Case RWE v. the Netherlands
Dr Yulia Levashova, LL.M, Assistant Professor at Nyenrode University and director of the dispute prevention program at the Asia Pacific FDI Network
The Hague District Court (Court) issued the three judgments on November 30, 2022 rejecting all claims by German companies: RWE and Uniper (claimants) against the Netherlands brought under the European Convention on Human Rights (“ECHR”) and the EU Charter of Fundamental Rights (“EU Charter”). Claimants argued that the State through the enactment of the Coal Ban Act has interfered with their property rights, hereby requesting compensation for damages. These claims were brought by German companies pursuant to Article 1 of the First Protocol (“FP”) of the ECHR and Article 17 of the EU Charter (Yet, while Article 1 FP ECHR is frequently invoked in Dutch State Courts, the Coal Ban Act is the first climate mitigation measure under the review, See: Parliamentary Documents II 2018/19, 35 167, No 2). In parallel, RWE and Uniper initiated ICSID arbitration proceedings under the Energy Charter Treaty (“ECT”) that are currently pending (See, RWE AG and RWE Eemshaven Holding II BV v. Kingdom of the Netherlands, ICSID Case No. ARB/21/4, and Uniper SE, Uniper Benelux Holding B.V. and Uniper Benelux N.V. v. Kingdom of the Netherlands, ICSID Case No. ARB/21/22. Please note that Uniper agreed to withdraw its claim against the Netherlands. However, no official decision about it has been issued). The Court’s judgments are the first decisions on the merits regarding the Dutch Coal Ban Act, and, hence, bear a much broader significance for future climate litigation and responsible business conduct.
The facts in the three courts’ judgments are slightly different, because the subject matter concerns different powerplants. However, the Court’s conclusion and reasoning in all three cases are very comparable. This article will discuss the reasoning of the Court in the judgment RWE Eemshaven Holding II v. the Netherlands. First, this article will shortly provide background to the Coal Ban Act and highlight the essential findings of the Court regarding Article 1 FP ECHR. Also, the notion of foreseeability, highly stressed by the Court, will be compared to the jurisprudence of ISDS tribunals.
Background of the Coal Ban Act
While the Paris Agreement heralded an important milestone in the effort to combat global climate change, mitigation of adverse effects of climate change has been at the forefront of Dutch industrial and economic policies since the 1999 Kyoto Protocol. However, in October 2017, the Dutch coalition agreement signaled an increased commitment to reduce CO₂ emissions in the Netherlands by 49% in 2030, going beyond the (at that time) European ambition of at least 40% in 2030.
Approximately 25% of total CO₂ emissions in the Netherlands can be attributed to electricity generation, and coal-fired generating plants, which are by far the largest emitters of greenhouse gases in the electricity sector.
While the future scenarios and viability of coal-fired power plants in the Netherlands had become an increasingly debated political issue (See, Letter of the Minister of the Economic Affairs, 19 January 2017, Parliamentary Documents II 2016/17, 30 196, No 505), the October 2017 coalition agreement announced the closure of coal-fired power plants by 2030 at last. Soon after the presentation of the coalition agreement, the Minister of Economic Affairs introduced a legislative proposal to Parliament prohibiting the use of coal to generate electricity by 2030. The Coal Ban Act entered into force on December 20, 2019. The Coal Ban Act contains provisions requiring energy companies (operators) to phase out coal in two stages. First, coal-fired plants with an electrical efficiency less than 44%, are prohibited to generate electricity as of January 1, 2025. Second, newer-generation installations having an electrical efficiency of 44% or more, will only be subject to this ban as of January 1, 2030. The Coal Ban Act considers the period between 20 December 2019 and 1st January 2030 as a transition period, allowing conversion to alternative uses such as biomass or hydrogen. Lastly, while the Coal Ban Act does not grant financial compensation for the phase-out, it allows additional compensation should an individual operator be disproportionately affected as a result of the ban.
Findings of the Court
The claimants argued that by enacting the Coal Act, without providing adequate financial compensation, the Netherlands breached Article 1 FP ECHR and Article 17 of the EU Charter, which equally guarantee the right to the undisturbed enjoyment of property. The Parties and the Court agreed that Article 17 EU and Article 1 FP ECHR Charter have the same meaning and should be applied and interpreted identically (See, RWE Eemshaven Holding II v. the Netherlands, C-09-608584-HA ZA 21-244, para. 5.3. ibid, para. 5.16.3). In deciding on the merits, the Court assessed: (1) the presence of ‘possession’; (2) interference with property rights; (3) whether interference was lawful and if so, carried out in the ‘general interest.’ Lastly, the Court applied the ‘fair balance test’.
