2023 Update: States increasingly refuse to pay Investor-State Dispute Settlement awards

Introduction: Resolution of Tax Disputes under Tax Treaties and/or Investment Treaties

Herreveld Van den Hurk & Partners (www.hhp.law) is small boutique advisory firm with an interdisciplinary team of top specialists in tax strategies, tax controversies and risks in international and European taxation. These specialists have a focus on direct and indirect taxation, on international law and investment treaties, and on formal law (as attorneys-at-law).?

Expertise on both international taxation and investment treaties is a logical combination for tax dispute resolution. Often, claims of foreign direct investors against a State under an investment treaty concern the behavior by its tax authority that conflicts with its substantive obligations under the investment treaty, such as the requirement of fair-and-equitable treatment and full compensation in case of (in)direct expropriation.? Foreign direct investors can also pursue tax dispute resolution options under national legislation or double taxation agreements. A good understanding of all available options is particularly important for consultants, when providing a balanced advise to clients, who make cross-border investments and seek optimal protection of their investments from various forms of risk, including tax risks.?So, the team of HHP team is properly balanced, to be able to assist such clients and their regular legal and tax advisors, in this very respect.

For an overview of the Investor-State Dispute Settlement cases that are tax related, please read the UNCTAD publication: Investor-State Dispute Settlements (ISDS) 1987-2021: Tax-Related ISDS Cases

2023 Update: States, increasingly, refuse to pay Investor-State Dispute Settlement Awards

Prof. Dr. Nikos Lavranos LL.M., partner of HHP Law, has recently released the 2023 edition (full version) of the “Report on compliance with investment treaty awards by States” and this HHP newsletter provides a summary of that release.?

In light of the termination of intra-EU international investment agreements (IIAs), the failure to approve the modernized Energy Charter Treaty (ECT) by the EU and its member states as well as the ongoing discussions of reforming the Investor-State Dispute Settlement (ISDS) mechanism, in particular within UNCITRAL Working Group III, this Report takes stock of the track record of States’ compliance with adverse ISDS awards compared to the first report published in October 2022.?

Whereas the discussion usually focuses on whether IIAs and ISDS contained in them are pro-investor biased and thus should be reformed or even completely removed as has been the case within the EU, the question to what extent States actually comply with their international obligations and pay awards rendered against them is hardly discussed.

The research for this updated Report covers the developments from October 2022 until July 2023 and is based on publicly available sources (free sources as well as behind paywalls). The research compiled the known investment treaty arbitration disputes regarding the top twenty countries which have faced most of such disputes. Subsequently, the research collected available information regarding the outcome of those disputes, focusing in particular on the question whether or not the States have complied with those awards by paying the amount of compensation.

More specifically, the following four broad classifications were used to classify the status and outcome of the cases:

• State prevailed = Tribunal declined jurisdiction, dismissed the case or otherwise discontinued the arbitration proceedings.
• Unpaid by State = covers all the situations in which Respondent refuses to pay a final and binding adverse award by initiating annulment, setting aside procedures or using other procedures which lead to delay of payment or even non-payment of the award.
• Pending = covers the situations of arbitral procedures which are still pending at the international level as well as enforcement procedures at the domestic level.
• Otherwise resolved = covers settlement agreements and similar situations which have led to the termination of the arbitral procedure prior to rendering a final award

Compared to the 2022 results, the Report reveals the following notable developments.

Key Trends in State Compliance with Investor-State Treaty Arbitration Awards

First, the Report underscores again the high number of EU member states, in particular Spain, Czech Republic, Poland, Romania, Hungary, Croatia, Slovakia, Italy, Bulgaria, Germany and the Netherlands, which have faced and continue to face multiple IIA and ECT disputes in the past years.

Second, both the number of unpaid awards as well as the outstanding amount of compensation have almost doubled from the previous year. Accordingly, the number of Spain’s unpaid awards has risen from 8 to 15, while the outstanding amount of compensation has doubled from at least USD 700 million to at least USD 1.3 billion. In addition, Spain has incurred interest rates and legal fees totalling USD 270 million. The Report reveals that Spain has been facing more than 50 intra-EU ECT claims resulting in damages claims totalling more than USD 10 billion so far.

