Arbitral tribunal finds Poland not in breach of alleged FET violations in rendering its administrative services to Festorino Invest Limited & Others

Festorino Invest Limited and Others v. Republic of Poland with the participation of the European Union (non-disputing treaty party), SCC Case No. V2018/098

This is a treaty-based arbitration initiated under the ECT and the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the Rules).

The tribunal in Festorino Invest Limited and Others v. Republic of Poland dismissed the claimant’s allegations in their entirety, holding that there was no inordinate delay on the part of the respondent’s agencies during the administrative procedures involving Blue Gas Uników. The tribunal also held that there was neither any proven ill intent nor discriminatory activities by the respondent against the claimants, and, therefore, the respondent was neither in breach of Art. 10(1) of the Rules nor Articles 26(2)(c) and 26(4)(c) of the Treaty. The claimant was consequently ordered to bear all costs of the arbitration and reimburse the respondent’s legal fees totalling PLN 1,296,584.50 with 5% per annum accruing from the date of the award.

Background of the case

In 2012, the claimants initiated a network of modern, high-efficiency combined heat and power plants (CHPs) to be developed and operated based on recognized but untapped natural gas deposits in Poland (the “investment”). The investment was made through Blue Gas Holding, a limited liability company organized and registered under the laws of Poland, in which the claimants hold 100% of the shares.

Under Polish law, hydrocarbon deposits, including natural gas, are subject to mining ownership, with the exclusive rights belonging to the state, i.e., the respondent. The State Treasury is the owner of all deposits of metal ores (except for bog iron ores), native metals, native sulphur, rock salt, potassium salt, potassium-magnesium salt, gypsum, and anhydrite, as well as gemstones. Deposits of other minerals (e.g., sand and gravel, limestone, dolomite) belong to the landowner (Art. §10 Mining Law). Polish Geological legislation requires the issuance of a licence granted by the relevant ministry before conducting any activity in relation to exploration, recognition, and mining of hydrocarbons.

A pivotal element of the Blue Gas Group’s strategy and, at the same time, a necessary condition for the investment, was obtaining licences for the exploration and recognition of selected natural gas deposits and, subsequently, transforming them into licences for the exploration and recognition of natural gas deposits and extracting gas from these deposits.

Jurisdictional issue

The EU raised objections as to the jurisdiction of the tribunal in entertaining the suit. It is argued that the claimants are all “investors” of the EU, of which Poland is a member state, and are therefore not “investors” of “another Contracting Party” to the ECT. This is the “intra-EU” argument, according to which the ECT does not operate in the context of intra-EU states but only in the context of a dispute involving an EU state and a non-EU state.

The tribunal held that “[t]here is nothing in the wording of Article 26, or any other provision of the ECT, that suggests that because the EU is itself a Contracting Party, Austria, Czech Republic, Cyprus and Poland cease to be distinct Contracting Parties vis-à-vis one another under the ECT.”

The argument that the ECT cannot apply rests on the interpretation of general provisions of EU law, notably Article 3(2) of the Treaty on the Functioning of the European Union (TFEU), which stipulates that the Union has “exclusive competence for the conclusion of an international agreement when its conclusion … may affect common rules or alter their scope.” Nothing in the TFEU, however, addresses the question of the continuing validity of the ECT when it brought investment under Union competence in 2007, after the ECT had been ratified and entered into force for the EU, Austria, Czech Republic, Cyprus, and Poland.

While the ECT does not contain any provision concerning the relationship between the ECT and the TFEU or EU more generally, it does make provision for circumstances where two treaties are in conflict. ECT Article 16 clearly rests on the understanding that the ECT and the EU treaties were intended by ECT contracting parties (including the EU) to co-exist, with investors entitled to take the benefit of the more favourable treaty provision in any case. Considering this provision, the tribunal quoting the decision in Vattenfall v. Germany held that it is not possible to “read into Article 26 an interpretation whereby certain investors would be deprived of their right to dispute resolution, whether against an EU Member State or otherwise.”

Fair and equitable treatment

The claimants’ alleged that the administrative delay of the respondent resulted in a breach of the FET, MFN, and the umbrella clause under the ECT. As a result of this delay, Blue Gas Uników was forced to declare bankruptcy and the other special purpose vehicles had to shut down operations.

