FOREIGN DIRECT INVESTMENT INTERNATIONAL …...British Petroleum (BP) British Petroleum(BP) Exploration Company (Libya) Ltd. v. Libya, BP/ Libya Concession Tribunal; (1979) 53 ILR 297,

MEMORIAL FOR RESPONDENT TEAM QUINTANA

1

FOREIGN DIRECT INVESTMENT

INTERNATIONAL MOOT COMPETITION

29 OCTOBER-1 NOVEMBER, 2015

ARBITRATION PURSUANT TO THE RULES OF ARBITRATION OF

THE

LONDON COURT OF INTERNATIONAL ARBITRATION

VASIUKI LLC

(CLAIMANT)

V.

REPUBLIC OF BARANCASIA

(RESPONDENT)

MEMORIAL ON BEHALF OF THE RESPONDENT

MEMORIAL FOR RESPONDENT TEAM QUINTANA t

i

TABLE OF CONTENTS

LIST OF AUTHORITIES…………………………………………………………………….IV

TABLE OF ABBREVIATIONS……………………………………………………………...XV

STATEMENT OF FACTS ……………………………………………………………………..1

ARGUMENTSADVANCED…………………………………………………………………….4

CONTENTION 1:.THE TRIBUNAL LACKS JURISDICTION OVER THE PRESENT

DISPUTE…………………………………………………………………………………………...4

I. The Bit has been terminated Under Article 59………………………………………….4

A. the BIT and EU law govern the same subject

matter…………………………………………………………………………………………….4

B. The BIT and EU law are materially

incompatible…………………………………………………………………………………….9

C. Alternatively, Article 8 of the BIT is derogated under Article 30

VCLT…………………………………………………………………………………………...13

II. The Termination was confirmed through subsequent notification under article 65

VCLT…………………………………………………………………………………….14

III. The bit was terminated under article 54(b)

VCLT…………………………………………………………………………………….15

CONTETION 2: THE RESPONDENT’S ADMINISTRATIVE AND REGULATORY MEASURES DO

NOT AMOUNT TO VIOLATION OF ARTICLE 2 OF THE

BIT………………………………………………………………………......................................17

I. Respondent’s regulatory measures did not defeat legitimate expectations of the

Claimant…………………………………………………………………………………18

A. Respondent’s Right to regulate is not limited by any promise to stabilize its legal

framework…………………………………………………………………………………18


ii

B. Amendment of LRE was proportionate and did not lead to total alteration of its

legal framework…………………………………………………………………………..20

C. Reasonableness of Claimant’s expectations should be weighed against public

interest……………………………………………………………………………………..21

II. Respondent’s Administrative measures were reasonable, transparent and

consistent……………………………………………………………………………..…23

CONTENTION 3: THE RESPONDENT’S ACTIONS ARE EXEMPTED ON THE BASIS THAT THEY WERE

NECESSARY IN ORDER TO MEET ITS ECONOMIC AND RENEWABLE ENERGY OBJECTIVES AND TO

ADHERE TO ITS EU

OBLIGATIONS…………………………………………………………………………………….26

I. The applicable standard in the present case is that of customary international law

…………………………………………………………………………………................26

A. The Lex Specialis does not embody own essential security interests of the

respondent……………………………………………………………………………26

B. Such a full fallback on customary international does not violate the Lex Specialis rule

or other rules of treaty

interpretation………………………………………………………………………………….27

II. The conditions laid down under Article 25 have been fulfilled…..………………….29

A. The economic hardships faced by the respondent were a grave and imminent peril to

its economic stability…………………………………………………………………………29

B. The measures taken by the respondent were the only way to protect its essential

securityinterests……………………………………………………………………………….30

C. The Measures Did Not Impair Other States’ or International Essential

Interest…………………………………………….……………………………………………………………..31

III. The tribunal should award damages

accordingly…………………..………………………………………………………………………………………….31


iii

CONTENTION 4: THE RESPONDENT CANNOT BE ORDERED TO RESCIND THE LRE AMENDED

ART 4 OR TO CONTINUE PAYING THE PRE-2013 TARIFF TO THE

CLAIMANT……………………………………………………………………………………….32

I. An order for restitution is not permissible as per Article 35 of Draft Articles of

State Responsibility…………………………………………………………………………………………………….32

A. Rescinding the LRE amendment is materially

impossible………………………........................................................................32

B. Restitution imposes a burden out of all proportion on the

respondent…………...............................................................................................33

II. Alternatively, an order for specific performance is not permissible …………....34

A. Specific performance as remedy in international investment law does not

exist………………………………………………………………………………………...35

B. Such an order would violate the sovereignty of the

respondent………………………………………………………………………………...35

CONTENTION 5: THE CLAIMANT’S BASIS FOR CLAIMING AND QUANTIFYING COMPENSATION

IS INCORRECT………………………………………………………………………………........36

I. The basis for claimant damages for Alfa is unfounded ……………………………...36

II. The claimant has erroneously used WACC to discount cash

flows……………………………………………………………………………………...36

III. Damages for prospective development of

plants…………………………………………………………………………………….37

IV. Payment of interest on damages……………………………………………………….37

PRAYER…………………………………………………………………………………………38


iv

LIST OF AUTHORITIES

ARTICLES

Cited as Reference

Martti Koskenniemi Martti Koskenniemi, FRAGMENTATION OF

INTERNATIONAL LAW: DIFFICULTIES

ARISING FROM THE DIVERSIFICATION

AND EXPANSION OF INTERNATIONAL

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v

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INTERNATIONAL INVESTMENT LAW AND EU

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Treatment and Stabilization Clause:Stable

Legal Environment and Regulatory Change in

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2011);783-806.

Gaetano Arangio-Ruiz Gaetano Arangio-Ruiz., Special Rapporteur

,Preliminary report on State Responsibility,

Extract from the Yearbook of the International

Law Commission, 1988, vol. II(1).


vi

Peter Jan Kuijper Peter Jan Kuijper, Ensuring respect for

Customary International Law in

EUROPEANISATION OF INT‘L LAW(2008).

Schreuer & Kreibum Christoph Schreuer and Ursula Kriebaum, ‗At

What Time Must Legitimate Expectations

Exit?‘in A LIBER AMICORUM: THOMAS WALDE—

LAW BEYOND CONVENTIONAL THOUGHTS(2009).

Stefaan De Ceulaer Stefaan De Ceulaer, Community MFN

Treatment in European Union, 57 Bulletin for

International Fiscal Documentation,495(2003).

Teerawat Wongkaew Teerawat Wongkaew, The Transplantation of

Legitimate Expectations in the ROLE OF STATE

IN INVESTOR STATE ARBITRATION (2014).

Thomas Walde Thomas Walde, ‗International Investment

An Overview of Key Concepts and

Methodology‘ (2007) 4 TRANSNATIONAL

DISPUTE MANAGEMENT 80.

Del Rio Global Subsidies Initiative (2014) A cautionary

tale: Spain‟s Solar PV Investment Bubble,

Geneva: International Institute for

Sustainable Development.

BOOKS

Alvarez and Brink Jose E. Alvarez and Tegan Brink, Revisiting

theNecessity Defense: Continental Casualty v.

Argentina, YEARBOOK OF

INTERNATIONAL INVESTMENT LAW

AND POLICY 2010-2011 (Karl P. Sauvant ed.,


vii

2011).

Corten & Klein Olivier Corten &Pierre Klein, Oxford

Commentaries on International Law: Vienna

Convention on Law of treaties,(2006).

Dimopoulos Angelos Dimopoulos, EU Foreign Investment

Law(2011)

Dörr & Schmalenbach Oliver Dörr & Kirsten Schmalenbach, Vienna

Convention on Law of Treaties : A

Commentary(2012).

G. Arangio-Ruiz G. Arangio-Ruiz, ‗Summary Records of the

Meetings of the Forty-fourth Session‘, ILC

Yearbook Vol. I, professor of international law

at university of Rome, appointed special

rapporteur from 1985-1996 at the ILC:

J. H. W. Verzijl J. H. W. Verzijl, International Law in

Historical Perspective (Leiden, Sijthoff, 1973),

part VI

Borzu Sabahi Borzu Sabahi, Compensation and Restitution in

Investor-State Arbitration and Practice(2011),

ILC yearbook YEARBOOK OF THE INTERNATIONAL

LAW COMMISSION, Part Two Report of the

Commission to the General Assembly on the

work of the thirty-fourth session ,1982 Volume

II.

McLachlan et al Mclachlan,et al,International Investement

Arbitration(2011)

Philip Striik Shaping the Single European Market in the

Field of FDI(2014).

Piet Eeckhout Piet Eeckhout,EU Internal Market and

International Trade(1994).


viii

R. Lefeber

R. Lefeber, Transboundary Environmental

Interference and the Origin of State Liability,

Kluwer Law International, (1996)

S A Sadat Akhavi SA Sadat-Akhavi, Methods of Resolving

Conflicts between Treaties (2003)

Sinclair Sir Ian Sinclair,The Vienna Convention on Law

of Treaties(1984)

Villiger Mark E Villiger, Commentary on the 1969

Vienna Convention on the Law of Treaties,

(2011).

Chittharanjan felix Amerisanghe Chittharanjan felix Amerisanghe, , jurisdiction

of international tribunals, Kluwer law

international,2003

Deutsche Gesellschaft für Völkerrecht Deutsche Gesellschaft für Völkerrecht (German

International Law Association) Documents of

the twenty-first session including the report of

the Commission to the General Assembly,

Yearbook of the international law commission

1969, vol. II,

CASES

Cited as Reference

Amoco International Amoco Int‘l Finance Corp. v. Iran,partial

award, 15 IRAN-U.S. C.T.R., (14 July, 1987).

CMS CMS v. Argentina, Award, ICSID CASE NO.


ix

ARB/01/8, (12 may 2005)

Toto Toto v. Lebanon, ICSID ARB /07/12,Award, ,7

June 2012.

