ARBITRATION UNDER THE RULES OF … · Phelps Dodge Phelps Dodge International Corp. v The Islamic...

ARBITRATION UNDER THE RULES OF ARBITRATION OF THE

INTERNATIONAL CHAMBER OF COMMERCE

Gros

FREEDONIA PETROLEUM

[Claimant]

v.

THE REPUBLIC OF SYLVANIA

[Respondent]

DRAFT MEMORIAL FOR CLAIMANT

ii

TABLE OF CONTENTS

LIST OF AUTHORITIES .......................................................................................................... v

TABLE OF ABBREVIATIONS ................................................................................................ x

STATEMENT OF FACTS ........................................................................................................ 1

SUMMARY OF ARGUMENTS ............................................................................................... 3

PART ONE: JURISDICTION ................................................................................................... 4

I.THE TRIBUNAL HAS JURISDICTION TO HEAR THE CLAIMS AS ACCORDING TO

ARTICLE 1(3) BIT FP IS AN INVESTOR OF THE OTHER CONTRACTING PARTY ..... 4

A.FP IS A COMPANY ESTABLISHED IN THE TERRITORY OF REPUBLIC OF

FREEDONIA IN ACCORDANCE WITH RESPECTIVE FREEDONIAN

LEGISLATION .................................................................................................................. 4

B.FP IS NOT FUNDED BY REPUBLIC OF FREEDONIA BECAUSE IT IS A PRIVATE

COMMERCIAL COMPANY, IRRESPECTIVE OF ITS OWNERSHIP STRUCTURE 5

C.FP DOES NOT PURSUE ANY SOVEREIGN ACTIVITIES AS ALL OF ITS

DEALINGS ARE OF COMMERCIAL NATURE AND ARE CARRIED ON FOR

PROFIT .............................................................................................................................. 6

II.CLAIMANT IS ENTITLED TO ASSERT ITS CLAIMS IN INTERNATIONAL

ARBITRATION, AS THERE WAS NO PRIOR CHOICE OF NATIONAL COURTS

UNDER THE FORK IN THE ROAD PROVISION OF THE BIT ........................................... 8

A.FPS HAS NEVER BROUGHT AN INVESTMENT DISPUTE BEFORE THE

DOMESTIC COURTS AS REQUIRED BY THE FORK IN THE ROAD PROVISION 9

B.THE PARTIES IN THE DOMESTIC PROCEEDINGS AND IN THE PRESENT

ARBITRAL PROCEEDINGS ARE DIFFERENT .......................................................... 10

C.THE CAUSES OF ACTION IN THE DOMESTIC PROCEEDINGS COMMENCED BY

FPS AND BY CLAIMANT DIFFER .............................................................................. 11

D.THE OBJECT OF BOTH PROCEEDINGS DIFFERS ..................................................... 13

III.RESPONDENT‘S COUNTERCLAIM SHOULD BE DISMISSED AS IT LACKS THE

LEGAL BASIS ........................................................................................................................ 13

iii

A.RESPONDENT'S COUNTERCLAIM DOES NOT CONCERN INVESTMENT

DISPUTE ......................................................................................................................... 13

B.RESPONDENT‘S REQUEST FOR DAMAGES IS UNFOUNDED AS IT LACKS

SUBSTANTIVE BASIS .................................................................................................. 14

PART TWO: MERITS ............................................................................................................. 15

I.THE ACTS OF NPCS ARE ATTRIBUTABLE TO RESPONDENT .................................. 15

II.RESPONDENT FAILED TO AFFORD CLAIMANT FAIR AND EQUITABLE

TREATMENT .......................................................................................................................... 16

A.RESPONDENT FAILED TO OBSERVE CLAIMANT‘S LEGITIMATE

EXPECTATIONS ............................................................................................................ 17

B.RESPONDENT TREATED CLAIMANT IN AN ARBITRARY AND

DISCRIMINATORY MANNER ..................................................................................... 20

III.RESPONDENT UNLAWFULLY EXPROPRIATED CLAIMANT‘S INVESTMENT ... 22

A.CLAIMANT WAS PROTECTED FROM ALL FORMS OF EXPROPRIATION UNDER

THE BIT ........................................................................................................................... 22

B.RESPONDENT EXPROPRIATED CLAIMANT BY SUSPENDING THE LICENSE .. 23

i.RESPONDENT INTERFERED WITH CLAIMANT‘S RIGHTS EXCESSIVELY ...... 23

ii.RESPONDENT‘S INTERFERENCE WAS LASTING................................................. 24

C.THE EXPROPRIATION DOES NOT MEET THE LEGALITY CRITERIA .................. 25

i.THE PUBLIC PURPOSE REQUIREMENT WAS NOT COMPLIED WITH .............. 25

ii.RESPONDENT FAILED TO PAY FULL AND EFFECTIVE COMPENSATION ..... 25

IV.RESPONDENT IS NOT ENTITLED TO RELY NEITHER ON ARTICLE 9 BIT, NOR

ON THE CUSTOMARY INTERNATIONAL LAW CONCEPT OF THE STATE OF

NECESSITY ............................................................................................................................ 26

A.RESPONDENT CANNOT RELY ON ARTICLE 9 BIT AS A JUSTIFICATION FOR

ITS ACTS ......................................................................................................................... 26

i. THE NATIONAL SECURITY INTEREST OF RESPONDENT WAS NEVER

THREATENED ........................................................................................................... 27

iv

ii. RESPONDENT FORFEITED THE RIGHT TO RELY ON ARTICLE 9 BIT, SINCE

MEASURES WERE APPLIED IN AN UNFAIR WAY ............................................ 28

iii. MEASURES CHOSEN BY RESPONDENT WERE UNNECESSARY, AS THEY

DID NOT CONTRIBUTE TO ALLEVIATION OF THE LEAK EFFECTS ............. 29

B.THE WRONGFULNESS OF RESPONDENT‘S ACTS CANNOT BE PRECLUDED ON

THE BASIS OF CUSTOMARY INTERNATIONAL LAW OF NECESSITY ............. 30

i.THERE WAS NO GRAVE OR IMMINENT THREAT TO RESPONDENT‘S

ESSENTIAL INTEREST ............................................................................................. 30

ii.THE MEASURES UNDERTAKEN WERE NOT THE ONLY WAY TO PROTECT

ESSENTIAL INTEREST AGAINST ALLEGED PERIL ........................................... 31

iii.STATE HAS CONTRIBUTED TO THE SITUATION OF NECESSITY ................... 31

V.THIS TRIBUNAL SHALL TAKE MEASURES IN ORDER TO PROTECT

CONFIDENTIALITY OF PRESENT PROCEEDINGS ......................................................... 32

A.THIS TRIBUNAL SHALL TAKE MEASURES UNDER ARTICLE 20(7) ICC RULES

TO PREVENT RESPONDENT FROM DISCLOSING CONFIDENTIAL

INFORMATION .............................................................................................................. 32

B.THIS TRIBUNAL SHALL REJECT AMICUS CURIAE BRIEF AND CSE‘S REQUEST

TO BE HEARD AS A NON-DISPUTING PARTY ....................................................... 33

PART THREE: PRAYER FOR RELIEF................................................................................. 35

v

LIST OF AUTHORITIES

Full name: Cited in:

AUTHORITIES:

Burke/White W. W. Burke-White, A. von Staden, Investment

Protection in Extraordinary Times: The

Interpretation and Application of Non-Precluded

Measures Provisions in Bilateral Investment

Treaties, Virginia Journal of International Law

2007 Vol. 48

126

Cremades/Madalena

B.M. Cremades, I. Madalena, The Parallel

Proceedings in the International Arbitration,

24(4) Arbitration International 2008

52

Derains/Schwartz Y. Derains, E. A. Schwartz, Guide to the ICC

Rules of Arbitration, Kluwer Law International

2005

154

Dolzer/Schreuer Rudolf Dolzer, Christoph Schreuer, Principles of

International Investment Law 2008

78, 86

Douglas

Z. Douglas, The Hybrid Foundations of

Investment Treaty Arbitration, 74 British

Yearbook of International Law 2003

37

Haeri Hussein Haeri, A Tale of Two Standards: „Fair

and Equitable Treatment‟ and the Minimum

Standard in International Law, Arbitration

International Vol.27 No.1 2011

80

Hotelling H. Hotelling, The Economics of Exhaustible

Resources, Journal of Political Economy, Vol. 39,

No. 2, April 1931

28

Kraakman The Anatomy of Corporate Law. A Comparative

and Functional Approach, Oxford University

Press, Second Edition, 2009

22, 24

Leboulanger Philippe Leboulanger, Some Issues in ICC Awards

Relating to State Contracts, ICC International

Court of Arbitration Bulletin Vol. 15, No.2

28

vi

Muchlinski Peter Muchlinski, Federico Ortino, Christoph

Schreuer, The Oxford Handbook of International

Investment Law 2008

118

Newcombe/Paradell Andrew Newcombe, Lluís Paradell, Law and Practice

of Investment Treaties: Standards of Treatment,

(Kluwer Law International 2009)

83, 127

OECD Paper 1 “Indirect expropriation” and the “right to

regulate” in international investment law, OECD

Directorate For Financial And Enterprise Affairs

Working Papers On International Investment

Number 2004/4

111

OECD Paper 2 Fair and equitable treatment standard in

international investment law, OECD Directorate

For Financial and Enterprise Affairs, Working

Papers On International Investment Number

2004/3

80

Reisman W. Michael Reisman, Robert D. Sloane, Indirect

Expropriation and Its Valuation in the BIT

Generation (2004) 74 British YB Intl L 115

108

Romero E. Silva Romero, The Dialectic of International

Arbitration Involving State Parties: Observations

on the Applicable Law in State Contract

Arbitration, ICC International Court of Arbitration

Bulletin Vol. 15 No. 2, 2004.

27

Schreuer

Ch. Schreuer, Travelling the BIT Route. Of

Waiting Periods, Umbrella Clauses and Forks in

the Road, 5 Journal of World Investment and

Trade 2004

36, 44, 55

Vasciannie

Stephen Vasciannie, The Fair and Equitable

Treatment Standard in International Investment

Law and Practice (1999) 70 British YB Intl L 99

80

Weiler T. Weiler, International investment law and

arbitration: leading cases from the ICSID,

NAFTA, Bilateral Treaties and Customary

23

vii

International Law, Cameron May, 2004

CASES:

American Bell American Bell v. Iran, 12 Iran-USTCR (1986) 170 77

Azurix Azurix Corp. v. Argentine Republic, ICSID Case

No. ARB/01/12, Decision on Jurisdiction of 8

December 2003

Benvenuti Benvenuti and Bonfant SRL v. the Government of

the People‟s Republic of the Congo, 1 ICSID Rep.

