FOREIGN DIRECT INVESTMENT INTERNATIONAL
ARBITRATION MOOT
London Court of International Arbitration - LCIA
29 October - 1 November 2015
King's College London
MEMORIAL FOR RESPONDENT
VASIUKI LLC
Helios Boulevard 1100
2401 Ville-de-Ra
Federal Republic of Cogitatia
T +38 1 396 4800
F +38 1 396 4809
CLAIMANT
REPUBLIC OF BARANCASIA
Valhallavegen 2-4
1010 Gamla-Uppsala
Barancasia
T +29 1 8675309
F +29 1 8675300 [email protected]
RESPONDENT
26 September 2015
i
TABLE OF CONTENTS
INDEX OF ABBREVIATIONS .................................................................................................... IV
INDEX OF LEGAL SOURCES ................................................................................................... VI
INDEX OF AUTHORITIES ....................................................................................................... VII
INDEX OF CASES .................................................................................................................... XVII
STATEMENTS OF FACTS ............................................................................................................ 1
ARGUMENTS ON JURISDICTION ............................................................................................. 4
I. THE ARBITRAL TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE
DISPUTE.......................................................................................................................................... 05
A) THE COGITATIA-BARANCASIA BIT HAS BECOME OBSOLETE AND
CONTRADICTS THE UE PROVISIONS…............................................................................ 05
B) THE COGITATIA-BARANCASIA BIT WAS TERMINATED BY THE WILL OF
BARANCASIA GOVERNMENT............................................................................................. 06
II. THE AMENDMENT OF THE LRE DID NOT AMOUNT TO A BREACH OF THE
COGITATIA-BARANCASIA BIT................................................................................................ 07
A) THE AMENDMENT OF THE LRE DID NOT HARM FAIR AND EQUITABLE
TREATMENT NOR CLAIMANT’S LEGITIMATE EXPECTATIONS................................ 07
ARGUMENTS ON THE MERITS................................................................................................ 10
III. RESPONDENT’S ACTIONS ARE EXEMPTED FROM LIABILITY.............................. 10
A) THE UNIDROIT PRINCIPLES SHALL BE APPLIED...................................................... 10
B) THE ACTIONS OF BARANCASIA DID NOT HARM THE INVESTORS..................... 11
B.I) PARTIES FACED AN EVENT OF HARDSHIP AND REGOTIATION WAS
NECESSARY............................................................................................................................ 13
C) RESPONDENT ACTED IN GOOD-FAITH........................................................................ 15
IV. RESPONDENT SHALL NOT BE ORDERED TO RESCIND THE AMENDMENT OF
THE LRE NOR TO CONTINUE PAYING THE PRE-2013 FEED-IN TARIFF.................... 16
A) RESPONDENT CANNOT RESCIND THE AMENDMENT OF THE LRE...................... 16
B) CLAIMANT IS NOT ENTITLED TO THE PRE-2013 FEED-IN TARIFF……............... 17
ii
V. CLAIMANT’S BASIS FOR CLAIMING AND QUANTIFYING COMPENSATION ARE
NOT APPROPRIATE……............................................................................................................. 18
A) MR. MARKO KOVIC REPORT DOES NOT REFLECT THE REALITY FOR
COMPENSATION……….…………………………………………………………………... 18
REQUEST FOR RELIEF............................................................................................................... 21
iii
INDEX OF ABBREVIATIONS
§/§§ Paragraph/ Paragraphs
& And
App. Arb. Application for Arbitration
Arb. Arbitration
Art./Arts. Article/Articles
BIT Bilateral Investment Treatment
Cf. Compare
Claimant Vasiuki LLC
Co. Corporation
Ed. Edition
ICSID International Centre for Settlement of Investment Disputes
Incoterm International Commercial term
LLC Limited Liability Company
LRE Law on Renewable Energy
Ltd. Limited
Memo. for Cl. Memorandum for Claimant
Mr. Mister
No./Nos Number/Numbers
p. Page
Proc. Ord. Procedural Order
Req. Arb. Request for Arbitration
Respondent Republic of Barancasia
SoC. Statement of Claim
SoD. Statement of Defense
UNCITRAL United Nations Commission on International Trade Law
UNIDROIT Unidroit Principles of International Commercial Contracts 2010
v. Versus (against)
iv
INDEX OF LEGAL SOURCES
BIT Agreement between the Republic of Barancasia and the Federal
Republic of Cogitatia for the Promotion and Reciprocal Protection of
Investments
LCIA Rules London Court of International Arbitration Rules
LRE The Republic of Barancasia Law on Renewable Energy
NYC Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, New York (10 June 1958)
UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts
v
TABLE OF AUTHORITIES
AUTHOR CITATION
Born, Gary International Commercial Arbitration.
The Hague: Kluwer Law International, 2009
Cited as: Born
Cordero-Moss, Giuditta The relevance of the UNIDROIT Principles in
Behn, Daniel investment arbitration.
Oxford University Press, November, 2014.
Cited as: Cordero-Moss/Behn
Fouchard, Philippe/ On International Commercial Arbitration.
Gaillard, Emmanuel/ The Hague: Kluwer Law International, 1999
Goldman, Berthold Cited as: Fouchard/Gaillard/Goldman
Hanotiau, Bernard Arbitrability, Due Process, and Public Policy
under the Article V of the New York Convention.
Journal of International Arbitration
Available at:
http://www.kluwerarbitration.com/document.
aspx?id=ipn30692
Cited as: Hanotiau
Lew, Julian D.M./ Comparative International Commercial
Mistelis, Loukas A./ Arbitration.
Kroll, Stefan M. The Hague: Kluwer Law International, 2003.
Cited as: Lew/Mistelis/Kroll
MCILWRATH, Michael. International Arbitration and Mediation a
SAVAGE, John. Practical Guide.
vi
Kluwer Law and Business. The Netherlands, 2014.
