Masdar Solar & Wind Cooperatief UA v Kingdom of Spain, ICSID case analysis

In late 1990s European Union decided for the Member States to start actively promoting electricity production from renewable energy sources. In response to which Spain, similarly to other European Countries, started to pass Royal Decrees, which were supporting new investments in renewable energy, such as, wind, solar and waste. To provide reasonable rates of return to the investors in the renewable energy sources, the new Royal Decrees provided grants, tax deductions and loan guarantees, which eventually attracted billions of euros from foreign investors. Arguably, one of the most attractive benefits for the investors was the offer of feed-in tariffs, which, based on the quantity of produced electricity, permitted to sell electricity at higher rates for the first 25 years and at reduced rates thereafter.

Following the global financial crisis in 2008, Spain facing financial difficulties, began to reduce support provided to the renewable energy sector. By 2012, the previously provided benefits in this sector of renewable energy were almost eliminated and in 2013 Spain carried out a complete electricity market reform, which also introduced a new tax on power generation. The 2013 regime, especially in comparison with regime before 2008, generated much lower than expected revenue for all renewable energy investors.

Consequently, many investors submitted arbitration claims against Spain under the Electricity Charter Treaty (ECT), which in general provides a wide range of protection provisions to foreign investors, including, fair and equitable treatment, most-favoured-nation, constant protection and security, the prohibition against expropriation and compensation of losses. The ECT provisions that were used as the fundament of these arbitration claims mainly focused on two provisions: the requirement of fair and equitable treatment and the prohibition of expropriation.

By the middle of 2016 the International Centre for Settlement of Investment Disputes (ICSID) had received more than 20 arbitration claims against Spain, to name few: Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1; Eiser Infrastructure Ltd. and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No. ARB/13/36; Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v Kingdom of Spain, ICSID Case No. ARB/13/31.

Besides ICSID arbitration, there were cases being filed under the United Nations Commission on International Trade Law (UNCITRAL) and the Stockholm Chamber of Commerce (SCC) rules, these were, PV Investors v Spain, UNCITRAL, 2011; Charanne and Construction Investments et al. v Spain, SCC, 2013; CSP Equity Investment S.a.r.l. v Spain, SCC, 2013.

The case in the question: Masdar Solar & Wind Cooperatief U.A. (the Claimant), similarly as other cases against Kingdom of Spain (the Respondent), considering above described situation, submitted their claim under ICSID, based on the ECT Article 10(1), which is fair and equitable treatment provision. Initially, the Claimant, as the base of the claim, also mentioned the ECT Article 13, which is expropriation provision, but eventually, in the Memorial, the Claimant confirmed not to maintain the claim in this part.

From the factual summary of the claim, the Claimant in 2008, made a foreign direct investment, as a company based in Netherland, acquired a significant amount of the ownership of a company in another foreign country. In this situation, the Netherlands based Masdar Solar & Wind Cooperatief U.A. acquired 40% of the ownership of the Spain based company: Torresol Energy Investments S.A. Soon after this acquisition the above described changes started to take place. The Claimant when making a decision upon the investment in 2007, made extensive research and calculated the potential future return on the investment, based on that time regime in the state sector of renewable energy, taking also into consideration potential foreseeable future changes, which were promised by the state. The changes that followed in the sector made by the state were unexpected, as they were not what was promised by the regime when the investment was made. Such changes in the sector drastically changed the potential of the investment revenue putting the investment at high risk.

In the claim, the Respondent called upon ICSID Article 41, related to the competence and jurisdiction of the Tribunal, additionally stating that ‘the Tribunal has no jurisdiction over the Claimant’s claims’.

Respondent contested jurisdiction for the Tribunal to hear the claim, stating that the ECT and ICSID regulations are not applicable based on the following: the claim should be treated as dispute between two countries, namely Abu Dhabi and Spain; the claimant has no ‘investment’ in Spain; the claimant did not have, based on the translation – required, business activities in the Netherlands; the claim is related to the taxation; the dispute is an intra-EU dispute and EU Law has ‘primacy’. Following extended analysis of regulations and case law, the Tribunal ‘declined to uphold any of the jurisdictional objections raised by Respondent’.

The key legal issues, in this case, were centred on the question if the Royal Decrees passed by the Respondent, which changed the renewable energy benefit regime, breached the ECT for fair and equitable treatment? The Claimant in the claim mentioned frustration of legitimate expectations, non-transparency in the conduct, usage of unreasonable and disproportionate measures and failure to provide a stable framework, which all contradicts the ECT Article 10(1), additionally was mentioned breach of non-impairment standard and the ‘umbrella clause’.

From an investor point of view, fair and equitable treatment provision in ECT is arguably the most frequently used base in disputes against states. This provision provides the following protection to an investor: the state must act in a transparent way, in good faith, be fair, just and non-discriminatory, and respect due process and procedural propriety.

The Respondent based its defence on the following arguments: the nature of energy system into which the investment was made, the remuneration regime, the impact of the global financial crisis, the economic stability of the state and correction of excess remuneration and the assessment of the measures taken.

The Tribunal when determining liability summed together legal practice, other similar case law, current legislation, as well as facts and arguments provided by both parties. The Tribunal confirmed that any state is unquestionably able to amend its legislation, to adapt to ever-changing legal and economic challenges, which should be regarded as acting in the public interests. It was made clear that no investor can reasonably expect that circumstances taken in to consideration, at the time of the investment, will remain without any changes, therefore, the investor must make thorough due diligent, which would also be based on a research of current laws of the state, which was unarguably done by the Claimant in this case. It could not have been reasonably expected from the Claimant to foresee potential drastic changes in the regime in the sector, because the Responded for many years before the investment was continuously acting in the way that was most reassuring to make the investment.

The tribunal in its analysis also mentioned a case which was decided upon just before the case in question, where due to the same circumstances an investor claimed compensation due to drastic changes in the regulation: Eiser Infrastructure Ltd. and Energia Solar Luxembourg S.a.r.l. v Kingdom of Spain, ICSID Case No. ARB/13/36. This case was also based on ECT and the Tribunal decided in favour of the investor.

Following thorough analysis of circumstances of the case, which were put forward by both parties, the Tribunal concluded that the Claimant had legitimate expectations that the benefits granted by the regime prior to 2008 would remain unaltered and, therefore, found that the Respondent was in the breach of the fair and equitable treatment obligations required by the ECT Article 10(1).

The Tribunal on 16 May 2018 declared that the Responded must pay the Claimant damages calculated at 64.5 million euro, pay the interest on the awarded sum starting from case submit date of 20 June 2014 and that both parties will bear own legal and other expenses.

The impact of this decision on international investment law together with other similar cases, where the award was in favour of the investor, namely: Eiser Infrastructure Ltd. and Energia Solar Luxembourg S.a.r.l., in my opinion, is that any European government when making changes in legislation will bear in mind potential cases and possible consequences, provided by these cases. European governments, by taking into consideration such cases, to avoid potential claims should be making regulatory changes slowly step-by-step and not as drastically as the Respondent in this case did, and, when making drastic changes to a sector regime, continue providing the benefits to already active investors and impact only newcomers.

Thank you.