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TEAM: TARASSOV

THE LONDON COURT OF INTERNATIONAL ARBITRATION

IN THE PROCEEDINGS BETWEEN

VASIUKI LLC

(CLAIMANT)

V.

REPUBLIC OF BARANCASIA

(RESPONDENT)

LCIA ARBITRATION NO 00/2014

MEMORANDUM FOR RESPONDENT

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CONTENTS

PART ONE: JURISDICTION OF THE TRIBUNAL AND ADMISSIBILITY OF CLAIMS - 17 -

I. INTRA-EU BIT JURISDICTIONAL OBJECTION ...................................................................... - 17 -

II. THE BIT HAS BEEN TERMINATED PURSUANT TO ARTICLE 59(1) OF THE VCLT - 18 -

a. Both the BIT and the TFEU Relate to the Same Subject Matter .................................................... - 19 -

b. Subjective Test: Barancasia and Cogitatia Intended the BIT to Be Superseded By the TFEU .. - 22 -

c. Objective test: the BIT Is Incompatible With the TFEU in Its Entirety ....................................... - 23 -

III. TERMINATION PROCEDURE LAID DOWN BY THE VCLT HAS BEEN FULLY

COMPLIED WITH ......................................................................................................................................... - 26 -

IV. THE TRIBUNAL LACKS JURISDICTION BASED ON ARTICLE 30(3) OF THE VCLT .. -

28 -

V. THE TRIBUNAL HAS NO JURISDICTION DUE TO THE LACK OF RESPONDENT’S

CONSENT TO ARBITRATE ...................................................................................................................... - 29 -

VI. THE PRESENT INVESTMENT DOES NOT FULFIL ITS ELEMENTAL

CHARACTERISTIC OF ASSUMPTION OF RISK................................................................................ - 31 -

VII. THE CLAIMS RAISED IN THE CASE AT HAND ARE INADMISSIBLE...................... - 32 -

PART TWO: MERITS...................................................................................................................................... - 37 -

VIII. RESPONDENT HAS ACCORDED CLAIMANT´S INVESTMENTS FAIR AND

EQUITABLE TREATMENT ....................................................................................................................... - 37 -

IX. CONTENT OF THE FET STANDARD IN BARANCASIA-COGITATIA BIT .............. - 37 -

X. RESPONDENT HAS MET INVESTOR’S BASIC REASONABLE AND LEGITIMATE

EXPECTATIONS ........................................................................................................................................... - 39 -

a. Claimant's Expectation with Regard To Alfa Project Cannot Be Built Upon the Lre ................. - 39 -

b. Claimant's Expectations That LRE or FiT Would Not Be Subject to Change Are not Legitimate

And Reasonable ................................................................................................................................................ - 39 -

XI. THE LRE AMENDMENT WAS A JUSTIFIED ACT IN THE PUBLIC INTEREST ..... - 41 -

XII. RESPONDENT HAS ACTED WITH TRANSPARENCY ..................................................... - 44 -

XIII. REJECTION OF PROJECT ALFA DOES NOT GIVE RISE TO BREACH OF THE BIT .. -

45 -

XIV. RESPONDENT’S ACTIONS ARE EXEMPT UNDER THE ESSENTIAL SECURITY

PROVISION OF THE BIT ........................................................................................................................... - 47 -

XV. ESSENTIAL SECURITY INTEREST IS CONTAINED IN ARTICLE 11 OF THE BIT- 47 -

XVI. NPM CLAUSE ENCOMPASSES ECONOMIC CRISES ........................................................ - 48 -

XVII. THE CRISIS IN BARANCASIA CLASSIFIES AS THREAT TO THE ESSENTIAL

SECURITY INTERESTS AND ADOPTED MEASURES ARE EXEMPTED FROM BREACHING

THE BIT ............................................................................................................................................................ - 49 -

XVIII. TAKEN MEASURES WERE NECESSARY AND NON-CONTRIBUTION

REQUIREMENT WAS FULFILLED ........................................................................................................ - 51 -

PART THREE: RESTITUTION AND QUANTUM .............................................................. - 53 -

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XIX. JUDICIAL RESTITUTION IS NOT A SUITABLE KIND OF REMEDY IN THE

CURRENT DISPUTE WITH REGARD TO JURISPRUDENCE ...................................................... - 53 -

XX. IT IS NOT LEGALLY PERMISSIBLE TO ORDER JUDICIAL RESTITUTION IN THE

CASE AT HAND ............................................................................................................................................ - 55 -

XXI. JUDICIAL RESTITUTION AWARD MIGHT NOT BE ENFORCEABLE ...................... - 56 -

XXII. MONETARY RESTITUTION IN THE FORM OF ORDERING RESPONDENT TO

continue to pay the pre-2013 feed-in tariff IS NOT LEGALLY PERMISSIBLE ................................ - 57 -

XXIII. CLAIMANT’S CALCULATIONS FOR DAMAGES ARE ILL-SUPPORTED AND

BASED ON FALSE AND INCORRECT LEGAL AND FACTUAL ASSUMPTIONS ................ - 59 -

a. Calculation Related to Project Alfa Provided By Claimant Is Overrated ....................................... - 59 -

b. Calculation Concerning Project Beta Is Not Accurate ...................................................................... - 60 -

c. Calculation Related To Lost Value of Land ........................................................................................ - 61 -

d. Calculation Related To Future Profits .................................................................................................. - 61 -

RELIEF SOUGHT ............................................................................................................................................ - 64 -

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LIST OF AUTHORITIES

CITED AS AUTHORITY

ALLEN Allen, B. E. Performance as a Remedy, Chapter 18, JurisNet, LLC,

2011.

BAETENS Baetens, F. ed. Investment law within international law: integrationist

perspectives, Cambridge University Press, 2013.

BJORKLUND Bjorklund, A. Yearbook on International Investment Law & Policy 2013-

2014, Oxford University Press, 2015.

BOUTE Boute, A. “Challenging the Re-Regulation of Liberalized Electricity

Prices Under Investment Arbitration” in: Energy Law Journal, vol.

32, no. 2, 2011.

BOTTINI Bottini, G. “Protection of Essential Interests in the BIT Era” in

Investment Treaty Arbitration and International Law, vol. 1, 2008.

BURKE-WHITE &

VON STADEN

Burke-White W. Von Staden A, “Investment Protection in

Extraordinary Times: The Interpretation and Application of Non-

Precluded Measures Provisions in Bilateral Investment Treaties” in:

Virginia Journal of International Law, vol. 48, no. 307, 2008.

CLODFELTER Clodfelter, Mark A. “The Future Direction of Investment

Agreements in the European Union” in: Santa Clara Journal of

International Law, vol. 12, no. 1, 2014.

CONFORTI Conforti, B., Lobelia, A. “Invalidity and Termination of Treaties:

the role of national courts” in: The Italian Yearbook of International

Law, vol. 14, no.1, 2004.

CORTEN & KLEIN Corten, O. and Klein, P. ed. The Vienna Conventions on the Law of

Treaties. Volume I, Part II: Conclusion and Entry into Force of Treaties,

Oxford University Press, 2011.

DIEHL Diehl, A. The Core Standards of International Investment Protection: Fair

and Equitable Treatment, Kluwer Law International, 2012.

DIMOPOULOS Dimopoulos, A. “The Validity and Applicability of International

Investment Agreements between EU Member States under EU

and International Law” in: Common Market Law Review, vol. 48, no.

1, 2011.

DOLZER &

SCHREUER

Dolzer, R. and Schreuer, S. Principles of International Investment Law,

2nd ed. Oxford University Press, 2012.

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DÖRR &

SCHMALENBACH

Dörr, O., Schmalenbach, K. Vienna Convention on the Law of Treaties:

A Commentary, Springer, 2012.

FERNANDO Fernando, R. “State Contracts and Oil Expropriations: The

Aminoil-Kuwait Arbitration” in: Virginia Journal of International Law,

vol. 24, no. 32, 1984.

FORJI Forji, A. G. “Drawing the Right Lessons from ICSID

Jurisprudence on the Doctrine of Necessity” in: The International

Journal of Arbitration, Mediation and Dispute Management, vol. 76, no. 1,

2010.

FONTAINE & DE LY Fontaine, M., De Ly, F. Drafting International Contracts, Transnational

Publishers, 2009.

GARNER Garner, B. A. Black's Law Dictionary, 10th ed. Thomson Reuters,

2014.

GALLUS Gallus N. “The influence of the host State’s level of development

on international investment treaty standards of protection” in:

Journal of World Investment and Trade, 2005.

GAZZINI Gazzini, T., “Foreign Investment and Measures Adopted on

Grounds of Necessity: Towards a Common Understanding” in

Transnational Dispute Management, vol. 7, no 1, 2010.

GEIGER et al. Geiger, R., Khan, D.E., Kotzur, M. European Union Treaties: Treaty

on European Union, Treaty on the Functioning of the European Union, C.H.

Beck, 2015.

HINDELANG Hindelang, S. “Circumventing Primacy of EU Law and the CJEU's

Judicial Monopoly by Resorting to Dispute Resolution

Mechanisms Provided for in Inter-Se Treaties? The Case of Intra-

EU Investment Arbitration” in: Legal Issues of Economic Integration,

vol. 39, no. 2, 2012.

KANTOR KANTOR, M. Valuation for Arbitration, Kluwer Law International,

2008.

LUZI Luzi R. J., Luzi A., “BITs & Economic crises: Do States have carte

blanche?” Juris Publishing, 2008.

MAUPIN Maupin, J. A. “Transparency in International Investment Law: The

Good, the Bad, and the Murky” in: Transparency in International Law,

Cambridge University Press, 2013.

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MARBOE Marboe, I. Calculation of Compensation And Damages in International

Investment Law, Oxford University Press, 2009.

MOON Moon, W. J. “Essential Security Interest in International

Investment Agreements” in Journal of International Economic Law,

vol.15, no. 481, 2012.

MUCHLINSKI Muchlinski, P. “Caveat investor’? The relevance of the conduct of

the investor under the fair and equitable treatment standard” in:

International and Comparative Law Quarterly, 2006.

MUSURMANOV Musurmanov, I. U. “The Implications of Romak v Uzbekistan for

Defining the Concept of Investment” in: Australian International

Law Journal, vol. 20, no. 1, 2013.

TUDOR Tudor, I. The Fair and Equitable Treatment Standard in the Law of

Foreign Investment, Oxford University Press, 2008.

ORTOLANI Ortolani, P. “Intra-EU Arbitral Awards vis-à-vis Article 107

TFEU: State Aid Law as a Limit to Compliance” in: Journal of

International Dispute Settlement, vol. 6, no. 1, 2015.

RADU Radu, A. “Foreign Investors in the EU – Which ‘Best Treatment’?

Interactions Between Bilateral Investment Treaties and EU Law”

in: European Law Journal, vol. 14, no. 2, 2008.

REINISCH Reinisch, A. “The Relevance of the UNIDROIT Principles of

International Commercial Contracts in International Investment

Arbitration” in: Uniform Law Review, vol. 19, no. 4, 2014.

SABAHI SABAHI, B. Compensation and restitution in investor-state arbitration:

principles and practice, Oxford University Press, 2011.

SCHNEIDER &

KNOLL

Schneider, M. E. and Knoll, J. Performance as a Remedy, JurisNet,

LLC, 2011.

SCHREUER Schreuer, Ch. “Fair and Equitable Standard: Interaction with Other

Standards” in Transnational Dispute Management, vol. 17, no. 5, 2007.

SORNARAJAH Sornarajah, M. Resistance and Change in the International Law on Foreign

Investment, Cambridge University Press, 2015.

VILLIGER Villiger, M. Commentary on the 1969 Vienna Convention on the Law of

Treaties, Martinus Nijhoff Publishers, 2009.

YANNACA-SMALL Yannaca-Small, K. “Fair and Equitable Treatment Standard:

Recent Developments” in: ICSID Review – Foreign Investment law

Journal, vol. 16, no. 2, 2011.

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LIST OF CASES AND ABRITRAL AWARDS

CITED AS DETAILS OF THE CASE

ADF Group Inc. ADF Group Inc. v. United States of America, Award, ICSID Case

No. ARB (AF)/00/1.

AFT v Slovak Republic Alps Finance and Trade AG v. The Slovak Republic, Award,

UNCITRAL.

Amoco Amoco International Finance Corp. v. The Government of the Islamic

Republic of Iran, Partial Award No. 310-56-3, 15 Iran-U.S.

C.T.R. 189.

Arif Mr. Franck Charles Arif v. Republic of Moldova, Award, ICSID

Case No. ARB/11/23.

Arrest Warrant case Case Concerning the Arrest Warrant of 11 April 2000 (Democratic

Republic of the Congo v Belgium), Judgment, I.C.J. Reports 2002.

Azurix Azurix Corp. v. The Argentine Republic, Award, ICSID Case No.

ARB/01/12.

Bayindir Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of

Pakistan, Award, ICSID Case No. ARB/03/29.

BIVAC Bureau Veritas, Inspection, Valuation, Assessment and Control,

BIVAC B.V. v. Republic of Paraguay, Decision on Jurisdiction,

ICSID Case No. ARB/07/9-

CMS CMS Gas Transmission Company v The Argentine Republic, Award,

ICSID Case No ARB/01/08.

Commission v Austria Case C-205/06, Commission of the European Communities v Republic

of Austria [2009] ECR I-01301.

Commission v Italy Case C-531/06, Commission of the European Communities v Italian

Republic [2009] ECR I-04103.

Continental Continental Casualty Company v. The Argentine Republic, Award,

ICSID Case No. ARB/03/9.

Duke Energy Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of

Ecuador, Award, ICSID Case No. ARB/04/19.

Eastern Sugar Eastern Sugar B.V. (Netherlands) v. The Czech Republic, Partial

Award, SCC Case No. 088/2004.

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Eco Swiss Case C-126/97 Eco Swiss China Time Ltd. v. Benetton International

NV [1999] E.C.R. I-3055.

EDF EDF (Services) Limited v. Romania, Award, ICSID Case No.

ARB/05/13.

EDF International EDF International S.A., SAUR International S.A. and León

Participaciones Argentinas S.A. v. Argentine Republic, Award,

ICSID Case No. ARB/03/23.

ELSI Elettronica Sicula S.p.A. (ELSI) v. Italy, Award of July 20 1989,

ICJ, General List No. 76.

Enron Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic,

Award, ICSID Case No. ARB/01/3.

Eureko Achmea B.V. v. The Slovak Republic, Award on Jurisdiction,

Arbitrability and Suspension, UNCITRAL, PCA Case No.

2008-13 (formerly Eureko B.V. v. The Slovak Republic).

Francovich Joined cases C-6/90 and C-9/90, Andrea Francovich and Danila

Bonifaci and others v Italian Republic

[1991] ECR I-05357.

Goetz Antoine Goetz et consorts v. République du Burundi, Award, ICSID

Case No. ARB/95/3.

Gottardo Case C-55/00. Judgment of the Court of 15 January 2002.

Elide Gottardo v Istituto nazionale della previdenza sociale (INPS).

Iberdrola Iberdrola Energia S.A. v. Republic of Guatemala, ICSID Case No.

ARB/09/5, Award, 17 August 2012 [Spanish].

LG&E LG&E Energy Corp., LG&E Capital Corp., and LG&E

International, Inc. v. Argentine Republic, Decision on Liability,

ICSID Case No. ARB/02/1.

