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TOMKA
MEMORIAL FOR RESPONDENT
CLAIMANT
Peter Explosive
v.
RESPONDENT
Republic of Oceania
International Chamber of Commerce (ICC)
International Court of Arbitration
I
CONTENT
STATEMENT OF FACTS ......................................................................................... 1
SUMMARY OF LEGAL ARGUMENTS ................................................................. 3
ARGUMENTS ON JURISDICTION ........................................................................ 4
1. Tribunal Does Not Have Jurisdiction Over the Dispute as Claimant Is Not an
Investor under the Euroasia BIT .......................................................................... 4
1.1. Euroasia Granted Claimant Nationality in Breach of Eastasia’s Sovereign Powers
and, thus, Claimant’s Nationality Should Not Be Recognized by the Tribunal ..... 5
1.2. In Any Event, Claimant Does Not Possess a Valid and Effective Euroasian
Nationality in Accordance with the Domestic Laws of Euroasia .......................... 6
2. The Tribunal Does Not Have Jurisdiction as Claimant Failed to Fulfill the
Preconditions for Arbitration Set Forth in the Euroasia BIT ............................. 10
2.1. The Most-Favored-Nation Clause Does Not Excuse Claimant’s Non-Compliance
with the Mandatory Domestic Litigation Requirement ........................................ 11
2.2. Claimant Failed to Pursue Amicable Consultations to the Extent that the Euroasia
BIT Requires ........................................................................................................ 15
ARGUMENTS ON ADMISSIBILITY AND MERITS .......................................... 17
3. Claimant’s Investment is Tainted by Corruption and Other Illegality and, thus,
Claimant’s Claims Are neither Admissible nor Does His Investment Enjoy
Protection under the Euroasia BIT ..................................................................... 17
4. Respondent’s Right and Duty to Protect Its Security Interests Prevent a Finding
on Expropriation ................................................................................................ 21
4.1. The Executive Order Is a Non-Compensable Measure Adopted Within the
Sovereign Powers of Respondent ......................................................................... 23
4.2. Alternatively, the Executive Order Does Not Deprive Claimant of Permanent
Control Over His Investment ............................................................................... 27
II
4.3. In Any Case, Respondent’s Liability in Exempted by Virtue of the Essential
Security Interest Clause of the Euroasia BIT ....................................................... 28
4.4. The Wrongfulness of Respondent’s Measures is Excluded Inasmuch as the Actions
Amounted to a Legitimate Countermeasure under Customary International Law ..
............................................................................................................................. 32
5. Respondent Is Not Liable for the Self-Inflicted Damage Suffered by Claimant’s
Investment .......................................................................................................... 35
REQUEST FOR RELIEF ......................................................................................... 38
III
LIST OF ABBREVIATIONS
ARfA Answer to the Request for Arbitration, dated 30 September
2015
ARSIWA International Law Commission Draft Articles on
Responsibility of States for Internationally Wrongful Acts
2001
CIL Customary international law
Claimant Peter Explosive
Contracting
Parties
The Republic of Euroasia and the Republic of Oceania
Eastasia BIT Agreement between the Republic of Oceania and the
Republic of Eastasia for the Promotion and Reciprocal
Protection of Investments
EO Executive Order of 1 May 2014 on Blocking Property of
Persons Contributing to the Situation in the Republic of
Eastasia
Euroasia BIT Agreement between the Republic of Oceania and the
Republic of Euroasia for the Promotion and Reciprocal
Protection of Investments
NEA National Environment Authority of Oceania
Parties The Republic of Oceania and Peter Explosive
PO2 Procedural Order No 2
PO3 Procedural Order No 3
RB Rocket Bombs Ltd.
Respondent The Republic of Oceania
RfA Request for Arbitration, dated 11 September 2015
SoUF Statement of Uncontested Facts
Tribunal The ICC Tribunal in these proceedings 28000/AC
IV
LIST OF AUTHORITIES
Treaties
Eastasia BIT Agreement between the Republic of Oceania and the Republic of Eastasia
for the Promotion and Reciprocal Protection of Investments, 1 January
1992.
Euroasia BIT Agreement between the Republic of Oceania and the Republic of Euroasia
for the Promotion and Reciprocal Protection of Investments, 1 January
1995.
UN Charter United Nations, Charter of the United Nations, 24 October 1945, 1 UNTS
XVI (accessed 24 September 2016 at http://www.un.org/en/charter-united-
nations/).
VCLT Vienna Convention on the Law of Treaties, Vienna, 23 May 1969, in force
27 January 1980, 1155 United Nations Treaty Series 331; (1969) 8
International Legal Materials 679; United Kingdom Treaty Series (1980)
58.
Other Legal Documents and Legislation
ARSIWA International Law Commission Draft Articles on Responsibility of States
for Internationally Wrongful Acts 2001
ICC Rules Rules of Arbitration of the International Chamber of Commerce, in force
as from January 2012
ILC Commentary International Law Commission, Draft Articles on Responsibility of States
for Internationally Wrongful Acts with Commentaries, U.N Doc. A/56/10
(2001)
Silverige Arbitration
Law
Arbitration Law of Braluft, Silverige (verbatim adoption of the
UNCITRAL Model Law on International Commercial Arbitration, 2006)
V
Table of Cases
Iran-United States Claims Tribunal
Emmanuel Too Too v Greater Modesto Insurance Associates, 23 IRAN-U.S. C.T.R. 378
(1989).
Phelps Dodge Phelps Dodge Corp. v Iran, 10 IRAN-U.S. C.T.R. 121 (1986).
Sea-Land Sea-Land Service, Inc. v Iran, 6 IRAN-U.S. C.T.R. 149 (1984).
Sedco Sedco, Inc. v National Iranian Oil Company (NIOC), 9 IRAN-U.S. C.T.R.
248 (1985).
Starrett Housing Starrett Housing Corp. v Iran, 4 IRAN-U.S. C.T.R. 122 (1983).
Tippets Tippets, Abbett, McCarthy, Stratton v TAMS-AFFA, 6 IRAN-U.S. C.T.R.
219 (1984).
Ad Hoc (UNCITRAL)
Austrian Airlines Austrian Airlines v The Slovak Republic [2009] (UNCITRAL, Final
Award).
Biloune Biloune and Marine Drive Complex Ltd. v Ghana Investments Centre and
the Government of Ghana [1989] (UNCITRAL, Award on Jurisdiction
and Liability).
CME CME Czech Republic B.V. v Czech Republic [2001] (UNCITRAL,
Partial Award).
Methanex Methanex Corporation v United States of America [2005] (NAFTA-
UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits).
National Grid
(Jurisdiction)
National Grid P.L.C v The Argentine Republic, [2006] (UNCITRAL,
Decision on Jurisdiction).
Pope & Talbot Pope & Talbot, Inc. v Government of Canada [2002] (NAFTA-
UNCITRAL, Interim Award).
S.D. Myers S.D. Myers, Inc. v Government of Canada [2000] (NAFTA-UNCITRAL,
Partial Award).
Saluka Saluka Investments B.V. v The Czech Republic [2006] (UNCITRAL,
Partial Award).
VI
International Center for Settlement of Investment Disputes
ADM Archer Daniels Midland Company and Tate & Lyle Ingredients Americas,
Inc. v The United Mexican States [2007] (ICSID Case No. ARB
(AF)/04/5, Award).
Ambiente Ufficio Ambiente Ufficio S.p.A. and others v Argentine Republic [2013] (ICSID
Case No. ARB/08/9, Decision on Jurisdiction and Admissibility).
Azinian Robert Azinian, Kenneth Davitian, & Ellen Baca v The United Mexican
States [1999] (ICSID Case No. ARB (AF)/97/2, Award).
Azurix Azurix Corp. v The Argentine Republic [2006] (ICSID Case No.
ARB/01/12, Award).
Cargill Cargill, Incorporated v United Mexican States [2009] (ICSID Case No.
ARB(AF)/05/2, Award, redacted version).
Champion Trading Champion Trading Company, Ameritrade International, Inc. v Arab
Republic of Egypt [2003] (ICSID Case No. ARB/02/9, Decision on
Jurisdiction).
CMS CMS Gas Transmission Company v The Republic of Argentina [2005]
(ICSID Case No. ARB/01/8, Award).
Continental Casualty Continental Casualty Company v The Argentine Republic [2008] (ICSID
Case No. ARB/03/9, Award).
El Paso El Paso Energy International Company v The Argentine Republic [2011]
(ICSID Case No. ARB/03/15, Award).
Enron Enron Corporation and Ponderosa Assets, L.P. v Argentine Republic
[2007] (ICSID Case No. ARB/01/3, Award).
Feldman Marvin Roy Feldman Karpa v United Mexican States [2002] (ICSID Case
No. ARB(AF)/99/1, Award)
Fireman’s Fund Fireman's Fund Insurance Company v The United Mexican States [2006]
(ICSID Case No. ARB(AF)/02/1, Award).
Fraport Fraport AG Frankfurt Airport Services Worldwide v The Republic of the
Philippines [2007] (ICSID Case No. ARB/03/25, Award).
Generation Ukraine Generation Ukraine, Inc. v Ukraine [2003] (ICSID Case No. ARB/00/9,
Award)
Inceysa
Vallisoletana
Inceysa Vallisoletana S.L. v Republic of El Salvador [2006] (ICSID Case
No. ARB/03/26, Award).
Kilic Kilic Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v
Turkmenistan [2013] (ICSID Case No. ARB/10/1, Award).
LG&E LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc.
v Argentine Republic [2007] [ICSID Case No. ARB/02/1, Decision on
Liability).
VII
M.C.I. Power M.C.I. Power Grp., L.C. v Republic of Ecuador [2009] (ICSID Case No.
ARB/03/6, Decision on Annulment).
Maffezini
(Jurisdiction)
Emilio Agustin Maffezini v The Kingdom of Spain [2000] (ICSID Case
No. ARB/97/7, Decision on Jurisdiction).
Metalclad Metalclad Corporation v The United Mexican States [2000] (ICSID Case
No. ARB(AF)/97/1, Award).
MTD MTD Equity Sdn, Bhd. and MTD Chile S.A. v Republic of Chile [2004]
(ICSID Case No. ARB/01/7, Award).
MTD (Annulment) MTD Equity Sdn, Bhd. and MTD Chile S.A. v Republic of Chile [2007]
(ICSID Case No. ARB/01/7, Decision on Annulment).
Occidental Occidental Petroleum Corporation and Occidental Exploration and
Production Company v The Republic of Ecuador [2012] (ICSID Case No.
ARB/06/11, Award).
Pey Casado Victor Pey Casado and President Allende Foundation v Republic of Chile
[2008] (ICSID Case No. ARB/98/2, Award).
Plama Plama Consortium Ltd. v Republic of Bulgaria [2005] (ICSID Case No.
ARB/03/24, Decision on Jurisdiction).
Rumeli Telekom Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri
A.S. v Republic of Kazakhstan [2008] (ICSID Case No. ARB/05/16,
Award).