34

38

Brazil-Tyres Brazil – Measures Affecting Imports of Retreaded

Tyres, WT/DS332/R

127, 147

Canfor Canfor Corporation v. United States and Terminal

Forest Products Ltd. v. United States (Decision on

Preliminary Question, 6 June 2006

125

CMS CMS Gas Transmission Co. v. Republic of

Argentina, ICSID Case No.ARB/01/08, Decision

of the Tribunal on Objections to Jurisdiction of 17

July 2003

49

Continental Continental Casualty Company v. Argentina,

Award, ICSID Case No ARB/03/9; IIC 336

(2008)

130

ELSI Elettronica Sicula S.P.A. (Elsi) (United States Of

America V. Italy)

15-ICJ-Reports-76 (1989)

96

Enron Enron Corporation v. Republic of Argentina,

Decision on Jurisdiction of 24 January 2004

49, 131

Enron 2 Enron Corporation and Ponderosa Assets, L.P. v.

Argentina (Award, 22 May 2007)

Foremost Teheran Foremost Teheran v. Iran, 10 Iran-USTCR (1986)

288

77

Gabˇcíkovo-

Nagymaros

International Court of Justice, Reports of

Judgements, Advisory opinions and orders, case

148

viii

concerning the Gabcikovo-Nagymaros project

Judcment of 25 september 1997

Genin Genin v. Estonia, Award of 25 June 2001, 6

ICSID Rep. 241

38

ICC Case 7365 ICC Case 7365, Final Award, ICC International

Court of Arbitration Bulletin 2004 Vol. 15 No. 2

28

Kardassopoulos Kardassopoulos v. Georgia and joined case,

Award, ICSID Case Nos ARB/05/18; ARB/07/15;

IIC 458 (2010), ¶ 270

23

LG&E LG&E Energy Corp and ors v. Argentina,

Decision on Liability, ICSID Case No ARB 02/1;

IIC 152 (2006); (2007) 46 ILM 36

130

Mafezzini Emilio Augustin Maffezini v. Kingdom-of-Spain,

ICSID Case No. ARB/97/7, Award on

Jurisdiction, 25th

January 2000

23, 25, 30,

76

Metalclad Metalclad Corp v Mexico, Award, Ad hoc—ICSID

Additional Facility Rules; ICSID Case No

ARB(AF)/97/1; IIC 161 (2000), signed 25 August

2000 despatched 30 August 2000

86

Methanex Methanex Corporation v. United States of

America, Decision of the Tribunal on Petitions

from Third Persons to Intervene as ‗Amici

Curiae‘, 15 January 2001,

162

Occidental

Exploration

Occidental Exploration and Productioxn

Company v. Ecuador, Award, LCIA Case No UN

3467, IIC 202 (2004) signed 01 July 2004

80, 86

Olguin Olguin v. Paraguay, Decision on Jurisdiction of 8

August 2000, 6 ICSID Rep. 156

38

Pantechniki Pantechniki S.A. Contractors & Engineers v.

Republic of Albania, ICSID Case No. ARB/07/21,

Award of 30 July 2009

55

Phelps Dodge Phelps Dodge International Corp. v The Islamic

Republic of Iran

IRAN-US Claims Tribunal Cases (Case No. 99)

119

ix

Salini Salini Costruttori SpA and Italstrade SPA v

Kingdom of Morocco, ICSID Case No. ARB/00/4,

Decision on Jurisdiction dated 16 July 2001, 42

ILM 609 (2003)

23

Saluka Saluka Investments BV v Czech Republic, Partial

Award, PCA—UNCITRAL Arbitration Rules; IIC

210 (2006), signed 17 March 2006

80, 82

Santa Elena Compañía del Desarrollo de Santa Elena SA v.

Costa Rica, Final Award, ICSID Case No

ARB/96/1, IIC 73 (2000), despatched 17 February

2000

87

Starrett Housing Starrett Housing International, Inc., v. The

Government of the Islamic Republic of Iran,

IRAN-US Claims Tribunal Cases (Case No. 24)

108

Tecmed Técnicas Medioambientales Tecmed SA v. Mexico,

Award, ARB(AF)/00/2; IIC 247 (2003); 10 ICSID

Rep 130, signed 29 May 2003

82

Tippetts Tippets, Abbett, McCarthy, Stratton v. TAMS-

AFFA Consulting Engineers of Iran, IRAN-US

Claims Tribunal Cases (Case No. 7)

109

Toto Construzioni Toto Construzioni Generali S.p.A. v. Republic of

Lebanon, ICSID Case No. ARB/07/12, Decision

on Jurisdiction of 11 September 2009

55

Waste Management Waste Management Inc v. Mexico, Award, ICSID

Case No ARB(AF)/00/3; IIC 270 (2004),

despatched 30 April 2004

80, 96

Wena Hotels Wena Hotels Ltd v Egypt, Award, ICSID Case No

ARB/98/4; IIC 273 (2000); 41 ILM 896 (2002),

signed 08 December 2000

113

T LEGAL ACTS:

The Argentina-US BIT Treaty between United States of America and

Argentina concerning the Reciprocal

Encouragement and Protection of Investments

41

x

TABLE OF ABBREVIATIONS

¶ paragraph

Amicus Curiae Brief Amicus Curiae Submission by CSE

submitted on 10 September 2010

Clarifications 1

FDI Moot 2011 Clarifications Requests (18

June) Responses

Clarifications 2 FDI Moot 2011 Clarifications Requests (20

August) Responses

Contracting Parties parties to the BIT

Executive Order Executive Order No. 2010 – 1023 issued by

the President of Sylvania on 29 November

2010

Investor an entity that is investor pursuant to Article

1(3) BIT

ILC Articles The International Law Commission‘s

Articles on State Responsibility

FP Freedonia Petroleum LLC

FPS Freedonia Petroleum S.A.

ICC International Chamber of Commerce

NPCS National Petroleum Company of Sylvania

OPA Oil Pollution Act

p. page

Q. question

Report confidential report on the oil spill prepared

by the Sylvanian Government

Agreement Medanos License Agreement

BIT Treaty between the Republic of Freedonia

and the Republic Sylvania concerning the

Encouragement and Reciprocal Protection

of Investments

The Tribunal Arbitral Tribunal constituted upon the

Claimant‘s request of 23 March 2011 on the

xi

basis of Article 11(3) BIT

TRIPS Agreement on Trade-Related Aspects on

Intellectual Property Rights

Uncontested Facts uncontested facts of FDI Moot 2011

Problem

WTO World Trade Organization

STATEMENT OF FACTS

1.Claimant is an experienced commercial company incorporated in the territory of Freedonia,

which is engaged in a profitable oil exploration business all over the world. FP was the only

entity, which decided to participate in the international tender for deep sea oil exploration

issued by Respondent on 31 January 2007 (3).

2.On 26 May 2007, Claimant and Respondent entered into a non-exclusive oil exploration

agreement. Claimant agreed to pay 12% of royalty and to take all appropriate measures to

prevent discharges of oil on navigable water and, in case of a discharge, to immediately

undertake a removal.

3.After two years of cooperation, an unpredicted explosion of an unknown origin occurred on

9 June 2009.

4.Claimant has fulfilled its obligations and immediately commenced the remedial actions.

Both the leaking wells and economical damage were addressed from the very beginning.

5.Six months after the explosion Respondent released to the public confidential analysis

concerning the consequences of the leak. The report was created with the aid of Claimant,

whose employees supplied Respondent with all the necessary information.

6.On 20 December 2009, coming under significant public pressure, Sylvanian congress

amended the Oil Pollution Act. Not only the scope of the term ―damages‖ was broadened but

also new safety obligations were imposed. Moreover, the damages cap on liability for oil

spills was eliminated. All the changes were enacted retroactively, as of 1 June 2009, exactly

one week before the explosion.

7.On 26 February 2010, the Sylvanian Government ordered FPS to pay SD 150,000,000 of

liquidated damages for the breach of its obligations under amended OPA. Both the

negotiations conducted and the claims lodged in the administrative proceedings failed.

8.The new Hydrocarbon Law was enacted on 10 August 2010. Among the other changes, the

National Petroleum Company of Sylvania (the ―NPCS‖), a company fully owned by the

Government of Sylvania, was created.

9.On 22 November 2010, Clean Sylvanian Environment (―CSE‖), a non-profit NGO, funded

by several Sylvanian nationals and domestic agricultural and seafood companies, publicly

demanded the Government to ―take urgent action‖ against Claimant.

10.One week after the CSE‘s intervention, without any prior notification, management and

operating teams sent by the Government took over the oil wells in order to ‖undertake the

necessary remedial works‖. Further, Claimant‘s License was suspended by Presidents

Executive Order No. 2010 – 102.

2

11.On 10 December 2010, the President of Freedonia contacted the President of Sylvania to

commence diplomatic negotiations intended to resolve the problem. After two meetings held

on 14 and 17 December 2010, diplomatic negotiations were suspended as Republic of

Freedonia failed to satisfy Respondents demand ―to ensure the observance by FPS of its legal

obligation‖.

12.On 23 March 2011, Freedonia Petroleum filed a request for arbitration before the

International Chamber of Commerce claiming compensation for breach of the BIT, including

unfair and inequitable treatment, violation of legitimate expectations, and expropriation.

13.In the course of arbitration proceedings, the Sylvanian Court ordered the release of the

written pleadings concerning the ongoing dispute to a third party, namely CSE.

3

SUMMARY OF ARGUMENTS

14.JURISDICTION: The Tribunal has jurisdiction over the present dispute. FP holds a

proper standing to act as a Claimant in the ongoing arbitration proceedings. It meets all

requirements set out in the BIT in order to be deemed as an Investor. It is a private company

pursuing commercial activities and as such it enjoys all rights conferred upon by it the BIT.

Furthermore, the fork in the road provision of the BIT was not triggered. Claimant is entitled

to assert its claims in the arbitration proceedings as there was no identity of the parties, cause

of action and the relief sought. Therefore, this Tribunal is a proper forum for the ongoing

dispute. Nevertheless, Respondent‘s counterclaim shall be dismissed as it does not concern

investment dispute and it lacks substantive basis. The counterclaim does not specify legal

instrument on which it is based and the provisions of the BIT cannot be utilized as its legal

basis.

15.MERITS: Respondent has breached its obligations under the BIT, what deprived

Claimant of the Investment. All actions of NPCS are attributable to Respondent, hence,

Respondent should be held liable for a wrongful and expropriatory take-over of the oil wells.

Secondly, Respondent infringed the fair and equitable treatment standard. Moreover,

Respondent violated its duty to keep the Report on the oil leak confidential. Further,

Respondent applied discriminatory and arbitrary measures with regard to the Investment.

Those actions were in contradiction with the provisions of the BIT. Furthermore, Respondent

unlawfully expropriated Claimant‘s Investment, invoking an alleged threat to the

environment. Respondent also failed to fulfill its duty of compensating Claimant immediately

and effectively for the expropriation. In any event, Respondent is not entitled to rely on

Article 9 BIT as is essential security was never threatened. Furthermore, it may not invoke the

state of necessity exception provided by the customary international law, as measures applied

were neither proportional, nor necessary.

4

PART ONE: JURISDICTION

16.This Tribunal has jurisdiction over the case at hand as Claimant, the Investor, has a proper

standing to assert its claims in the international arbitration (I). Furthermore, there was no

previous choice of the domestic forum under the fork in the road provision contained in the

BIT (II). However, the Respondent's counterclaim should be dismissed as it is not admissible

(III).

