While investment arbitration remains a 'hot topic' in international politics and the negotiation of free trade agreements is overshadowed by disagreements about chapters on investment protection, the practice of investment arbitration continues. It remains a popular means for investors worldwide to seek the protection of their rights under bi- or multilateral investment treaties. This holds especially true for the Energy Charter Treaty (ECT),2 which in 2018 again saw a big influx of new cases and remains the international investment agreement most used by investors.3
In the past, the prominence of the ECT could be explained by its geopolitical and economic origin. At times, it protected investors in the highly profitable but also often strictly governed energy sectors, especially after the breakdown of the Soviet Union, when several countries had regained – for the first time in decades – sovereignty over their natural resources.
However, in the past few years, the key factor for the activity surrounding the ECT is its availability for investors in the solar energy sector to challenge the revocation of incentives states had granted to them during the 2000s. The number of cases brought by investors is still expanding,4 with Spain and Italy still being the most targeted states.5
Fittingly, this chapter's 2017 edition dealt with the awards rendered in the Isolux Infrastructure Netherlands BV v. Spain6 and the Blusun SA, Jean-Pierre Lecorcier and Michael Stein v. Italian Republic7 arbitrations. Though factual background and arguments will still be different on a case-to-case basis, the legal reasoning is similar. The reader is invited to turn to the 2018 chapter, which dealt with substantial issues of solar claims. This year, one of the most controversial judgments of the decade forced arbitral tribunals tasked with deciding solar claims against Spain and Italy to deal with a whole other animal: European Union law.
With its judgment of 7 March 2018 in Slovak Republic v. Achmea BV, the Court of Justice of the European Union (CJEU) turned the arbitration world in Europe upside down.8
There are several reasons why the Achmea judgment is of particular importance to the ECT. First, it may be argued that the Achmea judgment is not that surprising in what it explicitly states, but in what it implies. Although the ECT is not mentioned in the judgment, its potential implications on the application of the ECT remain subject to debate. Second, besides its legal implications, its effect on the investment climate – especially given the created uncertainty by the Achmea judgment – is significant. A number of claims initiated against Spain and Italy after the Achmea judgment may have been guided by the awareness of investors to act quickly before the Member States of the European Union start to implement the Achmea judgment, which might also involve changes to the ECT.9
This year's chapter will also deal with a second objection to the jurisdiction of tribunals constituted under the ECT, which is becoming increasingly frequent: the tax carve-out in Article 21(1) of the ECT.10 In fact, most of the solar claims include the submission of a breach of the ECT through tax on the value of the production of electrical energy.11 This chapter sheds some light on how the 2018 awards rendered under the ECT have dealt with the tax carve-out and taxes on the merits.
II THE ECT AND AN OVERVIEW OF ITS INVESTMENT PROTECTION REGIME
The ECT12 is a multilateral treaty with its inception and origin dating from the early 1990s. The breakdown of the Soviet empire, the fall of the Berlin Wall and the following reunification of Germany led to a general reconfiguration of east–west relations. Russia and its eastern European neighbours' richness of energy resources combined with western Europe's general anxiety to diversify its sources of energy supply led to an initiative by the European Communities to establish a new legal basis of commercial relations in the energy sector.
In 1991, both western and eastern European states signed the European Charter, the political foundation of the ECT and as such a non-binding declaration of principles, including guidelines for the negotiation of a subsequent binding treaty. The result of the ensuing negotiations was the conclusion of the ECT, which was signed in December 1994 and entered into effect in April 1998.13
The following is an overview of the ECT's most pivotal provisions, limiting itself to Article 13 (i.e., the protection against undue and uncompensated expropriation), Article 10(1) (guaranteeing fair and equitable treatment (FET)) and Article 26 of the ECT (i.e., the dispute settlement mechanism under the ECT).
i Protection against direct or indirect expropriation under the ECT
The ECT follows the standard under customary international law and investment treaty practice and does not per se prohibit expropriation – whether it be 'direct', by transfer of legal title, or 'indirect' by measures doing without the transfer of legal title, leading to a substantial loss of control or economic value.14 The ECT recognises a host state's right to expropriate the property of investments made in that state by investors but predicates the lawfulness of the expropriation on the conditions set out in Article 13(1):
Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalised, expropriated or subjected to a measure or measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as 'Expropriation') except where such Expropriation is: (a) for a purpose which is in the public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the payment of prompt, adequate and effective compensation.
Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the 'Valuation Date').
Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.
For the purpose of determining a breach of Article 13(1), tribunals will simply try to establish: (1) the transfer of title or a measure having the same effect; (2) whether the transfer was made for a public purpose; (3) whether the transfer was conducted in a non-discriminatory manner; (4) whether the transfer was carried out under due process of law; and (5) whether the transfer was followed by payment of adequate and prompt compensation.
In the context of expropriation, tribunals are inclined to not only take into account the effect of the measure, but also the purpose, the manner and context in which the state acted (the 'police powers doctrine').15
ii Guarantee of FET under the ECT
The FET clause of the ECT can be found in sentence 2 of Article 10(1), which, in its pertinent parts, reads:
Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.