Enron, Award Enron v. Argentina, ICSID Case No.

ARB/01/3,Award, (22 May 2007).

Mobil Mobil Investments Canada and Murphy oil

Corporation v. Canada, ICSID

ARB(AF)/07/04,Decision on Liability( 22 June

2012).

Continental Continental Casualty Company v. Argentine

Republic, ICSID Case No ARB/03/9, Award,

(5 September 2008).

Sempra Energy Sempra Energy v Argentina,Award, ICSID

Case no. ARB/02/16Award, ( 28 September

2007).

ADF ADF Inc v United States of America, ICSID

Case No ARB(AF)/00/1, Award, (9 January

2003

Aminoil Arbitration between Kuwait and the American

Independent Oil Company ,(24 March 1982).

LIAMCO Libyan American Oil Company v. The

Government of the Libyan Arab Republic 62

ILR 140,142, (12 April 1977).

LG&E Corp LG&E Corp and ors. v. Argentina, ICSID

CASE NO ARB/02/1, IIC 295 (2007)

Damages award, (25 July 2007)

Metalclad Metalclad Corpn. v.The United Mexican

States, ICSID CASE No. ARB(AF)/97/1,

Award,( 30 august 2000)


x

Occidental petroleum Occidental petroleum Corporation and

Occidental Exploration and Production

Company v. Ecuador, ICSID Case no.

ARB/06/11, Decision on Jurisdiction, IIC

337(2008).

EDF EDF (Services) Limited v Romania, ICSID

Case No ARB/05/13, Award,(8 October 2009).

PSEG Global v. Turkey PSEG Global Inc and Konya Ilgin Elektrik U ¨

retim ve Ticaret Limited Sirketi v Republic of

Turkey, ICSID Case No ARB/02/5, Award (19

January 2007).

Parkerings-Compagniet Parkerings-Compagniet AS v Republic of

Lithuania, ICSID Case No ARB/05/8, Award

(11 September 2007)

Plama Plama Consortium Limited v Republic of

Bulgaria, ICSID Case No ARB/03/24, Award

(27 August 2008)

White Industries White Industries v. Republic of

India,UNCITRAL,final award, (30 November

2011).

British Petroleum (BP) British Petroleum(BP) Exploration Company

(Libya) Ltd. v. Libya, BP/ Libya Concession

Tribunal; (1979) 53 ILR 297, Award (merits)

(10 October 1973),.

Georges Pinson Case Georges Pinson case (France/United Mexican

States), UNRIAA, vol. V,Award (13 April

1928)

Suez V Argentina Suez V Argentina, ICSID Case no. ARB/03/19,

Decision on liability( 30 July 2010)

Total Totalv. Argentina, ICSID case no. ARB/04/01,


xi

Decision on liability ( 27December 2010)

INTERNATIONAL DECISIONS

Cited as Reference

Chorzow factory case Factory at Chorzow, Jurisdiction, Judgment

No. 8, 1927, P.C.I.J., Series A, No. 9, p. 48(13

September, 1928).

Electricity Company of Sofia Electricity Company of Sofia and Bulgaria,

Belgium v Bulgaria,Separate, Dissenting

Opinion of Judge Anzilotti, PCIJ.(4 April

1939),

Gabcikovo Hungary v.Slovakia, ICJ.Reports 1997

.Judgment (25 September 1997)

Pulau Ligitan and Pulau Sipadan

Indonesia/Malaysia,I.C.J. Reports 2002 , (17

December 2002).

Temple of Preah Vihar Cambodia v Thailand,Merit, ICJ Reports

(1962) , Judgment (15 June 1962)

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Cited as Reference

Bud_jovicky Budvar, narodni podnik Case C-478/07, Bud_jovicky Budvar, narodni

podnik v. Rudolf Ammersin GmbH, Judgment

of 8 September 2009, [2009] ECR I-07721.

Commission v. Austria C-205/06,Commission v. Austria, Judgment of

21 December 2001 [2001] ECR I-9285.


xii

Commission v. Ireland Case C-459/03, Commission v. Ireland,

Judgment of 30 May 2006, (2006) ECR I-4635.

Costa Costa v. ENEL, Judgment on June 6,1964,

[1964] ECR 585 (6/64).

EFTA Surveillance Authority/Norway Case E-2/06, EFTA Surveillance Authority v.

Kingdom of Norway, EFTA Court, Judgment

of 26 June 2007.

Francovich Joined Cases C-6/90 and C-9/90, Francovich

and Others v. Italy, [1991] ECR I-5357

Commission v. Italian Republic Case C-531-06, Commission v. Italian

Republic, Judgment of 19 May 2009.

Opel Austria GmbH & Co. v. Council CFI,Case T-115/94, Opel Austria GmbH & Co.

v. Council[1997] ECR I-365.

Opinion of the Advocate General Opinion of Mr Advocate General Tesauro

delivered on 28 November 1995,European

Court Reports 1996 I-01029.

STATUTES AND TREATIES

Cited as Reference


xiii

Act of Accession Act of Accession,2004

Council Regulation Council Regulation (EC) No 1467/97 of 7 July

1997

Community Guidelines on State Aid Community Guidelines On State Aid For

Environmental Protection, (2008/C 82/01)

CFR European Charter of Fundamental Rights

LCIA rules 2014 London Court of International Arbitration

Rules,2014

TEU Treaty for the European Union ( Treaty of

Maastricht)

TFEU Treaty for Functioning of the European Union

(Treaty of Lisbon)

Treaty of Athens Treaty of Athens,2004

VCLT Vienna Convention on the Law of treaties

REPORTS

Cited as Reference

ILC Report International Law Commission (2006),

‗Fragmentation of International

Law:Difficulties Arising from the

Diversification and Expansion of International

Law’.Geneva: Report of the Study Group of

ILC, 58th

Session.

Study for Juri Committee Policy Department for Citizens‘ Rights(2014),


xiv

Study for the Juri Committee on Legal

instruments and the Practice of Arbitration,

Brussels: Directorate General for Internal

Policies.

MISCELLANEOUS

Cited as Reference

ILC Draft Articles International Law Commission, Draft articles on

Responsibility of States for Internationally

Wrongful Acts, with commentaries (2001).

Jan Kleinheisterkamp Jan Kleinheisterkamp, The Next 10 Year ECT

Investment Arbitration, Report for the SCC / ECT

/ ICSID Conference on ―10 Years of Energy

Charter Treaty Arbitration‖ 9-10 June 2011.


xv

LIST OF ABBREVIATIONS

Abbreviation Full Form

¶ Paragraph

AIL Arbitration International Law

AJIL American Journal of International

Law

Art. Article

BEA Barancasia Energy Authority

BIT Bilateral Investment Treaty

CFR Charter for Fundamental Rights

CJEU Court of Justice of the European

Union

€ Euro

EC European Commission

ECHR European Convention on Human

Rights

ECJ European Court of Justice

EU European Union

FDI Foreign Direct Investment

FET Fair and Equitable Treatment

I.L.M International Legal Material

ICJ International Court of Justice

ICSID International Centre for Settlement

of Investment Disputes

ILR International Law Review

IMF International Monetary Fund

Int‘l International

€/kWh Euro/kilo Watt Hour

LCIA London Court of International

Arbitration


xvi

LRE Law on Renewable Energy

MFN Most Favoured Nation

NAFTA North American Free Trade

Agreement

PCIJ Permanent Court of International

Justice

PV Photovoltaic

VCLT Vienna Convention on Law of

Treaty

UNTS United Nations Treaty Series


1

STATEMENT OF FACTS

PARTIES TO DISPUTE

1. The Claimant, Vasiuki LLC was incorporated under the laws of Cogitatia in 2002;

Claimant is engaged in the development of, construction and operation of small scale

fossil fuels and wind turbine facilities in Cogitatia and various other regions including

Barancasia (Respondent).

2. The Respondent, ―Republic of Barancasia‖ [―Barancasia‖] is a party to Barancasia-

Cogitatia BIT.

EVENTS LEADING TO THE DISPUTE

1. The Republic of Barancasia and the Federal Republic of Cogitatia, on 31st December

1998 concluded a Bilateral Investment Treaty(―BIT‘) for the promotion and Reciprocal

Protection of Investments.

2. On, 1 May 2004, Barancasia and Cogitatia joined the European Union after which

Barancasia, upon review declared its Intra-EU BITs obsolete. On 15th November 2006,

Barancasia‘s Government announced its intention to terminate its Intra-EU BITs. On 11th

December 2006, the Government of Barancasia formally resolved to terminate all its

intra-EU BITs. On 29 June 2007 Barancasia notified the Federal republic of Cogitatia of

its intention to immediately terminate the BIT between them. Thereafter, Barancasia

removed the BIT from its ministry of finance website.

3. Vasiuki, the claimant, worked as a turnkey provider of engineering and plant

construction. Thereafter, it decided to avail the ―green subsidies‖ offered by the

Government of Barancasia to promote development of renewable energy. In May 2009

Vasiuki decided to Launch Experimental Solar Project ―Alfa‖. On 1 January 2010 the

solar panels of the Alfa project were connected to Grid and became operational but the

project was operating at a heavy loss due to defects in installation, delay and huge budget

overruns.

4. In May 2010, Barancasia adopted the Law on Renewable Energy (LRE). The LRE

provided that the development of renewable energy sources would be promoted by

guaranteed feed-in-tariff to renewable energy providers who will receive a license from


2

the national regulator. Further, the LRE provided that such a feed-in-tariff would remain

unchanged for a period of twelve years. On 1 July 2010, Barancasia Energy Authority

(BEA) announced feed in tariff 0.44EUR/kWH.

5. Vasiuki applied for a license for Alfa and its second photovoltaic project Beta. Alfa was

denied the license on the ground that feed-in tariff would only be available for the new

projects wherein nowhere did the laws of Barancasia said so. However, Beta was granted

the license and became operational on 30 January, 2011.

