In its Brief No. I of 21 March 2003 the Claimant presented as secondary prayers for relief the following:
"Should the Tribunal find that compensation for future losses, i.e. compensation for the period from 30 April 2003 until 16 September 2007 as described above, may not be awarded as claimed by Nykomb in the Statement of Claim - with the exception of the applied discount rate of 6 per cent in Nykomb's present value computation or a finding of an expected yearly production of less than 24 813 MWh - Nykomb respectfully, as a secondary prayer for relief, requests the Tribunal to
(i) order the Republic, to pay to Nykomb, an amount of 667 158 Lats together with interest thereon from 17 September 1999 until actual payment is made at an annual rate of 6 per cent;
(ii) order the Republic, to pay to Nykomb, an amount of 2 817 591,7 Lats - or such higher amount that may follow from electricity produced and supplied during March and April 2003 - together with interest thereon from 28 February 2000 until actual payment is made at an annual rate of 6 per cent;
(iii) confirm that the surplus electric power produced by and purchased from the Bauska Plant is to be purchased at a tariff to be calculated as twice the average electric sales tariff approved by the relevant regulatory body in the Republic of Latvia, currently 30,28 x 2 = 60,56 Lats/MWh, and
(iv) confirm that the surplus electric power so purchased shall be paid on a monthly basis."
"1.8 As a general point for the primary as well as secondary prayers for relief forwarded by Nykomb, the Tribunal may in the alternative and at its discretion decide whether any award shall be performed by the Republic on its own behalf or as principal for (on behalf of) Latvenergo, and likewise whether such performance shall be made to Nykomb on its own behalf or as principal for (on behalf of) its investment enterprise Windau.
1.9 Despite that Windau is not a party to this arbitration; it would in Nykomb's opinion not be incompatible with international law and the concept of arbitration under the Treaty to extend the res judicata effect of an award also to Windau, being wholly-owned and under direct control of Nykomb.
1.10 The Tribunal may also, as far as Nykomb is concerned, in the alternative and at its discretion, consider to ordering that any damages be paid directly to the investment enterprise Windau rather than to Nykomb as claimant investor. Such a solution is supported by arbitral jurisprudence within international investment law (see the "Mondev Award", at para 86). "
"A. The Tribunal shall:
(i) order the Republic, to pay to Nykomb, an amount of 667 158 Lats together with interest thereon from 17 September 1999 until the day of judgement at an annual rate of 6 per cent, and for the period thereafter until actual payment at an annual rate of 18 %.
(ii) order the Republic, to pay to Nykomb, an amount of 2 311 020 Lats together with interest thereon from 28 February 2000 until the day of judgement at an annual rate of 6 per cent, and for the period thereafter until actual payment at an annual rate of 18 %.
(iii) order the Republic, to pay to Nykomb, an amount of 4 119 502 Lats together with interest thereon from 16 September 2002 until the day of judgement at an annual rate of 6 per cent, and for the period thereafter until actual payment at an annual rate of 18 %.
B. Nykomb's secondary prayer for relief, as submitted in Brief I dated 21 March 2003, shall be adjusted accordingly. The Tribunal shall:
(i) order the Republic, to pay to Nykomb, an amount of 667 158 Lats together with interest thereon from 17 September 1999 until the day of judgement at an annual rate of 6 per cent, and for the period thereafter until actual payment at an annual rate of 18 %.
(ii) order the Republic, to pay to Nykomb, an amount of 3 019 030 Lats together with interest thereon from 28 February 2000 until the day of judgement at an annual rate of 6 per cent, and for the period thereafter until actual payment at an annual rate of 18 %.
(iii) confirm that the surplus electric power produced by and purchased from the Bauska Plant is to be purchased at a tariff to be calculated as twice the average electric sales tariff approved by the relevant regulatory body in the Republic of Latvia, currently 30,28 (double tariff = 60,56) Lats/MWh.
(iv) confirm that the surplus electric power so purchased shall be paid on a monthly basis."
- violates the obligation of fair and equitable treatment of investors, Article 10 (1);
- constitutes a treatment less favorable than required by international law, including treaty obligations, Article 10 (1);
- constitutes an impairment by unreasonable or discriminatory measures, Article 10 (1);
- constitutes measures having effect equivalent to expropriation, Article 13 (1).
"There was no negotiation, and there was obviously no economic motivation for Latvenergo to enter into one or several double tariff agreements, but Latvenergo had to deal with Nykomb, and others, and under conditions established by law only. There was no normal "haggling" about price as stated by Professor Wälde. Latvenergo held and still holds that position itself. It is in a monopolistic, public-service market that this transaction took place and which dominates its character from beginning to the end. This attribution - i.e. the operation by which the conduct of Latvenergo is treated as if it were an integral part of the state and by which the veil of its corporate personality is pierced (or lifted) - is based on customary international law (applicable under Art. 26 (6) of the Treaty), the State Responsibility draft of the International Law Commission as interpreted in the most recent and relevant awards, namely Maffezini I and II and in particular Salini v. Morocco. In addition it is also operated by operation of Art. 22 (1, 3 and 4) of the Treaty. We believe Art. 22 to be a special attribution norm for the primary obligations contained in part III of the Treaty, but whatever the legal argument about this, customary international law rules are fully sufficient for attribution and Art. 22 (1, 3 and 4) merely reinforce, by direct effect or by an indirect interpretative support, the attribution. Using a very old and in civil law established concept, Art 22 is clearly "accessory" ("akzessorisch", "accessorisk"), to the "primary" obligations in Part III of the Treaty."