As a result of the generally broad and unspecific definition of the FET standard, a great range of attempts to define the standard exist. Over the years, jurisprudence made clear that to find the FET standard violated, it is of the greatest importance to assess the specific factual elements of the state's conduct with regard to the investor.
Based on this analysis, tribunals will analyse, inter alia, whether the state acted in accordance with its representations of a stable and predictable business, and legal environment.16
As indicated above, any analysis of the FET standard under the ECT is first and foremost based on the facts of the case. There are certain indications on which tribunals place special importance. For example, not every violation of the host state's law is a violation of the FET standard.17 However, changes in the legal framework of the investment have to be communicated and applied in a transparent, non-arbitrary manner and with consistency. Otherwise, the host state's conduct may very well be an infringement of the investor's rights under Article 10(1).
As stated by Dolzer:
Inconsistent conduct by the host state confuses the investor, stands in the way of proper planning, and is not conductive to an investment-friendly climate. Not surprisingly, arbitral tribunals have confirmed that inconsistency of conduct by the host state, as regards the investor's obligations, is not compatible with the requirement of FET.18
Prominently featuring in the discussions on investment arbitration, the issue at heart is the host state's 'right to regulate'. The jurisprudence on the ECT has not developed consistent case law in dealing with this matter. Rather, the decisions may be divided into two categories.
A narrower approach demands that expectations must be based on clear and concrete assurances from the host state expressed in direct communication aimed at the investor regarding the specific business or relationship.
The more flexible approach only requires the investor to prove that it identified a basis for its expectations in generally applicable laws – namely the legal and regulatory framework that existed at the time of making the investment.
When balancing investor rights and the host state's right to regulate, tribunals will, however, accord to states a right to change policies over time.19
As stated by Dolzer:
Consistency may not be required under circumstances in which the host state had convincing reason to change course. As regards its legislative power, the host state will, in principle, have the right to pursue its interests in the light of the new circumstances, but not ignore the interests of the investor who had earlier adjusted his conduct to the previous course required by the host state. The power to regulate operates within the limits of rights conferred upon the investor. Correspondingly, it will have to be assumed that the reversing of a position in a dramatic manner with serious negative effects upon the investor will be consistent with FET only in the presence of serious exceptional reasons, compelling the host state to reverse its previous decision and to require the investor to re-adapt its business.20
As stated by Patrizia et al:
While the existing arbitral decisions on claims asserted under the ECT do not provide clear guidance, arbitral decisions applying other investment treaties indicate that tribunals will examine the specific circumstances of each case when considering whether the investor's expectations were reasonable under the FET standard. The tribunals . . . will likely consider, on a case-by-case basis, the conduct of the state as a whole, including whether the state made any specific assurances to investors and the reason for, and form of, the changes in legal framework, as well as any other circumstances surrounding the investment.21
iii Dispute settlement under the ECT
The dispute settlement mechanism of the ECT is enshrined in its Article 26(1), which sets out that disputes between 'a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former' shall be resolved amicably. If an amicable resolution of the dispute cannot be reached within three months, the investor is entitled to submit the dispute to either the national courts or administrative tribunals of the contracting party, the forum previously agreed by the parties or international arbitration. Should the investor choose to submit the dispute to arbitration, the investor will face the decision of whether it wants the case to be administered under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention),22 ad hoc arbitration under the UNCITRAL Arbitration Rules or arbitral proceedings under the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).
iv The provisional application of the ECT
Because of its immediate implications in practice, it is worth taking a look at Article 45(1) of the ECT regulating the treaty's provisional application. Article 45(1) reads: 'Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.'
The following paragraphs of Article 45 set out the regulatory framework for a declaration to not apply the Treaty provisionally (Article 45(2)) or to terminate the provisional application once a state has subjected itself to it (Article 45(3)). Article 45 follows the international standard of multilateral treaties and economic-related treaties of being applied provisionally, while containing quite elaborate language. Indeed, when comparing Article 25 of the Vienna Convention on the Law of Treaties (VCLT) with Article 45 of the ECT, the sophisticated wording of the latter is striking.
v The ECT's tax carve-out
One of the ECT's provisions that features heavily in solar claims as well as other proceedings is the tax carve-out. Article 21(1) of the ECT provides that: 'Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties.' Therefore, the provision effectively seeks to carve out measures relating to tax from the ECT's investor protection regime.
However, Article 21(5) of the ECT stipulates that Article 13, protection against unlawful expropriation, still applies to taxes. In this case, a special regime applies. Article 21(5) of the ECT requires the investor to refer the issue of whether the tax amounts to an expropriation or is discriminatory to the competent tax authority of the host state.
