TEAM ALIAS: PETREN ___________________________________________________________________________
THE LONDON COURT OF INTERNATIONAL ARBITRATION ___________________________________________________________________________
LCIA ARBITRATION NO. 00/2014
Claimant
VASIUKI LLC
v.
REPUBLIC OF BARANCASIA
Respondent
MEMORIAL FOR RESPONDENT
""
TABLE OF CONTENTS
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LIST
OF AUTHORITIES
BOOKS
ABBREVIATION
FULL CITATION
Dolzer
Rudolph Dolzer and Christoph Schreuer, PRINCIPLES INTERNATIONAL INVESTMENT LAW (2nd edn., 2012).
OF
Ghouri
Ahmad Ghouri, INTERACTION AND CONFLICT INVESTMENT ARBITRATION (2015).
IN
Linderfalk
Ulf Linderfalk, ON THE INTERPRETATION OF TREATIES : THE MODERN INTERNATIONAL LAW AS EXPRESSED IN THE 1969 VIENNA CONVENTION ON THE LAW OF TREATIES (2007).
Marboe
Irmgard Marboe, CALCULATION OF COMPENSATION DAMAGES IN INTERNATIONAL INVESTMENT LAW (2009).
McLachlan
Campbell McLachlan et al, INTERNATIONAL INVESTMENT
McNair
ARBITRATION : SUBSTANTIVE PRINCIPLES (2007). Lord Arnold McNair, LAW OF TREATIES (1961).
OF
TREATIES
AND
Molinuevo
Martín Molinuevo, PROTECTING INVESTMENT IN SERVICES : INVESTOR -STATE ARBITRATION VERSUS WTO DISPUTE SETTLEMENT (Global Trade Law Series, Vol. 38, 2011).
Newcombe
Andrew Newcombe and Lluís Paradell, L AW AND PRACTICE OF INVESTMENT TREATIES : STANDARDS OF TREATMENT (2009).
Sornarajah
M. Sornarajah, THE INTERNATIONAL LAW INVESTMENT (2010).
Villiger
Mark E. Villiger, COMMENTARY ON THE 1969 VIENNA CONVENTION ON THE LAW OF TREATIES (2009).
ON
FOREIGN
ARTICLES
ABBREVIATION
FULL CITATION
Ago
Robert Ago, Eighth Report (Addendum) of the Special Rapporteur in YEARBOOK OF THE INTERNATIONAL LAW COMMISSION , VOL. II(1), Doc. No. A/CN.4/318/Add.5-7 (1980).
;
Burgstaller
Markus Burgstaller, European Law and Investment Treaties, 26(2) JOURNAL OF INTERNATIONAL ARBITRATION 181 (2006).
Burke-White
William W. Burke-White and Andreas von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Treaties, 48 VIRGINIA JOURNAL OF INTERNATIONAL LAW 307
de Luca
(2008). Anna de Luca, Non-Pecuniary Remedies Under the Energy Charter Treaty, Occasional Paper, Energy Charter Secretariat, Knowledge Centre (2015).
Dorr
Oliver Dorr, Article 31: General Rule of Interpretation in VIENNA CONVENTION ON THE LAW OF TREATIES : A COMMENTARY (Oliver Dorr and Kirsten Schmalenbach eds., 2012).
Dubuisson
Francois Dubuisson, Article 59: Suspension of the Operation o a Mutlilateral Treaty by Agreement between Certain Parties o the Parties Only in THE VIENNA CONVENTION ON THE LAW OF TREATIES : A COMMENTARY , VOL. II, 1350 (Olivier Corten and Pierre Klein eds., 2011).
Eilmansberger
Thomas Eilmansberger, Bilateral Investment Treaties and EU Law, 46 COMMON MARKET LAW REVIEW 383 (2009).
Fitzmaurice
G.G. Fitzmaurice, Second Report of Special Rapporteur on the Law of Treaties in YEARBOOK OF THE INTERNATIONAL LAW COMMISSION , Vol. II, Doc. No. A/CN.4/107 (1957).
Foroohar online) Gray
(accessed Rana Forrohar, Why Greece Matters for Everyone, TIME (July 6, 2015). Christine D. Gray, Is there an International Law of Judicial
Remedies?, 56 BRITISH YEARBOOK OF INTERNATIONAL LAW 25 (1985). Hober
Kaj Hober, State Responsibility and Attribution, in The Oxford HANDBOOK OF INTERNATIONAL INVESTMENT LAW, 134 (Muchlinski et al, eds., 2008).
Kent
Avidan Kent and Alexandra P. Harrington, The Plea of Necessity under Customary International Law: A Critical Review in Light of the Argentine Cases in EVOLUTION IN INVESTMENT TREATY LAW AND ARBITRATION (Chester Brown and Kate Miles eds., 2011).
;"
Kleinheisterkamp
Jan Kleinheisterkamp, The Next 10 Year ECT Investment Arbitration: A Vision for the Future – From a European Law Perspective, LSE LAW, SOCIETY AND ECONOMY WORKING PAPERS 7/2011 (June, 2011).
Lachman
Desmond Lachman, Economic Crisis: The Global Impact of a Greek Default, AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC OLICY
MacGibbon
ESEARCH
P R (June 25, 2015). I. C. MacGibbon, The Scope of Acquiesance in International Law, 31 BRITISH YEARBOOK OF INTERNATIONAL LAW 143 (1954).
Markert
Lars Markert, The Crucial Question of Future Investment Treaties: Balancing Investors’ Rights and Regulatory Interests of Host States in EUROPEAN YEARBOOK OF INTERNATIONAL ECONOMIC LAW: INTERNATIONAL INVESTMENT LAW AND EU LAW, 145 (Marc Bungenberg et al eds., 2011).
Mui (accessed online)
Ylan Q. Mui, What the Crisis in Greece Means for the U.S. and Global Economies, THE WASHINGTON POST (June 29, 2015).
Orakhelashvili
Alexander Orakhelashvili, Article 30: Application of Successive Treaties Relating to the Same Subject Matter in THE VIENNA CONVENTION ON THE LAW OF TREATIES : A COMMENTARY , VOL. II, 764 (Olivier Corten and Pierre Klein eds., 2011).
Ramanujan
Adarsh Ramanujan, Conflicts Over “Conflict”: Preventing Fragmentation of International Law, 1(1) TRADE LAW AND DEVELOPMENT 171 (2009).
Sharpston
Eleanor Sharpston, European Community Law and the Doctrine of Legitimate Expectations: How Legitimate, and for Whom, 11 NORTH WESTERN JOURNAL OF INTERNATIONAL LAW AND BUSINESS 87 (1990-91).
Simma
Prof. Dr. Wolfram Karl, Article 1: Purposes and Principles in THE CHARTER OF THE UNITED NATIONS : A COMMENTARY , VOL. I (Bruno Simma ed., 2002).
Tariff Deficit Report
Asa Johannesson Linden et al, Electricity Tariff Deficit: Temporary or Permanent Problem in the EU, ECONOMIC PAPERS 534 (October, 2014).
Walde/Sabahi
Thomas W Wälde and Borzu Sabahi, Compensation, Damages, and Valuation, in The Oxford HANDBOOK OF INTERNATIONAL
;""
INVESTMENT LAW (Peter T Muchlinski et al, eds., 2008). MISCELLANEOUS
ABBREVIATION
FULL CITATION
Commentary to the VCLT
International Law Commission's Draft Articles on the Law of Treaties with Commentaries, in YEARBOOK OF INTERNATIONAL LAW, Vol. II, 187 (1966).
EAG 2008
Community Guidelines on State Aid for Environmental Protection, [2008] OJ C82/1 (April 1, 2008).
EAG 2014
COMMUNICATION FROM THE COMMISSION Guidelines on State Aid for Environmental Protection and Energy 2014-2020, [2014] OJ C200/1 (June 28, 2014).
EC 2010 Communciation
COMMUNICATION FROM THE COMMISSION to The European Parliament, The Council, The European Central Bank, The
European Economic Social Investment Committee,Bank, The Committee Of The Regions And TheAnd European COM (2010) 343. Electricity Directive
DIRECTIVE 2003/54/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL concerning Common Rules On Or The Internal Market In Electricity And Repealing Directive 96/92/EC, [2003] OJ L176/37 (June 26, 2003).
Fiscal Crisis Report
Congressional Budget Office, Federal debt and the Risk of a Fiscal Crisis, ECONOMIC AND BUDGET ISSUE BRIEF (July 27, 2010).
Renewable Energy
DIRECTIVE 2009/28/EC OF THE EUROPEAN PARLIAMENT AND
Directive
OF THE COUNCIL on the Promotion of the Use of Energy from Renewable Sources and Amending and Subsequently Repealing Directives 2001/77/EC and 2003/30/ECOJ [2009] OJ L140/16 (April 23, 2009).
SGP 1997
COUNCIL REGULATION (EC) NO. 1466/97 OF 7 JULY 1997 on the Strengthening of the Surveillance of Budgetary Positions and the Surveillance and Coordination of Economic Policies [1997] OJ L209 (July 7, 1997).
;"""
LIST
OF LEGAL SOURCES
CASES
ABBREVIATION
FULL CITATION
Aegean Sea Continental Aegean Sea Continental Shelf Case (Greece v. Turkey) Shelf (Jurisdiction) (Jurisdiction) 1978 ICJ Rep. 3 (December 19, 1978). AES Summit v. Hungary
AES Summit Generation Limited v. The Republic of Hungary, ICSID Case No. ARB/07/22 (September 23, 2010).
AES Summit v. Hungary
AES Summit Generation Limited v. Republic of Hungary, ICSID Case No. ARB/07/22, (September 23, 2010).
ATA v. Jordan
ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2 (May 18, 2010).
Autopista Concesionada v.
Autopista Concesionada de Venezuela CA v. Venezuela, 10
Venezuela ?@ ;$ 9"
ICSID Rep. 314 (September 23, 2003). British Petroleum Company (Libya) Ltd., v. The Government of the Libyan Arab Republic, Ad-Hoc Arbitration, , 5 YBCA 143 (1980) (October 10, 1973).
8LF ;$ 8\'1& ('A*<2"1
CME v. Czech Republic, UNCITRAL Arbitration (March 14, 2003).
CMS v. Argentina
CMS v. Argentina, ICSID Case No. ARB/01/8 (May 12, 2005).
Commission v. Austria
Commission of the European Communities v. Republic of Austria, European Court of Justice (Grand Chamber), C-205/06 (March 3, 2009).
Commission v. Finland
Commission of the European Communities v. Republic of Finland, European Court of Justice (Second Chamber), C118/07 (February 20, 2007).
Commission v. Italy
Commission of the European Economic Community v. Italian Republic, European Court of Justice, C-10/61 (February 27, 1962).
Commission v. Sweden
Commission of the European Communities v. Republic of Sweden, European Court of Justice (Grand Chamber), C249/06 (March 3, 2009).
