This article is an extract from TLR The Investment Treaty Arbitration Review - Edition 8. Click here for the full guide.
Despite calls for reform and controversial public debate in the past surrounding the negotiation of chapters on investment protection in free trade agreements, the practice of investment arbitration continues. It remains a popular means for investors worldwide to seek the protection of their rights under bilateral or multilateral investment treaties. This holds especially true for the Energy Charter Treaty (ECT),2 which in 2022 again saw an influx of new cases and remains the international investment agreement most used by investors.3
In the past, the prominence of the ECT could be explained by its geopolitical and economic origin. At times, it protected investors in the highly profitable but also often strictly governed energy sectors, especially after the breakdown of the Soviet Union, when several countries regained sovereignty – for the first time in decades – over their natural resources.
However, in recent years, the key factor for the activity surrounding the ECT is its availability for investors in the solar energy sector to challenge the revocation of incentives that states had granted to them during the 2000s. The number of cases brought by investors is still expanding, with Spain and Italy still being the most targeted states.4
In 2018, the arbitration world was turned upside down when the Court of Justice of the European Union (CJEU) issued its judgment in Slovak Republic v. Achmea BV.5 The effects of this decision were still evident in 2022. There are several reasons why the judgment is of particular importance to the ECT. First, it is simply because of the number of intra-EU cases that are brought under the ECT. For instance, in 2022, four investment arbitration cases were initiated under the ECT, two of which concerned intra-EU disputes. Second, it may be argued that the Achmea judgment is not that surprising in what it explicitly states, but in what it implies. Although the ECT is not mentioned in the judgment, its potential implications on the application of the ECT remain subject to debate. Finally, besides its legal implications, its effect on the investment climate – especially given the uncertainty created by the Achmea judgment – is significant. A number of claims initiated against Spain and Italy after the judgment may have been guided by the awareness of investors to act quickly before the EU Member States start to implement the Achmea judgment, which might also involve changes to the ECT.6 In the short time since the Achmea decision, the CJEU continued to reshape the landscape of intra-EU investment disputes, holding in Republic of Moldova v. Komstroy7 that intra-EU arbitrations based on the ECT are contrary to EU law.
This year's chapter deals with actual changes to the ECT in more detail. The reason for this focus is a new dynamic that has existed since 2019: the Energy Charter Conference established and mandated a 'modernisation group' to negotiate the modernisation of the ECT. The process is part of a wider reform discussion on the design of a new generation of investment agreements that is already taking place in forums such as the United Nations Commission on International Trade Law (UNCITRAL) Working Group III and conferences under the United Nations Conference on Trade and Development (UNCTAD). These efforts have been continued, as discussed in this chapter. Regarding the ECT itself, the chapter sheds some light on the legal framework for treaty change and on possible amendments to substantive provisions.
II Overview of the ECT and its investment protection regime
The ECT8 is a multilateral treaty, with its inception and origin dating from the early 1990s. The breakdown of the Soviet Union, the fall of the Berlin Wall and the following reunification of Germany led to a general reconfiguration of East–West relations. Russia and its eastern European neighbours' richness of energy resources combined with western Europe's general anxiety to diversify its sources of energy supply led to an initiative by the European communities to establish a new legal basis of commercial relations in the energy sector.
In 1991, both western and eastern European states signed the European Energy Charter, the political foundation of the ECT, and, as such, a non-binding declaration of principles, including guidelines for the negotiation of a subsequent binding treaty. The result of the ensuing negotiations was the conclusion of the ECT, which was signed in December 1994 and entered into force in April 1998.9
The following is an overview of the ECT's most pivotal provisions, limiting itself to Article 13 (i.e., protection against undue and uncompensated expropriation), Article 10(1) (guaranteeing fair and equitable treatment (FET)) and Article 26 (i.e., the dispute settlement mechanism under the ECT).
i Protection against direct or indirect expropriation under the ECT
The ECT follows the standard under customary international law and investment treaty practice and does not per se prohibit expropriation – whether it be 'direct' by the transfer of legal title, or 'indirect' by measures without the transfer of legal title, leading to a substantial loss of control or economic value.10 The ECT recognises a host state's right to expropriate the property of investments made in that state by investors but predicates the lawfulness of the expropriation on the conditions set out in Article 13(1):
Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalised, expropriated or subjected to a measure or measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as 'Expropriation') except where such Expropriation is:
- for a purpose which is in the public interest;
- not discriminatory;
- carried out under due process of law; and
- 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”).
Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.
For the purpose of determining a breach of Article 13(1), tribunals will try to establish:
- the transfer of title or a measure having the same effect;
- whether the transfer was made for a public purpose;
- whether the transfer was conducted in a non-discriminatory manner;
- whether the transfer was carried out under due process of law; and
- whether the transfer was followed by payment of adequate and prompt compensation.
In the context of expropriation, tribunals are inclined to take into account not only the effect of the measure but also the purpose, manner and context in which the state acted (the 'police powers doctrine').11
ii Guarantee of fair and equitable treatment under the ECT
The FET clause of the ECT can be found in sentence 2 of Article 10(1), which, in its pertinent parts, reads as follows:
Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable 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 favourable 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.
As a result of the generally broad and unspecific definition of the FET standard, there have been a wide range of attempts to define the standard. Over the years, jurisprudence has made it clear that to find the FET standard violated, it is of the greatest importance to assess the specific factual elements of the state's conduct towards the investor. The FET standard under the ECT requires states to be particularly forthcoming with information and to take an active part in the protection of the legitimate expectations of the investor, instead of merely refraining from acting contrary to them.
