INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES

Transcription

1 INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES In the Proceeding Between CONTIFICA ASSET MANAGEMENT CORP. (Claimant) v REPUBLIC OF RURITANIA (Respondent) MEMORIAL FOR RESPONDENT

2 TABLE OF CONTENTS LIST OF AUTHORITIES... ii STATEMENT OF FACTS... 1 SUMMARY OF ARGUMENTS... Error! Bookmark not defined. ARGUMENTS... 3 PART ONE: JURISDICTION... 3 I. THE TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE CLAIMS SUBMITTED BY THE CLAIMANT, AND THE CLAIMS ARE NOT ADMISSIBLE IN LIGHT OF THE FACTS SURROUNDING THE ACQUISITION OF SHARES IN FBI BY THE CLAIMANT... 3 II. THE TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE CLAIMANT S CLAIMS BASED ON THE ALLEGED BREACH OF THE SHARE PURCHASE AGREEMENT, AND THE CLAIMS ARE NOT ADMISSIBLE... 8 PART TWO: MERITS I. THE RESPONDENT HAS NOT VIOLATED ITS OBLIGATIONS UNDER THE BIT AND INTERNATIONAL LAW TOWARDS THE CLAIMANT, EITHER BY ADOPTING THE MEASURES FOR THE REGULATION OF MARKETING AND SALE OF ALCOHOL OR BY IMPOSING FURTHER REQUIREMENTS ON THE MARKETING AND SALE OF FREEBREW BEER A. The Respondent has not unlawfully expropriated any investments of the Claimant 11 B. The Respondent has not breached the standards of fair and equitable treatment in its treatment of the Claimant s investments II. MORAL DAMAGES MAY NOT, IN PRINCIPLE, BE AWARDED BY THE TRIBUNAL TO THE CLAIMANT III. THE LOSS OF SALES BY CAM S SUBSIDIARIES LOCATED OUTSIDE OF RURITANIA DO NOT CONSTITUTE A RECOVERABLE ITEM OF DAMAGES REQUEST FOR RELIEF i

3 LIST OF AUTHORITIES ARTICLES Source Andrew, Newcombe, 'The Boundaries of Regulatory Expropriation in International Law' (2005) 20:1 ICSID Review Christoph H. Schreuer, Nationality Planning, Fordham Conference, London, 27 April 2012, Revised 12 October 2012, Dr. Walid Ben Hamia, Observations by Dr. Walid Ben Hamida 7(2) Stockholm International Arbitration Review 84 Lars Markert and Elisa Freiburg Moral Damage in International Investment Disputes On the search for a legal basis or guiding principles (2013) 3 The Journal of World Investment and Trade 1 Markus Petsche Punitive Damages in International Commercial Arbitration: Much Ado about Nothing? (2013) 29(1) Arbitration International Mavluda Sattorova, From Expropriation to Non- Expropriatory Standards of Treatment: Towards a Unified Concept of an Investment Treaty Breach (PhD, University of Birmingham, 2010) Merryl Lawry-White Are moral damages an exceptional case? (2012) 15(6) International Arbitration Law Review 236 Patrick Dumberry Compensation for Moral Damages in Investor-State Arbitration Disputes 27(3) Journal of International Arbitration 247 Short Title The Boundaries of Regulatory Expropriation in International Law' Nationality Planning Observations by Dr Walid Ben Hamida Moral Damage in International Investment Disputes On the search for a legal basis or guiding principles Punitive Damages in International Commercial Arbitration: Much Ado about Nothing From Expropriation to Non- Expropriatory Standards of Treatment Are moral damages an exceptional case? Compensation for Moral Damages in Investor-State Arbitration Disputes TREATISES AND BOOKS Source American Law Institute, Restatement (Third) of Foreign Relations Law of the United States (1987) Andrew Newcombe and Lluís Paradel Law and Practice of Investment Treaties: Standards of Treatment, (Kluwer Law International 2009) Borzu Sabahi, Compensation and Restitution in Investor Arbitration (Oxford University Press, 2011) Campbell McLachlan QC, Laurence Shore, Matthew Short Title Third Restatement Law and Practice of Investment Treaties: Standards of Treatment Compensation and Restitution in Investor Arbitration International Investment ii

4 Weiniger International Investment Arbitration (Oxford University Press, 2007) Charter of Economic Rights and Duties of States, opened for signature 12 December 1974, A/RES/29/3281 (entered into force 3 January 1976) Christoph H. Schreuer, et al., The ICSID Convention: A Commentary (Cambridge University Press, 2nd edn. 2009) Christopher Dugan, Don Wallace, Jr., Noah Rubins, and Borzu Sabahi, Investor-State Arbitration (Oxford University Press, 2008) Crina Baltag The Energy Charter Treaty: The Notion of Investor (Kluwer Law International, 2012) ILC Articles on Responsibility of States for Internationally Wrongful Acts, GA RES 56 th Session, 83 rd Plenary Meeting, Agenda item 162, UN DOC A/RES/56/83 (28 January, 2002) Jeffrey Waincymer Procedure and Evidence in International Arbitration (Kluwer Law International, 2012) Monique Sasson, Substantive Law in Investment Treaty Arbitration: The Unsettled Relationship between International Law and Municipal Law, (Kluwer Law International, 2010) Nigel Blackaby, Constantine Partasides, et al., Redfern and Hunter on International Arbitration, (Oxford University Press, 2009) North American Free Trade Agreement, signed 17 December 1992, [1994] CTS 2 (entered into force 1 January 1994) OECD Convention on the Protection of Foreign Property, opened for signature 12 October 1967 (Notes and Comments) Peter T. Muchlinkski, Multinational Enterprises and the Law (Oxford, 1999) Report of the International Law Commission, UN GAOR, 53 rd sess, Supp No 10,UN DOC A/56/10 (23 April-1 June and 2 July-10 August 2001) United Nations Conference on Trade and Development, Expropriation: UNCTAD Series on Issues in International Investment Agreements II (United Nations, 2012) United Nations Conference on Trade and Development, Investor-State Disputes Arising From Investment Treaties: A Review: UNCTAD Series on International Investment Policies for Development (United Nations, 2005) Arbitration Charter of Economic Rights and Duties of States The ICSID Convention: A Commentary Investor-State Arbitration The Energy Charter Treaty: The Notion of Investor ILC Articles Procedure and Evidence in International Arbitration Substantive Law in Investment Treaty Arbitration: The Unsettled Relationship between International Law and Municipal Law, Redfern and Hunter on International Arbitration NAFTA OECD Convention Multinational Enterprises and the Law ILC Draft Articles on State Responsibility with Commentaries UNCTAD Report: Expropriation UNCTAD Report: Investor-Trade Disputes iii

