ENERGY NEWS #5/2017
Germany and other European states have drastically altered their energy policies over the last few years, in varying ways. The energy transition in Germany and the imminent nuclear exit are one element of this. But there have also been drastic cuts to subsidies promised for solar energy in Spain, the Czech Republic, Italy and Bulgaria. Several affected energy companies have appealed against these interventions that undermine their interests. Relief against such measures is granted primarily through state courts, in some cases up to the respective constitutional court. In the case of foreign companies protected by bilateral or multilateral investment treaties, legal protection is also possible through international arbitral Tribunals.
Summary
- Landmark decisions on energy policy, which impair foreign investment in the energy sector, or even devalue such investment retroactively, must be measured against the criteria of legal guarantees protecting legitimate expectations and investments under constitutional and international law.
- Legal protection for affected investors is granted primarily by state courts, including the respective constitutional courts. Frequently, however, foreign investors do not enjoy constitutional protection, or at least not to the same degree as domestic investors do. But where they can invoke the provisions of a bilateral or multilateral Investment treaty, legal protection through an international arbitral tribunal may be open to them.
- National and international legal systems are intertwined, as can be seen in the principle of interpreting Germany’s Basic Law (the Grundgesetz, or constitution) in harmony with public international law. International arbitration practice does its best to circumvent creating unnecessary conflicts between constitutional and public international law.
- It is usual to avoid what is termed a “double dip”, i.e. a foreign company cannot claim compensation before national courts as well as additional compensation before international arbitral tribunals. As a general rule, a foreign Investor must decide whether it wishes to claim compensation before a state court or an international arbitral tribunal (“fork in the road”).
I. Background and starting Position
There have been several drastic changes to energy policy in Europe over the last few years. These changes have not been limited to the energy transition in Germany or the forced nuclear exit this has entailed. Increasingly, renewable energies have also been impacted by this development. The German Offshore Wind Energy Act (Windenergie-auf-See-Gesetz) came into effect on 1 January of this year, scaling back targets for expanding the offshore wind sector. It also excludes individual clusters – i.e. individual areas in Germany’s exclusive economic zone – as future sites for new project tenders. This means that project investments that have already been made in the areas affected have suffered an almost total loss of value.
Similar developments have taken place in other European states in the solar energy sector. In Spain, the Czech Republic, Italy and Bulgaria, subsidy and tariff commitments for solar projects have been drastically reduced and in some cases even withdrawn with retroactive effect. In 2010, the Spanish government limited financial support that had provided for statesubsidized feed-in tariffs of 30 ct/kWh over a minimum period of 25 years. Only installations commissioned prior to 2008 were to continue to receive support. At the same time, the total volume of kilowatt hours that could receive financial support
was capped, and a grid transmission fee introduced (for the current state of proceedings, see Markert / von der Groeben, Requests for arbitration against Spain: have energy companies’ chances of success risen?, Gleiss Lutz Energy News #29/2016 of 17 November 2016). In the Czech Republic, as of 2014 financial support for new solar projects was stopped. In addition to this, however, a solar tax was imposed on existing projects retroactively. This meant that the feed-in tariff originally guaranteed for 20 years had, de facto, been reduced. In 2014, Italy likewise decided to reduce the feed-in tariff retroactively. Energy companies were given an option: either their feed-in tariff would be extended from 20 to 24 years, or remuneration would be cut by a lump sum for the 20-year term. And in 2012, Bulgaria introduced a grid tax intended to retroactively cut solar installations’ feed-in tariff. In Poland, following record numbers of wind turbine connections in previous years, the Situation changed drastically after the Polish Act on Investments in Wind Turbines entered into effect on 15 July 2016. A strict new distance criterion could see investors having to write off many wind farm projects already developed.
These statutory changes to the framework in individual jurisdictions have had a major impact on many energy companies. In many cases, the latter have sought legal protection against these sometimes drastic changes to energy policy before constitutional courts. Increasingly, foreign investors have also tried to enforce such protection before international arbitral tribunals. Essentially, these proceedings have revolved around constitutionally protected property rights as well as statutory guarantees on legal and investment certainty, in particular the principles of protecting legitimate expectations and the general ban
on retroactive state intervention.