Based on this analysis, tribunals will consider, among other things, whether the state acted in accordance with its representations of a stable and predictable business and legal environment.12
As indicated above, any analysis of the FET standard under the ECT is first and foremost based on the facts of the case. There are certain indications on which tribunals place special importance. For example, not every violation of the host state's law is a violation of the FET standard.13 Under the ECT, this standard may only be interpreted to protect the reasonable and justifiable expectations of the investors, if they were created in that regard by the host state. However, changes in the legal framework of the investment have to be communicated and applied in a transparent, non-arbitrary manner and with consistency. Otherwise, the host state's conduct may very well be an infringement of the investor's rights under Article 10(1).
As stated by Dolzer:
Inconsistent conduct by the host state confuses the investor, stands in the way of proper planning, and is not conductive to an investment-friendly climate. Not surprisingly, arbitral tribunals have confirmed that inconsistency of conduct by the host state, as regards the investor's obligations, is not compatible with the requirement of FET.14
Prominently featuring in the discussions on investment arbitration, the issue at heart is the host state's 'right to regulate'. The jurisprudence on the ECT has not developed consistent case law in dealing with this matter. Rather, the decisions may be divided into two categories:
- A narrower approach demands that expectations must be based on clear and concrete assurances from the host state expressed in direct communication aimed at the investor regarding the specific business or relationship.
- The more flexible approach only requires the investor to prove that it identified a basis for its expectations in generally applicable laws, namely the legal and regulatory framework that existed at the time of making the investment.
When balancing investors' rights and the host state's right to regulate, tribunals will accord to states a right to change policies over time.15 As stated by Dolzer:
Consistency may not be required under circumstances in which the host state had convincing reason to change course. As regards its legislative power, the host state will, in principle, have the right to pursue its interests in the light of the new circumstances, but not ignore the interests of the investor who had earlier adjusted his conduct to the previous course required by the host state. The power to regulate operates within the limits of rights conferred upon the investor. Correspondingly, it will have to be assumed that the reversing of a position in a dramatic manner with serious negative effects upon the investor will be consistent with FET only in the presence of serious exceptional reasons, compelling the host state to reverse its previous decision and to require the investor to re-adapt its business.16
As stated by Patrizia et al.:
While the existing arbitral decisions on claims asserted under the ECT do not provide clear guidance, arbitral decisions applying other investment treaties indicate that tribunals will examine the specific circumstances of each case when considering whether the investor's expectations were reasonable under the FET standard. The tribunals . . . will likely consider, on a case-by-case basis, the conduct of the state as a whole, including whether the state made any specific assurances to investors and the reason for, and form of, the changes in legal framework, as well as any other circumstances surrounding the investment.17
Additionally, the conduct of investors has gained importance as arbitral tribunals require investors to make a diligent analysis of the legal framework for an investment. Frequently, the due diligence of an investor has been referenced as the main element that should be considered in the overall evaluation of the legitimate expectations in light of FET protection.18 The position seems to be that investors must show a high level of diligence, which has to be tested against the diligence of an experienced business person. It has been argued that if the investor assesses the risks or expected returns unreasonably, subsequent losses have to be qualified as simple business risks, which are not protected by the FET standard.
iii Dispute settlement under the ECT
The dispute settlement mechanism of the ECT is enshrined in its Article 26(1), which sets out that 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' shall be resolved amicably. If an amicable resolution of the dispute cannot be reached within three months, the investor is entitled to submit the dispute to either the national courts or administrative tribunals of the contracting party, the forum previously agreed by the parties or international arbitration.
Should the investor choose to submit the dispute to arbitration, the investor must decide whether it wants the case to be administered under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention),19 ad hoc arbitration under the UNCITRAL Arbitration Rules or arbitral proceedings under the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).
iv The provisional application of the ECT
Because of its immediate implications in practice, it is worth taking a look at Article 45(1) of the ECT, which regulates the treaty's provisional application, and reads: 'Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.'
The following paragraphs of Article 45 set out the regulatory framework for a declaration not to apply the ECT provisionally (Paragraph (2)) or to terminate the provisional application once a state has subjected itself to it (Paragraph (3)). Article 45 follows the international standard of multilateral treaties and economic-related treaties of being applied provisionally, despite containing quite elaborate language; when comparing Article 25 of the Vienna Convention on the Law of Treaties (VCLT) with Article 45 of the ECT, the sophisticated wording of the latter is striking.
v The ECT's tax carve-out
One of the ECT's provisions that features heavily in solar claims and other proceedings is the tax carve-out. Article 21(1) of the ECT provides that '[e]xcept as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties'; therefore, the provision effectively seeks to carve out measures relating to tax from the ECT's investor protection regime.
However, Article 21(5) of the ECT stipulates that Article 13 (protection against unlawful expropriation) still applies to taxes. In this case, a special regime applies. Article 21(5) of the ECT requires the investor to refer the issue of whether the tax amounts to an expropriation or is discriminatory to the competent tax authority of the host state.
Tribunals are split regarding the question of whether this stipulates a compulsory requirement for the investor to fulfil before initiating arbitral proceedings. In Plama v. Bulgaria, the tribunal ruled that it was a compulsory requirement.20 The tribunal in Yukos et al. v. Russia, however, came to the opposite conclusion for cases where referral to relevant authorities would be an exercise in futility.21 In addition, according to the Yukos tribunal, Article 21(1) of the ECT does not apply if the alleged action does not constitute a bona fide exercise of a state's regulatory powers.22
III ECT cases of 2022
The table below contains decisions of arbitral tribunals that emerged during 2022 and up to the time of writing. Of these decisions rendered, only two do not involve an intra-EU disputes namely Eurus Energy v. Spain and Goljevšček and others v. Bosnia and Herzegovina. To date, only the tribunal in Green Power and SCE v. Spain (Green Power) has upheld the intra-EU objection.
