EJIL: Talk! | 18 March 2020
Risky business: Uniper’s potential investor-state dispute against the Dutch coal ban
by Dr. Pekka Niemelä, Harro van Asselt, Kati Kulovesi and Dr Mikko Rajavuori
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.
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.
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.