5 INDEX OF CASES Source Paragraph INTERNATIONAL COURT OF JUSTICE Case Concerning the Barcelona Traction, Light and Barcelona Traction Power Co Ltd (New Application: 1962) (Belgium v Spain) [1970] Elettronic Sicula S.p.A. (ELSI) (United States of ELSI America v Italy), I.C.J. Reports 1989 Nicaragua Case [1986] ICJ Reports 14 Nicaragua Case Oscar Chinn Case (UK v Belgium), Judgment, 12 Oscar Chinn December 1934, PCIJ Ser A/B, No. 63 (1934) EUROPEAN COURT OF HUMAN RIGHTS James v United Kingdom, 98 European Court of Human James Rights (ser. A) 9, 32 (1986) AUSTRALIAN HIGH COURT JT International SA v Commonwealth of Australia; JT International British American Tobacco Australasia Ltd v The Commonwealth (2012) 291 ALR 669 UNITED STATES SUPREME COURT Penn Central Transp. Co v New York City [1978] 438 Penn Central US 104 Taboe-Sierra Preservation Council, Inc. v Taboe Taboe-Sierra Preservation Council Regional Planning Agency, 122 S. Ct (2002). CONSTITUTIONAL COURT OF SOUTH AFRICA Soobramoney v Minister of Health (Kwazulu-Natal) Soobramoney (CCT32/97) [1997] ZACC 17 INDEX OF ARBITRAL AWARDS Source Short Title AD HOC ARBITRATION (UNCITRAL) [ADHOC] CME Czech Republic B.V v The Czech CME Republic, (Partial Award) (UNCITRAL 13 September 2001) ADC Affiliate Limited and ADC & ADMC Management ADC Limited v The Republic of Hungary (Award) (ICSID Case No. ARB/03/16, 2 October 2006) ADF Group Inc v United States of America (Award) ADF (ICSID Case No. ARB (AF)/00/1 9 Jan 2003) American Manufacturing and Trading Inc (AMT) v AMT Republic of Zaire (Award) (ICSID Case No. ARB/93/1, iv

6 21 February 1997) Asian Agricultural Products Ltd. v Republic of Sri Lanka (Final Award) (ICSID Case No. ARB/87/3 27 Jun 1990) Azurix Corp. v The Argentine Republic (Award) (ICSID Arbitral Tribunal Case No ARB/01/12 14 July 2006) Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana (Jurisdiction and Liability) (1984) 95 ILR 184 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (Award) (ICSID Case No ARB/05/22 24 July 2008) CMS Gas Transmission v The Argentine Republic (Award) (ICSID Caase No. ARB/01/8, 12 May 2005) Desert Line Projects LLC v The Republic of Yemen (Award) (ICSID Case No. Arb/05/17, 6 February 2008) Enron Corp. and Ponderosa Assets L.P. v Argentina (Award) (ICSID Case No. ARB/01/3, 22 May 2007) Generation Ukraine, Inc v Ukraine (Award) (ICSID Case No. ARB/00/9, 16 September 2003) Genin, Eastern Credit Ltd., Inc. and AS Baltoil v Republic of Estonia (Genin) (Award) (6 ICSID Reports 241, 25 June 2001) Global Trading Resource Corp. and Globex International, Inc. v Ukraine (Award) (ICSID Case No. ARB/09/11, 1 December 2010) ICSID Joseph Charles Lemire v Ukraine (Award) (ICSID Case No. ARB/06/18, 28 March 2011) LG&E v Argentine Republic (Award) (ICSID Case No. ARB/02/1, 12 May 2005) Pac Rim Cayman LLC v Republic of El Salvador (Decision on Jurisdiction) (ICSID Case No. ARB/09/12, 21 October 2005) Phoenix Action, Ltd. v The Czech Republic (Award) (ICSID Case No. ARB/06/5, 15 April 2009) Robert Azinian and Others v The United Mexican States (Award) (ICSID Case No. ARB(AF)/97/2, 1 November 1999) Saluka Investments Bv (The Netherlands) v Czech Republic (Partial Award) (UNCITRAL 17 March 2006) Sempra Energy International v Argentine Republic (Award) (ICSID Case No. ARB/02/16, 28 September 2007) SGS Société Générale de Surveillance, S.A. v Pakistan, AAPL Azurix Biloune Biwater CMS Desert Line Projects Enron Generation Ukraine Genin Globex Lemire LG&E Pac Rim Cayman Phoenix Action Azinian Saluka Sempra SGS v