In terms of adverse ECT awards, Spain tops the ranking followed by Italy and Romania, which have 14 and 8 unpaid adverse awards outstanding, respectively.

Indeed, adverse ECT awards continue to be rendered against Spain, such as Sevilla Beheer B.V. and others v. Spain (ICSID Case No. ARB/16/27) award issued on 22 May 2023, INFRACAPITAL v. Spain (ICSID Case No. ARB/16/18) award issued on 2 May 2023, Triodos v. Spain (SCC Case No. 2017-194) award issued on 24 October 2022. Moreover, annulment decisions have been issued which confirmed adverse awards against Spain, for example, Opera fund v. Spain (ICSID Case No. ARB/15/36) Decision on Annulment of 2 March 2023, Watkins v. Spain (ICSID Case No ARB/15/44) Decision of Annulment of 21 February 2023.

Third, this Report confirms again the fact that the overwhelming majority of intra-EU IIA/ECT disputes in fact concern renewable energy sources. This finding thus debunks the often-heard argument that the ECT is actually protecting fossil fuels.

Fourth, the Report reveals a new emerging trend, namely, that enforcement of intra-EU ECT awards is increasingly sought outside the EU. Indeed, Australia and the UK have emerged as new preferred investor-friendly jurisdictions for the successful recognition and enforcement of intra-EU IIA/ECT awards – next to the US which has traditionally been a preferred jurisdiction. For example, in April 2023, the High Court of Australia in Spain v. Infrastructure Services Luxembourg SàRL held that Spain had waived its foreign State immunity in Australia by ratifying the ICSID Convention. Consequently, Spain lost its foreign State immunity. Accordingly, the High Court confirmed that courts were able to 'recognise' and 'enforce', but not 'execute', the EUR 101 million ICSID award against Spain.

Previously, in 2020, the Federal Court of Australia also enforced the Eiser Infrastructure Ltd v. Spain intra-EU ECT award of EUR 128 million. In May 2023, in a similar case before the UK High Court, his Honour Justice Fraser supported the conclusion reached by the Australian High Court. Most recently, the UK High Court has ruled that the Antin v. Spain award holders are entitled to seize Spanish property in London in order to enforce their EUR 120 million ICSID ECT award against Spain.

Similarly, in 2020, the UK Supreme Court enforced the USD 250 million intra-EU IIA Micula v. Romania award.

Given the recent decisions by the German Federal Supreme Court in RWE/UNIPER and Mainstream, which deprived claimants of their right to compensation when it ruled that EU member states are allowed to use “upstream national legal protection” to effectively stop intra-EU ECT ICSID proceedings due to a lack of an effective arbitration agreement, recognition and enforcement of intra-EU IIA/ECT awards will increasingly be sought outside the EU.

The author of this newsletter, Prof. Dr. Nikos Lavranos LL.M., is an internationally recognized expert in investment law and arbitration, who has expertise in advising, litigating and negotiating in investment treaty disputes. He combines his experience as arbitrator, mediator, legal consultant, academic,? former Dutch policy maker, and chief negotiator for Bilateral Investment Treaties. He has been engaged in investment treaty arbitrations regarding particular Dutch BITs as well as the Energy Charter Treaty. He is Secretary General of the European Federation for Investment Law and Arbitration (www.efila.org), a non-profit think-tank based in Brussels.

Furthermore, Prof. Dr. Nikos Lavranos LL.M. is a visiting professor international investment law and climate change at the Vienna University. In teaching this course, he highlights the increasing risks for investors and their investments in the light of increasing climate change legislation and litigation. Effectively, every day new requirements are imposed by international, EU and domestic legislation, such as CBAM, ESG, CSR, and sustainability reporting requirements on companies. Consequently, CEOs and board members are increasingly exposed to such litigation risks and must mitigate them by scaling up their due diligence analysis for each and every investment decision. This means CEOs and board members must be up to speed with all these developments. HHP Law can offer a tailored-made advice to the C-level.

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Mr. Hilmar Nierop LL.M., partner of HHP, is happy to discuss with you any needs or ideas on international taxation and tax strategies, controversies and risks. You can reach him [email protected].

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