6. On 21 November, 2010 Barancasian Foreign Ministry Spokesperson responded to press

question about Barancasia‘s approach to Intra-EU BITs and about their informal contact

to the Ministry of Foreign Affairs of Cogitatia recently on 3 November, 2010 but had had

no official response from Cogitatia.

7. In 2011, a ground breaking technology was developed which reduced the cost of

development of solar panels. As a result, BEA received 7000 applications for license to

develop new photovoltaic power plants. Vasiuki also decided to launch 12 more

photovoltaic projects using its new and cheaper technology.

8. In 2012, it become apparent to the Government of Barancasia that LRE was a mistake

and had created a solar bubble and public officials also admitted that guaranteed profit for

12 years amounted to unfair windfall gains. Further, the Government contended that if all

7,000 applications for feed in tariff were approved, up to 15% of state revenue will be

diverted to finance solar feed in tariffs which was higher than what the Government

allocated to its educational system. Additionally, Barancasia could not borrow the

necessary amount for the maintenance of existing renewable energy system because it

would exceed the EU-mandate of borrowing limits for relevant year.

9. In June 2012 outraged teachers of Barancasia organized a strike demanding an increase

of salaries. To this, the government promised to review its legislation. On 3 January

2013, Barancasia Amended Article 4 of LRE by way of representations from the

specially invited testimonies of industry and stakeholder groups. The amendment

subjected the feed-in tariff to annual review. Subsequently, it reduced the tariff to

0.15kw/h applicable from 1 January, 2013.

10. In the meantime Vasiuki had obtained license for its 12 projects on July 1 2012 and made

investments in purchasing solar panels and had started the constructions. Moreover,


3

Vasiuki had invested a substantial amount of its own and had also borrowed huge sums in

furtherance of the same.

ARBITRATION PROCEEDINGS

Vasiuki initiated arbitration proceedings in the London Court of Arbitration against the Republic

of Barancasia pursuant to the dispute settlement provision contained in the Cogitatia- Barancasia

BIT.


4

ARGUMENTS ADVANCED

I. THE TRIBUNAL LACKS JURISDICTION IN THE PRESENT CASE

1. With the Accession of the parties to the EU in May 2004,1 the parties consented to be

regulated by the EU treaties2 and Community law (acquis communautaire).3 Such lex

posterior invoked the operation of Article 59 VCLT leading to implicit termination of the

BIT [A]. The Termination was confirmed through a subsequent notification by the

Respondent under Article 65 VCLT [B].

2. Alternatively, the Termination was carried out under Article 54(b) VCLT.[C]

A. The BIT has been terminated under Article 59

3. The Chapeau of Article 59 requires that two successive treaties relate to the same subject

matter and are signed by the same parties.4 In addition to this, the tacit abrogation of the

prior treaty will be resultant from the fact that:

‘the new provisions are incompatible with the previous provisions, or that the whole

matter which formed the subject of these latter is henceforward governed by the new

provisions.’5

In the present case, the BIT and EU law govern the same subject matter[i]. Additionally,

The BIT and EU law are materially incompatible.[ii] Alternatively, Article 8 of the BIT is

incompatible with EU legal order and derogated under Article 30[iii].

i. The BIT and EU law govern the same subject matter

4. Whether a treaty relates to the same subject-matter as an earlier one is to be determined

by interpretation pursuant to the rules laid down in Arts 31–33.6This sameness condition

1 Facts,¶5.

2 Treaty of Athens,Article1.

3 Act of Accession,Arts.2-6.

4 VCLT,Article59(1).

5 Electricity Company of Sofia, ¶243.


5

is also met where the earlier treaty deals with a certain subject-matter and a later treaty

,concluded by the same parties, takes up that same subject-matter together with one or

more further matters.7 A special treaty may well be tacitly abrogated by a later more

general treaty, if the parties clearly intended to exhaustively regulate the matter by that

later treaty.8

5. The most appropriate criterion, taking into consideration the object and purpose of Art

59, seems to be whether the area of regulatory overlap of the successive treaties is large

enough to form a reasonable basis for presuming, subject to further inquiry, that the

parties intended to terminate the earlier treaty by concluding the later one. 9

6. In the present case while the BIT regulates intra EU investment, EU law regulates the

internal market which is an area without internal frontiers in which the free movement of

goods, persons, services and capital is ensured in accordance with the provisions of the

Treaties10

and includes cross border investment by member states.11

Even though EU law

has a broader sphere of regulation. A comparison of the BIT and EU law would show that

the parties intended to regulate the subject matter of intra EU investment exhaustively by

the subsequent application of EU law as both the BIT and EU law provide the same

system of remedies where investments have been impaired as a result of state action.

7. Article 5 of the BIT provides protection against expropriation to the investor, similarly,

Article 17 of European Charter of Fundamental Rights provides fundamental right to

property including the right to fair compensation in good time. While it may be stated in

the light of Art.345 TFEU that the protection provided under Article 17 ECFR is not

broad enough as it does not prejudice the member states‘ right to govern its property

ownership. However, the standard of protection under Article 17 is comparable to that of

Article 5 BIT as this does not have the effect of exempting expropriation measures from

the fundamental rules of the Treaty, including those on freedom of establishment and free

6 Dor & Schmalenbach,p.625.

7 Id.

8 Corten & Klein p.1125.

9 Corten & Klein,p.45.

10 TFEU,Article 26.

11 Hindelang,p. 221.


6

movement of capital. Accordingly, expropriation measures in the EU should be non

discriminatory and proportionate to attain their legitimate objective (e.g. by providing for

adequate compensation).12

8. The basic freedoms and Fundamental Rights enshrined in the EU Treaties partially deal

with the same subject matter as full protection and security provisions under international

investment law. In particular, pursuant to Article 49 TFEU, restrictions on the freedom of

establishment are prohibited13

, The ECJ has held such freedom includes protection of

investment from physical interventions, impairment or neutralization measures which

might discourage investors from other Member States.14

9. In comparison to Article 2 of the BIT any European investor enjoys the protection of

fundamental rights, under the Charter of Fundamental Rights (CFR) as directly applicable

law. This includes the guarantee of personal liberty and security15

, the freedom to pursue

a freely chosen occupation16

to conduct business, the right to good administration,17

as

well as access to effective justice and due process.18

In addition to these rights the

minimum standard of treatment is applicable as customary international law.19

Principle

of legitimate expectations is also recognized under Community law as a part of

international principle of good faith of the State.20

10. While all the enforcement of all the protection laid down under the BIT are ensured

through Article 8 of the BIT. The non-contractual liability of the member states arising

out of a violation of any right due to non-implementation of an EU measure was

confirmed in the Francovich decision.21

This was further confirmed as individual's right

to compensation used to guarantee protection of the rights conferred by a provision which

12

EFTA Surveillance Authority,¶.79;

13 Article 49, TFEU.

14Commission v. Italian Republic.

15 Article 6, CFR.

16 Article15,CFR.

17 Article 41,CFR.

18 Article 47,CFR.

19 Kuijper,p.102.

20 Opel Austria GmbH & Co. v. Council.

21 Francovich.¶38.


7

cannot be invoked directly before the national court, yet places an obligation on the

State.22

11. Principle of non-discrimination under Article 18 TFEU is comparable to principles

enshrined under Article 3 of the BIT while the scope of operation of prohibition of all

restrictions on the movement of Capital under article 63 TFEU is the same as Article 4 of

the BIT. Furthermore EU citizens also have the freedom to move or reside anywhere in

the EU,23

are free to establish companies in the EU,24

to provide services across borders

within the EU.25

However, these freedoms are not unqualified. Member states are partially

allowed to restrict these freedoms for the purposes of imperative requirements of public

interest.26

.The underlying rationale of such limitations is the need to balance the basic

freedom with other fundamental values within the EU legal order, such as public policy,

public security or the correct operation of the Union from an economic and monetary

point of view.27

Thus freedom of capital is regulated more under EU law than the BIT

which guarantees lack of any restrictions for transfers.28

12. While there is no provision under the BIT regulating state aid which is the subject matter

of the dispute in the present case, Article 107 TFEU and State aid guidelines29

of the

European Commission regulate the special subject matter of State aid.

13. Thus , the relevant regulations corresponding to the subject matter of the BIT are

covered by the internal market rules on the freedom of capital movements, establishment

and services along with, competition and state aid rules, which are capable of imposing

restrictions and do not provide absolute rights to the investor.

14. Even though both BIT and EU law regulate investment between the two countries and

provide protection to the investor within their respective frameworks. The difference

between the investment protection provided under the two legal regimes is that:

22

Opinion of the Advocate General,¶26.

23 Article 21,TFEU.

24 Article 49,TFEU.

25 Article 56,TFEU.

26 Article 65,TFEU.

27 Study for Juri Committee,p.261.

28 Article 4,BIT.

29 Community guidelines on State aid.


8

a) While protection under EU law makes space for regulation in the internal market as

well as policy consideration and balancing of public and private interests.

b) The BIT gives absolute standards of protection which do not consider the above.

15. Thus, European investor rights are qualified by the ‗Policy space‘ for the European Union

and cannot be harmoniously constructed with absolute and unqualified rights of the

BIT.30

However, by virtue of principle of primacy of EU law31

over bilateral agreements

among member states32

as well as the operation of lex posteriori rule, the absolute

standards of protection are redundant as they are now qualified by the regulatory

framework of the internal market. Since such qualified rights are already provided under

the EU legal framework it can be validly concluded that the parties tacitly abrogated the

BIT, as they clearly intended to exhaustively regulate the matter by that EU legal regime.

