Stephanie Collins, Associate Attorney, Gibson, Dunn & Crutcher UK LLP
On 2 September 2021, the Court of Justice of the European Union (the “CJEU”) issued its ruling in Republic of Moldova v Komstroy concluding that, as a matter of EU law, Article 26 of the Energy Charter Treaty (“ECT”) is not applicable to “intra-EU” disputes. This post is concerned with the following questions: (i) to what extent (if indeed at all), can we expect intra-EU ECT tribunals to take into account the CJEU’s reasoning; (ii) what steps (if any) should investors be taking in light of Komstroy; and (iii) what are the implications of Komstroy on EU Member States?
To What Extent Can We Expect Intra-EU ECT Tribunals To Take Into Account The CJEU’s Reasoning?
Unquestionably, Komstroy will be relied upon by respondent EU Member States seeking to challenge a tribunal’s jurisdiction in intra-EU ECT proceedings. Yet, so far as arbitration proceedings brought under the auspices of ICSID are concerned, such tribunals should, in principle, consider Komstroy irrelevant. This is for numerous reasons.
First, questions of jurisdiction for an ICSID tribunal are a matter exclusively for the tribunal. Pursuant to Article 41(1) of the ICSID Convention, the tribunal “shall be the judge of its own competence”. Thus, an ICSID tribunal can reach a different conclusion to that of the CJEU.
Second, ICSID proceedings (and awards) are creatures of international law and part of a self-contained dispute resolution system. The EU legal order is separate from international law; accordingly, proceedings (and awards) are, in theory, unaffected by EU law and its developments.
Third, tribunals are likely to take issue with the CJEU’s conclusion that the ECT should be construed as containing a reference to EU law simply because the EU is a signatory to the ECT. Does this hence mean that every international agreement to which the EU is a signatory should now be considered as an instrument of EU law?
In any event, the CJEU’s reasoning is at odds with the CJEU’s Opinion 1/17, in which it was accepted that CETA tribunals – though outside of the EU judicial system – could nonetheless interpret and apply the CETA itself without running afoul of EU law. The decision does not explain how the CETA – to which the EU is also a party and must likewise be considered an “act of the EU” by the CJEU – can be compatible with EU law, but the ECT cannot.
Fourth, tribunals are also likely to take issue with the CJEU’s lack of interpretative analysis. Indeed, Komstroy (like the Achmea judgment)contains no analysis under the Vienna Convention on the Law of Treaties, which – as a matter of public international law – governs the interpretation of the ECT. It is therefore unclear how the CJEU can purport to explain how the ECT should be “interpreted”. Further, the judgment does not address the substantial body of case law under the ECT on the interpretation of Article 26 of the ECT. To date, all ECT tribunals that have considered jurisdictional objections based on the intra-EU nature of the dispute have rejected the suggestion that the ECT does not apply on an intra-EU basis. Those cases set forth what is now a well-established principle: that EU law is not relevant to the question of jurisdiction under the ECT.
For all these reasons, Komstroy is unlikely to have a significant impact on ECT tribunals considering whether they have jurisdiction to hear intra-EU disputes. It is also notable that despite the CJEU’s decision in Achmea, all ICSID tribunals in intra-EU BIT arbitrations have upheld their jurisdiction over intra-EU claims.
The situation may be more difficult, however, in the non-ICSID intra-EU ECT context – for example, ad hoc arbitrations conducted under the UNCITRAL Rules or Stockholm Chamber of Commerce (options under the ECT), where the arbitral seat is within the EU. These arbitrations are subject to the domestic jurisdiction of their seat and its lex arbitri. Domestic courts in this context will be competent to hear set-aside applications on the basis of Komstroy.
What Steps Should Investors Be Taking In Light Of Komstroy?
Notwithstanding the above analysis, EU-based investors considering energy investments in EU Member States may wish to consider their position. EU Member States will likely rely on Komstroy to challenge a tribunal’s jurisdiction before an ECT tribunal, and to resist enforcement and support a set-aside application before an EU Member State court (where there is an EU seat).
