FOREIGN DIRECT INVESTMENT INTERNATIONAL

ARBITRATION MOOT

London Court of International Arbitration - LCIA

29 October - 1 November 2015

King's College London

MEMORIAL FOR RESPONDENT

VASIUKI LLC

Helios Boulevard 1100

2401 Ville-de-Ra

Federal Republic of Cogitatia

T +38 1 396 4800

F +38 1 396 4809

direction@vasiuki.co.ct

CLAIMANT

REPUBLIC OF BARANCASIA

Valhallavegen 2-4

1010 Gamla-Uppsala

Barancasia

T +29 1 8675309

F +29 1 8675300 j.skolil@mof.gov.bc

RESPONDENT

26 September 2015

i

TABLE OF CONTENTS

INDEX OF ABBREVIATIONS .................................................................................................... IV

INDEX OF LEGAL SOURCES ................................................................................................... VI

INDEX OF AUTHORITIES ....................................................................................................... VII

INDEX OF CASES .................................................................................................................... XVII

STATEMENTS OF FACTS ............................................................................................................ 1

ARGUMENTS ON JURISDICTION ............................................................................................. 4

I. THE ARBITRAL TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE

DISPUTE.......................................................................................................................................... 05

A) THE COGITATIA-BARANCASIA BIT HAS BECOME OBSOLETE AND

CONTRADICTS THE UE PROVISIONS…............................................................................ 05

B) THE COGITATIA-BARANCASIA BIT WAS TERMINATED BY THE WILL OF

BARANCASIA GOVERNMENT............................................................................................. 06

II. THE AMENDMENT OF THE LRE DID NOT AMOUNT TO A BREACH OF THE

COGITATIA-BARANCASIA BIT................................................................................................ 07

A) THE AMENDMENT OF THE LRE DID NOT HARM FAIR AND EQUITABLE

TREATMENT NOR CLAIMANT’S LEGITIMATE EXPECTATIONS................................ 07

ARGUMENTS ON THE MERITS................................................................................................ 10

III. RESPONDENT’S ACTIONS ARE EXEMPTED FROM LIABILITY.............................. 10

A) THE UNIDROIT PRINCIPLES SHALL BE APPLIED...................................................... 10

B) THE ACTIONS OF BARANCASIA DID NOT HARM THE INVESTORS..................... 11

B.I) PARTIES FACED AN EVENT OF HARDSHIP AND REGOTIATION WAS

NECESSARY............................................................................................................................ 13

C) RESPONDENT ACTED IN GOOD-FAITH........................................................................ 15

IV. RESPONDENT SHALL NOT BE ORDERED TO RESCIND THE AMENDMENT OF

THE LRE NOR TO CONTINUE PAYING THE PRE-2013 FEED-IN TARIFF.................... 16

A) RESPONDENT CANNOT RESCIND THE AMENDMENT OF THE LRE...................... 16

B) CLAIMANT IS NOT ENTITLED TO THE PRE-2013 FEED-IN TARIFF……............... 17

ii

V. CLAIMANT’S BASIS FOR CLAIMING AND QUANTIFYING COMPENSATION ARE

NOT APPROPRIATE……............................................................................................................. 18

A) MR. MARKO KOVIC REPORT DOES NOT REFLECT THE REALITY FOR

COMPENSATION……….…………………………………………………………………... 18

REQUEST FOR RELIEF............................................................................................................... 21

iii

INDEX OF ABBREVIATIONS

§/§§ Paragraph/ Paragraphs

& And

App. Arb. Application for Arbitration

Arb. Arbitration

Art./Arts. Article/Articles

BIT Bilateral Investment Treatment

Cf. Compare

Claimant Vasiuki LLC

Co. Corporation

Ed. Edition

ICSID International Centre for Settlement of Investment Disputes

Incoterm International Commercial term

LLC Limited Liability Company

LRE Law on Renewable Energy

Ltd. Limited

Memo. for Cl. Memorandum for Claimant

Mr. Mister

No./Nos Number/Numbers

p. Page

Proc. Ord. Procedural Order

Req. Arb. Request for Arbitration

Respondent Republic of Barancasia

SoC. Statement of Claim

SoD. Statement of Defense

UNCITRAL United Nations Commission on International Trade Law

UNIDROIT Unidroit Principles of International Commercial Contracts 2010

v. Versus (against)

iv

INDEX OF LEGAL SOURCES

BIT Agreement between the Republic of Barancasia and the Federal

Republic of Cogitatia for the Promotion and Reciprocal Protection of

Investments

LCIA Rules London Court of International Arbitration Rules

LRE The Republic of Barancasia Law on Renewable Energy

NYC Convention on the Recognition and Enforcement of Foreign Arbitral

Awards, New York (10 June 1958)

UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts

v

TABLE OF AUTHORITIES

AUTHOR CITATION

Born, Gary International Commercial Arbitration.

The Hague: Kluwer Law International, 2009

Cited as: Born

Cordero-Moss, Giuditta The relevance of the UNIDROIT Principles in

Behn, Daniel investment arbitration.

Oxford University Press, November, 2014.

Cited as: Cordero-Moss/Behn

Fouchard, Philippe/ On International Commercial Arbitration.

Gaillard, Emmanuel/ The Hague: Kluwer Law International, 1999

Goldman, Berthold Cited as: Fouchard/Gaillard/Goldman

Hanotiau, Bernard Arbitrability, Due Process, and Public Policy

under the Article V of the New York Convention.

Journal of International Arbitration

Available at:

http://www.kluwerarbitration.com/document.

aspx?id=ipn30692

Cited as: Hanotiau

Lew, Julian D.M./ Comparative International Commercial

Mistelis, Loukas A./ Arbitration.

Kroll, Stefan M. The Hague: Kluwer Law International, 2003.

Cited as: Lew/Mistelis/Kroll

MCILWRATH, Michael. International Arbitration and Mediation a

SAVAGE, John. Practical Guide.

vi

Kluwer Law and Business. The Netherlands, 2014.