I.THE TRIBUNAL HAS JURISDICTION TO HEAR THE CLAIMS AS ACCORDING

TO ARTICLE 1(3) BIT FP IS AN INVESTOR OF THE OTHER CONTRACTING

PARTY

17.The Tribunal has jurisdiction over the present dispute. FP is an Investor and, therefore, has

a proper standing to pursue arbitration before the Tribunal. It meets all requirements as set out

in Article 1(3) BIT. Firstly, FP is a company established in the Territory of one of the

Contracting Parties, Republic of Freedonia, in accordance with the respective national

legislation (A). Secondly, FP is not funded by the Republic of Freedonia (B) and does not

pursue any sovereign activities (C).

A.FP IS A COMPANY ESTABLISHED IN THE TERRITORY OF REPUBLIC OF

FREEDONIA IN ACCORDANCE WITH RESPECTIVE FREEDONIAN

LEGISLATION

18.Under Article 11(1) BIT, the Tribunal has jurisdiction to hear the dispute between the

Contracting State, and an Investor of the other Contracting State. Article 1(3)b BIT states that:

―The term “Investor” shall be construed to mean, with regard to either Contracting Party:

(…)

b. any legal person established in the Territory of one of the Contracting Party in accordance

with the respective national legislation (…), regardless of whether their liability is limited or

otherwise.” [emphasis added]

FP is a private commercial company established in the territory of Republic of Freedonia1 and

therefore shall be regarded as an Investor for the purpose of this dispute.

19.Respondent, Republic of Sylvania, organized an international tender for deep sea oil

exploration. Claimant decided to take part in the bidding process. As an international energy

company it has already operated in various regions of the world and had an extensive

experience in the field of oil exploration. In order to be eligible to participate in the tender, FP

1 Clarifications 2, Q 55.

5

incorporated in Republic of Sylvania a wholly owned subsidiary - FPS. Due to Claimant‘s

outstanding experience, FPS won the tender and was granted a license.

20.The fact that FP established a subsidiary in the territory of Republic of Sylvania does not

alter its well-founded standing before the Tribunal. FP is an Investor accordingly to Article

1(3)(b) BIT and, therefore, has a right to act as Claimant in the present dispute.

B.FP IS NOT FUNDED BY REPUBLIC OF FREEDONIA BECAUSE IT IS A

PRIVATE COMMERCIAL COMPANY, IRRESPECTIVE OF ITS OWNERSHIP

STRUCTURE

21.According to Article 1(3) BIT, any legal person that is established in the territory of one of

the Contracting Parties may be qualified as an Investor, unless it is funded by the other

Contracting Party.

22.In the case at hand, FP is a private commercial company that acts in regular market

conditions and generates revenue from various business activities around the world2. It is a

limited liability company with fully transferable shares, what allows the fluent change of

shareholders3. It permits the company to conduct business uninterruptedly. The Freedonian

government is FP‘s majority shareholder and owns 60% of shares. However, it exercises its

interests in the company as would any other 60% shareholder under respective Freedonian

company laws4. There is no ample evidence to suggest that governmental interest threatens

the equity of shareholders‘ rights, nor that it is anyhow privileged. Therefore, the fact that the

Freedonian government owns 60% of FP‘s shares does not amount to company‘s funding.

23.In Maffezini the tribunal developed the ‗structural‘ test to assess the legal personality of an

entity in order to determine whether it shall be deemed as a state entity for jurisdictional

purposes. Tribunal determined that an organization SODIGA was a private commercial

company incorporated in accordance with Spanish private law and this fact militated against

the conclusion that it is a state entity. Thus, the ‘structural‘ test consisted of a review of the

laws pursuant to which SODIGA was established, the laws related to its organization and the

law that regulated its activities5. Moreover, the tribunal found that if a company is state-

owned, it is not sufficient to raise the presumption of an entity being an organ of the state. The

‗structural‘ test was subsequently applied by other tribunals, i.e. Kardassopoulos 6

and Salini

7.

2 Uncontested Facts, ¶1.

3 Kraakman,

4Clarifications 1, Q. 34.

5Weiler, p. 21.

6 Kardassopoulos, ¶270.

7 Salini, ¶32.

6

24.Further, the bedrock element of the company is what the civil law refers to as ‗separate

patrimony‘. It involves the demarcation of a pool of assets that are distinct from other assets

owned, singly or jointly, by the company‘s shareholders, and of which the company itself is

viewed in law as being the owner8. It means that a company is an independent legal entity

separate from its shareholders. Moreover, one of the basic shareholders‘ rights is entitlement

to dividends. All shareholders receive a claim on any profits a company pays out in the form

of a dividend. They have to make a contribution to company‘s funds or assets, but in return

they are entitled to gain from company‘s profits. Therefore, it can be stated that it is rather a

company itself that ‗funds‘ the shareholders.

25.In light of the above, FP cannot be deemed as funded by Republic of Freedonia. It is a

regular private commercial company that operates to maximize its profits. It does not meet the

requirement of ‗structural‘ test developed in Maffezini case as it was established in accordance

with private laws. Republic of Freedonia exercises its rights in FP just as any other

shareholder. Hence, the fact that it owns a majority shareholding cannot be deemed as

company‘s funding.

C.FP DOES NOT PURSUE ANY SOVEREIGN ACTIVITIES AS ALL OF ITS

DEALINGS ARE OF COMMERCIAL NATURE AND ARE CARRIED ON FOR

PROFIT

26.Article 1(3) BIT requires that an Investor cannot pursue any sovereign activities. FP meets

this criterion as it carries on exclusively for-profit activities in the field of exploration and

production of crude oil.

27.Sovereign activities are aimed at preserving 'public interest' and, thus, are closely related to

states‘ activity. When a state acts in the sphere of ‗dominium‘ it acts as a contractor which is

bound by the contracts it entered into. In the sphere of ‗imperium‘ state acts as a regulator

whose enactments are made for the public good. They should coincide not only with the

principle of 'common good', but also with the well-being of the population in the state's

keeping9. Therefore, all sovereign activities are carried on by the states in the ‗imperium‟

sphere. In the case at bar, investment is pursued by a private entity. FP invested in a rising

Sylvanian market in the hope that it will lead to Claimant‘s future revenue increase and

further development. Hence, it cannot be considered to be a sovereign act conducted by

Claimant as it is a textbook example of commercial activity.

8 Kraakman.

9 Romero.

7

28.The industry that Claimant is engaged in represents a regular commercial and profit-

oriented environment. In the ICC award no. 736510

the tribunal assessed the nature of

dealings pertaining to selling oil products as purely commercial. The tribunal decided that

dealings such as selling oil products represent regular commercial nature.11

. Production and

exploration of crude oil is just a previous step in the process of selling oil products and as

such is also purely commercial in nature. Some states decide to regulate the sphere of oil-

related business by introduction of the license systems. From the historical point of view, such

a regulatory solution was justified by the fact that oil belongs to world‘s disappearing

resources. Yet, as the earth is of finite size, this in principle applies to every mineral resource

and leads to demands for regulation of exhaustible assets12

.

29.Respondent also decided to introduce the license system to the oil industry. Therefore, in

order to pursue activities in the field of oil production and exploration, Claimant was granted

a license. However, the fact of operating the business under license does not alter the

mercantile character of FP‘s dealings. Claimant does not act as a ‗sovereign‘ but operates just

as any other commercial and profit-oriented entity.

30.Moreover, in Maffezini the tribunal established a ‗functional‘ test that was aimed to

assesses the control and function of an entity. The tribunal determined how to examine

whether specific acts or omissions of an entity are essentially commercial rather than

governmental in nature. The tribunal found that if character of the acts is fundamentally

commercial rather than governmental, they cannot be attributed to the state13

.

31.In the case at hand, there is no evidence that Claimant‘s actions are influenced in any way

by the Freedonian government. FP is a private energy company and it depends on its

shareholders and directors how the company will develop and what activities it will pursue.

32.Consequently, Claimant does not pursue any sovereign activities as all its dealings are

inherently commercial and profit-oriented.

33.In summary, FP has a well-founded standing to pursue arbitration before this Tribunal. It

clearly meets all requirements set out in the BIT in order to be qualified as an Investor,

namely, it has been established in the territory of one of the Contracting Parties, was not

funded by the Republic of Freedonia and does not pursue any sovereign activities. Thus, FP

may act as a Claimant in the present dispute.

10

ICC Case 7365, Final Award. 11

Leboulanger. 12

Hotelling, p. 137. 13

Maffezini, ¶ 52.

8

II.CLAIMANT IS ENTITLED TO ASSERT ITS CLAIMS IN INTERNATIONAL

ARBITRATION, AS THERE WAS NO PRIOR CHOICE OF NATIONAL COURTS

UNDER THE FORK IN THE ROAD PROVISION OF THE BIT

34.Claimant lawfully commenced the arbitration proceedings before this Tribunal. The

submission of the Investment dispute to the international arbitration is one of the fundamental

Investor‘s rights under the BIT. The sole fact that another entity, FPS, who is a wholly owned

subsidiary of Claimant, has instituted administrative proceedings before the Sylvanian

Ministry of Energy, cannot deprive Claimant from pursuing its treaty claims before this

Tribunal. The fork in the road provision contained in the BIT was not triggered as there was

no prior choice of the domestic forum.

35.The forum choice clause is contained in Article 11(3) BIT. It states as follows:

“The Contracting Parties hereby consent to the submission in good faith of Investment

Disputes to the International Chamber of Commerce (ICC) for settlement and resolution by

binding arbitration (…), provided that: b. the Investor has not brought the dispute before the

courts having jurisdiction within the territory of the Contracting Party that is a party to the

dispute.” [emphasis added]

36.The bifurcation clause provides that an Investor willing to lodge a claim against the host

state must choose between the litigation before the municipal courts and the international

arbitration. Once the choice is made, it is final and the Investor cannot pursue its claims

before the other forum14

.

37.Yet, not every application to a domestic court will be perceived as a choice of forum under

fork in the road provision. Investors are often involved in multiple minor disputes, which are

being decided by the national courts. This is exactly the case of FPS commencing the

administrative proceedings. Should this type of involvement be construed as decisive forum

choice for the investment disputes, it would either deprive foreign investors of the possibility

to arbitrate or have a chilling effect on the submission of disputes by investors to domestic

courts, even where the issues in contention are purely contractual, tortious or even

administrative, and clearly within the domain of municipal law15

.

38.A number of arbitral tribunals have decided that in order for the fork in the road to be

triggered, there must be an identity of the dispute pending before a national court and the

arbitral tribunal16

. The triple identity test was established to assess whether the disputes are

14

Schreuer, p. 240. 15

Douglas, p. 276. 16

Olguin, ¶30; Genin, ¶321; Middle East Cement, ¶70 et alia.

9

identical17

. The restraining interpretation of the test is necessary in order to enable the

investors to avail themselves of the possibility to undergo the international arbitration.

Otherwise, should the fork in the road provision be interpreted leniently, the investors would

be virtually proscribed from pursuing their claims before the arbitral tribunals every time they

are involved in any domestic proceeding. Hence, the triple identity test was established to

protect the investors. It requires joint identity of the parties (B), identity of causes of action

(C) and identity of objects (D). Before analyzing the triple identity test, it must be assessed

whether the dispute is pending before a judicial body as indicated in the fork in the road

provision (A). In the present case, none of those requirements was fulfilled and, therefore,

Claimant is entitled to pursue its claims before this Tribunal.

