{"id":3552,"date":"2016-02-29T09:09:57","date_gmt":"2016-02-29T15:09:57","guid":{"rendered":"http:\/\/itn.mattrock.ca\/?p=3552"},"modified":"2024-08-09T18:26:39","modified_gmt":"2024-08-09T16:26:39","slug":"icsid-tribunal-dismisses-final-claim-for-compensation-in-relation-to-hungarys-2008-termination-of-power-purchase-agreement-electrabel-sa-v-republic-of-hungary-icsid-case-no-arb-07-1","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2016\/02\/29\/icsid-tribunal-dismisses-final-claim-for-compensation-in-relation-to-hungarys-2008-termination-of-power-purchase-agreement-electrabel-sa-v-republic-of-hungary-icsid-case-no-arb-07-1\/","title":{"rendered":"ICSID tribunal dismisses final claim for compensation in relation to Hungary\u2019s 2008 termination of power purchase agreement"},"content":{"rendered":"

Electrabel S.A. v. Republic of Hungary<\/em>, ICSID<\/span> Case No. ARB\/07\/1<\/em><\/h2>\n

A Belgian energy company\u2014Electrabel S.A. (Electrabel)\u2014has failed in its final claim under the Energy Charter Treaty (ECT<\/span>). An International Centre for Settlement of Investment Disputes (ICSID) tribunal has found no breach of the ECT\u2019s fair and equitable (FET<\/span>) treatment standard by Hungary.<\/p>\n

In 2012 the ICSID tribunal had issued a decision dismissing three minor claims and postponing the fourth, major claim for a second phase of proceedings. The 2015 award (Award) orders Electrabel to cover the fees of the arbitration.<\/p>\n

Background<\/em><\/h3>\n

In 1995 Dunamenti (operator of Hungary\u2019s largest power plant, then wholly-owned by Hungary) and MVM (Hungary\u2019s sole wholesale electricity buyer, 99.9 percent owned by Hungary) entered into a Power Purchase Agreement (PPA). Subsequent to the PPA, a group of foreign investors, including Electrabel, invested substantial funds in Dunamenti as shareholders.<\/p>\n

Hungary acceded to the European Union in 2004. Between December 2005 and June 2008, the European Commission conducted a formal investigation into unlawful state aid provided by Hungary under, among other instruments, the PPA. In June 2008, the European Commission issued a final decision in relation to the investigation (EC<\/span> Final Decision). In December 2008 Hungary terminated the PPA.<\/p>\n

In June 2007 Electrabel commenced the present arbitration in anticipation of the PPA\u2019s termination. In March 2009, on the initiative and agreement of the parties, the tribunal ordered a first phase of proceedings addressing only issues of jurisdiction and liability. This procedural order also contemplated a second phase of proceedings to address quantum issues. Of note, the European Commission intervened in the first phase of proceedings to argue that Electrabel\u2019s claims did not fall within the jurisdiction of an international arbitral tribunal, as they were understood to be exclusively covered by European law.<\/p>\n

At the end of November 2012, the tribunal issued its Decision on Jurisdiction, Applicable Law and Liability (2012 Decision). The tribunal found its own jurisdiction in relation to all of Electrabel\u2019s claims under the ECT. With regards to liability, the tribunal dismissed three minor claims brought by Electrabel and dismissed all grounds for liability under the claimant\u2019s fourth and final claim\u2014the PPA Termination Claim\u2014with one exception, namely, that Hungary had failed to provide FET in calculating costs incurred by Electrabel for the purpose of granting compensation.<\/p>\n

In early 2015, arbitration proceedings initiated by E.D.F. International in relation to a similar investment in Hungary resulted in an arbitration award. Electrabel and Hungary made short written submissions regarding the E.D.F. <\/em>award.<\/p>\n

The 2012 Decision: PPA Termination Claim<\/em><\/h3>\n

In the first stage of proceedings, the tribunal considered the PPA Termination Claim in relation to both ECT Article 13(1) (expropriation provision) and ECT Article 10(1) (FET provision). The tribunal found that there had been neither direct nor indirect expropriation of Electrabel\u2019s investment.<\/p>\n

In relation to Hungary\u2019s alleged failure to provide FET, the tribunal briskly dismissed Electrabel\u2019s claim in relation to events prior to the EC Final Decision. It found, rather, that Electrabel\u2019s claim turned primarily on results of the European Commission investigation. \u201cIn the Tribunal\u2019s view, that [EC] Final Decision required Hungary under EU<\/span> law to terminate Dunamenti\u2019s PPA, as explained below. The Tribunal also draws a distinction between the [EC] Final Decision in regard to recoverable State aid and Hungary\u2019s own scheme for calculating Stranded Costs (with Net Stranded Costs)\u201d (para. 6.70).<\/p>\n

In the Decision, the tribunal therefore concluded that Hungary could only be liable in the present arbitration under ECT Article 10(1) for its application of EU law in determining Electrabel\u2019s stranded costs for the purpose of compensation. While the methodology prescribed under EU law resulted in a range of values, Electrabel was disappointed to have been compensated the minimum amount under that methodology.<\/p>\n

The 2015 Award: Fair & Equitable Treatment (FET) in calculating Net Stranded Costs<\/em><\/h3>\n

In the Award the tribunal considered Hungary\u2019s implementation of the European Commission\u2019s methodology for calculating Net Stranded Costs to determine whether it violated ECT Article 10(1).<\/p>\n

