{"id":10506,"date":"2024-04-11T17:08:35","date_gmt":"2024-04-11T21:08:35","guid":{"rendered":"https:\/\/journals.law.harvard.edu\/ilj\/?p=10506"},"modified":"2024-04-11T17:08:35","modified_gmt":"2024-04-11T21:08:35","slug":"margins-of-wrongfulness-in-arbitration-measuring-the-tinker-in-eiser-v-spain","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/ilj\/2024\/04\/margins-of-wrongfulness-in-arbitration-measuring-the-tinker-in-eiser-v-spain\/","title":{"rendered":"Margins of Wrongfulness in Arbitration: Measuring the Tinker in Eiser v. Spain"},"content":{"rendered":"

Galo M\u00e1rquez*<\/strong><\/p>\n

The saga of Spanish investment arbitrations born out of Spain\u2019s decision to disapply incentives in the renewable sector in the face of a financial crisis continues to generate awards on quantum and liability. The recent decision in Eiser v. Spain<\/em><\/a> is one of many that has contributed to a pool of inconsistent arbitral awards. Given the increasing number of decisions, it is not surprising that arbitral tribunals have reached divergent decisions as to the wrongfulness of Spain\u2019s measures. In his Dissent on Liability and Quantum<\/a>, Prof. Philippe Sands affirms that \u201c[n]o doubt, reasonable folk will question the wisdom of creating a system that allowed so many competing and contradictory awards to flower, and introduce the changes that seem so necessary\u201d (\u00b6 1<\/a>). This article addresses some of the inconsistencies arising from how arbitral tribunals have recognized that a state may make regulatory changes. Still, this recognition has not meaningfully impacted the damages awarded to investors.<\/p>\n

Nor have the competing views of arbitral tribunals resulted in a uniform application of the law of damages in international arbitration. Typically, when tribunals determine that a state\u2019s measure violates an investment treaty, they award damages for injury attributable to any part of the measure. By reviewing the decision in Eiser v. Spain<\/em>, this article suggests a different approach. It argues that states should only be liable for the portion of damages attributable to the difference <\/em>between the injury caused by the measure actually imposed, and the hypothetical injury that would have been caused by a lawful alternative measure. I will refer to this concept as the \u201cMargin of Wrongfulness.\u201d<\/p>\n

It must be mentioned that this article builds upon the work of the Academic Forum on Investor-State Dispute Settlement (\u201cISDS\u201d) before the United Nations Commission on International Trade Law Working Group III (\u201cUNCITRAL\u201d) on matters related to damages<\/a>. The author is an appointed Member of the Academic Forum on ISDS and a representative observer before Working Group II on Arbitration and Dispute Resolution. However, the views expressed here are mine alone. The benefit of this article is twofold. First, it demonstrates an inconsistency in the way that arbitral tribunals have awarded damages, which the ISDS community has sparingly addressed. Second, by reviewing over a few dozen awards, the article identifies that the concept of \u2018legitimate expectations\u2019 in international investment law cannot continue developing as it has in the last few decades without a shift in how damages are awarded.<\/p>\n

I. Introduction to the Spanish financial crisis<\/h3>\n

The Eiser v. Spain<\/em> case is an old tale with a new twist. Like many other countries, Spain introduced at the end of the 90s a package<\/a> of regulatory amendments and financial incentives to promote renewable energy in the country. Spain sought to promote a specific type of solar power through state subsidies. The new regulatory regime was an attempt to realize the spirit of the 1992<\/a> Framework Convention on Climate Change, the 1994<\/a> Energy Charter Treaty, and the 1997<\/a> Kyoto Protocol, as well as the 2001<\/a> European Union policy for reducing greenhouse gasses by means of developing renewable energy in the region.<\/p>\n

Starting in 1998, Spain issued a series of decrees to promote renewable energy by means of a guarantee for long-term supply of energy (Eiser<\/a>, \u00b6\u00b6 105-107). In the long term, however, these incentives were not sustainable. Spain was not left alone in the crusade to advance renewable energy throughout the 90s. In the first weeks of 1991, the Committee on Science and Technology of the European Parliament<\/a> made an aggressive call to move towards renewable energy on the basis of the results of the Brundtland report<\/a>\u2014document recounting the world\u2019s critical environmental problems. In the Committee\u2019s<\/a> view, \u201c[e]very effort should be made to develop the potential for renewable energy which could form the foundation of the global energy structure during the 21st<\/sup> century\u201d (p. 2, \u00b6 5<\/a>).<\/p>\n

Answering this call, Spain issued Royal Decree 661\/2007. The International Energy Agency viewed<\/a> the Decree as seeking \u201c[t]o contribute to Spain\u2019s efforts to achieve its 2010 national target for the promotion of electricity from renewable energy under EC Directive 2001\/77\/CE.\u201d More than an effort, several investors\u2014including Eiser<\/em> (\u00b6\u00b6 357-35<\/a>)\u2014argued that Decree 661\/2007 was a public policy creating an attractive environment for investment (Charanne v. Spain<\/a>, \u00b6 515).<\/p>\n

