 1 July 2010 the BEA announced the
fixed feed-in tariff of 0.44 EUR/kWh.120 Neither of these acts therefore could have been
relied on when deciding upon making an investment into Alfa. Claimant’s legitimate
expectations with regard to its pilot project were thus based on legislation which did not
provide any special incentives towards solar energy sector. Therefore the claimed level of
expectations finds no support in the law, nor in other state representations, and is thus not
legitimate.
B. CLAIMANT'S EXPECTATIONS THAT LRE OR FIT WOULD NOT BE
SUBJECT TO CHANGE ARE NOT LEGITIMATE AND REASONABLE
85. Before the arguments placing Barancasia actions into context are presented, Respondent
asks the Tribunal to bear in mind that in the present dispute Claimant’s investment consists
115 Duke Energy, ¶ 340; LG&E, ¶173; Tecmed, ¶ 154. 116 Saluka, ¶ 304; see also Duke Energy, ¶ 340. 117 Duke Energy, ¶ 340; LG&E, ¶173; Tecmed, ¶ 154. 118 Statement of Uncontested Facts, Problem, p. 21, ¶ 12. 119 Ibid., ¶ 14. 120 Ibid., p. 22, ¶ 21.
- 40 -
of a series of relatively separate investment projects and must be viewed as such. These are
represented by the Alfa project, the Beta project (“Beta”) and the 12 following projects.
Each of these projects was introduced in to certain extent different economic, social and
political conditions influencing Claimant’s substantive rights, especially legitimate
expectations.
86. At the beginning of 2013, the BEA announced new feed-in tariff of 0.15 EUR/kWh121
which undisputedly affected licenced solar investors. Therefore, the question to be resolved
is whether Claimant could have had legitimate expectation as to the stability of the original
terms.
87. In principle, an investor has a right to certain level of stability and predictability of legal
environment governing the investment.122 The tribunal in Parkerings added that the investor
obtains a right of protection of its legitimate expectation if it “exercised due diligence and its
legitimate expectations were reasonable in light of the circumstances.”123 Consequently, an investor
must anticipate that the circumstances could change, and thus structure its investment in
order to adapt to the potential alternations of legal environment.124
88. During 2011, before nearly 90% of Claimant’s solar power plants were even in the form of
a business plan,125 solar energy industry experienced dramatic technological changes that
caused substantial price reduction of the manufacturing and development of solar panels.
As contested above, before these events took place, Barancasia in line with other EU
Member States126 announced its FiT to support the industry and achieve sustainable
development in pursuit of EU climate and energy targets.127
89. During the period when Claimant should employ its due diligence a number of relevant
events occurred which had impact on reasonability of its expectations. Statements of state
officials admitting unsustainability of the support scheme were publicly announced,128
national strikes occurred in Barancasia as a public manifestation of disagreement with
121 Statement of Uncontested Facts, Problem, p. 24, ¶ 35. 122 BJORKLUND, p. 233. 123 Parkerings, ¶ 333. 124 Parkerings, ¶ 333. 125 Respondent points to the fact that on the grounds of technology development during 2011 Claimant decided to initiate its 12 follow on projects which, when finished, would have represented approx. 86% of all its built power plants. 126 See Policy Paper on Retrospective Changes, p. 2. 127 Statement of Uncontested Facts, Problem, p. 20, ¶ 7. 128 Procedural Order No 3, Problem, p. 23, ¶ 29.
- 41 -
excessive profits out of solar energy129 and a meeting with investors having significant share
in the market of renewables took place. Respondent submits that these events in their
totality represent only a small insight to the atmosphere in solar energy industry in
Barancasia. Respondent also submits that these events do not require a proactive approach
on the side of Claimant to be recognized. On the contrary, it would demand an intentional
denial of reality to ignore inevitable consequences of such events and thus cannot be
worthy of protection as reasonable and legitimate.
90. Abovementioned should all the more apply to Claimant as a sophisticated investor with
self-proclaimed tremendous know-how130 who has been doing business in Barancasia in
the field of renewable technologies since 2002.131
91. By deciding to expand its business for 12 new entities in 2011 despite the indicated
instability, Claimant took the business risk to be faced with changes of laws which would
very likely have an impact on its investment. The only possibility which could give rise to
expectations under such circumstances would have been a conclusion of an investment
agreement with Respondent with incorporated stabilisation clause, which was not the case
here.
92. All the aforementioned facts considered, Respondent submits that Claimant could not have
obtained reasonable and legitimate expectation that the Government of the Republic of
Barancasia would not pass legislation and regulatory measures which would impact its
investment.
XI. THE LRE AMENDMENT WAS A JUSTIFIED ACT IN THE
PUBLIC INTEREST
93. The concept of legitimate expectations suggests that the conditions in the host country play
part in the analysis of whether the standard has been breached. In other words, a level of
expectations on the part of the investor is correlated with the investment environment in
the host country.132 The Tribunal should therefore review the rationale behind the State's
129 Statement of Uncontested Facts, Problem, p. 24, ¶ 32. 130 Statement of Uncontested Facts, Problem, p. 22, ¶ 23. 131 Statement of Uncontested Facts, Problem, p. 20, ¶ 3. 132 UNCTAD Series II - FET, p. 14.
- 42 -
conduct as well as severity of impact caused by development in technology that is described
as ‘ground-breaking.’133
94. The tribunal in Saluka concluded on this issue that “[FET] involves a balancing exercise that
might take into account the host State's legitimate right subsequently to regulate domestic matters in the
public interest.”134 This is especially true of general legislative acts such as the LRE, since “[i]t
would be unconscionable for a country to promise not to change its legislation as time and needs change, or
even more to tie its hands by such a kind of stipulation in case a crisis of any type or origin arose.”135
95. Indeed, legislation amending the LRE was passed in response to a ground-breaking
technology developed in 2011, which caused solar panels substantially cheaper to
manufacture and dramatically reducing the cost of development.136 At that specific
moment, the technological advancement demonstrated during the year 2011 was not
foreseen. As a result, a number of states of the European Union were forced to adjust their
renewable energy policies in order to prevent a deeper economic repercussions.137
96. For example, in Bulgaria, the State Commision on Energy and Water Regulation
announced a 54% retrospective cut to the feed-in tariff for RES that would apply also to
existing installations. Three weeks later, it announced another change in the FiT only for
photovoltaic industry, decreasing the tariff by an additional 39 %.