7 (Decision on Jurisdiction) (ICSID case No ARB/01/13, 6 August 2003) Siemens A.G. v The Argentine Republic (Award) (ICSID Siemens Case No. ARB/02/8, 17 January 2007) SOABI v Senegal (ICSID Case No. ARB/82/1, 1 August SOABI 1984) The Rompetrol Group N. V. v Romania (Award) (ICSID Rompetrol Case No. ARB/06/3, 6 May 2013) NAFTA Glamis Gold, Ltd. v United States of America (Award) Glamis Gold (UNCITRAL, 8 June 2009) Marvin Feldman v Mexico (Award) (ICSID Case no. Feldman ARB(AF)/99/1, 16 December 2002) Metalclad Corporation v The United Mexican States Metalclad (Award) (ICSID Case No. ARB(AF)/97/1, 30 August 2000) Methanex Corporation v United States of America, Methanex (Award) (UNCITRAL, 3 August 2005) Mondev International Ltd v United States of America Mondev (Award) (ICSID Case No. ARB(AF)/99/2, 11 Oct 2002) Pope & Talbot v The Government of Canada (Interim Pope & Talbot Award) (UNCITRAL, 26 June 2000) S. D. Myers, Inc. v Government of Canada (Partial SD Myers Award) (UNCITRAL, 13 Nov 2000) Tecnicas Medioambientales Tecmed S.A. Tecmed v The United Mexican States (Award) (ICSID Case No. ARB (AF)/00/2, 29 May 2003) Tokios Tokeles v Ukraine (Award) (ICSID Case No. Tokios Tokeles ARB/02/18, 2 July 2007) Waste Management Inc v United Mexican States Waste Management (Award) (ICSID Case No. ARB(AF)/98/2, 2 June 2000) U.S.-MEXICO GENERAL CLAIMS COMMISSION Neer v Mexico, Opinion, United States-Mexico General Neer Claims Commission, 15 October 1926, 21 A.J.I.L. 555, 192 IRAN US CLAIMS TRIBUNAL Amoco International Finance Corp v Government of the Amoco Islamic Republic of Iran et al (1987) 15 Iran-USCTR 189 Lillian Byrdine Grimm v The Government of the Islamic Grimm Republic of Iran, Case No. 71, Iran-U.S. Claims Tribunal (Award of 18 Feb. 1983) Sedco, Inc. v National Iranian Oil Co., Interlocutory Sedco Award No. ITL , 28 October 1985, 9 Iran- United States Claims Tribunal Reports 248 Tippetts, Abbett, McCarthy, Stratton v TAMS Tippetts AFFA Consulting Engineers of Iran, 6 CTR 219 vi

8 (1984 II) vii

9 STATEMENT OF FACTS 1. Contifica Assets Management Corp ( CAM ) is a company incorporated in accordance with the Laws of Cronos, and is a part of Contifica Group an international commercial conglomerate. 2. On 30 June 2008, Contifica Spirts S.p.A, a member of the Contifica Group, was successful in a tender to purchase Freecity Breweries Inc ( FBI ) from the State Property Fund of Ruritania ( State Property Fund ). FBI was a well established and profitable business, it s most well known and successful product, Freebrew, was flavoured with a derivative of Rehyan, a local plant. 3. On 30 June 2008 Contifica Spirits and the State Property Fund entered into a share purchase agreement, for the sale of shares in FBI for USD 300,000, On 17 March 2010, Contifica Spirits shares in FBI were transferred to CAM, pursuant to a corporate restructure of Contifica Group. CAM obtained the principal intellectual property including Ruritanian-registered trademarks of FBI produced beer and trade dress registrations beer bottle designs specifically the iconic 0.8L FREEBREW bottle. 5. On 20 November 2010, the Ruritanian parliament adopted the Marketing of Alcoholic Beverages Act ( MAB ACT ) which included: a. Prohibitions on the marketing of alcoholic beverages on television and at sporting events; b. Prohibitions on serving beer at sports facilities, outdoors and at any place from 9 pm 9 am; c. The introduction of packaging requirements, which required trademarks and brands to be written in the same font and colour as other label text; and d. Prohibition on the sale of beer in bottles which were larger than 0.5L, Freebrew, unlike most of its competitors, was retailed in a 0.8L bottle. 6. On 15 June 2011, the Human Health Research Institute ( HRI ), funded by the Ruritanian Government, published a report which alleged that the consumption of 1

10 FREEBREW beer could increase the risk of cardiac complications. In July 2011, CAM became aware that concerns about Rehyan were first articulated in an interim report by the HRI in CAM has raised objections to the contents of the report. 7. After the publication of the report, the Ministry of Health and Social Security mandated the inclusion of product warnings on products containing Rehyan. 8. On 1 December 2011, the Prosecutor s Office of Ruritania initiated an investigation against Messrs Goodfellow and Straw, executives of FBI and Contifica Group. Messrs Straw and Goodfellow were notified of the investigation on 19 December On 23 December 2011, Messrs Goodfellow and Straw were arrested and the video of their arrest was aired on Ruritanian television. In a televised interview, the spokesman for the prosecutor s office said that [they] will not let people responsible for corruption escape investigation. 10. Messrs Goodfellow and Straw were released from detention on 3 January 2012, and the investigations were terminated on 20 June On 30 September CAM instituted arbitral proceedings against the Republic of the Ruritania 2

