The issue of arbitrability regarding intra-EU disputes under the Energy Charter Treaty (ECT) has become increasingly contentious in recent times, especially after EU court rulings questioned the compatibility of investor-state arbitration in international treaties involving EU Member States. This came alongside a growing number of criticisms directed towards the ECT.
In light of these developments, a significant case emerged where the English Courts dismissed an application from the Kingdom of Spain to set aside an order registering an ICSID award arising under the ECT. To fully appreciate the weight of this decision, it is crucial to understand the investment arbitration mechanism within the ECT and the reasons behind some member states considering withdrawal from the ECT.
Investment Arbitration under the Energy Charter Treaty
The Energy Charter Treaty (ECT) is a multilateral investment agreement established in 1994, designed to create a legal framework for energy cooperation and investment among its 53 member states, such as the UK, Spain, and the EU. A key objective of the ECT is promoting security, competition, and cross-border investment in the energy sector, by providing various protections for investors. For instance, Article 10 requires stable, equitable, favorable, and transparent conditions for investors from different member states.
In the event of a member state violating its ECT investor protection obligations, investors have the option to take the dispute to the member state’s domestic courts or pursue binding international arbitration. Should an investor choose arbitration, they must decide how the arbitration will be administered. The ECT offers three alternatives, one of which is arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), as long as both concerned member states are party to it.
According to UNCTAD’s Investment Dispute Settlement Navigator, the ECT remains the most frequently invoked international investment treaty by investors filing claims against States. As of May 2023, 158 investment arbitration cases were instituted under the ECT, sometimes in conjunction with another investment treaty. Out of these cases, 104 are arbitrations under the ICSID Convention, including ICSID Additional Facility cases, and 51 involve the Kingdom of Spain.
Criticism of the ECT and the “Intra-EU Objection”
The Energy Charter Treaty (ECT) has faced scrutiny in recent times, particularly from the European Union (EU) and its member states, who argue that it hinders efforts to transition to green energy and implement energy sector reforms to combat climate change. The ECT is seen as limiting member states’ policy options, leaving them vulnerable to claims from fossil fuel and renewable energy investors who enjoy certain safeguards under the treaty. Disputed policy interventions include reducing feed-in tariffs for renewable energy investors, revoking public concessions, imposing carbon taxes, controlling energy consumption, and implementing revenue caps or solidarity contributions on surplus profits in the fossil fuel sector.
Solar energy investors initiated various investor-state arbitrations under the ECT against member states, particularly Spain and Italy, due to changes in or revocations of incentives initially provided to encourage investment. Negotiations to modernize the ECT have met challenges, with some EU member states, such as Germany, Slovenia, Poland, the Netherlands, France, Spain, and Luxembourg, announcing intentions to withdraw from the treaty.
Among the proposals for a reformed ECT is the exclusion of “intra-EU disputes”, or disputes between investors from an EU member state against another EU member state, from arbitration under the ECT. This follows the decisions by the Court of Justice of the European Union (CJEU) in Slovak Republic v Achmea B.V. (Achmea) and Moldova v Komstroy (Komstroy).
In Achmea, the CJEU concluded that provisions included in an intra-EU investment treaty for investor-state arbitration went against EU law principles of mutual trust, sincere cooperation, and autonomy. The European judicial system has exclusive jurisdiction to interpret EU law, but the tribunal could not do so, leading the CJEU to deem investor-state arbitration in international agreements between EU Member States incompatible with EU law. In Komstroy, despite the absence of an EU member state, the CJEU maintained that, since the EU is party to the ECT, the treaty constituted an act of EU law, and the dispute resolution mechanism within the ECT (Article 26) did not apply “intra-EU” based on Achmea’s reasoning.
Although CJEU decisions in Achmea and Komstroy emboldened member states to challenge enforcement of ECT-related awards, tribunals and courts outside the EU have so far rejected these objections. A recent example in the United Kingdom, demonstrated when Spain attempted to overturn an English Court order registering an ICSID award related to an ECT dispute on jurisdictional grounds and citing sovereign immunity.
