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Arnold & Porter Obtains Groundbreaking Decision for Hungary on Energy Charter Treaty ICSID Arbitration Claims by Electrabel

December 6, 2012

LONDON, December 6, 2012 - Continuing a string of victories on behalf of Hungary and several other clients at the International Centre for the Settlement of Investment Disputes (ICSID), on 30 November 2012 Arnold & Porter received a favorable decision in the matter of Electrabel v. Hungary.  In a 257-page decision, an arbitral tribunal composed of V.V. Veeder (tribunal president), Gabrielle Kaufmann-Kohler and Brigitte Stern (co-arbitrators), rejected several claims brought by Belgian claimant Electrabel S.A. under the Energy Charter Treaty (ECT) concerning its investment in the Dunamenti power plant in Hungary.  The Tribunal deferred its decision on one remaining aspect of one claim until the year 2016.

The case has generated considerable public interest because it raised several issues concerning the interplay between investment treaty arbitration and European Union (EU) law.  The European Commission made submissions as a non-disputing party in the case, challenging the tribunal's jurisdiction and supporting Hungary's defenses on the merits.  Hungary did not challenge the Tribunal's jurisdiction, and the Tribunal found that it had jurisdiction to consider the dispute.  However, the Tribunal agreed with Hungary's position that (a) it is appropriate to interpret the ECT harmoniously with EU law in intra-EU ECT disputes, and (b) should efforts at harmonization fail, EU law would prevail over the ECT as between EU Member States under conflict of law rules applicable under public international law.  Moreover, the Tribunal found that because EU Member States have ceded certain sovereign powers to the EU, Hungary could not be held responsible (as a matter of attribution) for actions it was required to take under EU law.

Thus, the Tribunal rejected liability by Hungary for termination of Dunamenti's Power Purchase Agreement (PPA) with the state-owned electricity wholesale trader Magyar Villamos Mvek  (MVM) pursuant to an order to do so by the European Commission's DG Competition.  The Tribunal also concluded that Hungary's failure to pay Dunamenti its "net stranded costs" associated with the PPA termination did not constitute an expropriation because Claimants failed to demonstrate that the measure rendered its investment as a whole virtually worthless.  However, the Tribunal reserved the question of whether the failure to pay "net stranded costs" constituted a breach of the fair and equitable treatment provisions until a final calculation of "net stranded costs" becomes possible in 2016.

The Tribunal unequivocally dismissed Electrabel's three remaining claims against Hungary.  With respect to Hungary's reintroduction of regulated pricing for the public utility electricity sector for a 13-month period in 2006 and 2007, the Tribunal found that Electrabel could have had no legitimate expectation that regulated pricing would not be reintroduced, and that Hungary acted reasonably, particularly in light of instructions from the European Commission to reduce State Aid to the generators.  With respect to Electrabel's claim that Hungary was liable for positions taken by MVM in commercial negotiations with Dunamenti, the Tribunal found that MVM's conduct was not attributable to Hungary and was, in any event, not unreasonable.  Finally, with respect to Electrabel's claim that Hungary violated the ECT by removing Dunamenti's G1 unit from a mandatory off take regime for co-generation power plants, the Tribunal found that Electrabel had no legitimate expectations concerning mandatory off take for the G1 unit (which was outside the scope of the PPA) and that Hungary used rational criteria for determining eligibility for its mandatory off take regime.

The Arnold & Porter attorneys representing Hungary over the course of the proceedings have included partners Jean Kalicki, Dmitri Evseev, Luc Gyselen, Mara Senn and Whitney Debevoise, and associates Suzana Medeiros Blades, Alessandro Maggi, Wells Bennett, Paloma Gomez, Andras Kosaras and Mallory Silberman.  The Arnold & Porter team worked in close coordination with Hungarian counsel dr. János Katona and dr. Gábor Puskas, whose work was instrumental in achieving this successful result on behalf of Hungary.

 For more information on this ruling, contact Jean Kalicki at (+1 202-942-6155 or Jean.Kalicki@aporter.com) or Dmitri Evseev (+44 20 7786 6114 or Dmitri.Evseev@aporter.com). For more information about Arnold & Porter LLP's award-winning international arbitration practice and a list of our international arbitration professionals, see http://www.arnoldporter.com/practices.cfm?u=InternationalArbitration&action=view&id=379.

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