LIAMCO LIAMCO v. The Government of the Libyan Arab Republic, Award,

ad hoc arbitration 1997.

Matteucci Case C- 235/87 Annunziata Matteucci v. Communaute Francaise de

Belgique (French Regional Council of Belgium) and Another [1988] I-

5589.

Metalclad Metalclad Corporation v. The United Mexican States, Award, ICSID

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

Micula Ioan Micula, Viorel Micula and others v. Romania, Award, ICSID

Case No. ARB/05/20.

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Mondev Mondev International Ltd. v. United States of America, Award,

ICSID Case No. ARB (AF)/99/2.

MOX Plant Case C-459/03 Commission v. Ireland [2006] ECR I-4635.

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

Chile, Award, ICSID Case No. ARB/01/7.

National Grid National Grid P.L.C. v. Argentina Republic, Award, UNCITRAL.

Noble Ventures Noble Ventures, Inc. v. Romania, Award, ICSID Case No.

ARB/01/11.

Nordsee Case C-102/81, Nordsee Deutsche Hochseefischerei v. Reederei Mond

Hochseefischerei und Reederei Friedrich Busse Hochseefischerei Nordstern

[1982] ECR 1095.

Occidental (LCIA) Occidental Exploration and Production Company v. The Republic of

Ecuador, Final Award, LCIA Case No. UN3467.

Occidental Petroleum Corp. Occidental Petroleum Corporation and Occidental Exploration and

Production Company v. The Republic of Ecuador, ICSID Case No.

ARB/06/11.

Parkerings Parkerings-Compagniet AS v. Republic of Lithuania, Award, ICSID

Case No. ARB/05/8.

Petroleum Frontier Petroleum Services Ltd. v. Czech Republic, Final Award,

UNCITRAL.

Romak Romak S.A. (Switzerland) v The Republic of Uzbekistan, Award,

UNCITRAL, PCA Case No. AA280.

S.D. Myers S.D. Myers Inc. v. Government of Canada, Award, UNCITRAL,

Partial Award.

Saint-Gobain Case C-307/97 Compagnie de Saint-Gobain, Zweigniederlassung

Deutschland v Finanzamt Aachen-Innenstadt [1999] ECR I-06161.

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

Partial Award, UNCITRAL/PCA.

Sapphire Sapphire International Petroleums, Ltd. v. National Iranian Oil

Company, Award, 35 ILR 136 (1963).

Sempra Sempra Energy International v. Argentine Republic, Award, ICSID

Case No. ARB/02/16.

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SGS SGS Société Générale de Surveillance S.A. v. Republic of Paraguay,

Decision on Jurisdiction, ICSID Case No. ARB/07/29.

SOABI Société Ouest Africaine des Bétons Industriels v. Senegal, Award,

ICSID Case No. ARB/82/1.

Tecmed Técnicas Medioambientales Tecmed, S.A. v. United Mexican States,

Award, ICSID Case No. ARB(AF)/00/2.

Tehran Hostages case Case concerning United States Diplomatic and Consular Staff in Tehran

(United States of America v. Iran), I.C.J. Reports 1980.

Temple case Case concerning the Temple of Preah Vihear (Cambodia v. Thailand),

Merits, Judgement of 15 June 1962, I.C.J. Reports 1962.

Thunderbird – Dissenting

Opinion

International Thunderbird Gaming Corporation v. The United Mexican

States, UNCITRAL, Separate opinion of Thomas Wälde.

Thunderbird International Thunderbird Gaming Corporation v. The United Mexican

States, Award, UNCITRAL.

Wena Hotels Wena Hotels Ltd. v. Arab Republic of Egypt, Award, ICSID Case

No. ARB/98/4.

MISCELLANEOUS

CITED AS SOURCE

AICPA Statements

American Institute of Certified Public Accountants Statements on

Standards for Valuation Services, 2007. Available at:

http://www.aicpa.org/InterestAreas/ForensicAndValuation/R

esources/Standards/DownloadableDocuments/SSVS_Full_Ver

sion.pdf

DAMODARAN

Damodaran, A. Discounted Cash flow Valuation: Equity and Firm

Models, New York University, 2004. Available at:

http://people.stern.nyu.edu/adamodar/pdfiles/basics.pdf

Fitzmaurice Report Fitzmaurice G., “Second Report on the Law of Treaties”, 1957, UN

Doc. A/CN.4/107.

Press Release European Commission, “Commission asks Member States to terminate

their intra-EU bilateral investment treaties”, Brussels, 18 June 2015.

Peterson Peterson E.L. “Infringement proceedings initiated by European

Commission against five states over intra-EU BITs”. Available at:

http://www.iareporter.com/articles/infringement-proceedings-

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initiated-by-european-commission-against-five-states-over-intra-

eu-bits-2/

Opinion 1/09 CJEU, Opinion 1/09, Opinion delivered pursuant to Article 218(11)

TFEU - Draft agreement - Creation of a unified patent litigation system -

European and Community Patents Court - Compatibility of the draft

agreement with the Treaties, 8 March 2011, ECR I-01137.

Policy Paper on

Retrospective Changes

European Renewable Energies Federation, Policy paper on

retrospective changes to RES support, Max 2013.

The European Single

Market

European Commission. The European Single Market. Available at:

http://ec.europa.eu/growth/single-market/index_en.htm

ILC Articles with

Commentaries

Draft Articles on Responsibility of States for Internationally Wrongful Acts,

with commentaries, 2001. Available at:

http://legal.un.org/ilc/texts/instruments/english/commentarie

s/9_6_2001.pdf

Guidelines on State Aid Communication from the European Commission. Guidelines on

State Aid for Environmental Protection and Energy 2014 – 2020,

2014/C 200/01.

Guidance for the design of

renewables support

schemes

Commission Staff Working Document. European Commission

guidance for the design of renewables support schemes, SWD (2013) 439

final.

UNCTAD Series II Fair and Equitable Treatment, UNCTAD Series on Issues in

International Investment Agreements II, UNITED NATIONS (2012).

VCLT Vienna Convention on the Law of Treaties, opened for signature 23

May 1969 (entered into force 27 January 1980).

Energy Sector Consumption Expenses to GDP, IBRD, available at:

http://data.worldbank.org/indicator/GCG.XPN.TOTL.GD.Z

S.

Public Spending Details for

2014

UK Public spending. “Public Spending Details for 2014”. Available

at:

http://www.ukpublicspending.co.uk/year_spending_2014UKbt

_15bc1n#ukgs302

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LIST OF ABBREVIATIONS

ABBREVIATION MEANING

¶, para. Paragraph

Art(s). Article(s)

Article 2 Article 2 of the Barancasia-Cogitatia Bilateral Investment Treaty

Article 25 Article 25 of the ILC’s Articles on State’s Responsibility

Barancasia-Cogitatia

BIT/BIT

Agreement between the Republic of Barancasia and the Federal Republic of Cogitatia for the promotion and reciprocal protection of investments

BEA Barancasia Energy Authority

BIT Bilateral investment treaty

CCP Common commercial policy

CJEU Court of Justice of European Union

Contracting Party In relation to parties to the Barancasia-Cogitatia BIT

EU European Union

Extra-EU In relation to countries which are not Member States of the EU

FDI Foreign Direct Investment

FiT Feed-in-Tariff

Charter The Charter of Fundamental Rights of the European Union

Ibid. Ibidem / The same place

ICJ International Court of Justice

ICSID International Centre for Settlement of Investment Disputes

ILC Articles The draft articles on Responsibility of States for internationally wrongful acts, 2001.

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Intra-EU In relation to countries which are Member States of the EU

ISDS Investor-State Dispute Settlement

LCIA The London Court of International Arbitration

LRE Law on Renewable Energy

NPM Non Precluded Measure

NT National Treatment

p. /pp. Page / Pages

PCIJ Permanent Court of International Justice

Problem 2015 FDI Moot Court Problem

PO Procedural Order

Regulation Regulation on the Support of Photovoltaic Sector

Statement of Uncontested

Facts

Facts

TEU Treaty on European Union

TFEU Treaty on the Functioning of the European Union

UNCITRAL United Nations Commission on International Trade Law

UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts 2010

VCLT Vienna Convention on the Law of Treaties

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The present Memorial of the Republic of Barancasia (“Barancasia” or “Respondent”)

responds to the Request for Arbitration submitted by Vasiuki LLC (“Vasiuki” or “Claimant”)

in a dispute concerning Barancasia’s alleged breach of its obligations under the Agreement

between the Republic of Barancasia and the Federal Republic of Cogitatia for the Promotion

and Protection of Investments (“BIT”).

Respondent is represented by the Team Tarassov. All correspondence addressed to

Respondent shall therefore be delivered for the attention of the Team Tarassov.

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STATEMENT OF FACTS

In 1998, Cogitatia and Barancasia entered into the BIT.1 Both States belong to the group of

European countries which later, in 2004, acceded to the European Union (“EU”).2 Since then,

primary as well as secondary EU law has been binding upon both Member States. Therefore,

Barancasia’s government reviewed its Intra-European Union bilateral investment treaties

(“Intra-EU BITs”) and found them redundant based on the fact that EU law regulates

investment flows within the European Union. In order to conform to EU law, in 2006,

Barancasia announced its intention to terminate all its Intra-EU BITs and later that year it

formally resolved to do so.3

Barancasia has become highly dedicated to the EU’s climate and energy targets,4 and in 2010

adopted the Law on Renewable Energy (“LRE”).5 The regime established by the LRE became

tremendously attractive to foreign investors, mainly due to Barancasia’s commitment to ensure

sustainable development of renewable technology sources as well as due to the pre-announced

percentage of investment return.6 During 2011, though, a ground-breaking technology was

invented, which made solar panels substantially cheaper to manufacture and dramatically

reduced the costs of development.7 Consequently, investors’ profitability increased sharply and

disproportionally. Eventually a phenomenon called ‘the solar bubble’ was created under which

the sole object of business was the unproportioned level of profit flowing from the feed-in

tariff (“FiT”). By then, Barancasia Energy Authority (“BEA”) received over 7,000 applications

for licences.8

As a result of this development, solar energy framework in many European countries including

Barancasia became unsustainable. During 2012 it started to be obvious that the pay-out of the

fixed feed-in tariffs does not fulfil the purpose and aim of the LRE.9 On the contrary, the LRE

became solely a ‘factory’ on investors’ excessive profits.10 The unsustainability of the support

scheme was undisputable. It represented a huge financial burden on Barancasia since the

1 BIT, Problem, Annex No. 1, p. 25. 2 Statement of Uncontested Facts, Problem, p. 20, ¶ 5. 3 Ibid., ¶ 6; Press Release, Problem, Annex No. 5, Problem, p. 36; Government Resolution, Problem, Annex No. 6, p. 37. 4 Statement of Uncontested Facts, Problem, p. 20, ¶ 7. 5 Statement of Uncontested Facts, Problem, p. 21, ¶ 14; LRE, Problem, Annex No. 2, pp. 32-33. 6 Statement of Uncontested Facts, Problem, p. 22, ¶¶ 15-17. 7 Statement of Uncontested Facts, Problem, p. 23, ¶ 25. 8 Ibid., ¶ 26. 9 Ibid., ¶ 28; LRE, Problem, Annex No. 2, p. 32. 10 Ibid., ¶ 28.

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support was financed solely from the state budget; moreover, it was not even physically

possible to connect all new applicants to the national electricity grid.11 In addition, as this issue

started to be publicly discussed, national strikes were organized because of the inequality of

support between solar energy and the core values of society, such as education.12

The crisis emerged unexpectedly. It cannot be characterised as a result of accumulation of a

number of partial factors which in their entirety substantially influence the economic system.

On the contrary, the crisis was caused by one single factor – unforeseen technological

development. Barancasia found itself on the edge of a national crisis that had to be dealt with

immediately. Hence, it promised to examine its legislation in cooperation with representatives

of the industry, who were invited to present their views.13 As a result of mutual consensus,

Barancasia adopted an amendment of the LRE providing for an annual review of the tariffs.14

Subsequently, the Barancasia Energy Authority calculated and announced a new feed-in tariff

amounting to 0.15 EUR/kWh, applicable from 1 January 2013, while the same investment

return calculation was preserved.15

As has already been stated, the enactment of the LRE attracted a great deal of investors, inter

alia, Vasiuki LLC who apparently finds the subsequent conduct of Barancasia to be harmful

towards its investments. For this reason, it filed a Request for Arbitration with the London

Court of International Arbitration (“LCIA”), by which it initiated arbitration proceedings

against Barancasia, claiming the infringement of the fair and equitable treatment standard

(“FET”).16

11 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 12 Ibid., ¶¶ 28, 32. 13 Statement of Uncontested Facts, Problem, p. 24, ¶¶ 32, 34. 14 Ibid., ¶ 34; Amendment of Article 4 LRE, Problem, Annex No. 4, p. 35. 15 Statement of Uncontested Facts, Problem, p. 24, ¶ 35; Procedural Order No 2, Problem, pp. 59-60, ¶ 27. 16 See Request for Arbitration, Problem, pp. 3-6.

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PART ONE: JURISDICTION OF THE TRIBUNAL AND

ADMISSIBILITY OF CLAIMS

I. INTRA-EU BIT JURISDICTIONAL OBJECTION

1. Respondent submits that the Tribunal lacks jurisdiction over the current dispute based on

the fact that as a result of the Respondent’s accession to the European Union, EU law

superseded the preceding BIT.

2. This statement may be, inter alia, evidenced by the wording of Article 2 of the 2004 Act

Concerning the Conditions of Accession, in which the new Member States accepted that

“[f]rom the date of accession, the provisions of the original Treaties and the acts adopted by the institutions

and the European Central Bank before accession shall be binding.”17

3. It will be argued below that the termination of the prior treaty, i.e. the BIT, occurred by

virtue of Article 59(1) of the Vienna Convention on the Law of Treaties (“VCLT”),

in eventum, that the Tribunal lacks jurisdiction pursuant to Article 30(3) of the VCLT.

4. Respondent considers it important to first address the issue of whether EU primary law is

to be considered as international public law in order to advocate the relevance of the VCLT

applicability.18 The BIT, as well as the Treaty on the Functioning of the European Union

(“TFEU”), Treaty on European Union (“TEU”) and Accession Treaties have been all

formed by the process and in form of a public international law treaty within the meaning

of Articles 1 and 2(1) of the VCLT.19 Article 54 of the TEU together with Article 357 the

TFEU20 clearly suggest that those treaties have been concluded within the realm of

international public law. Additionally, pursuant to Article 48 of the TEU, those treaties

may be altered only in accordance with the appropriate international public law procedure.

In this context, “[w]hile it is true that the TEU and TFEU […] go, in terms of integration, far

beyond what has been seen in respect of any other international organization, this does not render these

17 See Article 2 of the 2004 Act Concerning the Conditions of Accession. 18 Pursuant to Article 1 VCLT “[t]he present Convention applies to treaties between States.” Then, according to Article 2 (1) VCLT, “[f]or the purposes of the present Convention: (a) 'treaty' means an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.” 19 HINDELANG, p. 183. 20 Article 54 TEU and Article 357 TFEU both identically stipulate that “[t]his Treaty shall be ratified by the High Contracting Parties in accordance with their respective constitutional requirements. The Instruments of ratification shall be deposited with the Government of the Italian Republic.”

