On 25 January 2016 it was reported that the first award of the more than 20 investment arbitrations against Spain regarding measures against solar energy was issued (Charanne B.V. and Construction Investments S.A.R.L. v. Spain (SCC Arb No. 062/2012).
As this is the first award regarding retroactive measures against renewable energy sources (RES), which many EU Member States have implemented in the past years, the outcome of the award contains important indications regarding the possible outcomes in other cases. Yet it should be stressed that this award is only binding for the parties involved in this specific case and not binding for the other arbitral tribunals. Also, this first arbitration challenged only the 2010 measures and did not concern the 2013 measures, which were even more severe against RES investors. Moreover, the other Member States, such as the Czech Republic, Slovakia or Italy have adopted slightly different types of measures, which are currently pending before other arbitral tribunals.
Accordingly, the takeaways from this award cannot simply be applied automatically and fully to the other solar energy disputes. Nonetheless, the analysis of the arbitral tribunal and its conclusions in this case are certainly relevant and thus important to understand.
In 2009, the claimants – Charanne B.V., a Dutch company, and Construction Investments S.à.r.l., a Luxemburg company – acquired shares in Grupo T-Solar Global, S.A. (“T-Solar”), which T- indirectly owned 34 solar plants. After mergers and share transfers over the course of 2011 and 2012, the claimants held an interest in T-Solar through two further companies (jointly, “Isolux”).
When the claimants made their investment, Spain had enacted a special regime for – among others -, solar energy producers, mainly through two “Royal Decrees” (Nos. 661/2007 and 1578/2008). Under this framework (the “Initial Framework”), T-Solar benefitted from a feed-in tariff for a 25-year period. Most plants would also receive 80% of that tariff after that 25-year period. The amount of the tariff depended on the plant’s installed capacity, among other criteria. In order to benefit from this special regime, investors had to invest in the plant facilities and register those facilities in a public registry (“RAIPRE”) within a peremptory deadline. All of T-Solar’s plants had been timely registered with RAIPRE.
Starting from 2010, Spain modified the Initial Framework (the “Modified Framework”),. The Modified Framework: (i) eliminated the feed-in tariff after the start of the plant’s 26th year (later, 30th year) of operations; (ii) required certain plants to take measures to be able to react to voltage dips; (iii) capped the amount of equivalent operating hours subject to the special regime (and thus, subject to the tariff); and (iv) established a transmission charge of EUR 0.55/MWh, in accordance with EU regulations.
The claimants notified their request for arbitration on 7 May 2012. They claimed “less than 10 million euros” for violations of the Energy Charter Treaty (ECT). The European Commission filed an amicus curiae brief. The Stockholm Chamber of Commerce (SCC) Arbitration Institute administered the arbitration under its 2010 Arbitration Rules, with Madrid as the seat of the arbitration.
The tribunal comprised Alexis Mourre (President), Guido Santiago Tawil (claimant’s appointment) and Claus von Wobeser (respondent’s appointment). Arbitrator Tawil appended a partial dissenting opinion to the Final Award.
1. Takeaway: The ECT remains available for intra-EU disputes
One of the main arguments brought forward by the various EU Member States, which have been confronted with ECT-claims, and with strong support by the European Commission (EC), is that – for various reasons – European investors would be prohibited from relying on the ECT to bring claims against EU Member States.
However, quite rightly, the arbitral tribunal fully rejected these arguments.
Firstly, Spain argued that investors of an EU Member State were simultaneously investors of the EU. Since the EU is a party to the ECT they argued that EU Member State investors could not be considered as “an Investor of another Contracting Party”. It was also argued that the definition of “territory” encompassed the territory of all member States and thus the investors originated in the same “area” or “territory” as they made the investment.
The tribunal dismissed this argument. It held that EU Member States did not lose their status as ECT parties when the EU ratified the ECT. Likewise, Spanish territory constituted the relevant “area” or “territory” for jurisdictional purposes..
