Client Alerts

Switzerland’s highest court upholds UNCITRAL award

Volterra Fietta Client Alert
5 December 2015

On 6 October 2015, the Swiss Federal Tribunal dismissed Hungary’s application to set aside the UNCITRAL award in EDF International v. Hungary in the sum of €107 million in favour of French utility company EDF International. The Swiss Federal Tribunal also ordered Hungary to pay EDF International’s costs in the sum of €184,815.

Background

In 2009, following Hungary’s termination of three long-term power purchase agreements (the “agreements”), EDF International filed an UNCITRAL claim against Hungary alleging a breach of the Energy Charter Treaty (“ECT”). The European Commission had requested the termination of the agreements because it considered them to be incompatible with the rules regarding State aid under EU law.

The UNCITRAL tribunal (the “tribunal”) found that the termination of the agreements did not breach the terms of the ECT. However, Hungary had failed adequately to reimburse EDF International’s “stranded costs” within the limits allowed by EU law and had thereby violated the ECT’s fair and equitable treatment standard.
The tribunal also found that no conflict existed between the compensation of stranded costs and the rules regarding State aid under EU law. In fact, the tribunal found that EU law encourages, and the ECT requires, Hungary to compensate investors for any stranded costs incurred.

Decision of the Swiss Federal Tribunal

As the seat of the tribunal was Zurich, Hungary challenged the UNCITRAL award before the Swiss Federal Tribunal pursuant to Switzerland’s Federal Code of Private International Law.

Hungary claimed that the tribunal had erred in finding that it had jurisdiction to hear the dispute on the basis that Hungary had withheld its consent to the arbitration. The Swiss Federal Tribunal rejected Hungary’s broad reading of Article 10(1) of the ECT and concluded that such a reading would render the ECT’s fair and equitable treatment standard redundant.

Hungary also claimed, following the reasoning adopted by the European Commission in relation to the award in Ioan Micula and others v. Romania (ICSID Case No. ARB/05/20)(“Micula v. Romania”) that payment of the award would be incompatible with EU law and would constitute illegal State aid.

In Micula v. Romania, the European Commission had argued that the payment of compensation to an investor on the basis of an award rendered under an intra-EU BIT would, in the specific circumstances of that case, constitute illegal State aid under EU law and that such an award would be unenforceable within the EU. The European Commission had also argued (as it has done in relation to several similar cases) that payment of damages pursuant to intra-EU BITs is generally contrary to EU law on the basis that it constitutes discrimination as among investors from different EU Member States.

In EDF International v. Hungary, the Swiss Federal Tribunal found that the award did not violate EU law concerning State aid on the basis that there was no contradiction between the ECT and EU law regarding compensation for stranded costs of investors and that the amount of damages satisfies the European Commission’s criteria on stranded costs.

Commentary

This decision, like that of the UNCITRAL arbitral tribunal, rejects the European Commission’s position which is hostile towards the payment of compensation to investors on the basis of awards rendered under intra-EU BITs.

However, this case can be distinguished from Micula v. Romania on the basis that whereas the award in Micula v. Romania was made on the basis of an intra-EU BIT (between Sweden and Romania), the award in this case was made on the basis of the ECT. As of today, the ECT is an intra-EU multilateral investment treaty as among all 28 EU Member States; it therefore does not discriminate as among investors of different EU nationalities. In addition, the EU itself and 23 non-EU Member States are also parties to the ECT. At several levels, therefore, the situation arising in EDF International v. Hungary can be analysed differently from that of Micula v. Romania.