On June 25, 2021, the Full Court of the Federal Court of Australia made an order recognizing an award issued by the International Centre for Settlement of Investment Disputes (ICSID) against the Kingdom of Spain.
In its decision, Kingdom of Spain v Infrastructure Services Luxembourg S.a.r.l. (No. 3)  FCAFC 112 (June 25, 2021) (second decision), the court held that Spain could not claim foreign state immunity in relation to the recognition of an ICSID award in Australia.
The decision followed an earlier Full Court decision in February 2021, Kingdom of Spain v Infrastructure Services Luxembourg S.a.r.l.  FCAFC 3 (Feb. 1, 2021) (first decision), in which the court held that a contracting state that consented to arbitration under the International Centre for the Settlement of Investment Disputes Convention 1966 (ICSID Convention) could not claim foreign state immunity in Australia.
In the second decision, the court, having regard to its reasons in the first decision, set out the form that an order recognizing an arbitral award in Australia should take.
Background to the Dispute
The case in Australia followed a dispute between Antin Infrastructure Services Luxembourg S.a.r.l (ISLS) and Spain under the Energy Charter Treaty. (See Infrastructure Services Luxembourg S.à.r.l. and Energia Termosolar B.V. (formerly Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V.) v. Kingdom of Spain, ICSID Case No. ARB/13/31, Award (June 15, 2018) (ICSID Decision).)
In 2011, ISLS invested in two solar power plants in Spain in reliance on a Spanish royal decree passed to encourage investment. The royal decree sought to increase renumeration for renewable energy facilities by providing regulatory stability with respect to tariffs. (ICSID Decision ¶ 91.)
Following the investment, Spain changed its regulatory regime and ISLS suffered economic loss.
The ICSID tribunal found that Spain had breached the “Fair and Equitable Treatment” standard under the Energy Charter Treaty and awarded ISLS damages of 112 million euros (about US$131.56 million), plus interest, as well as certain amounts toward its legal costs. (ICSID Decision pts. VIII & XI.)
ISLS subsequently applied to the Federal Court of Australia seeking an order that Spain pay the damages awarded.
Spain contested the Federal Court of Australia’s jurisdiction on the basis that it had foreign state immunity under section 9 of the Foreign State Immunities Act 1985 (Cth) (FSIA). (First decision ¶ 12.)
The court considered whether Spain could claim foreign sovereign immunity with respect to the recognition, enforcement, and execution of an arbitral award issued under the ICSID Convention.
In its reasons, the court considered the FSIA, the ICSID Convention, and the International Arbitration Act 1974 (Cth) (Arbitration Act).
Under section 9 of the FSIA, a foreign state is immune from the jurisdiction of Australia’s courts unless it submits to the court’s jurisdiction by “agreement or otherwise.” Agreement is defined as “a treaty or other international agreement in writing.” (First decision ¶ 16.)
The Arbitration Act allows an ICSID award to be recognized in Australia because Australia is a party to the ICSID Convention. (See ¶¶ 2, 20 & 42.)
Article 54 of the ICSID Convention requires that each contracting state recognize an award issued by an ICSID tribunal as binding. As such, a contracting state “with a federal constitution may enforce such an award through its federal courts” as if it “were a final judgment” of that court. (¶ 18.)
The court considered that article 54(2) of the ICISID Convention operated as an agreement by Spain to submit to the jurisdiction of a relevant court. As this constituted an agreement within the meaning of section 10 of the FSIA, Spain could not claim foreign state immunity under section 9 of the FSIA.
With respect to the process of recognition, enforcement, and execution of arbitral awards, the court noted that:
- Recognition is the process whereby a court confirms that an arbitral award is authentic and can have legal consequences in that jurisdiction.
- Enforcement involves a party seeking to ensure compliance with an award that has been recognized.
- Execution is the “formal process” through which “enforcement is carried out.” (First decision ¶ 26.)
Accordingly, article 54 “contemplates two distinct applications” to a municipal court: for recognition that an award is binding and for enforcement “of the pecuniary obligations imposed by the award.” (¶¶ 27 & 28.)
Having regard to the FSIA, Arbitration Act, and the ICSID Convention, the court concluded that it had jurisdiction to determine whether it could recognize the award (¶ 72), and ordered that the form of the order be discussed in a subsequent decision.
In the second decision, the court noted that the parties were “at issue as to what orders should be made” with respect to the first decision. (Second decision ¶ 1.)
Elaborating on its reasons in the first decision, the court noted that the proceedings related to recognition of the award. As such, the court considered that the orders should recognize the ICSID award such that they have “enforceable status.” (¶ 10.)
In its orders, the court recognized the ISCID award dated June 15, 2018, as binding on Spain. The court noted that the orders should not be construed as “derogating from the effect of any law relating to immunity … from execution.” (¶ 1.) As such, the court did not execute the award or make a determination with respect to questions of immunity in execution.
European Commission Investigation
As both Spain and Luxembourg are parties to the ICSID Convention, the matter proceeded to ICSID arbitration. Spain and Luxembourg are also members of the European Union (EU). As recorded in the first decision, the European Commission sought leave to argue that article 26 of the Energy Charter Treaty did not constitute an offer to ICSID arbitration, and even if it had constituted an offer, the arbitration was unlawful between members of the EU under European constitutional law. (First decision ¶ 113.) The Federal Court refused leave on the basis that it was not relevant to the question of recognition. The court also noted that it had no jurisdiction to hear the issue because the argument was not advanced before the trial judge. (First decision ¶ 115.)
Following the court’s second decision of June 25, 2021, the European Commission commenced an investigation into the ICSID award on July 19, 2021, stating its preliminary view that the award “would constitute State aid, as it grants Antin an advantage equivalent to those provided for by the non-notified 2007 Spanish scheme.”
The European Commission stated that Spain’s 2007 scheme had not obtained approval from the Commission and was therefore “unlawfully implemented.”
The purpose of the investigation is to determine wither the arbitration award would “qualify as incompatible State aid.” The investigation will also consider the award’s compliance with EU law and the finding by the Court of Justice of the European Union that “investor-to-State arbitration, when applied in an intra-EU context, undermines the system of legal remedies foreseen in the EU Treaties for resolving such disputes.”Prepared by Nabila Buhary, Law Library intern, under the supervision of Kelly Buchanan, Chief, Foreign, Comparative, and International Law Division II