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RAU
FOREIGN DIRECT INVESTMENT MOOT COMPETITION
2011
IN THE ARBITRATION UNDER THE RULES OF ARBITRATION OF THE
INTERNATIONAL CHAMBER OF COMMERCE
BETWEEN
FREEDONIA PETROLEUM
(CLAIMANAT)
V.
REPUBLIC OF SYLVANIA
(RESPONDENT)
-----------------------------------------------
MEMORIAL FOR THE RESPONDENT
-----------------------------------------------
ii
(a) TABLE OF CONTENTS
(a) TABLE OF CONTENTS _____________________________________________________ ii
(b) LIST OF ABBREVIATIONS __________________________________________________ iv
(c) LIST OF LEGAL SOURCES __________________________________________________ v
d) STATEMENT OF RELEVANT FACTS _________________________________________ 1
(f) SUMMARY OF ARGUMENTS ________________________________________________ 3
(h) ARGUMENTS ______________________________________________________________ 4
PART ONE: JURISDICTION ________________________________________________ 4
I) ICC LACKS JURISDICTION RATIONAE PERSONAE ________________________ 4
A) BIT is the only relevant source to be applied ________________________________ 4
B) MAFFEZINI award rationale is inapplicable _______________________________ 6
II) FORK IN THE ROAD CLAUSE DISABLES ICC’S JURISDICTION ___________ 7
A) Identity of the parties, object and cause of action ____________________________ 9
III) THE RESPONDENT’S COUTNERCLAIMS ARE ADMISSIBLE _____________ 10
PART TWO: MERITS: There is no liability on behalf of the Respondent ___________ 12
I) THE APPLICABLE LAW ARE ILC’S ARTICLES ON STATE RESPONSIBILITY
13
II) THE CONDITIONS FOR RESPONSIBILITY UNDER THE ARTICLES ARE NOT
SATISFIED ______________________________________________________________ 13
A) THE ACTIONS OF NPCS CANNOT BE ATTRIBUTED TO SYLVANIA _______ 14
1) The NPCS does not exercise governmental authority __________________________ 14
2) The NPCS was not directed nor controlled by the Respondent __________________ 15
i. The NPCS was not authorized by Sylvania to perform any actions which would
constitute a breach of an international obligation _______________________________ 15
ii. The NPCS was not under the control of Sylvania _____________________________ 16
B) There was no breach of an international obligation ___________________________ 17
1) THE RESPONDENT DID NOT COMMIT A BREACH OF CONFIDENTIALITY 17
i. There is no general obligation of confidentiality in arbitration ___________________ 17
ii. There is no obligation of confidentiality in investor-State arbitration ____________ 18
iii. The Claimant agreed that the present arbitration would not be confidential ______ 19
iv. In any event, the Respondent did not commit a breach of confidentiality _________ 20
2) THE RESPONDENT DID NOT EXPROPRIATE THE CLAIMANT’S
INVESTMENT ___________________________________________________________ 21
i. There was no direct expropriation on behalf of the Respondent _______________ 21
ii. There was no indirect expropriation on behalf of the Respondent _____________ 21
iii
a) The „sole-effect“ doctrine is not applicable ________________________________ 21
b) There was no regulatory expropriation ___________________________________ 22
c) The Claimant was not deprived of its investment ___________________________ 23
d) Even if there was deprivation, it cannot be qualified as “substantial” __________ 25
e) The measures in question are of a merely temporary nature __________________ 26
f) The Respondent did not expropriate the Claimant’s legitimate expectations _____ 27
3) THE RESPONDENT UPHELD ITS OBLIGATIONS REGARDING FET _______ 28
i. The BIT equates FET with the IMS ______________________________________ 28
ii. The Respondent satisfied the IMS requirements ____________________________ 29
iii. In any event, the Respondent’s actions are not a breach of the FET standard ____ 30
4) THE CLAMANT WAS ACCORDED FULL PROTECTION AND SECURITy ___ 35
5) THE RESPONDENT IS NOT LIABLE PURSUANT TO ARTICLE 9 OF THE BIT
36
i. Article 9 has precedence over CIL ________________________________________ 36
ii. Article 9 is a self-judging clause __________________________________________ 37
iii. The Respondent acted in good faith when protecting its essential security interests
38
iv. The Respondent may invoke other causes enumerated in Article 9 _____________ 38
a) The Respondent acted in the protection of its public order ___________________ 39
b) The Respondent acted in order to satisfy its international law obligations _______ 39
v. The Respondent does not owe compensation to the Claimant _________________ 40
C) Any potential liability on behalf of the Respondent is precluded due to necessity __ 40
1) The means used were the only ones by which the Respondent could safeguard its
interest __________________________________________________________________ 41
2) The interest in question was an essential ____________________________________ 41
3) There was a grave and imminent peril ______________________________________ 42
4) The act did not seriously impair an essential interest of the other state ___________ 42
5) The international obligation in question does not exclude the possibility of invoking
wrongfulness nor did Sylvania contribute to the state of necessity _________________ 43
PRAYER FOR RELIEF ____________________________________________________ 44
iv
(b) LIST OF ABBREVIATIONS
1. ICC – International Chamber of Commerce
2. FET – Fair and equitable treatment
3. FP – Freedonia Petroleum, the Claimant
4. FPS – Freedonia Petroleum S.A.
5. The BIT – Freedonia-Sylvania BIT
6. MLA – Medanos License Agreement
7. CIL – Customary International Law
8. ITLOS – International Tribunal on the Law of the Sea
9. IMS – International minimum standard
10. ICJ – International Court of Justice
v
(c) LIST OF LEGAL SOURCES
INTERNATIONAL TREATIES
Argentina-US BIT Article II(2) 14th
November 1991 at
http://www.oxfordlawcitator.com/protected/Citator?type=bib&doc=law-iic-ov-us&link=law-
iic-ov-us-bibItem-2
{Argentina-US BIT}
Convention on Biological Diversity, 1760 UNTS 79; 31 ILM 818 (1992)
{Convention on Biological Diversity}
Articles on Responsibility of States for Internationally wrongful acts, November 2001
{Articles on State Responsibility}
UNIDROIT Principles of International Commercial Contracts at
http://www.unidroit.org/english/principles/contracts/principles2010/blackletter2010-
english.pdf
{UNIDROIT Principles}
INTERNATIONAL CASE LAW
ADF Group Inc. v USA, Award, 9 January 2003, 18 ICSID Review-FILJ (2003) 195, 6 ICSID
Reports 470
{ADF}
Amco v. Indonesia, Award, 20 November 1984, I ICSID Reports, 493
{Amco}
vi
Amco Corporation and others v The Republic of Indonesia, Decision on Request for
Provisional Measures, (1983) 1 ICSID Reports 410, 412, 9 December 1983
{Amco, Provisional Measures}
Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of 14 July 2006
{Azurix}
Biwater Gauff (Tanzania) Ltd v. United Republic of Tanzania, ICSID Case No. ARB/05/22,
Procedural Order No. 3, 29 September 2006
{Biwater Gauff}
Case Concerning Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada
v. United Stated of America), Judgment, I.C.J. Reports 1984, p. 246
{Gulf of Maine}
Case Concerning the Gabcikovo- Nagymaros Project (Hungary v. Slovakia), Judgment, I.C.J.
Reports 1997
{Gabcikovo}
Case of M/V “SAIGA” (No. 2), (Saint Vincent and the Grenadines v. Guinea), ITLOS,
Judgment of July the 1st 1999, reprinted in 38 ILM 1999
{SAIGA}
Case concerning Military and Paramilitary Activities in and against Nicaragua, (Nicaragua
v. United States of America), Merits, Judgment of 27 June 1986, ICJ Reports 1984
{Nicaragua}
Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4,
Decision on Objections to Jurisdiction of May 24, 1999
{CSOB}
CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8,
Decision of the Tribunal on Objections to Jurisdiction of July 17, 2003, 42 ILM 788 (2003)
{CMS, Decision on Jurisdiction}
vii
CMS Gas Transmission Company v The Argentine Republic , ICSID Case No. ARB/01/8,
Award of 12 May 2005
{CMS}
CMS Gas Transmission Company v. The Argentine Republic, ICSID-Case-No. ARB/01/8
(US-Argentina BIT), Annulment-Decision-of-25-September-2000
{CMS Annulment}
Compańia de Aquas del Aconquija, S.A. and Compagnie Générale des Eaux v. Argentine
Republic, Case No. ARB/97/3, Decision on Annulment of 3 July 2002.
{Vivendi Annulment}
Continental Casualty v. Argentine Republic, ICSID Case No. ARB/03/09, Award of 5
September 200
{Continental Casualty}
Emilio Agustin Maffezini v. The Kingdom of Spain, Decision on Jurisdiction, ICSID case No.
ARB/97/7
{Maffezini, Decision on Jurisdiction}
Emilio Agustin Maffezini v. The Kingdom of Spain, Award, November 13, 2000ICSID Case
No ARB/97/7
{Maffezini}
Enron Corporation, Ponderosa Assets L.P. v. Argentine Republic, ICSID Case No.
ARB/01/3, Award of May 22, 2007
{Enron}
Fisheries Jurisdiction (Spain v. Canada), Jurisdiction of the Court, Judgment, I.C.J. Reports
1998
{Fisheries}
Glamis Gold, Ltd. v. United States of America, ICSID Case, Award of June 8, 2009
viii
{Glamis}
Genin, Eastern Credit Limited Inc and AS Baltoil v Republic of Estonia (Award) 6 ICSID
Rep 236 (ICSID, 2001, Fortier P, Heth & van den Berg)
{Genin}
Jan de Nul N.V. & Dredging N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13,
Award, November 6, 2008
{Jan de Nul}
Klöckner v. Cameroon, Award of 21 October 1983: ICSID Reports, vol. 2
{Klöckner}
LG&E v Argentina , Decision on Liability, 3 October 2006, 46 ILM (2007) 36
{LG&E}
Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Award of
June 26, 2003; 42 I.L.M. 811 (2003)
{Loewen}
Marvin Feldman v Mexico , ARB(AF)/99/1, 16 December 2002, 18 ICSID Rev-FILJ 488
(2003)
{Feldman}
Metalclad Corporation v United Mexican States, Award, Ad hoc—ICSID Additional Facility
Rules; ICSID Case No ARB(AF)/97/1; IIC 161 (2000)
{Metalclad}
Methanex Corporation v United States of America , NAFTA Arbitral Tribunal, Final Award
on Jurisdiction and Merits, 3 August 2005, IV D
{Methanex}
Mondev Int'l Ltd. v. United States, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002
ix
{Mondev}
MTD v Chile, Case No. ARB/01/7 Award, 25 May 2004, 12 ICSID Reports 6
{MTD v Chile}
National Grid plc v Argentine Republic, UNCITRAL Case No 1:09-cv-00248-RBW, Award,
3 November 2008
{National Grid}
Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award 12th October 2005
{Noble Ventures}
Occidental Exploration and Production Co v. Ecuador , LCIA No. UN 3467, Award, 1 July
2004, available at http://ita.law.uvic.ca/documents/Oxy-EcuadorFinalAward_001.pdf
{Occidental}
Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8 (Award of Sept. 11,
2007)
{Parkerings}
Pope & Talbot, Inc v. Canada, Interim Award (June 26, 2000)
{Pope & Talbot}
Racke / Hauptzollamt Mainz, ECJ, Judgment of 25 January 1979 (98/78, ECR 1979 p. 69)
{Racke}
S.D. Myers, Inc. v. Canada, UNCITRAL (NAFTA), Procedural Order No. 16, 13 May 2000
{S.D. Myers v. Canada, Procedural Order No. 16}
S.D. Myers, Inc. v. Canada, (November 13, 2000) Partial Award, 232. ILM 408
{S.D. Myers}
Saluka Investments BV (The Netherlands) v The Czech Republic , UNCITRAL Partial Award,
17 March 2006
x
{Saluka}
SEDCO, Inc. v. National Iranian Oil Company, C.T.R., vol. 15, p. 23 (1987)
{SEDCO}
Sempra Energy International v The Argentine Republic, ICSID Case No. ARB/02/16he,
Award 28 September 2007
{Sempra}
Sempra Energy v. Argentina, ICSID-Case-No. ARB/02/16, Decision on Annulment, 29 June
2010
{Sempra Annulment}
Sourthern Pacific Properties (Middle East) Limited c. Arab Republic of Egypt, Caso CIADI
No. ARB/84/3. Decisión sobre jurisdicción del 14 de abril de 1998
{Middle East}
Tecnicas Medioambientales Tecmed SA v The United Mexican States , ARB(AF)/00/2,
Award, 29 May 2003, 43 ILM 133 (2004)
{Tecmed}
Telenor Mobile Communications S.A. v. The Republic of Hungary, ICSID Case No.