11 ARGUMENTS PART ONE: JURISDICTION I. THE TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE CLAIMS SUBMITTED BY THE CLAIMANT, AND THE CLAIMS ARE NOT ADMISSIBLE IN LIGHT OF THE FACTS SURROUNDING THE ACQUISITION OF SHARES IN FBI BY THE CLAIMANT 12. The Respondent submits that the Tribunal does not have jurisdiction to hear the claims submitted by the Claimant, and that the claims are not admissible in light of the facts surrounding the acquisition of shares in FBI by the Claimant. 13. As a preliminary matter, the Respondent concedes that Article 8(1) of the 'Treaty of Mutual Promotion and Protection for Foreign Investment between The Republic of Ruritania and The State of Cronos' ('the BIT ) is satisfied, as three months have passed since the written notification of a claim by the Investor. 1 i. Jurisdiction 14. The Respondent submits that Claimant s corporate group engaged in a restructure for the sole purpose of gaining jurisdiction under the BIT, as was held to be the case in Phoenix Action. a. Definition of investment 15. The Respondent concedes that the transfer of shares in the Share Purchase Agreement satisfies the requirements of an investment as expressly provided for in the BIT. 2 The investment was made in connection with economic activities 3 and contributed to the host state s development. 4 The Contifica Group contributed significantly to Rurtitania s economy through increased output from the brewery and employment of local workers in the safest place to work in Ruritania. 5 b. Definition of investor 1 Statement of Claim, [27]. 2 Exhibit No. 1, Article 1(1)(b). 3 Exhibit No. 1, Article 1(1). 4 The ICSID Convention: A Commentary, Statement of Claim, [8]. 3

12 16. In order to gain protection under the BIT, CAM must be an investor. 6 Tribunals have supported parties ability to define what is required of a natural or juridical person in order to gain protection Although CAM as a legal person was incorporated in Cronos 8 at the time of submission of claim, the BIT in the instant case has a more ambiguous test for what constitutes an investor than in other jurisdictions. It is not clear that they intended to disallow the tribunal from considering a control test Tribunals do not recognise passive investments. 10 There is no evidence of investment made into the corporation after the transfer of the company in either production or change of management. This tends to suggest that CAM was a mere holding company and not the true controlling entity c. A mere holding company 19. The Respondent notes that Tribunals have only pierced the corporate veil when instructed to determine the beneficial owners by the BIT itself, 11 or where it was believed that the organisation was a mere holding company. 12 However, it is submitted that, in the instant case, CAM was a mere holding company. CAM is a 100% subsidiary, and certain transactions required the approval of the Board of Directors including, importantly, the acquisition of FBI shares the commencement of the current arbitration. 13 The company also shared executives throughout the group. 14 ii. The courts should pierce the corporate veil as there was an abuse of process 20. The Respondent submits that the transfer of shares from Contifica Spirits to CAM was not a bona fide transaction and was done in anticipation of a conflict with the 6 Exhibit No. 1, Article 1(3). 7 Tokios Tokeles. 8 Statement of Claim, [2]. 9 C.f. Tokios Tokelés. 10 Observations by Dr. Walid Ben Hamida, Waste Management. 12 SOABI. 13 Procedural Order No. 2, [18]. 14 Procedural Order No. 2, [21]. 4

13 State. 15 As such, the Tribunal should pierce the corporate veil and look to the true owner of CAM. 21. In determining whether the transfer was a bona fide transaction, the following factors from Phoenix Action should be considered; the timing of the investment, the timing of the claim, the substance of the transaction and the true nature of the operation. a. Timing of the investment 22. This factor was deemed most important by Prof Schreuer, who said [the] validity of nationality planning [is] primarily dependent on the time of the restructuring in relation to the dispute The Pac Rim Cayman held that an investment will not be bona fide when the relevant party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely as a possible controversy. 17 The acquisition of shares in FBI occurred only two months after the New Way Party achieved a majority in parliament, taking a hard stand against marketing and sale of alcohol. 18 Furthermore, this was well covered in the media at the time The behaviour of the Claimant can be analogised to the purchase of Benet Praha and Benet Group in the case of Phoenix Action, where the companies were already burdened with the civil litigation (and) problems with the tax and customs authorities at the time of purchase, indicating an intention to gain protection through the acquisition The stated intention of the Claimant in evidence provided shows that they sought the jurisdiction of Ruritania for greater investment protection. 21 This supports the notion that the Claimant was aware of the need to protect their investment, and chose to do so through the BIT rather than allowing FBI to pursue any domestic remedies. 15 Pac Rim Cayman, [2.99]. 16 Nationality Planning, p Pac Rim Cayman, [2.99]. 18 Statement of Defense, [6]. 19 Procedural Order No. 2, [9]. 20 Phoenix Action, [133]. 21 Exhibit RX 1. 5

14 b. Timing of the claim 26. Furthermore, this claim was instigated only 18 months after the acquisition of shares in FBI, on 30 September This timing can be explained by a failed attempt to have the regulations reversed domestically, and after being unsuccessful, then pursuing the claim under the BIT. c. Substance of the transaction 27. The transfer of shares to CAM took place as part of a wider intra-group restructuring 23 and CAM paid only a nominal amount for FBI. 24 This suggests that it was not operating as a separate company negotiating with other members of the Contifica Group, but that all companies were interested in CAM s acquisition for the BIT protections gained. d. True nature of the operation 28. The Contifica Group had invested significantly in the technology, design and equipment of FBI, as well as incorporating the company into their global network indicating faith in the company s long-term success. 25 However, no later investment occurred on the part of CAM. Therefore, their behaviour is similar to that of Phoenix Action where there was no business plan, no program of refinancing the Czech entities, and no economic objectives These factors combined demonstrate that CAM s investment in FBI was a mere rearrangement of assets to gain access to the Tribunal s jurisdiction, and thus the Tribunal has no jurisdiction over the claims presented. 27 iii. Conclusion on Jurisdiction 30. The Respondent submits that the Tribunal has no jurisdiction in this case, as not only does the Claimant not possess an investment under the BIT, but is, in any event, a mere holding company, and does not possess any right of claim before 22 Statement of Claim, [27]. 23 Ibid, [9]. 24 Statement of Defense, [7]. 25 Statement of Claim, [8]. 26 Phoenix Action, [138]. 27 Ibid, [140]. 6

15 this Tribunal. As such, the Tribunal has no jurisdiction over the claims made by the Claimant. 7