16. Lastly, while it may be argued that the BIT in the present case is lex specialis and is an

exception to the rule under Article 59.Before applying the exceptions as a matter of rule

following considerations may be considered as reasons for the prevalence of the general

law33

:

a) Whether third party beneficiaries may be negatively affected by the special law.

b) Whether the balance of rights and obligations, established in the general law would be

negatively affected by the special law.

17. In the present case, firstly, third party members of the EU law will be adversely affected

under Article 18 TFEU due to unequal rights conferred by the BIT on the parties.

Secondly, as already stated the balance between public and private interest will be

disturbed by absolute standards of the BIT.Hence, even if the tribunal concedes to the

fact of the BIT being lex specialis, it should not prevail over Article 59 VCLT in the

present case.

30

Jan Kleingeisterkam, p,6.

31 Costa v. ENEL.

32Rudolf Ammersin GmbH.

33 ILC Report.p.411.


9

ii. Additionally, the BIT and EU law are materially incompatible

18. Treaties are incompatible with each other if their obligations cannot be complied with

simultaneously, ie if the State Parties to both treaties cannot comply with one of them

without breaching the other.34

This requires their comparative interpretation. Only if

simultaneous application is not at all possible, namely that 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, will the earlier treaty be abrogated.35

19. In the present case, certain provisions of TFEU clash with the BIT as a whole and the two

cannot be applied at the same time by virtue of such a clash. The TFEU provisions which

are incompatible with the BIT are Article 207 [a], Article344 and 267[b] and

Article18[c].

a. The BIT is incompatible with Article 207 TFEU

20. Prior to the Lisbon treaty, although the Community enjoyed implicit external

competences in the field of FDI of third countries before the Lisbon Treaty under Article

133 of the EC Treaty. These competences were limited to questions of admission to the

market and did not cover the protection of investments during the post-entry phase. The

Community lacked external competence for the BITs‘ core provisions the protection of

already admitted investment.36

21. However, this changed with the Lisbon treaty which transferred exclusive competence

over FDI making EU the sole authority to legislate internally and conclude agreements

regarding the subject, hence transferring the necessary competence to exercise such

exclusive competence externally.37

Article 207(6) establishes parallelism between

exclusive external competence and the necessary internal competence38

Since,

34

SA Sadat-Akhavi, p. 5.

35 Villiger, p.673.

36 Hindelang and Maydell,,pp. 2–11.

37 Philip Strik, p.98.

38 Dimopoulos,p.98


10

competence for intra EU investment is shared, EU possesses the relevant legal basis to

conclude international investment agreements with provisions on investment protection.39

22. Article 207 transfers the exclusive competence of FDI to the European Union which

gives it the authority to take autonomous measures applicable for internal

regulation.40

Such autonomous measures may be taken with respect to regulating

investment protection for third countries within the internal market both in the form of

substantive rules and rules necessary for implementing international investment

agreements.41

23. Since there is no differentiation between intra EU and third country investment once

such investment enters the internal market42

. Such autonomous measures may be made

applicable on both member state and third country investment.43

In Commission v.

Austria, ECJ elucidated the concept of ‗hypothetical incompatibility‘ meaning that even a

perceived, but not yet materialized conflict between pre-accession treaties and EC law

obligations is sufficient to constitute a violation. Regarding compatibility of a pre

accession BIT and Article 64 TFEU(Article 307 TEC) which empowered the EU to take

measures restricting movement of capital with a third country , the ECJ observed: to

ensure effectiveness of Council measures, where adopted by the Council had to be

capable of being immediately applied, if the BIT doesn‘t contain any exception for

application of such measure, it will be in violation of Article 307.44

24. If the authority to issue such measures is read in the light of the decision of ECJ decision,

it can be concluded that intra EU BITs are materially incompatible with article 207 of

TFEU.

b. Article 8 of the BIT undermines EU legal order

39

Burgstaller,p.60..

40 Philip Striik,p.97.

41 Krajewski,p.107

42 Piet Eeckhout, ,p.344.

43 Philip Strik,p.134.

44C-205/06,Commission v. Austria, ¶23, [2001] ECR I-9285.


11

25. The primacy of EU law and the exclusive, final, authoritative jurisdiction of the CJEU

combined with the preliminary ruling systems under arts. 344 and 267 is a fundamental

part of the EU acquis communautaire. In MOX Plant case , the ECJ stated that An

International Agreement cannot affect the allocation of responsibilities defined in the

Treaties, and, consequently, the autonomy of Community legal system. The act of

submitting a dispute to an arbitral tribunal invokes the risk that a judicial forum other

than a court will rule on the scope of obligations imposed on member states, pursuant to

community law.45

26. Such an obligation of the Member States to have recourse to the procedures for settling

disputes established by EU law and, in particular, to respect the jurisdiction of the Court

of Justice, which is a fundamental feature of the EU system ,must be understood as a

specific expression of Member States‘ more general duty of loyalty resulting from

Article 4(3) TEU.46

27. Thus, the test laid down under MOX plant for infringement of Article 344 TFEU is not

whether such dispute has arisen between two member states but whether such a dispute

involves the chance of a ruling on the ‗scope of obligations‘ of the Member State under

EU law. In the present case the matter involves the validity of an amendment of a state

support measure which directly comes within the purview of Article 107 and the State

Aid guidelines of the EU.As this measure has been taken under a law passed to comply

with the EU‘s renewable energy objectives and is simultaneously governed by

Competition and state aid rules. An undertaking towards adjudicating such a dispute

would also have to consider or at least affect member state‘s corresponding obligations

pursuant to community law. Since such an engagement is explicitly prohibited under

Article 344 TFEU, therefore Article 8 of the BIT is incompatible with Article 344 in the

present case.

28. This incompatibility is particularly due to the inherent tension between State‘s obligation

under a BIT to honour its pre-accession concessions of special benefits to attract

investors and its supervening obligation under the European Treaties not to distort

45

Commission v. Ireland,¶175.

46 Op2/13,¶202.


12

competition in the Common Market through state aids.47

Such tension can be illustrated

with the example of Micula v. Romania which concerned Romania‘s revocation of

certain incentives for investment in underdeveloped regions in Romania which were held

to violate the promise of fair and equitable treatment contained in the Swedish-Romanian

BIT. An enforcement of the award in favor of the Claimant led to infringement

proceedings by the respondent as in Commission‘s opinion such award amounted to

illegal state aid. Similarly, in AES, Hungary‘s compliance with the Commission‘s

demand to reduce its state aid led to violation of legitimate expectations of AES, even

though non-compliance with such demand would amount to violation of EU‘s

competition law regime.

29. Hence, clearly member state‘s EU competition and state aid obligations cannot be

complied without contravening the BIT and to submit the same to an arbitral tribunal is a

further contravention of Article 344 TFEU. Thus, a submission of dispute to the tribunal

in the present case would undermine the EU legal order.

c. Compliance with the BIT would undermine Article 18 TFEU

30. The EU internal market operates with the internal freedoms and additional positive

measures to carry out the process of economic integration in the EU, so as to facilitate the

fusion of national markets into a single European markets to the greatest extent possible.

Article 18 of the TFEU lays down rule regarding prohibition of discrimination on the

basis of nationality.48

The intention behind article 18 is to provide same material rights

within the internal market. 49

As has already been argued EU law confers rights on

investors which are qualified and are regulated so as to create a balance between public

and private interests. On the other hand, the existence of Investor State Dispute

Settlement Mechanism and other absolute protections under the BIT leads to

discrimination between EU investors, as investors from specific member states enjoy a

47

Jan Kleinheisterkamp,p5..

48 Article 18,TFEU.

49Stefaan De Ceulaer p.495,.


13

broader degree of protection because of Intra-EU BITs whereas investors from other

countries have to enjoy qualified the protection that is afforded by the EU Law.

31. This broad protection particularly becomes discriminatory due to the provision of

Investor State Dispute Settlement clause which provides a direct access to international

arbitral bodies for the investor, whereas under EU law the investor has to deal with

Member State‘s courts in all cases where measures affecting investments originate from

EU Member States. Such a situation fragments the single market by conferring rights to

some EU investors on a bilateral basis. The provisions overlap and conflict with EU

single market law on cross-border investments.50

32. While it may be argued that instead of withdrawing such rights they may be extended to

all EU citizens, it is not compatible with the EU legal framework as such absolute rights

disturb the balance between private and public interest and cannot be applied without

infringing several provisions of TFEU.

In the light of the above, it can be validly concluded that the BIT and EU law cannot be

applied simultaneously and are materially incompatible.

iii. Alternatively, Article 8 of the BIT has been derogated under Article 30

VCLT

33. Article 59 is concerned only with the termination of the entire treaty. Article 30, in

contrast, is concerned with the priority between particular provisions of earlier and later

treaties relating to the same subject-matter and may be triggered at the slightest

incompatibility.51Thus, for reasons highlighted under [ii] [b] Article 8 of the BIT should

be derogated under Article 30 VCLT while keeping in mind that lex specialis is a

residuary rule to decide hierarchy of provisions and does not come into play in the

presence of an explicit rule recognized by the parties,52which in the present case is

Principle of Primacy of EU law.53

50

European Commission, 18 June 2015.

51 Villiger,p 786.

52 Sinclair,p.137.

53 Declaration Concerning Primacy of EU Law.


14

B. Termination has been confirmed through a subsequent notification

34. If the termination of the BIT is contended under Article 59 of VCLT, such termination is

subject to the procedure laid down in Article 65 of the VCLT.54

Article 65 VCLT lays

down the Procedure to be followed with respect to invalidity, termination, withdrawal

from or suspension of the operation of a treaty.

35. A notification under Article 65 must fulfill three prerequisites.55

Firstly, it should explain

the party‘s claim and the reasons for invoking defect in the validity of the treaty.

Secondly, it should indicate the measure that it proposes to be taken. According to

Waldock, a ‗measure‘ signifies ―a step or legal act performed with respect to the

treaty‖.56

Thirdly, it must explain the reason for the measure that includes the explanation

that the claim and the measure proposed are proportional.Such reasons should be legal

and not political.

