Memorial for Respondent - FDI Moot · Memorial for Respondent Team Mbaye v List of Abbreviations...

Team Mbaye

Ninth Annual

Foreign Direct Investment

Arbitration Moot Court

Buenos Aires

3-6 November 2016

Memorial for Respondent

ICC International Court of Arbitration

ICC Case 28000/AC

On behalf of

Republic of Oceania

(Respondent)

Against

Peter Explosive

(Claimant)

Memorial for Respondent Team Mbaye

ii

Table of Contents

Table of Contents ..................................................................................................................... ii

List of Abbreviations ................................................................................................................ v

List of Authorities ................................................................................................................... vii

Legal Sources ......................................................................................................................... xiii

Statement of Facts .................................................................................................................... 1

Arguments ................................................................................................................................. 4

Issue 1: Arguments on the Tribunal’s jurisdiction ............................................................... 4

A The Tribunal lacks jurisdiction under the Euroasia BIT because Peter Explosive is

not a Euroasian national ................................................................................................... 5

1 Euroasia’s discretion to grant its nationality to Claimant is subject to the limitations

imposed by international law .......................................................................................... 5

2 The Citizenship Act exceeds the limits set by international law as it is part of an

illegal aggression by Euroasia against Eastasia .............................................................. 6

2.1 Euroasia engaged in aggression when it annexed Fairyland ................................... 6

2.2 The regional authority of Fairyland could not legitimise Euroasia’s use of force .. 6

2.2.1 The referendum declaring secession from Eastasia was unlawful .............. 7

2.2.2 Fairyland does not have the right to external self-determination ................ 8

2.3 The Citizenship Act formed an integral part of the illegal annexation ................... 9

3 Claimant’s purported Euroasian nationality does not follow from the rules on

succession of states either ............................................................................................. 10


iii

B This Tribunal lacks jurisdiction because Claimant failed to comply with Article 9

Euroasia BIT.................................................................................................................... 11

1 The pre-arbitral steps contained in Article 9 Euroasia BIT are mandatory .................. 11

1.1 The mandatory nature follows from the structure of Article 9 Euroasia BIT ....... 12

1.2 The use of the term “may” in Article 9(2) Euroasia BIT does not indicate that

Article 9(3) Euroasia BIT is optional .................................................................... 13

2 Claimant’s potential argument that the pre-arbitral steps are futile must be rejected .. 13

C Claimant cannot invoke Article 8 Eastasia BIT pursuant to Article 3 Euroasia BIT

to overcome the Tribunal’s lack of jurisdiction ........................................................... 15

1 Careful interpretation of Article 3 Euroasia BIT reveals that it does not extend to

dispute settlement provisions ....................................................................................... 16

1.1 At the time the BIT was concluded, the ordinary meaning of the term

“treatment” did not encompass dispute settlement provisions .............................. 17

1.2 The context of Article 3 Euroasia BIT shows that the term “treatment” does not

extend to dispute settlement provisions ................................................................. 18

1.3 The term “other investment matters” has no relevance for the application of the

MFN clause to dispute settlement provisions ........................................................ 19

2 Even if the MFN clause could in general cover dispute settlement provisions, its

application to the local courts requirement in particular would be inappropriate ........ 20

Issue 2: Arguments on the merits of the dispute ................................................................. 21

D Claimant did not make a protected investment because he built Rocket Bombs

upon the bribery of an Oceanian official ...................................................................... 21

1 Claimant’s BIT protection is subject to a legality requirement .................................... 21

1.1 Article 1(1) Eastasia BIT contains an explicit legality requirement ..................... 22

1.2 Article 1(1) Euroasia BIT contains an implicit legality requirement .................... 23

2 The evidence is sufficient to determine that Claimant violated Oceanian law when he

made his investment ..................................................................................................... 23


iv

E Respondent is not liable to pay compensation for an expropriation .......................... 26

1 Respondent did not expropriate Claimant’s investment ............................................... 26

2 The sanctions were a legitimate exercise of Respondent’s police powers which does

not give rise to compensation ....................................................................................... 28

2.1 Economic sanctions are non-compensable measures in the sense of the police

powers doctrine ..................................................................................................... 29

2.2 The sanctions do not fail against a proportionality requirement ........................... 30

3 In any event, Respondent is excused by Article 10 Euroasia BIT ............................... 32

F Claimant contributed to the damages he suffered ....................................................... 33

1 Concluding the new weapons supply contract was negligent ...................................... 34

2 The negligence contributed to Claimant’s damage ...................................................... 35

G Request for Relief ............................................................................................................ 37


v

List of Abbreviations

Abbreviation Explanation

ARfA Answer to Request for Arbitration

BIT Bilateral Investment Treaty

e.g. exempli gratia, for example

et seq./seqq. et sequens/sequential, the following

ExC1/R1/C2 Exhibit C1/R1/C2

EU European Union

GATT General Agreement on Tariffs and Trade

ICJ International Court of Justice

ICSID International Centre for Settlement of Investment Disputes

i.e. id est, that is to say

MFN Most-Favoured-Nation

NEAO National Environment Authority of Oceania

OECD Organisation for Economic Co-operation and Development

p. Page

para. Paragraph

PCIJ Permanent Court of International Justice

PO2 Procedural Order No 2

PO3 Procedural Order No 3

RfA Request for Arbitration


vi

UN United Nations

Uncontested Facts Statement of Uncontested Facts

UNCITRAL United Nations Commission on International Trade Law

UNCTAD United Nations Conference on Trade and Development

US United States

USA United States of America

USD United States Dollar

v versus

VCLT Vienna Convention on the Law of Treaties, 1969


vii

List of Authorities

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Council of the European Union, Factsheet EU restrictive

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Crawford, The Creation of

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Zachary Douglas, The MFN Clause in Investment

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viii

Figanmese, The Impact of

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Henckels, Indirect

Expropriation and the Right

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Caroline Henckels, Indirect Expropriation and the Right

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Kriebaum, Regulatory

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ix

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x

Ranjan, Using Public Law

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Restat 3rd of the Foreign

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Rodriguez, A tool for Treaty

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Alejandro Faya Rodriguez, The Most-Favoured-Nation

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Sayapin, Elements of an Act

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Schrijver, The Use of Force

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Nico Schrijver, The Use of Force under the UN Charter:

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Talmon, The Duty Not to

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Stefan Talmon, The Duty Not to ‘Recognize as Lawful’ a

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xi

Tancredi, The Russian

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Antonello Tancredi, The Russian Annexation of the

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34

TASS, Over 150 offices

issuing Russian passports

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TASS Russian News Agency, Over 150 offices issuing

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The Oxford Handbook of


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Peter Muchlinski/Federico Ortino/Christoph Schreuer, The

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Thulasidhass, Most-

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against Russia 'threat'

Anya Tsukanova, Cheney urges divided Ukraine to unite

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http://news.smh.com.au/world/cheney-urges-divided-

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UNCTAD, Expropriation: A Sequel,

UNCTAD/DIAE/IA/2011/7, 2012

UNCTAD, Most-Favoured-

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UNCTAD, Most-Favoured-Nation Treatment, UNCTAD

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http://news.smh.com.au/world/cheney-urges-divided-ukraine-to-unite-against-russia-threat-20080906-4auh.html




xii

Vandevelde, Bilateral

Investment Treaties

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Waelde/Kolo,

Environmental Regulation

Thomas Waelde/Abba Kolo, Environmental Regulation,

Investment Protection and 'Regulatory Taking' in

International Law, The International and Comparative

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White, Equity – a general

principle of law recognised

by civilised nations

Justice Margaret White, Equity – a general principle of

law recognised by civilised nations, Queensland

University of Technology Law & Justice Journal, Vol.4

No.1 (2004), pp.103-116

Zadorozhnii, Russian

Doctrine of International

Law after the Annexation of

Crimea

Oleksandr Zadorozhnii, Russian Doctrine of International

Law after the Annexation of Crimea, Monograph, 2016

Zivkovic, Recognition of

Contracts as Investments in


Arbitration

Velimir Zivkovic, Recognition of Contracts as

Investments in International Investment Arbitration,

European Journal of Legal Studies, Vol.5 Issue 1

(Spring/Summer 2012), pp.74-192


xiii

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29 Eng. Rep. pp.1184-1186

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ICJ Reports 2005, p.168

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Nicaragua v USA

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Merits, Judgement

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PCIJ Advisory Opinion,

Tunis v Morocco

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xiv

Arbitral decisions

AAP v Sri Lanka Asian Agricultural Products Ltd. v Republic of Sri Lanka

ICSID Case No. ARB/87/3

Final Award

27 June 1990

Ambiente v Argentina

Ambiente Ufficio S.P.A. and Others (Case formerly known

as Giordano Alpi and Others) v Argentine Republic


Decision on Jurisdiction and Admissibility

8 February 2013

Austrian Airlines v

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Austrian Airlines v Slovak Republic

Final Award

9 October 2009

Chemtura v Canada Chemtura Corporation (formerly Crompton Corporation) v

Government of Canada

Award

2 August 2010

Daimler v Argentina

Daimler Financial Services AG v Argentine Republic


Award

22 August 2012

EDF v Romania EDF (Services) Limited v Romania


Award

8 October 2009


xv

Eureko v Poland Eureko B.V. v Republic of Poland

Partial Award

19 August 2015

Feldman v Mexico Marvin Feldman v United Mexican States

ICSID Case No. ARB(AF)/99/1

Award

16 December 2002

Fraport v Philippines Fraport AG Frankfurt Airport Services Worldwide v

Republic of the Philippines

Case No. ARB/03/25

Award

16 August 2007

Fraport v Philippines II Fraport AG Frankfurt Airport Services Worldwide v

Republic of the Philippines


Award

10 December 2014

Gemplus and Talsud v

Mexico

Gemplus S.A./SLP. S.A./Gemplus Industrial S.A. de C.V.

