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Intra-EU Disputes Under the ECT, What Next?

The ECJ has confirmed that intra-EU disputes under the ECT are not compliant with EU law. We discuss what impact, if any, this decision will likely have on the future of claims arising under the ECT.

The Intra-EU Question and the ECT

In a judgment handed down on 2 September 2021,1 the European Court of Justice (“ECJ”) finally ruled that the investor-state arbitration clause, at Article 26 of the Energy Charter Treaty (“ECT”), does not apply to intra-EU investment disputes.

While the ruling itself arose out of a case concerning two non-EU parties (i.e., Moldova and the Ukrainian company Komstroy LLC (“Komstroy”)), the ECJ confirmed its jurisdiction to interpret the ECT, it being part of EU law, noting that “where a provision of an international agreement can apply both to situations falling within the scope of EU law and to situations not covered by that law, it is clearly in the interest of the European Union that, in order to forestall future differences of interpretation, that provision should be interpreted uniformly, whatever the circumstances in which it is to apply” (Komstroy Judgment, para. 29).

The European Commission’s (“EC”) position concerning intra-EU disputes is already well-known. Put simply, the EC considers intra-EU disputes to be subject to EU law and, as such, that they should not be determined by bodies outside the EU judicial system. As a result, the EC considers that arbitration clauses pursuant to intra-EU investment treaties, which, in effect, remove a dispute from the EU legal order, are not compatible with EU law. This position was crystallised by the ECJ’s Achmea decision in March 2018. Until now, a question had remained over whether this same approach was intended to apply to the ECT.

In the recent Komstroy ruling, the ECJ resolved this outstanding question, stating that Article 26 of the ECT is intended to govern the bilateral relationship between two contracting parties in a similar way to the provision in the bilateral investment treaty [(“BITs”)] which gave rise to the decision in Achmea. As such, the investor-state arbitration clauses in the ECT “must be interpreted as not being applicable to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State” (para. 66).

While this will affect investors throughout the energy sector in the EU, it is noteworthy that a significant portion of the pending intra-EU cases include the many renewable energy arbitrations, not least those currently faced by Spain relating to its solar power incentives. For example, of the 57 ECT cases currently listed as ‘pending’ with ICSID, 37 of these concern intra-EU, renewable energy arbitrations.

What does this mean for existing, and future, investment claims under the ECT?

While this landmark decision suggests that intra-EU disputes under the ECT should no longer be pursued in investor-state arbitration, there is already an established trend in public international law cases that, despite the EC’s standpoint on jurisdiction as it concerns intra-EU disputes, EU Member States still remain bound by their broader obligations under international law.

Since the Achmea decision, a number of EU Member States have sought to defend claims or annul awards concerning both intra-EU BITs and the ECT on the basis that the arbitral tribunal did not have jurisdiction, or had manifestly exceeded its powers in accepting jurisdiction, over an intra-EU dispute. Despite the ECJ’s 2018 Achmea decision, as a matter of public international law, this challenge has been unsuccessful in all international investment treaty cases to date.

A recent annulment decision, Antin v Spain,2 highlighted that international committees and tribunals alike remain reluctant to accept this jurisdictional objection. The Antin ad hoc Committee, in fact, pointed to 56 other tribunals that had already dismissed the jurisdictional argument (of which 35 were considering the intra-EU argument in the context of the ECT, albeit before the Komstroy ruling), and agreed with the tribunal in InfraRed v Spain that one cannot “overstate the importance of the long record of recent arbitral awards or partial awards which disposed of the intra-EU jurisdictional objections and maintained the jurisdiction of the respective ECT tribunals”.3

However, by contrast, any arbitral tribunals with an EU-seat facing this jurisdictional objection will be subject to EU law, and as such, may not continue following this same logic. This, in turn, may lead to vastly different outcomes depending on the seat or institution of any arbitration in question, despite potentially relating to the same Member States, under the same treaty, or even relating to the same government incentives.

While most EU Member States last year entered into an agreement to terminate their intra-EU BITs, effectively preventing future disputes being brought under intra-EU BITs, it remains to be seen whether the Komstroy ruling will eventually lead to a similar conclusion for the ECT or whether other reforms, such as those already proposed by the EU, will come into play, including the EU’s proposed ‘Investment Court’.

Interestingly, for now, the ECJ accepted in its Komstroy ruling that EU Member States will still be required to comply with the investor-state arbitration provision insofar as it relates to an investor from a non-EU State, again seeming to create a two-tier system within the same treaty (para. 65).

Enforcement, a further stumbling block?

While investors facing any intra-EU dispute under the ECT, at least provided the arbitration is not seated in the EU, may have some confidence (for now) that the protections granted under the ECT will be upheld as a matter of public international law, the issue of enforcement will likely cause further issues, even in the event of a successful outcome for the investor.

Not only might EU Member States subsequently seek to challenge the registration of any awards in local courts (as may be appropriate) on the basis that the award is not compatible with EU law, but, as shown by the recent investigation by the EC (concerning the Antin v Spain Award), the payment of any award by an EU Member State to an investor may also be seen to fall foul of EU state aid rules.

Accordingly, investors will need to carefully consider non-EU options for both the seat of any arbitration and any possible enforcement action before commencing any new (or perhaps even continuing with) investor-state arbitrations under the ECT.

1 Case C‑741/19, Republic of Moldova v Komstroy LLC, [2 September 2021] ECLI:EU:C:2021:655.

2 Decision on Annulment, 30 July 2021, Infrastructure Services Luxembourg S.à.r.l. and Energia Termosolar B.V. (formerly Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V.) v Spain, ICSID Case No. ARB/13/31 (“Antin v Spain”)

3 Id., para. 154, citing, Award, 2 August 2019, InfraRed Environmental Infrastructure GP Ltd. et al. v. Kingdom of Spain, ICSID Case No. ARB/14/12, para. 260.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.