|Case name||Case number||Nature of the decision||Decision date|
|MOL Hungarian Oil and Gas Company Plc v. Croatia||ICSID Case No. ARB/13/32||Award of the Tribunal||5 July 2022|
|RENERGY v. Spain||ICSID Case No. ARB/14/18||Award||6 May 2022|
|Cavalum SGPS v. Spain||ICSID Case No. ARB/15/34||Award||29 September 2022|
|Kruck and others v. Spain||ICSID Case No. ARB/15/23||Decision on Jurisdiction, Liability and Principles of Quantum||14 September 2022|
|Cordoba Beheer and others v. Spain||ICSID Case No. ARB/16/27||Decision on Jurisdiction, Liability and the Principles of Quantum||11 February 2022|
|Eurus Energy v. Spain||ICSID Case No. ARB/16/4||Award||14 November 2022|
|Goljevšček and others v. Bosnia and Herzegovina||ICSID Case No. ARB/16/36||Award||18 April 2022|
|Green Power and SCE v. Spain||SCC Case No. V 2016/135||Award||16 June 2022|
|Infracapital v. Spain||ICSID Case No. ARB/16/18||Decision on Respondent Request for Reconsideration regarding the Intra-EU Objection and the Merits||1 February 2022|
|Second Decision on Reconsideration||19 August 2022|
|Rockhopper v. Italy||ICSID Case No. ARB/17/14||Final Award||23 August 2022|
|LSG Building Solutions and others v. Romania||ICSID Case No. ARB/18/19||Decision on Jurisdiction, Liability and Principles of Reparation||11 July 2022|
|TS Villalba and others v. Spain||ICSID Case No. ARB/21/43||Order taking note of the discontinuance of the proceeding||24 March 2022|
IV Achmea judgment and 2022 ECT decisions
This section takes a closer look at the effect of the Achmea judgment on the ECT. As numerous awards have dealt with this issue (whether as listed above or in an earlier decision on jurisdiction), the analysis, instead of looking at each case individually, gives an overview of the general notions that the tribunals applied in 2022 to assess the potential effects of Achmea. There is a trend of ECT tribunals dismissing jurisdictional objections based on the Achmea judgment. This question has also been raised in the context of set aside and enforcement proceedings of ECT awards.
i The intra-EU objection and the CJEU's Achmea judgment
In 2008, the Dutch insurance company Achmea BV (formerly known as Eureko BV) commenced an arbitration against the Slovak Republic under the Dutch–Slovakian bilateral investment treaty (BIT), claiming compensation based on the state's repeal of the liberalisation of its healthcare market.23 In its 2012 award, the tribunal constituted under the UNCITRAL Arbitration Rules found the state in breach of the FET standard and awarded Achmea damages in the amount of €22.1 million.24 Slovakia decided to bring set-aside proceedings before the Higher District Court of Frankfurt in Germany, the court of the seat of the arbitration. The Court rejected all of Slovakia's arguments, which had, among other things, argued that the tribunal lacked jurisdiction over the dispute because the BIT's arbitration clause was incompatible with EU law.25
On appeal, the German Federal Court of Justice made use of its power under Article 267 of the Treaty on the Functioning of the European Union (TFEU) and referred several questions to the CJEU, including the question on the compatibility of the ECT's arbitration clause with EU law.26
The starting point for the CJEU's judgment is its understanding of the primacy and uniform application of EU law, which Member States, including their domestic courts, are obliged to enforce. As noted by the CJEU, Member State courts, in particular, are given the opportunity through Article 267 of the TFEU to resolve potential conflicts between national and EU law by referring questions in cases before them to the CJEU.
The CJEU found that an arbitral tribunal constituted under a BIT might have to rule on matters of EU law where, based on the text of the BIT, it must apply the law of the respondent-state, which automatically also includes EU law. A potential safeguard against possible divergent judgments and awards was supported by Advocate General Wathelet in his opinion. He stated that the arbitral tribunal enjoyed the power of requesting a ruling from the CJEU on referred questions, as the arbitral tribunal constituted a 'court or tribunal of a Member State' pursuant to Article 267 of the TFEU.
The CJEU departed from these considerations of its Advocate General and held that an arbitral tribunal constituted under the BIT is outside the jurisdiction of the European Union and its Member States, this being the reason for the existence of the arbitration clause in a BIT in the first place. Accordingly, it is not open for arbitral tribunals constituted under BITs to call on the CJEU to have contentious issues of EU law resolved.
In a next step, the CJEU examined the award, which it found to be final and only subject to a very limited review by the courts of the Member States. The CJEU found that by virtue of concluding the BIT, the Member States established a regime that effectively prevents 'disputes from being resolved in a manner that ensures the full effectiveness of EU law'.27 The violation of the principle of the effectiveness of EU law then leads to the CJEU's final ruling 'that Articles 267 and 344 TFEU must be interpreted as precluding' a dispute settlement clause in an intra-EU BIT.28 This means, in practice, that a valid arbitration agreement between an EU Member State and an investor of another EU Member State cannot be concluded. The lack of a valid arbitration agreement is one of the limited grounds under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and most national arbitration laws, on which an award may be set aside or refused recognition and enforcement.29
The referring court, the German Federal Court of Justice, set aside the Achmea award. In doing so, it followed the CJEU's decision in substance and rejected any arguments presented by the investors regarding why the CJEU's Achmea judgment would not lead to an annulment of the award.30
ii Dismissal of objections to jurisdiction in recent ECT decisions
In 2022, arbitral tribunals constituted under the ECT have continued to dismiss all objections to jurisdiction raised in different intra-EU cases with the exception of Green Power.
In the past, EU Member States (acting as respondents in ECT arbitrations) argued that the ECT's investment protection regime did not apply to intra-EU proceedings. The issue lies in the wording of the offer to an investor to arbitrate under Article 26 of the ECT. Member States argued that intra-EU proceedings were 'disconnected' from the ECT's scope because of an implicit disconnection clause, incorporated in the ECT through the 2007 EU Lisbon Treaty, which modified EU Member States' rights and obligations and removed intra-EU disputes from the scope of Article 26 of the ECT.31 The Lisbon Treaty qualifies, according to their argument, as a 'successive treat[y] relating to the same subject-matter' pursuant to Article 30 of the VCLT. Under this Article, modification is possible if the earlier treaty provides that 'it is subject to, or that it is not to be considered as incompatible with, [a] later treaty'.