A.FPS HAS NEVER BROUGHT AN INVESTMENT DISPUTE BEFORE THE

DOMESTIC COURTS AS REQUIRED BY THE FORK IN THE ROAD PROVISION

39.There was no submission of an Investment dispute to the national court of a host state as

required by the Article 11(3)(b) BIT.

40.In order for a fork in the road provision to be triggered, the dispute shall be brought before

a domestic body as provided for therein. Article 11(3)(b) BIT states that an Investor must

bring the dispute ―before the courts having jurisdiction within the territory of the Contracting

Party‖ [emphasis added]. That wording covers solely the domestic courts and it does not

extend to other judicial or administrative bodies.

41.In comparison, a number of other BITs are formulated in a broader manner. The Argentina

– United States BIT (as provided in Aricle.VII(2)(a)) and Austria 2008 Model BIT concern

―courts and administrative tribunals‖. An even broader wording is used in Australia Model

BIT, where a fork in a road provision is triggered whenever a dispute is submitted to ―the

competent judicial or administrative bodies―.

42.In the case at hand, there were two proceedings commenced by FPS in the domestic forum.

First one was the recourse to the Sylvanian Ministry of Energy, which is a state body, and,

therefore, not an independent judicial forum. It was an administrative appeal to overturn the

order imposing the liquidated damages on FPS for its alleged incompliance with the

municipal law18

. Those administrative proceedings are not equivalent to litigation before a

court for the purposes of the BIT. In Azurix, the tribunal decided that a regulatory authority

established for the purpose of managing the concessions was not equivalent to an

administrative tribunal for the purposes of the investment treaty. The tribunal noted that the

17

Benvenuti, ¶1.14. 18

Uncontested Facts, ¶17.

10

agency did not have ―the independence required of a tribunal and does not have a judicial

function to settle conflicts‖ and its decisions were the administrative acts and not the

adjudication19

. Similarly, in the case at hand the Ministry of Energy is not equal to a court as

required by the fork in the road clause. In addition, those proceedings were not commenced

voluntarily by FPS, but rather under legal duress. Had FPS not appealed, it would have been

obliged to pay the damages as imposed by the government‘s order. Therefore, those

administrative proceedings cannot be considered as choice of a forum for the purposes of the

BIT.

43.The second proceedings commenced by FPS were to seek declaratory relief from the

Sylvanian courts to the effect that the terms of the Agreement took precedence over the

amendments to the OPA20

. Hence, they concerned only the interpretation of the municipal law

and not the Investment dispute itself. Those proceedings cannot be construed as a choice of

the domestic forum as they do not meet the triple identity test, similarly to the administrative

proceedings before the Ministry of Energy.

B.THE PARTIES IN THE DOMESTIC PROCEEDINGS AND IN THE PRESENT

ARBITRAL PROCEEDINGS ARE DIFFERENT

44.The dispute pending before a national judicial body and before an arbitral tribunal may be

considered the same solely if the parties to the both proceedings are identical21

. In the case at

bar, neither Claimant, nor Respondent were parties to the administrative proceedings before

the Ministry of Energy or to the proceedings before the Sylvanian courts.

45.According to Article 11(3)(b) BIT, the arbitration proceedings may be commenced

provided that the Investor has not previously initiated the proceedings before a national court.

In the present case, it is Claimant, FP, who is the Investor for the purposes of the BIT. Hence,

only the domestic proceeding initiated by FP could trigger the fork in the road provision. It is

not the case herein.

46.The administrative proceedings before the Ministry of Energy and before the Sylvanian

courts were commenced by FPS, while the request for arbitration was filed by Claimant.

Although FPS is a local company wholly owned by Claimant, those two companies cannot be

perceived as the same entity. Those are two distinct corporations, established in different

countries pursuant to distinctive national laws. The structure of ownership remains irrelevant.

19

Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction of 8 December

2003, ¶92. 20

Uncontested Facts, ¶16. 21

Ch. Schreuer, op. cit, p. 245; Lauder vs. Czech Republic, NAFTA-UNCITRAL Arbitration, Final Award of 3

September 2001, ¶162.

11

47.The sole purpose of incorporating FPS was to take part in the bidding process for oil

exploration permits22

. It was Respondent, who required incorporation of a subsidiary in

Sylvania as it was for Respondent‘s benefit to license a company susceptible to its laws.

There is no reasonable purpose to establish another entity and then assert that those two

entities are in fact the same company.

48.Therefore, the identity of the parties in the case at hand is excluded. As the parties to both

proceedings differ, there is no identity of the dispute and thus, the fork in the road provision is

not triggered. To conclude otherwise would in fact preclude foreign investors from enjoying

the main benefit of BITs, which is the investor‘s right to make recourse to international

arbitration whenever the treaty is breached. The fact that a local subsidiary instituted domestic

proceedings does not preclude the foreign investor from commencing the international

arbitration.

49.Such a reasoning was epitomized in Enron23

. It was decided that:

“Whether the locally incorporated company may further claim for the violation of its rights

under contracts, licences or other instruments, does not affect the direct right of action of

foreign shareholders under the Bilateral Investment Treaty for protecting their interests in the

qualifying investment.” Also in CMS24

and in Azurix25

, the tribunals decided that the actions

taken by the local companies before the national judicial bodies cannot be attributed to their

parent companies as a choice of forum under the fork in the road provision.

50.Thus, as the parties to the domestic and international proceedings differ, the requirement of

parties‘ identity is not fulfilled in the case at hand and Claimant is not precluded from

initiating the international arbitration.

C.THE CAUSES OF ACTION IN THE DOMESTIC PROCEEDINGS COMMENCED

BY FPS AND BY CLAIMANT DIFFER

51.The fork in the road provision applies solely if the causes of action in the domestic

proceedings and in the international dispute are identical26

. In the case at bar the background

of the claims brought in the respective fora differ.

52.Cause of action concerns the grounds or set of facts alleged that constitute the basis of the

claim27

. The underlying facts of the claims merely overlap, but they are not identical. The

administrative proceedings concern the FPS‘ compliance with safety obligations as imposed

22


Enron, ¶49. 24

CMS, ¶80. 25

Azurix, ¶90. 26


Cremades/Madalena, p. 509.

12

by the Agreement and OPA, while the court proceedings are based on the action to establish

which law applies to FPS‘ obligations. The present case‘s factual background consists of

actions taken by Respondent such as expropriation and leaking a confidential report to the

mass-media, which infringed both Claimant‘s business position and its reputation.

53.Thus, the domestic proceedings are based on alleged Claimant‘s misbehavior prior to and

during the oil spill, while these arbitration proceedings concern Respondent‘s actions

posterior to the oil leak. Although both factual backgrounds might seem alike to certain

extent, such a meager similarity does not meet the identity threshold as required by the triple

identity test. The narrow interpretation of that test is essential as it enables the Investor to

avail itself of the arbitration clause contained in the BIT.

54.Further, the basis of the claims in the respective proceedings are of different legal order.

The claims presented by Claimant before this Tribunal are treaty-based. They concern

Sylvania‘s breach of several BIT provisions towards Claimant as the Investor. On the other

hand, FPS acts were based on the municipal law. The administrative proceedings were

commenced by FPS to appeal from an order imposing liquidated damages for the alleged

FPS‘ breach of the applicable safety obligations under the domestic law. At the same time, the

court proceedings concerned the interpretation of these legal acts. None of those claims made

by FPS‘ did invoke any treaty protection provisions or did it concern a breach of any right

conferred or created by the BIT.

55.The opposition between treaty claims and claims based on the municipal law is similar to

broadly commented distinction between contract and treaty claims. The arbitral tribunals

dealing with the fork in the road provisions roughly unanimously held the restrictive division

between those two bases of claims. It is confirmed both by the case law28

and authorities29

.

Other concepts, such as ―essential basis‖ test used in Pantechniki30

case, are not considered

clear and reliable enough for further arbitral tribunals to follow31

.

56.Thus, the causes of action taken before a domestic body and before this Tribunal are of a

different nature – the former concerns an appeal from an order given by the Sylvanian

government, the latter is a treaty claim concerning Sylvania‘s breach of the BIT provisions. It

precludes the identity of the dispute between those two proceedings and, therefore, the

application of the fork in the road provision.

28

Vivendi annulment ¶95; SGS, ¶¶147-148; Bayindir, ¶167; BIVAC, ¶127 29


Pantechniki, ¶62. 31

Cf. Toto Costruzioni. Although the Tribunal did not discuss the Pantechniki award, it directly contradicted it.

13

D.THE OBJECT OF BOTH PROCEEDINGS DIFFERS

57.The objects of claims asserted before domestic forum and in international arbitration

differ, which proscribes identity of the dispute.

58.In the recourse to the Ministry of Energy, the FPS‘ aim was to quash an administrative

order imposing a fine, whereas by court proceedings FPS wished to establish the law

applicable to its obligations. Claimant‘s object before this Tribunal is to obtain compensation

for prejudice to its Investment and, more specifically, to seek declaration that Respondent

violated its rights under the BIT by expropriating the Investment without prompt and adequate

compensation and by subverting its legitimate expectations. Thus, the present proceedings‘

are of compensatory nature, while the purpose of the domestic proceedings was to exempt

FPS from the financial liability imposed by the government order.

59.Therefore, as object of the domestic proceedings and the international arbitration at hand

differ, the fork in the road provision may not have been triggered.

60.Claimant is entitled to assert its claims before this Tribunal as the fork in the road

provision contained in Article 11(3)(b) BIT was not triggered. Proceedings commenced by

FPS, Claimant‘s subsidiary, before the domestic fora do not meet the triple identity test.

Therefore, the dispute submitted to be resolved herein differs from the ones presented before

the municipal bodies. Hence, Claimant may pursue its claims in present international

arbitration proceedings.

III.RESPONDENT’S COUNTERCLAIM SHOULD BE DISMISSED AS IT LACKS

THE LEGAL BASIS

61.The Tribunal lacks jurisdiction over the Respondent‘s counterclaim. Firstly, Respondent‘s

counterclaim does not concern investment dispute as set out in article 11(1) BIT (A).

Secondly, counterclaim is unfounded since BIT does not provide for any substantive rules on

which Respondent can base his contentions (B).

A.RESPONDENT'S COUNTERCLAIM DOES NOT CONCERN INVESTMENT

DISPUTE

62.The very basis of the tribunal jurisdiction is the existence of the investment dispute.

Assessing the existence of the investment dispute precedes the examination of the other

prerequisites necessary for the establishment of jurisdiction.

63.The definition of the Investment Dispute is contained in Article 11(1) BIT:

“For purposes of this Article, an Investment Dispute is defined as a dispute involving (a) the

interpretation or application of an Investment agreement between a Contracting Party and an

14

Investor of the other Contracting Party; (b) the interpretation or application of any

Investment authorization granted by a Contracting Party‟s Investment authority to such

Investor; or (c) an alleged breach of any right conferred or created by this Agreement with

respect to an Investor or an Investment of an Investor of a Contracting Party.”