ARB/04/15, Award, September 13, 2006 2004
{Telenor}
Thunderbird Gaming v. United Mexican States (UNCITRAL/NAFTA, Jan. 26, 2006)
{Thunderbird}
Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran , 6 Iran-US
CTR 219, 225 (29 June 1984).
{Tippetts}
United Parcel Service of America Inc v Canada, Award on Jurisdiction, Ad hoc—
UNCITRAL Arbitration Rules, IIC 265 (2002), Decision on Jurisdiction, 22 November 2002
xi
{UPS}
Waste Management Inc. V. The United Mexican States, ICSID Case Num. ARB(AF)/98/2,
Award of June 2, 2000
{Waste Management}
COMMERCIAL ARBITRATION DECISIONS
Alliance v. Australian Gas Light Co., 34 SASR 215
{Alliance v. Australian Gas Light}
American Bell International v. The Ministry of Roads and Transportation et al, 13 May 1983;
Iran-US CTR, vol. 2
{American Bell v. The Ministry of Roads}
Bulgarian Foreign Trade Bank Ltd v. Al Trade Finance Inc., Supreme Court, 27 October
2000, (2001) XXVI Y.B. Comm. Arb. 291
{Bulgarian Bank v. Al Trade Finance}
Columbia v. Imperial Tobacco Canada Ltd., [2005] 2 S.C.R. 473
{Columbia v. Imperial Tobacco Canada}
Commonwealth of Australia v Cockatoo Dockyard Pty Ltd [1995] 36 NSWLR 662
{Australia v Cockatoo Dockyard}
ESSO Australia Resources Limited and Others v. The Honourable Sidney James Plowman
(Minister for Energy and Minerals) and Others, High Court of Australia, 7 April 1995, (1995)
11 Arbitration International 235
{ESSO v. The Hon. Plowman}
Harris International Telecommunications Inc v. Iran, Case 323-409-1, 2 November 1987, 17
Iran-US CTR 31
{Harris v. Iran}
xii
Hassneh Insurance Company of Israel & Others v. Steuart J. Mew [1993] 2 Lloyd's Rep. 243
{Hassneh Insurance v. Mew}
Johannessen v. United States, 225 U.S. 227, 242 (1912)
{Johannessen v. United States}
Partial Award in Case 5896, May 1991, published in ICC International Court of Arbitration
Bulletin - Vol. 11/No. 1
{Partial Award in Case 5896}
United States v. Panhandle Eastern Corp. et al., (D. Del. 1988) 118 F.R.D. 346.
{United States v. Panhandle}
ICC PUBLICATIONS
Bagner, Hans, The Confidentiality Conundrum in International Commercial Arbitration, ICC
International Court of Arbitration Bulletin Vol. 12 No. 1, January 2001
{Bagner}
Dimolitsa, Antonias, Institutional Rules and National Regimes Relating to the Obligation of
Confidentiality on Parties in Arbitration, in Special Supplement 2009: Confidentiality in
Arbitration: Commentaries on Rules, Statutes, Case Law and Practice, ICC Publication No.
700, 2009
{Dimolitsa}
Hwang, Michael, Chung, Katie, Protecting Confidentiality and its Exceptions-The Way
Forward? in Special Supplement 2009: Confidentiality in Arbitration: Commentaries on
Rules, Statutes, Case Law and Practice, ICC Publication No. 700, 2009
{Hwang, Chung}
Leboulanger, Philippe, Some Issues in ICC Awards Relating to State Contracts, ICC
International Court of Arbitration Bulletin Vol. 15 No. 2, 2004, p. 94
xiii
{Leboulanger}
Paulsson, Rawding, The Trouble with Confidentiality, ICC International Court of Arbitration
Bulletin Vol. 5 No. 1, 1994
{Paulsson, Rawding}
Smutny, Young, Confidentiality in Relation to States in Special Supplement 2009:
Confidentiality in Arbitration: Commentaries on Rules, Statutes, Case Law and Practice, ICC
Publication No. 700, 2009 edition
{Smutny, Young}
BOOKS AND ARTICLES
Briese, Rbyn, Schill, Stephan, If the State Considers: Self-Judging Clauses in International
Dispute Settlement in: Max Planck Yearbook of United Nations Law 13, 61-140 (2009)
{Briese, Schill}
Brownlie, Ian, Public International Law, Oxford University Press, 6th Edition, 2003
{Brownlie}
Cordero-Moss, Giuditta, Boilerplate Clauses, International Commercial Contracts and the
Applicable Law: Common Law Contract Models and Commercial Transactions Subject to
Civilian Governing Laws, Cambridge University Press, 2011
{Cordero-Moss}
Crawford, James, Sinclair, Anthony, The UNIDROIT Principles and their Application to State
Contracts, Special Supplement 2002: UNIDROIT Principles of International Commercial
Contracts: Reflections on their Use in International Arbitration, 2002, p.57
{Crawford&Sinclair}
Cremades, Bernardo, Cairns, David, Contract and Treaty Claims and Choice of Forum in
Foreign Investment Disputes, Dossier of the ICC Institute of World Business Law: Parallel
State and Arbitral Procedures in International Arbitration, 2005 , p. 13
xiv
{Cremades & Cairns}
Crivellaro, Antonio, Consolidation of arbitral and court proceedings in investment disputes,
Dossier of the ICC Institute of World Business Law: Parallel State and Arbitral Procedures in
International Arbitration, 2005, p.79
{Crivellaro}
Derains, Yves, Schwartz, Eric, A Guide to the ICC Rules of Arbitration, Kluwer Law
International, 2005
{A Guide to the ICC Rules of Arbitration}
Dolzer, Rudolf & Schreuer, Christoph, Principles of International Investment Law, Oxford
Univeristy Press, 2008
{Dolzer& Schreuer}
Douglas, Zachary, The International Law of Investment Claims, Cambridge University Press,
2009
{Douglas}
Dugan, Christopher, Wallace, Jr., Don, Rubins, Noah, Sabahi, Borzu, Investor-State
Arbitration, Oxford University Press, 2008
{Investor-State Arbitration}
Emerson, Robert W., Business Law Barron's Educational Series, 2003
{Emerson}
Craig, De Burca, EU Law: text, cases and materials, Oxford University Press, 2008
{Craig, De Burca)
Fitzmaurice M., Elias O.A., Merkouris P., Treaty interpretation and the Vienna Convention
on the Law of Treaties: 30 years on, BRILL, 2010
{Fitzmaurice, Elias, Merkouris}
Freeman, E.M., Regulatory Expropriation under NAFTA Chapter 11: Some Lessons
xv
from the European Court Of Human Rights, 42 Columbia Journal of Transnational Law, 2003
{Freeman}
Hitt, Michael A. R., Ireland, Duane and Hoskisson, Robert E., Strategic Management:
competitiveness and globalization: concepts & cases Cengage Learning, 2009
{Hitt}
Horn, Norbert, Kroll, Stefan, Arbitrating foreign investment disputes, Kluwer Law
International, 2004
{Horn, Kroll}
Kasenetz, Eric David, Desperate Times Call for Desperate Measures: the Aftermath of
Argentina’s State of Necessity and the Current Fight in the ICSID, 41 Geo. Wash. Int'l L.
Rev. 709
{Kasenetz}
Kraakman, Reinier H., Hansmann, Henry, The Anatomy of Corporate Law: a comparative
and functional approach Oxford University Press, 2004
{Kraakman, Hansmann}
Kurtz, Jürgen, Monnet, Jean, Adjudging the Exceptional at International Law: Security,
Public Order and Financial Crisis, Working Paper 06/08, 2008, available at:
http://centers.law.nyu.edu/jeanmonnet/papers/08/080601.pdf
{Kurtz}
Lalive, Pierre and Halonen, Laura, On the Availibility of Counterclaims in Investment Treaty
Arbitration, CYIL-2011 Vol. II, Rights of the Host States within the System of International
Investment Protection
{Lalive & Halonen}
McLachlan, Campbell, Shore, Laurence, Weiniger, Matthew, International Investment
Arbitration: substantive principles, Oxford University Press, 2008
{McLachlan. Campbell, Shore}
xvi
Muchlinski P.,Ortino F., Schreuer C. (ed.), The Oxford Handbook of International
Investment Law, Oxford University Press, 2008
{Muchlinski, Ortino, Schreuer}
Muchlinski, P., Multinational Enterprises and the Law, Oxford University Press, 2007
{Muchlinski}
Newcombe, Andrew, Paul, Paradell, Lluis, Law and practice of investment treaties: standards
of treatment, Kluwer Law International, 2009
{Newcombe, Paradell}
Platto, Charles, Economic consequences of Litigation Worldwide, Kluwer Law International,
1999
{Platto}
Ramseur, Jonathan, Liability and Compensation Issues Raised by the 2010 Gulf Oil Spill,
DIANE Publishing, 2011
{Ramseur}
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Law Institute, Vol. 1, 1987
{Third Restatement}
Rivkin, David, The impact of parallel and successive proceedings on the enforcement of
arbitral awards, Dossier of the ICC Institute of World Business Law: Parallel State and
Arbitral Procedures in International Arbitration, 2005, p. 269
{Rivkin}
Robison, Wade, Bayles, Michael, The Legal Essays of Michael Bayles, Springer, 2002
{Robison, Bayles}
Romero, Eduardo Silva, ICC Arbitration and State Contracts, ICC International Court of
Arbitration Bulletin Vol. 13 No. 1, 2002, p. 34
{ICC Arbitration and State Contracts}
xvii
Rovine, Arthur, Contemporary issues in international arbitration and mediation, BRILL,
2009
{Rovine}
Schreuer, Christoph, The Concept of Expropriation under the ETC and other Investment
Protection Treaties, in Investor-State Disputes - International Investment Law, TDM 5 (2005)
{Schreuer, Expropriation under the ETC}
Schreuer, Christoph, Travelling the BIT Route of Waiting Periods, Umbrella Clauses and
Forks in the Road, The Journal of World Investment and Trade, Geneva, April 2004, Vol. 5.
No. 2
{Schreuer}
Shaw, M.N., International Law Cambridge University Press, 5th
Revised ed., 2003
{Shaw}
Sornarajah M., The International Law on Foreign Investment, Cambridge University
Press, 1994
{Sornarajah}
Steffy, Loren, McGraw-Hill, Drowning in Oil: BP and the Reckless Pursuit of Profit,
Professional, 2010
{Steffy, McGraw-Hill}
OECD PUBLICATIONS
Essential Security interest Under International Investment Law, International Investment
Perspectives: Freedom of an Investment In a changing World, 2007 Edition, OECD 2007,
BRILL, 2010
{Essential Security Interests under International Investment Law}
International Investment Law: A Changing Landscape, OECD, OECD Publishing, 2005,
xviii
{International Investment Law}
MISCELLANEOUS
Canadian FIPA, at: http://www.dfait-maeci.gc.ca/tna-nac/what_fipa-en.asp#structure
US Model BIT, at http://www.state.gov/e/eeb/ifd/bit/
NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter Eleven
Provisions (31 July 2001)
The “Torrey Canyon”, Cmnd. 3246 (London, HM Stationery Office, 1967)
http://www.merriam-webster.com/dictionary/secure?show=1&t=1310948786
http://www.businessspectator.com.au/bs.nsf/Article/WRAPUP-2-Memorial-planned-for-rig-
victims-BP-readi-5SBPT?OpenDocument
http://www.economist.com/node/16270972
http://www.bbc.co.uk/news/uk-14070733.