This Decree was later retracted by Spain, causing significant harm to energy projects. The rationale behind a state\u2019s incapacity to unreasonably and unfairly backtrack from a commitment is quite logical. In the same way that a person would not purchase a car for a price other than the one advertised, investors expect to receive the benefit of protective guarantees or commitments that the government has made to them. UNCTAD<\/a> estimates that the Spanish Decree has been at the heart of over 40 investment arbitrations. This\u00a0 number keeps growing as investors submit new ISDS cases arising from Spain\u2019s retreat from its regulatory commitments to the energy sector (See<\/em>, WOC v. Spain<\/em><\/a>).<\/p>\n

A few years into the application of Decree 661\/2007, the Tribunal in Eiser <\/em>recounts that Spain became concerned due to a \u201ctariff deficit.\u201d The tariff deficit is generally understood as \u201c[t]he financial gap between the costs of subsidies paid to renewable energy producers and revenues derived from energy sales to consumers\u201d (\u00b6 124). To combat this deficit, in December 2012, the Spanish Parliament imposed a 7% tax on the total value of the energy fed into the national grid. This tax eliminated the subsidies for renewable energy. This mechanism was followed by several other decrees that blunted the financial incentives and subsidies for foreign investors. In June 2014, the government dealt the final blow to Decree RD 661\/2007 through a \u2018ministerial order\u2019<\/a> setting up a whole new regime for existing power plants (the \u201cDisputed Measure\u201d).<\/p>\n

The Eiser<\/em> case arose from a so-called \u2018failed\u2019 investment in the solar power sector in Spain (\u00b6\u00b6 94-95<\/a>). During the arbitration, Eiser<\/em> valued its investment through the Discounted Cash Flow (\u201cDCF\u201d) method at \u20ac124.3 million (\u00b6 136<\/a>). The relevance of damages in investment arbitration is a growing concern in the field. Certain circles claim that arbitral tribunals are awarding increasingly larger claims in favor of the investor. On this, the International Institute for Sustainable Development<\/a> mentions that its \u201c[r]esearch has found over 50 known cases in which an investor\u2013state tribunal has awarded a foreign investor over USD 100 million in compensation. In at least eight claims, the award reached over USD 1 billion\u201d (\u00b6 14<\/a>).<\/p>\n

The energy generation mechanism promoted under Decree 661\/2007 was allegedly categorized as a renewable source. The new policies materialized in Decree RD 661\/2007. The Arbitral Tribunal considered that the Decree contained a myriad of key elements, including: (i) a guaranteed \u201cpriority of dispatch\u201d into Spain\u2019s grid subject to certain conditions; and (ii) it allowed energy producers to adopt different tariffs for production in accordance with the specific characteristics of each project (\u00b6 112<\/a>).<\/p>\n

Eiser<\/em> brought an investment arbitration under the Energy Charter Treaty<\/a> as the general partner of a limited partnership, claiming that it invested in reliance on Royal Decree 661\/2007 and its stabilization clause\u00bewhich restricted Spain from amending its regulatory framework (\u00b6\u00b6 357-358<\/a>). Eiser\u2019s business model depends on identifying low-risk investments in public infrastructure.<\/p>\n

The State\u2019s decision to retract Decree 661\/2007 had a devastating effect on several companies. Although many foreign investors had access to bilateral investment treaties or the Energy Charter Treaty, locals recount<\/a> that Spain\u2019s decision to retroactively backtrack from the Decree 661\/2007 (the Disputed Measures) \u201c[l]ed to [\u2026] the total ruin of 62 000 families [\u2026] and that their opportunities to file claims before the Spanish Government have been restricted, given that they did not have access to more impartial, international courts.\u201d This was not the case for Eiser, which enjoyed its position as a United Kingdom incorporated company with the capacity to bring an investment arbitration against Spain.<\/p>\n

II. The Tribunal\u2019s Award<\/h3>\n

Against this backdrop, the Eiser<\/em> Tribunal was tasked with reviewing if the Disputed Measures breached the fair and equitable treatment (\u201cFET\u201d) standard. Embarking on this task, the Arbitral Tribunal had to address the State\u2019s capacity to regulate\u00bea heavily disputed point in international investment law (Isolux v. Spain<\/em><\/a>, \u00b6\u00b6 409-426; Novenergia II v. Spain<\/a>, \u00b6 542-697). Although the nuances to identify a breach of legitimate expectations may be contested, arbitral tribunals have generally considered the following points (\u00b6\u00b6 369-372<\/a>):<\/p>\n