Swedish Appeal Court links CJEU intra-EU arbitration obstacles to Swedish Arbitration Act, declares EUR 56 million SCC investment arbitration award invalid

By Dean Ehrlich, 16 December 2022

13 December 2022, STOCKHOLM. The Svea Hovrätt (Svea Court of Appeal) has declared the EUR 56 million SCC arbitral award rendered in Novenergia II v Kingdom of Spain on 15 February 2018 invalid. In doing so, the Court ordered the unsuccessful investors to pay Spain almost EUR 1 million in costs – an amount which includes costs incurred in response to developments in “the case law of the Court of Justice of the European Union.”

In short, the Court found that the dispute between Luxembourg based investors and Spain was not arbitrable in light of the well-known decisions in Achmea, Komstroy and PL Holdings – whose collective effect, the Court held, meant that disputes arising under the Energy Charter Treaty between Member States and their investors cannot be arbitrated and that Member States are prohibited from agreeing to bypass each other's national courts in order to resolve such disputes.

[TAO has written in detail about the CJEU’s decisions in Komstroy (here) and PL Holdings (here).]

“Since the obstacles to arbitration set out by the Court of Justice of the European Union must be equated with obstacles in Swedish law,” the Court held that the arbitral award in question “involved the examination of a question which, under Swedish law, could not be settled by arbitrators.”

The Court therefore set aside the arbitral award under S33(1) of the Swedish Arbitration Act.

Although the investors had argued that annulment would amount to “the application of a retroactive amendment to the content of the Energy Charter Treaty which is contrary to international law” and which would “constitute a serious and unambiguous violation of ECHR,” the Court was not satisfied that the investors had actually shown that the annulment would have those consequences or that they had no alternative means of relief against Spain.

The underlying dispute concerned Luxembourg registered fund company Novenergia II – Energy & Environment (SCA)’s investment in eight solar parks in Spain. In their claim, the investors alleged that Spain’s introduction of changes (between 2010-2014) to the tariff payable for energy produced from renewable sources (in place since 2007) breached the state’s obligations under the Energy Charter Treaty.

According to the investors, Spain had breached Article 10(1) on fair and equitable treatment and Article 13 on expropriation by:

  • limiting the time period of the guaranteed compensation to 25 years (rather than the lifecycle of the renewable energy installation); then
  • limiting the number of production hours that would earn producers compensation; before
  • finally replacing the old regulations, and replacing the tariff with flat fee compensation.

Eventually, on 8 May 2015, the investors commenced arbitration proceedings in Stockholm against Spain before the Arbitration Institute of the Stockholm Chamber of Commerce (as it was then called) under the SCC Rules.

Lawyer Johan Sidklev (Chairman), Professor Antonio Crivellaro and Judge Juez Bernardo Sepúlveda-Amor were appointed to the three-member tribunal constituted to hear the investors’ claims.

On 15 February 2018, the tribunal rendered its award, finding that Spain had indeed breached its obligations to the investors under the Energy Charter Treaty and ordering Spain to pay the investors close to EUR 56 million in damages and costs.

Shortly thereafter, on 17 May 2018, the Court stayed for the time being the enforcement of the award – at Spain’s request.

According to the Court, the first question to be decided was whether the underlying dispute was arbitrable in light of the CJEU’s decisions in Achmea, Komstroy and PL Holdings. In them, the CJEU considered whether arbitration clauses in international investment protection agreements concluded by two or more EU Member States were compatible with EU law.

In its decision (written in Swedish*) Court therefore proceeded to analyse and summarise the CJEU’s conclusions in the respective decisions, noting that:

  • In Achmea, the CJEU found that, by concluding a bilateral agreement, the Member States in question had established a mechanism for resolving disputes between an investor and a Member State which could result in those disputes being settled in a way that did not ensure the full effectiveness of Union law. The CJEU held that such an arbitration clause was not compatible with the principle of sincere cooperation between Member States and thus undermined the autonomy of Union law.
  • In Komstroy (despite the fact that the question raised did not relate to Article 26(2) of the Energy Charter Treaty), the CJEU held that the treaty provision must be interpreted as not applying to disputes between a Member State and an investor from another Member State concerning an investment made by the latter investor in the former Member State.
  • In PL Holdings, which involved an arbitration in Sweden under Swedish law, the CJEU recalled that the interpretation of a Union provision by the Court clarifies the meaning and scope of the provision in question, as it is to be interpreted and applied or should have been interpreted and applied, as from its entry into force. Subsequently, the CJEU held that limiting the temporal effects of the judgment would in fact limit the effect of its interpretation of the Member States’ obligations under the Treaties, in particular under Article 4(3) TFEU and Articles 267 and 344 TFEU, as interpreted in Achmea, and rejected PL Holdings’ request to limit the temporal effects of the judgment.

Following this summary, the Court concluded that the CJEU’s findings were “of a general nature” and “leave no room for a different conclusion where, as in this case, Swedish law applies to the proceedings.”

The effect of those decisions, especially after Komstroy, the Court explained, meant that the CJEU’s interpretations of the Energy Charter Treaty apply as from its entry into force. It follows, that “no arbitration agreement between the parties could ever have arisen on the basis of Article 26 of the Energy Charter Treaty.”

“In this context,” the Court noted, “in line with what the CJEU stated in PL Holdings, it would not have been possible for the parties to remedy the invalidity of the arbitration clause ex post either. The CJEU justified this ruling, inter alia, by stating that the question of the jurisdiction of an arbitral body cannot depend on the way in which the parties in the dispute act.”

The Court therefore held that arbitration clauses based on international investment protection agreements between Member States “are contrary to some of the most fundamental principles of EU law enshrined in the EU Treaties, such as the principle of mutual trust between Member States, sincere cooperation and the autonomy of EU law” and therefore Spain and the investors could not have agreed, either beforehand or afterwards, to resolve their differences through arbitration.

As S33(1) of the Swedish Arbitration Act requires that “the lack of arbitrability must follow from Swedish law in order for an arbitral award to be considered null and void,” the Court reasoned that obstacles to arbitration raised by the CJEU must also be considered obstacles to arbitration under Swedish law.

As “it is clear from the case law of the [CJEU] that disputes arising under the Energy Charter Treaty may not bypass Member State’s national courts” the Court held that the arbitration award is liable to be set aside.

However, before setting the arbitration award aside, the Court first assessed whether the European Convention on Human Rights or the principle of proportionality under EU law preclude the annulment of the arbitral award – as requested by the investors.

In this regard, the Court noted that the European Convention on Human Rights is incorporated into Swedish law and applies as law in Sweden. The European Convention on Human Rights’ fundamental rights are also enshrined in Union law as general principles.

However, there is a (rebuttable) presumption that Union law respects the European Convention on Human Rights, and starting from the presumption that CJEU’s interpretation of the Energy Charter Treaty is compatible with the European Convention on Human Rights, the Court held that the investors had not shown that annulment would change that position.

The Court held that this was so even after exercising its independent assessment – based on Sweden’s obligations under domestic and international law – “to ensure that the rights under the European Convention on Human Rights are not violated.”

Based on this conclusion, the Court held that there was “no reason to go further into the question of proportionality or whether an annulment of the arbitral award could itself have entailed a violation of the right to judicial review or the protection of property.”

As a consequence, the Court declared the arbitral award null and void.

This, however, is unlikely to be the end of the road for this matter. Because the Court considered that the matter “contains important questions for the administration of the law” it allowed an appeal against its decision to the Supreme Court. It therefore remains to be seen whether the investors will prosecute such an appeal, and whether the Supreme Court also grants the requisite leave.

The Court extended its decision of 17 May 2018 to stay the arbitration pending a final judgment.

In the appeal proceedings:

  • Hannes Snellman Advokatbyrå AB represented the Kingdom of Spain.
  • Mannheimer Swartling Advokatbyrå AB represented the investors.

[*Translations are ours]

 

URL: https://taobserver.com/news/311/swedish-appeal-court-links-cjeu-intra-eu-arbitration-obstacles-to-swedish-arbitration-act-declares-eur-56-million-scc-investment-arbitration-award-invalid