1
d) STATEMENT OF RELEVANT FACTS
1. Claimant is a multinational energy company in which Freedonia has 60% interest. In
2007 Claimant incorporated FPS, a wholly-owned subsidiary in Sylvania, to
participate in a oil exploration tender. On 26 May, Sylvania and FP entered into the
MLA.
2. Under the Agreement, Claimant undertook to observe safety obligations and prevent
all discharges on navigable water and ensure immediate and effective removal of oil
in case of a discharge. The Parties agreed that any modifications to the Agreement
would be made by mutual written consent and that Sylvanian law would govern it.
3. On 9 June 2009, a large explosion caused several FPS‘ oil wells to leak, releasing
35000 – 60000 gallons of oil daily. There was danger that the spill could get into a
―Loop Current‖, which would carry it into a protected marshland. On July 24 a
confidential report was published in a newspaper, stating that the Claimant indicated
that it might take 6 months to seal the well and that new release points, which could
have been avoided had the company been better prepared, were identified. The source
of the leak is unknown.
4. On 21 November an amendment to Sylvania‘s FoI law limited ―third-party‖ access
Sylvania‘s international arbitration cases, conditioning such access by an application
to Sylvanian courts.
5. On December 10 Sylvania‘s OPA was amended, revising the liability limitations,
broadening the scope of ―damages‖ and imposing new safety obligations. These
measures were made effective from June 1st 2009. In February 2010 FPS sought
declaratory relief from Sylvanian courts that the terms of the MLA took precedence
over OPA‘s amendments.
6. On February 26, the Respondent ordered FPS to pay SD 150 million for breaches of
its obligations under the MLA and OPA. FPS commenced administrative proceedings
to resist the request. The administrative claim was rejected and negotiations regarding
the payment failed.
7. On August 10 a Hydrocarbon Law was adopted, creating the NPCS. Meanwhile,
resulting from the spill, the social climate in Sylvania had become fraught, with
thousands of people losing jobs and industries severely damaged. CSE, an NGO,
2
requested that Sylvania take immediate action to remedy the damage to the
environment caused by FP.
8. On November 29 Sylvanian President issued an Executive Order, proclaiming a state
of emergency and declaring it an issue of national concern. FP‘s license was
suspended until it produced a plan to remedy the damage. NPCS personnel took over
the premises of the leaking wells in order to undertake necessary remedial works. On
10 December, the presidents of Sylvania and Freedonia commenced futile diplomatic
negotiations regarding the issue.
9. On 23 December FP and FPS sent a communication to Sylvania claiming a breach of
BIT. Sylvania responded by claiming that Freedonia was exploiting the investor-state
arbitration clause. On March 23 2011, while FPS‘ claim before Sylvanian courts was
pending, FP filled a request for arbitration before the ICC claiming a breach of BIT.
10. On 29 April Sylvania submitted its objections to jurisdiction, while serving notice of
its counterclaim. The Claimant answered the objections and the Tribunal was
constituted.
11. On 26 August CSE submitted a request before Sylvanian courts for the release of
arbitration details. Sylvania and FP submitted their comments, with FP objecting. The
Court ordered the release of the written pleadings, having regard to the issue‘s
extraordinary impact on Sylvanian citizens.
12. On 10 September, CSE filed a request to be present at the hearings. The tribunal
invited the Parties to comment.
13. Freedonia and Sylvania concluded a BIT in 1994. They are UN members, and Parties
to the VCLT, ICCPR, ICESCR, ECT and Convention on Biological Diversity.
3
(f) SUMMARY OF ARGUMENTS
JURISDICTION
14. The Tribunal lacks jurisdiction to adjudicate the present dispute, since the rationae
personae requirements are not fulfilled, as there is no investor in the meaning of the
BIT. Alternatively, the Tribunal‘s jurisdiction is barred through the activation of the
BIT‘s ‘fork-in-the-road‘ clause.
15. The Respondent‘s counterclaims are admissible since the involved Parties are the
same and it is closely connected to the main claim.
MERITS
16. The Respondent is not liable for the actions of the NPCS. The NPCS is not a state
organ, it does not exercise governmental authority, nor was it directed or controlled
by the Respondent.
17. The Respondent did not breach any of its obligations under the BIT or CIL. There
Respondent did not commit a breach of confidentiality. The Claimant‘s property was
not expropriated, since there was no substantial deprivation of its investment nor were
the relevant measures permanent. The Respondent fulfilled its obligations regarding
FET. The Respondent‘s actions did not breach the obligation to provide full
protection and security.
18. In any event, the protection of essential security interests, in line with Article 9 of the
BIT, excludes any potential breach of the Respondent‘s international obligations.
Article 9 is explicitly self-judging and was applied in good faith.
19. If the Tribunal finds that the Respondent breached its international obligations, the
Respondent‘s responsibility for the said breach is precluded, since the requirements
for necessity under CIL are satisfied.
4
(h) ARGUMENTS
PART ONE: JURISDICTION
1. In order for any judicial forum to have jurisdiction, there has to be a valid arbitration
agreement. The Claimant requested arbitration before the ICC, under Article 11 of the
BIT.
2. There is no presumption of jurisdiction1 – it has to be shown to exist. The Respondent
contests ICC‘s jurisdiction, insisting that necessary conditions are not met. The
Respondent will challenge Tribunal‘s jurisdiction on two accounts: 1) the Tribunal
lacks rationae personae jurisdiction, as there is no investor in the meaning of the BIT,
and b) the fact that ‘fork-in-the-road‘ clause was activated, left the Tribunal devoid of
competence to resolve the present dispute.
I) ICC LACKS JURISDICTION RATIONAE PERSONAE
A) BIT is the only relevant source to be applied
3. The ICC Arbitration Rules make no requests regarding parties; what is more, the
Rules do not even require that each party to the dispute at hand must have signed the
arbitration agreement.2 As the provisions of the Rules are silent on the topic, the
Tribunal needs to turn to arbitration agreement when deciding on the issue.
4. One of the issues that can raise concerns is the degree of detail to be provided
regarding ownership and control of the parties.3 The Rules require no such disclosure.
However, if the parties have agreed to limit jurisdiction and competence of the
tribunal to this respect, the Tribunal has no other choice but to apply the provisions set
forth by the parties to the dispute. It was established in Gulf of Maine, and universally
followed by arbitral tribunals that, when indulging to the parties requests, the tribunal
1 Middle East, para. 63.
2 A Guide to the ICC Rules of Arbitration, p. 89.
3 Ibid., p. 47.
5
needs to adapt to the rules parties set when deciding to arbitrate their dispute.4 In the
present case, that means that the Tribunal needs to turn to the BIT in order to question
its jurisdiction and competence.
5. The purpose and one, if not the most important, effect of an arbitration agreement is
to obtain a final decision on the dispute that is enforceable by law.5 Article 11,
prorogating jurisdiction of the ICC, states that in case of an investment dispute,
between a contracting party and an investor, dispute settlement mechanism will be set
in motion. In order to determine whether rationae personae jurisdiction conditions are
fulfilled, the Tribunal needs to refer to Article 1 of the BIT, which defines an Investor
of a Contracting Party as a natural or legal person of the other Contracting party,
„provided in all cases that the above defined natural and legal
persons do not pursue sovereign activities and are not funded by
the other Contracting Party.―
6. The Respondent does not dispute that FPS is incorporated in Sylvania and under its
laws. However, the Respondent asserts that both the ownership structure of the
Claimant and Claimant‘s actions disqualify FP and FPS from being viewed as an
Investor in the sense of Article 1.
7. Regardless of whether the Tribunal considers this kind of classification fit or just, it is
nevertheless bound by the provisions of the BIT which represent source of its
jurisdiction. It is not at liberty to apply different sets of rules other than what the
parties have instructed it to, as the Tribunal is to interpret jurisdictional instruments
neither restrictively nor expansively, but rather objectively and in good faith.6 In the
present case, that makes the situation clear-cut: Freedonia Petroleum is an
international energy company and is in its majority, i.e. 60% owned by the Freedonian
government.
8. ICC Rules are admittedly flexible and allow for ICC arbitration and arbitrators to
develop international commercial arbitration relating to state contracts or otherwise
4 Gulf of Maine, para. 23.
5 ICC Arbitration and State Contracts, p. 42.
6 Middle East, para. 63.
6
involving state entities.7 Whether or not a public entity, such as the Claimant can
agree to arbitration is not a question of arbitrability of a dispute, as administrative and
state contracts have been universally recognized as arbitrable,8 but it is rather, and
more so in the present case, a question of capacity.9 In the case at hand, the situation
is crystal clear: the BIT, i.e. the legal source prorogating jurisdiction, disables FP, and
subsequently FPS to bring a claim under this treaty. In the words of Pierre Mayer:
When a sovereign State is one of the subjects in a relationship, the concept of
administration, with reference to which public law is distinguished from private law,
is no longer involved; such a situation belongs to another field - the international
sphere - in which the traditional distinctions have no place or at any rate do not have
the same meaning.10
B) MAFFEZINI award rationale is inapplicable
9. The Maffezini award laid down criteria for determining whether a company presents a
state entity. This decision advocates that two tests need to jointly be fulfilled in order
for acts to be attributed to a state: the structural test, examining the ownership and the
creation of an enterprise, and functional test, dealing with the nature of entity‘s acts.
This award and the entire ICSID practice on the topic are rendered irrelevant as
parties‘ definition of the investor set forth in the BIT gives a straightforward guidance
to the Tribunal.
10. The Respondent also underlines that in the present case it is not necessary to attribute
acts of FP to Freedonia. It is not the question of attribution but merely a question of
finances. It is uncontested that FP is in its majority share owned by Freedonian
government.
11. Furthermore, the Tribunal should be mindful about the fact that the Government of
Freedonia did not hesitate to intervene on the behalf of FP. On December 10, 2010,
7 ICC Arbitration and State Contracts, p.37.
8 Leboulanger, p. 96.
9 ICC Arbitration and State Contracts, p. 38.
10 Ibid., p. 54 citing P. Mayer, La neutralisation du pouvoir normatif de l'Etat en matière de
contrats d'Etat, JDI, 1986, 5.
7
the President of Freedonia contacted the President of Sylvania to enter into diplomatic
negotiations regarding the latest developments. If Freedonia was in fact just a mere
shareholder, it is inconceivable that nothing short of the highest authority in a state,
i.e. Head of State would take time to dwell upon problems of just any company. The
Claimant cannot maintain that inter-state diplomatic negotiations were a prerequisite
to filing the request for arbitration, as a part of amicable settlement. Freedonia and
Sylvania explicitly agreed and embedded in Article 13 that provisions of the BIT shall
be enforced, regardless of whether diplomatic relations exist between the parties.11
This indicates that parties‘ intentions were to leave the investment disputes to the
investor and the host state, and not to transfer it to the inter-state level. States have
different dispute resolution mechanism at their disposal. Freedonia cannot misuse the
BIT protection granted to a legitimate investor to forum-shop for arbitration in what is
clearly its own dispute with Sylvania. A state may decide that for certain activities it
will create an enterprise possessing separate personality and enjoying the normal legal
consequences of that form.12
This is a prerogative of a state that is unhampered in the
present case.
II) FORK IN THE ROAD CLAUSE DISABLES ICC’S JURISDICTION
12. The so called fork-in-the-road clause is a common part of BITs13
that compels
investors to choose whether to bring claims in litigation before the host state or in
international arbitration proceedings.14
In addition, any choice the investor makes will
be final.15
As was stated in Maffezini, if the parties have agreed to a dispute settlement
mechanism which includes the fork-in-the-road – a choice between domestic courts or
to international arbitration – the choice once made becomes irreversible,16
which
11
The BIT, Art. 13.
