Renewed energy for investment arbitration: recent developments in Australia

Introduction

With increasing discussions around climate change and strong commitments made to reduce carbon footprints, many states have introduced incentives to promote investment in the renewable energy sector.  As the budgetary implications of those have become clearer, some states have "rowed back" on the incentives.  An important consideration for a foreign investor seeking to take advantage of such incentives is therefore the level of political sovereign risk, and what remedies are available when a state seeks to retain the benefit of the investment without honouring the promised incentives.  Investor state dispute settlement under treaties and conventions offers protection to investors, however, any award made under those regimes must be enforced and executed in order to provide an effective remedy.  

The case of Eiser is a landmark decision because it is the first contested enforcement of an investment arbitration award in Australia.  In November 2017, we reported here on the first enforcement of an investment arbitration award in the case of Lahoud.  In that case, the Court recognised and enforced two investment arbitration awards against the Democratic Republic of Congo.  However, the Democratic Republic of Congo did not appear in the Court to contest the enforcement of the awards.  In her reasons, Justice Gleeson confirmed that the Democratic Republic of Congo could not have relied upon foreign state immunity to argue that the awards should not be recognised and enforced.  Her Honour found that foreign state immunity was irrelevant in the circumstances, particularly because the Democratic Republic of Congo had submitted to the jurisdiction of the relevant tribunals. 

Spain appeared in the Federal Court to contest the enforcement of the relevant investment arbitration awards in Eiser and in doing so sought to challenge the reasoning adopted by the Court in Lahoud.

Background

From the late 1990's, Spain adopted a series of regulatory measures aimed at promoting the development of solar power and other sources of renewable energy, including enacting a law in 2007 aimed at establishing a subsidy system for electricity production from solar power and renewables.

As a result of these initiatives, the Applicants invested approximately €265 million in solar power projects in Spain.  

Spain was also a party to the Energy Charter Treaty, 2080 UNTS 95 (ECT).  Under article 26 of the ECT, contracting parties could opt to resolve disputes through investment arbitration under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) pursuant to the Convention on the Settlement of Disputes between States and Nationals of Other States (Washington Convention).

Between 2012 and 2014, Spain reduced and eventually revoked the financial incentives, significantly reducing the level of subsidies paid to solar power and other renewable energy generators, including the Applicants. 

In November and December 2013, the Applicants, which were incorporated in England and Wales and Luxembourg respectively, commenced two separate investment arbitrations against Spain.  The Applicants alleged that Spain's actions resulted in the diminution of the value of their investments and constituted a breach of Spain's obligation under Article 10(1) of the ECT to accord fair and equitable treatment to the Applicants' investments.

The respective arbitral tribunals found that Spain had breached Article 10(1) of the ECT and required Spain to pay a total of €240 million plus interest and costs as compensation to the Applicants (the Awards). 

Enforcement

The Applicants sought to enforce the Awards in Australia pursuant to the International Arbitration Act 1974 (Cth) (Arbitration Act).  The Washington Convention, which has force of law in Australia in accordance with section 32 of the Arbitration Act, provides that:

1. each Contracting State, shall recognise an award rendered pursuant to the Washington Convention as binding and enforce the pecuniary obligations (Article 54 of the Washington Convention); and
2. nothing in Article 54 shall be construed as derogating from the law in force relating to immunity from execution (Article 55 of the Washington Convention).

Spain resisted enforcement on the basis of foreign state immunity.  Relevantly:

1. section 9 of the Foreign States Immunities Act 1985 (Cth) (Immunities Act) provides that a foreign state is immune from jurisdiction of Australian courts in a proceeding; but
2. section 10 of the Immunities Act provides that a foreign state is not immune in a proceeding in which it has submitted to jurisdiction.

The Applicants argued that foreign state immunity should not apply to enforcement of the Awards because, among other things:

1. the Washington Convention excludes any claim for foreign state immunity in proceedings for the recognition and enforcement of an award, as opposed to in relation to any steps to execute upon a judgment that recognises and enforces such an award; and
2. by becoming a party to the ECT and a Contracting State to the Washington Convention, Spain had submitted to the jurisdiction of the Court under section 10 of the Immunities Act and had therefore waived any foreign state immunity.

Findings 

The Court distinguished between recognition/enforcement (i.e. entry of a judgment on the award) and execution (i.e. execution of the judgment against the property of the award debtor) of an award. This was because:

1. the Immunities Act differentiates between immunity of a foreign state from jurisdiction (which is dealt with in Pt II of the Immunities Act) and immunity of property from execution of a judgment or arbitral award (which is dealt with in Pt IV of the Immunities Act); and
2. the text of the Washington Convention itself differentiates between enforcement by way of recognition and enforcement, and execution. 

Consistent with Lahoud, the Court found that Spain had waived reliance on foreign state immunity in respect of recognition and enforcement of the Awards because it had submitted to the jurisdiction of the courts under section 10 of the Immunities Act by reason of its agreement to the terms of the Washington Convention (which provides that an ICSID award is binding and that the Contracting States (including Australia) are obliged to recognise and enforce the award as if it "were a final judgment of a court in that state”).

Analysis

The decision provides clear guidance on the recognition and enforcement of investment arbitration awards in Australia.  

Ultimately, however, the practical effect of this decision is not clear because the Applicants may be precluded from recovering the judgment sums if foreign state immunity applies to the execution of the judgment. 

In this regard, although the Court held that Spain had submitted to jurisdiction for the purposes of enforcement of the Awards, it noted that Article 55 of the Washington Convention "preserves any claim to foreign state immunity in relation to any steps to execute upon a judgment that recognises and enforces such an award". That is, the Applicants may still be precluded from executing the Awards against Spain's property because of foreign state immunity unless an exception in Pt IV of the Immunities Act applies.  These exceptions turn on different factual circumstances, including in relation to the particular property against which execution is sought.  It was not necessary for the Court to decide this issue.  However, if an exception does not apply to Pt IV of the Immunities Act, it may be that the decision in Eiser is a "zombie judgement" that is of no practical benefit to the Applicants. 

It follows that parties seeking to enforce investment arbitration awards in Australia should potentially consider whether an exception to Pt IV of the Immunities Act applies to the relevant assets in Australia before seeking to enforce an investment arbitration award.  Of course, the same consideration should be made for any other jurisdiction, and for any other investment arbitration awards, on a case-by-case basis.

Indonesia-Australia Comprehensive Economic Partnership Agreement 

On 10 February 2020, Indonesia and Australia ratified the IA-CEPA. The IA-CEPA was first signed on 4 March 2019 and it is one of a number of recent investment treaties entered into by Australia that contains comprehensive investment protections that may be enforced by ISDS, including investment arbitration. 

Our previous article in respect of the key outcomes, investment protections and the ISDS mechanism in the IA-CEPA is here.

Australia remains in negotiations with India for the Australia-India Comprehensive Economic Cooperation Agreement that  is widely reported will include an ISDS mechanism, amongst others. Australia has also positioned itself as a post-Brexit frontrunner in negotiations for the prospective Australia-United Kingdom Free Trade Agreement. There are few reported details of negotiations for the prospective Australia-United Kingdom Free Trade Agreement, however, submissions have been made in public consultations in both Australia and the United Kingdom as to the inclusion of an ISDS mechanism in any concluded agreement. 

Authors: Matthew Saunders, Partner; Adam Firth, Partner; James Clarke, Partner; Luke Carbon, Senior Associate; Prajesh Shrestha; Lawyer and Huei-Deen Yeong, Lawyer.