Category Archives: News

ICSID tribunal orders Zimbabwe to pay USD 196 million

In a recently published award, an ICSID tribunal ordered Zimbabwe to pay USD 196 million to several Swiss and German farmers whose farms were violently expropriated by order of President Mugabe.

This is the second ICISD award (a couple of years ago another ICSID tribunal had ordered Zimbabwe to compensate Dutch farmers) which found Zimbabwe’s so-called black empowerment policy to be nothing else than discrimination based on grounds of race.
This is a tellingly example of how important and useful Bilateral Investment Treaties (BITs) are as a last resort to obtain compensation for the total destruction of foreign investments.
It now remains to be seen whether Zimbabwe will honour its obligations and pay the compensation.

3 takeaways from the first Spanish solar arbitration award

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.

The facts

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.

4. Outlook

 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.

GIP has this understanding and stands ready to assist any investor regarding ECT claims.

 

Solar claims against EU Member States dominate at ICSID

The explosion of Energy Charter Treaty (ECT) claims against Spain made the EU the most sued region according to ICSID’s most recent caseload statistics.

The report (published 22 January) shows that EU Member States received 19 claims in 2015, over a third of all the claims registered at the ICSID in that year.

The vast majority – 15 cases – were filed against Spain, with three against Italy and one against Austria. All except the claim against Austria relate to reforms to the solar energy subsidy regimes.

The sudden growth in claims comes after a decline over the previous years. In 2015 a a new all-time record of 52 new claims were filed (in 2014, only 38 cases were filed). In total, Spain is defending 26 claims over its renewable energy market filed at ICSID and other institutions.

Meanwhile, 2015 saw only two new claims against states in South America, which had historically been the most-sued region.

Due to the claims against Spain, there has also been a rise in ECT claims at ICSID, which used to be relatively rare. While historically the ECT formed the basis for less than 9% of claims, in 2015 thisrose to 33%. Likewise the field of power disputes has expanded, being the subject matter of 42% of all new claims filed in 2015 compared to 17% in the past. The historical mainstay of oil, gas and mining disputes, however, accounted for only 19% of new claims in 2015.

The 15 cases against Spain highlight another trend in the statistics: apart from Spain and Italy – the recipients of the solar claims – very few states in 2015 had to deal with more than one new case.

In terms of the outcomes of arbitrations, tribunals continued to comply with historical trends. 47% of awards in 2015 upheld claims in part or in full, while 33% dismissed all claims and 20% declined jurisdiction.

Summing up, it can be concluded that claims against EU Member States will continue to increase, which makes the need for optimal investment protection through BITs and the ECT even more urgent.

As a specialized consultancy, GIP stands ready to advise on the best BIT/ECT protection available to your investment.

What will the Dutch EU presidency bring for investment protection?

As of 1 January 2016, the EU Presidency is now in the hands of the Netherlands. What will the next 6 months of the Dutch EU Presidency bring for investment protection?

As we have reported several times in our previous newsletters, investment protection and access to investor-state dispute settlement (ISDS) is increasingly under fire from several fronts.

Regarding intra-EU Bilateral Investment Treaties (BITs) (i.e. BITs concluded between EU Member States), the European Commission has initiated infringement procedures against 5 EU Member States (Sweden, Romania, Austria, Slovak Republic and the Netherlands) arguing that their intra-EU BITs are violating EU law. Those Member States will soon submit their cases  to the Court of Justice of the EU (CJEU). While a judgment is not expected in the next half year, it will be very interesting to see whether and how those states will defend their intra-EU BITs. It will be also interesting to see to what degree the line of arguments of those states will differ. So far the Netherlands has always been a staunch defender of its intra-EU BITs – even to the extent that it got actively involved in the Eureko/Achmea dispute against the Slovak Republic.

The new year already saw Italy withdrawing from the Energy Charter Treaty (ECT) to avoid new arbitrations over retroactive cuts to renewable energy. The European Commission is actively pushing member states to leave the ECT to make sure no new intra-ECT cases can be lodged.
The result of this strategy will be that European investors could only turn to domestic courts for relief, which – as we all know –in many Member States are corrupt and under direct political pressure from their governments. This will effectively lead to the removal of any effective level of investment protection within Europe.

