SIXTH ANNUAL FOREIGN DIRECT INVESTMENT INTERNATIONAL MOOT COMPETITION OCTOBER 2013 FRANKFURT, THE FEDERAL REPUBLIC OF GERMANY

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1 SIXTH ANNUAL FOREIGN DIRECT INVESTMENT INTERNATIONAL MOOT COMPETITION 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

2 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 The Tribunal should not exercise jurisdiction over the CAM claims in accordance with the Ruritania-Cronos BIT 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 Ruritania cannot be respondent for the alleged breach of SPA since it is not a party to SPA The dispute based on the alleged breach of SPA is not an investment dispute but a dispute of commercial nature (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 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 Ruritania did not act in violation of FET standard ii

3 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 (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 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 The facts of the dispute do not amount to exceptional circumstances standard (V) THE LOSS OF SALES BY CAM S SUBSIDIARIES LOCATED OUTSIDE OF RURITANIA TO FBI DOES NOT CONSTITUTE A RECOVERABLE ITEM OF DAMAGES The CAM s foreign subsidiaries are not investors under the Cronos-Ruritania BIT Sales by the CAM s foreign subsidiaries cannot be regarded as investment under the Cronos-Ruritania BIT The CAM s foreign subsidiaries failed to perform the obligation to mitigate loss incurred 33 PRAYER FOR RELIEF iii

4 LIST OF AUTHORITIES Books and Journals Anil Bernardini Black's Law Dictionary Yilmaz Anil, Corporate personality in ICSID arbitration, Int.A.L.R., 15(5), 2012, Bernardini, Piero, Nationality Requirements under BITs and Related Case Law, in: F.Ortino, L. Liberti, A. Sheppard, A. Warner, Investment Treaty Law Current Issues II, London 2007, Black's Law Dictionary, 6th edition. Available at: Blessing Brownlie Daujotas Blessing, Marc, Das neue internationale Schiedsgerichtsrecht der Schweiz Ein Fortschrit oder ein Rückschritt? Available at: [ Ian Brownlie, Principles of Public International Law, Q.C., Oxford University Press, USA, February 15, Rumanitas Daujotas, Non-Signatories and Abuse of Corporate Structure in International Commercial Arbitration (July 30, 2012). Available at: iv

5 Davies, Worthington and Micheler Derains Dolzer/Stevens Dobson Encyclopedia Davies, Worthington and Micheler, Gower and Davies Principles of Modern Company Law, Sweet & Maxwell, Limited, Cf. Yves Derains, Chronique des sentences arbitrales, Journal du Droit International (1982). Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties, Martinus Nijuhoff Publishers, J.M. Dobson, Lifting the Veil in Four Countries: The Law of Argentina, England, France and the United States (1986) 35 I.C.L.Q. Anthony D Amato, Good Faith in Encyclopedia of Public International Law, vol. 7, p. 107 (R. Bernhardt, ed. 1984). Also available at: ood-faith.pdf Kläger Roland Kläger, Fair and Equitable Treatment' in International Investment Law, Cambridge University Press Konrad, Rosenfeld Dr. Sabine Konrad, Dr. Friedrich Rosenfeld, The Nationality of Corporations in International Investment Law/The Determination of the Nationality of Investors under Investment Protection Treaties. The International Law Association, German Branch, Sub-Committee on Investment Law. Heft 106, March v

6 Lauterpacht Macovei Malik Marshall Hersch Lauterpacht, Development of International Law by the International Court, London, M. Macovei, Guide to the Implementation of Article 5 of the European Convention on Human Rights, Council of Europe, Mahnaz Malik, Definition of Investment in International Investment Agreements, Bulletin #1, August 2009/ The International Institute for Sustainable Development, Best Practices Series. Fiona Marshall, Fair and Equitable Treatment in International Investment Agreements Issues in International Investment Law. Background Papers for the Developing Country Investment Negotiators Forum Singapore, October 1-2, Available at: McLachlan/Shore/Weiniger Moore Nikiema Campbell McLachlan, Laurence Shore, and Matthew Weiniger, International Investment Arbitration, Oxford International Arbitration Series, M. Moore, A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon (2006) J.B.L Suzy H. Nikiema, Best Practices Indirect Expropriation. The International Institute for Sustainable Development (2012). vi