Concerning the FET obligations, the tribunal held that the context in which the delay occurred must be put into consideration. One year is not an inordinate delay, therefore does not amount to a breach of FET considering the complex application that goes into undertaking a sensitive mining project. Accordingly, it could not endorse the abstract rule that when an application is pending for more than a year that the state is internationally responsible. Applying the fault-based standards of liability under the ECT (in assessing the respondent’s actions in granting these licences), the tribunal maintained that the respondent’s activities were not discriminatory but were rather conducted sluggishly due to poor internal structures (such as having a small number of staff). The tribunal dismissed the claimants’ claim based upon the FET standard under Art. 10.

Discrimination

The claimant argued that the ministry had issued several licences to large upstream gas producers, including the largest state-controlled producer—Polskie Gornictwo Naftowe I Gazownictwo S.A. (PGNiG)—which unlike the claimants, did not have any interest in the gas deposits. The claimants alleged the actions of the ministry in not granting their licensing application was therefore discriminatory.

The tribunal held as follows: To find that this demonstrates actionable discrimination, the tribunal would have to be in possession of significantly more evidence proving (i) that the claimants and PGNiG were afforded noticeably different treatment in proceedings similar enough to be compared; and (ii) that such a discrepancy was nationality-based and not the result of some other confounding variable unrelated to nationality. Here, the tribunal lacked evidence on either point. First, it is not possible to view these limited passages concerning PGNiG’s licences and determine, without more than the claimants’ account, that PGNiG was treated in a different manner that could amount to a potential treaty breach. If discrimination could be found merely based on limited summaries of oil and gas licences held or sought by certain entities, states would be put in an impossible situation to maintain levels of potentially superficial equality to avoid treaty claims. Considering the complexity in this sector and the numerous variables that go into such licence proceedings, such a result would surely have obstructive implications

Umbrella clause

Both parties focused on the fact that the claimants’ umbrella clause position primarily rests on Art. 354 of the Civil Code, which mandates that the respondent acts in good faith.

The phrase from the Article “not do anything” … (to impede the performance of the obligation) cannot be taken to imply that any acts on the part of the respondent that could have even a minimal negative impact on the claimant’s investment are necessarily a violation of good faith. The tribunal did not wish to engage in a lengthy discussion of the requirements of good faith, but it can be safely said that something more than administrative inefficiencies is required to be considered such a violation.

The tribunal lacked evidence demonstrating any ill intent on the part of the respondent in the relevant administrative proceedings. The tribunal was not satisfied that the respondent acted in a manner to complicate, hinder, or impede the investment. The tribunal instead found various administrative proceedings that, due in part to factors such as staff shortages and an arguable failure to act in the most effective manner (as well as deficiencies in various filings made by the claimants), were not completed in the most ideal timeframe. While this is regrettable, and the tribunal agreed that the claimants expected a smoother process, it failed to establish a violation of good faith.

Even if there were a breach of the duty of good faith as understood under Polish law, this does not mean that this duty itself is somehow actionable under Article 10(1) of the ECT. The claimants did not explain how a general duty of good faith under Polish law can be equated with an obligation that Poland has “entered into” with the claimants’ investment as required under Article 10(1). The matter was resolved against the claimant.

There was no inordinate delay on the part of the respondent’s agency during the administrative procedures involving Blue Gas Uników and therefore no breach of the ECT. The reason that Blue Gas Uników could not generate revenue and the reason for which it was put into bankruptcy by the claimants are likely to have been unrelated to the administrative procedures that led to the Uników-2 well being blocked: it was unlikely to be profitable given the probable costs involved in dealing with the technical problems. As the success of Blue Gas Uników was critical to the development of the other projects because it was to be the source of finance, it follows that the claimants’ decision to put Blue Gas Uników into bankruptcy effectively ended those other projects as well.

Tribunal’s award

For the reasons stated above, the arbitral tribunal unanimously denied the respondent’s jurisdictional objections and upheld the jurisdiction of the tribunal; denied all of the claimants’ claims; denied all other claims; ordered the claimants to bear all costs of the arbitration; and ordered the claimants to pay the respondent the amount of PLN 1,296,584.50 (USD 294, 336.87) to reimburse the respondent for the legal fees incurred by the General Counsel to the Republic of Poland, with 5% interest per annum accruing from the date of this award.

Author

Sotonye Belonwu is an international law and development fellow in the Economic Law and Policy Program. She holds a Master of Laws degree from New York University.

Notes: The tribunal was composed of Bernardo M. Cremades (President, Spanish national), Kaj Hobér (claimant’s appointee, Swedish national), and Zachary Douglas QC (respondent’s appointee, Australian national). The award is available at: https://www.italaw.com/cases/9130