The big question is: will the Netherlands – as EU President – be able to effectively stop this course of events?

EU will fail to meet climate targets if it continues to terminate BITs and the ECT

At the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal. The agreement sets out a global action plan to put the world on track to avoid dangerous climate change.

The key elements agreed on include a long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels and  to undertake rapid reductions thereafter in accordance with the best available science.

More specifically, the EU and other developed countries agreed to continue to support climate action in order to reduce emissions and build resilience to climate change impacts in developing countries. Moreover, developed countries intend to continue their existing collective goal to mobilise USD 100 billion per year until 2025 when a new collective goal will be set.

In this context, the EU claims for itself to be at the forefront of international climate action. In particular, the EU has adopted the target of reducing CO2 emissions by at least 40% by 2030. This will require massive investments in renewable energy sources (RES) as well as investments for energy saving measures for private households, for industrial consumers as well as the transport sector (cars, trucks, ships, airplanes).

EU cannot meet its targets by dismantling investment protection

In light of the existing budgetary constraints in practically all EU Member States and the EU itself, the massive investments in RES necessary will have to come from private investors – individuals, SMEs, and multinationals. However, they will only invest in RES if they consider the investment risks to be manageable and if a decent return of their investments can be reasonably expected. In other words, investors need legal certainty and long-term stability, in particular since for RES investments any returns can only be expected after a few years. Indeed, the more than 3,000 Bilateral Investment Treaties (BITs) and the Energy Charter Treaty (ECT) have been concluded for that purpose, namely, to grant investors legal certainty by providing investment protection and access to investor-state dispute settlement (ISDS).

However, whereas the EU and its Member States are pushing for ever more ambitious targets for reducing CO2 emissions, they at the very same do everything they can to terminate their BITs and the ECT. This schizophrenic policy will result in a grand failure of the EU and its Member States to achieve any of their targets. First, the EU and its Member States are not only destroying any remaining confidence in the Rule of Law within the EU, but they also take away any effective legal guarantees which investors still have to protect their investments. Second, and as a result of the first point, the EU and its Member States will fail to meet their own targets as well as the targets agreed in the Paris Climate deal.

The big loser will not only be the investors, but more importantly, the environment.

But the EU and its Member States can still avoid this course of events, if they replace their schizophrenic approach with a more consistent one.

The solution is so obvious and simple: stop terminating BITs and the ECT!

Only by maintaining a high level of investment protection and providing for legal certainty will investors be ready to make the massive investments, which are necessary to achieve the agreed targets. In addition and as welcome side-effect, this would also create a huge number of new jobs. In sum, this would result in a win-win situation for everybody. Therefore, it can only be hoped that sense and sensibility will eventually regain the upper-hand.

 

Italy no longer member of Energy Charter Treaty, hopes to avoid more arbitrations

As of 1 January 2016, Italy has withdrawn from the Energy Charter Treaty (ECT). This means any new investments in the energy sector in Italy are not protected anymore by the ECT, while existing investments will remain protected until 2036. The withdrawal of Italy must be considered a significant setback to the relevancy of the ECT, in particular since also Russia withdrew from the ECT some years ago. The reason for Italy’s withdrawal from the ECT must be found in the rising number of arbitrations that Italy is facing because of its retroactive measures, which it adopted in the renewable energy sector. Apparently, Italy hopes to avoid new disputes by stepping out of the ECT, despite the fact that, as mentioned above, existing investments continue to be protected and allow investors to use the ISDS provisions of the ECT.

An additional reason for Italy’s move can be found by the fact that the European Commission is aiming to prevent European investors from using the ECT against EU Member States, i.e. to prevent intra-ECT disputes. It is for this reason that in the past years the European Commission is actively pushing EU Member States to step out of the ECT. In other words, as is the case with intra-EU BITs, the European Commission wants to make sure that no new intra-ECT cases can be lodged.

