In an award dated May 2, 2018, a tribunal constituted under the PCA<\/span> dismissed the claims by German renewable energy investors for breaches of full protection and security (FPS) and FET<\/span> under the ECT<\/span> and the 1992 Germany\u2013Czechoslovakia BIT<\/span>.<\/p>\n Entering into effect August 1, 2005, Czechia\u2019s Act 180\/2005 (Act on Promotion) was intended to promote the use of renewable energy systems and to increase the share of electricity produced from renewable energy sources. Pursuant to Section 6 of the act, Czechia provided investors with a maintained minimum rate of feed-in tariffs (FIT) for renewable energy sources for 15 years from the date of commissioning of such sources. The Czech Energy Regulatory Office (ERO) later amended this to 20 years.<\/p>\n Subsequent to this legislation, the ERO conducted presentations both overseas and within the Czech Republic guaranteeing the statutorily prescribed minimum prices for 15 (later 20) years.<\/p>\n In the ensuing years, the popularity of the program coupled with decreasing costs of photovoltaic (PV) production led Czech officials to fear an increase of electricity prices for households and industrial consumers. In response to this, on December 14, 2010, Czechia introduced Act 402\/2010, which effectively applied a solar levy of 26 per cent on FITs and 28 per cent on green bonuses. On January 1, 2011, Act 330\/2010 abolished all incentives related to PV plants with installed output exceeding 30 kWp commissioned after March 1, 2011.<\/p>\n On May 8, 2013, Antaris Solar GmbH and Michael G\u00f6de, together with eight other claimants, initiated arbitration against Czechia. They submitted that Czechia had breached its obligations under both the ECT and the BIT by reneging on its economic incentive arrangements originally intended to attract investors in PV power generation.<\/p>\n Czechia contended that the tribunal did not have jurisdiction over the claimants\u2019 ECT claims as the solar levy and subsequent amendments to the Act on Promotion were taxation measures under Czech law and, as such, excluded by way of the taxation carve-out contained in ECT Article 21.<\/p>\n In response, the claimants invoked VCLT<\/span> Article 31(1) in requiring the tribunal to read the amendments to the Act on Promotion in good faith and in the context of the ECT. In line with this reasoning, they asserted that the solar levy more fittingly characterized a deduction of the FIT than a tax, with its object and purpose being the offsetting of payments made from the state budget to the FIT.<\/p>\n In rejecting Czechia\u2019s assertion, the tribunal found it pertinent that the Czech Supreme Administrative Court, the Czech Constitutional Court and the Czech Ministry of Finance concluded that the solar levy was in essence a reduction of the FITs. The tribunal held that the ECT\u2019s Article 21 carve-out can only be invoked for tax measures whose principle objective is to raise state revenue, and not to reduce payable FITs.<\/p>\n Acknowledging the object and purpose of the ECT, Czechia contended that the treaty is not meant to grant a legal framework with immutability from future changes. Czechia argued that the continuance of FITs for the lifetime of the projects, the existence of a reasonable rate of return and the public purpose measures for which the amendments were made precluded Czechia\u2019s measures from being branded as unreasonable or disproportionate.<\/p>\n In response, the claimants asserted that the Act on Promotion contained an intrinsic promise of regulatory stability and that their subsequent investments were made on the premise of stability and of minimum FITs to be paid over 15 (later 20) years. In applying the three-part test elaborated in Micula<\/em> v. Romania<\/em><\/a>, <\/em>the frustration of the claimants\u2019 legitimate expectations occurred because (i) there was a specific promise of stability, (ii) the promise was essential to the claimants\u2019 investment and (iii) such reliance was reasonable.<\/p>\n Reflecting recent ECT tribunals calling for a balanced approach, the tribunal held that the ECT does not provide a free-standing obligation to accord a stable and predictable legal framework. The tribunal also did not accept the Charanne v. Spain<\/em><\/a> proposition that no legitimate expectations can arise in the absence of a specific commitment. The tribunal found it sufficient for an express or implied promise to give rise to a legitimate expectation.