Cited as: Mcilwrath/Savage.

Newcombe, Andrew Law and Practice of Investment Treaties:

Paradell, Lluís Standards of Treatment.

Kluwer Law International (2009)

Cited as : Newcombe/ Paradell

Redfern, Alan/ Law and Practice of International Commercial Hunter,

Martin Arbitration.

London: Oxford University Press, 1992.

Cited as: Redfern/Hunter 1992

Redfern, Alan/ International Arbitration.

Hunter, Martin/ London: Oxford University Press, 2009.

Blackaby, Nigel/ Cited as: Redfern/Hunter 2009

Partasides, Constantine

Schreuer, Christopher The ICSID Convention: A Commentary

2001.

Cited as: Schreuer

Schreuer, Christopher At What Time Must Legitimate Expectations

Kriebaum, Ursula Exit?

A Liber Amicorum: Thomas Walde—

Law Beyond Conventional Thoughts, Cameron

Publications (2009).

Cited as: Schreuer/ Kriebaum

vii

UNCITRAL UNCITRAL Digest of case law on the United

Nations Convention on the International Sale of

Goods.

Available at:

http://www.uncitral.org/uncitral/en

/case_law/digests/cisg.html

Cited as: UNCITRAL Digest

Vandevelde, Kenneth A Unified Theory of Fair and Equitable Treatment

New York University Journal International

Law & Politics (2010–11)

Cited as: Vandevelde

Wittich, Stephan Non-Material Damage and Monetary

Reparation in International Law”

Finnish YBIL (2004)

Cited as: Wittich

viii

INDEX OF CASES

International Chamber of Commerce:

Case No. 12171 November 2003

Cited as: ICC Case No. 12171

Case No. 10385 March 2002

Cited as: ICC Case No. 10385

Case No. 12111 January 2003

Cited as: ICC Case No. 12111

Case No. 9797 July 2000

Cited as: ICC Case No. 9797

Case No. 1512 1971

Indian Cement v. Pakistani Bank

Cited as: Indian Cement Case.

ICSID:

Case No. ARB/77/1 November 1979

AGIP S.p.A. v. The Government of the People’s

Republic of the Congo.

Cited as: AGIP v. Congo

Case No. ARB/74/3

ix

Kaiser Bauxite v. Jamaica.

Cited as: Kaiser Bauxite v. Jamaica.

Case No. ARB/03/18 November 2007

Aguas Cordobesas S.A., Suez, and Sociedad General de

Aguas de Barcelona S.A. v. Argentine.

Cited as: Suez.

Case No. ARB/01/8 May 2005

Company v. Argentine Republic.

Cited as: CMS Gas v. Argentine Republic.

London Court of International Arbitration:

Occidental v Ecuador July 2004

Occidental Exploration and Production Company v The

Republic of Ecuador

Cited as: Occidental v Ecuador.

1

STATEMENT OF FACTS

1. The parties to this arbitration are Vasiuki LLC (hereafter “Vasiuki” or the “CLAIMANT”)

and Republic of Barancasia (hereafter “Barancasia” of the “RESPONDENT”).

2. CLAIMANT is an LLC incorporated under the laws of Cogitatia in 2002, which has been

engaged in the development, construction and operation of renewable energy facilities in Cogitatia

and elsewhere in the region, including Barancasia, since 2001.

3. RESPONDENT is the Republic of Barancasia, a legal personality of international public law.

4. On 31 December 1998, the Republic of Barancasia (“Barancasia”) and the Federal Republic

of Cogitatia (“Cogitatia”) concluded an Agreement for the Promotion and Reciprocal Protection of

Investments (BIT);.

5. On 1 May 2004, Barancasia and Cogitatia joined the European Union (the “EU”);

6. On 15 November 2006, Barancasia announced its intention to terminate its Intra-

European BITs;

7. On 11 December 2006, the Government of Barancasia formally resolved to terminate all its I

ntra-EU BITs;

8. On 29 June 2007, Barancasia notified the Federal Republic of Cogitatia of its intention to im

mediately terminate the Cogitatia-Barancasia BIT;

9. On 28 September 2007, the Minister of Foreign Affairs of Cogitatia replied to Barancasia’s n

otification to terminate the BIT;

10. On 28 November 2008, Barancasia removed the BIT with Cogitatia from its Ministry of

Finance website, in particular, the section of the website listing valid and binding international

agreements;

11. In May 2009, Claimant purchased land plots in Barancasia and decided to launch an

experimental solar project, calling it “Alfa”;

2

12. On 1 January 2010, Claimant connected the project “Alfa” to the grid and became

operational;

13. In May 2010, Barancasia adopted the LRE, which aimed at encouraging the development of

renewable energy technology, improving security and diversification of energy supply, as well as

protecting the environment;

14. On 1 July 2010, the BEA announced publicly the fixed feed-in tariff: 0.44 EUR/kWh;

15. On 25 August 2010, Claimant’s application for a license for the Alfa project was rejected. On

the same date, Claimant successfully obtained a license with a guaranteed 0.44 EUR/kWh tariff for

its second photovoltaic project, Beta;

16. On 21 November 2010, a Barancasian Foreign Ministry spokesperson responded to a press

question about Barancasia’s approach for its Intra-EU BIT’s, stating that they had informally

contacted the Federal Republic of Cogitatia in order to confirm the termination of the BIT, but have

had no official response;

17. On 30 January 2011, Claimant’s Beta project became operational;

18. During 2011, a ground-breaking technology was developed making solar panels substantially

cheaper to manufacture and reducing the costs of development;

19. On 5 May 2012, the Prime Minister of Barancasia discussed the government’s success

terminating Intra-EU BIT’s. There is no record of any Cogitatian Government response or comment

to the interview;

20. In June 2012, outraged teachers of Barancasia organized national strikes demanding an increa

se of salaries and educational funding;