Tribunals are split over the question of whether this stipulates a compulsory requirement for the investor to fulfil before initiating arbitral proceedings. In Plama v. Bulgaria, the tribunal ruled that it was, in fact, a compulsory requirement.23 The tribunal in Yukos et al. v. Russia came to the opposite conclusion for cases where referral to relevant authorities would be an exercise in futility.24 In addition, Article 21(1) of the ECT does not apply, according to the Yukos et al. v. Russia tribunal, if the alleged action does not constitute a bona fide exercise of a state's regulatory powers.25
III the ect cases of 2018
The table below contains decisions of arbitral tribunals that emerged during 2018 and up to the time of writing.26 Of the 10 decisions, the investor emerged victorious in eight of them.
|Name||Date of the award or decision||Case No.|
|Novenergia II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Kingdom of Spain||Final Award, 15 February 2018||SCC Case No. 2015/063|
|Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic||Interim Award on Jurisdiction, 2 May 2018||PCA Case No. 2014-01|
|Masdar Solar & Wind Cooperatief U.A v. Kingdom of Spain||Award, 16 May 2018||ICSID Case No. ARB/14/1|
|Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdom of Spain||Award, 15 June 2018||ICSID Case No. ARB/13/31|
|Vattenfall AB et al. v. Germany||Decision on the Achmea Issue, 31 August 2018||ICSID Case No. ARB/12/12|
|Alpiq AG v. Romania||Award, 9 November 2018||ICSID Case No. ARB/14/28|
|Foresight Luxembourg Solar 1 S.a.r.l., Greentech Energy System A/S et al. v. Kingdom of Spain||Award, 14 November 2018||SCC V 2015/150|
|RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of Spain||Decision on Responsibility and on Principles of Quantum, 30 November 2018||ICSID Case No. ARB/13/30|
|Athena Investments A/S et al. v. Italy||Award, 23 December 2019||SCC Case No. 095/2015|
IV a closer look at the 2018 ect decisions
The following is a closer look at the impact of the Achmea judgment on the ECT. As all awards rendered against European states dealt with this issue, the analysis will, instead of looking at each case individually, provide an overview of the general notions that the tribunals applied to assess the potential impact of Achmea.
i The intra-EU objection and the CJEU's Achmea judgment
In 2008, the Dutch insurance company Achmea BV (formerly known as Eureko BV) commenced an arbitration against the Slovak Republic under the Dutch–Slovakian bilateral investment treaty (BIT) claiming compensation based on the state's repeal of the liberalisation of its healthcare market.27
In its 2012 award, the tribunal constituted under the UNCITRAL rules found the state in breach of the FET standard and awarded Achmea damages in the amount of €22.1 million.28 Slovakia decided to bring set-aside proceedings before the Higher District Court of Frankfurt of Main, Germany, the court of the seat of the arbitration. The Higher District Court rejected all of Slovakia's arguments, which had, inter alia, argued that the tribunal lacked jurisdiction over the dispute because the BIT's arbitration clause was incompatible with EU law.29
On appeal, the German Federal Court of Justice made use of its power under Article 267 of the Treaty on the Functioning of the European Union (TFEU) and referred several questions to the CJEU, including the question on the compatibility of the ECT's arbitration clause with EU law.30
The starting point for the CJEU's judgment is its understanding of the primacy and uniform application of EU law, which Member States, including their domestic courts, are obliged to enforce. Member State courts, especially, as noted by the CJEU, are given the opportunity through Article 267 of the TFEU to resolve potential conflicts between national and EU law by referring questions in cases before them to the CJEU.
The CJEU then went on to find that an arbitral tribunal constituted under a BIT might have to rule on matters of EU law where, based on the text of the BIT, it must apply the law of the respondent state, which automatically also includes EU law. A potential safeguard against possible divergent judgments and awards was supported by Advocate General Wathelet in his opinion. He stated that the arbitral tribunal enjoyed the power of requesting a ruling from the CJEU on referred questions, as the arbitral tribunal constituted a 'court or tribunal of a Member State' pursuant to Article 267 of the TFEU.
The CJEU departed from these considerations of its Advocate General and held that an arbitral tribunal constituted under the BIT is outside of the jurisdiction of the European Union and its Member States, this being the reason for the existence of the arbitration clause in a BIT in the first place. Accordingly, it is not open for arbitral tribunals constituted under BITs to call on the CJEU to have contentious issues of EU law resolved.