Spain’s Challenge to an ICSID Award Enforcement under ECT in the UK
Spain contested the enforcement of an ICSID award in the UK, focusing on two main arguments: sovereign immunity and material non-disclosure during a hearing without notice. They referenced the CJEU’s decisions in Achmea and Komstroy to assert that both the ICSID tribunal and the English courts lacked jurisdiction. The contentions were:
- Komstroy confirmed that the ECT’s investor-state arbitration provisions were incompatible with EU law, drawing from the Achmea decision, so there was no valid arbitration agreement in the ECT.
- Without a valid arbitration agreement, Spain claimed sovereign immunity from award recognition in the English courts.
To address Spain’s challenge, the English High Court had to examine the legal hierarchy in the context of intra-EU disputes under the ECT, the potential sovereign immunity defense under the State Immunity Act 1978, and the specific regime for recognizing and enforcing ICSID awards under the UK’s Arbitration (International Investment Disputes) Act 1966.
The 1966 Act aims to ensure UK compliance with the ICSID Convention, a multilateral treaty signed by both the UK and Spain. The Act establishes a unique registration process for ICSID awards, which significantly differs from the enforcement mechanisms under the New York Convention.
The English High Court summarized the UK Supreme Court’s stance in Micula & Ors v Romania, stating that:
- The potential defenses of a foreign State in registering an ICSID award are narrower than those for New York Convention enforcement.
- Additional defenses outside those enumerated in Articles 50-52 of the ICSID Convention may be available in “exceptional or extraordinary circumstances,” provided they don’t overlap with the ICSID Convention’s designated challenge grounds and are recognized by English courts for final judgments.
The English courts’ role under the 1966 Act is limited to authenticating ICSID awards, with no review allowed on jurisdiction or the ICSID tribunal’s proceedings.
The court also addressed the importance of Achmea and Komstroy decisions. Although the CJEU declared that arbitration under the ICSID Convention (incorporated into the ECT) was incompatible with EU law, the CJEU was not the ultimate authority under the ICSID Convention or the ECT. Hence, Spain could not invoke these cases to undermine the UK’s treaty obligations under the ICSID Convention. There was no justification for prioritizing CJEU decisions above the preexisting obligations of all signatory states.
Consequently, the court ruled that Spain’s jurisdictional objections could not be entertained under the 1966 Act since such challenges were allocated to Convention organs under Articles 50-52 of the ICSID Convention.
Spain further claimed it hadn’t waived its right to adjudicative immunity under the State Immunity Act, arguing that Achmea and Komstroy rendered ICSID arbitration provisions in the ECT void. The court rejected this, asserting ECT member states had unconditionally consented to arbitration, including under the ICSID Convention. Spain’s claim would result in a “partial offer of arbitration” based on investors’ residency, which the court rejected. Consequently, Article 54 (ICSID) and Article 26 (ECT) were considered as an arbitration agreement under Section 9(1) of the State Immunity Act, thereby waiving Spain’s adjudicative immunity.
The High Court’s ruling offers invaluable insight by thoroughly examining relevant legal authorities, concluding that states cannot employ defenses against the registration of ICSID awards—including intra-EU awards—under the Act, except in “exceptional or extraordinary” circumstances that cannot form annulment grounds in accordance with the ICSID Convention. Furthermore, the verdict upholds that regardless of the CJEU’s stance on investor-state arbitration provisions’ compatibility within multilateral and bilateral treaties among EU member states, the UK’s prior commitments under international treaties and associated domestic legislation prevail.
However, uncertainties regarding the arbitrability of intra-EU disputes (particularly under the ECT) and the enforcement of intra-EU awards in jurisdictions beyond England and Wales continue to linger, even as Spain considers appealing the decision. Consequently, prospective investors in ECT member states should take heed to acquire advice on optimal investment structures before making investments, ensuring risk minimization.
