MEMORIAL FOR RESPONDENT - FDI Moot€¦ · MEMORIAL FOR THE RESPONDENT ARMAND ix ARBITRAL DECISIONS...

Team Armand

THE LONDON COURT OF INTERNATIONAL ARBITRATION

MEMORIAL FOR RESPONDENT

ON BEHALF OF

Republic of Barancasia

c/o Pierre-Maurice Skolil

Procurator of the Treasury,

Ministry of Finance

Valhallavegen 2-4

1010 Gamla-Uppsala

Barancasia

RESPONDENT

AGAINST

Vasiuki LLC

Helios Boulevard 1100

2401 Ville-de-Ra

Federal Republic of Cogitatia

CLAIMANT

MEMORIAL FOR THE RESPONDENT ARMAND

i

TABLE OF CONTENTS

TABLE OF CONTENTS i

LIST OF ABBREVIATIONS iii

LIST OF AUTHORITIES iv

PRELIMINARY MATTERS 1

I. STATEMENT OF FACTS 1

II. SUMMARY OF ARGUMENTS 5

III. APPLICABLE LAWS AND RULES 7

ARGUMENTS 9

I. THE ARBITRAL TRIBUNAL HAS NO JURISDICTION TO HEAR THIS DISPUTE 9

1. The Tribunal has no jurisdiction to hear this dispute because Barancasia terminated the

BIT through notice on 29 June 2007, which was given before the Claimant’s investments

were made 9

A. Barancasia was entitled to terminate the BIT on the basis of VCLT Article 62 9

(i) Joining the EU was a supervening change of circumstances 10

(ii) The change to exclusive EU competence over Barancasia’s investment policy was

fundamental 10

(a) The change in the rules governing the movement of capital between Member

States was fundamental 11

(b) The change in the rules governing dispute settlement was fundamental 12

(c) The change in the rules governing the equal treatment of investors was

fundamental 13

(iii) The Contracting Parties did not foresee joining the EU in 2004 when they

concluded the BIT in 1998 13

(iv) The Contracting Parties signed the BIT because of the particular obligations it

created, and those obligations changed as a result of joining the EU 14

(v) After accession to the EU, the remaining investment obligations of Barancasia are

radically transformed 15

B. Barancasia was also entitled to terminate the BIT in accordance with VCLT Article 59 16

C. The arbitration clause in the BIT is inapplicable in accordance with VCLT Article

30(3) 17

D. Barancasia’s notice on 29 June 2007 terminated the BIT before the Claimant’s

investments were made. 17

II. BARANCASIA DID NOT BREACH BIT ARTICLE 2 20

1. Barancasia provided FET to the Claimant’s investments 20


ii

A. The Claimant’s expectation for the feed-in tariff rate to remain static was not

legitimate 20

(i) The Claimant’s expectation that the feed-in tariff would remain unchanged is not

reasonable 20

(ii) The Claimant did not adequately account for Barancasia’s sovereign power to

regulate in the public interest when forming their expectations 22

B. Barancasia did not deny justice or due process to the Claimant’s Alpha project 23

C. Barancasia did not deny justice or due process to the Claimant’s Alpha project 24

D. Barancasia did not deny justice or due process to the Claimant’s Alpha project 25

2. Barancasia observed its obligation with regard to the specific investments of the

Claimant in accordance with Article 2(3) 25

A. The Claimant must provide clear and convincing evidence for a broad interpretation

of the umbrella clause 26

B. In the absence of a stabilization clause, the umbrella should not be interpreted in a

way that implicitly freezes the LRE 27

III. THE TRIBUNAL SHOULD NOT ORDER BARANCASIA TO REPEAL THE

AMENDMENT TO LRE ARTICLE 4 OR TO CONTINUE TO PAY THE CLAIMANT

THE 0.44 EUR/kWh TARIFF 29

A. Arbitral tribunals do not have the power to award restitution or specific performance

in international investment law 29

B. An order for restitution or specific performance would impose a disproportionate

burden on Barancasia. 31

IV. THE TRIBUNAL SHOULD REJECT THE CLAIMANT’S CALCULATIONS FOR

COMPENSATION 33

A. No damages should be awarded with respect to Project Alpha because there is no

causal connection between the LRE and Project Alpha 33

B. The discounted cash flow (DCF) method is not an appropriate way to value the losses

suffered by the Claimant with respect to the Alpha, Cluster, and additional planned

projects 34

C. If the DCF method is used, cash flows to equity should be discounted at the cost of

equity 35

D. Any award to the Claimant for expenditures on the Cluster project should be reduced

to take into account potential mitigation 36

PRAYER FOR RELIEF 37


iii

LIST OF ABBREVIATIONS

BIT Barancasia-Cogitatia Bilateral Investment Treaty

BEA Barancasia Energy Authority

CCP EU Common Commercial Policy

CIL Customary International Law

DCF Discounted Cash Flow

EC European Community

EU European Union

FDI Foreign Direct Investment

FET Fair and Equitable Treatment

LRE Law on Renewable Energy

NAFTA North American Free Trade Agreement

RSPS Regulation on the Support of the Photovoltaic Sector

TEC Treaty Establishing the European Community

TFEU Treaty on the Functioning of the European Union

VCLT Vienna Convention on the Law of Treaties

WACC Weighted Average Cost Of Capital


iv

LIST OF AUTHORITIES

TREATIES

RULES

SCHOLARLY WORKS AND ARTICLES

Aust Aust, Anthony, Modern Treaty Law

and Practice (Cambridge University

Press 2007)

38

Bombassaro Bombassaro, Brian and Patricio

Grané, ‘Umbrella Clause Decisions:

The Class of 2012 and a Remapping

of the Jurisprudence’, Kluwer

Arbitration Blog (17 January 2013)

94

Short form Full citation Cited in para.

Swiss-Pakistan BIT Agreement between the Swiss

Federation and the Islamic Republic

of Pakistan on the Promotion and

Reciprocal Protection of Investments

(signed 7 November 1995, in force 5

June 1996)

94

BIT Barancasia-Cogitatia Bilateral

Investment Treaty

Sic passim

TFEU Consolidated version of the Treaty

on the Functioning of the European

Union, October 26, 2012, OJ C

326/49

43, 44, 45, 47, 50, 57,

58, 59, 60

VCLT Vienna Convention on the Law of

Treaties, 23 May 1969, 1155 UNTS

331 (in force 27 January 1980)

Sic passim

LCIA Rules London Court of International

Arbitration Rules (2014)

Sic passim


v

Brower Brower II, Charles H, ‘Corporations

as Plaintiffs Under International

Law: Three Narratives about

Investment Treaties’ [2011] Santa

Clara J Int'l L 179

81

Corten Corten, Oliver and Pierre Klein, eds,

The Vienna Convention on the Law

of Treaties (Oxford 2011)

40

Crawford Second Report Crawford, James, Special Rapporteur

to the International Law

Commission, Second Report on State

Responsibility, UN Doc A/CN 4/498

(17 March 1999)

88

Crawford ILC Crawford, James, The International

Law Commission’s Articles on State

Responsibility: Introduction, Text

and Commentaries (Cambridge

University Press 2002)

40, 105

Crawford Treaty and

Contract

Crawford, James, ‘Treaty and

Contract in Investment Arbitration’

[2009] 1 TDM at 20

96, 97, 98,

Dolzer and Schreuer Dolzer, Rudolf and Christoph

Schreuer, Principles of International

Investment Law (Oxford University

Press 2012)

34,36, 78, 79

Dörr and Schmalenbach Dörr, Oliver and Kirsten

Schmalenbach, eds, Vienna

Convention on the Law of Treaties:

A Commentary (Springer 2012)

38, 40, 52, 55, 58, 66,

67

Douglas Douglas, Zachary, ‘The Hybrid

Foundations of Investment Treaty

Arbitration’ (2003), 74 BYIL 151

105

Dumberry Dumberry, Patrick, ‘International

Investment Contracts’ in

International Investment Law: The

Sources of Rights and Obligations,

Tarcisio Gazzini and Eric De

Brabandere, eds, Martinus Nijhoff

Publishers (Leiden 2012)

94


vi

Dumberry Arbitrary

Conduct

Dumberry, Patrick, ‘The Prohibition

Against Arbitrary Conduct’ [2014]

JWIT 117

91

Endicott Endicott, Martin, ‘Remedies in

Investor-State Arbitration:

Restitution, Specific Performance

and Declaratory Awards’ in Philippe

Kahn & Thomas Wälde, eds, New

Aspects of International Investment

Law (2007)

105, 106

Garner Garner, Bryan, ed, Black’s Law

Dictionary, 10th edition (Thomson

Reuters 2014)

43

Gazzini Gazzini, Tarcisio, ‘Bilateral

Investment Treaties’ in International

Investment Law: The Sources of

Rights and Obligations, Tarcisio

Gazzini and Eric De Brabandere,

eds, Martinus Nijhoff Publishers

(Leiden 2012)

84, 86

Gray Gray, Christine, ‘The Choice

Between Restitution and

Compensation’, 10 Eur J Int’l L 413

103, 104

Johnson Johnson, Lise and Oleksandr

Volkov, ‘Investor-State Contracts,

Host-State “Commitments” and the

Myth of Stability in International

Law’, [2013] 361 AMRIARB at 372

96

Julliard Julliard, Patrick, ‘Bilateral

Investment Treaties in the Context of

Investment Law’. [2001] OECD 1

53

Kantor Kantor, Mark, Valuation for

Arbitration: Compensation

Standards, Valuation Methods and

Expert Evidence (Kluwer Law

International 2008)

113, 115, 118

Mann Mann, FA, ‘British Treaties for the

Promotion and Protection of

Investments’ in British Yearbook of

97


vii

International Law (Oxford

University Press 1981)

Mathijsen 6th edition Mathijsen, Pierre, A Guide to

European Union Law, 6th edition

(Sweet & Maxwell 1995)

43, 45, 48

Mathijsen 9th edition Mathijsen, Pierre, A Guide to

European Union Law, 9th edition

(Sweet & Maxwell 2007)

43

Narbone Narbone, Luigi and Nathalie Tocci,

‘Running around in circles? The

cyclical relationship between Turkey

and the European Union’, [2009]

JSEB 233

50

Raworth Raworth, Philip, Introduction to the

Legal System of the European Union

(Oceana 2001)

43

Reinisch Reinisch, August, ‘The EU on the

Investment Path – Quo Vadis

Europe? The Future of EU BITs and

other Investment Agreements’,

[2013] Santa Clara J Int’l L 111

44, 56

Ripinsky Ripinsky, Sergey with Kevin

Williams, Damages in International

Investment Law (British Institute of

International and Comparative Law

2008)

102

Sabahi Sabahi, Borzu, Compensation and

Restitution in Investor-State

Arbitration: Principles and Practice

(Oxford University Press 2011)

103

Schill Schill, Stephan W, ‘General

Principles of Law’ in International

Investment Law: The Sources of

Rights and Obligations, Tarcisio

Gazzini and Eric De Brabandere,

eds, Martinus Nijhoff Publishers

(Leiden 2012)

79

Shaw Shaw, Malcom and Caroline

Fournet, ‘Volume II, Part V

Invalidity, Termination and

40


viii

Suspension of the Operation of

Treaties, s.3 Termination and

Suspension of the Operation of

Treaties, Art. 62 1969 Vienna

Convention’, in Olivier Corten and

Pierre Klein, eds, The Vienna

Convention on the Law of Treaties

(Oxford 2011)

Sheppard Sheppard, Stephen, ed, The Wolters

Kluwer Bouvier Law Dictionary,

Desk Edition, Volume 1 (Wolters

Kluwer 2012)