The European Commission, which appears as amicus curiae in almost all intra-EU disputes, further argues that it was not the European Union or its Member States' intention to create obligations between the Member States, as they acted throughout the negotiations of the ECT as one block with the Commission as their voice.32
A second line of argument advanced by the European Commission highlights certain provisions of the ECT, which, according to the European Commission, show that the ECT acknowledges that EU Member States never offered to arbitrate with investors from another EU Member State.33 One of the requirements for an investor to submit a dispute to arbitration according to Article 26(1) of the ECT is that it made an investment in the area of another contracting party. Pursuant to Article 1(10) of the ECT, 'area' is defined as the territory of a state or as 'the areas of the member states of a [Regional Economic Integration Organisation]'. The European Commission argued that an investment made by an investor from an EU Member State on the territory of another EU Member State is made within the same area, meaning the area of the European Union as a Regional Economic Integration Organisation.34 The Commission also takes the view that 'EU law forms part of the “applicable rules and principles of international law” under Article 26(6) ECT, and the “relevant rules of international law applicable in the relations between the parties” pursuant to Article 31(3)(c) VCLT'.35 As such, EU law is part of the applicable law determinative for assessing the validity of an arbitration. Adherence to 'systemic coherence' and the principle of autonomy of EU law requires an interpretation avoiding any conflict with EU law, which 'leads to the conclusion that there is no offer to arbitrate'.36
On 15 January 2019, the EU Member States issued a political declaration in which the consequences of the Achmea judgment were discussed. Exposing divergences among the Member States, two additional declarations (one by Finland, Luxembourg, Malta, Slovenia and Sweden, and another by Hungary) were issued because of different positions regarding the impact of the Achmea judgment on the ECT.37
The arguments and the declarations mentioned above have, so far, not succeeded in convincing most of the arbitral tribunals since the Achmea judgment has been delivered. The starting point for tribunals is an interpretation of Article 26 of the ECT pursuant to Article 31(1) of the VCLT, which provides that treaties 'shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose'. As the plain wording of Article 26 of the ECT does not include a qualification of any kind with regard to intra-EU arbitrations – and circumstances and context of the ECT do not suggest otherwise – tribunals conclude that the ECT continues to apply to intra-EU arbitrations.38
Also, the argument that an investment has been made in the same area has been quickly dealt with by tribunals. In Landesbank Baden-Württemberg et al. v. Spain (LBBW), the tribunal referenced the decision in Foresight,39 in which the tribunal found that the term 'in the area' in Article 26(1) of the ECT must be seen in light of the specific dispute.40 If an investor chooses to initiate arbitration proceedings against an EU Member State and not the European Union, 'the area' referenced in Article 26(1) of the ECT means the territory of that particular Member State.
Taking into account the specific circumstances of the Achmea judgment, most tribunals continue to find that the CJEU limits its ruling to BITs concluded between EU Member States, and leaves it open for investors to initiate arbitral proceedings under other international instruments that are not solely intra-EU BITs.41 There are significant differences between an intra-EU BIT and the ECT: the former is concluded between two EU Member States, while the latter is signed by the European Union, its Member States and 25 other countries that are not EU Member States.42 This distinction was made by Advocate General Wathelet in his opinion predating the CJEU's Achmea judgment and not rejected by the CJEU in its judgment.43
Furthermore, tribunals in LBBW and in SolEs Badajoz v. Spain emphasised that even if EU law prohibited Spain from making an offer to arbitrate, that prohibition would not take priority over the ECT because of Article 16 of the Treaty.44 In the event of conflict, Article 16 of the ECT produces a prevailing effect of such rules that are more favourable to the investor. In addition, Article 16 is an express collision clause and, therefore, constitutes lex specialis in relation to other general conflict rules as the lex posterior principle in Article 30 of the VCLT.45
Since January 2019, respondents have also referred to the declaration of 22 EU Member States on the legal consequences of the Achmea judgment to support their objections to jurisdiction; however, most tribunals have, so far, not followed the argument, mainly for two reasons. First, the declaration has not been signed by all Member States, leading tribunals to the conclusion that it does not establish a subsequent agreement within the meaning of Article 31(3)(b) of the VCLT.46 According to the tribunal in LBBW, the declaration was 'too fragile a foundation on which to construct an agreement between the ECT Contracting States that Article 26 means something radically different from what it appears to say'.47 Second, the declaration itself distinguishes between bilateral agreements and intra-EU claims under the ECT by stating 'Member States together with the Commission will discuss without undue delay whether any additional steps are necessary to draw all the consequences from the Achmea judgment in relation to the intra-EU application of the Energy Charter Treaty'. Finally, the tribunal in Rockhopper found that the declaration could not be viewed as a declaration of interpretation in the sense of general international law because the effect would be that of a treaty change.48
Domestic courts in the European Union have also been called to refer questions to the CJEU for preliminary ruling. This has been seen, in particular, through a number of decisions by the Swedish courts. In 2020, the Svea Court of Appeal rejected two requests by Spain (in set-aside proceedings of an arbitral award) to refer the cases in Novenergia and Foresight to the CJEU for preliminary ruling on, among other things, whether the Achmea judgment would also apply to the ECT.49 On 13 December 2022, the Svea Court of Appeal declared the award rendered in Novenergia invalid after referring to the practice of the CJEU with respect to intra-EU investment disputes. As at the time of writing, the Svea Court of Appeal has not decided the set-aside proceedings in Foresight.