16 II. THE TRIBUNAL DOES NOT HAVE JURISDICTION OVER THE CLAIMANT S CLAIMS BASED ON THE ALLEGED BREACH OF THE SHARE PURCHASE AGREEMENT, AND THE CLAIMS ARE NOT ADMISSIBLE 31. The Respondent submits that the Tribunal does not have jurisdiction over the Claimant s claims based on the alleged breach of the share purchase agreement, and that those claims are thereby inadmissible. 32. Under Article 8(1) of the BIT, this Tribunal may only hear a dispute between a Contracting State and an Investor of the other Contracting State under this Treaty. 28 As such, the Respondent submits firstly that the actions of the State Property Fund are not attributable to the Respondent, and that, in any event, the actions do not constitute a breach of the BIT, thereby denying the Tribunal any jurisdiction to hear the Claimant s claims. i. The actions of the State Property Fund are not attributable to the Respondent 33. The Respondent submits that the actions of the State Property Fund cannot be attributed to the Respondent. The State Property Fund is independent and without the control, influence 29 or funding of the Respondent, 30 and thus does not meet the relevant test for attribution under customary international law. It is also not considered an organ of the State by the internal law of the State, 31 as it maintains its own legal personality Furthermore, the actions of the State Property Fund were not cloaked with the mantle of Government authority. 33 The Claimant knew that they were dealing with a separate entity as denoted in the Share Purchase Agreement, and the Claimant has provided no evidence to the contrary. 34 ii. In any event, the breach of contract does not amount to a breach of the BIT 28 Exhibit No. 1, Article 8(1). Emphasis added. 29 ILC Articles, Article Nicaragua Case. 31 ILC Articles, Article 4(2). 32 Statement of Defense, [11]. 33 Southern Pacific Properties, [82]. 34 Statement of Claim, [6]. 8

17 35. Even if the behaviour of the State Property Fund were attributable to the Respondent, a breach of a guarantee is merely a breach of contract and not a breach of a treaty when that breach was not grossly unfair and does not amount to an unjustified repudiation of the contract. 35 As such, the breach does not fall within the jurisdiction of the Tribunal Furthermore, the actions of the Respondent were not within the exercise of its sovereign authority ( puissance publique ). 37 Rather than in the case of Azurix, where regulations were considered to be within the scope of a State s sovereign authority, the Respondent is a mere party to the contract, 38 and as such may only be liable to compensate for any alleged breach of contract made under domestic law. iii. In any event, the Share Purchase Agreement does not fall under the umbrella clause 37. In the event that the Claimant seeks to rely on Article 6(2) of the BIT as an umbrella clause to establish the jurisdiction of the Tribunal, the Respondent submits that the clause would not operate to include any guarantees provided under the Share Purchase Agreement under its terms. Not only have Tribunals have taken an extremely restrictive approach when considering the scope of socalled umbrella clauses, but even in the event that it were to be applied, the guarantees under the Share Purchase Agreement would fall outside its scope. a. Treaty Construction 38. The first restriction placed upon umbrella clauses is the construction of the words of the treaty. As held by the Tribunal in SGS, the legal consequences of such clauses are so far-reaching in scope and so burdensome in their potential impact that clear and convincing evidence of such an intention of the parties would have to be proved. 39 The Respondent submits, therefore, that in the absence of a direct obligation, unlike the attribution alleged in the instant case, the umbrella clause would not encompass the Share Purchase Agreement. 35 Waste Management, [115]. 36 SGS, [162]. 37 Impregilo, [260]. 38 Azurix, [53]. 39 SGS, [166]. 9

18 b. Application of the Clause 39. The Respondent also submits that the guarantee provided under the Share Purchase Agreement would not fall within the scope of the umbrella clause as a matter of ordinary construction of its terms. Article 6 covers only obligations that Contracting States enter into, whereas the Share Purchase Agreement contains a representation of the knowledge of the State Property Fund as to the risks to consumers posed by Reyhan. 40 As this representation is not an obligation not to mitigate any risk as it arises, the Respondent submits that the Share Purchase Agreement falls outside of the umbrella clause in the BIT, and the Tribunal consequently has no jurisdiction to hear claims in regard to a potential breach thereof. iv. Conclusions on the Share Purchase Agreement 40. The Respondent submits that the actions of the State Property Fund of Ruritania are not attributable to it under customary international law. However, even were the Share Purchase Agreement to be attributed to the Respondent, any breach thereof would fall outside the scope of the BIT, as it does not constitute a use of the Respondent s sovereign authority, and nor does it fall within the scope of the BIT s umbrella clause. 40 Exhibit No. 2, [9.2.1]. 10

19 PART TWO: MERITS I. THE RESPONDENT HAS NOT VIOLATED ITS OBLIGATIONS UNDER THE BIT AND INTERNATIONAL LAW TOWARDS THE CLAIMANT, EITHER BY ADOPTING THE MEASURES FOR THE REGULATION OF MARKETING AND SALE OF ALCOHOL OR BY IMPOSING FURTHER REQUIREMENTS ON THE MARKETING AND SALE OF FREEBREW BEER A. The Respondent has not unlawfully expropriated any investments of the Claimant 41. The Respondent submits that its measures regulate the marketing and sale of alcohol, including the further imposition on the marketing and sale of FREEBREW beer, do not constitute an expropriation under Article 4 of the BIT or international law. 42. The Respondent concedes that both the MAB Act, 41 issued by the Ruritanian Parliament, and the ordinance requiring the labelling of Reyhan, 42 issued by the Ministry of Health and Social Security, are attributable to the Respondent 43 and were imposed in the exercise of its sovereign authority. 44 Furthermore, the Respondent concedes that these measures may affect investments of the Claimant, as defined within Article 1 of the BIT, 45 although it retains the right to challenge any specific investment raised by the Claimant. 43. However, the Respondent submits both, that the actions do not meet the legally required standard to be considered either direct expropriation, indirect expropriation or measures equivalent to expropriation, as required by Article 4 of the BIT, and in the alternative that any expropriatory measures fall within the commonly accepted police powers of the State. 46 i. The effect of the Respondent s measures 41 Exhibit No Statement of Claim, [15]. 43 ILC Articles, Article Azurix, [53]. 45 Exhibit No. 1, Article 1(1). 46 Statement of Defense, [13]-[15]. See also Third Restatement. 11