43

Snodgrass Snodgrass, Elizabeth, ‘Protecting

Investors’ Legitimate Expectations:

Recognizing and Delimiting a

General Principle’, (2006) 21 ICSID

Rev

78

Tietje Tietje, Christian, ‘Bilareral

Investment Treaties Between EU

Member States (Intra-EU BITs) –

Challenges in the Multilevel System

of Law’, [2013] Transnational

Dispute Management 1

45, 59, 64

Wälde Wälde, Thomas, ‘The “Umbrella

Clause” in Investment Arbitration –

A Comment on Original Intentions

and Recent Cases’, [2005] 1 JWIT at

26

94

Wong Wong, Jarrod, ‘Umbrella Clauses in

bilateral investment treaties: of

breaches of contract, treaty violations

and the divide between developing

and developed countries in foreign

investments disputes’, [2006] Geo

Mason L Rev 135

94


ix

ARBITRAL DECISIONS

AAPL AAPL v Sri Lanka, ICSID Case No

ARB/87/3, Award (27 June 1990)

113

Achema Achema BV (formerly Eureko BV) v

The Slovak Republic, UNCITRAL

PCA Case No 2008-13, Preliminary

Decision of the German Federal

Supreme Court (19 September 2013)

45

ADC Affiliate ADC Affiliate v Hungary, ICSID

Case No ARB/03/16, Award of the

Tribunal (2 October 2006)

30, 34

Autopista Autopista v Venezuela, ICSID Case

No ARB/00/5, Award (23 September

2003)

113

Azurix Azurix v Argentine Republic, ICSID

Case No ARB/01/12, Decision on

Jurisdiction (8 December 2003)

30

Biwater Gauff Biwater Gauff (Tanzania) Limited v

United Republic of Tanzania, ICSID

Case No ARB/05/22, Award (24 July

2008)

21

Continental Casualty Continental Casualty Company v

Argentine Republic, ICSID Case No

ARB/03/9, Award (5 September

2008)

81, 83

CME CME v Czech Republic,

UNCITRAL, Final Award (14 May

2003)

118

CMS Award CMS Gas Transmission Company v

Argentina, ICSID Case No

ARB/01/8, Award (25 April 2005)

99

CMS Annulment CMS Gas Transmission Company v.

Argentina, ICSID Case No

ARB/01/8, Decision of the ad hoc

Committee on the Application for

Annulment of the Argentine

Republic (September 25 2007)

98

Duke Duke Energy Electroquil Partners &

Electroquil SA v Republic of

Ecuador, ICSID Case No

78


x

ARB/04/19, Award (18 August

2008)

Eastern Sugar Eastern Sugar BV (Netherlands) v

The Czech Republic, UNCITRAL

Rules, SCC Case No 088/2004,

Partial Award (27 March 2007)

29, 55, 56

EDF EDF (Services) Limited v Romania,

ICSID Case No ARB/05/13, Award

(8 October 2009)

78

Electrabel Electrabel SA v The Republic of

Hungary, ICSID Case No

ARB/07/19, Decision on

Jurisdiction, Applicable Law and

Liability (30 November 2012)

45, 59, 66

El Paso Award El Paso Energy International

Company v Argentina, ICSID Case

No ARB/03/15, Award (27 October

2011)

78, 82, 83

El Paso Decision on

Jurisdiction

El Paso Energy International

Company v Argentina, ICSID Case

No ARB/03/15, Decision on

Jurisdiction (27 April 2006)

95

Enron v Argentina Enron Corporation and Ponderosa

Assets v Argentina, ICSID Case No

ARB/01/3, Decision on Jurisdiction

(Ancillary Claim) (2 August 2004)

34, 91, 118

Eureko Eureko BV v The Slovak Republic,

UNCITRAL PCA Case No 2008-13,

Award on Jurisdiction, Arbitrability

and Suspension (26 October 2010)

45, 46, 59, 64

Gami Gami Investments, Inc v Mexico,

UNCITRAL, Award (15 November

2004)

84, 86, 91

Thunderbird Int'l Thunderbird Gaming Corp v

United Mexican States, UNCITRAL,

Award (3 November 2008)

78

Joy Mining Joy Mining Machinery Limited v The

Arabic Republic of Egypt, ICSID

Case No ARB/03/11, Award on

Jurisdiction (August 6 2004)

100


xi

LG&E Award LG&E v Argentina, ICSID Case No

ARB/02/1, Damages Award (25 July

2007)

108, 111, 109, 112

LG&E Liability LG&E v Argentina, ICSID Case No

ARB/02/1, Decision on Liability (3

October 2006)

30

Metalclad Award Metalclad v Mexico, ICSID Case No

ARB(AF)/97/1, Award (30 August

2000)

113

Mobil Mobil Investments Canada Inc and

Murphy Oil Corporation v Canada,

ICSID Case No ARB(AF)/07/04,

Decision on Liability (May 22, 2012)

82, 83

MTD v Chile MTD Equity and MTD Chile v Chile,

ICSID Case No ARB/01/7, Award

(25 May 2004)

34

Noble Noble Ventures v Romania, ICSID

Case No ARB/01/11, Award (12

October 2005)

113

Parkerings Parkerings-Compagniet AS v

Lithuania, ICSID Case No

ARB/05/8, Award on Jurisdiction

and Merits (14 August 2007)

78

Saluka Saluka Investments BV (The

Netherlands) v Czech Republic,

UNCITRAL, Partial Award (17

March 2006)

78

SD Myers SD Myers, Inc v Canada,

UNCITRAL, First Partial Award (13

November 2000)

84, 86

SGS Société Générale de Surveillance SA

v Islamic Republic of Pakistan,

ICSID Case No. ARB/01/13,

Decision of the Tribunal on

Objections to Jurisdiction (6 August

2003)

94

Sola Tiles

Sola Tiles, Inc v Islamic Republic of

Iran, Iran-US Claims Tribunal,

Award (22 April 1987), 14 Iran-US

CTR 223

113


xii

SPP SPP (ME) v Egypt, Award (20 May

1992), (1997) 106 ILR 502

113

Starrett Housing Corp Starrett Housing Corp v Islamic

Republic of Iran, Iran-US Claims

Tribunal, Award (14 August 1987)

118

Tokios Tokios Tokeles v Ukraine, ICSID

Case No ARB/02/18, Decision on

Jurisdiction (29 April 2004)

34

COURT DECISIONS

Elide Gottardo Case C-55/00 Elide Gottardo v Istituto

nazionale della previdenza sociale

(INPS) [2002] ECR I-433

47, 48, 60

Commission v Finland Case C-118/07 Commission v.

Finland, [2009] ECR I-10889

43, 48

Commission v Austria Case C-205/06 Commission v. Austria

[2009] ECR I-1301

43, 48

Annunziata Matteucci Case 235/87 Annunziata Matteucci v

Communauté française of Belgium

[1988] ECR 5606

44, 47, 48, 60

Commission v Sweden Case C-249/06 Commission v. Sweden

[2009] ECR I-1335

43, 47, 48

D v Inspecteur Case 376/03 D v Inspecteur van de

Balestingdienst/Particulieren/Onderne

mingen buitenland te Heerlen [2005]

ECR I-05821

47, 48, 60

Gabčíkovo-Nagymaros Case Concerning the Gabčíkovo-

Nagymaros Project

(Hungary/Slovakia) [1997] ICJ Rep

1997

52, 55

Fisheries Jurisdiction Fisheries Jurisdiction (Germany v

Iceland) [1973] ICJ Rep 175

40, 55

OTHER SOURCES

European Commission

Press Release

‘Commission asks Member States to

terminate their intra-EU bilateral

44


xiii

investment treaties’, European

Commission Press Release (18 June

2015)

Conclusions of the

Presidency

‘Conclusions of the Presidency’,

European Council in Copenhagen (21-

22 June 1993)

50

Draft Articles ‘Draft Articles on the Law of Treaties

with Commentaries’, [1966] Yearbook

of the International Law Commission,

vol. II

40

Hepburn and Peterson Hepburn, Jarrod and Luke Eric

Peterson, ‘Stage is set for infringement

proceedings over intra-EU BITs, as

informal process between European

Commission and three member-states

fail to resolve EC’s concerns’,

International Arbitration Reporter (2

June 2015)

56

ILC Articles International Law Commission’s

Articles on Responsibility of States for

Internationally Wrongful Acts, in

Report of the International Law

Commission on the Work of its Fifty-

third Session, UN GAOR, 56th Sess,

Supp No 10 at 43, UN Doc A/56/10

(2001)

105, 107, 111

OECD Austria OECD Economic Surveys, Austria

1995 (OECD 1995)

50

OECD Finland OECD Economic Surveys, Finland

1995 (OECD 1995)

50

OECD Sweden OECD Economic Surveys, Sweden

1995 (OECD 1995)

50

OECD Umbrella Clause OECD, ‘Interpretation of the Umbrella

Clause in Investment Agreements’, in

International Investment Law:

Understanding Concepts and Tracking

Innovations: A Companion Volume to

International Investment Perspectives

(OECD Publishing 2008)

100


xiv

Peterson Peterson, Luke Eric, ‘EC asks

member-states to signal by year’s end

whether they will terminate their intra-

EU investment treaties; spectre of

legal action looms’, International

Arbitration Reporter (20 October

2010)

56

UN Conference, Law of

Treaties

UN Conference on the Law of

Treaties, ‘Summary Records of the

Second Session’ (9 April – 22 May

1969) UN Doc A/CONF/39/11/Add.1

38

UN Conference, Trade

and Development

United Nations Conference on Trade

and Development, ‘Fair and Equitable

Treatment’, Series on International

Investment Agreements II, United

Nations (UN 2012)

109


1

PRELIMINARY MATTERS

I. STATEMENT OF FACTS

Overview

1. This dispute stems from a state’s need to regulate in the face of changing socio-economic

conditions. Vasiuki, the Claimant, is an energy company that invested in the energy sector

of Barancasia, the Respondent. The Claimant’s investments were based on Barancasian

legislation intended to promote renewable energy development and innovation. After the

introduction of new technology which dramatically increased the profitability of renewable

energy production, members of the Barancasian public demanded changes to this

renewable energy legislation. In light of changing public opinion, Barancasia altered the

fixed feed-in tariff rate that the legislation offered to renewable energy providers. The

Claimant now seeks compensation for what it perceives as Barancasia reneging on its

commitment.

The Introduction of the Law on Renewable Energy

2. Aiming to encourage the development and introduction of innovative renewable energy

technology, and improve the security and diversification of its energy supply, Barancasia

adopted the Law on Renewable Energy (LRE) in May 2010.

3. The LRE authorized the Barancasia Energy Authority (BEA) to issue licences to renewable

energy providers, who would then receive a feed-in tariff for power supplied to the grid.

The tariff was fixed for a period of twelve years from the date the license was issued and

was premised on an 8% average annual return on investment for licensed renewable

projects.

4. The LRE encouraged the production of energy from renewable sources by state measures

until the proportion of electricity generated from renewable sources amounted to no less

than 20% of the country’s gross consumption of energy.

5. The Regulation on the Support of the Photovoltaic Sector (RSPS) implemented the LRE,

providing detailed procedures for calculating and applying the feed-in tariff.

6. On 1 July 2010, the BEA publicly announced that the fixed feed-in tariff rate would be set


2

at 0.44 EUR/kWh.

7. The Claimant was incorporated in 2002 under the laws of Cogitatia. It is an energy

company engaged in the development, construction, and operation of small-scale fossil fuel

and wind turbine generation facilities in Cogitatia and the surrounding region.

8. The Claimant purchased land plots in Barancasia and launched an experimental solar

energy project named “Alpha” in May 2009. Alpha was connected to the Barancasian

power grid and became operational on 1 January 2010. The project operated at a loss due

to defects in the installation and budget overruns.