In a next step, the CJEU examined the award, which it found to be final and only subject to a very limited review by the courts of the Member States. Interestingly, the CJEU here points to the difference between commercial and investment treaty arbitration. With regard to commercial arbitration, the CJEU had already found that the limited review of arbitral awards by Member State courts is justified 'provided that the fundamental provisions of EU law can be examined in the course of that review and, if necessary, be the subject of a reference to the Court for a preliminary ruling'.31 However, the CJEU identifies certain differences between commercial and investment arbitration with the latter being 'not based [on] freely expressed wishes of the parties, [but] derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts' and thus also from the regime that may ensure the uniform application of EU law.32 The CJEU found that by virtue of concluding the BIT, the Member States established a regime that effectively prevents 'disputes from being resolved in a manner that ensures the full effectiveness of EU law'.33 The violation of the principle of the effectiveness of EU law then leads to the CJEU's final ruling 'that Articles 267 and 344 TFEU must be interpreted as precluding' a dispute settlement clause in an intra-EU BIT.34 This means, in practice, that a valid arbitration agreement between a Member State of the European Union and an investor of another EU Member State cannot be concluded. The lack of a valid arbitration agreement is one of the limited grounds under the New York Convention, and most national arbitration laws, on which an award may be set aside or refused recognition and enforcement.35
The referring court, the German Federal Court of Justice, set aside the Achmea award. Thereby, the German Federal Court of Justice followed the decision by the CJEU in substance and rejected any arguments presented by the investors as to why the CJEU's Achmea judgment would not lead to an annulment of the award.36
The potential impact of this decision on the ECT is manifold, including political and legal implications alike, affecting past, current and future proceedings initiated under the ECT.
In Novenergia v. Spain, Spain – unsuccessfully – turned to the arbitral tribunal, which had rendered an award on 15 February 2018, namely a month before the CJEU's decision in Achmea, and requested a revision of the award. Being denied revision by the tribunal, Spain advanced its argument before the competent court of the seat of the SCC arbitration, the Svea Court of Appeal in Sweden, which, under the New York Convention, acts as the annulment court in respect of arbitral awards. On 15 May 2018, the Svea Court of Appeal stayed enforcement of the award pending a final ruling in the case.37 At the same time, Spain is urging the Svea Court of Appeal to refer the case to the CJEU.
On 15 January 2019, the Member States of the European Union issued a political declaration in which the consequences of the Achmea judgment were discussed. Exposing divergences among the Member States, two additional declarations (one by Finland, Luxembourg, Malta, Slovenia and Sweden, and another by Hungary) were issued due to different positions regarding the impact of the Achmea judgment on the ECT.38
In the past, the European Commission and Member States argued that the ECT's investment protection regime does not apply to inter-EU proceedings. The crux of this issue lies in the wording of Article 26 of the ECT. Member States on the receiving end of intra-EU arbitrations argued that intra-EU proceedings are 'disconnected' from the ECT's scope because of an implicit disconnection clause, incorporated in the ECT through the 2007 EU Lisbon Treaty, which modified EU Member States rights and obligations, and removed intra-EU disputes from the scope of Article 26 of the ECT.39 The Lisbon Treaty qualifies, according to their argument, as a 'successive treat[y] relating to the same subject-matter' pursuant to Article 30 of the VCLT. Under this article, such a modification is possible if the earlier treaty provides that 'it is subject to, or that it is not to be considered as incompatible with, [a] later treaty'. Article 16 of the ECT states that it is subject to a treaty 'more favourable' than it when it comes to the ECT's provisions on investment protection. According to the respondent states, this is exactly what the Lisbon Treaty provides for and this practice is in line even when applying to a multilateral treaty within the scope of Article 41 of the VCLT.
The European Commission, which appears as amicus curiae in almost all intra-EU disputes, further argues that it was not the European Union or its Member States' intention to create obligations between the Member States, as they acted throughout the negotiations of the ECT as one block with the Commission as their voice.40
A second line of argument advanced by the European Commission highlights certain provisions of the ECT, which, according the European Commission, show that the ECT acknowledges that EU Member States never offered to arbitrate with investors from another EU Member State.41 One of the requirements for an investor to submit a dispute to arbitration according to Article 26(1) of the ECT is that it made an investment in the area of another contracting party. Pursuant to Article 1(10) of the ECT, 'area' is defined as the territory of a state or as 'the areas of the member states of a [Regional Economic Integration Organization]'. The European Commission argued that an investment made by an investor from an EU Member State on the territory of another EU Member State is made within the same area, meaning the area of the European Union as a Regional Economic Integration Organization.42
In their latest amicus curiae brief, the European Commission seems to have adopted a very general argument. In the Commission's view, 'EU law forms part of the “applicable rules and principles of international law” under Article 26(6) ECT, and the “relevant rules of international law applicable in the relations between the parties” pursuant to Article 31(3)(c) VCLT.'43 As such, EU law is part of the applicable law determinative for assessing the validity of an arbitration. Adherence to 'systemic coherence' and the principle of autonomy of EU law requires an interpretation avoiding any conflict with EU law, which 'leads to the conclusion that there is no offer to arbitrate'.44
Notably, as at the time of writing, every tribunal has rejected the intra-EU objection before it and ruled that it enjoyed jurisdiction over the dispute. The starting point for the tribunals is an interpretation of Article 26 of the ECT pursuant to Article 31(1) of the VCLT, which provides that treaties 'shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose'. As the plain wording of Article 26 of the ECT does not include a qualification of any kind with regard to intra-EU arbitrations – and circumstances and context of the ECT do not suggest otherwise – tribunals conclude that the ECT continues to apply to intra-EU arbitrations.45
Also, the argument that an investment has been made in the same area has been quickly dealt with by tribunals. In Masdar v. Spain, the tribunal referenced the decision in PV Investors46 where the tribunal found that the term 'in the area' in Article 26(1) of the ECT must be seen in light of the specific dispute.47 If an investor chooses to initiate arbitration proceedings against an EU Member State and not the European Union, 'the area' referenced in Article 26(1) of the ECT means the territory of that particular Member State.