GIP can advise you on the optimal investment protection in Italy and many other countries using existing BITs. 

Better investment protection with Iraq’s accession to ICSID convention

On 18 November, Iraq finally ratified the Convention on the Settlement of Investment Disputes (ICSID Convention), which enters into force for Iraq on 17 December. This strategic decision comes at a time when Iraq needs significant amounts of Foreign Direct Investments in order to rebuild its country.

While Iraq has signed more than 30 Bilateral Investment Treaties (BITs), only the BITs with Japan and Kuwait have entered into force. Iraq has also ratified a multilateral investment protection treaty among several Arabic states. But there are many BITs in the pipeline, which are pending signature and/or ratification, for example with Slovakia, Iran, the UAE, the Czech Republic, Bahrain, China, Macedonia, Vietnam, Italy, Netherlands and Poland.

Unfortunately, Iraq is still not yet party to the New York Convention, which means that non-ICSID awards still face difficulties of being recognised and enforceable.

Despite the limited number of Iraqi BITs in force, the fact that Iraq has now ratified the ICSID Convention is a positive sign towards investors by providing them a reliable and globally recognized dispute settlement forum. The signature and ratification of more BITs, which will provide for access to ICSID, would significantly increase the attractiveness of Iraq.

GIP can advise you on how to safely invest in Iraq.

How investment arbitration can help to protect the climate

On 6 December 2015, the world leaders will meet in Paris for the World Climate Summit to work on a legally binding global climate agreement. Given that a failure to stop climate change would have catastrophic results for the global economy due to spreading natural catastrophes and demographic change, significant steps must be taken now.

In anticipation of the summit the European Union has been taking the lead by imposing more ambitious targets for curbing carbon emissions on its Member States than contained in the original 2020 targets.

Recently, on 23 October, EU leaders agreed to reduce greenhouse gas emissions by at least 40%, and increase energy efficiency and the share of renewables by at least 27% by 2030.

Moreover, the EU has adopted the energy roadmap 2050 aiming to reduce emissions to 80–95% below 1990 levels by 2050.

In other words, the EU is committed to emissions, which will only be possible by substantially increasing the production of renewable energy in Europe.

However, and at the same time, the European Commission is actually doing the opposite by actively destroying renewable energy producers. Member states too are doing what they can to destabilise the economic environment in many countries, making investments in renewables extremely risky and not worthwhile.

As we have reported previously in our newsletters, many Member States are retroactively removing the agreed feed-in tariffs (FIT) for the production of renewable energy, or retrospectively introducing other damaging measures. This has resulted in more than 30 investment arbitration disputes, which have been initiated by affected renewable energy producers against for example Spain, Czech Republic and Italy. The European Commission is has been actively intervening in those investment arbitration disputes, siding with the Member States.

At the same time, as is highlighted by the situation in the Czech Republic, where the Energy Regulatory Office – lead by a personal vendetta against solar energy – is currently threatening to block the distribution of 1,5 billion EUR worth of renewable energy subsidies in 2016, which would destroy the renewable energy industry and causing significant problems for the financing banks.

Thus, on the one hand the EU is pushing for ambitious greenhouse gas emission cuts, while at the other hand, it destroys renewable energy producers. There is a clear contradiction here, which needs to be clarified.

Turning back to the upcoming climate conference, it is important to remain realistic. Whatever the outcome will be, any binding international agreement on reducing greenhouse emissions will most likely not include any effective enforcement mechanism.

Indeed, so far multilateral environmental agreements only contain some sort of monitoring system, but lack an enforcement system that enables others to make sure that the States which are parties to such agreements fulfil their obligations.

This is where bilateral investment treaties (BITs) and investor-state dispute settlement (ISDS) come in, by assisting in the enforcement of legally binding environmental obligations. The following case is a good illustration of the usefulness of ISDS for the protection of the environment.

Most BITs contain “full protection and security”-standard. Arguably, the “full protection and security”-standard encompasses the obligation that the host state exercises sufficient “due diligence” to protect the investor’s physical assets and persons. It is not difficult to argue that this obligation also includes that the host state takes all necessary measures to prevent or effectively mitigate damages caused by egregious pollution or greenhouse gas emissions.