Salini Salini Costruttori S.p.A. and Italstrade S.p.A. v The Hashemite Kingdom
of Jordan [2004] (ICSID Case No. ARB/02/13, Decision on Jurisdiction).
Santa Elena Compañia del Desarrollo de Santa Elena S.A. v Republic of Costa Rica
[2000] (ICSID Case No. ARB/96/1, Award).
Senor Tza Ypu Shum Senor Tza Yap Shum v Republic of Peru, [2009] (ICSID Case No.
ARB/07/6, Decision on Jurisdiction and Competence).
Siag Waguih Elie George Siag and Clorinda Vecchi v Arab Republic of Egypt
[2009] (ICSID Case No. ARB/05/15, Award).
Soufraki Hussein Nuaman Soufraki v The United Arab Emirates [2004] (ICSID
Case No. ARB/02/7, Award).
Tecmed Técnicas Medioambientales Tecmed S.A. v United Mexican States [2003]
(ICSID Case No. ARB(AF)/00/02, Award).
Telenor Mobile Telenor Mobile Communications A.S. v Republic of Hungary [2006]
(ICSID Case No. ARB/04/15, Award).
Wena Hotels Wena Hotels Ltd. v Arab Republic of Egypt [2000] (ICSID Case No.
ARB/98/4, Award).
Wintershall Wintershall Aktiengesellschaft v Argentina [2008] (ICSID Case No
ARB/04/14, Award).
VIII
World Duty Free World Duty Free Company v Republic of Kenya, [2006] (ICSID Case No.
Arb/00/7, Award).
Others
Berschader Vladimir Berschader and Moise Berschader v Russian Federation [2006]
(SCC Case No 080/2004, Award).
Chorzow Factory
(Jurisdiction)
Factory at Chorzow, Decision on Jurisdiction, Permanent Court of
International Justice, Publications of the Permanent Court of International
Justice, Series A, No 9, 26 July 1927, p. 4.
Flegenheimer Flegenheimer Case, Decision No. 182 of 20 September 1958, UN Reports
of International Arbitral Awards, Volume XIV pp. 327-390.
ICC Case No. 6497 ICC Case No. 6497 (1994). YBCA Vol. XXIV, p. 71.
ICS Inspection and
Control Services
ICS Inspection and Control Services Ltd (United Kingdom) v Argentine
Republic (PCA Case No 2010-9, Award on Jurisdiction).
Renta Renta 4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro
Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de
Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV
S.A. v The Russian Federation [2012] (SCC Case No 24/2007, Award.)
Tunis and Morocco
Nationality Decrees
case
Tunis and Morocco Nationality Decrees case, Advisory Opinion, (ICJ
1923), Publications of the Permanent Court of International Justice Series
B, No. 4, 7 February 1923, p. 8.
International Court of Justice
Anglo-Iranian Oil
Company
Anglo-Iranian Oil Company case, United Kingdom v Iran, Judgment,
[1952] ICJ Rep 93, (ICJ 1952), 22 July 1952, International Court of
Justice [ICJ].
Gabcikovo-
Nagymaros
Case concerning the Gabcikovo-Nagymaros Project, Hungary v Slovakia,
Judgment [1997] ICJ rep 7, 25 September 1997, International Court of
Justice [ICJ].
Nottebohm
Nottebohm Case, Liechtenstein v Guatemala, Judgment, Second phase,
[1955] ICJ Rep 4, (ICJ 1955), 6 April 1955, International Court of Justice
[ICJ].
Wall in the Occupied
Palestinian Territory
Legal Consequences of the Construction of a Wall in the Occupied
Palestinian Territory, Advisory Opinion, ICJ Rep. 2004, p. 16.
IX
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1
STATEMENT OF FACTS
1. To attract foreign investment and increase its economic prosperity, the Republic of
Oceania (‘Respondent’) has concluded bilateral investment treaties with Eastasia and
Euroasia.1 The first agreement concerns Eastasian investors investing in Oceania: the
‘Agreement between the Republic of Oceania and the Republic of Eastasia for the
Promotion and Reciprocal Protection of Investments’ (the ‘Eastasia BIT’),2 whereas
the second one, the ‘Agreement between the Republic of Oceania and the Republic of
Euroasia for the Promotion and Reciprocal Protection of Investments’ (the ‘Euroasia
BIT’) concerns Euroasian investors.3 The clause concerning dispute resolution
between states and investors in the Euroasia BIT provides for arbitration only
secondarily, and primarily sets forth amicable consultations and litigation in the
domestic court as means of dispute resolution.4 In addition, the Euroasia BIT contains
a most favored nation clause.5
2. In February 1998, Peter Explosive (‘Claimant’), an Eastasian businessman, acquired
the entire share capital in Rocket Bombs (‘RB’), a company located in Oceania and
operating in the arms production industry.6 When Claimant invested in the company,
RB had lost its environmental license required for arms production under Oceanian
laws and regulations.7 The process for reacquiring the license is typically rigorous and
time-consuming, and requires the fulfillment of strict criteria.8 Claimant met with the
highest-ranking official in Oceanian Environment Authority and obtained the license
as soon as in June 1998.9 Claimant’s manufacturing facilities did not comply with the
terms of the license until January 2014.10 During these 15 years, Claimant’s business
flourished, and he concluded several contracts for arms production.11 Among these
contracts, RB concluded a 15-year arms sales contract with Euroasia,12 a state that was
1 SoUF, para. 1. 2 Eastasia BIT, Art. 1. 3 ibid. 4 Euroasia BIT, Art. 9. 5 Euroasia BIT, Art. 3. 6 SoUF, para. 2. 7 ibid. 8 SoUF, para. 6; PO2, para. 1. 9 SoUF, para. 6. 10 SoUF, para. 13. 11 SoUF, paras. 11–12. 12 SoUF, para. 9.
2
in the process of modernizing its land forces. These forces were later deployed to
Eastasia.13
3. At the time when the investment was made, Claimant was undisputedly a national of
Eastasia,14 a country in which his parents had been born, and where his parents have
lived for their whole lives.15 Claimant is also a resident of Fairyland,16 an Eastasian
territory which, briefly before the beginning of this dispute, had become the object of
aggression through the actions of its neighboring state, Euroasia.17 After a referendum
had been arranged locally in Fairyland against the will of Eastasia’s national
government,18 Euroasia had entered Eastasian territory by the use of its land forces,
installing foreign military presence in the area.19 A number of states condemned, and
still condemn, the act, which was also brought to the UN Security Council for
consideration.20 Eventually, the actions of Euroasia led the Eastasian government to
break off diplomatic relations with Euroasia.21
4. As a result of Euroasia’s actions, the President of the Republic of Oceania issued an
Executive Order (the ‘EO’) in May 2014.22 The EO was intended to be in force for the
time needed to ease the turmoil caused by Euroasia’s military entry to Eastasian
territory. The EO applied to numerous economic sectors chosen on the basis of their
significant contribution to the Euroasian economy, including its military forces.23
5. On 11 September 2015, Claimant submitted his Request for Arbitration to the ICC. It
is undisputed between the Parties that Claimant did not first submit the claim to the
competent domestic court of Oceania despite the fact that it is required under the
Euroasia BIT.
13 SoUF, para. 14. 14 SoUF, para. 2. 15 PO2, para. 4. 16 SoUF, para. 2. 17 SoUF, para. 14. 18 ibid. 19 ibid. 20 SoUF, para. 16; PO2, para. 3. 21 SoUF, para. 14. 22 SoUF, para. 16; PO3, para. 10. 23 PO3, para 10.
3
SUMMARY OF LEGAL ARGUMENTS
6. Arguments on jurisdiction. The Tribunal does not have jurisdiction over the dispute
on the following grounds. Claimant is not a Euroasian national in the sense of Article
1.2 of the Euroasia BIT (1). Furthermore, Claimant did not fulfill either of the
conditions precedent to Respondent’s consent to arbitration as set out in Article 9 of
the Euroasia BIT (2). Claimant cannot circumvent the conditions on Respondent’s
consent by relying on the most favored nation clause under the Euroasia BIT (2.1) and
Claimant also failed to pursue a settlement in amicable consultations with Respondent
as required by Article 9(1) of the Euroasia BIT (2.2).
7. Arguments on admissibility and merits. Claimant’s claims are not admissible as
illegality pervades Claimant’s investment. In the alternative, Claimant’s investment
should be denied protection under the Euroasia BIT due to the gravity of Claimant’s
violations (3).
8. Respondent did not expropriate Claimant’s investment under the Euroasia BIT on the
following grounds. Respondent adopted the EO within its sovereign powers for the
purpose of protecting its security interests (4.1). In the alternative, the EO Does not
permanently deprive Claimant of control over his investment (4.2). In any case, the
EO falls under the scope of the Essential Security Interest Clause, an exemption
clause set out in the Euroasia BIT (4.3). And, the wrongfulness of Respondent's
actions is precluded on the basis of the customary international law countermeasures
defense (4.4). Finally, Claimant contributed to the damage suffered by his investment
through his operations with Euroasia in the arms production industry and, thus,
Respondent is not liable to pay any compensation to Claimant (5).
4
ARGUMENTS ON JURISDICTION
9. The Tribunal does not have jurisdiction over the dispute as Claimant is not a Euroasian
national in the sense of Article 1.2 of the Euroasia BIT (1). Furthermore, Claimant
failed to fulfill both of the conditions precedent to Respondent’s consent to arbitration
as set out in Article 9 of the Euroasia BIT (2).
1. Tribunal Does Not Have Jurisdiction Over the Dispute as Claimant Is
Not an Investor under the Euroasia BIT
10. Under the Euroasia BIT a tribunal has jurisdiction to hear ‘[a]ny dispute regarding an
investment between an investor of one of the Contracting Parties and the other Party,
arising out of or relating to this Agreement.’24 Thus, in order for the Tribunal to have
jurisdiction to hear Claimant’s claims, Claimant must be an investor in the sense of
Article 1.2 of the same Treaty. This Article defines ‘investor’ as any ‘natural perso[n]
having the nationality of either Contracting Party in accordance with its laws.’25
Accordingly, as Claimant is not a Euroasian national, Claimant is not an investor in
the sense of Article 1.2 of the Euroasia BIT and, therefore, the Tribunal does not have
jurisdiction to hear Claimant’s claims.
11. Respondent will establish below in two, independent steps that Claimant is not a
Euroasian national. First, as Euroasia granted Claimant Euroasian nationality in breach
of Eastasia’s sovereignty, a nationality granted on such basis should not be recognized
to generate valid legal effects for Claimant (1.1). Second, were the Tribunal to
recognize Euroasia’s granting of nationality to Claimant, Claimant’s Euroasian
nationality is, in any event, neither valid in accordance with the domestic laws of
Euroasia, nor does Claimant have an effective link to Euroasia (1.2).
