Three Recent Developments in the EU’s Treatment of Energy Disputes
In the past five years, the EU has taken an increasingly aggressive stance against intra-EU investor-State dispute settlement (“ISDS”), with a specific focus on disputes in the energy sector The Court of Justice of the European Union (“CJEU”), the European Commission (“EC”), and EU Member States have taken a series of actions that have led to a state of affairs where, even if a European investor obtains an ISDS award against an EU Member State, enforcement of that award will be extremely challenging, if not impossible, within the EU. These actions also have repercussions for investment contracts executed directly with Member States. European clients with investments in other EU Member States should be aware of these changes and, where appropriate, take steps to ensure their investments will continue to be protected by one or more international investment agreements (“IIAs”).
Development 1: CJEU Rules that Intra-EU ISDS is Incompatible with EU Law, Including the Energy Charter Treaty
CJEU finds Intra-EU ISDS Incompatible with EU Law under Achmea and Its Progeny
The CJEU inflicted the first blow to the intra-EU ISDS system in its 2018 decision Slovak Republic v Achmea. There, the CJEU ruled that arbitration conducted under an intra-EU bilateral investment treaty (“BIT”) is incompatible with EU law because it removes disputes involving the interpretation or application of EU law from the mechanism of judicial review provided for by the EU legal framework. In the CJEU’s view, the Treaty on the Functioning of the European Union (“TFEU”) grants the CJEU supreme authority on issues of EU law. Because arbitral awards are subject to limited review by national courts, the CJEU reasoned that a possibility exists that an arbitral tribunal could decide an issue of EU law that would not be reviewable by the CJEU. Under this rationale, it held that an EU Member State violates its TFEU duties when it accedes to an investment treaty with another EU Member State which calls for ISDS.
EU Member States Terminated Their Intra-EU BITs Post-Achmea
The second blow to the intra-EU ISDS system came in 2020, when 23 EU Member States signed The Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (the “Termination Agreement”). Effective from 29 August 2020, that agreement terminates all BITs between its signatories, and explicitly purports to terminate their “sunset” clauses which provide arbitration rights to existing investors for a certain period (typically between 10 and 20 years) after a treaty terminates. While Austria, Finland, Ireland, and Sweden are not parties to the Termination Agreement, Austria, Finland, and Sweden have terminated all their intra-EU BITs separately, while Ireland had none to terminate.
The CJEU Extends Its Reasoning in Achmea to the ECT and Beyond, Further Unravelling Intra-EU Investment Protection
The following year, 2021, the CJEU issued its decision in Moldova v Komstroy, where it extended the reasoning of Achmea to the Energy Charter Treaty (“ECT”), a multilateral treaty to which many EU Member States, the EU, and the European Atomic Energy Community (“Euratom”) are all signatories, along with over 25 non-EU States. Later that year, in Poland v PL Holdings, the CJEU purported to further extended its reasoning from Achmea to ad hoc arbitration agreements between EU Member States and investors from other EU Members States when the arbitration agreement replicates the contents of a BIT.
While the CJEU has not gone so far as to prohibit all arbitration between a Member State and a private investor from another Member State, or arbitration between private parties, given the CJEU’s past decisions in this area, it could eventually attempt to preclude any intra-EU arbitration agreement on the basis that such agreements would remove matters of EU law from the CJEU’s judicial review process.
Development 2 : The EC Changed Course on Modernising the ECT, Opting for Withdrawal
The ECT is a multilateral investment treaty with over 50 signatories, including the EU and Euratom. It was created to stimulate cross-border investment in energy, diversify energy supplies, and liberalise energy markets by protecting energy investments from expropriation, and by requiring host States to afford such investments certain protections including fair and equitable treatment.
For several years, the ECT operated with relatively little controversy; it was one of the most frequently invoked IIAs, providing critical protection to investors in the energy sector against host State action violating the ECT’s substantive protections. But starting in 2012, several EU Member States (and particularly Spain and Italy) were subject to a wave of claims, often initiated by investors from other EU Member States, related to changes to renewable energy subsidies and regulations, most often in the solar sector. In response, Italy withdrew from the ECT, although all other EU Member States remained signatories.