Secondly, Spain argued that the ECT contained a so-called “implied disconnection clause” for intra-EU disputes. Some international treaties contain disconnection clauses, which provide that EU Member States will apply relevant provisions of EU law in their mutual relations instead of the international treaty that contains them. Article 7 of the ECT contains obligations concerning the transit of energy materials and products. Spain argued that Article 7 obligations only made sense if they applied to a customs union as a whole, rather than to transit between members of the union. Therefore, the existence of a customs union within the EU is incompatible with Article 7 ECT.
The arbitral tribunal dismissed this argument too.
Thirdly, Spain argued that dispute settlement under the ECT was incompatible with EU law. It relied on Article 344 TFEU, whereby “Member States undertake not to submit a dispute concerning the interpretation or application of the [EU] Treaties to any method of settlement other than those provided for therein.” Spain contended that Article 344 TFEU also regulated investor-State disputes. It argued that Article 344 TFEU required that disputes concerning the responsibility of EU Member States should remain within the jurisdiction of EU institutions, as such disputes would involve interpreting EU law. Moreover, Spain argued that treaties in force for the EU and for EU Member States are part of EU law. This dispute thus concerned EU law.
The tribunal rejected this argument. For the tribunal, Article 344 TFEU “[l]iterally” refers to inter-State disputes, rather than to disputes between EU Member States and private persons. The numerous domestic court disputes that concern the interpretation of EU legislation belie Spain’s thesis that only EU institutions should have jurisdiction over disputes concerning EU law. For the tribunal, EU Member States could agree to arbitrate disputes that “may involve” EU law issues. Moreover, relying on the EcoSwiss Case, the tribunal considered it “universally accepted” that arbitral tribunals have both the ability and the duty to apply EU law. Citing the Electrabel v. Hungary award, the tribunal construed Article 344 TFEU as a guarantee that the CJEU has the final say on EU law in order to ensure its uniform interpretation. Also, citing Electrabel again, the tribunal underscored that the EU accepted the possibility of investor-State arbitration under Article 26 ECT when it became a party to that treaty, which does not admit reservations (Article 46 ECT).
Furthermore, the tribunal noted that Spain did not identify a rule of European public order that forbids investor-State arbitration in intra-EU matters. The tribunal noted that it did not analyse EU norms and was not faced with any argument that the Initial Framework or the Modified Framework violated EU law. The tribunal also noted that the European Commission has recently started (but has not issued a decision on) state aid preliminary investigation proceedings regarding the Initial Framework. The tribunal remarked that were it faced with such matters, it would consider them as public order issues pertaining to the merits, to be decided “of course under the control of the judge who would eventually consider the validity of the award”.
In short, all the arguments claiming that EU law somehow prohibits European investors from using the ECT to bring claims against EU Member States have been fully rejected. This is good news because the arbitral tribunal explicitly accepted that the ECT is available for intra-EU disputes.
2. Takeaway: Broad definition of “investor” is maintained
Spain argued that the claimants were not investors under Article 1(7) ECT. For Spain, the claimants were “empty shells” ultimately controlled by two Spanish nationals. Access by these individuals to the tribunal would also violate the Spanish Constitution, Spain argued, as most Spanish citizens would not enjoy such access.
However, the arbitral tribunal dismissed the objection. The tribunal assessed its jurisdiction in light of the ECT, rather than Spain’s domestic laws. Moreover, the tribunal held that Article 1(7)(a)(ii) ECT simply requires that a company be “organised in accordance with the law applicable” in a Contracting Party to be recognised as an investor of that party. The claimants met this test. More importantly, the tribunal refused to analyse the nationality of ECT investors through “economic” criteria as suggested by Spain. The tribunal found it significant that the benefits of the ECT could only be denied to companies controlled by nationals of ECT parties (or “third State” nationals) under Article 17 ECT. The tribunal stated that Spain’s argument would also deny benefits to companies controlled by host State nationals, a possibility it said had been rejected by the drafters of the ECT. In appropriate circumstances, the tribunal would have considered (but Spain did not adduce) arguments on lifting of the corporate veil, such as fraudulent corporate structures or in cases of “fraud to jurisdiction” (e.g., a transfer of the assets that comprise the investment after a dispute has arisen).