20 44. Article 4 of the BIT contains the express prohibition on unlawful expropriation. It states that: Investments may not directly or indirectly be expropriated, nationalized [sic.] or subjected to any other measure the effects of which would be equivalent to expropriation or nationalization [sic.] The Respondent submits that no direct expropriation can be said to have occurred in the instant case, as such an expropriation would require a formal transfer of the ownership of property to the State, 48 which has not occurred here. Indeed, it is clear that the Claimant remains the legal owner of all relevant property, including FBI itself 49 and the intellectual property transferred during the sale In addition, the Respondent submits that the measures do not connote the degree of interference required to constitute an indirect expropriation. However, as the term receives no definition in the BIT, the Respondent submits that the Tribunal should adopt a high standard when considering if any of its measures constitute an expropriation. a. Control and Total Diminution of Value 47. When considering the level of interference with an investment required constituting an expropriation, Tribunals have frequently held that regulatory measures must effectively remove the control of an investment from the investor in order to constitute an indirect expropriation. For example, the CME Tribunal held that an indirect expropriation occurs only when a State takes steps that effectively neutralize [sic.] the benefit of the property for the foreign owner. 51 Similarly, the Pope & Talbot Tribunal held that the test [for indirect expropriation] is whether interference is sufficiently restrictive to support a conclusion that the property has been taken from the owner This approach is similar to that of Tribunals that have considered that the diminution of value of an investment may constitute expropriation. For example, 47 Exhibit No. 1, Article 1(1). 48 Amoco. 49 Statement of Claim, [21]. 50 Statement of Defense, [16]. 51 CME, [150]. 52 Pope & Talbot, [102]. 12

21 the Vivendi Tribunal observed that the weight of authority appears to draw a distinction between only a partial deprivation of value (not an expropriation) and a complete or near complete deprivation of value (expropriation). 53 In Sedco, the Iran-US Tribunal stated that a presumption of taking will exist only in circumstances of outright transfer of title, rather than incidental economic injury. 54 Similarly, the LG&E Tribunal stated that in many arbitral decisions, compensation has been denied when [the State s measure] has not affected all or almost all of the investment s economic value, 55 the Sempra Tribunal held that the value of the business had to be virtually annihilated, 56 and in CMS, the Tribunal held that the relevant test was whether the enjoyment of the property has been effectively neutralized [sic] The high burden required to claim such an indirect expropriation has been demonstrated in a number of cases. In Glamis Gold, a decrease in value from $49.1 million to $20 million was not considered by the Tribunal to be a sufficient economic impact to effect an expropriation of the Claimant s investment. 58 Similarly to Feldman, 59 the Methanex Tribunal found that there was no expropriation because the investor retained control of its subsidiaries and remained able to sell gasoline additive outside the state of California The Respondent submits that this test should be applied to the instant case on the basis that it is the most natural construction of Article 4 of the BIT. Indirect and measures equivalent to expropriation are intended to broaden the scope of measures beyond those considered under direct expropriation, not the standard required to constitute such an expropriation. As was considered by the Tribunal in Pope & Talbot, the phrase measures equivalent to expropriation does not broaden the ordinary concept of expropriation under international law to require 53 Vivendi, [7.5.11]. 54 Sedco, [275]. 55 LG&E, [262]. 56 Sempra, [285]. 57 CMS, [262]. 58 Glamis Gold, [536]. 59 <Discussed above>. 60 Methanex. 13

22 compensation for measures affecting property interests without regard to the magnitude or severity of that effect. 61 b. Partial expropriation: Value of Investment 51. The alternative approach that has been applied by arbitral Tribunals has been the diminution of value test. This approach holds a mere reduction in value of an investment may be considered expropriatory, however even amongst those that have applied it, Tribunals have differed significantly as to the level of diminution required to constitute an expropriation. For example, the Metalclad Tribunal described the standard as significant, 62 while the Wena Hotels Tribunal phrased it as not ephemeral The Respondent submits that this test should not be adopted, but that in the alternative should be attributed a similarly high standard, as is consummate with the approach of the Tribunals that have applied it. ii. The subject of expropriation 53. Prior to an evaluation of the facts in the instant case, the Respondent submits that the Tribunal should reject the conceptual severance approach for evaluating the impact of indirect expropriations in favour of the near universally applied parcel as a whole rule. 54. The parcel as a whole rule states that a property owner cannot divide its bundle of property rights and argue that a particular strand affected by a regulation has been taken. 64 If this were to be accepted, any property owner could simply separate a strand of property that had been affected and successfully claim that they had been substantially deprived of it. 65 Indeed, the nature of the complexity of certain investment transactions and the intricacy of structures utilised in channelling foreign investment across the globe result in conceptual severance being difficult to apply Pope & Talbot, [96]. 62 Metalclad, [103]. 63 Wena; Tippetts, [225]. 64 Taboe-Sierra Preservation Council. 65 The Boundaries of Regulatory Expropriation in International Law, From Expropriation to Non-Expropriatory Standards of Treatment,

