Is Investment Arbitration under the Energy Charter Treaty (ECT) compatible with EU law?

To date, the Energy Charter Treaty (ECT) is the most frequently invoked instrument in Investor-State Dispute Settlement (ISDS) worldwide.[i] Concluded in 1994 after the collapse of the Soviet Union, the ECT was aimed at promoting long-term cooperation in the energy sector by creating a level playing field for investors between the West and the former Communist bloc.[ii] Today, the ECT protects energy investors from severe financial losses resulting from tightening EU regulation in the energy sector, including the phasing out of coal until 2030.[iii] Concretely, Article 13(1) of the ECT protects investors in signatory states (and the EU) against direct and indirect expropriation by according investors the right to compensation equal to the “fair market value of the investment.” As climate advocacy exerts increasing pressure on Member States to accelerate the clean energy transition, the European Commission has proposed to narrow down the scope of protection against indirect expropriation granted under the ECT by extending the “public interest” exception under Art. 13(1)(a) ECT to environmental protection.[iv][v] However, a narrow interpretation of indirect expropriation as to exclude the protection of fossil fuel investments has not been followed by arbitral tribunals. Consequently, the ECT’s arbitration clause remains a highly relevant instrument for energy investors.[vi]

The Netherlands is the latest EU Member State to face arbitral proceedings under the ECT after German energy group, RWE, filed a lawsuit against the Dutch government claiming EUR 1.4 billion in damages resulting from the country’s coal phase-out until 2030. In response to the lawsuit, the Netherlands has contested a breach of the ECT.[vii] Some Member States refuted the legality of the arbitration clause per se and have asked the European Court of Justice (CJEU or Court) to deliver its judgment on the issue.[viii]

The jurisdictional dispute triggered by the RWE lawsuit has once again demonstrated the need for clarifying the applicability of the ISDS system to intra-EU investment disputes. Resolving this question is essential to provide legal certainty to energy investors in the EU on the one hand and protecting the EU’s rule of law on the other. The aim of this article is to lay out the jurisdictional dispute in three steps. First, I will briefly summarize the reasoning that justifies the questioning of the applicability of the ISDS system to intra-EU investment disputes in general. I will then test the transposability of this reasoning to an international treaty by using the example of the ECT. And for the last step, I will come to a more systemic discussion of the relationship between EU law and international law. I will conclude with a proposal for reform of the ISDS system.

1. Is Investor-State Arbitration under the ECT, as an international investment treaty, compatible with the CJEU’s jurisdictional autonomy?

Under Art. 26(3)(a) of the ECT, signatories give “unconditional consent to the submission of a dispute to international arbitration or conciliation.”[ix] The compatibility of this clause with EU law in the context of intra-EU investment disputes has been contested.[x] Backlash by Member States refuting the validity of arbitral proceedings under the ECT mainly stems from the CJEU’s infamous Achmea judement, delivered on 6 March 2018.[xi] In Achmea v Slovak Republic, the Court was asked to render judgement on the question of whether the ISDS provision under an intra-EU bilateral investment treaty (BIT) was compatible with the EU Treaties. The CJEU held that arbitration clauses in intra-EU BITs interfere with the ECJ’s final interpretive authority it derives from the principle of autonomy of EU law.[xii] Accordingly, the judgement was followed by an agreement between 23 Member States not only to alter the BITs’ dispute settlement provision but to terminate all intra-EU BITs.[xiii] Although the Achmea decision was limited to intra-EU BITs, it has been argued that the reasoning – incompatibility of ISDS clauses with the principle of the autonomy of EU law – is equally applicable to intra-EU investment disputes under a multilateral investment treaty.[xiv] The investment tribunal in the Vattenfall case argued against this broad interpretation of Achmea in finding that it had jurisdiction over Swedish power company Vattenfall’s claim against Germany for damages amounting to EUR 4.7 billion submitted under the ECT.[xv] 