9. The BEA declined to grant the feed-in tariff rate to the Claimant’s Alpha project on 25

August 2010, because the fixed feed-in tariff would only be available for new projects.

The Claimant was eligible to file a subsequent claim with the administrative courts, but did

not do so.

10. On the same date, the Claimant obtained a license for its second project, “Beta”, which

became operational on 30 January 2011.

The Introduction of Innovative Technology

11. Ground-breaking technology introduced in 2011 made solar panels cheaper to manufacture

and develop, dramatically increasing profits for renewable energy producers.

12. Soon after, the Claimant decided to launch twelve additional solar energy projects (the

Cluster projects) using the new technology. The Cluster projects were individually named

“Chi”, “Delta”, “Digama”, “Dzeta”, “Epsilon”, “Eta”, “Fi”, “Gama”, “Ipsilon”, “Jota”,

“Kapa”, and “Kopa”. On 1 September 2011 the Claimant borrowed substantial sums of

money in order to acquire land plots for the Cluster projects. The Claimant also obtained

the necessary construction permits. Licences were issued to the Cluster projects on 1 July

2012 with a fixed feed-in tariff rate of 0.44 EUR/kWh. The Claimant then ordered solar

panels and started construction of the photovoltaic installations.

13. The BEA received over 7000 applications for licenses to develop new photovoltaic power

plants. If all 7000 applications were approved, up to 15% of Barancasia’s revenue would

be diverted to finance solar feed-in tariffs, a higher share of government revenues than is

allocated to Barancasia’s education system.

14. From the beginning of 2012 Barancasia realized that the LRE had created a “solar bubble”,


3

and that the whole renewable energy support scheme was unsustainable and amounted to

an unfair windfall for developers.

15. In June 2012 Barancasian teachers organized national strikes demanding increased salaries

and educational funding. Opinion polls suggested that the Barancasian public supported

the belief that the government should treat teachers better than solar panels. Barancasia

promised to review the LRE.

16. At Energy Committee hearings held in November 2012, both national entrepreneurs and

foreign investors totalling a significant share of the local renewables market discussed LRE

reform. The Claimant was not present.

17. Subsequently, on 3 January 2013 Barancasia amended LRE Article 4, allowing the BEA

to annually review the feed-in tariff while “taking into account the costs of the best

available technology”.

18. The BEA then announced that the new annual feed-in tariff would be set at 0.15 EUR/kWh,

a reduction from the original tariff rate that still allowed for at least an 8% return on

investments. The amendment entered into force on 5 January 2013 and applied from 1

January 2013. It applied retroactively to the Beta and Cluster projects.

19. By this time, the Claimant had invested in the Cluster projects, including borrowing money,

buying land plots, hiring personnel, and paying advances for equipment that was shipped

on 31 January 2013.

The Bilateral Investment Treaty

20. Barancasia and Cogitatia are rapidly developing countries that are implementing wide-

ranging social and economic reforms.

21. On 31 December 1998 the Barancasia and Cogitatia signed an Agreement for the

Promotion and Reciprocal Protection of Investments (BIT), which entered into force on 1

August 2002. Both States ratified the Vienna Convention on the Law of Treaties (VCLT)

before 31 December 1998.

22. Both States joined the European Union (EU) on 1 May 2004, after which Barancasia

reviewed its Intra-EU BITs and decided that they had become obsolete.

23. On 29 June 2007 Barancasia notified Cogitatia of its intent to immediately terminate the

BIT. Three months later, on 28 September 2007, the Minister of Foreign Affairs of


4

Cogitatia confirmed receipt of Barancasia’s notice.

24. When asked by the press about its Intra-EU BITs on 21 November 2010, a spokesperson

from the Barancasian Foreign Ministry stated that Barancasia had informally attempted to

contact Cogitatia to confirm the BIT’s termination, most recently on 3 November 2010,

but that it had not received a response as of 21 November 2010.

25. On 20 April 2014 the Claimant asserted that Barancasia had violated the BIT by reducing

the guaranteed tariff rate and breaching its commitment to fix the initial rate for twelve

years. The Claimant stated its intention to pursue legal remedies under the BIT if the

dispute was not resolved. Barancasia declined negotiations. The Claimant has commenced

these arbitration proceedings under Article 8 of the BIT.


5

II. SUMMARY OF ARGUMENTS

26. JURISDICTION. The Tribunal has no jurisdiction to hear this dispute because Barancasia

gave notice to terminate the BIT on 29 June 2007, which was given before the Claimant’s

investments were made. First, Barancasia was entitled to terminate the treaty on the basis

of VCLT Article 62, because joining the EU in 2004 was a fundamental change in

circumstance. Accession to the EU fundamentally changed Barancasia’s investment

regime. Second, the BIT and the TFEU deal with the same subject matter and cannot be

applied at the same time. VCLT Article 59 states that when two treaties deal with the same

subject matter and are incapable of being applied at the same time, the earlier treaty is

terminated in favour of the latter treaty. Third, if the Tribunal finds the BIT was not

terminated in accordance with VCLT Article 59, VCLT Article 30(3) then applies. VCLT

Article 30(3) states that the earlier treaty applies only to the extent that its provisions are

compatible with the later treaty. The BIT and TFEU contain contradicting dispute

settlement methods, and the arbitration clause in the BIT is therefore inapplicable in

accordance with VCLT Article 30(3). Fourth, Barancasia is entitled to terminate the BIT

on the basis of VCLT Article 62 or Article 59 because of its notice on 29 June 2007, which

satisfies the termination procedures in VCLT Article 65 and Article 67. This notice was

given before the Claimant’s investments were made.

27. MERITS. Barancasia did not breach BIT Article 2. First, Barancasia met its obligation to

provide FET under BIT Article 2(2) because Barancasia did not (A) fail to meet the

Claimant’s legitimate expectations, as the expectation was not legitimately held; (B) deny

justice or due process; (C) exhibit manifest arbitrariness; or (D) discriminate against the

Claimant’s investments. Second, Barancasia observed its obligation with regard to the

specific investments of the Claimant in accordance with Article 2(3), because (A) the

article should be narrowly interpreted so as to (B) not impute a stabilization clause into the

LRE.

28. DAMAGES. Barancasia should not be ordered to repeal the amendment to LRE Article 4

or to continue to pay the Claimant the 0.44 EUR/kWh feed-in tariff for twelve years. First,

arbitral tribunals do not have the power to award restitution or specific performance in

international investment law. Second, an order for restitution or specific performance


6

would impose a disproportionate burden on Barancasia.

29. If the Tribunal decides to award compensation, it should reject the calculations for

compensation made by the Claimant’s Expert and instead accept the calculations for

damages made by Barancasia’s Expert, Juanita Priemo. First, no damages should be

awarded with respect to Project Alpha because there is no causal connection between the

LRE and Project Alpha. Second, the discounted cash flow (DCF) method is not an

appropriate way to value the losses suffered by the Claimant with respect to the Alpha,

Cluster, and additional planned projects. Third, if the DCF method is used, cash flows to

equity should be discounted at the cost of equity. Fourth, any award to the Claimant for

expenditures on the Cluster project should be reduced to take into account potential

mitigation.


7

III. APPLICABLE LAWS AND RULES

30. This arbitration is brought under the BIT, which is therefore the primary source of law for

this tribunal.1 Signing a BIT is “tacit submission to its provisions” in the case of an

investment dispute.2

31. BIT Article 8(5)3 provides that in the event of a dispute, the investor can choose the rules

for arbitration. The Claimant has selected the 2014 London Court of International

Arbitration Rules (LCIA Rules).4 Therefore, the LCIA Rules as well as the Official Rules

of the Foreign Direct Investment International Arbitration Moot govern these proceedings.5

32. LCIA Rule 16.4 states that the law of the seat can prohibit application of other applicable

laws.6 The law of the seat, Dunedin, Caledonia, 7 does not preclude application of the LCIA

Rules. The facts are silent on the content of Caledonian law, and it is therefore inferred that

the law of the seat allows application of the LCIA Rules.

33. The BIT does not contain a choice of law clause. LCIA Rule 22.3 states that in the absence

this clause, the Tribunal may apply the governing law “which it considers appropriate”.8

34. The Tribunal should interpret the treaty in accordance with the norms of the Vienna

Convention on the Law of Treaties (VCLT). The VCLT is customary international law

(CIL) that has been accepted by both Barancasia and Cogitatia.9 Investment tribunals have

traditionally interpreted treaties using the VCLT, and this Tribunal should as well.10

35. In accordance with the VCLT, obligations under the BIT are to be interpreted in light of

1 Barancasia – Cogitatia BIT, Article 8 [hereinafter BIT]; Azurix v Argentine Republic ICSID Case No ARB/01/12,

Decision on Jurisdiction (8 December 2003) at paras 47–66; LG&E v Argentine Republic, ICSID Case No

ARB/02/1, Decision on Liability (3 October 2006) at para 99 [hereinafter LG&E Liability]; ADC Affiliate v Hungary

ICSID Case No ARB/03/16, Award of the Tribunal (2 October 2006) at para 290 [hereinafter ADC Affiliate]. 2 LG&E Liability at para 85. 3 BIT Article 8(5). This is the second provision of Article 8, which appears as 8(5) in the problem. 4 BIT Article 8(5)(d). 5 Problem, Procedural Order No 1 at 17. 6 London Court of International Arbitration Rules (2014), Rule 16.4 [hereinafter LCIA Rules]. 7 LCIA Rules, Rule 16.4. 8 LCIA Rules, Rule 22.3. 9 Problem, Procedural Order No 2 at 57. 10 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press

2012) at 28 [hereinafter Dolzer and Schreuer]; ADC Affiliate at para 290; Tokios Tokeles v Ukraine ICSID Case No

ARB/02/18, Decision on Jurisdiction (29 April 2004) at para 27; MTD Equity and MTD Chile v Chile ICSID Case

No ARB/01/7, Award (25 May 2004) at para 112 [MTD v Chile]; Enron Corporation and Ponderosa Assets v

Argentine Republic ICSID Case No ARB/01/3, Decision on Jurisdiction (Ancillary Claim) (2 August 2004) at para

32 [hereinafter Enron v Argentina].


8

other applicable international agreements.11 Therefore, the BIT is affected by the parties’

other international obligations, including obligations as members of the EU.12

36. Further, VCLT Article 31(1) provides: “a treaty shall be interpreted in good faith in

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

and in the light of its object and purpose”.13 This plain meaning approach is critical to treaty

interpretation.14 This Tribunal should therefore apply VCLT Article 31(1) to interpret this

BIT.15

11 Vienna Convention on the Law of Treaties, 23 May 1969, 1155 UNTS 331 (in force 27 January 1980), Article

31(3)(c) [hereinafter VCLT] 12 Problem, Statement of Uncontested Facts at para 5. 13 VCLT, Article 31(1). 14 Dolzer and Schreuer at 29. 15 Ibid at 28.


9

ARGUMENTS

I. THE ARBITRAL TRIBUNAL HAS NO JURISDICTION TO HEAR THIS DISPUTE

1. The Tribunal has no jurisdiction to hear this dispute because Barancasia

terminated the BIT through notice on 29 June 2007, which was given before the

Claimant’s investments were made

37. The arbitral tribunal has no jurisdiction to hear this dispute because: (A) Barancasia was

entitled to terminate the BIT on the basis of VCLT Article 62; (B) Barancasia was also

entitled to terminate the BIT in accordance with VCLT Article 59; (C) The arbitration

clause in the BIT is inapplicable in accordance with VCLT Article 30(3); and (D)

Barancasia’s notice on 29 June 2007 terminated the BIT before the Claimant’s

investments were made.