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Two conjoined arbitrations

ICSID Cases Nos. ARB (AF)/04/3 & ARB (AF)/04/4)

Award

16 June 2010


xvi

Giovanni Alemanni v

Argentina

Giovanni Alemanni and Others v Argentine Republic


Decision on Jurisdiction and Admissibility

17 November 2014

Global and Globex v

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Global Trading Resource Corp. and Globex International,

Inc. v Ukraine


Award

1 December 2010

Hamester v Ghana Gustav F W Hamester GmbH & Co KG v Republic of

Ghana


Award

18 June 2010

ICS v Argentina

ICS Inspection and Control Services Limited (United

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PCS Case No. 2010-9

Award on Jurisdiction

10 February 2012

Impregilo v Argentina

Impregilo S.p.A v Argentine Republic


Award

21 June 2011


xvii

Inceysa v El Salvador Inceysa Vallisoletana S.L. v Republic of El Salvador


Award

2 August 2006

Italy v Cuba Republic of Italy v Republic of Cuba

Final Award

15 January 2008

Jan de Nul v Egypt Jan de Nul N.V. and Dredging International N.V. v Arab

Republic of Egypt


Decision on Jurisdiction

16 June 2006

Joy Mining v Egypt Joy Mining Machinery Limited v Arab Republic of Egypt



6 August 2004

Kiliç v Turkmenistan Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim

Şirketi v Turkmenistan


Award

2 July 2013

Klöckner v Cameroon Klöckner Industrie-Anlagen GmbH and Others v United

Republic of Cameroon and Société Camerounaise des

Engrais


Decision on Annulment

3 May 1985


xviii

LG&E v Argentina LG&E Energy Corp., LG&E Capital Corp., LG&E

International Inc. v Argentine Republic


Decision on Liability

3 October 2006

Maffezini v Spain

Emilio Augustín Maffezini v Kingdom of Spain


Decision of the Tribunal on Objections to Jurisdiction

25 January 2000

Metalclad v Mexico Metalclad Corporation v United Mexican States

ICSID Case No. ARB(AF)/97/1

Award

30 August 2000

Metal-Tech v Uzbekistan

Metal-Tech Ltd. v Republic of Uzbekistan


Award

4 October 2013

Methanex v USA Methanex Corporation v United States of America

Final Award of the Tribunal on Jurisdiction and Merits

3 August 2005

Middle East Cement v

Egypt

Middle East Cement Shipping and Handling Co. S.A. v

Arab Republic of Egypt


Award

12 April 2002


xix

MTD v Chile MTD Equity Sdn. Bhd. and MTD Chile S.A. v Republic of

Chile


Award

25 May 2004

Noble Ventures v Romania Noble Ventures, Inc. v Romania


Award

12 October 2005

Occidental v Ecuador Occidental Petroleum Corporation, Occidental Exploration

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Award

5 October 2012

Olguin v Paraguay Mr. Eudoro Armando Olguín v Republic of Paraguay


Award

26 July 2001

Oostergetel v Slovakia Oostergetel v Republic of Slovakia

Final Award

23 April 2012

Petrobart v Kyrgyzstan Petrobart Limited v Republic of Kyrgyzia

Award

13 February 2003


xx

Phoenix Action v Czech

Republic

Phoenix Action, Ltd. v Czech Republic


Award

15 April 2009

Plama v Bulgaria

Plama Consortium Limited v Republic of Bulgaria



8 February 2005

Plama v Bulgaria (Merits) Plama Consortium Limited v Republic of Bulgaria


Award

27 August 2008

Renta 4 v Russia Renta 4 S.V.S.A:, Ahorro Corporación Emergentes F.I.,

Ahorro Corporación Eurofondo F.I., Rovime Inversiones

SICAV S.A., Quasar de Valors SICAV S.A., Orgor de

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Award on Preliminary Objections

20 March 2009

Salini v Jordan

Salini Costruttori S.p.A. and Italstrade S.p.A. v Jordan


Award

31 January 2006


xxi

Salini v Marocco Salini Construttori S.P.A. and Italstrade S.P.A. v Kingdom

of Morocco



23 July 2001

Saluka v Czech Republic Saluka Investments BV (The Netherlands) v Czech

Republic

Partial Award

17 March 2006

SD Myers v Canada S.D. Myers Inc. v Government of Canada

Partial Award

13 November 2000

Soufraki v United Arab

Emirates

Hussein Nuaman Soufraki v United Arab Emirates


Award

7 July 2004

ST-AD v Bulgaria ST-AD GmbH v Republic of Bulgaria

PCA Case No. 2011-06 (ST-BG)


18 July 2013

SuezVivendi v Argentina Suez, Sociedad General de Aguas de Barcelona S.A., and

Vivendi Universal S.A. v Argentine Republic



30 July 2010


xxii

Tecmed v Mexico

Tecnicas Medioambientales Tecmed S.A. v United

Mexican States

ICSID Case No. ARB (AF)/00/02

Award

29 May 2003

Telenor v Hungary Telenor Mobile Communications A.S. v Republic of

Hungary


Award

13 September 2006

Tokios v Ukraine Tokios Tokelės v Ukraine


Award

26 July 2007

Total v Argentina Total S.A. v Argentine Republic



27 December 2010

Wintershall v Argentina Wintershall Aktiengesellschaft v Argentine Republic


Award

8 December 2008


xxiii

Yukos v Russia Yukos Universal Limited (Isle of Man) v Russian

Federation

PCA Case No. AA 227

Final Award

18 July 2014

Statutes

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Articles on State

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Responsibility of States for Internationally Wrongful

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Definition of Aggression,

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(XXIX)

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2319th plenary meeting, 14 December 1974

Draft Articles on Nationality Draft Articles on Nationality of Natural Persons in

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Draft Articles on State

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Draft Articles on Responsibility of States for

Internationally Wrongful Acts, with commentaries, 2001,

Yearbook of the International Law Commission, 2001,

Vol.II Part Two

ICJ Statute Statute of the International Court of Justice, annexed to

the UN Charter


xxiv

UN Charter Charter of the United Nations, 1945

Miscellaneous

Executive Order 13685 of

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Blocking Property of Certain Persons and Prohibiting

Certain Transactions With Respect to the Crimea Region

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xxv

UN Documents

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Palestine Refugees, General Assembly Plenary, 64th

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World Bank Guidelines World Bank Guidelines on the Treatment of Foreign

Direct Investment, 1992


1

Statement of Facts

The Republic of Oceania (“Oceania”, “Respondent”) concluded a BIT with both the Republic

of Euroasia (“Euroasia”) on 1 January 1995 and the Republic of Eastasia (“Eastasia”) on

1 January 1992.1

The investment

In 1998, Peter Explosive (“Claimant”), a resident of Fairyland and Eastasian national, became

the 100% shareholder and president of the arms producer Rocket Bombs Ltd. (“Rocket

Bombs”).2 The Oceanian company had lost its environmental license containing an approval

for arms production because its production line was not in compliance with the Environment

Act 1996.3 Without the license, the company was decrepit.4

The Environmental License

In order to resume arms production, Rocket Bombs was required to obtain a new license from

the National Environment Authority of Oceania (“NEAO”).5 The Environment Act required

adjustments to the production line that Claimant was not able to afford.6

Ordinarily, the process of adjusting a production line and the administrative procedure to

obtain an environmental decision from the NEAO are very long and time consuming.7 In

order to expedite this decision, Claimant had a private meeting with the President of the

NEAO in July 1998.8

On 23 July 1998, the NEAO granted the environmental license without further explanation,9

even though Rocket Bombs did not comply with the law.10

The necessary modernisation of Rocket Bombs to comply with the Environmental Act took

Claimant fourteen years and was only completed in January 2014.11

1 Uncontested Facts, para.1. 2 Uncontested Facts, para.2. 3 Uncontested Facts, para.2. 4 Uncontested Facts, para.2. 5 Uncontested Facts, para.4. 6 Uncontested Facts, para.4. 7 Uncontested Facts, para.6. 8 Uncontested Facts, para.6. 9 Uncontested Facts, para.6.

10 Uncontested Facts, paras.11, 13. 11 Uncontested Facts, para.13.

1

2

3

4

5

6


2

The Euroasian weapons contracts

Claimant concluded his first contract with Euroasia on 23 December 1998 for a period of

fifteen years.12 This contract was facilitated through a private meeting between the Minister of

National Defence in Euroasia, John Defenceless, and Claimant.13 The two men were close

friends.14 After receiving an advance payment from Euroasia, Claimant recommenced arms

production.15

On 28 February 2014, one day before Euroasia invaded Eastasia, Claimant concluded a new

weapons contract for another six years with John Defenceless, still Minister of the National

Defence of Euroasia.16

The reunification of Fairyland with Euroasia

On 1 November 2013, the authorities of Fairyland held a referendum on the secession of

Fairyland from Eastasia.17 The Eastasian Constitution does not allow such referenda.18 The

residents of Fairyland voted in favour of secession.19 The national government of Eastasia

declared the referendum unlawful.20

Despite the illegality of the referendum, the authorities of Fairyland purported to invite

Euroasia to intervene militarily.21

Euroasia sent its military into Eastasian territory and seized Fairyland on 1 March 2014.22

Prior to the invasion, the deliberations of the Euroasian Parliament on the Government’s

proposal to intervene were broadcast on Euroasian public television.23

Euroasia issued an official declaration of annexation on 23 March 2014. Eastasia declared this

annexation to be illegal and broke off diplomatic relations with Euroasia.24

12 Uncontested Facts, para.9. 13 Uncontested Facts, paras.8, 9. 14 Uncontested Facts, paras.8, 9. 15 Uncontested Facts, para.11. 16 Uncontested Facts, para.15. 17 Uncontested Facts, para.14. 18 Uncontested Facts, para.14. 19 Uncontested Facts, para.14. 20 Uncontested Facts, para.14. 21 Uncontested Facts, para.14. 22 Uncontested Facts, para.14. 23 PO2, para.3. 24 Uncontested Facts, para.14.

7

8

9

10

11

12


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The sanctions

Oceania and many other countries do not recognise the Euroasian annexation of Fairyland.25

On 1 May 2014, in order to protect essential security interests, the President of Oceania issued

the Executive Order on Blocking Property of Persons Contributing to the Situation in Eastasia

(“Executive Order”).26

The Executive Order introduced a system of sanctions directed against persons engaged in

certain sectors of the Euroasian economy, including the arms production sector.27 The

sanctions included a ban on business operations with such persons, suspending existing

contracts and making future contracts with them illegal.28 The property of sanctioned persons

was also blocked and could not be transferred or otherwise dealt in.29

Because of the second weapons contract Claimant had concluded with Euroasia, he was one

of the affected persons.

Corruption in the NEAO

Throughout 2013, the General Prosecutor’s Office of Oceania conducted an investigation

regarding the corruption and bribery in the NEAO.30 Criminal proceedings against those

officials, including the President of the authority, commenced on 21 November 2013.31

The President of the NEAO was, along with other officials, convicted of accepting bribes in

February 2015.32 He named Claimant as a person from whom he has received bribes and

against whom he is willing to testify.33 After being under investigation with regard to the

environmental license, criminal proceedings were initiated against Claimant which are

ongoing.34

25 Uncontested Facts, para.16. 26 Uncontested Facts, para.16. 27 Uncontested Facts, para.16. 28 Uncontested Facts, para.16. 29 ExC2, p.52, Section 1(a). 30 Uncontested Facts, para.18. 31 Uncontested Facts, para.18. 32 Uncontested Facts, para.19. 33 PO2, para.5. 34 Uncontested Facts, para.19.

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Arguments

Claimant is an arms producer supplying weapons to the aggressor state Euroasia which has

invaded Eastasia. Respondent imposed sanctions in response to that aggression. Claimant,

having been affected by these sanctions, now tries to claim compensation.

However, the Tribunal does not have jurisdiction to hear this dispute. While Claimant now

purports to be a national of Euroasia, the aggressor state, his purported change of nationality

was ineffective (A). Also, Claimant failed to take the mandatory pre-arbitral steps which are a

precondition for the Tribunal’s jurisdiction (B). Claimant cannot bypass the lack of

jurisdiction with the MFN clause either (C).

Even if the Tribunal had jurisdiction, the claims are without merit. From the very beginning

of Claimant’s investment a shadow was cast over it through his own conduct. Claimant only

obtained the necessary license for arms production by bribery and thus deprived himself of

the BIT’s protection (D). Respondent imposed the sanctions through a legitimate exercise of

its regulatory freedom regarding its foreign policy. Thus, the sanctions cannot be regarded as

an expropriation giving rise to compensation (E). In any event, Claimant was not an innocent

victim of restrictive measures. Rather, he contributed to his own damages. Claimant acted

negligently when he concluded a weapons supply contract with an aggressor state at a point in

time when its plans for invasion were already on the table (F).

