Komstroy: the beginning of the end for the Energy Charter Treaty?
On 2 November 2021, the ACELG will hold a webinar on the ECJ’s decision in Komstroy and the future of the Energy Charter Treaty. Please check the ‘NADE’ section on the ELB for more information.
Earlier this month, the Court of Justice handed down its judgment in Komstroy. The judgment was the latest on the relationship between EU law and international investment law following earlier cases such as Achmea (discussed here) and Opinion 1/17 (discussed here) where the Court demarked the limits under which international investment tribunals can legally operate under EU law. Komstroy added explicitly (and rather predictably) that there is no place for intra-EU arbitration proceedings under the Energy Charter Treaty (ECT), a multilateral agreement to which the EU, its Member States (apart from Italy which withdrew in 2016) and third states are parties. Within the EU such disputes must be resolved by the independent judiciary consisting of the EU and Member State courts and not by external quasi-judicial bodies.
In the words of the ECJ (para 66): The dispute settlement mechanism in ‘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.’
The investment arbitration industry equally predictably reacted strongly and negatively to the ruling. After all, intra-EU investment arbitration proceedings are a rather lucrative business model. The judgment has been described as ‘bafling’ reinforcing ‘discrimination’, and comprising of ‘scant and inconsistent reasoning […] based on political considerations rather than a sound and reasoned interpretation of the law’. At the same time, the industry is offering its clients the remarkable view that the judgment does not matter at all for intra-EU investment arbitration proceedings. Investment lawyers are claiming that the judgment ‘should have no bearing on an ECT tribunal’s jurisdiction’ and point to the fact that since Achmea 40 arbitration courts have rejected challenges to their jurisdiction ‘and will continue to declare them irrelevant in the future’.
This self-serving and ill-advised commentary calls for a few comments itself. We hence first discuss why continuing with intra-EU arbitration despite its illegality under EU law is highly problematic. We then set out why the ECT increasingly manoeuvers States in an impasse, where they cannot meet their climate related international obligations. Finally, we examine why the ECT itself stands in tension with EU law.
Continuing with intra-EU arbitration is a bad idea for everyone except the investment arbitration industry
EU Member States have to comply with EU law and continuing with the application of intra-EU BITs would result in Member States failing to fulfill their obligations under the EU Treaties. This means that:
- First, Member States are obliged to terminate all existing intra-EU investment agreements.
- Second, Member States are obliged to challenge jurisdiction of any tribunal requested by an investor in an intra-EU dispute as EU law precludes the applicability of these agreements.
- Third, Member States are legally bound to deny payment of such awards.
- Fourth, national courts of the EU Member States are legally bound not to enforce such awards.
All four points flows directly from the principle of sincere cooperation (Article 4(3) TEU), which demands Member States, as well as national courts in particular (settled case law; most fundamentally: Simmenthal  EU:C:1978:49, para 24), to take all appropriate steps to eliminate incompatibilities with Union law, arising both from national law and their international obligations. The principle of primacy of EU law is both unconditional and absolute: it applies to all branches of government, to all law of the Member State (including international agreements to which they are party), and needs to be observed immediately.
In particular the fourth point directly flows from the ECJ’s case law in Achmea and Komstroy.
However, it is also in line with the Court’s earlier cases finding Member States in breach of a specific expression (Article 351(2) TFEU) of the general loyalty obligation (Article 4(3) TEU) for not renouncing or renegotiating their bilateral investment treaties (BITs) with third states. In these cases Member States still enjoyed the benefits of Article 351 TFEU because non-EU states were involved; the reasoning a fortiori applies to legal relations between Member States (see, Commission v Austria, C-205/06, 1–3 and 16–45; Commission v Sweden, Case C-249/06, EU:C:2009:119; Commission v Finland, Case C-118/07, EU:C:2009:715). The obligation to end the incompatibilities with EU law is moreover in line with the relevance of a properly functioning and independent national judiciary as the very essence of the rule of law and the functioning of the judicial dialogue within the Union and a precondition for the principle of mutual trust (Portuguese Judges case, paras 31-37). In particular the latter case, in combination with the principle of loyalty, amounts to an obligation of the Member States to terminate all international agreements that undermine the core principles on which the EU legal order is built (judicial cooperation, rule of law, mutual trust).
It should be added that Member States have also politically and legally committed to terminate existing intra-EU investment agreements in a general agreement for the termination of Bilateral Investment Treaties between the EU Member States, albeit with the disclaimer that ‘the Agreement does not cover intra-EU proceedings on the basis of Article 26 of the ECT. The European Union and its Member States will deal with this matter at a later stage’ (recital 10). Komstroy clarifies in this regard that the ECT must be seen as a bundle of bilateral obligations and that therefore EU law precludes the ECT from imposing obligations on Member States as between themselves (paras. 64-65).
