{"id":6647,"date":"2019-09-19T00:30:29","date_gmt":"2019-09-19T05:30:29","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=6647"},"modified":"2024-08-09T18:30:09","modified_gmt":"2024-08-09T16:30:09","slug":"in-yet-another-solar-energy-incentives-case-against-italy-ect-tribunal-applying-proportionality-test-finds-breach-of-legitimate-expectations-alessandra-mistura","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2019\/09\/19\/in-yet-another-solar-energy-incentives-case-against-italy-ect-tribunal-applying-proportionality-test-finds-breach-of-legitimate-expectations-alessandra-mistura\/","title":{"rendered":"In yet another solar energy incentives case against Italy, ECT tribunal applying proportionality test finds breach of legitimate expectations"},"content":{"rendered":"\r\n

CEF Energia B.V. v. The Italian Republic, SCC<\/span> Arbitration V (2015\/158)<\/h2>\r\n

On January 16, 2019, a tribunal constituted under the ECT<\/span> issued its award in CEF Energia B.V. v. Italy<\/em>, partially upholding the investor\u2019s claims in connection with its investment in the photovoltaic sector in Italy. This adds to the long series of cases arising out of Italy\u2019s reform of its scheme of incentive tariffs for solar energy (see, for example, Blusun v. Italy<\/a><\/u><\/em> and Greentech v. Italy<\/a><\/u><\/em>).\u00a0<\/p>\r\n

Background of the dispute<\/h3>\r\n

Between 2010 and 2012, CEF, a company constituted under the laws of the Netherlands, acquired shares in three Italian companies: Megasol, Phenix and Enersol. Following the acquisition, Megasol and Phenix applied for the incentive tariffs established under Italy\u2019s so-called Conto Energia decrees, enacted to implement Legislative Decree No. 387\/2003. As for Enersol, at the time of the acquisition it had already been granted the incentives through a specific contract with the relevant Italian administrative entity. Eventually, Megasol and Phenix also obtained the incentives.<\/p>\r\n

In 2015, CEF commenced arbitration against Italy, challenging several measures that directly or indirectly amended the incentive tariffs scheme. Such measures included the Spalmaincentivi <\/em>decree, which reduced the incentives\u2019 amount; the administrative fees associated with the payment of the incentives; the imbalance costs scheme; and fiscal measures such as the \u201cRobin Hood\u201d tax and other immovable property taxes. CEF asserted that such measures breached the FET<\/span> standard, the umbrella clause, the obligation to provide a transparent legal framework and the obligation not to unreasonably impair the investment under ECT Article 10.<\/p>\r\n

Tribunal rejects intra-EU<\/span> jurisdictional objection<\/h3>\r\n

As a preliminary matter, the tribunal dismissed Italy\u2019s objection that it lacked jurisdiction to hear the case because the ECT does not cover intra-EU disputes. The tribunal noted that there is no implicit or explicit carve-out in the ECT for intra-EU disputes and that this finding has not been altered by either the enactment of subsequent EU fundamental treaties or the CJEU<\/span>\u2019s decision in <\/a>Achmea<\/a><\/em><\/u>. The tribunal held that Achmea <\/em>was \u201cof limited application\u201d (para. 97) as it concerned exclusively the ISDS<\/span> clause in the relevant BIT<\/span>, rather than the compatibility of the whole ISDS system with EU law.<\/p>\r\n

Tribunal limits the scope of CEF\u2019s FET claim<\/h3>\r\n

On the merits, the tribunal first stated that only those investors\u2019 expectations that existed when the investment was made fell under the FET standard. With respect to both Megasol and Phenix, the tribunal noted that when the investment was made they still had a number of conditions to satisfy before being granted the incentives, and that CEF could not have any expectations on the success of their applications. On the contrary, the tribunal pointed out that Enersol had already been granted the desired incentive tariffs at the time of CEF\u2019s investment. Thus, according to the tribunal, the investor had legitimate expectations with respect to the payment of incentives only to Enersol, but not to Megasol or Phenix.<\/p>\r\n

The tribunal also held that the complaints arising from administrative fees, imbalance costs, the Robin Hood tax and immovable property taxes all fell under the tax carve-out provided under ECT Article 21. In determining what constituted a \u201ctaxation measure\u201d for the purpose of ECT Article 21, the tribunal granted a high level of deference to the broad definition provided by the Italian Constitutional Court.<\/p>\r\n

Thus, the tribunal narrowed down CEF\u2019s FET claim to the breach of legitimate expectations caused by the enactment of the Spalmaincentivi <\/em>with respect to CEF\u2019s investment in Enersol.<\/p>\r\n

