On 24 May 2023, Justice Fraser issued a comprehensive judgment in Infrastructure Services Luxembourg v Kingdom of Spain, rejecting Spain’s defences to the enforcement and recognition in the UK of an ICSID award against Spain.
The enforcement and recognition of intra-EU ICSID awards against Spain in non-EU jurisdictions have been the subject of extensive controversy. In Australia, the High Court judgment of 12 April 2023 ruled against Spain. In the United States, the courts are split, with a US District Court Order of 29 March 2023 in favour of Spain contradicting previous precedent and the divergence of opinions under appeal.
The present legal issues concern the interpretation of the ICSID Convention and the ECT. However, the challenges to recognition, enforcement and execution are ultimately dependent on the law and practice of each foreign jurisdiction. Moreover, underlying the challenge are arguments of EU Law and sovereign immunity.
The result is a close interconnection between the international law issues and the domestic law of each country. The recent judgment of Justice Fraser provides an exhaustive review for its resolution in the UK. The issues raised are of international interest.
Background
Spain is a party to the Energy Charter Treaty (‘ECT’), which intended to promote long-term co-operation in energy markets. The ECT incorporated the state parties’ consent to arbitrate investment disputes under the ICSID Convention.
Several investors in renewable energy, particularly in solar power installations, entered into projects in Spain, which at the time had tariff advantages for renewable power. Spain reduced and eventually eliminated tariff advantages for solar energy. Several claims were brought against Spain for breach of the ECT, which were to be arbitrated under the ICSID Convention.
The claimants in this case are one of these investors. In ICSID Case No. ARB/13/31 the claimants succeeded in obtaining damages in an Award dated 15 June 2018. Subsequently, Spain challenged the Award, but the ICSID Committee decision dated 30 July 2021 rejected Spain’s arguments and confirmed the jurisdiction of the tribunal.
The claimants have subsequently engaged in proceedings in several countries for recognition of the Award, such as the UK, the US and Australia. The complex international litigation landscape includes related proceedings such as anti-suit injunctions, and separate cases from other investors either pursuing or having already succeeded in obtaining Awards for breach of the ECT, with similar legal arguments underpinning the present case.
Conflict among EU Law, the ECT and the ICSID Convention
The core of the problem is that the Court of Justice of the European Union has declared that in certain circumstances, like the ones in this case, investment arbitration is incompatible with EU law. In Slovak Republic v Achmea, the CJEU in 2018 ruled, in the context of a bilateral investment treaty between two Member States, that Articles 267 and 344 TFEU precluded these Member States from submitting a dispute to investment arbitration.
The Court reasoned that an arbitral tribunal in this context would have to address the interpretation or application of EU law but was not part of the EU judicial system provided in the Treaties. Further, there were very limited grounds for review of these awards in the courts of the Member States. The overall effect, according to the CJEU, was that investment arbitration would affect the autonomy of EU law. In 2021, the CJEU confirmed in Moldova v Komstroy that the Achmeadoctrine applied to the ECT.
According to Spain, the investment arbitration of the present case is therefore incompatible with EU law and Spain could not have validly consented to arbitrate the dispute. The ICSID Committee rejected annulling the award against Spain based on this argument. Now, Spain raises this argument again in the recognition proceedings before the UK court.
Justice Fraser reasoned that if a conflict existed between Spain’s obligations under the EU Treaties and under the ICSID Convention and the ECT, Article 30(4) of the Vienna Convention on the Law of Treaties should apply because these are pre-existing multilateral treaties with non-EU members. Under that reasoning, EU law cannot claim primacy and the ICSID Convention is applicable, also for the enforcement proceedings.
Further, whatever the international obligations of Spain, the UK courts have their own duty to fulfil the ICSID Convention and the UK Arbitration Act of 1966. Justice Fraser referred to the UK Supreme Court judgment Micula & Ors v Romania, which stated that defences against enforcement of ICSID awards can only occur in exceptional or extraordinary circumstances which do not directly overlap with the grounds for the annulment of the award under the ICSID Convention, adopting by express quotation the narrow interpretation of Professor Schreuer.
In the present proceedings, Justice Fraser rejected Spain’s arguments of lack of a written agreement to arbitrate and invalidity of the award (underpinned by EU law arguments) because these were grounds of challenge for the ICSID organs. The only potential argument before the UK courts was sovereign immunity.
Sovereign immunity
Under section 2(2) of the UK State Immunity Act 1978 (‘SIA’), Spain loses its adjudicative immunity if by prior agreement it has submitted to the jurisdiction of the Courts. The UK court agreed with Spain that this required an express waiver, but considered that Article 54 of the ICSID Convention satisfied this requirement by regulating the recognition and enforcement of awards. A contrary conclusion would mean that ICSID awards could only be enforced in the UK when the UK was a party to the award, which the court considered an ‘absurd’ interpretation. Moreover, immunity is lost under section 9(1) SIA when there is an agreement to arbitrate. The highest court in Australia, in its judgment of 12 April 2023, had dismissed Spain’s arguments for sovereign immunity based on very similar reasoning.
However, the UK court reaches a different result than a previous decision in the US for another claimant in a separate case. In its Order of 29 March 2023, the US District Court for the District of Columbia ruled that given EU law primacy, Spain lacked capacity to consent to arbitration under the ECT. Thus, under the US Foreign Sovereign Immunities Act, the waiver and arbitration exceptions to Spain’s sovereign immunity could not apply. The Order conflicts with other decisions from the same court level in the US, which rejected considering EU law arguments, and the split of opinions is currently under appeal in the US Court of Appeals for the District of Columbia Circuit.
In any event, Justice Fraser distinguished the US decision because in that case the ECT claim was arbitrated under the UNCITRAL arbitration rules rather than the ICSID Convention. The US court did reason that the presumption of a lack of an agreement to arbitrate can be overcome if the parties agreed to arbitrate under rules that delegate authority to the arbitrator to resolve challenges to the existence of an arbitration agreement. In Justice Fraser’s view, the ICSID rules do delegate that authority, and the UK and US positions eventually can be reconciled.
Conclusions
Finally, rejecting all of Spain’s arguments, Justice Fraser explained that the extensive hearing and consideration of arguments, and the lengthy judgment in this case, were unique in ICSID recognition proceedings. In the future, ‘This should not be taken as encouragement by any state in a similar position to Spain that there is a lengthy and costly legal argument, based on wide-ranging arguments under international law, to be had on all or any attempts to obtain recognition of an ICSID award’. After all, that is ‘exactly what international arbitration is designed to avoid’.
Under the ICSID Convention and international law, this is another victory for claimants. Under EU law, the European Commission has an open investigation against Spain, considering that payment of the award to the claimants in this dispute might constitute illegal State Aid.
As Justice Fraser put it, ‘One can well understand that Spain finds itself on the horns of a juridical dilemma’. The UK courts, however, cannot assist here. Like its famed literary character, Spain may be tilting at windmills, dedicating time and energy to a vain battle.
Pedro Aranguez Diaz is General Editor with the Cambridge International Law Journal. He would like to thank Danielle Morris (WilmerHale) for useful feedback on an earlier version of this piece.