Issue 1: Arguments on the Tribunal’s jurisdiction

Respondent respectfully submits that this Tribunal lacks jurisdiction. Claimant failed to

choose the appropriate BIT to submit his claim. As an Eastasian national, Claimant is not an

investor under the Euroasia BIT. Claimant’s purported change of nationality to Euroasian

contradicts international law and has no influence on the present proceeding (A). Moreover,

Claimant failed to submit his claim to the Oceanian courts prior to this arbitration. As this is a

mandatory requirement for the Tribunal’s jurisdiction, the claim must be dismissed (B).

Lastly, Claimant should not be permitted to bypass the lack of jurisdiction through the

operation of the MFN clause (C).

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A The Tribunal lacks jurisdiction under the Euroasia BIT because Peter Explosive is

not a Euroasian national

Claimant is not a Euroasian national and therefore not an investor under the Euroasia BIT. An

“investor” under Article 1(2) Euroasia BIT is “any natural person having the nationality of

either Contracting Party in accordance with its laws.” Claimant purports to have obtained

Euroasian nationality under the Euroasian Citizenship Act on 23 March 2014.

Claimant’s sole reliance on the Citizenship Act misses an important legal point: Euroasia’s

discretion to grant Claimant Euroasian nationality is subject to the limits imposed by

international law (1). The Citizenship Act exceeds these limits as it is part of an illegal

aggression by Euroasia against Eastasia (2). Claimant’s purported Euroasian nationality

cannot follow from the rules on succession of states either because these rules are not

applicable (3).

1 Euroasia’s discretion to grant its nationality to Claimant is subject to the

limitations imposed by international law

According to Article 9(7) Euroasia BIT, the Tribunal decides the dispute “in accordance […]

with the applicable principles of international law”. Article 9(7) Euroasia BIT only confirms

the general principle that any state’s ability to grant citizenship is confined to the boundaries

set by international law. The preamble of the Draft Articles on Nationality of Natural Persons

in Relation to the Succession of States expresses this general understanding (tracing back to

the jurisprudence of the PCIJ)35:“nationality is essentially governed by internal law within

the limits set by international law.”36

Especially the principles of non-use of force and non-intervention, codified in Article 2(4) UN

Charter and recognised as jus cogens,37 need to be observed while determining Claimant’s

nationality. As the tribunal in Methanex stated:

“[…] as a matter of international constitutional law a tribunal has an

independent duty to apply imperative principles of law or jus cogens […].”38

The Tribunal is therefore bound to respect the limits set by international law when

determining Claimant’s nationality.

35 PCIJ Advisory Opinion, Tunis v Morocco, p.24. 36 Emphasis added. 37 Krajewski, Völkerrecht, §4, para.97; Restat 3rd of the Foreign Relations Law of the US, § 102,

Comments h. and Reporters Notes 6; Nicaragua v USA, paras.108, 205, 209. 38 Methanex v United States, Part IV, Chapter C, p.11, para.24.

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2 The Citizenship Act exceeds the limits set by international law as it is part of an

illegal aggression by Euroasia against Eastasia

The Tribunal should not accept Claimant’s purported change of nationality based on an

isolated application of the Euroasian Citizenship Act. The Citizenship Act was part of

Euroasia’s aggression against Eastasia which violated jus cogens.

Euroasia’s actions qualify as an act of aggression under international law (2.1). Those

violations cannot be legitimised by the regional authorities of Fairyland (2.2). The Euroasian

Citizenship Act is an integral part of the annexation and consequently part of Euroasia’s

aggression (2.3).

2.1 Euroasia engaged in aggression when it annexed Fairyland

The annexation of Fairyland by Euroasia amounts to an aggression against Eastasia which is

forbidden by international law. An aggression by a state against another state is a violation of

jus cogens.39 An aggression is defined as

“[…] the use of armed force by a State against the sovereignty, territorial

integrity or political independence of another State […].”40

Euroasia’s invasion was an act of aggression, irrespective of the “bloodless and rather

peaceful”41 course of events. Euroasia sent troops over the border to support the secession of

Fairyland. It is irrelevant whether the armed forces meet resistance in the attacked state or

not.42 Thus, the military support of the secessionist movement in Fairyland by land forces

constitutes an illegal use of armed force against the sovereignty and territorial integrity of

Eastasia.

2.2 The regional authority of Fairyland could not legitimise Euroasia’s use of force

Euroasia may argue that the intervention was justified on the basis of the invitation sent by the

authorities of Fairyland. The Commentary on Article 20 of the Draft Articles on State

Responsibility states the generally accepted premise that

“consent by a State to particular conduct by another State precludes the

wrongfulness of that act in relation to the consenting State, provided the consent

39 Commentary on Draft Articles on State Responsibility, Article 27, para.5 and Article 40, para.4; Sayapin,

Elements of an Act of Aggression, p.102. 40 Definition of Aggression, Annex to A/RES/3314 (XXIX). 41 Uncontested Facts, para.14, emphasis added. 42 Zadorozhnii, Russian Doctrine of International Law after the Annexation of Crimea, p.47; Tancredi, The

Russian Annexation of the Crimea, p.33.

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is valid and to the extent that the conduct remains within the limits of the consent

given.”43

In the case at hand, however, the consent was not valid. Whether consent is valid has to be

determined by “the rules of international law relating to the expression of the will of the

state.”44 Principally, the consent needs to be expressed by the state’s highest authorities45 and

this is generally the internationally recognised, legitimate and effective government of the

sovereign state in charge of the territory.

The regional authority of Fairyland could thus not legitimise the sending of Euroasian troops

into the territory of Eastasia. The referendum did not vest the regional authority with the

power of a legitimate state government because it was unlawful (2.2.1). Fairyland did not

have the right to external self-determination either (2.2.2).

2.2.1 The referendum declaring secession from Eastasia was unlawful

The referendum did not lead to the regional authority of Fairyland having the power of a

legitimate state government, because the referendum was unlawful under Eastasian

constitutional law.

Fairyland did not have the right to hold a referendum on secession from Eastasia. A

referendum held on the secession of part of a state can only be legitimate as a matter of

international law, if it is allowed under the laws of the state.46 The International Committee of

Jurists, entrusted by the Council of the League of Nations with the task of giving an advisory

opinion upon the legal aspects of the Aaland Islands question, stated in its report:

“Generally speaking, the grant or refusal of the right to a portion of its

population of determining its own political fate by plebiscite or by some other

method, is, exclusively, an attribute of the sovereignty of every State which is

definitively constituted.”47

Eastasian law does not allow referenda on the secession of part of the Republic, but only

regional referenda pertaining to matters within the exclusive competence of that province.48

The right to secede is not a regional matter, but one that affects the whole state.

43 Commentary on Draft Articles on State Responsibility, Article 20, para.1, emphasis added. 44 Commentary on Draft Articles on State Responsibility, Article 20, para.5. 45 Corten, The Law Against War, p.263. 46 Reference re Secession of Quebec, Question 1, p.220; compare also the situation of the Scottish

Independence Referendum. 47 The Aaland Islands Question (Report On Jurisdiction), p.3. 48 PO2, para.2.

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32

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34

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As the Eastasian Constitution does not contain provisions regulating secession from the

Republic,49 the referendum in Fairyland was illegal. In fact, the government of Eastasia

declared the referendum unlawful and that it had no effect on the territorial shape of

Eastasia.50

2.2.2 Fairyland does not have the right to external self-determination

Claimant argues that the referendum was justified by a right to self-determination of the

Fairylanders.51 However, the right of the people of Fairyland to self-determination does not

extend to secession from Eastasia because “international law has not recognized a general

right of peoples to unilaterally declare secession from a state.”52

According to the widely cited opinion of the Canadian Supreme Court in its Reference re

Secession of Quebec, the right to external self-determination only occurs in very specific

circumstances:

“[...], a right to secession only arises under the principle of self-determination of

people at international law where “a people” is governed as part of a colonial

empire; where “a people” is subject to alien subjugation, domination or

international exploitation; and possibly where “a people” is denied any

meaningful exercise of its right to self-determination within the state of which it

forms a part. In other circumstances, peoples are expected to achieve self-

determination within the framework of their existing state.”53

Following its detailed analysis of international law, the Canadian Supreme Court found that

international law generally expects the right to self-determination to be exercised within the

territorial limits of a state.54 That same limitation is clearly embodied in the Eastasian

Constitution.55

The Fairylanders were neither oppressed nor politically excluded nor denied internal

democratic self-determination. To the contrary, residents of Fairyland have been treated as

other Eastasian nationals.56 Fairyland has its own authorities and it is allowed to organise

regional referenda pertaining to matters within its exclusive competence.57

49 PO2, para.2. 50 Uncontested Facts, p.34. 51 RfA, p.5. 52 UN Doc. A/51/18 (1996), para.6. 53 Reference re Secession of Quebec, emphasis added. 54 See also Pellet, The Opinions of the Badinter Arbitration Committee, p.180. 55 PO2, para.2. 56 PO3, para.9. 57 Uncontested Facts, para.14; PO2, para.2.

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Consequently, a right to external self-determination does not exist in the case at hand.

Eastasia is therefore entitled to maintain its territorial integrity under international law and

have that territorial integrity recognised by other states.58

In summary, the regional authorities of Fairyland were not entitled to invite Euroasia’s armed

forces in and their invitation cannot legitimise Euroasia’s use of force.

2.3 The Citizenship Act formed an integral part of the illegal annexation

The Citizenship Act, amended on 1 March 2014, the very day of the invasion,59 is an integral

part of the illegal annexation and thus itself illegal under international law.

In the ICJ’s DRC v Uganda decision, the ICJ affirmed that acts closely linked to an

aggression,

"will also, if they directly or indirectly involve the use of force, constitute a

breach of the principle of non-use of force in international relations.”60

The Citizenship Act is so closely linked to the invasion of Fairyland that it must be considered

to indirectly involve use of force.

Euroasia divided its illegal annexation in the acquisition of territory and the acquisition of

nationals. Euroasia’s actions in Fairyland reveal a two-step plan that has been followed before

in other instances of annexations of territory. For example, Israel annexed the Golan Heights61

and subsequently offered the residents Israeli passports and rights.62 A similar strategy has

been followed by Russia in the course of its annexation of Crimea. Russia supported the

referendum in Crimea and entered the territory after a disputed invitation. Passports and

national rights were offered to the residents after, and allegedly already prior to,63 the

annexation.64

Euroasia as a first step encouraged the referendum and annexed the territory. On the very

same day of the invasion, as a second step, it passed the amendment of the Citizenship Act

granting nationality to the residents of the annexed territory.65 The amended Citizenship Act

58 Compare Reference re Secession of Quebec, Question 2, p.222. 59 Compare PO2, para.4; Uncontested Facts, para.14. 60 DRC v Uganda, para.164, emphasis added. 61 S/RES/497 (1981). 62 GA/10794. 63 Compare Tsukanova, Cheney urges divided Ukraine to unite against Russia 'threat'. 64 TASS, Over 150 offices issuing Russian passports opened in Crimea Russia. 65 PO2, para.4.