97. Reacting to the changes, the European Bank for Reconstruction and Development said in
case of Bulgaria that they “[d]o not contemplate any investments in renewables in Bulgaria, not this
year, not next year, not until the framework is clearer.”138
98. Similar severe effects of technology development can be found in the Czech Republic,
Spain, Italy, Poland and several other countries.139 Respondent submits that in the light of
these circumstances, a legitimate public interest to amend legislation in order to respond to
an unexpected turn of events is present. Any longer inactivity would certainly have a
substantially more profound repercussions on the industry.
133 Statement of Uncontested Facts, Problem, p. 22, ¶ 25. 134 Arif. ¶ 537, citing Saluka, ¶ 305. 135 SORNARAJAH, p. 262, citing Continental, ¶ 258. 136 Statement of Uncontested Facts, Problem, p. 22, ¶ 25. 137 Policy Paper on Retrospective Changes, p. 2. 138 Ibid. 139 Ibid., p. 1.
- 43 -
99. As a result of the facts relevant to the present case, a dramatic burden was put on the State
budget when 7000 new users applied for the announced feed-in tariff140 – an amount which
is not even materially possible to connect to the national grid of Barancasia.141 As contested
in the facts of the dispute at hand, Barancasia would have to spend 15 % of its state
revenues on subsiding renewable energy.
100. Such a substantial change due to factors which could on no account be influenced or
prevented by Barancasia, must have had a reasonable response in the system of support of
the photovoltaic sector. Such alternation was also necessary in light of the introductory
Article 1of the LRE under which “sustainable development of the use of renewable energy sources” as
well as “other objectives of the state energy policy”142 must be observed by Barancasia. Bearing in
mind the interests of investors, Respondent reintroduced the level of feed-in tariff, while
observing substantial guarantees made when introducing pro-investment policy towards
renewable energy sector. In other words, it reviewed the core values that attracted investors
while still pursuing objectives and conditions of the original support scheme. Respondent
does not deny the fact that the nominal value of the FiT did change for more than a half.
However, it cannot be emphasized more that the new feed-in tariff still allowed energy
companies to obtain an annual average return rate at least 8 %143, that is the same amount
as the original tariff before the change of circumstances did. Thus what the amendment in
fact did was that it returned the tariff which became substantially disproportioned towards
Respondent into the originally promised terms.
101. Although BITs provide merely for right of investors and not States, it does not mean that
needs of the State should be disregarded and needs of investors should always prevail.
When applied to the present case, it is unsustainable to argue that investors would be
allowed to unilaterally profit from the market imbalance caused by external factors and the
State would be precluded to take necessary measures in order to respond to such imbalance.
102. Similarly to CMS case, Claimant in this dispute “cannot pretend to be insulated from any internal
or external condition affecting the operation of the company.”144 Respondent therefore submits that
even if Claimant’s expectations that feed-in tariff would not be subject to change were
140 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 141 Ibid. 142 LRE, Problem, p. 32, ¶ 1(1). 143 Procedural Order No 2, Problem, pp. 60-61, ¶ 27. 144 CMS, ¶ 157.
- 44 -
reasonable and legitimate, those must still be balanced with the legitimate need of
Respondent to regulate affairs in public interest. Respondent agrees that when a State
decides to act, it must bear legitimate expectations of investors in mind and chose a
balanced reaction.145 Nevertheless such reaction was in fact chosen in the present case
which is evidenced mainly by the preservation of the annual average return rate. Therefore,
Respondent’s actions did not breach the standard of fair and equitable treatment.
XII. RESPONDENT HAS ACTED WITH TRANSPARENCY
103. In this section Respondent will address the alleged non-transparency in case of amendment
of the LRE146 and the non-disclosure of criteria set for the administrative decision of the
BEA issuing licences for solar projects,147 under which the Alfa project application was
rejected.148
104. Although investment tribunals agreed on qualifying transparency as an essential element
of FET,149 there is an evident shift in the perception of this element and later case law warns
that that “if [transparency] terms were to be taken too literally, they would impose upon host States’
obligations which would be inappropriate and unrealistic.”150 The 2012 UNCTAD Series on Issues
in International Investment focusing on FET goes even further when it found that the
notions of transparency and consistency “may not be said to have materialized into the content of
fair and equitable treatment with a sufficient degree of support.”151
105. Also, some decisions relied on the fact that a specific reference was made to ‘transparency’
in the wording of the relevant agreement.152 In contrast, the Barancasia-Cogitatia BIT does
not contain an explicit reference to such an element. Thus, Respondent asks the Tribunal
to preferably not consider a potential breach of transparency at all as it is not imposed by
the BIT or to approach this criterion with great caution.
106. If the Tribunal decides to analyse whether Respondent acted transparently under the BIT,
Respondent submits that it should consider it under the ‘standard for transparency’ as
defined by the United Nations Conference on Trade and Development focusing of FET
145 Micula, ¶ 529. 146 Request for Arbitration, Problem, p. 5. 147 Procedural Order No 2, pp. 58-59, ¶ 16. 148 Statement of Uncontested Facts, Problem, p. 22, ¶ 23. 149 CMS, ¶ 611; Tecmed ¶ 154; Occidental ¶ 183; Saluka ¶ 303. 150 Saluka, ¶ 304. 151 UNCTAD Series II - FET, p. 63. 152 Metalclad, ¶ 76.
- 45 -
as “requirement of host States to publish laws and regulations. Two types of laws and regulations are
acknowledged – those addressing the general legal framework and those addressing the legal framework for
investment,”153 which Respondent fulfilled with regard to raised claims.
107. As to the standard, Respondent did fulfil its publishing obligation at every single instance,
mainly during conclusion and termination of the BIT154 as well as during enactments and
amendments in legislation regarding energy policy.155 Respondent even went further than
it is obliged to promote transparency. It held hearings with both national entrepreneurs and
foreign investors having in total a significant share of the local market of renewables156
when the amendment of the LRE was being proposed. Here Respondent rejects
accountability for not inviting all concerned investors which might be objected by Claimant
on the basis that it would be materially impossible157 and an attempt to find a common
ground on regulatory changes in solar industry with all investors would be impossible.
