counter-memorial - fdi moot
TRANSCRIPT
SIXTH ANNUAL
FOREIGN DIRECT INVESTMENT
INTERNATIONAL MOOT COMPETITION
24–26 OCTOBER 2013
FRANKFURT, THE FEDERAL REPUBLIC OF GERMANY
GERMAN INSTITUTION OF ARBITRATION
UNDER THE UNCITRAL ARBITRATION RULES ADMINISTERED BY THE DIS
CASE NO.
COUNTER-MEMORIAL
CONTIFICA ASSET MANAGEMENT CORP. THE REPUBLIC OF RURITANIA
CLAIMANT RESPONDENT
TEAM SCHWEBEL
TEAM SCHWEBEL
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TABLE OF CONTENTS
LIST OF AUTHORITIES .......................................................................................................... IV
STATEMENT OF FACTS ...................................................................................................... XVI
(I) THE TRIBUNAL LACKS JURISDICTION TO HEAR THE CLAIMS
SUBMITTED BY CAM AND IN ANY CASE, THESE CLAIMS ARE INADMISSIBLE ... 1
1. The Tribunal should not exercise jurisdiction over the CAM claims in accordance with the
Ruritania-Cronos BIT .................................................................................................................. 1
2. The present claims are inadmissible because they were filed in abuse of process since the
only purpose of the Contifica’s corporate restructuring was to gain access to arbitration under
the Cronos-Ruritania BIT ............................................................................................................ 5
(II) THE TRIBUNAL LACKS JURISDICTION OVER CAM’s CLAIMS BASED ON
THE ALLEGED BREACH OF SHARE PURCHASE AGREEMENT BY THE STATE
PROPERTY FUND OF RURITANIA AND IN ANY CASE, THOSE CLAIMS ARE
ADMISSIBLE ............................................................................................................................... 9
1. Ruritania cannot be respondent for the alleged breach of SPA since it is not a party to
SPA ...................................................................................................................................... 9
2. The dispute based on the alleged breach of SPA is not an investment dispute but a dispute
of commercial nature ................................................................................................................. 11
(III) THE REGULATORY MEASURES OF RURITANIA DO NOT CONSTITUTE AN
EXPROPRIATION OF CAM’S ASSETS AND DO NOT OTHERWISE VIOLATE ITS
OBLIGATIONS UNDER THE BIT AND INTERNATIONAL LAW .................................. 17
1. The regulatory measures taken in public interest within the scope of the sovereign powers
of Ruritania do not amount to expropriation or equivalent measures and in any case, the
Claimant is not entitled to compensation. ................................................................................. 17
2. Ruritania did not act in violation of FET standard ............................................................ 20
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3. In any case, the Tribunal is not an appropriate forum for hearing the claims based on
alleged violations of international law apart from the BIT or, alternatively, Ruritania did not
violate its obligations with regard to CAM’s trade mark and trade dress rights ....................... 21
(IV) THE CLAIM FOR COMPENSATION OF MORAL DAMAGES SHALL NOT BE
CONSIDERED IN THIS ARBITRATION AND IN ANY CASE, MORAL DAMAGES
SHALL NOT BE COMPENSATED ......................................................................................... 23
1. The Tribunal is not entitled to adjudicate the claims in relation to compensation of moral
damages since the dispute at hand does not concern investment .............................................. 23
2. The facts of the dispute do not amount to “exceptional circumstances” standard............. 24
(V) THE LOSS OF SALES BY CAM’S SUBSIDIARIES LOCATED OUTSIDE OF
RURITANIA TO FBI DOES NOT CONSTITUTE A RECOVERABLE ITEM OF
DAMAGES .................................................................................................................................. 28
1. The CAM’s foreign subsidiaries are not investors under the Cronos-Ruritania BIT ........ 28
2. Sales by the CAM’s foreign subsidiaries cannot be regarded as investment under the
Cronos-Ruritania BIT ................................................................................................................ 30
3. The CAM’s foreign subsidiaries failed to perform the obligation to mitigate loss incurred
……………………………………………………………………………………………33
PRAYER FOR RELIEF............................................................................................................. 34
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LIST OF AUTHORITIES
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Vandekerckhove Karen Vandekerckhove, Piercing the Corporate Veil: A
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ADC Affiliate ADC Affiliate Limited and ADC & ADMC Management
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Asian Agricultural Products Asian Agricultural Products Ltd. v. Republic of Sri Lanka,
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Autopista Concesionada de
Venezuela
Autopista Concesionada de Venezuela CA v. Venezuela,
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Azurix Azurix Corp v. Argentine Republic, ICSID Case No.
ARB/01/12, Decision on Jurisdiction, December 8, 2003.
Barcelona Traction Belgium v. Spain (Barcelona Traction case), ICJ Case
(ICJ Report 1970).
Bayandir Bayindir Insaat Turizm Ticaret Ve Sanayi S. A. (Scedil) v.
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Bosh International Bosh International, Inc and B&P Ltd Foreign Investments
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Bosh International Bosh International, Inc and B&P Ltd Foreign Investments
Enterprise v. Ukraine, ICSID Case No. ARB/08/11,
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CMS CMS Gas Transmission Company v. Argentine Republic,
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U.S. C.T.R, vol. 17, p. 153 (1987).
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to Jurisdiction, October 17, 2006.
Impregilo Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID
Case No. ARB/03/3, Decision on Jurisdiction, April 22,
2005.
Inceysa Inceysa Vallisoletana, S.L. v. Republic of El Salvador,
ICSID Case No.ARB/03/26, Award, August 2, 2006.
International Technical International Technical Products Corporation v. The
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Products Government of the Islamic Republic of Iran, Iran-U.S.
C.T.R, vol. 9, p. 206 (1985).
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jurisdiction, June 16, 2006.
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Lemire v. Ukraine Joseph Charles Lemire & others v. Ukraine, Award, ICSID
Case No. ARB/06/18, March 28, 2011.
LG&E LG&E Energy Corp., LG&E Capital Corp., LG&E
International Inc. v. Argentine Republic, ICSID Case No
ARB/02/1, Award, July 25, 2007.
Maffezini Maffezini v. Spain, ICSID Case No. ARB/97/7
(Argentina/Spain BIT), Award, November 13, 2000.
Malaysian Historical Salvors Malaysian Historical Salvors SDN BHD v. Malaysia,
ICSID Case No. ARB/05/10, Award for lack of
jurisdiction, May 17, 2007.
Marvin Roy Feldman Karpa Marvin Roy Feldman Karpa v. United Mexican States,
ICSID Case No.ARB(AF)/99/1 (also known as Marvin
Feldman v. Mexico), Award, December 16, 2002.
Methanex Methanex Corporation v. United States of America,
(NAFTA case), UNCITRAL, Final Award of the Tribunal
on Jurisdiction and Merits, August 3, 2005.
Mobil Corporation Mobil Corporation and others v. Bolivarian Republic of
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Venezuela, ICSID Case No. ARB/07/27, Decision on
Jurisdiction, June 10, 2010.
Monte Blanco Monte Blanco Real Estate Corp., Decision No. 37-B (Am.-
Mex. Cl. Comm'n of 1942), reprinted in Report to the
Secretary of State 191, 195 (1948).
Noble Ventures Noble Ventures Inc. v. Romania, ICSID Case No.
ARB/01/11.
Otis Elevator Otis Elevator Company v. The Islamic Republic of Iran,
Iran-U.S. C.T.R, vol. 14, p. 283 (1987).
Pac Rim Cayman Pac Rim Cayman LLC v. Republic of El Salvador, ICSID
Case No. ARB/09/12.
Parkerings Parkerings – Compagni et AS v. Lithuania, Award, ICSID
Case No ARB/05/8, September 11, 2007.
Patrick Mitchell Patrick Mitchell v. Democratic Republic of the Congo
ICSID Case No. ARB/99/7.
Phoenix Phoenix Action Ltd. v. Czech Republic, ICSID Case No.
ARB/06/5, April 15, 2009.
Rompetrol Group Rompetrol Group N.V. v. Romania, ICSID Case No.
ARB/06/3, Decision on Jurisdiction, April 18, 2008.
Saipem Saipem S.p.A. v. People's Republic of Bangladesh, ICSID
Case No. ARB/05/7.
Salini Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom
of Morocco, ICSID Case No. ARB/00/4, Decision on
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Saluka Saluka Investments B.V. v. The Czech Republic, PCA case,
Partial Award, March 17, 2006.