Respondent, by filing the counterclaim, seeks to obtain declaratory relief that the actions of

FP and FPS caused devastating harm to the Respondent, and to seek damages accordingly.

64.Respondent‘s contention contained in counterclaim does not fall within the scope of notion

―investment dispute‖. Firstly, Respondent's counterclaim does not stipulate whether it

concerns investment agreement or investment authorization. Secondly, it is impossible to

point out in the counterclaim legal issues that require interpretation or provisions with

unclear scope of application. Instead of focusing on legal issues, Respondent's counterclaim

concerns solely factual findings. Thus, such subject matter of the counterclaim renders it

inadmissible.

B.RESPONDENT’S REQUEST FOR DAMAGES IS UNFOUNDED AS IT LACKS

SUBSTANTIVE BASIS

65.Counterclaim contains also request for damages. Such a request cannot be the subject of

investment dispute since it lacks substantive basis.

66.Respondent does not specify legal basis on which the damages shall be assessed. The lack

of specification should not be attributable to Respondent‘s omission, but rather to the

impossibility of finding provisions in the BIT supporting Respondent‘s contention.

67.BIT provides for detailed rules on compensation. Article 4(3) sets out compensation for

expropriation and Article 5 for the losses expounded therein. Those Articles have common

feature – they concern compensation paid by the host state to the investor. There is no

provision in BIT which obliges investor to pay damages to the host state.

68.The attempt to find implied rules in the BIT concerning compensation awarded to the host

state is also impossible. The BIT, as its name states, concerns the encouragement and

reciprocal protection of investments. Preamble of the BIT explains that offering

encouragement and mutual protection to investments will be profitable for both parties. This

purpose is also underlined in Article 2(1) BIT which states that the contracting parties shall

encourage investments.

69.In light of treaty‘s title and preamble, the provisions of BIT should be construed in a

manner favourable to investor. This principle is also evidenced by the fact that BIT provides

rights only to investor and limits the exercise of powers of the host state. Therefore, the acts

15

of the state which are detrimental to the investor and are not explicitly permitted in the BIT

shall be prohibited. The obligation to pay damages is such an act.

70.Consequently, by virtue of the abovementioned arguments, the Tribunal does not have

jurisdiction to hear the counterclaim.

71.In light of the above this Tribunal is competent to hear the case at bar and should proceed

with the merits of the case. Claimant is the true Investor under the BIT and, as such, it is

entitled to avail itself of the recourse to international arbitration. Claimant should not be

deprived of that fundamental right as it has never chosen to proceed with its claims before a

domestic forum. Hence, the fork in the road provision was not triggered. On the contrary, the

Respondent's counterclaim is inadmissible and as such should not be heard by this Tribunal.

PART TWO: MERITS

72.The acts of NPCS are attributable to Respondent (I). Moreover, in the present case,

Claimant was deprived of its enjoyment of the Investment. Respondent failed to afford

Claimant fair and equitable treatment as required by the BIT (II). Furthermore, Claimant's

Investment was unlawfully and indirectly expropriated (III). Lastly, Respondent cannot be

exempted from liability as its essential security interest was not endangered (IV). Lastly, the

Tribunal shall prevent disclosure of confidential information (V).

I.THE ACTS OF NPCS ARE ATTRIBUTABLE TO RESPONDENT

73.Respondent is liable for the conduct of NPCS as it was governmental in nature. NPCS was

empowered by Respondent to exercise public authority.

74.The international law on state‘s responsibility is specified in ILC Articles. It is uncontested

that ILC Articles provide rules applicable to conduct of all states‘ organs and entities,

regardless of which type of authority they exercise – legislative, executive or judicial32

.

Therefore, every conduct of states‘ organ or entity shall be considered to be a conduct of the

state33

.

75.Article 5 ILC Articles states as follows:

“The conduct of a person or entity which is not an organ of the State under article but

which is empowered by the law of that State to exercise elements of the governmental

authority shall be considered an act of the State under international law.”

32

ILC Article 4. 33

Judgment of the United States Court of Appeals for the Second Circuit, 16 March 2004.

16

Therefore, state is responsible for a conduct of entities, which are not state‘s organs, but are

empowered to exercise governmental authority. In the light of Article 5 ILC Articles, NPCS

was empowered to exercise governmental authority.

76.To find elements, which constitute the exercise of governmental authority, it is essential to

refer to the Maffezini case, in which the tribunal defined functional and structural test relevant

for the issue of attribution. According to the findings of the tribunal, the essential for

functional element of attribution test is the nature of conduct - whether it is governmental or

commercial in nature. For structural element of such test, the question of effective control

should determined.

77.In the case at hand, all prerequisites of functional test presented were fulfilled. NPCS was

formally and legally allowed to achieve goals of Respondent‘s policy towards the Claimant as

well as Respondent‘s environmental policy, as the President of Sylvania ordered NPCS to

take over the wells of Claimant by issuing the Executive Order34

. In the circumstances of the

case, the aim to “achieve a particular result of such policy”35

as claimed by Respondent, was

the full protection of natural environment. In fact, the real goal Respondent achieved through

actions undertaken by NPCS was depriving Claimant of its rights to enjoy the Investment.

Accordingly, it is clear that the conduct of NPCS was governmental in nature.

78.Further, the structural element has to be analyzed. NPCS is the company created by the act

of the Sylvanian Government and incorporated under the law of Sylvania36

. It is wholly

owned by Respondent, who is entitled to appoint the Members of the Board37

. Those facts

clearly show that Respondent had an effective control over the NPCS and, thus, by virtue of

Article 5 ILC Articles it was an entity whose conduct has to be qualified as attributable to the

Respondent. The fact, that it was a private law company is, for the issue of attribution,

irrelevant38

. Consequently, Respondent is fully responsible for the conduct of NPCS which

exercised governmental authority.

II.RESPONDENT FAILED TO AFFORD CLAIMANT FAIR AND EQUITABLE

TREATMENT

79.In the present case, the Investment was made on the basis of the BIT. According to its

Article 2(2):

34

Executive Order, Section 1 and 2. 35

Foremost Teheran; American Bell. 36


Clarification 1, Q. 11. 38

Dolzer/Schreuer, p. 201.

17

“The Contracting Parties shall at all times ensure treatment in accordance with customary

international law, including fair and equitable treatment […]”

80.Respondent as the host state was therefore obliged to accord Claimant fair and equitable

treatment. The basic obligation of the host state under fair and equitable treatment standard is

to act in good faith, and to not deliberately set out to destroy or frustrate the investment by

improper means39

. It was underlined by the tribunals that this standard provides for higher

level of protection than customary standard of minimum treatment40

. It means that fair and

equitable treatment standard is autonomous, more precise and contains specific obligations

that are not part of the international minimum standard41

. The goal of fair and equitable

treatment is not only to preclude conduct against foreign investors from falling below certain

threshold unacceptable by the international community, but also to promote the investments42

and to ―maintain a stable framework for investments and maximum effective use of economic

resources”43

. Tribunals have also established that the standard should be interpreted on a

case-by-case basis as it contains various elements, which could be applicable in different

circumstances44

.

81.In the case at hand, Respondent disregarded its duties under the fair and equitable

treatment standard as it failed to observe Claimant‘s legitimate expectations created by

granting it a license for exploration of Medanos Field (A). Moreover, Respondent treated

Claimant in arbitrary and discriminatory manner by issuing the Executive Order which

suspended the license and by amending the law retroactively (B).

A.RESPONDENT FAILED TO OBSERVE CLAIMANT’S LEGITIMATE

EXPECTATIONS

82.It is a necessary requirement to observe legitimate expectations in order to afford the

investor fair and equitable treatment45

. According to Tecmed, the state is obliged to:

“provide to international investments treatment that does not affect the basic expectations

that were taken into account by the foreign investor to make the investment”46

.

83.Any conduct of a state may create investor‘s legitimate expectations. It may result from

“written or oral representations, licenses, concessions”47

. Claimant was granted a 5-year

39

Waste Management, ¶138. 40

Vasciannie, ch. IV A; Occidental Exploration ¶¶189-190; Enron ¶ 258. 41

Haeri, p.37 42

Ibidem, p. 40 43

CMS, ¶276 44

OECD Paper 2, p.2; Saluka, ¶29.1 45

Saluka, ¶302. 46

Tecmed, ¶ 154. 47

Newcombe, p.279.

18

non-exclusive oil exploration and drilling license48

. In return, among other things, Claimant

undertook to pay a 12% royalty to Respondent49

. The Agreement provided that Respondent

would take all measures to ensure Claimant enjoys its right conferred upon the License

Agreement50

.

84.It is frequent in the oil exploration and drilling process that certain accidents happen51

,

hence Respondent must have been aware of such business risk. In the case at hand, the sole

fact of regulating the situation of an oil discharge in Agreement52

proves that both parties

were conscious that oil leaks occur from time to time and may be severe enough to require

immediate reaction and further remedial process. Therefore Respondent estimated and

accepted the business risk by signing the License Agreement with Claimant. The Agreement

set forth certain rules of proceeding in case of an emergency situation. Respondent cannot be

allowed to change them instantly and arbitrarily, only because it was not satisfied with the

outcome of applied remedies.

85.There is no proof of Claimant‘s fault in the oil leak53

, therefore Claimant cannot be

burdened retroactively and entirely for the possibly-force majeure event. Claimant complied

with its obligations as to the payment of royalty and after the oil leak occurred, it undertook

all possible measures to remedy the consequences. The wells were sealed in cooperation with

Respondent‘s personnel54

and there was no basis to suspend the license at this point,

especially after the danger had been obviated. Claimant reasonably believed that it would

maintain the license rights to the end of the guaranteed period. By suspending the license on

the grounds of the alleged incompetence of Claimant, Respondent breached Claimant‘s

legitimate expectations.

86.Legitimate expectations may also be created by the legal framework provided by the

state55

. There is no doubt that a stable legal and business environment is an essential element

of fair and equitable treatment56

. The host state must take into account, while amending the

law, that its legal order might have created the basis of the investor‘s legitimate

expectations57

.

48


Uncontested Facts, ¶ 5. 50

Uncontested Facts, ¶6 51

For instance: cases of Exxon oil spill in 1989, BP oil spill in 2009, Shell North Sea oil spill in 2011 52

Uncontested Facts ¶5. 53

Clarifications 1, Q. 28. 54


Occidental ¶183; CMS ¶ 260; Dolzer/Schreuer, p.104. 56

Metalclad, ¶274 57

Dolzer/Schreuer, p.135.

19

87.At the time of the investment the OPA law of Sylvania provided SD75 million cap on

liability for spills from offshore facilities58

. Responded amended the OPA substantially after

three years of Parties‘ cooperation under the Agreement. The change occurred almost

immediately after the explosion had caused an oil leak problem. The amendments were

enacted retroactively and imposed enormous liability on Claimant, as the scope of damages in

the applicable law was extensively broadened and the liability cap was eliminated59

. During

the preparation of its business plan, Claimant estimated all benefits and drawbacks of the

investment in Sylvania. As a standard procedure, Claimant took the worst scenario into

consideration and decided that it was financially prepared for it. However, if Claimant had

known that a scope of liability would be virtually infinite and scope of damages would

become unreasonably wide, it would have never decided to invest in Sylvania. Therefore, it

was Claimant‘s legitimate and absolutely realistic expectation that it has to comply only with

the law in force at the time of signing the Agreement. It appears that Respondent suddenly

decided that its law was insufficient to fully compensate the effects of the oil leak and

amended OPA solely to change the legal situation of one subject, namely Claimant.