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set the “legal” grounds for the taking-over of the Eastasian citizens residing in Fairyland.

Thus, the granting of nationality was an integral part of Euroasia’s annexation of Fairyland.

The Citizenship Act is therefore inseparable from the illegal use of force and should thus be

considered as violating the principle of non-use of force in international relations.

3 Claimant’s purported Euroasian nationality does not follow from the rules on

succession of states either

Claimant might try to rely in the alternative on the law on succession of states as embodied in

the Articles on Nationality of Natural Persons in relation to the Succession of States (“Articles

on Nationality”) to support his purported change of nationality. This argument does, however,

not convince because the Articles on Nationality are not applicable in case of an illegal

succession.

While there is a presumption in Article 5 of the Articles on Nationality that habitual residents

acquire the nationality of a successor state, that presumption does not apply to illegal

territorial acquisitions. Article 3 of this convention reads:

“The present articles apply only to the effects of a succession of States occurring

in conformity with international law and, in particular, with the principles of

international law embodied in the Charter of the United Nations.”66

It has been established that Euroasia did not act in conformity with international law when it

used force against Eastasia to annex Fairyland.67 Accordingly, the Articles on Nationality are

not applicable and neither the territorial change nor the change of nationality of the citizens is

effective.

In conclusion, this Tribunal does not have jurisdiction, because Claimant is not an investor

under the Euroasia BIT. Claimant can neither derive his Euroasian nationality from the

Citizenship Act nor from the law on succession of states. Both legal instruments are not

applicable due to the illegal use of force by Euroasia against Eastasia.

66 Emphasis added. 67 See paras.26 et seqq.

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B This Tribunal lacks jurisdiction because Claimant failed to comply with Article 9

Euroasia BIT

Even if Claimant qualified as a Euroasian investor, the Tribunal nevertheless lacks

jurisdiction. Claimant failed to submit the dispute to the Oceanian courts prior to this

arbitration as required by Article 9(3) Euroasia BIT.

Article 9(1)-(3) Euroasia BIT states:

“(1) Any dispute regarding an investment between an investor of one of the

Contracting Parties and the other Party, arising out of or relating to this

Agreement, shall, to the extent possible, be settled in an amicable consultations

[sic] between the parties to the dispute.

(2) If the dispute cannot be settled amicably, it may be submitted to the competent

judicial or administrative courts of the Contracting Party in whose territory the

investment is made.

(3) Where, after twenty four [sic] months from the date of the notice on the

commencement of proceedings before the courts mentioned in paragraph 2 above,

the dispute between an investor and one of the Contracting Parties has not been

resolved, it may be referred to international arbitration.”

The article provides a multi-tier, sequential dispute resolution system through which an

investor must run consecutively to access arbitration. Most importantly, Article 9(3) Euroasia

BIT provides that an investor must pursue his claim in the Oceanian courts for two years

before he can commence arbitration. It is uncontested that Claimant did not submit the dispute

to the Oceanian Courts.

First, the ordinary meaning of the terms used in Article 9 Euroasia BIT, in light of their

structural context, shows that the local courts requirement is mandatory (1). Second, any

argument by Claimant that compliance with the local courts requirement is futile must be

rejected (2).

1 The pre-arbitral steps contained in Article 9 Euroasia BIT are mandatory

The structure of Article 9 Euroasia BIT reflects a three-step dispute resolution mechanism.

Each preceding step must be fulfilled before the investor may proceed to the next step (1.1).

Contrary to Claimant’s arguments, the use of the term “may” in Article 9(2) Euroasia BIT

does not indicate that the provision is optional (1.2).

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1.1 The mandatory nature follows from the structure of Article 9 Euroasia BIT

The way Article 9 Euroasia BIT is structured demonstrates the mandatory nature of the pre-

arbitral steps.

In essence, Article 9 Euroasia BIT is structured as follows: the first paragraph requires

amicable settlement efforts. The second paragraph states that if this attempt fails, the investor

may submit the dispute to the local courts. Finally, the third paragraph – Article 9(3) – states

that where the dispute is not resolved by the courts within twenty-four months, the investor

may then go to arbitration.

The mandatory nature of the local courts requirement results from Article 9(3) Euroasia BIT.

Once the condition precedent occurs (the elapse of twenty-fourt months after a case is filed in

Oceanian courts), then the investor can commence arbitration.

A very similar dispute settlement clause was interpreted in the same way in the case of

Impregilo v Argentina. Article 8(2)-(3) of the Argentina-Italy BIT states:

“(2) If the dispute cannot be settled amicably, it may be submitted to the

competent judicial or administrative courts of the Party in whose territory the

investment is made.

(3) Where, after eighteen months from the date of notice of commencement of

proceedings before the courts mentioned in paragraph 2 above, the dispute

between an investor and one of the Contracting Parties has not been resolved, it

may be referred to international arbitration.”68

The similarities to the clause in the present case are striking. The Impregilo tribunal stated

that if the investor wanted to submit his claim to arbitration, Article 8(3) Argentina-Italy BIT

required him to go to the local courts first and wait for eighteen months.69 This reading

accords with the interpretation of other tribunals which also relied on the very same dispute

settlement clause.70 The Impregilo tribunal affirmed that the eighteen months local courts

requirement in that BIT was a mandatory, jurisdictional requirement before the investor could

commence ICSID arbitration.71

68 Impregilo v Argentina, p.5, emphasis added. 69 Impregilo v Argentina, paras.82b, 90. 70 Giovanni Alemanni v Argentina, para.306; Ambiente v Argentina, para.589. 71 Impregilo v Argentina, paras.91, 94; compare same conclusion in Kiliç v Turkmenistan, paras.6.2.6-6.2.9

(holding that the pre-arbitral steps in a similar dispute resolution article were mandatory preconditions to

commencing arbitration).

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Thus, Article 9(3) Euroasia BIT requires Claimant to submit his claim to Oceanian courts for

twenty-four months prior to arbitration.

1.2 The use of the term “may” in Article 9(2) Euroasia BIT does not indicate that

Article 9(3) Euroasia BIT is optional

Claimant might allege that the word “may” used in Article 9(2) Euroasia BIT provides the

investor with a choice whether or not to go to local courts first. This is incorrect. As explained

above, the mandatory local courts requirement arises from Article 9(3) Euroasia BIT, not

from Article 9(2) Euroasia BIT. Article 9(3) Euroasia BIT uses strict, non-permissive

language.

Article 9(2) Euroasia BIT simply states that the investor may file a claim with the courts as

the second step in the dispute resolution process. Respondent agrees that “may” does express

a choice. But it is the choice to either pursue the claim in front of local courts or abandon the

claim. It is not a choice to directly go to arbitration and ignore Article 9(3) Euroasia BIT.72

Notably, the Impregilo tribunal interpreted a dispute settlement clause – quoted above at

para. 60 – that used the word “may” in the exact same manner as Article 9 Euroasia BIT. It

concluded:

“The condition to be complied with is a double one: first bringing the dispute

before the domestic courts and then waiting for 18 months before proceeding to

international arbitration.”73

Therefore, Respondent submits that the use of the term “may” in Article 9(2) Euroasia BIT

does not permit a reading of Article 9(3) Euroasia BIT under which the local courts

requirement is optional. This Tribunal should thus follow the Impregilo tribunal’s conclusion

and decide that the local courts requirement is mandatory.

2 Claimant’s potential argument that the pre-arbitral steps are futile must be

rejected

In a further attempt to overcome his failure to go to local courts prior to arbitration, Claimant

might advocate a “futility exception”. He might argue that this Tribunal can completely

disregard the local courts requirement as recourse to Oceanian courts was allegedly futile.

Such argument would be flawed both on legal and factual grounds.

72 Ambiente v Argentina, para.591. 73 Impregilo v Argentina, para.90; see also Ambiente v Argentina, para.591; Giovanni Alemanni v

Argentina, para.306.

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First, as to the applicable law in this case: Article 9 Euroasia BIT does not contain a futility

exception. Article 9(3) explicitly states that a dispute must be submitted to local courts for

twenty-four months before arbitration.

The Tribunal is respectfully asked to interpret the law and not to develop it.74 The

acknowledged limits of treaty interpretation are embodied in the Vienna Convention on the

Law of Treaties (“VCLT”). Article 32 VCLT stipulates that even if an interpretation

according to Article 31 VCLT yields a “manifestly absurd or unreasonable” result, the only

recourse an adjudicator has are supplementary means of interpretation. In this case, the

wording of Article 9(3) Euroasia BIT in no way suggests a futility exception, nor did

Claimant cite to any supplementary means of interpretation in support of his argument to the

contrary.

The overwhelming majority of tribunals have rejected futility arguments.75 Respondent is

aware of only two cases in which the tribunals decided in favour of a futility exception.76

However, these tribunals are not reliable authority. In both cases the tribunals imposed a

futility exception to pre-arbitral steps primarily because the tribunals believed that a local

courts requirement did not make sense in light of selected policy considerations.77

As the tribunal in ICS v Argentina held in accord with the acknowledged limits set by the

VCLT and with regard to a futility exception:

“The Tribunal cannot therefore create exceptions to treaty rules where these are

merely based upon an assessment of the wisdom of the policy in question, having

no basis in either the treaty text or in any supplementary interpretive source,

however desirable such policy considerations might be seen to be in the

abstract.”78

The Tribunal is therefore asked to remain faithful to its task of adjudication and reject an

implied futility exception.

Second, with respect to the facts of this case, Claimant bears the burden of proving that going

to local courts would be futile.79 Claimant did not show that he could not challenge the

sanctions’ application within the twenty-four months. The only information available is that

the Constitutional Court would take three to four years to rule on setting aside the Executive

74 Compare Renta 4 v Russia, para.93; Petrobart v Kyrgyzstan, p.49. 75 Wintershall v Argentina, para.196; ICS v Argentina, para.269; Kiliç v Turkmenistan, para.8.1.21. 76 Ambiente v Argentina, para.628; Giovanni Alemanni v Argentina, para.317. 77 See Ambiente v Argentina, paras.627, 628 and Giovanni Alemanni v Argentina, paras.316, 317. 78 ICS v Argentina, para.267. 79 Compare ST-AD v Bulgaria, para.366.

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Order.80 Claimant did not provide any information that a regular motion before the

administrative courts was not possible.

Respondent submits in conformity with the tribunal in ICS v Argentina that “this is not a case

of obvious futility, where the relief sought is patently unavailable within the [respective] legal

system.”81 Consequently, this Tribunal should reject Claimant’s attempt to circumvent the

local courts requirement by way of an alleged futility.

In conclusion, the Tribunal lacks jurisdiction because Claimant failed to submit the dispute to

the Oceanian courts prior to this arbitration as required by Article 9(3) Euroasia BIT.

C Claimant cannot invoke Article 8 Eastasia BIT pursuant to Article 3 Euroasia BIT

to overcome the Tribunal’s lack of jurisdiction

Claimant cannot rely on the Most-Favoured-Nation (“MFN”) clause in the Euroasia BIT to

create jurisdiction. Claimant argues that he can use the MFN clause in the Euroasia BIT to

access Article 8 Eastasia BIT.82 In Article 8 Eastasia BIT, the Contracting Parties offer the

investor direct access to arbitration without prior submission of the dispute to the local courts.