II. Legal protection of energy companies against state Intervention
Legal protection against state intervention that withdraws or at least devalues property rights, disappoints expectations warranting protection, or destroys the basis of investments, is primarily possible through state courts. This generally touches on constitutional issues of fundamental rights, namely the protection of property and professional activity. Besides the specialist courts, the respective national constitutional court generally has competence for a final decision on such issues. This legal route will generally be open to private companies as a way of defending their interests and rights according to constitutional
procedures. For domestic undertakings in the respective jurisdiction, this will usually be the only way of obtaining relief against laws directly violating their rights.
For foreign undertakings, legal options are often not restricted to those of the national state and the corresponding jurisdiction all the way up (in some cases) to the constitutional court. In many cases, there are bilateral or multilateral international treaties offering foreign undertakings specific investment protection. Under procedural law, such protection can usually be claimed and enforced before the arbitral tribunals provided for in the treaty. For foreign companies, this doubles the Options for legal protection. For them, international arbitration is an alternative to national courts, as long as a corresponding international treaty applies.
III. Tension between constitutional and public international law
At first sight, this finding seems disconcerting. “Native” players can only access the legal route provided for by the national state, while in many cases foreign players can draw on an additional legal option before international arbitral tribunals if a corresponding international investment protection treaty applies.
So the question that arises is why the respective national state’s constitutional court does not have the final word on interpreting national law. The answer to this lies in the different perspective that foreign investors can invoke. Corresponding international treaties establish obligations on the respective state vis-à-vis another state, and these also have protective effect on the respective foreign investors. Under Article 27 of the Vienna Convention on the Law of Treaties as well as under the general principles of customary international law, a state cannot invoke its own internal legal regulations to justify noncompliance
with a treaty. This also applies when interpreting national law using the standards of constitutional law; such interpretation cannot set aside the content of an international investment protection treaty and the obligations thereby entered into. In short, if an international investment protection treaty guarantees a certain standard of protection for foreign investors, this may involve a stronger level of protection than constitutionally guaranteed rights in the respective national state. Therefore, as well as having the option of a further type of proceedings in the form of arbitral tribunals, foreign Investors may also – under certain circumstances – be able to invoke stronger substantive guarantees of protection under the respective international treaty.
This may seem surprising. Guarantees under public international law often constitute only minimum standards that generally fall short of national constitutional law and the supposedly higher standards of protection it provides. But this assessment is only half-true when it comes to how the two levels relate to each other. There is a wide discrepancy in the standard of protection afforded by fundamental rights in various states. If a German investor, for example, is protected in an authoritarian state by a bilateral investment protection treaty between Germany and that state, the German investor can seek relief against arbitrary expropriation without compensation before an international arbitral tribunal even in cases where a citizen of this authoritarian state would not have this option in the same situation. It is not for nothing that this kind of international legal protection is frequently a mandatory requirement for investment abroad. Even in supposedly developed states under the rule of law and with balanced constitutional powers guaranteeing fundamental rights, conflicts with stricter international requirements may occasionally arise. This is also the case with the Federal Republic of Germany. The European Court of Human Rights has repeatedly called on Germany as well as all states party to the European Convention on Human Rights to comply with the latter’s standards of human rights. In Germany’s case, ECHR standards are sometimes higher than those guaranteed by the Federal Constitutional Court through Germany’s Basic Law.