"Prayers for dismissal":
"3.1 The Republic respectfully requests the Arbitral Tribunal:
(i) to dismiss the claim on its merits;
(ii) to order Nykomb to compensate the Republic for its costs of arbitration in an amount to be specified later; and
(iii) to order Nykomb, as between the parties, alone to be liable for the compensation to the Arbitral Tribunal and to the Arbitration Institute of the Stockholm Chamber of Commerce.
3.2 The Republic does not admit to the amount of Nykomb's claim.
3.3 Should the Arbitral Tribunal find that Nykomb has a valid claim for damages the Republic respectfully requests the Arbitral Tribunal to limit any adjudged damages to an amount that does not exceed the loss incurred by Nykomb on its investment".
"8.2 Accordingly, Latvia respectfully requests that the Arbitral Tribunal adjudge and declare:
(i) that it lacks the jurisdiction to entertain the claim in the nature submitted by Nykomb; or
(ii) that Latvenergo's conducts are not attributable to Latvia; and/or
(iii) that Latvia has not contravened any of its obligations under Part III of the Treaty; or
(iv) that Nykomb has not suffered any loss to warrant compensation; and
(v) that all costs of this arbitral proceedings, including legal costs, are to be borne by Nykomb".
The Claimant claims jurisdiction for this arbitration on the basis of Article 26.4.c of the Energy Charter Treaty of 17 December 1994 (the "Treaty" or the "ECT"). The article reads in part:
"ARTICLE 26 SETTLEMENT OF DISPUTES BETWEEN AN INVESTOR AND A CONTRACTING PARTY
(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible, be settled amicably.
(2) If such disputes can not be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution:
(a) to the courts or administrative tribunals of the Contracting Party party to the dispute;
(b) in accordance with any applicable, previously agreed dispute settlement procedure; or
(c) in accordance with the following paragraphs of this Article.
(4) In the event that an Investor chooses to submit the dispute for resolution under subparagraph (2) (c), the Investor shall further provide its consent in writing for the dispute to be submitted to:
(c) an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce."
"Investment" and "investor" as used in Article 26 are defined in Article 1 of the Treaty:
ARTICLE 1 DEFINITIONS
As used in this Treaty:
(6) "Investment" means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
(d) Intellectual Property;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.
A change in the form in which assets are invested does not affect their character as investments and the term "Investment" includes all investments, whether existing at or made after the later of the date of entry into force of this Treaty for the Contracting Party of the Investor making the investment and that for the Contracting Party in the Area of which the investment is made (hereinafter referred to as the "Effective Date") provided that the Treaty shall only apply to matters affecting such investments after the Effective Date.
"Investment" refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as "Charter efficiency projects" and so notified to the Secretariat
(7) "Investor" means:
(a) with respect to a Contracting Party:
(i) a natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law;
(ii) a company or other organization organized in accordance with the law applicable in that Contracting Party;
(b) with respect to a "third state", a natural person, company or other organization which fulfils, mutatis mutandis, the conditions specified in subparagraph (a) for a Contracting Party.
(8) "Make Investments" or "Making of Investments" means establishing new Investments, acquiring all or part of existing Investments or moving into different fields of Investment activity.
Article 26 requires that claims raised in an arbitration are relating to an investment under the Treaty. The Claimant's losses or damages are allegedly caused by the reduced income flow into Windau which affects the Claimant's investment. The Claimant's allegations create a clear relationship between the claims and the Claimant's investments in Windau as required by Article 26. However, it remains to be considered in connection with the merits whether there is a causal link between the refusal of Latvenergo to pay the double tariff and the alleged losses or damages.
The Claimant has also referred to parts of Article 22. The Respondent has objected to the Tribunal's jurisdiction on the ground that Article 22 is placed in Part IV of the Treaty. The Arbitral Tribunal notes, however, that the Claimant has stated that the provisions Article 22 referred to do not give rise to any separate claim, but are rather invoked as provisions which clarify the scope and contents of other treaty provisions, among them the provisions in Part III that the Claimant relies on as bases for its claims. The Tribunal finds that the interpretation and application of the relevant Articles of the Treaty, Articles 10 and 13, are best considered under the merits part of this award, and that the references to Article 22 cannot as such be dismissed as inadmissible in the form the references are relied on.
"Furthermore, Latvia's argument should not be understood (as do Nykomb and its expert) to advocate the principle of exhaustion of local remedies as a procedural requirement in the traditional sense of international law. Rather, Latvia's argument regarding Nykomb's claim for an alleged and contested breach of contract cannot be ascertained until the proper forum has first pronounced on the issue. There is no evidence to suggest that Windau has been prevented from pursuing such a course of action. It is in this sense that Latvia has presented its argument concerning the exhaustion of local remedies, which Nykomb and its legal expert persist in misunderstanding.