24 Euroasia BIT, Art. 9. 25 Euroasia BIT, Art. 1(2).
5
1.1. Euroasia Granted Claimant Nationality in Breach of Eastasia’s
Sovereign Powers and, thus, Claimant’s Nationality Should Not Be
Recognized by the Tribunal
12. First, as a prerequisite, Claimant’s Euroasian nationality should not be recognized to
generate legal effects for Claimant as his Euroasian nationality was granted on the
basis of an illegal act, which Euroasia carried out by breaching Eastasia’s territorial
sovereignty, in the area of Fairyland.26
13. As established in the Chorzow Factory, legal rights cannot derive from an illegal act.27
Furthermore, in accordance with the principle of non-recognition, legal effects arising
from illegal acts should not be recognized at an international level.28 It follows that in
cases where a person’s nationality is based on an internationally illegal act of a state,
the effects generated from the granting of nationality should neither be recognized by
other states, nor give rise to rights.29 Indeed, the same should apply to arbitral tribunals
at least to the extent that such recognition of unlawful actions would render the award
unenforceable.30 Thus, if an investor’s nationality was granted on the basis of an act
deemed unlawful under international law the nationality granted could not generate
rights for the investor, such as the right to invoke claims under a particular IIA.
14. Accordingly, when turning to the question of when the granting of nationality amounts
to an illegal act at an international level, under the ordinary rules on nationality
provided by international law,31 the power to confer nationality to groups of people in
its area falls within the exclusive sovereignty of each state.32 It follows that for a state
to be able to grant nationality to all persons residing in a specific area it must practice
its sovereign powers within that territory.33 Indeed, a state does not have the power to
systematically allow the population of another sovereign state’s territory to apply for
26 Brownlie 2008, 105. 27 Chorzow Factory (Jurisdiction), p. 31. 28 Wall in the Occupied Palestinian Territory, para. 121. 29 ibid. 30 Happ and Wuschka 2016, 254; Silverige Arbitration Law, Art. 36(b)(ii). 31 Tunis and Morocco Nationality Decrees case, para 24; German Government reply to the Preparatory
Committee of The Hague Codification Conference 1929, p. 375; Brownlie 2008, 383. 32 ibid.; Brownlie 2008, 384. 33 ibid.
6
its nationality.34 Thus, a state may only grant nationality in situations where it has the
power to do so without violating the sovereign powers of another state.35 When a state
does not abide by these rules, it acts unlawfully.
15. In the case at hand, when Euroasia granted Claimant and all other non-Euroasian
persons of Fairyland, a territory of Eastasia, the possibility to apply for Euroasian
nationality, through the amendment to the Euroasian Citizenship Act,36 it breached
Eastasia’s sovereign powers and, thereby, engaged in an internationally unlawful act.
In accordance with the principle of non-recognition states will not recognize the legal
effects of such actions, or in this case, Claimant’s Euroasian nationality following from
Euroasia’s breach of Eastasia’s sovereign powers. Moreover, the Tribunal must follow
the same lines of non-recognition as regards Claimant’s Euroasian nationality in order
to fulfill its duty to reach an enforceable award and avoid the award being subject to
unenforceability or other challenges. Indeed, this would likely be the case, if the award
was based on an act deemed internationally wrongful. To conclude, the Tribunal
should not recognize Claimant as a Euroasian national as Claimant does not meet the
nationality requirement of Article 1.2 of the Euroasia BIT. Thus, the Tribunal does not
have jurisdiction over this dispute under the Euroasia BIT.
1.2. In Any Event, Claimant Does Not Possess a Valid and Effective
Euroasian Nationality in Accordance with the Domestic Laws of
Euroasia
16. Even if the Tribunal were to find that no uncertainty exists as to the legality of
Euroasia’s actions, on the basis of which Claimant was granted nationality, Claimant
still does not possess a valid or effective Euroasian nationality in the sense of Article
1.2 of the Euroasia BIT. First, as to the validity of Claimant’s nationality, the
presumption of Claimant’s Euroasian nationality is overruled by the fact that the
Euroasian domestic authorities granted Claimant nationality contrary to the restriction
on the possession of dual nationality under the Euroasian Citizenship Act.37 Indeed,
34 See e.g. German Government reply to the Preparatory Committee of The Hague Codification Conference
1929, 375. 35 ibid. 36 PO2, para. 4. 37 ibid.
7
Claimant had not renounced his Eastasian nationality in accordance with the formal
requirements set out in the Eastasian Citizenship Law. Second, in any event, even if
these breaches were to be overlooked by the Tribunal in its determination of
Claimant’s nationality in the sense of Article 1.2 of the Euroasia BIT, no effective link
exists between Claimant and Euroasia to establish Claimant’s effective Euroasian
nationality.
17. When a tribunal examines an investor’s nationality in accordance with the domestic
legislation under which the nationality was granted to the investor for the purposes of
finding or declining jurisdiction,38 the tribunal has the power to determine, whether an
investor holds the necessary nationality under the relevant IIA39 independent of the
presumed home state’s decision.40 This was established in Soufraki where the tribunal
found that the national authorities’ determination regarding the granted nationality
may be overruled and the tribunal may come to an opposing conclusion on the matter.41
Indeed, authorities do not always investigate the requirements of granting a nationality
to a degree that would be sufficient to determine nationality for the purposes of
establishing jurisdiction in an investment dispute.42 In the same case the tribunal
reasoned that although the local officials had granted the investor a certificate of
nationality, the certificate was not sufficient to establish nationality for the investor as
the domestic authorities had not, when granting the certificate, conducted thorough
investigations as regards the criteria for acquiring the nationality at hand.43
18. It follows that although the domestic authorities of Euroasia have granted Claimant
Euroasian nationality, the tribunal must re-evaluate their determination regarding
Claimant’s Euroasian nationality for the purposes of establishing jurisdiction under the
Euroasia BIT.44 When looking at the requirements of the Euroasian Citizenship Act it
is explicit that the Act does not allow Euroasian nationals to hold dual citizenship.45
In this sense it is noteworthy that the Eastasian Citizenship Law sets certain procedural
38 Flegenheimer, para. 31; Pey Casado, para. 320. 39 Flegenheimer, para. 31; Soufraki, para. 62; Siag, para. 11. 40 Soufraki, para. 55; Champion Trading, para. 11. 41 Soufraki, para. 63. 42 Soufraki, para. 66. 43 ibid. 44 Soufraki, para. 55. 45 PO2, para. 4.
8
requirements for the renunciation of Eastasian nationality,46 which requirements
Claimant was required to abide by as an Eastasian national in order to avoid a situation
of dual nationality under the Euroasian Citizenship Act. In accordance with the
Eastasian Citizenship Law an Eastasian national ‘must submit a renunciation on the
legally prescribed form,’ which becomes effective ‘upon the acknowledgement of the
President of the Republic of Eastasia.’47 However, Claimant failed to abide by these
official procedural requirements by attempting to renounce his Eastasian nationality
on 2 March 2014 merely through an unofficial ‘electronic e-mail’ that he sent to the
President of the Republic of Eastasia.48 On 23 March 2014, when Claimant was
recognized as a Euroasian national,49 it is evident that Claimant still possessed
Eastasian nationality, against the requirements of the Euroasian Citizenship Act,50 as
Claimant had failed to renounce his Eastasian citizenship in accordance with the
official requirements set out in the Eastasian Citizenship Law.51 Thus, it seems that the
Euroasian national authorities failed to duly take into consideration all prevailing
requirements set out in the Euroasian Citizenship Act when granting Claimant
Euroasian nationality, which nationality seems to have been granted in breach of the
same Act.
19. To conclude, when the Tribunal determines Claimant’s alleged Euroasian nationality
under the Euroasian Citizenship Act, in the case that the Tribunal wishes to abide by
the requirements set out in the Euroasian Citizenship Act, the Tribunal cannot come to
a conclusion, in accordance with Euroasia’s domestic authorities’ evaluation of the
matter, that Claimant possesses a valid Euroasian nationality. If follows, that Claimant
does not have the required Euroasian nationality in accordance with Article 1.2 of the
Euroasia BIT, and therefore the Tribunal does not have jurisdiction over this dispute.
20. Finally, even if the Tribunal were to overlook the Euroasian domestic authorities’
faulty determinations regarding Claimant’s Euroasian nationality, Claimant’s
Euroasian nationality cannot be deemed effective in the sense of Article 1.2 of the
46 PO3, para. 2. 47 ibid. 48 ibid. 49 PO2, para. 4. 50 ibid. 51 PO3, para. 2.
9
Euroasia BIT, as no effective link52 between Claimant and Euroasia exists. Therefore,
the Tribunal does not have jurisdiction over the dispute at hand.
21. In dual nationality cases, as well as, in cases facing a similar problem to those, a
tribunal may apply the ‘effective nationality test’ established in the Nottebohm case53
in order to examine whether the national in question has an ‘effective link’ to the state
of nationality.54 Under the test, the most central standards for determining the required
genuine link are, i) family ties, ii) center of the interests of the person, iii) participation
in public life, and iv) the habitual residence of the individual concerned.55 However,
this list is not exhaustive and it is, in essence, the combined effect of all the
requirements that sets out, whether a person has an effective link to the state of
nationality.56
22. Returning to the case, in order for Claimant to have an effective Euroasian nationality,
Claimant needs to fulfill the above set requirements of the ‘effective nationality test’
in order to establish a general effective link to Euroasia. As to the first element of the
test regarding Claimant’s family ties, Claimant and his parents have been and currently
are Eastasian nationals57 and, thus, Claimant does not have any close, effective family
ties to Euroasia. As to the second element of the test, nothing in the case file indicates
that Claimant had any center of interests in Euroasia, apart from a single business
contract.58 However, a single international business contract with a state does not
imply as such that a person’s center of interests, including other than economic
interests, would be in that particular state. It is even less implicit that the single
business contract would indicate that the person participated in the public life of that
state, a third criteria of the test. Finally, as to the fourth and last element, Claimant
does not reside in Euroasia, but in Fairyland, a part of Eastasia.
23. Thus, on the basis of the application of the ‘effective link test’ no general perception
of Claimant’s effective link to Euroasia emerges. In other words, the Tribunal lacks
52 Nottebohm, para. 22. 53 Champion Trading, para.14. 54 Soufraki, para. 46, Champion Trading, 14. 55 Nottebohm, para. 22. 56 Nottebohm, para. 23. 57 PO2, para. 4; PO3, para. 2. 58 SoUF, para. 9.
10
sufficient factors that would point to the direction of Claimant having an effective
Euroasian nationality, despite the formal recognition of his Euroasian nationality by
the domestic authorities of Euroasia. Therefore, as Claimant’s Euroasian nationality is
not effective in the sense of Article 1.2 of the Euroasia BIT the Tribunal does not have
jurisdiction to hear Claimant’s claim under the Euroasia BIT.
24. In conclusion, on the grounds set out in this Chapter the Tribunal does not have
jurisdiction to hear Claimant’s claims as Claimant does not fulfillf the nationality
requirement set out in Article 1.2 of the Euroasia BIT.