Thus, foreign players seem to have an advantage over German players in Germany. And this is true insofar as German companies and investors are unable to invoke guarantees under bilateral or multilateral treaties against the Federal Republic of Germany. But in many cases, the procedural and material rights open to foreign players on the national level fall short of the protective guarantees enjoyed by German citizens or undertakings. By way of example, Germany’s Basic Law includes fundamental rights that do not always constitute universal rights: in some cases, their wording means that they only apply to
Germans. In these cases, foreigners’ fundamental rights are protected through the general freedom of action under Article 2(1) Basic Law. The scope of protection frequently falls short of the “German fundamental rights”, however. According to the wording of Article 19(3) Basic Law, which states that fundamental rights shall also apply to domestic legal entities to the extent that the nature of such rights permits, the Article does not directly apply to foreign undertakings. So, foreign legal entities generally cannot invoke material fundamental rights under the Basic Law. The only exemptions to this are what are
termed procedural fundamental rights, guaranteeing a fair trial, which apply as well as for foreign undertakings and natural persons from the European Union, for whom a special ban on discrimination exists under EU law.
IV. What does this mean for on-going proceedings on the German and international levels?
In some cases, foreign players directly impacted by state intervention in the energy sector are seeking relief before both national courts and international arbitral tribunals in parallel and according to different standards.
In international investment protection proceedings, the respective arbitral tribunal applies international legal standards, such as the Energy Charter Treaty or similar bilateral or multilateral treaties. As a rule, these guarantee investors fair and equitable treatment. States are prohibited from changing their legal framework in a surprising and arbitrary manner such that the investors’ legitimate expectations are violated. If a state violates its duty to treat investors fairly and equitably, then it is obliged to compensate the investor for the loss incurred. Such standards draw on public international law, and not primarily
on the respective national law.
On the national level, final judgments on major landmark decisions on energy policy are – in practice – generally the responsibility of constitutional courts. The standard is then the respective constitutional guarantees protecting legitimate expectations and investments as well as legal certainty.
There is no risk of a “double dip”. Foreign investors cannot defend themselves against state intervention and loss of their legal rights before national courts and arbitral tribunals at one and the same time so as to seek compensation on both levels. In any event, material compensation is rendered only once. This does not generally rule out the possibility of a stronger international standard supplementing the compensation already awarded on the national level. In many cases, however, the foreign investor will have to decide before proceedings are initiated whether to seek relief on the respective national level or on the international level, instituting proceedings accordingly (“fork in the road”).
Gleiss Lutz commentary
The progress of international economic relations has generated tension in the relationship of national constitutional law to public international law. The two levels are not divorced from one another. One indication of this is the German Federal Constitutional Court’s case law, which has shaped the principle of interpreting the Basic Law in harmony with public international law. For this reason, constitutional norms are always interpreted and applied in the light of the relevant international treaties, endeavouring to avoid conflicts between these two levels. Similarly, arbitral tribunals are called upon to not create conflicts between the relevant international treaties and the respective constitutional law unless this appears to be unavoidable. Arbitral tribunals are aware of this responsibility and in general are therefore very cautious about establishing that a state regulation contravenes public international law. So in spite of fundamental differences in the details of these legal systems, there is a general tendency towards cohesion.
Were the European Union to accede to the European Convention on Human Rights as expressly provided for by the Lisbon Treaty, the development sketched out above would continue. The European Convention on Human Rights has long been one of the key legal sources for EU fundamental rights and therefore encourages a certain degree of cohesion, at least on the European level. But the future relationship of case law by the European Court of Human Rights and that of the Court of Justice of the European Union on fundamental rights has yet to become fully clear. In any event, a December 2014 opinion by the Court of Justice of the European Union explicitly rejected any “monopoly of interpretation” on the part of the European Court of Human Rights.
Outside of Europe, international arbitral tribunals have previously played a key role in gradually and carefully developing a minimum international standard for treating foreign investors as well as formulas for establishing reasonable compensation in the event of expropriation. There is often a slight populist undertone to concerns that foreigners might be put in a better position, but in such cases the more obvious solution is often to improve national law such that the legal rights of domestic investors meet international standards. As a general rule, any tension between public international and constitutional law in a
developed state under the rule of law should be resolvable without legislation. But legal practitioners should always be Aware of the various legal levels.
Proposed citation: Wilske/Ruttloff, Protecting investments and legitimate expectations in the energy sector: Tension between public international and constitutional law?, Gleiss Lutz Energy News #5/2017 of 20 February 2017
Forward