21. On 1 July 2012, Claimant’s obtained licenses from the BEA for the development of all 12

photovoltaic power plants with an approved 0.44 EUR/kWh feed-in tariff;

22. On 3 January 2013, Barancasia amended Article 4 of the LRE to provide for annual review

of the feed-in tariff. Subsequently, the BEA calculated and announced the new fixed feed-in tariffs:

0.13 EUR/kWh, applicable from 1 January 2013. By that time Claimant had made considerable

investments of its own and borrowed money into the 12 new solar power plants projects;

23. On 20 April 2014, Claimant notified Respondent of its dispute with Barancasia and of its

intention to pursue legal remedies under the BIT if this dispute was not resolved to Vasiuki’s

satisfaction. Respondent has declined negotiations;

24. On 20 February 2015, the Arbitral Tribunal issued the Procedural Order No 1;

3

25. On 20 June 2015, the Arbitral Tribunal issued the Procedural Order No. 2;

26. On 6 September 2015,the Arbitral Tribunal issued the Procedural Order No. 3;

4

ARGUMENTS ON JURISDICTION

I. THE ARBITRAL TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE

DISPUTE;

27. The LCIA tribunal constituted by request of Vasiuki has not jurisdiction over the dispute

because the offer to arbitration provided by article 8.d of Cogitatia-Barancasia BIT was not in force

at the time of the investment in Barancasia. The BIT had become obsolete due to the accession of

both Barancasia and Cogitate to the European Union and it is materially inconsistent with the

European Union Legal Order.

28. Furthermore, the BIT provides for a unilateral termination proceeding by a merely notification

to one party to the other. Barancasia has realized the notice of termination to Cogitate and it agreed

to the content of the notice.

29. Thus, the tribunal lacks jurisdiction over the present investment dispute because the BIT

became obsolete and contradict UE provisions and because it was duly terminated by the will o

Barancasia.

A. THE BARANCASIA-COGITATIA BIT HAS BECOME OBSOLETE AND

CONTRADICTS THE UE PROVISIONS;

30. The BIT between Barancasia and Cogitatia was concluded in 1998 and accordingly to article

13.1 should be in force to a period of ten years since its conclusions.

31. But in 2004, both Barancasia and Cogitatia joined the European Union [Statement of

Uncontested Facts, p.20, §5]. The EU has a specific provision that regulates its functions between

all of its members with generic and specific principles searching for a common standard of

treatment between its members.

32. After the joinder of Barancasia to the EU, it decided to reanalyze its Intra-European bilateral

treaties and concluded that they had become obsolete. By understanding that those BIT became

obsoletes due to the joinder, Barancasia decided to terminate the referred BIT’s on December 2006

5

[Statement of Uncontested Facts, p.20, §6] exactly to prevent that any impasse between the Treaty

on the Function of the European Union [TFEU] and any Intra-European BIT.

33. The TFEU provides on its article 207 that:

“The common commercial policy shall be based on uniform principles, particularly with

regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to

trade in goods and services, and the commercial aspects of intellectual property, foreign

direct investment, the achievement of uniformity in measures of liberalization, export policy

and measures to protect trade such as those to be taken in the event of dumping or subsidies.

The common commercial policy shall be conducted in the context of the principles and

objectives of the Union's external action.”

34. Article 207 of the TFEU provides a general and common standard of principles to be applied

between the members concerning series of subjects, including foreign direct investment, to preserve

equity of treatment between the members.

35. Any bilateral treaty made privately by two members of the EU could contradict uniform

principles stabilized by the TFEU. To avoid this matter, Barancasia, rightly, concluded that not only

Cogitatia-Barancasia BIT had become obsolete, but all of this Intra-European BIT’s.

36. One significant difference between the provisions of the BIT and the TFEU is in regard of one

of the objects of the present discussion: The jurisdiction to decide over compensation involving

regulatory measures of states.

37. Accordingly to the BIT parties could choose either courts proceedings or international

arbitration to decide over an investment dispute. In the other hand, accordingly to article 268 of the

TFEU, the International Court of Justice of the EU shall have jurisdiction relating to compensation

in relation to damages caused by institutions of one state.

38. In this sense, it is possible to see that provisions of the BIT and the TFEU could be

contradictory, and since both parties had become members of the EU, the TFEU should prevail over

the BIT.

39. Furthermore, since the EU already regulates business transactions and investments manners

between its members, there is no need for another treaty between single states, being proof that the

Cogitatia-Barancasia BIT had become obsolete. In that sense, this tribunal lacks jurisdiction

because of the fact that the TFEU should prevail over the BIT and the second is obsolete.

6

B) THE COGITATIA-BARANCASIA BIT WAS TERMINATED BY THE WILL OF

BARANCASIA GOVERNMENT;

40. Despite of the fact that the BIT provided for duration of ten years, it also provided for

unilateral termination mechanism by the mere notification of its intention to the other contracting

party.

41. In 2006, when Barancasia joined the EU and concluded that its Intra-European BIT’s had

become obsolete, the Government of Barancasia resolved to terminate all of them.

42. On 29 June 2007, Barancasia notified Cogitate of its intention to terminate the BIT, and on set

ember of the same year Cogitate replied Barancasia’s notification [Statement of Uncontested Facts,

p. 21, §9].

43. On Annex No. 7.2 of the records the ministry of foreign affairs of Cogitatia expressly

confirmed that he had received the notification of Barancasia about the termination of the

agreement for the promotion and reciprocal protection of investments concluded between the two

states.

44. This notification, by the light of article 13.2 of BIT, constituted the duly termination of the

treaty by the will of Barancasia and the notification of Cogitatia. In that sense, the termination of

the BIT was in September 28, 2007.

45. Furthermore, to analyze if this tribunal has or not jurisdiction over the dispute it is necessary

to determine when Vasiuki stated to invest in its photovoltaic project in Barancasia.

