REUTERS | Christian Hartmann

Lex superior: How EU law trumps investment law

In the recently issued Green Power Partners K/S, SCE Solar Don Benito APS v. Kingdom of Spain award, for the first time ever, an SCC arbitral tribunal established under the Energy Charter Treaty (ECT) declined jurisdiction by accepting the Achmea jurisdictional objection.

This historic decision marks the culmination of a 15 year long campaign by the European Commission and EU member states, starting with the Eastern sugar award in 2007, to eradicate investor-state arbitration proceedings between EU investors and EU member states, whether based on intra-EU bilateral investment treaties (BITs) or the ECT.

Normative conflict between EU law and the ECT

Up until this decision, all arbitral tribunals had systematically rejected all EU law jurisdictional objections raised by EU member states.

The Vattenfall tribunal’s Achmea decision is arguably the most extensive analysis and ultimate rejection of the various EU law objections.

These EU law objections essentially boil down to arguments such as that the primacy and autonomy of EU law would supersede any dispute settlement provisions in intra-EU BITs or the ECT,  and that the ECJ case-law of Achmea, Komstroy and PL Holdings are relevant to and binding on arbitral tribunals and thus make intra-EU arbitrations incompatible with EU law. Also, the political declarations issued by the EU member states after the Achmea judgment, as well as the termination agreement, which recently entered into force, are all clear expressions of the intention of EU member states that intra-EU arbitration was never meant to be available for EU investors.

Much to the frustration of the EU member states and the European Commission, which systematically interfered as amicus curiae in all intra-EU disputes, none of these arguments ever convinced a majority of an arbitral tribunal.

Although the seeds of this decision seem to have already been planted by the Electrabel tribunal a decade ago, which stated that “EU law would prevail over the ECT in case of any material inconsistency”,  although ultimately it concluded that there is no inconsistency between the ECT and EU law.

Indeed, the arbitral tribunal in the present case referred multiple times to the Electrabel decision finding its reasoning “sound and persuasive” to resolve this conflict, which the ECJ recently identified between EU law and the arbitration clause of the ECT.

Lex superior: EU law trumps investment law

From the outset, it is interesting to note that the tribunal does not define what lex superior actually means.

The full Latin phrase, which the tribunal does not use, is: lex superior derogat legi inferiori, which means the hierarchically superior rule trumps the hierarchically inferior one.

However, it is questionable whether from the perspective of public international law, which ought to be the perspective of an international arbitral tribunal established on the basis of an international treaty (such as the ECT), a legal hierarchy between the ECT and EU treaties actually exists.

In other words, can it really be argued that EU law is hierarchically superior to the ECT?

The tribunal works around this problem by arguing that the EU member states are “part of a network of legal relations, including the ECT” and that in these relations the primacy of EU law applies, also regarding international agreements, such as the ECT.

The tribunal asserts that it is not prevented from looking beyond the ECT for overriding norms such as Article 103 UN Charter in order to determine whether it has jurisdiction. It even goes as far as saying that

“seen from the lex superior perspective, the ECT could only override EU law in intra-EU relations if the ECT, including its Article 16, could be considered as lex superior with respect to the relevant norms of EU law, including Article 267 and 344 TFEU and the principle of primacy”.

This is a kind of circular argument, since it presupposes that EU law is lex superior as regards the ECT in the first place, which is very questionable.

Moreover, the primacy of EU law seemed not to have stood in the way for the EU and its member states to join the ECT in the 1990s and accept the arbitration clause without any reservations.

In this context, it is also notable that the tribunal considers that academic articles which describe a proposed disconnection clause but which was eventually not adopted by the contracting parties of the ECT as not providing any clear guidance.

This is a somewhat surprising conclusion. At the very least, the tribunal could have concluded that there is no evidence of a disconnection clause, which was what other ECT tribunals have concluded too.

Be that as it may, using this starting point, the arbitral tribunal had no difficulties to accept the ECJ’s Komstroy judgment as effectively binding on it. Indeed the tribunal concluded rather sweepingly that

“For this reason, there cannot be any doubt that the rationale of the Achmea judgment is relevant, indeed, decisive, for the analysis of investor-state arbitration clauses in general, whether these are included in intra-EU BITs or in a multilateral treaty such as the ECT.”

Such a statement would probably be more expected from a domestic court of a member state rather than an international arbitral tribunal, unless of course, this tribunal considered itself in a similar position as a domestic court, which could have addressed a preliminary question to the ECJ and probably would have received the same lex superior answer.

EU and its Member States disconnect from the ECT

It should be noted that the tribunal emphasised the fact that this award pertains to a non-ICSID case: in particular, to a SCC tribunal with a seat within the EU. Thus, arguably, the same reasoning does not apply to an ICSID tribunal seated in Washington dealing with an intra-EU ECT dispute.

Nonetheless, the message is clear now: intra-EU ECT arbitrations within the EU are not possible anymore. That was already clear regarding intra-EU BIT disputes.

In this context, the timing of the award may be important too as it came on the eve of the conclusion of the ECT modernization process that was concluded on 24 June 2022.

While the agreed text has not yet been published, the summary of negotiations essentially confirms the outcome of the award.

First and foremost, a flexibility provision has been added, which allows Regional Economic Integration Organisations (REIOs) such as the EU to disapply certain ECT provisions among their members. Accordingly, the EU and its member states have decided to explicitly disapply Article 26 ECT, which is the investor-state dispute settlement (ISDS) provision, among them.

Consequently, investment arbitration disputes between European investors and EU member states (intra-EU ECT ISDS disputes) will not be possible any longer.

Second, another flexibility provision has been included, which enables those parties who wish to carve out fossil fuels, to do so, while allowing the other parties to maintain them.

Thus, the EU, its member states and interestingly also the UK, have opted to carve-out fossil fuel related investments from investment protection under the ECT, including for existing investments after 10 years from the entry into force of the relevant provisions and for new investments made after 15 August 2023.

In short, this effectively heralds the withdrawal of the EU and its member states from the ECT because by excluding fossil fuels and the ISDS provision, there seems to be little need for them to continue to remain party to the ECT.

In fact, this would also meet the demand of the European Parliament, which in a recently published report calls for a “coordinated exit from the ECT” by the EU and its member states.

Thus, it seems very likely that the EU and its member states will soon draft an ECT termination agreement similar to the one which terminated the intra-EU BITs.

For European investors, only domestic courts of the EU member states remain as the avenue for judicial recourse, and, ultimately, the European Court of Human Rights. For various reasons, such as lack of judicial independence, length of proceedings, exhaustion of local remedies for example, these avenue are obviously much less attractive for resolving disputes speedily and effectively.

In sum, the level of investment protection within the EU has been dealt a further blow by this award in combination with the outcome of the ECT modernisation process negotiations.


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