In contrast, on 11 February 2021, the Svea Court of Appeal granted a request for referral to the CJEU in the set-aside proceedings in Italy v. Athena Investments AS.50 In the context of two intra-EU BIT awards against Poland, the Supreme Court of Sweden referred those proceedings to the CJEU for preliminary ruling.51 On 26 October 2021, the CJEU rendered its preliminary ruling, stating that:
by concluding an ad hoc arbitration agreement with the same content as that clause, would in fact entail a circumvention of the obligations arising for that Member State under the Treaties and, specifically, under Article 4(3) TEU and Articles 267 and 344 TFEU, as interpreted in the judgment of 6 March 2018, Achmea.52
iii Post-Achmea developments
On the back of the above-discussed political declaration of the EU Member States on the Achmea judgment, on 5 May 2020, a multilateral treaty to terminate intra-EU BITs was concluded by a majority (23) of EU Member States (the Termination Agreement).53 The Termination Agreement entered into force on 29 August 2020, following its ratification by Denmark and Hungary.
According to the provisions of the Termination Agreement, investor-state dispute settlement provisions of the terminated intra-EU BITs could not serve as a legal basis for the institution of new investor-state arbitration proceedings. The Agreement contains transitional measures that address pending intra-EU investor-state disputes and also provide for such disputes to be transferred to domestic courts; however, it does not concern the ECT. In its preamble, it states that the issue of intra-EU investor-state arbitration under the ECT will be addressed 'at a later stage'. Since its entry into force, three more countries (Malta, Croatia and Cyprus) have ratified the Termination Agreement and it has become provisionally applicable in two others (Slovakia and Spain).
Following the intra-EU political and legal developments relating to investor-state dispute settlement mechanisms, on 3 December 2020, the Belgian government submitted a request to the CJEU for clarification on the compatibility of the intra-EU application of the arbitration provisions of the draft modernised ECT with the European treaties. The request seeks to obtain an opinion of the CJEU, to provide greater clarity and legal certainty. Particularly, the Belgian government seeks clarification on the compatibility under EU law of the dispute settlement mechanism contained in the draft modernised ECT. This is in the view that such a mechanism could be interpreted to allow its application intra-EU (i.e., between an investor who is a national of an EU Member State and an EU Member State).
On 16 June 2022, the CJEU declared Belgium's request inadmissible, holding that 'the Court does not have sufficient information on the content and, more particularly, on the scope of Article 26 which will appear in the modernised ECT, even though that scope is the subject of the present request for an Opinion. The latter therefore appears to be premature'.54
V CJEU decision in Komstroy
The Advocate General of the CJEU, Maciej Szpunar, issued an opinion in the Moldova v. Komstroy case on 3 March 2021.55 He concluded that the investor-state dispute settlement mechanism contained in Article 26 of the ECT was incompatible with EU law. Further, he concluded that an electricity supply contract in the arbitration would not constitute a protected 'investment' for the purposes of the ECT.
On 2 September 2021, the CJEU issued a landmark ruling in the Komstroy case, finding that, under EU law, Article 26 of the ECT is not applicable to intra-EU investment disputes, effectively agreeing with the opinion of the Advocate General.56
i Paris Court of Appeal request for a preliminary ruling and CJEU ruling
On 24 September 2019, the Paris Court of Appeal issued a judgment suspending set-aside proceedings relating to an UNCITRAL award issued in October 2013 and further requested a preliminary ruling from the CJEU on three distinct questions in close relation to the interpretation of Articles 1(6) and 26(1) of the ECT.57 The questions posed were as follows:
- Must Article 1.6 of the Energy Charter Treaty be interpreted as meaning that a claim which arose from a contract for the sale of electricity and which did not involve any contribution on the part of the investor in the host State can constitute an “investment” within the meaning of that article?
- Must Article 26(1) of the Energy Charter Treaty be interpreted as meaning that the acquisition, by an investor of a Contracting Party, of a claim established by an economic operator which is not from one of the States that are Parties to that Treaty constitutes an investment?
- Must Article 26(1) of the Energy Charter Treaty be interpreted as meaning that a claim held by an investor, which arose from a contract for the sale of electricity supplied at the border of the host State, can constitute an investment made in the area of another Contracting Party, in the case where the investor does not carry out any economic activity in the territory of that latter Contracting Party?
Multiple EU Member States participated in the proceedings before the CJEU. The judgment provides that Hungary, Sweden, Finland and the Council of the European Union questioned the CJEU's jurisdiction to preside over this matter, noting that neither of the parties to the underlying dispute maintains European nationality. The CJEU countered this view, however, finding that, in accordance with EU law, it has jurisdiction to interpret the ECT, and alike, as it was adopted by the European Union. The CJEU further opined that the parties had elected France as the seat to the underlying investment arbitration, subjecting it to French arbitration law and, therefore, EU law.
Following initial points on the jurisdiction of the CJEU, the Court turned to the questions posed by the Paris Court of Appeal and proceeded to assess the applicability of Article 26 of the ECT in an intra-EU context; however, in doing so, it additionally took a decision on a question that had not been posed by the Paris Court of Appeal, namely finding that intra-EU arbitration under Article 26 of the ECT is in contradiction with EU law. The CJEU's decision here appears to be a direct extension of its findings in the Achmea case.
ii Post-Komstroy developments
The CJEU's landmark decision has expectedly led to widespread discussions, with views both dissenting and in agreement with the Court. Shortly after the CJEU's decision, a number of arbitral tribunals were faced with renewed intra-EU objections on the basis of Komstroy. Petitions by EU Member States asking tribunals to reconsider previous jurisdictional rulings have so far been unsuccessful.
