AES v. Hungary (II) (ICSID Case No. ARB/07/22)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was rendered on September 23, 2010. A request for annulment was registered on January 28, 2011 and the decision dismissing the application in its entirety was issued on June 29, 2012.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of fair and equitable treatment, unreasonable and discriminatory measures, national treatment, full protection and security, the most favored nation treatment (Art. 10(1) and (7) of the ECT) and expropriation (Art. 13 of the ECT) (¶¶ 1.47, 2.17, 5.1). The dispute was submitted to an ICSID arbitral tribunal according to Article 26(4)(a)(i) of the ECT.
Any third parties or parallel proceedings:
The European Commission requested and upon invitation of the tribunal made written representations as a non-disputing party under ICSID Arbitration Rule 37(2). Yet, its request for copies of the parties' written submissions was denied (¶¶ 3.18, 3.22).
Factual background, including procedural history:
Claimants in this procedure were AES Summit Generation Limited ("AES Summit"), a company incorporated under the laws of the United Kingdom, and AES-TiszaErömü Kft. ("AES Tisza"), a company incorporated under the laws of the Republic of Hungary and a subsidiary of AES Summit. Respondent was the Republic of Hungary ("Hungary") (¶¶ 2.1.1, 2.1.2, 2.2.1).
On July 4, 1996 a purchase and sale agreement ("SPA") was made between Állami Privatizációs és Vagyonkezelö Részvénytársaság ("APV") and Magyar Villamos Müvek Részvénytársaság ("MVM"), two Hungarian state-owned entities, and AES Summit. Under the SPA AES Summit purchased a majority shareholding in AES Tisza, the assets of which included the power station Tisza II and two older coal-fired power stations, the Borsod power station and the Tiszapalkonya power station. As a result of the SPA, respondent was obliged to amend and extend the existing power purchase agreement for Tisza II of October 10, 1995 ("Original Tisza II PPA") and to enter into a new power purchase agreement for Borsod PPA ("Borsod PPA"). AES Summit had agreed in its turn to pursue and complete a retrofit of all units in Tisza II and the construction of a new power plant at Borsod (¶¶ 4.3-4.4).
In 2000 two arbitrations were initiated that were subsequently settled by the settlement agreement of December 19, 2001 (the "2001 Settlement Agreement"). The 2001 Settlement Agreement suspended all prior agreements, understandings, negotiations and discussions. It amended the Original Tisza II PPA and AES Summit, along with AES Corporation, the ultimate parent company of claimants, were released from all obligations under the Original Tisza II PSA to implement the development projects. This agreement also included a waiver of sovereign immunity clause, thus establishing that respondent was acting in its private and not governmental character. Further, according to the requirement set out in the 2001 Settlement Agreement, the Original Tisza II PSA was amended ("2001 PPA") and, among others, a change in law clause was included and the existing pricing schedule was replaced by a new one (¶¶ 4.5-4.11). On January 1, 2004, the administrative pricing regime for generators was terminated. Thereafter, the one agreed in 2001 PPA was used to calculate the prices paid to AES Tisza II (¶ 4.13). This was statutory terminated via price decrees issued on November 6, 2006 and January 26, 2007 that allegedly caused the loss of the claimants (¶¶ 4.21-4.24).
The tribunal first addressed the conditions defining the jurisdiction of an ICSID tribunal and found that it had jurisdiction ratione personae, ratione materiae, ratione voluntatis and ratione temporis. Equally, the procedural requirements under Art. 26 of the ECT were fulfilled (¶¶ 6.1.1-6.5.5). Two points deserve mention in this regard. Firstly, it was accepted that the Hungarian company AES Tisza would be treated as a national of "another contracting state" (Art. 26(7) of the ECT, Art. 25(2)(b) of the ICSID Convention) due to AES Summit owning 99% of its shares and exercising ownership and control over it (¶ 6.1.6). The second matter concerned the state aid procedure initiated by the European Commission. Here the tribunal noted that different parties were involved therein, that being Hungary and the European Commission, and that the subject matter was different, as the state aid procedure involved state aid. Thus, res judicata could not bar the present proceedings (¶ 6.5.4 footnote 18).
With reference to applicable law, the tribunal took into consideration Art. 41(2) of the ICSID Convention and Art. 26(6) of the ECT and concluded that the ECT, together with the applicable rules and principles of international law were applicable. It further stated that the apposite interpretation tools were Arts. 31 and 32 of the VCLT, whereas EU Competition Law would be considered as a fact, taking into account the established rule that a state may not invoke its domestic law as an excuse for alleged breaches of its international obligations (¶¶ 7.6.1-7.6.6). The tribunal further ascertained that the present dispute evolved around the conformity or non-conformity of Hungary's acts and measures with the ECT. Thus, the provision on relation to other agreements (Art. 16 of the ECT) would not be applicable. Respondent's obligation to comply with EU law would be taken into consideration, when determining the "rationality", "reasonableness", "arbitrariness" and "transparency" of the reintroduction of administrative prices and the Price Decrees (¶¶ 7.6.7-7.6.9). The tribunal declined the application of Art. 351 of the TFEU that provides for agreements between EU Member States and non-member states. Firstly, all nationalities in this dispute, UK and Hungary, were members of the EU. More importantly, claimants were not states and therefore this was not applicable to them. (¶ 7.6.10).
