Despite a win for Estonia, ICSID arbitrators continue to resist CJEU’s Achmea judgment
United Utilities (Tallinn) BV and Aktsiaselts Tallinna Vesi v. Republic of Estonia, ICSID Case No. ARB/14/24
An ICSID tribunal rejected all claims against Estonia, finding that the state did not breach the FET standard regarding legitimate expectations, other FET standards, the non-impairment standard or the umbrella clause under the Netherlands–Estonia BIT (the BIT). Nonetheless, this tribunal joined others before it in refusing to give up jurisdiction following the CJEU’s Achmea judgment.
Background and claims
Aktsiaselts Tallinna Vesi (ASTV), an Estonian company originally owned fully by the City of Tallinn, was privatized in 2001, leading to a 35.3 per cent shareholding by the Dutch joint-venture company United Utilities (Tallinn) BV (United Utilities). ASTV is active in the management of local water supply and sewage in Tallinn. Particularly relevant to this dispute, ASTV’s management authority allowed it to set up water tariffs, and the determination of such tariffs is regulated under the privatization contracts that United Utilities entered into.
The government of Estonia took certain measures related to the determination of ASTV’s water tariffs, which, in ASTV and United Utilities’ understanding, affected existing arrangements in place and United Utilities’ investment in ASTV. Such measures included (i) the enactment of the Anti-Monopoly Bill (AMB), which effectively created a new mechanism and methodology to determine water tariffs; (ii) the rejection of ASTV’s application for a proposed tariff revision under the AMB; and (iii) a legal investigation by the Chancellor of Justice against ASTV. Challenging those measures as breaches of the BIT and claiming damages in the sum of ASTV’s lost revenue (totalling up to EUR 130 million), United Utilities and ASTV initiated ICISD arbitration as co-claimants against Estonia on October 15, 2014.
Tribunal determines that it had jurisdiction over the case
The tribunal concluded that it had jurisdiction over the claims, after dealing with the issues of (i) ASTV’s nationality and the alleged status of United Utilities as a shell company, (ii) the effect of an ongoing claim in the Estonian court (ratione voluntatis jurisdiction) and (iii) the compatibility of the BIT with EU law.
First, even though ASTV is an Estonian company, the tribunal has jurisdiction over its claims as it meets the “foreign control” element under ICSID Convention Article 25 and the “controlled, directly or indirectly” element under BIT Articles 1 and 9. Crucially, the tribunal found that at the relevant times—that is, before the dispute arose and at the time consent to arbitration was given—United Utilities exercised operational and strategic control over ASTV, despite a non-majority shareholding.
Further, the tribunal dismissed as irrelevant the allegation that United Utilities is merely a shell company controlled by an ultimate owner. It viewed that such an issue does not preclude the finding that United Utilities controls ASTV for the purpose of establishing jurisdiction.
Second, the tribunal deemed that an ongoing claim in the Estonian court related to the same facts did not impede its jurisdiction by virtue of ICSID Convention Article 26 (the ratione voluntatis or consent-based jurisdiction) because the legal issues at dispute were not substantially the same. It found that the tribunal would deal with issues of Estonia’s international obligations while the Estonian court was dealing with ASTV’s rights solely under Estonian law.
Third, the award joined other international investment tribunals that refuse to give up jurisdiction following the CJEU’s Achmea judgment, which found arbitration clauses in intra-EU BITs to be unlawful and incompatible with EU law. For the tribunal, this issue was not of a jus cogens nature that would permit automatic termination of a treaty, and thus the mechanics of treaty termination or suspension in VCLT Articles 30, 59 and 65 must be observed. The tribunal found that the elements of treaty termination or suspension in the VCLT were not met in the case, and therefore the BIT and the tribunal’s jurisdiction were not in jeopardy. In reaching its decision, the tribunal admitted and took into account an amicus curiae submission by the European Commission.
On merits, tribunal rejects breaches of FET standard regarding legitimate expectations, other FET and non-impairment standards and umbrella clause
First, the tribunal dealt with the issue of legitimate expectations under the FET obligation in BIT Article 3(1). In assessing the facts, the tribunal searched for specific commitments building up the legitimate expectations of United Utilities when ASTV was privatized and after its privatization.
The claimants primarily argued that when ASTV was privatized, they had a legitimate expectation that the water tariff set out in their privatization contracts would not be radically overturned. After analyzing the facts, the tribunal concluded that no specific commitment to the effect of the claimants’ argument had been made by Estonia (either by the City of Tallinn or the national government). In the tribunal’s view, post-privatization events bore little to no relevance to the arguments related to legitimate expectations.
Second, the tribunal assessed other claims under the FET and non-impairment standards under BIT Article 3(1). While rejecting Estonia’s attempt to use the police power doctrine as an affirmative defence to its FET obligation, the tribunal sided with the respondent in all other elements of its analysis. It held that the claimants failed to prove that Estonia breached due process in the rejection of ASTV’s tariff revision, in the development of the tariff calculation methodology in the AMB, or in the Chancellor of Justice’s investigation measures. It also noted that, even if there had been a breach of due process, the claimants did not suffer damage due to the investigation. The tribunal also affirmed that the negative publicity against ASTV due to issues on water tariffs could be attributed to Estonia, did not amount to any breach of international obligations and caused no damage to the claimants. It also decided not to look into the claim of unreasonable and discriminatory measures, deeming it redundant with other arguments brought by the claimants.
Finally, the tribunal rejected the claims of breach of the umbrella clause in BIT Article 3(4). It found that the primary issue in the case was not the non-performance of the privatization contracts, but the changes in Estonia’s legislative and regulatory framework affecting the privatization contracts, issues already dealt with in the previous parts of the merits analysis.
Decision and costs
Conclusively, by majority, the tribunal rejected all claims against Estonia. The arbitrator appointed by the claimants, David A. R. Williams, issued a dissenting opinion, disagreeing with the majority’s conclusion. He viewed that (i) the claimants had legitimate expectations, which Estonia breached in fundamentally altering the tariff calculation, and (ii) the facts presented should have been sufficient to conclude a breach of due process.
On costs, the tribunal decided that the claimants must reimburse Estonia (i) 25 per cent of its legal costs, fees and expense and (ii) 25 per cent of its expended portion of share of the advance on costs. The tribunal made such conclusion after mentioning that it has broad discretion on this matter, that other tribunals have followed the approach where the winning party should be awarded its costs (the “costs follow the event” approach) and that, overall, Estonia won on merits but lost in jurisdiction.
Notes: The tribunal was composed of Stephen L. Drymer (president, appointed by the co-arbitrators, Canadian national), David A. R. Williams (claimants’ appointee, New Zealand national) and Brigitte Stern (respondent’s appointee, French national). The award of June 21, 2019 is available at https://www.italaw.com/sites/default/files/case-documents/italaw10648.pdf. The dissent by David A. R. Williams is available at https://www.italaw.com/sites/default/files/case-documents/italaw10649.pdf.
Theodore M. Amarendra is an International Finance & Development Fellow at the Asian Infrastructure Investment Bank, based in Beijing. He holds an LL.M. in international legal studies from New York University School of Law.