2. The Tribunal Does Not Have Jurisdiction as Claimant Failed to Fulfill
the Preconditions for Arbitration Set Forth in the Euroasia BIT
25. The dispute resolution clause set out in Article 9 of the Euroasia BIT only allows an
investor to commence arbitration after fulfilling several preconditions, which
preconditions Claimant has failed to meet. Namely, pursuant to the dispute resolution
clause, an investor cannot initiate arbitration before 24 months has passed since the
investor submitted the dispute to the competent domestic court of Oceania. In fact,
even before commencing domestic litigation, the investor is required to first pursue a
settlement, ensuring that the dispute is resolved in amicable consultations to the largest
possible extent.59
26. In this Chapter, Respondent will first establish that the domestic litigation requirement
is a mandatory precondition. Claimant does not dispute that he did not fulfill the
requirement, but he has relied on by the most-favored-nation clause included in Article
3 of the Euroasia BIT (the ‘MFN Clause’) to justify commencing arbitration despite
not having submitted the dispute to the competent court of Oceania. However, the
MFN Clause has the economic purpose of allowing competition foreign investors to
proceed on the basis of equality of opportunity in the host state. The requirements for
initiating international arbitration has nothing to do with such equality of opportunity.
While the MFN Clause encompasses Respondent’s guarantee to accord a certain
standard of treatment to Claimant’s operations in Oceania, this guarantee does not
involve a license to freely ignore the limits to Respondent’s consent to arbitration (2.1).
59 Euroasia BIT, Art. 9(1)–9(3).
11
Second, in addition to the non-compliance with the domestic litigation requirement,
Claimant also failed to pursue a settlement in amicable consultations with Respondent
to the extent required by Article 9(1) of the Euroasia BIT (2.2). Both of the mentioned
shortcomings on the part of Claimant lead to the lack of jurisdiction of the Tribunal.
2.1. The Most-Favored-Nation Clause Does Not Excuse Claimant’s Non-
Compliance with the Mandatory Domestic Litigation Requirement
27. The Tribunal does not have jurisdiction due to Claimant’s non-compliance with the
domestic litigation requirement set forth by Article 9(2)–(3) of the Euroasia BIT. The
requirement is a jurisdictional precondition, and not a directory pre-arbitral step. An
investment arbitration tribunal’s jurisdiction is based on the consent of the parties,60
and the conditions included in arbitration clauses constitute the limits to this consent.
Limiting consent also restricts the tribunals’ jurisdiction.61
28. In addition, the MFN Clause set out in Article 3 of the Euroasia BIT does not justify
Claimant’s non-adherence to the mentioned condition precedent to jurisdiction.
Effectively, Claimant is attempting to unilaterally change the terms of Respondent’s
conditional offer to arbitrate given in the Euroasia BIT. By guaranteeing a certain
standard of treatment to investors in the MFN Clause, Respondent did not waive its
right to impose limitations to its consent to arbitration.
29. Below, Respondent will first establish the binding nature of the domestic litigation
requirement, and second, move on to showing that the MFN Clause does not excuse
the non-compliance with the mentioned requirement. Both of these conclusions are
based on the interpretation of the Euroasia BIT as set out in Article 31(1) of VCLT
setting forth the principle that treaty provisions should be interpreted in accordance
with the ordinary meaning of the terms and in light of the article’s object and purpose62.
30. First, the mandatory nature of the domestic litigation requirement is manifested in the
formulation of Article 9(2)–(3) of the Euroasia BIT, namely the fact that the dispute
resolution provision has been framed as a sequential step-mechanism. The first step
60 Plama, para. 198. 61 Kilic, paras. 6.3.12–6.3.15. 62 VCLT, Art. 31(1); National Grid (Jurisdiction), para. 80.
12
comprises amicable consultations, the second step is composed of domestic litigation.
Arbitration does not constitute more than the ultimate step to be taken only after the
completion of the first two steps.63 The nature of the step-mechanism is also reflected
in the Preamble of the Euroasia BIT, which states that one of the purposes of the Treaty
is to provide investors with means of asserting claims and enforcing rights under
national law, and through international arbitration, mentioning arbitration only
secondarily. On the basis of this statement, the competent national court functions as
the primary forum for asserting claims and enforcing rights under the Euroasia BIT,
while arbitration is merely a subsidiary dispute resolution method.
31. To complement the interpretation based on the object and purpose of the ordinary
meaning of the wording, it has been established in investment treaty arbitration that a
tribunal should interpret IIA provisions in a way that gives each clause a meaning,
rather than depriving them of one (ut res magis valeat quam pereat).64 Following this
maxim, previous investment arbitration tribunals have considered domestic litigation
requirements to be binding on them, as the contrary interpretation would effectively
deprive a part of the dispute resolution provision of meaning.65 This is the correct
interpretation in the case at hand as well. Viewing the domestic litigation requirement
as a directory recommendation, and allowing Claimant to commence arbitration
without first submitting the dispute to the competent domestic court in Oceania, would
essentially deprive Article 9(2)–(3) of the Euroasia BIT of meaning. Thus, the Tribunal
should consider the domestic litigation requirement as mandatory.
32. Second, Claimant has relied on the MFN Clause set out in Article 3 of the Euroasia
BIT to excuse his non-compliance with the domestic litigation requirement. However,
contrary to Claimant’s erroneous statements, it has been acknowledged in investment
arbitration jurisprudence that MFN clauses do not apply to procedural issues.66 In
relying on the MFN Clause to justify the non-compliance with the prerequisites for
arbitration, Claimant is essentially accusing Respondent of a violation of the Euroasia
BIT. This is due to the general viewpoint that MFN clauses encompass a state’s
63 Euroasia BIT, Art. 9. 64 Ambiente Ufficio, para. 593. 65 Ambiente Ufficio, para. 593; Maffezini (Jurisdiction), para. 36. 66 Anglo-Iranian Oil Company; Plama; M.C.I. Power; Telenor Mobile; Senor Tza Yap Shum; Tecmed; Salini;
Wintershall; Renta; Austrian Airlines; ICS Inspection and Control Services Ltd; Kilic.
13
guarantee to accord a certain level of treatment to foreign investors, and the failure to
do so constitutes a breach of the clause.67 In this sense, Claimant’s reliance on the
MFN Clause to excuse non-compliance with the domestic litigation requirement is
absurd68.
33. In addition, the MFN Clause does not apply to the preconditions to arbitration set out
in Article 9 of the Euroasia BIT for several reasons that Respondent will elaborate on
in the following. To shortly summarize, procedural arrangements do not constitute
‘treatment’ in the sense of the MFN Clause, nor do they fall within the scope of the
Clause. In addition, MFN clauses only entitle investors to more favorable treatment,
while arbitration is not more favorable to Claimant than litigating the dispute in the
competent national court of Oceania. Finally, allowing Claimant to invoke the
procedure in the Eastasia BIT would be contrary to the equality of arms principle.
34. To commence with the ordinary meaning of ‘treatment’, the term is relevant because
the MFN Clause comprises Respondent’s guarantee to accord a certain standard of
‘treatment’ to ‘the income and activities related to such investments and to such other
investment matters regulated by this Agreement’.69 However, procedural
arrangements do not constitute ‘treatment’ in the sense of the clause, as has been
previously found in investment arbitration jurisprudence with respect to a
corresponding MFN clause. In Berschader, the tribunal found that the contracting
states referred to the ‘material rights accorded to investors’ by the term ‘treatment’.70
35. Furthermore, matters of procedure do not fall within the scope of this particular clause,
namely ‘the income and activities related to such investments and […] such other
investment matters regulated by this Agreement.’71 The ordinary meaning of the
wording of Article 3 of the Euroasia BIT refers explicitly to the substantive protection
guaranteed to foreign investors in the host state. While it is true that in investment
arbitration, tribunals have considered procedural arrangements to fall within the scope
of MFN clauses, such clauses have been formulated differently than the MFN Clause
67 Douglas 2010, 107. 68 ibid. 69 Euroasia BIT, Art. 3. 70 Berschader, para. 185. 71 Euroasia BIT, Art. 3.
14
at hand. For example, in Maffezini, the MFN clause in question did not provide for any
specific scope, but merely provided that the most favorable treatment would be granted
to ‘investments.’72 Therefore, the Tribunal should assess the MFN Clause in this case
differently to the earlier investment treaty jurisprudence relating to MFN clauses.
36. In addition, treatment under a third-party IIA should be de facto more favorable to an
investor for an MFN clause to apply.73 Thus, a central question that must be answered
is, whether the dispute resolution procedure under Eastasia BIT is more favorable than
the corresponding procedure under Euroasia BIT. The central difference is the step
that follows amicable consultations; the Euroasia BIT requires domestic litigation
while the Eastasia BIT does not.74 However, it does not automatically follow that the
procedure under the Euroasia BIT is less favorable than that of the Eastasia BIT. As
correctly stated by Dr. Paparinskis,
‘[…] international dispute settlement is not more favorable than domestic
dispute settlement; it is simply fundamentally different in structure.’75
Had Claimant first initiated domestic litigation, he would still have been later entitled
to commence arbitration in the case that the proceedings in Oceania would have turned
out to be biased or unreasonably delayed76. Therefore, the dispute resolution procedure
under Eastasia BIT was not more favorable to Claimant than the corresponding
procedure under Euroasia BIT.
37. Finally, an interpretation that MFN clauses can be applied to procedural agreements
would violate the equality of arms principle. According to the principle, the parties
should be treated equally in judicial proceedings. If the other party is entitled to change
the rules of the procedure agreed upon beforehand, the other party is worse off.
Interpreting that MFN clauses entitle investors to choose whether it wishes to apply
the procedure set forth by the IIA at hand, or the procedure set out in a third-party IIA
would mean that one of the parties could unilaterally alter the procedural rules once
72 Maffezini (Jurisdiction), para. 38. 73 Douglas 2010, 104. 74 Eastasia BIT, Art. 8; Euroasia BIT, Art. 9. 75 Paparinskis 2011, 49. 76 Foster 2010, 250.
15
the dispute has arisen.77 Such an interpretation is contrary to the equality of arms
principle.
38. To conclude, the domestic litigation requirement under Article 9(2)–(3) of the Euroasia
BIT is mandatory following the wording of the clause in light of the object and purpose
of the Treaty as reflected in its Preamble. Moreover, allowing the Claimant to
commence arbitration without first submitting the dispute to the competent domestic
court in Oceania would essentially deprive Article 9(2)–(3) of the Euroasia BIT of a
meaning, which would be contrary to the principles of treaty interpretation established
in jurisprudence. In addition, Claimant cannot circumvent the domestic litigation
requirement by reliance on the MFN Clause, as procedural arrangements do not
constitute ‘treatment’ in the sense of the Clause, nor do they fall within the scope of
the Clause. To add to the foregoing, MFN clauses only entitle investors to more
favorable treatment, while arbitration is not more favorable to Claimant than litigating
the dispute in the competent national court of Oceania. Finally, allowing Claimant to
invoke the procedure in the Eastasia BIT would be contrary to the equality of arms
principle.
39. On the basis of the reasons explained above, Claimant’s failure to litigate the dispute
in the competent domestic court of Oceania, which is required by Article 9(2)–(3) of
the Euroasia BIT, leads to the lack of jurisdiction of this Tribunal, as Claimant cannot
circumvent the requirement by virtue of the MFN Clause set out in Article 3 of the
Euroasia BIT.
