Vattenfall Dispute Settled: Questions Remain Unanswered

Yash Shiralkar

What’s going on?

The Vattenfall v. Germany saga, which dealt with the phase-out of nuclear power plants by Germany in the wake of the Fukushima disaster, may have finally come to an end. After several domestic court judgments, objections on the validity of intra-EU BIT claims post-Achmea and multiple instances of arbitrator challenges, it seemed as if the ICSID proceedings were finally underway. However, in a press media report dated 5 March 2021, the German Federal Ministry for Environment, Nature Conservation and Nuclear Safety announced that they had settled with Vattenfall. The Germany Ministry clarified that the phase-out would be completed by the end of 2022 and that it would pay €2.428 billion compensation (€1.425 billion of which would go to Vattenfall). Vattenfall, in its own press release dated 5 March 2021, reiterated the terms of the settlement and revealed that it would lead to the discontinuation of the Energy Charter Treaty (ECT) proceedings.

Some questions may never be answered

While the dispute may have come to a conclusion, some objections that were raised therein remain unanswered. This post will look at some of these points – such as the possibility of being a claimant in an investment treaty case without having substantive rights as well as the procedural objections that might arise with virtual hearings – and then further analyse the merit in these points, as they are certain to arise in the future in other proceedings.

Claimant but not investor – oversight in the ECT?

Germany, as Respondent, had indicated an intention to raise a jurisdictional objection that since all but one of the Claimants are German companies, they cannot claim as investors having their own substantive rights under the ECT. If the proceedings had continued, the Claimants would have, au contraire, argued that they could do so, through Art. 26(7) of the ECT:

An Investor other than a natural person which has the nationality of a Contracting Party to the dispute on the date of the consent in writing referred to in paragraph (4) and which, before a dispute between it and that Contracting Party arises, is controlled by Investors of another Contracting Party, shall for the purpose of article 25(2)(b) of the ICSID Convention be treated as a “national of another Contracting State” and shall for the purpose of article 1(6) of the Additional Facility Rules be treated as a “national of another State”.

Vattenfall AB, the Swedish parent company and the first Claimant to the proceedings, is the majority shareholder in the other claimants, who were its German subsidiaries, and had been since before the dispute arose. As such, all requirements prescribed by Art. 26(7) of the ECT are seemingly met. Germany argued (as is evident from the Recommendation Pursuant to the request by ICSID on the Respondent's Proposal to Disqualify All Members of the Arbitral Tribunal dated 16 April 2020) that even if the domestic subsidiaries meet all these requirements, at best they satisfy the requirements of ‘national of another Contracting State’ exclusively for the purposes of the ICSID Convention (Convention on the Settlement of Investment Disputes Between States and Nationals of Other States) but not for the ECT. Since disputes under the ECT, under the ICSID Convention, or otherwise, can only be brought against a Contracting Party by investors of another Contracting Party, the domestic entities of Vattenfall could not seek the protection of the Tribunal. As per Germany’s view, Art. 26(7) of the ECT did not grant these domestic companies substantive rights of their own under the ECT as the provision solely engaged with the procedural rights under the ICSID Convention. Resultantly, Germany pleaded that Art. 26(7) only gave procedural standing to the domestic entities, thereby allowing the Claimants to recover only to the extent of the parent company’s shareholding in the German subsidiaries. (¶115)

While Germany’s argument could have been supported by an ordinary reading of the text of Art. 26(7), it led to the absurd result that an entity can be a claimant without being a protected investor with its own substantive rights under the ECT. Notably, Art. 26(7) has not been without controversy in the past. To Germany’s dismay, in erstwhile cases such as Eskosol v. Italian Republic, where the Claimant met all the requirements under Art. 26(7), substantive rights were ultimately considered by tribunals.

Perhaps that is why Germany challenged the appointment of Judge Brower, who sat in PV Investors v. Spain, where this controversial provision had already turned heads. Germany’s objection was that since Judge Brower had already decided on the application of this provision before, it would lead to a conflict in this case. Leading up to the rejection of Germany’s challenge of Judge Brower, it was pointed out that Germany’s issue conflict objections did not carry much merit as the jurisdictional objections Germany raised in Vattenfall were not raised by any of the parties or arbitrators in the PV Investors case. On the contrary, the latter case dealt with the application of Art. 26(7) to proceedings brought under UNCITRAL or SCC Rules, without even doubting the ability of such domestic entities to bring forth their own claims. In fact, Judge Brower himself may have been unaware of such an objection and hence it was noted that he could not have held a firm view leading to any issue conflict. (¶¶ 116-117)