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treaties an aliud, but ‘merely’ a ‘treaty plus’ compared to other public international law treaties.”21

Respondent therefore does not find that the ‘unique’ regime established by the European

Treaties excludes those instruments from regular sources of international public law. Based

on that it must be concluded that the VCLT is applicable when the matter of BIT-EU law

inconsistency is being considered.

II. THE BIT HAS BEEN TERMINATED PURSUANT TO ARTICLE

59(1) OF THE VCLT

5. According to Article 59(1) of the VCLT,

“[a] treaty shall be considered as terminated if all the parties to it conclude a

later treaty relating to the same subject-matter and

(a) it appears from the later treaty or is otherwise established that the parties

intended that the matter should be governed by that treaty; or

(b) the provisions of the later treaty are so far incompatible with those of the

earlier one that the two treaties are not capable of being applied at the same

time.”22

6. Respondent contends that the conditions imposed by Article 59(1) of the VCLT were met

and, as a consequence, the later treaty – the TFEU – prevails over the BIT. In other words,

based on Article 59(1), the BIT has been effectively terminated. If the Tribunal were not

to find the common intention of the contracting States to be present, then Respondent

still considers the alternative condition of incompatibility to be fulfilled.

7. The VCLT remains silent on whether the whole treaty or only its parts shall be terminated.

However, “[t]he text would indicate - and this is confirmed by the travaux préparatoires of Article 59

-that the term ‘treaty’ refers to the entire treaty, the later one substituting en bloc and, hence, abrogating the

earlier one.”23 There are therefore no doubts that in accordance with Article 59 of the VCLT,

the BIT shall be considered as terminated in its entirety.

21 HINDELANG, pp. 185-186. 22 See Article 59(1) VCLT. 23 VILLIGER, p. 725.

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A. BOTH THE BIT AND THE TFEU RELATE TO THE SAME SUBJECT

MATTER

8. The determination of the same subject matter depends on the existence of conflicting

obligations with regard to the same subject matter; not on whether both Treaties provide

for the same rights.24

9. Respondent adopts a broad definition of the notion of the ‘same subject matter’ in the

sense that the fulfilment of the obligation under one treaty affects the fulfilment of the

obligation under another.25 Both the BIT and the TFEU cover foreign investment

activities, providing rules for the same aspects of foreign investment regulation, namely

their post-establishment treatment and operation, capital movements and limitations on

private property rights.26 The fact that EU law does not contain precisely the same

provisions as the BIT, e.g. in the form of the FET standard, rules on expropriation and

investor–state dispute resolution does not in any event mean that the performance of

Respondent’s obligations under the BIT does not affect fulfilment of obligations under

the TFEU and vice versa.

10. However, even if the narrow definition was adopted, the substantial similarity between

those successive treaties would have to be found. In this context, Respondent argues that

even though not precisely identical, both Treaties refer to the same issues in certainly not

minor or just incidental manner.27 “Indeed, even if there is no distinct chapter on investment in the

Treaties, there are provisions in the EU law that concern investment.”28 This statement is evidenced

by the following.

11. First, both Treaties serve the identical purpose to broaden and strengthen mutual

economic relationships and to promote the flow of capital and economic development of

the contracting parties. The preamble of the BIT makes it clear that it was concluded in

order “to develop economic co-operation to the mutual benefit of both Contracting Parties.”29 Similarly,

within the preamble of the TFEU, one can find dedications “to ensure the economic and social

progress of their States by common action to eliminate the barriers which divide Europe […] to strengthen

24 DIMOPOULOS, p. 74. 25 Ibid., p. 73. 26 DIMOPOULOS, p. 74. 27 Cf. Eureko, ¶ 242. 28 RADU, p. 239. 29 See Preamble of the BIT, Problem, p. 25.

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the unity of their economies […]”30 One of the most important underlying purposes of the EU

as such is to create a functioning single market within its frontiers, by virtue of “providing a

regulatory framework that fosters the free movement of goods and the free movement of services, and enhances

competitiveness; removing existing barriers to intra-EU trade and preventing the creation of new ones;

promoting a business and consumer-friendly environment based on transparent, simple, and consistent rules

offering legal certainty and clarity.”31 Regarding this statement in the investment policy context,

it is evident that the EU supports promotion and protection of investments between the

Member States. To this end, the rules on the free movement of goods, services and capital

which effectively protect and promote investments in relations between the Member States

were adopted. In this regard, the former ECJ held that any restrictions in terms of internal

market rules being liable “to deter investors from other Member States from investing in their capital”32

shall be prohibited.

12. Second, rules on the free movement of capital can be found in both Treaties. The BIT

contains relevant provisions within its Article 6 guaranteeing transfer of payments in a

freely convertible currency without any restrictions and undue delay. Similarly, the TFEU

reflects this issue in Article 63. Under its paragraph 1, “all restrictions on the movement of capital

between Member States and between Member States and third countries shall be prohibited.”33 The

following paragraph makes clear that “all restrictions on payments between Member States and

between Member States and third countries shall be prohibited.”34 In Commission v Austria, the Court

of Justice of the European Union (“CJEU”) already acknowledged these stipulations on

transfer of capital as contained in the BIT and the TFEU as overlapping.35

13. Third, Respondent finds substantive standards of protection to be identical. Both Treaties

provide for rules on the establishment of the investments. Pursuant to Article 2(1) of the

BIT, “[e]ach Contracting Party shall encourage and create favourable conditions for investors of the other

Contracting Party to make investments in its territory and shall admit such investments in accordance with

its laws and regulations.”36 Establishment of investments is, however, also covered by the

TFEU within its Article 8, which by stating the aim to eliminate inequalities effectively

prohibits any restrictions preventing foreign investors’ access to the market in the territory

30 Ibid. 31 See The European Single Market. 32 Commission v Italy, ¶ 46. 33 See Article 63(1) TFEU. 34 See Article 63(2) TFEU. 35 Commission v Austria, ¶ 26. 36 See Article 2(1) BIT, Problem, p. 26.

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of another Member State. In more specific terms, the freedom of establishment is subject

to Article 49 of the TFEU, which stipulates that “restrictions on the freedom of establishment of

nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition

shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any

Member State established in the territory of any Member State.”37

14. Fourth, it is stipulated by virtue of Article 3(1) of the BIT that once the investment has

been admitted, the Host State “shall accord to investments and returns of investors of the other

Contracting Party treatment which is fair and equitable and not less favourable than that which it accords

to investments and returns of its own investors or to investments and returns of investors of any third State,

whichever is more favourable.”38 The subsequent paragraph sets forth that the treatment which

is no less favourable than that which the Contracting Party accords to its own investors

shall be accorded to the investors of the other Contracting Party as well.39 The reflection

of the National Treatment (“NT”) clause is clearly visible within Article 18 of the TFEU,

as it is undisputable that the purpose of the NT clause is mainly to prevent discrimination

towards investors. The first part of Article 18 of the TFEU lays down that “[w]ithin the

scope of application of the Treaties, and without prejudice to any special provisions contained therein, any

discrimination on grounds of nationality shall be prohibited.”40 For the sake of completeness,

Respondent submits that in accordance with Article 54 of the TFEU, the legal entities are

also beneficiaries of Article 18 of the TFEU.41

15. Finally, as both Treaties provide for the rules on the protection of investments carried out

within the EU internal market, they also establish remedy mechanisms based upon which

investors may seek compensation for damage caused by Member States (see the Francovich

case),42 contrary to what was wrongly concluded by the Eastern Sugar tribunal.43

16. With regard to the above, Respondent finds the fulfilment of the “same subject matter”

condition to be proven.

37 Article 49 TFEU. 38 See Article 3(1) BIT, Problem, p. 26. 39 See Article 3(2) BIT, Problem, pp. 26-27. 40 See Article 18 TFEU. 41 GEIGER et al., p. 240. 42 See Francovich. 43 See Eastern Sugar, ¶ 180.

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B. SUBJECTIVE TEST: BARANCASIA AND COGITATIA INTENDED THE BIT TO

BE SUPERSEDED BY THE TFEU

17. Respondent asserts that both Barancasia and Cogitatia intended the TFEU to supersede

the BIT in question. This may be evidenced, inter alia, by the fact that no protocol or

declaration giving the priority to the BIT over EU law has been adopted. Respondent

believes that had parties not intended EU law to supersede the BIT, they could have made

a declaration or could have issued a protocol clarifying their position on that issue,

following the example of many acceding Member States.

18. To give evidence on such practice of new Member States, Respondent submits that Article

2 of the Protocol No. 20 to the TFEU states the following. “The United Kingdom and Ireland

may continue to make arrangements between themselves relating to the movement of persons between their

territories […] Nothing in Articles 26 and 77 of the Treaty on the Functioning of the European Union,

in any other provision of that Treaty or of the Treaty on European Union or in any measure adopted

under them, shall affect any such arrangements.”44 Another example is

51. Declaration by the Kingdom of Belgium on national Parliaments45 Belgium solely

clarified its position on which institutions act as components of the national parliamentary

system.

19. Furthermore, Respondent considers this conclusion to be justified by the wording of

Article 6(12) of the 2004 Act Concerning the Conditions of Accession, according to which

“[t]he new Member States shall take appropriate measures, where necessary, to adjust their position in

relation to […] those international agreements to which the Community or to which other Member States

are also parties, to the rights and obligations arising from their accession to the Union.”46 As both

Contracting Parties failed to do so, it clearly demonstrates their common approach

towards the redundancy of the BIT within the European legal order.

44 Article 2 of the Protocol No. 20 on the Application of Certain Aspects of Article 26 of the Treaty on the Functioning of the European Union to the United Kingdom and to Ireland. 45 51. Declaration by the Kingdom of Belgium on national Parliaments: “Belgium wishes to make clear that, in accordance with its constitutional law, not only the Chamber of Representatives and Senate of the Federal Parliament but also the parliamentary assemblies of the Communities and the Regions act, in terms of the competences exercised by the Union, as components of the national parliamentary system or chambers of the national Parliament.” 46 See Article 6(12) of the 2004 Act Concerning the Conditions of Accession.

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20. All the above mentioned indicates the presence of the Contracting Parties’ common

intention to terminate the BIT by virtue of the later treaty, and thus Article 59(1)(a) of the

VCLT applies.

C. OBJECTIVE TEST: THE BIT IS INCOMPATIBLE WITH THE TFEU IN ITS

ENTIRETY

21. However, in the event that the Tribunal does not consider the arguments provided above

as persuasive, Respondent offers its arguments proving the incompatibility of the Treaties

to the extent that they cannot prevail over each other.

22. The incompatibility under Article 59(1)(b) of the VCLT occurs once the application of the

BIT leads to the violation of the TFEU and vice versa. “[T]he specific determination of whether the

different sets of rules in intra-EU BITs and in the EU Treaties are incompatible and place conflicting

obligations on the Member States presents the main condition that needs to be satisfied in order to consider

intra-EU BITs as terminated by EU law.”47 As has already been suggested above, both the

TFEU and the BIT cover the same subject matter. The BIT does so in a comprehensive

manner, whereas the TFEU deals with the issue of intra-EU BITs mainly by virtue of its

various stipulations on the internal market. Even though the subject matter is overlapping,

the BIT might be perceived as encompassing certain rights providing for a more specific

protection of the investors. However, this does not mean that the subject matter of the

BIT is narrower or different.48 Nonetheless, as those additional rights and benefits are only

available to investors of Barancasian and Cogitatian nationality, they breach the general

principle of non-discrimination on the basis of nationality.

23. Article 18(1) of the TFEU constitutes the guiding principle of the EU law and a necessary

precondition for the functioning of the single market.49 The prohibition of discrimination

has direct effect and grants subjective rights which may be invoked by the beneficiaries,

i.e. all EU citizens.50

47 DIMOPOULOS, p. 74. 48 Ibid., p. 74. 49 GEIGER et al., p. 237. 50 Ibid., p. 240.

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24. Rights that might be perceived as additional are generally perceived to be the FET

standard, rules on expropriation and investor-state dispute settlement (Article 8(2)(b)–(d)

of the BIT). Respondent will address those areas in turn.

FAIR AND EQUITABLE TREATMENT

25. First of all, within the ambit of Article 2(2) of the BIT, the investments of investors of

either Contracting Party shall “at all times be accorded fair and equitable treatment in the territory of

the other Contracting Party”.51 The BIT itself does not contain a definition of the FET

standard. As a matter of fact, it is generally considered as a flexible, undefinable principle

dependent on a case-by-case analysis.52 The mere scope of the FET principle is therefore

extremely abstract, broad and non-unified. Yet, tribunals “must be disciplined by being based

upon state practice and judicial or arbitral case law or other sources of customary or general international

law.”53

26. Even though certain overlaps with the TFEU are present, e.g. the equitable treatment

standard pursuant to Article 18 of the TFEU, it can be concluded that EU law is by far

more rigid. In this sense, the FET clause may be regarded as providing an additional right

to Claimant and other investors from Cogitatia, which would be discriminatory towards

other nationals of other Member States.

EXPROPRIATION RULES

27. Article 5 of the BIT sets forth specific rules on expropriation. It stipulates that

expropriation of investment is prohibited without prompt, adequate and effective

compensation, unless it serves a public purpose.54 “Such compensation shall amount to the fair

market value of the investment expropriated immediately before expropriation or impending expropriation

became public knowledge, whichever is the earlier. The compensation shall carry interest from the date of

expropriation until the date of payment, be made without undue delay, be effectively realizable and be freely

transferable in a freely convertible currency.”55

28. In terms of EU law, the second sentence of Article 17(1) of the Charter of Fundamental

Rights of the European Union (“Charter”) stipulates the following. “No one may be deprived

51 Article 2(2) BIT, Problem, p. 26. 52 DOLZER & SCHREUER, pp. 132-133. 53 ADF Group Inc., ¶ 119. 54 Article 5(1) BIT, Problem, pp. 27-28. 55 See Article 5(1) BIT, Problem, pp. 27-28.

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of his or her possessions, except in the public interest and in the cases and under the conditions provided for

by law, subject to fair compensation being paid in good time for their loss.”56 It is apparent that whereas

the BIT contains its own detailed rules, the Charter solely provides for a general legal

framework and in further details refers to particular national laws. Moreover, the personal

scope of the Charter’s application is considerably narrower.57

29. It must be reminded that the Charter enjoys the same legal force as the Treaties.58 Apart

from that, Article 17(1) of the Charter not only refers to particular national laws, but it

even lays down its own EU law standards in the form of ‘fair compensation’ and ‘good

time’, in case national laws are silent in this respect. It cannot be therefore held that the

EU primary law does not contain the rules on expropriation as such.

30. Since BIT rules on expropriation are much more extensive and detailed, they provide for

the additional protection of investment.

INVESTOR-STATE ARBITRATION

31. According to Article 8(2) of the BIT, in the case of non-settled controversy, investors are

allowed to opt for ICSID, ad hoc or LCIA arbitration. The investor–state arbitration is

not, on the other hand, replicated by EU law at all. It is not permissible for an EU national

to initiate arbitration proceedings against the Member States for a violation of the Treaties.

