In the last few years, a number of foreign investors have made more than thirty arbitration claims against Spain due to modifications introduced in the country regarding the regulatory system for electricity production via renewable energies. Indeed, the economic crisis prompted two large cuts to investment incentives for renewable energies, one in 2010 and the other in 2013 & 2014. Due to this change in the situation, investors opened arbitration cases against Spain using the Energy Charter Treaty as the basis for their claims, with the most notable cases brought forth by the Stockholm Chamber of Commerce and the International Centre for Settlement of Investment Disputes (ICSID). Currently, four rulings have been issued. The last two have been against Spain, largely due to the fact that the arbitrators took the stance that the cuts in 2013 and 2014 violated the obligations laid out in the aforementioned treaty and this line of judgement was expected to be taken in almost all of the future rulings.
However, on the 6th March the European Court of Justice issued an extremely important sentence which could prove very favourable towards Spanish interests. The European Court of Justice has stated that it is against the Treaty on European Union that an arrangement contained in a Treaty made by two member states allow an investor from one of the states, to make a claim against the other state before an arbitration court in the event of a dispute regarding investments made in the other member state, as its ability to do so has been compromised on accepting said State. In this sense, the European Court has severely limited the possibility of opening an arbitration case concerning investment in situations where two European Union member states are involved.
This ruling has its basis in a litigation procedure between an investor from Holland and Slovakia. Holland and the Slovakian Republic had been associated with one another under an Agreement for the Reciprocal Promotion and Protection of Investments, which the countries had signed when the latter was still known as Czechoslovakia. In the aforementioned agreement, it was established that in the event of a conflict between an investor and the receiving State, it would be resolved through arbitration before an arbitration court of law.
The European Court of Justice essentially based its decision on the idea that an international agreement cannot violate the order established by the European treaties (The Treaty on European Union and The Treaty on the Functioning of the European Union), nor the Union’s right to autonomy, both relating to the regulation of member states and with respect to International Law. This autonomy is justified by essential characteristics of the Union and its law. As a result, an international agreement cannot violate the order put into place by the Union. On the other hand, an investment arbitration court is not a jurisdictional entity of a member state, and thus, when Union Law must be applied, it will not have the power to request a preliminary ruling from the Court of Justice, which could put the uniform interpretation and application of European regulation at serious risk.
The ruling is careful to distinguish between investment arbitration and commercial arbitration. It does so by outlining that commercial arbitration is based on the autonomy and freedom of both parties, whilst investment arbitration resulting from an international agreement through which the member states detract from the ability of their own courts, and thus the system which guarantees effective legal protection in areas regulated by Union Law, must be judged by Investment Arbitration Courts according to the interpretation and application of the aforementioned law.
The ruling with which we are concerned now refers exclusively to investment conflicts in which only European Union member states are involved, which raises reasonable doubt over what would be the solution if one of the countries was not a member of the Union. The ruling does not mention anything in this respect, but much of its reasoning is applicable to Bilateral Investment Agreements made with third party states.
Undoubtedly the ruling is very favourable towards Spanish interests, whose legal representation, it seems, have already invoked the ruling in ongoing trials. However, part of the problem is here to stay, seeing that, on top of the reputational damage, investors who have received or will receive favourable rulings could act against our country’s assets located outside of the Union; it could also cause diplomatic conflict and potentially damage the image of Spain as a country welcome to foreign investment.
On the other hand, what foreign investors cannot present under arbitration cases does not mean that their other claims will be systematically rejected. Matters which are brought forth in front of State Courts and, in this case, subsequently in front of the European Court of Justice, could be given favourable rulings when violations against Union Law are identified, especially in regards to what is referred to as community freedoms, and certainly in regards to the free movement of capital and freedom of establishment.
José Luis Iriarte
Lupicinio Rodríguez