2.2. Claimant Failed to Pursue Amicable Consultations to the Extent that the
Euroasia BIT Requires
40. In addition to the requirement of domestic litigation, the Euroasia BIT also provides
that an investor may only resort to judicial dispute resolution in the extent that
amicable consultations between the parties are not possible. A failure to comply with
a negotiation requirement set out in an IIA has been found to result in a lack of
jurisdiction in investment arbitration jurisprudence.78 In the case at hand as well, the
77 Douglas 2010, 104. 78 Enron, para. 88; Wintershall, para. 142.
16
formulation of Article 9(1) of the Euroasia BIT reveals the mandatory nature of the
negotiation requirement of the dispute resolution provision at hand. The Article uses
compulsory language to refer to amicable consultations, stating that the dispute ‘shall’
primarily be settled by way of negotiation.
41. The amicable consultations requirement obligates the investor that brings a claim to
ensure that the dispute is settled to the largest possible extent.79 Based on the ordinary
meaning of this clause, the Tribunal should interpret the wording to require that the
investor has to do his personal best in pursuing an amicable resolution to the dispute.
In the case at hand, Claimant has very good connections, having personal relations
with the Euroasian Minister of Defense, and having been able to arrange a personal
meeting with the President of the Oceanian NEA when commencing operations in
Oceania.80 However, when attempting to settle the dispute amicably with Respondent,
Claimant decided to approach Oceanian authorities with mere letters.
42. Moreover, while Claimant argues to have notified several ministries of Respondent of
the dispute, it has provided no evidence of the alleged notifications.81 Based on the
information provided by Claimant, the Tribunal cannot ascertain itself that the Parties
could not have reached an amicable settlement in negotiations. As it is Claimant’s duty
to comply with the conditions precedent to arbitration before initiating proceedings, it
is also Claimant’s burden to prove that it has satisfied the amicable consultations
requirement. Thus, where sufficient proof is not provided for the Tribunal, it should
find against Claimant.
43. Claimant did not genuinely attempt to enter into amicable consultations with
Respondent, nor did he provide proof of the attempts to negotiate before commencing
arbitration. Thus, the Tribunal should find that the amicable consultations requirement
set forth in Article 9(1) of the Euroasia BIT has not been met. It follows from the
mandatory nature of the requirement that the Tribunal does not have jurisdiction to
hear this case.
79 Euroasia BIT, Art. 9(1). 80 SoUF, paras. 6, 8. 81 RfA, 4.
17
ARGUMENTS ON ADMISSIBILITY AND MERITS
44. Claimant’s claims are not admissible as illegality pervades Claimant’s investment (3).
Furthermore, Respondent is not liable for expropriating Claimant’s investment under
the Euroasia BIT, as Respondent had the right and duty to adopt the EO for the purpose
of protecting its security interests (4.1). In any event, Respondent’s liability is
exempted under the Essential Security Interest Clause set out in Article 10 of the
Euroasia BIT (4.3) and the wrongfulness of Respondent’s actions is precluded on the
basis of the customary international law countermeasures defense (4.4). Finally,
Claimant contributed to the damage suffered by his investment through his operations
with Euroasia in the arms production industry and, thus, Respondent is not liable to
pay any compensation to Claimant (5).
3. Claimant’s Investment is Tainted by Corruption and Other Illegality
and, thus, Claimant’s Claims Are neither Admissible nor Does His
Investment Enjoy Protection under the Euroasia BIT
45. Claimant’s claims should be deemed inadmissible, as Claimant’s investment is tainted
by violations of international public policy and host state law. The actions taken by
Claimant to acquire the environmental license for arms production constituted an act
of bribery, and both Oceania82 as well as international public policy condemn
corruption83. Moreover, Claimant’s arms manufacturing in Oceania continued for over
a decade in violation of the Oceanian Environment Act.84
46. Despite Claimant’s continuous illegal conduct, he is now attempting to benefit from
the protection of the law by invoking the Euroasia BIT. However, according to the
principles of international investment law, the protection under IIAs is not extended to
investments that are tainted by severe illegality.85 As Claimant’s conduct relating to
the investment amounted to a grave violation of public policy and Oceanian law, the
Tribunal should find that the claims are not admissible in arbitration, or, in the
82 SoUF, para. 19. 83 World Duty Free, para. 142; Wena Hotels, para. 111. 84 SoUF, para. 13. 85 Mitchell, Sornarajah and Voon 2015, 29–30.
18
alternative, Claimant’s investment should be denied protection under the Euroasia
BIT.
47. In the words of the tribunal in Inceysa Vallisoletana,
‘[n]o legal system based on rational grounds allows the party that committed
a chain of clearly illegal acts to benefit from them.’86
In the same vein, in accordance with the ‘clean hands doctrine’ established in
international investment law, a tribunal cannot consider a claim brought by a party that
was involved in unlawful conduct in relation to the claim.87 For example, the tribunals
in Inceysa Vallisoletana and Plama refused to consider the investor’s claims under the
relevant IIAs on the basis of the clean hands doctrine, as the investors’ deceitful
conduct in making their investments violated host state law.88
48. A tribunal may find that the investor’s claims are inadmissible if the illegality is
considered to pervade the investment.89 In assessing this criterion, a tribunal takes into
account whether the violation was long-standing, continuous, deliberate, or necessary
for the investment’s financial viability.90 The final element is whether the unlawful
conduct goes to the core of the investment.91
49. In addition to the general criteria for not considering the investor’s claims in
investment arbitration as set out above, corruption is a special type of violation. An act
of corruption is a reason for refusing to consider a claim,92 as corruption is contrary to
international public policy and domestic law in the majority of the jurisdictions
participating in the investment regime.93
50. However, bribery is usually difficult to establish.94 Applying a high standard of proof
would put an undue disadvantage on a state invoking an act of corruption on the part
86 Inceysa Vallisoletana, para. 244. 87 Mitchell, Sornarajah and Voon 2015, 29–30. 88 Lim 2012, para. 15; Inceysa Vallisoletana, para. 244; Plama, paras. 144, 325. 89 Llamzon, 2008, p. 209; Plama, para. 325. 90 De Alba 2015, 326–31. 91 Llamzon, 2008, p. 209; De Alba 2015, 326–330. 92 Fraport, §40; Rumeli Telekom, para. 181. 93 World Duty Free, para. 142; Wena Hotels, para; 111 ICC Case No. 1110 (1963), para. 20; Llamzon, 2008,
p. 209. 94 Haugeneder 2009, 338.
19
of the investor.95 To balance out the difficulties in providing sufficient proof, the
tribunal in ICC Case No. 6497 considered that despite the fact that the party invoking
the corruption bears the burden of proof, the tribunal may shift the burden for the
purpose of obtaining more evidence in the matter.96 After the burden has been shifted
and the investor is unable to provide evidence to the effect that an act of corruption did
not take place, the arbitral tribunal may conclude that bribery has been established.97
51. In the case at hand, Claimant has engaged in two types of violations in the business
operations of RB. First, in commencing business operations in Oceania, he acquired
the environmental license necessary for commencing arms production through
bribery.98 Second, Claimant’s manufacturing continued in Oceania for over a decade,
in violation of the Oceanian Environment Act.99
52. First, to address the issue of corruption, before Claimant acquired his shares in RB, the
company had lost its environmental license required for arms production.100 Even
though it is a known fact that the terms of the license are demanding, and that obtaining
the license is time-consuming, Claimant was suddenly granted the license after visiting
the President of the Oceanian NEA.101 This severe act of corruption enabled Claimant
to evade the costs generating from compliance with the requirements of the
environmental license for years, which provided Claimant with an undue advantage as
regards the profitability of the investment. Without the license that Claimant acquired
illegally through corruption, he would not have been able to start operations and
successfully generate revenue from the investment. Therefore, the act of corruption
was not only necessary for Claimant’s investment’s financial viability, but also at the
very core of the investment. It is also unlikely that Claimant mistakenly bribed an
authority into granting the license, and thus, the act of corruption was deliberate.
53. Respondent has an exceptional amount of proof to support the finding on corruption.
Not only do the circumstances indicate that Claimant engaged in suspicious conduct
95 ibid. 96 ICC Case No. 6497, paras. 3–15. 97 ibid., with reference to Article 8 of the Swiss Civil Code. 98 SoUF, para. 6. 99 SoUF, para. 13. 100 SoUF, para. 2. 101 SoUF, para. 6.
20
to obtain the license, but also the President of the NEA has promised to testify that
Claimant gave a bribe to obtain the license.102 Moreover, as RB was granted the license
in a few months’ time even though the process should have taken years, the only
reasonable conclusion is that Claimant obtained the license through bribery.
54. Adding to the act of corruption described above, Claimant continued manufacturing
arms in Oceania in violation of the local environmental laws.103 Claimant’s violation
of the Oceanian Environment Act constituted a long-standing, continuous violation of
host state law. In addition, as investors are obligated to be aware of regulation that
concerns their operations, the violation was also deliberate.
55. To conclude, Claimant’s violations fulfill all elements that a tribunal considers when
it assesses whether the illegality pervades the investment. Respondent has provided a
wealth of evidence showing that the act of corruption was deliberate, necessary for
Claimant’s investment’s financial viability, and at the very core of the investment.
Moreover, the violations of the environmental law constituted a deliberate, long-
standing, and continuous breach. Thus, following the tribunals in Inceysa
Vallisoletana and Plama, the Tribunal should find Claimant’s claims as inadmissible
due to Claimant’s unlawful conduct in relation to the claim.104
56. Should the Tribunal decide to consider the claim, it should nonetheless find that
Claimant’s investment is not entitled to protection under the Euroasia BIT. The grave
nature of Claimant’s violations warrants the conclusion that his investment should not
enjoy protection guaranteed to investments by Respondent under the Euroasia BIT. At
the very least, the Tribunal should reduce the amount of compensation due to
Claimant, if it were to find that a breach of the Euroasia BIT is at hand, which
Respondent strictly denies.
102 PO2, para. 5. 103 SoUF, para. 12. 104 Mitchell, Sornarajah and Voon 2015, 29–30.
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4. Respondent’s Right and Duty to Protect Its Security Interests Prevent
a Finding on Expropriation
57. The essence of this dispute concerns the EO, a legitimate legal act Respondent adopted
within it sovereign powers for the purpose of protecting its national security as well as
foreign policy interests.105 Accordingly, Respondent will show below that the EO does
not amount to an indirect expropriation of Claimant’s investment in the sense of
Article 4 of the Euroasia BIT on the grounds set below.
58. Traditionally, expropriations, in other words, takings of ‘something of value’ away
from its owner through measures attributable to a state, have taken place in the form
of state decrees that transfer the investor’s title to property to the benefit of the host
state.106 However, in cases where a measure, attributable to the host state, results in a
destruction of the investment, usually by interfering detrimentally with the investor’s
business operations,107 but where a third party, or no party at all, receives benefit from
such measures,108 it is suitable to use the term ‘indirect’ expropriation.109 Despite the
versatile terminology used for indirect expropriations, such as measures tantamount,
or equivalent,110 to expropriation, the substance remains the same.111
59. Article 4 of the Euroasia BIT sets out the criteria for legal expropriations as well as
‘other measures the effects of which would be tantamount to expropriation’, but gives
no insight as regards what measures fall within this scope of legal expropriations.