36. The notification dated June 29 200757

was sent with the clear indication to terminate the

BIT as a measure. To explain the reason for treaty termination the resolution of the

government of Barancasia was annexed to such notification which clearly stated that it

was‗concerning the termination of the bilateral investment treaties concluded by the

Republic of Barancasia with members of the European Union.‘58

This, in itself was clearly

a manifestation of Barancasia‘s widely publicized intention of terminating all its intra EU

BITs after its accession to the EU.59

37. Furthermore, if no objection is raised within a 3 month period from the date of receipt of

a notification under Article 65, the notifying party may unilaterally take the measure

proposed. The measure taken must conform to the requirements of Art 67(2) VCLT

which states the act of termination should be through an ‗instrument‘ communicated to

54

Eureko,¶234.

55 Dor & Schmalenbach , p.1145.

56 Waldock [1966-I/2] YbILC 150.

57 Annex No.7..

58 Annex No.6.

59 Annex No.5.


15

the other party. Such instrument should be any kind of written instrument,which may be

formal or informal.60

38. Subsequent to the notification there were several informal communications made by the

Barancasian Foreign Ministry to confirm such termination till the last known date of

November 3,201061

which was past the reasonable period of 3 months. Though the facts

nowhere explicitly state that such communications were in written but given the fact that

they were made several times and the termination of all the intra EU BITs was confirmed

by Barancasian Prime Minister with no response or objection from Republic of Cogitatia

points to the fact that such communication was made in written.

C. Alternatively, the BIT was terminated under Article 54(2) VCLT

39. At the negotiation stage, State representatives have free reign to choose the substantive

and procedural rules that will govern the future cessation of their relationship. A State

that ratifies or accedes to the treaty also accepts any conditions or restrictions on

termination, withdrawal, or denunciation that the treaty contains.62

40. However, the treaty parties may waive these conditions or restrictions and permit

unilateral withdrawal,or terminate the treaty, ‗at any time by consent of all the parties

after consultation with the other contracting States‘.63

It is based on the contracting

parties‘ joint power of disposal under customary international law as ‗masters of their

treaty‘

41. International law does not accept any theory of the ‗acte contraire‘.64

Therefore, the

consent of all the parties to terminate a treaty does not have to be established in the same

form as theoriginal treaty. Rather, the States Parties are free under international law to

60

Dor & Schmalenbach, p.1170.

61 Facts¶24.

62 Helfer,p.160.

63 VCLT Art 54(b).

64 ILC Final Draft, Commentary to Art 51, 249 ¶3.


16

choose any form they please it will normally suffice if some or all of the parties implicitly

consent to the termination or withdrawal65

.

42. On this background, Art 54 (b) covers obsolescence or desuetude as a ground of

termination of a treaty, meaning treaty related conduct of the parties from which one can

imply their consent to abandon it by acquiescence66

An example of such a case would be

the effective termination after Declaration by Finland on the obsolescence of certain

provisions of the Peace Treaty of 1947 to which no other party raised any objection.67

\

43. In the present case the BIT became obsolete with the accession of its parties to the EU, as

all the matters regulated by the BIT were subsequently intended to be regulated by EU

law. The substantiation for the same has already been argued under Contention A.

44. Thus, in order to terminate such obsolete treaty the notification dated June 29 2007 was

sent. It is to be noted that the receipt of such notification to terminate was acknowledged

by Republic of Cogitatia on July 10 2007.68

45. In Temple of Praeh Vihar case the ICJ ruled that if a unilateral act creates circumstances

between two states which requires some reaction, within a reasonable period, on the part

of either authority, if they wished to disagree or had any serious question to raise in

regard to a measure by the other party. In the absence of any such reaction, the Court

simply concluded with the finding of acquiescence.69

46. In the light of the fact that after becoming aware of the notification instead of raising any

objection there was only an acknowledgment of the receipt. There were no responses to

any of the informal communications made either.Nor was there an objection or reaction

to the Barancasia‘s Prime Minister‘s confirmation of termination of all Barancasia‘s intra

EU BITs in an interview.70

Such circumstances called for a reaction within a reasonable

period of time, since there was absolute silence acquiescence on the part of Republic of

Cogitatia to the treaty termination can be inferred beyond reasonable doubt.

65

Villiger,p. 687.

66Id..

67 Dor & Schmalenbach,p.957

68 Annex No.7.2

69 Case Concerning the Temple of Preah Vihear ¶23.

70 Uncontested Facts,¶31.


17

II. RESPONDENT’S ADMINISTRATIVE AND REGULATORY MEASURES ARE CONSISTENT

WITH ARTICLE 2 OF THE BIT

47. The approach that ‗any adverse change in the business or legal framework of the host

country may give rise to a breach of the FET standard in that the investors’ legitimate

expectations of predictability and stability are thereby undermined’, is unjustified.71

As it

ignores the fact that investors should legitimately expect regulations to change over time

as an aspect of the normal operation of legal and policy processes of the economy.72

This

standard of protection, being relied on by the Claimant, was introduced by seminal

jurisprudence of Tecmed which has been extensively criticized by both scholars73

and

arbitral tribunals74

for its thin reasoning and over reaching scope.75

48. The Undefined nature of the term ‗Fair and Equitable‘ cannot be interpreted to cater to

unlimited expectations of the investor76

and the same must be balanced with the right of

the host state to regulate its economy in public interest.77

. Changes to general legislation,

in the absence of specific stabilization promises to the foreign investor, reflect a

legitimate exercise of the host State‘s governmental powers that are not prevented by a

BIT‘s fair and equitable treatment standard and are not in breach of the same.78

In

assessing the breach of FET by respondent‘s regulatory measures the focus of will be its

relation to legitimate expectations of the investor in the the absence of a stabilization

clause.

49. In the present case, the regulatory measures undertaken by the respondent were exercise

of its legitimate right to regulate. The measures undertaken do not frustrate any of the

legitimate expectations of the Claimant [A] and were implemented in a fair, reasonable

71

PSEG Global v. Turkey, ¶ 262.

72 Occidental v. Ecuador, ¶ 190.

73 McLachlan et al,p.325.

74 MTD Equity ¶66;WhiteIndustries,¶10.3.5.

75 Teerawat,p.77.

76 Thomas Walde,p 83.

77Schreuer and Kriebaum,p.265.

78 LG&E, ¶175


18

and transparent manner [B] while maintaining a fine balance between policy adaptability

and investor stability.

A. Respondent’s regulatory measures did not frustrate the legitimate expectations

of the Claimant

50. The rationale behind the protection of legitimate expectations is to encourage foreign

investors to make adequate business decisions based on the legal regime of, and

representations made by, the host State.79

However not all expectations upon which a

foreign investor takes a business decision are ‗legitimate‘, some expectations are

excluded from the protection afforded by international investment law.80

51. In the present case the Respondent did not create any legitimate expectation of stabilizing

its legal framework regulating Photovoltaic Sector. The measures regarding Amendment

of Article 4 of the LRE as well as alteration of feed in tariff were a legitimate exercise of

Respondent‘s right to regulate its economy.81

In the absence of a stabilization clause or a

specific representation made by the Respondent to the Claimant, such a right cannot be

limited in the favor of the investor82

[i] unless the change brought about by the exercise of

such right is disproportionate and leads to a total alteration of the legal framework83

[ii].

Lastly, Legitimate expectations must be weighed against public interest as a

countervailing factor84

[iii].

i. Respondent’s right to amend its laws is not limited by any promise to

stabilize its legal framework

52. The Claimant‘s alleged entitlement to stability of legal framework is unfounded as the

BIT does not incorporate a Stabilisation clause and no specific representation was given

by the Respondent to the Claimant. The principles of territorial sovereignty and economic

79

Felipe,p.1.

80 Schreuer and Kriebaum (n 5) 265.

81 Saluka,¶307.

82 Parkerings-Compagniet, ¶ 333–7; Plama, ¶267; ADF Group ¶ 189.

83 ICSID ARB /07/12,Award,¶244,7 June 2012.

84 Snodgrass,p.48.


19

self-determination, foundational in international law, dictate that each State has the right

to determine its own laws. In the absence of a stabilization clause signatories of such

treaties do not thereby relinquish their regulatory powers nor limit their responsibility to

amend their legislation in the normal exercise of their prerogatives and duties. Such

limitations upon a government should not lightly be read into a treaty through the ‗back

door‘ of FET standard 85

as an insurance policy against subsequent adverse changes in the

legal framework.86

53. When alleged legitimate expectation is one of regulatory stability the reasonableness of

the expectation must take into account the underlying presumption that absent an

assurance to the contrary a state cannot be expected to freeze its laws and

regulations.87

The LG&E Tribunal, regarding the scope of obligations of the host state

towards a foreign investor who relied on Gas Law and the terms of its license under its

implementing regulations, stated : ‘Changes to general legislation, in the absence of

specific stabilization promises to the foreign investor, reflect a legitimate exercise of the

host State’s governmental powers that are not prevented by a BIT’s fair and equitable

treatment standard and are not in breach of the same.‘88

54. In case of a license provided under a Regulation the basis of an investor‘s invocation of

entitlement to stability under a fair and equitable treatment clause relies on legislation or

regulation of a unilateral and general character, that is not specifically addressed to the

relevant investor. This type of regulation is not shielded from subsequent changes under

the applicable law.89

55. The Feed in tariff Policy was a part of the LRE.90

An amendment of such policy is within

the legitimate right of the Respondent to amend its laws as there was no promise to

stabilize it by the Respondent. The licenses issued to the Claimant under LRE in August

201091

and July 201292

were legal instruments of a general nature. These were ‗a means

85

J.Roman,p.281.

86 EDF,¶217.

87 Micula v. Romania,¶673.

88LG&E, ¶175.

89Total, Para 122.