Relying on the case law of the European Court of Human Rights (“ECtHR”) and Dutch courts, the Court concluded that coal-fired plants qualify as ‘possession’ under Article 1 FP ECHR and that the Coal Ban Act interferes with the claimants’ property rights. As the parties agree that the Coal Ban Act has a legitimate objective and serves the general interest, namely, to contribute to the CO₂ emission reduction targets set by the Netherlands, the real dispute revolved around the question of whether the Coal Ban Act provided a “fair balance.” The latter refers to an assessment of whether reasonable equilibrium can be established between the requirements of the general interest and the protection of the fundamental rights of the claimants. In the context of a ‘fair balance’ test, the Court examined whether the State’s measure was foreseeable and whether claimants could have legitimately expected that the ban would not materialise before 2055.
According to the Court, claimants could have expected the ban because in 2009, at the moment of investment, they were aware that the Dutch government had been actively pursuing policies to reduce CO₂ emissions. Also, at the time of investment, the claimants promised the Dutch government a substantial reduction of CO₂ by using biomass and CCS, which they failed to deliver, despite multiple subsidies provided to the company for the alternative use of energy. Ultimately, this prompted the Dutch government to introduce a (phased) ban. In evaluating the concept of foreseeability, the Court emphasized the importance of national and international developments to combat climate change when making business decisions. The business risk of regulatory changes is particularly high in sensitive operations that are likely to elicit heated public debate (See, RWE Eemshaven Holding II v. the Netherlands, C-09-608584-HA ZA 21-244, para. 5.16.3).
Foreseeability Test in Investment Cases
In its judgment, the Court heavily relied on the ‘foreseeability’ of the State’s measure as a threshold in assessing whether claimants could rely on its legitimate expectations to use their property under a fair balance test. The foreseeability test is commonly applied in investment decisions involving balancing of an investor’s legitimate expectations and the State’s right to regulate. In particular, tribunals consider the investor’s due diligence when determining whether changes to a regulatory framework would result in liability under a fair and equitable treatment (“FET”) standard. Some tribunals concur that the legitimate expectations will be violated if “the regulatory measures […] [were not] been reasonably foreseeable at the time of investment” (See, Charanne Construction v. Spain, SCC Case No. V 062/2012, Final Award, 21 January 2016, para. 505 and Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award, 12 July 2016, para. 781).
As the tribunal in Cavalum v. Spain put it, legitimate expectations must be examined in light of the information that the investor “knew or should reasonably have known” when making the investment. Tribunals have assessed the extent of the foreseeability of regulatory changes according to various sources of information available to investors. It includes a general assessment of a State’s regulatory framework, which may include decisions of national courts, as well as consideration of the socio-political circumstances in a host state. Tribunals are inconsistent on the precise threshold of foreseeability of a potential change. The apparent efforts of an investor to demonstrate that potential risks were assessed play an important role here. Insufficient due diligence of an investor in cases Stadtwerke München v. Spain, Antaris v. Czech Republic, Alejandro Gaspar v Costa Rica was the critical factor in finding that the investor cannot rely on the protection of legitimate expectations arising out of the stability of a regulatory framework.
Similarly, to recent arbitral awards, the Dutch Court’s decision places a high threshold on the foreseeability of a company to assess the regulatory framework in the background of political and legal developments. The Court emphasises the evolving nature of climate change policies, which businesses should consider in making an investment decision. In addition, in these decisions, the Court pays consideration to these companies’ own business conduct, particularly their failure to mitigate the foreseeable risks of government regulation. Hence, responsible business conduct, which includes a diligent appraisal of regulatory and socio-political risks, is central to balancing private and public interests.
ABOUT THE AUTHOR:
Dr Yulia Levashova, LL.M, is a scholar and a legal practitioner. She is an Assistant Professor at Nyenrode University in the Netherlands and the director of the dispute prevention program at the Asia Pacific FDI Network. Her specialization is international investment arbitration, commercial arbitration, CSR and due diligence. Yulia serves as an arbitrator in international commercial disputes. She is also a legal consultant to the Dutch government and international organizations, e.g. UNECE and UNCTAD, on the matters of ISDS and CSR. Yulia is a member of the Chartered Institute of Arbitrators and the London Court of International Arbitration.