12 Crawford&Sinclair, p. 60.
13 Waste management, para. 29; Schreuer, p. 240.
14 Schreuer, p. 239.
15 Crivellaro, p. 98.
16 Maffezini, Decision on jurisdiction para 63; Rivkin, p. 285.
8
commonly reflects host state‘s public policy.17
This clause was embedded in Article
11.3.b) of the BIT, which reads that ICC will have jurisdiction provided that:
„the Investor has not brought the dispute before the courts having
jurisdiction within the territory of the Contracting State that is a
party to the dispute.―
13. In the present case, the fork in the road clause is activated as FP, through FPS, did
bring claims before Sylvanian Ministry of Energy and Sylvanian courts. On February
12, 2010, FPS sought declaratory relief that the MLA took precedence over the
amendments of the OPA. On February 26, 2010, the Sylvanian Government ordered
FPS to pay 150.000.000 USD liquidated damage, which FPS tried to resist by
commencing administrative proceedings before Sylvanian Ministry of Energy. The
Claimant has, therefore, sought the protection in the Respondent‘s legal system. Thus,
regardless of the protection mechanism, judicial or administrative, it is precluded
from resorting to arbitration in order to get favourable results. What is of crucial
importance to note is the fact that this clause incapacitates the investor to request
arbitration for the same alleged violations the investor already applied for protection
to the domestic courts or administrative system,18
thus eliminating the risk of
duplication of proceedings.19
The protection the investor sought in the present case
relates directly to the dispute, as FP wanted declaratory relief relating to the
amendments of OPA, which presents one of the basic claims of the Claimant under
the BIT. In addition, it cannot be plausibly argued that the Claimant was ignorant of
this treaty provision providing that commencement of this type of action shall
constitute a repudiation of the BIT dispute settlement mechanism.20
17
Maffezini, Decision on jurisdiction, para. 63.
18 Schreuer, pp. 240-241; Crivellaro, p.98.
19 Cremades & Cairns, p. 18.
20 Partial Award in Case 5896, p. 37.
9
A) Identity of the parties, object and cause of action
14. In order for the fork-in-the-road clause to take effect, there has to be identity of the
parties and of object, as well of cause of action.21
Should this not be the case, the
clause will not be reached. In the present case, it was FPS who applied to the
Sylvanian courts and administrative organs. As argued above, there is a de facto
identity between FP and FPS, at least for the purposes of the present proceedings.
15. Aside from this, object and cause of action of the Claimant coincide in both
proceedings. The Claimant sought to protect its rights against the amendments of
OPA affecting its investment, thus protecting that investment. The Claimant cannot
argue that its application to Sylvanian domestic legal system was done in the pursuit
of the legal recourse with respect to Claimant‘s contractual rights, stemming from the
MLA, and that it is irrelevant for the treaty protection sought here.
16. Looking into the core of Claimant‘s assertions, it appears that Claimant argues that
violations of the BIT occurred through amendments of the OPA and establishment of
the NPCS, which allegedly breached FET and the prohibition of expropriation
embedded in the BIT. On the other hand, FPS previously tried to refute the obligation
to pay fine under the OPA, by appealing to Sylvanian Ministry of Energy and by
addressing Sylvanian courts to seek declaratory relief to the effect of the MLA.
Therefore, this analysis raises the question: if amendments of the OPA were
challenged by the investor before Sylvanian organs, and if the same amendments
represent the alleged breach of the BIT how can there not be identity between causes
of actions?
17. Furthermore, and regardless to the previously argued, the wording of the fork-in-the-
road clause envisaged in the Sylvania-Freedonia BIT is extremely broad and it does
not require that investor‘s previous claim alleges explicitly a breach of the BIT.22
In
other words, it is enough that the dispute relates to the investment made under the BIT
for this clause to be triggered.23
18. CMS Gas explicitly stated in the decision on jurisdiction:
21
Azurix, para. 88.
22 Vivendi annulment, para 55.
23 Rivkin, p. 286.
10
„Had the Claimant renounced recourse to arbitration, for example
by resorting to the courts of Argentina, this would have been a
binding selection under the BIT.―24
19. In the present case, the Claimant made a choice to address Sylvanian administrative
organs and court. The Claimant cannot opt to gain protection on two different plains
at the same time. As stated in Waste management, when both legal actions, i.e.
proceedings before domestic authorities and international arbitration, have a legal
basis derived from the same measures and legal source, they can no longer continue
simultaneously due to the imminent risk that the Claimant may obtain the double
benefit in its claim for damages.25
20. To conclude, the question of the Tribunal‘s competence is a simple one that reduces
the problem to the matter of interpretation of the BIT. In the present case, the
Claimant‘s company took the initiative and exercised their option by choosing the
forum26
of Sylvanian court and administrative organs, which left the Tribunal devoid
of jurisdiction.
III) THE RESPONDENT’S COUTNERCLAIMS ARE ADMISSIBLE
21. The Respondent argues that it is allowed to bring a counterclaim against the Claimant
and seek damages for devastating harm that occurred as a consequence of FP‘s and
FPS‘ acts. It is a ―cardinal principle‖ stated in Saluka, that in order to bring a
counterclaim in an arbitration, the parties involved must be the same.27
In the present
case, this is not an obstacle, as the Respondent is seeking damages for the atrocities
that resulted from FPS‘ actions, which is the Claimant‘s wholly-owned subsidiary. In
fact, it was established in Enron that admittedly there has to be a cut-off point when
accepting individual claims.28
In Enron tribunal‘s view, the claims would be
24
CMS, Decision on Jurisdiction, para. 81.
25 Waste Management, para. 27.
26 Partial Award in Case 5896, p. 37.
27 Saluka, para 49.
28 Enron, para 52.
11
inadmissible as the connection to the affected company would be too remote.29
As
that is clearly not the case, since FPS is the daughter company of the FP, the issue of
indirect claims cannot emerge in the present case and consequently, the Respondent
satisfies the criterion of necessary identity of the parties when bringing a
counterclaim.
22. In addition, there has to be a close connection to the main claim.30
This means that in
the present case, the counterclaim has to be linked to the BIT, presuming hereby that
the Tribunal found that it has jurisdiction to hear Claimant‘s claims under the BIT.
This connection between claims and counterclaims cannot easily be defined, as it was
admitted by the Saluka tribunal:
―No single attempt to define this requirement with universal effect
is likely to be satisfactory, since so much will always turn on the
particular circumstances of individual cases, including not only
their facts but also the relevant treaty and other texts.―
23. The mere fact that this link has to be assessed on case-to-case basis, means that every
tribunal has the liberty to weigh upon the circumstances of the each case. In the
present case, the damage occurred from an oil leak, resulting from the explosion of
June 9, 2009. As 35,000-60,000 gallons of oil were spilled into the Gulf of Libertad
daily, even one day of this catastrophe would have terrible consequences. The fact
that it took over a year to seal the leak means that there undoubtedly consequences so
devastating, that government of Sylvania had to take special measures, in the state
interest.
24. It is important to note that the Respondent did not pick and choose an entity to pin the
responsibility on. It is an uncontested fact that the spill occurred on Medanos Field, on
a field operated by FPS, which points to the MLA which granted a license for the oil
exploitation. This in itself speaks in favour of the primary claim and the counterclaim
being indivisible.31
25. There is a clear tendency of recent tribunals to adopt the more liberal and less strict
manner of interpretation of this test, in the sense that the tribunals do not apply the
29
Ibid.
30 Ibid., para. 61.
31 Klöckner, p. 9.
12
same strict test, but look at the conditions more loosely.32
Zachary Douglas, among
others, criticized this test of close link between the claims as being too strict.33
Douglas emphasized that:
―the requisite nexus is between the counterclaim and the
investment rights forming an object of the primary claims. Those
rights are guaranteed in the municipal law of the host state, and
hence, if the consent to arbitration is sufficiently broad, the
tribunal‘s jurisdiction rationae materiae extends to any
counterclaims whether their legal nature in the legal system of the
host state, so long the nexus is satisfied.‖34
26. Much like in the American Bell International v. The Ministry of Roads and
Transportation, where the counterclaim was submitted on the bases of a separate
licensing agreement,35
in the present case, the Respondent granted a license to the
Claimant, which guaranteed to observe certain safety obligations, which it failed to
do.
27. Moreover, ICSID tribunal declined jurisdiction in Amco since tax fraud, specifically
provided for in the national laws of Indonesia, was not contracted, and as such shared
no connection to the principal claim.36
In the present case, this is not an obstacle.
28. Therefore, the Respondent concludes its arguments by claiming that the Tribunal
should exercise jurisdiction and hear the Respondent‘s counterclaim which is, from
everything stated, admissible.
PART TWO: MERITS: There is no liability on behalf of the Respondent
29. Respondent respectfully submits that it shall discuss relevant issues in the merits
without prejudice to its argument regarding admissibility and jurisdiction. Nothing in
this pleading should be understood as acceptance of any of the allegations raised by
Claimant.
32
Lalive & Halonen, para. 7.41.
33 Douglas, p.260-263.
34 Ibid., p. 263.
35 American Bell v. The Ministry of Roads pp. 322, 324
36 Amco, ICSID Reports, vol. 1, p. 565; Harris v. Iran, at 57-61.
13
I) THE APPLICABLE LAW ARE ILC’S ARTICLES ON STATE
RESPONSIBILITY
30. It is widely accepted that ILC‘s Articles on Responsibility of States for Internationally
wrongful acts represent a codification of CIL on the issue.37
As such, they have been
extensively applied by the ICJ,38
as well as by numerous international tribunals,39
including those dealing with investor-state disputes.40
In the absence of rules of
attribution in the BIT, the rules of attribution found in general international law,
which supplement the BIT in this respect,41
are to be applied.42
Therefore, the relevant
law for the determination of Sylvania‘s liability for the actions of the NPCS are the
rules of CIL on state responsibility, as embodied in the aforementioned Articles.
II) THE CONDITIONS FOR RESPONSIBILITY UNDER THE ARTICLES ARE
NOT SATISFIED
31. Pursuant to Arts. 1 and 2 of the ILC‘s Articles, an act results in the responsibility of a
State if the act in question is (i) attributable to the State and (ii) constitutes a breach of
an international obligation of the State.43
Since, in the present dispute the said
cumulative conditions are not satisfied, the Respondent cannot be held liable for the
acts complained of by the Claimant.
37
Jan de Nul, para. 156; Noble Ventures, para. 69.
38 Gabcikovo, para 51;
39 Saiga, para. 133.
40 Jan de Nul, para. 156; Noble Ventures, para 69.
41 Noble Ventures, para 69.
42 Jan de Nul, para. 156.
43 Articles on State Responsibility, Art. 2
14
A) THE ACTIONS OF NPCS CANNOT BE ATTRIBUTED TO SYLVANIA
32. Since it is prima facie evident that NPCS does not have the status of a state organ and
that its acts were not adopted by Sylvania, the Respondent will show that the actions
of NPCS are not attributable to Sylvania, since the NCPS (i) does not exercise
governmental authority (Art. 5), (ii) nor was it directed or controlled by the
Respondent (Art. 8).
1) The NPCS does not exercise governmental authority
33. Acts of entities which are not state organs shall be attributable to the State only if
those entities (i) are empowered to exercise elements of governmental authority and
(i) if they performed such authority in the particular instance.44
Firstly, the fact that an
entity is state-owned is not decisive for the attribution of its act to the State; what is of
paramount importance is that the subject is empowered to exercise elements of
governmental authority.45
The scope of Art. 5 of is limited to entities which are
empowered by the internal law of the State to exercise governmental authority.46
There is no mention of entrusting any such authority to NPCS in the Hydrocarbon law
by which it was created,47
in any other Sylvanian law nor are there any indications to
support such a notion.
34. When determining whether the second condition is fulfilled, the nature and character
of the entities act should be determined.48
It is evident that the actions of the NCPS
are not of a governmental character, since the NPCS carried out the acts which were
supposed to be performed by a privately owned company in accordance with a
commercial contract.49
Hence, since neither of the cumulative prerequisites under Art.