Cited as: Mcilwrath/Savage.
Newcombe, Andrew Law and Practice of Investment Treaties:
Paradell, Lluís Standards of Treatment.
Kluwer Law International (2009)
Cited as : Newcombe/ Paradell
Redfern, Alan/ Law and Practice of International Commercial Hunter,
Martin Arbitration.
London: Oxford University Press, 1992.
Cited as: Redfern/Hunter 1992
Redfern, Alan/ International Arbitration.
Hunter, Martin/ London: Oxford University Press, 2009.
Blackaby, Nigel/ Cited as: Redfern/Hunter 2009
Partasides, Constantine
Schreuer, Christopher The ICSID Convention: A Commentary
2001.
Cited as: Schreuer
Schreuer, Christopher At What Time Must Legitimate Expectations
Kriebaum, Ursula Exit?
A Liber Amicorum: Thomas Walde—
Law Beyond Conventional Thoughts, Cameron
Publications (2009).
Cited as: Schreuer/ Kriebaum
vii
UNCITRAL UNCITRAL Digest of case law on the United
Nations Convention on the International Sale of
Goods.
Available at:
http://www.uncitral.org/uncitral/en
/case_law/digests/cisg.html
Cited as: UNCITRAL Digest
Vandevelde, Kenneth A Unified Theory of Fair and Equitable Treatment
New York University Journal International
Law & Politics (2010–11)
Cited as: Vandevelde
Wittich, Stephan Non-Material Damage and Monetary
Reparation in International Law”
Finnish YBIL (2004)
Cited as: Wittich
viii
INDEX OF CASES
International Chamber of Commerce:
Case No. 12171 November 2003
Cited as: ICC Case No. 12171
Case No. 10385 March 2002
Cited as: ICC Case No. 10385
Case No. 12111 January 2003
Cited as: ICC Case No. 12111
Case No. 9797 July 2000
Cited as: ICC Case No. 9797
Case No. 1512 1971
Indian Cement v. Pakistani Bank
Cited as: Indian Cement Case.
ICSID:
Case No. ARB/77/1 November 1979
AGIP S.p.A. v. The Government of the People’s
Republic of the Congo.
Cited as: AGIP v. Congo
Case No. ARB/74/3
ix
Kaiser Bauxite v. Jamaica.
Cited as: Kaiser Bauxite v. Jamaica.
Case No. ARB/03/18 November 2007
Aguas Cordobesas S.A., Suez, and Sociedad General de
Aguas de Barcelona S.A. v. Argentine.
Cited as: Suez.
Case No. ARB/01/8 May 2005
Company v. Argentine Republic.
Cited as: CMS Gas v. Argentine Republic.
London Court of International Arbitration:
Occidental v Ecuador July 2004
Occidental Exploration and Production Company v The
Republic of Ecuador
Cited as: Occidental v Ecuador.
1
STATEMENT OF FACTS
1. The parties to this arbitration are Vasiuki LLC (hereafter “Vasiuki” or the “CLAIMANT”)
and Republic of Barancasia (hereafter “Barancasia” of the “RESPONDENT”).
2. CLAIMANT is an LLC incorporated under the laws of Cogitatia in 2002, which has been
engaged in the development, construction and operation of renewable energy facilities in Cogitatia
and elsewhere in the region, including Barancasia, since 2001.
3. RESPONDENT is the Republic of Barancasia, a legal personality of international public law.
4. On 31 December 1998, the Republic of Barancasia (“Barancasia”) and the Federal Republic
of Cogitatia (“Cogitatia”) concluded an Agreement for the Promotion and Reciprocal Protection of
Investments (BIT);.
5. On 1 May 2004, Barancasia and Cogitatia joined the European Union (the “EU”);
6. On 15 November 2006, Barancasia announced its intention to terminate its Intra-
European BITs;
7. On 11 December 2006, the Government of Barancasia formally resolved to terminate all its I
ntra-EU BITs;
8. On 29 June 2007, Barancasia notified the Federal Republic of Cogitatia of its intention to im
mediately terminate the Cogitatia-Barancasia BIT;
9. On 28 September 2007, the Minister of Foreign Affairs of Cogitatia replied to Barancasia’s n
otification to terminate the BIT;
10. On 28 November 2008, Barancasia removed the BIT with Cogitatia from its Ministry of
Finance website, in particular, the section of the website listing valid and binding international
agreements;
11. In May 2009, Claimant purchased land plots in Barancasia and decided to launch an
experimental solar project, calling it “Alfa”;
2
12. On 1 January 2010, Claimant connected the project “Alfa” to the grid and became
operational;
13. In May 2010, Barancasia adopted the LRE, which aimed at encouraging the development of
renewable energy technology, improving security and diversification of energy supply, as well as
protecting the environment;
14. On 1 July 2010, the BEA announced publicly the fixed feed-in tariff: 0.44 EUR/kWh;
15. On 25 August 2010, Claimant’s application for a license for the Alfa project was rejected. On
the same date, Claimant successfully obtained a license with a guaranteed 0.44 EUR/kWh tariff for
its second photovoltaic project, Beta;
16. On 21 November 2010, a Barancasian Foreign Ministry spokesperson responded to a press
question about Barancasia’s approach for its Intra-EU BIT’s, stating that they had informally
contacted the Federal Republic of Cogitatia in order to confirm the termination of the BIT, but have
had no official response;
17. On 30 January 2011, Claimant’s Beta project became operational;
18. During 2011, a ground-breaking technology was developed making solar panels substantially
cheaper to manufacture and reducing the costs of development;
19. On 5 May 2012, the Prime Minister of Barancasia discussed the government’s success
terminating Intra-EU BIT’s. There is no record of any Cogitatian Government response or comment
to the interview;
20. In June 2012, outraged teachers of Barancasia organized national strikes demanding an increa
se of salaries and educational funding;
21. On 1 July 2012, Claimant’s obtained licenses from the BEA for the development of all 12
photovoltaic power plants with an approved 0.44 EUR/kWh feed-in tariff;
22. On 3 January 2013, Barancasia amended Article 4 of the LRE to provide for annual review
of the feed-in tariff. Subsequently, the BEA calculated and announced the new fixed feed-in tariffs:
0.13 EUR/kWh, applicable from 1 January 2013. By that time Claimant had made considerable
investments of its own and borrowed money into the 12 new solar power plants projects;
23. On 20 April 2014, Claimant notified Respondent of its dispute with Barancasia and of its
intention to pursue legal remedies under the BIT if this dispute was not resolved to Vasiuki’s
satisfaction. Respondent has declined negotiations;
24. On 20 February 2015, the Arbitral Tribunal issued the Procedural Order No 1;
3
25. On 20 June 2015, the Arbitral Tribunal issued the Procedural Order No. 2;
26. On 6 September 2015,the Arbitral Tribunal issued the Procedural Order No. 3;
4
ARGUMENTS ON JURISDICTION
I. THE ARBITRAL TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE
DISPUTE;
27. The LCIA tribunal constituted by request of Vasiuki has not jurisdiction over the dispute
because the offer to arbitration provided by article 8.d of Cogitatia-Barancasia BIT was not in force
at the time of the investment in Barancasia. The BIT had become obsolete due to the accession of
both Barancasia and Cogitate to the European Union and it is materially inconsistent with the
European Union Legal Order.
