Eiser v Spain: ICSID Award annulled on two grounds due to undisclosed ties

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Josep Gálvez
Galvez Pascual, Barcelona
info@galvezpascual.com

Eiser v Spain: ICSID Award annulled on two grounds due to undisclosed ties between claimants’ appointed arbitrator and claimants’ quantum experts

In its recent decision in the case of Eiser Infrastructure Limited and Energia Solar Luxemburg S.à r.l. v Kingdom of Spain (ICSID Case No ARB/13/36), an International Centre for Settlement of Investment Disputes ad hoc committee annulled the underlying award in its entirety, considering that the claimants’ appointed arbitrator had a conflict of interest. For the first time in the history of ICSID, a decision is annulled on the grounds of: (1) improper constitution of the tribunal; and (2) serious departure from a fundamental rule of procedure.

Background of the dispute

The claim, brought by investors from the United Kingdom and Luxembourg (Eiser and Energia Solar, respectively) under the Energy Charter Treaty, essentially alleged that unlawful regulatory reforms implemented by Spain to the tariff regime applied to electricity generation systems based on photovoltaic solar energy caused them €256m in damages.

The ICSID tribunal unanimously determined that Spain had violated its international obligations by upending a series of subsidies aimed at encouraging investment in the renewable energy sector several years after the companies had invested more than €126m into three solar plants. The award granted €128m to the claimants, including interest.

Following the ICSID award, Spain filed an application for annulment of the award on 21 July 2017, arguing that one of the arbitrators and his former firm, Sidley Austin LLP, frequently engaged experts from this firm in proceedings in which he acted as counsel, including two other arbitrations that took place while the Eiser arbitration was ongoing.

Consequently, an ad hoc committee composed of Professor Ricardo Ramírez Hernández (a national of Mexico), Mr Makhdoom Ali Khan (a national of Pakistan) and Judge Dominique Hascher (a national of France) (the ‘Committee’) was constituted and concluded that the applicant had sufficiently demonstrated that arbitrator Mr Stanimir A Alexandrov’s undisclosed business relationship with the claimants’ experts, the Brattle Company, had been improper, and thus annulled the award on the following grounds: (1) improper constitution of the Tribunal; and (2) serious departure from a fundamental rule of procedure.

(1) Improper constitution of the Tribunal

In considering whether the Tribunal had been properly constituted, the Committee first examined the parties’ respective interpretations of article 52(1)(a) of the ICSID Convention before turning to the question of what is the applicable standard when determining whether an award should be annulled under that provision.

Manner of Interpretation

The Committee interpreted article 52(1)(a) of the ICSID Convention considering the following parameters.

Specific text of Article 52(1)(a)

The Committee rejected the Eiser parties’ assertion that the provision only applies to procedural deficiencies regarding the constitution of the Tribunal at the outset of the arbitration, instead adopting the following interpretation: ‘the Tribunal must have not only been correctly formed, initially, but must have also continued to remain so for the duration of its existence’.¹

Context of article 52(1)(a)

The Committee explained that article 14(1) of the ICSID Convention sets out the qualifications of arbitrators designated to sit on arbitral panels. However, the Committee rejected the Eiser parties’ reasoning that a failure to exercise ‘independent judgement’ under paragraph (1) of Article 14 cannot provide a ground for annulment, instead finding that ‘a tribunal cannot be held to be “properly constituted” under Article 52(1)(a) where an arbitrator, whose ability to exercise independent judgment is in doubt, is either appointed to or continues to be a member of, a tribunal’.²

For the same reason, the Committee also dismissed Eiser’s argument that the award should merely be revised instead of annulled.

Object and Purpose of article 52(1)(a)

The Committee stated that the object and purpose of article 52(1)(a) are centred around the notions of procedural legitimacy and integrity and according to article 31 of the Vienna Convention, the Committee went on to emphasise that there is no greater threat to the legitimacy and integrity of the proceedings than the lack of impartiality or independence of one or more of the arbitrators.

Interpretation in accordance with relevant rules of international law

The Committee highlighted that its interpretation of article 52(1)(a) is consistent with article 31(3)(c) of the Vienna Convention, which provides that relevant rules of international law applicable to the relations between the parties shall be taken into account. The Committee went on to state that the right to an independent and impartial tribunal has been recognised as a general principle of international law and it therefore must be considered when interpreting the meaning of ‘improper constitution’ under article 52(1)(a).

The Committee concluded that: ‘for purposes of determining whether the Tribunal was properly constituted, it has the authority to examine whether the members of the Tribunal were and remained (and were seen to be/remain) impartial and independent throughout the proceedings’.³

Application of the standard

The Committee then applied a test similar to the three-step test set out in the case of EDF v Argentina:⁴

1. Was the right to raise this matter waived because the party concerned had not raised it sufficiently promptly?

2. If not, has the party seeking annulment established that a third party would find a visible or obvious appearance of lack of impartiality or independence on the part of an arbitrator on a reasonable evaluation of the facts of the case?