Generally, no ‘checklist’ exists for determining which measures fall under the scope
of indirect expropriation.112 However, the hypothetical group of measures is not
without boundaries. In S.D. Myers the tribunal noted that ‘[e]xpropriations tend to
involve the deprivation of ownership rights; regulations a lesser interference.’113 Thus,
105 PO3, para. 10. 106 Reinisch 2008, 408; See e.g. Metalclad, para. 103; Santa Elena; American International Group. 107 Sornarajah 2010, 365. 108 Metalclad, para. 103; Tippets, 225; Starrett Housing, 154. 109 Dolzer and Schreuer 2012, 101; Heiskanen 2007, 220, 224; See e.g. Starrett Housing, 154 Tippets, 225. 110 Pope & Talbot, para. 104. 111 Brownlie 2003, 508. 112 Generation Ukraine, paras. 20, 29. 113 S.D. Myers, para. 282.
22
‘[r]egulatory conduct by public authorities’ is unlikely to amount to an indirect
expropriation.114 Indeed,
‘not all government regulatory activity that makes it difficult or impossible for
an investor to carry out a particular business, change in the law or change in
the application of existing laws that makes it uneconomical to continue a
particular business, is an expropriation.’115
Moreover, it is not unusual for a state to adapt its policies with changing political
situations and adopt measures, which might well make certain business operations
‘uneconomic to continue.’116 Changes in regulations and the political system117, even
though interfering, must be absorbed by investors.118 The mere actualization of a
political risk with adverse effects on business operations does not entitle the investor
automatically to compensation under an IIA.119
60. Accordingly, Respondent will, first, establish that the EO is a bona fide legal act
adopted within the sovereign powers of Respondent and, cannot as such, in accordance
with the rules of international law, amount to an indirect expropriation of Claimant’s
investment (4.1). Second, the EO does not deprive Claimant permanent control over
his investment and, thus, the effects of the EO do not support a conclusion that the
property had been expropriated, or in other words, ‘‘taken’ from the owner’ (4.2).120
Third, in any event, Respondent is exempted from its substantive obligations under the
expropriation provision of the Euroasia BIT, as the EO falls within the scope of the
Essential Security Interest Clause set out in Article 10 of the Euroasia BIT (4.3). And
finally, fourth, in any case, the wrongfulness of Respondent’s measure is excluded on
the basis of the customary international countermeasures defense (4.4).
114 S.D. Myers, para. 281. 115 Feldman, para. 112; Azinian, paras. 83, 14. 116 ibid. 117 Starrett Housing, 156. 118 Wagner 2014–2015, 44–5. 119 Starrett Housing, 156. 120 Pope & Talbot, para. 102.
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4.1. The Executive Order Is a Non-Compensable Measure Adopted Within
the Sovereign Powers of Respondent
61. Turning to the first point, Respondent will now establish that the EO amounts to a
legitimate measure adopted within the sovereign powers of Respondent and, to that
effect, cannot as such amount to an indirect expropriation of Claimant’ investment.
62. In accordance with the general international law rules on treaty interpretation,121 the
tribunal must take into account ‘any relevant rules of international law applicable in
the relations between the parties.’122 According to a rule under CIL,123 the adverse
effects of a measure on an investment may be justified in the case of bona fide
regulations, or such measures, adopted within the legitimate sovereign powers of a
state.124 Thus, when determining the scope of indirect expropriation, the real intents
and purposes underlying the governmental measure, as well as, the public interests
involved are taken into account.125 However, this freedom of states is not absolute.126
Namely, a state’s bona fide legal act must fulfill the criteria of reasonableness,127 non-
discrimination, and they must be adopted in accordance with the due process of law.128
Most importantly, the measure must be adopted for a public purpose,129 in other words,
for the benefit of the general welfare.130
63. Respondent will now show in four steps that the EO amounted to a non-compensable
state measure, for which no compensation must be paid. First the EO was adopted
within the sovereign powers of a state, for a permissible public purpose. Second, the
EO was adopted in accordance with the due process of law. Third, the EO was non-
121 Saluka, para. 254. 122 VCLT Art. 31(3)(c). 123 Saluka, para. 262; Feldman, para. 103. 124 Brownlie 2003, 509; Saluka, paras. 254, 255; Sedco, para. 275; El Paso, paras. 233, 236; CME, para. 603;
Crawford 2012, 447–9; Dolzer 2002–2003. 125 Dolzer 2002-2003, 90; Sea-Land Service, 166; S.D. Myers, para. 285; LG&E, para. 189; Methanex, Part
IV, Chapter (d), para. 16; Azurix, para. 312. 126 Saluka, para. 258. 127 Feldman, para. 103; Fireman’s Fund; para. 176. 128 Methanex, Part IV, Chapter D, paras. 7, 15; Emmanuel Too, 378, 387, 388; Fireman’s Fund; para. 176. 129 Methanex, Part IV, Chapter D, paras. 7, 15; Fireman’s Fund; para. 176. 130 Saluka, para. 254.
24
discriminatory in nature, and, finally, proportional with respect to the aims it pursued
as well as the objectives of the international investment law regime.
64. First, when determining whether the EO amounts to a non-compensable ‘regulatory’
measure, emphasis should be placed, not on the formal administrative nature of the
EO, but on the state powers on the basis of which the measure was adopted and on the
purposes which it pursues. As a starting point states are generally given a broad
discretion to exercise their authority within their territories for the purpose of
protecting their government, as well as, citizens in general.131 More precisely, in cases,
where national interests are at stake, states may practice their sovereign powers with
respect to activities that endanger them.132 In other words, sovereignty can be
perceived as a ‘responsibility’, which requires states to take actions to ensure the
general protection and welfare of its citizens.133 As to the permissible public policy
objectives, it is a general responsibility of states at an international level to ensure the
security of their citizens,134 a responsibility also recognized in the preamble of the
Euroasia BIT.135 Thus, within the context of the treaty and general objectives of states
at an international level, it is evident that the protection of security issues can be
deemed as a legitimate public purpose for which measures may be adopted within the
sovereign powers of a state.
65. It follows that, as the EO was adopted for the purpose of protecting Respondent’s
national security interests from an ‘extraordinary and unusual’ threat caused by
Euroasia’s military actions in Fairyland, it was indeed the protection of Respondent’s
government and citizens that actualized through the adoption of the EO. Thus, for these
very objectives the EO, despite falling outside the scope of traditional bona fide
regulation, can also amount to a non-compensable measures adopted within the
sovereign powers of a state.136
131 Klabbers, 92. 132 ibid. 133 Potter 2014, 2. 134 Hernandez-Truyol 2005, 1014–5. 135 Euroasia BIT, Preamble. 136 Brownlie 1998, 289–90.
25
66. Second, the EO, was ‘prepared and published in accordance with Oceanian law.’137
Namely, the EO, was adopted on the basis of a mandate recognized in the
‘International Emergency Economic Powers Act 1992,’ which act authorizes the
President to declare a threat to the ‘national and/or international security which in
whole or substantial part originates outside the Republic of Oceania.’138 After a
declaration, the President may block transactions and freeze assets to cope with the
threat.’139 In accordance with the Oceanian Code of Administrative Procedure it could
be revised on appeal.140 As the EO was adopted on the basis of a legal mandate,
following all applicable procedures set out in Respondent’s domestic laws and could
be appealed, the EO was not an arbitrary measure, but on the contrary, a measure
adopted in accordance with the due process of law.
67. Third, the EO was non-discriminatory in nature. A measure may target certain sectors
whilst leaving some out without being discriminatory in nature, as long as, the criteria
used in determining these sectors is non-discriminatory.141 In the case at hand the EO
imposed legitimate constraints on various ‘critical’ sectors of the Euroasian society,
also on sectors outside the arms production industry.142 In accordance with the wording
of the EO, these sectors included ‘financial services, energy, metals and mining,
engineering, and defense, in particular arms production services, and related materiel’.
It is, thus, clear that the effects of the EO were targeted, on a non-discriminatory basis,
on all vital sectors of the Euroasian economy and, thus, the EO does not amount to a
discriminatory measure. The mere fact that Claimant happened to be the only actor in
the arms production industry targeted by the sanctions,143 may have been because RB
was the only company involved in arms trade with the Republic of Euroasia.144 Thus,
it does not as such imply that the EO as such was discriminating.
68. Finally, as to the question of whether the EO was reasonable, Respondent will show
that the EO was ‘proportional to the public interest presumably protected thereby and
137 ibid. 138 PO2, para. 7. 139 ibid. 140 PO3, para 10. 141 See e.g. Salacuse 2015, 344. 142 PO3, para. 10. 143 PO2, para. 6. 144 ibid.
26
to the protection legally granted to investments’.145 In other words the ‘reasonableness’
of the EO must be established in two aspects. On one hand, whether the measure was
reasonable with respect to the aims it pursues, namely, whether the sanctions it applied
were proportional to the threat faced by Respondent’s security interests. On the other
hand, whether the damage suffered by Claimant’s investment was proportional to the
aims of the Euroasia BIT.146
69. As to the first point, it is relevant that the EO was adopted as a response to Euroasia’s
unlawful military actions in the territory of Fairyland,147 which actions caused
Respondent to face an ‘unusual and extraordinary threat’ to [its] national security and
foreign policy.’148 As the threat generated from Euroasia’s military actions, it cannot
be deemed as disproportional to react to Euroasia’s military actions through economic
constraints aimed at the critical sectors of the Euroasian economy enabling the very
use of its military forces. As to the second point, as the nature of the EO was, in
essence, to place economic constraints on certain sectors of the Euroasian economy,
the measure cannot be deemed merely on the basis of this aspect as disproportional
with respect to the objectives of the Euroasia BIT. In fact, the EO would become
completely useless, if not for the economic constraints it places on certain actors. As
stated in the Euroasia BIT, the obligations of the BIT must be achieved in compliance
with the protection of safety.149 Thus, the EO fulfills the requirement of
proportionality.
70. In conclusion, as set out above, the EO was a legitimate, non-discriminatory and
reasonable measure adopted within the sovereign powers of Respondent for a
legitimate public purpose in accordance with the due process of law. To that effect,
despite its executive nature, it amounts to a non-compensable legal act for which no
compensation must be paid. Thus, Respondent is not liable for expropriating
Claimant’s investment through the adoption of the EO.
145 Tecmed, para. 122. 146 ibid. 147 PO2, para 6; EO, Preamble. 148 EO, Preamble. 149 Euroasia BIT, Preamble.
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4.2. Alternatively, the Executive Order Does Not Deprive Claimant of
Permanent Control Over His Investment
71. In the case that the tribunal would find that the EO does not amount to a non-
compensable legal measure, the EO still does not amount to an indirect expropriation
of Claimant’s investment, as Claimant was not permanently deprived of control over
his investment.