A. Barancasia was entitled to terminate the BIT on the basis of VCLT Article 62

38. A state may terminate a treaty in accordance with VCLT Article 62(1) if they can prove a

fundamental change in circumstances.16 In order to prove a fundamental change in

circumstances, the state must cumulatively meet five objective conditions: [1] there is a

supervening change of circumstances; [2] the change is fundamental; [3] the change was

not foreseen by the Parties when they concluded the original treaty; [4] the original terms

were a determining factor in the decision to sign the original treaty, and those terms have

now changed; and [5] the change radically transforms the states’ existing obligations under

the treaty.17

39. Circumstances have fundamentally changed since Barancasia signed the original BIT

because: (i) joining the EU was a supervening change of circumstances; (ii) it

16 VCLT Article 62(1). 17 VCLT Article 62(1); Oliver Dörr and Kirsten Schmalenbach, eds, Vienna Convention on the Law of Treaties: A

Commentary (Springer 2012) at 1078–1089 [hereinafter Dörr and Schmalenbach]; Anthony Aust, Modern Treaty

Law and Practice (Cambridge University Press 2007) at 298–299; UN Conference on the Law of Treaties,

‘Summary Records of the Second Session’ (9 April – 22 May 1969) UN Doc A/CONF/39/11/Add.1 at 119.


10

fundamentally changed the investment policy of both nations; (iii) the Contracting Parties

did not foresee joining the EU in 2004 when they concluded the BIT in 1998; (iv) the

Contracting Parties signed the BIT because of the particular obligations it created, and

those obligations changed as a result of joining the EU; and (v) after accession to the EU,

the remaining investment obligations of Barancasia are radically transformed.

(i) Joining the EU was a supervening change of circumstances

40. Joining the EU altered the circumstances that existed at the time the BIT was concluded.

A broad political transformation that radically changes the political alignment of a state is

accepted as a supervening change of circumstances within the meaning of VCLT 62(1).18

It is an objective change in the factual circumstances related to the treaty.19 The political

obligations of both states changed upon accession to the EU in May 2004. The EU holds

competence over common action and political obligations for all Member States, and no

Member State can legislate or enter into legally binding acts without being empowered by

the Union.20 Transferring competence over political alignment from Barancasia and

Cogitatia to the EU radically changed the obligations of both states from what they were

at the time the BIT was signed.21

(ii) The change to exclusive EU competence over Barancasia’s investment

policy was fundamental

41. A fundamental change must cause performance to be different from what was originally

undertaken.22 Acceding to the EU, which holds exclusive competence over Barancasian

investment policy, is a fundamental change in three key areas: (a) the movement of capital

between Member States; (b) dispute settlement; and (c) the equal treatment of investors.

18 ‘Draft Articles on the Law of Treaties with Commentaries’, [1966] Yearbook of the International Law

Commission, Vol II at 259; Dörr and Schmalenbach at 1082. 19 Malcolm Shaw and Caroline Fournet, ‘Volume II, Part V Invalidity, Termination and Suspension of the Operation

of Treaties, s.3 Termination and Suspension of the Operation of Treaties, Art. 62 1969 Vienna Convention’ in

Olivier Corten and Pierre Klein, eds, The Vienna Convention on the Law of Treaties (Oxford 2011) at para 24. 20 Consolidated version of the Treaty on the Functioning of the European Union, October 26, 2012, OJ C 326/49 (in

force 1 December 2009), Article 2 [hereinafter TFEU] 21 Fisheries Jurisdiction (Germany v Iceland), [1973] ICJ Rep 175 at para 32 [hereinafter Fisheries Jurisdiction]. 22 Ibid, at para 43.


11

42. The exclusive authority of the EU over investment at the time Barancasia and Cogitatia

joined the EU was provided for in the Treaty Establishing the European Community (TEC).

The relevant provisions of the TEC have been incorporated unchanged into the current

Treaty on the Functioning of the European Union (TFEU), which presently governs the

relations of EU Member States.

(a) The change in the rules governing the movement of capital between

Member States was fundamental

43. The EU’s exclusive jurisdiction over the free movement of capital and payment between

Member States fundamentally altered the investment obligations of Barancasia.23 Internal

investment policy in the EU is governed as a single market under EU common

commercial policy (CCP).24 TFEU Article 63 removes all restrictions on the internal

movement of capital and payments between Member States in order to promote

investment.25 Member States are required to conform their internal investment procedures

to TFEU Article 63.26 The effect is a single liberalised investment market for Member

States within the CCP, governed only by the provisions of the TFEU.27

44. Because of this single investment market, intra-EU BITs are incompatible with the CCP.

EU exclusive competence implies that only the EU can lawfully institute internal

investment rules between Member States that address the same subject matter as the

CCP.28 Internal investment relationships based on BITs between Member States are

contrary to this single market because Member States no longer have the ability to enter

individual investment agreements on their own.29 The European Community (EC) has

23 TFEU Article 63 24 Philip Raworth, Introduction to the Legal System of the European Union (Oceana 2001) at 29. 25 TFEU Article 63. For the definition of investment see Stephen Sheppard, ed, The Wolters Kluwer Bouvier Law

Dictionary, Desk Edition, Volume 1 (Wolters Kluwer 2012) at 1396; Bryan Garner, ed, Black’s Law Dictionary,

10th edition (Thomson Reuters 2014) at 954. 26 Pierre Mathijsen, A Guide to European Union Law, 6th edition (Sweet & Maxwell 1995) at 256 [hereinafter

Mathijsen 6th edition]; TFEU Article 63; Case C-118/07 Commission v Finland, [2009] ECR I-10889 [hereinafter

Commission v Finland]; Case C-249/06 Commission v Sweden [2009] ECR I-1335 [hereinafter Commission v

Sweden]; Case C-205/06 Commission v Austria [2009] ECR I-1301 [hereinafter Commission v Austria]. 27 Pierre Mathijsen, A Guide to European Union Law, 9th edition (Sweet & Maxwell 2007) at 257. 28 August Reinisch, ‘The EU on the Investment Path – Quo Vadis Europe? The Future of EU BITs and other

Investment Agreements’, [2013] Santa Clara J Int’l L, 111 at 119 [hereinafter Reinisch]. 29 Eastern Sugar BV (Netherlands) v The Czech Republic, UNCITRAL Rules, SCC Case No 088/2004, Partial

Award (27 March 2007) at para 126 [hereinafter Eastern Sugar].


12

reiterated the precedence of the TFEU over other agreements between Member States,

stating that there is “no need for agreements of this kind”.30 Consequently, the EC has

called for Member States to terminate their intra-EU BITs upon accession to the EU.31

(b) The change in the rules governing dispute settlement was fundamental

45. The TFEU does not allow for investment arbitration, making the method of dispute

settlement fundamentally different from what was originally undertaken.32 The TFEU

governs relationships between Member States and it does not contain provisions on

arbitration for foreign investors.33 Alternatively, intra-EU BITs do not provide for dispute

resolution before the ECJ, as established in TFEU Article 344.34 Member States are

required to conform their investment procedures, including dispute settlement, to the

TFEU.35

46. Joining the EU therefore fundamentally changed the dispute settlement method available

to Barancasia and Cogitatia. Investment protections such as access to arbitration are

essential features of BITs, 36 and accession to the EU therefore caused performance to be

radically different from what was originally undertaken.

30 Ibid. 31 Ibid; ‘Commission asks Member States to terminate their intra-EU bilateral investment treaties’, European

Commission Press Release (18 June 2015); Case 235/87 Annunziata Matteucci v Communauté française of Belgium

[1988] ECR 5606 at para 22 [hereinafter Annunziata Matteucci]. 32 Eureko BV v The Slovak Republic, UNCITRAL PCA Case No 2008-13, Award on Jurisdiction, Arbitrability and

Suspension (26 October 2010) at para 209 [hereinafter Eureko]; Electrabel SA v The Republic of Hungary, ICSID

Case No ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 November 2012) at para 5.37

[hereinafter Electrabel]; Christian Tietje, ‘Bilareral Investment Treaties Between EU Member States (Intra-EU

BITs) – Challenges in the Multilevel System of Law’, [2013] Transnational Dispute Management 1 at 18

[hereinafter Tietje]. 33 Eureko at para 209; Electrabel at para 5.37; Tietje at 18. 34 Tietje at 18; Achema BV (formerly Eureko BV) v The Slovak Republic, UNCITRAL PCA Case No 2008–13,

Preliminary Decision of the German Federal Supreme Court (19 September 2013). 35 Mathijsen 6th edition at 256 36 Eureko at para 245.


13

(c) The change in the rules governing the equal treatment of investors was

fundamental

47. TFEU Article 18 requires the equal treatment of investors. Under TFEU Article 18,

Member States cannot be discriminated against based on nationality.37 Within the EU’s

single market, all Member States must be treated the same.38

48. BIT advantages investors from Cogitatia over investors from other Member States by

granting it investment protections and access to investor-state arbitration.39 This

disadvantages investors from other Member States that are not party to the BIT and

therefore do not have access to the same investment protections as the Claimant. Such

unequal treatment is contrary to TFEU Article 18.40 Accession to the EU, and the

consequent change in the standard for the equal treatment of investors, rendered

Barancasia’s obligations to the Claimant different from those which were originally

undertaken.

(iii) The Contracting Parties did not foresee joining the EU in 2004 when they

concluded the BIT in 1998

49. Barancasia and Cogitatia did not foresee joining the EU when they signed the BIT because

they were experiencing rapid development and wide ranging social and economic

reforms.41 They were not in a position to foresee accession to the EU within six years.

50. EU accession criteria refers to a stable market economy and the ability to take on the

obligations of membership in the EU.42 Strict economic criteria for membership are

referred to in TFEU Article 140, including measuring price stability against existing EU

Member States.43 At the time the BIT was signed, the EU had just admitted Finland,

37 TFEU Article 18. 38 Case 376/03 D v Inspecteur van de Balestingdienst/Particulieren/Ondernemingen buitenland te Heerlen [2005]

ECR I-05821 at paras 57–61 [hereinafter D v Inspecteur]. See also Case C-55/00 Elide Gottardo v Istituto nazionale

della previdenza sociale (INPS) [2002] ECR I-433 [hereinafter Elide Gottardo]; Annunziata Matteucci. 39 Mathijsen 6th edition at 256; TFEU Article 63; Commission v Finland; Commission v Sweden; Commission v

Austria. 40 TFEU Article 18. See also: D v Inspecteur at paras 57-61; Elide Gottardo; Annunziata Matteucci; Commission v

Sweden at para 27. 41 Problem, Statement of Uncontested Facts at para 2. 42 ‘Conclusions of the Presidency’, European Council in Copenhagen (21–22 June 1993) at 13. 43 TFEU Articles 63 and 207 (formerly Articles 121, 122, 123 TEC).


14

Austria, and Sweden, which were three developed nations with relatively strong and stable

economies.44 There was pushback against admitting countries such as Turkey, based on

their developing and constantly changing political and economic situations.45 Therefore it

is unlikely that Barancasia and Cogitatia, countries with rapidly developing and constantly

changing socio-economic conditions, would have foreseen that they could meet the strict

criteria for joining the EU.

(iv) The Contracting Parties signed the BIT because of the particular

obligations it created, and those obligations changed as a result of joining the

EU

51. The original terms of the BIT, outlining the protection and promotion of investments, were

essential to Barancasia and Cogitatia’s decision to conclude the agreement.46 Joining the

EU terminated the BIT, thereby altering those essential terms, and consequently changed

the investment relationship between Cogitatia and Barancasia.

