Herbert Smith Freehills secures victory for Kingdom of Spain in investor-state arbitration

Herbert Smith Freehills has helped secure a victory for the Kingdom of Spain in an investor-state arbitration under the Stockholm Chamber of Commerce rules commenced by two European investors Charanne B.V. (Netherlands) and Construction Investments S.à.r.l. (Luxembourg).

The disputes concerned regulatory changes made by Spain in 2010 to the Feed in Tariff regulation governing the PV sector in Spain. The claimants alleged that these regulatory changes breached the investment protection provided for in Articles 10 (fair and equitable treatment and effective means for the assertion of claims) and 13 (expropriation) of the Energy Charter Treaty.

On 21 January 2016, an international tribunal comprised of Alexis Mourre (President), Guido Tawil and Claus Von Wobeser, rejected (by majority) the totality of the claimants' claims and ordered the claimants to pay the Kingdom of Spain's costs (€1.3 million).

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For further information, please contact Christian Leathley, Partner, Eduardo Soler-Tappa, Partner or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812

Eduardo Soler-Tappa
Eduardo Soler-Tappa
Partner, co-head of dispute resolution
+34 91 423 4061

Italy reported to have withdrawn from the Energy Charter Treaty

It has been reported in various public sources that the Energy Charter Secretariat has confirmed that the Government of Italy (“Italy”) gave formal notice to the Depository for the Energy Charter Treaty (“ECT”) of its intention to withdraw from the ECT. While Italy has yet to make a public announcement in this regard, it is understood that Italy’s stated reason for the withdrawal is its desire to avoid the annual fees for membership in the Energy Charter Conference, which are approximately €370,000 per annum. This is said to be part of a broader strategy by the government to minimise Italy’s memberships in international organisations and the related costs associated with such memberships.

In order for a Contracting Party to withdraw from the ECT, pursuant to article 47(2) they must give notice one year prior to the withdrawal taking effect. Accordingly, if notice was indeed given in January this year, Italy’s withdrawal will not take effect until January 2016. Moreover, pursuant to article 47(3) the post-withdrawal period during which the ECT will continue to apply to pre-existing qualifying investments, commonly known as the “sunset period”, is 20 years. Thus, those investors who make qualifying investments prior to Italy’s withdrawal taking effect in January 2016 will still enjoy the protections of the ECT for 20 years after Italy’s withdrawal, i.e. until January 2036.

Some will question whether Italy’s withdrawal is also partially motivated by concerns about existing and potential future claims from the renewable energy sector. However, given the sunset clause that applies to the ECT, if the Italian government is concerned by the risk of such claims from existing investments, withdrawal from the ECT will do little to limit that exposure.

If the reports are correct, Italy is the first member to give notice of its withdrawal from the ECT. However, it is not the first country to turn its back on the ECT: after signing and accepting provisional application of the ECT in 1994, in 2009 the Russian Federation informed the Depository that it would not ratify the ECT and that its provisional application had been terminated.

The effect of Italy’s status as a member state of the European Union (“EU”), which will continue to be a member of the ECT, remains to be seen.

For more information, please contact Christian Leathley, Partner, Jennifer Hartzler, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+44 20 7466 2532
Jennifer Hartzler
Jennifer Hartzler
Associate (New York)
+44 20 7466 7536

The largest Arbitration Awards in history: Three Majority shareholders in Yukos awarded total damages of over $50bn from the Russian Federation

On 18 July 2014, the Claimants in three related arbitrations administered under the 1994 Energy Charter Treaty and the 1976 UNCITRAL Arbitration Rules prevailed against the Russian Federation.  The Claimants[1] were former shareholders of the OAO Yukos Oil Company (“Yukos”), which had emerged in the early 2000s as the largest private oil company in post-Soviet Russia.

Although the arbitrations were brought separately by each Claimant and not consolidated, the Parties appointed the same arbitrators to each Tribunal (collectively, the “Tribunals”) and the Tribunals proceeded to hear and decide the claims together in three substantially similar awards (the “Awards”).  The Tribunals found that the Russian Federation had unlawfully expropriated the assets of Yukos, in contravention of its obligations under international law, through a series of targeted measures taken between 2003 and 2007.  Put together, in monetary terms the arbitration Awards are by far the largest ever made public, as the Tribunals awarded total damages to the Claimants of more than US$ 50 billion. The Tribunals also ordered Russia to reimburse the Claimants for arbitration costs of € 4.2 million and costs of representation of more than US$ 60 million.