7 Available at: priation.pdf Ortino/Liberti/Sheppard/War ner Park Scheinman F. Ortino, L. Liberti, A. Sheppard & Warner (eds.), Investment Treaty Law: Current Issues II (London: BIICL, 2007). William W. Park, Non-signatories and International Contracts: An Arbitrator s Dilemma in Multiple Party Actions, International Arbitration, 3 (2009) by Prof. William W. Park (Cohasset, USA). Martin F. Scheinman, Evidence and Proof in Arbitration, Cornell University Press, Schreuer Christoph Schreuer, A commentary to the ICSID Convention, Cambridge University Press, Schreuer at Fordham Conference Christoph Schreuer, Nationality Planning, Fordham Conference, London, 27 April Revised October 12, 2012, Available at: Schreuer, Expropriation Christoph Shreuer, The concept of expropriation under the ETC and other investment treaties, revised 20 May Available at: vii

8 Vandekerckhove Wakefiled, Durkin Karen Vandekerckhove, Piercing the Corporate Veil: A Transnational Approach (European Company Law), Kluwer Law International, Daniella Germain B. Psych. Hons, Melanie A. Wakefield, Ph.D., and Sarah J. Durkin, Adolescents Perceptions of Cigarette Brand Image: Does Plain Packaging Make a Difference?. Journal of Adolescent Health (2009) 1 8. Available at: 20and%20Adolescents.pdf Case Law ADC Affiliate Aguas del Tunari ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16. Aguas del Tunari, S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, 29 January 2003, Decision on Jurisdiction. Amto Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005 (ECT), Final Award, March 26, Asian Agricultural Products Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No.ARB/87/3, 27 June Autopista Concesionada de Venezuela Autopista Concesionada de Venezuela CA v. Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, September 27, viii

9 Azurix Azurix Corp v. Argentine Republic, ICSID Case No. ARB/01/12, Decision on Jurisdiction, December 8, Barcelona Traction Belgium v. Spain (Barcelona Traction case), ICJ Case (ICJ Report 1970). Bayandir Bayindir Insaat Turizm Ticaret Ve Sanayi S. A. (Scedil) v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29 (2005). Bosh International Bosh International CMS Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11, October 25, Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11, Award, October 25, CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8 (2005). Cementownia Cementownia NowaHuta S.A. v. Turkey, ICSID Case No. ARB(AF)/06/2, Award, September 17, esky v. the C ech Republic esky v. the C ech Republic, (ECHR), June 6, Desert Line Eastman Kodak Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, February 6, Eastman Kodak Company v. The Government of Iran, Iran- ix

10 U.S. C.T.R, vol. 17, p. 153 (1987). El Paso EnCana Eureko Fedax Flexi-Van Leasing Gustav Hamester Helnan Impregilo Inceysa International El Paso Energy International Company v. The Argentine Republic, ICSID Case No ARB/03/15. EnCana v. Ecuador, LCIA Case No. UN3467, Award, February 3, Eureko B. V. v. Poland, Ad Hoc Arbitration case, Partial Award, August 19, Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3 (1998), Decision on Objections to Jurisdiction, July 11, Flexi-Van Leasing, Inc. v. The Government of the Islamic Republic of Iran, Iran-U.S. C.T.R, vol. 12, p. 335, at p. 349 (1986). Gustav F W Hamester v. Republic of Ghana, ICSID Case No. ARB/07/24, June 18, Helnan International Hotels A/S v. The Arab Republic of Egypt, ICSID Case No.ARB/05/19, Decision on Objection to Jurisdiction, October 17, Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, April 22, Inceysa Vallisoletana, S.L. v. Republic of El Salvador, ICSID Case No.ARB/03/26, Award, August 2, Technical International Technical Products Corporation v. The x