3. If so, could the manifestly apparent lack of impartiality or independence on the part of that arbitrator have had a material effect on the award?

In relation to the first limb of the test, the Committee rejected Eiser’s argument that Spain knew or should have known about the relationship between Alexandrov and the Brattle Group, deciding instead that the claimant failed to demonstrate that Spain was actually aware of the relevant information.

In this regard, the Committee considered that ‘the existence of the information in the public domain does not discharge the burden of the Eiser Parties to prove that Spain was aware of the relevant facts’.⁵

In analysing whether the second and third limbs of the test had been satisfied, the Committee considered whether the standard for disqualification had been met. Consequently, the Committee stated that the appropriate standard is the one adopted in the case of Blue Bank v Venezuela,⁶where the Chairman of the Administrative Council of ICSID disqualified the claimant’s appointed arbitrator, Mr Jose Maria Alonso, from serving on the tribunal on the grounds that his law firm elsewhere was acting against Venezuela.

In this sense, to the Committee, the applicable legal standard is an ‘objective standard based on a reasonable evaluation of the evidence by a third party’.⁷ Therefore, the subjective belief of the party requesting the disqualification is not enough to satisfy the requirements of the ICSID Convention.

Considering this standard, the Committee held that:

• on an assessment of the facts, an objective third party would conclude that the existence of the relationship between Alexandrov and the Brattle Group created a manifest appearance of bias; and

• given the extent of the ‘past and present professional connections and interactions’⁸ between Alexandrov and the Brattle Group, the arbitrator was under a clear obligation to disclose this relationship.

Accordingly, the Committee, imposes a high scrutiny bar and finds that those numerous undisclosed past and present connections between arbitrator, Alexandrov and the claimants’ quantum experts, the Brattle Group, warrants annulment of the underlying award.

(2) Serious departure from a fundamental rule of procedure

Both parties considered that, for an award to be annulled, a fundamental rule of procedure must be severely affected and that the right to an independent and impartial tribunal is a fundamental rule of procedure. However, the parties disagreed on the question of when there has been a consequential departure from this fundamental rule of procedure.

The Eiser parties submitted that in order for an award to be annulled, it was necessary to prove that a deviation from the fundamental rule influenced the outcome of the case and that without the deviation, the result would not have been the same. On the contrary, Spain considered that it only requires demonstrating a ‘potential effect’ of the departure on the award.

According to the Committee’s analysis, this fundamental rule had been violated since Alexandrov did not reveal his relationship with one of the parties’ appointed experts, depriving Spain of having a fair hearing. At the same time, the Committee also considered that if the other arbitrators had been informed of the existing relationship, they could have taken it into account at the stage of deliberation.

Finally, the Committee analysed whether this deviation may be considered as serious according to articles 52(1)(a) and (d), and thus have a material effect on the result. In this regard, the Committee considered that an annulment body cannot be made aware of the deliberations that the arbitrators carried out, but that the fact of achieving unanimity does not of itself prevent the annulment of the award. Consequently, the Committee considered that it is to be expected that each arbitrator may influence the opinions of the other arbitrators through their ongoing deliberations and that if the other two arbitrators had been aware of the relationship, they may have given a different value to Alexandrov’s contributions. The Committee therefore concluded that it cannot be considered unlikely that the non-disclosure of his relationship with the Brattle Group influenced the final result.

In summary, the Committee found that a conflict of interest may have existed and that failure to disclose it may have affected the outcome of the award, and therefore annulled the award on the ground of serious departure from a fundamental rule of procedure.

Conclusion

At a time where stakeholders in ICSID arbitrations are in desperate need of a solution to the ever-increasing bias challenge, the reasoning of the Committee is enlightening and marks the first time that an argument of improper tribunal constitution has succeeded in an ICSID annulment proceeding. As dealt with by the Committee, the decision sets forth suitable standards and criteria to examine the proper constitution of the Tribunal and determine whether a serious departure from a fundamental rule of procedure has occurred. Consequently, concerns related to the integrity of tribunals will allow less room for any relationship between the arbitrators and any participant in an arbitration proceeding. Therefore, the high demands of these processes will require heightened duties of disclosure and even specific information systems to avoid potential conflicts of interest that could compromise the arbitral procedure.

Notes

1. EiserInfrastructure Limited and Energía Solar Luxembourg S.à r.l v Spain, ICSID Case No ARB/13/36. Decision on the Kingdom of Spain’s Application for Annulment, at para 158.

2. Ibid, para 167.

3. Ibid, para 178.

4. EDF International SA, SAUR International SA and León Participaciones Argentinas SA v Argentine Republic, ICSID Case No ARB/03/23, para 136.

5. Eiser (see n 1 above), para 190.

6. Blue Bank International & Trust (Barbados) Ltd v Bolivarian Republic of Venezuela (ICSID Case No ARB/12/20).

7. Eiser (see n 1 above),para 206.

8. Ibid, para 208

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