Seedling Respondent

Team Code – IR404

4TH INTERNATIONAL BANKING AND INVESTMENT LAWMOOT COURT COMPETITION, 2015

ASK

IN THE AD-HOC ARBITRATION TRIBUNAL FORMED UNDER THE TREATY AT JAIPUR, SOUTHERIA

IN THE MATTER CONCERNING BILATERAL INVESTMENT TREATY BETWEEN:

CLAIMANT: Poseidon Petroleum and Natural Gas Limited (PPNGL) Southeria

-AND-

RESPONDENT: The Government of the Republic of Southeria

-MEMORIAL ON BEHALF OF THE RESPONDENT-Page 1

TABLE OF CONTENTS

INDEX OF AUTHORITIES...........................................................................................................4

LIST OF ABBREVIATIONS..........................................................................................................6

STATEMENT OF FACTS..............................................................................................................7

ISSUES RAISED...........................................................................................................................10

4. Respondent’s actions are not exempt under both the essential security provision of BIT and the Customary International Law defense of necessity.......................................................10

SUMMARY OF ARGUMANTS..................................................................................................11

4. Respondent’s actions are not exempt under both the essential security provision of BIT and the Customary International Law defence of necessity......................................................12

ARGUMENTS ADVANCED.......................................................................................................13

1. The tribunal lacks jurisdiction on claims of Claimant........................................................13

1.1. The Tribunal lacks jurisdiction because Claimant fails to satisfy the BIT’s investment requirement..........................................................................................................13

1.2. The Tribunal lacks jurisdiction on claim of fair and equitable treatment...................15

2. Respondent has complied with its obligation to provide fair and equitable treatment and full protection and security to claimant......................................................................................15

2.1. The FET clause should be interpreted with reference to CIL.....................................16

2.2. Respondent has accorded claimant’s investments fair and equitable treatment..........16

A. Lack of arbitrariness and non-discrimination..............................................................17

B. Transparency and stability, including the respect of the legitimate expectations.......17

C. Respondent has not violated the obligation of vigilance and protection.....................21

D. Bad faith......................................................................................................................22

E. No violation of due process.........................................................................................23

3. Government of Southeria has not Expropriated Claimant’s Investment............................24

3.1. Respondent has not expropriated Claimant’s investment directly..............................24

3.2. Respondent has not expropriated Claimant’s investment indirectly...........................25

3.3. The amendments in the Income tax Act shall not be regarded as expropriation because it is a legitimate exercise of the sovereignty of Southeria........................................26

4. Respondent’s actions are exempt under both the essential security provision of BIT and the Customary International Law defense of necessity.............................................................27

4.1. Respondent’s Actions Are Exempt under the BIT......................................................28

A. Present situation qualifies as an Essential Security Issue............................................28

B. The BIT’s Essential Security Provision Is Self-Judging.............................................29


4.2. Respondent’s actions are exempt under the necessity defense of Customary International Law…………...................................................................................................29

A. Introducing retrospective amendment in the tax laws was the only way for Southeria to avoid grave and imminent peril......................................................................................30

B. The Measures Did Not Impair Other States’ or International Essential Interests.......30

PRAYER........................................................................................................................................32


INDEX OF AUTHORITIES

B OOKS R EFERRED :

1. A Reinisch, Standarts of Investment Protection, (OUP 2008)..........................................152. Craig, De Burca, EU Law: text, cases and materials, (OUP 2008)..................................193. Dolzer, Rudolf & Schreuer, Christoph, Principles of International Investment Law,

(OUP 2008)........................................................................................................................214. I Tudor, The Fair and Equitable Treatment Standard in the International Law of

Foreign Investment, (OUP 2008)......................................................................................205. Muchlinski P, Ortino F, Schreuer C (ed), The Oxford Handbook of International

Investment Law, (OUP 2008)............................................................................................21

C ASES C ITED :

1. Asian Agricultural Products Ltd v Sri Lanka, ICSID Case no ARB/87/3, Final Award (27 June 1990)...................................................................................................................20

2. Azurix Corp v The Argentine Republic, ICSID Case No ARB/01/12, Award (14 July 2006) para 361.............................................................................................................14, 18

3. Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, Case No ARB/05/22, Award (24 July 2008)........................................................................................................14

4. CMS Gas Transmission Company v The Argentine Republic, ICSID Case No ARB/01/8, Award (12 May 2005).................................................................................................24, 27

5. Continental Casualty Company v The Argentine Republic, Case no ARB/03/9, Award (5 September 2008)................................................................................................................29

6. Duke Energy Electroquil Partners & Electroquil S A v Republic of Ecuador, ICSID Case No ARB/04/19, Award (18 August 2008)................................................................17

7. Eureko B V v Republic of Poland, UNCITRAL arbitration, Partial Award (19 August 2005) 12 ICSID Reports 335.........................................................................................4, 20

8. Generation Ukraine Inc v Ukraine, ICSID Case No ARB/00/9, Decision on Jurisdiction (16 September 2003) para 20.............................................................................................16

9. International Centre for the Settlement of Investment Disputes MTD Equity Sdn Bhd & Anor v Republic of Chile (2005) 44 ILM 91......................................................................17

