Risky business: Uniper’s potential investor-state dispute against the Dutch coal ban

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In pursuit of the ambitious long-term goals of the Paris Agreement to limit global warming to well below 2 degrees Celsius and preferably to 1.5 degrees from pre-industrial times, various European countries have decided to phase out coal. While such policies are necessary to tackle climate change – after all, coal is the dirtiest fossil fuel – they may give rise to legal claims from companies whose investments are adversely affected by the low-carbon energy transition.

This scenario started to play out in recent months with the German utility Uniper publicly pondering bringing a claim – reported to amount to €850 million – against the Netherlands due to a new Dutch law banning the generation of coal-fired power after 2030. As a consequence of the law, which was enacted in December 2019, Uniper’s new power plant on the Maasvlakte (near Rotterdam) will have to close by 2030. The potential dispute raises a complex web of legal questions related to international investment and climate change law, EU law and corporate law.

Legal base of Uniper’s claim

Uniper’s claim against the Dutch government would be based on the investment protection rules of the Energy Charter Treaty (ECT), to which both Germany (Uniper’s home state) and the Netherlands are parties. Articles 10 and 13 of the ECT respectively provide that the parties are under an obligation to provide fair and equitable treatment (FET) to investments, and that full compensation should be provided in case of direct expropriation (i.e. situations where a state transfers or terminates an investor’s title to property) and indirect expropriation (i.e. when the effects of a state’s actions are legally analogous to expropriation).

When an investor finds that the host state has breached these obligations, it can bring a compensation claim against the host state under Article 26 of the Treaty. The merits of the claim, and the amount of compensation due, will be decided through investor-state dispute settlement (ISDS) procedures relying, in practice, on an ad hoc arbitral tribunal composed of three members.

Uniper’s potential arguments

Uniper has stated that the Dutch coal ban de facto expropriates its investment (i.e. the Maasvlakte power plant) without compensation. The company has also claimed that its decision to build the power plant was heavily influenced by direct negotiations with the Dutch government. Fortum, a Finnish state-owned company that recently became a majority shareholder in Uniper, has stated that the ECT protects Uniper’s rights in the “event of unilateral regulatory changes”. Although the details of Uniper’s arguments are not in the public domain, these statements indicate that its claim would be based on the ECT’s expropriation and FET articles.

Given the background of the investment, and the fact that the power plant started operating only in 2016, it is plausible that Uniper would claim that the coal-fired power ban violates the FET standard because it breaches Uniper’s legitimate expectations concerning the investment’s projected lifespan (>40 years). As the ban does not constitute a direct expropriation, the central legal question is whether the ban has an effect equivalent to expropriation.

Assessing the arguments

It is difficult to predict the outcome of Uniper’s potential claim. There is some agreement that non-discriminatory legislative measures, which fall within the exercise of a state’s police powers (including the power to make public policy), are non-compensable even when their effects are equivalent to expropriation. Emission reduction policies to prevent dangerous climate change would fit this description.

However, arbitral tribunals have taken very different approaches to indirect expropriation claims. Some tribunals have focused solely on the effects of legislative measures. Under this approach, it is irrelevant whether the challenged legislation was non-discriminatory and proportionate and whether it had a legitimate purpose. Arbitration tribunals have also modified the police powers doctrine by holding that a non-discriminatory public interest law enacted in accordance with due process is not deemed expropriatory and compensable unless the host state had given specific commitments to refrain from such legislation. There is nothing to suggest that the Dutch government gave such a commitment. Nevertheless, without knowing all the facts that led to Uniper’s investment decision, it remains uncertain how the indirect expropriation claim would be approached by an arbitral tribunal.

Similar uncertainties relate to Uniper’s potential claims under the FET standard. “Legitimate expectations” is considered a sub-principle of the FET standard, but existing arbitral practice does not establish unequivocally the circumstances in which government behaviour generates a relevant legitimate expectation, nor the circumstances in which the FET standard protects a legitimate expectation.

News reports indicate that the Dutch government’s approval of the power plant depended on the expectation that Uniper would also invest in carbon capture and storage technology, which ultimately turned out to be an expensive option. Moreover, it is not evident that the Dutch government made specific promises to Uniper concerning the power plant’s life span. However, without access to all the facts, one can only speculate about the strength of Uniper’s potential arguments. It is possible that the arbitral tribunal would reject Uniper’s claims. At the same time, its arguments are non-frivolous and have some legal merit in light of the basic principles of international investment law.

Achmea judgment

Uniper’s claim would put to the test the 2018 ruling of the Court of Justice of the EU (CJEU) in the Achmea case. That case concerned the question of whether the arbitration clause in a bilateral Dutch-Slovak investment treaty was compatible with fundamental principles of EU law. The Court held that the clause was incompatible with the autonomy of EU law, which led the Bundesgerichtshof to annul the award issued in the underlying arbitration.

