The Swedish energy utility firm Vattenfall filed two separate Arbitration cases against the German government. This blog post will examine these two arbitrations.
Vattenfall vs. Germany I
Vattenfall, a Swedish energy utility firm, first took the German government to international arbitration in April 2009. The first Vattenfall arbitration challenged environmental limitations on a 2.6 billion Euros coal-fired power plant erected along the banks of Elbe River in Hamburg. According to Vattenfall, the German government was supposed to offer permits allowing for the plant to be built which then got delayed, due to the environmental ministry giving specific requirements for the plant. The plan to build the coal power plant faced a lot of opposition from the get-go, due to fears among the public and certain political parties that there would be harm caused to the environment.
Concerns were particularly that the plant would be bigger than needed to meet Hamburg’s energy needs and it was argued that smaller and more environmentally-friendly options would be more beneficial. The plans also faced opposition due to pollution the power plant would cause to the water and high carbon emissions that would occur due to the same.
When the permits were delayed, Vattenfall submitted their concerns to the domestic court, following which the government issued permits, despite strong opposition, but gave additional requirements to protect River Elbe. These additional aspects included restrictions on the river’s water volume, the temperature of the area, and the oxygen levels.
Instead of complying with the given requirements, Vattenfall argued that following the regulations and restrictions would make the plant construction impractical and uneconomical. The plant’s uneconomical nature would make the plan go beyond the contract’s agreement made in 2007. By putting a stricter standard on the construction, Vattenfall alleged that Germany had violated the Energy Charter Treaty.
Vattenfall then launched a 1.6 billion Euro investor-state claim against Germany. They argued that Hamburg’s environmental rules added up to expropriation due to Germany failing to provide foreign investors with fair treatment. The matter was filed at the World Bank’s International Centre for the Settlement of Investment Disputes.
The Energy Charter Treaty
The Energy Charter Treaty (1994) protects foreign investors in the energy sector. It guarantees fair and equitable treatment, and in cases of expropriation, it guarantees compensation. The treaty allows a party to sue another signatory to the treaty in whose territory the former is investing. While the treaty does not have its own court or tribunal, it allows the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C. or the Arbitration Institute of the Stockholm Chamber of Commerce to handle such disputes under the UN rules of ad hoc arbitration.
The Treaty States That:
• The host state must compensate for confiscation
• The host state must treat the foreign investor fairly and equitably at all times
• The host state must treat the foreign investor no less favorable than its own country’s investors.
• The host state should treat foreign investors as they treat their other foreign investors.
Most details of this particular case remain unknown to the public. Both parties held back crucial information on the proceedings and refused to comment on the issue publicly. For instance, Vattenfall did not clearly state the basis of their arguments and the kind of relief they sought from the arbitration.
The matter was settled in 2010, when Germany agreed to settle with the Swedish firm in order to avoid proceedings by the tribunal that could lead to massive compensation payments. As part of the settlement, Hamburg was obliged to drop the additional environmental requirements and had to issue the permits for the plant erection to proceed.
To date, German tax payers do not know what amount the case was settled for. The coal plant started its operation in Hamburg in 2014.
Vattenfall Vs. Germany II
After the nuclear disaster that happened in 2011 in Fukushima, Germany’s parliament decided to make changes to the Atomic Energy Act to speed up the phase-out of nuclear energy to finish by 2022. The changes entailed shutting down some of the old reactors located in Germany.
Vattenfall, the Swedish energy company, operated and owned two old reactors. The plants were Kruemmel and Bruensbuttel. According to the report presented by the CEO of Vattenfall, the closing of the two reactors resulted in the loss of many revenues. In 2012, Vattenfall filed a case before the International Centre for Settlement of Investment Disputes asking for about 19 billion Euros as compensation after the German government upheld a high court ruling of shutting down the reactors.
The Swedish firm claimed that Germany had breached obligations under the Energy Charter Treaty by phasing out the use of nuclear energy plants and replacing them with renewable energy alternatives.
This second Vattenfall arbitration is interesting from a procedural point of view. The German government raised objections in regards to ICSID’s jurisdiction to hear the matter on the basis of EU law. It claimed that investor-State disputes involving two EU Member States should regard EU law as part of the applicable international law. Vattenfall on the other hand argued that EU law does not form part of international law as it is autonomous and therefore should not influence in the tribunal’s assessment of its jurisdiction over the matter at hand.
The tribunal found that Germany’s objection in regards to jurisdiction was timely and that it met procedural requirements to raise such objection on the basis of Article 41(1) ICSID. However, it concluded that the jurisdiction of the tribunal is to be determined by considering general principles of international law and the ICSID Convention.
Regarding applicability of EU law, the tribunal found that EU law forms part of international law within the terms of Article 38(1) of the ICJ Statute. Nonetheless, the ICSID argued that the fact that EU Member States have given competence over certain matters to the EU does not mean that the Energy Charter Treaty does not find application between EU Member States.
Upon these initial determinations regarding jurisdiction and applicability of EU law, the case remained to be heard before the ICSID. Again, as in the former Vattenfall vs. Germany arbitration, many details remained confidential. As shown on the ICSID website, the tribunal has issued four confidentiality orders. This means that details regarding the matter are kept from the public and press enquiries are denied. Even German parliamentarians do not have access to this information. The only detail that is available is a one-page summary explaining Vattenfall’s arguments.
In early March 2021, it became public that the German government had reached an agreement with Vattenfall, providing compensation of just over 1.5 Billion Euros.
To conclude, the two cases are interesting because they show that proceedings before the ICSID take place with a high level of confidentiality. This may be upsetting to tax payers in States that are ordered to pay high amounts of compensation to foreign investors, as the public is unable to understand the background of such proceedings and compensations.
Further, the two matters are interesting from an environmental point of view. Germany’s intention to decrease its negative impact on the environment is met with claims for compensation by foreign investors whose commercial operations are impacted. It is assumed that there will be a number of such cases going forward, as States continue to become more sustainable and replace traditional forms of energy with renewable ones.
Lastly, it is interesting that proceedings before the international arbitration tribunal can take place under such a high degree of confidentiality. This potentially raises questions as to the accountability of arbitrators towards the public and signatories to international agreements providing such tribunals with jurisdiction.
The Arbitration team at Rattsakuten is well versed in handling arbitration and dispute resolution between various arbitration tribunals. Contact Us for an informal discussion about your arbitration case.