46. Vasiuki since 2007 was monitoring Barancasian legislative process and researching suitable

land plots in Barancasia for its investment, but only in 2009 Vasiuki purchased land plots for its

photovoltaic project.

47. Purchasing the land plots can not be considered as investment under the BIT because it had

not yet obtained the licensee of its projects. If Vasiuki had bought the land plots and did not get the

licensee it would be and investment frustrated solely by Vasiuki, without harm to Barancasia.

48. That is exactly the case at hands, the achievement of buying the land plots has no relation

with the 0.44E/kWh tariff, because it was made before the application for license.

49. Furthermore, the investment started in fact when Vasiuki obtained the license for its Beta

project in August 2010, and since then, Vasiuki’s investments could be understood as an investment

in Barancasia project.

7

50. However, in 2010 the BIT was not in force anymore, and Vasiuki could not have used its

resolutions of conflicts system.

51. In that sense, the offer of an LCIA arbitration contained in the BIT was not valid at the time

of investment and by lack of an arbitration agreement, this tribunal should consider that it has no

jurisdiction over the dispute to guarantee that a future award will not suffer annulment.

II. THE AMENDMENT OF THE LRE DID NOT AMOUNT TO A BREACH OF THE

COGITATIA-BARANCASIA BIT;

52. The measures taken by the government of Barancasia do not amount to a breach of the

Cogitatia-Barancasia BIT, mainly because the amendment of the LRE did not harm fair and

equitable treatment nor Claimant’s legitimate expectations (A).

A. THE AMENDMENT OF THE LRE DID NOT HARM FAIR AND EQUITABLE

TREATMENT NOR CLAIMANT’S LEGITIMATE EXPECTATIONS.

53. Claimant’s allegations that the amendment of the LRE constituted a breach of fair and

equitable treatment between the investor and the host state should not prevail in the present dispute.

54. First of all, the amendment of the law was not unreasonable and is valid since it reflected the

social and economic situation that Barancasia was suffering.

55. Barancasia, since its joinder to the EU tried to achieve the objectives of having renewable

energy projects and to make that achievement, it sought to draft the LRE to ensure sustainable

development of the use of renewable energy sources, promote further development and introduction

of innovative technologies [LRE, p.32, Article 1].

56. The same law also provided that the Barancasia Energy authority would announce the feed-in

tariff that would be applicable for the investors who obtained the license to development of their

projects and this license would apply for 12 years.

57. The law itself did not make any reference about the price of the fee-in tariff, but, the Republic

on Barancasia Regulation on The Support of Photovoltaic Sector [Annex no. 3. p. 34] has specifics

provisions on how the feed-in tariff should be calculated.

8

58. The regulation specifies that the feed-in tariff should be calculated taking into account a series

of factors like: average investment in equipment of the power plant; quantity of electricity

produced; Annual average capital cost; return of investments; expected income over the usage of

power plants and others.

59. Barancasia fixed the 0.44EUR/kHw by analyzing those factors, that were reasonable and

profitable at the time of issuing the project for the power plants.

60. Vasiuki got interest to the value of the tariff and got the license for the period of 12 years to

its photovoltaic project that its development was to be made in regard of solar panels.

61. But, during 2011, a ground-breaking technology was developed making solar panels much

cheaper to be manufactured [Statement of Uncontested Facts, p. 23, §25].

62. Because of that, the tariff of 0.44EUR/kHw got extremely profitable to any investor that

obtained the license and used the cheaper technology to develop solar panels. The case of Vasiuki

was not different, by taking advantage of the new technology decided to launch 12 more projects of

30kW, the limit of each project allowed for license according to LRE, for obtaining the referred

tariff.

63. Therefore, it is obvious that the 0.44EUR/kHw tariff would be extremely profitable to the

investor jeopardizing, so, the host state, that would have to make a bigger disposal of money for a

cheap investment of money.

64. Furthermore, the economic and social reality in Barancasia was of a general crisis which

encouraged strikes and public protests. One of the strikes made specific considerations about the

question of the solar panels, which made the Government of Barancasia promise to review its

legislation about the investments.

65. Because of that in 2013 the government decided to amend article 4 to the LRE stating that the

tariff fixed by Barancasia Energy Authority could be annually reviewed in concerning to the

development and usage of new available technology [Annex 4, p. 35].

66. In that sense, Barancasia reevaluated the tariff and decided to stabilize a new tariff that should

apply to all investments involving photovoltaic power plants on an amount of 0.15 EUR/kWh

67. Vasiuki alleges that this amendment harmed fair and equitable treatment between the investor

and the host stated and also violated its legitimate expectation because of the new feed-in tariff that

would apply to its case.

9

68. In this sense, the political situation in Barancasia was critical and it pleased for actions of the

government. The development of the new technology was an outside factor that gave reason to the

changing of the Barancasian Law.

69. Vasiuki thoughts that the old tariff would prevail during all the 12 years provided by the law

is inconsistent with a behavior of a business company since external factors are common in

international investments. Also, it is unreasonable to think that in regard of a development of a new

and cheaper technology the scenario of the investment would not change.

70. Therefore, if the old tariff would prevail it would lead to an unjust enrichment regarding the

investors. In that sense, Bishop and Crawford understand that most developed legal systems

recognize the doctrine of unjust enrichment. Some arbitral tribunals have decided investment cases

on the basis that the government was unjustly enriched by taking certain actions against foreign

investors. This doctrine is equitable in nature. It is doubtful whether the doctrine may be invoked as

an alternative to a breach of contract when an agreement exists1.

71. In that sense, the doctrine of unjust enrichment could be seen as a two way street, which is

most applied by the actions of the state, but in certain cases the investor can be the one who benefits

from an external action.

72. Therefore, since external factors gave ground to the amendment of the LRE, it was valid and

the 0.15EUR/KwH should prevail. Also, the amendment did not harm fair and equitable treatment

or legitimate exception of the investor since it would be extremely profitable to the investor in

detriment of the host state.

