The arbitrability of intra-EU disputes under the Energy Charter Treaty (ECT) has been a vexed issue in recent years, particularly following EU court decisions which have cast doubt on the compatibility with EU law of investor-state arbitration in international treaties involving EU Member States and as criticisms of the ECT have grown louder and more numerous.
In this briefing, we discuss a significant recent decision in which the English Courts rejected an application from the Kingdom of Spain (Spain) to set aside an order registering an ICSID award arising under the ECT. It is important first to set the decision in its context by explaining the investment arbitration mechanism under the ECT and the reasons why some member states have threatened to withdraw from the ECT.
Investment arbitration under the ECT
Introduced in 1994, the ECT is a multilateral investment treaty that establishes a legal framework between its 53 member states (including the UK, Spain and the EU) for energy cooperation and investment. As reported in our article on the EU’s 2022 modernisation proposals, the aim of the ECT is to promote and facilitate security, competition and cross-border investment in the energy sector, in part by providing various protections for investors – by way of one example, Article 10 requires member states to encourage and create stable, equitable, favourable and transparent conditions for investors from a different member state.
If a member state breaches its investor protection obligations under the ECT, investors have the option of referring the dispute to that member state’s domestic courts or, more frequently, to binding international arbitration. If an investor opts for arbitration, it is faced with a decision as to how that arbitration will be administered. The ECT provides for three options, one of those being arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), provided that both of the relevant member states are party to the ICSID Convention.
UNCTAD’s Investment Dispute Settlement Navigator confirms that the ECT is the international investment treaty most often used by investors to pursue claims against States. As at May 2023, there were 158 investment arbitration cases instituted under the ECT (sometimes invoked together with another investment treaty), 104 of which are arbitrations under the ICSID Convention (including ICSID Additional Facility cases) and 51 of which are claims involving the Kingdom of Spain.
Criticism of the ECT and the “Intra-EU objection”
In recent years, the ECT has been the subject of criticism from some quarters, particularly the EU and its member states. Critics describe the ECT as “anti-climate”, arguing that it restricts member states’ efforts to facilitate green energy transition and implement energy sector reforms necessary to combat climate change. The principal concern is that the need for energy transition leaves states with little option but to introduce policies that are potentially adverse to fossil fuel and renewables investors, exposing them to claims under the ECT which offers those investors certain safeguards.
Examples of contentious policy instruments and state intervention measures proposed as part of energy sector reforms include the reduction of feed-in tariffs originally offered to investors in the renewable energy space, revocation of public concessions, carbon taxes, steps to control energy consumption, and the implementation of revenue caps or other measures (such as the recently proposed “solidarity contributions” on “surplus profits” in the fossil fuel sector). Many of the investor-state arbitrations instigated under the ECT have seen investors in the solar energy sector pursue member states, particularly Spain and Italy, in connection with changes to (or, more specifically, revocations of) incentives initially offered to encourage investment.
There are ongoing efforts to modernise the ECT to address the growing concerns, but recent negotiations have stalled, with a vote by the ECT’s member states postponed indefinitely while discussions as to the way forward continue. The current impasse has led several EU member states, including Germany, Slovenia, Poland, the Netherlands, France, Spain, and Luxembourg, to announce their intention to withdraw from the ECT.
One of the proposals under discussion for a reformed ECT is the exclusion of ‘intra-EU disputes’, that is to say, disputes between investors from an EU member state against another EU member state, from arbitration under the ECT. This follows in the wake of the decisions by the European Court of Justice (CJEU) in Slovak Republic v Achmea B.V. (Achmea) and Moldova v Komstroy (Komstroy), discussed in our recent article on the enforcement of energy arbitration awards.
In Achmea, the CJEU ruled that investor-state arbitration provisions in an intra-EU investment treaty violated the EU law principles of mutual trust, sincere cooperation and autonomy, by lifting disputes that might concern interpretation of EU law out of the EU’s judicial system, which had exclusive competence to determine such issues. Tribunals in investor-state arbitrations might be asked to consider the application of EU law, but had no jurisdiction to do so under EU law owing to the primacy of the EU’s legal system. Accordingly, the CJEU ruled in Achmea that EU law precluded investor-state arbitration in international agreements between EU Member States. The CJEU then followed Achmea with the decision in Komstroy in 2021, which concerned a dispute under the ECT which did not involve any EU Member State. Despite that, in Komstroy, the CJEU held that, because the EU was itself a contracting party to the ECT, that treaty was an act of EU law and, therefore, the dispute resolution mechanism within the ECT (Article 26) could not and did not apply ‘intra-EU’, relying on the reasoning in Achmea.
Although the CJEU’s decisions in Achmea and Komstroy have been deployed by member states to challenge enforcement of awards rendered under the ECT, all tribunals and courts outside of the EU have to date rejected the objection. One recent example is in the UK, where Spain sought to set aside an English Court order to register an ICSID award in connection with a dispute under the ECT, relying on jurisdictional grounds and the defence of sovereign immunity.
Spain’s challenge to enforcement of an ICSID award under ECT in the UK
Although Spain challenged the registration order on two distinct grounds: (i) sovereign immunity; and (ii) material non-disclosure during a without notice hearing, we focus on the former below.