Following Achmea and Komstroy, the EC took the position that the ECT as written no longer aligns with the EU’s investment policy and climate goals, while reiterating that its intra-EU ISDS provisions are incompatible with EU law. Hence, the EC, among other stakeholders, advocated for ECT modernisation on three key points for many years: (1) phasing out protections for fossil fuel investments; (2) expanding the ECT to cover other technologies facilitating the energy transition; and (3) removing intra-EU ISDS from the ECT.
The modernisation proposal gained sufficient traction to be set for a European Council vote in November 2022. But in the lead up to the vote, several EU Member States expressed preferences for withdrawing from the ECT rather than modernising it. Ultimately, four States (France, Germany, Spain, and the Netherlands) blocked the vote. Without European Council authorisation either way, the EU and Euratom could not vote on the modernisation proposal. Further, the European Parliament, whose assent is also necessary for any modernisation to enter into force, did not support ECT reform. Thus, on 7 July 2023, the EC abandoned its pro-modernisation position. Instead, it issued a statement proposing that the EU, its Member States, and Euratom withdraw from the ECT. Due to mounting opposition to the proposed modernisation, the EEC determined “there is no legal and/or institutional avenue for the modernisation of the ECT to be adopted and produce its effects” and that without modernisation, the EU (and its Member States and Euratom) cannot remain a party to the ECT. To date, four EU Member States have officially notified the ECT Secretariat of their intention to withdraw from the treaty (Germany, France, Poland, and Luxembourg), and several others have announced their intention to do so.
Thus, as modernisation had become politically unfeasible, the EC concluded that ECT withdrawal is “the only available solution” and offered a new Council resolution to that effect. This new resolution will require a qualified majority (i.e.,55% of EU Member States representing at least 65% of the EU population). Further, to attempt to counter the implications of the ECT’s sunset clause, which affords existing investments continued protection for 20 years post-termination, the EC also proposed a new intra-EU agreement wherein Member States would agree that the ECT’s sunset clause is inapplicable to intra-EU disputes.
If these proposals are accepted by the European Council and implemented by EU Member States, existing investors in the European energy sector may need to restructure their investments to maintain investment treaty protection.
Development 3 : Given the CJEU’s Decisions, European Renewable Energy Investors Are Looking Beyond the EU to Enforce their ISDS Arbitration Awards
Following decisions by Italy and Spain to alter feed-in tariffs for solar projects, over 50 investors, many from the EU, launched claims for investment treaty violations. While the results of these arbitrations have been mixed, there are currently over 20 outstanding awards in which Spain was found liable for violating its treaty obligations, and at least 3 against Italy.
Italy and Spain objected to the jurisdiction of the investment treaty tribunals in these cases using the same legal reasoning applied by the CJEU in Achmea and Komstroy — i.e., that intra-EU ISDS is incompatible with EU law and accordingly, Italy and Spain had not validly consented to arbitration in the applicable treaty (the “Intra-EU Objection”). As far as is publicly known, only the Green Power v. Spain tribunal has upheld the Intra-EU Objection, with dozens of other tribunals upholding jurisdiction notwithstanding the CJEU’s past edicts. The Green Power tribunal appeared to base its decision on the fact that the ECT does not specify the law governing the arbitration agreement, and the SCC arbitration in question was seated in Stockholm rather than in the self-contained ICSID system in which there is no seat of arbitration. On that basis, the Green Power tribunal found Swedish law (including its incorporation of EU law) applicable to interpreting the arbitration agreement.