Moreover, neither the laws of Barancasia nor the BIT states such an obligation to obligatory
discus the planned change with all stakeholders. Nevertheless, Barancasia on its own accord
clearly demonstrated its will to discuss the upcoming changes with the relevant industry.
The obligation of transparency should thus not be found as in breach.
108. There may be other information items included in the treaty provisions that offer higher
level of transparency providing inclusion of items such as administrative procedures and
administrative rulings, such as the administrative proceeding of Alfa project licence.
However, this would be one of the issues when negotiating such a provision. No such
evidence that parties have agreed upon a higher level of transparency is present in the BIT.
XIII. REJECTION OF PROJECT ALFA DOES NOT GIVE RISE TO
BREACH OF THE BIT
109. Owing to the fact that the act allegedly in breach of the BIT is a first instance administrative
body decision which can be amended through an effective system of appeal Respondent
submits that the rejection of project Alfa does not give rise to a breach of the BIT. In fact,
153 UNCTAD Series II – Transparency, p. 20. 154 Statement of Uncontested Facts, Problem, p. 21, ¶ 11. 155 Regulation, Problem, p. 34; LRE Amendment, Problem, p. 35; LRE, Problem, pp. 32-33. 156 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 157 The number of licenced investors is to date 6000.
- 46 -
Claimant did not use the possibility to appeal by which he prevented the corrective system
from reforming the alleged error.
110. Respondent submits that for an act of an administrative body to reach the threshold of
breaching international law, it must cause substantial consequences to the investor.158
According to prof. Wälde “[t]he disappointment of legitimate expectations must be sufficiently serious
and material. Otherwise, any minor misconduct by a public official could go to the jurisdiction of a treaty
tribunal.”159
111. This view is based on a fact that the function of investment tribunals is not to act as a
general-recourse administrative law tribunal. This is apparent when one looks at the origins
of ISDS. Until then, a home State interference in a dispute was necessary, which formed
an important filter against multitude of claims that did not justify “the machinery of an
international treaty to come into play.”160 Since modern BITs do not provide for such an in-built
‘filter’ the same function has to be accomplished through interpretation of relevant
provisions of the BIT.
112. Nevertheless, as prof. Paulsson stated “[c]ases of administrative misconduct which are not serious
enough, in terms of materiality of a breach, amount of damage or lack of instant remedy, do not justify
triggering the operation of the heavy and costly treaty machinery under [the FET clause].”161
113. A total of 7000 applications were filed with the BEA, as to an administrative body
empowered by the LRE162 to administer licencing as a first instance, in the short period of
a little over one year. Respondent does not exclude that in any of the 7000 proceedings
a certain irregularity may have occurred. However, it is not in powers of any state to fully
exclude administrative mistakes. Again, for such reason Barancasia offers an adequate
appeal system.163 To this Respondent notes that Clamant was given a full opportunity to be
heard and to present evidence within the appeal system. Claimant, however, did not make
such an attempt and made it impossible to redress any possible imperfections.
114. Respondent also states that it is not up to the Tribunal to determine how BEA should have
interpreted the LRE or responded to Claimant, as by doing so, in the words of the
158 BOUTE, p. 532. 159 Thunderbird – Dissenting Opinion, ¶ 14. 160 Thunderbird, ¶ 14. 161 PAULSSON, p. 109. 162 LRE, Problem, p. 32, art. 5. 163 Procedural Order No 2, Problem, p. 59, ¶ 23.
- 47 -
Thunderbird tribunal: “[t]he Tribunal would interfere with issues of purely domestic law and the manner
in which governments should resolve administrative matters (which may vary from country to country).”164
115. For all the aforementioned reasons, it must be concluded that Respondent conduct
regarding project Alfa did not reach the level of gravity which would give rise to breach of
international law represented by the BIT.
XIV. RESPONDENT’S ACTIONS ARE EXEMPT UNDER THE
ESSENTIAL SECURITY PROVISION OF THE BIT
116. Even if the Tribunal finds that the amendment of the LRE165 jointly with the
announcement of the new FiT166 amounted to a violation of the fair and equitable
treatment, those State actions were be exempted from breaching the BIT due to the
application of the non-precluded measures provision envisaged in Article 11 of the BIT.
117. Respondent will demonstrate that firstly, the heading ‘Essential Security Interest’ must be
read into the content of the Article 11, secondly, the NPM clause in the BIT covers
situations of economic crises and lastly Respondent will provide evidence in support that
the adopted measures successfully met the conditions for triggering the NPM defence and
Respondent can therefore invoke Article 11.
XV. ESSENTIAL SECURITY INTEREST IS CONTAINED IN
ARTICLE 11 OF THE BIT
118. The clause embodied in Article 11 of the Barancasia–Cogitatia BIT provides:
“Article 11
Essential Security Interests
Nothing in this Agreement shall be construed to prevent either Contracting
Party from taking measures to fulfil its obligations with respect to the
maintenance of international peace or security.“167
119. Respondent suggests to first interpret the clause according to Article 31(1) of the VCLT
in order to demonstrate that the clause does encompass internal threats in host States.
When interpreting ordinary meaning of the clause at hand, the interpretative value of
164 Thunderbird, ¶ 160. 165 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 166 Ibid., ¶ 35. 167 Ibid.
- 48 -
headings must firstly be considered168 since in a subjective point of view, headings form
indications of what the parties wanted and in an objective view they are also elements to
determine the rights and obligations of the parties.” Although this statement may have been
originally intended for the law of private international contracts, due to silence of
investment law doctrine, Respondent suggest analogical use.
120. Further, if parties intended to detach headings from eventual interpretation, an explicit
disclaimer would have to be used.169 This exact situation occurred in an ICC Interim
Arbitral Award, where a heading clause denying legal effect to the wording of the heading
was applied by the tribunal.170 Since such disclaimer clause is not present, the Tribunal
should include protection of the Essential Security Interest when interpreting the Article
11 of the BIT.
XVI. NPM CLAUSE ENCOMPASSES ECONOMIC CRISES
121. In the outskirt, Respondent states that the rule of protection of essential security interests
in the BIT needs to be distinguished from the necessity defence under customary
international law as reflected in Article 25 of the ILC’s Articles (“Article 25”) and those
two standards must be examined separately.