SARL SARL Benvenuti and Bonfant v.People’s Republic of
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SEDCO SEDCO, Inc. v. National Iranian Oil Company, Iran-U.S.
C.T.R, vol. 15, p. 23 (1987).
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SGS v. Philippines Société Générale de Surveillance v. Republic of the
Philippines, ICSID Case No. ARB/02/6; Decision on
Jurisdiction.
SGS v. Pakistan SGS Société Générale de Surveillance S.A. v. Islamic
Republic of Pakistan, ICSID Case No. ARB/01/13.
Schering Schering Corporation v. The Islamic Republic of Iran,
Iran-U.S. C.T.R., vol. 5, p. 361 (1984).
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ARB/06/1, December 7, 2011.
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Starrett Housing International, Inc., v. The Government of
the Islamic Republic of Iran, Bank Omran, Bank Mellat,
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Interlocutory Award, December 19, 1983.
Técnicas Medioambientales
Tecmed
Técnicas Medioambientales Tecmed, S.A. v. The United
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Tokios Tokeles Tokios Tokeles v. Ukraine, ICSID Case No ARB/02/18,
Decision on Jurisdiction, April 29, 2004.
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Treaties and Other International publications
ARS Draft Articles on the Responsibility of States for
Internationally Wrongful Acts, Int'l L. Comm'n, 56th Sess.,
G.A. Supp No. 10, U.N. Doc A/56/83 (2001);
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Declaration on the TRIPS agreement and public health,
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http://www.wto.org/english/thewto_e/minist_e/min01_e/mi
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STATEMENT OF FACTS
1 Contifica Asset Management Corp. (‘CAM’ or ‘Claimant’) is a company incorporated under the
laws of the State of Cronos. CAM is a member of Contifica group, a major international
conglomerate with interests in many industrial areas and operations in over 30 countries. A
parent company of Contifica group is Contifica Enterprises Plc., which is incorporated under the
laws of Prosperia.
2 The Republic of Ruritania (‘Ruritania’ or ‘Respondent’) is one of the Contracting States to the
Treaty of Mutual Promotion and Protection of Foreign Investment between the Republic of
Ruritania and the State of Cronos dated March, 15 1997 (‘Cronos – Ruritania BIT’ or ‘BIT’).
3 Freecity Breweries Inc. (‘FBI’) is a brewery in Ruritania. FBI produces, among other sorts of
beer, the popular FREEBREW, an alcohol product with concentrate of Reyhan – a Ruritanian
local plant. Until 2008 FBI was owned by the State Property Fund of Ruritania (‘Fund’), a
business entity established under the laws of Ruritania.
4 In the beginning of 2008, Fund decided to sell its assets associated with FBI to a foreign investor
and announced an international tender. Five companies submitted their bids, including Contifica
Spirits S.p.A. (‘Contifica Spirits’), which is a wholly owned subsidiary of Contifica Enterprises
Plc.
5 One June 30, 2008 Contifica Spirits was declared the winner of the tender. On the same day
Contifica Spirits and Fund entered into a share purchase agreement (‘SPA’) providing for the
acquisition of all shares in FBI for USD 300,000,000.
6 In January, 2010 the New Way party secured the majority in the Ruritanian parliament. Taking a
hard stance towards marketing and sale of alcohol was one of the widely publicized issues of the
party’s election manifest.
7 On March 17, 2010 the shares in FBI were transferred from Contifica Spirits to Claimant for a
token amount of less than USD 5,000. It is readily apparent from the Memorandum sent from
Mr. Straw to Mr. Goodfellow (executives of Contifica group and of CAM) dated March 1, 2010
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(Exhibit RX1) (‘Memorandum’) that the transfer was committed with a sole purpose of “treaty-
shopping” and protection of assets of Contifica group with the means of the BIT.
8 On November 20, 2010 the Ruritanian parliament adopted the Regulation of Sale and Marketing
of Alcoholic Beverages Act (‘MAB Act’), pursuant to which the marketing of all alcoholic
beverages (including beer) on television and at sporting events was prohibited and requirements
concerning the labeling and packaging were imposed to reduce alcohol consumption, especially
among the youth.
9 On June 15, 2011 the Human Health Research Institute (‘HRI’) released a report founding that
consumers of Reyhan-containing products, including FREEBREW beer, were exposed to a
higher risk of cardiac complications.
10 On June 30, 2011 the Ministry of Health and Social Security – in order to lower the danger that
consumption of Reyhan creates for the population – adopted an ordinance (‘Ordinance’) which
required any product containing Reyhan concentrate to be labeled with a respective warning.
11 On December 1, 2011 the Prosecutor’s Office of Ruritania commenced investigation against
Messrs Goodfellow and Straw (executives of Contifica group and of CAM), who were
suspected of committing bribery in connection with the acquisition of the FBI shares from Fund.
12 On December 19, 2011 Messrs Goodfellow and Straw were notified of the ongoing criminal
proceedings. Messrs. Goodfellow and Straw were told that they may be summoned for an
interrogation after the holiday season in the beginning of 2012.
13 On December 23, 2011 Messrs. Goodfellow and Straw were detained in the Freecity
International Airport when boarding their flight to Prosperia.
14 On January 3, 2012 the executives were released.
15 On June 20, 2012 criminal investigation against Messrs. Goodfellow and Straw was terminated.
16 On September 30, 2012 Claimant resorted to the present Tribunal claiming that the losses of
Contifica group incurred due to the market changes were caused and should be compensated by
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Respondent, who allegedly acted with the aim of expropriation of CAM’s assets. Criminal
proceedings against the executives were also claimed unjust.
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(I) THE TRIBUNAL LACKS JURISDICTION TO HEAR THE CLAIMS
SUBMITTED BY CAM AND IN ANY CASE, THESE CLAIMS ARE
INADMISSIBLE
17 In accordance with Article 23(1) of the UNCITRAL Arbitration Rules applicable in this
arbitration, “the arbitral tribunal shall have the power to rule on its own jurisdiction”1. The
Respondent submits that the Tribunal is without jurisdiction over the claims of CAM because (i)
the ownership of FBI by CAM is not a bona fide investment and does not enjoy protection under
the Cronos-Ruritania BIT, (ii) CAM is not an appropriate claimant in this case since it is a mere
shell company.
18 In any event, these claims are inadmissible because they were filed in abuse of process.
1. The Tribunal should not exercise jurisdiction over the CAM claims in accordance with
the Ruritania-Cronos BIT
19 In accordance with Article 8 of the Cronos-Ruritania BIT the Tribunal possesses jurisdiction
over the “disputes concerning investments between a contracting State and an investor of the
other contracting State”. The Respondent submits that the present dispute does not concern
investment since the ownership of shares in FBI does not meet the necessary criteria to be
regarded as one. Moreover, the bona fide character of CAM’s investment is also called into
question. Besides, CAM is not an investor in the sense of the Cronos-Ruritania BIT since it is a
mere shell company used for filing a claim.
1.1 The ownership of FBI by CAM does not meet the requirements for an investment under
international law, including contribution to the host State's development, duration and risk
20 Investments tribunals formulated special criteria (‘Salini criteria’) which allow recognizing
certain transactions as investment.2Accordingly the investment should inter alia correspond to
1 UNCITRAL Arbitration Rules, Article 23.1.
2 See Salini, para 52; Fedax, para 43; Joy Mining, paras 55 to 57; Bayindir, paras 130 to 137; Jan de Nul, paras 90 to
96; Saipem, paras 99 to 114; Malaysian Historical Sailors, paras 43 to 46; etc.
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the criteria of the contribution to the host state development, duration and risk. These criteria are
considered universal subject to just few exceptions.3 The Respondent submits that investment at
hand does not comply with Salini criteria.
21 One of the criteria is contribution to the host State's development4 which corresponds to the
purpose of the Cronos-Ruritania BIT (“to intensify economic cooperation between the two
Contracting States” (Preamble of the Cronos-Ruritania BIT). However, the Respondent is not
aware of any significant economic contribution to Ruritania by FBI business since the
acquisition of its shares by CAM. There is no evidence such as business plan or re-financing
(these factors were taken into account in Phoenix)5 intended by the Claimant for FBI. All major
economic success of FBI was achieved when it was owned by Contifica Spirits, a company
incorporated in Posteriana and thus not an investor in the light of the BIT. The “investment” at
hand has not influenced the “economic cooperation” between Cronos and Ruritania and therefore
is not an investment protected under the Cronos-Ruritania BIT as interpreted “in the light of its
object and purpose”.6
22 Salini criteria are “interdependent” and “should be assessed globally”.7 The duration
8 of CAM’s
investment was entirely dictated by the necessity to file the present claim under the Cronos-
Ruritania BIT, which, as stated below in this submission, was the only purpose of FBI
acquisition by CAM.9 Moreover, CAM cannot claim to be undergoing any kind of risk
10 since it
is going to lose nothing but the token price of less than USD 5,000 it paid for FBI (Statement of
Defense, para 7).