10. International Centre for the Settlement of Investment Disputes Técnicas Medioambientales Tecmed, S A v Mexico (2004) 43 ILM 133,154..................................17

11. International Thunderbird Gaming Corporation v The United Mexican States, NAFTA, Award (26 January 2006)..................................................................................................16

12. Jan de Nul N V and Dredging International N V v Arab Republic of Egypt, ICSID Case No ARB/04/13, Award (6 November 2008)..................................................................4, 22


13. Noble Ventures, Inc v Romania, ICSID Case No ARB/01/11, Award (12 October 2005)...........................................................................................................................................21

14. Parkerings- Compagniet AS v Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007)..........................................................................................................18, 25

15. PSEG Global Inc The North American Coal Corporation and Konya Ingin Electrik Uretim ve Ticaret Limited Sirketi v Turkey, ICSID Case No ARB/02/5, Award (19 January 2007).....................................................................................................................17

16. Saluka Investments B V v Czech Republic, UNCITRAL arbitration, Partial Award (17 March 2006).................................................................................................................17, 18

17. Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award (30 April 2004)................................................................................................12, 15

18. Wena Hotels Limited v Arab Republic of Egypt, ICSID Case No ARB/98/4, Decision on Jurisdiction (25 May 1999)................................................................................................20


LIST OF ABBREVIATIONS

ASR Articles on State ResponsibilityArt ArticleBIT Eiropa - Southeria Bilateral investment treatyCIL Customary International LawDTAA Double Taxation Avoidance agreementFET Fair and equitable treatmentHon’ble HonorableICC International Chamber of CommerceICJ International Court of JusticeICSID International Convention for settlement of Investment DisputesILC International Law commissionIMS International Minimum StandardIPO Initial Public OfferingNAFTA North American Free Trade AgreementPara/Paras ParagraphPPNGL Poseidon Petroleum and Natural Gas LimitedUN United NationsUNCITRAL United Nation Commission on International Trade Lawv VersusVCLT Vienna Convention on law of treaties


STATEMENT OF FACTS

I

Poseidon Petroleum and Natural Gas Limited (PPNGL) Southeria is one of the largest and

arguably the most prominent independent oil and gas exploration and production companies in

Southeria, operating in Southeria since 1996.The group has been operating in Southeria for

about 15 years It has made extensive discoveries of oil and natural. PPNGL Southeria has also

considerably increased its assets in the form of refineries and oil and natural gas transport

rolling stock. In 2007, Eiropa PPNGL listed the Southerian part of its business, PPNGL

Southeria Limited, on the National and Tongo Stock Exchanges of Southeria raising US$2

billion and retaining 62% holding.

II

The same year the Poseidon Holding company of which Eiropa PPNGL has been the principal

subsidiary, decided to reorganize the structure of the group assets by permitting its Australian

subsidiary, PPNGL (Aurora), to acquire controlling shareholding in the Eiropa PPNGL, with

the result that the Eiropa PPNGL‟s stake in PPNGL Southeria was to be reduced to 10 percent

after the transaction. In 2011 PPNGL (Aurora) sold 40% of PPNGL Southeria shares to

Upanishad Resources Private Ltd, a global natural resources company, for approximately

US$7.5 billion, retaining a 22% holding. In 2012, it further sold an aggregate 11.5% holding in

PPNGL Southeria Limited for a net cash consideration of US$1.3bn, retaining 0.5%

shareholding.

III

PPNGL Southeria filed a dispute notice against the Southerian Internal Revenue over a $1.6

billion tax claim for the fiscal year ended March 2007. The dispute notice was filed under the


terms of a Eiropa-Southeria Investment Treaty, and the Southerian Government and PPNGL

Southeria immediately started negotiations to find a resolution to the dispute. The tax claim

related to transactions carried out to reorganize the company’s structure in 2007 leading to

British Petroleum (Aurora) acquiring controlling shareholding in the British PPNGL, with the

result that the Eiropa PPNGL’s stake in PPNGL Southeria was to be reduced to 10 percent

after the transaction.

IV

The tax department‟s investigation, which started in January 2014, has meant that Eiropa

PPNGL has not been able to proceed with the sale of its 10% stake in PPNGL Southeria, valued

at about $700 million. Eiropa PPNGL was in fact generally restricted from any sale of its stock

(valued at US$1.1bn as at 30 June 2014) to PPNGL (Aurora). As a result of the tax notice and

embargo, Eiropa PPNGL shares were seen opening down 25% on the day that the news of the

dispute went viral, traders in Rockville, Eiropa, said. This trend continued. So due to the

arbitrary amendment in the Income Tax Act of Southeria, which imposed retrospective tax on

PPNGL Southeria, huge losses were incurred by it.

V

Even after protracted negotiations, no agreement was reached on PPNGL Southeria’s claim that

the retrospective tax was not legitimately expected under the investment agreement and the

bilateral double taxation avoidance agreement, it was unusual in the history of taxation, it was

tantamount to losses in assets/profits transfer, and therefore the company was entitled to claim

“restitution of losses” resulting from the attachment of its stake in PPNGL Southeria since

2014.