44
Articles on State Responsibility, Art. 5.
45 Articles on State Responsibility with commentaries, page 43; CSOB, paras 18-20.
46 Articles on State Responsibility with commentaries, page 43.
47 Uncontested facts, para 19.
48 Maffezini, para. 52.
49 Uncontested facts, paras. 3, 5.
15
5 are fulfilled, it is clear that the actions of the NPCS cannot be attributed to Sylvania
on this basis.
2) The NPCS was not directed nor controlled by the Respondent
35. Pursuant to Art. 8 of the ILC‘s Articles, the conduct of a person shall be considered an
act of a State under international law if that person is in fact acting under the
instructions of, or under the direction or control of that state in carrying out the
conduct.50
It shall be proven by the Respondent that none of these circumstances were
present.
i. The NPCS was not authorized by Sylvania to perform any
actions which would constitute a breach of an international
obligation
36. Normally, a State‘s authorization of a breach of its international obligation by a
private person results in its responsibility for the said breach.51
However, if that
person performs acts which fall outside the scope of the given authorization, the State
does not assume the risk that the instructions will be carried out in an internationally
wrongful way.52
The NPCS was only authorized to assist in securing control of the
leaking oil wells and performing acts in relation to the cleanup.53
The purpose of this
authorization was limited to assistance in the management of the catastrophic spill and
its length in time was dependant on the adequate reaction by FPS to the environmental
hazard.54
The term used in the Executive Order, ―to secure control‖, cannot be
interpreted to mean physical removal of FPS and its personnel. In accordance with the
50
Articles on State Responsibility, Art 8.
51 Ibid.
52 Articles on State Responsibility with commentaries, page 48.
53 Executive Order No. 2010 – 1023.
54 Ibid.
16
usual meaning of the term secure, ―to relieve from exposure to danger‖, 55
and in line
with the purpose of the operation, it is clear that NPCS was authorized to prevent any
further leaking from the damaged oil wells and help remedy the spill, thus bringing an
end to a dangerous situation. The use of force is a prerogative exclusively reserved for
the adequate state organs and its transfer to other entities cannot be lightly assumed
without strong supporting evidence. Clear and convincing evidence must be
produced56
to prove a mater as serious as state responsibility. 57
As in the present case
there is no such evidence, it is obvious that the NPCS was not authorized by Sylvania
to perform any wrongful acts.
ii. The NPCS was not under the control of Sylvania
37. In order to establish that a private entity was under the control of a State, there has to
be a link between the person performing the act and the State which satisfies the
―effective control‖ test. The jurisprudence on this matter is very demanding58
and the
burden of proof the Claimant needs to discharge is a heavy one.
38. There are no indications that the Respondent had effective control over the NPCS.
The fact that the NPCS is state-owned does not in itself indicate otherwise, as
international law acknowledges the separateness of corporate entities from its owners,
as long as the ―corporate veil‖ is not pierced.59
Nor is the fact that the corporate entity
was established by the State sufficient basis for the attribution of its act to the State, as
long as the State does not exceed its normal shareholder rights and use its ownership
rights specifically in order to achieve a particular result.60
There is no evidence that
Sylvania misused its ownership rights and, therefore, it cannot be held liable for the
actions of NPCS. This is in accordance with arbitration practice61
and the position
55
http://www.merriam-webster.com/dictionary/secure?show=1&t=1310948786
56 Ibid.
57 Shaw, p. 780.
58 Jan de Nul para. 173; Nicaragua, paras. 113-115.
59 Articles on State Responsibility with commentaries, page 48.
60 Ibid.
61 Ibid., page 48.
17
taken in SEDCO, where it was found that, in relation to a de facto seizure of property
by a state-owned oil company, the acts in question were not attributable to the State
since there was no proof that the State used its ownership interest as a vehicle for
directing the company to seize the property.62
39. Moreover, the fact that Sylvania appoints the Board of Directors of NPCS is of no
relevance to the issue, as that is a normal exercise of prerogatives by a sole
shareholder.63
Once appointed, the Directors are independent from the shareholder
and act in the company‘s best interest. As a result it is clear that the Respondent did
not have effective control over the NPCS.
B) There was no breach of an international obligation
40. In any event, the Respondent will show that, even if the Tribunal attributes NPCS‘
acts to Sylvania, there is no breach of its international obligations.
1. THE RESPONDENT DID NOT COMMIT A BREACH OF
CONFIDENTIALITY
i. There is no general obligation of confidentiality in arbitration
41. Although parties to arbitration normally recognize confidentiality, whether there is a
legal duty of confidentiality combined with legal sanctions is a different question.64
As Paulsson and Rawding write, and arbitration tribunals commonly adopt, a general
duty of confidentiality cannot be said to exist de lege lata in international
arbitration.65
Neither the UNCITRAL Arbitration Rules nor Model Law place such a
62
Ibid., page 48; SEDCO,p. 23.
63 Hitt, p. 284; Emerson, p. 360.
64 Bagner, p.22.
65 Paulsson, Rawding, p.49; Alliance v. Australian Gas Light Co.; ESSO v. The Hon.
Plowman; Bulgarian Bank v. Al Trade Finance; United States v. Panhandle
18
burden on the parties.66
Consequently, unless the parties have expressly agreed,
whether or not an arbitration is confidential depends upon the applicable arbitral
rules.67
As there is no such requirement in the BIT or the MLA68
, and the Arbitration
Law of Flatland, the seat of the arbitration,69
and the applicable ICC Rules are silent
on the issue70
it can only be concluded that the Respondent did not have an obligation
of confidentiality regarding the present proceeding.
ii. There is no obligation of confidentiality in investor-State
arbitration
42. Even if the Tribunal finds that there is a general duty of confidentiality in
international arbitration, such a duty is not applicable to the present case, as such an
assumption is not valid for investor-State investment arbitration.71
There is a general
consensus that the public has a legitimate interest in investment arbitration involving
states,72
which is dictated by a strong trend towards transparency in treaty-based
arbitration.73
In Australia v Cockatoo, the tribunal stated that when issues of public
concern are involved, such as health and the environment, an obligation of
confidentiality cannot be imposed on governments.74
NAFTA likewise does not
impose a general duty of confidentiality on the disputing parties,75
while information
about both ICSID and NAFTA proceedings is abundantly made publicly available.76
The non-existence of confidentiality in investor-State arbitration was also confirmed
66
Dimolitsa, pp. 10, 14.
67 Muchlinski, Ortino, Schreuer, p.751.
68 Clarifications, Q 43.
69 Clarifications, Q7;
70 Muchlinski, Ortino, Schreuer, p. 739.
71 Smutny, Young, p.74.
72 Muchlinski, Ortino, Schreuer, p. 724.
73 Biwater Gauff, para. 144 ff.
74 Australia v Cockatoo Dockyard
75 NAFTA, Notes of Interpretation of Ch.XI, paras. A1–A2a.
76 Redfern, p. 672.
19
in a number of awards77
whereas the New US Model BIT not only allows, but obliges
the respondent to make virtually all the arbitration documentation public.78
The
present proceedings involve both public health and serious environmental issues, and
as such are of the utmost public interest to Sylvania‘s citizens, which means that an
implied duty of confidentiality is inapplicable.
iii. The Claimant agreed that the present arbitration would not be
confidential
43. When it entered into the MLA the Claimant was fully aware that, pursuant to
Sylvania‘s FoI Law, all information concerning international arbitration cases
involving Sylvania was to remain public.79
It was also aware that the BIT provided for
dispute resolution before an institution whose arbitration rules did not impose an
obligation of confidentiality.80
However, the Claimant chose not to include any
confidentiality obligations in the MLA.81
Since it is universally accepted that the
disclosure of information, when required by law, does not constitute a breach of
confidentiality commitments,82
it is evident that the Claimant, by entering into an
agreement with the knowledge that the other party had an obligation to make the
relevant information regarding the arbitration public, tacitly gave its consent to the
proceeding‘s publicity.
77
; Amco, Provisional Measures, 412; Metalclad, para 13.
78 2004 US Model BIT, Art. 29(1).
79 Uncontested facts, para 10.
80 The BIT, Art. 11.
81 Clarifications, Q 43.
82 S.D. Myers., para. 16; Mondev, 29; Bagner, p. 19; Hwang, Chung, p. 43;
20
iv. In any event, the Respondent did not commit a breach of
confidentiality
44. Should the Tribunal find that the Respondent did have a confidentiality obligation, the
Respondent submits that the said obligation was not breached. Firstly, the report
which was leaked to La Reforma is not covered by the duty of confidentiality since it
was not specifically created for the purpose of arbitration, and such, ―historical
documents‖, due not enjoy protection.83
45. Secondly, the report in question was classified by Sylvania‘s Government as
confidential under its regulations.84
As evidenced by the recent News of the World
controversy, newspapers often resort to illegal means of attaining valuable
information, including hacking into personal accounts of officials.85
It cannot be
simply assumed that the leak is attributable to the Respondent; the Claimant must
meet the burden of proof on the issue. Since it is agreed that the source of the leak
remains unknown86
it is obvious that the Respondent cannot be held accountable for
the leak.
46. However, even if the Tribunal finds that the Respondent is responsible for the leak of
the report, this would still not constitute a breach of the Respondent‘s obligations
since, as argued supra, the disclosure of the information was required by Sylvania
under the FoI Law,87
and such disclosure is not in breach with confidentiality
obligations.88
83
Hassneh Insurance v. Mew 243.
84 Uncontested facts, para 9; Clarifications, Q 43.
85 http://www.bbc.co.uk/news/uk-14070733
86 Clarifications, Q 64.
87 Uncontested facts, para 10.
88 Hwang, Chung, p. 43.
21
2) THE RESPONDENT DID NOT EXPROPRIATE THE
CLAIMANT’S INVESTMENT
i. There was no direct expropriation on behalf of the
Respondent
47. Direct expropriation is an overt deprivation of an alien of the legal rights of ownership
to property.89
As there is no transfer of title, and being that the Claimant is still the
owner of the FPS‘ shares, it is prima facie evident that no direct expropriation is
present.
ii. There was no indirect expropriation on behalf of the
Respondent
48. Indirect expropriation is a form of expropriation which leaves the investor's title
untouched but deprives him of the possibility to utilize the investment in a meaningful
way.90
In order for a tribunal to determine that indirect expropriation occurred, it has
to find that (i) the Claimant was deprived of its property (ii) in a substantial manner
(iii) which is not merely temporary.91
As shall be proven by the Respondent, since
these cumulative conditions are not fulfilled, the Claimant‘s contentious on this issue
are unfounded.
a) The „sole-effect“ doctrine is not applicable
49. When assessing if the Claimant has been deprived of its property, the Tribunal should
not apply the ―sole-effect doctrine‖, which only takes into account the impact of the
measures on the investor‘s property rights92
. A more balanced approach, giving
89
Horn, Kroll, p. 151; Rovine, p. 35.
90 Dolzer, Schreuer, p. 92.
91 Telenor, paras 65 and 70.
92 See Muchlinski, Ortino, Schreuer
22
relevance to the context of the measure and intent of the State,93
should be applied, as
it is dominant in case-law94
and state practice. The US Model BIT and vast number of
FTAs concluded over the globe,95
explicitly state that the effect of the measure alone
will not be sufficient for a finding of indirect expropriation96
and that the design to
protect legitimate public welfare objectives should be taken into account.97
One of the
recognized legitimate public welfare objectives is environmental protection.98
50. The only motive for Sylvania‘s actions was the protection of its environment and the
health and safety of its citizens.99
There was no intent on behalf of the Respondent to
expropriate the Claimant‘s assets, nor did Sylvania economically benefit as a result of
the actions in question, which means that they cannot be deemed as expropriatiatory.
b) There was no regulatory expropriation
51. As a matter of customary international law,100
a state is not responsible for loss of
property resulting from bona fide general regulation or other action that is commonly
accepted as within the police powers of the State.101
The only requirements are that
the measures are for a (i) legitimate public purpose, (ii) non-discriminatory102
and (iii)
proportional.103
93
Dolzer, Schreuer, p. 104.
