Ad Hoc Committee denies Spain’s application for annulment, confirms EUR 30.8 million ICSID Award

In a Decision dated 20 March 2023, an ad hoc Committee constituted in accordance with Article 52(3) of the ICSID Convention rejected Spain’s Application for Annulment in its entirety. In doing so, the Committee ordered Spain to pay the Claimant’s costs in the sum of £627,637 for legal fees and £1,742.18 for disbursements. It also decided that Spain must bear the costs of the annulment proceedings in their entirety.

The award in question was rendered on 5 August 2020 in the arbitration proceedings between Hydro Energy 1 S.à r.l. and Hydroxana Sweden AB (the “Claimants”) and the Kingdom of Spain before the International Centre for Settlement of Investment Disputes (ICSID Case No. ARB/15/42). The ICSID Tribunal was composed of Lord Collins of Mapesbury (President), Professor Rolf Knieper and Mr. Peter Rees.

The dispute arose out of measures implemented by the Spanish government that altered the regulatory and economic regime applicable to hydroelectric energy producers , which had an allegedly negative impact on the Claimants' investments in various Spanish companies which together owned and operated 33 hydroelectric plants in Spain, with a total installed production capacity of 106,788 MW.

The dispute was submitted to the ICSID on the basis of the Energy Charter Treaty (the “ECT”) – which entered into force on 16 April 1998, for the Grand Duchy of Luxembourg, the Kingdom of Sweden and the Kingdom of Spain – and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966 (the “ICSID Convention”).

In the arbitration, the Claimants alleged that Spain breached its obligations pursuant to: (i) Article 13 of the ECT, by means of the indirect expropriation of their investment; and (ii) Article 10(1), by failing (a) to accord fair and equitable treatment, (b) to not impair, by unreasonable or discriminatory measures, the management, maintenance, use, enjoyment or disposal of the Claimants’ investment, and (c) to accord the most constant protection and security. The Claimants sought compensation for damage caused as a result of those violations.

On 9 March 2020, the Tribunal issued a Decision on Jurisdiction, Liability and Directions on Quantum. In it, the Tribunal dismissed the ECT Article 13(1) claim, and declared and directed that Spain might (or would) be in breach of ECT Article 10(1), if and to the extent that the remuneration of each of the plants in the Ondina and Xana portfolios failed to accord with a reasonable post tax rate of return in the small-hydro market in Spain on the basis of WACC plus 1%, with the risk-free rate being the Spanish 10-year bond rate of 4.398%.

On 5 August 2020, the Tribunal issued the award in question, ordering Spain to pay the Claimants the amount of EUR 30 875 000, together with interest from 1 June 2013 until date of payment.

Further, the Tribunal ordered the Claimants and Spain to bear their own legal costs and other expenses and to equally bear the fees and expenses of the members of the Tribunal and charges for the use of the facilities of ICSID.

Spain’s Application for Annulment

On 30 September 2020, Spain filed an Application for Annulment of the Award.

Spain’s first two grounds were based on an alleged excess of powers pursuant to Article 52(1)(b), due to the Tribunal’s alleged failure to apply EU law, (a) to jurisdiction and (b) to merits.

It argued that the standard of review under Article 52(1)(b) permits the Committee to determine that the Tribunal exceeded its powers if it contravened the parties’ consent to arbitration, including by not applying the proper law of the arbitration. This is because, according to Spain, consent is conditional on the application of the correct law by the Tribunal.

In addition, Spain contended that manifest excess of powers also occurs if a tribunal applies standards not included in the relevant treaty provision.

1. Failure to apply proper law to jurisdiction:

In relation to excess of powers in respect of jurisdiction, Spain maintained that, in certain circumstances, a manifest error of law could lead to annulment if it were so gross or “inconsistent” as to constitute failure to apply “proper law at all.”

In this respect, acknowledging that ICSID tribunals must decide disputes “in accordance with the ECT and according to applicable rules and principles of International Law,” Spain argued that, pursuant to Article 26 of the ECT, “EU Law is the International Law applicable to the underlying arbitration,” and not the ECT, which was the law finally applied by the Tribunal. Therefore, in assuming jurisdiction as a consequence of failing to apply the proper law, Spain argued that the Tribunal had exceeded its powers.

According to Spain, the Tribunal’s interpretation of Article 26 ECT (that an arbitral tribunal has jurisdiction to hear an intra-EU dispute) breached Articles 267 and 344 of the Treaty on the Functioning of the European Union (TFEU), as it breached the principles of prevalence and independence of EU Law. In Spain’s view, that was the only interpretation that harmonised the ECT with EU Law and was additionally consistent with Articles 30 and 59 of the Vienna Convention.