"R
Continental Casualty v. Continental Casualty Company v. The Argentine Republic, Argentina ICSID Case No. ARB/03/9 (September 5, 2008). Eastern Sugar v. Czech Eastern Sugar BV v. Czech Republic, Partial Award, SCC Case Republic (Partial Award) No 088/2004 (March 27, 2007). Eco Swiss v. Benetton Electrabel v. (Jurisdiction)
Eco Swiss China Time Ltd Benetton International, [1999] ECR I-3055 (June 1, 1999).
!.
Hungary Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19 (November 30, 2012).
Elimination of Racial Application of the International Convention on the Elimination Discrimination of All Forms of Racial Discrimination (Georgia v. Russian (Preliminary Objections) Federation) (Preliminary Objections) 2011 ICJ Rep. 70 (April 1, 2011). Enron v. Argentina
Enron Corporation and Ponderosa Assets v. Argentine Republic, ICSID Case No. ARB/01/3 (May 22, 2007).
Eureko v. Poland (Partial Eureko B.V. v. Republic of Poland, UNCITRAL Arbitration, Award) Partial Award (August 19, 2005). Eureko v. (Jurisdiction)
Slovakia Eureko BV v. Slovakia, Award on Jurisdiction, PCA Case No 2008-13 (October 26, 2010).
Franck Charles Arif v. Moldova
Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23 (April 8, 2013).
Francovich v. Italy
Andrea Francovich v. Italian Republic, [1995] ECR I-03843 (November 19, 1991).
Gabcikovo-Nagymaros
Case Concerning the Gabcikovo-Nagymaros Project (Hungary v. Slovakia) (Merits) ICJ 7 (September 25, 1997).
Goetz v$ Burundi
Antoine Goetz v. République du Burundi, ICSID Case No. ARB/95/3 (February 10, 1999).
Himpurna v. PLN
Himpurna California Energy Ltd. v PT. (Persero) Perusahaan Listruik Negara, UNCITRAL Arbitration (May 4, 1999).
Levitt v. Iran
William J. Levitt v. The Government of the Islamic Republic of Iran, Iran-United States Claims Tribunal, 14 Iran–US CTR (1987) 191 (April 22, 1987).
LG&E v. Argentina LG&E Energy Corp. v. Argentine Republic, Decision on (Decision on Liability) Liability, ICSID Case No. ARB/02/1 (October 3, 2006). LIAMCO v. LibM:
Libyan American Oil Company (LIAMCO) v. The Libyan R
Arab Republic, Ad Hoc Arbitration (April 12, 1977). Matteucci v. Belgium
Annunziata Matteucci v. Communauté française of Belgium, [1988] ECR 5589 (September 27, 1988).
Micula v. Romania
Ion Micula v. Romania, ICSID Case No. ARB/05/20 (December 11, 2013).
Micula v. Romania (State Commission Decision (EU) 2015/1470 on State aid SA.38517 Aid Decision) (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v. Romania of 11 December 2013 , C(2015) 2112 (March 30, 2015). MTD v. Chile
MTD Equity and MTD Chile v. Republic of Chile, ICSID Case No. ARB/01/7 (May 25, 2004).
Noble Ventures v. Romania
Noble Ventures Inc. v. Romania, ICSID Case No. ARB/01/11 (October 12, 2005).
Occidental v. Ecuador (Provisional Measures)
Occidental Petroleum Corporation v. The Republic of Ecuador, ICSID Case No. ARB/06/11 (August 17, 2007).
Oil Platforms (Preliminary Case Concerning Oil Platforms (Iran v. United States) Objection) (Preliminary Objection) 1996 ICJ Rep. 803 (December 12, 1996). PSEG v. Turkey
PSEG Global Inc. v. Republic of Turkey, ICSID Case No. ARB/02/5 (January 19, 2007).
Pulau Ligitan
Sovereignity over Pulau Ligitan and (Indonesia/Malaysia), ) 2001 ICJ Rep. 575.
Reynolds Tobacco v. Iran
RJ Reynolds Tobacco Company v. The Government of the Islamic Republic of Iran, Iran-United States Claims Tribunal, 8 Iran-US CTR 55 (March 1, 1985).
Sempra v. Argentina
Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16 (September 28, 2007).
Pulau
Sipadan
Shufeldt Claim (United Shufeldt Claim (Claim of the United States of America on States v. Guatemala) behalf of P. W. Shufeldt v. The Republic of Guatemala), 2 RIAA 1079 (November 2, 1929). Tecmed v. Mexico
Técnicas Medioambientales Tecmed v. United Mexican States, ICSID Case No. ARB(AF)/00/2 (May 29, 2003).
The Wimbledon Case
The S.S. “Wimbledon”, (United Kingdom and Ors. v. Germany) PCIJ, Ser. A, No. 1 (August 17, 2003).
R"
WHO-Egypt Case
Interpretation of the Agreement on 25 March, 1951 Between WHO and Egypt (Advisory Opinion) ICJ 96 (1980).
STATUTES ANDTREATIES
ABBREVIATION
FULL CITATION
ILC Articles/ Commentary to the ILC Articles
Report of the International Law Commission, 53rd Session, April 23-June 1, July 2-August 10 2001, U.N. Doc. A/56/10 Supplement No. 10 (2001).
NAFTA
North American Free Trade Agreement, 32 ILM 289 (1993) ( January 1, 1994).
TFEU
Treaty on the Functioning of the European Union, 2008 O.J. C 115/47 (December 1, 2009).
VCLT
Vienna Convention on the Law of Treaties, 1155 UNTS 331 (May 23, 1969).
R""
LIST OF ABBREVIATIONS
ABBREVIATION ¶ / ¶¶
FULL CITATION Paragraph(s)
$
US Dollars
Art(s).
Article(s)
BIT
Bilateral Investment Treaty
Doc(s).
Document(s)
EAG
Environmental Aid Guidelines
EC Treaty
Treaty Establishing the European Economic Community
EC/Commission
European Commission
ECJ
European Court of Justice
Ed(s).
Editor(s)
Edn.
Edition
EU
European Union
"/EUR
Euro
FDI
Foreign Direct Investment
FET
Fair and Equitable Treatment
GDP
Gross Domestic Product
ICJ
International Court of Justice
ILC
International Law Commission
ILC Articles
Draft Articles on State Responsibility
LCIA
London Court of International Arbitration
No(s).
Number(s)
p. / pp.
Page(s)
Prof.
Professor
Rep(s).
Report(s) R"""
SCC
Stockholm Chamber of Commerce
SGP
Stability and Growth Pact
TFEU
Treaty on the Functioning of the European Union
UN
United Nations
U.N. Charter
Charter of the United Nations
UNCITRAL
United Nations Commission on International Trade Law
v.
Versus
VCLT
Vienna Convention on the Law of Treaties
Vol(s).
Volume(s)
R";
STATEMENT OFFACTS THE SUCCESSIVETREATIES
The Republic of Barancasia [“Respondent”] and the Federal Republic of Cogitatia entered into a BIT on December 31, 1998, which came into force on August 2, 2002. Both countries acceded to the EU on May 1, 2004, thereby acceding to the TFEU, signed on December 13, 2007. In light of the accession, Respondent concluded that the BIT had become obsolete and notified Cogitatia of its intention to terminate the BIT on June 29, 2007. The notification stated that the BIT would be terminated with effect from June 30, 2008. Respondent also made several informal attempts to inform Cogitatia about the termination. Finally, on May 5, 2012, the Prime Minister of Barancasia declared that intra-EU BITs had been successfully terminated. Cogitatia never raised any objections to the notification or declaration. CLAIMANT
Vasiuki LLC [“Claimant”] is a Cogitatian company, which was engaged in the small-scale fossil fuel and wind turbine generation sector. It expanded its renewable energy operations to take advantage of ‘green subsidies’ offered by States. Subsequently, it started an experimental solar project called Alfa [“Alfa”] in Barancasia in 2009. However, Alfa operated at heavy losses due to defects in the installation, delays and huge budget overruns. It sought to rely on governmentbacked green subsidies as a hope for survival. THE TARIFF REGIME
On May 1, 2010, Respondent enacted the Law on Renewable Energy [“ LRE”] to encourage production of renewable energy by offering State support, till the total share of such energy amounted to no less than 20% of the country’s gross energy consumption. To this end, eligible photovoltaic producers were to be granted licenses by the Barancasian Energy Authority [“BEA”], the energy regulator in Barancasia for the development of solar projects. According to Article 4 of the LRE, licensees would receive a feed-in tariff for a period of 12 years, calculated on the basis of the Photovoltaic Support Regulation [“LRE Regulation”]. However, nothing in the LRE indicated that the feed-in tariffs would not be changed during these 12 years.
C
On July 1, 2010 the BEA announced a feed-in tariff of 0.44 EUR/kWh for 12 years, which would guarantee an assured return of 8% to producers. Under this regime, Claimant was denied a license for Alfa as the feed-in tariff was not meant for existing projects. Respondent had denied all license applications by existing producers uniformly. Subsequently, Claimant decided to start a second project called Beta, which was granted a license by the BEA. THE REDUCTION INTARIFFS
During 2011, a ground-breaking technology was developed which reduced the costs of production of photovoltaic energy significantly by making solar panels cheaper to manufacture. Since the profitability of investments that used the latest technology and received the 0.44 EUR/kWh increased dramatically, the BEA received 7000 applications for a license under the LRE. The officials of Barancasia admitted that the feed-in tariff regime had created a solar bubble and had become unsustainable. It estimated that if it were to grant licenses to all 7000 applicants, it would have to divert 15% of its state revenues to the photovoltaic sector. Further, Respondent could not have borrowed the requisite amount to meet this additional expenditure as it risked exceeding the borrowing limits mandated under EU law. In June, 2012, widespread protests broke out among Barancasian teachers, because the projected expenditure on tariffs for 7000 applicants was more than the expenditure on education. In light of these factors, Respondent decided to review its legislation. Amidst the fiscal and political turmoil in Respondent state, the BEA granted Claimant licenses to operate 12 new projects under the Barancasia Solar Installation Project [“New Projects”]. On January 3, 2013, following private consultations with certain stakeholders and industry representatives, Respondent passed an amendment to the LRE [“ Amendment”], which provided for an annual review of the feed-in tariff to take into account the costs of the best available technology. This Amendment came into effect on January 5, 2013. Subsequently, the BEA reduced the tariff to 0.15 EUR/kWh, to ensure that producers who were using the best available technology could still earn a return of 8% on investment. Aggrieved by the actions of Respondent, Claimant has approached this tribunal [“Tribunal”] under Article 8 of the BIT.