23 Thus, while formally falling within the definition of Article 1 of the BIT, the ownership of FBI
by CAM cannot be considered an investment.
3 Schreuer, para 67.
4 Salini, para 52; Joy Mining, para 53; Jan de Nul, para 91; Helnan, para 77; Malaysian Historical Salvors, paras 73
to 74; Patrick Mitchell, para 33. 5 Phoenix, para 140.
6 Vienna Convention, Article 31.
7 Salini, para 52.
8 Salini, para 52, 54; Schreuer, p. 130
9 See Submission I, para. 35
10 Salini, para 52.
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1.2 The investment in the present case is not a bona fide investment and therefore does not enjoy
protection under the Cronos-Ruritania BIT
24 The shares in FBI owned by CAM are not a bona fide investment therefore its protection under
the Cronos-Ruritania BIT is contrary to the objectives of the BIT system.11
25 In Phoenix, the tribunal stated that “the existence of a nominal price for the acquisition of
investment raises necessarily some doubts about the existence of an investment”12
. Such deals
can only be considered legitimate if “there are other interests and risks entailed in the business”13
but further investigation of facts is still needed.14
26 The Claimant paid less than USD 5,000 for the investment which was previously bought from
Fund for USD 300,000,000 (Statement of Defense, para 7) and for which it is currently claiming
USD 380,000,000 in damages (Statement of Claim, para 30). The token price is manifest and,
therefore, the Respondent submits that the existence of bona fide investment is in question. As
stated above, there was no real economic development in FBI business since its acquisition by
CAM. Thus there is no grounds whatsoever for justifying the existence of token price paid by the
Claimant.The token price is manifest evidence that there was no intention on behalf of the
Claimant to create an economically valid investment.
27 For all these reasons the Respondent submits that the ownership of FBI by CAM is mala fide
investment, if an investment at all, and therefore it should not enjoy protection under the Cronos-
Ruritania BIT.
11 Salini, para 52; Inceysa, para 230.
12 Phoenix, para 119.
13Société Générale, para 36.
14 Phoenix, para 119.
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1.3 CAM is not an appropriate claimant in this dispute
28 Shell companies created for the sole purpose of achieving the result which would not otherwise
be available are not encouraged under international law.15
The Respondent submits that CAM is
but a special vehicle for filing a claim and therefore not a bona fide investor.
29 CAM was made an investor in the sense of the Cronos-Ruritania BIT with the only mission to
bring this claim as stated below in this submission.16
CAM did not contribute any economic
value to FBI after having acquired its ownership. The fact that CAM was incorporated in Cronos
and acquired by Contifica group well before the present dispute (in 1983 and 2003 respectfully,
Procedural Order No. 2, point 24) does not mean that it is not used as a shell vehicle in the
present case. According to the Memorandum dated March 1, 2010 (Exhibit RX1), the presence of
a Contifica group companies in Ruritania was taken into account while deciding on the
restructuring of FBI ownership; therefore, there was simply no need for creation of a new shell
entity.
30 Thus, the Respondent submits that the corporate veil of CAM should be lifted. Under Article
1(3) of the Cronos-Ruritania BIT the nationality of investor is determined pursuant to the criteria
of incorporation. Nevertheless, “nationality must correspond with the factual situation”17
and the
genuine connection with the State should be examined.18
Ruritania submits that CAM does not
possess the genuine nationality of Cronos for the purpose of seeking protection under the
Cronos-Ruritania BIT and its corporate veil should be pierced.
31 The corporate veil can be lifted “to prevent the misuse of the privileges of legal personality”.19
One of the aims of veil piercing is to identify the true nationality of a corporation.20
Although the
15 Brownlie, p. 489; Daujotas, p.25; Barcelona Traction, para 56; Autopista Concesionada de Venezuela, paras 116,
122 ; Monte Blanco, para 38 16
See Submission I, para. 35 17
Nottenbohm Case (Second Phase), Judgement of the International Court of Justice, 6 April, 1955, cited by
Brownlie, pp. 431, 417. 18
Brownlie, pp. 413, 417 . 19
Barcelona Traction, para 56. 20
Anil, p.177; Davies, Worthington and Micheler, p.200; Vandekerckhove, pp.13–15.
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interpretation of the veil lifting doctrine differs from jurisdiction to jurisdiction21
, the most
common prerequisite for lifting the veil on sham grounds is the “existence of an element of fraud
coupled with excessive control by shareholders”.22
32 CAM is a member of Contifica group and is entirely controlled by it (Statement of Claim,
para 4). In numerous cases tribunals agreed to look beyond the subsidiary shell company and
instead regarded the parent company as a party to the proceedings.23
Moreover, Professor Weil in
his dissenting opinion in Tokios Tokeles24
highlighted the importance of the origin of capital
invested.
33 In the present case the origin of capital invested in FBI was Contifica spirits and the whole
Contifica group. Thus the Respondent submits that these companies should be the truly claimants
to file the present claims. However, Contifica Spirits and Contifica Enterprises plc (the parent
company) are incorporated in Posteriana and Prosperia (Statement of Defense, para 4) and are
not entitled to bring claims under the Cronos-Ruritania BIT. For this only reason FBI shares
were transferred to CAM. Therefore, Ruritania submits that in the present case CAM is not a
genuine investor under the Cronos-Ruritania BIT and should be deprived of its protection.
2. The present claims are inadmissible because they were filed in abuse of process since
the only purpose of the Contifica’s corporate restructuring was to gain access to
arbitration under the Cronos-Ruritania BIT
34 The principle of good faith is well established in international law.25
A breach of the good faith
principle is a ground for refusing the enforcement of right that is otherwise protected by law.26
Investment arbitration in respect of claims made in abuse of process (i.e., in breach of the good
21Ibid, p.174.
22Ibid, p.174; Davies, Worthington and Micheler, p.202 ; Moore, p.193; Dobson, pp. 839, 840–841.
23 ICC case no.2375 (1975); ICC Case no.5730; ICC Case No. 8385; ICC Case No. 3879 (Westland Helicopters);
ICC Case No. 8385; 1991 Swiss Ad Hoc Case ASA Bull. p. 202 (1992). Cited by Park. 24
Tokios Tokelés v. Ukraine, ICSID Case No.ARB/02/18, Dissenting Opinion, (Apr. 29,2004). 25
Encyclopedia, vol. 7, p. 107. 26
Lauterpacht, p. 164
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faith principle) also referred to as “treaty shopping” is contrary to the basic objectives of BITs.
As stated in Phoenix,
“The abuse here could be called a “détournement de procédure”, consisting in
the claimant’s creation of a legal fiction in order to gain access to an
international arbitration procedure to which it was not entitled27
….It is the duty
of the tribunal not to protect such an abusive manipulation of the system of
international investment protection under … the BITs. It is indeed the Tribunal’s
view that to accept jurisdiction in this case would go against the basic objectives
underlying…bilateral investment treaties.”28
35 Under the existing international law, the structuring of an investment with the purpose of
benefitting from a BIT is not prohibited29
. However, if corporate restructuring is conducted for
the sole purpose of gaining access to arbitration under a BIT, it is deemed an abuse30
. The
Respondent submits that the sole purpose of the transfer of FBI shares to CAM was to gain
access to arbitration under the Cronos-Ruritania BIT. This is evident from (2.1) the timing of the
transfer of shares as well as (2.2) the aim of the transfer stated by Contifica group itself.
2.1 The timing of the transfer of FBI shares implies that restructuring of FBI ownership
constitutes an abuse of corporate structure
36 For the assessment of validity of corporate planning, “the time of the restructuring in relation to
dispute” is important.31
The general rule elaborated by the recent investment arbitration decisions
is that modification of corporate structure is an abuse if it took place after the damages giving
rise to the claim had occurred.32
37 However, the restructuring can also be deemed an abuse if it took place before the occurrence of
damages giving rise to the dispute. This exception applies if the future dispute was already
foreseeable at the time of the restructuring. For jurisdiction to be dismissed on the grounds of
27Phoenix, para 143.
28Ibid, para 144.
29Mobil Corporation, paras 191, 204; Aguas del Tunari, paras 321, 330.