1 BISHOP, R. Doak. CRAWFORD, James. Foreign Investments Disputes: Cases, Materials and

Commentary. Second Edition. Kluwer Law international. p 16.

10

ARGUMENTS ON MERITS

I. RESPONDENT’S ACTIONS ARE EXEMPTED FROM LIABILITY;

73. Primarily, in order to determine the grounds for liability and considering that the BIT omitted

the law applicable, the UNIDROIT Principles shall be applied to the case (A). In this sense, the

measures of the Republic of Barancasia are exempted from liability since they did not harm the

investors (B), as parties where facing an event of hardship and a renegotiation was necessary (B.I).

Additionally, the Respondent acted in good-faith (C).

A. THE UNIDROIT PRINCIPLES SHALL BE APPLIED

74. UNIDROIT Principles shall be applied to the present case. This Tribunal shall look to

transnational principles as a measure to interpret and in order to fill the gaps of the BIT and the

domestic law of Barancasia. An illustration of these transnational principles can be seen in the

UNIDROIT Principles [ICC 10385 §73; ICC 12111; ICC 9797], which may be used to interpret or

supplement international uniform law instruments and domestic law2.

75. Also, according to the Rules of Arbitration of the LCIA, in the case the Arbitral Tribunal

finds the parties have not made the choice of the rules of law applicable to the merits of the dispute,

the Arbitral Tribunal shall apply the law(s) or rules of law which it considers appropriate3.

76. In this sense, this Tribunal shall apply the provisions established between the Republic of

Barancasia and the Republic of Cogitatia in the BIT and the UNIDROIT Principles as guidelines to

interpret such agreement.

77. Regarding the relevance of the UNIDROIT Principles to investment arbitrations, Professor

Cordero-Moss and Dr. Benh, state:

2 Unidroit Principles of International Commercial Contract 2010 – Preamble: “These principles set forth

general rules for the international commercial contracts. They shall be applied when the parties have agreed that their

contract be governed by them. They may be applied when the partied have agreed that their contract be governed by

general principles of law, lex mercatoria or the like. They may be applied when the partied have not chosen any law to

govern their contract. They may be used to interpret or supplement international uniform law instruments. They may

be used to interpret or supplement domestic law. They may serve as a model for national and international

legislators.” 3 LCIA Rules of Arbitration, article 22.3.

11

“In order to ascertain the role and relevance of the PICC in investment arbitration, it is first

necessary to look at the sources that regulate which law is applicable in investment

arbitration in general. An analysis of these sources will show that, to varying degrees,

investment arbitration is open to the application of sources such as ‘rules of law’ and

international law, independently or in combination with national law”4.

78. Applying transnational principles is consistent with the international source of the arbitrators’

powers. Arbitrators may apply transnational legal principles since they belong to no national legal

order and are therefore not bound to apply the substantive or choice of law rules of any one

jurisdiction [Fouchard, §443].

79. There is “a strong tendency in arbitral case law to examine the existence and validity of the

arbitration agreement exclusively by reference to transnational substantive rules, in keeping with

the transnational nature of the source of the arbitrators’ powers”5. In this regard, arbitrators may

apply any law or rule of law which they consider to be appropriate.

80. The application of the UNIDROIT Principles reflects the international practice as a

supplementation of the rules of law applicable and as an uniform interpretation method. In this

sense, in AGIP S.p.A. v. The Government of the People’s Republic of the Congo, the Tribunal

decided that the law applicable was the law of Congo, “supplemented if need be by any principles

of international law”6.

81. Such international practice is also reinforced in the Energy Charter Treaty, entered into force

on April 16, 1998, which provides: “A Tribunal established under paragraph 4 shall decide the

issues in dispute in accordance with this Treaty and applicable rules and principles of international

law.”7

82. In this sense, considering that the BIT signed between the states of Barancasia and Cogitatia

does not establish the law applicable and that the LCIA Rules determines that in such case the

Tribunal shall apply the law(s) or rules of law which it considers appropriate, it is Respondent’s

understanding that the UNIDROIT Principles provides the best source as general principles of law

and shall be applied as a rules of law in order to determine Respondent’s exemption in the present

case.

B) THE ACTIONS OF BARANCASIA DID NOT HARM THE INVESTORS;

4 Cordero-Moss/Behn, p. 03.

5 Fouchard §444 n.169 e.g. Indian Cement.

6 AGIP v. Congo e. g. Kaiser Bauxite v. Jamaica.

7 Energy Charter Treaty, Article 26(6).

12

83. In 2010, the development of renewable energy projects had a high cost and faced major

barriers to its expansion. Knowing this scenario, the government of Barancasia created the LRE in

order to attract investors by providing a state support in the development of renewable energy

sources. The LRE article 3 provides:

“Article - Duration of Support Measures: The feed-in tariff announced by the Barancasia

Energy Authority (“BEA”) and applicable at the time of issuance of a license will apply for

twelve years”.

84. From this article it is indeed possible to interpret that the government of Barancasia would

pay a feed-in tariff for investor who received a license during twelve year. However, at no moment

investors were made believe that this tariff would not change.

85. In fact, on the same day that the LRE was published, the Republic of Barancasia also

published the Regulation on the Support of the Photovoltaic Sector, which clearly provided the

grounds for the calculation of the tariff and which does not mention, at any time, that the feed-in

tariff would never be recalculated.

86. In particular, article 2 of the Regulation provides:

“Article 2. Calculation of the Fixed Feed-in Tariff:

The general fixed feed-in tariff should be calculated taking into account:

1) average investment in equipment of power plants and their connection to electricity

grids;

2) average annual quantity of electricity produced at power plants and submitted to

electricity grids per one unit of the installed capacity of a power plant;

3) the useful life of power plants;

4) the period of commissioning of power plants and allocation of investment during this

period;

5) the forecasted variable costs of operation of power plants, their variation over the

useful life of the power plants;

6) the duration of fixed feed-in tariffs specified by the Law;

7) annual average capital costs per one unit of the installed capacity of a power plant,

calculated on the basis of the necessary investment per one unit of the installed capacity of

the power plant;

8) the discount rate;

9) the ratio of a project’s own funds to borrowed funds;

10) return on investment of the producer’s own funds; 11) the interest on loans to be imposed by banks;

12) other expected income over the useful life of power plants, directly related to the

operation of a power plant;

13) the costs of balancing the production of electricity, if such costs are provided for.”