32. It has been suggested by the CJEU that incompatibilities created by the additional rights

provided only to certain EU citizens may be cured by unilaterally extending these rights to

all the other EU nationals.59 Nevertheless, “whether such unilateral extension of BIT rights is

compatible with EU law depends on whether it respects the primacy of EU law.”60 Respondent,

though, highlights the fact that the possibility of unilateral extension is not a feasible

option, since it does not actually cure the ‘incompatibility in its entirety’. Particularly,

Article 18 of the TFEU would not be complied with simply because the favourable regime

of one of the intra-EU BITs has been extended. On the contrary, in order to comply with

56 See Article 17(1) Charter. 57 The wording of Article 17 of the Charter is, although narrow, fully consistent with Article 345 TFEU laying down that Treaties shall not prejudice the rules in Member States governing the system of property ownership, and also with the 1. Declaration concerning the Charter of Fundamental Rights of the European Union stating that “[t]he Charter does not extend the field of application of Union law beyond the powers of the Union or establish any new power or task for the Union, or modify powers and tasks as defined by the Treaties.” 58 See Article 6 TEU. 59 Gottardo, ¶ 34. 60 DIMOPOULOS, p. 85.

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EU law, all the intra-EU BITs would have to be unilaterally extended.61 Since no other

Member States is a party to the present arbitration proceedings, ordering effective

unilateral extension cannot be achieved at this point. Furthermore, Member States would

never be able to extend the additional rights contained in the BITs to their own nationals

as those simply cannot be beneficiaries of the BITs.

33. The above is also without any prejudice to the misleading position of the Eastern Sugar

tribunal, stating that if particular investors / EU citizens feel that the additional rights of

the particular BIT should be extended to their benefit, they should claim their rights under

Article 18 of the TFEU individually.62 This conclusion is clearly erroneous and it fails to

grasp the true objective of Article 18.

34. However, even if it is accepted that additional substantive rights might be legitimately

extended to other EU nationals, the same could not be held regarding the additional

procedural right to initiate investor-state arbitration, as it collides with the principle of

primacy and autonomy of EU law.63 In this context, Dimopoulos considers that “unilateral

extension of the right to initiate investor-state arbitration to all EU nationals does not present a viable

solution. It would only result in […] the breach of the exclusive jurisdiction of the Court of Justice.”64 In

any case, the existence of such a dispute resolution mechanism still violates Article 18 of

the TFEU, as it discriminates against other EU citizens.

35. Overall, it has been shown that pursuant to Article 59(1)(b) of the VCLT, there are serious

incompatibilities causing the BIT to be terminated in its entirety. Hence, the Tribunal has

no jurisdiction to hear the current dispute.

III. TERMINATION PROCEDURE LAID DOWN BY THE VCLT HAS

BEEN FULLY COMPLIED WITH

36. In addition, Respondent highlights the fact that the termination procedure established by

virtue of Article 65 of the VCLT has been fully complied with.

37. Under this Article, the party invoking termination of the treaty must notify the other party

of the claim and such notification shall indicate the measure proposed to be taken with

61 See judgements in Saint-Gobain, Matteucci and Gottardo. 62 See Eastern Sugar, ¶ 170. 63 For further details, see Chapter on Admissibility of this Memorandum, p. 31. 64 DIMOPOULOS, p. 91.

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respect to the treaty and reasons thereof.65 In accordance with Article 67(1) of the VCLT,

the notification shall be made in writing, while Article 67(2) of the VCLT sets forth that

the notification must be carried out through an instrument communicated to the other

party.

38. Respondent notified Cogitatia by Notification from 29 June 2007, where it specified the

measure to be taken (i.e. termination).66 Cogitatia then confirmed the acceptance of the

notification on 28 September 2007,67 whereby the conditions set by Article 78(b) and (c)

have been met and the notification should thus be deemed perfected.

39. Concerning the reasons for the termination, those have been publicly announced. For

instance, in Daily News published on 15 November 2006, the Prime Minister stated

Respondent’s intention to terminate intra-EU BITs “as there is no more necessity for these

instruments of public international law within the legal framework of the new European Union.”68

Indeed, Article 67(2) of the VCLT lays down that the notification including the reason

thereof must be correctly communicated; nonetheless, it is generally accepted by

distinguished scholars and supported by the wording of the Article in question that the

communication may also be informal.69 In any event, according to Krieger “[i]f a State does

not comply with the formal requirements, the acts will take no effect unless the other States Parties accept

the validity of the notification and declaration of termination explicitly or tacitly.”70 Therefore,

Respondent contends that even if its notification was initially considered imperfect, such

flaw was corrected by Cogitatia’s subsequent implicit consent with the termination.

40. Respondent maintains that Cogitatia accepted the validity of the notification when it failed

to object pursuant to Article 65(2) of the VCLT. This Article expressly stipulates that “[i]f,

after the expiry of a period which […] shall not be less than three months after the receipt of the notification,

no party has raised any objection, the party making the notification may carry out in the manner provided

in article 67 the measure which it has proposed.”71 In the current dispute, Cogitatia failed to raise

any objections to the Barancasia’s intention to terminate the BIT. “Failure to raise an objection

65 Article 65(1) VCLT. 66 Annex No. 7.1, Problem, p. 39. 67 Annex No. 7.2, Problem, p. 40. 68 Annex No. 5, Problem, p. 36. 69 See VILLIGER, p. 844; see also KRIEGER in DÖRR & SCHMALENBACH, p. 1170, ¶ 11. 70 KRIEGER in DÖRR & SCHMALENBACH, p. 1171, ¶ 15; see also FITZMAURICE, p. 34. 71 See Article 65(2) VCLT.

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thus qualifies as a form of tacit acquiescence in a unilateral claim.”72 Respondent therefore proposes

that the relevant procedure has not only been initiated, but also successfully concluded.

41. Based upon the above, the BIT must be considered as effectively terminated on the basis

of the implicit consent of Cogitatia and, hence, the Tribunal lacks jurisdiction for

substantial reasons set out in Article 59(1) of the VCLT and procedural reasons under

Articles 65, 67 and 78 of the VCLT.

IV. THE TRIBUNAL LACKS JURISDICTION BASED ON ARTICLE

30(3) OF THE VCLT

42. In case the Tribunal finds Article 59 of the VCLT to be inapplicable, Respondent suggests

to examine the current issue in light of Article 30(3) of the VCLT, pursuant to which

“[w]hen all the parties to the earlier treaty are parties also to the later treaty

but the earlier treaty is not terminated or suspended in operation under Article

59, the earlier treaty applies only to the extent that its provisions are compatible

with those of the later treaty.”73

43. Analogously to the previous argumentation concerning the application of Article 59(1)(b)

of the VCLT,74 Respondent finds serious incompatibilities between Article 18(1) of the

TFEU and the additional rights contained in the BIT, since those are provided only to the

investors from Barancasia or Cogitatia.

44. Moreover, since this incompatibility cannot be cured by way of unilateral extension,75 it

must be held that under Article 30(3) of the VCLT, Article 8 of the BIT shall not be

applied, as its potential application would necessarily violate the non-discrimination

principle honoured by the TFEU. Hence, the Tribunal lacks jurisdiction.

45. Finally, Respondent briefly introduces the EU law perspective on the clash of international

public law and EU law. In Commission v Italy, the CJEU stated that matters governed by the

EU Treaties take precedence over bilateral agreements concluded between Member States

before their accession to the EU. This rule applies where a conflict arises from the

provisions of the EU Treaties themselves or, more frequently, from secondary legislation.

72 VILLIGER, p. 809; see also FITZMAURICE, p. 34. 73 See Article 30(3) VCLT. 74 See Chapter on Objective test of this Memorandum, p. 23. 75 Ibid.

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V. THE TRIBUNAL HAS NO JURISDICTION DUE TO THE LACK

OF RESPONDENT’S CONSENT TO ARBITRATE

46. Pursuant to Article 13(2) of the BIT, the agreement shall remain in force for the period of

10 years. Thereafter it shall remain in force until the expiration of a twelve-month period

from the date either party notifies the other in writing of its intention to terminate the BIT.

47. Article 54 of the VCLT, though, stipulates that

“[t]he termination of a treaty or the withdrawal of a party may take place (a)

in conformity with the provisions of the treaty; or (b) at any time by consent of

all the parties after consultation with the other contracting States.”76

48. Concerning the possibility of terminating a treaty anytime, Villiger makes clear that “[t]reaty

parties are the masters of their own treaty and may at any time – contrary to any time-limit or other

conditions stipulated by the treaty, and even if the treaty is silent – agree to its termination or in maiore

minus the withdrawal of a particular State.”77

49. Respondent terminated the BIT by the official notice made on 29 June 2007,78 effective as

of 30 June 2008, which was executed prior to its contractual termination period.79

However, pursuant to Article 54(b) of the VCLT, Respondent does not consider this

termination as premature or invalid. By the notification of the BIT termination,

Respondent clearly expressed its intention and will to terminate the BIT. Cogitatia then

officially confirmed the acceptance thereof by failing to give any relevant statement on the

matter of the notification, i.e. the termination of the BIT. By confirming the acceptance of

the termination, all conditions prescribed by Article 78 of the VCLT have been met and

thus the notification must be considered as legally perfected.

50. With regard to consent of both parties to terminate, Respondent asserts that Article 54(b)

of the VCLT “does not state that the consent of the parties must be established explicitly […] it will

normally suffice if some or all of the parties implicitly consent to the termination or withdrawal.”80 In this

76 Article 54 VCLT. 77 VILLIGER, p. 686; see also GIEGERICH in DÖRR & SCHMALENBACH, p. 957, ¶ 37. 78 See Annex No. 7.1, Problem, p. 39. 79 In accordance with Article 13(1) BIT, it entered into force on the date of the last written notification through diplomatic channels of the fulfilment by the Contracting Parties of all the necessary internal procedures for bringing the BIT into force. As the last written notification occurred on 1 August 2002, pursuant to the Art 13 (2) BIT, it might have been terminated from August 2, 2012 whereby it was supposed to remain in force until the expiration of 12 month period from the written notification of intention to terminate the BIT. 80 GIEGERICH in DÖRR & SCHMALENBACH, p. 958, ¶ 40.

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context, Respondent considers undoubtable that Cogitatia consented tacitly when it did

not object within 3 months of the notification pursuant to Article 65(2) of the VCLT.81 If

one was to interpret the above-mentioned conversely, the potential State’s conduct in mala

fide, e.g. if the State deliberately did not react to the official communication of the other

State seeking to terminate a treaty, could never be ‘punished’ in the field of international

public law. In other words, once a State behaves diligently “it needs to know that, absent any

objection, the right it possesses under Article 65 to carry out the proposed action will not later be

contested.”82

51. Despite being unusual, tacit consent to terminate an international treaty has already been

acknowledged as a valid form of termination in a number of cases, for instance in the

judgment of the Reichsgericht of 23 May 1925, which found that the Brest-Litovsk treaty

had been terminated by a declaration of the Soviet Government and by the absence of

protest from the German side. Furthermore, the same was concluded in the judgement of

the Arnhem Court of Appeals of 23 March 1971 and in the administrative decision of the

Crown of 22 March 1975, whereby the latter dealt with termination “for tacit mutual consent

in connection with agreements between the Netherlands and Indonesia unilaterally denounced by Indonesia

with subsequent acquiescence by the Netherlands.”83

52. Hence, according to Article 54(b) of the VCLT in connection with Article 65(1) and (2),

Article 67 and Article 78 of the VCLT,84 the BIT has been effectively terminated as of

30 June 2008, which is the date of termination determined by Respondent in its

notification.85 For the sake of completeness, Respondent asserts that the given time of

termination also fully corresponds with the time limit set in Article 65(2) of the VCLT.

53. Respondent is aware that the above is without any prejudice to Article 13(3) of the BIT,

containing the sunset clause. According to that Article, “[i]n respect of investments made prior

to the termination of this Agreement, the provisions of this Agreement shall continue to be effective for a

period of ten years from the date of its termination.”86

81 This conclusion is also reached by number of other scholars, e.g. see VILLIGER, p. 809. 82 CORTEN & KLEIN, p. 1503. 83 CONFORTI, p. 59. 84 For further details see Chapter on Termination Procedure of this Memorandum. 85 Annex No. 7.1, Problem, p. 39. 86 Article 13(3) BIT, Problem, p. 31.

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54. However, as Claimant has purchased land plots for the purpose of realising its first Alfa

Project (“Alfa”) in the territory of Respondent during May 2009,87 there was no qualified

investment at the time of the BIT termination and therefore the sunset clause is not

applicable.

55. To conclude, Respondent believes that the Tribunal lacks jurisdiction over the present

dispute due to the fact that Respondent effectively terminated the BIT and so its consent

to be a party to arbitration proceedings is missing.

VI. THE PRESENT INVESTMENT DOES NOT FULFIL ITS

ELEMENTAL CHARACTERISTIC OF ASSUMPTION OF RISK

56. Article 1(1) of the BIT gives a definition of the term ‘investment’ and provides a non-

exhaustive list thereof. According to this Article the investment “shall comprise every kind of

asset invested in connection with economic activities by an investor of one Contracting Party in the territory

of the other Contracting Party in accordance with the laws and regulations of the latter”88 and shall

include, inter alia, movable and immovable property (a), and the rights conferred by the

LRE and any licenses pursuant to the LRE (e).89

57. Notwithstanding the fact that the BIT enshrines its own definition of ‘investment’, there

are other additional elements inherent to the notion of investment which must be present

in order for the investment to be considered protected under the BIT.

58. In particular, Respondent seeks to highlight a decision on jurisdiction in Salini. Respondent

refers to this decision in spite of the fact that it was rendered under the auspices of the

ICSID Convention, since some other (non-ICSID) tribunals also adopted the Salini test,

although in a revised form.90 In Romak, the three-member tribunal operating under the

UNCITRAL Rules, stated the following: “The Arbitral Tribunal therefore considers that the term

‘investments’ under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSID

or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time

87 Statement of Uncontested Facts, Problem, p. 21, ¶ 12. 88 Article 1(1) BIT, Problem, pp. 25-26. 89 Ibid. 90 Revised, inter alia, in Lesi-Dipenta v Algeria (Consortium Groupement L.E.S.I.- DIPENTA v. République algérienne démocratique et populaire, ICSID Case No. ARB/03/) and Pey Casado v Chile (Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2). See Romak, ¶¶ 202-203.

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and that involves some risk.”91 Similar conclusion has been reached by the tribunal in AFT.92

Respondent thus considers Salini’s definition of investment in its modified version to be

fully applicable before the LCIA tribunal as well.

59. Hence, it may be concluded that one of the undisputed elements of an investment is an

assumption of risk. Nevertheless, the element of risk must be of certain quality.

Respondent suggests that mere commercial risk is inherent in any commercial activity and as

such is not sufficient for the investment to avail itself of the protection provided by the

BIT. Political risk is an equally insufficient ground for qualification of an investment. The

alteration of legislation is a sovereign right of any State and may also affect any field of

commercial activities, i.e. both protected and unprotected investments by the BIT. The

correct assumption is that the risk must be perceived as an investment risk. Investment risk

is present when the success and failure is uncertain and dependent on the investor itself.

In other words, the investor must have some control over the final profitability of the

investment.

60. However, such investment risk was not present in the current dispute. It is obvious that

the LRE established a regime which established a favourable environment for investors

by enacting the feed-in tariffs termed for 12 years to guarantee a stable income. The

element of risk is therefore missing; consequently the investments in question (Alfa, Beta

and subsequent 12 projects) cannot be considered as qualified investment and so they

cannot benefit from the BIT protection regime.