30Phoenix, paras 92, 95, 144; Aguas del Tunari, para 205; Mobil Corporation, para 205; Cementownia, para 117.
31Schreuer at Fordham Conference, p. 18
32 Ibid; Phoenix, para 92; Mobil Corporation, para 205.
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abuse such disputes should be foreseen “as a very high probability and not merely as possible
controversy”.33
38 The Respondent submits that at the time of the transfer of FBI shares to CAM Contifica group
was fully aware of the high probability of the present dispute. The transfer of FBI shares took
place two months after the New Way party won the parliamentary elections (Statement of
Defense, para 6). The tougher regulations towards marketing and sale of alcohol were envisaged
in the New Way party election manifesto which was publicly available and discussed (Statement
of Defense, para 6). Production and sale of beer is the principal business of FBI and any
regulation adverse to alcoholic beverages should have a strong impact on its business and lead to
considerable losses. Therefore the possibility of the present dispute was clearly foreseen by
Contifica group as soon as any information regarding the toughening of relevant regulation was
available. At the time of the restructuring of FBI ownership the New Way party had already
secured a majority in Ruritanian parliament (Statement of Defense, para 6) and the successful
realization of its pre-election plans was ensured. Thus the present dispute became inevitable
which was undoubtedly understood by Contifica group.
39 Thus, the Respondent argues that the timing of the transfer of FBI shares clearly demonstrates
that its main purpose was to gain access to the present arbitration since the possibility of the
present dispute was foreseen by Contifica group.
2.2 The aim of transfer of FBI shares to CAM was clearly stated by the Contifica group itself
40 In the present case the aim of transfer of FBI shares to CAM is indicated in the Memorandum
dated March 1, 2010 (Exhibit RX1) sent from the General Counsel Adam Straw to the Chief
Executive Officer Lucas Goodfellow, the executives of FBI and Contifica Group. It is
unambiguously stated in this Memorandum that the main purpose of restructuring the investment
was “further protection of Contifica Group” rather than any commercial purpose.
33 Pac Rim Cayman, para 2.99
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41 Thus, Ruritania submits that the claims were filed by CAM in abuse of process and their
protection is against the basic principles of international investment law and the spirit of the
Cronos-Ruritania BIT. Therefore, these claims should be deemed inadmissible.
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(II) THE TRIBUNAL LACKS JURISDICTION OVER CAM’s CLAIMS
BASED ON THE ALLEGED BREACH OF SHARE PURCHASE
AGREEMENT BY THE STATE PROPERTY FUND OF RURITANIA
AND IN ANY CASE, THOSE CLAIMS ARE ADMISSIBLE
42 In accordance with Article 8 of the BIT to be heard by the present Tribunal the dispute should
involve an investor in the sense of the BIT and an investment as defined in the BIT and the
dispute shall be against the State of Ruritania.
43 The Respondent submits that (i) the Republic of Ruritania is not a party to the dispute over the
alleged breach of SPA since it was the Fund who undertook obligations under SPA and not
Ruritania (ii) the alleged breach of SPA leads to the dispute of pure commercial nature which is
outside the scope of dispute resolution clause of the BIT, (iii) CAM is not an investor in terms of
the BIT.34
Therefore the Claimant is not entitled to file those claims in the present Tribunal.
Moreover, claims based on the alleged breach of SPA are inadmissible since their acceptance by
the Tribunal will result in violation of dispute resolution clause contained in SPA.
1. Ruritania cannot be respondent for the alleged breach of SPA since it is not a party to
SPA
44 Ruritania is not a party to the dispute since the actions of the Fund cannot be assimilated to the
actions of a sovereign state of Ruritania.
45 Pursuant to international investment case law35
, the issue of attribution is to be decided in
accordance with Draft articles on the responsibility of states for internationally wrongful acts
(‘ARS’).
34 See Submission I, para. 28-33
35 Gustav Hamester, para 171; Bosh International, para 142.
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46 ARS stipulate three cases where actions of an entity can be attributed to the State: (i) an entity is
a State’s organ36
(ii) an entity exercises elements of governmental authority37
(iii) an entity acts
“on the instructions of, or under the direction or control” of the State.38
47 The Respondent submits that the facts of the present dispute did not fall into any of these three
cases.
1.1 Actions of the Fund are not attributed to Ruritania since it is not a state organ
48 Under the law of Ruritania the Fund is a separate legal entity (Statement of Defense, 11). It does
not possess the status of state organ and therefore its actions cannot be attributed to Ruritania
under Article 4 of ARS.
1.2 The Fund did not act on behalf of Ruritania since it the Fund did not exercise elements of
governmental authority
49 The Respondent acknowledges that acts of a separate entity exercising elements of governmental
authority should be attributed to the State. However, it must be shown that the act in question
was conducted in exercise of such governmental authority and it is not merely an act that could
be performed by commercial entity.39
50 By selling the shares in FBI the Fund did not exercise any elements of governmental power. The
Claimant did not provide any evidence that conclusion of SPA concerned the sovereign power of
Ruritania. The shares were sold in crisis environment in order to optimize property management
of the Fund but this is a “public interest” element and not use of special governmental powers.
As mentioned in Jan de Nul
“(w)hat matters is not the “service public” element, but the use of “prérogatives
de puissancepublique” or governmental authority”.40
36 ARS, Article 4.
37 ARS, Article 5.
38 ARS, Article 8.
39Maffezini, paras 52 and 57; Gustav Hamester, para 193.
40Jan de Nul, para 170.
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51 Thus, it is not enough for an act of an entity to be performed in the general fulfillment of public
interest, mission or purpose to qualify as an attributable act. The Respondent submits that the
Fund acted as an ordinary shareholder (acts de jure gestionis) rather than exercised governmental
power.
1.3 The Fund did not act "on the instructions of, or under the direction or control" of Ruritania
52 The Respondent argues that Article 8 of ARS is not applicable in the present case since Ruritania
did not exercise any control over the Fund or provided any instructions or directions thereto.
53 The Claimant did not provide any evidence of such instructions, direction or control by
Ruritania, as would be required by Article 8. It is not denied that the Ruritanian government was
informed of the developments taking place in relation to FBI. However, the fact that the State is
informed about the action of the entity does not mean that the entity is under the effective control
of the State.41
54 Additionally, the establishment of an entity is not the sufficient proof of control.42
If an entity,
notwithstanding the fact that it is established and owned by the State, is considered to be
separate, prima facie its conduct is not attributable to the State unless it exercises elements of
governmental authority within the meaning of Article 543
, which, as already stated by the
Respondent, is not the case.
55 For all these reasons Ruritania cannot be considered a party to the dispute concerning the alleged
breach of SPA and therefore the Tribunal lacks jurisdiction.
2. The dispute based on the alleged breach of SPA is not an investment dispute but a
dispute of commercial nature
56 The Respondent submits that the dispute based on the alleged breach of SPA only regards the
shares in FBI (the investment) as subject matter but at its core is a dispute of pure commercial
41 Gustav Hamester, para 199
42For example, the Workers’ Councils considered in Schering.
43SEDCO, para 132. See also International Technical Products (para 74); and Flexi-Van Leasing, (para 68).
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nature. Such disputes shall not be resolved by the way of investment arbitration, since (i) a
breach of commercial contract does not amount to violation of international law and (ii) a breach
of a commercial contract is not elevated to the BIT level by virtue of “umbrella clause”.
2.1. A breach of a commercial contract does not constitute violation of international law
57 Should the Tribunal find that there was the breach of SPA and that this act is attributable to
Ruritania, the breach of contract does not per se entail responsibility of the State under
international law. As mentioned in Noble Ventures v. Romania
“The Tribunal recalls the well-established rule of general international law that
in normal circumstances per se a breach of a contract by the State does not give
rise to direct international responsibility on the part of the State. This derives
from the clear distinction between municipal law on the one hand and
international law on the other, two separate legal systems”.44
58 The same view was reiterated by many investment tribunals.45
The tribunal in Sempra v
Argentina stated that treaty breaches "involve a kind of conduct that only a sovereign State
function or power could effect"46
, thus a BIT violation must be a de jure imperii act. The CAM’s
claims relating to the alleged breach of warranty deal with the conduct of the Fund that was
contractual and not sovereign in nature.
59 SPA is an ordinary commercial contract and parties thereto did not exercise any sovereign power
to conclude it. This contract could have been entered into by any private entity. All CAM’s
claims are inextricably linked to SPA and are in reality contract claims. Consequently, the
alleged breach of warranty by the Fund, even attributed to Ruritania, does not constitute a breach
of the BIT engaging the international responsibility of Ruritania.