72. An indirect expropriation is at hand when a measure radically impacts the foreign
investor’s investment to such an extent that compensation is required.150 Thus, as
confirmed by numerous tribunals when determining the scope of indirect expropriation
emphasis is placed on the consequential effects of the state’s measure.151 The tribunal
in Pope & Talbot clarified the required effects and stated that the effects need to be
‘sufficiently restrictive’ as if ‘the property has been ‘taken’ from the owner.’152 In
Tecmed, the tribunal elaborated on the nature of the required interference by noting
that the interference must deprive the investor of ‘economical use and enjoyment of
its investment.’153 Thus, in order for an expropriation to take place, the investor must
be substantially deprived of the enjoyment of the investment,154 as well as to a
significant part the economic benefit deriving from the investment.155 Finally, these
losses must be irreversible and definitive in nature.156
73. In order for such a substantial and total denial of rights to take place, the investor must
lose control over the overall investment.157 Thus, it is not sufficient that the investor is
deprived of specific rights related to the investment.158 In turn, when examining,
whether the investor remained in control of the investment, the tribunal examines,
among other case-by-case specific issues, whether the investor remained in control of
150 Mouri 1994, 37; Reinisch 2008, 410. 151 Tippets, 225–6; Metalclad, paras. 108, 111: Santa Elena, para. 71–2; Biloune, para. 26; Phelps Dodge, 130;
Starrett Housing, 154; Tecmed, para. 116; Fireman’s Fund, paras. 176, 396. 152 Pope & Talbot, para. 102. 153 Tecmed, para. 115; Fireman’s Fund, para. 176; CMS, para. 256; Enron, para. 154; Continental Casualty,
para. 276. 154 CMS, para. 262. 155 Metalclad, para. 103. 156 Tecmed, para. 115–6; Fireman’s Fund, para. 176; Tippets, 225. 157 Azurix, para. 322; LG&E, paras. 188, 191; Pope & Talbot, para. 100. 158 El Paso, para. 233. Dolzer and Schreuer 2012, 117.
28
the shares and, thus, in ownership of the investment at all times?159 Are the business
operations supervised by the expropriating state or does the state take proceeds of the
company sales?160 Moreover, has the state adopted any other measures denying the
investor of ‘full ownership and control of the investment’?161
74. Turning to the case at hand, Respondent does not dispute the fact that Claimant’s
investment might have suffered some minor and reversible economic damage due to
the effects of the EO. Indeed, that is the very intent of the EO. However, due to the
temporary nature of countermeasures,162 it is not possible that Claimant would have
suffered permanent damage to his investment. Moreover, Claimant remained in full
control of his shares and, thus, overall in control of RB, his business which constituted
his investment. Respondent did not replace management or supervise the work of RB,
take proceeds of company sales or, under any circumstances, in light of the facts of
this case, detain employees of RB. Thus, as Respondent remained in full control of his
contracts and company, the mere, temporary, financial damage suffered by Claimant’s
investment does not support a finding on expropriation. To conclude, the EO does not
amount to an indirect expropriation of Claimant’s investment.
4.3. In Any Case, Respondent’s Liability in Exempted by Virtue of the
Essential Security Interest Clause of the Euroasia BIT
75. In any event, Respondent is not liable for expropriating Claimant’s investment under
the Euroasia BIT as the EO falls under the scope of the Essential Security Interest
Clause set out in Article 10 of the Euroasia BIT. Respondent will, first, establish below
that Article 10 of the Euroasia BIT should be interpreted to provide a wide margin of
appreciation to the Contracting Parties to decide, although in good faith, which
measures they deem to fulfill these requirements. Second, in accordance with the
standard of good faith, Respondent will show that the EO falls under the scope of the
Article as Respondent adopted the EO in order ‘to fulfill its obligations with respect to
the maintenance of international peace or security.’163 Thus, regardless of the
159 Azurix, para. 322. 160 Pope & Talbot, para. 100. 161 ibid. 162 Gabčíkovo-Nagymaros case, 7, 55-6. Cf. ARSIWA, Arts. 49, 51-3. 163 Euroasia BIT, Art. 10.
29
Tribunal’s findings on expropriation, with respect to the EO, Respondent is exempted
from its obligations set out in the Euroasia BIT.164
76. As to the first step, Respondent does not dispute that the tribunal would not have any
discretion in evaluating, which measures fall under the scope of Article 10, but points
out that the Contracting Parties intended for the Tribunal’s evaluation to be limited to
a good faith review of the Contracting Parties’ actions. This interpretation of Article
10 of the Euroasia BIT is supported by the Contracting Parties implicit intentions set
out below, as well as, due to the very nature of international peace and security matters
in general.
77. Turning to the general international rules on treaty interpretation,165 although Article
10 is textually silent as to how much discretion the Tribunal should give to the
Contracting Parties’ evaluation of the matter, a direct conclusion cannot be drawn
according to which the Tribunal may fully replace the Contracting Parties’ assessment
of the situation.166 In support of this interpretation of the Article, in accordance with
the preamble of the Euroasia BIT, the objectives of the Euroasia BIT should be
achieved ‘in a manner consistent with the protection of […] safety.’ Indeed, although,
‘safety’ may be understood in a variety of ways, the ordinary meaning of the word
insists that the term encompasses measures preventing injury or loss,167 also inherent
aspects of the term ‘security’, or, in other words, the ‘state of being safe from harm.’168
Moreover, had the Contracting Parties intended the scope of Article 10 to be construed
narrowly, for instance, to only encompass measures adopted pursuant to the Charter
of the United Nations, such an interpretation of the Article would deprive the Article
of any substantive meaning. Indeed, Article 103 of the Charter of the United Nations
explicitly states the Charter’s obligations as prevailing to obligations arising from the
United Nations Member States’ other international agreements.169
164 Burke-White and von Staden 2007, 329. 165 VCLT, Arts. 31 and 32. 166 Burke-White and von Staden 2007, 371 167 Merriam-Webster Dictionary, definition for "Safety” (accessed on 24 September
2016 http://www.merriam-webster.com/dictionary/safety). 168 Merriam-Webster Dictionary, definition for “Security” (accessed on 24 September
2016 http://www.merriam-webster.com/dictionary/security). 169 UN Charter, Art. 103.
30
78. Moreover, in further support of the Contracting Parties intention established in the
previous paragraph, it lies in the very nature of security issues in general, that the
interpretation of such measures is usually dependent on a nation’s national
determination of the matter.170 Namely, it may be questioned to what extent investment
treaty arbitral tribunals have the capacity to take into consideration all necessary
aspects underlying a state’s security policy, an issue at the core of a state’s sovereignty.
The mere fact that a tribunal has jurisdiction to hear such a claim does not suggest that
an investment arbitral tribunal would be the best instance to determine states’ national
security related issues.171 In other words, tribunals tend to be poorly positioned to
evaluate matters involving ‘critical’ state security policies, from an ‘outsider’
perspective.172 Therefore, the general nature of international peace and security matters
further supports the Contracting Parties intention to interpret Article 10 as leaving a
wide margin of appreciation for them to decide on what matters fall under the Article.
79. Thus, due to the general nature of national security matters, as well as, the Contracting
Parties’ intentions as set out in the preamble of the Euroasia BIT and obligations as
United Nations Member States,173 it is evident that Article 10 should be interpreted to
leave the Contracting Parties a broad discretion to decide which matters fall under the
scope of the Article.
80. With respect to the second issue, the Contracting Parties discretion is, however, subject
to a good faith review conducted by the Tribunal. Respondent will now establish that
this good faith standard was fulfilled by Respondent in the adoption of the EO. In
essence, the review sets out a ‘fair dealing element’ for treaty performance and requires
that the parties to the treaty act honestly and to the best of their abilities.174 The fairness
of a state’s actions can be witnessed, for instance, through transparency in its general
conduct.175 Moreover, the ‘good faith standard’ requires that a rational basis for the
state’s actions exists,176 especially, with respect to measures adopted for national
170 Burke-White and von Staden 2007, 371 171 Akande and Williams 2003, 403–404. 172 Burke-White and von Staden 2007, 372. 173 PO2, para. 8. 174 Burke-White and von Staden 2007, 379. 175 Burke-White and von Staden 2007, 380 176 ibid.
31
security purposes. Would a reasonable person come to an equivalent conclusion that
such a security threat existed?177
81. Turning to the case at hand, it follows that all measures that the Contracting Parties
regard as having been adopted ‘to fulfill its obligations with respect to the maintenance
of international peace or security,’ fall under the scope of Article 10 of the Euroasia
BIT, as long as the measure has been adopted in accordance with the standard of good
faith. These measures include the EO, a measure Respondent adopted as a consequence
of Euroasia’s military actions in the turmoil of the illegal annexation of Fairyland to
Euroasia.178
82. In this sense, it should be noted that as the EO was adopted for the purpose of excluding
a ‘threat to the national security and foreign policy’ of Respondent.179 Respondent
maintains that it had obligations under international law ‘to take active steps to wipe
out the consequences of such unlawful behavior.’180 Indeed, Respondent had let
Claimant produce arms in its territory, which arms were later used in Euroasia’s
unlawful military intervention. Respondent was obliged to neutralize the effects of
these actions it had taken as a contributing third party.181 Moreover, as a great number
of states, including Respondent, were against the annexation of Fairyland and the UN
Security Council had discussed the matter,182 it is evident that Respondent acted as any
reasonable state would have acted in a similar situation. Namely, similar sanctions
were imposed by other states as well.183 Finally, Respondent acted transparently,
which can be noted from the fact that Respondent publicly condemned Euroasia’s
military actions as well as broke of its diplomatic ties with Euroasia.184 Thus,
Respondent acted honestly and to the best of its abilities and thereby in good faith
when adopting the EO.
177 ibid. 178 SoUF, para. 14. 179 EO, Preamble. 180 ARfA, p. 16. 181 Brilmayer and Tesfalidet 2011, 43. 182 PO2, para. 3; SoUF, para. 16. 183 PO3, para. 11. 184 PO2, para. 6.
32
83. To conclude, regardless of the Tribunal’s findings on expropriation Respondent is
exempted from liability under the Euroasia BIT, as the EO falls under the scope of the
Essential Security Interest Clause set out in Article 10 of the Euroasia BIT.
4.4. The Wrongfulness of Respondent’s Measures is Excluded Inasmuch as
the Actions Amounted to a Legitimate Countermeasure under
Customary International Law
84. Were the Tribunal to find that Respondent must compensate Claimant for
expropriating Claimant’s investment under the Euroasia BIT, Respondent will
establish in this Chapter that the customary international law countermeasures defense
(the ‘CIL CD’) precludes the wrongfulness of the measure. The CIL rules on state
responsibility apply in international investment law as a secondary source of law and
set out the general conditions for a state to be considered responsible for a wrongful
act, and the legal consequences that follow such an act.185
85. Under the CIL CD, the wrongfulness of a violation of international law, such as a
breach of an international treaty,186 is precluded if the violating act amounts to a
countermeasure, i.e. a legitimate self-help measure that a state adopts in response to a
wrongful act.187 In investment arbitration jurisprudence, the wrongfulness of an act
amounting to a countermeasure under CIL had been precluded regardless of whether
or not the breached obligation is owed to an investor or a state.188
86. In the case at hand, Euroasia’s wrongful acts injured Eastasia189 and, thus, Respondent
remains a third state. However, with respect to serious breaches of international law,
it is not solely the injured states that are entitled to take countermeasures. In order to
ensure the effective enforcement of fundamental obligations under international law,
third states might also take countermeasures in the sense of the CIL CD. Indeed, the
effective enforcement of fundamental obligations under international law requires that
if a state violates the essential norms of international law, e.g. commits an act of
185 ILC Commentary, General Commentary, para. 1. 186 ILC Commentary, Chapter V, para 1. 187 Cargill, para. 382; Paparinskis 2008, 269. 188 ADM, paras. 127, 170. 189 SoUF, para. 16.
