1. Introduction

The future of investor-state arbitration between EU investors and EU Member States (“intra-EU investment arbitration”) remains uncertain. This has become particularly evident in light of the EU Commission’s efforts to abolish intra-EU investment arbitration, coupled with the growing number of judgments by the Court of Justice of the European Union (“CJEU”) declaring the underlying arbitrations incompatible with EU law (Achmea, Komstroy and PL Holdings). In the Achmea decision, the CJEU found an intra-EU investment arbitration under the bilateral investment treaty (“BIT”) at issue incompatible with the principle of primacy and autonomy of EU law under Articles 267 and 344 of the Treaty on the Functioning of the EU (“TFEU”). In Komstroy, the CJEU expanded its Achmea reasoning to intra-EU investment arbitrations under the Energy Charter Treaty (“ECT”). The PL Holdings judgment further expanded the Achmea doctrine to intra-EU investment arbitrations based on an ad hoc arbitration agreement.

The above-mentioned CJEU judgments concern only arbitrations which have not been conducted under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID”). The self-contained ICSID regime has its own mechanism for reviewing awards and precludes access to domestic courts. For this reason, investors often prefer to bring an ICSID arbitration (which is not tied to any arbitral seat and thus, to scrutiny by a domestic court), where the underlying BIT or multilateral treaty provides for such an option.

The Achmea, Komstroy and PL Holdings arbitrations, however, were all seated in EU Member States, making the respective courts competent to hear the set-aside proceedings, and to seek preliminary rulings from the CJEU on the intra-EU legal question. That said, arbitral tribunals have so far overwhelmingly rejected the view that the CJEU’s decision in Achmea would affect their jurisdiction over intra-EU investment arbitrations, irrespective of whether these concern ICSID or non-ICSID arbitrations.

Two recent developments in the ECT context might, however, accelerate the demise of intra-EU investment arbitrations:

  • Green Power et al. v. Spain: The first-known award in a Stockholm-seated ECT arbitration to uphold a host state’s intra-EU objection and recognize the primacy of EU law.
  • ECT reform: The draft amended ECT expressly excluding intra-EU investment arbitration and narrowing the scope of investment protection and investor-state arbitration.

Section 2 of this newsletter summarizes the Green Power tribunal’s reasoning behind its award. Section 3 highlights the most salient aspects of the ECT reform, and Section 4 considers what these developments mean for Japanese companies with operations in the EU.

2. Green Power et al. v. Spain award

To date, tribunals have consistently displayed a high degree of skepticism towards the EU’s and CJEU’s ambition to abolish intra-EU investment arbitrations and assumed jurisdiction over such disputes. In a landmark award dated 16 June 2022, the Green Power tribunal unanimously broke with this arbitral practice and declined to hear an ECT claim brought by two Danish investors against Spain. Relying on the CJEU’s Achmea and Komstroy judgments, the tribunal held that EU law precluded ECT arbitrations and invalidated Spain’s consent.

The crux of the dispute was whether Spain validly consented to arbitrate pursuant to Article 26(3)(a) of the ECT, which reads:

(3)(a) Subject only to subparagraphs (b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration […] in accordance with the provisions of this Article. (emphasis added)

Despite acknowledging that Spain’s consent was unconditional on its face, the tribunal considered Article 26 of the ECT to be only “the starting point”. Given the “complexities of this case”, it felt compelled to also analyze the validity of Spain’s consent under EU law. To the tribunal, the following aspects could not be overlooked:

  • The arbitration was not conducted on the basis of the ICSID Convention but under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) and seated in Stockholm, Sweden.
  • The parties and arbitral seat involved EU Member States (i.e., Denmark, Spain and Sweden).
  • The case involved EU state aid issues, much like in the Achmea judgment.
  • Denmark and Spain had accepted the EU’s intra-EU policy, including the primacy of EU law, and EU’s exclusive competence over state aid questions.
  • Swedish law recognizes the primacy of EU law over its domestic law.

The tribunal then proceeded to examine Article 26 of the ECT (i) in its context as well as in light of its object and purpose, and (ii) by “applying the relevant norms of EU law”.

a. Interpretation of the context and object and purpose

Turning to the context of Article 26 of the ECT, the tribunal highlighted that the ECT recognizes the EU law’s relevance by allowing states which are party to a Regional Economic Integration Organization (“REIO”), such as the EU, to enter into “a network of special legal relations” granting each other “special benefits” (Article 25 of the ECT) and to transfer competence over certain matters to such REIO (Articles 1(1)-(3) of the ECT). This would be evidenced by the EU’s exclusive competence in state aid matters and in resolving EU law questions.

The tribunal also considered Denmark’s and Spain’s declarations at the time of the conclusion of the ECT as an acceptance of the CJEU’s continued competence to resolve intra-EU issues, which meant that their consent to arbitrate was not unconditional in the sense of Article 26 of the ECT. Equally, the parties’ declarations following the Achmea judgment would evidence their shared understanding that Article 26 of the ECT “ha[d] to be disapplied” for intra-EU investment arbitrations.

Unable to draw any certain conclusions from the ECT’s object and purpose, the tribunal opined that an examination of the relevant EU law would be necessary.

b. Application of the relevant EU law norms

In the second part of its reasoning, the tribunal delved into an analysis of the CJEU’s Achmea and Komstroy judgments and the principles of “autonomy and primacy of the EU legal order”. In its view, EU law applied both as a matter of international law and Swedish law, the latter being the law of the arbitral seat.

