Energy sales not protected by Energy Charter Treaty

The Paris Court of Appeal has set aside an arbitral award regarding electricity sales issued by an arbitral tribunal constituted under the UNCITRAL Rules arising from claims brought by a Ukrainian investor against the Republic of Moldova under the Energy Charter Treaty (ECT). The ruling, which remains subject to appeal to the French Supreme Court, confirms that debt claims under a commercial contract, not associated with an investment, might not constitute an ‘investment’ under the ECT. Arguably, the decision runs contrary to a previous arbitral decision concerning international long-term gas sales. Consequently, if allowed to stand, it may have important implications for structuring long-term energy commodity sale and purchase transactions.

Facts

Energoalians LLC (Energoalians), a Ukrainian company, Derimen, a BVI registered company, and Moldtranselectro, a Moldovan state-owned entity, entered into an agreement whereby Energoalians was to sell electricity to Derimen, and Derimen would sell the same electricity to Moldtranselectro.

Moldtranselectro allegedly failed to pay Derimen for the relevant electricity, whereupon Derimen transferred its interest in the sum allegedly due to it to Energoalians.

Following a dispute relating to payments due under the contractual arrangements, Energoalians initiated arbitration proceedings against Moldova alleging various breaches of the ECT. The proceedings were conducted under the UNCITRAL Rules and the arbitration was seated in Paris. The majority of the arbitral tribunal found that it had jurisdiction to hear the dispute, as the transaction qualified as an ‘investment’ under the ECT (the presiding arbitrator dissented). The arbitral tribunal further decided that Moldova had breached its obligations under the ECT. It ordered Moldova to pay damages to Energoalians.

Moldova challenged the arbitral award before the French courts on the ground, amongst others, that the arbitral tribunal lacked jurisdiction. Moldova argued that Energoalians’ debt claims, arising from the sale of electricity, did not have the characteristics of an investment and did not fall within the applicable definitions of ‘investment’ in the ECT, notably “claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment” and “any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector”.

Decision

In considering whether the arbitral tribunal had correctly assumed jurisdiction under the ECT, the Paris Court of Appeal examined the meaning of ‘investment’ under the ECT. The court decided that, when interpreted in the context of the provisions of the ECT and in light of the ECT’s object and purpose, namely, to “catalyse economic growth by means of measures to liberalise investment and trade in energy”, a qualifying ‘investment’ generally requires a capital or valuable contribution to an economic entity within the territory of the host state. In this case, the court concluded that the debt claims arose out of a commercial transaction, which had as its sole purpose the sale of electricity and did not involve a transfer of capital or other resources to Moldova. Accordingly, the supply of electricity could not be associated with an investment activity for purposes of the ECT and the arbitral tribunal did not have jurisdiction.

Comments

Whilst the French court’s decision is in line with the prevailing jurisprudence distinguishing protected investments from ordinary sales transactions, it appears to depart from a previous ECT decision that debt claims arising from a long-term contract concerning the sale of gas are investments protected by the ECT (see Petrobart Ltd. v. The Kyrgyz Republic, SCC Arbitration No. 126/2003, Award, 29 March 2005). Whilst the meaning of the term ‘investment’ must be interpreted in the context of each specific treaty, in accordance with the relevant principles of international law, the French court’s decision indicates that, generally, a commercial transaction which has as its sole purpose the sale of a commodity will not usually constitute a protected ‘investment’. The fact that a treaty specifies “claims to money” amongst the qualifying ‘investments’ does not necessarily mean that all claims to money will qualify as ‘investments’ when such a term is examined against the characteristics of an ‘investment’.

As a consequence of this decision, parties entering into international electricity, oil and gas sale and purchase agreements with foreign state-owned entities should be on notice that they might not benefit from investment treaty protections if the agreement’s sole purpose is to sell that commodity. In any given transaction, the availability of investment treaty protection will likely depend upon the wider nature of the transaction and specific words employed in the relevant treaty. In structuring transactions that contain long-term sale or supply commitments involving a foreign state-owned entity, parties should consider whether it is necessary to provide for alternative extra-contractual protection - particularly if the contractual arrangement in question with the foreign state does not involve an associated investment activity.

Link to decision (in French) available here.