52. The ICJ, in the Case Concerning the Gabčíkovo-Nagymaros Project, concluded that an

investment tribunal must determine how closely linked the terms of a treaty are to its

purpose.47 A tribunal must ask whether the parties would have signed the original treaty in

the absence of those terms.48

53. The purpose of the BIT was to maintain an ongoing stable legal environment for investment

by defining and protecting the conditions of an acceptable international investment

relationship between an investor and Barancasia.49 This is commonly accepted as the

purpose of a BIT,50 and is the reason the Contracting Parties signed it.51

44 OECD Economic Surveys, Austria 1995 (OECD 1995); OECD Economic Surveys, Finland 1995 (OECD 1995);

OECD Economic Surveys, Sweden 1995 (OECD 1995). 45 Luigi Narbone and Nathalie Tocci, ‘Running around in circles? The cyclical relationship between Turkey and the

European Union’, [2009] JSEB 233. 46 BIT Preamble. 47 Case Concerning the Gabčíkovo-Nagymaros Project (Hungary/Slovakia), [1997] ICJ Rep 1997 at para 104

[hereinafter Gabčíkovo-Nagymaros]. 48 Dörr and Schmalenbach at 1088. 49 BIT Preamble; Patrick Julliard, ‘Bilateral Investment Treaties in the Context of Investment Law’, [2001] OECD 1

at 1 [hereinafter Julliard]. 50 Julliard at 1. 51 BIT Preamble.


15

54. Joining the EU demonstrated that the intent of the Contracting Parties had changed. They

no longer intended to promote and protect an international investment relationship through

foreign investors, but rather to promote the free movement of capital between the borders

of EU Member States. This is a radically different relationship than was present under the

BIT.

(v) After accession to the EU, the remaining investment obligations of

Barancasia are radically transformed

55. Based on the fundamental change of investment policy as a result of accession to the EU,

the remaining investment obligations of Barancasia are fundamentally different than what

was originally undertaken.52 Article 62 does not require that all obligations change, rather

that obligations change to the extent that the affected party can no longer fulfill them.53

56. Joining the EU shifted domestic investment competence from Barancasia to the EU.54 This

frustrated Barancasia’s ability to fulfill any remaining investment protections under the

BIT because the EC, which has publicly stated there is no need for intra-EU BITs55 and is

actively trying to terminate them, 56 now controls Barancasia’s investment regime.

Barancasia no longer has the ability to provide the Claimant with investment protections

under the BIT, such as access to arbitration, because the BIT no longer applies to

Barancasia’s investment regime.57

52 Fisheries Jurisdiction at para 43; Gabčíkovo-Nagymaros at para 104. 53 Dörr and Schmalenbach at 1089. 54 Eastern Sugar at para 126; Reinisch at 119. 55 Eastern Sugar at para 126. 56 Luke Eric Peterson, ‘EC asks member-states to signal by year’s end whether they will terminate their intra-EU

investment treaties; spectre of legal action looms’, International Arbitration Reporter (20 October 2010); Jarrod

Hepburn and Luke Eric Peterson, ‘Stage is set for infringement proceedings over intra-EU BITs, as informal process

between European Commission and three member-states fail to resolve EC’s concerns’, International Arbitration

Reporter (2 June 2015). 57 Eastern Sugar at para 126; Reinisch at 119.


16

B. Barancasia was also entitled to terminate the BIT in accordance with VCLT

Article 59

57. In addition to terminating on the basis of a fundamental change in circumstance, the BIT

was also terminated in accordance with VCLT Article 59 because the VCLT and TFEU

cannot be applied at the same time.

58. Termination under VCLT Article 59 requires that a subsequent treaty govern the same

subject matter, making both treaties incapable of being applied at the same time.58 The BIT

and TFEU govern the same subject matter in contradictory ways in relation to dispute

settlement and the equal treatment of investors. The treaties are therefore incapable of

being applied concurrently.

59. As discussed, the TFEU does not provide for investor-state arbitration, where the BIT

does.59 These contradicting investment dispute settlement methods make the two treaties

incapable of being applied at the same time. One treaty, the BIT, provides for a dispute

settlement method unavailable in the TFEU. Therefore, the BIT is subject to the

termination provisions of VCLT Article 59.60

60. With respect to the equal treatment of investors, access to arbitration advantages investors

from Cogitatia over investors from other Member States. The Claimant’s access to

arbitration is based on the existence of a valid BIT.61 Under TFEU Article 18, Member

States cannot be discriminated against based on nationality.62 Within the EU’s single

market, all Member States must be granted the same economic treatment.63 Under the

TFEU, the Claimant does not have access to arbitration as a dispute settlement method.

Investors from other Member States similarly lack access to arbitration. Allowing the BIT

to remain in force therefore permits Cogitatia to discriminate against investors from

Member States not party to the BIT by not providing them access to arbitration.

58 VCLT Article 59; Dörr and Schmalenbach at 1012. 59 Eureko at para 209; Electrabel at para 5.37; Tietje at 18. 60 VCLT Article 59. 61 BIT Article 8. 62 TFEU Article 18. 63 D v Inspecteur at paras 57-61. See also Elide Gottardo; Annunziata Matteucci.


17

61. These contradictions between the BIT and TFEU mean that the two treaties are incapable

of being applied at the same time, and in accordance with VCLT Article 59, the BIT is

terminated.

C. The arbitration clause in the BIT is inapplicable in accordance with VCLT

Article 30(3)

62. If the Tribunal finds that the BIT was not terminated in accordance with VCLT Article 59,

it should find that the arbitration clause in the BIT is inapplicable in accordance with VCLT

Article 30(3).

63. VCLT Article 30(3) states that where two successive treaties cover the same material, but

the earlier treaty is not terminated in accordance with VCLT Article 59, the earlier treaty

applies only to the extent that its provisions are compatible with the later treaty.64

64. The dispute settlement methods contained in the BIT and TFEU are contradictory, and

incapable of being applied at the same time. Investor-state arbitration is an essential aspect

of the BIT, 65 and the TFEU does not provide access to arbitration as a means of settling

investment disputes.66 In accordance with VCLT Article 30(3), the terms of the BIT should

apply only insofar as they are compatible. This contradiction in dispute settlement means

that the arbitration clause contained in BIT Article 8 is not compatible with the TFEU, and

therefore should not apply. The Tribunal therefore does not have jurisdiction to hear this

dispute.

D. Barancasia’s notice on 29 June 2007 terminated the BIT before the Claimant’s

investments were made.

65. Barancasia is entitled to terminate the BIT on the basis of VCLT Article 62 or Article 59

because of its notice on 29 June 2007, which satisfies the termination procedures in VCLT

Article 65 and Article 67.

64 VCLT Article 30(3). 65 BIT Article 8; See also Eureko at para 245. 66 Eureko at para 209; Electrabel at para 5.37; Tietje at 18.


18

66. VCLT Articles 65(1) provides termination procedures that must be followed when

terminating or withdrawing from a treaty based on the VCLT.67 Article 65 requires that the

terminating party provide proper notice to terminate, including the specific action to be

taken and reasons for that action.68 However, states may dispense with this requirement to

provide reasons.69 Further, Article 65(2) requires that three months pass from the

notification date before the treaty is terminated.70

67. VCLT Article 67 adds two final requirements: Article 67(1) states that notification must

be in writing,71 and Article 67(2) requires that notification come from a head of state or

foreign affairs minister.72

68. Barancasia provided proper notice to terminate the BIT on 29 June 2007, when notice to

terminate the BIT was sent from the Prime Minister of Barancasia to Cogitatia.73 This

notice was in writing, and stated that Barancasia considered the BIT terminated.74 The

document also cited Resolution No. 1800, which indicates that Barancasia was initiating

termination procedures for all BITs concluded with members of the European Union.75

69. Though Barancasia was not obliged to provide reasons in the 29 June 2007 notice,76 it is

likely that Cogitatia knew Barancasia’s reasons for terminating the BIT. By June 2007,

Barancasia had made a number of statements about terminating intra-EU BITs. These

statements were either made through public newspapers or official government decisions.77

As a Contracting Party to the BIT, it is unlikely that Cogitatia had no knowledge of these

public statements.

70. Barancasia’s notice on 29 June 2007 initiated a three-month period, as per VCLT Article

65(2), meaning the BIT was officially terminated on 29 September 2007. This was before

the Claimant’s investments were made.

67 VCLT Article 65. 68 VCLT Article 65(1). 69 Dörr and Schmalenbach at 1145. 70 VCLT Article 65(2). 71 VCLT Article 67(1). 72 VCLT Article 67(2). 73 Problem, Annex No 7.1 Notification dated June 29, 2007 at 39. 74 Problem, Annex No 7.1 Notification dated June 29, 2007 at 39. 75 Problem, Annex No 6 Resolution 1800 at 37. 76 Dörr and Schmalenbach at 1145. 77 See e.g. Problem, Annex No. 5 at 36; Problem, Annex No. 6 at 37.


19

71. On 1 January 2010 the Alpha project became operational,78 and projects in the renewable

energy sector cannot operate without a license. It can be inferred that Alpha received a

license before it commenced operations,79 and the date of investment for Alpha is, at the

latest, 1 January 2010.

72. On 25 August 2010 the Claimant obtained a license from the Barancasian Energy Authority

(BEA) for its second photovoltaic project, Beta.80 The date of investment for Beta is, at the

latest, 25 August 2010.

73. On 1 September 2011 the Claimant borrowed large sums of money to fund its Cluster

projects.81 When the loan was secure, the Claimant obtained land plots for the Cluster

projects.82 The Claimant then obtained licenses for the development of the Cluster projects

on 1 July 2012.83 Investing in the Cluster began on 1 September 2011, and the investment

was completed, at the latest, on 1 July 2012.

74. Based on Barancasia’s termination notice, the BIT could be terminated in accordance with

VCLT Article 62 or Article 59 on 29 September 2007. The Claimant’s investments were

made after this date, and they are not subject to protection under the BIT. The Tribunal

therefore has no jurisdiction to hear this dispute.

78 Problem, Statement of Uncontested Facts at para 13. 79 Problem, Procedural Order No 3 at 62. 80 Problem, Statement of Uncontested Facts at para 23. 81 Problem, Procedural Order No 2 at 57. 82 Problem, Procedural Order No 2 at 58. 83 Problem, Statement of Uncontested Facts at para 33.


20

II. BARANCASIA DID NOT BREACH BIT ARTICLE 2

75. Barancasia met its obligations under BIT Article 2 because (1) it provided the Claimant’s

investments with fair and equitable treatment (FET) as required by Article 2(2) and (2)

observed its obligation with regard to the specific investments of the Claimant in

accordance with Article 2(3).

1. Barancasia provided FET to the Claimant’s investments

76. Regardless of whether the Tribunal qualifies BIT Article 2(2) as an autonomous or

customary international law standard, when applied to the present dispute, Barancasia has

met the requirements of FET. Barancasia’s treatment of the Claimant’s investment

complied with FET because Barancasia did not (A) fail to meet the Claimant’s legitimate

expectations, because the expectation was not legitimately held; (B) deny justice or due

process; (C) exhibit manifest arbitrariness; or (D) discriminate against the Claimant’s

investments.

A. The Claimant’s expectation for the feed-in tariff rate to remain static was not

legitimate

77. Expectations are only protected by FET when they are legitimately held, and the

Claimant’s expectation that the LRE would remain unaltered was not legitimate because

(i) the expectation was not reasonable, and (ii) the expectation did not adequately account

for Barancasia’s right to regulate in the public interest.