11 Products Jan de Nul Joy Mining Lemire v. Ukraine LG&E Government of the Islamic Republic of Iran, Iran-U.S. C.T.R, vol. 9, p. 206 (1985). Jan de Nul N.V v. Egypt (ARB/04/13), Decision on jurisdiction, June 16, Joy Mining Machinery Ltd v. Egypt, ICSID Case No. ARB/03/11, Award for lack of jurisdiction, August 4, Joseph Charles Lemire & others v. Ukraine, Award, ICSID Case No. ARB/06/18, March 28, LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentine Republic, ICSID Case No ARB/02/1, Award, July 25, Maffezini Maffezini v. Spain, ICSID Case No. ARB/97/7 (Argentina/Spain BIT), Award, November 13, Malaysian Historical Salvors Marvin Roy Feldman Karpa Methanex Mobil Corporation Malaysian Historical Salvors SDN BHD v. Malaysia, ICSID Case No. ARB/05/10, Award for lack of jurisdiction, May 17, 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, Methanex Corporation v. United States of America, (NAFTA case), UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, August 3, Mobil Corporation and others v. Bolivarian Republic of xi

12 Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, June 10, Monte Blanco Noble Ventures Otis Elevator Pac Rim Cayman Parkerings Patrick Mitchell Phoenix Rompetrol Group Saipem Salini 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 Inc. v. Romania, ICSID Case No. ARB/01/11. Otis Elevator Company v. The Islamic Republic of Iran, Iran-U.S. C.T.R, vol. 14, p. 283 (1987). Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12. Parkerings Compagni et AS v. Lithuania, Award, ICSID Case No ARB/05/8, September 11, Patrick Mitchell v. Democratic Republic of the Congo ICSID Case No. ARB/99/7. Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, April 15, Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Jurisdiction, April 18, Saipem S.p.A. v. People's Republic of Bangladesh, ICSID Case No. ARB/05/7. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, July 23, xii

13 Saluka SARL SEDCO Sempra SGS v. Philippines SGS v. Pakistan Schering Société Générale Spyridon Roussalis Starrett Housing Saluka Investments B.V. v. The Czech Republic, PCA case, Partial Award, March 17, SARL Benvenuti and Bonfant v.people s Republic of Congo, ICSID Case No. ARB/77/2, August 8, SEDCO, Inc. v. National Iranian Oil Company, Iran-U.S. C.T.R, vol. 15, p. 23 (1987). Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16. Société Générale de Surveillance v. Republic of the Philippines, ICSID Case No. ARB/02/6; Decision on Jurisdiction. SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13. Schering Corporation v. The Islamic Republic of Iran, Iran-U.S. C.T.R., vol. 5, p. 361 (1984). Société Générale v. Dominican Republic, LCIA Case No. UN7927, Preliminary Objections to Jurisdiction, September 19, Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, December 7, Starrett Housing Corporation, Starrett Systems, Inc., Starrett Housing International, Inc., v. The Government of the Islamic Republic of Iran, Bank Omran, Bank Mellat, (Case No. 24), U.S.C.T.R. 4 (1983 III), p. 122 (154) xiii

14 Interlocutory Award, December 19, Técnicas Tecmed Medioambientales Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2 Award, May 29, Tokios Tokeles Tokios Tokeles v. Ukraine, ICSID Case No ARB/02/18, Decision on Jurisdiction, April 29, W. v. Switzerland W. v. Switzerland, ECHR Case No /88, January 26, Waguih Siag Waste Management William Nagel Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID Case No.ARB/05/15, June 1, Waste Management, Inc. v. United Mexican States (Number 2), ICSID Case No. ARB(AF)/00/3, Final Award, April 30, William Nagel v. Czech Republic, SCC Case 49/2002, Award, September 10, Treaties and Other International publications ARS Declaration on the TRIPS agreement 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); Declaration on the TRIPS agreement and public health, November 14, Available at: xiv

