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The initially alluring and subsequently vehemently amended incentives for investments in renewable
energy projects across Europe have given rise to a significant number of arbitration claims brought on
basis of the Energy Charter Treaty (ECT)1 and various BITs. Currently there are tens of pending
investment treaty arbitrations with respect to renewable energy projects in Spain, Italy, Czech Republic,
. A number of awards have already been rendered.2
The common element in these cases was that companies invested in renewable energy projects across
Europe; the investments were the result of commitments made by the governments to provide
lucrative incentives amounts for the energy so created. The regulatory regime of these states provided
for these payments but after the projects began, the states amended their regulatory regimes to
substantially reduce the tariffs paid for energy. The tension in these cases was the result of the clash of
the following:
1. A state is entitled to sovereign policy as to its legislative incentives. Thus, a policy can be
changed by the government if it so desires;
2. However, this could be overridden if the investor holds legitimate expectations.
3. If the tariffs are reduced such that the project is no longer viable, that may be a form of indirect
expropriation.
(a) 3 cases that found that the change in regulatory regime was within the powers of the host state
and that there was not sufficient legitimate expectation created by the state such that it would
be considered unfair to the investor;
(b) cases found in favour of the investor.
Cases that found in favour of the state on basis that State had right to change the incentives on basis
of sovereign right
In Charanne, the tribunal concluded that the power of the state to change the regime could be
overridden if the investor holds legitimate expectations. These can be generated by a specific
commitment towards the investor (para. 490 of the award). The tribunal did not find that there is such a
1
http://www.ena.lt/pdfai/Treaty.pdf
2
http://arbitrationblog.kluwerarbitration.com/2018/03/22/legitimate-expectations-renewable-energy-treaty-
arbitrations-lessons-far/
3
Charanne B.V., Construction Investments S.A.R.L. v Spain, SCC Arbitration No.: 062/2012
4
Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italy, ICSID Case No. ARB/14/3
5
Jürgen Wirtgen, Stefan Wirtgen, Gisela Wirtgen, JSW Solar (zwei) GmbH & Co. KG v. The Czech Republic
(“Wirtgen”) PCA Case No. 2014-03
IN Wirtgen, the tribunal followed the argument that a state is entitled to make regulatory amendments
and there can be a violation only if legitimate expectations generated by specific commitments are
affected (para. 436-437 of the award). The tribunal, however, held that the guarantees of return to
investors as the groundwork of the renewable energy promotion regime had been left intact. If an
investor would continue to receive a level of revenue through the FIT system that ensures a 15 year
payback of capital expenses and a return on investment of at least 7% per year over a period of 15 (later
20) years, there should not be a breach.
In Blusun, the tribunal said that ECT, demanded stability and predictability not only at the initial time of
investment but also throughout its operation. Any amendments, although within a state’s margin of
appreciation, should be proportionate to a legislative aim. It is not only what is the substance of the
regulatory changes but also what is their manner. The only carve-out is when there is a specific
commitment and the investor has placed reliance on it (para. 373 of the award).
Cases that found in favour of investor on legitimate expectations and fair and equitable treatment
standard
The 2 cases that found in favour of the investor were Eiser v Spain6 and Novenergia v Spain7 so we will
look at them in some detail
The tribunal in Eiser reiterated that a state has full regulatory powers but on the other hand, this should
not abrogate its fair and equitable treatment obligations towards investors (para. 362 of the award).
Therefore, if any changes are made, these should not be of a manner that does not take account of the
circumstances of existing investments made in reliance on the prior regime. The ECT was found to
protect investors against total and unreasonable changes (para. 363 of the award). Although changes
are allowed, fundamental stability of the essential characteristics of the legal regime relied upon by
investors in making long-term investments should be ensured by the host state and radical amendments
on key characteristics of the investment that were relied upon by the investors would constitute a
breach of the fair and equitable treatment standard (FET). In Eiser, the tribunal accepted that the
regulatory change was so radical and fundamental that it affected the financial fundamentals of the
investments made in Spain and “washed away” the benefits envisioned at the time of investment. This
qualified as a breach.
The tribunal in Novenergia noted the reasoning in Eiser and analysed whether Spain generated
legitimate expectation and whether subsequently Spain radically altered the essential characteristics of
its legislation in a manner that violates the FET standard (para. 656 of the award). The tribunal found
that the objective of Spanish legislation was to ensure achieving emissions and renewable targets under
EU law. Spain created, according to the tribunal, a very favourable investment climate for renewable
energy investors. The domestic legislation in force at the time of investment incorporated commitments
6
Eiser Infrastructure Limited and Energia Solar Luxembourg S.a.r.l. v Spain, ICSID Case No. ARB/13/36
7
Novenergia II-Energy & Environment (SCA) (Luxembourg), SICAR v. Spain, SCC Arbitration 2015/063
It is important for a foreign investor to understand the main concepts and conflicts in these cases:
1. All agreed that states have the sovereign right to make changes to the regulatory regime, as a
general principle.
2. All agreed that this right of the state may yield to the interests of the investor if there is a
legitimate expectation created by the state that the regulatory regime will remain constant.