Spain sought to rely on the CJEU’s decisions in Achmea and Komstroy as authority, under both EU and international law, to contend that both the ICSID tribunal and the English courts lacked jurisdiction, arguing that:
- Komstroy had confirmed that the ECT’s investor-state arbitration provisions were incompatible with EU law, relying on the decision in Achmea, and there was therefore no valid arbitration agreement in the ECT; and
- absent a valid arbitration agreement, Spain enjoyed sovereign immunity from recognition of awards in the English courts.
To address Spain’s application, the English High Court had to consider primacy of law in the context of intra-EU disputes under the ECT, application of the English law defence of sovereign immunity under State Immunity Act 1978 (SIA) and the distinct regime for recognition and enforcement of an ICSID award under the UK’s Arbitration (International Investment Disputes) Act 1966 (the Act).
The Act represents the domestic legislation introduced to ensure the UK’s compliance with its treaty obligations under the ICSID Convention, which the English court recognised as a multilateral treaty, to which both the UK and Spain are signatories (similar to the ECT). The Act provides the regime for the registration of ICSID awards which differs in many material respects from that for enforcement of awards under the New York Convention, enacted into UK law by the Arbitration Act 1996.
Summarising the position set out in the UK Supreme Court’s decision in Micula & Ors v Romania (European Commission intervening)  UKSC 5, the High Court held that:
- The defences available to a foreign State faced with an application to register an award under the ICSID Convention are narrower than those that would be available if the award were being enforced under the New York Convention.
- There is arguable scope for additional defences not already identified in Articles 50 to 52 of the ICSID Convention but those are only available if:
- there are “exceptional or extraordinary circumstances”, which are not well-defined;
- the defences do not overlap with the grounds of challenge specifically allocated to Convention organs under of the ICSID Convention (i.e., to ICSID itself); and
- the English courts must recognise the defence in respect of final judgments.
- That being the case, the English courts are restricted under the Act to ascertaining the authenticity of an ICSID award, and there is to be no re-examination of an ICSID tribunal’s jurisdiction or the fairness and propriety of proceedings before the ICSID tribunal.
The High Court then considered the significance of the CJEU’s decisions in Achmea and Komstroy. The Court held that, although the CJEU had found that arbitration under the ICSID Convention (as incorporated into the ECT) is incompatible with EU law, the CJEU is “not the ultimate arbiter under the ICSID Convention, nor under the ECT”. The ICSID Convention is itself a multilateral treaty to which the UK acceded before its accession to what is now known as the EU and which has signatories other than the EU member states. It was not therefore open for Spain to rely on Achmea or Komstroy to “dilute the UK’s multilateral international treaty obligations” under the ICSID Convention or to interpret the Act “differently to what its clear terms require”. There was no reason to interpret the ECT and the ICSID convention “by ignoring their clear terms regarding dispute resolution, in preference for granting the CJEU decisions complete primacy over those pre-existing treaty obligations of all states”.
Having addressed the position under the Act and in Achmea and Komstroy, the High Court found that Spain was not entitled to raise jurisdictional objections as a defence under the Act because that type of challenge had been allocated to the Convention organs under Articles 50 to 52 of the ICSID Convention.
Spain also argued that it had not agreed in writing to submit its dispute to arbitration on the basis that the CJEU’s decisions in Achmea and Komstroy deprived the ICSID arbitration provisions within the ECT of effect, and Spain has not therefore waived its right to adjudicative immunity under the SIA. The High Court dismissed Spain’s argument on the grounds that member states to the ECT have given their unconditional consent to disputes being referred to arbitration, including arbitration under the ICSID Convention. The High Court found that Spain’s argument would result in there having been in the ECT a “partial offer of arbitration to some investors, but not others”, depending upon whether those investors were resident within EU Member States or elsewhere. The Court therefore determined that Article 54 of ICSID and Article 26 of the ECT (those being the dispute resolution mechanism in each respective convention) qualify as an agreement to arbitration under Section 9(1) of the SIA, and, therefore, a waiver of adjudicative immunity.
The High Court’s decision clarifies (via an intentionally lengthy canvassing of the relevant authorities) that States cannot mount defences to the registration of ICSID awards, including intra-EU awards, under the Act unless there are “exceptional or extraordinary” circumstances that are not capable of forming grounds on which to seek to annul the award under the ICSID Convention. The decision also confirms that, whatever the CJEU’s position is on the compatibility of investor-state arbitration provisions in multilateral and bilateral treaties involving EU Member States, that does not dispense with the UK’s pre-existing obligations under other international treaties or the UK’s domestic legislation enacted to give effect to those obligations.
Despite the clarity of the decision, there remains some uncertainty as to the arbitrability of intra-EU disputes (particularly under the ECT) and the enforcement of intra-EU awards in jurisdictions other than England and Wales (notwithstanding that Spain may seek to appeal the decision). It is therefore prudent for any would-be investors in ECT member states to consider seeking advice on optimal investment structures before investing with a view to ensuring that these risks are minimised.