44Noble Ventures, para 53.
45Waste Management, para. 160; Joy Mining, para 72; Impregilo, para 260; Azurix, para 315.
46Sempra, para 56, See also CMS, para 44
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2.2. Breach of a commercial contract is not elevated to the BIT level by virtue of “umbrella
clause”
60 The Claimant may rely on Article 6(2) of the BIT – the so-called “umbrella clause” – in order to
argue that even if all its claims were contract claims, they would have been turned into treaty
claims by virtue of this clause. Nevertheless the Respondent believes that in the present case the
umbrella clause shall not be construed as elevating breaches of any commercial contract with an
investor to the level of BIT violation.
2.2.1. The umbrella clause shall not elevate the contract breach to the BIT level
61 First of all, Article 6(2) is not applicable in the present case as it requires the State to fulfill
obligations it “may have entered into with an Investor or an Investment”. However, SPA was
concluded between the Fund and Contifica Spirits, which is not claimant in the present dispute.
Should the Tribunal find that the status of Investor was assigned together with SPA then the
contractual arbitration clause is binding on CAM, which prevents adjudication of this matter by
the present Tribunal.47
62 The umbrella clause may be construed as elevating the breach to the level of BIT only when
“enough evidence was produced to show that such was the shared intent of the Contracting
Parties” .48
In the BIT at hand the Contracting States have demonstrated the opposite intent by
choosing the location for the umbrella clause. Here no such intent was clearly demonstrated. The
location of umbrella clause “at the end of the treaty rather than at the beginning with other
substantive obligations” implies that it was not intended by the signatories to be a substantive
obligation.49
Notably, even tribunals that came to different views as to the interpretation of
umbrella clause agree that the location of the umbrella clause at the end of the BIT could be
influential.50
47See Submission II, paras 68-71
48 SGS v. Pakistan, para 167.
49 SGS v Pakistan, para 170.
50See SGS v Pakistan (para 169-171) and SGS v Philippines, (para 124).
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63 Moreover, interpretation of umbrella clause as elevating all contractual breaches to BIT level is
detrimental since (i) it incorporates by reference into the BIT the unlimited number of state
contracts, thus unjustly and unpredictably enlarging obligations of the State, (ii) it makes the
other protective articles of the BIT substantially superfluous as there would be no need to
demonstrate a violation of substantive treaty standards if a breach of any obligation would
suffice as a treaty violation, (iii) it allows to investors to circumvent contractually agreed dispute
resolution provisions by giving them the unilateral option to bring contractual disputes to
investment arbitration as treaty claims. In other words, as stated by the tribunal in Gustav
Hamester:
“…consequence of an automatic and wholesale elevation of any and all contract
claims into treaty claims risks undermining the distinction between national
legal orders and international law. In the Tribunal's view, this is not a result that
is in line with the general purpose of the ICSID/BIT mechanism for the
international protection of foreign investments”.51
64 A number of other tribunals opposed the idea of elevation of contract breaches by virtue of an
umbrella clause. In particular, as stated in Joy Machinery,“purely commercial aspects of a
dispute should not be brought into the public international law arena by virtue of an umbrella
clause”.52
Further, the tribunal in El Paso held that the umbrella clause did not extend treaty
protection to breaches of commercial contract concluded by the State, but instead covered
additional investment protections contractually agreed by the State in its sovereign capacity.53
The El Paso tribunal considered that foreign investors need protection (through international
arbitration) from interference by a State acting as sovereign and not from a State acting as a
commercial entity.54
51Gustav Hamester, para 349.
52Joy Machinery, para 72.
53El Paso, para 81.
54El Paso, para 80.
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2.2.2. In case the Tribunal regards Article 6(2) of the BIT as elevating, the present contract does
not fall within its scope
65 In any case, contracts concluded between investor and legal entity which is separate from the
State do not fall within the scope of umbrella clause. This approach was supported in Impregilo
v. Pakistan:
In the Tribunal's view, given that the contracts were concluded by Impregilo
with WAPDA [Pakistan Water and Power Development Authority], and not
with Pakistan, Impregilo’s reliance upon Article 3 of the BIT [umbrella clause]
takes the matter no further.55
66 This view was reiterated by several other cases.56
67 Moreover, as stated by the Respondent before, the acts of the Fund should not be attributed to the
State. Thus, given that umbrella clause in the BIT is specifically delimited by reference to
obligations assumed by the State, there is no ground for extending the ambit of Article 6(2) to
contractual obligations entered into by other separate legal entities.
3. Even if the Tribunal upholds its jurisdiction, claims based on alleged breach of SPA are
inadmissible since deciding the matter at hand in this arbitration will violate the contractually
agreed dispute resolution clause in SPA
68 The Respondent objects to exercise of jurisdiction by the Tribunal, even if the Tribunal formally
has it, because it contradicts the dispute resolution clause in SPA.
69 In SGS v Philippines the tribunal did not allow the claimant to override an exclusive jurisdiction
clause in the contract declaring that
“[The tribunal] should not exercise its jurisdiction over a contractual claim when
the parties have already agreed on how such a claim is to be resolved, and have
done so exclusively. SGS should not be able to approbate and reprobate in
respect of the same contract: if it claims under the contract, it should comply
with the contract in respect of the very matter which is the foundation of its
claim”.57
55Impregilo, para 223.
56Gustav Hamester, para 343; Amto, para.110; William Nagel, paras 162-163; CMS (Annulment Decision), para 95.
57SGS v. Philippines, para 155.
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70 Moreover, as stated in Bosh v Ukraine58
where the possibility of a contractual claim is asserted
under umbrella clause, the claimant should comply with any dispute settlement clause included
in that contract and cannot therefore invoke investment arbitration.
71 SPA contains an exclusive arbitration clause as it deals with “all disputes arising out of or in
connection with” the present SPA (Article 14.2 of SPA). There is no doubt that the dispute and
the claims relating to the alleged warranty breach arise “out of or in connection with” SPA.
58Bosh International, para 252.
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(III) THE REGULATORY MEASURES OF RURITANIA DO NOT
CONSTITUTE AN EXPROPRIATION OF CAM’S ASSETS AND DO
NOT OTHERWISE VIOLATE ITS OBLIGATIONS UNDER THE BIT
AND INTERNATIONAL LAW
72 The Respondent submits that the adoption of MAB Act as well as imposition of other
requirements in respect of sale and marketing of FREEBREW violates neither the BIT nor
obligations of Ruritania under international law. The Respondent submits that (i) Ruritania's
actions do not amount to expropriation or measures equivalent to expropriation, (ii) Ruritania did
not violate its obligations under FET, (iii) in any case, the Tribunal is not an appropriate forum
for hearing the claims based on alleged violations of international law apart from the BIT or,
alternatively, Ruritania did not violate its obligations with regard to CAM’s trade mark and trade
dress rights.
1. The regulatory measures taken in public interest within the scope of the sovereign
powers of Ruritania do not amount to expropriation or equivalent measures and in any
case, the Claimant is not entitled to compensation.
1.1 Ruritania's actions are not expropriatory since they were taken within the sovereign powers
of Ruritania and their purpose was protection of public health
73 Expropriation and any measures equivalent to it are prohibited by Article 4 of the BIT. Under the
BIT the term “expropriation” is defined as including also “any other measure...the effects of
which would equivalent to expropriation”59
. However, the Cronos-Ruritania BIT does not
provide the definition of expropriation and does not set any criteria for determining the existence
of it, which is not a rare case among bilateral investment treaties.60
Therefore, expropriation
should be defined in accordance with other sources, namely customary international law, practice
59 Article 4 of the BIT; Nikièma, pp. 5-7; OECD Working Paper, p. 6
60 Schreuer, Expropriation, p. 5.; Dolzer/Stevens, p.99.
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of international investment arbitrations and doctrine. Since the Claimant attributes to Ruritania
only de facto expropriation, arguments of the Respondent do not extend any further.