For the above reasons, Latvia is of the view that the Arbitral Tribunal lacks the jurisdiction to entertain Nykomb's claim for the double tariff. Whether such a tariff is due or not is a matter of dispute, and if contested (as seems to be the case here) can only be determined by the proper forum, and in accordance with the proper law of the contracts in question."
The Arbitral Tribunal understands the quoted statement to the effect that the Respondent does not claim the existence of a general obligation under the Treaty or under international law that local remedies must be exhausted before arbitration can be requested under Article 26 of the Treaty. Nonetheless the Tribunal finds it appropriate to state that in the Tribunal's view, no such general obligation to exhaust local remedies can be derived from the Treaty or international law in general. On the contrary, according to ECT Article 26 (4) the investor has the option of requesting Treaty arbitration even if it has agreed to the jurisdiction of a local forum - which, however, it has not done in the present case. As a preliminary issue, the Tribunal has come to the conclusion that it has jurisdiction to determine, as a preliminary matter, whether there has been a breach of the contract, insofar as it is necessary for its decision in relation to the claims raised on the basis of the Treaty.
The Arbitral Tribunal finds that the scope and application of the Treaty provisions relied on by the Claimant is best considered after a general description of the background for the dispute, including the successive laws and regulations and of the purchase contracts entered into by Latvenergo. After such general description the Tribunal will decide whether a claim or a part thereof is found to fall outside the scope of a treaty provision and shall be dismissed for lack of jurisdiction, and, if found to be within the scope of the Tribunal's jurisdiction, whether it shall be dismissed on its merits. See section 4.3.3 below.
"When the Soviet Union's occupation of the Republic came to an end in 1991, the Republic needed to reduce its dependency on electricity imported from Russia, Lithuania and Estonia. In the long term, the Republic was faced with a possible shutdown of the nuclear reactors in Russia and Lithuania and a significant uncertainty regarding power generation based on oil shale in Estonia. This dependency on electricity imports was deemed to be a national security risk. If the nuclear reactors in Russia and Lithuania had been closed, or had otherwise become unavailable because of breakdowns or defects, the Republic would have been unable to satisfy its needs for electricity. Electricity from Russia and Belarus is transmitted to the Republic through a connection of the main power system of Russia with the high-voltage networks in the Republic. Russia had, however, and still has, the technical ability to disconnect the high-voltage networks from the main power system of Russia. Such a disconnection would, inter alia, raise the electricity costs in the Republic. At the same time, it became apparent that the domestic generating capacity was insufficient to meet the increasing demands on electricity as the Republic was rebuilding its economy. The Republic had also been left with enormous ecological problems, e.g. air pollution from usage of dirty fossil fuels in local heating plants, and needed to encourage the use of cleaner fuels to stimulate a better environment.
To increase domestic generating capacity and the use of cleaner fuels, the Republic needed to attract private investments in the electricity industry, particularly from foreign investors. However, electricity prices were very low in the Republic. This was due mainly to the low import prices charged by the Russian state electricity monopoly and by the Ignalina power plant in Lithuania. Another contributing factor to the low prices in the Republic was the prohibition on several major Latvian hydropower producers to charge the full price for their electricity. Foreign investors could, however, hardly compete on a market so strongly influenced and dependent on import dumping; i.e. the large import of cheap electricity from Russia and Lithuania. Generally, Western investors were quite reluctant at the beginning of the 1990's to risk their capital in Eastern Europe. As a result, Western investors needed a strong incentive, an economic "premium", to invest in new power generation and co-generation capacity in the Republic.
A co-generation plant is able to produce both electricity and heat, hence co-generation. Through the combined production of electricity and heat co-generation plants are able to use more than 80 per cent of the energy contents in the fuels used. The traditional condensing power plants, which were unable to produce both electricity and heat, could only use between 30 to 40 per cent of the energy contents in the fuels used. When introducing co-generation based on natural gas in Latvia, the Republic could, inter alia, streamline the use of the energy contents in the fuels used and improve the ecological situation by phasing out highly pollutant fossil fuels."
"Currently there is over Lts 2,250,000 invested in this project represented by Lts 750,000 of equity (provided as to Lts 650,000 by Nykomb), Lts 200,000 in supplier credits from Germany and Lts 1,300,000 of local bank loans backed by a strong guararantee from the parent company of Noell KRC in Germany. In addition Nykomb has invested some Lts 200,000 in upgrading the heating grid in the municipality of Ogre."
By way of illustration, this corresponds to, in Swedish kronor (at 15/-):
Equity 750 000 11 250 000
Supplier credits 200 000 3 000 000
Local bank loans 1 300 000 19 500 000
Investment in Bauska 2 250 000 33 750 000
Plus, as stated in the letter, "Backed by a strong guarantee from the parent company of Noell KRC".