94 Ibid.
95International Investment Law, p. 70.
96 2004 Us Model BIT, Canadian FIPA.
97 Dolzer, Schreuer, p. 104.
98 International Investment Law, p. 71-2.
99 Executive Order No. 2010 – 1023.
100 Saluka, para 262; Methanex, IV D para 7; SEDCO, p. 275; Brownlie, p. 509; Sornarajah,
p. 283; 2004 Us Model BIT; Canadian FIPA;
101 Third Restatement, Section 712, Comment g.
102 Methanex, IV D para 7.
103 LG&E, paras 189 and 195; Azurix, para 311.
23
52. (i) The protection of the environment is well recognized in investment arbitration as a
legitimate purpose.104
It is evident that this condition is met, as the relevant regulatory
changes introduced more stringent safety obligations105
, preventing a new
environmental disaster.
53. (ii) The adopted regulation was non-discriminative and did not target the Claimant.
The measures are of a general application and will not only affect the Claimant, but
other oil companies as well, including NPCS. The fact that the liability cap was
retrospectively eliminated106
is in no way relevant, since, as will be shown infra, the
cap would not have been applicable with regard to FPS, as the company failed to fulfil
its safety obligations.107
54. (iii) Finally, the measures were not disproportionate, since the investor will not bear
the individual and excessive burden.108
The damages of the spill from the Claimant‘s
rigs are expected to amount to hundreds of billions SD and the Sylvanian society as a
whole will bear the burden, with thousands of people losing their jobs and the
environment seriously damaged.109
It is only fair that the company, which had a
significant role in causing and aggravating the disaster, plays a part in mitigating the
consequences of the spill and preventing a future environmental hazard by improving
safety conditions.
c) The Claimant was not deprived of its investment
55. However, even if the Tribunal looked solely at the effect of the measures on the
Claimant‘s investment, expropriation would still not exist, since the Claimant was not
deprived of its property. In order for deprivation of property to exist the owner has to
104
Muchlinski, Ortino, Schreuer, p. 435; Feldman, para 103.
105 Uncontested facts, para 13.
106 Ibid.
107 Ibid., para. 6.
108 Azurix, para 311.
109 Uncontested facts, paras. 8, 21, 27 .
24
be deprived of fundamental rights of ownership.110
As stated in Pope & Talbot there
is no such deprivation when the Host State:
―does not supervise the work of the officers or employees of the
investment, does not take any proceeds of the of the company
sales, does not interfere with management or shareholders‘
activities, does not prevent the Investment from paying dividend to
its shareholders, does not interfere with the appointment of
directors or management and does not take any other actions
ousting the Investor from full ownership and control of the
investment.‖
56. This test set out in Pope & Talbot was adopted by a number of investment
tribunals.111
57. The requirements under the test are not fulfilled in the present case, since the
Claimant is still in full possession of its investment, FPS. The Claimant is in control
of the company‘s shares, it can incur economic benefit from them or transfer them at
will. There was no compulsory appointment of managers by the Respondent and the
Claimant is in control of the company‘s day-to-day operations.112
In addition, FP has
failed to provide any evidence that the economic value of its investment has decreased
as a result of the Respondent‘s actions. Any potential decrease in value of the
Claimant‘s shares in FPS would not be a result of the Respondent‘s measures, but a
consequence of the catastrophic spill from FPS‘s wells, aggravated by its incompetent
response. As evidenced by the Deepwater Horizon incident, there is a direct negative
effect of an incident of such magnitude on the oil company‘s share value. As a result
of the spill in the Gulf of Mexico, BP‘s share value halved in 30 days.113
Therefore, it
is clear that there is no deprivation of the Claimant‘s investment, as no causal nexus
between the Respondent‘s actions and any potential depreciation in the value of FP‘s
investment can be established.
110
Tippetts, 219; Pope & Talbot, paras. 96-98; S.D. Myers, Partial Award, para. 232.
111 LG&E, para, 188; Sempra, para 284; Enron, para 245.
112 Feldman, para 152.
113 http://www.economist.com/node/16270972.
25
d) Even if there was deprivation, it cannot be qualified as
“substantial”
58. Should the Tribunal find that the Claimant was to some extent deprived of its property
rights, it cannot be considered as substantial, in the sense of the criteria set out in
Pope&Talbot.114
This approach was supported by the tribunals in Occidental115
and
CMS,116
while other tribunals have adopted more stringent standards, requiring
annihilation of the investment,117
radical deprivation118
or loss of all uses of
property,119
to the extent where it is rendered worthless.120
The Claimant cannot
discharge this demanding burden of proof for several reasons. Firstly, the actions of
the NPCS are not attributable to Sylvania and any potential interference with the use
of the Claimant‘s property which stems from the activities of the NPCS‘s cannot be
considered as deprivation by the Respondent. However, even if the Tribunal finds
otherwise, they would still not constitute substantial deprivation, since they were
performed at a time when the Claimant was unable to effectively use its property for
reasons not connected to the Respondent. At the time there was an ongoing
emergency clean-up response, which means that any kind of drilling from the wells
would have been impossible. If anything, the NPCS‘s response to the disaster was
beneficial to the value of FP‘s investment, as any prolongation of the crisis would
have had a negative influence on the Claimant‘s image and share value.
59. Secondly, the fact that FP‘s exploration license was temporarily suspended121
did not
result in substantial deprivation of the Claimant‘s investment since, as mentioned, the
company would not have been able to explore the Fields in any event due to the
ongoing environmental catastrophe.
114
Pope & Talbot, para 102.
115 Occidental, para 89.
116 CMS, para 263.
117 Sempra, para. 285 .
118 Tecmed, para 115.
119 Freeman, p. 191.
120 National Grid, para 154.
121 Executive Order No. 2010 – 1023.
26
e) The measures in question are of a merely temporary
nature
60. The duration of economic deprivation is a crucial factor in identifying indirect
expropriation.122
Even a substantial deprivation of the Claimant‘s investment does not
constitute expropriation if it is merely ephemeral.123
For it to do so, it would have to
be permanent or for a substantial period of time.124
In LG&E, the tribunal stated that
the measure must be permanent125
and that it cannot be temporary by nature.126
In SD
Myers, a lasting removal of the owner‘s rights was required and it was found that a
period of 18 months was insufficient for expropriation,127
while in Hauer v. Land
Rheinland-Pfalz a measure of the EC lasting three years was found to be transitory.128
61. The measures taken by the Respondent cannot be deemed as permanent and
irreversible. On the contrary, it was explicitly stated that the measures would be in
place only until FP presents a plan to respond to the ongoing environmental crisis.129
The company‘s license was merely suspended, which is by definition a temporary
measure. In any event, the duration of the measures is solely dependent on the
Claimant and its willingness to properly execute its obligations. Once the
environmental hazard is over the Claimant will be able to fully enjoy the benefits of
its investment, which renders the notion that an expropriation has occurred manifestly
unsound.
122
Schreuer, Expropriation under the ETC, p. 29.
123 Tippetts case, 225.
124 Schreuer, Expropriation under the ETC, p. 29.
125 International Investment Law, p. 55.
126 LG&E, para 193.
127 S D Myers, paras 283 and 287.
128 International Investment Law, p. 62.
129 Executive Order No. 2010 – 1023.
27
f) The Respondent did not expropriate the Claimant’s
legitimate expectations
62. While the disappointment of legitimate investor expectations by host states may play
a factor in the determination of whether an expropriation has occurred, a high
threshold has been established by investment tribunals in assessing this issue.130
Where investors are not specifically made to believe in certain state assurances their
expectations are less legitimate for property protection purposes.131
As stated by the
tribunal in Methanex:
„as a matter of general international law, a non-discriminatory
regulation for a public purpose, which is enacted with due process
and, which effects, inter alios, a foreign investor or investment is
not deemed expropriatory and compensable unless specific
commitments had been given by the regulating government to the
then putative foreign investor contemplating investment that the
government would refrain from such regulation.―
63. No such explicit assurances were given by Sylvania to the Claimant. Clause 18 of the
MLA cannot be deemed to represent such assurance, since it does not contain a
stabilization clause. The Respondent did not undertake to restrain itself from changing
its laws, but from unilaterally changing the terms of the agreement itself. This is
evidenced by the formulation of Clause 18, which states that modifications of terms
and conditions of this Agreement may only be made by mutual written consent.132
It is
therefore evident that the obligation pertains to modifications of the agreement itself
and not applicable laws.
64. The Claimant specialises in the exploration of crude oil. It is well aware that offshore
drilling is a high-risk and high-return business.133
If the drilling process is successful
the company makes a high profit. However, in the event of an environmental
catastrophe of such proportions as the Medanos spill, caused by the Claimant‘s
drilling activities and to which the Claimant failed to adequately respond, the
130
Muchlinski, Ortino, Schreuer, p. 448.
131 Ibid.
132 Uncontested facts, paras. 6, 9 22; Clarifications, Q28.
133 Steffy, McGraw-Hill, p. 3.
28
expectation of profit or of absence of new regulation is not legitimate. Hence, no
breach of legitimate expectations in the context of expropriation is present.
3) THE RESPONDENT UPHELD ITS OBLIGATIONS REGARDING
FET
i. The BIT equates FET with the IMS
65. FET is a standard which does not have a clear definition in international law.134
Thus,
its precise meaning in each particular case shall depend on the wording of the relevant
BIT and should be interpreted in light of Art. 31(2) of the VCLT, in accordance with
the ordinary meaning of its terms.135
Art. 2 (2) of the BIT provides that the
Contracting Parties shall… ensure treatment in accordance with customary
international law, including fair and equitable treatment‖.136
It is important to note
that the BIT, by stating that the FET standard is included in CIL, determines the
boundaries of the standard and limits its scope to include only the content which
exists in CIL. It is well established in arbitral practice that, when linked with CIL in
such a way, the FET standard is equated with the IMS,137
as it does not have any
content within CIL outside the IMS.
66. The practice when interpreting treaties with identical or similar wording is
unambiguous. The NAFTA Free Trade Commission stated in its official interpretation
of Art. 1105 (1) that such a provision reflects the IMS.138
This view by the
Commission was reinforced by NAFTA tribunals.139
67. Moreover, in model BITs of both US and Canada, which in relevant part use identical
wording to that used in Art. 2(2), it is provided ―that FET prescribes the customary
134
Muchlinski, Ortino, Schreuer, p. 628.
135 Ibid., p.634; Dolzer, Schreuer, p.121.
136 The BIT, Art. 2(2).
137 Dugan, p. 496.
138 FTC Note of Interpretation, 31 July 2001.
139 Mondev, paras 100 et seq; UPS, Decision on Jurisdiction, para 97; ADF, paras. 175–178.
29
international law minimum standard of treatment and that it does not require treatment
in addition to or beyond that which is required by that standard‖.140
68. In contrast, had Sylvania and Freedonia wanted the FET standard to offer broader
protection than the IMS, they would have used a clause which reflects such an
intention. For example, Article II(2) of the Argentina-US BIT guarantees FET and
provides that investments shall ―in no case be accorded treatment less than that
required by international law‖.141
This clause clearly states that international law is a
floor bellow which treatment must not fall and that the treatment guaranteed by FET
might be of a higher level.
69. It is evident from the unambiguous wording of Art. 2(2) of the BIT and overwhelming
state and arbitral practice that the FET standard in the BIT is equal to the protection
offered by the IMS.
ii. The Respondent satisfied the IMS requirements
70. The minimum standard of treatment is set to serve as a floor, an absolute bottom,
bellow which conduct is not accepted by the international community.142
The
benchmark for the IMS was set in Neer, where the tribunal found that treatment falls
below the standard if it amounts:
―to an outrage, to bad faith, to wilful neglect of duty, or to an
insufficiency of governmental action so far short of international
standards that every reasonable and impartial man would readily
recognize its insufficiency‖.143
71. Thus, the threshold for the breach of the IMS is a very high one.144
72. The threshold set in Neer and the relevance of the standard in investment arbitration
was recognized in a number of awards, with descriptions such as ―blatant
unfairness‖145
and ―grossly unfair‖146
being used.