74 There are several criteria with the help of which the line between indirect expropriation and
regulatory measures should be drawn.61
75 First, actions amounting to expropriation are taken in bad faith with the intention to deprive
investor of its assets as opposed to bona fide regulation designed to serve public interest which is
not deemed expropriatory. 62
76 Ruritania adopted MAB Act and Ordinance to reduce alcohol consumption, especially among the
youth, and consumption of all harmful Reyhan-containing products (not only beer) (Statement of
Defense, para. 14). These measures are justified by scientific evidence (Statement of Claim,
para. 14). The Claimant challenges the results of the HRI report on the grounds that another
report by an expert hired and paid to by the Claimant demonstrates other evidence. Still, the
latter report concentrates only on technical details of the HRI report without providing any proof
that Reyhan is harmless (Statement of Defense, para. 15). The positive effect of the plain
packaging on reduction of alcohol consumption is undisputable since the majority of experts
forecast the decrease of demand on harmful products63
. Therefore, the Respondent submits that
the measures taken represent a bona fide regulation adopted to protect public interest and do not
meet the criteria of bad faith to be considered expropriatory.
77 Moreover, the measures taken by Ruritania are proportional64
. The slightest measures were taken
in relation to alcohol. Tougher regulations were adopted concerning the products containing
Reyhan (which were still adequate since these products were not banned even after their
dangerous character was discovered) (Statement of Claim, para. 15).
61 Nikièma, p. 13.
62 Ibid, p. 17.
63 Wakefiled, Durkin, p. 1.
64 Nikièma, p. 15; Técnicas Medioambientales Tecmed, para 122.
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19
78 Second, these measures were taken within “police powers” of Ruritania and therefore are not
deemed expropriatory. In Saluka it was held that:
“the principle that a State does not commit an expropriation and is thus not
liable to pay compensation to a dispossessed alien investor when it adopts
general regulations that are “commonly accepted as with in the police power of
States” forms part of customary international law today”.65
79 Third, expropriation means permanent and total deprivation of investor’s assets66
. FBI, CAM and
Contifica Group as a whole carried out various activities apart from the sale of Reyhan-
containing products which were not affected by the regulation (Statement of Claim, paras. 4, 13).
This means that the actions of Ruritania were aimed at reducing consumption of poisonous
Reyhan and not against CAM as a business entity.
80 In Marvin Feldman v. Mexico the tribunal concluded that there was no expropriation since the
business remains “under the complete control of the claimant”.67
The Respondent also argues
that although the sales of CAM decreased, FBI business still remains under the control of CAM.
The failure to comply with financial covenants lies within the common commercial risk. The
CAM’s ownership of trademarks as well as other assets is untouched (Statement of Defense,
para 16).
81 For all these reasons, the Respondent submits that the measures taken in relation to FSI business
cannot be regarded as expropriatory.
1.2 The measures adopted within the “police powers” of Ruritania are not subject to
compensation
82 In accordance with Article 4 (d) of the Cronos-Ruritania BIT, expropriation can be tolerated if
the compensation is provided. However, this provision of the BIT deals with the so-called lawful
expropriation in the course of which the State seizes investor’s assets and pays compensation for
it.
65 Saluka, para 262.
66Nikièma, p. 13; LG&E, para 118.
67 Marvin Roy Feldman Karpa, para 111.
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83 In the present case the actions of Ruritania were merely regulatory measures falling within the
“police powers” doctrine and thus are not qualified as expropriation, even a lawful one. The
Claimant is not entitled to seek compensation for damages caused by regulatory measures as it
was stated in Marvin Feldman v. Mexico case.68
In Methanex Corporation v. United States of
America case the tribunal noted that
“as a matter of general international law, a non-discriminatory regulation for a
public purpose, which is enacted in accordance with due process and, which
affects, inter alias, a foreign investor or investment is not deemed expropriatory
and compensable unless specific commitments had been given by the regulating
government to the then putative foreign investor contemplating investment that
the government would refrain from such regulation.”69
2. Ruritania did not act in violation of FET standard
84 FET standard is established in Article 2 of the Cronos-Ruritania BIT. Although the BIT does not
define FET standard and the notion of FET under international law is ambiguous70
, there are
some objective criteria which are used for determination of violation of FET.71
85 First, FET standard is violated if the actions had discriminatory character.72
In the present case,
contrary to the Claimant’s allegations, the measures were non-discriminatory and were
implemented with respect to all products containing Reyhan ranging from bread and meat
products to soft drinks and spirits (Statement of Defense, para. 15).
86 Second, violation of the legitimate expectations amounts to the breach of FET. However, the
conduct of Contifica group several months before the adoption of Reyhan-adverse measures
implies that these adverse measures were anticipated, as outlined above in para 38. Moreover,
the materialization of risks, including “changes of the economic and political system”, “does not
68 Marvin Roy Feldman Karpa, para 103.
69 Methanex, IV D, para 7.
70 Marshall, p. 7.
71 Kläger, p. 154.
72 Ibid, p. 187.
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21
necessarily mean that property rights affected by such events can be deemed to have been
taken.”73
3. In any case, the Tribunal is not an appropriate forum for hearing the claims based on
alleged violations of international law apart from the BIT or, alternatively, Ruritania
did not violate its obligations with regard to CAM’s trade mark and trade dress rights
3.1 The Tribunal is not an appropriate forum for hearing the claims arising out of violations of
international law apart from the BIT
87 The present Tribunal was constituted on the basis of Article 8 of the Cronos-Ruritania BIT which
stipulates that the Tribunal should have jurisdiction only over the disputes arising out of the BIT.
For this reason, the Respondent requests the Tribunal to decline its jurisdiction in respect of the
claims based on alleged breach of other international law.
3.2 Alternatively, Ruritania did not violate its obligations under international law, primarily with
respect to CAM’s trademark and trade dress rights
88 Should the Tribunal assume its jurisdiction over breaches of international law apart from the
BIT, the Respondent is convinced that no violation of international law took place. The Claimant
fails to indicate what rules of international law were violated, attributing to the Respondent only
deprivation of its trademark and trade dress rights. For this reason the argumentation of the
Respondent is limited to this particular issue.
89 First of all, the Respondent submits that the Claimant was not deprived of use and enjoyment of
its trademarks since the brand name may still be displayed on the pack, albeit in the same font
and colour as the other text on the label (Statement of Claim, para. 11).
90 Ruritania is a member state of the World Trade Organization (Procedural Order No 2, para. 12)
and thus a party to TRIPS. Trademarks are regulated by Section 2 of TRIPS. However, the right
73 Starrett Housing, para 156.
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to use trademarks is granted by Article 15 of TRIPS only as a right to prevent non-authorized of
trademark by third parties. The protection of trademark against adverse regulatory measures is
not envisaged by any of WTO agreements. Moreover, Article 8 of TRIPS expressly allows the
member States to amend their regulations with the purpose of protecting public health. The same
view is reiterated in Declaration on the TRIPS agreement and public health.74
91 Ruritania is a party also to the Paris Convention for the Protection of Industrial Property
(Procedural Order No 2, para 15). However, the Paris Convention contains no provision
regarding the right to use trademarks. It is limited to the right to register (Article 6 of the Paris
Convention) which was not violated by Ruritania in the present case. Consequently, the
Claimant’s allegations of violation of international law are groundless.
74 Declaration on the TRIPS agreement, para 4.
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(IV) THE CLAIM FOR COMPENSATION OF MORAL DAMAGES
SHALL NOT BE CONSIDERED IN THIS ARBITRATION AND IN
ANY CASE, MORAL DAMAGES SHALL NOT BE COMPENSATED
92 The Respondent submits that (i) the Tribunal is not entitled to hear the claim concerning
compensation of moral damages, (ii) in any case, compensation for moral damage cannot be
granted since “exceptional circumstances” standard is not met.
1. The Tribunal is not entitled to adjudicate the claims in relation to compensation of
moral damages since the dispute at hand does not concern investment
93 According to Article 8 of the BIT, the Tribunal is entitled to adjudicate disputes concerning
investments between a Contracting State and investor. Assuming but not conceding that the
Respondent breached the obligation to provide full support and security under the BIT, the
Respondent states that the claim for compensation of moral damages cannot be heard in the
course of this arbitration, since it does not relate to the investment in the sense of the BIT.
94 As pointed out in Spyridon Roussalis v. Romania, a corporation is not entitled to recover moral
damages for business opportunities it supposedly lost as a consequence of restrictions imposed
by the State.75 The Respondent states that the arguably inflicted harm could have affected natural
persons (i.e.,Messrs Lucas Goodfellow and Adam Straw (‘the Executives’), and not legal entity
(i.e.,the Claimant).
95 In any case, should the Tribunal make reparation to the Claimant for the breach of full support
and security obligation, it should not be made in the form of moral damages compensation.
