Belgium asks European Court of Justice to opine on compatibility of Energy Charter Treaty’s investor-State arbitration provisions with EU law

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On 3 December 2020, the Government of Belgium announced that it was submitting a request to the Court of Justice of the European Union for an opinion on ‘the compatibility of the intra-European application of the arbitration provisions of the future modernised Energy Charter Treaty with the European Treaties.’ This is major news, potentially sounding the death knell for the settlement of intra-EU investor-State disputes through treaty arbitration. The arbitration of investor-State disputes under intra-EU BITs was held incompatible with EU law by the CJEU in its 2018 Achmea judgment. The Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union adopted by 23 Member States in May this year seeks to terminate the remaining intra-EU BITs and their ‘sunset clauses’, as well as to prevent investors in pending and new arbitration proceedings from relying on their protections. The ECT, to which the EU and all its Member States bar one (Italy having withdrawn from the Treaty at the beginning of 2016) are parties, together with some 22 other States, is thus the one intra-EU investment protection agreement still standing.

In its press release, Belgium states that the purpose of the request is to seek ‘legal clarification’:

 on the compatibility under Union law of the dispute settlement mechanism provided for in the draft modernised Energy Charter Treaty, in view of the fact that this mechanism could be interpreted as allowing its application intra-European Union[.]

But whatever the Court decides will also have immediate relevance for investor-State arbitration under the current version of the ECT, for one simple reason. In the current negotiations on reform of the ECT, the EU has advocated that ongoing multilateral reforms of investor-State dispute settlement, such as those within UNCITRAL Working Group III, if agreed, be applied to the ECT, including any future multilateral investment court. But these proposals have not been favourably received by other ECT contracting parties, and the negotiations have not touched on changing its Article 26 (governing the settlement of disputes between an investor and a contracting party) as regards its applicability to intra-EU disputes (that is, disputes between investors of an EU Member State against another EU Member State). The EU Council’s negotiating directives for the modernization of the Energy Charter Treaty, adopted in July 2019 to guide the Commission and the Member States in the negotiations, did not contain anything on the issue and, unsurprisingly, other ECT contracting parties have not raised  it either. So if new investor-State dispute settlement provisions in a revised ECT unchanged in their scope ratione personae would be incompatible with the EU Treaties because they would cover intra-EU disputes, then the current Article 26 is presently incompatible with EU law because it has been consistently interpreted as having such effect.

In intra-EU ECT arbitrations since the Achmea judgment, the respondent Member States, supported by the Commission, have consistently argued that the ECT’s ISDS provisions do not cover such disputes – but to no avail. Nor does it appear that the Member States themselves are ad idem on the issue. In their 15 January 2019 Declaration on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection in the European Union, 22 Member States stated that:

[I]nternational agreements concluded by the Union, including the Energy Charter Treaty, are an integral part of the EU legal order and must therefore be compatible with the Treaties. Arbitral tribunals have interpreted the Energy Charter Treaty as also containing an investor-State arbitration clause applicable between Member States. Interpreted in such a manner, that clause would be incompatible with the Treaties and thus would have to be disapplied.

However, Finland, Luxembourg, Malta, Slovenia and Sweden issued their own joint declaration, and Hungary its own individual declaration the following day, both of which expressed the view that it was too early to express any view as to the compatibility with EU law of the intra-EU application of the ECT. No Member State court has yet been willing to make a reference to the CJEU on the matter. On three occasions, Spain has been unsuccessful in requests, in proceedings in the Swedish courts to aside the awards in Novenergia II  v Spain and Foresight, Greentech, GWM v Spain to submit the questions concerning the compatibility of intra-EU ECT arbitration with EU law to the CJEU under the preliminary ruling procedure. Moreover, the Intra-EU BITs Termination Agreement expressly provides that ‘it does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty. The European Union and its Member States will deal with this matter at a later stage’.

In consequence, the applicability of Article 26 of the ECT to intra-EU disputes as a matter of EU law has remained unclear. Several ECT arbitral tribunals have made valiant efforts to argue that the Achmea judgment can be distinguished, and the CJEU’s strictures therein do not apply to the ECT. In the most thorough examination of the issues so far, the arbitral tribunal in Eskosol v Italy concluded that Achmea did not affect the jurisdiction of arbitral tribunals to decide disputes under the ECT, in particular because the applicable law in disputes under the ECT did not include EU law. The tribunal saw the CJEU’s decision in Achmea as founded on a concern about the submission to arbitration of disputes requiring the application of EU law, which undermined the Court’s monopoly on the interpretation of EU law, in particular through the preliminary ruling procedure. Article 26(6), the applicable law provision in the ECT, provides that tribunals must decide disputes in accordance with the Treaty and ‘applicable rules and principles of international law’, which as interpreted by the Eskosol tribunal meant rules applicable to all States, in particular custom and general principles of law, but not EU law as a regional legal system. In Achmea, the CJEU considered EU Law applying by virtue of Article 8(6) of the BIT in force between the Netherlands and Slovakia, as national law and as ‘relevant agreements between the Contracting Parties’, but not as ‘general principles of international law’. In consequence, the Eskosol tribunal concluded that:

Because the ECT contains no equivalent incorporation into its applicable law of either category of law that the CJEU found offending in Article 8(6) of the Achmea BIT… the CJEU’s concern about a tribunal applying EU law under the Achmea BIT is not directly transposable to the ECT.