G
SUMMARY OFARGUMENTS
1. The Tribunal does not have jurisdiction in the instant case because the BIT was implicitly terminated by the conclusion of the TFEU on December 1, 2009, as per Article 59 of the VCLT. The BIT and the TFEU fulfill the requirements of same subject matter, common intention and incompatibility under Article 59 of the VCLT. Further, the procedure for termination has been complied with. 2. The actions of Respondent do not violate the FET clause under Article 2 of the BIT. The denial of license to Alfa does not violate the transparency obligation under the FET clause. The reduction in tariff does not violate the legitimate expectations of Claimant, as Respondent’s actions could not have given rise to any such expectation. In any event, Respondent’s actions were a legitimate exercise of its regulatory powers, and hence, are justified. Finally, the refusal to consult Claimant before termination does not violate the due process requirement because the Amendment constituted a quasi-legislative action. 3. Respondent’s actions are precluded from wrongfulness as they were undertaken in pursuance of its obligations under the TFEU. Respondent’s obligations under the TFEU had superseded its obligations under the BIT by virtue of the operation of Article 30(3) of the VCLT, and the nonapplicability of Article 10 of the BIT. In any case, Respondent’s breach of obligations is exempted under Article 11 of the BIT, and under the customary defence of necessity. 4. Restitution cannot be granted to Claimant for a breach of obligations under the BIT because compensation, and not restitution, is the primary remedy in investor-State arbitration. In any case, the remedy of restitution is precluded under Article 35 of the ILC Articles. 5. Compensation worth "2.1 million cannot be granted to Claimant. Claimant’s calculation in this regard does not comply with established accounting and legal standards for calculation of damages.
V
ARGUMENTSADVANCED I.
THE TRIBUNAL DOES NOT HAVEJURISDICTION
1.
IN THE PRESENT MATTER
The jurisdiction of an arbitral tribunal is derived from the consent of parties. In the BIT,
this takes the form of an arbitration clause under Article 8 of the BIT. In the present case however, the BIT has been validly terminated with the coming into force of the TFEU on December 1, 2009. This is because first, the requirements under Article 59 of the VCLT have been fulfilled (Section A) and second, the procedural requirements for termination have been complied with (Section B). Thus, the Tribunal does not have jurisdiction. A. The Requirements under Article 59 of the VCLT have been Fulfilled
Article 59 provides for the implicit termination of a treaty by successive treaties. 1 In
2.
order to invoke termination under this Article, it must first be shown that both treaties relate to the same subject matter (Section 1). Thereafter, it must be shown that either there was common intention to have the later treaty govern the matter ( Section 2), or the provisions of treaties are so far incompatible that they cannot be applied at the same time (Section 3). All three requirements have been met in the instant case.
1. 3.
The Treaties Relate to the Same Subject Matter Article 59 of the VCLT uses the expression “relating to the same subject matter”, not
exactly covering the same subject matter. This indicates that the same subject matter test must be broadly construed, in that it does not require a precise correspondence between the provisions of 2
the two treaties. In order to satisfy this test, first, the object of the two treaties must be identical and second, the provisions of the two treaties must be comparable, not identical.3 4.
The object of a treaty can be ascertained from its preamble, 4 as well as the scheme of the
treaty.5 The TFEU, inter alia, seeks to achieve the same objects as the BIT. The object of the BIT is to “develop economic cooperation to the mutual benefit of both Contracting Parties” and
1
Art. 59, VCLT. Dubuisson, p. 1336. 3 Dubuisson, p. 1336. 4 Villiger, p. 428. 2
5
Pulau Ligitan, ¶ 51; Villiger, p. 428.
>
“create and maintain favourable conditions for investments.”6 Similarly, the EU, being a union of States, seeks to “strengthen the unity of their economies and to ensure their harmonious
development”.7 In pursuance of this objective, it seeks to “progressively abolish restrictions on … foreign direct investment” through its Common Commercial Policy [“CCP”].8 Thus, the objects of the BIT and the TFEU are identical. 5.
Further, the provisions of the two treaties are also comparable. The guarantee of FET 9
under the BIT corresponds with provisions on equal treatment and non-discrimination under the TFEU,10 as well as general principles of EU law – such as protection of legitimate expectations, proportionality and procedural fairness.11 The provisions regarding full protection and security 12 and indirect expropriation under the BIT13 correspond with the right of establishment under Article 49 of the TFEU, which states “restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited”. 14 6.
Further, the BIT guarantee of national and minimum standard of treatment 15 corresponds
with Article 49(2) of the TFEU, which states that the right of establishment is to be exercised in accordance with “the conditions laid down for its own nationals by the law of the country where such establishment is affected.”16 Finally, the two treaties also offer comparable systems of remedies. Under Article 8 of the BIT, an aggrieved investor can approach national courts or arbitral tribunals to claim damages for violations of the BIT. 17Similarly, under EU law, an aggrieved investor can approach national courts to claim damages for violation of EU law. 18 7.
Admittedly, the degree of protection offered by the BIT and TFEU is different. However,
the test of same subject matter does not depend on “the degree of precision of the enunciated
6
Preamble, BIT. Preamble, TFEU. 8 Art. 206, TFEU. 9 Art. 2, BIT. 10 Art. 18, TFEU. 11 Eureko v. Poland, ¶ 250; Sharpston, p. 88. 12 Art. 2, BIT. 13 Art. 5, BIT. 14 Art. 49, TFEU. 15 Art. 3, BIT 16 Art. 49(2), TFEU. 17 Art. 8, BIT 7
18
Francovich, p. 35.
3
rules.”19 The test is satisfied if the treaties “govern the same object at the same time, either by way of general rules or more specific ones .”20 Therefore, both the BIT and the TFEU govern the conditions in which foreign investment takes place, albeit with rules that differ in their degree of precision. 8.
It is erroneous to argue that the TFEU is merely concerned with the “entry phase” of
investments, while the BIT provides protections at the “post-entry phase.” The TFEU does, in fact, contain several provisions that govern the treatment of investments after they have been made. The provision on non-discrimination, for instance, is not limited to the mere admission of investments; it also prohibits any subsequent discrimination on grounds of nationality.21 Further, the freedom of establishment under Article 49 of the TFEU covers both the right to “set up and manage undertakings”.
22
Finally, EU law principles like legitimate expectations and
proportionality govern the actions of Member States in all transactions with foreign investors, even after investments have been made. 23 Therefore, the TFEU governs conditions of investment both before and after the investment has been made.
2. 9.
The Requirement of Common Intention is Met There was common intention between the Parties to have the later treaty govern the
matter. Such intention “may either be apparent from the text of the later treaty or otherwise established.”24 In the present case, the presence of common intention is apparent from Article 351 of the TFEU. Article 351 is in the nature of a survival clause, which states that agreements between EU Member States and Non-EU States “shall not be affected by the provisions of the Treaties.”25 This provision must be interpreted in accordance with the rule of per argumentum a
contrario, which states that when a treaty provision refers to a smaller part of a generically defined class, it excludes all other parts of that class. 26 Such exclusion would extend to all intraEU BITs. The tribunal in Electrabel concluded that Article 351 of the TFEU, as a survival
19
Dubuisson, p. 1336. Dubuisson, p. 1336. 21 Art. 18, TFEU. 22 Art. 49, TFEU. 23 Sharpston, p. 90. 24 Art. 59, VCLT; Dubuisson, p. 1339. 25 Art. 351, TFEU. 20
26
The Wimbledon Case, p. 23; Linderfalk, p. 302; McNair, p. 400-401.
O
clause, “does not apply to the agreements between the two EU Member States.”27 Thus, by acceding to the EU the Parties in the instant case intended for the BIT to be abrogated in accordance with this provision. 10.
Further, common intention of the Parties can also be “otherwise established”. 28 In
Eureko and Eastern Sugars, the tribunals looked at past statements and conduct of both parties to ascertain whether there was common intention. 29 Respondent clearly announced its intention to terminate the treaty on November 15, 2006, 30 and notified Cogitatia of such intention on June 29, 2007.31 Further, it contacted the Government of Cogitatia informally several times to confirm termination of the BIT. 32 However, at no point did Cogitatia raise any objections to such termination. Silence can be construed against a party, when it is under an obligation to respond. 33 Under Article 65(3) of the VCLT, the State that disagrees with termination is expected to raise objections to the same, within three months of receiving such notification. 34 In light of its actions, it may be presumed that Cogitatia intended to terminate the treaty. Thus, common intention is established. 11.
Although in Eureko and Eastern Sugars the presence of ‘common intention’ was not
found, the facts of the present case are materially different. In both the aforementioned cases, parties had continued to list the BIT as a treaty in force on their official websites.35 Further, in the Eastern Sugars case, the Czech Republic had failed to raise the issue of termination prior to the case.36 In the instant case, however, Respondent had removed the BIT from its website on November 28, 2008, almost a year before the termination. 37 Moreover, it had raised the issue of termination as early as November 15, 2006, and continued making such efforts subsequently. 38 Therefore, both Respondent and Cogitatia had common intention to terminate the BIT.
27
Electrabel v. Hungary, ¶ 4.180. Art. 59, VCLT. 29 Eureko v. Slovakia, ¶ 105; Eastern Sugar v. Czech Republic, ¶ 155. 30 Uncontested Facts, ¶ 6. 31 Uncontested Facts, ¶ 9. 32 Uncontested Facts, ¶¶ 24, 31. 33 MPEPIL, p. 7; MacGibbon, p. 144. 34 Art. 65(3), VCLT. 35 Eureko v. Slovakia, ¶ 99; Eastern Sugar v. Czech Republic, ¶ 155. 36 Eastern Sugar v. Czech Republic, ¶ 122. 37 Uncontested Facts, ¶ 11. 28
38
Uncontested Facts, ¶¶ 6, 9, 24, 31.
T
3.
The Provisions of the Treaties are so Incompatible that they Cannot be Applied at the Same Time
12.
Treaties are considered incompatible if compliance with one prevents the fulfillment of
obligations under the other treaty, or undermines the object and purpose of the other treaty. 39 The BIT and the TFEU are incompatible for three reasons: first, the BIT prevents the fulfillment of Article 207 of the TFEU; second, the BIT undermines the object of equal treatment under Article 18 of the TFEU, and third, the BIT undermines the object of uniform application of EU law. 13.
Article 207 of the TFEU read with Article 3 of the TFEU grants exclusive competence to
the EU to legislate in the area of FDI, which forms part of the CCP.40 This implies that “only the
Union may legislate and adopt legally binding acts” with respect to FDI. 41 Although the exclusive competence granted under Article 207 of the TFEU is yet to be exercised by the EU, the mere conferring of such competence makes intra-EU BITs incompatible with the TFEU. In
Commission v. Austria and Commission v. Sweden, the ECJ had to decide whether the competence of the Commission to impose restrictions on capital transfers under Articles 57 and 59 of the EC Treaty was incompatible with the free transfer of capital provisions in BITs with non-EU countries.42 Although the Commission had not exercised such competence, the ECJ held that the fact that it had the power to unilaterally adopt restrictive measures in this regard was sufficient to establish an incompatibility with the prior agreement.” 43 Similarly, the exclusive competence of the EU to legislate on the matter of FDI, which is also covered by the BIT, reveals an incompatibility with the BIT. 14.
