EU Court of Justice rules against Intra-EU arbitration under the Energy Charter Treaty

International

On 2 September 2021, the Court of Justice of the European Union (CJEU) ruled that intra-EU arbitrations based on the Energy Charter Treaty (ECT) violate EU law.  The decision is likely to impact the 43 pending intra-EU arbitrations brought under the ECT and to cause prospective investors aiming to achieve protection under the ECT to consider (re)structuring their investments from outside the EU and to avoid EU seats whenever possible.

Background

In 2013, a Paris-seated UNCITRAL tribunal issued an award in an ECT dispute involving Energoalians (now Komstroy), a non-EU investor, and the Republic of Moldova, a non-EU Member State.  The dispute concerned debt claims arising from a series of contracts for the supply of electricity concluded with Moldtranselectro, a Moldovan public utility, which the original creditor had assigned to Energoalians.  In the context of the ensuing setting aside proceedings, the Paris Court of Appeal referred to the CJEU the question of whether the acquisition of a claim arising out of an electricity supply contract constitutes an “investment” under the ECT.

Following the CJEU’s landmark judgment in Achmea addressing investor-State arbitrations under intra-EU bilateral investment treaties (BITs) and the consequential steps taken by the EU Member States to terminate their intra-EU BITs, and amid the ongoing consultations regarding the ECT’s modernisation, the European Commission and several EU Member States intervened before the CJEU to seek a ruling on the question of the validity of intra-EU ECT arbitrations under EU law.  This question has been the subject of considerable debate since the Achmea ruling, with a string of arbitral tribunals holding that Achmea does not extend to the ECT, a multilateral treaty to which both EU and non-EU States, and the EU itself, are parties. In March 2021, Advocate General Szpunar opined not only on the interpretation of the notion of “investment” under the ECT, but  also the validity of intra-EU ECT arbitration.

The CJEU’s Judgement

The CJEU upheld its jurisdiction to rule on the question of the validity of intra-EU ECT arbitration based on its powers, under Article 267 of the Treaty on the Functioning of the European Union (TFEU), to interpret the acts of the institutions, bodies, offices or agencies of the EU.  It also invoked its exclusive competence, under Article 207 of the TFEU, as regards foreign direct investment, including the question of the notion of “investment” referred to it.  While it observed that it does not, in principle, have jurisdiction to interpret an international agreement regarding its application to disputes not covered by EU law, the CJEU grounded its jurisdiction on the EU’s interest in the uniform interpretation of the disputed provisions and on the fact that the arbitration’s seat in Paris called for the application of EU law by the French courts even if the dispute concerned a non-EU investor and a non-EU State.

The CJEU opined that the extra-EU nature of the dispute did not preclude its jurisdiction.  In its view, it cannot be inferred from Article 26 of the ECT that this arbitration provision also applies to a dispute between an operator from one EU Member State and another Member State.  The CJEU recalled that “the autonomy of EU law with respect both to the law of the Member States and to international law is justified by the essential characteristics of the European Union and its law, relating in particular to the constitutional structure of the European Union and the very nature of that law.”  It pointed out that such autonomy is preserved through a judicial system intended to ensure consistency and uniformity in the interpretation of EU law.  The CJEU noted that an arbitral tribunal seized with an ECT dispute is required to interpret, and even apply, EU law, because the ECT itself is an act of EU law in light of it being an international agreement concluded by the Council of the EU.  In line with its Achmea ruling, the CJEU observed that arbitral tribunals are not located within the judicial system of the EU.  Moreover, their awards rendered pursuant to Article 26 of the ECT are not subject to review by a court of an EU Member State capable of ensuring full compliance with EU law and guaranteeing that questions of EU law can, if necessary, be submitted to the CJEU for a preliminary ruling.

Dismissing arguments stemming from the multilateral nature of the ECT, the CJEU noted that a provision such as Article 26 of the ECT is intended, in reality, to govern bilateral relations between two ECT Contracting Parties, in an analogous way to the provision of the BIT at issue in Achmea.

The CJEU found that the preservation of the autonomy and of the particular nature of EU law precludes the arbitration obligations under the ECT from being imposed on EU Member States as between themselves.

The CJEU also found that the acquisition of a claim arising out of a mere electricity supply contract cannot, in itself, be regarded as aiming at undertaking an economic activity in the energy sector for the purpose of the definition of “investment” in the ECT.  It noted that the investor’s claim did not arise from a contract connected with an investment under Article 1(6)(c) of the ECT as the contractual relationship concerned only the supply of electricity, irrespective of whether an economic contribution was necessary in order for a commercial transaction to constitute an investment.

Commentary

The CJEU’s ruling regarding the validity of intra-EU ECT arbitrations raises issues under the law of treaties, as codified in the Vienna Convention on the Law of Treaties (VCLT), especially the principle of effectiveness of treaties. The ruling effectively creates a separate legal regime for non-EU investors under the ECT, thereby imposing an inequality of arms between EU and non-EU investors relying on the ECT protection.  The multilateral nature of the ECT does in fact matter because the ECT enshrines the common intention and obligations of all of the parties to the ECT, and not just the EU.

As arbitral tribunals constituted under investment treaties, including the ECT, are not part of the EU judicial system, it remains to be seen if the CJEU’s extension of the legal effect of Achmea to the ECT will have any bearing on such tribunals’ rulings regarding their own jurisdiction. The ruling nevertheless adds to the considerable legal uncertainty in relation to the enforcement of intra-EU ECT awards. The CJEU’s ruling likely will cause some investors to seek to avoid EU-based arbitral seats in order to steer clear of a preliminary reference to the CJEU or the post-award blocking effects to which this ruling might give rise.  Indeed, even if arbitrators sitting in intra-EU ECT arbitrations were to reject the CJEU’s decision in Komstroy—as most arbitral tribunals have done in relation to the Achmea decision—, there is nevertheless an increased likelihood that an EU Member State on the losing end of any intra-EU award, will invoke the Komstroy decision to challenge and/or resist the enforcement of such an award.  To avoid the challenges and uncertainty that inevitably will arise from the Komstroy decision, investors wishing to benefit from the ECT’s protections should seek counsel on how to (re)structure their investments from outside the EU and tailor their dispute resolution options by choosing World Bank (ICSID) arbitration rather than UNCITRAL arbitration and by seating any ECT arbitrations outside the EU.