VII. THE CLAIMS RAISED IN THE CASE AT HAND ARE

INADMISSIBLE

61. Finally, Respondent submits that regardless of the final decision on jurisdiction, the claims

raised in the case at hand are inadmissible. All claims introduced by Claimant refer to the

post-accession period, therefore the interpretation of EU law is necessary. As already

mentioned above, the Tribunal is actually obliged to apply EU law as it belongs to the

body of international public law.93

91 Romak, ¶ 207. 92 The tribunal in AFT held that “when the asset arises from a contract, the contract itself should qualify as an investment. For that purpose the contract must meet certain minimum characteristics, such as duration, contribution and risk.” (See MUSURMANOV, pp. 122-123.) 93 See Chapter on Intra-EU Jurisdictional Objection of this Memorandum, p. 17.

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62. Article 267 of the TFEU reads that

“[t]he Court of Justice of the European Union shall have jurisdiction to give

preliminary rulings concerning: (a) the interpretation of the Treaties; […]

Where such a question is raised before any court or tribunal of a Member State,

that court or tribunal may, if it considers that a decision on the question is

necessary to enable it to give judgment, request the Court to give a ruling thereon.

Where any such question is raised in a case pending before a court or tribunal

of a Member State against whose decisions there is no judicial remedy under

national law, that court or tribunal shall bring the matter before the Court.”94

63. Moreover, Article 344 of the TFEU stipulates that “[m]ember 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”,95 and according to Article 19(1) of the TEU “[t]he Court of Justice of

the European Union […] shall ensure that in the interpretation and application of the Treaties the law

is observed.”96

64. Undisputedly, the above-mentioned provisions safeguard the autonomy of EU law by

conferring the exclusive competence on the CJEU which renders final rulings, providing

binding guidance on the interpretation of EU law.

65. With regard to the current dispute, it is undoubtable that EU law must be interpreted.

Nonetheless, the case would not eventually reach the CJEU, since arbitral tribunals are

generally not considered courts or tribunals within the meaning of Article 267 of the

TFEU. Furthermore, the scrutiny of national courts of Member States (and therefore the

CJEU) is sufficiently circumvented since the seat of arbitration is located outside of the

EU.97 Finally, one cannot hold that the case at hand would reach national court during the

enforcement proceedings since this phase is not obligatory and may never be initiated. For

all of the reasons stated above, there is a considerable threat that a potentially wrong or

even completely arbitrary interpretation of EU law by the Tribunal may never be cured by

the CJEU, and the autonomy of EU law is thus jeopardised.

94 Article 267 TFEU. 95 Article 344 TFEU. 96 Article 19(1) TEU. 97 DIMOPOULOS, p. 88; Procedural Order No. 1, Problem, p. 17.

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66. Therefore, Respondent argues that with regard to its duty to respect the exclusive

competence of the CJEU to interpret EU law, the only acceptable forum where the present

dispute could be heard is represented by Barancasia’s national courts.

67. As to the legal nature of Article of the 344 TFEU, Claimant, led by conclusions from the

Mox Plant, case may argue that this Article is solely applicable in cases between two

Member States.98 However, in this regard Respondent highlights the words of Mark

Clodfelter, who stated that: “[t]he ECJ decision in Mox Plant certainly concerned an inter-State

dispute, but it nowhere suggested that Article 344 is limited to cases involving only State parties. Moreover,

the text of Article 344 itself is manifestly silent in this respect and the absence of any limitation to inter-

State disputes could very well suggest instead that any submission by a Member State, regardless of the

character of the counter-party to the dispute, to a non-EU treaty forum violates the obligation of Article

344.”99

68. At this point, Respondent would like to draw Tribunal’s attention to the orbiter dictum in

the Eastern Sugar partial award. The defendant similarly argued that post-accession damages

should not be dealt with within arbitration, since they fall within the exclusive jurisdiction

of the CJEU according to Article 344 of the TFEU. The tribunal noticed that the

European Commission (”Commission“) did not start infringement proceedings against

the Netherlands and the Czech Republic for failing to terminate their BITs as it would

have been expected if the BIT had been incompatible with Article 344 of the TFEU.100

Defendant’s argument that the BIT had been implicitly superseded by EU law when the

Czech Republic acceded to the European Union was rejected. It must be held that the

inaction of the Commission and the parties has been interpreted by the arbitral tribunals

as a tacit endorsement of compatibility. However, in light of the recently initiated

infringement proceedings, the Commission has left no space for doubting the European

position not just on the incompatibility of intra-EU BITs’ substantial provisions with EU

law, but also in its legal standing towards the right to initiate investor-state arbitration in

disputes with Member States.101

69. Investment arbitration originated from the necessity of delocalisation and independence

of national courts. However, it should be taken into consideration that after the accession

98 Cf. DIMOPOULOS, p. 87. 99 CLODFELTER, p. 179, emphasis added. 100 See Eastern Sugar, ¶ 121. 101 See Press Release and Peterson.

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to the EU, the mistrust towards national courts of Member States has become highly

unfounded. In Eureko, the Commission stated that “[c]ontinued resort to outside dispute

settlement mechanisms by EU subjects based on intra-EU BITs also reveals mistrust in the courts of EU

Member States. This has no place in the current post-enlargement context, which is rooted in mutual trust

between Member States and founded on the development of a common favourable investment environment.

Mutual trust in the administration of justice in the European Union is one of the principles regarded as

necessary by the European Court of Justice for the sound operation of the internal market.”102

70. Claimant may also likely argue that the CJEU itself waived its exclusive jurisdiction over

the interpretation of EU law executed by arbitral tribunals, as evidenced, for instance, by

the ruling in Nordsee. However, this objection must be strictly rejected since the cases of

commercial and investment arbitration differ substantially. Commercial arbitration is being

regularly constituted by consent within the submission contract or arbitration clause,

which in both cases are of purely private law character. Private parties are not responsible

for correct interpretation of EU law. It is therefore obvious why the CJEU is not as

concerned with the potential EU law misinterpretation in terms of commercial arbitration.

On the other hand, in the latter case, the consent of a State to arbitrate is included within

the regular source of law, i.e. the international bilateral agreement. Thus, bearing in mind

that States are the primary subjects of EU-law duties and only they are bound by Article

344 of the TFEU, it may be concluded that the CJEU never rejected its jurisdiction over

investment disputes as such.

71. In this context, Respondent also points at the CJEU’s opinion on the creation of the

European Patent Court, where it held that it was incompatible with the EU law. The

European Patent Court would necessarily be called upon to interpret and apply EU law.

The CJEU thus concluded its opinion by the following: “[c]onsequently by conferring on an

international court which is outside the institutional and judicial framework of the European Union an

exclusive jurisdiction to hear a significant number of actions brought by individuals […] and to interpret

and apply European Union law in that field, would deprive courts of Member States of their powers in

relation to the interpretation and application of European Union law and the Court of its powers to reply,

by preliminary ruling, to questions referred by those courts and, consequently, would alter the essential

character of the powers which the Treaties confer on the institutions of the European Union.”103

102 Eureko, ¶ 185. 103 Opinion 1/09, ¶ 89.

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72. Needless to emphasize that the current dispute puts identical demands on the Tribunal –

it is also called upon to interpret EU law, while the potential authority of the CJEU is

excluded. Respondent therefore finds the consideration presented in the CJEU’s Opinion

as fully applicable to the case in question.

73. In sum, since the Tribunal is not permitted to submit a preliminary question before the

CJEU and the national courts of Member States are unreachable, Respondent objects

inadmissibility of the claims raised before the Tribunal.

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PART TWO: MERITS

VIII. RESPONDENT HAS ACCORDED CLAIMANT´S INVESTMENTS

FAIR AND EQUITABLE TREATMENT

74. In the Request for Arbitration, Claimant asserts that denial of the licence for the Alfa

project and subsequent changes to Barancasia’s renewable energy laws amounted to

violation of Article 2 of the BIT.104 However, Respondent contends that the amendment

of LRE did not result in breach of any obligations of Barancasia arising under the BIT, as

will be shown it the following paragraphs. In particular, Respondent did not breach any

legitimate expectations of Claimant (Part I.) nor the guarantees of stability and due process

(Part II.) encompassed by the FET standard.

IX. CONTENT OF THE FET STANDARD IN BARANCASIA-

COGITATIA BIT

75. In order to determine whether a breach of the BIT has in fact occurred, it is necessary to

first interpret its provisions. However, the wording of the FET clause does not reference

to customary international law or the minimum treatment standard as to a source of

interpretation, neither does it by itself reveal the intentions of the Contracting Parties with

regard to contents or conditions of the protection.

76. Given this omission, Respondent submits to adopt an interpretation offered by the tribunal

in EDF according to which the FET requires an interpretation under which investor’s

expectations are be balanced against needs for governmental action in time of crisis.105

77. Despite the controversies with the definition and scope of application of the FET, several

tribunals have recurrently identified several elements which are protected under the

standard:106

a. legal stability and legitimate expectations;107

b. protection against denial of justice;108

104 Request for Arbitration, Problem, p. 5. 105 EDF International, ¶ 1005. 106 YANNACA-SMALL, p. 118; DOLZER & SCHREUER, passim. 107 Sempra, ¶ 300. 108 Iberdrola, ¶¶ 443-444.

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c. freedom from coercion;109 and

d. compliance with contractual obligations;110

while none of those was violated in the present case.

78. Based on the assertions of Claimant,111 the Tribunal is likely to consider some or all of the

elements in the form of the following issues:

a. whether Respondent met Claimant’s reasonable and legitimate expectations;

b. whether the LRE Amendment was a justified act in the public interest;

c. whether Respondent acted with transparency;

d. whether Respondent breached the FET by denying Claimant the licence for its Alfa

project.

79. In assessing these issues, Respondent submits that not any breach of one of the elements

of the FET is sufficient to prove the breach the BIT. Every minor state misconduct could

otherwise mean a breach of an international obligation. However, such conclusion must be

rejected. In the words of the tribunal in S.D. Myers, the standard is breached only by

“treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable

from the international perspective.”112 In addition, Claimant has the burden of “bringing sufficient

proof that it did not receive treatment which was fair and equitable.”113

80. Alternatively, if the Tribunal was to conclude the FET standard in the BIT differs from

offered notion, then Respondent submits that regardless of whether the phrase ‘fair and

equitable’ carries an autonomous meaning or is conjoined with the minimum standard of

protection under customary international law, the substantive elements required to be

satisfied by Respondent may likely be the same.114 However, Respondent has satisfied its

responsibilities regardless of which standard is adopted.

109 DOLZER & SCHREUER, p. 147. 110 SGS, ¶ 146. 111 Request for Arbitration, Problem, pp. 5-6. 112 S.D. Myers, ¶ 263. 113 TUDOR, p. 138. 114 See, e.g., SCHREUER, p. 17; CMS, ¶ 284, Saluka, ¶ 291; Azurix, ¶ 361.

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X. RESPONDENT HAS MET INVESTOR’S BASIC REASONABLE

AND LEGITIMATE EXPECTATIONS

81. Investment tribunals have confirmed that FET “protects the reasonable expectations of the investor

at the time it made the investment.”115 A crucial element of the resulting test is whether

Claimant's expectations, in the words of the Saluka tribunal, “[rose] to the level of legitimacy

and reasonableness in light of the circumstances.”116

82. Therefore, the focus of the Tribunal should be on whether Claimant’s expectations were

reasonable and legitimate and if so, whether Respondent had a reasonable justification for

not fulfilling them.

A. CLAIMANT'S EXPECTATION WITH REGARD TO ALFA PROJECT CANNOT

BE BUILT UPON THE LRE

83. As mentioned above, FET protects reasonable expectations of an investor at the time it

made the investment.117 Since Claimant launched its initial investment in form of Alfa

project in May 2009,118 relevant circumstances of this period have to be taken into account

in order to fully understand the contents of the legitimate expectations with respect thereof.

84. Barancasia adopted the LRE in May 2010119 and on 1 July 2010 the BEA announced the

fixed feed-in tariff of 0.44 EUR/kWh.120 Neither of these acts therefore could have been

relied on when deciding upon making an investment into Alfa. Claimant’s legitimate

expectations with regard to its pilot project were thus based on legislation which did not

provide any special incentives towards solar energy sector. Therefore the claimed level of

expectations finds no support in the law, nor in other state representations, and is thus not

legitimate.

B. CLAIMANT'S EXPECTATIONS THAT LRE OR FIT WOULD NOT BE

SUBJECT TO CHANGE ARE NOT LEGITIMATE AND REASONABLE

85. Before the arguments placing Barancasia actions into context are presented, Respondent

asks the Tribunal to bear in mind that in the present dispute Claimant’s investment consists

115 Duke Energy, ¶ 340; LG&E, ¶173; Tecmed, ¶ 154. 116 Saluka, ¶ 304; see also Duke Energy, ¶ 340. 117 Duke Energy, ¶ 340; LG&E, ¶173; Tecmed, ¶ 154. 118 Statement of Uncontested Facts, Problem, p. 21, ¶ 12. 119 Ibid., ¶ 14. 120 Ibid., p. 22, ¶ 21.

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of a series of relatively separate investment projects and must be viewed as such. These are

represented by the Alfa project, the Beta project (“Beta”) and the 12 following projects.

Each of these projects was introduced in to certain extent different economic, social and

political conditions influencing Claimant’s substantive rights, especially legitimate

expectations.

86. At the beginning of 2013, the BEA announced new feed-in tariff of 0.15 EUR/kWh121

which undisputedly affected licenced solar investors. Therefore, the question to be resolved

is whether Claimant could have had legitimate expectation as to the stability of the original

terms.

87. In principle, an investor has a right to certain level of stability and predictability of legal

environment governing the investment.122 The tribunal in Parkerings added that the investor

obtains a right of protection of its legitimate expectation if it “exercised due diligence and its

legitimate expectations were reasonable in light of the circumstances.”123 Consequently, an investor

must anticipate that the circumstances could change, and thus structure its investment in

order to adapt to the potential alternations of legal environment.124

88. During 2011, before nearly 90% of Claimant’s solar power plants were even in the form of

a business plan,125 solar energy industry experienced dramatic technological changes that

caused substantial price reduction of the manufacturing and development of solar panels.

As contested above, before these events took place, Barancasia in line with other EU

Member States126 announced its FiT to support the industry and achieve sustainable

development in pursuit of EU climate and energy targets.127

89. During the period when Claimant should employ its due diligence a number of relevant

events occurred which had impact on reasonability of its expectations. Statements of state

officials admitting unsustainability of the support scheme were publicly announced,128

national strikes occurred in Barancasia as a public manifestation of disagreement with

121 Statement of Uncontested Facts, Problem, p. 24, ¶ 35. 122 BJORKLUND, p. 233. 123 Parkerings, ¶ 333. 124 Parkerings, ¶ 333. 125 Respondent points to the fact that on the grounds of technology development during 2011 Claimant decided to initiate its 12 follow on projects which, when finished, would have represented approx. 86% of all its built power plants. 126 See Policy Paper on Retrospective Changes, p. 2. 127 Statement of Uncontested Facts, Problem, p. 20, ¶ 7. 128 Procedural Order No 3, Problem, p. 23, ¶ 29.