28. Furthermore, the BIT provides for a unilateral termination proceeding by a merely notification
to one party to the other. Barancasia has realized the notice of termination to Cogitate and it agreed
to the content of the notice.
29. Thus, the tribunal lacks jurisdiction over the present investment dispute because the BIT
became obsolete and contradict UE provisions and because it was duly terminated by the will o
Barancasia.
A. THE BARANCASIA-COGITATIA BIT HAS BECOME OBSOLETE AND
CONTRADICTS THE UE PROVISIONS;
30. The BIT between Barancasia and Cogitatia was concluded in 1998 and accordingly to article
13.1 should be in force to a period of ten years since its conclusions.
31. But in 2004, both Barancasia and Cogitatia joined the European Union [Statement of
Uncontested Facts, p.20, §5]. The EU has a specific provision that regulates its functions between
all of its members with generic and specific principles searching for a common standard of
treatment between its members.
32. After the joinder of Barancasia to the EU, it decided to reanalyze its Intra-European bilateral
treaties and concluded that they had become obsolete. By understanding that those BIT became
obsoletes due to the joinder, Barancasia decided to terminate the referred BIT’s on December 2006
5
[Statement of Uncontested Facts, p.20, §6] exactly to prevent that any impasse between the Treaty
on the Function of the European Union [TFEU] and any Intra-European BIT.
33. The TFEU provides on its article 207 that:
“The common commercial policy shall be based on uniform principles, particularly with
regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to
trade in goods and services, and the commercial aspects of intellectual property, foreign
direct investment, the achievement of uniformity in measures of liberalization, export policy
and measures to protect trade such as those to be taken in the event of dumping or subsidies.
The common commercial policy shall be conducted in the context of the principles and
objectives of the Union's external action.”
34. Article 207 of the TFEU provides a general and common standard of principles to be applied
between the members concerning series of subjects, including foreign direct investment, to preserve
equity of treatment between the members.
35. Any bilateral treaty made privately by two members of the EU could contradict uniform
principles stabilized by the TFEU. To avoid this matter, Barancasia, rightly, concluded that not only
Cogitatia-Barancasia BIT had become obsolete, but all of this Intra-European BIT’s.
36. One significant difference between the provisions of the BIT and the TFEU is in regard of one
of the objects of the present discussion: The jurisdiction to decide over compensation involving
regulatory measures of states.
37. Accordingly to the BIT parties could choose either courts proceedings or international
arbitration to decide over an investment dispute. In the other hand, accordingly to article 268 of the
TFEU, the International Court of Justice of the EU shall have jurisdiction relating to compensation
in relation to damages caused by institutions of one state.
38. In this sense, it is possible to see that provisions of the BIT and the TFEU could be
contradictory, and since both parties had become members of the EU, the TFEU should prevail over
the BIT.
39. Furthermore, since the EU already regulates business transactions and investments manners
between its members, there is no need for another treaty between single states, being proof that the
Cogitatia-Barancasia BIT had become obsolete. In that sense, this tribunal lacks jurisdiction
because of the fact that the TFEU should prevail over the BIT and the second is obsolete.
6
B) THE COGITATIA-BARANCASIA BIT WAS TERMINATED BY THE WILL OF
BARANCASIA GOVERNMENT;
40. Despite of the fact that the BIT provided for duration of ten years, it also provided for
unilateral termination mechanism by the mere notification of its intention to the other contracting
party.
41. In 2006, when Barancasia joined the EU and concluded that its Intra-European BIT’s had
become obsolete, the Government of Barancasia resolved to terminate all of them.
42. On 29 June 2007, Barancasia notified Cogitate of its intention to terminate the BIT, and on set
ember of the same year Cogitate replied Barancasia’s notification [Statement of Uncontested Facts,
p. 21, §9].
43. On Annex No. 7.2 of the records the ministry of foreign affairs of Cogitatia expressly
confirmed that he had received the notification of Barancasia about the termination of the
agreement for the promotion and reciprocal protection of investments concluded between the two
states.
44. This notification, by the light of article 13.2 of BIT, constituted the duly termination of the
treaty by the will of Barancasia and the notification of Cogitatia. In that sense, the termination of
the BIT was in September 28, 2007.
45. Furthermore, to analyze if this tribunal has or not jurisdiction over the dispute it is necessary
to determine when Vasiuki stated to invest in its photovoltaic project in Barancasia.