<\/p>\n The tribunal did not doubt that the main objective of the Act on Promotion was to establish a secure, stable and predictable regime. The ERO\u2019s plainly stated promise of guaranteed minimum FITs, along with statements from government officials, reinforced this recurring theme.<\/p>\n However, the tribunal criticized the claimants for being an \u201copportunistic investor\u201d (para. 431) that should have known that changes to the existing regime were imminent. The tribunal reiterated statements from the Czech Prime Minister, the Minister of Industry and Trade and the Minister of Environment along with press reports stressing the impending change in regulatory incentives and the political controversy surrounding Czechia\u2019s renewable energy scheme. Thus, according to the tribunal, the lack of due diligence precluded the claimants\u2019 complaint of impairment by arbitrary and unreasonable conduct.<\/p>\n Importantly, once again, when ascertaining the existence of legitimate expectations, the tribunal held that it \u201c[did] not accept that\u2026there is a free-standing obligation to provide a stable and predictable investment framework\u201d (para. 365). Nor did they accept Czechia\u2019s assertion requiring a specific stabilization arrangement for legitimate expectations to arise (para. 365). Yet, due to the public purpose of the measures in combating rising consumer costs and windfall investor profits, along with the claimants\u2019 own lack of due diligence, the majority dismissed the FET and impairment claims.<\/p>\n While Czechia prevailed on the merits, the tribunal decided that the claimants were to bear three-quarters of the arbitration costs, as they succeeded on the issue of the tax carve-out.<\/p>\n Closely following his dissenting opinion in Wirtgen v. Czechia<\/em><\/a>, <\/em>Born did not view due diligence as a condition to treaty-based protection under international law. According to Born, where due diligence comes into play is if it would have contradicted from the outset the claimants\u2019 initial understanding of the investment. In line with this, Born viewed the language of Section 6 of the Act on Promotion to be clear in its granting of a long-term guarantee of a specific minimum FIT that further due diligence would not have led the claimants to believe otherwise.<\/p>\n In addition, Born criticized the majority for failing to give effect to legitimate expectations arising out of the general regulatory framework. He repeatedly stressed the importance of the binding nature of legislation. According to Born, legislation is a both pragmatic and appropriate medium for the regulation of conduct in an economic system; to deny \u201cstates the power to make binding commitments to private parties, including investors, by way of legislative (or regulatory) guarantees\u201d would amount to an affront to the rule of law (dissenting opinion, para. 37).<\/p>\n Similar to Micula<\/em>, the singular matter of importance to Born was \u201cwhether the statements and actions of the state provide a sufficiently clear commitment regarding future treatment to give rise to legal rights or legitimate expectations on the part of an investor\u201d (dissenting opinion, para. 35). Due to the existence of a regulatory framework explicitly providing for economic stability, the dissenting opinion answered this in the affirmative.<\/p>\n Notes<\/em>: The tribunal was composed of Lawrence Antony Collins (president appointed by the co-arbitrators, British national), Gary Born (claimants\u2019 appointee, U.S. national) and Peter Tomka (respondent\u2019s appointee, Slovak national). The award is available in English at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw9809.pdf<\/a> and the dissenting opinion of Gary Born is available in English at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw9810.pdf<\/a><\/p>\n Joseph Paguio<\/strong> is a Canadian lawyer based in the Asian International Arbitration Centre in Kuala Lumpur, Malaysia. He holds an LL.M. in International Law from the University of Edinburgh.<\/p>\nBackground and claims<\/h3>\n
Tribunal rejects jurisdictional objection based on ECT taxation carve-out<\/h3>\n
Czechia did not act arbitrarily or without reason and did not frustrate legitimate expectations<\/h3>\n
Costs<\/h3>\n
Arbitrator Gary Born\u2019s dissenting opinion<\/h3>\n