91 Uncontested Facts¶23.


20

of implementing the core principle‘ of Law on Renewable Energy93

enacted by the

Barancasian legislature and cannot qualify as a representation or a promise specifically

addressed to the investor.94

ii. The Amendment of the LRE was a proportionate measure and did

not lead to total alteration of its legal framework

56. Investor‘s Expectations are protected from unreasonable modifications in the legislative

framework.95

Changes in regulatory frameworks are not sufficient grounds for creating

legitimate expectations protected under FET standard96

and would only be considered as

failure to grant fair and equitable treatment if such change is entirely drastic in the

essential features of its transactions97

or leads to a total alteration or breakdown of the

legal framework established. 98

57. Renewable energy subsidy must be designed in a way that makes it robust in the face of

changing costs. Since inflexibilities result in a system that fails to reduce compensation in

the response to technology‘s declining costs. Such failure overcompensates the investors

and becomes particularly problematic in the case of Solar PV as it is a modular

technology that can be installed in relatively short timelines making it easier for investors

to respond to such technological changes, much faster than policy makers.99

58. In the present case the amendment made to the LRE was proportionate to the

circumstances and did not cause a total or drastic alteration of the feed in tariff regime of

the LRE. Its objective was to modify the prevalent Feed in tariff in order to make it more

sustainable and robust in its response to the present and future change in technology.

Firstly, the alteration of the feed in tariff was to bust the ‗solar bubble‘ being

created100

due to unfair windfall for the Photovoltaic licensees101

in the face of

92

Uncontested Facts¶33.

93 Article 3,LRE,Annex No.2.

94 Total,¶149.

95 Impregilo,¶291.

96 Moshe Hirsch, p.796.

97Toto v. Lebanon,¶244.

98 El Paso v. Argentina¶374; Mobil Investments,¶153.

99 Del Rio,p.7.



21

substantial reduction in the manufacturing costs of solar panels.102

It is pertinent to

mention that such amendment was made to preserve the Feed in tariff scheme which was

otherwise proving to be unsustainable in its implementation,103

as the economy could not

be burdened with costly Solar PV generation for years to come, while overcompensating

licensees for the same.

59. Secondly, the revised feed in tariff of 0.15 €/kWh was calculated taking into account the

variety of factors to be considered under Article 3 of the Photovoltaic Support

Regulation, while ensuring 8% rate of average annual return, which was the initial

premise for feed in tariff calculation.104

60. Lastly, the feed in tariff was made annually reviewable for adjustment taking into account

the costs of the best available technology105

in order to give rapid response to any change

in technology leading to declining costs since solar PV is a modular technology that can

be installed in relatively short timelines.106

This was to prevent any unfair windfall in the

future with a change in technology.

61. Thus, Respondent‘s regulatory measure were proportional to the objective of making the

support scheme more sustainable and robust and did not drastically alter the legal

framework initially established by the LRE. These were made with a view to minimize

harm to the investor and maximize policy adaptability.

iii. Reasonableness of Claimant’s expectations should be weighed

against public interest

62. The Host State has a right to enact public interest legislation, even if the changes

negatively affect a foreign investor. Such conduct will not be considered as defeating the

investors‘ legitimate expectations and violating the FET standard, as long it is

implemented by the government in a bona fide manner.107

101

Uncontested Facts,¶29.

102 uncontestedFacts,¶25.


104 Procedural Order No.2,¶27.

105 Annex No.4.

106 Del Rio, p.7.

107 Saluka,¶304.


22

63. Since the protection of legitimate expectations is not unconditional and everlasting,108

the

same must be qualified by the need to maintain a reasonable degree of regulatory

flexibility on the part of the host State to respond to changing circumstances in the public

interest.109

64. The concept of reasonableness serves as the fundamental basis of evaluating the basic

criterion of legitimate expectations. Under Rawls‘ theory, reasonable citizens have to

recognize right of others to develop, pursue and realize their own visions of the good

life.110

Transposing that definition into the investment framework, investors as rational

agent have to recognize that in some circumstances, especially in times of crisis, States

may have to take measures to protect public interest.111

In assessing ‗reasonableness of

expectations‘, political, socio-economic, historical perspective112

,high regulatory risk,

national shortage113

and vicissitude of national economy114

are surrounding

circumstances which also play an important role.

65. Accordingly, legitimate expectations, may not to be protected when the public interest

served by the act that disappoints the expectations outweighs the investor‘s individual

interest in having its expectations met.

66. In Suez it was stated that the reasonable expectation of the investor should have included

regulatory changes in exercise of State‘s legitimate regulatory interests over a period of

30 years of APSF concession and in case of any unforeseen change in circumstances.115

67. In the light of the above ,a constructive reference of the surrounding circumstances and

context would engender reduced expectations in the present case.116

Firstly, while the

invention of the new technology led to substantial reduction in costs to developing solar

power plants, it also created a ‗solar bubble‘ and exposed the prospect of gross abuse of

108

Thunderbird ¶30.

109 EDF Services v. Romania,¶219;McLachlan QC, Shore and Weiniger (n 10) 239.

110 Shaun P.Young p.180.

111 Teerawat, p.81.

112 Duke Energy v. Ecuador¶340.

113 Id,,¶347.

114 Generation Ukraine 20,37.

115 Decision on Liability¶236.

116 Nordzucker v. Poland (UNCITRAL) Second Partial Award¶88.


23

the feed in tariff in future by the investors to the government as well as the people

.117

This was further substantiated by opinion polls prioritizing educational funding over

renewable energy support scheme measure in terms of public interest.118

Thus, to expect

no regulatory change despite substantial change in technology leading to cost reduction

and political opposition to the unfair windfall is misplaced optimism and not legitimate

expectation of the claimant.

68. Secondly, the Claimant needs to place its expectations reasonably while recognizing the

right of citizens to develop. While the renewable energy support system financed by the

state budget, was proving to be unsustainable as the Respondent would have to exceed its

EU mandated borrowing limits to maintain the existing Feed in Tariff.119

There was a

also a pressing need for public financial allocation to the education system of the country

in the light of national strikes by teachers demanding a raise in their salary and a higher

public allocation to the country‘s educational system. As already stated the public

prioritized the need for educational funding over the state support measures for renewable

energy production.

69. Hence the expectations placed by the Claimant are solely subjective120

and are not that of

a diligent or prudent investor,121

as these do not consider the socio economic, political

and factual surrounding circumstances and the right of host state‘s citizens to develop.

B. The Respondent’s Administrative measures were reasonable, transparent and

consistent

.

70. The host country authorities are required to act consistently, without ambiguity and

transparently, making sure the investor knows in advance the regulatory and

administrative policies and practices to which it will be subject, so that it may

comply.‗Transparency‘ requires that all relevant legal requirements for the purpose of

117


118 Uncontested Facts¶32.


120 EDF ¶ 219.

121 Elizabeth Snodgrass,p. 36.


24

initiating, completing and successfully operating investments made, or intended to be

made, under the Agreement should be capable of being readily known to all affected

investors.‗Consistency‘ requires a host state to act coherently and apply its policies

consistently.The reasonableness principle requires that the host state‘s conduct be

reasonably related to a legitimate public policy objective.122

71. In the present case denial of license to Alfa by BEA was a fair, consistent and transparent

measure as the rules detailing the criteria and process of issuance of licenses were

publicly stated and the same rules were used in the approval procedure resulting in denial

of license.

72. The denial of license to Alfa was reasonable as it was related to a public policy objective.

The purpose behind a feed in tariff scheme enshrined is to provide a premium price over

and above the wholesale market price of electricity, so as to help renewable energy

developers project their future revenue streams with confidence while making a decision

of considering viability of investment in the Photovoltaic sector.123

This was not the case

with Alfa a license issuance for which was made only because the tariff gave it ‗some

hope to survive‘ so that the budget overruns could be covered through the tariff

revenue.124

73. The FIT scheme was put in place to support a viable investment decision and not to

compensate investors for their investment decisions which turn out to be unviable. For

the same reason, issuance of license to existing projects was not unconditional, unlike in

case of new projects. It was qualified by the prospect of development of such a plant, so

that an investor may further develop its plant by availing the feed-in tariff. The intention

behind applying for a license for Alfa was to balance its losses and not to develop it

further as it was an experimental project125

for which ‗there appeared no future without

the feed in tariff‘126

and was as such sans a reliable profitable future at the time.127

122

Saluka Investments BV v. Czech Republic, ¶ 460

123 Del Rio,p.6.

124 Procedural Order¶22.





25

Claimant‘s application for a license for a new project at the same time as Alfa128

further

confirmed its intention, as it chose to channelize its acquired technical knowhow and

funds into a new project instead of saving Alfa.

74. Thus, license to Alfa was denied on reasonable grounds. There was no inconsistency in

the denial of such license as Alfa did not show a prospect of development as an existing

project.

128



26

III. THE RESPONDENT’S ACTIONS ARE EXEMPTED ON THE BASIS THAT THEY WERE

NECESSARY FOR BARANCASIA IN ORDER TO MEET ITS ECONOMIC AND RENEWABLE

ENERGY OBJECTIVES AND TO ADHERE TO ITS EU OBLIGATIONS

75. The respondent relies on the defense of necessity as enshrined under the customary

international law [A.] In order to be able to invoke the defense of necessity under the

customary international law, the conditions laid down in Article 25 of Draft Articles of

State Responsibility have to be fulfilled, which in the present case have been met [B.]

The fact of necessity of respondent to be taken into consideration while awarding

damages [C.]

A. The applicable standard in the present case is that of customary international

law

76. The BIT is the special treaty regime to the dispute at hand; hence, it forms the lex

specialis for the same. The Lex Specialis cannot be applied in the present case [i.]

Therefore, recourse may be had to Draft Articles of State responsibility which is in

consonance with principles of treaty interpretation [ii].

i. The Lex Specialis does not embody own essential security interests of

the respondent.