13

87. Hence, investors were never led to believe that the feed-in tariff would never be recalculated

during the twelve year duration. On the contrary, since the beginning the government of Barancasia

made it clear that the general feed-in tariff should be calculated taking into account the return on

investment of the producer’s own funds and mainly the average investment in equipment of power

plant.

88. Therefore, Respondent’s actions did not harm the investors, since the reduction of the feed-in

tariff does not jeopardizes the continuation of the projects on renewable energy and does not break

with the legitimate expectations of any investor. The Republic of Barancasia kept the commitments

it has made, in particular the LRE and the state support through the feed-in tariff.

B.I) PARTIES FACED AN EVENT OF HARDSHIP AND REGOTIATION WAS

NECESSARY

89. During the first year the relationship between the Claimant and Respondent occurred without

further problems. However, a ground-breaking technology that was developed in 2011 making solar

panels substantially cheaper to manufacture and dramatically reducing the costs of development.

This new technology amounted to a substantial reduction of the development costs which meant

that the profitability of investments made under the 0.44EUR/kWh tariff increased dramatically,

leading to an overrated profitability [Statement of Uncontested Facts, p. 22, §25].

90. In this sense, the UNIDROIT Principles state:

“Article 6.2.2 - (Definition of hardship)- There is hardship where the occurrence of events

fundamentally alters the equilibrium of the contract either because the cost of a party’s

performance has increased or because the value of the performance a party receives has

diminished, and (a) the events occur or become known to the disadvantaged party after the

conclusion of the contract; (b) the events could not reasonably have been taken into account

by the disadvantaged party at the time of the conclusion of the contract; (c) the events are

beyond the control of the disadvantaged party; and (d) the risk of the events was not

assumed by the disadvantaged party”.

91. In this regard, parties faced an event of hardship in which the equilibrium of their relation was

fundamentally altered, requiring the renegotiation of the terms under the risk of jeopardizes the

entire negotiation.

14

92. In the case, Suez v Argentina, in the separate opinion, one of the arbitrators took issue with the

majority’s finding that Argentina’s forced renegotiation of the concession contract was a per se

violation of the treaty. In challenging this finding, the arbitrator determined that the obligation to

renegotiate contracts when faced with unforeseen events is normal and legal:

“Renegotiation of long-term concession contracts is far from exceptional. Several

witnesses for the Claimants admitted that it was normal to renegotiate the original terms of

such contracts when faced with new and unforeseen events ... I do not agree with the

assumption expressed in the Decision (para. 239) that AASA was coerced into acceding to

the renegotiation because, had it refused, it could have been accused of violating Article 5.1

of the Concession Agreement, which obligated both sides to ‘use all means available to

establish and maintain a fluid relationship which would facilitate the discharge of this

Concession Agreement.’ Rather, I believe that this clause is evidence that the obligation to

renegotiate did not have as its sole source the Emergency Law, but the Concession Contract

itself and that AASA could not lawfully refuse to renegotiate (as in fact it did not refuse). On

this basis, he concluded that the ‘renegotiation process was not per se a violation of the

State’s obligations under the standard of fair and equitable treatment”.

93. In this sense, to continue paying investor with the pre-2013 feed-in tariff would represent a

profitability dramatically increased, harming the fair and equitable in the relation between

Barancasia and it investors. The international standard for such contracts in the event of ‘hardship’

aims to impose an obligation on the parties to negotiate an adaptation of the contract to the changed

circumstances or the termination of the contract, which is moreover, , an effect of the good faith that

should prevail in the execution of any contract [Suez v. Argentina].

94. In this scenario, Respondent acted in good-faith and started a fair process in order to revisit

the LRE due to the new and unexpected event. Thus, on 3 January 2013, after conducting private

hearings with representatives of industry and certain shareholders groups before the Barancasia

Parliamentary Energy Committee8, the LRE was amended, now stating that: “The feed-in tariffs set

by the Barancasia Energy Authority may be reviewed annually for adjustment taking into account

the costs of the best available technology”[Article 4].

95. On the commentary to the UNIDROIT Principles, it is possible to understand that:

“Although nothing is said in this Article to that effect, both the request for renegotiations by

the disadvantaged party and the conduct of both parties during the renegotiation process

are subject to the general principle of good faith and fair dealing and to the duty of

cooperation. Thus the disadvantaged party must honestly believe that a case of hardship

8 Statement of Uncontested Facts, p. 23, § 34.

15

actually exists and not request renegotiations as a purely tactical manoeuvre. Similarly,

once the request has been made, both parties must conduct the renegotiations in a

constructive manner, in particular by refraining from any form of obstruction and by

providing all the necessary information.”9

96. Therefore, this Tribunal shall find that the parties faced an unexpected situation that required

a renegotiation for the maintenance of the fair and equitable treatment in parties relation.

C) RESPONDENT ACTED IN GOOD-FAITH;

97. Even in investments arbitrations, which in the majority of the cases involve a state and an

investor, parties are expected to act in good faith and deal with fairness, such as established by the

UNIDROIT PRICIPLES “each party must act in accordance with good faith and fair dealing in

international trade”10

.

98. Good faith and fair dealing may be considered to be one of the fundamental ideas underlying

the UNIDROIT Principles. By stating in general terms that each party must act in accordance with

good faith and fair dealing, this Article makes it clear that even in the absence of special provisions

in the Principles the parties’ behavior throughout the life of the contract, including the negotiation

process, must conform to good faith and fair dealing11

. Whether it’s a commercial arbitration,

investment or a regular state court case, good-faith is widely accepted and applicable as a general

principle.