122. Respondent further submits that the economic security qualifies as an essential interest of
the Host State under Article 11 of the BIT. This is because the provision needs to be
interpreted broadly. The position that it only addresses ‘exemplary’ security threats such as
armed conflicts and wars is unsustainable and has to be dismissed. Firstly, these cases are
covered by reference to the ‘maintenance of international peace or security’171 and secondly,
the magnitude of the problems caused by economic crises may match or even exceed the
problems caused by a military invasion.172 NPM clauses will therefore cover broader array
of State actions and demand fulfilment of lower threshold of severity than international
customary law defence.173
168 FONTAINE, p. 151. 169 Ibid, p. 152. 170 Ibid, p. 153. 171 BIT, Problem, p. 30, Art. 11. 172 MOON, p. 3. 173 BURKE-WHITE & VON STADEN, p. 31.
- 49 -
123. Broad interpretation of NPM clauses is supported also by ICDIS cases addressing the
Argentine 2001-2002 financial crisis.174 While interpreting the limits of essential security
which is similar to the wording in the Barancasia-Cogitatia BIT, the Tribunal in LG&E
observed that: “[t]o conclude that a severe economic crisis could not constitute an essential security interest
is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of
the Government to lead.”175
124. Furthermore, the proposed interpretation is supported by examining the scope of the
exception in the light of the rationale for its inclusion. The inclusion of security exception
allows States to retain sovereignty to deal with national security threats.176 This applies
regardless of the origin of such threat and as was observed by the CMS Tribunal: “There is
nothing [...] in the context of the object and purpose of the treaty that could on its own exclude major
economic crises from the scope of [the NPM clause].”177
125. As a necessary consequence of the presented arguments, financial crises are covered under
the NPM clause as it is contained in the BIT.
XVII. THE CRISIS IN BARANCASIA CLASSIFIES AS THREAT TO THE
ESSENTIAL SECURITY INTERESTS AND ADOPTED
MEASURES ARE EXEMPTED FROM BREACHING THE BIT
126. Respondent agrees that not every financial crisis can be apprehended as a threat to essential
security interest of the Host State. In order to determine appropriate limits of application
of the exemption, reasonable threshold needs to be found. Relevant cases concerning the
Argentine economic crisis may serve as an important lead. Notably, the Tribunal in
Continental held that the protection of essential security interests does not require that ’total
collapse’ of the country178 or that a catastrophic situation must have already occurred before
responsible national authorities may have recourse to its protection.179 The invocation of
the clause does not require that the situation has already degenerated into one that calls for
174 See: LG&E, Enron, CMS. 175 LG&E, ¶ 238. 176 EMMERSON, p. 137. 177 CMS, ¶¶ 359-360. 178 Continental, ¶ 180. 179 Ibid.
- 50 -
the suspension of constitutional guarantees and fundamental liberties. There would be no
point in having such protection if there is nothing left to protect.180
127. This viewpoint must be upheld as it would be unsustainable to refuse the application of
the provision solely on the grounds that the situation did not reach the threshold of total
collapse. Since the object of the provision is to prevent situation of collapse, it would be
absurd to demand that the Host State should wait until it falls into total breakdown and
only then it could trigger the protection of the NPM clause. Therefore we cannot
reasonably expect a State in peril to wait until the condition state fully matures before it
reacts to it.181 Consequently the fundamental purpose of every State is to maintain law and
order and these measures are intended to preserve the essential interests of the Host State
and must be adopted before the situation goes out of control or is irreversible.182
128. The austerity of the crisis suffered by Respondent needs to be evaluated at this point.
According to LG&E the test “requires a careful assessment of all relevant economic, social and political
aspects of and the dangers posed by the crisis.”183
129. The present crisis is based upon a single factor which distinguishes it from mentioned
events occurring in Argentina, where the crisis was a result of as an accumulation of several
inputs including contributions on the side of the State. The sole factor causing the
instability of Barancasian economy is represented by a FiT in the amount 15 % of the state
budgets diverted into solar industry for a period of 12 years. This sole factor imposes a
burden on the budget that is ten times higher than in other European countries focused on
solar energy.184 If compared to United Kingdom Central Government and Local Authority
spending in fiscal year 2014, the 15 % would be the third biggest expenditure area after
health care and pensions and above education, defence, general government and others.185
130. Respondent submits that this factor alone would in case of Barancasia, as well as any other
state, result in a severe threat to its population and the functioning of the government itself.
Based on these facts, there could be no doubt about seriousness of situation in Barancasia.
180 Ibid. 181 FORJI, p. 54. 182 GAZZINI, p. 18. 183 LG&E, ¶ 248. 184 Energy Sector Consumption. 185 Public Spending Details.
- 51 -
131. Thus it is apparent that the situation which occurred in Barancasia from 2011186 to 3
January 2013187 was of such exceptional nature to threaten essential security interests since
the 15% diversion of the State budget188 was unsustainable and Respondent faced an
inevitable economical threat.
XVIII. TAKEN MEASURES WERE NECESSARY AND NON-
CONTRIBUTION REQUIREMENT WAS FULFILLED
132. Lastly, the question of necessity of the measures in question needs to be addressed.
Respondent argues that the high threshold of international customary law demanding that
the measures were ‘the only way’ to safeguard the interest of the State189 is not to be applied
in this case. As was already stated, protection under Article 25 and Article 11 of the BIT
are not equivalent. The wording of Article 25 expressly demands such requirement to be
fulfilled, on the contrary the Article 11 sets no such precondition for its application.
133. Respondent therefore proposes to follow the approach introduced in Continental and
LG&E in which the tribunals employed the concept of legitimacy to examine the necessity
of the measures. According to LG&E the NPM clause “refers to situations in which a State has
no choice but to act. A State may have several responses at its disposal to maintain public order or protect
its essential security interests.“190 By the same token, the tribunal in Continental viewed the
standard of ‘necessary measures’ in the context of “assess[ing] whether the [...] measures
contributed materially to the realization of their legitimate aims under [the relevant provision of the
BIT].”191 In applying the standard, it further held: “the necessity of a measure should be determined
through a process of weighing and balancing.”192
134. To answer the question whether the measures adopted by Respondent were legitimate and
proportional to the conditions at the time, Respondent references to Merits part of this
Memorandum (¶¶ 24-32).