Claimant’s submission is incorrect, because the MFN clause of the Euroasia BIT is not meant

to cover dispute settlement provisions. Traditionally and as a rule, MFN clauses do not apply

to dispute settlement provisions.83 Their origin lies in international trade law which was only

ever concerned with substantive guarantees.84 In fact, bilateral investment treaties contained

MFN clauses long before they granted investors access to dispute settlement with the state.85

Against this background, extending MFN treatment to dispute settlement must be seen as a

departure from the ordinary.

80 PO3, para.6. 81 ICS v Argentina, para.269. 82 PO1, para.4(1)(c); RfA, p.3. 83 Dissenting opinion by Laurence Boisson de Chazournes in Garanti v Turkmenistan, para.64; GATT,

Article 1. 84 GATT, Article 1. 85 Germany-Pakistan BIT (1959); Liberia-Switzerland BIT (1963); Denmark-Indonesia BIT (1968).

74

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Consequently, investment tribunals have found that MFN clauses extend to procedural

provisions only when the MFN clause clearly and unequivocally requires that outcome.86 As

the Plama tribunal stated:

“[…] an MFN provision in a basic treaty does not incorporate by reference

dispute settlement provisions in whole or in part set forth in another treaty,

unless the MFN provision in the basic treaty leaves no doubt that the Contracting

Parties intended to incorporate them.”87

Interpreting the treaty according to Article 31 VCLT leads to the conclusion that the

Contracting Parties intended to keep the traditional meaning of the MFN clause. There are

several indications which show that the dispute settlement is not covered (1). Even if the

MFN clause could, in principle, include dispute settlement provisions, its application to the

local courts requirement in particular would be inappropriate (2).

1 Careful interpretation of Article 3 Euroasia BIT reveals that it does not extend to

dispute settlement provisions

There are several indications that Article 3 Euroasia BIT only refers to the substantive

treatment the State Parties accord to an investment.

Article 31 VCLT provides that a treaty is to be interpreted in accordance with the ordinary

meaning of the terms in context. Any interpretation should be guided by the treaty’s object

and purpose, i.e. the state parties’ intentions as expressed in the language of the treaty.88

Article 3 Euroasia BIT states:

“Each Contracting Party shall, within its own territory, accord to investments

made by investors of the other Contracting Party, to the income and activities

related to such investments and to such other investment matters regulated by this

Agreement, a treatment that is no less favourable than that accorded to its own

investors or investors from third-party countries.”89

First, the ordinary meaning of the term “treatment” at the time the Euroasia BIT was

concluded, only referred to substantive treatment (1.1). Additionally, the context of Article 3

Euroasia BIT also shows that the term “treatment” does not extend to dispute settlement

86 Wintershall v Argentina, para.172; Plama v Bulgaria, para.204; McLachlan/Shore/Weiniger,

International Investment Arbitration: Substantive Principles, p.256. 87 Plama v Bulgaria, para.223, emphasis added. 88 VCLT, Article 3; Austrian Airlines v Slovakia, para.121; Plama v Bulgaria, para.198. 89 Emphasis added.

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provisions (1.2). Lastly, the term “other investment matters” has no relevance for the

application of the MFN clause to dispute settlement provisions (1.3).

1.1 At the time the BIT was concluded, the ordinary meaning of the term

“treatment” did not encompass dispute settlement provisions

The question of whether or not Article 3 Euroasia BIT extends to dispute settlement turns on

the interpretation of the term “treatment”. The term is not defined in the Euroasia BIT.

Respondent submits, in line with the ICS v Argentina tribunal, that the so-called “principle of

contemporaneity” in treaty interpretation should be used for interpreting the term.90 As the

tribunal in Daimler v Argentina confirmed: If there is no evidence to the contrary, the parties

are assumed to have shared the general understanding of a term at the time the treaty was

concluded.91

One indication of the generally understood scope of the term “treatment” is the use of that

term in the World Bank Guidelines92. The Guidelines were drafted in 1992, three years before

the Euroasia BIT was concluded. The Guidelines use the term “treatment” only in part III, in

the context of substantive guarantees and concrete measures by the state. Dispute settlement is

not mentioned within the discussion of “treatment” at all.

Indeed, it was uncontested at the time the Euroasia BIT was concluded, and for many years

after, that MFN clauses had no effect on the jurisdictional requirements agreed to by the

parties in dispute resolution provisions. Only in 2000 did the tribunal in Maffezini v Spain

apply an MFN provision to dispute settlement for the first time.93

Respondent submits that before the Maffezini case was published no state party to a BIT –

including Oceania – ever thought about applying the MFN clause to dispute settlement

provisions.94 Consistently negative reactions to that decision95 demonstrate that the leap taken

by the Maffezini tribunal was ill considered and should not be followed.

90 ICS v Argentina, para.289; see also Wintershall v Argentina, para.128. 91 Daimler v Argentina, para.220. 92 World Bank Guidelines on the Treatment of Foreign Direct Investment, 1992. 93 Parker, A BIT at a Time, p.37; Figanmese, The Impact of the Maffezini Decision, p.221. 94 Douglas, The MFN Clause in Investment Arbitration, p.101. 95 Salini v Jordan, para.115; Plama v Bulgaria, para.203; Telenor v Hungary, paras.89, 90.

84

85

86

87

88


18

Considering this very issue, the tribunal in Daimler v Argentina observed with regard to a BIT

concluded in 1991 that

“the term “treatment” was likely meant by the two State Parties, at the time of the

conclusion of the BIT, to refer to the Host State’s direct treatment of the

investment and not to the conduct of any international arbitration arising out of

that treatment.”96

The most conclusive evidence available on this issue comes from the comparison of two

treaties entered into by Oceania within the short span of three years, the Eastasia and the

Euroasia BIT. The Eastasia BIT contained no pre-arbitral local courts requirement. The

Euroasia BIT was subsequently drafted to include such a requirement. It would undermine the

specifically negotiated provisions of the Euroasia BIT if the MFN clause could incorporate

dispute resolution mechanisms from previously concluded treaties.

In summary, it is clear that the term “treatment” was not meant to extend to dispute settlement

provisions at the time the Euroasia BIT was concluded.

1.2 The context of Article 3 Euroasia BIT shows that the term “treatment” does not

extend to dispute settlement provisions

The context of Article 3 Euroasia BIT, in particular its interplay with Article 5 Euroasia BIT,

further supports Respondent’s submission. The Euroasia BIT contains two MFN provisions.

A more general one in Article 3 Euroasia BIT, as already discussed; and a more specific

clause in Article 5 Euroasia BIT, which deals with losses of the investor owing to war.

Article 5 Euroasia BIT specifically refers to more favourable “treatment as regards

restitution, indemnification, compensation or other settlement”.97 This formulation covers

settlement of disputes about the investor’s claims for compensation. It can be deduced as an

argumentum e contrario that Article 3, which only refers to “treatment”, does not.

In other words, it does not make sense to have one MFN clause (Article 5) that covers

virtually all forms of treatment, including “other settlement”, and then have a second MFN

clause (Article 3) repeating it. Such interpretation would run counter to the principle of

effectiveness. This principle is a generally accepted doctrine in international law98 stating that

96 Daimler v Argentina, para.224, emphasis added. 97 Emphasis added. 98 Noble Ventures v Romania, para.50; Decision on Annulment in Klöckner v Cameroon, para.62; compare

also Eureko v Poland, para.248.

89

90

91

92

93

94


19

an interpretation must not render a treaty clause meaningless.99 This is, however, precisely

what Claimant’s interpretation would do: It would reduce the effect of Article 5 Euroasia BIT

to a mere repetition of the guarantee already contained in Article 3 Euroasia BIT.

In summary, the context of Article 3 Euroasia BIT, in particular the broad scope of Article 5

Euroasia BIT, supports a narrower reading of Article 3 Euroasia BIT.

1.3 The term “other investment matters” has no relevance for the application of the

MFN clause to dispute settlement provisions

Lastly, Claimant may assert that the term “treatment” in Article 3(1) Euroasia BIT should be

read broadly, because it not only encompasses treatment of “investments”, but also treatment

of “income and activities related to such investments and such other investment matters

regulated by this agreement”. However, this is incorrect.

“Other investment matters” cannot be read in a way that inflates the meaning of the word

“treatment”. The key to Article 3 Euroasia BIT is the term “treatment” – not the list of items

that enjoy such treatment. If the term “treatment” excludes dispute settlement, it is of no

relevance to whom or to what such treatment is accorded.

In fact, the terms “activities related to such investments” and “other investment matters” in

Article 3 Euroasia BIT, on which Claimant might rely, even support Respondent’s position.

These terms simply mirror the key substantive standards of treatment in Article 2 Euroasia

BIT. Article 2 Euroasia BIT specifies that the guaranteed (substantive) treatment standards

shall be accorded not only to investments (Article 2(2)), but also to activities of investors with

regard to investments (Article 2(3)) and moreover to returns of the investments as well as to

returns from reinvested returns (Article 2(4)). In short, the substantive treatment guaranteed

in Article 2 Euroasia BIT has a broad scope of application. Since Article 3 Euroasia BIT

mirrors Article 2 Euroasia BIT, it also mirrors its list of protected items.

Therefore, the term “other investment matters” does not inflate the meaning of “treatment”

which only refers to substantive guarantees.

99 AAP v Sri Lanka, para.40; Eureko v Poland, para.248.

95

96

97

98

99

100


20

2 Even if the MFN clause could in general cover dispute settlement provisions, its

application to the local courts requirement in particular would be inappropriate

Even tribunals that have permitted investors to circumvent certain dispute settlement

provisions through the use of the MFN clause acknowledged necessary limits.100 Specifically,

certain types of dispute settlement provisions or parts thereof were categorised as immune to

circumvention because they qualified as key conditions to a contracting party’s consent to

arbitrate.101

The local courts requirement in Article 9(3) Euroasia BIT is a precondition for Respondent’s

consent. Whether a particular requirement is a condition precedent is an issue of

interpretation. An indicator is the language used and whether that provision was specifically

negotiated. As a general rule, Mr. Gary Born states:

“[P]rovisions with defined time periods and concrete pre-arbitration steps are

more likely to be categorized as conditions precedent, whose breach forecloses

access to arbitration […].”102

Article 9(3) Euroasia BIT is a concrete pre-arbitral step with a defined time period of twenty-

four months. Moreover, it appears to have been specifically negotiated by Oceania and

Euroasia when compared to the Eastasia BIT, which contains no local courts requirement.

Investment tribunals such as Wintershall, ST-AD and Kiliç have characterised requirements

using similar language as conditions precedent.103 Relating such preconditions to consent has

led these tribunals to reject the application of the MFN clause.104

In conclusion, the Tribunal should not allow Claimant to use Article 3 Euroasia BIT to

overcome Respondent’s conditional consent to arbitrate investment disputes.

