An ICSID Annulment Committee refuses to revoke an award against Italy
Introduction and background
This article examines the decision to uphold an arbitral award that was issued on 14 September 2020 (the 'Award') following ICSID arbitration No. ARB/16/5 between (i) ESPF Beteiligungs GmbH, ESPF Nr. 2 Austria Bitterlings GmbH, and InfraClass Energie 5 GmbH & Co. KG (collectively 'ESPF') and (ii) the Italian Republic ( 'Italy' or the 'Applicant'). Italy sought the annulment of the Award, which was issued by an ICSID Tribunal and involved a dispute under the Energy Charter Treaty ('ECT').
In particular, the dispute concerned ESPF's investments in Italy's renewable-energy sector and resulted from legislative measures Italy implemented in 2015 that sought to significantly curtail the promotion of solar-energy investments.
In the Award, which was delivered prior to Komstroy[1] and PL Holdings[2], the tribunal rejected Italy's objection that intra-EU investment arbitration disputes under ECT were precluded post-Achmea.[3] The majority of the tribunal found Italy in violation of Article 10(1) of the ECT. In particular, the tribunal found that Italy had breached: (i) the obligation to accord fair and equitable treatment; (ii) the impairment clause (pursuant to which Italy may not – under any circumstance – impose discriminatory or unreasonable measures on investments), and (iii) the obligation to respect its previous commitments concerning investors and their investments (the 'umbrella clause'). The tribunal awarded ESPF a total of EUR 16,000,000 in damages.
Interest in this decision stems from the fact that it appears to be the first case in which an ad hoc committee has had to deliver a decision based on an ECT dispute following Green Power v Spain[4] in which, as our readers are fully aware, an arbitration tribunal upheld the intra-EU arbitration objection for the first time.
Italy's position on the tribunal's 'manifest excess of powers' under Article 52(1)(b) of the ICSID Convention
Italy put forward a multifaceted argument in its bid to annul the Award, primarily revolving around what it perceived to be significant 'deficiencies' in the tribunal's decision to uphold its jurisdiction despite Italy's intra-EU objection, as well as its decision to handle the post-hearing award.
Firstly, Italy vehemently argued that the tribunal exceeded its jurisdiction under Article 52(1)(b) of the ICSID Convention. This overstepping of boundaries, according to Italy, resulted from what it considered to be an erroneous or misapplication of the law by the tribunal, particularly in extending its jurisdiction to a claim that fell outside its purview. Italy supported its argument by citing prior arbitration decisions within the EU, emphasising that rulings handed down by other courts and tribunals could not be used as precedents when determining a manifest excess of jurisdiction in a specific case. Italy's stance was clear: the absence of a precedent rule in arbitration case law should have led the tribunal to review its own jurisdiction without any deference to previous decisions.
Central to Italy's line of reasoning was its contention that the tribunal, by invoking Article 26 of the ECT, had overstepped its authority. Italy asserted that the ECT was not intended to govern energy policy within the internal markets of EU Member States, asserting that the European Commission was better suited to carry to do so. Italy also argued that, while the EU and its Member States had entered into the ECT, their agreement only extended to arbitration between a non-EU investor and EU Member States or between EU investors and non-EU Member States. The Applicant argued that the distribution of powers between the EU and its Member States under the ECT limited the EU's authority, precluding it from acting outside the boundaries of the ECT. Arbitrating disputes between EU investors and Member States, Italy asserted, would violate pre-existing obligations, now codified in EU treaties, that are fundamental to the EU's legal framework.
Italy cited Achmea to support its claim that EU law prohibits Member States from agreeing to intra-EU arbitration due to the principle of autonomy of EU law. The Applicant argued that Komstroy merely confirmed this pre-existing interpretation. Italy disagreed with the tribunal's view that there was no 'disconnection clause' in the ECT and emphasized that the analysis should not be limited to the absence of such a clause. Instead, it raised the crucial question of whether the ECT allows for an intra-EU exception, allowing EU law to take precedence over international law in EU-related matters, irrespective of a specific provision.
The second ground for Italy's request for annulment pertains to the tribunal's alleged improper handling of the two awards issued after the hearing. Italy claimed that the tribunal had failed to state the reasons on which the award is based under Article 52(1)(e) of the ICSID Convention and had departed from a fundament rule of procedure under Article 52(1)(d) given that it failed to properly take into account Belenergia[5] and SunReserve[6] ('Post-hearing Awards'). In the Applicant's view, the Post-hearing Awards played a central role in the arbitration process and the tribunal's failure to substantively engage with them was a significant error that warranted the Award's annulment. This argument also served Italy's interest in showing that the tribunal violated its right to be heard, which – it argued – violated a fundamental procedural rule.
The Committee's analysis
Jurisdiction
In assessing the first ground for annulment, the ad hoc committee (the 'Committee') primarily focused on the tribunal's decision to assert jurisdiction under Article 26(2)(c) of the ECT in the context of an intra-EU dispute, which enumerates the conditions under which an investor may choose to submit a dispute to arbitration. Both parties agreed that Article 52(1)(b) of the ICSID Convention establishes a two-fold standard: the existence of excess powers and the requirement that the excess be manifest. This framework dictated the Committee's approach to jurisdictional and applicable-law issues.
The Committee's initial task, therefore, was to scrutinise whether the tribunal's exercise of jurisdiction in the face of Italy's intra-EU objection amounted to a manifest excess of powers.[7] At the heart of the dispute is the concept of 'consent'. This raises the question of whether an explicit exception precluding the application of the ECT between investors from Member States and other Member States under the ECT is required under Article 26 of the ECT or if, instead, an exception may be inferred.