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excessive profits out of solar energy129 and a meeting with investors having significant share

in the market of renewables took place. Respondent submits that these events in their

totality represent only a small insight to the atmosphere in solar energy industry in

Barancasia. Respondent also submits that these events do not require a proactive approach

on the side of Claimant to be recognized. On the contrary, it would demand an intentional

denial of reality to ignore inevitable consequences of such events and thus cannot be

worthy of protection as reasonable and legitimate.

90. Abovementioned should all the more apply to Claimant as a sophisticated investor with

self-proclaimed tremendous know-how130 who has been doing business in Barancasia in

the field of renewable technologies since 2002.131

91. By deciding to expand its business for 12 new entities in 2011 despite the indicated

instability, Claimant took the business risk to be faced with changes of laws which would

very likely have an impact on its investment. The only possibility which could give rise to

expectations under such circumstances would have been a conclusion of an investment

agreement with Respondent with incorporated stabilisation clause, which was not the case

here.

92. All the aforementioned facts considered, Respondent submits that Claimant could not have

obtained reasonable and legitimate expectation that the Government of the Republic of

Barancasia would not pass legislation and regulatory measures which would impact its

investment.

XI. THE LRE AMENDMENT WAS A JUSTIFIED ACT IN THE

PUBLIC INTEREST

93. The concept of legitimate expectations suggests that the conditions in the host country play

part in the analysis of whether the standard has been breached. In other words, a level of

expectations on the part of the investor is correlated with the investment environment in

the host country.132 The Tribunal should therefore review the rationale behind the State's

129 Statement of Uncontested Facts, Problem, p. 24, ¶ 32. 130 Statement of Uncontested Facts, Problem, p. 22, ¶ 23. 131 Statement of Uncontested Facts, Problem, p. 20, ¶ 3. 132 UNCTAD Series II - FET, p. 14.

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conduct as well as severity of impact caused by development in technology that is described

as ‘ground-breaking.’133

94. The tribunal in Saluka concluded on this issue that “[FET] involves a balancing exercise that

might take into account the host State's legitimate right subsequently to regulate domestic matters in the

public interest.”134 This is especially true of general legislative acts such as the LRE, since “[i]t

would be unconscionable for a country to promise not to change its legislation as time and needs change, or

even more to tie its hands by such a kind of stipulation in case a crisis of any type or origin arose.”135

95. Indeed, legislation amending the LRE was passed in response to a ground-breaking

technology developed in 2011, which caused solar panels substantially cheaper to

manufacture and dramatically reducing the cost of development.136 At that specific

moment, the technological advancement demonstrated during the year 2011 was not

foreseen. As a result, a number of states of the European Union were forced to adjust their

renewable energy policies in order to prevent a deeper economic repercussions.137

96. For example, in Bulgaria, the State Commision on Energy and Water Regulation

announced a 54% retrospective cut to the feed-in tariff for RES that would apply also to

existing installations. Three weeks later, it announced another change in the FiT only for

photovoltaic industry, decreasing the tariff by an additional 39 %.

97. Reacting to the changes, the European Bank for Reconstruction and Development said in

case of Bulgaria that they “[d]o not contemplate any investments in renewables in Bulgaria, not this

year, not next year, not until the framework is clearer.”138

98. Similar severe effects of technology development can be found in the Czech Republic,

Spain, Italy, Poland and several other countries.139 Respondent submits that in the light of

these circumstances, a legitimate public interest to amend legislation in order to respond to

an unexpected turn of events is present. Any longer inactivity would certainly have a

substantially more profound repercussions on the industry.

133 Statement of Uncontested Facts, Problem, p. 22, ¶ 25. 134 Arif. ¶ 537, citing Saluka, ¶ 305. 135 SORNARAJAH, p. 262, citing Continental, ¶ 258. 136 Statement of Uncontested Facts, Problem, p. 22, ¶ 25. 137 Policy Paper on Retrospective Changes, p. 2. 138 Ibid. 139 Ibid., p. 1.

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99. As a result of the facts relevant to the present case, a dramatic burden was put on the State

budget when 7000 new users applied for the announced feed-in tariff140 – an amount which

is not even materially possible to connect to the national grid of Barancasia.141 As contested

in the facts of the dispute at hand, Barancasia would have to spend 15 % of its state

revenues on subsiding renewable energy.

100. Such a substantial change due to factors which could on no account be influenced or

prevented by Barancasia, must have had a reasonable response in the system of support of

the photovoltaic sector. Such alternation was also necessary in light of the introductory

Article 1of the LRE under which “sustainable development of the use of renewable energy sources” as

well as “other objectives of the state energy policy”142 must be observed by Barancasia. Bearing in

mind the interests of investors, Respondent reintroduced the level of feed-in tariff, while

observing substantial guarantees made when introducing pro-investment policy towards

renewable energy sector. In other words, it reviewed the core values that attracted investors

while still pursuing objectives and conditions of the original support scheme. Respondent

does not deny the fact that the nominal value of the FiT did change for more than a half.

However, it cannot be emphasized more that the new feed-in tariff still allowed energy

companies to obtain an annual average return rate at least 8 %143, that is the same amount

as the original tariff before the change of circumstances did. Thus what the amendment in

fact did was that it returned the tariff which became substantially disproportioned towards

Respondent into the originally promised terms.

101. Although BITs provide merely for right of investors and not States, it does not mean that

needs of the State should be disregarded and needs of investors should always prevail.

When applied to the present case, it is unsustainable to argue that investors would be

allowed to unilaterally profit from the market imbalance caused by external factors and the

State would be precluded to take necessary measures in order to respond to such imbalance.

102. Similarly to CMS case, Claimant in this dispute “cannot pretend to be insulated from any internal

or external condition affecting the operation of the company.”144 Respondent therefore submits that

even if Claimant’s expectations that feed-in tariff would not be subject to change were

140 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 141 Ibid. 142 LRE, Problem, p. 32, ¶ 1(1). 143 Procedural Order No 2, Problem, pp. 60-61, ¶ 27. 144 CMS, ¶ 157.

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reasonable and legitimate, those must still be balanced with the legitimate need of

Respondent to regulate affairs in public interest. Respondent agrees that when a State

decides to act, it must bear legitimate expectations of investors in mind and chose a

balanced reaction.145 Nevertheless such reaction was in fact chosen in the present case

which is evidenced mainly by the preservation of the annual average return rate. Therefore,

Respondent’s actions did not breach the standard of fair and equitable treatment.

XII. RESPONDENT HAS ACTED WITH TRANSPARENCY

103. In this section Respondent will address the alleged non-transparency in case of amendment

of the LRE146 and the non-disclosure of criteria set for the administrative decision of the

BEA issuing licences for solar projects,147 under which the Alfa project application was

rejected.148

104. Although investment tribunals agreed on qualifying transparency as an essential element

of FET,149 there is an evident shift in the perception of this element and later case law warns

that that “if [transparency] terms were to be taken too literally, they would impose upon host States’

obligations which would be inappropriate and unrealistic.”150 The 2012 UNCTAD Series on Issues

in International Investment focusing on FET goes even further when it found that the

notions of transparency and consistency “may not be said to have materialized into the content of

fair and equitable treatment with a sufficient degree of support.”151

105. Also, some decisions relied on the fact that a specific reference was made to ‘transparency’

in the wording of the relevant agreement.152 In contrast, the Barancasia-Cogitatia BIT does

not contain an explicit reference to such an element. Thus, Respondent asks the Tribunal

to preferably not consider a potential breach of transparency at all as it is not imposed by

the BIT or to approach this criterion with great caution.

106. If the Tribunal decides to analyse whether Respondent acted transparently under the BIT,

Respondent submits that it should consider it under the ‘standard for transparency’ as

defined by the United Nations Conference on Trade and Development focusing of FET

145 Micula, ¶ 529. 146 Request for Arbitration, Problem, p. 5. 147 Procedural Order No 2, pp. 58-59, ¶ 16. 148 Statement of Uncontested Facts, Problem, p. 22, ¶ 23. 149 CMS, ¶ 611; Tecmed ¶ 154; Occidental ¶ 183; Saluka ¶ 303. 150 Saluka, ¶ 304. 151 UNCTAD Series II - FET, p. 63. 152 Metalclad, ¶ 76.

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as “requirement of host States to publish laws and regulations. Two types of laws and regulations are

acknowledged – those addressing the general legal framework and those addressing the legal framework for

investment,”153 which Respondent fulfilled with regard to raised claims.

107. As to the standard, Respondent did fulfil its publishing obligation at every single instance,

mainly during conclusion and termination of the BIT154 as well as during enactments and

amendments in legislation regarding energy policy.155 Respondent even went further than

it is obliged to promote transparency. It held hearings with both national entrepreneurs and

foreign investors having in total a significant share of the local market of renewables156

when the amendment of the LRE was being proposed. Here Respondent rejects

accountability for not inviting all concerned investors which might be objected by Claimant

on the basis that it would be materially impossible157 and an attempt to find a common

ground on regulatory changes in solar industry with all investors would be impossible.

Moreover, neither the laws of Barancasia nor the BIT states such an obligation to obligatory

discus the planned change with all stakeholders. Nevertheless, Barancasia on its own accord

clearly demonstrated its will to discuss the upcoming changes with the relevant industry.

The obligation of transparency should thus not be found as in breach.

108. There may be other information items included in the treaty provisions that offer higher

level of transparency providing inclusion of items such as administrative procedures and

administrative rulings, such as the administrative proceeding of Alfa project licence.

However, this would be one of the issues when negotiating such a provision. No such

evidence that parties have agreed upon a higher level of transparency is present in the BIT.

XIII. REJECTION OF PROJECT ALFA DOES NOT GIVE RISE TO

BREACH OF THE BIT

109. Owing to the fact that the act allegedly in breach of the BIT is a first instance administrative

body decision which can be amended through an effective system of appeal Respondent

submits that the rejection of project Alfa does not give rise to a breach of the BIT. In fact,

153 UNCTAD Series II – Transparency, p. 20. 154 Statement of Uncontested Facts, Problem, p. 21, ¶ 11. 155 Regulation, Problem, p. 34; LRE Amendment, Problem, p. 35; LRE, Problem, pp. 32-33. 156 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 157 The number of licenced investors is to date 6000.

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Claimant did not use the possibility to appeal by which he prevented the corrective system

from reforming the alleged error.

110. Respondent submits that for an act of an administrative body to reach the threshold of

breaching international law, it must cause substantial consequences to the investor.158

According to prof. Wälde “[t]he disappointment of legitimate expectations must be sufficiently serious

and material. Otherwise, any minor misconduct by a public official could go to the jurisdiction of a treaty

tribunal.”159

111. This view is based on a fact that the function of investment tribunals is not to act as a

general-recourse administrative law tribunal. This is apparent when one looks at the origins

of ISDS. Until then, a home State interference in a dispute was necessary, which formed

an important filter against multitude of claims that did not justify “the machinery of an

international treaty to come into play.”160 Since modern BITs do not provide for such an in-built

‘filter’ the same function has to be accomplished through interpretation of relevant

provisions of the BIT.

112. Nevertheless, as prof. Paulsson stated “[c]ases of administrative misconduct which are not serious

enough, in terms of materiality of a breach, amount of damage or lack of instant remedy, do not justify

triggering the operation of the heavy and costly treaty machinery under [the FET clause].”161

113. A total of 7000 applications were filed with the BEA, as to an administrative body

empowered by the LRE162 to administer licencing as a first instance, in the short period of

a little over one year. Respondent does not exclude that in any of the 7000 proceedings

a certain irregularity may have occurred. However, it is not in powers of any state to fully

exclude administrative mistakes. Again, for such reason Barancasia offers an adequate

appeal system.163 To this Respondent notes that Clamant was given a full opportunity to be

heard and to present evidence within the appeal system. Claimant, however, did not make

such an attempt and made it impossible to redress any possible imperfections.

114. Respondent also states that it is not up to the Tribunal to determine how BEA should have

interpreted the LRE or responded to Claimant, as by doing so, in the words of the

158 BOUTE, p. 532. 159 Thunderbird – Dissenting Opinion, ¶ 14. 160 Thunderbird, ¶ 14. 161 PAULSSON, p. 109. 162 LRE, Problem, p. 32, art. 5. 163 Procedural Order No 2, Problem, p. 59, ¶ 23.

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Thunderbird tribunal: “[t]he Tribunal would interfere with issues of purely domestic law and the manner

in which governments should resolve administrative matters (which may vary from country to country).”164

115. For all the aforementioned reasons, it must be concluded that Respondent conduct

regarding project Alfa did not reach the level of gravity which would give rise to breach of

international law represented by the BIT.

XIV. RESPONDENT’S ACTIONS ARE EXEMPT UNDER THE

ESSENTIAL SECURITY PROVISION OF THE BIT

116. Even if the Tribunal finds that the amendment of the LRE165 jointly with the

announcement of the new FiT166 amounted to a violation of the fair and equitable

treatment, those State actions were be exempted from breaching the BIT due to the

application of the non-precluded measures provision envisaged in Article 11 of the BIT.

117. Respondent will demonstrate that firstly, the heading ‘Essential Security Interest’ must be

read into the content of the Article 11, secondly, the NPM clause in the BIT covers

situations of economic crises and lastly Respondent will provide evidence in support that

the adopted measures successfully met the conditions for triggering the NPM defence and

Respondent can therefore invoke Article 11.

XV. ESSENTIAL SECURITY INTEREST IS CONTAINED IN

ARTICLE 11 OF THE BIT

118. The clause embodied in Article 11 of the Barancasia–Cogitatia BIT provides:

“Article 11

Essential Security Interests

Nothing in this Agreement shall be construed to prevent either Contracting

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

maintenance of international peace or security.“167

119. Respondent suggests to first interpret the clause according to Article 31(1) of the VCLT

in order to demonstrate that the clause does encompass internal threats in host States.

When interpreting ordinary meaning of the clause at hand, the interpretative value of

164 Thunderbird, ¶ 160. 165 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 166 Ibid., ¶ 35. 167 Ibid.

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headings must firstly be considered168 since in a subjective point of view, headings form

indications of what the parties wanted and in an objective view they are also elements to

determine the rights and obligations of the parties.” Although this statement may have been

originally intended for the law of private international contracts, due to silence of

investment law doctrine, Respondent suggest analogical use.

120. Further, if parties intended to detach headings from eventual interpretation, an explicit

disclaimer would have to be used.169 This exact situation occurred in an ICC Interim

Arbitral Award, where a heading clause denying legal effect to the wording of the heading

was applied by the tribunal.170 Since such disclaimer clause is not present, the Tribunal

should include protection of the Essential Security Interest when interpreting the Article

11 of the BIT.

XVI. NPM CLAUSE ENCOMPASSES ECONOMIC CRISES

121. In the outskirt, Respondent states that the rule of protection of essential security interests

in the BIT needs to be distinguished from the necessity defence under customary

international law as reflected in Article 25 of the ILC’s Articles (“Article 25”) and those

two standards must be examined separately.