The core of Spain’s arguments revolved around the following points:

• pursuant to ECT Article 26(6) and ICSID Convention Article 42(1), the law governing jurisdiction is international law, which includes EU law as explained by the CJEU’s ruling in Achmea;
• international law and therefore EU law is the proper law in the arbitration and applies to jurisdiction through the ECT Article 26(6) choice of law provision;
• the Achmea judgement, which was not properly analysed by the Tribunal, succinctly summarises the EU law position;
• according to EU law the ECT does not apply to disputes among EU Member States;
• a literal reading of the ECT Article 26 excludes intra-EU disputes;
• the dispute in the arbitration was an “intra-EU” dispute between an EU Member State and investors of another Member State, which pursuant to the ECT, Article 26, “should not be construed as consenting to the submission of intra-EU disputes to arbitration as this would contravene EU law and specifically Articles 267 and 344 of the [TFEU]”;
• Member States could not have consented to arbitration, because they had relinquished sovereign competencies over their internal market; and
• the award therefore incorrectly analysed jurisdiction as a matter of proper law;

So, Spain claimed that the Tribunal had failed to acknowledge the specific conflict rules in EU law and, in particular, the principle of prevalence, and “wrongly declar[ed its] jurisdiction with regard to an intra-EU dispute” in the context of a manifest excess of power.

Furthermore, Spain objected to the Tribunal’s jurisdiction ratione personae on the grounds that the Claimants, incorporated in EU Member States, do not satisfy the criteria of “investors of another Contracting Party” under Article 26 of the ECT as both parties are from EU Member States. Moreover, Spain contended that the ECT does not apply to disputes concerning investments made within the EU.

1. Failure to apply proper law to the merits

Spain’s second ground for saying the Tribunal manifestly exceeded its powers arose out of its allegation that the Tribunal failed to apply the proper law to the merits, i.e., EU State aid law, in relation to the Claimants’ legitimate expectations.

Spain’s allegation, as summarised at the oral Hearing, was that the Tribunal should have applied EU state aid law: (i) to determine the scope of investors’ rights; (ii) to analyse the Claimant’s legitimate expectations; and (iii) in relation to the principle of proportionality.

Spain argued that in the arbitration it “robustly invoked EU Law” as an element of international law, and explained that “application of EU law to the merits of the matter has fundamental consequences as it affects core EU principles, even such a basic EU law institution as State Aid.”

Relying on Electrabel v Hungary, it submitted that “the subsidies the claimant sought to have set in stone in those proceedings are in fact deemed to be State Aid and therefore subject to requirements of EU law.”

Spain further claimed that the Tribunal summarised its “arguments regarding legitimate expectations and right of investors taking into account EU law,” but did not consider them in resolving the dispute as there was “no statement of reasons as to why European Union law, being international law, is not the international law that applies to the merits of the case.”

Spain also submitted that “if EU Law had been applied to the merits of the dispute,” instead of the ECT, then the Tribunal “would have found that the alleged expectations of investors were not lawful” at all.

In Spain’s view, not applying the relevant applicable law amounted to manifestly exceeding powers and had to lead to the award’s annulment as the Tribunal “would have reached different conclusions had it considered the legislation on State Aid”.

The ad hoc Committee’s Decision

First, the Committee decided it cannot take into account Post-Award Decisions to support either side’s argument in its consideration as to whether the Tribunal’s reasoning on EU law: (i) was substantively wrong or flawed or (ii) was substantively right or at least a reasonable approach.

After noting that the annulment remedy under the ICSID Convention is not a right of appeal, the Committee was of the opinion that the underlying principle is one of finality of awards, which is central to dispute resolution within the ICSID Convention.

Following this line of thought, in terms of the applicable standard of review on excess of powers grounds, the Committee found that the limited remedy requires that an excess be“manifest,” pursuant to Article 52(1)(b).

The Tribunal also stressed that the notion of “manifest” is regarded as a high threshold so as to reaffirm the fundamental principle that the parties must not use annulment as a means of reopening previous legal proceedings, including by introducing new evidence, arguments or authorities.

In the Committee’s view, misapplication or misapprehension of the proper law do not constitute an excess of powers and that, for example, the Updated ICSID Background Paper makes it clear that even a “manifestly incorrect application of the law” is not a ground for annulment.

The Committee therefore considered there to be a distinction between an error in the application or interpretation of proper law (even a serious error) and an error so gross or egregious as to constitute failure to apply proper law, in the Soufraki v UAE sense. Spain’s position, as the Committee understood it, was that the Tribunal failed to apply the proper law entirely, possibly as a consequence of gross or egregious misapplication or misinterpretation of that proper law.

In relation to the Tribunal’s alleged failure to apply the proper law on jurisdiction, the Committee observed that the Tribunal acted within its mandate in determining its own jurisdiction and in determining the applicable law to the dispute. In doing so, it did not exceed its powers and did not decline to apply international or EU law to the question of jurisdiction. The Tribunal made clear that the choice of law provisions of the Energy Charter Treaty and the ICSID Convention do not determine jurisdiction and that they were not relevant for the present purposes.

Thus, the Committee concluded that the Tribunal had not, in this case, made an error in its application of international treaty provisions in the ECT and ICSID Convention to the issue of its jurisdiction, so as to constitute so gross or egregious an error of law so as to constitute a failure to apply the law.

The Committee held that Spain had to show that in making its decision, the Tribunal had failed to apply EU State aid law, and that this failure was manifest. In the Committee’s view, however, Spain had not satisfactorily established any of those elements of its annulment application.

Finally, the Committee noted that as EU state aid law was not applicable to the subsidy scheme, when the Claimants made their investments in 2011, the Tribunal "could not have held that the Claimants did not have legitimate expectations under EU state aid law at the time of their investments,” as Spain claimed in the annulment proceedings.