In this light, the reaction of the investment arbitration industry to continue with intra-EU claims and investment proceedings is remarkable. The industry appears convinced that arbitrators will continue to claim jurisdiction over intra-EU disputes and that therefore claims can still be brought by investors.
Encouraging such legally treacherous (and very expensive) arbitration is simply irresponsible. The arbitration industry can offer little reassurance as to whether its clients might see any money at the end of the day. Achmea is crystal clear: enforcement of awards can no longer happen in the EU. National courts are bound to follow this ruling. That is to say: when Member States comply with EU law and refuse to pay any award against them, litigating investors are likely looking to see whether the Member State in question has any assets outside of the EU. In other words, when no court inside the 27 EU Member States recognizes the – under EU law illegal – arbitration award the litigating investor may turn to the booming business of hunting down money outside the EU. One can only imagine the damage that this does to the trust of citizens in national and international institutions and equality before the law.
The potential protracted legal battles with highly unsure outcomes are – one cannot refrain from adding – above all immensely profitable to the investment arbitration industry itself. Writing hundreds of pages on an award (e.g., on jurisdiction) generally pockets investment arbitrators some 3000 dollars per day (excluding expenses) under ICSID rules alone. Legal fees for the lawyers representing the Member States and investors can reach tens of millions of euros. International investment law, then, perfectly illustrates a point that Charles Dickens made with regard to English law in Bleak House:
‘The one great principle of the English law is, to make business for itself. There is no other principle distinctly, certainly, and consistently maintained through all its narrow turnings. Viewed by this light it becomes a coherent scheme, and not the monstrous maze the laity are apt to think it. Let them but once clearly perceive that its grand principle is to make business for itself at their expense, and surely they will cease to grumble.’
Continuing with the Energy Charter Treaty at all is a bad idea…
The ECT is an international treaty that was adopted in the 1990s with the purpose of protecting investment in the newly-independent fossil-rich former-Soviet states, which did not have a tradition of democracy, separation of powers and independent judiciaries. Since then, however, the ECT has become a tool used by the fossil fuel industry to delay and hinder much-needed democratically-adopted climate action (see recently and both scientifically and politically authoritatively the 6th report of the International Panel on Climate Change) by States. By relying on the investor state dispute settlement (ISDS) mechanism under the ECT the fossil fuel industry has regularly successfully been able to bypass the domestic constitutionally embedded courts, asking for billions in compensation for ‘expected’ profits in the face of – in light of widespread climate science, long-looming – decisions to phase out fossil fuels.
With increasing climate action, including actions triggered by successful climate litigation (see e.g. the Netherlands, Ireland, France, and Germany), States are more and more exposed to such claims for damages. These arbitration claims create a risk of great costs that policy-makers cannot avoid taking into account when taking climate action. States like the Netherlands are squeezed between a rock and a hard place. On the one hand, they have been legally obliged to take climate action (Dutch Supreme Court, Urgenda, 2019) and on the other they face multi-billion-euro claims in arbitration by fossil giants like RWE and Uniper. Needless to add that this was never the intention of the ECT and that the ECT in this way puts factual financial pressure on States to breach their international obligations under the 2015 Paris Agreement.
The investment arbitration industry claims that giving investors an additional right to sue governments for tax payer money is necessary for achieving climate change goals. Investment lawyers often cite ISDS-cases related to private investments in renewable energy. Yet, such claims are based on assumptions that lack evidence. What is more, in relation to existing awards related to renewables investments, no condition was attached to the awards that the tax payer money should go to protecting the environment. Quite to the contrary, it made it more difficult for these states to realize renewables projects as less funds were available and it discouraged them to undertake such projects. Yet, tax payer money is more necessary than ever to achieve climate change goals and invest in energy infrastructure projects in order to achieve the energy transition. The last thing we need is to encourage those investors that are willing to engage in the extra-judicial legal arm-wrestling that is ISDS.
… and questionable under EU law!
While Komstroy make it crystal clear that the Energy Charter Treaty is not applicable to intra-EU disputes, the judgment does not answer the question whether the ECT as applied to disputes between the EU or Member States on the one hand and investors from outside de EU on the other is compatible with EU law.