In fact, this line of argument is currently tested in an ISDS case, which has been brought by Peter Allard. He is a Canadian owner of an eco-tourist facility in Barbados and brought the ISDS case against Barbados alleging a breach of the “full protection and security”-standard of the Canada-Barbados BIT. More specifically, Allard claims that Barbados breached its BIT obligations by failing to enforce its domestic environmental laws, which he alleges led to the environment being spoilt and thus a loss of tourist revenues at his eco-resort.

Another example in which ISDS could help to force States to take effective measures to protect the environment is the case of the massive fires that have been affecting the climate in Indonesia and several of its neighbouring countries. Millions of people are suffering from respiratory problems and many sectors of the economy cannot function anymore properly. The haze is caused by fires, which are set to burn forests in order to create land for palm oil crops. Reportedly, this practice, which takes place every year, seems to have been condoned by Indonesia and the respective provincial governments. It seems that Indonesia has neither prevented the fires and the resulting haze, nor has it responded to these fires in a promptly and effective manner with a view of minimising their negative effects. If that is indeed the case, this would constitute a breach of Indonesia’s international treaty obligations relating to both environmental protection and investment protection.

Since most of Indonesia’s BITs contain the “full protection and security”-standard, it would be possible that affected foreign investors could use the BITs for bringing ISDS claims against Indonesia.

More generally, it seems reasonable to apply this line of argument also in the case of greenhouse gas emissions. For example, if in Paris a treaty is signed which contains binding targets for the reduction of greenhouse gas emissions and a State party fails to implement them, which in turn causes damages to a foreign investor, that foreign investor could use the BIT and ISDS to bring a claim against that State. The possibility of facing ISDS claims, which could amount to hundreds of millions of dollars, could be an effective instrument to persuade States to actually implement their legally binding environmental protection obligations.

Considering the fact that – unfortunately – many States around the world fail to effectively implement applicable environmental legislation – be it international or domestic -, causing not only damages to the environment and the health of their citizens but also to the property of foreign investors, ISDS claims could turn out to be a very effective tool to compel States to take the necessary steps to prevent environmental damages.

In other words, the protection of investors goes hand in hand with the protection of the environment.

Accordingly, instead of actively dismantling investor protection in Europe, the European Commission should take measures against the Member States for violating their obligations towards renewable energy producers. Similarly, the European Commission should stop undermining the legal status of intra-EU BITs and the Energy Charter Treaty. This would be the best way in ensuring that the Member States meet the ever more ambitious cuts in greenhouse gas emissions.

In sum, the useful role which ISDS can play for the protection of the environment is yet another argument – next to the well-known and generally accepted – arguments that investment treaties and ISDS promote the Rule of Law, legal certainty and the flow of FDIs – for maintaining easily accessible, effective and fair ISDS rules in all trade and investment agreements.

The GIP team stands ready to advise you on the best available investment protection in Europe and beyond.

Czech Energy Regulator threatens to destroy renewables industry and damage the banking sector

The Czech energy sector is currently being held hostage by the Czech Energy Regulator (ERU), which is refusing to define the prices that renewable energy projects, installed before 2011, should receive next year. Each year ERU is required to publish a list of prices, based on which the Feed-in-tariffs are paid out. This year ERU has so far (that is end of November) refused to do so. If the situation is not resolved very soon, a total of 42 billion crowns (1,5 billion euro) would not be paid out to renewable energy companies.

The consequences would be dyer: defaults on bank loans, thousands of jobs destroyed in an instant, bankrupt companies and more. But not only the renewables industry would suffer, but also the financing banks, who have bankrolled projects worth tens of billions of euro.
How exactly did we arrive at this point?

