Introduction

The European Union, the European Atomic Energy Community (hereinafter - ‘EURATOM’) and 26 Member States are Contracting Parties to the Energy Charter Treaty (hereinafter ‘ECT’) . A large number of arbitral tribunals have interpreted Article 26 ECT as applying to disputes between an investor from one EU Member State and another Member State. In so doing, they have rejected the contrary position taken by the Commission in the first case of this kind and in all similar cases to date.

The Court of Justice of the European Union (hereinafter ‘CJEU’) has now confirmed in a binding and authoritative manner that intra-EU arbitration under Article 26 of the ECT is incompatible with the EU Treaties. And yet, in their consistent and almost unanimous decision-making practice, arbitral tribunals continue to consider that Article 26 ECT applies intra-EU. According to the CJEU, any such arbitral award must be regarded as incompatible with EU law, in particular Articles 267 and 344 TFEU. Such an award cannot therefore produce any effect and thus cannot be enforced in order to pay the compensation awarded by it.

Article 26 ECT provides for the possibility of ICSID arbitration. This creates the risk that third countries will recognise and enforce these arbitration awards without the possibility for an EU court to declare them null and void. As a matter of fact, Article 54 ICSID sets up a simplified recognition and enforcement mechanism. To date, the Australian courts consider that this mechanism does not allow a Member State to claim before them the lack of a valid arbitration agreement, once the arbitral tribunal has rejected this argument. A request to take a position to that effect is also pending before the US courts and courts in the UK. Even under the UNCITRAL rules or those of the Arbitration Institute of the Stockholm Chamber of Commerce, arbitrators often decide to place the seat of the arbitral tribunal outside the European Union , thus avoiding review by the courts of the Member States and, by extension, the CJEU.

There is therefore a risk of conflict between the Treaties and the ECT as interpreted by some arbitral tribunals which, if confirmed by the courts of a third country, would de facto turn into a legal conflict because arbitration awards violating EU law would circulate in the legal orders of third countries.

According to the case-law of the Court, the risk of legal conflict is such as to render an international agreement incompatible with EU law . In the Commission’s view, in order for the ECT to be compatible with the Treaties, all risk of conflict needs to be eliminated. It will also be important that the risk is addressed from the perspective of public international law, if it is to have the desired effect on the decision-making practice of arbitral tribunals. The Commission is, therefore, of the view that the appropriate response is to adopt an instrument that is a ‘subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions’ within the meaning of Article 31(3)(a) of the Vienna Convention on the Law of Treaties (VCLT).

Factual context

The ECT is a trade and investment agreement for the energy sector gathering 53 Contracting Parties, including the EU, EURATOM and 26 EU Member States, signed in 1994 and in force as of 1998. It provides rules for trade and transit of energy products, as well as for the protection for energy investments.

In the absence of any substantial update of the ECT since the 1990s, the ECT became increasingly outdated whereas, at the same time, the EU has considerably developed its approach with regard to the substantive standards on investment protection, which in more recent agreements are defined so as to ensure that protection of investment does not affect its right to regulate. It also became one of the most litigated investment treaties in the world, with EU Member States being the principal target of claims by investors, most of them based in other EU countries.

In the face of growing dissatisfaction from Contracting Parties and civil society, a modernisation process, driven by the EU and its Member States, was initiated in November 2018, and focused mostly on investment protection standards, as well as on the limitation of the protection granted to fossil fuels and on fostering sustainable development.

The negotiations took place between 2019 and 2022. An “agreement in principle” on the draft modernised ECT was reached on 24 June 2022. On that occasion, the Member States, the European Union and EURATOM informed the other Contracting Parties of the ECT of their intention to conclude a subsequent agreement on the interpretation of the ECT. On 22 November 2022, the Energy Charter Conference (‘the Conference’) will be called upon to formally approve the negotiated amendments to the ECT and to its Annexes.

The modernised ECT will facilitate sustainable investments in the energy sector by creating a coherent and up-to-date framework. It will provide legal certainty by ensuring a high level of investment protection, while reflecting clean energy transition goals and contributing to the achievement of the objectives of the Paris Agreement.

The ECT will offer investment protection reflecting the reformed and modernised standards developed by the EU in its recent trade and investment agreements, preserving the right of governments to pursue their public policy objectives, including in relation to climate change mitigation and adaptation. It will reinforce the pursuit of the EU’s climate policies. The modernised ECT will also allow the Contracting Parties, including the EU and EURATOM, to exclude new fossil fuel related investments from investment protection and to phase out protection for existing investments.

Finally, the modernised ECT includes, for greater certainty, a clause confirming that an investor from a Contracting Party that is a member of a regional economic integration organisation (REIO), like the EU, cannot bring an investor-state dispute settlement (ISDS) claim against another Contracting Party member of the same REIO.

Legal context

In Achmea , the CJEU held that investor-State arbitration clauses in international agreements concluded between the Member States of the European Union are contrary to the EU Treaties and, as a result of this incompatibility, cannot be applied after the date on which the last of the parties to an intra-EU bilateral investment treaty became a Member State of the European Union. Applying the same principles, the CJEU held in Komstroy that Article 26(2)(c) ECT must be interpreted as not being applicable to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State. It is well-established that judgments of the CJEU apply ex tunc. In PL Holdings , the CJEU rejected a request to limit in time the application of the Achmea judgment. In Romatsa, the CJEU held that any intra-EU arbitration award, including an ICSID award, rendered in violation of those findings, has to be set aside and, therefore, may not, in any event, be enforced in order to enable its beneficiaries to obtain payment of the damages which it awards them.





Process for adoption

On 22 November 2022, during its 33rd meeting, the Energy Charter Conference is to take four decisions related to the modernisation of the ECT. These decisions will be taken simultaneously and their purpose is to: (1) adopt the proposed amendments to the text of the ECT (CC 760); (2) approve the proposed modifications and changes to the Annexes to the ECT (CC 761); (3) approve the proposed changes to Understandings, Declarations and Decisions (CC 762); and (4) approve the decision regarding the entry into force and provisional application of amendments to the text of the ECT and changes/modifications to its Annexes (CC 763). These decisions will be subject to a unanimity vote. If the vote is successful, i.e. if no Contracting Party raises an objection, the decisions for the modernisation of the ECT will be considered as “adopted by the Energy Charter Conference. This adoption will trigger subsequent processes for the ratification, provisional application, and eventual entry into force of the various elements of the reform package.