According to the tribunal, the CJEU in Achmea confirmed that Articles 267 and 344 of the TFEU render an offer to arbitrate in an intra-EU dispute inapplicable. The tribunal agreed that this was necessary to ensure consistency and uniformity in the interpretation of EU law. In its view, this rationale also applied to ECT cases, considering that the CJEU’s reasoning in Achmea was not limited to BITs but referred to arbitration offers “in an international agreement”, as reconfirmed in the CJEU’s Komstroy judgment. Similarly, the Green Power tribunal stressed that Articles 107 and 108 of the TFEU precluded arbitral tribunals from ruling on state aid matters which were subject to the EU Commission’s exclusive competence. However, irrespective of whether such matters were at issue, the Achmea judgment had to be applied to guarantee the consistent and uniform interpretation of EU law.

Next, the tribunal briefly addressed other arbitral rulings, either by dismissing their reasoning or distinguishing them as ICSID arbitrations. Notably, the tribunal observed that had the claimants in the present case opted for an ICSID arbitration, instead of an SCC arbitration (which they could have), EU law questions would “not [have] arise[n] in the same manner” given the limited scope of review and lack of an arbitral seat in ICSID arbitrations. Accordingly, the tribunal concluded that to ignore EU law would amount to “overstepping its powers under the ECT”.

In a final step, the tribunal addressed the conflict between Article 26 of the ECT and EU law and qualified EU law as a lex superior. However, it did not address the claimants’ argument that Article 16(2) of the ECT resolves any potential conflicts and stipulates that the ECT will remain unaffected by a prior or subsequent agreement. To the tribunal, there were “no grounds” to assume that the ECT had an overriding character.

Consequently, the tribunal held that Spain’s offer to arbitrate had been invalidated by application of the principle of primacy of EU law, as reconfirmed in Komstroy, and declined its jurisdiction.

The award of the Green Power tribunal has been criticized as an attempt to disapply Article 26(3)(a) of the ECT despite its plain wording and the special procedures for treaty modification. It has been stressed that it is not for a tribunal or court to remedy a conflict between the ECT and EU law by way of interpretation; rather, such a result would require an amendment of the ECT by its contracting parties. Such amendment, however, might soon become reality.

3. ECT reform

On 24 June 2022, following a five-year negotiation and only a few days after the Green Power award, the Energy Charter Secretariat (“Secretariat”) announced the ECT contracting parties’ agreement in principle on 

a modernized ECT. The reform process was initiated in 2018. The ECT has long been considered outdated and criticized for insufficiently protecting the host states’ right to regulate public policy matters and for favoring investors. To remedy this, the contracting parties to the ECT have been renegotiating leaner investment protections and investor-state arbitration provisions. Separately, some ECT contracting states, including the EU and its Member States, threatened their withdrawal from the ECT unless it was made ‘greener’ and promoted mainly ‘clean’ renewable energy.

Some of the key changes to the ECT include:

  • An EU-driven option to agree on the exclusion of investor-state arbitration for contracting states of the ECT that are also members of a REIO (point 6). So far the EU is the only REIO of the ECT, so the exclusion only affects EU Member States, in line with the CJEU’s Komstroy judgment;
  • An optional exclusion of existing and future fossil fuel investments, thus precluding claims by the fossil fuels sector against host states (point 1, pillar 2); and
  • A narrower definition of covered investors and investments and more restrictive investment protection and provisions highlighting host states’ right to regulate.

With this, the EU has achieved another important milestone in its battle against intra-EU investment arbitration, at least under the ECT.

4. Outlook

It remains to be seen what the future of intra-EU investment arbitration will hold. For the time being, tribunals may well consider the Green Power case an outlier and continue to adjudicate intra-EU disputes. Investors also may try to avoid EU Member State courts by seating an arbitration or finding enforceable assets outside the EU, or opting for ICSID arbitrations. However, EU Member State courts may be increasingly reluctant to enforce intra-EU awards, particularly once the amended ECT enters into force. Similarly, ICSID arbitrations may cease to be a safe heaven for investors, as the recent proceedings in the Uniper and RWE intra-EU investment arbitrations have exemplified.

Following the Netherland’s decision to phase out coal-produced energy by 2030, two German energy companies, RWE and Uniper, filed ICSID claims under the ECT. This prompted the Netherlands to initiate parallel proceedings before the German courts to halt both arbitrations due to their intra-EU nature. RWE and Uniper, in turn, attempted to force the Netherlands to withdraw from the parallel proceedings given the self-contained nature of the ICSID regime. At the same time, only the RWE tribunal is likely to adjudicate on this procedural conundrum. This is because Uniper has reportedly agreed to withdraw its intra-EU investment arbitration soon in exchange for a bail-out by the German Government. As both the RWE and Uniper cases show, intra-EU investment arbitration faces an uncertain future, even if initiated in reliance on the ICSID Convention.

Against this background, Japanese companies with operations in the EU may want to contemplate their options, including restructuring their investments and other means of securing continued treaty protection. Our international disputes practice with substantial expertise in investor-state arbitration and in many jurisdictions will continue to report on the topic. For further assistance and an introduction to our team, please feel free to contact us anytime.