Recent Developments in Investment Disputes: ICSID, The Energy Charter Treaty, Solar Industry and FSIA
Arbitration claims for breaches of the Energy Charter Treaty have emerged in the last couple of years, as certain countries have tried to reduce or place restrictions on financially favorable regulatory measures aimed at promoting renewable energy.
Two of those arbitration cases have recently come under the spotlight and I found that it would be interesting to provide you with a general description of those two cases.
Eskosol S.p.A. (Eskosol) is an Italian company that heavily invested in the photovoltaic industry in Italy when the country implemented a regulatory system of feed-in tariffs which guaranteed fixed payments to certain specific projects (including those of Eskosol).
The Italian government, however, later amended the feed-in tariffs system causing a significant reduction in the economic advantages enjoyed by Eskosol. The company then initiated arbitral proceedings against Italy for violation of the Energy Charter Treaty. The dispute was submitted to the International Centre for Settlement of Investment Disputes (ICSID) on the basis of the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings (the Arbitration Rules).
After Eskosol’s request for arbitration was registered, Italy filed an application to dismiss Eskosol’s claim pursuant to Rule 41(5) of the Arbitration Rules according to which “a party [to a dispute] may […] file an objection that a claim is manifestly without legal merit“. The arbitral tribunal, however, denied Italy’s request in a decision of 20 March 2017.
On 12 April 2017, the arbitral tribunal ruled on a second application by Italy requesting security for costs pursuant to Article 39(1) of the Arbitration Rules (which provides that “a party [to a dispute] may request that provisional measures for the preservation of its rights be recommended by the Tribunal“). In its application, Italy argued that there was a “material risk” that, in the scenario that Eskosol’s overall claim and action were denied, the company would not be in a position to comply with a costs award. Italy’s application was further substantiated by the fact that Eskosol had recently been declared bankrupt.
In its decision of 12 April 2017, the arbitral tribunal interestingly found, as a threshold matter, that “[r]equests for measures regarding security for costs are […] not ipso facto beyond the scope of a tribunal’s powers” and that “nothing in the [ICSID Convention or the Arbitration Rules], addressing an ICSID tribunal’s authority to recommend provisional measures, suggests that this authority is limited only to certain types of measures, or alternatively stated, excludes certain types of measures“. In the case at hand, although the tribunal accepted that Eskosol’s bankruptcy made it unlikely that the company would be in a position to pay an eventual costs award directly from its own funds, the arbitral tribunal ruled that Italy had not demonstrated that a measure of security for costs was either necessary or urgent. The tribunal was also satisfied by the fact that Eskosol had contracted an insurance agreement with coverage of up to EUR 1,000,000, which rendered the risk of non-payment of costs very low. The tribunal ultimately denied Italy’s application for security for costs.
The case remains currently pending as to its merits.
In a second case, another ICSID tribunal concluded, on 4 May 2017, that Spain had violated the Energy Charter Treaty by also removing (in the aftermath of the global financial crisis) feed-in tariffs offered in the solar sector. This decision is interesting since it appears to contradict two previous decisions (i.e. Charanne and Construction Investments v. Spain and Isolux Netherlands, BV v. Kingdom of Spain) which had been rendered in Spain’s favour (although it must be noted that the facts of those two cases differ from those in Eiser).
Despite this potential contradiction, the award rendered in Eiser has recently been confirmed on an ex parte basis by the U.S. District Court for the Southern District of New York. Spain has, however, moved to vacate this order for violation of the Foreign Sovereign Immunities Act (FSIA). In this later proceeding, Spain argues essentially that Section 1650a of the FSIA prevents enforcement of an ICSID award though ex parte summary proceedings.
Although Spain’s motion is still pending, it would be interesting to see what will be the position of the court after the United States Court of Appeals for the Second Circuit has just recently found, in Mobil Cerro Negro Ltd e.a. v. Venezuela, that ICSID awards can only be enforced through the procedures set forth in the FSIA and not on the basis of summary ex parte proceedings (this case will be the topic of a later post).
So stay posted for further developments!