Arbitration analysis: In his analysis of how investment treaty arbitrations are being developed in Spain, Frederico Singarajah of Hardwicke says the recent ruling in Isolux Netherlands, BV v Kingdom of Spain will be a useful guide to claims against Spain in the photovoltaic sector, governed by the Energy Charter Treaty 1994 (ECT).
What was the background to this dispute?
This is a Stockholm Chamber of Commerce (SCC) arbitration claim by Isolux Infrastructure Netherlands BV (the claimant), acting as major shareholder in T-Solar Global SA, T-Solar Global Operating Assets SA and Tuin Zonne Origen SLU against the Kingdom of Spain (the respondent), brought further to article 26 of the Energy Charter Treaty 1994 (ECT).
The claim was issued on 3 October 2013, and refers to a series of regulatory reforms by the Respondent to the special regime, which ratified the objectives of Directive 2001/77/EC and Directive 2009/28/EC for the electricity production from renewable sources.
The special regime was implemented by the Law of the Electric Sector (LSE) 54/1997, which in turn was introduced by a series of Royal Decrees between 1998 and 2010. The tariffs and remuneration prescribed by article 30.4 were taxed and/or modified by subsequent legislation.
The claimant alleged it invested reliant on the Special Regime, and the taxation/modifications amount to expropriation, in breach of articles 10(1) and/or 13 of the ECT.
What issues were before the tribunal? What did the tribunal decide?
The tribunal was composed of Prof Guido Santiago Tawil (appointed by the claimant), Dr Claus Von Wobeser (appointed by the respondent) and Mr Yves Derains as chairman.
The respondent advanced seven grounds disputing jurisdiction:
- article 26 of the ECT does not apply to investments within the EU: dismissed, article 26(1) applies to any ‘contracting party and an investor of another contracting party relating to an investment’, including from EU Member States. Article 344 of the Treaty on the Functioning of the European Union does not preclude the jurisdiction of the tribunal
- the claim is brought by Spanish and Canadian investors and the claimant is simply a shell company: dismissed, on application of articles 1(7)(a)(ii) of the ECT, the claimant is a ‘company or other organisation organised in accordance with the law applicable in that contracting party’, the Netherlands
- the claimant’s investment does not qualify under article 1(6) of the ECT: dismissed, it is common ground that the claimant owns 88.3413% of T-Solar, a company that exerts an economic activity in the Spanish energy sector and derives an indirect benefit from it. Article 1(6) gives examples but does not define ‘investment’. On application of an objective test, the claimant’s investment qualifies under article 1(6) of the ECT. Further, article 1(8) states ‘establishing new investments, acquiring all or part of existing Investments’ which is consistent with the claimant’s position
- the claim amounts to an abuse of process: dismissed, the tribunal rejects the ground that the claimant company was formed fraudulently to benefit from the Netherlands’ participation in the ECT. The claimant’s shareholders’ actions did not amount to forum shopping, but legitimate corporate planning
- the tribunal lacks jurisdiction for failing to apply article 17 of the ECT (control by national of a third state): dismissed, this jurisdictional challenge was parasitic on the previous two challenges. As the tribunal found the claimant made an investment, on an objective basis, and there is no abuse of process, it should not deny the protection of Part III, by applying article 17. In any event, article 17 gives rise to an issue of admissibility, not jurisdiction. The tribunal could only assess this ground, on analysis of substantive issues. Further, article 17 cannot be applied retrospectively and the respondent could only trigger article 17 with notice, prior to the dispute
- article 21(1) excludes jurisdiction for the tribunal to decide law 15/2012 breaches the respondent’s duties under article 10(1): allowed, the claimant argued the measures of law 15/2012 were not passed in ‘good faith’ and were not within the ‘carve out’ provisions of article 21(1). Article 21(1) can only be used to exclude legitimate bona fide taxation provisions. To determine whether such provisions are excluded, the tribunal may consider whether law 15/2012 comprises legitimate taxation provisions or used for a different purpose. Nothing raised by the claimant rebuts the presumption that law 15/2012 was promulgated by the state bona fide
- inadmissibility of the question raised relating to law 15/2012, for failure to comply with article 21(5)(b) (procedure for dealing with the issue of whether a tax constitutes expropriation): allowed, the claimant argued that that the provision at article 21(5)(b) is not mandatory, or alternatively, the Spanish authorities has no mechanism to remedy, and therefore, compliance is moot, as a matter of practicality. The tribunal agreed with the claimant that the ECT does not sanction a failure to comply with inadmissibility. Nonetheless, the tribunal was unable to examine this question without referral first, to the Spanish tax authorities. The tribunal will revisit this issue when it makes its decision on costs
The claimant advanced two substantive grounds in the arbitration:
Breach of article 10 of the ECT: dismissed. There is no general and independent obligation to encourage ‘stable, equitable, favourable and transparent conditions for Investors’. Legitimate expectation must be weighed up against reasonability and proportionality. The language of article 10(1) refers to specific agreements ‘entered into’ rather than administrative or legislative measures. Royal Decrees 661/2007 and 1578/2008 were not designed specifically for foreign investors and are not specific agreements entered into by the claimant.
