REUTERS | Gleb Garanich

The winter of our discontent

It is not news that Europe has been hit hard by soaring energy prices. Power generators that had been shut down during the COVID-19-related economic downturn could not be ramped up in time to meet the increased demand as lockdowns waned. A prior long, cold winter had already depleted the amount of gas in storage, while droughts caused by global warming shut down hydro and nuclear plants. The situation was exacerbated by European sanctions in response to the events in Ukraine (and Russian retaliation). Gas prices in Europe have since risen to more than 10 times their historical average values due to a depletion of Russian natural gas supply, a major source of power for electric generators and home heating on the continent. The final nail in the coffin was the shutdown of the key Nord Stream 1 pipeline, the biggest Russian gas pipeline to Europe, on 2 September.

The energy crisis has governments contemplating various measures in an effort to soften the blow of rising costs of living. For example, Germany has recently placed three refineries owned by Russian oil company Rosneft under the control of the Bundesnetzagentur (BNA), the country’s federal energy regulator. This move follows the amendment of a key energy law in August, which allows the German government to place companies with “infrastructure critical to Germany’s security of supply” under temporary trusteeship and, as a last resort, to expropriate them. Across the Channel, the price cap on household energy bills introduced in the UK in September will be partly funded by a 25% windfall tax on oil and gas firms’ profits.

At the European level, the EU has proposed to enforce a cap on the revenues of companies that produce electricity at a low cost, such as companies that do not burn gas, as well as a separate windfall tax on major oil, gas and coal companies, whose profits are also rising in the face of the energy crisis. These two levies are expected to raise over EUR140 billion for member states. In the coming months and years, member states will also be called upon to implement further measures as part of the announced comprehensive reform of the electricity market aiming to decouple the dominant influence of gas on the price of electricity.

The question may arise as to the compatibility of these different measures with the Energy Charter Treaty (ECT), more specifically with the substantive protections it provides for investors. In particular, the question of whether investment protection extends to windfall taxes or caps on profits will have to be clarified, as the ECT carves out taxation measures from the treaty regime (article 21, ECT). It should be noted that in order to verify if a measure falls within the ECT taxation carve-out, domestic laws on what constitutes a taxation measure are considered (as determined by article 21(7)(a)(i)). The mere labelling of the measure as a tax is not sufficient to exclude it from the treaty application, as it would otherwise “empower contracting parties to define unilaterally which measures fall within the ECT’s protective scope”, as held in Voltaic Network GmbH v Czech Republic (paragraph 263). More decisive are the objectives behind the measure. Measures that, albeit formulated as taxation, may serve purposes other than raising revenues for the state, are generally considered to be outside the carve-out. Interestingly, in Voltaic Network v Czech Republic, the arbitral tribunal held that a levy imposed by the Czech government on solar energy producers did not fall within the taxation carve-out, for it had the primary objective of reducing the excessive profits made by these producers.

Disputes will likely arise in response to these measures as they are put in place. Investors might seek to submit the dispute to international arbitration in accordance with article 26(2)(c) of the ECT. As far as intra-EU disputes are concerned, the outcome of such arbitration proceedings is particularly unclear following the European Court of Justice’s (ECJ) decisions in Achmea and Komstroy.

In the 2018 Achmea case, the first of a series of rulings reshaping the landscape of the intra-EU investment dispute settlement system, the ECJ found that the arbitration clause contained in article 8 of the 1991 Netherlands-Slovakia BIT had an adverse effect on the autonomy of EU law, and was therefore incompatible with it.

Three and a half years later, the ECJ extended the Achmea solution to ECT arbitration. In the Komstroy case, it ruled that the investor-state dispute settlement (ISDS) mechanism provided for by article 26(2)(c) of the ECT was incompatible with EU law.

Both decisions are based on the principles of the primacy and autonomy of EU law. Indeed, the ECJ found that arbitral tribunals constituted under intra-EU BITs or the ECT may be called on to interpret and even apply EU law. However, as the ECJ noted, such arbitral tribunals cannot be regarded as a court or a tribunal of a member state within the meaning of article 267 of the TFEU and, as such, have no power to make a reference to the ECJ for a preliminary ruling. Moreover, the ECJ found that arbitral awards are not subject to review by a court of a member state capable of ensuring full compliance with EU law.

Following these decisions, it is now clear that all investor-state arbitration proceedings between EU investors and EU member states, whether based on intra-EU BITs or the ECT, are contrary to EU law. Consequently, an increasing number of awards rendered under the ECT by arbitral tribunals seated within the EU will likely be successfully challenged. It is also expected that this case law will make it more difficult to enforce an intra-EU ECT award within EU member states. Indeed, as foreseen in the ECJ’s Micula decision, the intra-EU ISDS ban could also hinder the recognition and enforcement of arbitral awards before EU domestic courts.

Upstream, ECT tribunals have so far been reluctant to implement the ECJ’s ban on intra-EU ISDS. In fact, so far only one tribunal established under the ECT has declined jurisdiction on the basis of the Achmea jurisdictional objection, in the Green Power award.

In contrast, in two recent awards, Infracapital F1 Sarl v. Spain and Kruck v Spain, both ICSID tribunals rejected the argument that Komstroy should be a basis for declining jurisdiction under the ECT, on the grounds that international law, not EU law, applies to determine a tribunal’s jurisdiction and that there should therefore be no separate treatment for intra-EU disputes and non-intra-EU disputes. Both awards have also held that the ECT does not give the tribunal constituted under it the authority to disregard its provisions which expressly grant an investor a right to arbitration, regardless of a contracting party’s obligations under a different legal order. They noted in this regard that the EU and its member states had not made any special provision for intra-EU disputes upon accession to the ECT.

Similarly, in the LSG Building Solutions GmbH and others v Romania case, an ECT tribunal rejected all EU law objections raised by Romania.

Time will tell if other EU arbitral tribunals seized of intra-EU ECT disputes will follow this trend. However, it is foreseeable that more and more of them will decline jurisdiction, in particular in cases where the request for arbitration was introduced after the rendering of the Komstroy decision, especially as many domestic courts of the EU are diligently enforcing the ISDS ban imposed by the ECJ.

The entry into force of the modernised ECT, on which an agreement in principle was reached between contracting parties in June 2022, should definitely close the door to intra-EU investor-state arbitration. Indeed, the new text will prohibit EU member states and other states that are part of a regional economic integration organization (REIO) from bringing an ISDS claim against another contracting party member of the same REIO, thus crystallizing the Komstroy jurisprudence.

In sum, and as already noted by many authors, it seems that the time for intra-EU ISDS arbitration with a seat in the EU is well and truly over. The next era of investment dispute settlement in the EU may see the establishment of a future EU multilateral investment court.

However, the implications of the Komstroy decision are far less clear in cases where the arbitral tribunal is seated outside the EU. In such cases, arbitral tribunals are unlikely to consider themselves bound by the ECJ’s jurisprudence and decline jurisdiction. Consequently, in cases where the seat of arbitration is discretionary, investors will likely focus their choice outside the EU, for example in Switzerland. In our opinion, this would presumably be the case regardless of whether the dispute is intra-EU or not, since the Komstroy decision focuses expressly on the seat of arbitration being in Paris, even though the investor had its seat outside of the EU and the respondent state was not an EU member state. Additionally, since the ECJ’s ISDS ban will still constitute a significant obstacle when enforcing awards before EU domestic courts, one can expect that investors will invariably attempt to do so outside the EU. Consequently, in the cold European winter ahead and in this climate of legal and economic insecurity, there might still be interesting developments for the Swiss arbitration scene.

 

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