VI


The company pointed out that the restructuring was planned at the instance of The Poseidon

Holding Lt, which was the principal company in the group, and it was to be achieved within the

territorial jurisdiction of Eiropa, and had nothing to do with the tax jurisdiction of the

Southerian tax authorities. Nor did it involve any sale of shares, only a transfer of shares within

the group. It also claimed that decline in share value in the Rockville Stock Exchange was the

direct result of the tax investigation, and that therefore it was entitled to claim compensation for

the loss, as also for the loss of goodwill.

VII

Correspondence received from the Income Tax Department indicated that the assessment stems

from amendments introduced in the 2012 Finance Act which, by a “removal of doubts”

Explanation, seek to tax transactions of previous years. The transactions subject to the

assessment were those undertaken to effect the group reorganization that was required to enable

the Initial Public Offering of PPNGL Southeria Limited in 2007. This was the frivolous

argument given by the Income Tax Department to defend their cause, which they failed to do

so, because they were in contravention with the provision of the BIT, which enumerated that the

parties will not be allowed to impose retrospective tax on each other.

VIII

The company raised the matter with the Finance Ministry and advised the Ministry of its

intention to invoke the Bilateral Investment Treaty for arbitration, which was denied by the

ministry. Finally, finding the Ministry unhelpful, the company invoked Article 9(3)(b) of the

Treaty and demanded that the issue be settled through arbitration.


ISSUES RAISED

The following questions have been raised before this Hon’ble Tribunal to consider:

1. Whether the Tribunal has jurisdiction over the claims submitted by the Claimant?

2. Whether the respondent has breached its obligation to provide fair and equitable treatment and full protection and security to claimant.

3. Whether the respondent has violated the Article 5 of the BIT by illegitimately expropriating the claimant’s property.

4. Respondent’s actions are exempt under both the essential security provision of BIT and the Customary International Law defense of necessity.


SUMMARY OF ARGUMANTS

1. Whether the Tribunal has jurisdiction over the claims submitted by the Claimant?

Respondent humbly submits that the tribunal lacks jurisdiction over the submitted claims of the

claimant because PPNGL Eiropa is not the real investor in the present case and the tribunal

should pierce the corporate veil to find the real investor in PPNGL, which is Poseidon, the

ultimate holding company and thus claim should have been initiated by Poseidon according to

the relevant provisions.

Moreover, the claimant made no attempts to exhaust local judicial remedies, which was a

perquisite to seek remedy under section 9 of BIT which deals with giving fair and equitable

treatment to the investor.

2. Whether the respondent has breached its obligation to provide fair and equitable

treatment and full protection and security to claimant.

The Respondent argues that it has complied with all its obligations to provide fair and equitable

treatment and ensuring full protection and security of the investment of the claimant. The

Tribunal should interpret the FET clause in accordance to International Minimum standard in

CIL to protect only gross and offensive conduct, as required by customary international law.


Whatever may be the Tribunal’s interpretation of the FET standard, however,

Respondent accorded Claimant’s investment fair and equitable treatment by acting in

accordance to the recurrent elements of the Fair and Equitable Standard

3. Whether the respondent has violated the Article 5 of the BIT by illegitimately

expropriating the claimant’s property.

There is no possibility of direct expropriation in the present case as the ownership and legal

rights of the claimants have not been hampered by respondent’s measures and continue to

remain with the claimants. Further, the retrospective tax also does not constitute indirect

expropriation as general, non-discriminatory in not enough to constitute indirect expropriation

and the investor is not deprived partially or substantially from using its investment. The

amendments in the Income tax Act shall not be regarded as expropriation because it is a

legitimate exercise of the sovereignty of Southeria

4. Respondent’s actions are exempt under both the essential security provision of BIT

and the Customary International Law defence of necessity.

Even if tribunal finds that the respondent have violated article 3 and 5 of the BIT, its actions

are exempt under the BIT and customary international law. For preventing Tax evasion and

recouping the lost sums in the form of evaded tax, retrospective tax was a measure

necessary to safeguard the essential security interests of Republic of Southeria under both


the essential security provision found in Article 11(2) of the BIT and the customary

international law defense of necessity.

ARGUMENTS ADVANCED

1. The tribunal lacks jurisdiction on claims of Claimant

1.1. The Tribunal lacks jurisdiction because Claimant fails to satisfy the BIT’s investment requirement.

BIT Article 9(1) imposes a nationality requirement: a dispute arbitrated under the BIT must be

between a Contracting State and an Investor of the other Contracting State. BIT Article 1(e)

defines the term investor as “any national or company of a Contracting Party” and company is

defined. Claimant is not an Investor within the meaning of the BIT because it is not a real

shareholder of PPNGL and thus it has not made any investment in Southeria. Rather, Poseidon,

the ultimate parent company of which Eiropa PPNGL has been the principal subsidiary is

PPNGL’s true owner which is not a national of Eiropa and thus is not covered by BIT by virtue

of article 2 of BIT.

Respondent requests that the Tribunal look to the nationality of Poseidon Enterprises, which

controls Claimant, and not the nationality of Claimant, which is a mere asset management

subsidiary. Recent decisions have prescribed looking through holding companies to find the


beneficial owner or true controller of an investment, for the purposes of determining nationality

to establish jurisdiction. For example, in Waste Management, the NAFTA tribunal held that the

nationality of the “beneficial ownership” of the company that suffered damages, rather than the

company’s nationality, was relevant in determining whether the claimant met the nationality

requirement.1 Tribunals have also looked through a second layer of shareholders to determine if

the true controller of a company meets the nationality requirement.

