In a recent groundbreaking decision, an arbitral tribunal constituted under the auspices of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) has held that project financing provided by Portigon AG (Portigon) to renewable energy projects in Spain amounted to a qualifying “investment” under the Energy Charter Treaty (ECT) and the ICSID Convention.1 As a result, Portigon is now able to pursue a substantial claim for damages to those projects in an investment treaty arbitration against Spain challenging recent energy sector reforms. This decision signals new opportunities for debt finance providers to benefit from the protections against adverse government action that are afforded by some 2,700 investment treaties in force worldwide.

Portigon’s investment treaty arbitration against Spain

In May 2017, Portigon, a German financial services firm, brought an investment treaty arbitration against Spain under the ECT complaining about a series of reforms to Spain’s renewable energy sector. More than 50 investor-state arbitrations have been brought against Spain arising out of these energy reforms, which include a 7% tax on power generators’ revenues and a reduction in subsidies for renewable energy producers. Unlike many other claimants, however, Portigon was not a shareholder in the affected companies, but rather provided debt finance for several solar plants, alongside equity investors who have brought their own claims against Spain. Having provided loans and interest rate swaps to companies developing and operating dozens of renewable energy projects in Spain, Portigon claims that the Spanish government’s energy reforms have adversely affected the cash flow of those projects, thereby diminishing the prospect of repayment or sale of the debt and violating the protections provided to investors under the ECT.

The tribunal’s decision on jurisdiction

According to public reports,2 Spain raised several jurisdictional objections to Portigon’s investment treaty claims, including most notably that Portigon’s financing, as a form of debt capital, did not constitute a qualifying “investment” under the ECT and ICSID Convention and that Portigon, as a lender, therefore could not avail itself of the substantive protections and dispute resolution procedures of those treaties. A majority of the ICSID tribunal, comprised of Chilean presiding arbitrator Felipe Bulnes Serrano and Dutch co-arbitrator Albert Jan van den Berg, rejected Spain’s jurisdictional objection, holding that no distinction is made between equity and debt capital as means of making investments under the treaties in question. As both forms of capital were found to meet the relevant requirements for an investment, the majority ruled that Portigon’s financing of the projects qualified for protection under the ECT. The majority also held that the dispute arose directly out of an investment, as required under Article 25(1) of the ICSID Convention for Portigon to be able to take the dispute to ICSID arbitration.

Co-arbitrator Giorgio Sacerdoti of Italy dissented from the majority, reasoning that the financing provided by Portigon did not fall within the ICSID Convention’s definition of an “investment” and that there was also no direct relationship between the investment and the dispute in question, as required under the ICSID Convention. He did, however, agree with the majority that Portigon’s financing constituted a qualifying investment under the ECT.

As a majority of the tribunal rejected Spain’s jurisdictional objection, Portigon’s arbitration will now proceed to the merits phase of the proceedings.

New opportunities to seek recourse against adverse government action

In recent years, there has been a heated debate among practitioners and academics as to whether certain financial instruments (such as sovereign bonds, negotiable instruments, and loans) qualify as protected investments under investment treaties, with diverging decisions by arbitral tribunals.3 The Portigon v. Spain jurisdictional decision provides important support for those arguing that a broad range of financial instruments (here, financing of projects by way of loans and hedging instruments) qualify for investment treaty protection. This decision may open the door for debt finance providers to avail themselves of a powerful network of some 2,700 investment treaties worldwide to protect themselves against adverse government action.

Under investment treaties, host states guarantee certain minimum standards of legal protection to foreign investors, typically including protections against discriminatory treatment, expropriation without compensation, and unjustified restrictions on payments and capital flows. In addition, investment treaties often impose obligations on host states to treat investments made by foreign investors fairly and equitably and to respect the reasonable expectations of such investors. Investors usually have the right to enforce these legal protections through claims for money damages in binding international arbitration against the host state. Depending on the specific terms of the applicable investment treaties, those providing debt financing to projects around the world may now be in a stronger position to bring claims in international arbitration directly against host states for breaches of such investor protections.

At present, there is at least one other pending case brought by a financial institution against Spain raising similar issues, Landesbank Baden-Württemberg v. Spain.4 If the tribunal in that case also rules that the claimant’s debt financing qualifies as a protected investment, it will solidify the groundbreaking decision in Portigon v. Spain and significantly strengthen the hand of debt finance providers in pursuing similar claims against adverse government action around the world.