With regard to the Achmea judgment, respondent EU Member States and the European Commission are of the opinion that the judgment does also apply to the ECT. The view is based on the argument that the findings of the CJEU can be transported and applied to arbitrations under the framework of the ECT. In the words of the European Commission, arbitral tribunals under the ECT are like tribunals established under intra-EU BITS 'not “national courts or tribunals” in the sense of Article 267 TFEU, and there is no complete review of arbitral awards by such tribunals through national courts within the EU, even less so for ICSID arbitrations'.48 Hence, tribunals should either find a 'harmonious interpretation of the ECT in conformity with EU law, or second, in the event of a conflict, the primacy of EU law as lex posterior'.49
Taking into account the CJEU's Achmea judgment, tribunals found throughout 2018 that the CJEU carefully limited its ruling to BITs concluded between EU Member States, and left it open for investors to initiate arbitral proceedings under other international instruments that are not solely intra-EU BITs.
First, tribunals established under the ECT derive their jurisdiction exclusively from Article 26 of the ECT.50 In that respect, tribunals found that Article 26(6) of the ECT, contrary to the submissions of the European Commission and most respondent EU Member States, only constitutes an agreement regarding the law applicable to the merits of the dispute. Thus, by operation of Article 26(6) of the ECT, EU law does not form a part of the applicable law to determine the jurisdiction of the tribunal.51
For example, the tribunal in the ICSID arbitration Vattenfall AB et al. v. Germany found that the assessment of jurisdiction must be made under the ICSID Convention and the instrument containing the consent to arbitration, namely Article 26 of the ECT, interpreted and applied in accordance with international law.52 Similar to the intra-EU objections raised by the European Commission and EU Member States in the past, the arguments based on the Achmea judgment failed to survive interpretation of Article 26 of the ECT under Article 31(1) of the VCLT. According to the tribunals, the plain wording of the ECT does not leave any room for harmonious interpretation under Article 31(3)(c) of the VCLT.53
Second, there are significant differences between intra-EU BITs and the ECT. The former is concluded between two EU Member States, while the latter is signed by the European Union, its Member States and 25 other countries that are not Member States of the European Union.54 This distinction was made by Advocate General Wathelet in his opinion predating the CJEU's Achmea judgment and not addressed or rejected by the CJEU in its judgment.
And finally, in the context of ECT arbitrations, tribunals are tasked with adjudicating alleged infringements of rights under international law, not under EU law,55 which thus does not conflict with the CJEU's decision in Achmea.
ii Cases related to taxation measures
Another jurisdictional challenge by respondent states that appears to feature ever more often in arbitrations under the ECT is the tax carve-out pursuant to its Article 21(1).
Traditionally, taxes play an important role in a state's regulatory strategy when it comes to energy investments. States that are rich in natural resources may use taxes to have the public participate in profits made by investors who exploit those resources; other states may use taxes to incentivise the making of investments in a certain field of energy production according to the state's overall energy strategy. In view of this, energy investments are always subject to a complex and often changing tax system, which might negatively impact foreign investments. At the same time, energy politics is often seen as one of the most strategically important subjects. Challenges of taxation measures by foreign investors before an international tribunal is therefore a delicate subject.
During the negotiations leading up to the ECT, the different stances on energy politics among the negotiating states came to light. A coalition of the United States, Canada and the United Kingdom favoured excluding taxation measures from arbitration under Article 26 of the ECT.56 Germany, however, argued that excluding arbitration entirely would have a devastating effect on the investors' position, and pointed to eastern Europe, where indirect expropriation through taxation measures was not unlikely.57
Owing to support from the chair of the legal group, Craig Bamberger, who endorsed the German position, the final text of Article 21, in its pertinent parts, now reads:
(1) Except as otherwise provided in this Article nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties.
. . .
(5) Article 13 shall apply to taxes.
This provision would become one of the most contested issues, not in relation to measures by eastern European countries, but in the solar claims against Spain, Italy and the Czech Republic. All of these countries introduced a tax that adversely affected the position of foreign investors.