On 11 November 2021, the tribunal in LBBW58 declined to amend an earlier decision, finding that it was not hindered by EU law to hear an intra-EU claim under the ECT. The tribunal had formed the view that its decision was now res judicata and, most notably, that its finding that it had jurisdiction would not have been altered by the CJEU's decision in Komstroy. Interestingly, the tribunal was of the view that the CJEU's ruling that Article 26 of the ECT was at odds with EU law, was not a core part of the Court's ruling and, therefore, was not binding.
The tribunal in Mathias Kruck and others v. Kingdom of Spain59 dismissed Spain's renewed request to reconsider the effects of the CJEU's decisions. The tribunal recognised a clash of Grundnormen because the CJEU made itself clear that ECT arbitration tribunals are not part of the legal order, but their role and authority is established by an international treaty. The tribunal concluded that the solution lies in the hands of the contracting parties of the ECT.
In December 2021, the tribunal in Rockhopper v. Italy60 joined this growing trend of ECT tribunals dismissing requests for reconsideration of the respondents' intra-EU objections following the CJEU's ruling in the Komstroy case. Drawing the same conclusion, the tribunal in Cavalum v. Spain61 applied its initial reasoning to the Komstroy decision, emphasising that Spain had given unconditional consent to arbitration, that the new decision did not affect its jurisdiction under international law and that the fact that EU law is at least in part international law does not change this conclusion.
Similarly, in Infracapital v. Kingdom of Spain (Infracapital),62 the tribunal had explicitly rejected the separate and different treatment for intra-EU disputes and non-intra-EU disputes. It found that 'nothing in the ECT gives an ECT tribunal the authority to disregard or modify the explicit provisions of the ECT and decline jurisdiction on the basis of a Contracting Party's status or its obligations under a different legal order';63 however, the state requested for reconsideration of that finding based on the Komstroy Judgment.
The tribunal declined to reconsider its decision based on Komstroy, stating the following:
Although strictly speaking the CJEU Komstroy Judgment is a new fact because the judgment itself was not known to the Tribunal at the time of the Decision, the issues raised by the CJEU Komstroy Judgment have already been addressed by the Parties and the Decision made it clear that even if the Achmea Judgment could be extended to the ECT, this would not affect the Tribunal's jurisdiction.64
The tribunal explicitly referred to CJEU's reasoning in Komstroy but held a different opinion with respect to the interpretation of a tribunal's jurisdiction based on the ECT.
In contrast to this ECT decision, the German Supreme Court confirmed a lower court decision holding that an intra-EU arbitration (based on a BIT and not the ECT) was inadmissible;65 however, the Higher Regional Court of Cologne held explicitly in its decision of 1 September 2022 that:
[f]rom the findings of the CJEU . . . it also follows that the arbitration clause in Art. 26 paragraph 2 c) in conjunction with paragraph (3) and (4) ECT for intra-EU disputes, i.e. a dispute between a Member State and an investor from another Member State, is incompatible with EU law and thus cannot be an effective legal basis for an arbitration obligation based on this provision.66
VI Green Power Case and admission of the intra-EU Objection
The award in the Green Power case is, so far, the only arbitral decision upholding the intra-EU objection. The dispute arose out of the changes in Spain's regulatory framework providing for a feed-in tariff system, which included monetary incentives to renewable energy producers. The investors (the claimants) were two Danish companies that invested in several Spanish photovoltaic power plants between 2008 and 2011. In September 2016, they submitted to arbitration before a Stockholm-seated SCC tribunal under the ECT.
With respect to the intra-EU objection, the respondent-state argued that the tribunal lacked jurisdiction ratione personae because the claimants were EU investors and, therefore, were not investors from the territory of another contracting party, according to Article 26(6) of the ECT. Further, it argued that the tribunal lacked jurisdiction ratione voluntatis as the state's offer to arbitrate under Article 26(6) was inapplicable to intra-EU disputes.
The tribunal dismissed the ratione personae objection, holding that Spain and Denmark were contracting parties to the ECT in their own right despite the European Union also being a party to the ECT;67 however, it upheld the ratione voluntatis objection. Preliminarily, the tribunal had found that there was no agreement regarding the applicable law to the tribunal's jurisdiction.68 It, therefore, considered that, regarding its jurisdiction, its assessment started with Article 26(6) ECT but it also included other relevant rules of international law and domestic law, as well as EU law.69 This entailed analysing post-ECT declarations, such as the termination of intra-EU arbitration agreements in 2019, as well as developments in EU law in the CJEU decisions in Achmea and Komstroy. The tribunal consequently declared Spain's unilateral offer invalid under EU law and declined jurisdiction.
After the Green Power award, many respondent-states requested reconsideration of decisions on jurisdiction where tribunals had already dismissed the intra-EU objection. For instance, the respondent in Infracapital70 filed a second request for reconsideration on 24 June 2022 based on the award rendered by the Green Power tribunal. The Infracapital tribunal laid out the requirements for reconsidering its decisions namely:
- whether the award in Green Power constituted a 'fact';
- whether the Green Power award was known to the tribunal and the respondent before the decisions subject to reconsideration; and
- whether the Green Power award is of such nature as to decisively affect the decisions subject to reconsideration.71
The tribunal briefly considered the Green Power award as a 'fact' that was 'newly discovered' as it was only rendered on 16 June 2022;72 however, not only did the Infracapital tribunal consider that the differences between ICSID and non-ICSID proceedings would suffice to reach a different conclusion as that in the Green Power award, but it also disagreed with the application of EU law to tribunals' jurisdiction based on the ECT.73 The tribunal, therefore, refrained from reconsidering its decision on jurisdiction.
As at the time of writing, no tribunal has followed the reasoning of the Green Power award.