Accordingly, the arbitral tribunal applied the broad definition of “investor” by simply analysing whether the claimants had fulfilled the formal condition of being organized in accordance with the applicable law in a Contracting Party of the ECT. Again, this is good news for investors who have structured their investments in a way to obtain maximum investment protection.
3. Takeaway: No violations of the ECT
The claimants argued that the Spanish measures constituted an “indirect expropriation” and thus violated Art. 13 ECT. They also claimed that the measures were in violation of Art. 10 ECT, in particular the “fair and equitable treatment” (FET)-standard.
Despite the fact, that the arbitral tribunal rejected all jurisdictional objections raised by Spain and the European Commission and thus followed the claimants, it did not find any violations of the ECT.
Indirect expropriation (Art. 13 ECT)
The claimants argued that the Modified Framework constituted indirect expropriation, as it deprived them of a “substantial value” of their indirect investment in T-Solar (Art. 1(6)(b) ECT). They also argued that the Modified Framework affected their future cash flows and, therefore, their returns, a form of investment (Article 1(6)(e) ECT).
However, arbitral tribunal disagreed. According to the tribunal, a measure constitutes indirect expropriation under international law if it “substantially affect[s]” the investor’s property rights. This can occur when the State effectively takes all or part of the investment or when the taking causes a loss of such a magnitude that it “destroys [the] value” of the investment. The parties agreed that Spain had not affected the claimants’ shareholder rights and that T-Solar was still in operation, turning a profit and in possession of its assets. Therefore, the claimants actually complained of a reduction in the profitability of T-Solar and, consequently, of the value of their shares. However, the arbitral tribunal concluded that this reduction does not justify an indirect expropriation claim in itself.
Fair and equitable treatment (“FET”) (Art. 10(1) ECT)
First, the claimants argued the Modified Framework frustrated their legitimate expectations that the Initial Framework would remain stable and that they would receive the feed-in tariffs. They argued that Spain enticed the claimants’ investments through the Initial Framework and through Government materials that promised up to 15% profitability. They expected to receive feed-in tariffs throughout the lifecycle of the plants, which they estimated at 35-50 years (Spain’s estimate was 25-30 years). For the claimants, registration with RAIPRE consolidated their right to receive the feed-in tariffs.
But the arbitral tribunal dismissed this part of the claim. The tribunal accepted that legitimate expectations could derive both from specific commitments and from the host State’s legal system. However, it rejected the notion that both types of expectation were identical. An investor cannot expect that an existing regulatory framework will remain unchanged absent a specific commitment from the host State. Similarly, regulations aimed at a limited number of investors are as “general” as any statute or regulation and do not create specific commitments vis-à-vis each investor. Accepting the opposite proposition would excessively limit States’ ability to regulate their economies.
Furthermore, the tribunal was not persuaded that the claimants had any legitimate expectations that the Initial Framework would not be modified (e.g., a stabilisation clause or a statement addressed to investors). These expectations should be analysed objectively, rather than on the basis of the investors’ subjective beliefs at the time of the investment. The expectations should also be reasonable in light of any representations by the host State. Additionally, in order to frustrate legitimate expectations, the regulatory changes should not have been “reasonably foreseeable at the time of the investment”. As part of their due diligence, investors in a “highly regulated sector such as energy” must “exhaustive[ly]” analyse the applicable legal framework before they make their investment.
In this regard, the tribunal found that:
- Spanish law and jurisprudence that predated the investment allowed Spain to modify its solar energy regulations;
- Spanish Government documents that enticed solar energy investments were not “sufficiently specific” to create the expectation claimed; and
- RAIPRE registration was an administrative requirement to be able to sell energy, rather than a guarantee to a specific return.