There was no legitimate expectation of an immutable legal framework in respect of tariffs on a long-term basis. The changes to the special regime, by Royal Decrees 5/2012, 2/2013 and 9/2013 and law 15/2012 do not violate the obligation for just and equitable treatment. The claimant failed to carry out legal due diligence and did not have a general understanding of the legal framework. At the time of investment (29 October 2012), no reasonable investor could have held a legitimate expectation that the legal framework would not be modified in the photovoltaic sector. The legality of these modifications has been confirmed in various Supreme Court decisions. The tribunal was not bound by these decisions, but found them relevant in discharging its duties under the ECT.
The claimant knew when it invested, the plants would yield a return of 6.19% (after tax) it cannot argue the imposition of a limit of 7.19% by the respondent, amounts to a breach of its legitimate expectation. The tribunal did not have jurisdiction to consider the claim under article 10(6). The claimant’s claim conflated immediate with retrospective application of the specific remuneration introduced by Royal Decree 9/2013. The claim of retrospective application was dismissed.
The tribunal also rejected the allegation of a breach of the respondent’s duty ensure ‘protection and security’ for the investment, or that it introduced ‘unreasonable or discriminatory measures’. It could be said the measures chosen by the respondent, could have been more favourable to the claimant. This was not sufficient for a finding that they were exorbitant or unreasonable.
Breach of article 13 of the ECT: dismissed—the claimant argued that its investment includes both the shares it holds and the revenue from T-Solar’s plants. Further, the respondent’s repeal/modification of the special regime diminished or annihilated the economic value of the investment. This is indirect expropriation. The respondent argued that future revenue is not a tangible asset capable of expropriation.
The meaning of ‘investment’ within article 13, has been determined in the third jurisdictional challenge. The claimant’s shares are an investment and protected by article 13. A diminution in revenue, consequential to state measures, can be representative of diminution in economic value of the investment. It is not the revenue that is expropriated, but the tangible assets that yield the revenue.
To determine the expropriative effect, the tribunal had to apply the test as to whether there was a ‘substantial, radical, severe, devastating privatisation of rights or virtual annihilation, effective neutralisation or destruction of the investment, its value or fruits’.
The measures implemented by the respondent have not affected the claimant’s control in any way. In determining whether they have substantially diminished revenues, the tribunal relied on the methodology used by the respondent’s experts. As already established, for there to be expropriation there had to be a diminution in revenue substantially below 6.19%, however, the actual revenue of the plants, after the legislative changes was of 7.11%.
How does the award relate to the 21 January 2016 award (in claim brought by claimant’s
The 2016 award was concerned with legislative changes made in 2010 and was in relation to the limitation on the life of the projects and the reduction of the number of hours of electricity generation subject to regulated remuneration.
This tribunal consisted of the same party appointed arbitrators, but a different chairman. Nonetheless, very similar outcomes were reached. This arbitration was in respect of the 2012 and 2013 changes and was in relation to the taxation of revenue and reduction of subsidies. There was, however, much overlap in terms of jurisdictional challenges, especially in respect of the ECT within an EU context.
What are the implications for investment treaty arbitration practitioners?
This was a reasoned arbitration award made by respected arbitrators. Although it is not binding, it will be very useful as a guide to claims against Spain in the photovoltaic sector, governed by the ECT. This is the second arbitration of this type and confirms the conclusions of the first.
The case followed the expropriation test, which has a high threshold for investors to surmount, (established in Electrabel SA v Republic of Hungary (ICSID Case No. ARB/07/19)). When read with the 2016 award, the award is useful in understanding what is likely to be important.
Are there any trends in this area?
There have been approximately 35 claims filed against Spain under the ECT, further to the legislative changes. Three cases have rendered awards considering the application of the concept of ‘fair and equitable treatment’ and ‘legitimate expectation’. Both Charanne BV & Construction Investments SARL (SCC Case No. 062/2012) (Charanne) and the January 2016 Isolux claims were dismissed. The arbitral tribunal was composed of the same party appointed members.
Eiser Infrastructure Ltd. v. Spain (ICSID Case No. ARB/13/36) allowed the claim, challenging the 2012-2014 reforms. The arbitral tribunal in that case was completely different.
The current award supports the Charanne and 2016 awards. It will be interesting to see the development of the pending awards in respect of the composition of the panels and their consideration of the issues.