Consequently, the new law cannot constitute the ground for Claimant‘s liability in the case at

hand.

88.Furthermore Respondent violated Claimant‘s legitimate expectation as to the disclosure of

information included in the Report60

. The information contained therein concerned

circumstances of the explosion which caused the oil leak. The report also contained

information on the process of removal of the sea pollution. The confidentiality of the

abovementioned information was protected by the international law, namely by the TRIPS.

Both Freedonia and Sylvania are members of WTO61

and, therefore, are bound by the

provisions of TRIPS, which are aimed to establish equal conditions of commercial activity in

all WTO Member States.

89.TRIPS requires all WTO Member States to comply with the minimal standard of

protection concerning intellectual property, including security of undisclosed information.

Article 39(2) of TRIPS establishes rules concerning the protection of confidential

information, commonly known as ―trade secret‖. This Article defines trade secret under few

conditions as follows:

58


Uncontested Facts, ¶¶10-14. 60


Clarifications 2, Q. 70.

20

“(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly

of its components, generally known among or readily accessible to persons within the circles

that normally deal with the kind of information in question;

(b) has commercial value because it is secret; and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in

control of the information, to keep it secret.‖

90.The information which became available by the publication of the confidential report, had

the value of trade secret protected by the TRIPS for the following reasons.

91.Firstly, prior to the day of publication, information included in the report were known only

to Claimant and to the Sylvanian government, therefore if any third party acquired the

information, it had to be due to a disclosure by one of the Parties.

92.Secondly, those pieces of information covered the details of all circumstances directly

related to the commercial activity of Claimant that was conducted on Respondent‘s territory.

Those information included data on the quantity of the oil that leaked and on the estimated

time Claimant needed to remove the pollution. Such information had significant influence on

all aspects of Claimant‘s commercial activity, not only conducted on the territory of the

Respondent, but also carried out all over the world.

93.Claimant submitted the data to Respondent as the information were supposed to be

protected by the confidential nature of the special report62

. Claimant fulfilled its obligations of

confidentiality and at the same placed trust in Respondent with regard to this matter.

Respondent violated Claimant‘s legitimate expectations either intentionally or by its

negligence, which resulted in publication of the report in the national press. The leak of the

report was contrary to honest commercial practice which is defined in TRIPS as ―breach of

confidence‖ of the party entitled to the protection of trade secrets.

94.It has to be reiterated, that the disclosure of the report caused acquisition of confidential

information by the third parties. Such a disclosure has heavily and adversely influenced

Claimant‘s relations with its business partners all over the world.

95.Due to the all above-mentioned reasons, Respondent failed to observe Claimant‘s

legitimate expectations and should be held liable for it.

B.RESPONDENT TREATED CLAIMANT IN AN ARBITRARY AND

DISCRIMINATORY MANNER

96.It is established by the tribunals that non-arbitrariness and non-discrimination are essential

elements of the fair and equitable treatment standard63

. Protection from unjustified and

62


Waste Management ¶98; CMS ¶259.

21

discriminatory measures is also provided in the present case, specifically by Article 2(3) BIT

which reads:

“The Contracting Parties […] shall in no way be subject to unjustified or discriminatory

measures”.

According to ELSI, arbitrariness is:

“[a]n act which shocks, or at least surprises, a sense of juridical propriety”.64

97.In the present case, Respondent acted arbitrary by seizing the oil wells and suspending

Claimant‘s license in the Executive Order. Moreover, its decision to change law retroactively

was a discriminatory measure. As Respondent was prohibited from such acts under the BIT

aforementioned provision, Claimant‘s claims in the present case shall be heard.

98.Firstly, the problem of the seizure of the wells shall be covered, as it occurred without any

notification, on the alleged reason to “undertake necessary remedial work”65

. Prior to this

event, Respondent for over a year chose neither to step in directly, nor to help Claimant in any

other way with removing the consequences of the leak. Respondent did not react even after

Claimant first prognosis appeared to be wrong and six months were not enough to stop the

leak66

. Moreover, Claimant still was allowed to manage the wells long after the gusher was

sealed.

99.Claimant‘s personnel were suddenly forced to surrender the oil wells to a newly created,

Respondent-owned NPCS teams67

. Surprisingly, the wells were seized one week after an

NGO – Clean Sylvanian Environment started to lobby for the expropriation of Claimant‘s

investment and falsely accused FP of incompetence and failure to remedy the leak68

. It

remains unclear what interest lies behind CSE‘s acts, as it is indeed a non-profit organization,

however was funded and is financially supplied by Sylvanian seafood companies69

.

These measures were unexpected by Claimant, as it took all the effort to remedy the oil leak

already before the take-over.70

100.Secondly, Respondent acted arbitrarily by issuing the Executive Order which suspended

Claimant‘s license. The Order was issued for a different reason than provided for, as there

was no need to address the emergency anymore. Respondent-owned NPCS took over the

64

ELSI ¶128. 65

Uncontested Facts, ¶ 23. 66


Clarifications1, Q. 32. 68


Ibidem. 70


22

wells after the damaged wells had been already sealed71

. The danger was therefore obviated.

Hence, Respondent misused its police powers and helped itself with a government-controlled

entity to deprive Claimant of the Investment. Such conduct clearly clashes with the principle

of non-arbitrariness.

101.Lastly, the decision to change the OPA after the oil leak was certainly a discriminatory

measure towards Claimant. The amended law introduced new provisions regarding damages

in the event of an oil pollution72

. Claimant was the only investor in the Medanos Field and the

only entity besides Respondent which had contact with the oil spill. Taking these facts into

consideration, there is no doubt that this kind of change of law concerned Claimant

exclusively. As imposing such extensive obligations on just one single entity is definitely

discriminatory, Respondent breached its obligations.

102.In light of the above, the decisions to suspend the license, take over the oil wells and

burden Claimant with extensive financial liability were not aimed at security of Respondent‘s

environment and were therefore, arbitrary and discriminatory.

III.RESPONDENT UNLAWFULLY EXPROPRIATED CLAIMANT’S INVESTMENT

103.In the case at hand, Respondent deprived Claimant of its investment unlawfully and

indirectly. According to the provisions of the binding BIT, Respondent was not allowed to

expropriate the Investment. The very purpose of the Investment was for Claimant to earn

reasonable profit and for Respondent to experience the benefits of expertise, know-how and

development of new industries and markets. Claimant was the only company, which was

sufficiently specialized and willing to take part in the bidding process for a right to

exploration of the Medanos Field73

. Nevertheless, after granting Claimant the license,

Respondent still failed to observe basic principles set forth in the BIT. In light of the fact that

Claimant was protected from all forms of expropriation under the BIT (A), Respondent

unlawfully expropriated Investment by suspending the license and seizing the oil wells (B).

A.CLAIMANT WAS PROTECTED FROM ALL FORMS OF EXPROPRIATION

UNDER THE BIT

104.Article 1 BIT stipulates that the term „investment‖ shall be construed to mean every asset

that an investor owns or controls, directly or indirectly. Article 1(2)(e) BIT states that the term

―investment‖ includes particularly:

71

Clarifications2, Q. 49. 72



23

“any right of a financial nature accruing by law or by contract and any license, concession or

franchise [...][emphasis added]‖

Clearly, the license for exploration and drilling in the Medanos Field falls within the scope of

the above-mentioned provision. Further, performing of the rights under the license would not

have been possible without actual control over the oil wells. Hence, both of these rights

altogether constituted the Investment which was unlawfully expropriated by Respondent.

105.Claimant‘s investment was protected from all forms of expropriation under Article 4(1)

BIT which provides that:

“The Investments to which this Agreement relates shall not be subject to any measure which

might limit permanently or temporarily the Investor‟s ownership, possession, control or

enjoyment […]”

Moreover, according to Article 4(2) of the BIT:

“Investments or Investors of one of the Contracting Parties shall not be directly or indirectly

nationalized, expropriated, requisitioned or subjected to any measure having similar effect

[…]”

106.In light of the abovementioned provisions, Claimant‘s license was protected from all

forms of expropriation under the BIT. Therefore, Respondent shall be held liable for the

unlawful expropriation conducted in the case before this Tribunal.

B.RESPONDENT EXPROPRIATED CLAIMANT BY SUSPENDING THE LICENSE

107.In the case at hand, Claimant‘s Investment was expropriated indirectly. In order to

determine whether indirect expropriation occurred, two factors shall be verified most

carefully: scale of government interference in the rights of the investor (i) and its duration (ii).

In the present case both factors were excessive enough for proving an indirect expropriation

on the part of Respondent.

i.RESPONDENT INTERFERED WITH CLAIMANT’S RIGHTS EXCESSIVELY

108.It is the effect of governmental conduct that matters in determining if indirect

expropriation occurred, and not whether the state expressly proclaims its intent to

expropriate74

. This is also compatible with the ―sole effect doctrine‖ corroborated in Starrett

Housing v Iran:

“it is recognized in international law that measures taken by a State can interfere with

property rights to such an extent that these rights are rendered so useless that they must be

deemed to have been expropriated, even though the State does not purport to have

expropriated them [...]”75

74

Reisman, ch. II A. 75

Starrett Housing ¶154.

24

109.Respondent issued the Executive Order suspending Claimant‘s license on the grounds of

the alleged national security interest. However, at the point of suspending the license, there

was no danger of further damage to the environment76

. By suspending the license Claimant

was deprived of the enjoyment and economic benefits of Investment. Claimant‘s personnel

lost control over the oil wells77

. Following the ITT case, a governmental interference amounts

to expropriation if it denies property owners “fundamental rights of ownership, use,

enjoyment or management of the business”. This approach is also confirmed by Tippetts78

.

110.Hence, indirect expropriation occurred as Respondent‘s interference was so excessive as

to deprive Claimant of its economic rights.

ii.RESPONDENT’S INTERFERENCE WAS LASTING

111.In order to exclude indirect expropriation, Respondent has to prove that the government‘s

interference was ―ephemeral‖79

. This is not the case herein, as Claimant‘s deprivation of

rights was lasting. Claimant agrees that assessment whether duration of state‘s interference

was excessive should be made on a case-by-case basis. However, Executive Order did not

provide any time limit of suspension. Already prior to the take-over, mostly cleanup work was

left to be done80

and Claimant took all efforts in remedying the consequences of the leak. In

light of these facts, a condition of presenting “a plan acceptable to the Sylvanian government

to curtail and remedy the damage caused by the Medanos Field Oil Spill”81

remained

incoherent.

112.Furthermore, in S.D. Myers v. Canada, the NAFTA Tribunal stated that:

“in some contexts and circumstances it would be appropriate to view a deprivation as

amounting to an expropriation even if it were partial and temporary”.

113.Claimant‘s license has been suspended for almost a year to this date. It was established by

various tribunals that interference, which lasts for about one year or even less is not

ephemeral82

.