Then the tribunal turned to the substantive claims. Regarding the obligation to provide fair and equitable treatment, it clarified that it only had jurisdiction over treaty claims and declined to hear the alleged breach of contractual rights, as Hungary opted out the umbrella clause of the ECT (¶¶ 9.3.1-9.3.4). After noting the rule that legitimate expectations can only be created at the moment of the investment, citing Duke Energy v. Ecuador, Tecmed and LG&E v. Argentina (¶ 9.3.8), it then took the view that time of investment is the time, when the investment is decided and made, in line with CMS (¶ 9.3.12). In the present case, the tribunal held that on the adduced evidence neither in 1996 not in 2001 could AES Summit have had a legitimate expectation (¶¶ 9.3.14-9.3.26). With reference to the duty to provide a stable legal and business environment enshrined in Art. 10(1) of the ECT, the tribunal underscored that this is not a stability clause. Rather, it explained that a legal framework is subject to change in order to adapt to new circumstances. Moreover, a state has the sovereign right to exercise its powers, including legislative acts (¶ 9.3.29). In the present case, the tribunal observed that respondent made no specific commitments limiting its sovereign right to change its law or leading claimants to believe that no change would occur (¶ 9.3.31). Using the words of Tecmed, the tribunal underscored that only when a state's acts or procedural omissions are manifestly unfair or unreasonable, such as would shock or at least surprise a sense of juridical propriety, is the standard of fair and equitable treatment infringed (¶ 9.3.40).
Regarding the treaty prohibition of the impairment of investments by unreasonable or discriminatory measures under Art. 10(1) of the ECT, the tribunal expressed the view that analysis of any unreasonableness or discrimination, follows the finding that an impairment of the investment took place (¶ 10.3.3). In the present case this was affirmed, due to AES having received a lower payment from MVM. The tribunal then proceeded with analyzing the element of unreasonableness, which requires first the examination of a rational policy being in place and thereafter the reasonableness of the state's act in relation to policy (¶¶ 10.3.5-10.3.7). Respondent submitted that its decision to reintroduce administrative pricing was due to pressure by the investigations of the European Commission. The majority was not convinced as: (a) a state aid decision of the European Commission was not issued; (b) the Hungarian agency in dealing with state aid had not been consulted; and (c) the use of cap profits had no direct connection with state aid (¶¶ 10.3.15-10.3.18). Yet, the tribunal accepted that the pursued policy, that of so-called luxury profits, was a perfectly valid and rational policy objective (¶ 10.3.34). It was also convinced that the adopted measures were reasonable, proportionate and consistent with the public policy, as expressed by the parliament (¶ 10.3.36). Further, following the implementation of these measures the generators were indeed still going to receive a reasonable return, the tribunal found (¶ 10.3.44). The claimant's allegation of discrimination was unsuccessful. The tribunal was not convinced as the prices had been the logical result of a uniform methodology that was equally applied to all generators based on their differing assets and operating cost structures (¶ 10.3.50).
Claimant's national treatment and most favored nation treatment claims were based on the same facts, as the ones stated above regarding the claim of discrimination. Thus, they were equally rejected (¶¶ 11.3.2-12.3.2).
Claimant's alleged breach of the full protection and security standard was similarly not successful. The tribunal took the view that this standard does not protect against a state's right to legislate, although in some circumstances it may extend beyond a protection of physical security. The duty, it said quoting Brownlie, is no more than to provide a "reasonable measure of prevention which a well-administered government could be expected to exercise under similar circumstances" (¶¶ 13.3.2-13.3.3). Thus, it dismissed the claim (¶ 13.3.6).
Finally, regarding the claim of expropriation, the tribunal noted that this requires the investor to be deprived, in whole or in significant part, of the property in or effective control of its investment; or for its investment to be deprived, in whole or in significant part, of its value. This was not the case here, where the legislation in question did not interfere with ownership or use of property (¶¶ 14.3.1, 14.3.4).
Consequently, the tribunal adjudicated that respondent had not breached Arts. 10(1) and (7) and 13 of the ECT (¶ 16.1).
This dispute concerned an administrative pricing regime for electricity that was statutory terminated. One of the claimants that was a juridical person incorporated in Hungary, the host state of the investment and respondent in this arbitration. Still, it was treated as a national of "another contracting state" (Art. 26(7) of the ECT, Art. 25(2)(b) of the ICSID Convention) as the majority of its shares was owned by a foreign company that also exercised ownership and control over it. The tribunal would consider respondent's obligation to comply with EU law, while determining the reasonableness of the enacted legislation. It then noted, that legitimate expectations are created at the moment of investment that being when the investment is decided and made. At the here material time none were made. Thereafter, although the tribunal accepted that the measures taken had indeed impaired claimant's investment, they were not unreasonable, as they pursued a perfectly valid and rational policy objective. Moreover, the measures themselves were reasonable. The alleged breach of the full protection and security standard was unsuccessful, as it does not protect against a state's authority to legislate. The expropriation claim was also not successful, as the legislation in question did not interfere with ownership or use of property. AES's claims for annulment of the final award under the grounds of manifest excess of powers and failure to state reasons were dismissed in their entirety.
This summary comes from the following paper:
The paper is part of the joint OGEL/TDM/ArbitralWomen Special Issue:
TDM 7 (2018) - OGEL/TDM/ArbitralWomen - Strategic Considerations in Energy Disputes