100 Maffezini v Spain, paras.62, 63; National Grid v Argentina, para.92. 101 Wintershall v Argentina, para.162; Daimler v Argentina, para.194; Dissenting Opinion by Laurence

Boisson de Chazournes in Garanti v Turkmenistan, paras.62, 63. 102 Born/Scekic, p.249. 103 ST-AD v Bulgaria, para.368; Wintershall v Argentina, paras.115, 116; Kiliç v Turkmenistan, para.6.2.9. 104 Wintershall v Argentina, paras.160(1)(2), 197; Kiliç v Turkmenistan, para.7.9.1; also compare ST-AD v

Bulgaria, paras.402, 403.

101

102

103

104

105


21

Issue 2: Arguments on the merits of the dispute

Respondent is not liable to compensate Claimant for losses he suffered due to the Executive

Order. First and foremost, Claimant’s investment is not protected because Claimed bribed a

public official to obtain the required license for its operation (D). Second, even if Claimant

made a protected investment, Respondent did not illegally expropriate Claimant (E). In any

event, Claimant materially contributed to the damage suffered. This contribution prevents

Claimant from being awarded compensation (F).

D Claimant did not make a protected investment because he built Rocket Bombs

upon the bribery of an Oceanian official

The key prerequisite for a BIT to grant protection is that the investor has made an investment

in accordance with the BIT.105 Only then does the investment regime apply ratione materiae.

Both the Euroasia and the Eastasia BIT require that the investment be established in

accordance with the laws of the host state. They each contain a legality requirement (1).

Claimant’s investment does not comply with the requirements of either BIT, because the

investment was made illegally. The evidence provided by Respondent is sufficient to find that

Claimant bribed an Oceanian official to gain an environmental license and establish his

investment (2).

1 Claimant’s BIT protection is subject to a legality requirement

The Tribunal’s findings on the jurisdictional issues in this case necessarily influence

Respondent’s submissions on the merits: If the Tribunal allows Claimant to use the MFN

clause to access the dispute settlement clause in the Eastasia BIT, Respondent submits that the

legality requirement explicitly follows from Article 1(1) Eastasia BIT (1.1). If the Tribunal

finds that it has jurisdiction not by virtue of the MFN clause but on the basis of the Euroasia

BIT alone, a legality requirement is still implied in Article 1(1) Euroasia BIT (1.2).

105 Dolzer/Schreuer, Principles of International Investment Law, p.60.

106

107

108

109


22

1.1 Article 1(1) Eastasia BIT contains an explicit legality requirement

Claimant’s investment is subject to a legality requirement imposed by the Eastasia BIT.

Article 1(1) Eastasia BIT explicitly defines investments as such assets only that are invested

“in accordance with the laws and regulations of the [host state, i.e. Oceania]”.

If the Tribunal finds that Claimant can import the dispute settlement provisions of the Eastasia

BIT through the MFN clause, these provisions must be imported with their original meaning,

i.e. the meaning they have in the Eastasia BIT. If Claimant imports Article 8(1) and (2)

Eastasia BIT, referring to the settlement of “disputes concerning investments”, these terms

have a specific, defined meaning under the Eastasia BIT. In particular, the term “investments”

– as quoted right above – is defined as investments made in accordance with the law of the

host state. Thus, if Claimant imports direct access to arbitration of disputes concerning

investments, this should be read as an import of “direct access to arbitration of disputes

concerning legal investments”.

Consequently, if the Tribunal allowed Claimant to rely on the Eastasia BIT through the MFN

clause, Claimant’s investment is subject to the legality requirement contained in Article 1(1)

Eastasia BIT.

Claimant, however, tries to argue that he can pick the specific terms contained in the Eastasia

BIT and then interpret them according to the Euroasia BIT.106 This would allow Claimant to

create a new, hybrid dispute settlement clause. Such a clause cannot be found in either the

Euroasia BIT or the Eastasia BIT.

This approach would go far beyond the appropriate scope of an MFN clause. The purpose of

the MFN clause is to protect against discrimination.107 If the Tribunal allowed the MFN

clause to be stretched this far, Claimant would enjoy an entirely new kind of treatment that

the state never promised to any other investor.108 The MFN clause is intended only to prevent

discrimination between investors of a different nationality and not to rewrite treaties in favour

of the investor.109 Therefore, such an approach should be rejected.

106 Compare RfA, p.3. 107 UNCTAD, Most-Favoured-Nation Treatment, pp.13, 14; Vandevelde, Bilateral Investment Treaties,

p.367; Thulasidhass, Most-Favoured-Nation Treatment in International Investment Law, p.7; Rodriguez,

A tool for Treaty Shopping?, p.98. 108 Compare Thulasidhass, Most-Favoured-Nation Treatment in International Investment Law, p.7;

Rodriguez, A tool for Treaty Shopping?, p.98. 109 Thulasidhass, Most-Favoured-Nation Treatment in International Investment Law, p.7; Rodriguez, A tool

for Treaty Shopping?, p.98.

110

111

112

113

114


23

In summary, if Claimant relies on Article 8 Eastasia BIT, his investment must comply with

the explicit legality requirement of the Eastasia BIT.

1.2 Article 1(1) Euroasia BIT contains an implicit legality requirement

In the alternative, if the Tribunal did not apply the Eastasia BIT but the Euroasia BIT,

Article 1(1) Euroasia BIT contains an implicit legality requirement.

It is a well-established principle in investment arbitration that even in the absence of an

explicit legality requirement, investment definitions must be interpreted to include an implied

one. In this regard, there are only two categories of awards: those which have found that there

is an implicit legality requirement110 and those where illegality was not an issue. There is not,

however, a single award where the tribunal denied an implicit legality requirement.

From a state’s point of view, there is no reason why it should grant protection to illegal

investments. Therefore, borrowing the words of the Phoenix tribunal, “[s]tates cannot be

deemed to offer access to the ICSID dispute settlement mechanism to investments made in

violation of their laws.”111

From a more general point of view,

“[i]t would also be contrary to the basic notion of international public policy –

that a contract obtained by wrongful means (fraudulent misrepresentation) should

not be enforced by a tribunal.”112

For these reasons, Article 1(1) Euroasia BIT must be read to contain an implied legality

requirement.

2 The evidence is sufficient to determine that Claimant violated Oceanian law

when he made his investment

The evidence which Respondent can submit is sufficient for the Tribunal to find that Claimant

established his investment illegally. Before addressing the facts of this case, it is necessary to

clarify two points with regard to the permissible type of evidence on the one hand and the

relevant standard of proof on the other.

110 Phoenix Action v Czech Republic, para.101; Plama v Bulgaria (Merits), para.139; Hamester v Ghana,

para.123; Yukos v Russia, para.1352; Fraport v Philippines II, para.322. 111 Phoenix Action v Czech Republic, para.101 – the same holds true for ICC arbitration. 112 Plama v Bulgaria (Merits), para.143.

115

116

117

118

119

120

121


24

Circumstantial evidence is permissible and sufficient to prove bribery. The Metal-Tech

tribunal rightfully pointed out that

“corruption is by essence difficult to establish and that it is thus generally

admitted that it can be shown through circumstantial evidence.”113

As far as the standard of proof is concerned, there are two main schools of thought. One camp

advocates the usual civil law standard of proof by a “preponderance of the evidence” which

requires to proponent of an issue to show that an event was more likely than not to have

occurred.114 The other camp would require that the evidence be “clear and convincing so as

to reasonably [support the alleged facts]”.115 Respondent’s evidence satisfies even the

elevated standard.

Claimant bought the arms producer Rocket Bombs in 1998.116 At that time, Oceania had

introduced the Environmental Act 1996117 and Rocket Bombs had lost its environmental

license necessary for arms production in 1997.118 Consequently, to establish the business,

Claimant had to obtain a new environmental license.119 A new license was contingent on a

production line in compliance with the Environmental Act.120

The legal way out would have been to adjust the production line to the environmental

requirements. This is not the path Claimant chose.121 The evidence shows that he instead

opted to bribe the President of the NEAO in order to obtain the license.

The licensing process is usually “very long and time consuming”122 because after the

applicant has submitted proof of compliance, the authority also “visits the arms production

site to verify compliance”.123 These steps were not fulfilled in the present case. Instead,

Claimant had a private meeting with the President of the NEAO in July 1998.124

113 Metal-Tech v Uzbekistan, para.243; Oostergetel v Slovakia, para.303 Fraport v Philippines II, para.479. 114 Tokios v Ukraine, para.124; Fraport v Philippines, para.399. 115 Fraport v Philippines II, para.479; see also EDF v Romania, para.221. 116 Uncontested Facts, para.2. 117 Uncontested Facts, para.4. 118 Uncontested Facts, paras.2, 4. 119 Uncontested Facts, paras.2, 4; PO2, para.1. 120 PO2, para.1. 121 Uncontested Facts, para.13. 122 Uncontested Facts, para.6. 123 PO3, para.1. 124 Uncontested Facts, para.6.

122

123

124

125

126


25

After the private meeting, it took less than twenty-two days for Claimant to obtain the

license.125 Of course, the issuance of a license might have been legal, if Claimant in this

meeting had “provide[d] the National Environment Authority evidence that its production line

complies with the environmental requirements”.126 As a matter of fact, however, Claimant’s

production line only came into compliance with the Environmental Act in 2014 – more than

fifteen years after the meeting.127

Thus, it is not possible for Claimant to have obtained the license legally. This fact particularly

points towards bribery because the President of the NEAO has a history of corruption. He was

convicted in 2015, along with other officials from the NEAO, of having accepted bribes.128

The investigations were initiated after the General Prosecutor’s Office of Oceania in 2013 was

given an anonymous tip that officials of the NEAO had suggested “that it would be possible

to expedite the issuance of an environmental license if they received a pecuniary

gratification”.129 The convicted NEAO President named Claimant as a person from whom he

had received bribes.130 The criminal proceedings against Claimant are pending.131

There is no reasonable explanation for these events other than Claimant making use of a

corrupt individual susceptible to bribery in order to bypass Oceanian environmental law.

Respondent therefore submits that the Tribunal has clear and convincing evidence to find that

Claimant bribed the NEAO President in the course of establishing his investment.

Claimant might raise an argument in defence claiming that the bribery took place during the

life of the investment rather than in the establishment phase and should therefore not be

relevant. This argument should be rejected.

It follows from these facts that the environmental license was inextricably linked to the

operation of Claimant’s entire business. Indeed, the environmental licence was a conditio sine

qua non for the business to be operational and thus have any worth. In light of such

entanglement, it would be artificial to only qualify the payment of the purchase price as the

“making” of the investment.

125 Uncontested Facts, para.6. 126 PO2, para.1. 127 Uncontested Facts, para.13. 128 Uncontested Facts, para.19. 129 Uncontested Facts, para.18, emphasis added. 130 PO2, para.5. 131 PO2, para.5.

127

128

129

130

131


26

To sum up, the circumstances satisfy even an elevated standard of proof and warrant the

determination that Claimant bribed an official to get a license. This illegality at the

establishment of Claimant’s investment takes it outside of the BIT’s scope and renders the

investment unprotected.

E Respondent is not liable to pay compensation for an expropriation

Claimant challenges the sanctions Respondent introduced against persons supporting Euroasia

in its annexation of Fairyland as being expropriatory.132 These sanctions, however, are non-

discriminatory regulatory actions designed to weaken Euroasia’s economic and military

capacity. Such measures do not amount to expropriation, are not equivalent to expropriation,

and do not give rise to a duty of compensation.