EU Courts Refuse to Enforce Intra-EU ISDS Awards While Some Courts Outside the EU Have Rejected the Intra-EU Objection
Even though dozens of arbitral tribunals have rejected the Intra-EU Objection, it has found favour in enforcement proceedings within the EU. Unsurprisingly, domestic courts within the EU have nearly uniformly relied upon CJEU jurisprudence to refuse enforcement of intra-EU ISDS awards. Accordingly, award creditors have sought to enforce their awards beyond the CJEU’s jurisdictional remit. Certain courts, such as those in the United Kingdom and Australia, have flatly rejected the Intra-EU Objection. Other courts, like those in the United States, remain divided.
In England and Wales, the courts have rejected the Intra-EU Objection since the 2020 Micula decision. Most recently, in May 2023, the High Court issued a judgment enforcing an award ICSID issued in Antin Infrastructure Services v. Spain, relating to Antin’s investment in the Spanish solar energy sector. In the enforcement proceedings (Infrastructure Services Luxembourg v Kingdom of Spain, [2023] EWHC 1226 (Comm)), Spain argued that the award’s incompatibility with EU law meant that the original tribunal had lacked jurisdiction. The High Court flatly rejected this argument. Under the ICSID Convention, Spain’s jurisdictional objections could only be brought during the arbitration; they could not be raised at the enforcement stage. The court went on to reason that, even if Spain could have raised the Intra-EU Objection before it, the CJEU was not “the ultimate arbiter under the ICSID Convention nor under the ECT.” The court was also unconvinced that signing the TFEU somehow granted CJEU decisions “complete primacy over those pre-existing treaty obligations of all states”, including the obligations of the United Kingdom and Spainunder the ICSID Convention and the ECT. The Antin claimants also sought to recognise and enforce their award in Australia. Those proceedings largely focused on Spain’s waiver of sovereign immunity through its accession to the ICSID Convention. However, the most recent decision of 12 April 2023 (Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2023] HCA 11) also rejected Spain’s reliance on the Intra-EU Objection. In doing so, the court reasoned that given Spain’s accession to the ICSID Convention, it could not raise a jurisdictional objection to an ICSID award at the enforcement stage.
U.S. Courts Are Currently Split on the Intra-EU Objection
Courts in the United States have approached the Intra-EU Objection differently. Under US law, the existence of a valid arbitration agreement waives a State’s immunity from execution of an arbitration award. Yet U.S. courts are currently divided on whether the Intra-EU Objection impacts the scope of a Member State’s consent to arbitrate under the ECT, or negates the existence of the arbitration agreement altogether. If the Intra-EU Objection is interpreted as going to the State’s scope of consent to a valid arbitration agreement, the State will have waived immunity from execution and the award will be enforced. However, if the objection is interpreted as the State never having formed a valid arbitration agreement, then the State’s sovereign immunity will remain intact, impeding enforcement.
Three decisions involving the enforcement of ISDS awards arising from solar investments have been heard by different judges sitting in the same court, the District Court of the District of Columbia. In all three matters, the claimants sought to enforce awards against Spain in the face of its Intra-EU Objection. In two decisions, — 9Ren and NextEra — the D.C. district court judges found that Spain agreed to arbitrate under the ECT, and that the Intra-EU Objection thus went only to the scope of its consent. Accordingly, the decision was not reviewable by the court at the enforcement stage, and Spain was deemed to have waived its sovereign immunity.
In contrast, the D.C. district court judge in Blasket found that EU law impeded Spain’s ability to enter into the arbitration agreement; as no valid arbitration agreement existed, Spain was deemed immune from execution. Given this split at the district court level, all three cases are currently part of a consolidated appeal to the D.C. Circuit Court of Appeals, with a decision expected in 2024. A further enforcement matter against Spain has been stayed at the district court level pending the appellate decision.
Conclusion
In short, when investing within the EU, including in the renewables sector, investors should take action to protect themselves and their investments in light of the above-mentioned developments with respect to intra-EU BITs and the ECT vis-à-vis intra-EU investments. All EU energy investors should obtain advice about how to structure (or re-structure) their investments to gain protection from other bilateral or multilateral investment treaties, taking into account any relevant tax and corporate governance concerns.