Spain, pursuant to Law 15/2012 of 1 January 2013, introduced a tax measure that taxes the production of electricity and its feeding into the Spanish electricity grid. In 2008, Italy introduced a 'Robin Hood' tax that applied to all energy producers but photovoltaic, biomass and wind energy. In 2011, the tax was extended to also cover renewable energy producers and in 2013 the scope of the Robin Hood tax was extended to cover companies with an annual gross income of over €3 million.58 In 2011, the Czech Republic enacted a law which established 'a levy on revenues generated by photovoltaic power plants'.59 Also in 2011, the Czech Republic repealed the income tax exemption for producers of renewable energy.60
Spain's taxation measure
In Masdar v. Spain, the claimant argued that 'there is prima facie evidence that the [tax] is arbitrary' and would thereby not be triggering the carve-out in Article 21(1) of the ECT. According to the claimant, the tax did not constitute a taxation measure but was in fact a tariff reduction for renewable energy producers limiting the effectiveness of the incentive regime based on which the claimant made its investments.61 The claimant's case that it put before the tribunal was thus whether Spain's tax measure was a bona fide tax, apt to trigger the exemption from the carve-out as identified by the Yukos tribunal.62
The tribunal went on to establish that Yukos concerned 'an extreme case', dealing with 'measures which were egregious and which, in reality, had little, if anything, to do with the bona fide raising of tax revenues for public purposes'.63 The Yukos tribunal not only noted that states generally enjoy wide discretion when imposing and enforcing taxes, but even where these measures might result in substantial deprivation without compensation. The threshold that is derived from the above was then applied by the tribunal, which ultimately found that it 'does not have jurisdiction to entertain claims arising out of the introduction of the [tax]',64 even if there are 'undoubtedly questions that might be raised about the economic effects and the purpose of the [tax]'.65
Italy's taxation measure
The claimants in Athena et al. v. Italy adopted a different approach. Given the standard applied to the exemption from the tax carve-out, the claimant only challenged whether a decision by the Italian Constitutional Court, which rendered the tax invalid on an ex nunc basis rather than on an ex tunc basis, was in accordance with the ECT.66 The claimant explicitly stated that it was not contesting the tax measure itself.
The tribunal still found the claim to fall outside of the tribunal's jurisdiction pursuant to Article 21(1) of the ECT. The tribunal's starting point in that regard was the wording of the Article, which provides that nothing in the ECT shall 'impose obligations with respect to taxation measures'. If the tribunal were to award damages based on the Constitutional Court's decision, it would, according to the tribunal, seem to impose 'obligations with respect to taxation measures'.67 For that reason, the tribunal considered the distinction between the tax measure and the court's decision not meaningful enough.68
The Czech Republic's taxation measure
In Antaris et al. v. the Czech Republic, the claimant advanced two grounds why Article 21(1) of the ECT should not apply. First, Article 31(1) of the VCLT warrants interpretation in light of the principle of good faith, the context, object and purpose of the treaty at hand. As confirmed by theEnergy Charter Secretariat, 'taxes shall be imposed in good faith'.69
With regard to the Yukos tribunal's findings and the threshold associated with it, the claimant submitted that the standard is not limited to extreme circumstances but shall rather prevent states from evading 'international liability by disguising a measure as a tax'.70 To underpin its contention, the claimant pointed to a decision by the Czech Constitutional Court, which confirmed that the tax measure was in fact not a tax.
The respondent argued that, under Article 21(7) of the ECT, a taxation measure includes 'any provision relating to taxes of the domestic law of the contracting party'.71 The tribunal would thus only be tasked with assessing whether the claim concerned a measure constituting a tax according to the respondent's domestic laws.72
Meeting this argument, the claimant brought forward, as a second argument, that the tax measure does not even qualify as tax under the Czech Republic's domestic laws, as it would be paid for a specific purpose, namely to reduce the burden on consumers without negatively impacting the state deficit, and, second, the producers received a direct consideration for paying the tax.73 In addition, the tribunal's task of interpreting Article 21(7) of the ECT does not stop at assessing the nature of the measure under the domestic law of the respondents but must take into account the interpretation of the ECT as an instrument of international law as well.
The tribunal brought some clarity by finding that it would follow a two-step test: first, performing a characterisation under the domestic law and then applying 'Article 21's inherent limits'.74 According to the tribunal, this follows already from the ordinary meaning of Article 21 of the ECT, which can only be applicable where the domestic law characterises a measure as a tax.75 It further adopted a substantive not a formalistic approach to this issue. Declaring a measure as a tax would not suffice, according to the tribunal; rather, the measure must meet substantive criteria to identify as tax. To assess this question under the domestic laws of the Czech Republic, it found support in various Czech court decisions, which it considered to be 'authoritative on this point'.76 The tribunal followed a decision by the Czech Supreme Administrative Court in which the court found that the measure would not constitute a tax in substance.77
It also rejected submissions by the respondent that the tribunal should adopt a formalistic approach by stating that:
If an ECT Tribunal were to considered only the form of the measure rather than its substance, it would provide the scope for abuse of the ECT's tax carve-out, as the contracting states would be able to escape their obligations under Part III of the ECT, and thus liability from their violations thereof, simply by labelling governmental actions as “taxation” measures.78
By that, the tribunal found that the measure was unable to engage Article 21(1) of the ECT at all, which is why the tribunal enjoyed jurisdiction over the claims.79
V Looking Back at the 2018 cases
The cases discussed above from 2018 exemplify the complexity surrounding investment arbitration under the ECT nowadays.