122. Respondent further submits that the economic security qualifies as an essential interest of

the Host State under Article 11 of the BIT. This is because the provision needs to be

interpreted broadly. The position that it only addresses ‘exemplary’ security threats such as

armed conflicts and wars is unsustainable and has to be dismissed. Firstly, these cases are

covered by reference to the ‘maintenance of international peace or security’171 and secondly,

the magnitude of the problems caused by economic crises may match or even exceed the

problems caused by a military invasion.172 NPM clauses will therefore cover broader array

of State actions and demand fulfilment of lower threshold of severity than international

customary law defence.173

168 FONTAINE, p. 151. 169 Ibid, p. 152. 170 Ibid, p. 153. 171 BIT, Problem, p. 30, Art. 11. 172 MOON, p. 3. 173 BURKE-WHITE & VON STADEN, p. 31.

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123. Broad interpretation of NPM clauses is supported also by ICDIS cases addressing the

Argentine 2001-2002 financial crisis.174 While interpreting the limits of essential security

which is similar to the wording in the Barancasia-Cogitatia BIT, the Tribunal in LG&E

observed that: “[t]o conclude that a severe economic crisis could not constitute an essential security interest

is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of

the Government to lead.”175

124. Furthermore, the proposed interpretation is supported by examining the scope of the

exception in the light of the rationale for its inclusion. The inclusion of security exception

allows States to retain sovereignty to deal with national security threats.176 This applies

regardless of the origin of such threat and as was observed by the CMS Tribunal: “There is

nothing [...] in the context of the object and purpose of the treaty that could on its own exclude major

economic crises from the scope of [the NPM clause].”177

125. As a necessary consequence of the presented arguments, financial crises are covered under

the NPM clause as it is contained in the BIT.

XVII. THE CRISIS IN BARANCASIA CLASSIFIES AS THREAT TO THE

ESSENTIAL SECURITY INTERESTS AND ADOPTED

MEASURES ARE EXEMPTED FROM BREACHING THE BIT

126. Respondent agrees that not every financial crisis can be apprehended as a threat to essential

security interest of the Host State. In order to determine appropriate limits of application

of the exemption, reasonable threshold needs to be found. Relevant cases concerning the

Argentine economic crisis may serve as an important lead. Notably, the Tribunal in

Continental held that the protection of essential security interests does not require that ’total

collapse’ of the country178 or that a catastrophic situation must have already occurred before

responsible national authorities may have recourse to its protection.179 The invocation of

the clause does not require that the situation has already degenerated into one that calls for

174 See: LG&E, Enron, CMS. 175 LG&E, ¶ 238. 176 EMMERSON, p. 137. 177 CMS, ¶¶ 359-360. 178 Continental, ¶ 180. 179 Ibid.

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the suspension of constitutional guarantees and fundamental liberties. There would be no

point in having such protection if there is nothing left to protect.180

127. This viewpoint must be upheld as it would be unsustainable to refuse the application of

the provision solely on the grounds that the situation did not reach the threshold of total

collapse. Since the object of the provision is to prevent situation of collapse, it would be

absurd to demand that the Host State should wait until it falls into total breakdown and

only then it could trigger the protection of the NPM clause. Therefore we cannot

reasonably expect a State in peril to wait until the condition state fully matures before it

reacts to it.181 Consequently the fundamental purpose of every State is to maintain law and

order and these measures are intended to preserve the essential interests of the Host State

and must be adopted before the situation goes out of control or is irreversible.182

128. The austerity of the crisis suffered by Respondent needs to be evaluated at this point.

According to LG&E the test “requires a careful assessment of all relevant economic, social and political

aspects of and the dangers posed by the crisis.”183

129. The present crisis is based upon a single factor which distinguishes it from mentioned

events occurring in Argentina, where the crisis was a result of as an accumulation of several

inputs including contributions on the side of the State. The sole factor causing the

instability of Barancasian economy is represented by a FiT in the amount 15 % of the state

budgets diverted into solar industry for a period of 12 years. This sole factor imposes a

burden on the budget that is ten times higher than in other European countries focused on

solar energy.184 If compared to United Kingdom Central Government and Local Authority

spending in fiscal year 2014, the 15 % would be the third biggest expenditure area after

health care and pensions and above education, defence, general government and others.185

130. Respondent submits that this factor alone would in case of Barancasia, as well as any other

state, result in a severe threat to its population and the functioning of the government itself.

Based on these facts, there could be no doubt about seriousness of situation in Barancasia.

180 Ibid. 181 FORJI, p. 54. 182 GAZZINI, p. 18. 183 LG&E, ¶ 248. 184 Energy Sector Consumption. 185 Public Spending Details.

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131. Thus it is apparent that the situation which occurred in Barancasia from 2011186 to 3

January 2013187 was of such exceptional nature to threaten essential security interests since

the 15% diversion of the State budget188 was unsustainable and Respondent faced an

inevitable economical threat.

XVIII. TAKEN MEASURES WERE NECESSARY AND NON-

CONTRIBUTION REQUIREMENT WAS FULFILLED

132. Lastly, the question of necessity of the measures in question needs to be addressed.

Respondent argues that the high threshold of international customary law demanding that

the measures were ‘the only way’ to safeguard the interest of the State189 is not to be applied

in this case. As was already stated, protection under Article 25 and Article 11 of the BIT

are not equivalent. The wording of Article 25 expressly demands such requirement to be

fulfilled, on the contrary the Article 11 sets no such precondition for its application.

133. Respondent therefore proposes to follow the approach introduced in Continental and

LG&E in which the tribunals employed the concept of legitimacy to examine the necessity

of the measures. According to LG&E the NPM clause “refers to situations in which a State has

no choice but to act. A State may have several responses at its disposal to maintain public order or protect

its essential security interests.“190 By the same token, the tribunal in Continental viewed the

standard of ‘necessary measures’ in the context of “assess[ing] whether the [...] measures

contributed materially to the realization of their legitimate aims under [the relevant provision of the

BIT].”191 In applying the standard, it further held: “the necessity of a measure should be determined

through a process of weighing and balancing.”192

134. To answer the question whether the measures adopted by Respondent were legitimate and

proportional to the conditions at the time, Respondent references to Merits part of this

Memorandum (¶¶ 24-32).

135. Disregarding the fact that Respondent believes that non-contribution of the Host State is

not demanded under the NPM clause as the provision is silent on this matter, even if the

186 Meaning the development in technology. As found in: Statement of Uncontested Facts, Problem, p. 23, ¶ 25. 187 Meaning the announcement of the new FiT. As found in: Ibid, p. 24, ¶ 34. 188 Statement of Uncontested Facts, Problem, p. 23, ¶ 29. 189 As stated in Article 25 of the ILC Articles. 190 LG&E, ¶ 239. 191 Continental, ¶¶ 192 and 196. 192 Ibid.

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Tribunal conditioned the applicability of Article 11 to the satisfaction of the non-

contribution requirement, it would have to conclude that it was fulfilled in the case at hand.

136. Respondent submits that the crisis was caused due to external factors which were outside

of control of Respondent. Still, the contribution of a Stet must be sufficiently substantial,193

which was not the case here. What is more, the attitude adopted by Respondent shows

desire to mitigate the severity of the crisis and it cannot be faulted as it made reasonable

efforts to tackle it, especially by holding consultations with national entrepreneurs and

foreign investors having in total a significant share of the local market of renewables.194

Moreover, it generally followed the EU climate and energy targets when entering into the

crisis.195

137. To sum up, the crisis which hit Respondent reached the gravity which triggered the

protection provided to the actions of the State under the NPM clause in the BIT.

193 LUZI, p. 16. 194 Statement of Uncontested Facts, Problem, p. 24, ¶ 34. 195 Statement of Uncontested Facts, Problem, p. 20, ¶ 7.

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PART THREE: RESTITUTION AND QUANTUM

138. In its prayer for relief, Claimant requests the Tribunal to “[o]rder Respondent a) to repeal the

amendment to Article 4 of the LRE or b) to continue to pay Vasiuki the €0.44 feed-in tariff for 12

years.”196

139. Respondent proposes that Claimant’s request to order Respondent to rescind the disputed

legislative act (here also referred to as “judicial restitution”) should be rejected as unsuitable

since compensation offers a much more suitable remedy in the present case, while

minimising the interference with State sovereignty (Section I.). Secondly, a significant

obstacle lies in the wording of the ILC Articles and the LCIA Arbitration Rules, which

allow for non-pecuniary damages only under certain conditions, which are not met in the

present case (Section II.).

140. Furthermore, Respondent suggests that Claimant’s request to order Respondent to

continue to pay Vasiuki the €0.44 feed-in tariff for 12 years (here also referred to as

“monetary restitution”) was rejected. Ordering Respondent monetary restitution should be

rejected due to the fact that such payment would contravene EU law as it would effectively

amount to prohibited state aid under Article 107 of the TFEU (Section IV.)

141. Moreover, in both cases of judicial and monetary restitution, enforcement of final award

will necessarily be accompanied by practical obstacles (Sections III. and IV.).

XIX. JUDICIAL RESTITUTION IS NOT A SUITABLE KIND OF

REMEDY IN THE CURRENT DISPUTE WITH REGARD TO

JURISPRUDENCE

142. Award of non-pecuniary damages is an established remedy in the field of international

public law. Nonetheless, the character of the violation which the remedy relates to has to

be scrutinised. It must be highlighted that the jurisprudence of the International Court of

Justice (“ICJ”) imposing restitution of some form represented a response to unlawful acts

such as occupation of embassy premises (Tehran Hostages case)197, illegal intervention of

military and police forces (Temple case)198, or an unlawful issuance of an arrest warrant

196 See Request for Arbitration, Problem, p. 5. 197 Tehran Hostages case, ¶. 3. 198 Temple case, ¶ 6.

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against a state official (Arrest Warrant case)199. As the background of these cases suggests,

ordering restitution was more than appropriate as the remedial effect could not have been

obtained by any other means, i.e. by monetary compensation.

143. Turning from international public law to investor-state disputes, Respondent points out

that even where the tribunals ordered some form of particular relief, it related to acts

administrative in nature.200 In contrast, Claimant in this case seeks a partial repeal of a

specific legislative act, which was both adopted and modified in a duly democratic manner.

Not only is it much easier to rescind an administrative act than a statute, but a legislative

act is also required to meet higher standards regarding its adoption and repeal. National

constitutions contain strict rules concerning the repeal of laws and set precise procedures

to be followed. Rescinding a law without following those procedures would be

constitutionally impermissible.

144. Respondent further notes that tribunals are reluctant to order States to change their

legislation since they demonstrate high respect for States’ sovereign powers. This issue was

addressed for example in the Goetz case, in which the tribunal ordered an alternative

remedy (restitution and compensation) and left the ultimate choice on the Burundian

government, calling it a ‘sovereign decision’.201

145. In this context, Respondent highlights the award in LG&E, where the tribunal found that

“[t]he judicial restitution required in this case would imply modification of the current legal situation by

annulling or enacting legislative and administrative measures that make over the effect of the legislation in

breach. The Tribunal cannot compel Argentina to do so without a sentiment of undue interference with its

sovereignty. Consequently, the Tribunal arrives at […] the need to order and quantify compensation.”202

146. The inclination of tribunals to respect States’ sovereignty is also evident in other

jurisprudence. The tribunal in Occidental held in its decision on provisional measures that

when a State has exercised its sovereign powers and put an end to a contract, it is “impossible

to compel a State to make restitution”203 as it would “constitute in fact an intolerable interference in the

199 Arrest Warrant case, p. 3. 200 Cf. in LG&E, the subject of restitution were tariff schemes introduced by governmental regulations and decrees (see LG&E - Award, ¶ 81). Then, in Occidental Petroleum Corp., Claimants sought re-establishment of the participation contract terminated by Caducidad Decree (see Occidental Petroleum Corp., Award, ¶ 201). Similarly, in LIAMCO, the restoration of Concession Agreements repudiated by nationalization introduced by Libyan Revolutionary Command Council’s law – i.e. de facto regulatory measure in nature (see LIAMCO, p. 90). 201 Goetz, ¶ 133. 202 LG&E - Award, ¶ 87, emphasis added. 203 Occidental Petroleum Corp., Decision on Provisional Measures, ¶ 79.

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internal sovereignty of States”204 as well as represent “reparation disproportional to its interference with

the sovereignty of the State when compared to monetary compensation.”205

147. In light of the above, Respondent concludes that although restitution might be ordered

in theory, it is not a suitable remedy in the present case for two reasons: (1) compensation

offers a much more suitable remedy in the present case than judicial restitution, as the

ICJ’s jurisprudence suggests, and (2) the potential interference with State sovereignty is

much more considerable in the case of judicial restitution.

XX. IT IS NOT LEGALLY PERMISSIBLE TO ORDER JUDICIAL

RESTITUTION IN THE CASE AT HAND

148. Respondent maintains that the impermissibility of judicial restitution in the present

dispute is also supported by virtue of Article 35 of the ILC Articles on Responsibility of

States. It sets forth that the responsible State is under an obligation to make restitution,

provided that

a. it is not materially impossible,

b. it does not involve a burden out of all proportion to the benefit deriving from

restitution instead of compensation.206

149. In this regard, Respondent contends that neither of these requirements was met. Firstly,

Respondent finds the restitution to be materially impossible following the argumentation

of the tribunal in LG&E, which considered restitution impossible based on the undue

interference with the State’s sovereignty.207 Secondly, according to the Commentary to the

ILC Articles, the benefit to be gained from restitution must not be wholly disproportionate

to its cost to the responsible State.208 In order to assess the proportionality of restitution,

one must execute the benefits-costs test. The balancing process clearly indicates preference

for compensation since the proposed restitution interferes with Respondent’s sovereign

legislative procedure. It might thus jeopardise Respondent’s internal political and

economic stability and additionally, it may involve adverse consequences under EU law as

will be analysed further.

204 Ibid. 205 Ibid., ¶ 84, emphasis added. 206 Article 35 of the ILC Articles. 207 ṢABĀḤĪ, p. 88. 208 ILC Articles with Commentaries, p. 98, ¶ 11.

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150. Furthermore, Article 26.3 of the LCIA Arbitration Rules sets forth that “[a]n award may be

expressed in any currency, unless the parties have agreed otherwise.”209 It is apparent from this

wording that the rules do not allow for the possibility of awarding judicial restitution. Thus,

this supports the conclusion that the Tribunal does not have competence to issue an award

imposing repeal of the LRE amendment.

151. It is true that the wording of Article 22.1(vii) of the LCIA Arbitration Rules210 allows for

ordering specific performance of any agreement. When interpreting the LCIA Arbitration

Rules, though, one must be aware that these were originally drafted to facilitate commercial

arbitrations. In light of this observation, the Article in question clearly refers to a typical

agreement concluded between private parties. Acta imperii, on the other hand, are far from

being of private law nature. Since Respondent and Claimant have not concluded any

separate private law contract concerning the investment, the cited provision shall not be

considered applicable to the present dispute.

152. Overall, ordering judicial restitution in the case at hand seems to be wholly inappropriate.

What is more, the relevant norms of international law exclude such an option, since

imposing Respondent to repeal the law proves to be impossible for the conflict with its

sovereignty and since it imposes a disproportional burden in comparison to compensation.

Finally, the Tribunal lacks the competence to order such an award under the LCIA

Arbitration Rules.

XXI. JUDICIAL RESTITUTION AWARD MIGHT NOT BE

ENFORCEABLE

153. Even though there is no restriction on the enforcement of judicial restitution within the

New York Convention (“NY Convention”), there is serious concern that it would be

practically impossible in the present case for the following reasons.