Subsequently, the Netherlands and 21 other EU Member States issued a political declaration that arbitration clauses in bilateral investment treaties between EU Member States are contrary to EU law. The declaration also suggested that no new intra-EU investment arbitration should be initiated. Importantly, the declaration indicates that these principles should apply with respect to the ECT, meaning that EU investors from one Member State (such as Uniper) should no longer be able to bring claims against others (such as the Netherlands). Both Germany and the Netherlands have signed the declaration. Responses by the Dutch government to parliamentary questions suggest that Achmea would indeed be invoked to argue against the admissibility of a claim by Uniper.

The CJEU has not ruled on the compatibility of the ECT’s arbitration clause with EU law, and arbitral tribunals are unlikely to follow the declaration’s approach before the CJEU rules on the matter or before the (unlikely event that the) ECT is amended accordingly. However, should Uniper bring a successful claim against the Dutch government’s coal ban under the ECT, legal hurdles would probably arise at the enforcement stage. Given the uncertainties over the compatibility of intra-EU arbitrations under the ECT with EU law, a Member State court would likely refer relevant enforcement questions to the CJEU for a preliminary ruling. Should the CJEU then follow the logic of its Achmea decision, this would prevent the enforcement of the award within the EU and possibly lead to its annulment.

International climate law perspectives

From a broader international legal perspective that also considers the Paris Agreement and the growing number of laws and policies to implement it, the implications of a possible claim by Uniper against the Dutch coal ban are serious. Phasing out coal is widely seen as one of the most critical measures to implement the Paris Agreement. The UN Secretary-General, for example, has called on countries to end their “coal addiction”. And both Germany and Finland (the majority shareholder of Uniper’s parent company) are in the process of phasing out coal, by 2038 and 2029 respectively.

Uniper’s possible legal challenge against the Dutch coal ban would thus run counter to the goals of the Paris Agreement and efforts by the international community to implement them. Moreover, the dispute would likely have a chilling effect on other countries intending to phase out fossil fuels. The claim would therefore cast doubt on the mutual supportiveness of international investment agreements and the Paris Agreement.

Climate policy and corporate law

Difficult questions also arise in the context of corporate law and the role of state-owned companies and state shareholders in climate policy. Specifically, Uniper’s claim would put the Finnish government in an uncomfortable position given that its state-owned company Fortum is a majority shareholder in Uniper. Finland has urged the EU to be more ambitious about climate change, including by adopting a 2050 climate neutrality goal. Allowing the subsidiary of a state-owned company to challenge another EU government’s climate policies would seem highly contradictory.

However, using their shareholder powers to prevent Uniper from seeking compensation for its stranded assets could expose Fortum and the Finnish state to liability under Finnish and German company law. Moreover, government interventions into Uniper’s legal strategy could run counter to the Finnish government’s own principles of good corporate governance.

Conclusion

No claim has been submitted as of yet, and Uniper may decide to accept its losses. However, with climate action gradually ramping up, it seems like only a matter of time before the legal questions we raise here will need answering. The legal quagmire raised by claims such as this will likely test the coherence of various legal spheres.

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    Comments

    Matteo Vaccaro-Incisa says

    March 19, 2020

    I wish firstly to thank the faculty of the University of Eastern Finland involved in the drafting of this excellent post, highlighting the potential intertwine with several disciplines that may arise in an investment arbitration case.

    In the spirit of academic fruitful exchange, I would like to offer the following two considerations, sparked by the reading of the post.

    The first is of a framework nature: in the context of investment law (with a horizontal and de-centralized dispute settlement mechanism, i.e., arbitration), the focus is the (business) relationship between a foreign investor and the host State, as opposed to grand issues of public international law. I am not persuaded that investment arbitration has much of a role in the interpretation – let alone, development – of international law in general, as interpretations therein offered are ontologically bound to be mere obiter dicta and may only apply in casu. Therefore, in principle I tend to question the need for arbitrators (or counsels) to offer sua sponte, motu proprio, or ex gratia (pick the one you like!) digressions on public international law: this is simply not their task in the context of a business dispute, and there are other courts and bodies arguably more fit to this end (let alone, the States themselves with their treaty-making activity, as well as joint interpretations, as you recall). A much different thing is, of course, for arbitrators to elaborate on rationale and methodology applied to interpret a certain provision or concept (which, when different from the majority, is indeed the ratio of a separate or dissenting opinion).

    Then, concerning certain domestic laws enacted for the public interest (on e.g. environment protection), especially when passed ex abrupto and without international (or at least regional) proper coordination (i.e., States acting with different parameters and timelines), and under a (relatively) vague framework (e.g. Paris Agreement), I think it is possible to argue that these laws in principle operate more within the domain of mitigation, rather than preclusion, of a possible BIT breach.