Further, the BIT violates Article 18 of the TFEU, which prohibits “any discrimination on
grounds of nationality.”44 In Matteuci v. Belgium, Belgium had offered scholarships to only German nationals by virtue of a bilateral treaty between the two States. 45 This was held to breach the guarantee of equal treatment under Article 18.46 In the present case, since the degree of
39
Dubuisson, p. 1336; Ramanujan, p. 179. Art. 207 and Art. 3, TFEU; Eilmansberger, p. 394. 41 Art. 2, TFEU. 42 Commission v. Austria, ¶ 37; Commission v. Sweden, ¶ 36. 43 Commission v. Austria, ¶ 37; Commission v. Sweden, ¶ 38. 44 Art. 18, TFEU. 45 Matteucci v. Belgium, ¶ 23. 40
46
Matteucci v. Belgium, ¶ 23.
W
protections provided under the BIT is greater than that provided under the TFEU,47 an investor from Cogitatia would enjoy greater rights than an investor from any other EU State with which Respondent does not have a BIT. Such unequal treatment of investors on the basis of nationality constitutes a breach of Article 18. 15.
Admittedly, the tribunals in Eureko and Eastern Sugars refused to find an incompatibility
between the BIT and EU law on the basis of Article 18 of the TFEU, stating that such incompatibility could be resolved by extending BIT protection to all EU Member States. 48 However, the test under Article 59 of the VCLT requires that the incompatibility exist at the time
of coming into force of the later treaty. The mere fact that incompatibility can be removed does not change the fact that the incompatibility existed at the relevant time. 49 Therefore, the BIT guarantees are incompatible with Article 18 of the TFEU. 16.
Finally, the provision of investor-state arbitration under Article 8 of the BIT undermines
the object of uniform application of EU law. Under Article 344 of the TFEU, “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.” 50 It is only the national courts of Member States that can make a preliminary reference to the ECJ in such matters. 51 This limitation of the competence to interpret and apply EU law protects the object of uniform application. It follows that arbitral tribunals cannot interpret or apply EU law, or make a preliminary reference to the ECJ for the same.52 17.
In the present case however, the Tribunal will be required to interpret certain provisions
of the TFEU in order to ascertain the rights of the parties under the BIT. Further, the investor can engage in the practice of forum shopping, which would lead to a situation where “the ECJ could be by-passed in a matter which is (also) governed by EU law.”53 Therefore, Article 8 of the BIT undermines the object of uniform application of EU law.
47
Eastern Sugar v. Czech Republic, ¶ 117; Eureko v. Slovakia, ¶ 153; EC 2010 Communication, p. 9. Eastern Sugar v. Czech Republic, ¶ 117; Eureko v. Slovakia, ¶ 153. 49 Commission v. Austria, ¶ 42; Commission v. Sweden, ¶ 43. 50 Art. 344, TFEU. 51 Art. 267, TFEU. 52 Eco Swiss v. Benetton, ¶ 34; Electrabel v. Hungary, ¶ 4.152. 48
53
Eilmansberger, p. 405; Eureko v. Slovakia, ¶ 185.
4
B. The Procedural Requirements of Termination have been Complied with
18.
The procedure for termination under Article 59 of the VCLT is neither governed by
Article 13 of the BIT ( Section 1), nor by Article 65 of the VCLT (Section 2). Instead, such procedure is derived from customary international law, and has been complied with (Section 3).
1. 19.
The Procedure for Termination is not Governed by Article 13 of the BIT Article 13 of the BIT lays down the procedure for termination at the volition of either
party. The operation of this provision is governed by Article 54(a) of the VCLT, which deals with “termination in conformity with the provisions of the treaty”.54 In contrast, Article 59 of the VCLT is an example of termination by law.55 Therefore, the procedure provided under Article 13 of the BIT is not applicable for determining procedure for termination under Article 59 of the VCLT. 20.
Further, Article 13 of the BIT cannot be considered to provide the sole procedure for
termination of the BIT. Under this provision, no termination can take place during the initial ten years after the coming into force of the BIT.56 If Article 13 governed all instances of termination, it would lead to an absurd situation wherein a party would be unable to terminate the BIT even in case of a fundamental change in circumstances between the two parties. 57 Thus, there was no requirement to terminate the BIT in accordance with Article 13.
2. 21.
The Procedure for Termination is not Governed by Article 65 of the VCLT Article 65 of the VCLT provides the procedure for termination of a treaty when a party 58
“invokes a ground […] for terminating it.” On the other hand, Article 59 of the VCLT does not require the invocation of a ground for termination; it results in implicit termination of the treaty.59 This is evinced by the use of the phrase “termination […] of a treaty implied by conclusion of a later treaty” under the title to Article 59. This is opposed to the language employed in Articles 60, 61 and 62 of the VCLT which require the existence of a material
54
Art. 54(a), VCLT. Art. 59, VCLT. 56 Art. 13(2), BIT. 57 Art. 62, VCLT. 58 Art. 65, VCLT. 55
59
Art. 59, VCLT.
CD
breach, supervening impossibility or fundamental change in circumstances to invoke termination of a treaty.60 Therefore, Article 65, VCLT does not govern the procedure for termination under Article 59, VCLT.
3.
The Procedure for Termination under Customary International Law has been Complied with
22.
The VCLT provides that “rules of customary international law will continue to govern
questions not regulated by the provisions of the present Convention .” 61 In Gabcikovo-
Nagymaros, the ICJ noted that the procedural principles under customary law are based on the obligation of States to act in good faith. 62 This obligation of acting in good faith would require Parties to notify the other party about the termination of a treaty, and negotiate in case of objections.63 No specified period or mode of termination, however, has been prescribed in this respect. 23. Respondent fulfilled its notification obligations by giving notice of the termination on June 29, 2006.64 Since Cogitatia never raised any objections to such termination, there was no obligation upon Respondent to negotiate.65 G. Fitzmaurice, the Special Rapporteur of the ILC on the Law of Treaties, recognized in his Second Report that automatic expiry of treaties “may result from the operation of a rule of law independently of the treaty .”66 Therefore, the BIT was automatically terminated by the coming into force of the TFEU on December 1, 2009. II.
RESPONDENT’S ACTIONS
DO NOTCONSTITUTEA BREACH OF ITSFET OBLIGATIONSUNDER
THE BIT
24.
Respondent did not breach its FET obligations under Article 2 of the BIT by the denial of
license to Alfa (Section A), the reduction in feed-in tariff ( Section B) or by its failure to consult Claimant before reducing the tariff ( Section C).
60
Arts. 60-62, VCLT. Preamble, VCLT. 62 Gabcikovo-Nagymaros, ¶ 109. 63 Gabcikovo-Nagymaros, ¶ 109; WHO-Egypt Case, ¶ 49. 64 Uncontested Facts, ¶ 9. 65 Uncontested Facts, ¶ 24. 61
66
Fitzmaurice, p. 23.
CC
A. The Denial of License to Alfa does not Violate the FET Clause
25.
The denial of a license to Alfa under the LRE did not violate Respondent’s transparency
obligation under the FET clause. The transparency obligation is considered discharged when the authorities upon becoming “aware of any scope for misunderstanding or confusion […] ensure that the correct position is promptly determined and clearly stated so that investors can proceed with all appropriate expedition.”67 Accordingly, in Champion v. Egypt, no violation of the transparency obligation was found because the relevant information was made “public, available, or … [was] published or produced by the [respondent] upon the request of the [claimants]”. 68 In the instant case, upon receiving Claimant’s application for a license for Alfa, the BEA promptly responded by informing Claimant of its policy to not grant licenses to existing producers. 69 Further, the license was denied to all existing producers uniformly.70 Therefore, Respondent has discharged its transparency obligations. 26.
Further, such denial of license was not in contravention of the LRE. Admittedly, Article 4
of the LRE allows for the grant of licenses to existing producers. However, it is limited to existing producers who seek to develop their capacity.71 Claimant did not indicate any such inclination towards developing Alfa’s pre-existing capacity. In any case, the feed-in tariff under the LRE was only meant for projects operating at a capacity not exceeding 30 kWh.72 Since Alfa was already operating at the capacity of 30 kWh,73 it could not have developed its capacity without becoming ineligible for the feed-in tariff. Therefore, the denial of license to Alfa was not contrary to the parent statute. B. The Reduction in Tariff does not Violate the FET Clause
27.
Respondent reduced the feed-in tariff from 0.44 EUR/kWh to 0.15 EUR/kWh on January
3, 2013.74 This did not violate Claimant’s legitimate expectations under the FET clause because the expectation of continued payment of the pre-Amendment tariff for 12 years was not 67
Metalclad v. Mexico, ¶ 76. Champion v. Egypt, ¶ 164 69 Uncontested Facts, ¶ 22. 70 Procedural Order No. 2, ¶ 14. 71 Art. 5, LRE. 72 Art. 1, LRE Regulation. 73 Project Alfa Problems, Vasiuki LLC Dataset. 68
74
Uncontested Facts, ¶ 38.
CG
legitimate (Section 1). In any event, the reduction in tariff is justified as a legitimate regulatory measure (Section 2).
1.
Expectation of Continued Payment of the Pre-Amendment Rate of Tariff was not Legitimate
28.
The power of States to create, amend and repeal laws is an important attribute of their
sovereignty and has been recognized by several tribunals. 75 It has also been recognized that the FET clause cannot be treated “as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework .”76 The only circumstance in which an investor can expect that the law will not change is in the presence of a stabilization clause. 77 For instance, in
LG&E v. Argentina, investors were offered certain tariff guarantees under an Argentine decree.78 The removal of such tariff guarantees was considered to violate the legitimate expectations of the investor, only because the Argentine decree contained a stabilization clause stating that the “licensee’s tariff system will not be subject to freezing, administration and/or price control.” 79 In the absence of such a stabilization clause in the present case, Claimant’s expectation of receiving the pre-Amendment rate of tariff for 12 years was not legitimate. 29.
Further, no such expectation could have been legitimate in light of the prevailing
circumstances in Barancasia. In order to be considered legitimate, an expectation must be reasonable in light of the “political, socio-economic, cultural and historical conditions prevailing in the host state.”80 In National Grid v. Argentina , the tribunal held that the economic crisis in Argentina must be taken into account for determining whether the investors’ expectations were legitimate.81 Similarly, in Pope and Talbot v. Canada, the tribunal held that when there had been a substantial change in economic factors surrounding the investment, a State could not be expected to restrict the grant of quotas according to historically agreed patterns. 82
75
Parkerings v. Lithuania, ¶ 333; EDF v. Romania, ¶ 217; Klager, p. 154. EDF v. Romania, ¶ 217. 77 Parkerings v. Lituania, ¶ 332; Klager, p. 174. 78 LG&E v. Argentina, ¶ 41. 79 LG&E v. Argentina, ¶¶ 41 and 131. 80 Duke v. Ecuador, ¶ 365-366; Bayindir v. Pakistan. ¶ 193; Vandevelde, p. 67. 81 National Grid v. Argentina, ¶ 180. 76
82
Pope and Talbot v. Canada, ¶¶ 121-123.