140
United States Model BIT of 2004, Article 5(2); Canadian FIPA, Article 5.
141 Argentina-US BIT Article II(2).
142 Glamis, para 616.
143 Neer, pp.60-62.
144 Shaw, p. 825.
145 Glamis, para. 614.
30
73. The best illustration of what set of facts would constitute the violation of this principle
is represented by the events in Loewen. In this case, after a dispute worth only US$ 1
million, Loewen was order by the Court to pay an amount of US$ 500 million, US$
400 million of which for punitive damages, while the company‘s assets were subject
to imminent seizure unless it posted a bond worth US$625 million.147
The tribunal
characterized the whole process as a disgrace, but still found that the FET standard
was not breached.148
It is clear that the level of injustice required for a breach of the
IMS standard is a high one and one which is not present here.
74. The treatment accorded to the Claimant does not violate the IMS, since it was
reasonable and proportional considering the circumstances and the Claimant‘s
involvement in the oil spill. The Respondent acted in good faith in the protection of
the environment and the health of its citizens, while the Claimant was not refused
access to justice nor was it treated shockingly, grossly unfair or outrageously. It is
therefore evident that the Respondent fully upheld its obligations under BIT‘s Art.
2(2).
iii. In any event, the Respondent’s actions are not a breach of
the FET standard
75. Even if the Tribunal adopts the position that the FET standard from Art 2(2) of the
BIT offers broader protection than that encompassed in the IMS, the Respondent
submits that there was still no breach of FET, since (a) the Claimant‘s legitimate
expectations were not subverted, (b) it was not treated in a discriminatory or arbitrary
manner, (c) it was not denied due process nor (d) did the Respondent act in bad faith.
76. (a) In the words of the Tribunal in PSEG:
„legitimate expectations by definition require a promise of the
administration on which the Claimants rely to assert a right that
needs to be observed.―149
146
Methanex, para 98.
147 Investor-State Arbitration, p. 530.
148 Loewen, para 119.
149 PSEG, para 241.
31
77. Therefore, in order for the expectations to be legitimate, they need to be a direct result
of representations made by the host State at the time of the investment.150
78. The Respondent did not take upon itself any such restrictions. Clause 18 of the MLA
is not a stabilization clause which would prevent the Respondent from changing its
laws. A typical stabilization clause is worded as following: ―The laws of the host state
are applicable as in force of…‖151
Clause 18 of the MLA, contains no such explicit
waiver by the Respondent of its regulatory rights. It simply states that any
modifications of the terms and conditions of the Agreement may only be made by
mutual written consent.152
The purpose of this clause was purely to, due to the specific
nature of concession contracts, reiterate the principle of sanctity of contract.153
The
Respondent did not give any assurances to the Claimant that its laws would remain
unchanged, that the liability cap would remain intact or that the definition of damages
would remain the same. On the contrary, Clause 19, inserted into the Agreement
immediately after Clause 18, explicitly provides that the Agreement will be governed
by Sylvanian law.154
As noted by the tribunal in Parkerings, when the investor does
not secure stability by inserting a stabilization clause, but opts to explicitly reference
the applicability of domestic law, there can be no frustration of legitimate
expectations.155
79. As far as the obligation of the Host State to provide a stable and predictable legal
framework is concerned156
, the Respondent submits that, barring a stabilization
clause, this requirement is not unconditional.157
As stated by the tribunal in Saluka:
„No investor may reasonably expect that the circumstances
prevailing at the time the investment is made remain totally
unchanged. In order to determine whether frustration of the foreign
investor's expectations was justified and reasonable, the host State's
150
Waste Management, para.98; LG&E., para. 128.
151 Dolzer, Schreuer, p. 75.
152 Uncontested facts, para 6.
153 Unidroit Principles, Art. 1.3.
154 Clarifications, Q 48.
155 Parkerings, para 336.
156 CMS, para. 274, Occidental, para. 183.
157 Investor-State Arbitration, p.514
32
legitimate right subsequently to regulate domestic matters in the
public interest must be taken into consideration as well.―158
80. Hence, it is evident that international law extends a high level of deference to the right
of governments to regulate matters within their internal borders.159
That is why, in the
absence of a specific guarantee by the government to the contrary, the Host State is
free to change its legal framework when circumstances require.160
Exceptional
circumstances caused by the oil spill warranted a legislative change. The investor
could have reasonably expected that the laws of Sylvania would change in case of a
disastrous spill. In such circumstances, introducing more stringent safety obligations
and eliminating the liability cap is a predictable and legitimate response by a
responsible Government. Therefore, it is evident that the Respondent upheld its
stability and predictability obligations under FET.
81. The sole fact that amendments to the OPA were applied retrospectively161
does not
subvert the Claimant‘s legitimate expectations, since the amendments did not target
the Claimant. Firstly, the Respondent submits that the retrospective effect does not in
any way impair the Claimant‘s interests, since the liability cap would not have been
applicable to the Claimant. It is undisputable that liability caps are only to be applied
insofar as there has been no gross negligence.162
Since, as already demonstrated, the
Claimant acted in gross negligence by failing to adequately respond to the
environmental catastrophe, the aforementioned amendments did not have an adverse
effect on the investor.
82. However, if the Tribunal concludes that the amendments are pertinent for the
Claimants‘ position, the Respondent submits that it was entitled to said amendments.
Unlike in criminal law, in civil law retrospective legislation is permitted under certain
conditions.163
Retrospective laws are passed in developed legal systems, including the
US,164
EU165
and Canada.166
After the Deepwater Horizon incident, the US Congress
158
Saluka, para 305
159 S D Myers, para 263; UN GA Resolution 3281 (XXIX), Art. 2(1) and 2(2).
160 Parkerings, para 334; Investor-State Arbitration, p. 514.
161 Uncontested facts, para 14.
162 Cordero-Moss, p. 77; Ramseur, p. 5;
163 Bayles, Robinson, p. 105.
164 Johannessen v. United States, 225 U.S. 227, 242 (1912).
33
seriously considered retrospectively raising BP‘s liability cap, while the Justice
Department stated that such a measure would stand if legally challenged.167
83. The investor has a duty to inform itself of the Host State‘s law and policies.168
Hence,
the Claimant must have known that there are retrospective laws in Sylvania.169
Yet it
still agreed to subject the MLA to Sylvanian law. In doing so, the Claimant accepted
the possibility that it might be affected by retrospective regulation. The amendment to
the OPA did not specifically target the Claimant, since all its provisions will be
equally applied to all companies in a similar position, including NPCS. Therefore, the
amendments to the OPA did not subvert the Claimant‘s legitimate expectations.
84. Furthermore, the suspension of the Claimant‘s exploration license cannot be
considered a violation of the Claimant‘s legitimate expectations. In Genin, the
tribunal stated that not only a suspension, but a revocation of a license to operate is
permissible when objectively justified on objective grounds, such as failure to respect
applicable regulations.170
The Claimant failed to meet its obligation under the MLA
and applicable Sylvanian law, by not taking all appropriate measures to prevent a
discharge of oil and failing to remedy it. The license was suspended by the Sylvanian
President until the Claimant fulfilled its obligations, in line with Sylvania‘s Statutory
Code.171
The Claimant was aware of this provision of Sylvanian law and, by agreeing
to the applicability of Sylvanian law to the MLA, accepted the risk that it could be
applied if circumstances required. Therefore, the justified suspension of the
Claimant‘s license does not go against its legitimate expectations.
85. (b) A State measure is discriminatory if (i) similar cases are (ii) treated differently (iii)
without justification.172
As shown, the Claimant was not treated differently from any
other company in like circumstances. Its treatment was justified by the immediate
165
Racke, para 20; Craig, De Burca, p. 552.
166 British Columbia v. Imperial Tobacco Canada, para. 69.
167 http://www.businessspectator.com.au/bs.nsf/Article/WRAPUP-2-Memorial-planned-for-
rig-victims-BP-readi-5SBPT?OpenDocument.
168 MTD v Chile, paras 165-6; Muchlinski, p. 644.
169 Clarifications, Q 81.
170 Genin, 298–299, 300–301.
171 Executive order No. 2010 – 1023.
172 Saluka, para 313.
34
need to protect the endangered environment and public health, both goals widely
recognized as reasonable. It is evident that any discrimination claim is futile.
86. (c) There was no violation of due process by the Respondent. FPS was allowed to
challenge the Respondents decision through administrative proceeding and it was
allowed access to Courts.173
The fact that the final judgment in the proceedings has
not yet been made in no way indicates a violation of due process, as only a year and a
half has passed since the initiation of the proceedings, which is more than within the
usual time frame for litigation174
and there has been no indication that the decision
was intentionally delayed.
87. (d) A violation of FET can occur if the Host State acts in bad faith.175
The Respondent
acted in good faith, its only interest being the well being of its citizens and
environmental protection, as evidenced by the Executive Order.176
The Respondent‘s
actions were not motivated by the desire to cause the Claimant harm, which means
there was no mala fides.
88. Finally, it must be noted that tribunals have placed considerable importance on the
investor‘s conduct when determining whether FET has been breached.177
Where
unconscionable investor conduct is found, it can have serious consequences on its
claim.178
The Claimant, a multinational energy corporation, made a high-risk offshore
drilling investment. It failed to follow the necessary safety requirements, causing a
large oil spill which it was not able to properly remedy, thus failing to fulfil its
obligations under the MLA179
and creating billions SD of damage.180
It is a situation
in which no investor can expect to make a profit. The measures taken by Sylvania
were necessary and proportional, the Claimant was treated in line with the
circumstances and the treatment accorded to it was Fair and Equitable.
173
Uncontested facts, paras. 16, 17.
174 Platto, pp. 145, 158, 173, 209.
175 Dolzer, Schreuer, p 145.
176 Executive order No. 2010 – 1023.
177 Noble Verntures, para 147; Methanex, para 432; Muchlinski, p. 640.
178 Muchlinski, p. 640.
179 Uncontested facts, para. 5.
180 Ibid., para. 27
35
4) THE CLAMANT WAS ACCORDED FULL PROTECTION AND
SECURITY
89. Art. 2(2) of the BIT provides that the Contracting Parties shall ensure treatment in
accordance with full protection and security to the investors of the other Contracting
party.181
The BIT defines full protection and security as a part of CIL, thus limiting its
scope of application. In this limited context, full protection and security is meant to
protect the physical integrity of an investment against use of force.182
The context in
which a violation of full protection and security is invoked concerns the destruction of
investor property during internal armed conflict, riots and acts of violence.183
It is the
obligation of the Host State to adopt measures to protect investors from such
threats.184
90. As a result of the disastrous spill and the Claimant‘s failure to adequately remedy it,
the social situation on Sylvania had become fraught, with thousands affected.185
The
public‘s aggravation with the Claimant‘s incompetence to handle the issue was
intensifying186
, and there was a legitimate concern that the public could demonstrate
its frustration in an outburst of protests, endangering the investor‘s property.
However, the Respondent managed to adequately respond to the public outcry by
adopting effective necessary measures, thus protecting the Claimant‘s property and
fulfilling its obligations to provide the Claimant‘s investment with full protection and
security.
181
The BIT, Art. 2(2).
182 Saluka, para 484.
183 McLachlan, Shore, Weiniger, p. 248.
184 Investor-State Arbitration, p. 534.
185 Uncontested facts, para 21.
186 Ibid., para 22.
36
5) THE RESPONDENT IS NOT LIABLE PURSUANT TO ARTICLE
9 OF THE BIT
i. Article 9 has precedence over CIL
91. In assessing the Respondent‘s defence under Article 9 of the BIT, the Tribunal must
differentiate between a defence based on Article 9 and a defence based on CIL. As
determined in CMS Annulment, the treaty provision is separate from the international
law defence and should be applied first, while the CIL defence, as a secondary rule of
international law, should be applied only if the treaty-based defence is
unsuccessful.187
This is because the treaty-based defence is a threshold: if it applies,
the substantive obligations under the treaty do not, which means that there is no
breach of international obligations.188
However, the defence based on necessity under
CIL becomes relevant only after it is determined that there has been such a breach.189
92. In Sempra annulment, the ad-hoc committee annulled the Sempra award precisely
because the Tribunal manifestly exceeded its powers by failing to apply the treaty
defence as a separate standard before applying Article 25 of ILC‘s Articles.190
Therefore the Tribunal in the present dispute must first determine whether the
Respondent‘s actions are valid under Article 9 of the BIT. If it finds that they are not,
it should examine whether conditions for necessity under CIL are fulfilled.
