ICSID tribunal finds Spain in breach of the FET standard under the Energy Charter Treaty

Masdar Solar & Wind Cooperatief U.A. v. The Kingdom of Spain, ICSID Case No. ARB/14/1

In a final award of May 16, 2018, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) found Spain in breach of the fair and equitable treatment (FET) standard under Article 10(1) of the Energy Charter Treaty (ECT), in a case initiated by Masdar Solar & Wind Cooperatief U.A. (Masdar), a company constituted in the Netherlands.

Background and claims

One of Spain’s policies to stimulate investment in the renewable energy sector was the Royal Decree 661 of 2007 (RD661/2007), under which renewable energy generators would benefit from a premium set by the Spanish government above the wholesale market price. The basis of remuneration for generators was a feed-in tariff (FIT) for the lifetime of the installation by way of an alleged stability commitment: Article 44.3 of RD661/2007 would prevent future changes to the tariff regime from affecting plants registered and commissioned by January 1, 2012.

Masdar contended that, by a series of disputed measures introduced between 2012 and 2014, Spain abolished the RD661/2007 regime and introduced a much less favourable regime, which applied to those installations commissioned under the RD661/2007 regime alike.

Masdar had made investments in three concentrated solar power (CSP) plants pursuant to RD661/2007. Claiming that its investments had been affected by the disputed measures, Masdar initiated arbitration seeking a declaration that Spain had breached the FET standard under ECT Article 10(1). It also sought full reparation for the injury to its investments in the form of full restitution by re-establishing the situation that existed prior to Spain’s alleged ECT breaches, together with compensation for all losses suffered prior to the reinstatement.

Tribunal dismisses most of Spain’s jurisdictional objections

Objecting to the tribunal’s personal jurisdiction (ratione personae), Spain alleged that Masdar’s conduct, by virtue of general indicia of control, was attributable to the UAE, which is not party to the ECT. Since the dispute was between two states, Spain argued that the requirements of ECT Article 26 and Article 25 of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention) were not met. The tribunal dismissed this objection since Spain had not adduced evidence supporting its control argument and had already conceded that Masdar had no governmental powers.

Spain’s objection to the tribunal’s subject matter jurisdiction (ratione materiae) was based on its argument that Masdar had no “investment” in Spain for the purposes of ECT Article 1(6) and ICSID Convention Article 25. The tribunal considered that a substantial number of recent awards, such as Abaclat v. Argentinac and GEA Group Aktiengesellschaft v. Ukraine, considered that “investment” has an inherent meaning that an alleged investment must meet, along with falling under one of the categories of assets mentioned in bilateral investment treaties (BITs). Essentially, the tribunal held that elucidating the meaning of the term “investment” in ECT Article 1(6) was part of the interpretation of this provision. It was satisfied that Masdar had made an “investment” within the meaning of the above cases.

Spain relied on the Spanish and Italian language versions of the ECT to argue that Article 17 of the ECT requires an investor to have substantial business activities in its home state. It raised a consent (ratione voluntatis) objection, arguing that Masdar’s presence in the Netherlands did not satisfy this criterion. The tribunal rejected the objection as it was not proven by evidence.

Another ratione voluntatis objection related to the “levy introduced on the value of the production of electricity of a direct and real nature,” with Spain arguing that the levy was a bona fide tax to which the ECT Article 21(1) taxation exemption applied. The tribunal agreed and concluded that it did not have jurisdiction to entertain claims arising out of the introduction of the levy.

For tribunal, Achmea does not apply to multilateral treaties to which the European Union is a party

A last objection was raised by Spain on the ground that ECT Article 26 did not apply to intra-EU disputes: as Masdar was a Dutch enterprise, EU law would have primacy over the ECT. The tribunal concluded that nothing in the text of the ECT precluded intra-EU disputes from its scope and that EU law is not incompatible with the provision for investor–state arbitration contained in the ECT. The two legal orders could be applied together as regards this arbitration, because only the ECT deals with investor–state arbitration and nothing in EU law can be interpreted as precluding investor–state arbitration under the ECT and the ICSID Convention.

Following the rendering of the judgment of the CJEU in Slovak Republic v. Achmea BV on March 6, 2018, Spain requested the tribunal to reopen the arbitration. It sought to introduce into the record the Achmea judgment, arguing that it confirmed the intra-EU objection it had raised. The tribunal, however, held that the Achmea judgment applied to BITs, but not to multilateral treaties to which the European Union itself is a party, such as the ECT (para. 679).

Fair and equitable treatment under ECT Article 10(1)

According to Masdar, the enactment of the disputed measures led to the dismantling of the regime under RD661/2007, which removed the stability that was promised on the basis of which Masdar made its investments. Spain relied on Charanne v. Spain to argue that stabilization provisions offered in general legislation, or press releases and others, cannot create legitimate expectations for investors.

In its analysis, the tribunal affirmed that a state is at undisputed liberty to amend its legislation. It indicated that FET could not include economic and legal stability, and foreign investors could not legitimately expect it, unless explicit undertakings were directly extended to investors (para. 485). However, the tribunal also cautioned that this right was not unfettered.

To establish whether Spain had breached the investor’s legitimate expectations, the tribunal considered the two schools of thought developed in Charanne. The majority opinion in that case held that only specific commitments can give rise to legitimate expectations. In turn, the dissenting opinion held that, if investors were relying on general law as the source for their legitimate expectations, they would have to prove that they had undertaken sufficient due diligence to understand the legal system.

The tribunal in the Masdar case found that the investor had undertaken the due diligence necessary to understand the legal system and bring a claim of legitimate expectations based on general law. While noting that it was not bound to the Charanne majority opinion, and therefore did not need to consider the existence of specific commitments, the tribunal also found that a specific commitment existed in the form of a resolution issued by Spain addressed specifically to each of the operating companies (para. 520).

Since specific commitments existed, in addition to general commitments, both of which were found to give rise to legitimate expectations, the tribunal declined to choose between both schools of thought and found that Spain was in breach of its FET obligations pursuant to ECT Article 10(1).

Decision and costs

The tribunal decided that Spain breached the FET standard under ECT Article 10(1) and that Masdar was entitled to full reparation. Considering that granting restitution of the RD661/2007 regime would materially affect Spain’s legislative authority, the tribunal decided to grant reparation through monetary compensation. The tribunal ordered Spain to pay damages of EUR 64.5 million plus pre- and post-award compound interest.

Notes: The tribunal was composed of John Beechey (President, appointed by the Chairman of the ICSID Administrative Council, British national), Gary Born (claimant’s appointee, U.S. national) and Brigitte Stern (respondent’s appointee, French national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw9710.pdf.

Trishna Menon is a B.Sc., LL.B. (Honours) graduate of the Gujarat National Law University, India.