However, the Modified Framework could still frustrate the legitimate expectation that the State would not act unreasonably, contrary to public interest, or disproportionately. For the tribunal, the Modified Framework did not frustrate this expectation, for the following reasons:
- The tribunal agreed with Spain that the 30-year cap for the feed-in tariffs corresponded approximately to the lifecycle of the plants, to pre-investment Government representations about such lifespan and, approximately, to the duration of 32 of the 34 land leases for the plants;
- The median solar radiation for the relevant region and the technology used in the plants informed the new cap on equivalent operating hours. These are objective criteria, which were identified by the Initial Framework and pre-investment documents;
- The Modified Framework met the public interest of reducing the deficit in the solar energy sector, as the tariffs exceeded those paid to other technologies in absolute terms, the deficit increased year on year and the price paid by domestic consumers per KW/hour was increasing more rapidly than the EU average;
- The claimants had not proven that the EUR 0.5/MWh transmission charge was wrongful (the tribunal did not elaborate); and
- Security measures to cover voltage dips did not discriminate against solar energy investors, although Spain did not apply them to wind power investors, as a State “may well apply different rules to different industrial sectors without incurring in discrimination under international law”.
Secondly, the claimants argued that the Modified Framework applied retroactively and breached their acquired rights to operate under the Initial Framework. They drew a parallel with Argentina’s liability for the “pesification” of obligations denominated in foreign currencies, notably in CMS v. Argentina.
The arbitral tribunal dismissed this part of the claim, as it had found no legitimate expectations to a stabilisation of the regulatory framework. Moreover, and unlike the case before it, CMS involved specific, contractual commitments.
In short, the arbitral tribunal fully rejected the two main complaints of the claimants. Essentially, the tribunal concluded that the deprivation of their investments caused by the Spanish measures was not sufficiently serious enough as to constitute an “indirect expropriation”. Besides, the arbitral tribunal concluded that the claimants did not have any legitimate expectations that the regulatory framework would remain stable – even the application of those measures retroactively, i.e., to existing installations, did not amount to a violation of the FET-standard.
From the solar investor’s perspective the outcome of this award is disappointing. In particular, the conclusions of the majority of the tribunal that there has been no violation of the ECT is rather surprising and from a legal perspective very questionable.
While one may argue whether or not the deprivation of the investments was sufficiently serious enough, it is clear that Spain created legitimate expectations with the RES investors when it invited them to invest in Spain. There were clear specific commitments by Spain, which guaranteed that the feed-in tariff would remain unchanged for the whole lifecycle of those plans. That was indeed also the conclusion of the dissenting arbitrator Tawil.
Obviously, States can modify their legislation. However, it is equally obvious that such changes can never be applied retroactively but only for new RES installations, i.e., only for the future. Indeed, it is rather surprising that the arbitral tribunal did not discuss in any depth the issue of retroactivity, whereas under the Rule of Law, it is generally accepted that retroactive legislative changes are unacceptable because it violates the legal certainty and legitimate expectations of investors (indeed of all citizens). It is to be hoped that the other arbitral tribunals will analyse this issue in more depth and thereby come to a different conclusion. Indeed, the 2013 measures of Spain had an even more devastating impact on the investors, so the arbitral tribunals dealing with these measures have every reason a find violation of the ECT.
But there is one important silver lining in this award, which concerns the conclusions of the arbitral tribunal regarding the intra-EU aspects.
First and foremost, the tribunal rejected all the misguided arguments by Spain and the European Commission regarding so-called “implied disconnection clause” and Art. 344 TFEU. Accordingly, there is no legal obstacle – neither under EU law nor under the ECT – that would prevent European investors from bringing ECT claims against EU Member States. This is an important victory for all other pending solar energy claims under the ECT.
Second, the arbitral tribunal rightly defined the term “investor” in the ECT broadly, thus rejecting Spain’s attempts to read into the ECT any more restrictive type of definition. Again, this is a crucial victory for investors, which can reasonably assume that the arbitral tribunals in the other pending cases will continue to follow this tribunal’s approach.
So, in conclusion while the outcome of this award is disappointing for the harmed RES investors, there are some hopeful elements in it too. The good thing is that this award is not binding on the other arbitral tribunals, so – in principle – there is no precedent which would prevent them to come to different conclusions, i.e., to find a violation of the ECT. Moreover, each dispute is case- and fact specific, so it is quite possible that the claimants in the other disputes will be successful across the board. But this requires deep understanding of the ECT and investment arbitration issues and the solar energy industry.