Will the proposed modernisation of the ECT clip the wings of European investor-state arbitration?

By Jalal El Ahdab, Jonathan Choo, William Langran, Garreth Wong

08-2019

The proposed modernisation of the Energy Charter Treaty (ECT) received an important boost on 15 July 2019.

The EU Foreign Affairs Council, together with the Member States who are parties to the Energy Charter Treaty (ECT), has given a mandate to the European Commission to start negotiations to modernise the ECT. Following this mandate the European Commission has adopted a number of negotiating directives. The aim of the negotiations is to modernise the provisions of the ECT to take account of sustainable development and climate goals, as well as modern standards of investment protection and investor- state dispute settlement.

In its press release announcing the negotiating mandate the European Commission states that it "will aim to bring the provisions on investment protection in line with the modern standards of agreements recently concluded by the EU and its member states. It will also look to ensure that the modernised ECT continues to aim at a high level of investment protection. The modernised ECT should explicitly reaffirm the so-called "right to regulate", i.e. the right of the contracting parties to take measures for the protection of health, safety, the environment and other public policy objectives. The EU also aims to clarify that investment protection provisions cannot be interpreted as a commitment by the contracting parties not to change their laws. Investor-to-state dispute settlement provisions should reflect the EU approach in its investment protection agreements and the position taken by the EU in ongoing multilateral reforms".

The ECT provides a multilateral framework for energy cooperation. It was signed in December 1994 and entered into legal force in April 1998. Currently there are fifty-three Signatories and Contracting Parties to the Treaty. This includes both the European Union and Euratom.

The Treaty's provisions focus on the protection of foreign investments, non-discriminatory conditions for trade in energy materials, products and energy-related equipment based on WTO rules, and provisions to ensure reliable cross-border energy transit flows through pipelines, grids and other means of transportation. Notably, the Treaty also provides for the resolution of disputes between participating states. In recent years some EU Member States, such as Spain, have faced a rising number of claims by investors asserting their rights under the ECT, primarily as a result of changes in legislation that directly emanates from compliance with and domestic implementation of EU law.

The proposed modernisation of the ECT comes at an interesting time in the development of investor state arbitration with the EU seeking an apparent change to the current investor state dispute environment between itself and states it is contracting with under Free Trade Agreements (FTAs). Firstly, the EU is trying to replace the current investor state dispute resolution model which mostly operates under either ICSID or UNCITRAL rules with a new investment court system. In its recent FTA with Canada (CETA), the EU and Canada have agreed that any disputes under the agreement will be resolved under the new investment court system.

Secondly, the Court of Justice of the EU (CJEU) considers that some arbitration clauses in intra-EU bilateral investment treaties (BITs) are incompatible with EU law. Many of these BITs are old, signed before at least one of the contracting parties became a member of the EU. These BITs allow for dispute resolution via independent arbitral tribunals. As these tribunals operate under institutional rules such as ICSID or UNCITRAL amongst others, the CJEU is of the view they may not apply EU law to the dispute before them because unlike a Member State court, an arbitral tribunal cannot refer EU law questions to the ECJ. EU Law should be applied to these disputes because the parties are members of the EU.

The CJEU, in its controversial judgment in Achmea [1], stated that the arbitration clause contained in Article 8 of the 1991 Netherlands-Slovakia BIT (the “BIT”) had a hostile effect on the sovereignty of EU law, and was therefore incompatible with EU law. Following this ruling Member States (including the UK) have agreed to terminate, where possible, all existing intra-EU BITs by 6 December 2019. Twenty-One Member States have also declared that the ruling in Achmea applies to the ECT, which is not a BIT but a multi-lateral treaty. However, from reports in the arbitral press, every arbitral tribunal which has been asked to rule on the question has adopted a narrow interpretation of Achmea ruling that the ECT is part of international law, not EU law and therefore the ruling in Achmea does not apply to the ECT.

It is generally agreed that modernisation of the ECT is required and the EU will play a key role. What is uncertain is whether we can expect a rapprochement in the turf war between the assertion of supremacy of EU law by EU institutions and the opposing view by arbitral tribunals that the ECT, as an instrument of international law, trumps EU law. Will there be a compromise or will one legal order claim victory over the other?

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[1] Case number = C-284/16