46. Vasiuki since 2007 was monitoring Barancasian legislative process and researching suitable
land plots in Barancasia for its investment, but only in 2009 Vasiuki purchased land plots for its
photovoltaic project.
47. Purchasing the land plots can not be considered as investment under the BIT because it had
not yet obtained the licensee of its projects. If Vasiuki had bought the land plots and did not get the
licensee it would be and investment frustrated solely by Vasiuki, without harm to Barancasia.
48. That is exactly the case at hands, the achievement of buying the land plots has no relation
with the 0.44E/kWh tariff, because it was made before the application for license.
49. Furthermore, the investment started in fact when Vasiuki obtained the license for its Beta
project in August 2010, and since then, Vasiuki’s investments could be understood as an investment
in Barancasia project.
7
50. However, in 2010 the BIT was not in force anymore, and Vasiuki could not have used its
resolutions of conflicts system.
51. In that sense, the offer of an LCIA arbitration contained in the BIT was not valid at the time
of investment and by lack of an arbitration agreement, this tribunal should consider that it has no
jurisdiction over the dispute to guarantee that a future award will not suffer annulment.
II. THE AMENDMENT OF THE LRE DID NOT AMOUNT TO A BREACH OF THE
COGITATIA-BARANCASIA BIT;
52. The measures taken by the government of Barancasia do not amount to a breach of the
Cogitatia-Barancasia BIT, mainly because the amendment of the LRE did not harm fair and
equitable treatment nor Claimant’s legitimate expectations (A).
A. THE AMENDMENT OF THE LRE DID NOT HARM FAIR AND EQUITABLE
TREATMENT NOR CLAIMANT’S LEGITIMATE EXPECTATIONS.
53. Claimant’s allegations that the amendment of the LRE constituted a breach of fair and
equitable treatment between the investor and the host state should not prevail in the present dispute.
54. First of all, the amendment of the law was not unreasonable and is valid since it reflected the
social and economic situation that Barancasia was suffering.
55. Barancasia, since its joinder to the EU tried to achieve the objectives of having renewable
energy projects and to make that achievement, it sought to draft the LRE to ensure sustainable
development of the use of renewable energy sources, promote further development and introduction
of innovative technologies [LRE, p.32, Article 1].
56. The same law also provided that the Barancasia Energy authority would announce the feed-in
tariff that would be applicable for the investors who obtained the license to development of their
projects and this license would apply for 12 years.
57. The law itself did not make any reference about the price of the fee-in tariff, but, the Republic
on Barancasia Regulation on The Support of Photovoltaic Sector [Annex no. 3. p. 34] has specifics
provisions on how the feed-in tariff should be calculated.
8
58. The regulation specifies that the feed-in tariff should be calculated taking into account a series
of factors like: average investment in equipment of the power plant; quantity of electricity
produced; Annual average capital cost; return of investments; expected income over the usage of
power plants and others.
59. Barancasia fixed the 0.44EUR/kHw by analyzing those factors, that were reasonable and
profitable at the time of issuing the project for the power plants.
60. Vasiuki got interest to the value of the tariff and got the license for the period of 12 years to
its photovoltaic project that its development was to be made in regard of solar panels.
61. But, during 2011, a ground-breaking technology was developed making solar panels much
cheaper to be manufactured [Statement of Uncontested Facts, p. 23, §25].
62. Because of that, the tariff of 0.44EUR/kHw got extremely profitable to any investor that
obtained the license and used the cheaper technology to develop solar panels. The case of Vasiuki
was not different, by taking advantage of the new technology decided to launch 12 more projects of
30kW, the limit of each project allowed for license according to LRE, for obtaining the referred
tariff.
63. Therefore, it is obvious that the 0.44EUR/kHw tariff would be extremely profitable to the
investor jeopardizing, so, the host state, that would have to make a bigger disposal of money for a
cheap investment of money.
64. Furthermore, the economic and social reality in Barancasia was of a general crisis which
encouraged strikes and public protests. One of the strikes made specific considerations about the
question of the solar panels, which made the Government of Barancasia promise to review its
legislation about the investments.
65. Because of that in 2013 the government decided to amend article 4 to the LRE stating that the
tariff fixed by Barancasia Energy Authority could be annually reviewed in concerning to the
development and usage of new available technology [Annex 4, p. 35].
66. In that sense, Barancasia reevaluated the tariff and decided to stabilize a new tariff that should
apply to all investments involving photovoltaic power plants on an amount of 0.15 EUR/kWh
67. Vasiuki alleges that this amendment harmed fair and equitable treatment between the investor
and the host stated and also violated its legitimate expectation because of the new feed-in tariff that
would apply to its case.
9
68. In this sense, the political situation in Barancasia was critical and it pleased for actions of the
government. The development of the new technology was an outside factor that gave reason to the
changing of the Barancasian Law.
69. Vasiuki thoughts that the old tariff would prevail during all the 12 years provided by the law
is inconsistent with a behavior of a business company since external factors are common in
international investments. Also, it is unreasonable to think that in regard of a development of a new
and cheaper technology the scenario of the investment would not change.
70. Therefore, if the old tariff would prevail it would lead to an unjust enrichment regarding the
investors. In that sense, Bishop and Crawford understand that most developed legal systems
recognize the doctrine of unjust enrichment. Some arbitral tribunals have decided investment cases
on the basis that the government was unjustly enriched by taking certain actions against foreign
investors. This doctrine is equitable in nature. It is doubtful whether the doctrine may be invoked as
an alternative to a breach of contract when an agreement exists1.
71. In that sense, the doctrine of unjust enrichment could be seen as a two way street, which is
most applied by the actions of the state, but in certain cases the investor can be the one who benefits
from an external action.
72. Therefore, since external factors gave ground to the amendment of the LRE, it was valid and
the 0.15EUR/KwH should prevail. Also, the amendment did not harm fair and equitable treatment
or legitimate exception of the investor since it would be extremely profitable to the investor in
detriment of the host state.