15 ECHR OECD Working Paper ndecl_trips_e.htm The European Convention on Human Rights (1950) Indirect Expropriation and the Right to Regulate In International Investment Law. OESD Working Paper on International Investment (2004). TRIPS The Agreement on Trade Related Aspects of Intellectual Property Rights (Annex 1C of the Marrakesh Agreement establishing the World Trade Organisation of April 15, 1994). UNCITRAL Arbitration Rules UNCITRAL Arbitration Rules (as revised in 2010 by General Assembly Resolution 65/22). Vienna Convention Vienna Convention on the Law of Treaties (1969) xv

16 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, ( 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, 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

17 (Exhibit RX1) ( Memorandum ) that the transfer was committed with a sole purpose of treatyshopping 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 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 xvii

18 Respondent, who allegedly acted with the aim of expropriation of CAM s assets. Criminal proceedings against the executives were also claimed unjust. xviii

19 (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. 2 Accordingly the investment should inter alia correspond to 1 UNCITRAL Arbitration Rules, Article 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. 1

20 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 development 4 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 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 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 Phoenix, para Vienna Convention, Article Salini, para Salini, para 52, 54; Schreuer, p See Submission I, para Salini, para 52. 2

21 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 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 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 Phoenix, para Société Générale, para Phoenix, para

22 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 See Submission I, para Nottenbohm Case (Second Phase), Judgement of the International Court of Justice, 6 April, 1955, cited by Brownlie, pp. 431, Brownlie, pp. 413, Barcelona Traction, para Anil, p.177; Davies, Worthington and Micheler, p.200; Vandekerckhove, pp

23 interpretation of the veil lifting doctrine differs from jurisdiction to jurisdiction 21, 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 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 Tokeles 24 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 21 Ibid, p Ibid, p.174; Davies, Worthington and Micheler, p.202 ; Moore, p.193; Dobson, pp. 839, ICC case no.2375 (1975); ICC Case no.5730; ICC Case No. 8385; ICC Case No (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 Lauterpacht, p

24 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 entitled 27.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 Under the existing international law, the structuring of an investment with the purpose of benefitting from a BIT is not prohibited 29. However, if corporate restructuring is conducted for the sole purpose of gaining access to arbitration under a BIT, it is deemed an abuse 30. 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 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 27 Phoenix, para Ibid, para Mobil Corporation, paras 191, 204; Aguas del Tunari, paras 321, Phoenix, paras 92, 95, 144; Aguas del Tunari, para 205; Mobil Corporation, para 205; Cementownia, para Schreuer at Fordham Conference, p Ibid; Phoenix, para 92; Mobil Corporation, para

25 abuse such disputes should be foreseen as a very high probability and not merely as possible controversy 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

26 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. 8

27 (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 law 35, 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 Gustav Hamester, para 171; Bosh International, para

28 46 ARS stipulate three cases where actions of an entity can be attributed to the State: (i) an entity is a State s organ 36 (ii) an entity exercises elements of governmental authority 37 (iii) an entity acts on the instructions of, or under the direction or control of the State 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 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 ARS, Article ARS, Article ARS, Article Maffezini, paras 52 and 57; Gustav Hamester, para Jan de Nul, para

29 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 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 5 43, 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 For example, the Workers Councils considered in Schering. 43 SEDCO, para 132. See also International Technical Products (para 74); and Flexi-Van Leasing, (para 68). 11

30 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 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 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. 44 Noble Ventures, para Waste Management, para. 160; Joy Mining, para 72; Impregilo, para 260; Azurix, para Sempra, para 56, See also CMS, para 44 12

31 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 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 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 See Submission II, paras SGS v. Pakistan, para SGS v Pakistan, para See SGS v Pakistan (para ) and SGS v Philippines, (para 124). 13

32 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 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 Gustav Hamester, para Joy Machinery, para El Paso, para El Paso, para

33 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 This view was reiterated by several other cases 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 Impregilo, para Gustav Hamester, para 343; Amto, para.110; William Nagel, paras ; CMS (Annulment Decision), para SGS v. Philippines, para

34 70 Moreover, as stated in Bosh v Ukraine 58 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. 58 Bosh International, para

35 (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 Schreuer, Expropriation, p. 5.; Dolzer/Stevens, p