CV
30.
In the instant case, the unsustainability of the tariff regime had been highlighted in the
local media, and by Barancasian officials, as early as the beginning of 2012.83 There were widespread strikes by Barancasian teachers, and public opinion was overwhelmingly opposed to the tariff regime.84 In June, 2012, Respondent promised to review its legislation. 85 In countries such as Spain and Czechoslovakia, which had similar tariff regimes and were facing a similar crisis, the Governments had reduced the amount of feed-in tariffs offered to producers. 86 In light of these circumstances, Claimant’s expectation that the tariff would not be changed was neither reasonable nor legitimate. Hence, there has been no violation of Claimant’s legitimate expectations.
2. 31.
The Reduction in Tariff was a Legitimate Regulatory Measure Tribunals have recognized that the protection of legitimate expectation must be balanced
with the regulatory powers of the State.87 An action is not considered a violation of legitimate expectation if it constitutes a legitimate exercise of regulatory powers.88 Accordingly, in Genin v.
Estonia, the revocation of the license of a foreign bank was held to not have violated its legitimate expectations because the Estonian Government had legitimate regulatory concerns about financial impropriety at the bank.89 In order to be a legitimate regulatory action, a measure must be for a public purpose and must be reasonable.90 32.
The reduction in tariff by Respondent was for a public purpose. Tribunals have
recognized that States must be given a wide margin of appreciation in determining what constitutes public purpose.91 The feed-in tariff regime had created an unsustainable solar bubble, as a consequence of which Respondent received 7000 applications for licenses. 92 If it were to accept all applications, it would have to spend 15% of its state revenues on feed-in tariff
83
Uncontested Facts, ¶ 28-29. Uncontested Facts, ¶ 32. 85 Uncontested Facts, ¶ 32. 86 The Economist Report. 87 Genin v. Estonia, ¶ 365; Thunderbird v. Mexico (Walde Separate Opinion), ¶ 109-110; Vandevelde, p. 55; p. 153. 88 Genin v. Estonia, ¶ 365; Vandevelde, p. 55; Klager, p. 153. 89 Genin v. Estonia, ¶ 367. 90 MCI v. Ecuador, ¶ 154; Vandevelde, p. 55. 91 LIAMCO v. Libya, ¶ 192; Newcombe, p. 369. 84
92
Uncontested Facts, ¶ 26.
C>
Klager,
payments.93 Further, Respondent could not have funded these tariff payments through loans due to EU-mandated borrowing restrictions.94 This situation posed a serious threat to Respondent’s fiscal health. A similar solar bubble had caused the Government of Spain to incur a tariff deficit of $26 billion, which ultimately prompted it to reduce the tariffs. 95 Therefore, the reduction in tariffs was for a public purpose. 33.
Further, the reduction in tariff was a reasonable measure. In LG&E v. Argentina, the
tribunal recognized that “economic hardships” and “political and social realities ” could have justified the Argentine government’s actions. However, Argentina’s actions were held to have violated the FET requirement because the government “went too far by completely dismantling the very legal framework constructed to attract investors .”96 In the instant case, Respondent merely reduced the tariff in a manner that ensured that producers using the latest available technology could continue earning the promised 8% return on investment. 97 Thus, Respondent’s actions were reasonable in the circumstances. 34.
Therefore, the reduction of tariff by Respondent can be justified as a legitimate regulatory
measure. C. The Failure to Consult Claimant does not Violate the FET Clause
35.
The fact that Respondent did not consult Claimant before amending the LRE does not
violate the due process requirement under the FET clause, as there was no obligation upon Respondent to do so. 36.
Under administrative law, the obligation of consultation arises only when the
administrative body is discharging a quasi-judicial function,98 not a quasi-legislative function.99 A conclusive test for determining whether a particular action is quasi-judicial or quasi-legislative is that of specificity. If an administrative action affects a particular entity individually or
93
Uncontested Facts, ¶ 28. Uncontested Facts, ¶ 30. 95 The Economist Report. 96 LG&E v. Argentina, ¶ 139. 97 Procedural Order No. 2, ¶ 27. 98 Wade, p. 435; Craig, p. 332. 94
99
Wade, p. 435; Craig, p. 333; Genin v. Estonia, ¶ 367.
C3
specifically, it is quasi-judicial in character. On the other hand, if it is of general application, it is quasi-legislative in nature.100 37.
In ADC v. Hungary, Hungary’s decision to take over airport operations of the investor,
without having given it an opportunity to be heard, was held to have violated the FET clause. 101 Similarly, in Metalclad v. Mexico, the non-renewal of license of a land-fill operator without giving it an opportunity to be heard was criticized. 102 All the aforementioned cases involve administrative action which affects the rights of a particular investor individually. 38.
In the instant case, the reduction of tariff under the Amendment was of general
application, as it applied to all investors who were receiving the tariff under the LRE. As this constituted a quasi-legislative action, there was no obligation upon Respondent to give Claimant an opportunity to be heard. Thus, the due process obligation under the FET clause has not been violated. III.
RESPONDENT’S ACTIONS
39.
AREEXCUSED BY VIRTUE OF ITSOBLIGATIONS UNDER THETFEU
Respondent’s obligations under the BIT conflicted with its obligations under the TFEU.
In light of such conflict, Respondent’s obligations under the TFEU must prevail by virtue of the operation of Article 30(3) of the VCLT ( Section A), and the non-applicability of Article 10 of the BIT (Section B). A. Respondent’s Obligations under the TFEU Must Prevail as per Customary Law
40.
As per Article 30(3) of the VCLT, priority of conflicting treaty obligations must be 103
determined in accordance with the customary norm of lex posterior derogate legi priori . This requires that direct and irreconcilable conflicts between treaty obligations be decided in favour of the later treaty.104 Where the TFEU constitutes lex posterior, an incompatibility between the TFEU and a Member State’s obligations under a pre-existing intra-EU BIT must be decided in
100
Wade, p. 438; Craig, p. 336. ADC v. Hungary, ¶ 290. 102 Metalclad v. Mexico, ¶ 91. 103 Villiger, pp. 402 and 406. 101
104
Ghouri, pp. 163-164; Orakhelashvili, p. 789.
CO
favour of the former. 105 Thus, Respondent’s obligations under the TFEU superseded its obligations under the BIT. 41.
The lex posterior rule under Article 30(3) of the VCLT is applicable here as
Respondent’s obligations under the BIT were in direct conflict with its obligations under Article 107 of the TFEU ( Section 1), and Article 126 of the TFEU ( Section 2). This allows for the prevalence of its obligations under the TFEU, thereby precluding its measures from wrongfulness.
1.
Respondent’s Obligations under the BIT Conflicted with its Obligations under Article 107 of the TFEU
42.
The inherent conflict between Member States’ obligations under Article 107 of the
TFEU, and their BIT obligations which require a continued payment of unjustified State Aid, is well recognized.106 Such conflict existed in the present instance, as the pre-Amendment rate of tariff required to be paid by Respondent, under the BIT, threatened to distort competition. 43.
Under the EAG 2008, which were the applicable Guidelines on State Aid at the time of
the Amendment,107 aid for increasing the share of renewable energy in total energy production is subject to strict conditions: first, the aid must create an ‘ incentive effect’, and second, the aid must be ‘proportional’. Aid is considered to create an ‘incentive effect’ if it encourages investment that is not “ economically attractive in [its] own right.” 108 Enterprises that are
sufficiently profitable without such aid do not meet this condition.109 Further, State Aid for renewable energy is considered ‘proportional’ if the aid amount is just sufficient to cover the 110
difference between its cost price and market price. inefficient firms afloat.”111
105
Kleinheisterkamp, p. 10; Elimansberger, pp. 425-426. Kleinheisterkamp, p. 317; Burgstaller, pp. 194-195. 107 EAG 2014, ¶ 248. 108 EAG 2008, ¶¶ 26-28. 109 EAG 2008, ¶ 146. 110 EAG 2008, ¶¶ 30-32 and 107. 106
111
EAG 2008, ¶ 36.
CT
The aid is not meant to “maintain
44.
The pre-Amendment rate of tariff did not meet these requirements. It resulted in windfall
profits to photovoltaic producers,112 and was required to support inefficient projects, such as Beta, which had not adapted to the new technology.113 Thus, the pre-Amendment rate of tariff was incompatible with the internal market,114 and Respondent’s obligation under the BIT to continue its payment conflicted with its State Aid obligations under the TFEU. 45.
In this respect, it is immaterial that the Commission had not initiated any action against
Respondent for a breach of its State Aid obligations. The TFEU itself clarifies that the Commission is not the sole ‘competent authority’ for regulating State Aid, and mandates co-
operation between Member States and the Commission in this respect. 115 Thus, a conflict with regard to Respondent’s State Aid obligations can be found to exist even in the absence of any action by the Commission. In the past, the ECJ has: “[…] favoured an ex-ante action and held that waiting for an actual conflict between Community legislation and international obligations, when such conflict can be116 reasonably anticipated, would deprive the Community legislation of its effect” 46.
The Commission has opined that such conflicts between a BIT and State Aid obligations
under the TFEU must be decided in favour of the latter, in accordance with Article 30(3) of the VCLT. 117 Thus, in the instant case, Respondent’s measures were precluded from wrongfulness.
2.
Respondent’s Obligations under the BIT were Incompatible with its Obligations under Article 126 of the TFEU
47.
Article 126 of the TFEU requires Member States to maintain a certain ratio of debt to 118
GDP. Further, Protocol 12 to the TFEU and SGP 1997 require Member States to take corrective measures if they expect to breach this ratio. 119 Respondent faced an unquestionable risk of breaching its mandatory borrowing limits if it continued the payment of the pre-
112
Uncontested Facts, ¶¶ 25 and 28-29. Procedural Order No. 2, ¶ 30. 114 AES Summit v. Hungary (Award), ¶ 10.3.19. 115 Art. 108(1), TFEU; Micula v. Romania, ¶¶ 801-805. 116 Ghouri, p.154; Commission v. Finland, ¶¶ 16 and 29-33; Commission v. Austria, ¶¶ 17-19; Commission v. Sweden ¶¶ 17-23 and 45. 117 Micula v. Romania, ¶¶ 317 and 336. 118 Art. 126(2), TFEU; Art 1, Protocol (No. 12) on the Excessive Deficit Procedure, TFEU. 113
119
Art. 10, SGP 1997; Art 3, Protocol (No. 12) on the Excessive Deficit Procedure, TFEU.
CW
Amendment rate of tariff to photovoltaic investors. 120 It was required to prevent such breach under EU Law. Thus, Respondent’s obligation of complying with this requirement meant it could not continue paying the pre-Amendment tariff. 48.
