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The UK Issues Ultimatum on the Energy Charter Treaty: What's Next?

The Modernisation of the Energy Charter Treaty: So Close, And Yet So Far Background Image

By  Louise Woods, Sophie Freelove, Simon Michau and Max Marshall*

The UK has announced that it will review its membership of the Energy Charter Treaty (the “ECT” or “Treaty”) if there is no agreement on modernisation by November 2023. This announcement comes after a second vote on modernisation, previously scheduled for April 2023, was postponed. The UK and EU had been key drivers in the modernisation of the ECT, which was agreed in principle (the Agreement in Principle, or “AIP”) in June 2022.

We reported on the modernisation of the ECT last year. The proposed amendments to the ECT included:

  • a “flexibility” mechanism that would allow States to phase out existing and future fossil fuel investment protections after 10 years;
  • an updated list of energy materials and products to be covered by the provisions of the Treaty (such as biogas and hydrogen); and
  • amendments to certain definitions, including investor and investment and the introduction of a definition for ‘indirect expropriation’.

However, as previously reported, the modernisation of the Treaty became uncertain last year following announcements from a number of EU Member States of their intentions to withdraw.

EU Withdrawal Update

Previously, the European Commission (“EC”) had targeted a co-ordinated, EU-wide approach to the ECT, in an attempt to use the block’s bargaining power to achieve the modernisation.  However, a number of EU countries indicated their intention to leave on the eve of the first planned vote on modernisation. To date Denmark, Spain, Slovenia and Portugal have announced their intention to leave the ECT, with France, Germany, Poland and Luxembourg having already formally notified their withdrawal to the ECT Secretariat. France, Germany and Poland will all formally withdraw in December 2023, whilst Luxembourg will withdraw in June 2024. Italy also previously withdrew from the ECT in 2016.

Relatedly, in July 2023 the EC announced its proposal for a coordinated withdrawal from the Treaty by the EU block, abandoning the AIP it had been negotiating since 2019.

Operation of Sunset Clause

Despite the pending withdrawals, the Treaty’s 20-year ‘sunset clause’ means that States may still face claims for 20 years after they withdraw.

Proposed neutralisation of the sunset clause

However, withdrawing EU countries previously indicated their intention to “neutralise” the sunset clause. Whilst there have been suggestions of agreements between EU Member States and other ECT signatories, it remains unclear whether any ECT signatories would agree to sign such agreements and what the effect of such agreements might be.

The Energy Charter Secretariat issued a statement in November 2022 setting out the high bar that would be required if parties intended to rely on Article 62(1) of the Vienna Convention on the Law of Treaties to terminate the sunset clause for a “fundamental change of circumstances”. This issue will likely be tested in claims following any State’s withdrawal from the ECT.

The Intra-EU Question and a proposed subsequent EU Agreement

Separately, EU countries will likely argue that the ECT should not apply to intra-EU disputes. The Court of Justice of the European Union (“CJEU”), in its well-known decisions in Achmea and Komstroy, ruled that intra-EU Investor-State arbitrations are incompatible with EU law.

In October 2022, the EC proposed a “subsequent agreement on the interpretation of the ECT” for EU Member States, which purports to confirm that the ECT and its sunset clause never applied to intra-EU relations, and as such that no claims can be brought under the ECT as between Member States (mirroring the CJEU’s decision in Komstroy). This agreement would purport to make any intra-EU ECT dispute invalid (including existing ones provided the award had not been executed before 6 March 2018).

The proposed subsequent agreement also invited “the secretariat of ICSID and the secretariat of the SCC not to register any new intra-EU arbitration proceedings based on the ECT”.

However, this line of argument has generally been rejected by arbitral tribunals ruling on ECT claims, as well as by the courts of States outside the EU when seized with enforcement proceedings for ECT awards.

By way of example, the recent English High Court judgment in Infrastructure Services v. Spain upheld the joint Luxembourgish and Dutch claimants’ ICSID award against Spain under the ECT, finding that there were “no proper grounds” for setting it aside.

This notably contrasts with the decision in Green Power v. Spain (2022) where a Stockholm-seated arbitral tribunal, applying Swedish law (as the law of the seat) on jurisdictional issues, followed the CJEU’s Achmea and Komstroy rulings on the incompatibility of EU law with intra-EU ECT disputes, and found that the ECT does not include a valid arbitration offer when applied intra-EU.

This indicates a clear distinction arising depending on whether arbitrations under the ECT are seated, or enforcement of ECT arbitral awards takes place, inside or outside the EU.

Discussion: What about the UK?

Much of the discussion regarding the sunset clause arises in the context of the EU, and how Member States may purport to neutralise it as between themselves. Whether any of these methods would be successful remains unknown.

However, while arguments may arise, it is even less clear whether the UK would have any option but to see out the 20-year sunset provision. In such case, this would mean remaining bound by the terms of the ECT as it currently stands (in its unmodernised form) for much longer than might have been achieved if the modernisation were to be approved.

Nevertheless, the protections available may still change in the intervening period for other reasons, as recently seen by the UK denying benefits to legal entities (without substantial business activities) owned and controlled by Russian nationals, as well as Russian investors included in the UK’s sanctions list.

In light of the changing environment, careful treaty – and dispute-forum planning will likely remain critical.

*Max Marshall is a trainee in our London office.

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.