187
CMS Annulment, para 134.
188 Ibid., para. 129.
189 Ibid.
190 Sempra Annulment, paras. 209 and 219.
37
ii. Article 9 is a self-judging clause
93. In order for an essential security clause to have self-judging character, leaving States
to unilaterally determine the legitimacy of extraordinary measures, clear intent to that
end must be shown by the contracting Parties.191
In assessing whether such intent is
present in a BIT clause the analysis must begin with its text.192
As determined by the
ICJ in Nicaragua a clause is self-judging if the applicable measures are those which
are considered by a party as necessary.193
The Court found that the self-judging
character of GATT Article XXI was reflected in its explicit wording that the State
may take any action which it considers necessary… for the protection of its essential
security interests.194
This notion that a clause which contains the phrase ―it considers
necessary‖ is unequivocally self-judging is universally accepted.195
94. This explicit wording from GATT is contrasted to provisions which do not contain
such express language. Most notably, the 1991 US-Argentina BIT, which led several
tribunals to reject the self-judging character of its essential security provision, states
that the Treaty will not preclude the application by either Party of measures necessary
for … the protection of its essential security interests. The absence of the phrase ―it
considers necessary‖ is notable, and it is precisely the absence of this phrase that led
the CMS tribunal to find that the clause was not self-judging.196
95. Therefore, in determining whether an essential security clause is self-judging, the
precise wording of the clause is of paramount importance. When the clause contains
explicit language ―it considers necessary‖ it shall be deemed as self-judging, while
when the wording of the clause is unclear, as in the US-Argentina BIT, the clause
should be considered non-self-judging.
96. Article 9 of the BIT provides that ―nothing in this Agreement shall be construed… to
preclude a Party from applying measures that it considers necessary for… the
191
CMS, para. 370.
192 Essential Security Interests under International Investment Law, p. 101.
193 Nicaragua, para 222.
194 Ibid.
195 Essential Security Interests under International Investment Law, p. 95; Newcombe,
Paradell, p. 490; Kasenetz, p. 737.
196 CMS, para 370.
38
protection of its own essential security interests.‖197
The BIT was concluded a decade
after Nicaragua, which means that the Parties were fully aware of the relevance of the
inclusion of the phrase ―it considers necessary‖ in the Treaty.198
It is evident that it
was the clear intention of the parties to make the essential security clause self-judging
and not subject to judicial review, apart from that of good faith.199
iii. The Respondent acted in good faith when protecting its
essential security interests
97. As argued supra, the Respondent acted in good faith when reacting to the crisis
caused by the spill. Due to the gravity of the situation a state of emergency was
pronounced in Sylvania and the situation declared an issue of national concern.200
The
Respondent‘s measures were for the benefit of Sylvania‘s people and were not
designed to cause harm to any other entity, including the Claimant. Therefore, it is
clear that the Respondent rightfully protected its essential security interest under
BIT‘s Article 9.
iv. The Respondent may invoke other causes enumerated in
Article 9
98. Essential security interests are not the only interests protected under Article 9. The
BIT provides that a Party can apply measures it considers necessary for the (i)
protection of its public order or the (ii) observance of its international law
obligations.201
By linking these reasons for invoking Article 9 to essential security
interests with the word ―or‖ the BIT establishes them as independent causes for
action, distinct from the protection of essential security interests.
197
The BIT, Art. 9.
198 Fitzmaurice, Elias, Merkouris, p. 247.
199 Ibid. 246, Briese, Schill, p.49; Enron, para. 324.
200 Executive Order No. 2010 – 1023.
201 The BIT, Art. 9.
39
a) The Respondent acted in the protection of its public order
99. The notion of public order serves to protect the rule of law in a State. The disturbance
of that state of affairs through an outbreak of violence, rioting and public disorder
engages the notion of ordre public.202
100. As a result of the oil spill, thousands were adversely affected and the social climate
in Sylvania had become fraught.203
In such circumstances, there were serious threats
of a violence outbreak which would have endangered the public order. Therefore, the
Respondent rightfully acted in order to maintain its public order, in line with Art. 9.
b) The Respondent acted in order to satisfy its international
law obligations
101. Sylvania may apply measures it considers necessary for the observance of its
international law obligations.204
This is strengthened by the BIT‘s Preamble, which
states the Treaty protection must be consistent with environmental standards.205
Sylvania has an obligation under the Convention on Biological Diversity to preserve
the protected marshland area affected by the spill206
, as well as a general obligation
under international law to protect the environment.207
102. By ensuring that the clean-up of the oil was as effective as possible and enacting
legislation which would impose better safety obligations the Respondent made sure it
complied with these obligations, thus properly exercising its rights under Article.
202
Kurtz, p. 44.
203 Uncontested facts, para. 21.
204 The BIT, Art. 9.
205 Ibid., preamble.
206 Uncontested facts, para. 8, Convention on Biological Diversity, Article 1.
207 Brownlie, p. 285.
40
v. The Respondent does not owe compensation to the Claimant
103. As previously argued, a successful defence based on Article 9 of the BIT
means that there is no breach of Treaty obligations.208
No breach of Treaty, means no
compensation is owed to the investor.209
As Sylvania properly exercised its rights
under Article 9, it did not commit a breach of the BIT and is not liable to compensate
FP.
C) Any potential liability on behalf of the Respondent is precluded due to
necessity
104. Should the Tribunal find that NPCS‘ acts are imputable to Sylvania and represent a
breach of its international obligations, the Respondent still cannot be held liable for
those acts since their wrongfulness is precluded due to necessity. Necessity may be
invoked as a ground for precluding wrongfulness if the act was the (i) only means for
the state to safeguard an (ii) essential interest against a (iii) ‗grave and imminent peril‘
and the (iv) act does not seriously impair an essential interest of the other state.210
Furthermore, it is required (v) that the international obligation does not exclude the
possibility of invoking necessity and that the State itself had not contributed to it.211
Under these conditions necessity is widely recognized as a ground under CIL for
precluding wrongfulness, as confirmed by the ICJ in Gabcikovo,212
as well as
international tribunals213
, state practice214
and doctrine215
. All of the above mentioned
prerequisites are satisfied.
208
CMS Annulment, para 129; Continental Casualty, para 199.
209 Continental Casualty, para. 199; LG&E, para. 261.
210 Articles on State Responsibility, Art. 25(1); Shaw, p. 798.
211 Ibid.
212 Gabcikovo, pp. 7, 40.
213 Saiga, para. 133.
214 The “Torrey Canyon”; Articles on State Responsibility with commentaries, at p. 81.
215 Articles on State Responsibility with commentaries, p. 81; Shaw, p. 798.
41
1) The means used were the only ones by which the Respondent could
safeguard its interest
105. The disastrous Medanos oil spill216
caused considerable damage to Sylvania‘s
environment, which had to be remedied. Although this was an obligation of FPS
under the MLA217
the Claimant failed to properly address the situation even after a
number of notices, which is illustrated by the fact that FPS failed even to produce a
plan for addressing the situation.218
In the absence of the Claimant‘s co-operation,
Sylvania had no choice but to act the way it did. As evidenced by the Torrey Canyon
incident, in which the Britain bombed a leaking ship in order to prevent further
damage, governments can resort to much more drastic measures when dealing with
catastrophes of this magnitude.219
Hence, it is evident that the measures taken by
Sylvania were the only ones available and ones which had the least effect on the
Claimant.
2) The interest in question was an essential
106. As a consequence of the disastrous leak from the Claimant‘s oil wells, the
Respondent‘s environment was seriously endangered. In Gabcikovo, the ICJ explicitly
stressed that the preservation of the environment represents an ―essential interest‖ in
relation to Art. 25 of ILC‘s Articles.220
This position is confirmed by a considerable
amount of state practice221
and doctrine222
. Therefore, there can be no question as to
whether the protection of its environment was an essential interest for Sylvania. In
addition, the spill caused considerable damage to the Sylvanian economy.223
It is well
216
Uncontested facts, para 7.
217 Ibid., para 5.
218 Executive Order No. 2010 – 1023.
219 The “Torrey Canyon”
220 Gabcikovo, para 53.
221 Articles on State Responsibility with commentaries, at p. 81; Fisheries, p. 432.
222 Articles on State Responsibility with commentaries, p. 83.
223 Uncontested facts, para 21.
42
established in investment arbitral practice that the prevention of an economic
breakdown is an essential State interest.224
It is therefore evident that Sylvania, by
trying to avoid environmental and economic crises, clearly acted in the protection of
its essential interests.
3) There was a grave and imminent peril
107. As a result of the disaster, 35,000 – 60,000 gallons of oil were daily being released
into Gulf, endangering a protected marshland with high levels of biodiversity.225
In
addition, the spill caused considerable damage to Sylvanian economy, rendering
thousands jobless and dealing a large blow to branches of economy important for the
day-to-day survival of Sylvania‘s citizens, such as agriculture and seafood industry.226
Sylvania was in danger of being thrust into an environmental, economic and social
devastation from which it would have been unable to recover. It is evident that the
peril caused by the oil leak was indeed grave.
108. In addition, the peril was also imminent, as the environmental hazard was very much
present at the time, with large amounts of oil leaking into the Gulf each day and with
the consequences of the environmental tragedy daily growing in magnitude. There
were serious indications that the situation could worsen and that the spill could get
into a ―Loop Current‖, resulting in the impossibility of a cleanup.227
It cannot be
contented that such circumstances do not represent an imminent peril requiring
immediate response.
4) The act did not seriously impair an essential interest of the other
state
224
CMS, para. 319.
225 Uncontested facts, para 8.
226 Ibid., para 21.
227 Ibid., paras. 8,9.
43
109. The actions of the Respondent were undertaken in order to protect its essential
environmental interests. However, the Libertad Gulf is one of Earth‘s most important
bodies of water228
and as such, its protection represents an interest of the international
community as a whole, including Freedonia. Hence, Sylvania‘s protection of its
environment did not impair as essential interest of Freedonia, but benefited it.
5) The international obligation in question does not exclude the
possibility of invoking wrongfulness nor did Sylvania contribute to the
state of necessity
110. The exclusion of the possibility of invoking wrongfulness is reserved for obligations
contained in humanitarian conventions229
and does not apply to obligations relevant to
the present case i.e. the obligation not to expropriate, respect legitimate expectations
and afford FET. There is no mention of such a limitation in the BIT and the burden of
proof to prove that such a restriction exists would fall upon the Claimant.
111. Finally, it cannot be contended that the Respondent contributed to the state of
necessity since Sylvania has done everything within its powers to minimize the
damage from the spill and end the environmental catastrophe. On the other hand, it is
the Claimant which has, with its inaptness to adequately and promptly respond to the
incident, considerably contributed to the situation of necessity.
228
Amicis Curiae, para 3.
229 Articles on State Responsibility with commentaries, p. 84.
44
PRAYER FOR RELIEF
In light of all previously argued, the Respondent respectfully requests that the Tribunal
adjudge and declare that:
(1) it lacks jurisdiction to adjudicate on FP‘s claims and that Sylvania‘s
counterclaims are admissible;
Or, in the alternative, that:
(2) the Respondent did not commit materially breach confidentiality;
(3) the Respondent did not commit a breach of the BIT nor of general international
law;
(4) the Respondent acted in protection of its essential security interests;
(5) any potential breach of its international obligations by the Respondent is
precluded by necessity.
Respectfully submitted,
Rau
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