The tribunal explained that both Stranded Costs and Net Stranded Costs are terms of art in EU law. In considering whether Hungary\u2019s calculation of Electrabel\u2019s Net Stranded Costs ran afoul of Hungary\u2019s obligations under ECT Article 10(1), the tribunal noted that it had already rejected, in the 2012 Decision, any allegation of discriminatory measures, and that Electrabel made no allegations regarding either lack of transparency or due process.<\/p>\n

Therefore, as put concisely by the tribunal, the principal issues arose in regard only to arbitrariness and frustrated legitimate expectations. In general it was Electrabel that bore the burden of proving its case under the ECT\u2019s FET standard.<\/p>\n

Absence of arbitrariness<\/em><\/h3>\n

In terms of Electrabel\u2019s claim of arbitrariness, the tribunal applied an objective test in the circumstances prevailing at the relevant time. The tribunal found itself in agreement with previous tribunals, such as Saluka<\/em>, AES<\/em>, and Micula<\/em>, in that a measure will not be arbitrary if it is reasonably related to a rational policy. And, following the AES<\/em> tribunal especially, this required two elements: the existence of a rational policy and the state acting reasonably in relation to that policy.<\/p>\n

The tribunal considered the following arguments by Electrabel, among others: first, Hungary\u2019s decision as to the level of compensation was driven by a desire to minimize the associated burden on the national budget; and second, Hungary had decided against compensation even before the extent of losses resulting from the PPA\u2019s termination could have been known.<\/p>\n

The tribunal noted that Hungary\u2019s scheme was not devised by the Hungarian Parliament for Dunamenti alone, but for an entire industrial sector. It also noted that these had been turbulent economic times, with Hungary\u2019s economy facing severe financial and fiscal constraints. Relevant negotiations were difficult and protracted. The tribunal observed that it would be all too easy, many years later with hindsight, to second-guess a state\u2019s decision and its effect on a single entity such as Dunamenti, when the state was required at the time to consider much wider interests in awkward circumstances, balancing different and competing factors. Further, even as regards only Dunamenti, Hungary sought to balance several appropriate considerations.<\/p>\n

Ultimately, the tribunal found that Electrabel had not proven that \u201cHungary\u2019s conduct was arbitrary or that there was no legitimate purpose for Hungary\u2019s conduct or that Hungary\u2019s conduct bore no reasonable relationship to that purpose or was, in another word, disproportionate\u201d (para. 168).<\/p>\n

Lack of legitimate expectations <\/em><\/h3>\n

As regards legitimate expectations under the ECT\u2019s FET standard, the tribunal found no evidence that Hungary represented to Electrabel, at the times of its investments in Dunamenti, that it would ever act differently from the way that it eventually did act towards Dunamenti or Electrabel. And, in the absence of such a representation, the tribunal found that Electrabel\u2019s case on legitimate expectations could not succeed.<\/p>\n

The tribunal concluded that Electrabel\u2019s case appeared to rest upon purported representations concerning pricing arrangements. However, the statements in question did not amount to a representation (or assurance) that Dunamenti would be entitled to a reasonable profit or that Electrabel would be entitled to a reasonable return on its investment. Furthermore, in the tribunal\u2019s view, any such entitlement would have been inconsistent with the terms of the PPA: although in this case the place for such an entitlement would have been in the PPA from 1995 onwards, it was evident that, under the PPA, Dunamenti bore the risk of a change in the applicable law.<\/p>\n

Furthermore, the tribunal noted that \u201cthe application of the ECT\u2019s FET standard allows for a balancing exercise by the host State in appropriate circumstances. The host State is not required to elevate unconditionally the interests of the foreign investor above all other considerations in every circumstance. As was decided by the tribunals in Saluka v Czech Republic and Arif v Moldova<\/em>, an FET standard may legitimately involve a balancing or weighing exercise by the host State.\u201d (para. 165).<\/p>\n

Tribunal notes <\/em>E.D.F. award<\/em><\/h3>\n

The tribunal noted that it may be perceived as being at variance with the E.D.F.<\/em> tribunal. Although the tribunal had considered the parties\u2019 submissions on the E.D.F.<\/em> award, it found it inappropriate to further dissect the E.D.F.<\/em> award in search of evidence and arguments.<\/p>\n

The tribunal could not be \u201cinfluenced therefore by the result of a different arbitration, where an investor\u2019s claim appears to have been formulated differently and decided on different arguments and evidence\u201d (para. 225). The tribunal went on to note that the E.D.F.<\/em> award had also declined to compensate the investor for the maximum amount of Net Stranded Costs.<\/p>\n

Costs<\/em><\/h3>\n

The tribunal found that the parties should be responsible for their own legal costs and expenses. Electrabel, however, was required to cover the fees and expenses of the arbitrators as well as ICSID\u2019s administration fees.<\/p>\n

Notes: The tribunal is composed of V. V. Veeder, (President, British national), Gabrielle Kaufmann-Kohler (claimant\u2019s appointee, Swiss national), and Brigitte Stern (respondent\u2019s appointee, French national). The Award was dispatched to the parties on November 25, 2015 is available at http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw4495.pdf<\/a>.<\/p>\n

 <\/p>\n

<\/a>Matthew Levine<\/strong>\u00a0is a Canadian lawyer and a contributor to IISD<\/span>\u2019s Investment for Sustainable Development Program.<\/p>\n