REUTERS | Jose Cabezas

Is there still a reason d’etre for the ECT after the CJEU’s ban on intra-EU ECT arbitration?

As has been widely reported, the recent Komstroy judgment of the Court of Justice of the EU (CJEU) in which it extended the application of its previous Achmea judgment to the Energy Charter Treaty (ECT) by determining that investor-state arbitration within the EU is incompatible with EU law, raises the fundamental question whether there is still a reason d’etre (reason for being) for the ECT?

In order to answer this question, it is useful to take a step back and recall the reasons for negotiating, signing and eventually ratifying the ECT.

The negotiations started in 1991, that is right after the fall of communism and the disintegration of the Soviet Union into Russia and a handful of newly independent states.

This period ushered in a chaotic transitional period for most, if not all, Central and Eastern European states and the former Soviet Union republics, which was marked by political, legal and economic instability.

At the same time, Western European states, both within and outside the EU, as well as Japan and the US had vital interest in creating political, legal and economic stability or, at the very least, assist in creating the conditions for achieving that stability.

One tool to do that is the conclusion of international agreements on a variety of areas, such as, among others, bilateral and multilateral trade and investment agreements and Europe agreements, which would effectively lead to EU accession. In addition, facilitating membership to the WTO and OECD were further important elements for this policy.

In the context of this chaotic transitional period, securing energy supply, in particular oil and gas, from Russia and the other former Soviet Union republics into Western Europe was of utmost importance.

It is for this reason, that the idea for negotiating the ECT emerged and was particularly driven by The Netherlands. The main purpose of the ECT was to promote and protect investments in the energy sector in the ECT signatory states by guaranteeing high standards of investment and investor protection, and by providing the possibility to use international arbitration, instead of domestic courts, for the resolution of any disputes.

Without doubt, the ECT has had a resounding effect by bringing on board all major oil and gas producing and consuming countries, including Russia, Norway and Japan, as well as the EU itself and the EU member states.

However, when the Yukos dispute against Russia arose, the first cracks of the ECT became visible. Indeed, Russia never ratified the ECT and when it was confronted with the USD50 billion Yukos award, it left the ECT for good. Nonetheless, the currently pending setting aside procedure before the Dutch Supreme Court will most likely decide against Russia, meaning that the award will be confirmed and Russia ordered to pay the USD 50 billion to Yukos.

More recently, the ECT has been further undermined. This time by the EU and its member states.

First, the unprecedented high number of renewable energy cases against Spain, Italy and many other EU Member States has put the investor-state arbitration mechanism of the ECT into the political spotlight. These governments could not understand why the ECT should hinder them when they decide to retroactively withdraw guaranteed feed-in-tariffs

Accordingly, the backlash against the ECT arbitration system has been increasing in the EU member states. In fact, Italy withdrew from the ECT as of 1 January 2016, although the sunset clause protecting previously made investments for 20 years continues to apply.

Second, the Achmea judgment of the CJEU, which resulted in the termination agreement that aims to terminate most, if not all, intra-EU BITs, raised the question why should investor-state arbitration under the ECT continue to exist when a similar mechanism has been declared incompatible with EU law by the CJEU?

Indeed, with its Komstroy judgment, the CJEU rather sweepingly banned investor-state arbitration for intra-EU ECT disputes. It also adopted a very narrow definition of the term “investment”  by deciding that a contract does not constitute an “investment” within the meaning of the ECT (in clear contrast to the broad definition as adopted by numerous ECT arbitral tribunals).

By adopting this position, the CJEU is taking EU law into a collision course with the ECT and its arbitral tribunals.

As a consequence thereof, the EU and its member states are effectively disconnecting from the ECT.

This is further amplified by the other parallel discussion of fighting climate change and the increasing pressure on fossil fuel companies to essentially terminate their activities. The recent judgment of the Dutch court brought by NGOs against Shell is a clear illustration for the potentially far-reaching impact on CO2 omitting companies.

In the context of the currently ongoing ECT modernisation process, the EU is calling for carving out fossil fuel investments from the scope of the ECT. This would also mean that investor-state arbitration would also not be available anymore in order to protect multi-billion dollar investments in this sector. Accordingly, the central aim of securing energy supply into the EU would become superfluous.

In sum, if indeed half of the ECT members (that is, the EU and its member states) are disconnecting from the ECT, while at the same time the ECT does not protect fossil fuel investments any longer, the existing reason d’etre of the ECT appears to be disappearing.

This would be particularly unfortunate as the dual aim of creating legal, political and economic stability as well as securing energy supply are still very much needed in Europe and beyond.

Therefore, rather than dismantling the ECT, the EU and its member states should instead invest their efforts in making the ECT fit for the needs of the 21st century.

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