(i) The Claimant’s expectation that the feed-in tariff would remain unchanged

is not reasonable

78. It was not reasonable for the Claimant to expect the LRE to remain static despite rapid

developments in technology, because the contingencies and presumptions built into the

LRE should have informed the Claimant’s expectation that the tariff could change if


21

conditions changed. An investor’s expectations are deemed legitimate if they are

reasonable,84 and investors should reasonably expect regulatory change over time.85

79. A change to the tariff rate should have been expected because the factors that informed the

incentive scheme, including proportions of energy consumption and return rates, changed

dramatically. As the legal regime under which the Claimant’s Beta and Cluster projects

were made, the LRE is relevant to determining expectations.86 LRE Article 2 states:

production of energy from renewable sources shall be incentivized

by state measures until the share of electricity generated from

renewable sources amounts to no less than 20 percent as compared

with the country’s gross consumption of energy.87

This 20% qualification informs investors that the incentive regime was not indefinite.

The feed-in tariff rate was based on the premise that the “average annual return on

investment for licensed renewable projects should be 8%”,88 which could change with

more efficient technology. The reduction in the feed-in tariff rate to 0.15 EUR/kWh still

allows investors to receive at least an 8% return,89 consistent with the original premise.

80. Further, the Claimant should have expected technological innovation. The “introduction

of innovative technologies” was one of the desired objectives of the LRE.90 The Claimant

inadequately took into account the risk of change as a result of the development of new

technology when it made its investments, because technological innovation was

encouraged by the LRE.91

84 Elizabeth Snodgrass, ‘Protecting Investors’ Legitimate Expectations: Recognizing and Delimiting a General

Principle’, (2006) 21 ICSID Rev at paras 35–36. See e.g. Duke Energy Electroquil Partners & Electroquil SA v

Republic of Ecuador, ICSID Case No ARB/ 04/19, Award (18 August 2008) at paras 351–354; Saluka Investments

BV (The Netherlands) v Czech Republic, UNCITRAL, Partial Award (17 March 2006) at 304–308 [hereinafter

Saluka]; EDF (Services) Limited v Romania, ICSID Case No ARB/05/13, Award (8 October 2009) at para 219; Int'l

Thunderbird Gaming Corp v United Mexican States, UNCITRAL, Award (3 November 2008) at para 147. 85 Dolzer and Schreuer at 147. See e.g. Saluka at paras 304-308; El Paso Energy International Company v

Argentina, ICSID Case No ARB/03/15, Award (27 October 2011) at paras 344–352, 365–374 [hereinafter El Paso

Award]; Parkerings-Compagniet AS v Lithuania, ICSID Case No ARB/05/8, Award on Jurisdiction and Merits (14

August 2007) at paras 327–338. 86 Dolzer and Schreuer at 134; Stephan W Schill, ‘General Principles of Law’ in International Investment Law: The

Sources of Rights and Obligations, Tarcisio Gazzini and Eric De Brabandere, eds, Martinus Nijhoff Publishers

(Leiden 2012) at 169. 87 Problem, Annex No 2: The Republic of Barancasia Law on Renewable Energy, Article 2 page 32. 88 Problem, Uncontested Statement of Facts at para 21. 89 Problem, Procedural Order No 2 at para 27 page 59-60. 90 Problem, Annex No 2: The Republic of Barancasia Law on Renewable Energy, Article 1 page 32. 91 Problem, Uncontested Statement of Facts at para 14.


22

(ii) The Claimant did not adequately account for Barancasia’s sovereign power

to regulate in the public interest when forming their expectations

81. The Claimant should have anticipated that Barancasia would fulfill its duty to regulate in

the public interest as a result of changes in technology and economic circumstances. The

Claimant should have anticipated that the exercise of Barancasia’s sovereign power could

include regulatory changes.92 Legitimate expectations for investments should consider the

relevance of public interest and policy balancing attempts by the state when enacting new

legislation.93

82. Laws can be changed with social, economic, or other justification.94 Alterations to the law

may result in far reaching consequences and burdens on investors and still not violate

FET.95

83. It is unreasonable to expect that laws will not change, because it would be

“unconscionable” for a state to make that kind of commitment as a part of FET.96 It is

“inconceivable” that entering into a BIT would preclude Barancasia from modifying

legislation, 97 and would consequently inhibit its sovereign power:

[g]overnments change, policies changes and rules change. These are

facts of life with which investors and all legal and natural persons

have to live with.98

The Claimant could not reasonably expect to be immune from changing political pressures

and circumstances.

84. Public opinion in Barancasia was overwhelmingly in support of treating teachers better

than solar panels,99 and a responsible government must respond to changing circumstances

and desires of the population to which it is accountable.100 Technological advancement

92 Charles H. Brower II, ‘Corporations as Plaintiffs Under International Law: Three Narratives about Investment

Treaties’, [2011] Santa Clara J Int'l L 179 at 187 93 Continental Casualty Company v Argentine Republic, ICSID Case No ARB/03/9, Award (5 September 2008) at

para 261 [hereinafter Continental Casualty]. 94 El Paso Award at para 372. 95 Mobil Investments Canada Inc and Murphy Oil Corporation v Canada, ICSID Case No ARB(AF)/07/04,

Decision on Liability (22 May 2012) at para 153 [hereinafter Mobil]. 96 El Paso Award at para 372, citing Continental Casualty at para 258. 97 El Paso Award at paras 367–368. 98 Mobil at para 153. 99 Problem, Uncontested Statement of Facts at para 32. 100 Tarcisio Gazzini, ‘Bilateral Investment Treaties’ in International Investment Law: The Sources of Rights and

Obligations, Tarcisio Gazzini and Eric De Brabandere, eds, Martinus Nijhoff Publishers (Leiden 2012) at 113


23

made photovoltaic energy production more profitable,101 increasing the number of

applications made under to the BEA.102

85. Barancasia had to balance competing policy objectives for future allocations of the state

budget, because up to 15% of Barancasia’s revenue would be paid to finance solar feed-in

tariffs—a higher share of government revenues than is assigned to Barancasia’s education

system.103 The Barancasian public believed teachers should not be treated worse than solar

panels.104 Barancasia’s amendment of LRE Article 4 was consistent with its promise to

review the legislation.105 The law was changed with the public’s interest education and

responsible economic regulation in mind.

86. The Tribunal does not have an “open mandate” to review Barancasia’s exercise of

regulatory power.106 The Tribunal should not substitute its own determination on the

correct or appropriate policy choice in a controversial circumstance for that of the

sovereign state.107

B. Barancasia did not deny justice or due process to the Claimant’s Alpha project

87. Barancasia did not deny justice or due process to the Alpha project because it provided the

Claimant with a fair procedure, including consideration and rejection of its application with

reasons, and recourse to Barancasia’s administrative courts.108

88. Instances of denial of justice include refusing to make a decision or provide access to the

courts, unreasonable delay in proceedings, judicial corruption, and a lack of due process

such as no notice or opportunity to be heard.109 FET protects against intrinsic, systematic

[hereinafter Gazzini]; See also SD Myers, Inc v Canada, UNCITRAL, First Partial Award (13 November 2000) at

para 261 [hereinafter SD Myers]; Gami Investments, Inc v Mexico, UNCITRAL, Award (15 November 2004) at para

93 [hereinafter Gami]. 101 Problem, Uncontested Statement of Facts at para 25. 102 Problem, Uncontested Statement of Facts at para 29. 103 Problem, Uncontested Statement of Facts at para 29. 104 Problem, Uncontested Statement of Facts at para 32. 105 Problem, Uncontested Statement of Facts at para 32. 106 Gazzini at 113, citing SD Myers at para 261 and Gami at para 93. 107 SD Myers at para 261; Gami at para 93. 108 Problem, Procedural Order No 2 at 59. 109 United Nations Conference on Trade and Development, ‘Fair and Equitable Treatment’, Series on International

Investment Agreements II, United Nations (UN 2012) at 80 [hereinafter UNCTAD FET].


24

failures to provide fairness which are not rectifiable, making exhaustion of local remedies

an element of establishing a denial of justice.110

89. Alpha was able to apply for the new feed-in tariff,111 the BEA did not refuse to make a

decision:112 it denied the feed-in tariff with reasons based on its interpretation of the

LRE.113 The Barancasian legal system provided the opportunity be heard in the

administrative courts to correct the decision, if the Claimant had applied.114 There is no

evidence to suggest delay in proceedings or judicial corruption.115 Barancasia met its

obligations to provide due process under FET.

C. Barancasia did not deny justice or due process to the Claimant’s Alpha project

90. The explanation for the denial of Alpha’s feed-in tariff was consistent with the LRE’s

purpose to promote further developments in the energy sector. This made the relationship

between the decision and the objective rational, not arbitrary.

91. If a rational explanation exists, whether that explanation for the decision was good or bad

is not a matter for this Tribunal to decide.116 For instance, in Gami, the Tribunal had to

decide on allegations that Mexico failed to implement and enforce its legislation in a

consistent manner which, in the Claimants view, amounted to arbitrary conduct.117 The

Tribunal held that claims of arbitrary conduct require more than a simple demonstration of

maladministration on the part of the host state, it requires that the maladministration was

based on arbitrary reasons.118

92. The Claimant’s Alpha project predated the adoption of the LRE.119 Barancasia denied the

feed-in tariff to Alpha because the LRE was intended to “promote further development and

110 UNCTAD FET at 81; James Crawford, Special Rapporteur to the International Law Commission, Second Report

on State Responsibility, 17 March 1999, UN Doc A/CN 4/498 at para 75 [hereinafter Crawford Second Report]. 111 Problem, Statement of Uncontested Facts at para 22. 112 Problem, Statement of Uncontested Facts at para 22. 113 Problem, Statement of Uncontested Facts at para 22. 114 Problem, Procedural Order No 2, at page 59. 115 Problem, Procedural Order No 2, at page 59. 116 Enron v Argentina at 281; UNCTAD FET at 78. 117 Gami at paras 101–103; Patrick Dumberry, ‘The Prohibition Against Arbitrary Conduct’, [2014] JWIT 117 at 131

[hereinafter Dumberry Arbitrary Conduct]. 118 Gami at para 105; Dumberry Arbitrary Conduct at 131. 119 Problem, Statement of Uncontested Facts at paras 13–14.


25

introduction of innovative technologies”.120 The BEA assessed that the feed-in tariff should

apply to future investments,121 which is a rational reason based on its interpretation of the

LRE.

D. Barancasia did not deny justice or due process to the Claimant’s Alpha project

21. The amendment to the LRE was not discriminatory, as the new fixed feed-in tariff did not

single out the Claimant nor did it favour domestic over foreign investments.122 As

described by the Tribunal in Biwater Gauff, discriminatory measures are those that treat

foreign investment less favorably than domestic investment.123 The amendment makes no

distinction to which investors it applies.124

2. Barancasia observed its obligation with regard to the specific investments of the

Claimant in accordance with Article 2(3)

93. The Tribunal should find that Barancasia’s alteration of the LRE did not breach its

obligations to the Claimant, and therefore did not violate the BIT. Barancasia observed its

obligation with regard to the specific investments of the Claimant in accordance with

Article 2(3), because (A) the article should be narrowly interpreted where the Claimant

cannot provide clear and convincing evidence for a broad interpretation of the umbrella

clause, and (B) in the absence of a stabilization clause, the umbrella should not be

interpreted in a way that implicitly freezes the LRE. This interpretation allows Barancasia

to make amendments to its own laws, including the feed-in tariff rate, without violating the

BIT.