The restructuring was planned at the instance of Poseidon holding company thus it can be

easily inferred that beneficial owner of PPNGL southeria was the ultimate parent company

which had effective control on the PPNGL southeria as well as on claimant. The Tribunal

should look beyond Claimant, a holding company with no substance, to the nationality of the

true shareholder, Poseidon Enterprises to determine that Claimant may not rely on the BIT.

Even if the tribunal rejects this claim and opine that Eiropa PPNGL and not Poseidon

Enterprises is the investor in the present claim, the respondent argues that after the restructuring

PPNGL (Aurora) became the controlling shareholder of PPNGL Southeria and PPNGL

Aurora’s share reduced to a mere 10% thus just for the sake of getting benefits under Eiropa-

Southeria BIT, Eiropa PPNGL cannot initiate arbitral proceedings against Government of

Southeria.

1.2. The Tribunal lacks jurisdiction on claim of fair and equitable treatment

1 Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award (30 April 2004) para 80.


Article 3(3) of Eiropa- Southeria BIT provides that “dispute resolution under Article 9 of this

Agreement shall only be applicable to this paragraph in the absence of a normal local judicial

remedy being available.” The present clause makes it mandatory for the investor to pursue every

local judicial remedy available before seeking relief for violation of article 3 of BIT.

The claimant, without approaching local courts and exhausting any local judicial remedies,

directly invoked dispute resolution clause under article 9 of BIT. Thus, it is submitted that

claimant has no claim arising even if the tribunal finds that the Fair and equitable standard in

article 3 has been violated.

2. Respondent has complied with its obligation to provide fair and equitable

treatment and full protection and security to claimant.

BIT Article 3 (2) states that each Contracting State shall “Investments of investors of each

Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full

protection and security in the territory of the other Contracting Party.,” or FET. According to

one tribunal, the threshold for finding a violation of the FET standard “is a high one.”2 Without

prejudice to arguments above, Respondent submits that it did not violate the FET standard,

asserting that (A) the standard should be interpreted with reference to customary international

law; and that Respondent (B) Respondent has accorded claimant’s investments fair and

equitable treatment.

2 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, Case No ARB/05/22, Award (24 July 2008) para 597.


2.1. The FET clause should be interpreted with reference to CIL

While Article 3(2) does not explicitly refer to international law, multiple tribunals have found

that the autonomous FET standard is not materially different from the minimum standard of

treatment in customary international law.3 In Deutsche Bank AG and Biwater Gauff, faced with

a nearly identical clause as here, the tribunals adopted the standard of Waste Mgmt,4 which

prohibits conduct that is:

“arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to .

. . prejudice, or involves a lack of due process leading to an outcome which offends judicial

propriety – as might be the case with a manifest failure of natural justice in judicial proceedings

or a complete lack of transparency and candor in an administrative process.”5

The Tribunal should interpret the FET clause to protect only gross and offensive conduct, as

required by customary international law. Whatever the Tribunal’s interpretation of the FET

standard, however, Respondent accorded Claimant’s investment fair and equitable treatment.

2.2. Respondent has accorded claimant’s investments fair and equitable treatment.

3 Azurix Corp v The Argentine Republic, ICSID Case No ARB/01/12, Award (14 July 2006) para 361; Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22, Award (24 July 2008) para 592.4 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22, Award (24 July 2008) para 420; Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka , ICSID Case No ARB/09/2, Award (31 October 2012) para 599.5 Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award (30 April 2004) para 98.


The conception of fair and equitable treatment is broad and difficult to be determined by certain

criteria. However, tribunals have identified a certain number of recurrent elements which they

consider as constituting the normative content of the fair and equitable treatment standard.6

These elements can be analyzed in four categories: 1. Lack of arbitrariness and non-

discrimination. 2. Transparency and stability, including the respect of the investor’s reasonable

expectations. 3. Obligation of vigilance and protection. 4. Bad Faith 5. Due process and non-

denial of justice.7 Respondent’s observance of these elements is fully and precisely examined

below.

A. Lack of arbitrariness and non-discrimination.

State measure is discriminatory if (i) similar cases are (ii) treated differently (iii) without

justification.8 As the factsheet is silent on this issue it can be inferred that, the Claimant was not

treated differently from any other company in like circumstances. The amendment to the tax

provisions did not specifically target the Claimant, since all the provisions of amended income

tax act be equally applied to all companies in a similar position. Its treatment was justified by

the need to protect the essential interests by tax evasion. Thus it is evident that any

discrimination claim is futile.

B. Transparency and stability, including the respect of the legitimate expectations

6 A Reinisch, Standarts of Investment Protection, (OUP 2008) 118.7 A Reinisch, Standarts of Investment Protection, (OUP 2008) 118.8 Saluka Investments BV (The Netherlands) v The Czech Republic, UNCITRAL, Partial Award (17 March 2006) para 313.