In light of this conflict between Respondent’s obligations under the BIT and TFEU, and
the primacy of its TFEU obligations, Respondent is exempt from responsibility for breach of its BIT obligations. B. Article 10 of the BIT is Inapplicable for Determining Hierarchy of Obligations
49.
Article 10 of the BIT is extremely limited in scope, in that it does not give Claimant
unqualified discretion in “taking advantage of whichever Rules are more favourable to his case.”121 It explicitly states: “When a matter is governed simultaneously both by this Agreement and by another international agreement to which both Contracting Parties are parties,
nothing in thisrules Agreement shall prevent to […] of whichever are more favourable hisinvestors case.” […] from taking advantage [emphasis supplied] 50.
The purpose of such ‘Preservation of Rights’ clauses is to allow an investor to invoke the
more favourable terms contained in another treaty entered into between the States. 122 The underlying aim is to allow parties to enter into treaties inter se that derogate from the provisions of the BIT, provided the subsequent treaty is more favourable to the interest of the investor. 123 The use of the qualification – “nothing in this agreement shall prevent” under Article 11 does not however allow the investor discretion in taking advantage of more the more favourable terms under this BIT when the subsequent or other agreement contains more restrictive obligations than the BIT. Such interpretation finds approval under Article 30(2) of the VCLT, which only recognizes the validity of conflict clauses that grant priority to another treaty.124 51.
In any case, the ECJ has expressly held that Member States’ obligations under EU
Treaties, such as the TFEU, must take precedence over obligations arising under any prior 120
Uncontested Facts, ¶ 30. Art. 10, BIT. 122 Newcombe, pp. 477-478; Dolzer , pp. 190-191. 123 Commentary to the VCLT, p. 216. 121
124
Villiger, pp. 404-405; Orakhelashvili, p. 789.
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treaty. 125 Such inherent supremacy of obligations arising under the TFEU has also been emphasized by commentators and tribunals.126 In light of this norm, Article 10 cannot be allowed to dictate a precedence of Respondent’s obligations under the BIT. IV.
RESPONDENT’S ACTIONS
AREPRECLUDED FROMWRONGFULNESSUNDER THEBIT, AND
UNDER CUSTOMARYINTERNATIONALLAW
52.
Respondent’s breach of obligations is exempt under the BIT, and under customary
international law. The fiscal crisis faced by Respondent constituted a threat to peace and security, as required under Article 11 of the BIT ( Section A). In any case, the prevailing situation constituted ‘necessity’, as understood under customary international law ( Section B). A. Respondent’s Breach of Obligations is Exempt under the BIT
53.
Respondent’s actions are exempt under Article 11 of the BIT, which excludes the
operation of the substantive provisions of the treaty. 127As per this provision, any measure taken by Respondent for the “maintenance of international peace or security” is exempt from wrongfulness,128 in that there is no breach of treaty obligations, and no liability arises. 129 54.
The provision was intended to allow a party to derogate from its treaty obligations when
its national security interests were at risk. The economic crisis undoubtedly threatened Respondent’s national security interests, triggering Article 11 ( Section 1). In any case, Article 11 is applicable as the fiscal crisis could have posed a threat to international peace, through its spillover effects (Section 2).
1. 55.
Article 11 Exempts Measures Adopted for Maintenance of National ‘Security’ Article 11 of the BIT precludes from wrongfulness any measure taken by Respondent for
the “maintenance of international peace or security .” 56.
According to the principles established in the VCLT, the phrase ‘international peace or
125
Commission v. Italy, pp. 7-8 and 10. Micula v. Romania, ¶ 317; Eilsmanberger, pp. 421-422. 127 Markert, p. 164. 128 Art. 11, BIT. 126
129
Sornarajah, p. 463; Markert, p. 164.
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security’ must interpreted contextually, and in accordance with its ordinary meaning.130 This requires grammatical interpretation, with due consideration to the use of syntax.131 To this end, due weightage must be given to the usage of the conjunction ‘ or’, instead of ‘and’, conjoining the terms ‘international peace’ and ‘security’ in Article 11.132 The use of such syntax indicates that the Parties intended for the term ‘international’ to only qualify the term ‘peace’, and not ‘security’. 57.
This is evident from a comparison of the ‘international peace or security’ clause
incorporated under Article 11 of the BIT, with the ‘international peace and security’ clause found under the U.N. Charter.133 It is well established that the use of similar but distinct terms in treaties indicates the intention of parties to incorporate and affect dissimilar meanings. 134 Accordingly, the ‘international peace or security’ phrase in Article 11 of the BIT must be given a disjunctive interpretation. Thus, the term ‘security’ employed therein is not limited to international security. National security interests also fall within the ambit of Article 11. 58.
This interpretation is affirmed by a contextual interpretation of this phrase,135 and an
application of the rule of non-redundancy.136 As per this rule, no part of a treaty should be rendered a mere “surplassage” or “pleonasm” during the course of interpretation.137 The entire text of the treaty must be taken into account while deriving the meaning of a clause or phrase, including the ‘title’ of that clause. 138 The title to Article 11 indicates that the purpose of the clause is to preclude responsibility for measures taken for the protection of “essential security interests”. This would ordinarily include national security interests of the Parties. 59.
Respondent’s economic crisis qualifies as a threat to ‘security’ under Article 11 of the
BIT. The test is the severity of crisis, not its nature. 139 Tribunals and commentators have recognized that consequences of an economic crisis can be as grave as that of a military invasion, 130
Art. 31(1), VCLT. Linderfalk, p. 62; Elimination of Racial Discrimination (Preliminary Objections), ¶ 135; Aegean Sea Shelf (Jurisdiction), ¶ 53. 132 Art. 11, BIT. 133 Art. 1, U.N. Charter; Burke-White, pp. 332 and 355. 134 Linderfalk, p. 108; Dorr, p. 545. 135 Art. 31(1), VCLT. 136 Linderfalk, p. 110. 137 Linderfalk, p. 108. 138 Dorr, p. 543; Oil Platforms (Prelim inary Objection), ¶ 47. 131
139
Sempra v. Argentina, ¶ 374; Sornarajah pp. 463-464.
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Continental
in terms of the “impact such crises have upon living conditions of people.” 140 Economic crises may, therefore, pose a threat to ‘security’ of the State.141 60.
In the present instance, Respondent’s crisis constituted a grave fiscal emergency, which
threatened its security. A diversion of revenue by Respondent from other sectors of the economy, towards funding of the pre-Amendment rate of tariff,142 would have slowed down other essential sectors of the economy, posing risk of recession and an overall degradation in the standard of living of citizens. 143 Alternately, supporting the tariff through borrowed funds would have resulted in Respondent breaching its EU-mandated borrowing results, 144 posing threat of economic sanctions. Hence, Respondent’s actions are justified under Article 11 of the BIT.
2.
In any Case, Respondent’s Measures were Aimed at Maintenance of ‘International Peace and Security’
61.
Assuming the ‘international peace or security’ clause under Article 11 of the BIT bears
the same meaning as the ‘international peace and security’ clause incorporated under the U.N. Charter,145Respondent’s measures were aimed at preventing an international crisis. Extremely severe economic crises may constitute threats to international peace and security, particularly where the crises have had cross-border implications and effects.146 Economic crises in Argentina and the U.S. have had such global repercussions in the past. 62.
The fiscal emergency faced by Respondent certainly threatened the EU economy, in light
of the existence of a common currency in the Union. This is particularly demonstrated by the Greek fiscal crisis of 2010.147 Hence, Respondent’s actions are exempt under Article 11 of the BIT. B. Respondent’s Actions are Exempt Under the Customary Defence of Necessity
63.
Even if Respondent’s actions are not justified under Article 11 of the BIT, they are
140
Sornarajah, p. 459; LG&E v. Argentina (Decision on Liability), ¶ 238. CMS v. Argentina, ¶¶ 352, 360 and 362. 142 Uncontested Facts, ¶ 29. 143 Fiscal Crisis Report, p. 4. 144 Uncontested Facts, ¶ 30. 145 Burke-White, p. 355. 146 Simma, pp. 40-42. 141
147
Lachman, pp. 6-9; Mui (accessed online); Foroohar (accessed online).
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precluded from wrongfulness under the defence of necessity under customary international law. Article 25 of the ILC Articles which are widely accepted as reflective of customary international law,148 enlist the following requirements for the plea of necessity to be applicable: first, the act in question must have been the ‘only way’ for the State to safeguard an ‘essential interest’ against a ‘grave and imminent peril’; second, the act in question should not have ‘seriously impaired an essential interest of the State towards which the obligation exists’, and third, the State concerned should not have contributed to the situation of necessity.149 64.
Admittedly, the defence of necessity is restricted in scope. 150 However, it must not
eliminate a State’s right to self-determination and its sovereign power to protect itself during times of emergency. To this end, a State may subjectively determine whether the requisite conditions under Article 25 of the ILC Articles have been met, provided the subjectivity is not too broad.151 65.
Respondent’s actions are exempt under the defence of necessity as the impending fiscal
crisis posed a ‘grave and imminent’ peril ( Section 1) to its ‘essential’ economic interests (Section 2), and the Amendment was the ‘only way’ to tackle the prevailing situation ( Section 3). There was no contribution by Respondent towards creation of the situation of necessity
(Section 4), and Cogitatia’s essential interests were not impaired ( Section 5). Lastly, the BIT did not preclude the possibility of invoking the defence of necessity ( Section 6).
1. 66.
Respondent Faced a ‘Grave and Imminent’ Peril Respondent’s fiscal and infrastructural emergency posed a grave and imminent peril.
Ordinarily, the seriousness and imminence of a threat is left to the ‘subjective appreciation’ of the responsible State.152 However, even objectively, serious budgetary and monetary situations have been recognized as constituting a grave peril. 153 Holding that such crises do not meet the requisite threshold of gravity under Article 25 of the ILC Articles would constitute “an erroneous application of the law that [favours] foreign investment to the detriment of a State undergoing a
148
Gabcikovo-Nagymaros, ¶32. Art. 25, ILC Articles. 150 Art. 25, ILC Commentary, ¶¶ 2 & 14; CMS v. Argentina, ¶ 317. 151 LG&E v. Argentina (Decision on Liability), ¶248. 152 LG&E v. Argentina (Decision on Liability), ¶ 248. 149
153
Art. 25, ILC Commentary, ¶ 8.
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crisis.”154 67.
Further, the emergency faced by Respondent was ‘imminent’ and ‘proximate’. 155 The
requirement of imminence does not limit the defence of necessity to pre-existing perils, nor does it require the occurrence of future perils to be established with “absolute certitude”. 156 A “measure of uncertainty” is acceptable,157 as long as the peril was considered inevitable at the time when the impugned measure was taken.158 68.
