Photovoltaic Knopf Betriebs GMBH v. Czech Republic

Case summary

At a glance

Parties: Photovoltaik Knopf Betriebs-GmbH (Germany) v. the Government of the Czech Republic
Case no.: PCA Case No. 2014-21
Forum and rules: UNCITRAL Arbitration Rules 1976, administered by the PCA; seat Geneva, Switzerland
Treaty: Germany–Czech and Slovak Federal Republic BIT; Energy Charter Treaty
Tribunal: Hans van Houtte (President), John Beechey, Toby Landau
Sector: Renewable energy (solar photovoltaic)
Outcome: The Tribunal upheld jurisdiction, including over the Solar Levy under the ECT, and rejected the Achmea objection. It dismissed all claims on the merits (15 May 2019).
Amount: Claimed: not less than CZK 61.3 million (earlier CZK 39.2 million and CZK 62.6 million). Awarded: nothing. The Claimant bears 75% of the arbitration costs and must pay the Respondent EUR 49,180.98. Each side bears its own legal costs (Claimant EUR 210,598.11; Respondent USD 1,246,817).

The dispute

Photovoltaik Knopf, a German company owned by an Austrian private foundation, bought FVE Kněžmost s.r.o. on 10 August 2010. Through that company it built a solar plant of about 1 MW, which was put into operation in December 2010. The plant was meant to benefit from the Czech incentive regime under Act No. 180/2005 (the Act on Promotion): feed-in tariffs and the 5% limit on annual tariff cuts. It was also meant to benefit from income-tax incentives: a tax holiday and accelerated depreciation. In response to the 2009–2010 solar boom, the Czech Republic repealed the tax incentives and introduced a levy of 26% (later 10%) on solar electricity from plants commissioned in 2009–2010 (the Solar Levy), both with effect from 1 January 2011. The Claimant alleged breaches of fair and equitable treatment, full protection and security and the prohibition of unreasonable or arbitrary impairment under the ECT and the BIT. The Respondent argued that the ECT tax carve-out (Article 21) excluded these measures and, after the CJEU's 2018 Achmea judgment, that intra-EU arbitration was barred. On the merits it denied any breach.

Key holdings

The tax holiday and the shortened depreciation period fall within the ECT tax carve-out, so the Tribunal has no jurisdiction over them under the ECT. They remain covered by the BIT. ¶ 232; fn. 765
The Solar Levy is not a 'Taxation Measure' under Article 21 ECT. The Respondent bore the burden of proof and did not show that Czech law treats the levy as a tax; the Supreme Administrative Court held on 10 July 2014 that it was in substance a reduction of the feed-in tariff. Independently, Article 21 has implicit international limits. It does not cover a measure whose main aim was to reduce tariffs rather than raise general revenue, and which was given the form of a tax to avoid ECT claims. The Tribunal found no bad faith comparable to Yukos-type cases. ¶¶ 233–262
The Achmea judgment has no effect on jurisdiction. The Respondent clearly and repeatedly said it would not raise an intra-EU objection, and so waived it under Article 186(2) of the Swiss PILA and Article 21(3) of the UNCITRAL Rules. Arbitrability is governed only by Article 177(1) PILA, and EU law has no primacy in Switzerland. Article 177(2) PILA bars the State from relying on its own law, which includes EU law. The Tribunal did not decide whether Achmea applies to the ECT. ¶¶ 337–359
No breach of the obligation to provide a stable and predictable legal framework. That obligation is part of fair and equitable treatment, but it is not absolute. There was no stabilisation commitment, and the changes were a legitimate exercise of regulatory power during the solar boom. After the changes, the ERO reference plant still had a payback of 9.9 years (against the 15 years promised) and a return of 8.4% (against the 7% promised). ¶¶ 482–490
No breach of legitimate expectations. The State gave no assurance of regulatory stability. Mr Knopf relied on a banker rather than on State statements and did little due diligence, while warning signs had built up since 2009. Any reliance would have been unreasonable. Separately, under EU State aid law no legitimate expectation could arise from an un-notified aid scheme; the European Commission's decision of 28 November 2016 confirmed that the regime was State aid, and its letter of 27 July 2004 was not a decision. ¶¶ 498–533
No breach of transparency, of full protection and security, or of the non-impairment standard. The measures pursued a rational policy: relieving consumers and cutting excessive profits. They were implemented reasonably, and investors still earned a reasonable return. ¶¶ 538–539, 549, 599–604
Costs: the Claimant won on jurisdiction and the Respondent on the merits, and both sides behaved properly. The Claimant bears 75% and the Respondent 25% of the arbitration costs, so the Claimant pays the Respondent EUR 49,180.98. Because the claims were reasonable and the issues novel, each side bears its own legal costs. ¶¶ 636–643

Procedural history

8 May 2013The Claimant and nine other investors file a joint Notice of Arbitration. On 10 June 2013 the Respondent splits the proceedings into six arbitrations.
17 March 2014The co-arbitrators appoint Hans van Houtte as President, and the Tribunal is constituted.
22 April 2014The Claimant files its individual Notice of Arbitration, which counts as the formal start of this case.
27 February 2015Procedural Order No. 2 moves the seat from Paris to Geneva. It also allows the European Commission to intervene as amicus on condition that it undertakes to pay the resulting costs. The Commission refuses, and its submission is disallowed on 14 April 2015.
27 February – 3 March 2017Hearing in The Hague.
18 April 2018The Tribunal invites submissions on the effect of the Achmea judgment.
24 June 2018Gary Born resigns. The Claimant appoints John Beechey on 20 August 2018, and the SCC Arbitration Institute dismisses the Respondent's challenge to him on 26 October 2018.
15 May 2019Award: jurisdiction upheld, all claims dismissed, costs apportioned.