All international agreements concluded by the EU and its Member States must be compatible with the EU Treaties. Opinion 1/17 has set out the conditions under which agreements containing investment tribunals can be found compatible with EU law. The ECJ held in this opinion that the investment court system (ICS) as introduced under CETA was compatible with EU law. Before Opinion 1/17, one core reason (in addition to several others) to reject the compatibility of external (quasi-)judicial bodies with EU law has been that these bodies undermined the autonomy of EU law and the authority of the ECJ by being able to give binding interpretations of EU law. For this reason, CETA took a four-pronged separation approach: first, the CETA tribunal cannot determine the legality of EU law; second, it treats EU law as fact; third, it follows the prevailing interpretation of the ECJ; and fourth, the EU/ECJ is not bound by the tribunal’s decision. Point one and two are meant to normatively disconnect EU law and the ECJ from the decisions of the ICS under CETA – whether these provisions achieve such a disconnection is a different question. Point three aims at lowering the likelihood of substantive differences in interpretation. Point four aims at excluding challenges based on decisions of the ICS.
While a general clause provides that the arbitration tribunal established under the ECT should ‘decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law’ the ECT does not offer the separation guarantees of CETA. It is not specifically tailored to meet the EU’s autonomy concerns and arguably would not meet the ECJ’s concerns if it was put to the test. With the legality of the ECT under EU law being doubtful more in general, perhaps the Commission, the Council and the Member States should take seriously the recent petition, signed by 1 million EU citizens already, aiming to end the ECT. This would avoid further protracted legal battles in the future and be a positive step in the fight against climate change.
Dear Christina and Laurents,
It is good to see your blogpost. However, I would caution on several points. As you know, this field is more complex than a short blogpost.
1. I know your position on ISDS, but as academics we must strive for balance. I have spent years researching on ISDS and EU investment law and not everything is such a clear picture as the “big bad” investors coming after grandma’s pension fund. There is plenty of empirical research in this field providing a much more nuanced picture of a controversial field. I would recommend the works of Daniel Behn and Malcolm Langford, former colleagues of mine, who use quantitative methods to assess many aspects and myths about the system.
2. Based on Achmea, Member States are not obliged to terminate intra-EU BITs. The Court only says in Achmea that ISDS provisions similar to the one in the Slovakia-Netherlands BITs are incompatible with Articles 267 and 344 TFEU. Two points follow from this (a) It is not the entirety of an intra-EU BIT which is incompatible with EU law, but only those ISDS provisions which are similar to the Slovak-Dutch BIT. What similar means, only the CJEU knows. (b) How the MS will remove the incompatibility is not mentioned. Thus, this can be done either via treaty termination (as they seem to want to do) or treaty amendment. So, your statement “First, Member States are obliged to terminate all existing intra-EU investment agreements” simply does not flow neither from Achmea, neither from other cases on the incompatibility of pre-accession MS agreements with EU law (in some cases termination was needed, in others other methods as long as the incompatibility was removed)
3. I have mentioned this many times over the years, as someone who straddles the line between EU and investment law. From the perspective of EU law and its autonomy what you say is all true. From the perspective of PIL and investment law/arbitration what the EU does internally is not much interest to them. Under PIL until those agreements are not clearly terminated together with their sunset clauses, arbitral tribunals can and will find jurisdiction. There has been too much ink spilled on how the EU Treaties have “superseded” intra-EU BITs or the ECT in an intra-EU setting. None of these arguments are convincing and so far they have been never accepted by arbitral tribunals. The closest I found to an acceptance was in a dissent of Argentinian arbitrator Marcello Kohen who argued that there is substantive overlap between BITs and EU Law (decent reasoning, not sure I am convinced. Full protection and security is the equivalent of what in EU law? Or fair and equitable treatment? So I don’t really see this overlap to argue some form of superseding under the VCLT 1969)
4. The MS, especially not the capital exporting ones, like the Netherlands (the investors of which have greatly benefited from Dutch BITs) are really not the victims here. They knew what they signed (and I feel sorry for those Eastern EU states who did not). If they want to terminate these agreements and the ECT, then send a clear message and terminate them. But then again, countries like the Netherlands, have decided to weasel themselves out of the termination agreement you mention in the blogpost. Because MS think like this (and this was mentioned by the AG in Achmea): when it is in their interest, intra-EU BITs are good. When not, they should not comply with their international obligations.
In conclusion, if I put my EU hat on, within the EU the ECT will be inapplicable in an intra-EU setting (autonomy, Achmea, all that stuff, half of which was made up by the Court in some leaps of logic. Amazing how some of the arguments did not stop the CETA ICS to be compatible with EU law). However, if I put my investment law hat on, as an arbitrator I would uphold jurisdiction based on the ECT or intra-EU BITs until there is no clear termination of the agreements and their sunset clauses. And if the MS lose, their accounts should be blocked in signatory countries of the ICSID convention and the awards in non-ICSID arbitrations could be challenged pursuant to limited grounds under article V of the NY Convention if the location of the arbitration was in an EU MS.