When determining whether a disconnection clause exists, the burden falls on the party challenging the ordinary meaning of the text in order to demonstrate that, despite the clear wording, a different interpretation was warranted based on the treaty's object and purpose or other criteria under the Vienna Convention on the Law of Treaties. From the Committee's perspective, Article 26 unambiguously offered unconditional consent to arbitration without any carve-outs. The absence of any conflict between Article 344 of the TFEU[8] and the ECT reinforced this conclusion.
Excess of powers
Article 16 of the ECT emphasised that the ECT's dispute-resolution provisions take precedence over any conflicting or less favourable EU law; this did not restrict Italy but instead provided investors with the option of benefitting from the ECT's arbitration provision should they choose to do so. The central issue was whether Italy's objection regarding consent could absolve the EU or its Member States from their commitment under Article 26 of the ECT. The Committee took the position that Italy had not proven that the tribunal had exercised an excess of powers, particularly not in a 'manifest' manner, when it concluded that the Lisbon Treaty did not modify the ECT.
As for the applicable substantive law, the Committee noted that Italy had failed to produce substantive evidence on EU law provisions in the arbitration or the initial stages of the annulment, such as those related to incentives and incompatible State aid. Article 26(6) of the ECT references 'applicable rules of international law', and the Committee agreed with the tribunal's determination that EU law was not relevant to the dispute. The Committee highlighted that the absence of a strict precedent in international arbitration and the consistency of prior cases addressing similar issues significantly undermined the claim that there had been a manifest exercise of excess of powers.
Failure to state reasons
Italy's arguments regarding the tribunal's claimed failure to provide reasons pivoted around an alleged need for a higher standard of reasoning due to the fact that there were other decisions reaching contrary conclusions based on similar facts or similar applicable laws regarding the same standards or conduct. The Committee, however, agreed with ESPF that no such higher standard applied and that the tribunal's task was merely to explain the basis for its conclusions in a manner that an average reader could understand. An inadequate examination of precedents could not justify – per se – the Award's annulment. In summary, Italy did not successfully demonstrate that the tribunal had failed to state reasons, particularly not in a way that would preclude a reader from following the explanations the tribunal provided on each issue.
Breach of a fundamental rule of procedure
The Applicant also argued that there was no deliberation after the Post-hearing Awards. According to Italy, the tribunal's failure to take into consideration the Post-hearing Awards resulted in a de facto violation of its right to be heard, which itself constituted proof of a breach of a fundamental procedural rule. The Committee noted that Italy had conflated this argument with the argument relating to the tribunal's failure to state reasons. Accordingly, the Committee decided to treat both grounds separately, finding numerous references to the Post-hearing Awards in the Award itself and in a Partial Dissenting Opinion, which included a direct reference to SunReserve.
An annulment application fundamentally hinges on whether a tribunal adequately evaluated the issues presented, as supported by the parties' arguments and the authorities the parties cite. The tribunal's reasoned findings on these pivotal issues resulted in the tribunal holding Italy liable.
Italy fell short of its burden to show that the tribunal failed to provide sufficient reasons for its decisions on the pertinent substantive matters. The Committee also stated that not every breach of a procedural rule warrants annulment and, in this dispute, Italy did not prove any significant violation of a fundamental procedural rule.
Conclusion
In the wake of its analysis of the arguments set out in this case, the Committee concluded that the application for annulment of the Award issued on 14 September 2020, as lodged by the Italian Republic, had to be unequivocally rejected in full. Italy was also ordered to bear the full financial burden of the annulment proceedings, including the Committee's costs, administrative fees levied by ICSID and any direct expenses. This outcome reinforces the recognised conclusion that annulment proceedings constitute an extraordinary remedy that is only granted in connection with a serious violation. In this decision, the Committee found a lack of evidence supporting such a finding in connection with the Award. According to the Committee, the fact that there is one decision – Green Power v Spain – that accepts the intra-EU objection is not sufficient to justify the 'manifest excess of powers' threshold that must be met to overrule an award issued under the ICSID Convention.
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[1] CJEU, Case C-741/19, Republic of Moldova v Komstroy LLC, Judgment of the Court (Grand Chamber) (2 September 2021) ECLI:EU:C:2021:655 ('Komstroy').
[2] CJEU Case C-109/20, Republiken Polen v PL Holdings Sàrl, Judgment of the Court (Grand Chamber) (26 October 2021) ECLI:EU:C:2021:875 ('PL Holdings').
[3] CJEU, Case C-284/16, Slowakische Republik v Achmea BV, Judgment of the Court (Grand Chamber) (6 March 2018) ECLI:EU:C:2018:158 ('Achmea').
[4] Green Power Partners K/S and SCE Solar Don Benito APS v Kingdom of Spain, SCC Case n.º 2016/135, 16 June 2022 ('Green Power v Spain').
[5] Belenergia S.A. v Italian Republic, ICSID Case n.º ARB/15/40, Award, 6 August 2019 ('Belenergia').
[6] SunReserve Luxco Holdings SRL, et al. v Italian Republic, SCC Case n.º 32/2016, 25 March 2020 ('SunReserve').
[7] While it is true that the assertion that '[n]ot a single ECT tribunal has ever accepted the intra-EU objection' no longer holds following Green Power K/S and Obton A/S v Spain, SCC Case n.º 2016/135, Award, 17 June 2022, it nevertheless remains important to acknowledge the existence of a consistent body of arbitral decisions that rejects intra-EU jurisdictional objections and upholds the jurisdiction of international tribunals where the ECT is the main applicable treaty.
[8] Treaty on the Functioning of the European Union, in force in Spain since 30 March 2010, Art. 344: 'Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein'.