VII New chapter in the modernisation process of the ECT
Calls for reform of traditional dispute mechanisms and demands for renegotiation of substantive provisions in international investment agreements have been voiced for some time. As a result, a general reform discussion on the design of a next generation of investment agreements is taking place in forums such as the UNCITRAL Working Group III and the frequent UNCTAD conferences.74 With its decision of 9 November 2019, the Energy Charter Conference has turned to another chapter in the reform discussion. It has established and mandated a modernisation group to start negotiations on the modernisation of the ECT. The negotiations take into account already identified topics and suggested policy options issued in 2019 and 2018.75
Suggested policy options include almost all core provisions of the ECT, such as the definition of 'investment' and 'investor', the FET clause, the most-favoured nation (MFN) clause and the notion of 'indirect investment'. Proposals also touch on new provisions dealing with questions such as security for costs, third-party funding, transparency and sustainable development.
The comments on different policy options given by the parties to the ECT show widespread agreement on some topics while there also seems to be visible divergence on others.76 For example, there has been substantial agreement that the MFN clause should not extend to dispute settlement provisions and for MFN obligations to apply only to investors in 'like circumstances' or 'like situations'. Similarly, most comments agree on the inclusion of a clause requiring investments to be made in accordance with host state law.
Little agreement could be found, however, on what a modernisation of the FET clause could look like. The European Union and Turkey favoured a closed list of specific FET obligations – as in recent EU investment treaties; by contrast, Switzerland wanted an open-ended list, and Azerbaijan proposed only that a list of actions breaching FET should be included, without clarifying whether this was inclusive or exclusive. A connection between FET and the international minimum standard of treatment of foreigners under customary international law was supported by Azerbaijan and Georgia. Azerbaijan added that the definition should clarify that a violation of other clauses was not a violation of FET. Meanwhile, five of the eight submissions (Albania, the European Union, Georgia, Switzerland and Turkey) clarified their view that the full protection and security obligation covered only the physical security of investors and investments.
Interestingly, only the European Union and its Member States have so far commented on possible changes to the investor-state dispute mechanism in Article 26 of the ECT. The European Union highlighted that it strives to ensure that its ongoing multilateral reforms of investor-state dispute settlement, such as those within the UNCITRAL Working Group III and ICSID, will be applied to the ECT. This includes the ambition that a future Multilateral investment court applies to the ECT.77
With a view to the technical frame for treaty change, the multilateral nature of the ECT should be borne in mind. Amendments to the ECT have to follow the procedure set out in its Article 42. Pursuant to this provision, proposed amendments must be adopted by the Charter Conference, and, even if the amendment is adopted by the Charter Conference, it cannot come into effect (between parties having ratified the amendment) until it has been ratified by at least three-quarters of the ECT Member States.
The year 2020 proceeded with three rounds of negotiations and concluded with the 31st Meeting of the Energy Charter Conference. The conferences took place between July and December 2020, where, because of the developments of the covid-19 pandemic, all meetings were conducted virtually. The overall themes of discussion focused on an agreed list of topics for modernisation of the ECT.
The first negotiation discussed key aspects of the ECT, including the definitions of 'charter', 'economic activity in the energy sector', 'investment' and 'investor', as well as the definition of the various investment protection provisions, including 'indirect expropriation', the provisions on compensation for losses, FET, denial of benefits, the MFN clause, the right to regulate, transfers and the 'umbrella' clause.
The second negotiation discussed ancillary definitions of the ECT, including 'definition of transit', 'access to infrastructure', 'definition and principles of tariff setting', 'sustainable development and corporate social responsibility', dispute settlement ('frivolous claims', 'security for costs', 'third-party funding', 'transparency', 'valuation of damages') and a remaining topic from the previous round (a provision relating to public debt).
The third negotiation discussed the definition of 'pre-investment', the provision on 'regional economic integration organisation' and 'obsolete provisions'. Additionally, the modernisation group discussed topics from previous rounds relating to investment protections (definitions of investor, investment, most constant protection and security and the right to regulate) and related issues involving dispute settlement (frivolous claims, third-party funding and security for costs).
A group of more than 100 representatives of each of the European and national parliaments together signed a declaration calling on the 'EU negotiators to ensure that the provisions in the ECT that protect foreign investment in fossil fuels are deleted and thus removed from the ECT'. Further, the statement called for the fundamental reform, limitation or removal of the investor-state dispute settlement provision.
On 2 December 2020, the European Commission indicated the possibility of its withdrawal from the ECT. In its communication, the Commission cited its strong commitment to pursuing the modernisation agenda, and that it considered a reform to the ECT as a best possible outcome. This was for reasons that a withdrawal would engage the operation of its 'sunset clause', triggering, in particular, its continued application for existing investments in the fossil fuel industry for a period of 20 years and permitting claims to be brought under the ECT's current dispute resolution mechanisms; however, the Commission acknowledged the possibility of its complete withdrawal if the modernisation process fails to align the ECT with the Paris Agreement. This highlights the concerns of the European Union and its broader regulatory commitments, notably also in the European Green Deal, with a commitment of its signatories to reaching carbon neutrality by 2050. A withdrawal from the ECT has been discussed among the European states before, including in January 2016, when Italy's withdrawal from the ECT took effect.
On 3 February 2021, the French Minister of the Economy, Finance and Economic Recovery issued a letter discussing the potential for a coordinated withdrawal by the European Union and its Member States. The French Minster cited similar concern towards the need for substantial progress in the negotiations to modernise the ECT in 2021.
In the fourth round of negotiations, the modernisation group mandated the Energy Charter Secretariat, and the chair and vice chairs, with the drafting of compromise proposals.
In the fifth round, an advance of consensus on transfers, as well as on certain issues related to sustainable development (notably corporate social responsibility (CSR), resource-based perspectives and impact assessment) and early disposal of frivolous claims in investor-state proceedings was achieved.
The modernisation group continued in the sixth round the discussions on the definition of 'economic activity in the energy sector', which began in the prior round. While recalling the benefits of different implementation and taking into account contracting parties' individual climate goals and energy mixes, the Secretary presented some initial options to implement such flexibility.