Under EU law, Respondent had an obligation to provide ‘guaranteed’ and ‘non-
discriminatory’ grid access to producers of photovoltaic energy. 159 However, it lacked the infrastructure to provide such access to all 7000 applicants,160 making the crisis inevitable. Further, the unsustainable public expenditure that Respondent would need to incur for supporting the feed-in tariff would result in a ‘grave’ fiscal emergency, 161 which Respondent was entitled to prevent.
2. 69.
Respondent’s Essential Interests were Seriously Impaired The essential interests of a State are those interests that are of “exceptional importance to
the State seeking to assert it.” 162 As to which interests meet this threshold cannot be prejudged;163 ordinarily, it depends on the conditions of each specific case. 164 However, tribunals and commentators have expressly acknowledged that economic interests and the “continued functioning of […] essential services” constitute essential State interests. 165 The prevailing situation in Barancasia not only impaired the economic interests of Respondent, but the widespread strikes and protests also prevented the functioning of essential services, such as
154
Sornarajah, p. 456. Gabcikovo-Nagymaros, ¶ 54. 156 Kent, p. 250; Gabcikovo-Nagymaros, ¶ 20. 157 Kent, p. 250. 158 Gabcikovo-Nagymaros, ¶ 54; Art. 25, ILC Commentary, ¶15. 159 Art. 6, Electricity Directive; Art. 16(2)(b), Renewable Energy Directive. 160 Uncontested Facts, ¶ 29. 161 Uncontested Facts, ¶¶ 29-30. 162 Ago, p. 19; Kent, p. 249. 163 Art. 25, ILC Commentary, ¶15. 164 LG&E v. Argentina (Decision on Liability), ¶ 252. 155
165
Ago, p. 14; Kent, pp. 249-250; LG&E v. Argentina (Decision on Liability), ¶ 251.
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education.166 Thus, the requirement of impairment of essential interests is met.
3. 70.
The Amendment was the Only Way for Respondent to Address its Fiscal Crisis For the ‘only way’ requirement under Article 25 of the ILC Article to be satisfied, it is
sufficient to establish that measures adopted by the responsible State were the only reasonable means available.167 To this end, the responsible State must be given a ‘margin of appreciation’ in determining its course of actions when faced with a crisis,168 as long as the measures taken are necessary and legitimate.169 The mere existence of alternatives, however unreasonable, does not preclude the defence of necessity,170 as: “[there] will often be issues of scientific uncertainty and different views may be taken by informed experts on whether there is a peril, how grave or imminent it is and whether the means proposed are the only ones available in the circumstances.” 171 [emphasis supplied] 71.
In light of the inherent biases in evaluating a State’s decision with the benefit of
hindsight,172 the mere existence of expert opinions offering alternate solutions to the prevailing situation does not preclude the customary defence of necessity. 173 In any case, Claimant has not produced any expert evidence indicating existence of alternatives. Further, a “world comparative”174 with States facing a similar situation of windfall gains resulting from feed-in tariffs indicates that the reduction in feed-in tariffs was a legitimate measure.175
4. 72.
The Amendment did not Impair Cogitatia’s Essential Interests Respondent’s actions did not seriously impair the essential interests of any State or the
international community. The proportionality requirement under Article 25 of the ILC Articles only prohibits a State from protecting its own interests at the cost of essential interests of other
166
Uncontested Facts, ¶¶ 29-30 and 32. Kent, pp. 254-255. 168 Sornarajah, p. 463; Continental Casualty v. Argentina (Decision on Liability), ¶ 181. 169 Continental Casualty v. Argentina, ¶¶ 227-230; LG&E v. Argentina (Decision on Liability), ¶ 239. 170 Kent, p. 255. 171 Art. 25, ILC Commentary, ¶ 16. 172 Sornarajah, p. 463; LG&E v. Argentina (Decision on Liability), ¶ 257. 173 Kent, pp. 253-255; Enron v. Argentina, ¶ 308. 174 Enron v. Argentina, ¶ 308; Sempra v. Argentina, ¶ 350. 167
175
Tariff Deficit Report, pp. 33-34.
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States.176 This obligation is limited to inter-State relations, and does not arise “in context of an individual or a corporation operating within a state.” 177 The mere fact that investors are the ultimate beneficiaries under BITs does not allow for their individual interests to substitute the interests of their State.178 73.
Since the Amendment was uniformly applicable to both domestic and foreign investors,
there is no evidence that Cogitatia suffered in any way. Respondent was the only party whose essential interests were at risk.
5. 74.
Respondent did not Contribute Substantially to the Situation of Necessity For a preclusion of the customary defence of necessity, the contribution of responsible
State towards the situation of necessity should have been ‘sufficiently substantial’. 179 Since the retrospective examination of a State’s action is inherently biased, 180 the State’s contribution must be evaluated on the basis of reasonableness of its measures in light of the knowledge available to 181
it at the relevant point in time . A policy that has been regarded as reasonable beforehand cannot, subsequently, be considered ‘contribution’.182 75.
In the present instance, the pre-Amendment rate of tariff constituted reasonable policy
prior to the technological changes that occurred in 2011.183 It was the windfall profits resulting from the ground-breaking technological changes that prompted more applications than Respondent’s infrastructure or budget could sustain. 184 Since Respondent could not have foreseen such change in circumstances, it cannot be held responsible for having contributed to the situation of necessity.
6. 76.
The BIT did not Preclude the Possibility of Invoking the Defence of Necessity The BIT did not, inherently, exclude the operation of the defence of necessity. The
objective underlying BITs is the balancing of interests of States and investors, not merely the 176
Kent, p. 255; Ago, p. 20; LG&E v. Argentina (Decision on Liability), ¶ 254. Sornarajah, p. 464. 178 Sornarajah, p. 464; CMS v. Argentina, ¶ 358. 179 Art. 25, ILC Commentary, ¶ 20. 180 Sornarajah, p. 463; Continental Casualty v. Argentina, ¶¶ 235-236. 181 Kent, p. 259; Gabcikovo-Nagymaros, ¶ 57. 182 Continental Casualty v. Argentina, ¶ 235. 183 Uncontested Facts, ¶ 25. 177
184
Uncontested Facts, ¶ 25.
GO
protection of investments from State interference. 185 Thus, an exclusion of the defence of necessity would ignore the State Party’s essential interests, and would be inconsistent with the objective of the BIT. 186 Further, such exclusion would defeat the very purpose of the defence itself, which is meant to exonerate a State for wrongfulness of action taken under ‘extreme circumstances’.187 77.
In the present instance, Article 11 of the BIT clearly indicates that both parties intended
to retain the possibility of derogating from their treaty obligation in situations of emergency. 188 Thus, in the absence of any express exclusion of this defence, 189 Respondent is not precluded from invoking the defence necessity to justify its actions. V.
RESPONDENTCANNOT BE ORDERED TO PERFORM ITSOBLIGATIONSTHROUGH AN AWARD OF SPECIFIC PERFORMANCE
78.
In the event that this Tribunal were to hold Respondent responsible for a breach of its
obligations under the BIT, the remedy for such a breach should be compensation, and not restitution. This is because compensation is the primary remedy in investment arbitration (Section A). In any case, restitution cannot be granted as the conditions precluding restitution under Article 35 of the ILC Articles have been met ( Section B).
A. Compensation is the Primary Remedy in Investment Arbitration 79.
In practice, tribunals in investor-State arbitration have almost always granted
compensation instead of restitution as the remedy for a breach of obligations under a BIT.190 This is because restitution has been held to be “against the respect due for the sovereignty” of the responsible State.191 This was explicitly recognised by the tribunal in Occidental v. Ecuador, where it was held that:
185
Markert, p. 146. Markert, p. 146; Kent, pp. 256-257. 187 CMS v. Argentina, ¶¶ 353-354. 188 Art. 11, BIT. 189 Art. 25, ILC Commentary, p. 84. 190 BP v. Libya, p. 155; Occidental v. Ecuador (Provisional Measures), ¶ 84; Molinuevo, p. 226. 186
191
LIAMCO v. Libya, pp. 124-125.
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“It is well established that where a State has, in the exercise of its sovereign powers, put an end to a contract or a license, or any other foreign investor’s entitlement, specific performance must be deemed legally impossible.” 192 80.
This is further evinced by the fact that even where tribunals have granted restitution as a
remedy, it has been with the consent of the responsible State.193 Alternatively, the responsible State has been granted discretion to choose between restitution and monetary damages.194 The decision to opt for an award of restitution, in these cases, is seen to be “within the competence of the sovereign decision” of the responsible State, and thus permissible. 195 81. view.”
Compensation is also seen as “less intrusive into State sovereignty from a legal point of 196
It allows for the protection of the rights of foreign investors without impinging upon
the sovereignty of States. This rationale accounts for the primacy of compensation over restitution in arbitration cases involving investment disputes.197 82.
If restitution were to be granted in the present case, Respondent would be compelled to
either repeal a legislation duly passed by its Parliament, or to pay the pre-Amendment rate of tariff to only Claimant, in clear contradiction of its internal policies.198 An award of monetary damages, on the other hand, will restore Claimant to the financial position it would have been in had the Amendment not been enacted,199 without breaching Respondent’s internal sovereignty. Therefore, compensation must be the primary remedy in the instant case.
B. In any Event, the Conditions Precluding Restitution Under Article 35 of the ILC Articles have been met
83.
This Tribunal cannot grant restitution to Claimant. It can neither direct Respondent to
repeal the Amendment to the LRE, nor require it to continue paying the pre-Amendment rate of tariff to Claimant.200 84.
Article 35 of the ILC Articles lays down two conditions under which restitution should
192
Occidental v. Ecuador (Provisional Measures), ¶ 79. ATA v. Jordan, ¶ 131; Franck Charles Arif v. Moldova, ¶ 633. 194 Goetz v. Burundi, ¶ 135; Art. 1135(1), NAFTA. 195 Goetz v. Burundi, ¶ 136; McLachlan, ¶ 9.120. 196 de Luca, ¶17. 197 Gray, pp. 179-180. 198 Procedural Order No. 1, ¶ 4. 199 Claimant’s Expert’s Report, ¶ 7. 193
200
Procedural Order No. 1, ¶ 4.
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not be granted: first, when such an award is materially impossible ( Section 1), and second, when it imposes a disproportionate burden upon the responsible State as compared to an award of compensation (Section 2). These conditions are disjunctive, and the fulfillment of either condition would preclude the remedy of restitution. In the present case, both these conditions have been met.
1. 85.
Restitution is Materially Impossible Article 35(a) of the ILC Articles provides that restitution must not be granted where
compliance with such an award would be “materially impossible”.201 Both possible forms of restitution meet this condition in the present case. 86.
The abnormally high profits resulting from the pre-Amendment tariff led to a massive
increase in investment in Barancasia’s photovoltaic sector, with 7000 applications being filed for a license under the LRE. 202 Reinstating the pre-Amendment rate of tariff would only attract an 203
even greater number of applications which Respondent would be bound to approve. However, it will be physically impossible for Respondent to accommodate all these users within its national grid.204 Therefore, repealing the Amendment to the LRE is materially impossible. 87.