154. To begin with, it is without doubt that Claimant would have to seek enforcement of the

award before Barancasia courts since no foreign forum has jurisdiction to compel another

209 Article 26.3 of the LCIA Arbitration Rules. 210 Article 22.1(vii) LCIA Arbitration Rules reads as follows: “[t]he Arbitral Tribunal shall have the power, upon the application of any party or (save for sub-paragraphs (viii), (ix) and (x) below) upon its own initiative, but in either case only after giving the parties a reasonable opportunity to state their views and upon such terms (as to costs and otherwise) as the Arbitral Tribunal may decide to order compliance with any legal obligation, payment of compensation for breach of any legal obligation and specific performance of any agreement (including any arbitration agreement or any contract relating to land).”

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sovereign State to change its law. However, Respondent suggests that national courts

might not be ready to enforce such award.

155. Enforcement courts might refuse the enforcement based on Article 5(2)(b) of the

NY Convention for a conflict with public policy, since the only legally acceptable

mechanism of modifying or cancelling a statute or its part is either by way of regular

legislative procedure or by a decision of a constitutional court or its equivalent.

156. In this context, Respondent emphasizes Article 32.2 of the LCIA Arbitration Rules, which

stipulates as follows: “Arbitral Tribunal […] shall make every reasonable effort to ensure that any

award is legally recognised and enforceable at the arbitral seat.”211 The arbitral seat in this case is

located within a third neutral country – Caledonia. Nonetheless, even if the enforcement

is eventually sought therein, Caledonian courts will certainly lack jurisdiction to enforce

the judicial restitution in question, as was suggested above. Respondent thus requests the

Tribunal to bear in mind practical enforceability of the award in order to fulfil the

fundamental objectives of arbitration itself.

XXII. MONETARY RESTITUTION IN THE FORM OF ORDERING

RESPONDENT TO CONTINUE TO PAY THE PRE-2013 FEED-

IN TARIFF IS NOT LEGALLY PERMISSIBLE

157. Alternatively to ordering the repeal of the law in question, Claimant requests the Tribunal

to impose the obligation “to continue to pay Vasiuki the €0.44 feed-in tariff for 12 years.”212

However, Respondent asserts that the alternative prayer for relief effectively amounts to

prohibited individual state aid under Article 107(1) of the TFEU.213

158. The EU provides for a specific framework of allowed state aid in the energy sector.214

Under these rules, state aid may be found permissible solely under certain conditions. In

this context, Respondent refers to the following: “The primary objective of aid in the energy sector

is to ensure a competitive, sustainable and secure energy system in a well-functioning Union energy

211 Article 32.2 of the LCIA Arbitration Rules, emphasis added. 212 See Request for Arbitration, Problem, p. 5. 213 Under Article 107(1) TFEU: “[s]ave as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.” 214 See Guidelines on State Aid.

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market.”215 Furthermore, “[t]he proposed aid measure must be an appropriate instrument to address

the policy objective concerned.”216

159. However, considering the great number of state aid proceedings initiated by the European

Commission in the energy sector217 under Article 108(2) of the TFEU, it was highly

probable that one would be commenced against Respondent, since it had chosen the

‘unsuitable’ modality of incentives,218 i.e. fixed feed-in tariffs. For this reason, Respondent

amended Article 4 of the LRE in order to stop infringing the EU rules on state aid. Since

it is strongly presumed that the guaranteed pay-out of feed-in tariffs for 12 years amounted

to prohibited state aid, monetary restitution shall not be awarded.

160. Following the Akzo Nobel decision,219 it is undisputable that awarding monetary restitution

in the present dispute would amount to a preferential advantage accorded exclusively to

Claimant and it would therefore be selective, failing to have solely remedial function. The

European Commission’s attitude in Micula also provides some valuable guidance: its

general reiteration that Article 107 of the TFEU would be violated by rendering the award,

which would grant investors an economic advantage otherwise unavailable within the

European market, seems to be fully applicable to the current dispute. Finally, it is of crucial

importance that complying with obligations arising out of an intra-EU BIT cannot impede

the application of EU law.

161. Of course, within the frontiers of the European Union, enforcement courts might again

be reluctant to enforce an award amounting to prohibited state aid under EU law on

grounds of public policy, since EU competition law has been acknowledged as the EU

public policy.220

215 Guidelines on State Aid, p. 12, ¶ 30, emphasis added. 216 Ibid., p. 14, ¶ 40. 217 E.g. case of the state aid that Austria planned to grant to energy-intensive businesses under the Green Electricity Acct was considered as incompatible with the internal market (see Commission Decision of 8 March 2011 on State aid measure No C 24/2009); or case of Estonian State Aid for Capacity Payments for Oil-Shale Fuelled Electricity Production from 2011, case No. SA.30531. 218 See European Commission guidance for the design of renewables support schemes, where it was clearly stated that “[t]he Communication recommends that feed in tariffs are phased out and support instruments that expose renewable energy producers to market price signals such as feed in premiums are used.” (Guidance for the design of renewables support schemes, p. 12). 219 See ORTOLANI, pp. 121 – 122; In Akzo Nobel, the CJEU stated the payment of compensation to be compatible with Article 107 TFEU as long as the payment does not serve further purposes and simply aims at compensating an undertaking for damage, meaning that the compensation does not entail any selective advantage, and the compensation is legally permissible under the national law. “Conversely, the state is not free to pay compensation in the absence of a legal obligation to do so, since such a measure would entail a preferential treatment of the recipients.” 220 See judgement in Eco Swiss.

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162. To conclude in light of the above, Respondent denies the feasibility of the restitutio in

integrum imposition, both in the form of judicial and monetary restitution.

XXIII. CLAIMANT’S CALCULATIONS FOR DAMAGES ARE

ILL-SUPPORTED AND BASED ON FALSE AND INCORRECT

LEGAL AND FACTUAL ASSUMPTIONS

163. Respondent contends that Claimant’s computation of damages contained in Mr. Kovič’s

expert report is flawed for several reasons. Firstly, damages for Alfa project should not be

included or should be significantly lower than the damages sought. Secondly, the discount

rate should be 12 % instead of 8 % proposed by Claimant. Thirdly, damages in cost of

land are not to be awarded and lastly, Claimant’s basis for future losses is merely

speculative.

A. CALCULATION RELATED TO PROJECT ALFA PROVIDED BY CLAIMANT IS

OVERRATED

164. It is important to again emphasize that Alfa Project was launched in 2009 and its

establishment was thus not covered by the LRE enacted in 2010. Because of that the

damage calculated on the basis of the guaranteed FiT should not be taken into account by

the Tribunal. Even after 2010, Alfa had never been granted a licence under the LRE. Based

on that, Respondent rejects the inclusion of project Alfa into computation of damages as

it falls outside the scope of LRE and thus could not have been damaged by the change

thereof.

165. However, if the Tribunal decides that it would include project Alfa to calculation of

damages, Claimant rejects that the amount of damages presented by Claimant on the basis

that it is inaccurate. A commonly accepted standard for awarding forward-looking

compensation is that damages must be proven with reasonable certainty. The reasonable

certainty threshold has been repeatedly set rather high.221

166. In his expert report, Mr. Kovič calculates the net present value of damages to

€120,621. However, such assumption is overestimated. In fact, Alfa has encountered

significant problems from its beginning. The project was operating at a heavy loss due to

defects in the installation, delays and huge budget overruns, which can be evidenced by

221 KANTOR, pp. 77, 80.

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the fact that the actual project costs exceeded the planned budget for more than 50 %222

and that the achieved capacity was in its first year only at half the expected level.223

Notwithstanding that Mr. Kovič’s estimation presumes that project capacity would reach

the originally planned 21 % capacity by 2013.224 Such estimation is far too confident since

it is based merely on the fact that the project noticed an increase by 2.2 % between the

years 2009 and 2010. It is impossible to reach a valid conclusion that such increase would

be steady and was not only a random occurrence. Indeed, it is doubtful whether such a

problematic project can even reach the full capacity of 21 %. It is also interesting to note

that a project which in 2010 was almost abandoned due to enormous problems by

Claimant, 225 is proposed to be considered as a fully operational standard photovoltaic

power plant three years later.

167. Because Claimant’s documentation226 simply does not provide sound basis for prediction

of the progress of the Alfa Project as presented by Mr. Kovič, Respondent suggests the

Tribunal to lower the compensation submitted by Claimant.

B. CALCULATION CONCERNING PROJECT BETA IS NOT ACCURATE

168. In order to evaluate future incomes of project Beta by Discounted Cash Flow Method, it

is necessary to estimate the present value of expected net cash flows by using a discount

rate.227 However, Claimant’s projection of future incomes is not accuare.

169. There are two basic discounted cash flow valuation methods. In both methods the cash

flow to equity is discounted to respective discount rates. Equity valuation uses cost of equity

as the discount rate, on the other hand Firm valuation uses cost of capital (WACC) as the

discount rate.228

170. Claimant’s expert report contains a fundamental flaw because it wrongly mixes cash flows

and discount rates. Mr. Kovič used the Equity valuation229 where the right discount rate is

cost of equity. However, in the report he wrongly used cost of capital (amounting to 8 %)

222 Project Alfa Problems, Problem, p. 47. 223 Ibid. 224 Expert Report of Marko Kovič, Ph.D., Problem, p. 50, ¶ 6. 225 Statement of Uncontested Facts, Problem, p. 21, ¶ 13. 226 See Vasiuki LLC Dataset; Annual Projected Revenue From Vasiuki LLC Owned/ Operated General Projects; Vasiuki LLC Historic Statements on Income (Loss) Before Tax; Project Alfa Problems and Vasiuki LLC Projected Photovoltaic Generating Projects, Problem, pp. 41-48. 227 AICPA Statements, p. 32. 228 DAMODARAN, p. 11. 229 See Expert Report of Juanita Priemo, MBA, C.A., Problem, p. 54, ¶ 9.

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as the discount rate. Discounting cash flows to equity wrongly at the WACC led to an

upwardly biased estimate of the value of equity.230 As Mrs. Priemo correctly points out,

cost of equity which is set to 12 %231 should have been used as a discount rate.

171. Such error amounted to a 4 % difference in the discount rate and as result in

miscalculation of almost €20,000. Respondent therefore again asks the Tribunal to lower

the claimed damages to appropriate amount while using the correct discount rate.

C. CALCULATION RELATED TO LOST VALUE OF LAND

172. Respondent further strongly disagrees with Mr. Kovič’s opinion on wasted expenditure

for the 12 new solar projects stated in his report.232 It is proposed by Claimant that the

land will become worthless and unsaleable and the equipment will be simply thrown

away.233 Nevertheless, the investment into land can on no account be presumed worthless

as the current price for acquired land is approximately acquisition price plus 10 %.234 Thus

Claimant did not lose any money by purchasing the land. Perceiving return of prices after

the solar bubble into normal level as damage is unsustainable. The same can be concluded

of acquired equipment because there was no evidence that it lost its value and should thus

be considered as wasted and amounting to loss. Even so, Respondent would like to remind

the Tribunal that Claimant continued with its plans regarding the 12 new solar power

plants and did not decide to abandon the project, thus the equipment did not in fact remain

unused.235

D. CALCULATION RELATED TO FUTURE PROFITS

173. At the outskirt of this last section, Claimant notes that to use the discounted cash flow

analysis for future losses has often been rejected.236 Prognoses about the future are

inherently speculative and uncertain elements cannot be properly made the object of

compensation of damages. By words of the Amoco tribunal: “[o]ne of the best settled rules of the

law of international responsibility of states is that no reparation for speculative or uncertain damages can

230 DAMODARAN, p. 9. 231 Vasiuki LLC Pojected Photovoltaic Generating Projects, Problem, p. 48. 232 As described in Annex No. 2 to the Expert Report of Marko Kovič, Ph.D., Problem, p. 51. 233 See Expert Report of Juanita Priemo, MBA, C.A., Problem, p. 54, ¶ 11. 234 Procedural Order No 3, Problem, p. 63, ¶ 16. 235 Procedural Order No 2, Problem, p. 59, ¶ 26. 236 Amoco, ¶ 238; Metalclad, ¶ 121; Wena Hotels ¶ 122.

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be awarded.“237 Moreover, high probability of wrong calculation can easily lead to unjust

enrichment on the side of Claimant.238

174. At the time of occurrence of the alleged breach of the BIT, the 12 new power plants were

in the planning phase during which Claimant applied for licences and purchased necessary

land and equipment in order to construct the power plants. Similar planned projects are

for the purpose of valuation often characterised as ‘lost opportunity’ or loss of ‘chance’.239

With regard to those, tribunals have generally been very reluctant.240Although some of the

tribunals have awarded damages for such enterprises, it must be „sufficiently probable that such

profits would have been made.“241

175. Situation of the 12 new projects closely reminds situation in case SOABI where the breach

occurred before the 10-year project had even started. The tribunal concluded that in such

case “it is impossible to calculate the profits that would have been made.”242 The case was again

identified as loss of opportunity and value of such loss was not established by loss of profit

but by calculation in discretion of the tribunal.243 In this particular case, tribunal then

awarded sum equal to less than 3 % of the amount claimed as profits.244 Thus Respondent

invites the Tribunal to adopt the same approach. It might be argued that it is possible to

determine future incomes by way of comparison with other, already operational projects

of Claimant. However, there are only two of them – Alfa and Beta and both exhibit great

operational differences, Respondent therefore contends that it is impossible to arrive at

any valid generalised conclusions based on information concerning Claimant’s past

enterprises.

176. With regards to Claimant’s allegedly planned expansion, it must be noted that in case of

lost opportunities, some tribunals were not even satisfied when business plans were

presented.245 Claimant has not even presented such level of evidence, and the only proof

is an interview with a local manager246 and unfounded allegations of Claimant itself. All

those facts considered, it must be concluded that sufficient probability that any profits

237 Amoco, ¶ 238. 238 Ibid, ¶ 231. 239 MARBOE, p. 114. 240 Ibid, p. 306. 241 Sapphire ¶ 189. 242 SOABI ¶ 7.13. 243 Ibid. 244 Ibid, ¶¶ 6.27, 9.26, 12.06. 245 Eastern Sugar, ¶ 355. 246 Procedural Order No 2, Problem, p. 60, ¶ 28.

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would be made cannot be established. Respondent therefore respectfully asks the Tribunal

not to accept the alleged loss caused from alleged frustration of Claimant’s business

expansion because of lack of evidence.

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RELIEF SOUGHT

On the basis of all presented evidence and argumentation, Respondent requests the

Tribunal to:

(1) find that it has no jurisdiction and/or that the claims asserted by the Claimant

are not admissible;

(2) in the event that the Tribunal does not grant Barancasia’s first prayer for relief,

find that Barancasia has not violated the protections of the BIT or is exempted

from such violation;

(3) in the event that the Tribunal does not grant Barancasia’s first or second prayer

for relief, deny Claimant’s request for specific performance;

(4) in the event that the Tribunal does not grant Barancasia’s first or second prayer

for relief, find that Claimant’s calculations for damages are ill-supported and based

on false and incorrect legal and factual assumptions;

(5) find that Barancasia is entitled to restitution by Claimant of all costs related to

these proceedings.

Respectfully submitted on 26 September 2015 by

Tarassov Team

On behalf of Respondent

THE REPUBLIC OF BARANCASIA