First, Claimant has not sufficiently substantiated that the sanctions had an effect equivalent to

expropriation on his investment (1). But even if the theoretical threshold for an expropriation

were met, the sanctions were introduced as a legitimate exercise of Respondent’s police

powers (2). In any event, Article 10 Euroasia BIT – a so-called “non-precluded measures

clause” – explicitly exempts Respondent from liability (3).

1 Respondent did not expropriate Claimant’s investment

Article 4 Euroasia BIT follows the established approach of investment law that an investment

can be expropriated in two ways: directly if the investor’s property is taken133 or indirectly if

measures do not formally take away property but are tantamount to such taking.134

Respondent did neither. The Executive Order did not take away Claimant’s title to the assets

owned by Rocket Bombs or his ownership of the investment as a whole. Accordingly, no

direct expropriation has occurred.

As indicated above, indirect expropriation requires an effect that is “tantamount” to

expropriation.135 Investment tribunals and scholars have developed two main criteria to assess

whether a measure is tantamount to expropriation: First, the severity of the effect on the

132 RfA, p.6. 133 Dolzer/Schreuer, Principles of International Investment Law, p.92; SuezVivendi v Argentina, para.132;

Telenor v Hungary, para.38. 134 Dolzer/Schreuer, Principles of International Investment Law, p.92; SuezVivendi v Argentina, para.132;

Telenor v Hungary, para.38; Tecmed v Mexico, para.114; Middle East Cement v Egypt, para.107. 135 Article 4(1) Euroasia BIT; compare also e.g. Tecmed v Mexico, para.114; Metalclad v Mexico, para.102;

Olguin v Paraguay, para.84.

132

133

134

135

136


27

investment136 – specifically, whether it reduces the value of the investment to nearly zero.137

The second factor is the duration of the measure.138 Tribunals have found that the measure

must be permanent.139 Accordingly, a measure that only affects the investment’s value to a

lesser extent or is temporary cannot meet this standard.140

Applying these criteria to the case at hand, Respondent’s sanctions fall short of having an

effect tantamount to expropriation.

First, Claimant has not shown that the value of his investment was reduced close to zero.

While Claimant brought forward that his company suffered “a rapid decrease in the value of

its shares” due to the sanctions,141 this statement alone is insufficient. Claimant assesses the

decrease at 120,000,000 USD. However, even if that figure were correct, the information is

incomplete. It would be necessary to know the total value of the shares before the sanctions to

assess whether a decrease by 120,000,000 USD constitutes a reduction to nearly zero.

Claimant has to this date not provided the missing information.

Second, the sanctions are only temporary, not permanent. Tribunals demand that a measure

be permanent142 because only then can it be compared to the “taking of title” as required by

direct expropriation. Whether a particular measure is sufficiently permanent must be decided

on a case by case basis.143

In SD Myers v Canada, for example, a period of eighteen months was held to be of

insufficient duration. The tribunal persuasively argued that the term “tantamount to

expropriation” (which is identical to Article 4 Euroasia BIT in the case at hand) meant

“equivalent” to (direct) expropriation.144 It concluded that the mere interference with the

claimant’s investment “only for a time” was no “expropriation case”.145

136 UNCTAD, Expropriation: A Sequel, p.63; Telenor v Hungary, para.70; LG&E v Argentina, para.190;

Tecmed v Mexico, para.115; Total v Argentina, para.195. 137 UNCTAD, Expropriation: A Sequel, p.65 with various references. 138 UNCTAD, Expropriation: A Sequel, p.69; Telenor v Hungary, para.70; SD Myers v Canada, paras.284,

287; LG&E v Argentina, para.190. 139 Tecmed v Mexico, para.115; LG&E v Argentina, para.193; see also SuezVivendi v Argentina, para.140;

Total v Argentina, para.196. 140 Compare Total v Argentina, para.195; LG&E v Argentina, para.193; SD Myers v Canada, paras.284,

287. 141 RfA, p.5. 142 Tecmed v Mexico, para.115; LG&E v Argentina, para.193; see also SuezVivendi v Argentina, para.140;

Total v Argentina, para.196. 143 Compare Tecmed v Mexico, para.114; UNCTAD, Expropriation: A Sequel, p.57. 144 SD Myers v Canada, para.285. 145 SD Myers v Canada, paras.287, 288.

137

138

139

140


28

In the present case, the time between the issuance of the sanctions on 1 May 2014 and today

is only twenty-eight months. By their nature, sanctions are only temporary. The very objective

of sanctions is to exert pressure so that a state changes its behaviour.146 As soon as this

objective is reached, sanctions will be lifted. The Executive Order is directed against the

“actions and policies of the Government of Euroasia”.147 There is no indication that the

sanctions would be left in place after the Fairyland incident is resolved.

What is more, Claimant himself could at any time cut ties with the aggressor Euroasia and

bring himself outside the scope of the sanctions. As the sanctions are carefully drafted to only

target persons that support Euroasia’s military readiness,148 Claimant’s new weapons supply

contract is the only reason for him to be targeted. Were Claimant to break with the aggressor,

he could use the available reconsideration proceedings149 to have the applicability of the

sanctions reassessed.

In sum, the effect of the sanctions does not meet the severity and duration requirements to

find state action “tantamount” to direct expropriation. Consequently, Respondent did not

indirectly expropriate Claimant’s business and did not violate Article 4 Euroasia BIT.

2 The sanctions were a legitimate exercise of Respondent’s police powers which

does not give rise to compensation

Even if the sanctions met the threshold requirements, they are still a non-compensable

exercise of Respondent’s police powers. Investment tribunals as well as scholarly opinions

are in accord that states can take measures which deprive an investor of the investment but do

not call for compensation.150 These measures are not an expropriation because they are an

exercise of a sovereign state’s inherent right to regulate.151 Limiting a state’s regulatory power

would have an unjustifiable chilling effect on vital state functions.152 Controversy only arises

in borderline cases where a demarcation line between such (non-compensable) “police

powers” and compensable expropriation must be drawn.153

146 Malek, Nonviolent Sanctions and Incentives. 147 ExC2, p.52, Preamble. 148 ExC2, p.52, Section 1(a)(1). 149 PO3, para.10. 150 UNCTAD, Expropriation: A Sequel, p.78; Dolzer/Schreuer, Principles of International Investment Law,

p.109; Methanex v USA, Part IV Chapter D para.7; Saluka v Czech Republic, para.255; Chemtura v

Canada, para.266; Feldman v Mexico, para.103. 151 Kriebaum, Regulatory Takings, p.721. 152 Compare Kriebaum, Regulatory Takings, p.721; Waelde/Kolo, Environmental Regulation, p.839. 153 UNCTAD, Expropriation: A Sequel, pp.78 et seqq.

141

142

143

144


29

Sanctions, however, are not a borderline case but fall squarely within a state’s regulatory

freedom. This explains why there is not a single award – to Respondent’s knowledge – where

a state’s right to introduce sanctions was in question or where an investor was granted

compensation for being negatively affected by sanctions.

Such absence of precedent speaks volumes, considering the frequent occurrence of sanctions.

Today, the USA and the EU alone have sanctions in place against 44 different countries.

These modern sanctions are mostly “targeted sanctions” against persons and their property

who support and have ties to the government of the sanctioned country.154 Very recently, on

19 December 2014, the USA introduced sanctions due to the Crimea crisis that are virtually

identical to the sanctions introduced by Respondent.155 Even in the context of the Fairyland

incident, other states besides Oceania have introduced sanctions similar to Respondent’s

Executive Order.156

The legal reason for such “weight of authority by absence” is that sanctions fall within states’

non-compensable police powers (2.1). As a second and precautionary step, Respondent

anticipates that with regard to the public purpose, Claimant may raise concerns about

proportionality. However, the sanctions were proportionate to the public purpose of concern

in this case (2.2).

2.1 Economic sanctions are non-compensable measures in the sense of the police

powers doctrine

Respondent’s sanctions are non-compensable measures under the police power doctrine.

Police powers are defined as regulatory measures, enacted non-discriminatorily, with due

process and for a public purpose.157 The sanctions are contained in the Executive Order and

that Order was enacted non-discriminatorily and with due process.

154 See only the extensive consolidated lists of sanctioned persons of the US

(https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx), the EU

(https://data.europa.eu/euodp/en/data/dataset/consolidated-list-of-persons-groups-and-entities-subject-to-

eu-financial-sanctions/resource/1e1022c4-8a0e-4b2e-ace4-7beb8208ba5c), Australia

(http://dfat.gov.au/international-relations/security/sanctions/Pages/consolidated-list.aspx). 155 Executive Order 13685 of 19 December 2014. 156 PO3, para.11. 157 See only Methanex v USA, Part IV Chapter D para.7; Saluka v Czech Republic, para.255; Chemtura v

Canada, para.266.

145

146

147

148

https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx

https://data.europa.eu/euodp/en/data/dataset/consolidated-list-of-persons-groups-and-entities-subject-to-eu-financial-sanctions/resource/1e1022c4-8a0e-4b2e-ace4-7beb8208ba5c

https://data.europa.eu/euodp/en/data/dataset/consolidated-list-of-persons-groups-and-entities-subject-to-eu-financial-sanctions/resource/1e1022c4-8a0e-4b2e-ace4-7beb8208ba5c

http://dfat.gov.au/international-relations/security/sanctions/Pages/consolidated-list.aspx


30

The Executive Order also qualifies as a “regulatory measure”. Regulatory measures in the

sense of police powers are general measures that relate to vital aspects of state sovereignty.158

Respondent submits that the ability of a state to introduce sanctions belongs to a core domain

of state sovereignty. Sanctions are a key element of foreign policy. And as made clear by the

ICJ in the famous case of Nicaragua v USA, foreign policy is an important aspect of state

sovereignty.159

Characterising sanctions as compensable measures would lead to a chilling effect on states’

foreign policy. First, paying compensation to sanctioned individuals would in most cases

defeat the very purpose of the sanction. It makes little sense to freeze all bank accounts of a

targeted individual in order to cut off his or her support to the targeted country and then, in a

second step, pay compensation in the amount of the assets frozen. There would be no

pressure, if the loss were instantly to be compensated for.

Moreover, the mere prospect of having to pay millions in compensation for targeted sanctions

might discourage states from introducing sanctions in the first place. In order for sanctions to

be effective in changing another state’s behaviour, their monetary volume can and must be

significant. Thus, if states were exposed to investor claims for imposing sanctions, this might

very well have a chilling effect on the international sanctions regime. Such a chilling effect

could be devastating for the international community, since sanctions are an important tool for

international peace-keeping.160

For these reasons, Respondent’s sanctions, as an exercise of police powers, cannot be an

expropriation and do not trigger liability.

2.2 The sanctions do not fail against a proportionality requirement

In the interest of fully elaborating the police powers doctrine, the Tribunal may consider that

the Tecmed v Mexico tribunal identified a “proportionality requirement” that would limit the

acceptable scope of state regulation.161 Respondent submits that this Tribunal should not

consider the Tecmed decision persuasive authority because it is legally flawed. In any event,

Claimant cannot rely on that putative limitation in this case.