1 BISHOP, R. Doak. CRAWFORD, James. Foreign Investments Disputes: Cases, Materials and
Commentary. Second Edition. Kluwer Law international. p 16.
10
ARGUMENTS ON MERITS
I. RESPONDENT’S ACTIONS ARE EXEMPTED FROM LIABILITY;
73. Primarily, in order to determine the grounds for liability and considering that the BIT omitted
the law applicable, the UNIDROIT Principles shall be applied to the case (A). In this sense, the
measures of the Republic of Barancasia are exempted from liability since they did not harm the
investors (B), as parties where facing an event of hardship and a renegotiation was necessary (B.I).
Additionally, the Respondent acted in good-faith (C).
A. THE UNIDROIT PRINCIPLES SHALL BE APPLIED
74. UNIDROIT Principles shall be applied to the present case. This Tribunal shall look to
transnational principles as a measure to interpret and in order to fill the gaps of the BIT and the
domestic law of Barancasia. An illustration of these transnational principles can be seen in the
UNIDROIT Principles [ICC 10385 §73; ICC 12111; ICC 9797], which may be used to interpret or
supplement international uniform law instruments and domestic law2.
75. Also, according to the Rules of Arbitration of the LCIA, in the case the Arbitral Tribunal
finds the parties have not made the choice of the rules of law applicable to the merits of the dispute,
the Arbitral Tribunal shall apply the law(s) or rules of law which it considers appropriate3.
76. In this sense, this Tribunal shall apply the provisions established between the Republic of
Barancasia and the Republic of Cogitatia in the BIT and the UNIDROIT Principles as guidelines to
interpret such agreement.
77. Regarding the relevance of the UNIDROIT Principles to investment arbitrations, Professor
Cordero-Moss and Dr. Benh, state:
2 Unidroit Principles of International Commercial Contract 2010 – Preamble: “These principles set forth
general rules for the international commercial contracts. They shall be applied when the parties have agreed that their
contract be governed by them. They may be applied when the partied have agreed that their contract be governed by
general principles of law, lex mercatoria or the like. They may be applied when the partied have not chosen any law to
govern their contract. They may be used to interpret or supplement international uniform law instruments. They may
be used to interpret or supplement domestic law. They may serve as a model for national and international
legislators.” 3 LCIA Rules of Arbitration, article 22.3.
11
“In order to ascertain the role and relevance of the PICC in investment arbitration, it is first
necessary to look at the sources that regulate which law is applicable in investment
arbitration in general. An analysis of these sources will show that, to varying degrees,
investment arbitration is open to the application of sources such as ‘rules of law’ and
international law, independently or in combination with national law”4.
78. Applying transnational principles is consistent with the international source of the arbitrators’
powers. Arbitrators may apply transnational legal principles since they belong to no national legal
order and are therefore not bound to apply the substantive or choice of law rules of any one
jurisdiction [Fouchard, §443].
79. There is “a strong tendency in arbitral case law to examine the existence and validity of the
arbitration agreement exclusively by reference to transnational substantive rules, in keeping with
the transnational nature of the source of the arbitrators’ powers”5. In this regard, arbitrators may
apply any law or rule of law which they consider to be appropriate.
80. The application of the UNIDROIT Principles reflects the international practice as a
supplementation of the rules of law applicable and as an uniform interpretation method. In this
sense, in AGIP S.p.A. v. The Government of the People’s Republic of the Congo, the Tribunal
decided that the law applicable was the law of Congo, “supplemented if need be by any principles
of international law”6.
81. Such international practice is also reinforced in the Energy Charter Treaty, entered into force
on April 16, 1998, which provides: “A Tribunal established under paragraph 4 shall decide the
issues in dispute in accordance with this Treaty and applicable rules and principles of international
law.”7
82. In this sense, considering that the BIT signed between the states of Barancasia and Cogitatia
does not establish the law applicable and that the LCIA Rules determines that in such case the
Tribunal shall apply the law(s) or rules of law which it considers appropriate, it is Respondent’s
understanding that the UNIDROIT Principles provides the best source as general principles of law
and shall be applied as a rules of law in order to determine Respondent’s exemption in the present
case.
B) THE ACTIONS OF BARANCASIA DID NOT HARM THE INVESTORS;
4 Cordero-Moss/Behn, p. 03.
5 Fouchard §444 n.169 e.g. Indian Cement.
6 AGIP v. Congo e. g. Kaiser Bauxite v. Jamaica.
7 Energy Charter Treaty, Article 26(6).
12
83. In 2010, the development of renewable energy projects had a high cost and faced major
barriers to its expansion. Knowing this scenario, the government of Barancasia created the LRE in
order to attract investors by providing a state support in the development of renewable energy
sources. The LRE article 3 provides:
“Article - Duration of Support Measures: The feed-in tariff announced by the Barancasia
Energy Authority (“BEA”) and applicable at the time of issuance of a license will apply for
twelve years”.
84. From this article it is indeed possible to interpret that the government of Barancasia would
pay a feed-in tariff for investor who received a license during twelve year. However, at no moment
investors were made believe that this tariff would not change.
85. In fact, on the same day that the LRE was published, the Republic of Barancasia also
published the Regulation on the Support of the Photovoltaic Sector, which clearly provided the
grounds for the calculation of the tariff and which does not mention, at any time, that the feed-in
tariff would never be recalculated.
86. In particular, article 2 of the Regulation provides:
“Article 2. Calculation of the Fixed Feed-in Tariff:
The general fixed feed-in tariff should be calculated taking into account:
1) average investment in equipment of power plants and their connection to electricity
grids;
2) average annual quantity of electricity produced at power plants and submitted to
electricity grids per one unit of the installed capacity of a power plant;
3) the useful life of power plants;
4) the period of commissioning of power plants and allocation of investment during this
period;
5) the forecasted variable costs of operation of power plants, their variation over the
useful life of the power plants;
6) the duration of fixed feed-in tariffs specified by the Law;
7) annual average capital costs per one unit of the installed capacity of a power plant,
calculated on the basis of the necessary investment per one unit of the installed capacity of
the power plant;
8) the discount rate;
9) the ratio of a project’s own funds to borrowed funds;
10) return on investment of the producer’s own funds; 11) the interest on loans to be imposed by banks;
12) other expected income over the useful life of power plants, directly related to the
operation of a power plant;
13) the costs of balancing the production of electricity, if such costs are provided for.”