ERU claims that the law, on which the biggest part of the Czech Republic’s renewable subsidies is based, first needs to be notified to the European Commission (EC) according to EU state aid law, before the subsidies can be paid out. When the law was passed, back in 2005, the subsidies in the form of feed-in-tariffs were not considered state aid within the meaning of EU state aid law. And subsequently the subsidies were paid out regularly each year, without the law ever having been notified to the EC. However the Czech government recently – out of the blue – decided to notify the law. ERU now argues, that unless notification is received or the Czech government issues a declaration confirming that the law does not violate EU regulations, it cannot set out the subsidies for next year. ERU chairwoman Alena Vitásková – who to the public presents herself as a martyr and fighter against what she calls the “solar mafia” – claims she either needs EU notification or a decision by the Czech government, which would make clear that the law and the subsidies are not counter to EU legislation.

Never mind, that both industry associations, the chamber of commerce and the Industry Ministry have all informed ERU, that the law does not in fact need notification for the subsidies to be paid out, ERU is still refusing to budge.

Questioned by journalists, what kind of government decision ERU would need to change its minds, Vitásková could not answer. This and many obscure statements make it clear, that the real motive behind ERU’s reckless behaviour is to be found somewhere else.

Vitásková, who herself has a background in the gas industry and has close ties to Czech president Milos Zeman – who himself is said to be fond of Vladimir Putin and his regime – is head of the independent Energy Regulator ERU. She has in the past years repeatedly claimed, that the solar boom, which saw more than 2 GW of photovoltaic power plants installed in the Country before 2011, was partly orchestrated by what she calls the „solar mafia“. Every since she was made ERU chairwomen in 2012, she has lead several media attacks on solar producers, claiming that a number of solar investors are defrauding the system by producing more energy than installed. She herself is the subject of a lengthy police investigation and her job is currently anything but safe.

Interestingly, Vitásková is currently facing criminal investigations for the dodgy appointment of EUR’s vice-chairwoman Renata Vesecká. The crucial problem for Vitásková is that as of 2016, she would no longer be chairwoman of ERU, since a new law was passed earlier this year, changing the leadership structure of the office. Vitaskova can only safe her job if a technical bylaw is passed, ensuring that she stays in office until the end of her term in 2017. That bylaw is currently still in parliament and on the way to being passed later this year, after parliament had stalled and delayed it. Apparently, Vitaskova has made so many enemies across the political, bureaucratic and economic spectrum that hardly anybody wants to see her remain in office.

Holding investors hostage

Vitaskova, whose motives might be found in the uncertainty over her personal future, her past in the non-renewable energy sector, her love for PR or elsewhere, has probably not realised, what she has got herself into.

It could be argued that all she wanted was a new debate in the media about how much the Czech state pays out to the renewable energy industry, which is in fact helping the government achieve its environmental goals as imposed by EU law. It could be argued that she wants to put pressure on parliament to guarantee her job until 2017. In all probability there are many reasons, but what is almost certainly true is that Vitaskova and her colleagues at ERU have underestimated the consequences and also don’t know what they are talking about.

No knowledge of notification

At a round table on 27 November 2015 Vitaskova expressed hope, that the situation would sort itself out, when industry minister Jan Mládek returns from Brussels with a notification at the same day. This displays a fundamental lack of knowledge about EU notification procedures and highlights, that Vitaskova has dug herself a hole and now needs a way out which helps her safe face.

As always, this also highlights the fact, that the basic legitimate expectations investors must have, are to legitimately expect key official bodies to be run by people who lack fundamental knowledge about important aspects of their work. As we pointed out in our article Mind the gap, investors basically have to expect, that even if a law is prepared by national institutions, ministries and regulatory bodies, and then debated and passed on government level, then passes the legislative process and becomes law, investors still have to presume that somebody along the line screwed up and that they might in the end get shafted.

A wave of ISDS lawsuits

Representatives of the Czech industry ministry assured renewables investors that a solution would be found, and unlike ERU they seem to understand the danger of the situation. If ERU fails to set out the prices for 2016 and companies go bust, the Czech Republic will face a barrage of lawsuits, both national and international. And in these cases, the Czech Republic probably won’t stand a chance.

If you have renewable assets in the Czech Republic and are affected by the current situation, get in touch with us to see how we can help you protect your assets.