33
aggression or violates territorial integrity, such a violation should be followed by a
response from the international community.190 The insufficiency of collective
enforcement regimes is evident from cases such as the one at hand;191 the Security
Council has been unable to come to a conclusion in the matter of Fairyland, despite
the uncontroversial fact that Euroasian land forces crossed the border and invaded an
Eastasian territory192. Thus, third states, such as Respondent, have the duty and right
to act in response to such violations of international law.
87. In the Gabčíkovo-Nagymaros case, the International Court of Justice confirmed the
prerequisites that should be fulfilled in order for a breach to amount to a
countermeasure. Although the applicable requirements as regards third party
countermeasures remains to some extent unclear,193 there is no reason why the
requirements set out in this case should not apply to such measures. First, the measure
should be directed against a state that committed the internationally wrongful act.
Second, countermeasures cannot be taken until the injured state has called upon the
state to discontinue the wrongful act or to make reparation for it. Third, the effects of
the countermeasure should be proportionate to the injury caused by the wrongful act,
and fourth, the countermeasure should be reversible.194 The EO fulfills all of these
requirements, as Respondent will show below.
88. It is uncontroversial that a violation of territorial integrity of a state constitutes an
internationally wrongful act.195 Territorial integrity has been one of the key principles
of international law since the 19th century.196 In the case at hand, Euroasia violated the
territorial integrity of Eastasia by deploying its armed forces to Eastasian territory in
March 2015.197 As a result of these violations, Respondent, through the EO, imposed
constraints on operations in certain key sectors of the Euroasian economy.198 Whereby
Respondent sought to counter Euroasia’s invasion in Fairyland, and pressure Euroasia
190 Ni 2004, 7–9. 191 ibid. 192 SoUF, para 14. 193 ILC Commentary, Art. 54, p. 137. 194 Gabčíkovo-Nagymaros case, 7, 55–6. Cf. ARSIWA, Arts. 49, 51–3. 195 UN Charter, Art. 2(4). 196 Akweenda 1989, 500. 197 SoUF, para 14. 198 EO, Section 1(a)(i).
34
into discontinuing the internationally wrongful act, namely the violation of the
territorial integrity of Eastasia.199
89. Eastasia declared the annexation illegal in a matter of days after Euroasia had invaded
the region, and broke off diplomatic relations between the two countries.200 Thus,
Eastasia as the injured state has called upon Euroasia to discontinue the invasion of
Fairyland. Furthermore, the EO is a proportionate response to Euroasia’s actions, as
the violation committed by Euroasia is grave, and the EO merely sets economic
constraints on certain industries of the Euroasian economy. In particular, targeting the
arms production industry should be seen as proportionate; at the very least, a third state
should be entitled to take action to prevent the flow arms into a conflict area. Finally,
the EO is a reversible administrative decision. The issuing authority, the President of
Oceania, may decide to revoke the order.201
90. To conclude, the CIL CD precludes the wrongfulness of a measure that breaches an
international treaty, if the measure in question amounts to a countermeasure.
Furthermore, the EO fulfills the requirements set out in the Gabčíkovo-Nagymaros
case. The EO was directed against Euroasia, which committed an internationally
wrongful act by violating the territorial integrity of Eastasia. The injured state,
Eastasia, has called upon Euroasia to discontinue the invasion. Moreover, the effects
of the EO are proportionate to the injury caused by Euroasia’s violation of territorial
integrity, especially as regards the fact that the EO targets the arms production
industry. Finally, the President of Oceania can reverse the EO.202 As the EO amounts
to a countermeasure in the sense of the CIL CD, the wrongfulness of Respondent’s
breach under the Euroasia BIT is precluded.
199 EO, Preamble. 200 SoUF, para. 14. 201 PO3, para. 10. 202 Gabčíkovo-Nagymaros case, 7, 55–6. Cf. ARSIWA, Arts. 49, 51–3.
35
5. Respondent Is Not Liable for the Self-Inflicted Damage Suffered by
Claimant’s Investment
91. In any case, Claimant is not entitled to compensation on the basis of the EO as
Claimant could have prevented the EO being directed at him altogether and, thereby,
the alleged indirect expropriation of his investment by avoiding a considerable
business risk, or in other words, by discontinuing the sales of arms through RB to
Euroasia, a party involved in the conflict in Fairyland. As IIAs are not insurance
policies against business risks,203 Claimant should bear the consequences of his own
faulty business judgments.
92. In this Chapter, Respondent will, first, show that Claimant could have avoided the
damage allegedly suffered by his investment by abstaining from concluding the new
arms sales contract with Euroasia.204 Second, Respondent will establish that the
adoption of the EO, which Claimant alleges to have caused adverse effects on his
business operations in Oceania, was reasonably foreseeable to Claimant. Indeed,
Claimant should have been able to foresee at the time when the new arms sales contract
was concluded that such legitimate countermeasures, as the EO, might follow, if he
continued the sale of arms to the aggressor state, Euroasia. Therefore, through his
negligent actions, Claimant knowingly took a risk of damage to his investment and,
thus, should bear the adverse consequences of the risk’s actualization himself.
93. As to the first point, in international investment law, a tribunal may reduce the amount
of damages deriving from a breach of an IIA if the victim of such an act materially
contributed to the damage. This conclusion has been confirmed in the ILC
Commentary205 and by investment arbitration jurisprudence206. In the case at hand, the
alleged expropriation of Claimant’s investment occurred as a result of Claimant’s
decision to continue the sale of arms to an unstable area.207 In February 2015, at the
time when Claimant and Euroasia concluded their new arms sales contract, the state
of Euroasia was considering the possibility of a militarily invasion of Fairyland, a part
203 MTD, para. 178. 204 SoUF, para. 15. 205 ILC Commentary, Art. 39, p. 109. 206 Occidental, paras. 670, 673; MTD (Annulment), para. 101. 207 SoUF, para. 16.
36
of Eastasian territory.208 It followed that merely a day after the conclusion of the arms
sales contract between RB and Euroasia, Euroasian military forces entered Eastasian
territory.209 In May 2015, Respondent adopted the EO as a response to Euroasia’s acts
of aggression in Fairyland.210 Through the adoption of the EO Respondent hoped,
among other goals, to protect its national security interests211 by pressuring Euroasia
into discontinuing the wrongful invasion of Fairyland.212 For these reasons, the effects
of the EO were extended to persons operating in certain ‘critical’ sectors of the
Euroasian economy.213 Had Claimant abstained from concluding the new arms sales
contract with Euroasia, RB’s operations would not have fallen within the scope of the
EO, as there is no indication in the case file that Claimant otherwise operated in
Euroasia. Thus, RB’s business operations would not have suffered on the basis of the
EO’s adverse effects and, accordingly, Claimant could have avoided the damage
suffered by his investment, namely RB. All simply by avoiding the conclusion of a
new arms sales contract with the prospective aggressor state, Euroasia.
94. Moreover, turning to the second point, it was foreseeable for Claimant that Respondent
was likely to take measures in order to stop the flow of arms to the conflict area of
Fairyland and that these measures would damage Claimant’s investment. It follows
that Claimant’s actions reflect a kind of negligence that warrants a reduction of
compensation. According to customary international law reflected in the ARSIWA and
the ILC Commentary, compensation for an internationally wrongful act may be
reduced if the victim, or in investment arbitration the investor, acts willfully or
negligently.214 In more than one case, damages have been reduced on the basis of the
investor’s failure to duly and sufficiently take into consideration all circumstances
prior to making a business decision, which failure has then led to an ill-informed
business judgment that would have been avoided had the investor acted diligently.215
208 SoUF, paras. 2, 14, 15. 209 SoUF, paras. 14, 15. 210 EO, Preamble. 211 ibid. 212 ibid. 213 EO, Section 1(a)(i). 214 ILC Commentary, Art. 39, p. 109. 215 Azurix, para. 426; MTD, paras. 178, 243.
37
95. By concluding the new arms sales contract with the aggressor state, Euroasia, Claimant
took a conscious business risk which might actualize into measures that would impede
Claimant’s business operations. On 28 February 2014, when RB and Euroasia
concluded the new arms sales contract, there was a public political discussion
regarding the likely invasion of Fairyland.216 To add to the foregoing, Claimant had a
personal relationship with the Euroasian Minister of Defense.217 On the basis of the
publicly broadcasted political debate and Claimant’s close personal relations with the
highest political authority in defense matters in Euroasia, it would not be credible for
Claimant to allege that he could not have foreseen the invasion prior to concluding the
new contract with the future aggressor state.
96. To conclude, Claimant could have avoided the damage suffered by his investment by
abstaining from concluding the new arms sales contract with Euroasia. Claimant would
not have become subject to EO, if not for the new arms sales contract. Additionally,
the adoption of the EO and its potentially adverse effects on Claimant’s business
operations in Oceania were reasonably foreseeable to Claimant. Therefore, through his
negligent actions, Claimant knowingly took a risk of damage as regards his investment.
Due to Claimant’s contribution to the damage inflicted on his investment, the Tribunal
should not order Respondent to compensate Claimant for any part of the damage. In
any case, should the Tribunal find that denying Claimant all compensation is not
warranted in the case at hand, following the reasoning in MTD,218 Respondent should
not be ordered to compensate Claimant more than 50% of the damage incurred to
Claimant’s investment.
216 SoUF, paras. 14–15; PO2, para. 3. 217 SoUF, para. 8. 218 MTD (Annulment), para. 101.
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REQUEST FOR RELIEF
97. Respondent respectfully asks the Tribunal to find that:
(1) The Tribunal does not have jurisdiction over the dispute as Claimant is not a
Euroasian national and therefore does not qualify as an investor under the Euroasia
BIT; and
(2) The Tribunal does not have jurisdiction as Claimant has failed to fulfill the
conditions precedent to arbitration as set out in Article 9 of the Euroasia BIT prior to
bringing his claims before the Tribunal; and
(3) Claimant’s claims are inadmissible, as his investment is tainted by the illegality
of Claimant’s actions; and
(4) Respondent is not liable for any breaches under the Euroasia BIT as Respondent
had the right and duty to adopt measures for the purpose of national security; and
(5) Claimant is not entitled to any compensation under the Euroasia BIT, as Claimant
through the continuation of RB’s arms sales contract contributed to the damage
suffered by his investment.