The Tribunal also notes that according to Windau's annual report for 2001, the managing director of Noell, Mr. Kulbe, was the chairman of the board of Windau. The German group's interest is also indicated by the fact that the German ambassador to Latvia as well as representatives of Noell participated in the meeting with the Prime Minister of Latvia on 26 October 1999, see sections 3.4 and 3.5.7 below. The legal relationship between Nykomb and the German group might have been of interest to the Tribunal when considering the alleged losses or damages incurred by Nykomb because of the reduced income flow into Windau, but this has not been further documented by the Claimant.
"1. In order to promote the production of electric power in the Republic of Latvia, these Regulations provide that the state joint stock company Latvenergo shall purchase electric power from the electric station not under the authority of Latvenergo (hereafter, the "decentralized electric stations").
2. The purchasing price for electric power produced by decentralized electric stations, except those specified in section 3 hereof, shall correspond to the average calculated tariff for electric power sale of the state joint stock company Latvenergo.
3. The purchasing price for electric power produced by such small-size electric hydroelectric power stations (not in excess of 2 MW), which operate or which shall be restored by 2000, shall correspond to the double average tariff for the sale of electric power for a period of eight years from the start of operation of the respective electric station." (Emphasis added.)
The Law of 6 September 1995 On the Regulation of Entrepreneurial Activity in Energetics (the "Entrepreneurial Law") replaced Resolution No. 54 and extended the group of power producers to include, inter alia, co-generation plants. Article 27 reads in part as follows:
"Article 27. Procedure for setting tariffs.
(1) The tariffs charged for energy supply shall be calculated by an energy supply enterprise in accordance with the methodology for tariff calculation determined by the Council.
(2) The tariffs shall provide for that enterprises gain economically justified revenues from payments received from the consumers for the coverage of justified costs of energy resources production, salaries, operational and administrative costs, as well as maintenance of existing assets and new approved investments.
(9) Spare power which corresponds to the state power standard from renewable energy resources (minihydropower plants with installed capacity up to 2 MW and wind power plants), as well as from little capacity cogeneration plants with installed capacity from 1 MW up to 12 MW shall be purchased into the state power transmission grid at a higher tariff.
(10) The power purchase price from power plants mentioned in part 9 of this article shall correspond to the double average sales tariff of power and shall be valid for eight years from the starting day of operation of the power plant. After that the purchase price shall correspond to the average tariff of power."(Emphasis added.)
The Energy Law contained no specific provision concerning the use of the double tariff. The right to the double tariff was not repeated for any category of electric power plants in the new law, nor were there any transitory provisions upholding this right for those who were ensured the double tariff under the Entrepreneurial Law as amended in 1997, hereunder the cogeneration plants which had obtained a contract with Latvenergo effective before 31 May 1997 (see section 3.5.4 above).
However, Article 41 provides as follows:
"The Cabinet of Ministers shall determine a common procedure by which licensed electric power supply enterprises must buy up surplus electric power produced which remain after usage for selfneeds and in compliance with the electric power parameters determined within the state, from cogeneration stations located within the zone of activity of their license and the exploitation of which has been started." (Emphasis added.)
In consequence of the Claimant's view that Article 41 only applies to cogeneration plants having started production before the Energy Law was enacted (or came into force), the Claimant draws the conclusion that Regulation No. 425 of 31 October 1998 and Resolution No. 9 of 8 January 2002 issued pursuant to Article 41 (see sections 3.5.6 and 3.5.9 below) do not apply to the Bauska production. The Respondent draws the conclusion that Article 41 authorizes the Cabinet to determine new procedures for cogeneration plants not yet in production, including the Bauska plant, without any limitation with regard to upholding the right to the double tariff ensured under the Entrepreneurial Law.
"These Regulations stipulate:
1.1. that licenced electric power supply enterprises shall have the obligation to purchase generated surplus electric power... from the cogeneration stations starting their operation..., with the installed electric capacity... not in excess offour MW;
1.2 the procedure in which licenced electric power supply enterprises shall purchase electric power surplus from cogeneration stations with electric capacity not in excess of four MW.
2. If electric power surplus is purchased from cogeneration stations with capacity not in excess of four MW, the purchase tariffs shall be determined based on the value of the average electric power sale tariff (Tv). The Purchase tariff shall change depending on the value of the average electric power sale tariff (Tv), approved by the Energy Supply Regulation Council and which has been published in the newspaper of Latvijas Vestnesis.
4. If surplus electric power is purchased from co-generation stations with capacity from 0,5 MW to four MW, the purchase tariff (Tie) shall be determined depending on the type of fuel used in the technological process of the production:
4.1. Tie = 0,95 TV, if local fuel is used
4.2 Tie= 0,75 Tv, if imported fuel is used"
The Latvian Law on Foreign Investments is dated 5 November 1991. Clause 8.4 reads as follows:
"8.4. In the event, that future laws of the Republic worsen the investment conditions, a foreign investment shall be subject to the laws which were in effect on the date the investment was made."
"1. The Cabinet of Ministers stipulates common requirements to co-generation plants with respect to their operation mode, reliability and efficiency, as well as the common procedure in which, depending on the type of fuel and efficiency, the price for the surplus electricity that is left after consumption for own needs and is purchased from co-generation plants that correspond to the requirements stipulated in this Article shall be determined.