2. Can the CJEU’s reasoning in Achmea be applied to international treaties such as the Energy Charter Treaty?

To say the least, a broad interpretation of Achmea is not far-fetched. The Court gives clear supremacy to its own jurisdiction in stating that “an international agreement cannot affect the allocation of powers fixed by the Treaties or, consequently, the autonomy of the EU legal system, observance of which is ensured by the Court.”[xvi] The Court derives this view from principle of EU law autonomy enshrined in Art. 244 of the Treaty of the Functioning of the European Union (TFEU). Importantly, the Court goes further to justify the very existence of Art. 244, namely, the “constitutional structure of the EU and the very nature of that law.”[xvii] By the latter, the Court refers to the EU’s “independent source of law”, i.e. the EU Treaties.[xviii]

It is the CJEU’s interpretation of the Treaty provisions which gives the EU as a legal entity its substantive and coherent structure. Art. 267 of the TFEU works towards a uniform interpretation and “full effectiveness”[xix] of EU law by force of its preliminary reference procedure, allowing courts and tribunals of a Member State to request preliminary rulings from the CJEU. The crucial point here is that the CJEU sees ad-hoc arbitral tribunals to be excluded from the definition of a “court or tribunal of a Member State” and consequently from the right to request from it a preliminary ruling. It is on this ground that the use of arbitral tribunals by Member States is seen to wrongfully preclude the applicability of Art. 267 to intra-EU investment disputes and their submission to the principle of EU law autonomy. In order to assess the legal risk of ECT’s ISDS provision with respect to the principle of EU law autonomy and the CJEU’s jurisdictional supremacy it is necessary to engage in more systemic debate on the relationship between EU law and international law.

3. Regime collision between international law and EU law or a unity of regimes?

The crucial question for the purpose of this article is whether the jurisdiction of arbitral tribunals in intra-EU investment disputes arising under a multilateral treaty such as the ECT truly jeopardizes the consistency in the application and interpretation of EU law. The gist of this question is two-fold. First, whether arbitral tribunals can realistically resolve intra-EU investment disputes under the ECT without interpreting EU law (de facto), and secondly, whether they should do so (de jure). To start, intra-EU ECT disputes do not take place in a vacuum, but in a tight web of EU energy regulations and with ramifications for the European energy market.[xx] Therefore, arbitral tribunals are susceptible to interpret matters pertaining to EU law and de facto affect the uniform interpretation of EU law.[xxi]

Secondly, do intra EU-disputes under the ECT pertain to the sphere of EU law or international law, or both? Clarifying the relationship between EU law and international law is essential because Art. 26(4) of the ECT explicitly provides that arbitral tribunals shall refer to the Treaty itself as well as international law when deciding on the issues of a dispute. EU law jurisprudence and arbitral practice support the theory that EU law is international law. In Van Gend en Loos, the CJEU found that the EU constituted “a new legal order of international law”.[xxii] In Achmea, the CJEU stated that “EU law must be regarded both as forming part of the law in force in every Member State and as deriving from an international agreement between Member States.”[xxiii] Taken together, these two cases strongly suggest that EU law is not only a product of international law but is a constitutive part of it. In Vattenfall v. Germany, the arbitral tribunal found that EU Treaties (TEU and TFEU) indeed form part of international law but it did not “consider it necessary or appropriate to determine whether other aspects of EU law that are not rooted in the EU Treaties also constitute international law.”[xxiv] However, if EU law is (part of) international law, the international nature of the ECT no longer serves as a justification for a systemic separation of the ECT from EU law rules and principles.[xxv] In light of this, the ISDS provisions of the ECT appear to put the uniform interpretation and consistent application of EU law at risk, both from a de facto and de jure standpoint.