23 55. In the seminal decision of US Supreme Court decision of Penn Central, the majority opinion held that the takings jurisprudence does not divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated, and instead focus on the parcel as a whole This approach has been consistently applied by international arbitral tribunals. For example, the Feldman Tribunal considered an enterprise which pursued several lines of export activities, one of them being the export of cigarettes. When the investor s cigarette export line was exorbitantly taxed by government authorities, it forced the closure of the line while leaving the other lines, such as those concerning the export of alcoholic beverages or photographic supplies, unaffected. While the Tribunal found that the investor had been deprived of the possibility of exporting tobacco products due to the State measure, it nevertheless concluded that business, as a viable going concern, had not been expropriated Similarly in Telenor Mobile, the Tribunal stated that, in order for a regulation to be considered expropriatory, there must be a substantial deprivation of the value of the investment viewed as a whole: The Tribunal considers that, in the present case at least, the investment must be viewed as a whole and that the test the Tribunal has to apply is whether, viewed as a whole, the investment has suffered substantial erosion of value The Respondent submits that this test should be preferred by the Tribunal in the instant case, and that as such the effect of the measures should be assessed against the business as a whole, rather than the individual strands of the investment. However, the Respondent will also make alternative submissions under such a 67 Penn Central, [ ]. 68 Feldman, [152]. 69 Telenor Mobile, [67]. 15

24 iii. Are the measures a legitimate exercise of the Respondent s police powers? 59. The Respondent submits that, even in the event that any of the impugned measures were to be considered an expropriation, the imposition of such regulations is nevertheless excused under the police powers doctrine, which operates to preclude certain measures from being considered expropriatory. a. What is the police powers doctrine? 60. As expressed by Newcombe, customary international law applies the presumption that: Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations. 70 The term 'police powers' refers to all forms of domestic regulation under a state's sovereign powers. 71 It is in the exercise of these police powers that the State is able to protect essential public interests from certain types of harm, and in such circumstances impose restrictive regulations without any compensation being due. b. Why should the police powers doctrine be preferred over sole effects? 61. While the Claimant may submit that opposing doctrines, such as that of sole effects, should be applied to the instant case, the Respondent nevertheless submits that the police powers doctrine should be applied as an accepted standard under customary international law and a regularly applied doctrine by arbitral tribunals. 1) Normative justification 62. The Claimant submits that the police powers doctrine is the most accurate reflection of the current intention of parties to international investment treaties and closest to fulfilling the interests behind them. 63. Furthermore, investors are aware that regulatory environments are prone to changes and are able to anticipate. As stated by the PCIJ in Oscar Chinn, favourable business conditions and goodwill are transient circumstances, subject 70 The Boundaries of Regulatory Expropriation in International Law, Ibid,

25 to inevitable changes. 72 As observed by the Azinian Tribunal, it is a fact of life everywhere that individuals may be disappointed in their dealings with public authorities Moreover, the police powers doctrine is an accurate representation of the nature of property rights in democratic system, stemming from the general proposition that property rights have inherent limitations they are never absolute. 74 Indeed, as property is a social institution that serves social functions property cannot be used in a way that results in serious harm to public order and morals, human health or the environment As such, the Respondent submits that the police powers doctrine should be applied in the instant case. 2) Status in customary international law 66. The Claimant submits that the police powers doctrine is the accepted standard of international customary law and that, in determining the meaning of otherwise undefined terms in the BIT, the Tribunal should apply it in establishing what measures may be expropriatory in the instant case. As stated by the Iran-US Claims Tribunal when considering the role of customary international law: [A]s a lex specialis in the relations between the two countries, the Treaty supersedes the lex generalis, namely customary international law. This does not mean, however, that the latter is irrelevant to the instant case. On the contrary, the rules of customary law may be useful in order to fill in possible lacunae of the Treaty, to ascertain the meaning of undefined terms in the text or, more generally, to aid interpretation and implementation of its provisions The police powers doctrine has been referred to in a number of UN General Assembly resolutions, such as the Charter of Economic Rights and Duties of States. Article 2(2)(a) of the Charter states that: Each State has the right [t]o regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and 72 Oscar Chinn, [99]. 73 Azinian, [83]. 74 The Boundaries of Regulatory Expropriation in International Law, Ibid, Amoco, [112]. 17

26 regulations and in conformity with its national objectives and priorities. No State shall be compelled to grant preferential treatment to foreign investment. The Respondent submits that such a Resolution should be granted great weight in the construction of customary international law, as is the approach of the International Court of Justice There is also consistent state practice that such a standard should be applied. As stated in the Third Restatement: A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police powers of states, if it is non-discriminatory. 78 3) Treatment by Arbitral Tribunals 69. The police powers doctrine has been consistently accepted by arbitral Tribunals in the consideration of regulatory expropriation. For example in Saluka, the Permanent Court of Arbitration stated that: It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare. 79 Numerous other Tribunals have also applied the doctrine, including the Iran- Untied States Claims Tribunal in Sedco, 80 the NAFTA Tribunal in Feldman 81 and in Methanex, 82 and the Tribunal in Suez. 83 c. What are the criteria are applied in the police powers doctrine? 70. Before applying the police powers doctrine to the measures employed in the instant case, the Respondent will outline the way in which the doctrine has been applied in international arbitral tribunals and the considerations therein. 77 Nicaragua Case, US Restatement, s 712, Comment g. 79 Saluka, [255]. 80 Sedco, Feldman, [83]. 82 Methanex, [7]. 83 Suez, [147]. 18