Nevertheless, Germany would have hoped that their jurisdictional objection would have been as convincing to the Tribunal as it was innovative and novel. Additionally, as pointed out, if the ordinary meaning of the text of a treaty led to an absurd result, the Vienna Convention on the Law of Treaties suggests resorting to the object and purpose. One of the main objects of the ECT is the promotion and protection of foreign investments (recognised by the tribunal in its award in Plama v. Republic of Bulgaria). Germany may have argued that the German entities are not foreign investors and hence incapable of making foreign investments, ergo should not, on this reasoning, have been able to avail themselves of the ECT’s protection mechanism.

However, a crucial obstacle before Germany was one of the reasons for incorporating this article into the ECT. Several countries have strict foreign investment laws requiring such foreign investors to set up domestic entities in order to carry out their investment (¶ 250, PV Investors – Decision of Jurisdiction). Art. 26(7) would thus allow such a domestic entity to claim, assuming it still had foreign control. It would thus allow States to maintain their investment regimes without making foreign investors compromise on their investment treaty protection. However, as was noted by the majority in PV Investors, regardless of this provision, the mentioned hypothetical foreign investor could still bring a claim and its domestic subsidiary would essentially constitute its ‘investment’ (¶ 268, PV Investors – Decision of Jurisdiction). Hence, there is little purpose that will be served by the provision if an entity can be a claimant without being an investor; and its quantum of claim is restricted to the extent that it has foreign shareholding. It is difficult to see otherwise.

Drawbacks of a virtual hearing

In addition to this innovative jurisdictional objection in respect of Vattenfall’s domestic subsidiaries, Germany also challenged the arbitral tribunal on equally innovative grounds. Germany had argued that the Tribunal's decision to hold the hearing on quantum online despite its objections showed that it viewed the hearing as a mere formality, and hence created an appearance of bias. While recommending that this ground of challenge cannot be sustained, the PCA Secretary-General reiterated that the decision to conduct a virtual hearing fell squarely within the decision-making power of the Tribunal. Germany had raised all the objections that one could envisage to be a virtual hearing’s pitfalls – the matter was too complex and involved too many witnesses to proceed by video conference; a virtual hearing could not approach the value of in-person cross-examination, and created concerns about witness coaching, etc. Germany substantiated upon this by arguing that the ICSID Rules do not allow holding a hearing online against the will of one party, as online hearings are not provided for explicitly in the Rules. (¶¶ 130-131, Recommendation Pursuant to the request by ICSID on the Respondent's Proposal to Disqualify All Members of the Arbitral Tribunal dated 16 April 2020).   

Vattenfall pointedly argued that the principal hearing had already taken place in 2016 and there could be no right to an in-person hearing, especially to what is a limited supplemental evidentiary hearing. (¶ 134) It is difficult to see how Germany’s objections to a virtual hearing held any merit. In fact, ICSID even conducted a webinar on 5 May 2020 on how to go about conducting virtual hearings. Germany’s objection that the ICSID Rules disallow virtual hearings by being silent on it cannot stand if ICSID itself has been advocating for a transition to virtual hearings for as long as the world is still locked down.

This view was also shared in the Challenge Decision dated 15 December 2020 in Landesbank Baden-Wuerttemberg v. Spain, where Spain unsuccessfully challenged the entire tribunal for, inter alia, refusing to reconsider its decision to conduct a virtual hearing. Both challenges ultimately were rejected as they failed to show how a virtual hearing might prejudice one party more so than the other.

Conclusion

It is pleasing to see an amicable settlement being effectuated. While virtual hearings have become the new normal and cannot easily be objected to, there are certain aspects that cannot be identically replicated by a virtual hearing. However, there has to be a balance of considerations – a necessity to not incur undue delay in the adjudication of a dispute while ensuring that the due process rights of a party are not hampered. Concurrently, complex and novel jurisdictional objections such as the one dealing with Art. 26(7) of the ECT will certainly be looked at in future disputes under the ECT. Tribunals may well be forced to decide between a literal interpretation or a purposive one.

Yash Shiralkar is a final-year law student at Government Law College, Mumbai. He is passionate about international law and in particular investment treaty arbitration. His team was ranked 4th at the FDI Moot 2020 and his team was the runner-up at the Frankfurt Investment Arbitration Moot 2021.