Through due diligence and proportionality, tribunal finds breach of legitimate expectations<\/h3>\r\n

In determining whether Italy breached CEF\u2019s legitimate expectations, the tribunal adopted a two-step approach. As a first step, the tribunal investigated the origin and scope of CEF\u2019s legitimate expectations and whether CEF reasonably relied on them. The tribunal noted that CEF\u2019s expectations were both precise in their origin from explicit acts of Italy, and specific as to what Enersol was to receive by way of incentive and for how many years.<\/p>\r\n

As for reliance on such expectations, the tribunal examined CEF\u2019s due diligence in the performance of its investment. In particular, Italy argued that a due diligence report prepared by CEF\u2019s legal counsel warned CEF of the risk of enactment of retroactive laws that would have amended the energy sector incentive program. Thus, CEF could not reasonably rely upon the expectations on the stability of Italy\u2019s regulatory framework on solar energy incentive tariffs. CEF, however, rejected this argument, stating that the report made clear that the risk of retroactive changes was extremely low and concerned exclusively those companies that had not yet entered into an incentive contract, which was not Enersol\u2019s case. The tribunal supported CEF\u2019s argument, holding that it had indeed reasonably relied upon its legitimate expectations.<\/p>\r\n

As for the second step, the tribunal applied the proportionality criteria set out in El Paso v. Argentina<\/a><\/u><\/em> to determine whether CEF\u2019s legitimate expectations had been breached. In this context, the tribunal noted that there is an \u201cacceptable margin of change\u201d where the state can exercise its regulatory powers in the public interest and amend its regulatory framework without breaching investors\u2019 legitimate expectations. To determine whether such acceptable margin of change has been transgressed, the tribunal must carry out \u201ca balancing and weighing exercise\u201d between the claimant\u2019s expectations and the respondent\u2019s right to regulate.<\/p>\r\n

The tribunal observed that Italy\u2019s amendments to its regulatory framework were reasonable and pursued a public interest objective. It also stated that tribunals should grant sovereigns a high level of deference, which, however, is not absolute. Regulatory changes, the tribunal held, must be balanced against the respondent\u2019s specific commitments and freely assumed international obligations vis-\u00e0-vis the investor. In the event of higher \u201clevel of engagement\u201d between the state and the investor, as in the case at stake, less deference should be attributed to acts that, even if reasonable, end up breaching investors\u2019 expectations.<\/p>\r\n

Thus, the majority concluded that the Spalmaincentivi<\/em> breached ECT Article 10(1) in respect of CEF\u2019s legitimate expectations on its investment in Enersol<\/em>. Arbitrator Giorgio Sacerdoti dissented, stating that the balancing and weighing exercise should have led the tribunal to reach the opposite conclusion. In particular, he noted how the findings of the due diligence report on the possibility of unilateral amendment, the reasonableness of Italy\u2019s regulatory changes, the transparent way in which they were adopted and the existence of a legitimate public interest all led to the conclusion that CEF could not reasonably rely on its legitimate expectations.<\/p>\r\n

Remaining claims dismissed on the merits<\/h3>\r\n

The tribunal dismissed the umbrella clause claim, which rested on the allegation that Italy had breached the incentive contracts with respect to all three of CEF\u2019s investments. The tribunal gave great deference to the contracts\u2019 qualification as \u201caccessory contracts to public measures\u201d under Italian law, which entailed the respondent\u2019s power to unilaterally amend them. Since the obligations under the umbrella clause must be discharged in accordance with the law applicable to them, and since Italian law provided for unilateral amendment, the tribunal ruled that Italy did not breach the obligations owed to CEF under the umbrella clause.<\/p>\r\n

Lastly, the tribunal dismissed the claims of failure to provide a transparent legal framework and of unreasonable impairment, having already determined that Italy\u2019s regulatory measures were reasonable.<\/p>\r\n

Based on the above, Italy was ordered to pay CEF EUR 9.6 million in damages, plus compound interest until the date of payment of the award at an annual rate of LIBOR+2 per cent, as well as EUR 1 million as a share of CEF\u2019s costs and legal fees.<\/p>\r\n

Notes<\/em>: The tribunal was composed of Klaus Reichert (president appointed by the disputing parties, German and Irish national), Klaus Sachs (claimant\u2019s appointee, German national) and Giorgio Sacerdoti (respondent\u2019s appointee, Italian national). The award is available at https:\/\/www.italaw.com\/cases\/7364<\/a>.<\/u> The award is currently being challenged before Swedish Courts, which have stayed execution until further notice.<\/p>\r\n

Alessandra Mistura<\/strong> is a Ph.D. Candidate in International Law at the Graduate Institute of Geneva.<\/p>\r\n