27 1) Legitimate Purpose 71. While the breadth of purposes to which the police powers doctrine has been applied has never been fully enunciated by any Tribunal, the commonly attested grounds covered under the doctrine include: (a) forfeiture or a fine to punish or suppress crime; (b) seizure of property by way of taxation; (c) legislation restricting the use of property, including planning, environment, safety, health and the concomitant restrictions to property rights; and (d) defence against external threats 84 2) Proportionality 72. A number of Tribunals have expressed that the police powers doctrine may only be applied where there is a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized [sic.] by any expropriatory measure. 85 As per the Tribunal in Saluka: It thus inevitably falls to the adjudicator to determine whether particular conduct by a state crosses the line that separates valid regulatory activity from expropriation. Faced with the question of when, how and at what point an otherwise valid regulation becomes, in fact and effect, an unlawful expropriation, international tribunals must consider the circumstances in which the question arises. The context within which an impugned measure is adopted and applied is critical to the determination of its validity Courts and Tribunals have been reticent to impugn otherwise legitimate government policy on the basis of a proportionality assessment. As per the European Court of Human Rights in James, national authorities are better placed than [an] international [court] to appreciate what is in the public interest. 87 The South African Constitution Court has expressed similar sentiment, stated in Soobramoney that courts should be slow to interfere with rational decisions taken 84 UNCTAD Report: Expropriation, Tecmed, [122]; Azurix, [312]. 86 Saluka, [264]. 87 James, [32] 19

28 in good faith by the political organs and medical authorities whose responsibility it is to deal with such matters In general, the assessment of the proportionality of a government measure will be done on a case-by-case basis. As per the General Ukraine Tribunal: [T]here is no checklist, no mechanical test to achieve that purpose. The decisive considerations vary from case to case, depending not only on the specific facts of a grievance but also on the way the evidence is presented, and the legal bases pleaded. The outcome is a judgement, i.e. the product of discernment, and not the printout of a computer programme. 89 3) Absence of positive acquisition of public benefit 75. The character of government measures may also determine whether they constitute an indirect expropriation. In certain cases, where the government in question has acquired a public benefit, such as a national park, it has been required to pay compensation for the acquisition of public benefits. 90 However, where the state is acting to protect the public from harms associated with the use of property, such as health effects, then no compensation should be made available. 91 4) Legitimate Expectations 76. Tribunals that have considered the police powers doctrine have sometimes excluded the application of it in circumstances where investors had expected that the government would not introduce the regulations it ultimately did. Tribunals not only divided about whether the criterion exists, 92 but also on the kind and specificity of the assurances that may give rise to such expectations. Nevertheless, where Tribunals have found the criterion to be dispositive, it appears that there has been a significantly high barrier required of investors who rely on their expectations to establish the expropriatory nature of government regulations. 77. In Methanex, the Tribunal considered that only specific commitments given by the regulating government to the then putative foreign investor contemplating 88 [29] (Chaskalson J). 89 Generation Ukraine, [20.29]. 90 The Boundaries of Regulatory Expropriation in International Law, The Boundaries of Regulatory Expropriation in International Law, CMS, [252]-[264]. 20

29 investment that the government would refrain from such regulation 93 would be sufficient to defeat the application of the police powers doctrine. Unreasonable expectations, such as those raised in Feldman, will be insufficient to substantiate investor expectations capable of defeating the police powers doctrine. 94 iv. Are the measures employed in the instant case capable of constituting expropriation? 78. The Respondent submits that the measures alleged by the Claimant do not significantly interfere with its investment, and thus cannot be capable of constituting either indirect expropriation or measure equivalent to expropriation under Article 4 of the BIT. In the alternative, the Respondent submits that all the impugned measures are valid uses of its police powers and thus cannot be considered expropriatory in the instant case. a. FBI as a whole 1) Control Test 79. The Respondent simply submits the Claimant s business as a whole has not been sufficiently affected by its regulatory schemes to constitute an expropriation under the control test. Not only does the Claimant continue to operate its business in Ruritania, 95 it has demonstrated the ability to reduce its production targets to respond to changing investment conditions. 96 As the Claimant has maintained control of FBI notwithstanding the fall in revenue to 10% of its 2009 levels, 97 the measures employed by the Respondent have deprived the Claimant of the control its investment in Ruritania, 98 and thus that it has not been subject to an expropriation under Article 4 of the BIT. 2) Value Test 80. In the alternative, the Respondent concedes that the value of the Claimant s investment has decreased as a result of its regulatory measures, but will 93 Methanex, [7]. 94 Feldman, [111]. 95 Statement of Claim, [21]. 96 Ibid, [20]. 97 Ibid, [19]. 98 Ibid, [19]. 21

30 alternatively submit that such measures do not constitute expropriation as they are a valid use of the Respondent s police powers. 3) Police Powers 81. The Respondent submits that any otherwise expropriatory measure against FBI as a whole is a valid exercise of the police powers doctrine. This will be discussed in reference to each of the individual measures below. b. The MAB Act: Packaging Restrictions 82. The Respondent submits that the packaging restrictions imposed under the MAB Act, namely the plain packaging scheme and the alcoholic beverage serving size limitation, do not constitute an expropriation of the Claimant s investments under the BIT as they are a valid exercise of the Respondent s police powers. 1) Control / Value Test 83. The Respondent concedes that the interference with the Claimant s rights are sufficient to otherwise constitute an expropriation. 2) Police Powers 84. The Respondent nonetheless submits that the measures imposed do not constitute an expropriation, as they fall within the legitimate exercise of its police powers. The stated aim of the regulations is to address the problems of alcohol addiction and exposure of the youth to alcohol. The Respondent submits that this falls within the aim of the protection of public health, and is thus a valid exercise of its police powers. It also submits that it has obtained no positive public benefit, and has only restricted the ability of producers to exercise their rights. 85. The limitation on the ability of alcohol producers to advertise their products is a proportionate measure to achieve the stated goal. The goal of advertising is to entice prospective consumers to purchase their products with appealing designs. When considering the plain packaging of cigarettes, the Australian High Court commented that the area for the most valuable use of the marks is removed: connection with retail customers as they purchase and use [the] products. 99 The 99 JT International, [213] (Hayne J). 22