135. Disregarding the fact that Respondent believes that non-contribution of the Host State is
not demanded under the NPM clause as the provision is silent on this matter, even if the
186 Meaning the development in technology. As found in: Statement of Uncontested Facts, Problem, p. 23, ¶ 25. 187 Meaning the announcement of the new FiT. As found in: Ibid, p. 24, ¶ 34. 188 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 189 As stated in Article 25 of the ILC Articles. 190 LG&E, ¶ 239. 191 Continental, ¶¶ 192 and 196. 192 Ibid.
- 52 -
Tribunal conditioned the applicability of Article 11 to the satisfaction of the non-
contribution requirement, it would have to conclude that it was fulfilled in the case at hand.
136. Respondent submits that the crisis was caused due to external factors which were outside
of control of Respondent. Still, the contribution of a Stet must be sufficiently substantial,193
which was not the case here. What is more, the attitude adopted by Respondent shows
desire to mitigate the severity of the crisis and it cannot be faulted as it made reasonable
efforts to tackle it, especially by holding consultations with national entrepreneurs and
foreign investors having in total a significant share of the local market of renewables.194
Moreover, it generally followed the EU climate and energy targets when entering into the
crisis.195
137. To sum up, the crisis which hit Respondent reached the gravity which triggered the
protection provided to the actions of the State under the NPM clause in the BIT.
193 LUZI, p. 16. 194 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 195 Statement of Uncontested Facts, Problem, p. 20, ¶ 7.
- 53 -
PART THREE: RESTITUTION AND QUANTUM
138. In its prayer for relief, Claimant requests the Tribunal to “[o]rder Respondent a) to repeal the
amendment to Article 4 of the LRE or b) to continue to pay Vasiuki the €0.44 feed-in tariff for 12
years.”196
139. Respondent proposes that Claimant’s request to order Respondent to rescind the disputed
legislative act (here also referred to as “judicial restitution”) should be rejected as unsuitable
since compensation offers a much more suitable remedy in the present case, while
minimising the interference with State sovereignty (Section I.). Secondly, a significant
obstacle lies in the wording of the ILC Articles and the LCIA Arbitration Rules, which
allow for non-pecuniary damages only under certain conditions, which are not met in the
present case (Section II.).
140. Furthermore, Respondent suggests that Claimant’s request to order Respondent to
continue to pay Vasiuki the €0.44 feed-in tariff for 12 years (here also referred to as
“monetary restitution”) was rejected. Ordering Respondent monetary restitution should be
rejected due to the fact that such payment would contravene EU law as it would effectively
amount to prohibited state aid under Article 107 of the TFEU (Section IV.)
141. Moreover, in both cases of judicial and monetary restitution, enforcement of final award
will necessarily be accompanied by practical obstacles (Sections III. and IV.).
XIX. JUDICIAL RESTITUTION IS NOT A SUITABLE KIND OF
REMEDY IN THE CURRENT DISPUTE WITH REGARD TO
JURISPRUDENCE
142. Award of non-pecuniary damages is an established remedy in the field of international
public law. Nonetheless, the character of the violation which the remedy relates to has to
be scrutinised. It must be highlighted that the jurisprudence of the International Court of
Justice (“ICJ”) imposing restitution of some form represented a response to unlawful acts
such as occupation of embassy premises (Tehran Hostages case)197, illegal intervention of
military and police forces (Temple case)198, or an unlawful issuance of an arrest warrant
196 See Request for Arbitration, Problem, p. 5. 197 Tehran Hostages case, ¶. 3. 198 Temple case, ¶ 6.
- 54 -
against a state official (Arrest Warrant case)199. As the background of these cases suggests,
ordering restitution was more than appropriate as the remedial effect could not have been
obtained by any other means, i.e. by monetary compensation.
143. Turning from international public law to investor-state disputes, Respondent points out
that even where the tribunals ordered some form of particular relief, it related to acts
administrative in nature.200 In contrast, Claimant in this case seeks a partial repeal of a
specific legislative act, which was both adopted and modified in a duly democratic manner.
Not only is it much easier to rescind an administrative act than a statute, but a legislative
act is also required to meet higher standards regarding its adoption and repeal. National
constitutions contain strict rules concerning the repeal of laws and set precise procedures
to be followed. Rescinding a law without following those procedures would be
constitutionally impermissible.
144. Respondent further notes that tribunals are reluctant to order States to change their
legislation since they demonstrate high respect for States’ sovereign powers. This issue was
addressed for example in the Goetz case, in which the tribunal ordered an alternative
remedy (restitution and compensation) and left the ultimate choice on the Burundian
government, calling it a ‘sovereign decision’.201
145. In this context, Respondent highlights the award in LG&E, where the tribunal found that
“[t]he judicial restitution required in this case would imply modification of the current legal situation by
annulling or enacting legislative and administrative measures that make over the effect of the legislation in
breach. The Tribunal cannot compel Argentina to do so without a sentiment of undue interference with its
sovereignty. Consequently, the Tribunal arrives at […] the need to order and quantify compensation.”202
146. The inclination of tribunals to respect States’ sovereignty is also evident in other
jurisprudence. The tribunal in Occidental held in its decision on provisional measures that
when a State has exercised its sovereign powers and put an end to a contract, it is “impossible
to compel a State to make restitution”203 as it would “constitute in fact an intolerable interference in the
199 Arrest Warrant case, p. 3. 200 Cf. in LG&E, the subject of restitution were tariff schemes introduced by governmental regulations and decrees (see LG&E - Award, ¶ 81). Then, in Occidental Petroleum Corp., Claimants sought re-establishment of the participation contract terminated by Caducidad Decree (see Occidental Petroleum Corp., Award, ¶ 201). Similarly, in LIAMCO, the restoration of Concession Agreements repudiated by nationalization introduced by Libyan Revolutionary Command Council’s law – i.e. de facto regulatory measure in nature (see LIAMCO, p. 90). 201 Goetz, ¶ 133. 202 LG&E - Award, ¶ 87, emphasis added. 203 Occidental Petroleum Corp., Decision on Provisional Measures, ¶ 79.
- 55 -
internal sovereignty of States”204 as well as represent “reparation disproportional to its interference with
the sovereignty of the State when compared to monetary compensation.”205
147. In light of the above, Respondent concludes that although restitution might be ordered
in theory, it is not a suitable remedy in the present case for two reasons: (1) compensation
offers a much more suitable remedy in the present case than judicial restitution, as the
ICJ’s jurisprudence suggests, and (2) the potential interference with State sovereignty is
much more considerable in the case of judicial restitution.