77. Article 11 of the BIT lays down Essential Security Interests under which other

obligations of the treaty may be suspended. The said Article only specifies international

peace or security, in furtherance of which, any measures taken are not precluded.129

However, the respondent invokes the defense on account of economic instability and

international obligations imposed by the European Union. In case of failure of such a

self- contained regime, recourse to the general law is permitted.130

78. The respondent argues that there are certain conditions that must be met before a

provision may be considered to be in deviation of general principles of international law.

129

Article 11, BIT.

130 Martti Koskenniemi, p. 82, ¶4.


27

This is to avoid the dangers of the fragmentation of international law and prevent

inconsistency and conflict between different regimes.131

79. The respondent submits that the special rule must clearly determine the conditions for

liability so as to exclude CIL.132

If the treaty provision is ambiguous about its relationship

with the general rule or the conditions under which it is applicable, it would be necessary

to fall back on CIL and apply it harmoniously with the treaty provision.133

Various

tribunals have adopted an approach wherein the language of the treaty is unclear or

ambiguous, CIL is made applicable.134

ii. Such a full fallback on customary international does not violate the

Lex Specialis rule or other rules of treaty interpretation

80. As per Art. 31(1) of VCLT, Art. 6(2) must be read in good faith in accordance with its

ordinary meaning. The Claimant submits that, as per Article 31(3)(c), while interpreting a

provision the ―relevant rules of international law applicable between the parties‖ have to

be taken into account.135

These relevant rules of international law include CIL rules or

general rules under international law and the Claimant submits that the interpretation

must be to harmonize the two where possible.

81. It must be understood that the relevance of a particular rule of international law in the

interpretation of a treaty is to be gauged on the basis of the intention of the parties to

bring the treaty into relation with that rule.136

82. Furthermore, the respondent agrees that the operation of a special law or regime would

preclude the operation of a general rule of international law. However, as per Article 55

of the ILC Articles on State Responsibility, it always depends on the special rule to

establish the extent to which the general rule is to be excluded.137

131

Brownlie, p. 55.

132 Alvarez and Brink, pp. 332-333.

133 ILC Fragmentation Conclusions, ¶¶19-20; Georges Pinson Case, p. 422.

134 CMS, Award, ¶¶320-331.

135 Article 31(3) (c), VCLT.

136 ILC Draft Articles on State Responsibility, Commentary to Article 27, ¶16.

137 ILC Draft Articles on State Responsibility, Commentary to Article 55, ¶¶2-3.


28

83. Hence, the Tribunal in Amoco held that even when the Treaty as a whole constitutes lex

specialis, rules of CIL may be used to fill lacunae in the working of a treaty and ascertain

the meaning of undefined terms.138

84. Self-contained regimes or subsystems as ―closed legal circuits‖ in the sense that they

would completely and finally exclude the application of the general law. A minimal

conclusion that one can draw from practice and literature is that articles 31 and 32 of the

VCLT are always applicable unless specifically set aside by other principles of

interpretation.139

85. In addition to the aforementioned, the mere fact that the respondent, in the present case

did not include its own essential security interests in Article 11 does not bar the

respondent from invoking customary international law. This is supported by the

proposition that among several possible constructions, the principle of effective

interpretation requires adopting the interpretation that best gives effect to the norm in

question. Effectiveness includes the notion of enforceability. 140

86. Consequently, it cannot be easily inferred that a state was willing to give up ‗the rights or

faculties of unilateral reaction it possessed under general international law‘ by

complementing special primary obligations with a specific set of secondary

obligations.141

87. If states create new substantive obligations along with special enforcement mechanisms,

they merely relinquish their facultés under general international law in favour of a special

regime‘s procedures to the extent that and as long as those procedures prove efficacious.

When such procedures fail, enforcement through countermeasures under general

international law becomes an option.142

138

Amoco International, ¶112.

139 Pulau Ligitan and Pulau Sipadanp. 645-646, ¶37

140 Bruno Simma and Dirk Pulkowski, p 3, ¶483-529,

141 Id, page 26.

142 G. Arangio-Ruiz, p 25.

http://ejil.oxfordjournals.org/search?author1=Bruno+Simma&sortspec=date&submit=Submit

http://ejil.oxfordjournals.org/search?author1=Dirk+Pulkowski&sortspec=date&submit=Submit


29

B. The conditions laid down under Article 25 have been fulfilled

88. Article 25 of Draft Articles of Sate Responsibility states that necessity cannot be invoked

unless there is a grave and imminent peril to a state‘s essential security interests [i] ,the

measures undertaken by the respondent were the only for it to avoid such a peril [ii], they

do not hamper the interests of the state towards which the obligation exists.[iii]

i. The economic hardships faced by the respondent were a grave and

imminent peril to its economic stability

89. Arbitral tribunals have held on a number of instances that economic interests could often

be essential security interests.143

The measures in the present case were aimed at securing

the essential security interests of the respondent i.e. restoring economic stability.

90. The hardships of the respondent which prompted the respondent to make regulatory and

administrative changes are twofold:

a. It could not have continued to pay the pre-2013 tariff to the existing

license holders

91. The respondent submits that it had reached a threshold limit for borrowing and as a result

could not have continued to pay the existing license holders the promised feed-in-

tariff.144

This caused the respondent to reach a situation of budget deficit.

92. As a member of the European Union, there were obligations on the respondent to

maintain a Debt to GDP ratio145

of 60%.146

In the event of default, the European Union

may undertake a procedure to correct the said deficit.147

In the event of failure in

compliance, the EU may impose sanctions on the defaulting state as well.148

93. Keeping the aforesaid circumstances, the respondent had no choice but to reduce its debt

to a minimal permissible limit granted by the EU. Had it not done so, a mounting deficit

143

CMS, Award, ¶359; Enron, Award, ¶332; Continental, Award, ¶178.

144 Uncontested Facts, ¶30.

145 Article 104(c), TEU.

146 Article 1, protocol on the excessive deficit procedure, TEU.

147 Article 126, TFEU.

148 Council Regulation (EC) No 1467/97 of 7 July 1997.


30

already coupled the economic sanction by the EU would have taken a toll on the

economic stability of the respondent.

b. The amendment in 2013 was also done to align the support schemes

with the state aid rules of the European Union

94. In 2011, when the ground breaking technology was discovered, the cost of development

of photovoltaic power plants was reduced significantly.149

This led to an increased profit

for the investors since the calculation of tariff was done in accordance with the old cost of

production. However, with the reduced costs but a higher feed-in-tariff, there was a case

of unjust enrichment of the investors.

95. The European Union Guidelines state that in particular, the aid amount must be limited to

the minimum needed to achieve the environmental protection sought. Therefore, eligible

costs for investment aid are based on the notion of the extra (net) cost necessary to meet

the environmental objectives..150

96. In the present case, if the respondent had paid a tariff of 0.44€/Kwh to the license

holders, it would have compromised with the provisions enshrined in the state aid

guidelines, upon which the commission could make enquiries into the legality of the said

aid granted.

ii. The measures taken by the respondent were the only way to

protect its essential security interests

97. The fact that a part of its measures were in the nature of mitigating the peril cannot

prevent the respondent from the defense of necessity. The ICJ in the Gabcikovo-

Nagymaros case held that a ―peril‖ appearing in the long term might be held to be

―imminent‖ as soon as it is established that the realization of that peril, however far off it

might be, is not any less certain and inevitable.151

98. The Respondent submits that for reasons already stated above, the threat faced by the

Respondent‘s essential interest was a grave and imminent one. In addition to that, the

nature of measures was such that the respondent had no other way to deal with the

149

Uncontested facts, ¶25.

150 Community Guidelines on State Aid For Environmental Protection, (2008/C 82/01)

151 Gabcikovo., p. 42, ¶54.


31

hardships. Tribunals in the past have defined the only way requirement to mean that so

long as the measure taken are a legitimate exercise of state power and were necessary, the

first requirement under Article 25 is said to have been met.152

iii. The Measures Did Not Impair Other States’ or International Essential

Interests

99. There is no evidence that Cogitatia or the international community suffered severe

consequences due to the measures taken by the respondent. The only party in the present

dispute is Vasiuki. Therefore, the respondent is not disqualified from invoking the

defense on this ground as well.

C. The tribunal should award damages accordingly

100. In the event that the tribunal decides to award damages to the claimant, the respondent

submits that the computation of damages may be done keeping in mind the state of

necessity of the respondent. In CMS, although the defense was not accepted yet the

Tribunal held, some of the negative impacts should be attributed to the business risk

borne by CMS when investing in Argentina. The Tribunal said that both parties should

be ―sharing some of the costs of the crisis in a reasonable manner‖, otherwise the arbitral

award could ―amount to an insurance policy against business risk‖.153

Specifically, the

adverse economic circumstances were taken into account in determining the market

value of the shares using discounted cash flow analysis (DCF).154

The Enron Tribunal

also made downward adjustments in its DCF valuation of the investment to ―reflect the

reality of the crisis‖ as compared to a ―normal business scenario‖.155

152

Continental, Award¶¶227-230.

153 CMS, Award of 12 May 2005, ¶244.

154 Id, ¶443-446

155 Sempra, Award,¶¶397, 416-449.


32

IV. THE RESPONDENT CANNOT BE ORDERED TO RESCIND THE LRE AMENDED

ARTICLE 4 OR TO CONTINUE TO PAY THE PRE-2013 TARIFF TO CLAIMANT

101. The claimant prays for rescinding the LRE amendment thereby seeking juridical

restitution. Although restitution has been accorded primacy in forms of reparation, yet

the investment arbitral tribunals generally don‘t take an extreme step of ordering the

revocation or annulment of domestic legislative measures.156

Primarily because of a

limit on their powers to do so and secondly, because such an order may suffer from

enforcement problems in the host state.157

102. Additionally,, the respondent contends that such a remedy cannot be passed on account

of disqualifications as mentioned in customary international principles of reparation [A.]