96 In accordance with Article 36 of ARS
the compensation shall cover any financially assessable damage. This
formulation is intended to exclude compensation for what is sometimes referred
to as ‘moral damage’, i.e. the affront or injury caused by a violation of rights not
75 Spyridon Roussalis, para 587.
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associated with actual damage to property: this is the subject matter of
satisfaction.76
97 Moreover, Article 37(2) of ARS stipulates that satisfaction may consist in, inter alia, an
acknowledgement of the breach.77 The Respondent accepts that the arrest of the Executives
constitutes a breach of the obligation to provide full support and security, and asks the Tribunal
to regard this statement as satisfaction for the Claimant.
2. The facts of the dispute do not amount to “exceptional circumstances” standard
98 Even if the Tribunal decides that moral damages claim may be heard in this arbitration, the facts
of the case do not permit to grant compensation for the moral damage alleged by the Claimant.
99 For moral damages to be compensated, the facts of the case should comply with the “exceptional
circumstances” standard formulated by tribunals in previous case law.78
100 Particularly, the ‘exceptional standard’ includes the following characteristics: (i) the Contracting
State's actions imply physical threat, illegal detention or other analogous situations in which the
ill-treatment contravenes the norms according to which civilized nations are expected to act, (ii)
the Contracting State's actions cause stress, anxiety and other mental suffering such as loss of
reputation and credit, (iii) both cause and effect are grave or substantial.79
101 The new generation of the investment arbitration decisions is characterised with a much higher
threshold for awarding moral damages. The tribunals have awarded moral damages
compensation only twice among quite a considerable number of claims, which attests to the
significance of the ‘exceptional circumstances’ standard while considering the question of moral
damages compensation.
102 The Respondent submits that the facts of this case are not sufficient to meet the threshold of the
“exceptional circumstances” standard, which will be demonstrated below in details.
76 ARS, Article 36(1).
77 ARS, Article 37(2).
78 Desert Line, para 406; Waguih Siag, para 545; Lemire v. Ukraine, para 333.
79Lemire v. Ukraine, para 333.
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2.1 The Respondent’s actions were neither illegal nor arbitrary, nor contradict the norms of the
international law
103 The arrest or detention of a person conducted when it is reasonably considered necessary to
prevent their fleeing after initiating criminal proceedings against him is not regarded as arbitrary,
illegal or discriminatory measure80
and, consequently, does not infringe the individual’s right to
liberty and security.81
The risk of flight was considered by the court to be a specific evidence of
the plans to flee82
and acknowledged to be a justification for legal authorities actions on a pre-
trial detention of the individual.83
104 At the moment of the Executives’ arrest there were sufficient and evident grounds to conclude
that they were going to abscond during the investigation initiated against them in relation to the
bribery of the officials of the Fund: the conduct of the Executives (the attempt to flight to
Prosperia from the Freecity International Airport) and other circumstances of the situation
(particularly, the assets of the Contifica Group located in other jurisdictions) reveal their true
intention to leave Ruritania.
105 The Respondent maintains that the arrest and detention of the Executives shall be deemed neither
arbitrary nor a violation of human rights because Ruritania’s police actions were aimed at
preventing the Executives from fleeing justice.
2.2 No evidence of the damage caused to the CAM investment as a result of Ruritania’s police
actions was demonstrated by the Claimant
106 According to the general principles of legal process, a party claiming something bears the burden
of proof (onus probandi), i.e., has the responsibility to prove sufficiently to the satisfaction of the
arbitrators the truth and correctness of the allegations made in relation to the claim.84
The Sixth
Edition of Black's Law Dictionary explained this principle as follows:
80 W. v. Switzerland, para. 33.
81 ECHR, Article 5, para 1, subpara c.
82 esky v. the C ech Republic, para 56.
83 Macovei, p. 28.
84 Scheinman, p. 10.
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The proof lies upon him who affirms, not upon him who denies; since, by the
nature of things, he who denies a fact cannot produce any proof.85
107 The Respondent states that even if the Tribunal were to establish that the Claimant was entitled
to moral damage, such damages would need to be compensatory and not punitive in nature, and
commensurate with any discernible harm or loss that was incurred.86However, the Claimant
failed to submit sufficient and satisfactory evidence thereof. Moreover, the Claimant
acknowledged that the Executives did not suffer any physical harm during the detention, as set
forth in point 22 of the Procedural Order No. 2.
108 The claims for compensation of the alleged loss of reputation and credit are based on the illusion
of expected profitability that is normally regarded by case law as unacceptable evidence. In
AAPL v. Republic of Sri Lanka case the tribunal pointed out that the assessment of future profits
requires proof that they were reasonably anticipated and not merely possible. In addition, the
Tribunal took into account that the speculative, unspecified and indefinite character of the sum
stated for damage compensation does not permit to include it as a proper element of damage.87
109 In the present case the Claimant did not provide any calculation or quantification for the sum
alleged. Neither stress nor any other mental suffer, nor lost reputation, credit, future profitability
can be established with a sufficient degree of certainty, taking into account the facts and
submissions made by the Claimant.
2.3 Neither Respondent’s actions nor the effect alleged by the Claimant are grave and
substantial
110 Respondent submits that there are no similarities between the extraordinary nature of the State’s
actions and its effects in the cases where the tribunal awarded compensation for damages thereof
(e.g., military siege88, harassment and threats by the governmental bodies89) and the allegations
asserted by the Claimant in this case. Respondent's police officers' actions were taken for a
85 Black's Law Dictionary, p. 516.
86 Spyridon Roussalis, para 301.
87Asian Agricultural Products, para 101.
88SARL, para 34.
89Desert Line, para 56.
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public purpose related to the Respondent’s internal interests (anticorruption policy) and,
therefore, shall not be deemed arbitrary or discriminatory, as it was demonstrated above.
111 For all these reasons the Respondent argues that the Tribunal has no jurisdiction to adjudicate the
claims in relation to compensation of moral damages and in any case, the moral damages are not
to be compensated since the “exceptional circumstances” standard is not met.
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(V) THE LOSS OF SALES BY CAM’S SUBSIDIARIES LOCATED
OUTSIDE OF RURITANIA TO FBI DOES NOT CONSTITUTE A
RECOVERABLE ITEM OF DAMAGES
112 The Respondent argues that the loss of sales by CAM’s subsidiaries are not subject to recovery
since (i) the CAM's foreign subsidiaries are not Investors under Cronos – Ruritania BIT, (ii)
sales by the CAM’s foreign subsidiaries cannot be regarded as investment under Cronos –
Ruritania BIT, (iii) the CAM’S foreign subsidiaries failed to perform the obligation to mitigate
loss incurred.
1. The CAM’s foreign subsidiaries are not investors under the Cronos-Ruritania BIT
1.1. The CAM’s foreign subsidiaries do not comply with criteria set by the Cronos - Ruritania
BIT to be regarded as Investors
113 According to Article 1(3)of the Cronos-Ruritania BIT, the term "Investor" means with regards
to each Contracting State, inter alia, “any entity which is established in accordance with, and
recognised as a legal person by the law of that Contracting State [...] which is the owner,
possessor or shareholder of an Investment in the territory of the other Contracting State”.90
114 Thus, the definition of the investor is based on the incorporation criterion, and the CAM’s
foreign subsidiaries, as they are not “established in accordance with... the law” of either the State
of Cronos or the Republic of Ruritania, are not investors under the BIT.
115 It must be also pointed out that “there is no consensus among scholars as to how the nationality
of corporations has to be determined”.91
Two approaches exist: a treaty-based approach and an
external standards approach. Applying a treaty-based approach, “tribunals merely have to imply
the criteria that have been agreed upon by the Contracting State in the pertinent international
90 Cronos – Ruritana BIT, Article 1.3.
91 Konrad, Rosenfeld, p.52.
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investment treaty”.92
Under external standards approach, tribunals consider that “the nationality
of corporations cannot be determined solely by having recourse to the criteria set out in the
international investment agreement”, and “additional criteria beyond the text of the treaty have to
be used”.93
116 Judging by the investment arbitral practice, tribunals show “a marked reluctance to apply
external standards”94
: in the vast majority of the key investment cases concerning possible
disregard of distinct legal personality – irrespective of whether the latter was disregarded in the
end or not – the final decision was based on the strict terms of a respective BIT.95
In this sense, a
good demonstration is the case of Saluka, which reads as follows:
“<...> The Tribunal cannot in effect impose upon the parties a definition of
“investor” other than that which they themselves agreed. That agreed definition
required only that the claimant-investor should be constituted under the laws of
(in the present case) The Netherlands, and it is not open to the Tribunal to add
other requirements which the parties could themselves have added but which
they omitted to add”.96
117 Hence, as there is an international investment treaty containing detailed provisions on who may
be regarded as an Investor, “there is no basis for applying external standards at all”.97
Consequently, the CAM’s foreign subsidiaries may not be regarded as investors under the BIT.
