Published on 4 July 2022 in Client Alerts

Energy Charter Conference reaches an agreement in principle on the modernisation of the Energy Charter Treaty

On 24 June 2022, the Energy Charter Conference agreed in principle on the modernisation of the Energy Charter Treaty (the “ECT”).  The proposed changes to modernise the ECT will, among other things, limit investor protections and restrict investors’ recourse to arbitration under the ECT.  Notable changes to the ECT include the exclusion of intra-European Union (“EU”) disputes from investor-State arbitration and a narrower scope of protected investments and investors.   In order for these changes to come into effect, the Energy Charter Conference still needs to adopt the modernisation and the ECT Contracting Parties need to ratify it.

Background

The ECT is a multilateral treaty signed in 1994 which provides a binding framework for energy cooperation between its Contracting Parties.  As of today, these include the EU and 52 States, including most EU Member States as well as other States essentially in Europe and Asia.

In 2017, the Energy Charter Conference set out a framework for discussions on the modernisation of the ECT and since then its Contracting Parties have participated in numerous meetings and no fewer than 15 rounds of negotiations.

Main changes to the ECT

Pending finalisation and publication of its full text, the Energy Charter Conference has set out some of the main changes to the ECT agreed in principle.  These include substantial amendments to the meaning and scope of the ECT.  In general, the modernised ECT will limit investor protections and restrict investors’ recourse to arbitration under the ECT.

Some of the main changes include:

1. Excluding intra-EU disputes from investor-State arbitration – An investor from a Contracting Party that is part of a regional economic integration organisation, such as the EU, will not be able to bring an arbitration claim under the ECT against another Contracting Party member of the same regional economic integration organisation.  This effectively bars intra-EU investor-State arbitrations, which EU courts have held to be contrary to EU law;

2. Limiting the definition of “investor” – Investors will be required to have substantial business activities in their State of incorporation to enjoy investment protection.  This may exclude special purpose vehicles or mailbox companies from investment protection under the ECT;

3. Limiting the definition of “investment” – In order to enjoy coverage under the ECT, investments will have to comply with additional requirements.  In addition, specific public debt instruments will be excluded from coverage of the dispute settlement provisions;

4. Clarifying the definition of investor protection clauses – Amongst other changes, the modernised ECT will specify the types of circumstances that may give rise to frustration of an investor’s legitimate expectations.  It will also specify that certain non-discriminatory measures will not constitute indirect expropriation, that most-favoured nation clauses will not extend to dispute settlement procedures and that Contracting Parties have the right to regulate in the interest of legitimate public policy objectives.  This may limit the scope of investor protection under the ECT; and

5. Supplementing the dispute settlement provisions – The dispute settlement provisions of the modernised ECT will include mechanisms for dismissing claims that are manifestly without legal merit at the outset of proceedings and expediting the dismissal of claims which are unfounded as a matter of law on the merits.  This appears to be aimed at claims submitted following an investment restructuring for the purpose of gaining investment protection.

Next steps

The draft text of the modernised ECT will be communicated to the Contracting Parties by 22 August 2022 for potential adoption by the Energy Charter Conference on 22 November 2022.

The Energy Charter Conference will need to adopt the modernised ECT unanimously (i.e., at least with no Contracting Party present at the meeting dissenting).  The modernised ECT will then enter into force 90 days after its ratification by three-quarters of the Contracting Parties and will only bind those Contracting Parties which have ratified it.

Investors may want to start preparing for the upcoming changes to ECT.   Among other things, investors that currently rely on the ECT should urgently consider the potential effects of the modernisation of the ECT on their investment protection in order to mitigate any potential risks.  The resulting changes to the ECT could seriously affect the rights and protections of those investors as from the time when a modernised ECT comes into effect.

For further information, please contact Graham Coop (Graham.Coop@volterrafietta.com), Florentine Vos (Florentine.Vos@volterrafietta.com) or Magdalena Kowalczuk (Magdalena.Kowalczuk@volterrafietta.com).