99. In the present case, Respondent acted in good-faith with regard to the new scenario the parties

were faced. According to the Vienna Convention on the Law of Treaties, good-faith shall guide all

parties relation:

“Article 31 - General rule of interpretation - 1. A treaty shall be interpreted in good faith in

accordance with the ordinary meaning to be given to the terms of the treaty in their context

and in the light of its object and purpose. 2. The context for the purpose of the interpretation

of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a)

any agreement relating to the treaty which was made between all the parties in connexion

with the conclusion of the treaty; (b) any instrument which was made by one or more parties

in connexion with the conclusion of the treaty and accepted by the other parties as an

9 Commentary to the UNIDROIT Principles of 2010, p. 220. 10

UNIDROIT PRINCIPLES - Article 1.7 - Good faith and fair dealing. 11

Commentary to the UNIDROIT Principles of 2010, p. 17/18

16

instrument related to the treaty. 3. There shall be taken into account, together with the

context: (a) any subsequent agreement between the parties regarding the interpretation of

the treaty or the application of its provisions; (b) any subsequent practice in the application

of the treaty which establishes the agreement of the parties regarding its interpretation; (c)

any relevant rules of international law applicable in the relations between the parties. 4. A

special meaning shall be given to a term if it is established that the parties so intended.”

100. Thus, the general principle of good-faith shall be applicable in the present case, in order to

interpret parties actions and to demonstrate that the development of a new ground-breaking

technology required a renegotiation.

IV. RESPONDENT SHALL NOT BE ORDERED TO RESCIND THE AMENDMENT OF

THE LRE NOR TO CONTINUE PAYING THE PRE-2013 FEED-IN TARIFF;

101. In light of the reasoning above Respondent must not and cannot rescind the amendment of the

LRE (A). Furthermore, even if the amendment of the LRE is not rescinded, Claimant is not entitled

to the pre-2013 feed-in tariff (B), due to its investments.

A. RESPONDENT CANNOT RESCIND THE AMENDMENT;

102. First, as stated above, the amendment of the LRE does not harm Claimant’s legitimate

expectations. Claimant is creating an incomplete and coloured scenario that did not exist.

103. The amendment of the LRE represents a fair and consistent conduct of Respondent in order to

maintain the balance in the relationship between Barancasia and the investor.

104. The amendment of the LRE represents the changes necessary due to unexpected events. Also,

the process was fair and followed all of the requirements. Respondent conducted hearings between

the Barancasia Parliament and some of the investors and then amended the LRE.

105. It is not possible to discuss that such amendment leads to a unfair treatment to Claimant. Such

amendment is applicable to all the investors on renewable energy and reflects nothing else but the

correct feed-in tariff due to the new scenario in which parties are living. In fact, in the present case,

the absence of renegotiation of the feed-in tariff would represent a inconsistency and a lack of good-

faith, since from now on, the cost to manufacture is dramatically reduced.

106. In this sense, the Commentary to the UNIDROIT Principles, states that:

17

“Decrease in value of the performance received by one party - The second manifestation of

hardship is characterised by a substantial decrease in the value of the performance received

by one party, including cases where the performance no longer has any value at all for the

receiving party. The performance may relate either to a monetary or a non-monetary

obligation. The substantial decrease in the value or the total loss of any value of the

performance may be due either to drastic changes in market conditions (e.g. the effect of a

dramatic increase in inflation on a contractually agreed price) or the frustration of the

purpose for which the performance was required (e.g. the effect of a prohibition to build on

a plot of land acquired for building purposes or the effect of an export embargo on goods

acquired with a view to their subsequent export). Naturally the decrease in value of the

performance must be capable of objective measurement: a mere change in the personal

opinion of the receiving party as to the value of the performance is of no relevance. As to the

frustration of the purpose of the performance, this can only be taken into account when the

purpose in question was known or at least ought to have been known to both parties.”12

107. In this regard, Respondent acted consistently to all the understandings and commitments it has

made to Claimant and all the renewable energy investors. Therefore, this Tribunal must understand

that Respondent cannot and shall not rescind the amendment of the LRE.

B) CLAIMANT IS NOT ENTITLED TO THE PRE-2013 FEED-IN TARIFF;

108. Claimant alleges that it is entitled to the pre-2013 feed-in tariff. However, such allegation

shall not proper. That is due to the fact that the price to manufacture the project was substantially

cheaper as already stated. Therefore, the payment of the pre-2013 feed-in tariff would represent a

profitability dramatically increased, it would not be fair and equal profitability inconsistent to the

investments Claimant has made.

109. The commentaries to the UNIDROIT Principles, provides an example of a situation in which

renegotiation is necessary due to changes in the market:

“A, a construction company situated in country X, enters into a lump sum contract with B, a

governmental agency, for the erection of a plant in country Y. Most of the sophisticated

machinery has to be imported from abroad. Due to an unexpected devaluation of the

currency of country Y, which is the currency of payment, the cost of the machinery increases

dramatically. A is entitled to request B to renegotiate the original contract price so as to

adapt it to the changed circumstances”13

.

12 Commentary to the UNIDROIT Principles of 2010, p. 214. 13 Commentary to the UNIDROIT Principles of 2010, p. 218.

18

110. In this sense, continue paying Claimant the feed-in tariff calculated in 2010 would represent

an unbalanced relation that was established due to other business circumstances.

111. In light of the above, Claimant is not entitled to receive the pre-2013 feed-in tariff as a matter

of fair and equal treatment due to the new grounds in the relation between the parties.

V. CLAIMANT’S BASIS FOR CLAIMING AND QUANTIFYING COMPENSATION ARE

NOT APPROPRIATE;

112. Claimant’s basis for quantifying the compensation does not reflect the reality and Mr. Marko

Kovic report is uncompleted, reflecting a over-optimistic view on Claimant’s project (A), an

therefore must not be consider in the event that this Tribunal finds that a compensation is necessary.