1.2. CAM is not entitled to claim for its foreign subsidiaries’ damages
118 As the CAM’s foreign subsidiaries are not investors under the BIT, they cannot claim any
damages referring to the BIT – neither by themselves nor by the agency of the CAM.
92Ibid, p.52. See e.g. McLachlan/Shore/Weiniger, p. 131; Bernardini, in: Ortino/Liberti/Sheppard/Warner (eds.),
Investment Treaty Law – Current Issues II, 17 (23). 93
Ibid. P.52. 94
Ibid. p. 54. 95
See e.g. Saluka, para 241; Tokios Tokeles, paras 21 et seqq.; ADC Affiliate, paras 357-359; Mobil Corporation,
paras. 156–57 (June 10, 2010); Rompetrol Group, para 85; Waste Management Inc. v. United Mexican States, ICSID
Case No.ARB(AF)/00/3, Award (Apr. 30, 2004), 43 I.L.M. 967 (2004), para.85 etc. 96
Saluka, para 241. 97
Konrad, Rosenfeld, p.55.
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119 Such a conclusion is borne out of current arbitral practice. E.g., in the EnCana the tribunal,
referring to a particular provision of Canada – Ecuador BIT, recognized the legal standing of the
parent company to claim for its own damage, but not for those of the third state subsidiaries.98
2. Sales by the CAM’s foreign subsidiaries cannot be regarded as investment under the
Cronos-Ruritania BIT
2.1 Sales by the CAM’s foreign subsidiaries (‘the Sales’) do not fall within the scope of the
Investments under the BIT
120 According to the BIT,
The term "Investment" means every asset which is directly or indirectly invested
in accordance with laws and regulations of the Contracting State in which
territory the Investment is made by Investors of the other Contracting State.
121 Correspondingly, as soon as the CAM’s foreign subsidiaries are not investors under the Cronos-
Ruritania BIT, no assets or transactions of them may be regarded as investments in the sense of
the Cronos-Ruritania BIT.
2.2 The Sales do not comply with criteria of investments elaborated in investment arbitral
practice
122 It’s important to show that the Sales were not investments under the Cronos-Ruritania BIT not
only due to formal grounds (i.e. because companies that carried them out were not Investors
under the BIT), but also due to their inherent nature.
123 In order to determine the existence of an investment, one usually looks into the BIT. However,
the BIT contains a very broad and abstract definition of an investment – as compared to the term
of the Investor. It includes “every asset” and is “accompanied by a non-exhaustive list of
examples of the types of assets covered by this definition”.99
The drawbacks of the such “50-
98EnCana v. Ecuador, paras 115-120.
99Malik, p.11.
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year-old typical”100
formulation are obvious: “it does not bring in the criteria often associated
with even the common, everyday understanding of investment, such as an expectation of profit,
an element of risk and a certain duration”.101
124 Nowadays states tend to formulate a definition of an investment in BITs with greater detail,
albeit to different degrees.102
International arbitral practice follows the same pattern: a number of
criteria of an investment were elaborated and successfully applied in the course of numerous
proceedings.
125 Correspondingly, it will be justified and correct to apply such criteria when determining the
nature of investment, thereby deciding whether the Sales could be regarded as an investment
under the Cronos-Ruritania BIT.
126 The most popular scheme of “investment criteria” is the so-called Salini test, which includes the
following features of investments:
(i) a contribution of resources;
(ii) a “certain duration of performance of the contract”;
(iii) “participation in the risks of the transaction”;
(iv) contribution to the Host State’s economic development.103
127 Factual background of the present case indicates the Sales did not comply with at least two of
four criteria.
100Ibid. P.3.
101Ibid. P.11.
102Ibid.P.11.
103See Salini, para.52; Fedax, para 43; Joy Mining, paras 55 to 57; Bayindir v. Turkey (ARB/03/29), Decision on
jurisdiction, 14 November 2005, para.130 to 137; Jan de Nul, paras 90 to 96; Saipem, paras 99 to 114; Malaysian
Historical Salvors para. 43 to 46; etc.See also Schreuer, p. 67.
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2.2.1 There was no any assumption of risk
128 The third requirement of the Salini test is that the transaction entailed a risk for the contributor
and, more precisely, an economic risk “in the sense of an uncertainty regarding its successful
outcome”.104
129 CAM has major shareholding in both FBI and CAM’s foreign subsidiaries supplying raw and
packaging to FBI and so a priori exercises effective control over them. Actually, supplies to FBI
were no more than deals between “the links of the same chain”, contracts “from self to self”.
Consequently, it is unreasonable to say that the CAM’s foreign subsidiaries assumed any
material risk when undertaking and performing their contractual obligations on supplies to FBI.
130 Moreover, in Parkerings v. Lithuania the tribunal considered that in case the investor is aware of
the nature of the risks on the investment in the host state, but took no contractual precautions for
protecting the investment, it is deemed that no risk is assumed by the investor.105
Consequently,
as the CAM’s foreign subsidiaries could have expected that their supplies would be reduced due
to some circumstances and took no precautions (e.g. insurance against loss of profits), they did
not assume any investment risk.
2.2.2. There was no contribution to the Host State’s economic development
131 The ad hoc committee in the case of Patrick Mitchell v. Congo the tribunal stated that the
“contribution to the economic development of the host State” standard is “an essential [...]
characteristic or unquestionable criterion of the investment”.106
132 Nevertheless, sales of the CAM’s foreign subsidiaries to FBI did not directly contribute to
Ruritania’s economic development.
104Patrick Mitchell, para 27.
105Parkerings, paras 335-338.
106Patrick Mitchell, para 33.
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133 First, such sales only served the needs of FBI. Increase of supply volumes would not necessarily
entail increase of beer produced. Therefore, CAM’s subsidiaries could not directly influence the
volume of contribution to economic development of Ruritania.
134 Second, should those sales have failed, it would not have impacted FBI’s production very much,
because the latter could purchase raw and packaging from other (non-CAM’s) suppliers. It is
also evidence of a supplementary character of those sales.
135 Third, FBI was in its turn another subsidiary of CAM. Correspondingly, a “self-to-self” character
of the Sales is unlikely to be regarded as contribution to economic development of Ruritania.
3. The CAM’s foreign subsidiaries failed to perform the obligation to mitigate loss
incurred
136 The obligation to mitigate damages has been described as “the most firmly established rule of
lex mercatoria”107
and has become “consistent factor in [arbitral] awards over the years”.108
It
consists in a principle that a “person who has suffered an injury or loss should take reasonable
action, where possible, to avoid additional injury or loss; the failure of a plaintiff to take
protective steps after suffering an injury or loss can reduce the amount of the plaintiff's
recovery”.109
Consequently, as the CAM’s foreign subsidiaries knew their sales to FBI would decrease due to
the fact that FBI’s beer products had been recognized detrimental to health, they should have
found any other purchasers (even abroad) and ship them raw and packaging produced to FBI.
Not having taken any measures, the CAM’s foreign subsidiaries violated their obligation to
mitigate loss incurred, and thus such damages are not subject to recovery.
107Hanotiau, p. 217. See also: Blessing, p.68 (point 8).
108 Derains, p. 267 et seq. at p. 986.
109See: http://legal-dictionary.thefreedictionary.com/Mitigation+of+Damages.
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PRAYER FOR RELIEF
In the light of the foregoing, the Respondent respectfully requests this Tribunal to find that:
(A) the Tribunal lacks jurisdiction to hear the claims submitted by CAM and in any case,
those claims are inadmissible;
(B) the Tribunal lacks jurisdiction over CAM’s claims based on the alleged breach of share
purchase agreement by the State Property Fund of Ruritania and in any case, those claims are
admissible;
(C) the regulatory measures of Ruritania do not constitute an expropriation of CAM’s assets
and do not otherwise violate its obligations under the Cronos - Ruritania BIT and international
law;
(D) the claim for compensation of moral damages shall not be considered in this arbitration
and in any case, moral damages shall not be compensated;
(E) the loss of sales by CAM’s subsidiaries located outside of Ruritania to FBI does not
constitute a recoverable item of damages.
RESPECTFULLY SUBMITTED ON SEPTEMBER 22, 2013
Team Schwebel
On behalf of Respondent,
the Republic of Ruritania.