FREIF Eurowind Holdings Ltd. v. Kingdom of Spain

Case summary

At a glance

Parties: FREIF Eurowind Holdings Ltd (United Kingdom) v. the Kingdom of Spain
Case no.: SCC Case No. 2017/060
Forum and rules: Arbitration Institute of the Stockholm Chamber of Commerce; SCC Rules 2017; seat Stockholm
Treaty: Energy Charter Treaty (Article 26(4)(c))
Tribunal: Professor Douglas Jones AO (Chairperson), Professor Thomas Clay, Mr C. Mark Baker (who replaced Professor Dr Kaj Hobér after Spain's successful challenge)
Sector: Renewable energy (wind farms)
Outcome: Final Award of 8 March 2021: the Tribunal upheld jurisdiction except over the 7% TVPEE tax, dismissed all claims on the merits and ordered FREIF to pay Spain's costs.
Amount: Claimed: EUR 122.7 million including a tax gross-up (EUR 99.4 million including pre-award interest without the gross-up; EUR 68 million if the TVPEE is excluded). Awarded: nothing. FREIF must pay Spain EUR 2,730,536.62 in legal costs and EUR 304,304 plus USD 4,725.57 for Spain's share of the Costs of the Arbitration, with simple interest at the Spanish Government 10-year bond yield.

The dispute

FREIF Eurowind Holdings Ltd is an English company. In 2011 it entered into a joint venture with Renovalia through Renovalia Reserve S.L., acquiring a 50% preferred equity interest in six operating Spanish wind parks with a total capacity of 244 MW. From 2012 to 2014 Spain changed the regime that supported renewable energy. It imposed a 7% tax on the value of electricity production (TVPEE, Law 15/2012) and changed the inflation indexation. It then replaced the RD 661/2007 and RD 1614/2010 incentives with a New Regulatory Regime based on a "reasonable return" for standard facilities (RDL 9/2013, Law 24/2013, RD 413/2014 and MO IET/1045/2014). FREIF claimed that these measures breached the ECT's fair and equitable treatment standard (frustration of legitimate expectations, lack of transparency and good faith), the impairment clause and the umbrella clause, the last relying on an alleged "2010 Agreement" with the wind sector. Spain raised three jurisdictional objections: the intra-EU objection, the taxation carve-out, and a fork-in-the-road objection based on lawsuits that Spanish subsidiaries had filed before the Supreme Court. On the merits, Spain argued that it had guaranteed only a reasonable rate of return.

Key holdings

Intra-EU objection rejected. The United Kingdom, Spain and the EU are each separate Contracting Parties to the ECT. Article 26 contains no disconnection clause, EU law is not 'applicable' law under Article 26(6), and Achmea does not extend to the ECT, a multilateral treaty to which the EU is itself a party. ¶¶ 309–335
Taxation objection upheld. The TVPEE is a tax under Spanish law and a bona fide taxation measure: it applies to a class of persons and raises money for public purposes, and there is no evidence that it targeted FREIF. It is therefore carved out by Article 21 ECT, and the Tribunal has no jurisdiction over it. ¶¶ 367–379
Fork-in-the-road objection (Article 26(3)(b)(i)) rejected under the triple identity test. The Spanish lawsuits were brought by subsidiaries (DEMEPI, EACLM, ENERDUERO) over which FREIF, as a minority shareholder in their parent company, had no proven decision-making power. Those lawsuits also had a different object and cause of action, being based on Spanish and EU law. ¶¶ 415–428
EU law is not part of the governing law, and the European Commission's State Aid decision SA.40348 does not bind the Tribunal. The State Aid character of the subsidies is a relevant fact in assessing what FREIF could legitimately expect. ¶¶ 526–533
No frustration of legitimate expectations. Viewed as at October 2011, FREIF's own due diligence (the Linklaters Memorandum and its Investment Committee Memo) and the case law of the Spanish Supreme Court showed that tariffs could be changed, subject only to a reasonable return. The Tribunal declined to draw adverse inferences from Spain's failure to produce data. The benchmark return was 7%, and both experts' calculations put the wind farms' IRR above it (7.1% for Brattle, 10.2% for Quadrant). ¶¶ 540–571
The other claims also fail. Spain consulted publicly before the New Regulatory Regime, so there was no breach of transparency or good faith. No impairment was shown, and the measures were reasonable and proportionate. The umbrella clause does not apply: RD 1614/2010 was not a binding agreement entered into with FREIF, which was not yet an investor in 2010, and registration in the RAIPRE creates no obligations under the clause. ¶¶ 572–603
Costs follow the event. FREIF pays Spain EUR 2,730,536.62 in legal costs and all of Spain's share of the Costs of the Arbitration, with simple interest at the Spanish 10-year bond yield; EURIBOR was rejected because it was negative. FREIF's request for the costs of the cancelled 2019 hearing and of the supplementary objection was refused. ¶¶ 677–691

Procedural history

21 March 2017FREIF filed its Request for Arbitration with the SCC.
22 May 2017Spain filed its Answer and appointed Professor Thomas Clay.
14 September 2017The SCC Board dismissed Spain's first challenge to Professor Dr Kaj Hobér.
10 October 2017The SCC Board appointed Professor Douglas Jones AO as Chairperson.
4 January 2019The Tribunal refused the European Commission leave to intervene as a non-disputing party.
September 2019The hearing was postponed after the 1 May 2019 sale of the wind farm interests came to light; a further round of document production followed.
19 December 2019The SCC upheld Spain's second challenge to Professor Dr Hobér. FREIF appointed Mr C. Mark Baker on 7 January 2020.
28 September – 2 October 2020Main Evidentiary Hearing held virtually, after the April 2020 dates were vacated because of COVID-19.
8 March 2021Final Award: jurisdiction upheld except over the TVPEE, all claims dismissed, costs awarded to Spain.

Tribunal, counsel and experts

Decided by: Doug Jones President — appointed by the institution
Thomas Clay Co-arbitrator — appointed by the respondent
C. Mark Baker Co-arbitrator — appointed by the claimant (replaced Professor Dr Kaj Hobér on 7 January 2020)
Kaj Hobér Co-arbitrator — appointed by the claimant (first challenge dismissed 14 September 2017; released 19 December 2019 after Spain's successful second challenge)
For the claimant: King & Spalding LLP · Gómez-Acebo & Pombo
For the respondent: Attorney General's Office of the Ministry of Justice
Experts: Carlos Lapuerta (claimant) · José Antonio García (claimant) · Richard Caldwell (claimant) · José Alberto Ceña Lázaro (claimant) · Daniel Flores (respondent) · Jordan Heim (respondent)