In our Solar Wars articles published on 9, 10 and 26 January 2018, we considered the 2016 and 2017 arbitral awards in respect of investors’ claims under the Energy Charter Treaty (ECT) arising out of the curtailment of renewable incentive schemes across Europe; as well as the European Commission’s (EC) comments on those claims. Like some sort of sci-fi epic producing numerous sequels, another chapter in this story was written last week with reports emerging of an award against Spain in the case of Novenergia v Spain (SCC Case No. V2015/063); and reports that Spain is seeking to remove an arbitrator sitting on some of the remaining claims which it faces.
Legitimate expectation: a significant hurdle for investors
There is no precedent in international arbitration and so it is difficult to identify a constant thread in the Charanne, Eiser and Isolux awards. However, all those awards seem to accept that fair and equitable treatment protections such as that in Article 10(1) ECT do not prevent a state from amending its regulatory regime, unless (i) it has given specific assurances to keep that regime in place for the lifetime of the investment (such as a contractual ‘stablisation clauses’); and/or (ii) such changes are disproportionate to the aim of the legislative changes, and fail to take due regard to investors’ ‘legitimate expectations’ (reasonable reliance interests), formed before such reforms were mooted.
The only award in favour of an investor was Eiser. In that case, the tribunal held that the claimants were entitled to expect that Spain would not revise the regulatory regime upon which their investments were based so that all value in them was lost; and that Spain’s 2013/14 amendments to the regime were a “total and unreasonable change”, which implemented an entirely new regime based upon assumptions different to those provided for in the 2007 legislation. The claim succeeded on that basis, although that award is now being challenged by Spain.
Novenergia v Spain
It is reported that the tribunal in the Novenergia v Spain case ordered Spain to pay €53 million to Novenergia, a Luxembourg investment fund which had invested in photovoltaic plants in Spain. The award is significant for the following reasons:
- The tribunal confirmed that Article 10(1) ECT does not create an independent obligation to provide stable investment conditions. The key question is whether the investor has legitimate expectations of stability.
- Contrary to Charanne, the tribunal held that such expectations “arise naturally from undertakings and assurances” given by the state. These do not need to be specific undertakings and/or contractual stabilisation clauses – state conduct or statements which objectively create such expectations (irrespective of whether the state intended to create them) are sufficient.
- Novenergia was entitled to form legitimate expectations as to the 2007 Special Regime regime based on statements by officials to Spain’s Congress of Deputies, as well as Spain’s marketing documents which, the tribunal said, constituted “bait”.
- As in Eiser, the tribunal held that Spain’s 2013/2014 reforms, which replaced the Special Regime with a new regime guaranteeing only a ‘reasonable rate of return’, were a “radical and unexpected” departure from the 2007 regime. At the time of its investment decision, Novenergia had a legitimate expectation that the Special Regime would remain relatively stable.
- The tribunal found that Novenergia’s investments had not been destroyed by the 2013 reforms, and in fact they were achieving a reasonable rate of return. However, going further than Esier, the tribunal held that it was sufficient for the claim to succeed that Novenergia could show “quantifiable prejudice” compared with its position when it initially made its investment. The tribunal found that the 2013/14 reforms had a “significant damaging economic effect” on Novenergia’s plants, decreasing revenues by 24% – 32%.
If other tribunals follow this reasoning, it potentially makes the hurdle facing investors in the remaining claims somewhat easier than previously seemed the case.
A party to an arbitration can apply to have an arbitrator removed on the grounds that they are not independent or impartial, or that an institution-appointed arbitrator (usually the chairperson) is unsuitable or incapable. Such challenges can disrupt and delay the arbitral process, even if ill-founded.
Before the award in Novenergia, Spain raised concerns about the chairman’s suitability because he was not fluent in Spanish, although no challenge was ultimately made. However, it was reported last week that Spain has applied to disqualify a US arbitrator from two other tribunals hearing claims relating to the reform of its solar regime. The grounds for the challenges are not known, but they were made after the same arbitrator issued a dissenting opinion from an award dismissing an ECT claim against the Czech Republic relating to that country’s reform of its renewables sector. In that opinion, the arbitrator accepted arguments similar to those which succeeded in the Novenergia case, i.e. that a claim based upon legitimate expectation can succeed even where the state has not provided express assurances as to the preservation/stability of the regulatory regime.
The saga continues…
Novenergia is likely to give other claimants against Spain new hope. With around 30 ECT claims against Spain alone still to be resolved, and the EC having demanded that Spain not pay the Eiser award (which will almost certainly apply to the Novenergia award as well), there is no end in sight to this continuing saga. Watch this space…