XX. IT IS NOT LEGALLY PERMISSIBLE TO ORDER JUDICIAL
RESTITUTION IN THE CASE AT HAND
148. Respondent maintains that the impermissibility of judicial restitution in the present
dispute is also supported by virtue of Article 35 of the ILC Articles on Responsibility of
States. It sets forth that the responsible State is under an obligation to make restitution,
provided that
a. it is not materially impossible,
b. it does not involve a burden out of all proportion to the benefit deriving from
restitution instead of compensation.206
149. In this regard, Respondent contends that neither of these requirements was met. Firstly,
Respondent finds the restitution to be materially impossible following the argumentation
of the tribunal in LG&E, which considered restitution impossible based on the undue
interference with the State’s sovereignty.207 Secondly, according to the Commentary to the
ILC Articles, the benefit to be gained from restitution must not be wholly disproportionate
to its cost to the responsible State.208 In order to assess the proportionality of restitution,
one must execute the benefits-costs test. The balancing process clearly indicates preference
for compensation since the proposed restitution interferes with Respondent’s sovereign
legislative procedure. It might thus jeopardise Respondent’s internal political and
economic stability and additionally, it may involve adverse consequences under EU law as
will be analysed further.
204 Ibid. 205 Ibid., ¶ 84, emphasis added. 206 Article 35 of the ILC Articles. 207 ṢABĀḤĪ, p. 88. 208 ILC Articles with Commentaries, p. 98, ¶ 11.
- 56 -
150. Furthermore, Article 26.3 of the LCIA Arbitration Rules sets forth that “[a]n award may be
expressed in any currency, unless the parties have agreed otherwise.”209 It is apparent from this
wording that the rules do not allow for the possibility of awarding judicial restitution. Thus,
this supports the conclusion that the Tribunal does not have competence to issue an award
imposing repeal of the LRE amendment.
151. It is true that the wording of Article 22.1(vii) of the LCIA Arbitration Rules210 allows for
ordering specific performance of any agreement. When interpreting the LCIA Arbitration
Rules, though, one must be aware that these were originally drafted to facilitate commercial
arbitrations. In light of this observation, the Article in question clearly refers to a typical
agreement concluded between private parties. Acta imperii, on the other hand, are far from
being of private law nature. Since Respondent and Claimant have not concluded any
separate private law contract concerning the investment, the cited provision shall not be
considered applicable to the present dispute.
152. Overall, ordering judicial restitution in the case at hand seems to be wholly inappropriate.
What is more, the relevant norms of international law exclude such an option, since
imposing Respondent to repeal the law proves to be impossible for the conflict with its
sovereignty and since it imposes a disproportional burden in comparison to compensation.
Finally, the Tribunal lacks the competence to order such an award under the LCIA
Arbitration Rules.
XXI. JUDICIAL RESTITUTION AWARD MIGHT NOT BE
ENFORCEABLE
153. Even though there is no restriction on the enforcement of judicial restitution within the
New York Convention (“NY Convention”), there is serious concern that it would be
practically impossible in the present case for the following reasons.
154. To begin with, it is without doubt that Claimant would have to seek enforcement of the
award before Barancasia courts since no foreign forum has jurisdiction to compel another
209 Article 26.3 of the LCIA Arbitration Rules. 210 Article 22.1(vii) LCIA Arbitration Rules reads as follows: “[t]he Arbitral Tribunal shall have the power, upon the application of any party or (save for sub-paragraphs (viii), (ix) and (x) below) upon its own initiative, but in either case only after giving the parties a reasonable opportunity to state their views and upon such terms (as to costs and otherwise) as the Arbitral Tribunal may decide to order compliance with any legal obligation, payment of compensation for breach of any legal obligation and specific performance of any agreement (including any arbitration agreement or any contract relating to land).”
- 57 -
sovereign State to change its law. However, Respondent suggests that national courts
might not be ready to enforce such award.
155. Enforcement courts might refuse the enforcement based on Article 5(2)(b) of the
NY Convention for a conflict with public policy, since the only legally acceptable
mechanism of modifying or cancelling a statute or its part is either by way of regular
legislative procedure or by a decision of a constitutional court or its equivalent.
156. In this context, Respondent emphasizes Article 32.2 of the LCIA Arbitration Rules, which
stipulates as follows: “Arbitral Tribunal […] shall make every reasonable effort to ensure that any
award is legally recognised and enforceable at the arbitral seat.”211 The arbitral seat in this case is
located within a third neutral country – Caledonia. Nonetheless, even if the enforcement
is eventually sought therein, Caledonian courts will certainly lack jurisdiction to enforce
the judicial restitution in question, as was suggested above. Respondent thus requests the
Tribunal to bear in mind practical enforceability of the award in order to fulfil the
fundamental objectives of arbitration itself.
XXII. MONETARY RESTITUTION IN THE FORM OF ORDERING
RESPONDENT TO CONTINUE TO PAY THE PRE-2013 FEED-
IN TARIFF IS NOT LEGALLY PERMISSIBLE
157. Alternatively to ordering the repeal of the law in question, Claimant requests the Tribunal
to impose the obligation “to continue to pay Vasiuki the €0.44 feed-in tariff for 12 years.”212
However, Respondent asserts that the alternative prayer for relief effectively amounts to
prohibited individual state aid under Article 107(1) of the TFEU.213
158. The EU provides for a specific framework of allowed state aid in the energy sector.214
Under these rules, state aid may be found permissible solely under certain conditions. In
this context, Respondent refers to the following: “The primary objective of aid in the energy sector
is to ensure a competitive, sustainable and secure energy system in a well-functioning Union energy
211 Article 32.2 of the LCIA Arbitration Rules, emphasis added. 212 See Request for Arbitration, Problem, p. 5. 213 Under Article 107(1) TFEU: “[s]ave as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.” 214 See Guidelines on State Aid.