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87. Hence, investors were never led to believe that the feed-in tariff would never be recalculated
during the twelve year duration. On the contrary, since the beginning the government of Barancasia
made it clear that the general feed-in tariff should be calculated taking into account the return on
investment of the producer’s own funds and mainly the average investment in equipment of power
plant.
88. Therefore, Respondent’s actions did not harm the investors, since the reduction of the feed-in
tariff does not jeopardizes the continuation of the projects on renewable energy and does not break
with the legitimate expectations of any investor. The Republic of Barancasia kept the commitments
it has made, in particular the LRE and the state support through the feed-in tariff.
B.I) PARTIES FACED AN EVENT OF HARDSHIP AND REGOTIATION WAS
NECESSARY
89. During the first year the relationship between the Claimant and Respondent occurred without
further problems. However, a ground-breaking technology that was developed in 2011 making solar
panels substantially cheaper to manufacture and dramatically reducing the costs of development.
This new technology amounted to a substantial reduction of the development costs which meant
that the profitability of investments made under the 0.44EUR/kWh tariff increased dramatically,
leading to an overrated profitability [Statement of Uncontested Facts, p. 22, §25].
90. In this sense, the UNIDROIT Principles state:
“Article 6.2.2 - (Definition of hardship)- There is hardship where the occurrence of events
fundamentally alters the equilibrium of the contract either because the cost of a party’s
performance has increased or because the value of the performance a party receives has
diminished, and (a) the events occur or become known to the disadvantaged party after the
conclusion of the contract; (b) the events could not reasonably have been taken into account
by the disadvantaged party at the time of the conclusion of the contract; (c) the events are
beyond the control of the disadvantaged party; and (d) the risk of the events was not
assumed by the disadvantaged party”.
91. In this regard, parties faced an event of hardship in which the equilibrium of their relation was
fundamentally altered, requiring the renegotiation of the terms under the risk of jeopardizes the
entire negotiation.
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92. In the case, Suez v Argentina, in the separate opinion, one of the arbitrators took issue with the
majority’s finding that Argentina’s forced renegotiation of the concession contract was a per se
violation of the treaty. In challenging this finding, the arbitrator determined that the obligation to
renegotiate contracts when faced with unforeseen events is normal and legal:
“Renegotiation of long-term concession contracts is far from exceptional. Several
witnesses for the Claimants admitted that it was normal to renegotiate the original terms of
such contracts when faced with new and unforeseen events ... I do not agree with the
assumption expressed in the Decision (para. 239) that AASA was coerced into acceding to
the renegotiation because, had it refused, it could have been accused of violating Article 5.1
of the Concession Agreement, which obligated both sides to ‘use all means available to
establish and maintain a fluid relationship which would facilitate the discharge of this
Concession Agreement.’ Rather, I believe that this clause is evidence that the obligation to
renegotiate did not have as its sole source the Emergency Law, but the Concession Contract
itself and that AASA could not lawfully refuse to renegotiate (as in fact it did not refuse). On
this basis, he concluded that the ‘renegotiation process was not per se a violation of the
State’s obligations under the standard of fair and equitable treatment”.
93. In this sense, to continue paying investor with the pre-2013 feed-in tariff would represent a
profitability dramatically increased, harming the fair and equitable in the relation between
Barancasia and it investors. The international standard for such contracts in the event of ‘hardship’
aims to impose an obligation on the parties to negotiate an adaptation of the contract to the changed
circumstances or the termination of the contract, which is moreover, , an effect of the good faith that
should prevail in the execution of any contract [Suez v. Argentina].
94. In this scenario, Respondent acted in good-faith and started a fair process in order to revisit
the LRE due to the new and unexpected event. Thus, on 3 January 2013, after conducting private
hearings with representatives of industry and certain shareholders groups before the Barancasia
Parliamentary Energy Committee8, the LRE was amended, now stating that: “The feed-in tariffs set
by the Barancasia Energy Authority may be reviewed annually for adjustment taking into account
the costs of the best available technology”[Article 4].
95. On the commentary to the UNIDROIT Principles, it is possible to understand that:
“Although nothing is said in this Article to that effect, both the request for renegotiations by
the disadvantaged party and the conduct of both parties during the renegotiation process
are subject to the general principle of good faith and fair dealing and to the duty of
cooperation. Thus the disadvantaged party must honestly believe that a case of hardship
8 Statement of Uncontested Facts, p. 23, § 34.
15
actually exists and not request renegotiations as a purely tactical manoeuvre. Similarly,
once the request has been made, both parties must conduct the renegotiations in a
constructive manner, in particular by refraining from any form of obstruction and by
providing all the necessary information.”9
96. Therefore, this Tribunal shall find that the parties faced an unexpected situation that required
a renegotiation for the maintenance of the fair and equitable treatment in parties relation.
C) RESPONDENT ACTED IN GOOD-FAITH;
97. Even in investments arbitrations, which in the majority of the cases involve a state and an
investor, parties are expected to act in good faith and deal with fairness, such as established by the
UNIDROIT PRICIPLES “each party must act in accordance with good faith and fair dealing in
international trade”10
.
98. Good faith and fair dealing may be considered to be one of the fundamental ideas underlying
the UNIDROIT Principles. By stating in general terms that each party must act in accordance with
good faith and fair dealing, this Article makes it clear that even in the absence of special provisions
in the Principles the parties’ behavior throughout the life of the contract, including the negotiation
process, must conform to good faith and fair dealing11
. Whether it’s a commercial arbitration,
investment or a regular state court case, good-faith is widely accepted and applicable as a general
principle.