2. The procedure stipulated in Paragraph One of the current Article shall not apply to producers who, by 1 June 2001, have received a license for electricity generation and have commenced the operation of these plants and equipment within the term stipulated in the license."
By this amendment the Cabinet's authority under Article 41 apparently was excluded for cogeneration plants that had received a license and had commenced their operations before 1 June 2001. This wording of the law apparently excluded the Bauska plant, which had received its license on 4 April 1999 and started operation on 28 February 2000. But there is no indication in the amendment law, or other documented material, whether this new limitation of the Cabinet's authority under Article 41 should have the effect of a corresponding limitation of Regulation No. 425 of 31 October 1998 issued under Article 41 in its original wording (see section 3.5.6 above), nor have the parties commented on this particular question. As will be seen in section 3.5.9 below, resolution No. 425 was formally repealed on 8 January 2002, and then replaced by a provision again determining 0.75 to be the multiplier applicable to plants like the Bauska plant.
There is agreement between the parties that the double tariff was unequivocally set down by the Entrepreneurial Law in 1995, with a legal obligation for Latvenergo to apply it in its purchase contracts for power plants covered by the law. With the exception of an interim period from 10 January to 7 May 1997, see section 3.5.3 above, the double tariff for certain power plants was in force at least until the Energy Law came into force on 6 October 1998. The Claimant contends that Windau continues to have the right to the double tariff, since the transitory provisions of the Energy Law and subsequent regulations emanated in pursuance of that law do not apply to cogeneration plants coming into production after the enactment of the Energy Law. The Respondent contends, and the Arbitral Tribunal accepts upon the evidence presented, that the categorical application of the double tariff was repealed by the Energy Law and replaced by the subsequent Regulation No. 425 of 31 October 1998, the latter replaced by Regulation No. 9 of 8 January 2002 again determining the multiplier to be 0.75 for plants like the Bauska plant.
"5. The Energy System shall pay to the Cogeneration Station for the balance of electric power delivered by the Cogeneration Station to the Energy System's grid according to Regulations No. 54, issued by the Republic of Latvia Cabinet of Ministers on 14.03.95."
"1. From the day of signing this Agreement, [the Parties have agreed] to change and express in the following wording the following Clauses:
As from 10 January 1996 and until the end of the term of this agreement, the Energy System shall pay to the Cogeneration Station for the balance of electric power delivered by the Cogeneration Station to the Energy System's grid according to the double calculated average sales tariff for electric power of VAS "Latvenergo" (or its legal successors).
As for 1996, the double average sales tariff for electric power of VAS "Latvenergo" has been mutually agreed in Supplement No. 1 to this Agreement of 01.01.1996, it is 0,048 Ls per 1 kWh.
Price for the electric power is defined in lats according to double average electric power sales tariffs on the basis of the Republic of Latvia Law "On Regulation of Entrepreneurial Activities in Energy Industry".
Prices are fixed in Supplement No. 1, which is an integral part of this Contract.
The Parties shall be released from liability for violation against their contractual obligations, if it has been caused by force majeure conditions - changes in the legislation and decisions of the Government, earthquake, war, floods, etc.
VI. Additional provisions
If the average electric power sales price changes, changes shall also be made in prices defined in this Contract.
"2. Contract price
The price for electric power shall be established in lats on the basis of the law "On the Regulation of Entrepreneurial Activities in the Energy Sector" of the Republic of Latvia.
5. Liability of the Parties
The Parties shall not be liable for the infringement of any provision of this Contract if such infringement is caused by force majeure, i.e. amendments to legislative regulations, government resolutions, earthquake, war, flood, etc.
6. Additional conditions
If the average sales price of electric power changes, the Contract price shall be modified accordingly.
"2. Purchase Price
Surplus electric power shall be purchased for the price, which is effective in Latvia on the specific date of purchase."
5. Force majeure
The parties shall be fully or partially released from responsibility, if Force Majeure circumstances have occurred, moreover, if such circumstances have occurred after the execution of relevant agreements and the parties could neither foreseen nor influence them.
The parties acknowledge that Force Majeure circumstances include resolutions of the Parliament and the Cabinet of Ministers which eliminate or materially affect the performance of the agreements, natural catastrophes - floods, fire and rebellions...."
"2. Purchase Price and Sale Price of Electric Energy.