The protection of investor’s legitimate expectations is an integral part of the fair and equitable

treatment.9If Contracting Party’s conduct creates reasonable and justifiable expectations on the

part of an investor (or investment) to act in reliance on said conduct, the failure of a party to

honor these expectations may entail a violation of the fair and equitable treatment.10

I. Legitimate expectations must be in consonance with the ground reality and the

claimant’s expectations were not legitimate and reasonable.

The respondent is aware that in some cases international tribunals have gone so far as to suggest

that any adverse change in the business or legal framework of the host country may give rise to

a breach of the FET in that the investors’ legitimate expectations of predictability and stability

are thereby undermined. However, as observed by several arbitral tribunals such approach is

unjustified, as it would potentially prevent the host state from introducing any legitimate

regulatory change. It ignores the fact that investors should legitimately expect regulations to

change over time as an aspect of the normal operation of legal and policy processes of the

economy they operate in.11In this respect, The Republic of Southeria reiterates that in Duke

Energy v. Ecuador the tribunal emphasized that legitimate expectations of an investor must be

grounded in reality, experience and context.12

9 Generation Ukraine Inc v Ukraine, ICSID Case No ARB/00/9, Decision on Jurisdiction (16 September 2003) para 20; Eureko B V v Republic of Poland, UNCITRAL, Partial Award (19 August 2005) 12 ICSID Reports 335) para 32.10 International Thunderbird Gaming Corporation v The United Mexican States, NAFTA, Award (26 January 2006) para 147.11 PSEG Global Inc The North American Coal Corporation and Konya Ingin Electrik Uretim ve Ticaret Limited Sirketi v Turkey, ICSID Case No ARB/02/5, Award (19 January 2007).12 Duke Energy Electroquil Partners & Electroquil S A v Republic of Ecuador , ICSID Case No ARB/04/19, Award (18 August 2008).


The respondents would also like to clarify that the amendments in the Income tax act only

inserted Explanations to the provisions in order to avoid them from being misunderstood and

thus no new provisions were inserted. The decisions in Técnicas Medioambientales

Tecmed13and others cases14 require that an investor “knows beforehand any and all rules and

regulations that will govern its investments”. It was the duty of the claimant to determine the

clear ambit of taxing provisions which they haven’t complied with, so the tax assessment has

nothing to do with the legitimate expectations of the Claimants.

II. The host State has legitimate right to regulate domestic matters in the public interest

Investor’s legitimate expectations should at all times be balanced with host state’s regulatory

interest.15 A state is entitled to exercise its policy powers, if reasonable regulatory interest

requires so.16 It is evident that international law extends a high level of deference to the right of

governments to regulate matters within their internal borders.17 As stated by the tribunal in

Saluka: “No investor may reasonably expect that the circumstances prevailing at the time the

investment is made remain totally unchanged. In order to determine whether frustration of the

foreign Investor’s expectations was justified and reasonable, the host State's legitimate right

subsequently to regulate domestic matters in the public interest must be taken into

consideration as well.”18

13 International Centre for the Settlement of Investment Disputes Técnicas Medioambientales Tecmed, S A v Mexico (2004) 43 ILM 133,154.14 International Centre for the Settlement of Investment Disputes MTD Equity Sdn Bhd & Anor v Republic of Chile (2005) 44 ILM 91,105-6.15 Saluka Investments B V v Czech Republic, UNCITRAL arbitration, Partial Award (17 March 2006) para 133.16 Saluka Investments B V v Czech Republic, UNCITRAL arbitration, Partial Award (17 March 2006) para 133.17 International Centre for the Settlement of Investment S D Myers, Inc v Canada, Partial Award (13 November 2000), 232 ILM 408.18 Saluka Investments B V v Czech Republic, UNCITRAL arbitration, Partial Award (17 March 2006) para 305.


The Parkerings tribunal confirmed that an investor’s expectation could not be frozen upon the

legal framework at the time the investment was established and investors “must anticipate that

the circumstances could change”.19

Similarly, the discussion in Feldman v United Mexican States,20 citing the Restatement Third,

Foreign Relations Law of the United States21 notes that “a state is not responsible for loss of

property or for other economic disadvantage resulting from bona fide general taxation,

regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within

the police power of states, if it is not discriminatory.”

Thus, it is clear from the above law that, host country can regulate its domestic matters which

are in the public interests and the legitimate and reasonable needs of an economy should not be

given a go by and bona fide taxation to recoup the losses incurred in the past, which is not

discriminatory at the same time cannot come under the domain of hampering legitimate

expectations of an investor.

III. Retrospective amendment is permitted in the present circumstances

However, if the Tribunal concludes that the amendments are pertinent for the Claimant’s

position, the Respondent submits that it was entitled to said amendments. Unlike in criminal

19 Parkerings- Compagniet AS v Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007).20 Feldman v United Mexican States (Award) 7 ICSID Rep 341, 366 (2002) para 97; Azurix Corp v Argentine Republic, ICSID Case No ARB/01/12, Award (14 July 2006) para 101-11.21 Restatement Third, Foreign Relations Law of the United States, American Law Institute, Vol. II (1987) §712, comment (g).


law, in civil law retrospective legislation is permitted under certain conditions.22 Retrospective

laws are passed in developed legal systems, including the US,23 EU24and Canada.25

After the Deepwater Horizon incident, the US Congress seriously considered retrospectively

raising BP‘s liability cap, while the Justice Department stated that such a measure would stand

if legally challenged.26 Thus the claimant cannot seek relief under this head.