99. In the present case, Respondent acted in good-faith with regard to the new scenario the parties
were faced. According to the Vienna Convention on the Law of Treaties, good-faith shall guide all
parties relation:
“Article 31 - General rule of interpretation - 1. A treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose. 2. The context for the purpose of the interpretation
of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a)
any agreement relating to the treaty which was made between all the parties in connexion
with the conclusion of the treaty; (b) any instrument which was made by one or more parties
in connexion with the conclusion of the treaty and accepted by the other parties as an
9 Commentary to the UNIDROIT Principles of 2010, p. 220. 10
UNIDROIT PRINCIPLES - Article 1.7 - Good faith and fair dealing. 11
Commentary to the UNIDROIT Principles of 2010, p. 17/18
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instrument related to the treaty. 3. There shall be taken into account, together with the
context: (a) any subsequent agreement between the parties regarding the interpretation of
the treaty or the application of its provisions; (b) any subsequent practice in the application
of the treaty which establishes the agreement of the parties regarding its interpretation; (c)
any relevant rules of international law applicable in the relations between the parties. 4. A
special meaning shall be given to a term if it is established that the parties so intended.”
100. Thus, the general principle of good-faith shall be applicable in the present case, in order to
interpret parties actions and to demonstrate that the development of a new ground-breaking
technology required a renegotiation.
IV. RESPONDENT SHALL NOT BE ORDERED TO RESCIND THE AMENDMENT OF
THE LRE NOR TO CONTINUE PAYING THE PRE-2013 FEED-IN TARIFF;
101. In light of the reasoning above Respondent must not and cannot rescind the amendment of the
LRE (A). Furthermore, even if the amendment of the LRE is not rescinded, Claimant is not entitled
to the pre-2013 feed-in tariff (B), due to its investments.
A. RESPONDENT CANNOT RESCIND THE AMENDMENT;
102. First, as stated above, the amendment of the LRE does not harm Claimant’s legitimate
expectations. Claimant is creating an incomplete and coloured scenario that did not exist.
103. The amendment of the LRE represents a fair and consistent conduct of Respondent in order to
maintain the balance in the relationship between Barancasia and the investor.
104. The amendment of the LRE represents the changes necessary due to unexpected events. Also,
the process was fair and followed all of the requirements. Respondent conducted hearings between
the Barancasia Parliament and some of the investors and then amended the LRE.
105. It is not possible to discuss that such amendment leads to a unfair treatment to Claimant. Such
amendment is applicable to all the investors on renewable energy and reflects nothing else but the
correct feed-in tariff due to the new scenario in which parties are living. In fact, in the present case,
the absence of renegotiation of the feed-in tariff would represent a inconsistency and a lack of good-
faith, since from now on, the cost to manufacture is dramatically reduced.
106. In this sense, the Commentary to the UNIDROIT Principles, states that:
17
“Decrease in value of the performance received by one party - The second manifestation of
hardship is characterised by a substantial decrease in the value of the performance received
by one party, including cases where the performance no longer has any value at all for the
receiving party. The performance may relate either to a monetary or a non-monetary
obligation. The substantial decrease in the value or the total loss of any value of the
performance may be due either to drastic changes in market conditions (e.g. the effect of a
dramatic increase in inflation on a contractually agreed price) or the frustration of the
purpose for which the performance was required (e.g. the effect of a prohibition to build on
a plot of land acquired for building purposes or the effect of an export embargo on goods
acquired with a view to their subsequent export). Naturally the decrease in value of the
performance must be capable of objective measurement: a mere change in the personal
opinion of the receiving party as to the value of the performance is of no relevance. As to the
frustration of the purpose of the performance, this can only be taken into account when the
purpose in question was known or at least ought to have been known to both parties.”12
107. In this regard, Respondent acted consistently to all the understandings and commitments it has
made to Claimant and all the renewable energy investors. Therefore, this Tribunal must understand
that Respondent cannot and shall not rescind the amendment of the LRE.
B) CLAIMANT IS NOT ENTITLED TO THE PRE-2013 FEED-IN TARIFF;
108. Claimant alleges that it is entitled to the pre-2013 feed-in tariff. However, such allegation
shall not proper. That is due to the fact that the price to manufacture the project was substantially
cheaper as already stated. Therefore, the payment of the pre-2013 feed-in tariff would represent a
profitability dramatically increased, it would not be fair and equal profitability inconsistent to the
investments Claimant has made.
109. The commentaries to the UNIDROIT Principles, provides an example of a situation in which
renegotiation is necessary due to changes in the market:
“A, a construction company situated in country X, enters into a lump sum contract with B, a
governmental agency, for the erection of a plant in country Y. Most of the sophisticated
machinery has to be imported from abroad. Due to an unexpected devaluation of the
currency of country Y, which is the currency of payment, the cost of the machinery increases
dramatically. A is entitled to request B to renegotiate the original contract price so as to
adapt it to the changed circumstances”13
.
12 Commentary to the UNIDROIT Principles of 2010, p. 214. 13 Commentary to the UNIDROIT Principles of 2010, p. 218.
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110. In this sense, continue paying Claimant the feed-in tariff calculated in 2010 would represent
an unbalanced relation that was established due to other business circumstances.
111. In light of the above, Claimant is not entitled to receive the pre-2013 feed-in tariff as a matter
of fair and equal treatment due to the new grounds in the relation between the parties.
V. CLAIMANT’S BASIS FOR CLAIMING AND QUANTIFYING COMPENSATION ARE
NOT APPROPRIATE;
112. Claimant’s basis for quantifying the compensation does not reflect the reality and Mr. Marko
Kovic report is uncompleted, reflecting a over-optimistic view on Claimant’s project (A), an
therefore must not be consider in the event that this Tribunal finds that a compensation is necessary.