The Achmea judgment might lead to attempts by the European Union to modify, reform or renew the ECT – an undertaking that, until now, was not a subject of debates. It might also involve interests of EU Member States openly clashing. At the same time, it is remarkable that awards against eastern European and central Asian countries are a rarity nowadays. That may be, inter alia, explained by the fact that the Ukrainian–Russian crisis, which resulted in a couple of arbitrations, falls outside of the scope of the ECT.
The guidance and insights provided by tribunals in 2018 decisions on the interpretation of the tax carve-out cannot be emphasised enough. Taxation related claims are increasing and with it the need for an understanding of the tax carve-out, given the minefield between public welfare, state's sovereignty and an investor's legitimate expectation to have its investment unharmed by arbitrary taxation measures. In that context, it is a particularly welcomed sight that tribunals very thoroughly examined the issues before them, oftentimes analysing domestic laws and related decisions by courts but also inviting parties to comment on similar arbitral awards. Tribunals, so it seems, are more aware of the expectations of the users of system in them to create a uniform regime of investment protection under the ECT. The 2018 arbitral awards were a step in that direction.
The 2018, developments surrounding the ECT mainly concerned the western European community. It is to be expected that the European Union and its Member States will spend much of 2019 dealing with issues between themselves, which were already clearly identified in the three different notes issued by EU Member States after the Achmea judgment, which differ as to the application of the Achmea judgment to the ECT.80
Before that backdrop, it can be expected that it will take some time for the European Union and its Member States to identify common ground regarding the implementation of the Achmea judgment with respect to the ECT. Countries concerned with solar claims, especially, will push for immediate reforms or political actions. However, the consensual nature of EU politics might cause significant delay if Member States are not able to find such consensus.
But it should not be overlooked that the ECT's signatories are not only western European states, but also many capital-importing countries in eastern Europe and central Asia. With China's belt and road initiative now well underway and the commencement of construction of the Nord Stream II project, the focus might again shift east. Not least because of the dozens of treaty claims pending against western European states, being a politically contested subject, the ECT will therefore remain an important legal instrument of investment protection in the years to come.
1 Patricia Nacimiento is the co-head of the German dispute resolution team at Herbert Smith Freehills LLP.
3 See UNCTAD overview of investment arbitration cases filed, http://investmentpolicyhub.unctad.org/ISDS/FilterByApplicableIia. Investors filed a total of seven new cases under the ECT in 2018, four of them against Spain, see https://energycharter.org/what-we-do/dispute-settlement/all-investment-dispute-settlement-cases.
4 See footnote 3. Spain was hit with an additional four arbitrations under the ECT, while other claims was filed against Italy.
5 ACF Renewable Energy Limited v. Republic of Bulgaria, ICSID Case No. ARB/18/1.
6 Isolux Infrastructure Netherlands BV v. Spain, SCC Arbitration, Award, 13 July 2016, published on 29 June 2017.
7 Blusun SA, Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3, Award, 27 December 2016, published on 7 June 2017.
8 Slovak Republic v. Achmea B.V., Judgment of the CJEU, 6 March 2018, Case C-284/16, ECLI:EU:C:2018:158.
9 Compare the declaration by 22 of the 28 Member States regarding the implementation of the Achmea judgment.
10 See, in particular, the awards at p. 5.
11 See e.g., Foresight et al. v. Kingdom of Spain, SCC Case No. 2015/150, Award, paras. 223 et seq.
12 For literature on the ECT, see also: S Jagusch, A Sinclair and P Devenish, 'The Energy Charter Treaty: The Range of Disputes and Decisions', Global Arbitration Review: The Guide to Energy Arbitrations (general editor J William Rowley QC, editors D Bishop and G Kaiser, 2015) pages 30–45.
13 As at the time of writing, 52 states have signed the Energy Charter Treaty. All EU Member States are individual signatories, but the Treaty has also been signed collectively by the European Union and Euratom bringing the total number of parties to the Treaty to 54, although five of these states have not ratified the Treaty yet. Belarus expressly applies the Treaty provisionally.
14 See, C Schreuer, 'The Concept of Expropriation under the ECT: Essays in Honour of Christian Tomuschat' (2006), pages 115, 144.
15 Saluka Investments BV v. The Czech Republic, Permanent Court of Arbitration, Partial Award, 17 March 2006. However, the ECT itself is silent on the question of whether requirements other than those listed in Article 13(1) are to be included in a tribunal's analysis.
16 Schreuer, footnote 14.
18 R Dolzer, 'Fair and Equitable Treatment: Today's Contours', 12 Santa Clara J Int'l Law 7 (2014).
19 See, for example, Saluka Investments BV v. Czech Republic, Permanent Court of Arbitration, Partial Award, 17 March 2006; as well as C A Patrizia, J R Profalzer, S W Cooper and I V Timofeyev, 'Investment Disputes Involving the Renewable Energy Industry Under the Energy Charter Treaty', Global Arbitration Review: The Guide to Energy Arbitrations (general editor J William Rowley QC, editors D Bishop and G Kaiser, 2015) footnotes 32, 33.
