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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
Uncontested Facts, ¶2. 23
Enron, ¶49. 24
CMS, ¶80. 25
Azurix, ¶90. 26
Schreuer, p. 248. 27
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
Schreuer, p. 288. 30
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
Uncontested Facts, ¶19. 37
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, ¶4. 49
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
Clarifications 2, Q. 49. 55
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, ¶14 59
Uncontested Facts, ¶¶10-14. 60
Uncontested Facts, ¶9 61
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
Clarifications 2, Q. 43. 63
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
Uncontested Facts ¶9. 67
Clarifications1, Q. 32. 68
Uncontested Facts ¶22. 69
Ibidem. 70
Clarifications 2, Q. 50.
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
Uncontested Facts, ¶11 73
Uncontested Facts, ¶3.
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
Clarifications 2, Q. 49. 77
Clarifications 1, Q. 32. 78
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
Clarifications 2, Q. 49. 84
Uncontested Facts ¶21. 85
Clarifications 2, Q. 49. 86
Clarifications 1, Q. 28. 87
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
Uncontested Facts ¶5. 95
Clarifications 2, Q. 50. 96
Clarifications 2, Q. 49.
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
Clarifications 2, Q. 50. 100
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
Uncontested Facts, ¶9. 109
Uncontested Facts, ¶33.
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
Uncontested Facts, ¶11. 112
Uncontested Facts, ¶22. 113
Uncontested Facts, ¶23. 114
Clarifications 2, Q. 49. 115
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
Amicus Curiae Brief, ¶1. 119
Amicus Curiae Brief, ¶10. 120
Amicus Curiae Brief, ¶11. 121
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