A. MR. MARKO KOVIC REPORT DOES NOT REFLECT THE REALITY FOR
COMPENSATION;
113. First, it is imperative to state that Vasiuki was a young developer of electric projects, mostly
focused on the turnkey sale of gas turbines and wind projects. It had fairly recently begun
developing wind energy projects for its own account. Its entry into the solar market in Barancasia
was its first attempt to develop solar energy projects. This was a new line of business for Vasiuki.
114. Having said that, Claimant alleges that it has been harmed by the denial of a license to the
Alfa project. Such allegation is both illogical and impossible. Claimant is requesting for the
approval of a feed-in tariff to a project that began before the creation of the LRE.
115. Claimant had the license of Alfa project rejected since the feed-in tariff would only be
available for new projects, not for existing projects. Claimant started developing project Alfa in
2009, almost a year before the existence of the LRE, thus there are no damages are to be calculated
under the different value of the feed-in tariff.
116. Professor Kovič calculates a loss of €120,621 resulting from Barancasia not allowing Alfa to
take advantage of the €0.44/kWh feed-in tariff set by the Energy Law. The fundamental problem is
that Project Alfa was not undertaken in response to the Energy Law, which was passed in order to
provide incentives for subsequent photovoltaic development, not as a subsidy for pre-existing
projects.
117. Second, Vasiuki’s own documents show that it was not able to accurately forecast the
performance of the Alfa Project. Vasiuki was unable to control the construction costs, resulting in
19
an overrun of more than 50% of the estimated project cost. Additionally, the solar installation’s
performance was poor, resulting in it operating at only 12.1% of design capacity, versus Claimant’s
projection of 21%.
118. Due to these problems, it is unlikely to agree with Professor Kovič supports a calculation that
simply assumes the documented problems will go away quickly, and the unit will become a reliably
profitable operation, even if the Tribunal were to agree with Claimant that the tariff under the
Energy Law should apply retroactively [Ms. Priemo Report, p. 52, § 7].
119. Claimant has a similar claim for Project Beta. Project Beta commenced operation on 1
January 2011, and was given a license under the Energy Law. As such, the €0.44/kWh tariff was
applied to the project upon entering commercial service. The amendment of the Energy Law as of 1
January 2013 reduced the tariff applicable to Project Beta to €0.15/kWh.
120. Claimant’s report makes the assumption that the revenue figure would be the only impact is a
reasonable one. The annual operating costs of photovoltaic installations are very low and tend to be
fixed costs, based on my experience in auditing such companies. However, such reports makes a
fundamental error in its calculation of net present value in his Annex 1(B) [Ms. Priemo Report, p. 53, §
9].
121. Professor Kovič has discounted the cash flows to equity at the weighted average cost of capital
(“WACC”), which is a rate that includes both debt and equity. The correct calculation would discount
the cash flows to equity at Claimant’s cost of equity, which its documentation shows is 12%, not 8%
[Ms. Priemo Report, p. 53, § 9]
122. Thus, in the rare event that the Tribunal determines that Claimant is entitled to damages for the
tariff change on Project Beta, those damages would be no more than €104,402.
123. Additionally, Claimant requests for “wasted investment” in land, photovoltaic panels and related
equipment. The Kovič Report sets out alternative calculations for this head of damages: (a) €690,056 for
the cost of land and equipment; or (b) €1,427,500 for lost profits resulting from the change in the feed-in
tariff under the Energy Law [Ms. Priemo Report, p. 53, § 10].
124. However, such analysis presupposes that there is no use for any of the expenditure, that the land
would be useless, and the equipment will simply be thrown away. The land had value before Vasiuki
acquired it, and it will presumably continue to have value into the future. The equipment can likely be
used for another solar venture or sold to someone who wishes to make such investment. In short, there
appears to be significant potential mitigation, which Professor Kovič has simply ignored [Ms. Priemo
Report, p. 53, § 11].
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125. Moreover, the Claimant’s report has again discounted the cash flows to equity at the weighted
average cost of capital. Thus, even it the Tribunal understands that Claimant lost profits on the Project
based on the change in the feed-in tariff, those lost profits would be no more than €1,238,697. This
figure assumes that Claimant will continue the Project build out on schedule, and that the units will
operate through the year 2023 at a capacity of 21% [Ms. Priemo Report, p. 53, § 12].
126. Finally, Professor Kovič has assumed that several additional installations would be undertaken by
Claimant, resulting in an additional €765,835 of damages. However, there are no documents to support
Claimant’s alleged plans for such expansion, mainly, there is no plan section of the Vasiuki LLC
Dataset, nor evidence that any additional land has been acquired.
127. Furthermore, Claimant’s report suggests that interest should be added to any damages that may be
awarded, calculated at Claimants WACC of 8%. However, as pointed out above, Professor Kovič
should have used a 12% rate for discounting alleged future losses [Ms. Priemo Report, p. 54, § 15].
128. In that sense, this tribunal shall understand that 12% WACC rate is the one to be considered,
disregarding the 8% rate, and that the expenditure was not part of the investment and must not be
considered on the calculation for compensation.
129. Thus, Ms. Priemo’s reports must be considered in the event that this tribunal finds that a
compensation is necessary.
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REQUEST FOR RELIEF
In light of the above submissions, counsel for RESPONDENT respectfully requests the Tribunal to
find that:
a) This Tribunal does not have jurisdiction over the dispute concerning Claimant’s
photovoltaic projects under the Cogitatia-Barancasia BIT;
b) Respondent’s measures in respect to the LRE did not amount to a breach of the BIT;
c) Respondent’s actions are exempted from liability;
d) Respondent shall not be ordered to rescind the amendment to the LRE nor, to continue
paying the pre-2013 feed-in tariff;
e) Claimant’s basis for claiming and quantifying compensation are not appropriate;