20 Footnote 18.
21 Patrizia et al, op cit, footnote 15, pages 78–79.
22 If one but not both of the host state and investor's state have not ratified the ICSID Convention, the investor may elect arbitration under the ICSID Additional Facility Rules.
23 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 266.
24 Yukos Universial (Isle of Man) et al. v. Russian Federation, PCA Case No. AA 228, Final Award, 18 July 2014, para. 1422 et seq.
25 ibid., para. 1407.
27 Achmea B.V. v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko B.V. v. The Slovak Republic), Award, 7 December 2012.
28 ibid., paras. 283 and 352.
29 Judgment of the Higher Regional Court of Frankfurt (German), 18 December 2014, paras. 33, 50–57.
30 Decision of the German Court of Justice, 3 March 2016.
31 Slovak Republic v. Achmea B.V., Case C-284/16, Judgment of 6 March 2018, para. 54. This view was formed by the CJEU in Eco Swiss, Case C-126/97, Judgment of 1 June 1999, EU:C:1999:269, paras. 35, 36 and 40; 26 October 2006; Mostaza Claro, C-168/05, Judgment of the CJEU, 26 October 2006, EU:C:2006:675, paras. 34 to 39.
32 Slovak Republic v. Achmea B.V., Case C-284/16, Judgment of 6 March 2018, para. 55.
33 ibid., para. 56.
34 ibid., para. 60.
35 See, New York Convention, Article 1(a): 'the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.'
36 Para. 14 Achmea argued inter alia that Slovakia was barred from invoking the invalidity of the arbitration agreement according to the principle of good faith enshrined in section 242 of the German Civil Code.
37 Novenergia II – Energy Environment (SCA) v. Kingdom of Spain, Case No. T 4658-18, Judgment of 16 May 2018. This did not prevent Novenergia from seeking enforcement of the award in the United States. Enforcement proceedings are currently pending before the District Court of Columbia, Case No. 1:18-cv-1148.
38 The separate declaration issued, inter alia, by Sweden is of particular relevance to the ECT, as Sweden, diverging from the majority of Member States, will not direct its state-owned companies to end any commenced arbitration. Thus, the Vattenfall AB et al. v. Germany arbitration will not be affected.
39 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 265.
40 ibid., para. 283.
41 ibid., para. 279.
42 ibid., para. 280.
43 Vattenfall AB et al. v. Germany, ICSID Case No ARB/12/12, Decision on the Achmea Issue, 18 August 2018, para. 81.
44 ibid., para. 83.
45 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 397; Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, para. 312.
46 The PV Investors v. The Kingdom of Spain, PCA Case No. 2012-14, Preliminary Award on Jurisdiction, 13 October 2014, paras. 178-180.
47 Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, para. 319. See also, Vattenfall AB et al. v. Germany, ICSID Case No ARB/12/12, Decision on the Achmea Issue, 18 August 2018, para. 179 et seq.
48 Vattenfall AB et al. v. Germany, ICSID Case No ARB/12/12, Decision on the Achmea Issue, 18 August 2018, para. 85.
50 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 396; Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, paras. 678–683.
51 Vattenfall AB et al. v. Germany, ICSID Case No ARB/12/12, Decision on the Achmea Issue, 18 August 2018, para. 122.
52 ibid., para. 128.
53 ibid., para. 158.
54 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 398.
55 ibid., para. 397.
56 Taxation of Foreign Investments, Article 21 of the Energy Charter Treaty in Context, Ugur Erman Özgür, 2015, p.44.
57 ibid., p.45.
58 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 167 et seq.
59 Antaris Solar GmbH and Dr. Michael Göde v. the Czech Republic, PCA Case No. 2014-01, Award 2 May 2018, para. 96.
60 ibid., para. 100.
61 Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, paras. 273 et seq.
62 Yukos Universial (Isle of Man) et al. v. Russian Federation, PCA Case No. AA 228, Final Award, 18 July 2014, para. 1407.
63 Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018, para. 284.
64 ibid., para. 295.
65 ibid., para. 290.
66 Athena Investments A/S et al. v. Italy, SCC Case No. 095/2015, Award, 23 December 2019, para. 225.
67 ibid., para. 227.
69 Antaris Solar GmbH and Dr. Michael Göde v. the Czech Republic, PCA Case No. 2014-01, Award 2 May 2018, paras. 195 et seq.
70 ibid., para. 201.
71 ibid., para. 221.
72 ibid., 223.
73 ibid., paras. 207, 208.
74 ibid., para. 224.
75 ibid., para. 225.
76 ibid., para. 233.
77 ibid., para. 243.
78 ibid., para. 249
79 ibid., paras. 252, 253.
80 Compare footnote 9.