What steps, then, should EU-based investors be taking? In circumstances where no dispute is in existence or reasonably foreseeable, EU investors may wish to restructure their investments through a non-EU jurisdiction which benefits from the protections of an extra-EU BIT or is a third state in the context of the ECT (such as through Switzerland). Post-Brexit, the UK is another option since there should be no issue from an EU law perspective with a UK investor bringing a claim against an EU Member State (the UK has a number of BITs with EU Member States and is a Contracting Party to the ECT).
In the event disputes do arise in an intra-EU context, and an EU investor is seeking to rely upon the ECT, it is advisable that investors opt for arbitration under the auspices of ICSID or else avoid an EU seat. Where available, investors might also look to enter into bespoke contractual arrangements with the relevant EU Member State with specific arbitration agreements.
At the enforcement stage, Komstroy may decrease the chances of successful enforcement of any resulting intra-EU ECT award within the EU domestic courts. Intra-EU investors with existing or planned investments may wish to identify whether the EU Member State in which they are seeking to invest has commercial assets (not covered by immunity) outside of the EU. A number of recent decisions in Australia and the US provide some comfort that enforcement of an intra-EU arbitral award will not be resisted on EU law grounds. The same can be said for the UK where, in February 2020, the Supreme Court in Micula v Romania lifted a stay of enforcement of an ICSID arbitral award despite an extant State-aid investigation by the European Commission.
What Are The Implications Of Komstroy On EU Member States?
For now, the ECT remains in force between all Contracting Parties, which includes all EU Member States, as well as the EU. Indeed, a modification of the ECT to remove its application as between EU Member States would require the participation of all 53 Contracting Parties. Komstroy does not (and cannot) modify the express terms of the ECT itself. This may be contrasted with the situation post-Achmea: the judgment ultimately led to a treaty between most EU Member States to terminate intra-EU BITs, though the treaty left the signatories to “deal with [the ECT] at a later stage”.
Meanwhile, the process of “modernising” the ECT is on-going, and Komstroy is likely to accelerate the European Commission’s efforts to make substantial amendments (though the Commission’s draft proposal for Article 26 does not expressly exclude intra-EU disputes). Indeed, in December 2020, Belgium submitted a request to the CJEU for an opinion on the compatibility of the intra-EU application of the arbitration provisions of the future modernised ECT with the European Treaties in view of the fact that the mechanism could be interpreted as allowing its application intra-EU.
Aside from ECT-related questions, there remains the issue of how EU Member State courts address Komstroy in the context of enforcement proceedings of ICSID awards. On the one hand, from an EU law perspective, national courts of EU Member States have a duty of “sincere cooperation” under Article 4(3) of the TFEU, pursuant to which they must assist each other in carrying out tasks which flow from the Treaties. On the other, Article 54(4) of the ICSID Convention places an obligation on Contracting States to recognise awards as bindingand to enforce them as if they are final judgments of a court in that State. EU institutions have indicated that they will oppose any such enforcement, even if it places an EU Member State in breach of its other public international law obligations. It is certainly conceivable that an EU Member State court could conclude that its EU obligations trump its ICSID obligations.
Beyond the legal realm, Komstroy may have a more practical impact on EU Member States; EU-based investors considering energy investments in those countries may now view them as too risky. First, the applicability of Article 26 to intra-EU disputes was not a question that was before the CJEU (it was not one of the three referred to the CJEU by the Paris Court of Appeal) and had no impact on the Komstroy case. This might undermine investor confidence in the EU judicial system. Second, Komstroy might create uncertainty regarding the extent of investor protection within the EU. This could make investments more expensive as it will drive up risk-premiums. Komstroy may, therefore, undermine investor confidence at a time when the EU and its Member States are seeking substantial private investment in its energy sector as part of its efforts to de-carbonise.
Like Achmea, Komstroy is unlikely to be a moment of reckoning – at least from the perspective of intra-EU ECT tribunals determining their jurisdiction in an ICSID context. Enforcement of intra-EU ECT awards within the EU has become more challenging – but in the wake of Achmea such proceedings were unlikely to have been brought in any event.
With another preliminary reference on the applicability of Article 26 pending before the CJEU, and discussions around the “modernisation” of the ECT on-going, there are undoubtedly many more developments to come.