114.In light of the above, indirect expropriation of Claimant‘s investment occurred in the

present case.

76



Tippetts ¶225. 79

OECD Paper 1, p.14. 80

Clarification 2, Q. 49. 81

Executive Order Section 1. 82

Middle East Cement ¶107; Wena Hotels ¶ 99.

25

C.THE EXPROPRIATION DOES NOT MEET THE LEGALITY CRITERIA

115.Expropriation carried out by Respondent was unlawful. Article 4(2) BIT provides for the

following legality criteria of expropriation, which have to be fulfilled cumulatively:

“[e]xcept for public purposes, or national interest, against immediate full and effective

compensation, and on condition that these measures are taken on a non-discriminatory basis

and in conformity with all legal provisions and procedures.”

In the case at hand, at least the first two criteria were not complied with. The license

suspension was not based on the grounds of public purpose or national interest (i). Secondly,

Respondent failed to provide Claimant with immediate, full and effective compensation (ii).

i.THE PUBLIC PURPOSE REQUIREMENT WAS NOT COMPLIED WITH

116.Expropriation of Claimant‘s license rights was not carried out for public purpose.

Respondent cannot argue that it had to protect its environment, as it will be explained later.

However, at this point Claimant indicates that “the damaged wells were sealed [...] long

before the government officially transferred management of the wells to NPCS on 29

November 2010.”83

Clearly there was no need to take over in order to prevent further damage.

What is more, Respondent failed to directly react on the oil leak for a year and a half. Then,

crushed by the public pressure, inter alia NGOs84

, decided to expropriate the investment

without any notification. Claimant took excessive part in sealing of the damaged wells85

,

therefore any argument that it was negligent shall not be heard. It is wrongful to believe that

Respondent took measures to protect its national security so late. By the time the measures

were enacted, the alleged crisis has passed. In light of the above, Respondent decided, under

public pressure, to shift entire liability for the leak on Claimant, and such conduct has no

factual grounds86

.

117.Therefore, the public purpose legality criterion of expropriation was not fulfilled in the

present case.

ii.RESPONDENT FAILED TO PAY FULL AND EFFECTIVE COMPENSATION

118.The very concept of compensation is to reimburse the investor for losing its benefits of

the investment. Also in cases of expropriatory environmental measures, as allegedly in the

present case, it is the state‘s obligation to pay compensation87

.

119.In the case at hand, Respondent deprived Claimant of its benefits of the investment,

however failed to compensate it. Not only did Respondent breach its obligation to compensate

83





Santa Elena; Muchlinski, p.436.

26

but also burdened Claimant with excessive damages by eliminating the liability cap. Such

actions cannot be seen as conducted in good faith. Respondent was pressured by the public

opinion and despite Claimant took all possible measures in order to remedy the consequences

of the oil leak, decided to treat Claimant unfairly. In the Phelps Dodge case88

, where the

management transfer of the investment occurred, the tribunal stated:

“The Tribunal fully understands the reasons why the respondent felt compelled to protect its

interests through this transfer of management, and the Tribunal understands the financial,

economic and social concerns that inspired the law pursuant to which it acted, but those

reasons and concerns cannot relieve the Respondent of the obligation to compensate Phelps

Dodge for its loss”.

120.In light of the above, Respondent is liable to pay full and effective compensation and

cannot escape this obligation by invoking the public purpose excuse.

IV.RESPONDENT IS NOT ENTITLED TO RELY NEITHER ON ARTICLE 9 BIT,

NOR ON THE CUSTOMARY INTERNATIONAL LAW CONCEPT OF THE STATE

OF NECESSITY

121.Respondent cannot invoke essential security clause contained in the Article 9 BIT. It is

also precluded from hiding behind the shield of the defense of necessity, enshrined in the ILC

Articles.

122.Security clause constitutes a carve-out in state‘s obligations towards the investor under

the investment treaty. If the essential security clause applies, there is no breach of the treaty.

Therefore, the invocation of Article 9 BIT shall be considered by the Tribunal in first place as

it is a primary rule of law.

123.In the present case, Respondent did not fulfill the prerequisites necessary for the

invocation of Article 9 BIT security clause (A) and is prohibited from relying on the

customary international law necessity defense (B).

A.RESPONDENT CANNOT RELY ON ARTICLE 9 BIT AS A JUSTIFICATION FOR

ITS ACTS

124.Respondent‘s efforts to rely on Article 9 BIT are futile, as the invocation of Article 9 BIT

cannot be conducted at will, since its self-judging character is subject to a good faith test.

125.Moreover, in order to be considered necessary, actions undertaken by the state have to

contribute to a sought goal. Respondent failed to fulfill both prerequisites in the case at hand.

According to Article 9 BIT:

88

Phelps Dodge ¶ 130.

27

“Nothing in this Agreement shall be construed to: (...) 2. to preclude a Party from applying

measures that it considers necessary for the maintenance or restoration of public order(...) or

the protection of its own essential security interests.”

The language of this article indicates that this clause has a self-judging character. Self-judging

exceptions are by nature prone to being abused, hence this Tribunal shall not hesitate to

embrace narrow and restrictive approach to their interpretation. This notion has gathered

significant support among international tribunals89

. Therefore, the host states are required to

act in good faith in order to avail themselves of the essential security exception.

126.According to respected commentators ―the good faith‖ test should include two elements:

firstly, whether the state has engaged in honest and fair dealing and secondly, whether there is

a rational basis for the assertion of the national security exception‖90

.

127.Additionally, in Brazil-Tyres it was decided that a measure cannot be considered

necessary if it does not contribute to the achievement of its objective. The WTO case is

relevant in this case, as Article XX GATT was used as a prototype for the creation of modern

security exceptions. Therefore, as suggested by notable scholars applicable interpretive

principles drawn from WTO jurisprudence on Article XX GATT shall be considered carefully

by investment law tribunals91

.

128.The Tribunal should refuse to relief Respondent on the basis of Article 9 BIT as

Respondent invoked the security clause in bad faith, knowing that there is no rational basis its

assertion (i). Respondent also forfeited the right to rely on Article 9 BIT, since measures were

applied in unfair manner (ii). Moreover, measures chosen by Respondent did not contribute to

alleviation of the leak effects (iii), what rendered them absolutely unnecessary.

i. THE NATIONAL SECURITY INTEREST OF RESPONDENT WAS NEVER

THREATENED

129.Respondent may not rely on the security clause as its national security interest in the

present case was not endangered.

130.Article 9 BIT does not provide a definition of ―an essential security interest‖. Therefore,

it may be construed on a case law basis, which provides that the interest of a state must be

severely endangered in order to apply essential security clauses. Among dozens of cases

regarding invocation of security exception, only in two, LG&E and Continental92

, the states

were allowed to invoke that instrument. Argentina was only two times allowed to rely on

89

Canfor; Enron ¶ 331. 90

Burke/White, p.379. 91

Newcombe/Paradell, p.15 92

LG&E; Continental

28

essential security exception, although it experienced ―the near-collapse of the domestic

economy; (…) the real risk of insurrection and extreme political disturbances.‖ At the same

time, even the above mentioned facts were still not enough for multiple tribunals to consider

such an economic crisis as a state of necessity93

. In the case at hand, Respondent was not at

the verge of collapse and situation was under control, thus it did not have a basis to claim its

national security interest threatened.

131.In the case at hand, the sole fact of regulating the situation of an oil discharge in the

Agreement94

proves that both parties were conscious that oil leaks occur from time to time

and may be severe enough to require immediate reaction and further remedial process. As was

expressed by the Enron tribunal:

“object and purpose of the Treaty is, as a general proposition, to apply in situations of

economic difficulty and hardship that guarantee the protection of the international

guaranteed rights of its beneficiaries.”

132.Claimant does not contest that the aftermath of the leak has to be controlled and

alleviated, but it has to be born in mind that the leak was already sealed when the wells were

taken over and as pointed out further, the amount of oil was not that significant as represented

by Respondent.

ii. RESPONDENT FORFEITED THE RIGHT TO RELY ON ARTICLE 9 BIT, SINCE

MEASURES WERE APPLIED IN AN UNFAIR WAY

133.Claimant was particularly interested in sealing the leak and mitigating its effects, since

besides financial and humanitarian reasons, continuing leak harmed company‘s international

reputation. Therefore, the special emergency response team was immediately mobilized to

work not only on sealing the wells, but already mitigating its effects95

. Claimant had been

battling the leak for 18 months and spent significant amount of money on these attempts.

Finally, with certain help from Sylvania, the leak was sealed and all that remained was a

cleanup and remedial work, conducted by Claimant96

.

134.Nevertheless, on 29 November 2010, without any notification, Respondent took over the

wells.

135.As explained above, leaks are detrimental but also an inherent part of oil exploration

business. However, the complicated reality of crude oil exploration industry may not be easy

to understand by affected society. As citizens‘ outcry begins to increase, state needs a

93

Cf. CMS. 94




29

scapegoat to blame and punish, what happened in the case at hand. Respondent bent under

social pressure unlawfully took over already sealed wells, as an effort to restore and

strengthen its political position.

136.The principle of good faith requires also the honest and loyal exercising of every right97

.

In the case at bar, Respondent acted disloyally to Claimant. Although they both suffered

financial harm because of unexpected explosion, Respondent breached its FET obligations

and retroactively enacted new laws, as an effort to prepare grounds for shifting the burden of

responsibility and extracting as much money as possible from Claimant98

. Claimant never

tried to escape responsibility and had continued to battle the leak until the gusher became

checked. Nonetheless, part of its wells was expropriated without notification and the license

was suspended.

137.It is puzzling why Respondent asks for a remedy plan simultaneously with the sudden

expropriation of Claimant‘s wells, as such a plan was already prepared and being

implemented from outset99

. The explanation comes with the expression used by the President

in Executive Order, namely ―acceptable to the Government‖. Claimant is in fact being forced

to agree to the amount of unlawfully risen compensation for damages imposed by the new Oil

Pollution Act.

iii. MEASURES CHOSEN BY RESPONDENT WERE UNNECESSARY, AS THEY

DID NOT CONTRIBUTE TO ALLEVIATION OF THE LEAK EFFECTS

138.The quality, which absolutely disqualifies measure as necessary, is a lack of contribution

to the achievement of action‘s objective. As defined in Brasil-Tyres case: “contribution to the

achievement of the objective must be material, not merely marginal or insignificant”.100

In this situation an alleged objective was to remedy the results of leak. According to

Executive Order, the wells were taken over until ―Freedonia Petroleum S.A submits a plan

acceptable to the Government to curtail and remedy the damage caused by the Medanos Field

Oil Spill‖101

.

139.Transferred management of the wells did not contribute to the alleviation of the oil leak

effects. Once the worst moments were behind as successful cooperation of Claimant and

Respondent brought an end to the crisis, there were no indications that further cooperation in

97

Ibidem. 98

Uncontested Facts ¶¶12-13. 99


Brasil-Tyres, ¶ 210 101

Executive Order, section 1.

30

remedying the leak would be unsuccessful. State could have easily pursued its goal of

applying the effective remedy, if the wells were under the management of the Claimant.