2.1 Latvenergo shall buy from Windau the surplus electric energy generated in cogeneration regime pursuant to requirement of the issued license, after satisfaction of Windau's own needs (power surplus transmitted to the power system network) and which energy corresponds to parameters specified in the country, at the following price:
(a) until the judgment of the Constitutional Court in respect of the case relating to the acknowledgement as being invalid of Section of the November 30, 1999 protocol decision the Cabinet of Ministers, Latvenergo shall buy from Windau and pay for the electric energy generated at the power plant pursuant to the formula Tie = 0.75 Tv...the difference... shall be paid by Latvenergo. to the escrow account at A/S Vereinsbank Riga, which shall be used pursuant to the following conditions:
i in the event that the Constitutional Court acknowledges Section 1 of the November 30, 1999 protocol decision of the Cabinet of Ministers to be valid, this money shall be immediately transferred into the bank account of Windau at the S/S Vereinsbank Riga;
(b) after the judgment of the Constitutional Court, Latvenergo shall buy from Windau and pay for the surplus electric energy generated at the power plant for the period of eight years after the commissioning of the Windau cogeneration plant in Bauska, in the following amount
i if by virtue of the judgment of the Constitutional Court, the November 30, 1999 decision of the Cabinet of Ministers or Section 1 thereof will remain effective, the purchase price from the cogeneration plant in Bauska shall be calculated pursuant to the formula Tie = 2.0 Tv;
ii if by virtue of the judgement of the Constitutional Court, the November 30, 1999 protocol decision of the Cabinet of Ministers or Section 1 thereof will lose effect, the purchase price from the cogeneration plant in Bauska shall be calculated pursuant to the formula Tie = 0.75 Tv.
2.2 The parties mutually agree that irrespective of adoption of any judgment of the Constitutional Court, either party shall be entitled to submit its objections or claims in respect of the purchase price of electric energy stated in Section 2.1 (b) of this Agreement in the manner prescribed by law, and the parties agree that in the event that following the review of such objection or claim, the decision adopted by court differs from the provisions of Section 2.1.(b), the purchase price, determined pursuant to this court decision shall further be applied.
7. Force Majeure
7.1 The Party referring to Force Majeure circumstances as a hindrance for the performance of its obligations.shall give notice thereof. within three calendar days..
7.2 If either Party fails to perform its obligations in accordance with this Agreement due to Force Majeure, it shall be released from responsibility...."
"7. Force Majeure
7.1 None of the Parties shall be held liable if the performance of any provision hereof is delayed or made impossible by any natural or man-made calamities, by mass disorders, war, riots, as well as action of state authorities or any other condition beyond the control of the Party whose obligations are affected by it, which the Parties could not anticipate, while making this Agreement, and which the Parties are unable to prevent by using reasonable methods available to them.
7.2 The Party, which refers to force majeure conditions... shall report about it... not later than within three calendar days...
10. Term of Agreement
10.1 The Parties agree that this Agreement shall be in force for an undetermined period of time, subject to Clause 10.3 hereof.
10.3 If the Parties do not agree on a new purchase price for electric power by 6 March 2006, when the duty of Latvenergo to buy electric power for the double tariff expires, then this agreement shall lose its legal force at the moment when the said term expires."
"...the law regulates purchase of power from cogeneration stations and it is a state regulated business. At the moment determining a different purchase price would be a violation of the given law".
c) Further, the Respondent contends that Contract No. 16/97, including its agreement on the purchase price, was replaced by the agreement of 10 March 2000 (see section 3.6.7 above), fixing the multiplier at 0.75 after the Constitutional Court's decision. The Claimant contends that the 10 March 2000 agreement was a purely interim agreement, entered into under a certain degree of duress and in order to get out of the loss-producing standstill situation while waiting for the Constitutional Court's decision.
"Subject: On signing the interim agreement
During the negotiations in the Privatization Agency Latvenergo orally expressed you an offer to sign an interim agreement until our disagreement in the matters related to the purchase of the produced surplus power is solved.
Taking into account the tense course of the negotiations, the oral offer as if did not receive the necessary attention.
Therefore we repeatedly offer you to sign an interim agreement on purchasing surplus power from the station and on supplying power to the station from Latvenergo, determining the precise term for such an agreement. …
We understand that a station, which has been launched, has to start operating as soon as possible and this is exactly the reason for our proposal. Understanding your concern, we can include in the agreement the provision that the agreement shall not be in any way related to the previous or future relationship between Latvenergo and ‘Windau Ltd'."
a) The non-payment must be caused directly by the Republic or a state organ, or Latvenergo's actions in the contractual relationship with Windau must be attributable to the Republic;
b) The non-payment and the circumstances around such non-payment must constitute a violation of an obligation under Part III of the Treaty; and
c) The non-payment of the double tariff must have caused loss or damage to the Claimant's investment.
It is conceded by the Respondent that the Entrepreneurial Law in force at the time of Latvenergo and Windau entering into Contract No. 16/97 on 24 March 1997 gave Windau a statutory right to the double tariff during the first eight years of production. The Respondent has also conceded that Windau's acquired statutory right to the double tariff was taken away by successive legislative acts, first, possibly, with the amendment to the Entrepreneurial Law of 11 June 1997 (see section 3.5.4), then definitely by the repeal of the Entrepreneurial Law by the Energy Law with effect from 6 October 1998 and the Cabinet of Ministers' Regulation No. 425 of 31 October 1998 (see sections 3.5.5 and 3.5.6 above). These are acts for which the Republic is directly responsible.
The central government of Latvia was also fully aware of Latvenergo's refusal to pay the double tariff. After a meeting with the Prime Minister on 29 October 1999 the Cabinet of Ministers on 30 November 1999 issued a Resolution ordering the double tariff to be paid to Windau (see section 3.5.7 above). As explained, the Resolution was later invalidated by the Constitutional Court for constitutional reasons, but the incident is evidence of the central government's full knowledge of Latvenergo's failure to pay the double tariff. There is no evidence of the government taking any further steps to protect Windau's rights under the contract, or to reinstate Windau's statutory right to the double tariff, for instance in accordance with the Republic's obligations to protect foreign investments under the Energy Charter Treaty, see section 4.3.2 below.