A. MR. MARKO KOVIC REPORT DOES NOT REFLECT THE REALITY FOR

COMPENSATION;

113. First, it is imperative to state that Vasiuki was a young developer of electric projects, mostly

focused on the turnkey sale of gas turbines and wind projects. It had fairly recently begun

developing wind energy projects for its own account. Its entry into the solar market in Barancasia

was its first attempt to develop solar energy projects. This was a new line of business for Vasiuki.

114. Having said that, Claimant alleges that it has been harmed by the denial of a license to the

Alfa project. Such allegation is both illogical and impossible. Claimant is requesting for the

approval of a feed-in tariff to a project that began before the creation of the LRE.

115. Claimant had the license of Alfa project rejected since the feed-in tariff would only be

available for new projects, not for existing projects. Claimant started developing project Alfa in

2009, almost a year before the existence of the LRE, thus there are no damages are to be calculated

under the different value of the feed-in tariff.

116. Professor Kovič calculates a loss of €120,621 resulting from Barancasia not allowing Alfa to

take advantage of the €0.44/kWh feed-in tariff set by the Energy Law. The fundamental problem is

that Project Alfa was not undertaken in response to the Energy Law, which was passed in order to

provide incentives for subsequent photovoltaic development, not as a subsidy for pre-existing

projects.

117. Second, Vasiuki’s own documents show that it was not able to accurately forecast the

performance of the Alfa Project. Vasiuki was unable to control the construction costs, resulting in

19

an overrun of more than 50% of the estimated project cost. Additionally, the solar installation’s

performance was poor, resulting in it operating at only 12.1% of design capacity, versus Claimant’s

projection of 21%.

118. Due to these problems, it is unlikely to agree with Professor Kovič supports a calculation that

simply assumes the documented problems will go away quickly, and the unit will become a reliably

profitable operation, even if the Tribunal were to agree with Claimant that the tariff under the

Energy Law should apply retroactively [Ms. Priemo Report, p. 52, § 7].

119. Claimant has a similar claim for Project Beta. Project Beta commenced operation on 1

January 2011, and was given a license under the Energy Law. As such, the €0.44/kWh tariff was

applied to the project upon entering commercial service. The amendment of the Energy Law as of 1

January 2013 reduced the tariff applicable to Project Beta to €0.15/kWh.

120. Claimant’s report makes the assumption that the revenue figure would be the only impact is a

reasonable one. The annual operating costs of photovoltaic installations are very low and tend to be

fixed costs, based on my experience in auditing such companies. However, such reports makes a

fundamental error in its calculation of net present value in his Annex 1(B) [Ms. Priemo Report, p. 53, §

9].

121. Professor Kovič has discounted the cash flows to equity at the weighted average cost of capital

(“WACC”), which is a rate that includes both debt and equity. The correct calculation would discount

the cash flows to equity at Claimant’s cost of equity, which its documentation shows is 12%, not 8%

[Ms. Priemo Report, p. 53, § 9]

122. Thus, in the rare event that the Tribunal determines that Claimant is entitled to damages for the

tariff change on Project Beta, those damages would be no more than €104,402.

123. Additionally, Claimant requests for “wasted investment” in land, photovoltaic panels and related

equipment. The Kovič Report sets out alternative calculations for this head of damages: (a) €690,056 for

the cost of land and equipment; or (b) €1,427,500 for lost profits resulting from the change in the feed-in

tariff under the Energy Law [Ms. Priemo Report, p. 53, § 10].

124. However, such analysis presupposes that there is no use for any of the expenditure, that the land

would be useless, and the equipment will simply be thrown away. The land had value before Vasiuki

acquired it, and it will presumably continue to have value into the future. The equipment can likely be

used for another solar venture or sold to someone who wishes to make such investment. In short, there

appears to be significant potential mitigation, which Professor Kovič has simply ignored [Ms. Priemo

Report, p. 53, § 11].

20

125. Moreover, the Claimant’s report has again discounted the cash flows to equity at the weighted

average cost of capital. Thus, even it the Tribunal understands that Claimant lost profits on the Project

based on the change in the feed-in tariff, those lost profits would be no more than €1,238,697. This

figure assumes that Claimant will continue the Project build out on schedule, and that the units will

operate through the year 2023 at a capacity of 21% [Ms. Priemo Report, p. 53, § 12].

126. Finally, Professor Kovič has assumed that several additional installations would be undertaken by

Claimant, resulting in an additional €765,835 of damages. However, there are no documents to support

Claimant’s alleged plans for such expansion, mainly, there is no plan section of the Vasiuki LLC

Dataset, nor evidence that any additional land has been acquired.

127. Furthermore, Claimant’s report suggests that interest should be added to any damages that may be

awarded, calculated at Claimants WACC of 8%. However, as pointed out above, Professor Kovič

should have used a 12% rate for discounting alleged future losses [Ms. Priemo Report, p. 54, § 15].

128. In that sense, this tribunal shall understand that 12% WACC rate is the one to be considered,

disregarding the 8% rate, and that the expenditure was not part of the investment and must not be

considered on the calculation for compensation.

129. Thus, Ms. Priemo’s reports must be considered in the event that this tribunal finds that a

compensation is necessary.

21

REQUEST FOR RELIEF

In light of the above submissions, counsel for RESPONDENT respectfully requests the Tribunal to

find that:

a) This Tribunal does not have jurisdiction over the dispute concerning Claimant’s

photovoltaic projects under the Cogitatia-Barancasia BIT;

b) Respondent’s measures in respect to the LRE did not amount to a breach of the BIT;

c) Respondent’s actions are exempted from liability;

d) Respondent shall not be ordered to rescind the amendment to the LRE nor, to continue

paying the pre-2013 feed-in tariff;

e) Claimant’s basis for claiming and quantifying compensation are not appropriate;