140.Finally, the State even exacerbated the situation by passing the management of the wells

to the NPCS in such a sensitive moment. NPCS was created on 30th

August 2010 and took

over the wells on 29th

November 2010. Claimant expresses its doubts whether a corporation

with 3-month experience will be able to further battle the situation more efficient than an

experienced and technologically advanced entity as Claimant.

141.This Tribunal shall dismiss the defense of essential security clause, as the means

undertaken by Respondent were unnecessary, unreasonable and detrimental to Respondent‘s

interest.

B.THE WRONGFULNESS OF RESPONDENT’S ACTS CANNOT BE PRECLUDED

ON THE BASIS OF CUSTOMARY INTERNATIONAL LAW OF NECESSITY

142.It is undisputed that elements of customary international law concept of necessity are

correctly enshrined in ILC Articles. The Articles point out what elements shall be

cumulatively satisfied to allow a state to invoke the defense of necessity. In the case at hand,

there was no grave or imminent threat to Respondent‘s essential interest (i), the measures

taken were not the only way to protect the essential interest against the alleged peril (ii) and

Respondent has contributed to the situation of alleged necessity (iii).

i.THERE WAS NO GRAVE OR IMMINENT THREAT TO RESPONDENT’S

ESSENTIAL INTEREST

143.Respondent‘s confidential reports stated that the leak may “become an unchecked gusher

shooting millions of gallons of oil per day into the Gulf”102

. It is arguable if such continuously

shooting gusher of oil may be considered a grave and imminent threat to State‘s essential

interest, especially as leak remained minor in comparison to the forecasts, and State is barely

in the middle of cleanup process. The wells were taken over at the end of November 2010,

long after the leak was sealed, what precludes Respondent from claiming that it expropriated

Claimant‘s investment to thwart any imminent threat.

144.Therefore, claiming that such circumstances may constitute a threat to the very existence

of Respondent or its essential interest is an overstatement, especially in the context of famous

oil-caused calamities that our civilization went through.

102

Uncontested Facts ¶9.

31

ii.THE MEASURES UNDERTAKEN WERE NOT THE ONLY WAY TO PROTECT

ESSENTIAL INTEREST AGAINST ALLEGED PERIL

145.Existence of other ways to protect essential interest is conspicuous in the case at hand.

Cooperation is the primary solution that comes to mind.

146.Respondent seems to omit the fact that the success in sealing the leak was a combined

effort of State‘s and Claimant‘s scientists and workers. What is more, the exposure of the leak

was detrimental for Claimant in terms of international reputation. Therefore, the fast

regeneration of Sylvanian‘s fauna and flora is a priority to Claimant and any offer of help

would be gladly accepted. Unfortunately, despite being aware of how serious the situation is,

Respondent never assisted Claimant in its efforts to alleviate the effects of the leak before the

expropriation.

147.Claimant acknowledges that the precise assessment of the means used is not always

possible and shares this reasonable view with multiple renowned tribunals103

. However, in the

case at hand, the circumstances were not pressing and the means chosen were unreasonably

restrictive in comparison to the contribution they brought to the achievement of the objective.

Such lack of balance deprives the measures applied of the quality of being necessary104

.

iii.STATE HAS CONTRIBUTED TO THE SITUATION OF NECESSITY

148.It is well-recognized that state can contribute to situations of necessity either by its acts or

omissions. It has been confirmed by the Gabˇcíkovo-Nagymaros Project105

tribunal, which

stated that Hungary is forbidden from invoking the defense of necessity because it contributed

by ―acts or omissions‖ to situation it found itself in. According to the Commentary on ILC

Articles, the contribution has to be sufficiently substantial and not merely incidental or

peripheral106

.

149.Assuming that situation was allegedly as severe as Respondent contends, it should have

intervened in the moment it came to the conclusion that ―FP is incompetent and its efforts are

abject‖107

. However, Respondent had not intervened for eighteen months. If Respondent had

stopped the leak much earlier, the size of calamity would be today much different and, as a

result, there would be no need to declare a state of emergency. Therefore if Respondent had

enough knowledge and power to seal the leak, but for any reason abstained, it significantly

contributed to the calamity. On the other hand, if Respondent and NPCS are incapable of

103

Continental, ¶ 181 104

See Brazil-Tyres, supra note 80 105

Gabˇcíkovo-Nagymaros, ¶57. 106

Commentary on ILC Articles, p.84 107

Uncontested Facts ¶9.

32

alleviating the effects, then the wells were taken over in bad faith and means applied cannot

contribute to the accomplishment of sought goal.

150.Therefore, regardless of Respondent‘s actual capabilities, the fact remains that it cannot

invoke any defense to exempt itself from responsibility for breaching its international

obligations.

V.THIS TRIBUNAL SHALL TAKE MEASURES IN ORDER TO PROTECT

CONFIDENTIALITY OF PRESENT PROCEEDINGS

151.In order to protect confidentiality of the present proceedings, this Tribunal shall prevent

Respondent from disclosing confidential information (A) and reject amicus curiae brief

submitted by CSE (B). Such acts are necessary to ensure equal treatment of the parties and

protect their legitimate interests.

A.THIS TRIBUNAL SHALL TAKE MEASURES UNDER ARTICLE 20(7) ICC

RULES TO PREVENT RESPONDENT FROM DISCLOSING CONFIDENTIAL

INFORMATION

152.Claimant requests this Tribunal to order Respondent not to disclose confidential

information concerning the present case. Pursuant to Article 20(7) ICC Rules, Tribunal is

empowered to issue such an order. The issuing of such order will also protect Claimant‘s

interests which were previously threatened by disclosure of confidential information.

153.In the case at hand, conduct of Respondent justifies request for Tribunal‘s order. On 29th

September 2009, the leading Sylvanian newspaper, La Reforma, posted excerpts from the

report prepared by the Sylvanian Government108

. Those excerpts were extremely unfavorable

to Claimant, as they blamed it solely for the oil spill. Although it is unknown how La Reforma

gathered confidential information, this incident indicates that Respondent is at least negligent

in protecting information concerning the oil spill. Another example of Respondent‘s attitude

towards confidentiality of proceedings is disclosure of the written pleadings to CSE – a non-

governmental organization dealing with protection of environment109

.

154.This Tribunal is empowered to protect confidential information by virtue of the ICC

Rules. The principle of confidentiality is embodied in Article 20(7) of ICC Rules, according

to which:

“The Arbitral Tribunal may take measures for protecting trade secrets and confidential

information.”

108



33

The notion of ―confidential information‖ is not defined in the Rules, however it is sufficiently

broad to include documents produced for the purpose of the arbitration itself, such as

pleadings or other information relating to the arbitration or even its existence110

.

Consequently, all information gathered by La Reforma and disclosed by Respondent to CSE

could be a subject of Tribunal‘s order.

155.The disclosure of confidential information is an act detrimental to Claimant. Publishing

excerpts from the report by La Reforma contributed to public outcry and led to amendments to

OPA, which were passed ―under considerable public pressure.‖111

Those amendments were

unfavorable to Claimant and constituted a first step to the expropriation of Claimant‘s

Investment.

156.The disclosure of pleadings to CSE could also result in violating Claimant‘s interests,

since acts of CSE were aimed at the expropriation of Investment. On 22 November 2010 CSE

demanded that Sylvanian Government take urgent action in order to remedy the spill112

. The

Government Responded by taking over the wells on 29 November 2010113

. CSE demanded

urgent action, although oil leak had been stopped long before 29 November 2010114

. Those

facts show that CSE played key role in the expropriation. Therefore, this Tribunal shall

prevent disclosure of confidential information to an entity whose conduct exacerbated the

dispute at hand.

157.The aforementioned reasoning is endorsed by the Biwater case. It was found that public

discussion concerning the subject of the case cannot be used as “an instrument to further

antagonize the parties, exacerbate their differences, unduly pressure one of them or render

the resolution of the dispute potentially more difficult”115

. Hence, Tribunal‘s order preventing

disclosure of confidential information is necessary to evade such consequences.

B.THIS TRIBUNAL SHALL REJECT AMICUS CURIAE BRIEF AND CSE’S

REQUEST TO BE HEARD AS A NON-DISPUTING PARTY

158.The CSE‘s request to be heard as non-disputing party and its amicus curiae brief shall be

rejected. The conduct of CSE contributed to the commencement of the present dispute and its

participation will result in discrimination of Claimant.

110

Derains/Schwartz, p. 285. 111





ICSID Case No.ARB/05/22, ¶149.

34

159.CSE contends that it is funded by several Sylvanian nationals and domestic agricultural

and seafood companies. This information can be found only on CSE‘s website116

and in the

amicus curiae brief117

. However, there is no evidence from third-party supporting such a

contention.

160.As it was stated in ¶156, CSE played active role in the expropriation. In its amicus curiae

brief CSE supports Respondent‘s position against Claimant118

. The conduct of CSE prior to

the commencement of the dispute indicates that it did not perform any act detrimental to

Respondent. Neither in the amicus curiae brief CSE raised any arguments which do not

support Respondent‘s contention. In fact, CSE fiercely defended the revision of the OPA119

and taking over of the wells120

. Those acts amounted to the expropriation of Claimant‘s

Investment.

161.Consequently, the aforementioned facts prove that CSE have always supported

Respondent. Given that there are no objective evidence stating that CSE is independent from

Respondent, this Tribunal shall be aware that the allowance of CSE to the present proceedings

will lead to the discrimination of Claimant. In that case Respondent‘s contentions would be

present by two entities, whereas only Claimant would bear the burden of presenting its case.

162.The risk of unfair treatment which could result from the allowance of third party was

described in the Methanex case. It was held that it is tribunal‘s obligation to evade such a risk,

even at the expense of rejecting amicus curiae brief121

.

163.To sum up, equal treatment of the parties can only be attained by rejection of amicus

curiae brief and issuing of the preventive order. Only equality of the parties guarantee that

this Tribunal will pass an award which is both justified by the facts of the case and applicable

law.

164.In the light of all submissions, Respondent failed to accord Claimant fair and equitable

treatment. Furthermore, it unlawfully expropriated the Investment, hence has the duty of

compensation. Moreover, it is not entitled to rely on the exemptions of liability as its

essential security was not endangered and it itself contributed to the calamity. Lastly, the

Tribunal shall protect confidentiality of proceedings, since lack of confidentially amounts to

discrimination of Claimant.

116

Uncotested Facts, ¶22. 117

Amicus Curiae Brief, ¶2. 118




Methanex, ¶ 35-37.

35

PART THREE: PRAYER FOR RELIEF

165.In the light of all the above submissions, Claimant respectfully requests the Tribunal to

find that:

(1) The Tribunal has jurisdiction over the present dispute;

(2) Respondent‘s counterclaim is inadmissible;

(3) Respondent breached its obligations arising under Articles 2 and 4 BIT;

(4) Respondent is not entitled to exempt its liability on the basis of Article 9 BIT.

Respectfully submitted on 30 September 2011

by

GROS

on behalf of

FREEDONIA PETROLEUM LLC

ARBITRATION UNDER THE RULES OF … · Phelps Dodge Phelps Dodge International Corp. v The Islamic...

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Transcript of ARBITRATION UNDER THE RULES OF … · Phelps Dodge Phelps Dodge International Corp. v The Islamic...