On 3 December 2020, Belgium announced that it had submitted a request to the Court of Justice of the European Union (the “CJEU”) for an opinion on the compatibility of the intra-European Union (“EU”) application of the arbitration provisions of the future modernised Energy Charter Treaty (“ECT”) with the European Treaties. As currently interpreted by the CJEU, EU law precludes investor-State arbitration claims on the basis of intra-EU bilateral investment treaties (“BITs”). Belgium stated that it was putting the question to the CJEU “in a neutral manner” without defending “a pre-established opinion on the matter”. This client alert reviews the background and substance of Belgium’s request and concludes by considering the potential consequences for EU and UK energy investors.
Background
In its judgment of 6 March 2018 in Case C-284/16 (“Achmea”), the CJEU ruled that the investor-State dispute settlement (“ISDS”) provisions of treaties between EU member States such as the Netherlands-Slovakia BIT are incompatible with EU law. The scope of application of this ruling, and in particular its potential application to the ECT, are currently topics of debate.
Following the Achmea decision, on 5 May 2020, 23 EU member States signed an agreement to terminate their intra-EU BITs (the “Termination Treaty”). Four EU member States did not sign the Termination Treaty: Austria, Finland, Ireland and Sweden. According to the Termination Treaty, investor-State arbitration provisions of the terminated intra-EU BITs cannot serve as the legal basis of new arbitration proceedings. The Termination Treaty provides for transitional measures to address pending intra-EU ISDS disputes or to have such disputes transferred to domestic courts. However, the Termination Treaty does not cover the ECT. According to its preamble, the issue of intra-EU investor-State arbitration under the ECT will be addressed “at a later stage”.
In November 2019, the Energy Charter Conference, an intergovernmental decision-making body for the Energy Charter process, approved the mandate, procedure and timeline for negotiations on modernisation of the ECT. The underlying decision proposed policy options and amendments related, inter alia, to the ECT’s investment protection and dispute settlement provisions.
The latest (third) negotiating round took place in November 2020. According to a statement on behalf of the European Commission (the “EC”) on 2 December 2020, “[i]f core EU objectives…are not attained within a reasonable timeframe, the Commission may consider proposing other options, including the withdrawal from the ECT.”
The EU member States have diverging positions regarding the impact of Achmea on the intra-EU application of the ECT’s investor-State arbitration provisions. On 19 July 2018, the EC issued a communication stating explicitly that Achmea applies equally to the ECT. In January 2019, 22 EU member States declared their support for this position.
However, two additional declarations (one signed by Finland, Luxembourg, Malta, Slovenia and Sweden and another signed by Hungary) took a different approach. The former five states declared “that it would be inappropriate, in the absence of a specific judgment on this matter, to express views as regards the compatibility with Union law of the intra-EU application of the Energy Charter Treaty.” Hungary went further by explicitly stating that the Achmea judgment is silent with respect to the ECT’s investor-State arbitration mechanism and hence has no application to ECT claims.
Several attempts have already been made to obtain clarification from the CJEU on the relevance of Achmea to the ECT. Spain has tried unsuccessfully to convince a Swedish court to refer the issue to the CJEU on three occasions. In response to Spain’s third attempt, on 26 October 2020, the Svea Court of Appeal held that Spain’s arguments did not justify seeking a preliminary ruling on the issue from the CJEU.
In November 2020, the EC and a number of EU member States called on the CJEU to rule on whether Achmea precludes intra-EU ECT investor-State arbitration. This request arose from the Komstroy v. Moldova case where the CJEU had initially been asked by the Cour d’appel de Paris to interpret certain ECT provisions. None of the parties to that case was from the EU. In a different case, the Advocate-General of the CJEU asserted in his opinion that Achmea does apply to the ECT and precludes intra-EU ECT investor-State arbitration.
Despite these numerous suggestions that the CJEU rule on the relevance of Achmea to the ECT’s investor-State arbitration provisions, the CJEU has yet to address the issue. This uncertainly is apparently the motive for Belgium’s request.
Belgium’s request to the CJEU
By its request, Belgium seeks legal clarification from the CJEU on whether the ISDS mechanism of the draft modernised ECT complies with the CJEU’s Achmea judgment. The draft modernised ECT could be interpreted – as can the current ECT – so as to allow the intra-EU application of its ISDS mechanism.
Belgium has stated that it is putting the question to the CJEU “in a neutral manner”. Belgium reiterated that it does not aspire to defend any “pre-established opinion on the matter”. The purpose of the request is to merely address “uncertainties and divergences” that have arisen among EU member States on whether the CJEU’s Achmea judgment applies to the ECT. The Request is also intended to obtain “clarity and legal certainty”, with a view to preventing any potential complications with regard to subsequent legal challenges.
Potential consequences for intra-EU ECT investor-State arbitration
Whatever the outcome of Belgium’s request – and no final outcome will be apparent for a considerable period – it is hardly likely that the CJEU’s decision will be the final word on the issue. Arbitral tribunals will no doubt act according to their own legal judgment. Just as, following the Achmea judgment, many arbitral tribunals constituted under intra-EU BITs continued to rule in favour of their own competence, so it is likely that some tribunals constituted under the ECT in relation to intra-EU disputes will continue to rule in favour of their own competence despite a contrary decision by the CJEU.
In any event, EU-based investors with energy-related investments in other EU member States should consider reviewing their investment protection coverage at an early date. This is particularly relevant if an investor is aware of an existing or potential future dispute which has not yet been submitted to investor-State arbitration. As with the Achmea judgment, it is likely that any new CJEU judgment resulting from Belgium’s request may be applied to intra-EU ECT investment disputes differently depending on whether these were initiated before or after the date of the CJEU judgment. Frequently, investors concerned about the legal security of their investments also consider restructuring their investments by interposing a non-EU-based subsidiary in order to obtain the benefit of protection under an extra-EU BIT. Such restructuring is much more likely to be effective if undertaken before a dispute arises.
Finally, as divergent views have been expressed as to the status of the United Kingdom (“UK”) with respect to Achmea and its consequences, many of the above comments are potentially equally applicable to UK-based investors.
For further information, please contact Graham Coop (graham.coop@volterrafietta.com).