Furthermore, restricting the claimant from sale of remaining 10% shareholding cannot be

considered a violation of the Claimant‘s legitimate expectations. The Claimant failed to meet its

obligation under the applicable tax Southerian law, The claimant was restricted by the

Southerian authorities until the Claimant fulfilled its obligations, in line with Sylvania‘s

Statutory Code. The Claimant was aware of this provision of Southerian law. Therefore, the

justified sale of shares of the Claimant does not go against its legitimate expectations.

C. Respondent has not violated the obligation of vigilance and protection

The obligation of a host state to remain vigilant while according investments on its territory full

protection and security is considered to be part of the fair and equitable standard.27 Thus, the

tribunal in the AMT case determined the full protection and security as an obligation of a state

22 Robison, Wade, Bayles, Michael, The Legal Essays of Michael Bayles, Springer, 200223 Johannessen v United States, 225 U S 227, 242 (1912)24 Craig, De Burca, EU Law: text, cases and materials, (OUP 2008) 552.25 Columbia v Imperial Tobacco Canada Ltd [2005] 2 S C R 473, para 69.26 https://diversitatesjournal.files.wordpress.com/2012/01/diversitates_3_-n-2_-artigo-41.pdf27 Wena Hotels Limited v Arab Republic of Egypt, ICSID Case No ARB/98/4, Decision on Jurisdiction (25 May 1999) para 84, 95.


to ensure the full enjoyment of protection and security of investments and not to permit the

invocation of its own legislation to detract from any such obligation.‟28

Under the case law of investment adjudication this element of fair and equitable treatment refers

to the impairment of investment’s physical integrity only, but fails to extend beyond the mere

physical safety.29 The physical safety enshrines obligation of a state to protect investments on its

territory from excessive interference, whether caused by the state itself or by third parties.30

Under this standard a state is under a due diligence obligation to take reasonable measures of

protection of foreign investments, which well-administered government could exercise under

the similar circumstances.31 However, it was expressly pinpointed that in case if the state’s

behavior was not totally unjustifiable, but was reasonably connected to some rational legal

policy, there would be no breach of obligation of vigilance and protection.

In the case at hand the Retrospective taxation constituted a part of Southeria’s rational legal

policy of implementation of lawful buyout decision and thus it cannot be considered as a

violation of the vigilance and protection obligation.

D. Bad faith

A violation of FET can occur if the Host State acts in bad faith.32 The Respondent acted in good

faith, its only interest being the protection of its economic interests. The Respondent‘s actions

28 I Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment, (OUP 2008) 156.29 Eureko B V v Republic of Poland, UNCITRAL arbitration, Partial Award (19 August 2005) 12 ICSID Reports 335, para 240.30 A Reinisch, Standarts of Investment Protection, (OUP 2008)138.31 Asian Agricultural Products Ltd v Sri Lanka, ICSID Case no ARB/87/3, Final Award (27 June 1990) para 77.32 Dolzer, Rudolf & Schreuer, Christoph, Principles of International Investment Law, (OUP 2008)145.


were not motivated by the desire to cause the Claimant harm, which means there was no mala

fides.

Finally, it must be noted that tribunals have placed considerable importance on the investor‘s

conduct when determining whether FET has been breached.33Where unconscionable investor

conduct is found, it can have serious consequences on its claim.34 PPNGL Eiropa, in the present

case acted in bad faith, and tried to evade tax obligations by changing its controlling

shareholding in order to change ownership of PPNGL Southeria without paying the applicable

capital gains tax. The measures taken by Respondent were necessary and proportional, the

Claimant was treated in line with the circumstances and the treatment accorded to it was Fair

and Equitable.

E. No violation of due process

Due process and denial of justice generally deal with the administrative decision-making

process and the judicial system, and are not applicable to the facts present here. For instance,

denial of justice may include:(a) Denial of access to justice and the refusal of courts to decide;

(b) Unreasonable delay in proceedings; (c) Lack of a court’s independence from the legislative

and the executive branches of the State; (d) Failure to execute final judgments or arbitral

awards; (e) Corruption of a judge; (f) Discrimination against the foreign litigant; (g) Breach of

fundamental due process guarantees, such as a failure to give notice of the proceedings and

failure to provide an opportunity to be heard.35There was no violation of due process by the

33 Noble Ventures, Inc v Romania, ICSID Case No ARB/01/11, Award (12 October 2005) para 147.34Muchlinski P, Ortino F, Schreuer C (ed), The Oxford Handbook of International Investment Law, (OUP 2008) 64035Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreements II, UNITED NATIONS (2012) 81.


Respondent. As none of these are present in the instant case. Furthermore, with the exception of

a claim for unreasonable delay, there is a requirement that the Claimant exhaust local

remedies.36 Claimant did not bring claims to Respondent’s courts or administrative bodies, and

chose instead to seek remedies in arbitration.