- 58 -
market.”215 Furthermore, “[t]he proposed aid measure must be an appropriate instrument to address
the policy objective concerned.”216
159. However, considering the great number of state aid proceedings initiated by the European
Commission in the energy sector217 under Article 108(2) of the TFEU, it was highly
probable that one would be commenced against Respondent, since it had chosen the
‘unsuitable’ modality of incentives,218 i.e. fixed feed-in tariffs. For this reason, Respondent
amended Article 4 of the LRE in order to stop infringing the EU rules on state aid. Since
it is strongly presumed that the guaranteed pay-out of feed-in tariffs for 12 years amounted
to prohibited state aid, monetary restitution shall not be awarded.
160. Following the Akzo Nobel decision,219 it is undisputable that awarding monetary restitution
in the present dispute would amount to a preferential advantage accorded exclusively to
Claimant and it would therefore be selective, failing to have solely remedial function. The
European Commission’s attitude in Micula also provides some valuable guidance: its
general reiteration that Article 107 of the TFEU would be violated by rendering the award,
which would grant investors an economic advantage otherwise unavailable within the
European market, seems to be fully applicable to the current dispute. Finally, it is of crucial
importance that complying with obligations arising out of an intra-EU BIT cannot impede
the application of EU law.
161. Of course, within the frontiers of the European Union, enforcement courts might again
be reluctant to enforce an award amounting to prohibited state aid under EU law on
grounds of public policy, since EU competition law has been acknowledged as the EU
public policy.220
215 Guidelines on State Aid, p. 12, ¶ 30, emphasis added. 216 Ibid., p. 14, ¶ 40. 217 E.g. case of the state aid that Austria planned to grant to energy-intensive businesses under the Green Electricity Acct was considered as incompatible with the internal market (see Commission Decision of 8 March 2011 on State aid measure No C 24/2009); or case of Estonian State Aid for Capacity Payments for Oil-Shale Fuelled Electricity Production from 2011, case No. SA.30531. 218 See European Commission guidance for the design of renewables support schemes, where it was clearly stated that “[t]he Communication recommends that feed in tariffs are phased out and support instruments that expose renewable energy producers to market price signals such as feed in premiums are used.” (Guidance for the design of renewables support schemes, p. 12). 219 See ORTOLANI, pp. 121 – 122; In Akzo Nobel, the CJEU stated the payment of compensation to be compatible with Article 107 TFEU as long as the payment does not serve further purposes and simply aims at compensating an undertaking for damage, meaning that the compensation does not entail any selective advantage, and the compensation is legally permissible under the national law. “Conversely, the state is not free to pay compensation in the absence of a legal obligation to do so, since such a measure would entail a preferential treatment of the recipients.” 220 See judgement in Eco Swiss.
- 59 -
162. To conclude in light of the above, Respondent denies the feasibility of the restitutio in
integrum imposition, both in the form of judicial and monetary restitution.
XXIII. CLAIMANT’S CALCULATIONS FOR DAMAGES ARE
ILL-SUPPORTED AND BASED ON FALSE AND INCORRECT
LEGAL AND FACTUAL ASSUMPTIONS
163. Respondent contends that Claimant’s computation of damages contained in Mr. Kovič’s
expert report is flawed for several reasons. Firstly, damages for Alfa project should not be
included or should be significantly lower than the damages sought. Secondly, the discount
rate should be 12 % instead of 8 % proposed by Claimant. Thirdly, damages in cost of
land are not to be awarded and lastly, Claimant’s basis for future losses is merely
speculative.
A. CALCULATION RELATED TO PROJECT ALFA PROVIDED BY CLAIMANT IS
OVERRATED
164. It is important to again emphasize that Alfa Project was launched in 2009 and its
establishment was thus not covered by the LRE enacted in 2010. Because of that the
damage calculated on the basis of the guaranteed FiT should not be taken into account by
the Tribunal. Even after 2010, Alfa had never been granted a licence under the LRE. Based
on that, Respondent rejects the inclusion of project Alfa into computation of damages as
it falls outside the scope of LRE and thus could not have been damaged by the change
thereof.
165. However, if the Tribunal decides that it would include project Alfa to calculation of
damages, Claimant rejects that the amount of damages presented by Claimant on the basis
that it is inaccurate. A commonly accepted standard for awarding forward-looking
compensation is that damages must be proven with reasonable certainty. The reasonable
certainty threshold has been repeatedly set rather high.221
166. In his expert report, Mr. Kovič calculates the net present value of damages to
€120,621. However, such assumption is overestimated. In fact, Alfa has encountered
significant problems from its beginning. The project was operating at a heavy loss due to
defects in the installation, delays and huge budget overruns, which can be evidenced by
221 KANTOR, pp. 77, 80.
- 60 -
the fact that the actual project costs exceeded the planned budget for more than 50 %222
and that the achieved capacity was in its first year only at half the expected level.223
Notwithstanding that Mr. Kovič’s estimation presumes that project capacity would reach
the originally planned 21 % capacity by 2013.224 Such estimation is far too confident since
it is based merely on the fact that the project noticed an increase by 2.2 % between the
years 2009 and 2010. It is impossible to reach a valid conclusion that such increase would
be steady and was not only a random occurrence. Indeed, it is doubtful whether such a
problematic project can even reach the full capacity of 21 %. It is also interesting to note
that a project which in 2010 was almost abandoned due to enormous problems by
Claimant, 225 is proposed to be considered as a fully operational standard photovoltaic
power plant three years later.
167. Because Claimant’s documentation226 simply does not provide sound basis for prediction
of the progress of the Alfa Project as presented by Mr. Kovič, Respondent suggests the
Tribunal to lower the compensation submitted by Claimant.
B. CALCULATION CONCERNING PROJECT BETA IS NOT ACCURATE
168. In order to evaluate future incomes of project Beta by Discounted Cash Flow Method, it
is necessary to estimate the present value of expected net cash flows by using a discount
rate.227 However, Claimant’s projection of future incomes is not accuare.