120 Problem, Statement of Uncontested Facts at para 14; Problem, Annex No 4: The Republic of Barancasia Law on

the Amendment of Article 4 of the Law on Renewable Energy, Article 1 at 32. 121 Problem, Statement of Uncontested Facts at para 22. 122 Problem, Annex No 4: The Republic of Barancasia Law on the Amendment of Article 4 of the Law on Renewable

Energy, Article 1 at 32. 123 Biwater Gauff (Tanzania) Limited v United Republic of Tanzania, ICSID Case No ARB/05/22, Award (24 July

2008) at para 695. See also US v Italy (Elettronica Sicula Spa case), 1989 ICJ Reports 15 (20 July 1989) at para 128. 124 Problem, Annex No 4: The Republic of Barancasia Law on the Amendment of Article 4 of the Law on Renewable

Energy, Article 1 at 32.


26

A. The Claimant must provide clear and convincing evidence for a broad

interpretation of the umbrella clause

94. Without clear and convincing evidence of the Contracting Parties’ intent for a widely

encompassing umbrella clause, the Tribunal should adopt a narrow approach. Articles with

a similar structure and wording to BIT Article 2(3) are often referred to as umbrella

clauses.125 BIT Article 2(3) provides that:

[e]ach Contracting Party shall observe any other obligation it may

have with regard to a specific investment of an investor of the other

Contracting Party.126

The Tribunal in SGS v. Pakistan, faced with a similarly worded provision, 127 did not find

that an umbrella clause elevated a contract breach to a treaty breach.128 The Tribunal

interpreted the clause narrowly in the absence of clear and convincing evidence to suggest

the state parties had intended the clause to have a broad scope.129 Otherwise, the clause

would incorporate a possibly infinite number of state contracts,130 which could unjustly

open the “floodgates” to potential disputes.131

95. The alteration of the LRE reflects Barancasia’s responsibility to ensure its renewable

energy regime could evolve following the development of new technology. This Tribunal

should take a balanced interpretive approach, described in El Paso132 which considers “the

State's responsibility to create an adapted and evolutionary framework for the development

of economic activities”.133

125 Patrick Dumberry, ‘International Investment Contracts’ in International Investment Law: The Sources of Rights

and Obligations, Tarcisio Gazzini and Eric De Brabandere, eds, Martinus Nijhoff Publishers (Leiden 2012) at 236. 126 BIT Article 2(3). 127 Agreement between the Swiss Federation and the Islamic Republic of Pakistan on the Promotion and Reciprocal

Protection of Investments (signed 7 November 1995, in force 5 June 1996), Article 11. 128 Société Générale de Surveillance SA v Islamic Republic of Pakistan, ICSID Case No ARB/01/13, Decision of the

Tribunal on Objections to Jurisdiction (6 August 2003) at para 174 [hereinafter SGS]. See also Brian Bombassaro

and Patricio Grané, ‘Umbrella Clause Decisions: The Class of 2012 and a Remapping of the Jurisprudence’, Kluwer

Arbitration Blog (17 January 2013); Jarrod Wong, ‘Umbrella Clauses in bilateral investment treaties: of breaches of

contract, treaty violations and the divide between developing and developed countries in foreign investments

disputes’, [2006] Geo Mason L Rev 135 at 152. 129 SGS at paras 166-167. 130 SGS at paras 166-167. 131 Thomas Wälde, ‘The “Umbrella Clause” in Investment Arbitration- A Comment on Original Intentions and

Recent Cases’, [2005] 1 JWIT at 26 [hereinafter Wälde]. 132 El Paso Energy International Company v Argentina, ICSID Case No ARB/03/15, Decision on Jurisdiction (27

April 2006) at para 70 [hereinafter El Paso Decision on Jurisdiction]. 133 El Paso Decision on Jurisdiction at para 70.


27

B. In the absence of a stabilization clause, the umbrella should not be interpreted in

a way that implicitly freezes the LRE

96. Without express mention of stabilization, Barancasia should not be assumed to have taken

on an obligation not to change its laws or regulations.134 Unlike a stabilization clause, the

umbrella clause does not make Barancasia’s obligations more onerous; the purpose of the

umbrella clause is merely to provide a forum for certain contractual breaches.135

97. Though umbrella clauses, in general, protect specific obligations pertaining to

concessions,136 there is no specific obligation contained in the Beta and Cluster licenses

which guarantees that the LRE should remain unchanged throughout the life of the projects.

The LRE is a legal regime that targets specific investors and investments, meaning that it

could fall within BIT Article 2(3) as an obligation.137 LRE Article 4 was amended, but

Barancasia was in compliance with its own amendment by changing the tariff rate.138 It

could therefore not be assumed that this amendment violated an obligation under BIT

Article 2(3).

98. A host state is under an obligation to follow its own laws while they are in force.139 If a

specific law is altered the content of the obligation, to follow the law, remains the same.140

The feed-in tariff is not a separate obligation “distinct from the law itself”. 141 In the absence

of a stabilization clause, “investors take the risk that the obligations of the host State under

its own law may change, and the umbrella clause makes no difference to this basic

proposition”.142

99. There was no “stabilization clause” contained in the LRE, and the twelve year guarantee

should not be interpreted as such in the context of the accompanying conditions and

134 James Crawford, ‘Treaty and Contract in Investment Arbitration’, [2009] 1 TDM at 20 [hereinafter Crawford

Treaty and Contract]. 135 Lise Johnson and Oleksandr Volkov, ‘Investor-State Contracts, Host-State “Commitments” and the Myth of

Stability in International Law’, [2013] 361 AMRIARB at 372. 136 FA Mann, ‘British Treaties for the Promotion and Protection of Investments’ in British Yearbook of International

Law (Oxford University Press 1981) at 246. 137 Crawford Treaty and Contract at 20. 138 Problem, Statement of Uncontested Facts at para 35. 139 Crawford Treaty and Contract at 20. 140 CMS Gas Transmission Company v Argentina, ICSID Case No ARB/01/8, Decision of the ad hoc Committee on

the Application for Annulment of the Argentine Republic (September 25 2007) at para 95(c) [hereinafter CMS

Annulment]. 141 Crawford Treaty and Contract at 20. 142 Crawford Treaty and Contract at 20.


28

contingencies in the legal regime.143 In CMS, the dismantling of the tariff regime breached

the umbrella clause.144 However, the license at the center of the dispute contained two

contractual “stabilization clauses” that guaranteed that the tariff regime would not be

subject to freezes or price controls and that any changes to the rules governing the licenses

would be authorized by the written consent of the licensee.145

100. The amendment to the LRE should not be considered sufficiently grave enough to breach

Barancasia’s international obligations under the treaty. The Tribunal in Joy Mining found

that contract breaches should have sufficient magnitude in order to “trigger” provisions

contained in international treaties.146 Umbrella clauses should only protect against

substantial interferences with contracts made with sovereign powers.147 In this instance,

the LRE was amended to allow for an annual review of the feed-in tariff rate;148 the

renewable energy regime continued,149 licences were not revoked,150 and subsidies were

still provided to investors subsequent to the amendment.151 The reduction in the tariff rate

to 0.15 EUR/kWh maintained the 8% annual return on which the tariff rate was

premised.152

143 Problem, Statement of Uncontested Facts at para 21; Problem, Annex No 2: The Republic of Barancasia Law on

Renewable Energy, Article 2 page 32. 144 CMS Gas Transmission Company v Argentina, ICSID Case No ARB/01/8, Award (25 April 2005) at para 303

[hereinafter CMS Award]. 145 CMS Award at para 302. 146 Joy Mining Machinery Limited v The Arabic Republic of Egypt, ICSID Case No ARB/03/11, Award on

Jurisdiction (August 6 2004) at para 81. 147 OECD, “Interpretation of the Umbrella Clause in Investment Agreements”, in International Investment Law:

Understanding Concepts and Tracking Innovations: A Companion Volume to International Investment Perspectives

(OECD Publishing 2008) at 109. 148 Problem, Statement of Uncontested Facts at para 34; Problem, Annex No 4: The Republic of Barancasia Law on

the Amendment of Article 4 of the Law on Renewable Energy at 35. 149 Problem, Annex No 4: The Republic of Barancasia Law on the Amendment of Article 4 of the Law on Renewable

Energy at 35. 150 Problem, Annex No 4: The Republic of Barancasia Law on the Amendment of Article 4 of the Law on Renewable

Energy at 35. 151 Problem, Statement of Uncontested Facts at para 35; Problem, Annex No 4: The Republic of Barancasia Law on

the Amendment of Article 4 of the Law on Renewable Energy at 35. 152 Problem, Procedural No 2, at 59–60.


29

III. THE TRIBUNAL SHOULD NOT ORDER BARANCASIA TO REPEAL THE

AMENDMENT TO LRE ARTICLE 4 OR TO CONTINUE TO PAY THE CLAIMANT

THE 0.44 EUR/kWh TARIFF

101. Barancasia should not be ordered to repeal the amendment to LRE Article 4 or to continue

to pay the Claimant the 0.44 EUR/kWh feed-in tariff for twelve years, because (A) arbitral

tribunals do not have the power to award restitution or specific performance in international

investment law, and (B) an order for restitution or specific performance would impose a

disproportionate burden on Barancasia.

A. Arbitral tribunals do not have the power to award restitution or specific

performance in international investment law

102. The remedy for breach of the FET obligation must be determined in accordance with

CIL.153 Most international investment agreements, including the Barancasia-Cogitatia BIT,

do not contain rules regarding the appropriate remedy when one of the Contracting Parties

breaches the obligation to provide FET. The only guidance with respect to remedies is in

the form of substantive principles for determining compensation in the event of

expropriation.154

103. Under CIL, restitution and specific performance are not available remedies in investor-

state disputes. This is indicated by the practice of arbitral tribunals, which has

overwhelmingly been to award compensation rather than restitution. As Christine Gray

notes, “[o]ne of the problems in establishing the primacy of restitution lies in the large gap

between practice and theory”.155 This is especially true with respect to restitution in the

form of an order to modify the legal situation in a state, such as an order to repeal a domestic

legislative measure, which is known as juridical restitution. Never has such an order clearly

been granted in modern investment arbitration.156

153 Sergey Ripinsky with Kevin Williams, Damages in International Investment Law (British Institute of

International and Comparative Law 2008) at 25 [hereinafter Ripinsky]. 154 Ripinsky at 25. 155 Christine Gray, ‘The Choice Between Restitution and Compensation’, 10 Eur J Int’l L 413 at 416 [hereinafter

Gray]. 156 Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (Oxford

University Press 2011) at 77 [hereinafter Sabahi].


30

104. The Chorzów Factory case is often relied upon to establish the primacy of restitution.

However, in Chorzów Factory, the Permanent Court of International Justice (PCIJ) did not

in fact order restitution.157 As noted by the Tribunal in BP v Libya, “what the Court

established [in Chorzów] were ‘the principles which should serve to determine the amount

of compensation due for an act contrary to international law’”. After an extensive review

of the law, the Tribunal concluded:

the responsibility incurred by the defaulting party for breach of an

obligation to perform a contractual undertaking is a duty to pay

damages, and […] the concept of restitutio in integrum has been

employed merely as a vehicle for establishing the amount of

damages.158

105. Furthermore, the International Law Commission’s Articles on the Responsibility of States

for Internationally Wrongful Acts (ILC Articles) should not be used as justification for a

restitution order. First, the ILC Articles represent both a codification and progressive

development of the law, and should not be treated as a formal source of law.159 Second, the

ILC Articles should not be uncritically applied in investor-state disputes.160 In the ILC

Articles, Part Two contains the relevant articles with respect to the obligation to provide

restitution. However, this obligation does not extend to investors. Article 33(1) states: “The

obligations of the responsible State set out in [Part Two] may be owed to another State, to

several States, or to the international community as a whole […]”161 Therefore, the primacy

of restitution in the inter-state context, indicated by the ILC Articles, should not be

transplanted into the investor-state context.