In the seventh round, the discussion on sustainable development and CSR advanced, which also included environmental impact assessments, a proposed amendment of the ECT provision on transparency as well as a proposal on climate change and the clean energy transition.
The modernisation group made advances on several aspects of sustainable development and CSR and built on previous discussions on a draft article on the relationship between the ECT and the Paris Agreement in the eighth round. In the ninth round, consultations relating to the draft compromise proposal by the Secretariat took place.
i Agreement in principle
After six additional rounds of negotiations (15 in total), on 24 June 2022, the Energy Charter Conference communicated that the contracting parties to the ECT have reached an 'agreement in principle' on the modernisation of the treaty.
With regard to substantive issues, the need to strengthen the right to regulate has been emphasised. Accordingly, the ECT contracting parties have envisaged additional references to the states' right to regulate in the preamble, a stand-alone article reaffirming that right in the interest of legitimate public policy objectives, as well as an exception clause building on the analogous provisions of the GATT and GATS. Furthermore, a list of certain measures constituting a violation of the FET standard were envisaged, as well as a clarification of the circumstances in which legitimate expectations may be considered. The ECT contracting parties also seek to clarify the notion of direct expropriation and to introduce a list of factors for considering indirect expropriation. Additionally, an explicit provision is foreseen stating that non-discriminatory measures adopted in pursuance of a legitimate policy do not constitute indirect expropriation.
With respect to renewable energy, climate change and sustainable development, the agreement in principle has updated the list of energy materials and products to include hydrogen, biomass and synthetic fuels, among others. It has also introduced a 'flexibility mechanism', which would allow contracting parties to exclude investment protection for fossil fuels in their territories. The European Union and the United Kingdom have already opted for that carve-out.
The agreement in principle foresees a number of provisions referring to environmental and labour agreements, such as the United Nations Framework Convention on Climate Change, the Paris Agreement and the ILO conventions. There is similarly a prohibition on lowering environmental and labour protection standards to encourage the inflow of trade and investment in the energy sector. Additionally, the ECT contracting parties have expressed their commitment to the clean energy transition, promotion of low-carbon technologies in energy trade and investment, and cooperation in implementing climate change-related policies.
With respect to dispute resolution mechanisms, the agreement in principle foresees several modifications:
- For the definition of investors, natural persons having the nationality of the host state when making the investment would be excluded from the investment protection mechanism under the modernised ECT. Corporations must comply with a requirement of substantial business activities in the home state.
- The agreement explicitly refers to the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration.
- An early dismissal of frivolous claims has been envisaged.
- The agreement provides for a disconnection clause for regional economic international organisations (REIOs), which excludes the application of the investment dispute settlement mechanism among ECT contracting parties that are members of the same REIO.
ii Further withdrawals
In late 2022, several EU Member States announced their intention to withdraw from the ECT, namely Poland, Spain, the Netherlands, France, Belgium, Slovenia, Germany and Luxembourg. On 24 November 2022, the European Parliament passed a Resolution78 urging the Commission to coordinate the withdrawal from the ECT. Interestingly, the Resolution states that:
the final text of the modernised ECT integrates elements of the negotiating mandate given to the Commission, is not aligned with the Paris Agreement, the EU Climate Law or the objectives of the European Green Deal, is not in line with the objectives laid down by Parliament in its resolution of 23 June 2022 on the future of EU international investment policy, including, most notably, the immediate prohibition of fossil fuel investors from suing contracting parties for pursuing policies to phase out fossil fuels, in line with their international commitments, the significant shortening of the time frame for phasing out the protection of existing investments in fossil fuels, and the removal of the ISDS mechanism.79
To date, the Depositary of the ECT has received the written notifications of withdrawal from France (taking effect on 8 December 2023), Germany (taking effect on 21 December 2023) and Poland (taking effect on 29 December 2023); however, the ECT's 20-year sunset clause must be taken into account.
VIII Looking back at 2022
The cases from 2022 that have been discussed exemplify the importance of investment arbitration between EU Member States under the ECT. From the beginning of 2018, it was to be expected that the European Union and its Member States would spend much of the next few years dealing with issues between themselves – issues that were already clearly identified in the three different notes issued by the EU Member States in January 2019, which differ with regard to the application of the judgment to the ECT.80 At the same time, it is remarkable that awards against eastern European and central Asian countries remain a rarity. This may be explained by the fact that, among other things, many of the disputes in that region fall outside the scope of the ECT.
The CJEU's decision on Komstroy has not found wide reflection in intra-EU investment disputes under Article 26 of the ECT. Only the Green Power tribunal has declined jurisdiction in its award of 16 June 2022. The tribunal considered EU law as part of the applicable law to its jurisdiction and, thereby, considered that the respondent (Spain) could not have validly agreed to investment arbitration with nationals of other EU Member State.
While 2022 saw promising developments on the modernisation of the ECT with the conclusion of an agreement in principle, these developments appeared insufficient for the European Union, which sought a coordinated withdrawal from the ECT in late 2022. This led France, Germany and Poland to officially withdraw from the ECT in December 2022.
IX Outlook for 2023
With the beginning of the 'EU exodus' from the ECT, we might expect more claims being filed under the ECT in 2023 seeking to be covered by the ECT's current scope of application. In the coming years, renewable energy cases will most likely continue to play an important role in investment arbitration under the ECT. To this end, it can be expected that it will still take some time for the European Union and its Member States to identify common ground regarding the implications of the Achmea and Komstroy judgments with respect to the ECT. It remains to be seen whether the ECT contracting parties will agree on the final text of the modernised ECT.
It should not be overlooked that the ECT's signatories are not only western European states but also many capital-importing countries in eastern Europe and central Asia. With China's belt-and-road initiative now well under way, the focus might shift east. This is not least because of the dozens of ECT claims pending against western European states. The ECT, therefore, will remain an important legal instrument of investment protection in the years to come.