169. There are two basic discounted cash flow valuation methods. In both methods the cash
flow to equity is discounted to respective discount rates. Equity valuation uses cost of equity
as the discount rate, on the other hand Firm valuation uses cost of capital (WACC) as the
discount rate.228
170. Claimant’s expert report contains a fundamental flaw because it wrongly mixes cash flows
and discount rates. Mr. Kovič used the Equity valuation229 where the right discount rate is
cost of equity. However, in the report he wrongly used cost of capital (amounting to 8 %)
222 Project Alfa Problems, Problem, p. 47. 223 Ibid. 224 Expert Report of Marko Kovič, Ph.D., Problem, p. 50, ¶ 6. 225 Statement of Uncontested Facts, Problem, p. 21, ¶ 13. 226 See Vasiuki LLC Dataset; Annual Projected Revenue From Vasiuki LLC Owned/ Operated General Projects; Vasiuki LLC Historic Statements on Income (Loss) Before Tax; Project Alfa Problems and Vasiuki LLC Projected Photovoltaic Generating Projects, Problem, pp. 41-48. 227 AICPA Statements, p. 32. 228 DAMODARAN, p. 11. 229 See Expert Report of Juanita Priemo, MBA, C.A., Problem, p. 54, ¶ 9.
- 61 -
as the discount rate. Discounting cash flows to equity wrongly at the WACC led to an
upwardly biased estimate of the value of equity.230 As Mrs. Priemo correctly points out,
cost of equity which is set to 12 %231 should have been used as a discount rate.
171. Such error amounted to a 4 % difference in the discount rate and as result in
miscalculation of almost €20,000. Respondent therefore again asks the Tribunal to lower
the claimed damages to appropriate amount while using the correct discount rate.
C. CALCULATION RELATED TO LOST VALUE OF LAND
172. Respondent further strongly disagrees with Mr. Kovič’s opinion on wasted expenditure
for the 12 new solar projects stated in his report.232 It is proposed by Claimant that the
land will become worthless and unsaleable and the equipment will be simply thrown
away.233 Nevertheless, the investment into land can on no account be presumed worthless
as the current price for acquired land is approximately acquisition price plus 10 %.234 Thus
Claimant did not lose any money by purchasing the land. Perceiving return of prices after
the solar bubble into normal level as damage is unsustainable. The same can be concluded
of acquired equipment because there was no evidence that it lost its value and should thus
be considered as wasted and amounting to loss. Even so, Respondent would like to remind
the Tribunal that Claimant continued with its plans regarding the 12 new solar power
plants and did not decide to abandon the project, thus the equipment did not in fact remain
unused.235
D. CALCULATION RELATED TO FUTURE PROFITS
173. At the outskirt of this last section, Claimant notes that to use the discounted cash flow
analysis for future losses has often been rejected.236 Prognoses about the future are
inherently speculative and uncertain elements cannot be properly made the object of
compensation of damages. By words of the Amoco tribunal: “[o]ne of the best settled rules of the
law of international responsibility of states is that no reparation for speculative or uncertain damages can
230 DAMODARAN, p. 9. 231 Vasiuki LLC Pojected Photovoltaic Generating Projects, Problem, p. 48. 232 As described in Annex No. 2 to the Expert Report of Marko Kovič, Ph.D., Problem, p. 51. 233 See Expert Report of Juanita Priemo, MBA, C.A., Problem, p. 54, ¶ 11. 234 Procedural Order No 3, Problem, p. 63, ¶ 16. 235 Procedural Order No 2, Problem, p. 59, ¶ 26. 236 Amoco, ¶ 238; Metalclad, ¶ 121; Wena Hotels ¶ 122.
- 62 -
be awarded.“237 Moreover, high probability of wrong calculation can easily lead to unjust
enrichment on the side of Claimant.238
174. At the time of occurrence of the alleged breach of the BIT, the 12 new power plants were
in the planning phase during which Claimant applied for licences and purchased necessary
land and equipment in order to construct the power plants. Similar planned projects are
for the purpose of valuation often characterised as ‘lost opportunity’ or loss of ‘chance’.239
With regard to those, tribunals have generally been very reluctant.240Although some of the
tribunals have awarded damages for such enterprises, it must be „sufficiently probable that such
profits would have been made.“241
175. Situation of the 12 new projects closely reminds situation in case SOABI where the breach
occurred before the 10-year project had even started. The tribunal concluded that in such
case “it is impossible to calculate the profits that would have been made.”242 The case was again
identified as loss of opportunity and value of such loss was not established by loss of profit
but by calculation in discretion of the tribunal.243 In this particular case, tribunal then
awarded sum equal to less than 3 % of the amount claimed as profits.244 Thus Respondent
invites the Tribunal to adopt the same approach. It might be argued that it is possible to
determine future incomes by way of comparison with other, already operational projects
of Claimant. However, there are only two of them – Alfa and Beta and both exhibit great
operational differences, Respondent therefore contends that it is impossible to arrive at
any valid generalised conclusions based on information concerning Claimant’s past
enterprises.
176. With regards to Claimant’s allegedly planned expansion, it must be noted that in case of
lost opportunities, some tribunals were not even satisfied when business plans were
presented.245 Claimant has not even presented such level of evidence, and the only proof
is an interview with a local manager246 and unfounded allegations of Claimant itself. All
those facts considered, it must be concluded that sufficient probability that any profits
237 Amoco, ¶ 238. 238 Ibid, ¶ 231. 239 MARBOE, p. 114. 240 Ibid, p. 306. 241 Sapphire ¶ 189. 242 SOABI ¶ 7.13. 243 Ibid. 244 Ibid, ¶¶ 6.27, 9.26, 12.06. 245 Eastern Sugar, ¶ 355. 246 Procedural Order No 2, Problem, p. 60, ¶ 28.
- 63 -
would be made cannot be established. Respondent therefore respectfully asks the Tribunal
not to accept the alleged loss caused from alleged frustration of Claimant’s business
expansion because of lack of evidence.
- 64 -
RELIEF SOUGHT
On the basis of all presented evidence and argumentation, Respondent requests the
Tribunal to:
(1) find that it has no jurisdiction and/or that the claims asserted by the Claimant
are not admissible;
(2) in the event that the Tribunal does not grant Barancasia’s first prayer for relief,
find that Barancasia has not violated the protections of the BIT or is exempted
from such violation;
(3) in the event that the Tribunal does not grant Barancasia’s first or second prayer
for relief, deny Claimant’s request for specific performance;
(4) in the event that the Tribunal does not grant Barancasia’s first or second prayer
for relief, find that Claimant’s calculations for damages are ill-supported and based
on false and incorrect legal and factual assumptions;
(5) find that Barancasia is entitled to restitution by Claimant of all costs related to
these proceedings.
Respectfully submitted on 26 September 2015 by
Tarassov Team
On behalf of Respondent
THE REPUBLIC OF BARANCASIA
Recommended