"As a national economy object of the State importance, the Joint Stock Company "Latvenergo" shall not be privatized. All shares in the Joint Stock Company "Latvenergo" are owned by the State."
For this reason, whether Latvenergo's refusal to pay the double tariff was based on a misunderstanding of the legal situation, or whether it for other reasons ignored the legal framework under which it was operating, its actions concerning the purchase price are attributable to the Republic. Consequently, the Republic must be found responsible for Latvenergo's failure to pay the double tariff. - The Tribunal will add that for this finding it is not necessary to rely on the supplemental rule in Article 22 (1) of the Treaty contended by the Claimant (see section 4.3.1 below).
The Claimant alleges that the non-payment of the double tariff constitutes violation of several of the provisions of Article 10 of the Treaty, and also amounts to expropriation, or having an effect equivalent to an expropriation, as defined in Article 13 of the Treaty. It also relies on Article 22 (1) of the Treaty.
"ARTICLE 10 PROMOTION, PROTECTION AND TREATMENT OF INVESTMENTS
(1) Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favorable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favorable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.
(3) For the purposes of this Article, "Treatment" means treatment accorded by a Contracting Party which is no less favourable than that which it accords to its own Investors or to Investors of any other Contracting Party or any third state, whichever is the most favourable.
(7) Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favourable.
"ARTICLE 13 EXPROPRIATION
(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as "Expropriation") except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective compensation.
Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the "Valuation Date")...."
"ARTICLE 22 STATE AND PRIVILEGED ENTERPRISES
(1) Each Contracting Party shall ensure that any state enterprise which it maintains or establishes shall conduct its activities in relation to the sale or provision of goods and services in its Area in a manner consistent with the Contracting Party's obligations under Part III of this Treaty..
- Windau is subject to a treatment having an effect equivalent to expropriation;
- The Republic fails to accord fair and equitable treatment of investments and constant protection and security of such investments;
- The failure to pay the double tariff represents discrimination, and a violation of the obligation to most-favoured nation's treatment; and
- Latvenergo is under both statutory and contractual obligation to purchase electric power from the Bauska plant at the double tariff, and the Republic is, pursuant to Article 10 (1), under a duty to observe obligations that it has entered into, including obligations entered into by Latvenergo.
The Respondent denies for a number of reasons that the Respondent is in breach of any obligations under the Treaty, mainly contending that Latvenergo is a separate legal entity for which the Republic is not responsible, and that the scope of the asserted Treaty provisions are limited as set out in section 2.5 above.
Article 10 (1) provides inter alia that
"...no Contracting Party shall in any way impair by...unreasonable or discriminatory measures their [the Investor's Investments]...use, enjoyment or disposal".
It is undisputed that the Claimant's first investment in Windau occurred by the contract of 11 March 1999, registered on 25 March 1999, for the purchase of 51 per cent of the shares in Windau. The withdrawal of Windau's statutory right to the double tariff took place in September/October 1998, which was before Nykomb's investment. But as pointed out in lit. a) above, the claims for losses or damages are also based on the breach of the Contract which occurred from September 1999, which is after Nykomb's first investment was made. At least in the latter situation there is no question of the retroactive effects of the Treaty.
24 Mar 1997 Contract Nos. 16/97 and 17/97 entered into
26 Mar 1997 Contract No. 18/97 entered into
11 June 1997 The Entrepreneurial Law was amended, excluding contracts after 31 May 1999
25 Sep 1997 Latvenergo board decision: No further contracts with Windau
2 Oct. 1997 Latvenergo declared Contract Nos. 16/97 and 17/97 invalid
24 Oct. 1997 Dupont Aldrich Inc. and Jonathan Moseley became shareholders
19 Feb 1998 Noell turnkey and supply contract with Windau
6 Mar 1998 Windau compromise proposal to Latvenergo on invalidity dispute
20 Mar 1998 Latvenergo rejected any compromise, referring to being "bound by law"
Spring 1998 Noell invited Nykomb to take over as equity investor
8 May 1998 Windau asks for an off-take contract for Bauska
21 May 1998 Latvenergo refused, referring to board decision of 25 September 1997
29 Jun 1997 Windau letter to Council concerning the double tariff
30 Jun 1998 Council's letter to Windau confirming the double tariff
July 1998 Nykomb involved itself in project investigations
30 Oct. 1998 PriceWaterhouseCooper's financial proposal
16 Dec 1998 First instance Court decision in the Latelektro-Gulbene case
12 Feb 1999 Loan agreement between Vereinsbank and Windau
11 Mar 1999 Nykomb's purchase agreement for 51 per cent of the shares in Windau
30 Jun 1999 The Latvian Supreme Court ruling in the Latelektro-Gulbene case
11 Sep 1999 Bauska ready to start operation. Latvenergo refuses to pay double tariff
28 Feb 2000 Bauska started operation
10 Mar 2000 Windau -Latvenergo interim agreement
About Jan 2002 Latvenergo's court action against Windau on validity of Contract 16/97
11 Feb 2002 Nykomb Request for Arbitration
January 2003 Latvenergo's court action withdrawn, according to Claimant.