Of particular note in the Awards is the Tribunals’ consideration of the doctrine of “unclean hands” in international law, along with the application of the doctrine of contributory fault. The Tribunals’ decision to reduce to Claimants’ recovery by 25%, following the same approach adopted in the recent case of Occidental Petroleum and another v Ecuador, is likely to attract significant attention and may set a precedent for future investment treaty cases. However, the Tribunals’ extensive analysis of the Parties’ submissions concerning valuation, damages, and the awarding of interest will also add to the body of jurisprudence available to practitioners and arbitrators faced with similar questions.

The decision could prompt other Claimants (including some of the over 50,000 other minority shareholders in Yukos) to move forward with claims against the Russian Federation. For claimants from ECT signatory states, the Tribunals’ decision to uphold the continued application of the substantive protections of the ECT, at least for qualifying investments made before Russia withdrew from the ECT in August 2009, is likely to make the ECT an attractive option under which to bring such claims.

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ICSID Publishes Latest Caseload Statistics

The International Centre for Settlement of Investment Disputes (ICSID) has recently released its latest statistics concerning the cases brought under its auspices.

The report provides a number of interesting statistics on cases registered by ICSID historically, and in the year 2013, including; the distribution by economic sector; the basis of consent invoked to establish ICSID jurisdiction, the geographic distribution of cases by state party involved and the outcomes of cases decided and settled or otherwise discontinued.

The report is published twice a year and can be found here.

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ICSID Tribunal discusses hierarchy between EU law and ECT in Electrabel case

Hungary has recently seen claims brought against it by a Belgian investor for breaches of the Energy Charter Treaty (ECT) dismissed in the case of Electrabel S.A. v the Republic of Hungary (ICSID Case No. Arb/07/19).

The tribunal clarified the relationship between EU law and the ECT with respect to States having ratified the ECT prior to acceding to the EU. In intra-EU disputes involving recently acceded member states, EU law will prevail over the ECT where there are material inconsistencies between the two bodies of law.

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Energy Charter Treaty ruling clarifies effect of Russia’s “provisional application” accepting jurisdiction to hear Yukos’ claim

Summary and business impact

On 30 November 2009, a tribunal sitting at the Permanent Court of Arbitration in The Hague and constituted under the UNCITRAL Rules, ruled that former Yukos shareholders can proceed to the merits phase of their arbitration against the Russian government. Yukos’ expropriation claim is valued at between US$50 and US$100 billion, making it potentially the largest arbitration in history from a quantum point of view.

The claim was brought under the Energy Charter Treaty (the “ECT”), a multilateral instrument which binds over 50 state parties and provides substantial protection to investors in the energy sector, including a standing offer to arbitrate. Russia signed but did not ratify the ECT. In clarifying that Russia is bound by its “provisional application” of the treaty, the tribunal has provided a fundamental precedent for other investors in the energy sector, particularly those with interests in Russia who invested prior to Russia’s withdrawal on 19 October 2009.

Background

The facts of the case will be familiar to many. In 2004, Yukos, Russia’s then largest oil company, and its main shareholder, Mikhail Khodorkovsky, were accused of tax evasion and ordered to pay tens of billions of dollars in back-taxes. In December of that year, the Russian Government ordered the sale of Yukos’ main production unit, Yuganskneftegas, at auction and it was sold, allegedly at an undervalue, to state-controlled oil company Rosneft. Yukos finally went bankrupt in 2007.

It is a well established principle of public international law that states shall not expropriate foreign investments, save where such expropriation is effected for a public purpose, in a non-discriminatory manner, and, crucially, is accompanied by the payment of prompt, adequate and effective compensation.

In 2008, the former shareholders of Yukos, (GML Limited – the Gibraltar-registered vehicle formerly known as Menatep, Hulley Enterprises Limited, Yukos Universal Limited and Veteran Petroleum Limited, the Yukos pension fund), brought their expropriation claims against Russia under the ECT. These claims were later linked as one arbitration.

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