The claimant had initiated negotiations with government of Southeria and after their failure to

negotiate, the claimant had access to the local courts of but the claimant didn’t even intend to

raise the matter in the local courts and exhaust any local remedy. Thus the arguments relating to

due process and unnecessary delay, if raised, will have no merit. Furthermore, the failure of

negotiation process between Government of Southeria and the claimant will not be covered

under violation of due process. Given that Claimant never availed itself of Respondent’s legal

institutions, it cannot claim now that there has been a lack of due process or a denial of justice.

For all the above reasons, Respondent has satisfied its obligations under the BIT to provide fair

and equitable treatment

3. Government of Southeria has not Expropriated Claimant’s Investment.

Article 5 of the BIT enshrines that investments of the Contracting Parties’ investors shall not be

directly or indirectly expropriated, except for public purpose on conditions of due process, non-

discriminatory basis, against full compensation.

3.1. Respondent has not expropriated Claimant’s investment directly

36 Jan de Nul N V and Dredging International N V v Arab Republic of Egypt , ICSID Case No ARB/04/13, Award (6 November 2008) paras 256-61.


Claimant alleges that Respondent unlawfully expropriated its investment by introducing

retrospective tax. However, these claims are substantiated neither by law, nor by facts of the

case.

The international investment law recognizes two types of expropriation: direct and indirect. A

direct expropriation is an expropriation in its traditional meaning. The crucial element of a

direct expropriation is that property must be “taken” by State authorities. Thus, the official

governmental act of expropriation is required. In the case at hand there was no official

governmental act that constituted expropriation. Therefore, the direct expropriation has not

occurred. Direct expropriation is an overt deprivation of an alien of the legal rights of ownership

to property. As there is no transfer of title, and being that the Claimant is still the owner of the

shares, it is prima facie evident that no direct expropriation is present.

3.2. Respondent has not expropriated Claimant’s investment indirectly

The respondent hereby further submits that there has been no indirect expropriation of the

claimant’s investment as well.

The discussion in Feldman v United Mexican States37 notes that, “a state is not responsible for loss

of property or for other economic disadvantage resulting from bona fide general taxation,

regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the

police power of states, if it is not discriminatory.

37 Marvin Feldman v Mexico, ICSID Case No ARB/99/1, Award (16 December 2002).


In another case, CMS v. Argentina38, the claimant, an investor in gas Transportation Company,

alleged that the Argentina’s decision to suspend a tariff adjustment formula for gas

transportation during the crisis constituted an indirect expropriation. In evaluating this claim the

tribunal after reviewing the relevant arbitral jurisprudence , stated that the relevant question is to

examine whether the enjoyment of property has been effectively neutralized’ because ‘the

standard where indirect expropriation is contended is that of ‘substantial deprivation’. Although

the tribunal recognized that the measure under dispute had an important effect on the investor’s

business, it found no substantial deprivation and thus no breach of expropriation provision of

Argentina – US BIT. It also noted that ‘the investor is in control of the investment; the

government does not manage day to day operations of the company; and the investor has full

ownership and control.

Th

us, bona fide and non-discriminatory taxation cannot be regarded as a measure equivalent to

expropriation and moreover there has been no deprivation of the investor from the investment

whether partial or substantial and investor was having full ownership and control it was having

before the tax notice was sent

3.3. The amendments in the Income tax Act shall not be regarded as expropriation

because it is a legitimate exercise of the sovereignty of Southeria

Even if the tribunal was to find that the actions of Government of Southeria amounted to

expropriation, the amendments in the Act “cannot be wrongful because it is a legitimate

expression of sovereignty. No compensation is payable for [such] acts.”38 CMS Gas Transmission Company v The Argentine Republic, ICSID Case No ARB/01/8, Award (12 May 2005)262.


For those reasons, the tribunal should take into account the view expressed by the tribunal in

Saluka v. Czech Republic where it highlighted that it is now established in international law that

“states are not liable to pay compensation to a foreign investor when, in the normal exercise of

their regulatory powers, they adopt in anon-discriminatory manner bona fide regulations that are

aimed at the general welfare”.

Likewise, in Parkerings v. Lithuania39 the tribunal held that it was each state’s undeniable right

and privilege to exercise its sovereign legislative power at its own discretion and that “there is

nothing objectionable about the amendment brought to the regulatory framework existing at the

time an investor made its investment”.

Similarly, in the present the Southerian authority by introducing tax law policy has not violated

any provisions of BIT. It has simply acted simply exercise its legitimate sovereign authority, by

which it is fully entitled to introduce such kinds of policy.

4. Respondent’s actions are exempt under both the essential security provision of BIT

and the Customary International Law defense of necessity.

Even if tribunal finds that the respondent have violated article 3 and 5 of the BIT, its actions are

exempt under the BIT and customary international law. For preventing Tax evasion and

recouping the lost sums in the form of evaded tax, retrospective tax was a measure necessary to

safeguard the essential security interests of Republic of Southeria under both the essential

39Parkerings-Compagniet v Republic of Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007).


security provision found in Article 11(2) of the BIT (Section A) and the customary international

law defense of necessity (Section B).

