Jürgen Wirtgen, Stefan Wirtgen, Gisela Wirtgen and JSW Solar (zwei) GmbH & Co. KG v. Czech Republic, PCA Case No. 2014-03
In a dispute involving Czechia’s solar power sector, the majority of an arbitral tribunal administered by the Permanent Court of Arbitration (PCA) dismissed all claims brought under the Czechoslovakia–Germany bilateral investment treaty (BIT) in an award dated October 11, 2017.
Background and claims
The claims were brought by three members of the Wirtgen family (Wirtgen) and their company JSW Solar (zwei) GmbH & Co. KG (JSW Solar). In 2009 and 2010 the claimants invested in three solar photovoltaic plants in Czechia. In an effort to encourage the production of electricity from renewable sources of energy, Czechia issued a two-part Support Scheme providing incentives of a guaranteed feed-in tariff (FIT), originally for 15 and later for 20 years, and tax incentives, including long-term income tax exemptions and shortened depreciation periods. According to Wirtgen and JSW Solar, they made investments relying on the explicit guarantees and incentives in the Support Scheme.
In 2009 and 2010, Czechia amended the Support Scheme, in view of a drastic drop in the cost of solar panels that led to windfall profits for solar power producers and a solar boom. According to Czechia, the profits exceeded the rate of return that was originally contemplated by the Support Scheme. The amendments consisted of a 26 per cent solar levy, the withdrawal of the tax exemption and the extension of the depreciation period.
Members of the Czech parliament petitioned for the repeal of the solar levy before the Czech Constitutional Court, which concluded that, despite these measures, a plant meeting technical parameters would achieve a simple payback of capital expenses. The claimants then initiated international arbitration, claiming that the relevant framework contained a stabilization commitment and that the amendments gave rise to breaches of their legitimate expectations, guaranteed under the fair and equitable treatment (FET) clause, the full security and protection (FSP) clause and the umbrella clause of the BIT.
Two jurisdictional objections against JSW Solar rejected by the tribunal
Czechia objected to the tribunal’s jurisdiction, arguing that claimant JSW Solar is not an investor within the meaning of the BIT as it is not a “juridical person” and hence lacks legal personality under German law. The claimants, in turn, argued that “juridical person” must be interpreted autonomously, without recourse to domestic law.
The tribunal concluded that the term “juridical person” has an autonomous meaning because the contracting parties to the BIT did not refer to domestic law while defining it. Further, the tribunal found that an entity that can invest, enter into contracts, acquire property, sue and be sued in its own name qualifies as a juridical person even if it lacks legal personality under domestic law.
The European Commission (EC) raised the other prong of objection. It submitted an amicus curiae brief arguing that “the conclusion of the Treaty on Accession of the Czech Republic to the EU implied the termination of the BIT pursuant to Article 59 of the [Vienna Convention on the Law of Treaties]” (para. 241). The tribunal rejected this argument. It found that intra-EU BITs remained valid, mainly because the Lisbon Treaty and the BIT do not have the same subject matter. For example, EU law does not include an investor-state dispute settlement (ISDS) mechanism or an FET guarantee. The tribunal reasoned that the EC also failed to show that the European Union’s competence over foreign direct investment covers the same subject matter as the BIT (para. 265).
Majority holds that no specific commitments were made to claimants, hence no FET breach
Wirtgen and JSW Solar alleged that, by abrogating the tax incentives and introducing the solar levy, Czechia breached both components of BIT Article 2(1), which requires states to protect investors’ legitimate expectations and not to deliberately cause them damage.
According to the claimants, the solar levy effectively reduced the FIT by the amount of the levy, in breach of their legitimate expectations. They also alleged that Czechia had committed to maintaining the tax incentives unchanged for the life of the plants. Czechia countered that no specific commitments were made and that the FIT remained intact in spite of the solar levy.
The majority held that FET obligations are breached when an investor’s objectively reasonable expectations at the time the investment is made are breached. However, it noted that, absent a stabilization commitment, investors “can have no legitimate expectation that the host State’s laws will not change” (para. 408). Ascertaining whether there was a legitimate expectation of stability by the investor requires consideration of the form, content and clarity of the alleged promise.
After evaluating the relevant context and circumstances, the majority found that there was no separate guarantee of an absolute FIT price level in the abstract, set independently of the guarantees of a payback of capital expenses and an annual return on investment. Rather, Czechia provided a level of revenue through an FIT system for solar energy producers that met specific technical and economic parameters. It also concluded that, even after the measures were taken, the claimants have continued to receive a level of revenue that ensured a payback of capital expenses and a return on investment over a period of 15 (later 20) years. As the guarantees given by Czechia continue to be complied with, the majority held that there can be no breach of legitimate expectations. It also reviewed other documents on which the claimants allegedly relied and concluded that, contrary to claimants’ allegations, none guaranteed fixed revenues.
Concerning the reversal of the tax exemptions and extension of the depreciation period, the majority concluded that Czechia neither offered guarantees that the exemption would apply throughout the lifetime of the plants nor promised that solar panels would be depreciated over a particular period. Furthermore, the majority found that Czechia did not offer guarantees that the incentives would not be amended.
The majority rejected the allegation that Czechia caused deliberate harm by attracting investors based on the guarantees and revoking them once the investments were made. It found no evidence that the Support Scheme was designed to promote “foreign” investment. In addition, it concluded that the measures were not improper or without justification, but were taken in pursuit of legitimates objectives of protecting the Czechs from unreasonably high electricity costs. The measures were also tailored to limit the effects only to investors that benefitted from the solar boom, the tribunal found.
No violation of full security and protection standard or umbrella clause
The majority held that Czechia did not in the first place provide the kind of guarantees alleged by the claimants, and hence had not violated its obligation to provide legal security. Similarly, the claimants’ umbrella clause claim failed since they could not prove that the Czechia had an obligation to ensure a fixed FIT or the maintenance of the tax incentives.
Decision and costs
Having dismissed all claims, the majority ordered each party to bear its own legal costs and an equal part of the arbitration costs.
Arbitrator Gary Born dissents
Gary Born, the claimants’ appointee, strongly disagreed with the majority’s decision. According to him, Czechia provided a plain and unequivocal statutory guarantee for a fixed FIT for the duration of the investment and the claimants invested relying on such guarantee. He maintained that the majority’s interpretation essentially rewrites the straightforward Czech laws, undermining the rule of law and Czechia’s ability to provide meaningful legislative guarantees.
Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (presiding arbitrator appointed by the parties upon the co-arbitrators’ proposal, Swiss national), Gary Born (claimant’s appointee, U.S. national) and Peter Tomka (respondent’s appointee, Slovak national). The award is available in English at https://www.italaw.com/sites/default/files/case-documents/italaw9498.pdfand the dissent is available at https://www.italaw.com/sites/default/files/case-documents/italaw9499.pdf.
Mintewab Abebeis an Ethiopian lawyer and holds an LL.M. from New York University School of Law.