Conclusion: A Multilateral Investment Court (MIC) as a potential compromise

While the merits of the current ISDS system for energy investors in the ECT context are high, the costs for the EU and its Member States of this system in terms of the loss of public confidence in the EU as a driver of climate action, the lack of transparency granted to the public in matters of public interest as well as the European rule of law are arguably higher. In response to the diplomatic, political and legal risks of the ISDS as it stands, the EU and its Member States have been active proponents of the creation of a Multilateral Investment Court (MIC) as part of the United Nations institutional framework.[xxvi] Intergovernmental talks in view of reforming the ISDS system have been instituted by the United Nations Commission on International Trade Law (UNCITRAL) in 2017. The UNCITRAL talks situate the dispute around the ECT in a larger debate on the role of Investor-State Arbitration in international law and bring to the surface a wide-spread recognition among states of the need for reform. According to the UNCITRAL, for arbitration to remain an attractive mode of dispute settlement in future IIL disputes, its embedding in a permanent international court structure would be a viable innovation.[xxvii] The benefits of a MIC are high in terms of increased transparency and consistency of awards but leaves the tension of two regimes – EU law and international investment law – yet to be resolved.    

[i] See official statistic on the International Energy Charter website: https://www.energycharter.org/media/news/article/the-energy-charter-treaty-ect-remains-the-most-frequently-invoked-iia/.

[ii] F. Simon, “Energy Charter Treaty reform reaches milestone, with little progress to show”, Euractiv, December 16^th 2020.

[iii] ibid.

[iv] Art. 13(1)(a) ECT states that indirect expropriation is permitted “for a purpose which is in the public interest.”

[v] Energy Charter Secretariat, Report of the Modernization Group on Progress Made in Fulfilling the Negotiations Mandate 25 November 2020, p. 22. Accessible at: https://www.euractiv.com/wp-content/uploads/sites/2/2020/12/ECT-report-on-progress-made_FS.pdf.

[vi] M. Khan, “EU urged to quit energy treaty as companies sue over climate action”, Financial Times, February 7^th 2021.

[vii] Reuters Staff “RWE seeks compensation for Dutch plans to shut coal-fired plant”, Reuters, February 4^th 2021.

[viii] M. Khan, “EU urged to quit energy treaty as companies sue over climate action”, Financial Times, February 7^th 2021.

[ix] Energy Charter Secretariat, Consolidated Energy Charter Treaty, 2015. Accessible at https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf.

[x] Cf. S. Hindelang, “The Limited Immediate Effects of CJEU’s Achmea Judgement”, VerfBlog, March 9th 2018.

[xi] Judgment of the Court of Justice of 6 March 2018, C-284/16, Slovak Republic v Achmea, ECLI:EU:C:2018:158.

[xii] Slovak Republic v Achmea, para. 58.

[xiii] Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union (2020) Official Journal L 169/1 (29.5.2020). Accessible at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:22020A0529(01).

[xiv] A. Lang, “Regime Collision between EU Law and Investment Law: New Developments in the Vattenfall Case”, VerfBlog, September 12^th 2018.

[xv] ibid.

[xvi] Slovak Republic v Achmea, para. 32.

[xvii] Slovak Republic v Achmea, para. 33.

[xviii] Ibid.

[xix] Slovak Republic v Achmea, para. 43.

[xx] Cf. The EU’s ‘Clean energy for all Europeans package’ (2019), including regulations on energy efficiency, renewable energy and electricity market design.

[xxi] S. Hindelang, “The Limited Immediate Effects of CJEU’s Achmea Judgement”, VerfBlog, March 9^th 2018

[xxii] Judgment of the Court of Justice of 5 February 1963, C-26/62, Van Gend en Loos v Administratie der Belastingen, ECLI:EU:C:1963:1. p. 12.

[xxiii] Slovak Republic v Achmea, para. 41.

[xxiv] Vattenfall v. Germany, ICSID, award of 31 August 2018, case no. ARB/12/12, paras 148-155.

[xxv] cf. D. Quentin, “Achmea: Consequences on Applicable Law and ISDS Clauses in Extra-EU BITs and Future EU Trade and Investment Agreements.” European Papers – A Journal on Law and Integration, vol. 2019 4, no. 1, European Papers (www.europeanpapers.eu), June 2019, p. 105.

[xxvi] I. Hallak, “Multilateral Investment Court: Overview of the reform proposals and prospects”, European Parliamentary Research Service, January 2020. Pp. 2-6.

[xxvii] Ibid.