4.1. Respondent’s Actions Are Exempt under the BIT

Respondent’s actions are exempt under Article 11(2) of the Eiropa-Southeria. The provision,

agreed upon by both parties, was intended to allow a party to derogate from its treaty

obligations when its essential security interests are at risk. The provision’s power to discharge

BIT protections generally afforded to the investor has been referred to as “self-judging,” in that

the decision rests with the state alone and is exempt from scrutiny by the tribunal. Article 11(2)

of the bit states that “Notwithstanding paragraph (1) of this Article nothing in this Agreement

precludes the host Contracting Party from taking action for the protection of its essential

security interests”

Respondent’s actions were essential to the protection of its own essential security interests,

which were threatened by huge tax evasion my multinational companies, and thus meet the

requirements of Article 11(2).

A. Present situation qualifies as an Essential Security Issue

Respondent’s enactment of retrospective tax laws for protection and recoupment of the

monetary gains it could have enjoyed the form of capital gains tax if the appellant had complied

with the tax obligations properly, qualify as an action essential security issue under the BIT.

The test is the severity of the crisis, not its nature.40

40 CMS Gas Transmission Company v The Argentine Republic, ICSID Case no ARB/01/08, Award (12 May 2005) para 354.


B. The BIT’s Essential Security Provision Is Self-Judging

The purpose of the BIT, and the Article 11(2) emergency clause specifically, was to encourage

investment but allow each party to retain its sovereign immunity during crises. Construing

Article 11(2) as non-self-judging would thus defeat the purpose the emergency clause and void

it of any meaning. Accordingly, Respondent’s judgment is protected by the Article 11(2)

emergency clause is exempt from scrutiny by the tribunal.

Arguendo, it is nowhere mentioned that in the BIT the intention of the contracting parties was to

scrutinize the state actions through tribunal and furthermore, the language of the provision

suggest that it is upon the discretion of contracting party to take measures which are necessary

for protection of it’s essential security interests.

4.2. Respondent’s actions are exempt under the necessity defense of Customary

International Law

Even if the tribunal finds that Respondent’s actions are not exempt under Article 11(2) of the

BIT, Respondent’s actions are exempt under the necessity defence as outlined by the

International Law Commission in Article 25 of the Draft Articles on State Responsibility (the

“ILC Articles”). Many tribunals cite the ILC Articles as representative of customary

international law on necessity.41 Southeria’s condition and its response satisfy the four

requirements for a state to claim necessity. The requirements are as follows:

41 Case Concerning Gabčíkovo-Nagymaros Project (Hungary v Slovakia), I C J Reports 1997, p 7 (Sep 25) para 32


(i) The measures were the only way to avoid a grave and imminent peril; and,

(ii) The measures don’t impair other states’ or international community’s essential interests.

The measures were not exempt if:

(a) The obligation excludes the possibility of invoking the necessity defence; or,

(b) If the state contributed to the situation of necessity

A. Introducing retrospective amendment in the tax laws was the only way for

Southeria to avoid grave and imminent peril

Past tribunals have interpreted “only way” to mean state action overall rather than specific

measures and found the first requirement of the necessity defense was satisfied where state

action was the only way to avoid the grave and imminent peril. Attempting to analyses and

compare each specific measure taken by a state in order to combat a crisis is too complicated

and attenuated; past tribunals have found that as long as the measures taken were necessary and

legitimate, the state satisfied the first requirement.42 Respondent’s introduction of retrospective

tax, was a necessary and legitimate measure that is necessary for protecting essential interests

and fulfilling the fiscal needs of a country like Southeria.

B. The Measures Did Not Impair Other States’ or International Essential Interests

There is no evidence that Eiropa or the international community suffered severe consequences

due to the introduction of retrospective tax. The only party whose essential security interests are

at risk is Southeria.42 Continental Casualty Company v The Argentine Republic, Case no ARB/03/9, Award (5 September 2008) para 227-230.


I. The Obligation did not preclude the possibility of invoking the necessity defence

Southeria’s obligations under the BIT clearly allowed the possibility of invoking the necessity

defence. The inclusion of Article 6(2) is clear evidence that both parties intended to retain the

possibility of derogating from their treaty obligations in situations of emergency.

II. Southeria did not contribute to the situation of necessity

The Respondent has not contributed to the state of necessity. As noted by the Sempra tribunal,

this last condition listed in Art. 25 of the ILC Articles is a general principle of law which

prevents a party from taking legal advantage of its own fault.43 The Respondent submits that in

the present case, there is no suggestion that the Respondent State has contributed the condition

where retrospective tax becomes necessary, and furthermore the respondent was not at fault, it

was claimant’s mala fide policies that forced respondent to take necessary measures to cope tax

evasion and protecting it’s necessary security interest and the respondent had no contribution to

this situation.

43 Art. 25(2)(b), ILC Articles


PRAYER

In light of all previously argued, the Respondent respectfully requests that the Tribunal adjudge

and declare that;

1. The Tribunal has no jurisdiction over the present dispute.

2. Respondent provided fair and equitable treatment to Claimant.

3. Respondent has not expropriated Claimant‘s investment;

4. Respondent is exempt under essential security provision;

And pass such other order or orders as the Hon’ble Tribunal may deem fit in the interest of

justice, equity and good conscience.

All of which is humbly prayed.

Sd/-

Counsel for Respondent



Documents

Seedling Respondent