106. Finally, the LCIA Rules should not be interpreted to give this Tribunal the power to award

restitution in this dispute. LCIA Rule 22.1(vii) states that the Arbitral Tribunal may decide

“to order compliance with any legal obligation […] and specific performance of any

157 Gray at 416. 158 BP v Libya, Award (Merits) (10 October 1973), (1979) 53 ILR 297 at 347. 159 James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and

Commentaries (Cambridge University Press 2002) at 74; Martin Endicott, ‘Remedies in Investor-State Arbitration:

Restitution, Specific Performance and Declaratory Awards’, in Philippe Kahn & Thomas Wälde, eds, New Aspects

of International Investment Law (2007) at 530 [hereinafter Endicott]. 160 Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003), 74 BYIL 151 at 189. 161 International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts, in

Report of the International Law Commission on the Work of its Fifty-third Session, UN GAOR, 56th Sess, Supp No

10 at 43, UN Doc A/56/10 (2001), Article 33(1) [hereinafter ILC Articles].


31

agreement”.162 This confirms that the Tribunal has jurisdiction to make such an order, but

says nothing about the circumstances in which the applicable law permits such an order to

be made.163 International investment law does not permit an order for restitution or specific

performance.

B. An order for restitution or specific performance would impose a disproportionate

burden on Barancasia.

107. Even if the Tribunal has the power to order restitution or specific performance, it should

not make such an order in this case. The ILC Articles specify that restitution should only

be ordered if it “does not involve a burden out of all proportion to the benefit deriving from

restitution instead of compensation”.164

108. This limitation has been applied by several arbitral tribunals. In LG&E v Argentina, the

Claimant was seeking the restoration of the gas regulatory framework that had been in

place prior to the state’s breach. The Tribunal declined this request for juridical restitution,

stating that it could not compel Argentina to annul or enact legislative and administrative

measures to make over the effect of the legislation in breach “without a sentiment of undue

interference with its sovereignty”.165

109. In the situation at hand, if restitution were to be ordered, there would be a grave

disproportionality between the burden imposed on Barancasia and the benefit to the

Claimant. The benefit to the Claimant of continuing to receive the 0.44 EUR/kWh feed-in

tariff for twelve years, rather than simply receiving compensation up-front, is difficult to

discern. On the other hand, Barancasia’s economic stability and political independence

would be threatened if it were ordered to repeal the amendment to Article 4. By 3 January

2013 Barancasia had already issued 6000 licenses under the LRE.166 Approving all 7000

applications would have required the diversion of 15% of state revenues to the renewable

energy scheme; therefore, repealing Article 4 and paying at least 6000 licensees the 0.44

EUR/kWh tariff would result in approximately 12-13% of state revenues being spent on

162 LCIA Rules, Rule 22.1(vii). 163 Endicott at 521 n 9. 164 ILC Articles, Article 35(b). 165 LG&E v Argentina, ICSID Case No ARB/02/1, Damages Award (25 July 2007) at para 87 [hereinafter LG&E

Award]. 166 Problem, Procedural Order No 2 at 58.


32

renewable energy.167 In addition, borrowing the necessary amounts for the maintenance of

the renewable energy support scheme without affecting other areas of the budget would

require Barancasia to exceed its EU-mandated borrowing limits.168

167 Problem, Statement of Uncontested Facts at para 28. 168 Problem, Statement of Uncontested Facts at para 30.


33

IV. THE TRIBUNAL SHOULD REJECT THE CLAIMANT’S CALCULATIONS FOR

COMPENSATION

110. If the Tribunal decides to award compensation, it should reject the calculations for

compensation made by the Claimant’s Expert and instead accept the calculations for

damages made by Barancasia’s Expert, Juanita Priemo, MBA, C.A., for the following

reasons: (A) no damages should be awarded with respect to Project Alpha because there is

no causal connection between the LRE and Project Alpha; (B) the discounted cash flow

(DCF) method is not an appropriate way to value the losses suffered by the Claimant with

respect to the Alpha, Cluster, and additional planned projects; (C) if the DCF method is

used, cash flows to equity should be discounted at the cost of equity; and (D) any award to

the Claimant for expenditures on the Cluster project should be reduced to take into account

potential mitigation.

A. No damages should be awarded with respect to Project Alpha because there is no

causal connection between the LRE and Project Alpha

111. Article 31(1) of the ILC Articles states: “The responsible State is under an obligation to

make full reparation for the injury caused by the internationally wrongful act”.169 The

Tribunal in LG&E v Argentina, after considering the ILC Articles and arbitral decisions,

emphasized that it had to determine the “actual loss” suffered by the investor “as a result”

of Argentina’s conduct.170

112. The Claimant’s losses on the Alpha project were not caused by Barancasia’s internationally

wrongful act. Since the Alpha project was conceived and developed prior to the LRE, the

project’s losses existed prior to Barancasia’s reduction of the 0.44 EUR/kWh feed-in tariff

and there is no causal connection between the amendment to LRE Article 4 and the

Claimant’s decision to proceed with the project.171

169 ILC Articles, Article 31(1) [emphasis added]. 170 LG&E Award at para 45 [emphasis original]. 171 Problem, Expert Report of Juanita Priemo at para 7.


34

B. The discounted cash flow (DCF) method is not an appropriate way to value the

losses suffered by the Claimant with respect to the Alpha, Cluster, and additional

planned projects

113. It would not be appropriate to value the losses suffered by the Claimant with respect to the

Alpha, Cluster, and additional planned projects using the DCF method. The DCF method

is a highly speculative method that relies on projections many years into the future. Arbitral

tribunals often refer to the requirement that an enterprise is a “going concern” in order for

the DCF method to be reasonable.172 Kantor explains that arbitral tribunals’ refusal to use

the DCF method for enterprises that are not going concerns is “best understood as declining

to grant an investor compensation for future earnings because the arbitrators were

concerned that projecting future earnings would be too speculative and uncertain in the

particular circumstances”.173 In Metalclad v Mexico, for example, the Tribunal recognized

that “where an enterprise has not operated for a sufficiently long time […] any award based

on future profits would be wholly speculative”.174 The DCF method was rejected in Sola

Tiles despite three years of operations, and in AAPL v Sri Lanka, the Tribunal held that “the

prior presence on the market for at least two or three years” was required before the

enterprise could be considered a going concern. In addition, as noted by the Tribunal in

Noble Ventures v Romania:

[u]nder international law, an enterprise may be considered a going

concern only if it has a recent history of profitability from which to

project future profits with a reasonable degree of certainty”.175

114. In the present situation, the Alpha, Cluster, and additional planned projects do not have a

sufficient history of profitable operations from which to project future profits with a

reasonable degree of certainty. The Alpha project began operations in January 2010, but

operated at a loss and did not achieve its expected capacity until 2013, when the LRE was

172 Metalclad v Mexico, ICSID Case No ARB(AF)/97/1, Award (30 August 2000) [hereinafter Metalclad]; AAPL v

Sri Lanka, ICSID Case No ARB/87/3, Award (27 June 1990); Sola Tiles, Inc v Islamic Republic of Iran, Iran-US

Claims Tribunal, Award (22 April 1987), 14 Iran-US CTR 223; Autopista v Venezuela, ICSID Case No ARB/00/5,

Award (23 September 2003); SPP (ME) v Egypt, Award (20 May 1992), (1997) 106 ILR 502. 173 Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence

(Kluwer Law International 2008) at 102 [hereinafter Kantor]. 174 Metalclad at paras 120-121. 175 Noble Ventures v Romania, ICSID Case No ARB/01/11, Award (12 October 2005) at para 228.


35

amended.176 The Cluster project was still in development at this time.177 Therefore, at the

time of Barancasia’s reduction of the fixed feed-in tariff, neither of these projects had a

sufficient record of profitability from which to project future profits. Furthermore, the

Claimant’s claim for compensation for its allegedly planned projects, for which no

investments have been made, is entirely inappropriate. The only support for the allegedly

planned projects is a witness statement from a local manager, who stated that this was a

long-term goal of the company.178 This falls well short of meeting the requirement that an

enterprise have several years of profitability before the DCF method can be used.

C. If the DCF method is used, cash flows to equity should be discounted at the cost

of equity

115. The Claimant’s Expert made a valuation error when he used the weighted average cost of

capital (WACC) as the discount rate for all of the cash flows in his valuations using the

DCF method. As Kantor explains, “using WACC may overvalue a company by under-

discounting the portion of a company’s net cash flows that benefits solely the equity

investors”.179

116. This is what the Claimant’s Expert has done. While both the Beta and Cluster projects were

financed in part by debt,180 there is no indication that the debt-to-equity ratio will remain

constant throughout their business lives. In fact, the projected income statement for the

Cluster project shows interest on loans being paid only through 2015, and it is reasonable

to assume that Beta was financed in a similar manner.181 At that point, assuming that the

Claimant does not take on additional debt, all of the net cash flows would solely benefit

the equity investors, and should therefore be discounted at the cost of equity.

117. The evidence suggests that the Claimant would not take on additional debt to finance these

projects. As indicated by Barancasia’s Expert, the annual operating costs of photovoltaic

installations are very low and tend to be up-front fixed costs.182 These costs have already

176 Problem, Expert Report of Marko Kovic at para 6. 177 Problem, Statement of Uncontested Facts at para 36. 178 Problem, Procedural Order No 2 at 28. 179 Kantor at 169. 180 Problem, Procedural Order No 3 at 63. 181 Problem, Kovic-Annex 4, p 1. 182 Problem, Expert Report of Juanita Priemo at para 9.


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been paid. It is therefore unlikely that the Claimant would take on additional debt, since

the annual operating costs are low and would be easily met through revenues.

D. Any award to the Claimant for expenditures on the Cluster project should be

reduced to take into account potential mitigation

118. Many arbitral tribunals have recognized the responsibility of an injured party to take

reasonable measures to mitigate its losses.183 If the Claimant’s losses with respect to the

Cluster project are measured on the basis of the cost of land and equipment for the project,

the Tribunal should take into account that these assets continue to have value.

119. The calculation provided by the Claimant’s Expert effectively assumes that the land and

equipment purchased by the Claimant is without value. In fact, the Claimant has continued

to use the land and equipment to operate the project.184 If the Claimant halted the project

as a result of not receiving the 0.44 EUR/kWh feed-in tariff, it could sell the assets in order

to recover its expenditures. The price of the land is now 10% higher than when it was

bought, and it is unlikely that the photovoltaic panels have significantly declined in value

in such a short period of time.185

183 Kantor at 113; see e.g. Enron v Argentina; CME v Czech Republic, UNCITRAL, Final Award (14 May 2003);

Starrett Housing Corp v Islamic Republic of Iran, Iran-US Claims Tribunal, Award (14 August 1987). 184 Problem, Procedural Order No 2 at 59. 185 Problem, Procedural Order No 2 at 60.


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PRAYER FOR RELIEF

THE RESPONDENT RESPECTFULLY REQUESTS THAT THE ARBITRAL

TRIBUNAL:

• FIND that it has no jurisdiction.

• In the event that the tribunal finds that it does have jurisdiction, FIND that Barancasia

has not violated the protections of the BIT.

• In the event that the tribunal finds that Barancasia has violated the BIT, DENY the

Claimant’s request for restitution or specific performance.

• FIND that the Claimant’s Expert’s calculations for damages are ill-supported, and

instead accept the calculations of Barancasia’s Expert.

• FIND that Barancasia is entitled to all costs related to these proceedings from the

Claimant.

ALL OF WHICH IS RESPECTFULLY SUBMITTED THIS 26TH DAY OF SEPTEMBER, 2015.

MEMORIAL FOR RESPONDENT - FDI Moot€¦ · MEMORIAL FOR THE RESPONDENT ARMAND ix ARBITRAL DECISIONS...

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