There are, however, problems with this analysis. Other ECT arbitral tribunals have held that EU law does form part of international law for the purposes of Article 26(6) of the ECT. Moreover, in Achmea the CJEU seemed to think that the possibility that an arbitral tribunal adjudicating an investment dispute might apply EU law sufficed to render any provision submitting to arbitration before such a tribunal precluded by Articles 267 and 344 TFEU. Indeed, while in its Opinion 1/17, the CJEU was willing to hold the dispute settlement provisions in the EU-Canada Comprehensive Free Trade Agreement compatible with EU law it did so on the basis, inter alia, of the specific exclusion of EU law from the law applicable to investment disputes arising under that treaty. If such an express exclusion is required, then the ECT currently does not satisfy the criterion, albeit that the EU has proposed that such an understanding be footnoted.

Interestingly, in a footnote in his opinion in Joined Cases C‑798/18 and C‑799/18, Advocate General Saugmandsgaard Øe suggested that Article 26 was not applicable to intra-EU disputes, although he admitted that resolution of the issue was unnecessary, as both cases concerned attempts by Italian companies to reply on the ECT’s substantive protections in proceedings before the Italian courts. Moreover, although the request for a preliminary ruling in Case 741/19 arose out of proceedings in the French courts to set aside an award in an extra-EU ECT arbitration, at the recent hearing of the case before the CJEU all the participating Member States focused on the question of the compatibility of the ECT with the EU Treaties. It is thus not impossible that the CJEU may take the opportunity to rule on the issue even prior to its consideration of Belgium’s request, although given the request’s prospective focus it would not become entirely irrelevant were that to happen and the fact that the request has been made would seem good reason not to pre-empt it.

The question now having been asked, it does seem likely that if the CJEU concludes that the dispute settlement provisions in the draft modernised Energy Charter Treaty permit arbitration of intra-EU investor-State disputes, to that extent at least it will hold them incompatible with the EU Treaties. Indeed, it is not certain that the Court will hold the provisions compatible with EU law as even regards their extra-EU applicability. For the reason already given, the Court’s conclusions are likely directly to affect ongoing and, indeed, completed, ECT arbitrations. At present, according to the Energy Charter Secretariat, there are at least 43 pending intra-EU arbitrations. In addition, in various cases when intra-EU ECT arbitration proceedings have ended in an award in favour of the investor, annulment and enforcement proceedings are being fought before national courts. Indeed, the 15 January 2019 Declaration commits its remaining 21 Member State signatories (and the UK until the end of this year) to request courts to set aside or refuse to enforce such awards.   

The Court’s conclusions could also put the EU and its Member States in a quandary. Criticisms of both the ECT’s substantive and procedural protections have been growing, particularly on the basis that the Treaty is an obstacle to climate mitigation and the construction of a new green economy. The EU’s proposals for modernisation include provisions on sustainable development, including one on climate change and clean energy transition, which makes specific reference to the 2015 Paris Agreement. In September, European Parliamentarians called for the EU to withdraw from the Treaty absent fundamental reform. On 2 December, in a written response to a parliamentary question, Valdis Dombrovskis, Commission Executive Vice-President and Trade Commissioner, stated that negotiations were at an early stage and the EU’s view was that, if possible, withdrawal should be avoided, as it would trigger the ECT’s 20-year sunset clause. However, he warned: ‘If core EU objectives, including the alignment with the Paris Agreement, are not attained within a reasonable timeframe, the Commission may consider proposing other options, including the withdrawal from the ECT.’

If the ECT’s proposed – and current – investor-State dispute settlement provisions are held to be incompatible with EU law, what is to be done? If the incompatibility exists only as regards the provisions’ application to intra-EU disputes, the possibility exists for their exclusion by an inter se agreement between the EU and it Member States. But such an arrangement might be challenged by investors invoking the ECT’s sunset clause, and might also have the perverse consequence that EU investors will simply re-route their investments through companies incorporated in non-EU ECT contracting parties. Whatever the outcome, however, pressure to abandon the ECT is likely to increase.

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