    I am of course not saying that protecting environment, health, etc., is not a most important thing on the part of States to do. Neither I am saying that arbitral tribunals facing these questions shall not carefully balance the competing interests and obligations involved (public interests v business activity).

    I am, however, not convinced in principle that it is appropriate to (inadvertently?) draw analogies between, on the one side, Sovereigns “trapped” in investment contracts they freely signed but have turned inconvenient and, on the other, common citizens unfairly subject, e.g., to fine-print oppressive terms and conditions with a phone company. This, especially so in the case of Western highly developed States with a wealth of experience in investment law. No matter how weakened the ancient maxim rex superiorem non recognoscens, and how extensively you want to interpret that on acta jure gestionis, it can still quite safely be assumed that obtaining, say, a license or concession contract from a Sovereign is not just like concluding a contract with a private individual. Indeed, a Sovereign is never trapped (at least, formally) in its business dealings with a private subject – no one ever questioned the States’ sovereign power to expropriate. Of course, this freedom comes at a cost, i.e., the obligation to indemnify (which is the essence of the distinction between trade and investment law: compliance v compensation).

    In other words – and more in casu –, it is arguably more a domestic (political) problem that German or Dutch politicians over the last few years bound their States to overly long licenses or concessions with hefty environmental implications (arguably problematic already at the time of signing the relevant contracts). The State (rectius, the politicians) that afterward realizes that it has made a mistake remains indeed free to act as it wishes (i.e., expropriate directly or indirectly, or even ‘mistreat’) but, in principle, is also bound to indemnify a subject that has planned and invested accordingly to a legal concession legitimately received, and then find itself with its business plans overwhelmed by a new regulation. This, of course, does not mean to turn expropriations into a lucrative business for investors (but, let’s be honest, it is hardly ever been so).

    Point being, the financial losses potentially resulting here for States are the responsibility of government officials in charge (i.e., politicians) at the time of the conclusion of bad agreements vis-à-vis their own State (i.e., people). Domestically, a legal paradigm shift ought to be sought, as the political mandate (especially when democratically received) should no longer be shielding from personal responsibility for incompetent choices ultimately detrimental for an entire community. At the international level, and aside from UNCITRAL ISDS reform attempt, to presume that a foreign investor should simply accept unexpected losses out of a State change of mind is perhaps disingenuous (not that you made this point in the post, to be sure).

    That a vast framework of vague international (para-)legal instruments may be effectively relied upon to prevent the wrongfulness of a de facto expropriation has yet to be seen. By the same token, the narrative that sees investors trying to hamper, soften, or block legitimate sovereign regulation adopted in the public interest by threatening to sue the host States is, for certain States and certain topics at least, perhaps not the most appropriate excuse (not that you explicitly made this point either, to be sure).

    Pekka Niemelä says

    March 19, 2020

    Dear Matteo,

    Many thanks for your eloquent response. I think we are in agreement on the main issues you raise. Your first point relates to the distinction between fact and applicable law in legal decision-making, and I agree that the Paris Agreement and the broader UNFCCC framework would constitute an element of fact in the analysis of an ECT tribunal established to determine the merits of Uniper’s compensation claim. In other words, while the Paris Agreement could be invoked to justify the Dutch coal ban, it could not be invoked to justify a breach of the ECT per se, unless one makes the implausible argument that the Paris Agreement applies to the merits of the dispute between Uniper and the Dutch government. While the fact/applicable law distinction gives rise to a whole host of theoretical questions, it is commonsensical that the Paris Agreement remains, for all practical purposes, a factual element in investment disputes.

    As to your second point about governments making bad policy and changing their minds, I agree that politics is too short-sighted and that investment treaties may be the only means with which investors can protect themselves against arbitrary exercises of public power. That said, and to return to Uniper’s situation, I’m not familiar with the debates preceding the adoption of the coal ban in the Netherlands and neither am I familiar with the Dutch legal principles that determine whether a private actor (such as Uniper) is entitled to compensation when a state regulatory measure affects its property rights. What government officials promised to Uniper prior to its investment decision is also somewhat unclear, as are the economic assumptions that formed the basis of its investment decision. Still, in my view, there is clearly no single correct answer to the question whether Uniper should have received compensation for the consequences of the coal ban, as this is a profoundly perspectival matter. On the one hand, it is clearly problematic that the power plant was commissioned as late as 2016 - the level of required emission reductions to prevent dangerous climate change was known to all by then. On the other hand, it is clear that the coal ban creates significant losses to Uniper in relation to this particular investment. However, one could make the argument that Dutch rules concerning compensation should decide the issue (rather than those of the ECT), as these are the result of a long maturation process and reflect the current values of the Dutch society. In other words, those rules constitute a legitimate and acceptable compromise between the interests of different stakeholders and also respect the democratic process from which they originate. This is not to argue that the Dutch rules (or similar rules in other countries) are beyond critique, as there are few (if any) legal rules that please all.