We do not appreciate your ad hominem attacks (‘I know your position on ISDS’), nor your insinuation that we do not understand what we are doing (‘this is more complex than a short blog post’; ‘we must strive for balance’, etc). Your post seems to follow a common weakness: the sharper the tone, the weaker the arguments. Please apply professional politeness also on the internet.
On substance, your arguments are not convincing under EU law. Achmea makes a broad argument on mutual trust and the independence of the judiciary, which cannot be reduced to the specific provisions of the Slovak-Dutch BIT. This point has been confirmed by Komstroy and may be confirmed again by the Court, if national courts do not assume an ‘acte éclairé’ (the Court has clearly ruled on this point, no further references are necessary). The latter would in fact be the position that the German courts in the Dutch State /RWE and Uniper cases on jurisdiction should take.
You also imply that we made a number of points that we did not make, such as that ‘credit giver’ countries like the Netherlands are the victims. Our point was that the ECT creates a situation in which compliance with international (Paris agreement) and national (successful climate cases) obligations becomes very costly. As a result, the tax payer is the victim of arbitrage proceedings by multinationals that claim that they may legitimately expect that states do not take the necessary climate measures to which they have politically and legally committed.
We could also recommend good reads to you on arbitration cases that actually do qualitative empirical analysis and show how wrong things can go – start for example with Alessandra Arcuri. However, as we are aware of the studies you mention, you may also know the opposite picture painted by those, who dig deeper.
We would like to finish on a point, which is a general observation made to allow the reader to think about the complexity of the subject matter, rather than a point related to you, Szilard, in person. We do not have any financial or any other personal interest in the continuation or termination of ISDS under the ECT or under any other investment treaty. I would invite all scholars writing on this topic to voluntarily disclose whether they have ever received payment related to arbitration cases. This would in our view make transparent, who according to ethical standards of independence can write on the subject matter.
Christina and Laurens
Dear Christina and Laurens,
This was not meant to be a personal attack on either of you. We have known each other for many years, and I respect both of your scholarly achievements. This blogpost, however, in my opinion is not entirely balanced and neutral, and your personal convictions on this hot topic come through. I would always advise academics to strive for some level of neutrality. I know there are different schools of thought on this. Many of my colleagues in the UK are very opinionated even in the class room. I prefer neutrality.
You make some very broad statements such as “Encouraging such legally treacherous (and very expensive) arbitration is simply irresponsible”, you talk about the “arbitration industry” and how “investment lawyers” react. The picture as you well know is much more complex than this. There are people who are connected to arbitration who are pro State or pro investor, there are people who are connected to arbitration and academia, and then there are a lot of us academics who comment on it. And on top of that we have NGOs, government representatives, multinationals, SMEs, etc.
I am an academic, I have zero ties to the arbitral practice, and I have never gained anything from it. In your blogpost you talk about an entire field of law and professionals connected to it as if it were a monolith. And it is not. There are plenty of critical voices in it, especially lots of academics who do not have any financial ties to arbitration. And when they criticise the system, they use data to get as much input as possible. Gathering big data in a field where we don’t have adequate databases requires years of work of entire teams of people. I have worked and work on such projects and they are very complex in design, data gathering etc. On a multi-country project I am working on now we have so far spent weeks discussing just the data gathering methods.
At the end of such a project you can only write conclusions and test assumptions which are backed up by your data. If your data shows for example that investors win 60% of times at the jurisdiction phase but lose 60% at the merits phase, you cannot conclude for example that “the system favours investors”. Ever since I got involved in such projects, I am very careful in what conclusions I draw about an entire system as a few rotten apples are not enough to draw wider conclusions. This is something we lawyers often do as we are not trained in thinking about systems but about individual cases. I have researched national courts cases which later ended up in arbitration in which the investors were given prison sentences for bribing government officials, cases in which local juries impartially treated foreign investors, cases in which states revoked licenses even when the Supreme Court of the country said that the licenses should be reinstated, etc. The picture is very complex and there are no clear conclusions. That is why I caution for neutrality.
When you criticize an entire system it is not enough to look at a couple of cases, as we lawyers tend to do. I know Arcuri’s work, I have read her analyses and they often look at individual cases, but they are not systemic in nature.
I hope this has clarified what I meant to say. We could debate for hours about the legal arguments used by the Court and which of them are convincing. I leave that to another time.