3. However, the difference was between what constitutes the creation of a legitimate expectation.
In Novenergia, the tribunal concluded that the legislation in itself could create that legitimate
expectation in itself. In Charanne, for example, the tribunal looked at whether there was a
specific commitment towards the investor that the legislation would not be changed – in the
absence of such commitment, then the investor could not claim legitimate expectation of no
changes to the regime.
4. The dissenting opinion of Gary Born in the Wirtgen stated since Czech Republic had committed
itself and guaranteed a minimum of profit in the form of feed-in tariffs to the investors for a
fixed period of time, an investor who relied on this regulatory regime is entitled to expect that
the regime would not change. The dissenting opinion goes beyond what was said in the award
by the majority – that a level of profitability was guaranteed and hence if the level of profits is
ensured, there can be no breach. Instead, the entire regime is, in the view of Born, a
commitment guaranteed by the state and should not be amended.
5. The decisions also looked at whether there was a fundamental change in the regime such that
the economic fundamentals were seriously affected.
It is also appropriate to consider that the Art. 24 of the Charter provides the carve out rights, whereby
states can make changes to rules in order to protect human, animal or plant life or health. This is a
narrower carve-out than in most BITs which refer to such issues as health, safety, environment etc.
Note that these carve-outs do not allow the State leeway to make changes for purely financial reasons,
which seems to be the rationale for the changes in the energy regimes for Spain, Italy and Czech
Republic - it was too expensive.
In addition, the provisions of Art. 10 (1) of the ECT put an onus on states to maintain stability in regard
to energy projects; this is not the case in most BITs or FTAs.8 Thus, perhaps the decisions in favour of
the investors paid greater heed to the concepts contained in that Article.
8
Each Contracting Party shall, in accordance with the provisions of this
Treaty, encourage and create stable, equitable, favourable and transparent
Analysis Based upon Indirect Expropriation.
These cases can also analyzed on the basis of indirect expropriation. The question of what constitutes
indirect expropriation is a difficult one to answer, given the history and discrepancies between tribunal
decisions this issue. Direct expropriation is much easier to analyze since the asset of the investor is
transferred to the state. With indirect expropriation, the state has interfered with the property or
business in such a way as to cause it serious harm. The extremes range on the one side to tribunals who
will refuse to find indirect expropriation provided that the investor still owns the asset, regardless of the
extent to which it has been neutralized financially. As long as the asset ownership remains, there is no
indirect expropriation. This obviously conflates indirect with direct expropriation. For example, the
arbitral tribunal in Nykomb v. Latvia9 found that the loss of the economic value of the investment did
not, by itself, constitute expropriation, because the state did not take possession of the enterprise or its
assets, or interfere with the shareholders’ rights or management control. 10
On the other end of the spectrum are other tribunals that find indirect expropriation provided that the
state has imposed regulations that take away the operating licence for the business or has caused such
economic harm that it can no longer operating profitably. The degree of profitability is often at issue
with tribunal decisions as to when the reduction in profitability results in indirect expropriation.
Thus, the question is whether licence cancellation and reducing the rates for renewable energy are
really just different forms of indirect expropriation. There is no generally accepted and clear definition of
the concept of indirect expropriation and what distinguishes it from non-compensable regulation,
although this question is of great significance to both investors and governments.
Although the Charanne tribunal rejected the expropriation claim, it adopted the broader definition of
indirect expropriation applied by tribunals that addressed investors’ claims under NAFTA and BITs,
rather than the more narrow definition made in Nykomb. It therefore remains to be seen what
approach other arbitral tribunals will adopt when determining whether the reductions of a feed-in tariff
or, more broadly, the roll-back of the renewable energy investment incentive regimes, deprive investors
of the use and benefit of their investment to such an extent to constitute an indirect expropriation
under the ECT. As the Charanne award indicates, such decisions will likely examine closely the specific
facts and circumstances of each case. As with the question of whether a state’s action constitutes a
breach of the FET obligation, these tribunals are also likely to balance protection of investors’
expectations with the state’s right to change the legal framework and pursue new policies.14
Similarly, in Blusun, the tribunal dismissed the claim that the actions of Italy constituted indirect
expropriation.15
The issue can be further refined as the determination of who is to pay the economic cost of attending to
the public interest involved in the measure in question. Is it to be the society as a whole, represented by
the state, or the owner of the affected property. 16 Often, it seems that the reality is that tribunals will
indirectly making this assessment when deciding whether to award damages for indirect expropriation
related to actions of the state. Should the population of the state bear the costs of this action by the
state, or is it more reasonable to put the cost on the investor by refusing to find indirect expropriation.
11
Charanne supra Note 3
12
Charanne, supra note 3 para. 461 (citing arbitral decisions).
13
Id. paras. 462-65.
14
For an article on more background on these cases see Investment Disputes Involving the Renewable Energy
Industry Under the Energy Charter Treaty, Paul Hastings LLP The Guide to Energy Arbitrations - Second Edition
2017.
15
Blusun, Note 4 supra. Section D of the decision.
16
R. Higgins “The Taking of Property by the State: Recent Developments in International Law” Recueil des Cours –
Académie de Droit International, 1982, Vol. 176 at 276-77