A similar court action had earlier been brought by the company Latelektro-Gulbene against Latvenergo. In both cases Latvenergo appears to have argued that the purchase agreements were invalid, because they were signed on behalf of Latvenergo by a person unauthorized to do so, because the price clauses (see section 3.6.3 and 3.6.6 above) were unclear and therefore not legally binding, and because the purchase price agreement had been superseded by subsequent legislation.
Latelektro-Gulbene won its case in three Latvian court instances, which culminated in the decision of the Latvian Supreme Court in June 1999 (see section 3.6.8 above). Latvenergo's court action against Windau was initiated after the Latelektro-Gulbene case had been decided and Latvenergo had entered into a new contract with Latelektro-Gulbene accepting the double tariff, see section 3.6.8 above. The case against Windau was only withdrawn in January 2003. It has not been explained why Latvenergo gave up the court case.
- that Windau shall have sold all generated electricity to Latvenergo at the double tariff provided for by the Latvenergo agreements (defined in clause 2.2.9 as Contract Nos. 16/97, 17/97 and 18/97);
- that three years had expired after the commissioning of the Bauska plant; and
- that Windau had fulfilled all its liabilities and repaid all loans and covered all expenses connected with the purchase, construction and commissioning of (the 16) co-generation plants.
As for the objection that the purchase contract is not an investment contract within the meaning of the Treaty, it suffices to note that such a contract clearly falls within the definition of investments in Article 1 of the Treaty.
Another assessment rule is contained in Article 26 (8), which provides that the awards of arbitration according to Article 26 may include an award of interest. The question of interest will be dealt with below.
According to Articles 34 and 35 ILC restitution is considered to be the primary remedy for reparation. Article 35 states:
"A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution:
(a) is not materially impossible;
(b) does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation."
At the hearing the Claimant submitted a list of "capital requirements" for the Bauska plant 1999-2003, including the situation at the end of 2000 (for illustration, SEK at 15/- is added here):
Shares 250 000 3 750 000
Loans 380 000 5 700 000
Owner costs 439 000 6 585 000
1 069 000 16 035 000
NOELL/BBP 1 495 000 22 425 000
VEREINSBANK 622 000 9 330 000
SUM TOTAL 3 186 000 47 790 000
The Claimant has claimed interest on the claimed amounts in the various periods, from the beginning of each of the designated periods until payment. In its first requests for relief, and in its calculations of net present values of future losses on the sale of electric power, the Claimant claimed for an annual interest rate of six per cent, stating that this is the prevailing interest rate in Latvia. In its Brief No. III of 9 September 2003 (see section 1.2.1 above) the Claimant claimed for an annual interest rate of six per cent up to the date of the award, and 18 per cent from that date until payment. The Claimant contends that it has the right to claim 18 per cent which is the stipulated interest rate in the Contract between Windau and Latvenergo in the event of late payment.
1. a) The Republic of Latvia is ordered to pay to Nykomb Synergetics Technology Holding AB, Stockholm, Lats 1,600,000 -one million six hundred thousand Lats - plus interest at the rate of 6 (six) per cent per annum from the date of the award until full payment is effective.
b) The Republic of Latvia is ordered to ensure the payment of the double tariff to Windau SIA, Riga, for electric power delivered from Windau's cogeneration plant at Bauska in accordance with Contract No. 16/97 for the period from the date of this award until 16 September 2007.
2. The Republic of Latvia is ordered to pay to Nykomb Synergetics Technology Holding AB, Stockholm, as compensation for its costs incurred in connection with this arbitration SEK 2,000,000 -twomillion SEK.
3. In accordance with the decision of the Arbitration Institute of the Stockholm Chamber of Commerce, the arbitrators and the said Arbitration Institute shall be entitled to fees and compensation for expenses in the following amounts:
|a)||Bjørn Haug, chairman, fees costs||€ € €||90,000 7.677 97,677|
|b)||Rolf A. Schütze, arbitrator, fees||€||49,500|
|16 per cent VAT on fees and costs||€||9,596|
|c)||Johan Gernandt, arbitrator, fees||€||49,500|
|25 per cent VAT on fees and costs||€||13,066|
|d)||The Arbitration Institute, administrative fee||€||20,946|
|Sum total||€ 253,523|
As between the parties, Nykomb Synergetics Technology Holding AB shall be responsible for 50 per cent and the Republic of Latvia for 50 per cent of the amounts due in this arbitration to the arbitrators and the Arbitration Institute.
In relation to the arbitrators and the Arbitration Institute the parties shall be jointly and severally liable for the payment of the amounts due to the arbitrators and the Arbitration Institute.
- Nykomb Synergetics Technology Holding AB shall also pay 25 per cent VAT on its part of the administrative fee to the Arbitration Institute, i.e. (25 per cent of €20,946/2) = € 2,618.