158 Mann, The Right of States to Regulate and International Investment Law, p.5. 159 Nicaragua v USA, para.205. 160 Council of the European Union, Factsheet EU restrictive measures, p.1. 161 Tecmed v Mexico, para.151.

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It is critical to note that the Tecmed tribunal identified a proportionality requirement without

any textual basis in the BIT. Also, the tribunal neither cited general principles of investment

law, nor did it cite to previous investment tribunals or other experts in the field.162 The only

legal authority cited is the European Court of Human Rights163 – an adjudicative body

deciding on a different set of rules in a different context. It comes as little surprise that “most

tribunals thus far have declined to follow the approach adopted by Tecmed”.164 Likewise,

scholars have expressed serious concerns regarding such methodology.165

For these reasons, the Tribunal should not follow the Tecmed decision.

But even if the Tribunal were to take a proportionality test into consideration, the Executive

Order was proportionate to the public interest it pursued. Claimant may argue that the aim of

the sanctions (to prevent weapons supplies to Euroasia) could have been achieved with less

intense measures, e.g. with an export ban to Euroasia instead of the freezing of Claimant’s

assets.

However, an export ban to Euroasia would not have been as effective as the comprehensive

sanctions Respondent introduced. An export ban targeting Euroasia could have been easily

circumvented by delivery through a third country. A more comprehensive ban to generally

forbid weapons exports could still have been circumvented by smugglers.

Respondent aimed to close the floodgates and prevent further Euroasian aggression. Any

conceivable measure less comprehensive than the one taken would not have sufficed in this

particular case. The sanctions were therefore proportional.

In summary, Respondent’s proportionate measures are covered by the police power doctrine

and thus do not give rise to a claim for compensation.

162 Tecmed v Mexico, paras. 118-151. 163 Tecmed v Mexico, para.122 with footnotes 140 and 141. 164 Vandevelde, Bilateral Investment Treaties, p.296. 165 Ranjan, pp.867 et seqq.; Henckels, Indirect Expropriation and the Right to Regulate, p.233.

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3 In any event, Respondent is excused by Article 10 Euroasia BIT

In any event, Respondent was justified in introducing the sanctions on the basis of Article 10

Euroasia BIT. This article contains the BIT’s non-precluded measures clause and provides

that:

“Nothing in this Agreement shall be construed to prevent either Contracting

Party from taking measures to fulfil its obligations with respect to the

maintenance of international peace or security.”

Respondent issued the Executive Order to fulfil its international obligations with respect to

the maintenance of international peace and security.

Claimant may point to the fact that the UN could not agree on a resolution regarding the

Fairyland incident.166 However, Respondent had an obligation within the meaning of

Article 10 Euroasia BIT under the law of state responsibility. Such obligation arises

independently from a resolution by the UN.167

The Articles on State Responsibility, which are widely accepted as a codification of

customary international law,168 contain the relevant rule. Article 41 of the Articles on State

Responsibility explains the obligations that states have when another state commits a “serious

breach of a peremptory norm”.169

Euroasia committed a serious breach of a peremptory norm. As explained above when

discussing Claimant’s nationality (para. 25), the prohibition of use of force is a peremptory

norm.170 A breach is furthermore “serious” – as defined by Article 40(2) – if it is a

“systematic” breach, which means that the violation has “to be carried out in an organized

and deliberate way”.171 Here, Euroasia invaded Eastasia in an organised manner and

deliberately violated its territorial integrity by sending troops into the territory.

166 PO2, para.3. 167 Talmon, The Duty Not to ‘Recognize as Lawful’, p.121. 168 Crawford, State Responsibility, para.31; Llamzon, Corruption in International Investment Arbitration,

para.10.12; Hobér in The Oxford Handbook on International Investment Law, p.550. 169 Articles on State Responsibility, Article 40. 170 See only Nicaragua v USA, para.190; Crawford, The Creation of States in International Law, p. 146;

Pomson/Horowitz, Humanitarian Intervention and the Clean Hands Doctrine in International Law, p.224. 171 Commentary on Draft Articles on State Responsibility, Article 40, para.8.

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Article 41 of the Articles on State Responsibility was thus triggered. In its paragraph 2 it

states:

“No State shall recognize as lawful a situation created by a serious breach within

the meaning of article 40, nor render aid or assistance in maintaining that

situation.”172

Weapons from Oceanian territory would to this day continue to fuel the dispute in Fairyland,

had Oceania not introduced the Executive Order. The contract between Claimant and the

Euroasian Ministry of Defence was aimed at the supply of weapons for the Euroasian army

for another six years.173 These weapons would be delivered to Euroasian troops annexing

Fairyland. Allowing such weapons to be exported from its territory to the aggressor Euroasia

would mean to “render aid or assistance in maintaining a situation created by a serious

breach”. Introducing the Executive Order was consequently in fulfilment of Respondent’s

obligation not to render aid to the aggressor.

Thus, Respondent is in any event exempt from liability under Article 10 Euroasia BIT.

In summary, the Executive Order issued by Respondent did not expropriate Claimant because

the threshold for expropriation was not met. If the Tribunal were to disagree on this point, the

Executive Order could still not be classified as an expropriation because it was a legitimate

exercise of Respondent’s police powers. In any event, the Executive Order is justified under

Article 10 Euroasia BIT, because Respondent was under an obligation not to render assistance

to Euroasia.

F Claimant contributed to the damages he suffered

Even if the Tribunal finds that Respondent expropriated Claimant, Respondent is not liable to

pay the full 120,000,000 USD which Claimant demands as damages. It was Claimant’s own

negligent conduct that made him a target of the sanctions.

The doctrine of “contributory negligence” is part of the law on state responsibility and is

codified in Article 39 of the Articles on State Responsibility.

172 Emphasis added. 173 Uncontested Facts, para.15.

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The article states:

“In the determination of reparation, account shall be taken of the contribution to

the injury by willful or negligent action or omission of the injured State or any

person or entity in relation to whom reparation is sought.”174

It is uncontroverted that this rule applies to investor claims for compensation against the

state.175 Consequently, the Tribunal should consider whether Claimant contributed to his

damages by a wilful or negligent action. Respondent submits that Claimant acted negligently

when he concluded a second weapons supply contract with Euroasia one day before

Euroasia’s aggression against Fairyland (1). This negligent conduct caused Claimant’s

damage (2).

1 Concluding the new weapons supply contract was negligent

Claimant negligently made himself a target of the Executive Order by concluding the second

weapons supply contract in February 2014.

Negligence is defined as behaviour “which manifest[s] a lack of due care on the part of the

victim of the breach for his or her own property or rights”.176 In this case Claimant entered

into the contract despite it being public knowledge that Euroasia would most likely invade

Fairyland in clear violation of Eastasia’s territorial integrity. It was reasonably foreseeable

that Oceania would adopt countermeasures to try and prevent an escalation in the region. A

reasonable arms producer would consequently have refrained from such a contract in “due

care […] for his or her own property and rights”.

Public knowledge of Euroasia’s invasion plans is evidenced by various factors:

First, Euroasia had long advocated for Fairyland’s right to self-determination.177 Second, the

Fairyland referendum held on 1 November 2013 specifically posed the question of “re-

unification” with Euroasia.178 After the unlawful referendum in Fairyland there was an

official letter by Fairyland to Euroasia asking for intervention, sent on 23 January 2014.179

174 Emphasis added. 175 Occidental v Ecuador, para.678; Yukos v Russia, para.1633; MTD v Chile, para.178; Gemplus and

Talsud v Mexico, para.11.12. 176 Commentary on Draft Articles on State Responsibility, Article 39, para.5. 177 PO2, para.3. 178 Uncontested Facts, para.14. 179 Uncontested Facts, para.14; PO2, para.3.

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Third,

“the deliberations of the Euroasian Parliament on the Government’s proposal to

intervene included discussion of the Fairyland letter of 23 January 2014

requesting Euroasia’s assistance and were broadcast on Euroasian public

television.”180

It was therefore public knowledge that Euroasia was well positioned to use armed force

against Eastasia. This information alone would warrant a finding that Claimant was negligent

to continue selling arms to Euroasia.

Claimant, however, even had special ties to the Euroasian military. It is uncontested that

Claimant was a close personal friend of John Defenceless, the Euroasian Minister of

Defence.181 It is further uncontested that Peter Explosive met with John Defenceless in

February to negotiate the new weapons supply contract. In fact, only one day after the

contract was concluded on 28 February 2014, Euroasia invaded Fairyland.182

It can reasonably be assumed from this timeline that Claimant knew that Euroasia was poised

to invade Eastasia. A reasonable investor in his position should have foreseen an international

condemnation of the invasion including restrictive measures in response to the aggression.

Under these specific circumstances, it was negligent to negotiate and enter into the weapons

supply contract of February 2014.

2 The negligence contributed to Claimant’s damage

Claimant’s negligence is the sole reason why he became a target of the sanctions. The

Tribunal should note that the order was carefully drafted to only target persons who supported

Euroasian military readiness. It only applies to “persons operating in such sectors of the

Euroasian economy such as [list of sectors closely related to military readiness]”.183 The list

includes “defence, in particular arms production”.184

Thus, Claimant was not affected by the sanctions merely because he was an arms producer.

He was affected because he was an arms producer “operating in the Euroasian economy”.

Claimant was “operating in the Euroasian economy” solely because of the newly formed

weapons supply contract. There was no other link; the old supply contract expired in January

180 PO2, para.3, emphasis added. 181 Uncontested Facts, para.8. 182 Uncontested Facts, paras.15, 14; PO2, para.4. 183 ExC2, p.52, Section 1(a)(i), emphasis added. 184 ExC2, p.52, Section 1(a)(i), emphasis added.

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2014 (prior to the Executive Order of 1 May 2014). Therefore, it was Claimant’s new contract

– Claimant’s negligent conduct – that made him a target of the sanctions.

Due to the fact that Claimant would not have been targeted had he not acted negligently,

Respondent submits that the proportion of contribution be assessed at 100%. If the Tribunal

were to disagree on this point then, at the very least, the value of the negligently concluded

weapons supply contract must be deducted from Claimant’s loss.

To sum up, even if the Tribunal were to find that Claimant is in principle entitled to damages,

Claimant’s award should be reduced by the percentage of his own contribution. This

contribution is in fact 100% and should therefore lead to the rejection of Claimant’s claim. In

any event, the damage claim should be reduced by the value of the most recent weapons

supply contract with Euroasia.

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G Request for Relief

For the reasons set out above, Respondent respectfully requests that the Tribunal

(1) find that it does not have jurisdiction because

(a) Claimant is not an investor pursuant to Article 1(2) Euroasia BIT;

(b) Claimant was required to comply with the pre-arbitral steps as provided in

Article 9 Euroasia BIT prior to bringing his claims before this Tribunal and

failed to do so; and

(c) Claimant may not invoke Article 8 Eastasia pursuant to Article 3 Euroasia

BIT.

(2) find that

(a) Claimant did not make a protected investment;

(b) Respondent is not liable to pay compensation for an expropriation; and

(c) Claimant contributed to the damages his investment suffered.

Respectfully submitted on 26 September 2016

/s/

Team Mbaye

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