Additionally, as an alternative remedy, the claimant prays that the specific obligation of

paying the 0.44€/Kwh towards it may be fulfilled. Since the remedy of specific

performance does not exist as an available remedy, it cannot be availed by the claimant

[B.]

A. An order for restitution is not permissible as per Article 35 of Draft Articles

of State Responsibility

103. Article 35 of Draft Articles lays down the conditions for the implementation of an order

of restitution. It states that restitution may not be granted in the cases of material

impossibility [i] or if it amounts to imposing a burden out of all proportion on the

respondent [ii.]

i. Rescinding the LRE amendment is materially impossible

104. Material impossibility occurs in situations where the fundamental change in

circumstances cannot be restored to the status quo ante.158

Such material impossibility

156

Chittharanjan felix Amerisanghe, p.412.

157 Charles N Browner and Jason D Brueschke, p. 496

158 ILC Draft Article on State Rresponsibility, Commentary to Article 35, ¶4.


33

can occur on the grounds of an obligation of international law. 159

Therefore, it becomes

a case of legal impossibility.

105. The host State could be exempted from an obligation to provide restitutio in integrum

whenever its internal legal system is such as not to permit the discharge of that

obligation.160

The parties in the Aminoil case agreed in the arbitration agreement stated

that restoration of the status quo ante following the annulment of the concession by

Kuwaiti decree would be impracticable in any event; they agreed also to submit to

arbitration the question (an and quantum) of compensation.161

106. In the present case, the respondent is bound by the conditions imposed on it through the

Laws of the European Union. Considering the aforesaid laws, the respondent had

amended the LRE Article 4 to bring the state aid rules in line with those formulated by

the European Union.162

This forms an extrinsic factor for the amendment beyond the

control of the respondent and violation of the same may ensue actions in the form of

sanctions upon the respondent.163

ii. Restitution imposes a burden out of all proportion on the respondent.

107. The second disqualification for restitution is where compensation can provide an equally

efficacious relief such that restitution only imposes a burden out of all proportion on the

respondent.164

Therefore, it takes the aspect of equity and reasonableness into

consideration where a clear preference to compensation is given when the balance

process does not favor restitution.165

108. The respondent would have to amend its laws, which for the aforementioned reasons

already put forth a case of legal impossibility; it would also in turn entail sanctions on

the respondent by the European Union in the event of failure to comply with the laws.

These sanctions could be monetary or otherwise and compliance with the same would

159

R. Lefeber, p. 133.

160 ILC Yearbook, p. 99-100,¶. 156.

161 Aminoil, p. 979.

162 Refer Contention III.

163 Id.

164 ILC Draft Artcles on State Responsibility, Article 35(b).

165 J. H. W. Verzijl, p. 744;Deutsche Gesellschaft für p. 149.


34

impose a burden out of all proportion on the respondent. Compensation, on the other

hand would be an equally efficacious relief to the claimant.

109. It is also pertinent to mention that, the injured State would not be entitled to claim

restitutio where the application of such remedy would entail the annulment or the non-

application of legislative provisions, of administrative acts or definitive judgments

within the legal system of the author State.166

Providing restitution would jeopardize the

political independence of the host state.167

110. The issue of legal responsibility was raised in LG&E v Argentina .The claimant had

asked the tribunal to invite Argentina to provide an assurance that the gas regulatory

framework would be restored. The tribunal held that:

―Restitution would imply modification of the current legal framework by enacting

legislative measures that make over the legislation in breach. The tribunal cannot

compel Argentina to do so without a sentiment of undue interference with its

sovereignty‖168

111. The LIAMCO169

tribunal also highlighted the fact that an order of restitution which

would effectively require revoking nationalization measures, which were not in

themselves unlawful and had the character of ‗act of state‘ would violate Libya‘s

sovereignty and was practically unenforceable. Thus the tribunal awarded compensation.

B. An order for specific performance is not permissible

112. The tribunal should not order the respondent to honor its specific obligations

towards the claimant by paying the pre-2013 tariff primarily because a remedy of specific

performance is not a remedy at the disposal of the claimant [i]. It also impinges upon the

sovereignty of the respondent [ii].

166

Gaetano Arangio-Ruiz, p. 22.

167 ILC Draft Articles on State Responsibility, Commentary to Article 35, ¶11.

168 LG&E Corp., ¶ 239.

169 LIAMCO, ¶ 217.


35

i. Specific performance as remedy in international investment law does

not exist

113. The ILC Draft Articles which are a source of law for the forms of reparation do not

provide for specific performance as a remedy available at the disposal of the injured

party.170

In addition to that, the Chorzow Factory Case171

is also silent on the same.

Hence, the fact that how this remedy would fit within the possible forms of reparation as

suggested by ILC Draft Articles continues to remain murky till date.172

114. Additionally, the LCIA rules, under which the said proceedings are being carried do not

bestow upon the tribunal to award such a remedy. Therefore, an order for specific

performance is also beyond the power of this tribunal.173

115. Justice Lagergen, in British petroleum174

held that there is no uniform principle general

principle of law pursuant to which specific performance is a remedy available at the

option of an innocent party, especially not a private party acting under a contract with a

government. The responsibility incurred by the defaulting party for breach of an

obligation to perform a contractual undertaking is a duty to pay damages.

ii. Such an order would violate the sovereignty of the respondent

116. Specific performance is contrary to the foundations of international arbitration due to the

enforcement problems it poses and it should, therefore, be excluded on public policy

principles.175

It would amount to declaring the contract valid and resuming it.176

It

creates an obligation on the host state to comply with its contractual obligations which,

is nothing but an interference with the sovereignty of the host state.

117. The said principle was also upheld in Occidental v. Ecuador, wherein the tribunal

focused on the effect of an order of specific performance on the respondent state. ―To

impose on a sovereign state reinstatement of a foreign investor in its concession would

170

Martin Endicott,p 544.

171 Chorzow Factory Case, p. 48

172 Borzu Sabahi, p 80.

173 Refer LCIA rules, 2014.

174 British Petroleum(BP), ¶¶389,391

175 LIAMCO, ¶ 390

176 Borzu Sabahi, p 81.


36

constitute reparation disproportional to its interference with the sovereignty of the state

when compared to monetary compensation.177

V. THE CLAIMANTS BASIS FOR CLAIMING AND QUANTIFYING

COMPENSATION IS INCORRECT

118. The claimant seeks damages for lost profits to Alfa on account of denial of license [A],

compensation for beta and the 12 projects on account of change in the feed-in-tariff [B],

damages on account of reduced tariff for prospective development of plants [C] and

lastly interest rate for damages in the past [D.]

A. The basis for claiming damages for Alfa is unfounded

119. It has already been stated before that Alfa was not undertaken in pursuance of energy

law. Hence, no legitimate expectations of the claimant were created. Additionally, the

respondent was also not eligible for the license as per the energy law because Feed-in-

tariffs were given as an incentive for development of old and new projects and not for

the revival of sick ones.178

In such a scenario, where the property has no performance

record or failed to make a profit, future profits would be wholly speculative.179

120. Keeping the aforesaid in mind, the respondent submits that Alfa was not eligible for a

license as per the LRE and the claimant‘s assertion of lost profits to Alfa on account of

denial of license is without any basis.

B. The claimant has erroneously used WACC to discount cash flows.

121. The claimant expert uses the WACC method for discounting the cash flows for

calculation of damages for Beta. Since, it has been clarified by the claimant that it

intends to continue the 12 projects180

therefore; calculation of damages for the same has

also been done using the same discounting method.

122. There are two methods for discounting cash flows:

177

Occidental petroleum , ¶ 140.

178 Expert Report of Juanita Priemo, ¶7.

179 Metalclad ,¶ 119-122.

180 Procedural order 2.


37

(a) Cash flows to equity are discounted at the cost of equity

(b) Cash flows to firm are discounted at WACC, which includes cost of debt.

The claimant has erroneously discounted the cash flows to equity at WACC instead

of cost of equity. As a result, this has led to a higher discounting value since WACC

also includes the cost of debt in addition to cost of equity.

123. The correct calculation would have been to discount the cash flows to equity at the cost

of equity, in the event of which the correct rate is 12% and not 8%. This substantially

reduces the amount of damages payable to the respondent.

C. Damages for prospective development of plants

124. Damages have also been claimed for additional investments in the future. However,

there is not a conclusive evidence to support this fact in the business plan of the

claimant. In the absence of such validation, an opinion cannot be framed. It would be

violative of the professional accountancy standards. In the lack of such indication, it is

impracticable to consider such investments for damages.

D. Payment of interest on damages

125. The claimant also seeks a payment for interest on losses incurred in the past. However,

the claimant uses the same rate as that of WACC for interest calculation. The reasons

stated above show that the WACC rate of 8% is not the correct rate for discounting cash

flows. Similarly, the said rate cannot be applied for interest payments as well. Therefore,

the interest rate should also be calculated at 12%.


38

RELIEF SOUGHT

The Respondent respectfully prays to the Tribunal to declare –

1. That the Tribunal does not have jurisdiction over this dispute.

2. In the event that the first prayer is not granted, declare that the respondent‘s

administrative and regulatory measures have not violated ―Fair and Equitable Treatment‖

in the BIT.

3. Where the second prayer is not granted declare, that the Respondent‘s actions are

exempted on the grounds of necessity.

4. In case the third prayer is not granted, declare that the Respondent cannot may be called

upon to rescind the LRE amended Article 4 or in the alternative pay the pre-2013 to the

claimant.

5. In the event that the first or second prayer are not granted declare that the Claimant‘s

basis for claiming and quantifying compensation is incorrect.

Respectfully submitted on 26 September 2015 by

QUINTANA

On behalf of Respondent

REPUBLIC OF BARANCASIA.