Further, a retroactive reinstatement of the pre-Amendment rate of tariff for Claimant
would constitute new State Aid under Article 107 of the TFEU. 205 Granting such aid only to Claimant would violate the State Aid provisions, since it “ is liable to improve the competitive
position of the recipient compared to other undertakings with which it competes.”206 It follows that it is legally impossible for Respondent to comply with the second form of restitution requested by Claimant. The ILC Articles only prohibit the responsible State from relying on its internal laws for precluding a remedy of restitution. 207 In the present case, however, the remedy is precluded due to Respondent’s obligations under EU law, which has been established to be international law.208 Thus, the second form of restitution requested by Claimant would require 201
Art. 35(a), ILC Articles. Uncontested Facts, ¶¶ 26-27. 203 See Part IV(B)(1) of this Memorandum. 204 Uncontested Facts, ¶¶ 29. 205 Micula v. Romania (State Aid Decision), ¶ 61. 206 Micula v. Romania (State Aid Decision), ¶ 46. 207 Art. 35, ILC Commentary, ¶ 8. 202
208
Electrabel v. Hungary (Jurisdiction), ¶ 4.119.
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Respondent to breach its international obligations, and is materially impossible.
2. 88.
In any case, Restitution will Impose a Disproportionate Burden upon Respondent Article 35(b) of the ILC Articles provides that restitution must not be granted when it
would impose a disproportionate burden upon the responsible State as compared to an award of compensation.209 89.
In the present case, restitution will impose a disproportionate burden upon Respondent.
Firstly, it would violate Respondent’s sovereignty.210 Secondly, repealing the Amendment to the LRE would require Respondent to pay the higher rate of tariff to all licensees, thereby imposing an inequitable financial burden as compared to compensation. Finally, reinstating the preAmendment rate of tariff for Claimant alone would, in all likelihood, invite legal proceedings against Respondent for violation of the EU State Aid rules. 211 In comparison, the benefit to Claimant would largely be the same under both restitution and compensation. Therefore, the second condition under Article 35 has been met. 90. VI.
Thus, restitution as requested by Claimant cannot be granted.
CLAIMANT’S ASSESSMENT
91.
OFDAMAGES ISFLAWED
The quantum of damages as calculated by Claimant’s Expert, Prof. Kovi #, is
"2.1
million. However, this figure is incorrect because first, the method of discounting used by Prof. Kovi# is flawed (Section A); second, his estimation of damages for project Alfa is flawed (Section B); third, damages for the New Projects are speculative (Section C); fourth, lost profits cannot be granted for the Follow-on Solar Installation Projects [“ Follow-on Projects”] ( Section D); and finally, the interest rate applicable need not be equal to the discount rate (Section E). A. Projected Cash Flows for Project Beta and the New Projects Should be Discounted at the Rate of 12%
92.
Prof. Kovi# has used the Discounted Cash Flow Method [“ DCF Method”] to calculate
the net present value of Claimant’s investments. There exist two established ways of arriving at 209 210
Art. 35(b), ILC Articles. Occidental v. Ecuador (Provisional Measures), ¶ 84.
211
Art. 107, TFEU.
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the net present value of a company under this Method: first, by discounting the cash flows to
equity by the cost of equity, or alternatively, by discounting the cash flows to the firm by the Weighted Average Cost of Capital [“ WACC”] of the firm.212 The WACC includes cost of both
debt and equity. In the present case, however, Prof. Kovi # has applied it to discount the cash flows to equity alone.213 This has led to an inflated estimation of damages.214 93.
As acknowledged by tribunals, the appropriate rate to be used in such cases is the
claimant’s cost of equity.215 This is particularly true for photovoltaic plants, which have minimal operating costs, with most of the investment being made at the time of establishment. 216 Consequently, operating revenues are likely to be directed towards repayment of debt, resulting in a progressive decline in the proportion of debt in the total capital of the firm. This renders the WACC variable and inappropriate for use as the rate of discount. Therefore, Claimant’s cost of equity, which is equal to 12%,217 must be used. B. Claimant’s Estimation of Damages for Alfa is Flawed
94.
Compensation may be granted for a breach of legitimate expectation when such
expectation was relied upon at the time of investment.218 In the present case however, Alfa was established prior to the enactment of the LRE, and was not undertaken in response to it. 219 Therefore, no damages are required to be paid for a breach of legitimate expectations regarding Alfa. 95.
In any case, damages for Alfa as estimated by Prof. Kovi # are too speculative. The profits
for which damages are sought must be “direct and certain,” 220 and must be based on a past 221
history of profitability of the project. Alfa had been plagued by severe delays and costoverruns from the time of its inception. In fact, the project would have been abandoned had it not
212
CMS v. Argentina, ¶¶ 430 and 432. Annex 4, Claimant’s Expert’s Report. 214 Damodaran, p. 57 [accessed online]. 215 PSEG v. Turkey, ¶ 345. 216 Respondent’s Expert Report, ¶ 9. 217 Project Financing, Vasiuki LLC Dataset. 218 AES Summit v. Hungary, ¶ 9.3.7; Tecmed v. Mexico, ¶ 154. 219 Uncontested Facts, ¶¶ 13-14. 220 LIAMCO v. Libya, pp. 161-162. 213
221
Metalclad v. Mexico, ¶ 120.
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been for the enactment of the LRE.222 This was in spite of its already receiving a feed-in tariff of 0.1989 EUR/kWh under the pre-LRE legal framework. 223 Therefore, the profitability of the project, even with the payment of an assured tariff, cannot be reasonably established. This must be accounted for in the calculation of damages. C. Claimant’s Estimation of Damages for the New Projects is too Speculative
96.
In his Report, Prof. Kovi# has proposed two alternate methods for the calculation of
damages for the 12 New Projects. The first method seeks to provide reliance damages to Claimant for expenditure incurred for acquiring land, equipment and personnel. This method would be applicable in the event that the Projects were cancelled. 224 However, Claimant has decided to complete the Projects.225 Compensating Claimant for such expenditure, when the land and equipment is already in use, would amount to double compensation. 226 Thus, such compensation should not be granted. 97. The other alternative proposed by Prof. Kovi# is to quantify the loss of profits from the Projects by applying the DCF Method. However, for compensation to be granted under this method, the project in question must be a “going concern” 227 with a past record of profitability. 228 Estimation of damages on the basis of future profits would otherwise be inherently speculative.229 98.
In the present case, the New Projects have not been completed yet. Further, they are of a
much larger scale than Alfa or Beta, and are based on new, untested technology. 230 Any projection of profits for these projects would be speculative. Therefore, the DCF Method should not be applied. For instance, in Levitt v. Iran, the tribunal refused to grant compensation for lost profits from an unfinished building project as it was uncertain whether the project would have
222
Uncontested Facts, ¶ 13. Claimant’s Expert Report, ¶ 6. 224 Claimant’s Expert Report, ¶¶ 9-10. 225 Procedural Order No. 2, ¶ 26. 226 MTD v. Chile, ¶ 243. 227 Walde/Sabahi, p. 1078. 228 PSEG v. Turkey, ¶ 311. 229 Marboe, ¶ 5.427. 223
230
Uncontested Facts, ¶ 27.
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been a commercial success.231 99.
Since neither method proposed by Prof. Kovi# is appropriate, at most a nominal lump
sum amount should be granted as compensation for these Projects.232 In any case, the uncertainty with regard to future profits must be accounted for while estimating damages under the DCF Method.233 D. Claimant is not Entitled to Damages for the Follow-on Projects
100.
Compensation for projects which have not been undertaken yet, is inherently speculative
and must not be granted.234 101.
In LIAMCO v. Libya, the tribunal refused to grant compensation for the mere loss of
opportunity to develop an oil field as no action had been taken towards such development.235 Further, in Micula v. Romania, it was held that mere witness statements of company employees were not sufficient to establish claimant’s plans for future investment, in the absence of any documentary proof to this effect. 236 102.
In the present case, Claimant has only produced a witness statement as evidence to
indicate that it did plan to establish the Follow-on Projects.237 Therefore, any damages for these Projects are entirely speculative, and must not be granted. E. The Rate of Interest on Damages need not be Equal to the Discount Rate
103.
Prof. Kovi# in his Report, has stated that the rate of interest must always be equal to the
discount rate used under the DCF Method. This is based on the assumption that the rate of interest must be derived from Claimant’s cost of capital. However, cost of capital is only one of many factors from which the interest rate may be derived.238 Since the cost of capital of a company is based on subjective considerations, such as the capital structure, risk portfolio and expected returns of that company, it has been considered to be an inappropriate standard for the 231
Levitt v. Iran, ¶ 56. Shufeldt Claim (United States v. Guatemala), p. 1101. 233 Himpurna v. PLN, ¶ 365. 234 PSEG v. Turkey, ¶¶ 310-312. 235 LIAMCO v. Libya, pp. 161-162. 236 Micula v Romania, ¶ 965. 237 Procedural Order No. 2, ¶ 28. 232
238
Marboe, ¶ 6.47.
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calculation of interest.239 Therefore, the rate of interest need not be equal to the discount rate applied. 104.
Given the absence of a uniform international practice for determining interest rate, this
Tribunal has discretion in selecting the applicable rate in the present dispute.240 Article 5 of the BIT provides for the 6-month LIBOR rate as the appropriate rate of interest to be applied in cases of lawful expropriation by either of the Contracting Parties. 241 This rate can also be applied in case of a breach of other obligations under the BIT since the rationale for payment of interest remains the same. Further, the application of such a rate is in accordance with the larger principle of party autonomy under international arbitration. 242 105.
Thus, the damages calculated by Prof. Kovi# must be altered accordingly.
239
Marboe, ¶¶ 6.97-6.99; PSEG v. Turkey, ¶ 345. Art. 38, ILC Commentary, ¶ 10. 241 Art. 5(1), BIT. 240
242
Autopista Concesionada v. Venezuela, ¶ 382; Reynolds Tobacco v.
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Iran, p. 192.
REQUEST
106.
FORRELIEF
For the aforementioned reasons, Respondent respectfully requests the Tribunal to find
that: (a) It does not have jurisdiction over this dispute. 107.
In the event that the Tribunal finds it has jurisdiction, Respondent requests the Tribunal
to conclude that: (a) Respondent has not violated Article 2 of the BIT. (b) Respondent’s actions are exempt by virtue of its obligations under EU law, and under the defence of necessity. 108.
In the event that the Tribunal does not grant Respondent’s first or second prayer for
relief, Respondent requests that the Tribunal: (a) Deny Claimant’s request for specific performance. (b) Find that Claimant’s calculations for damages are ill-supported and based on false and incorrect legal and factual assumptions.
Respectfully submitted on September 26, 2015 by
PETREN
On Behalf of Respondent THE REPUBLIC OF BARANCASIA
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