Intra-EU disputes cannot be arbitrated under the Energy Charter Treaty, says the Court of Justice of the European Union
06 September 2021
On 2 September 2021, the Grand Chamber of the Court of Justice of the European Union (the Court) delivered its judgment in Case C-741/19, Republic of Moldova v Komstroy LLC, finding that the acquisition of a claim arising from a contract for the supply of electricity does not constitute an investment within the meaning of the Energy Charter Treaty (the ECT).
Although this was not an intra-EU dispute, the Court also took the opportunity to state its view that the investor-State arbitration clause in the ECT does not cover intra-EU disputes. This follows the Court’s 2018 ruling in Slovak Republic v Achmea B.V. (Achmea), reported on here.
The case concerns Moldova’s application before the French courts to set aside an UNCITRAL award rendered by a Paris-seated arbitral tribunal under the ECT in 2013, in favour of Komstroy’s predecessor, Energoalians, a Ukrainian distributor of electricity. The only connection to the EU was that the arbitration was seated in France.
Moldova successfully challenged the award before the Paris Court of Appeal on the ground that the tribunal lacked jurisdiction because the dispute arose from a contract for the sale of electricity, which did not constitute an ‘investment’. On appeal, the French Court of Cassation set aside the judgment, on the ground that the Court of Appeal had interpreted the concept of ‘investment’ by adding a condition to it which was not provided for in the ECT. The Court of Cassation remanded the matter to the Court of Appeal.
In the remanded case, Moldova once again contended that the tribunal lacked jurisdiction. In September 2019, the Paris Court of Appeal suspended the proceedings and made a preliminary reference to the Court for a ruling on the interpretation of the ECT.
Questions referred to the Court
The Paris Court of Appeal referred three questions to the Court, seeking a ruling on the interpretation of Articles 1(6) and 26(1) of the ECT, namely whether (i) a contract for the sale of electricity constitutes an ‘investment’; (ii) the acquisition of a claim by an investor of a Contracting Party of a claim established by an economic operator which is not from one of the Contracting Parties constitutes an ‘investment’; and (iii) the investment was made in the ‘area’ of Moldova. The European Commission and a number of Member States intervened in the proceedings and urged the Court to rule on whether its findings in Achmea (in relation to the investor-State arbitration provision in the bilateral investment treaty between The Netherlands and Slovakia) extended to the ECT.
The Court first examined whether it had jurisdiction over the reference. It considered that even though, in principle, it did not have jurisdiction to interpret an international agreement in the context of a dispute not covered by EU law, it did have jurisdiction in this instance because:
- the ECT is an agreement concluded by the EU Council, and thus, an act of one of its institutions, which the Court is entitled under Article 267 of the Treaty on the Functioning of the European Union (the TFEU) to interpret;
- it is in the EU’s interest to interpret the provisions of the ECT uniformly to “forestall future differences of interpretation”; and
- by choosing Paris as the seat of the arbitration, the parties made French law, of which EU law forms part, the applicable lex fori to the dispute in the main proceedings.
The Court went on, therefore, to consider the questions referred to it.
Consideration of the questions
In order to answer the first question, the Court considered it necessary to first specify which disputes may be submitted to arbitration under Article 26 of the ECT.
It concluded that Article 26(2)(c) of the ECT, which provides that disputes may be settled by investor-State arbitration, must be interpreted as not being applicable to disputes between an investor of one Member State and another Member State. The Court followed its reasoning in Achmea, the central point being that, by virtue of Article 344 of the TFEU, Member States cannot submit a dispute concerning the interpretation or application of EU treaties to any settlement method other than those provided in those treaties.
The Court considered that Article 26(6) of the ECT, which provides that an arbitral tribunal established pursuant to paragraph 4 of that Article shall decide the issues in dispute in accordance with the ECT and applicable rules and principles of international law, require the tribunal to interpret and even apply EU law because “the ECT itself is an act of EU law”. The Court considers that such a tribunal cannot be classified as a court or tribunal ‘of a Member State’ within the meaning of Article 267 TFEU, and thus could not make a reference to the Court for a preliminary ruling.
The Court acknowledged that an international agreement providing for the establishment of a court responsible for the interpretation of its provisions is not, in principle, incompatible with EU law. It considered, however, that the exercise of the EU’s competence in international matters cannot extend to permitting a provision according to which a dispute between an investor of one Member State and another Member State concerning EU law may “be removed from the judicial system of the European Union such that the full effectiveness of that law is not guaranteed”.
The Court further considered that the multilateral nature of the ECT, comprising both EU and non-EU Member State parties, does not alter that conclusion, as “a provision such as the ECT is intended, in reality, to govern bilateral relations between two of the Contracting Parties, in an analogous way to the provision of the bilateral investment at issue in […] [Achmea]”. The Court also adopted the distinction between treaty-based and commercial arbitration made in Achmea, with the latter deriving from “freely expressed wishes of the parties” and the former from an agreement by Member States to remove disputes from the jurisdiction of their own courts.
On the first question, the Court ultimately ruled that “a mere supply contract is a commercial transaction which cannot, in itself, constitute an ‘investment’ within the meaning of Article 1(6) ECT”. In light of this, the Court considered it unnecessary to answer the second and third questions.
The decision is notable in that the pronouncement that intra-EU disputes cannot be arbitrated under the ECT was not a question referred to the Court; nor is it contained in the dispositive part of the judgment as the case did not concern an intra-EU dispute. While the Court cannot thus be said to have issued a formal ruling on the matter, it is a clear indication of how the Court would decide the question, if referred, in future.
Another notable feature is that the Court reached this conclusion purely from the vantage point of EU law, without any consideration of international law. The Court’s interpretation of “this Treaty” in Article 26(6) of the ECT as being a reference to EU law just because the EU is a signatory to the ECT is baffling and one may wonder whether every international agreement to which the EU is a signatory is now to be regarded as an instrument of EU law. The distinction with commercial arbitration is equally baffling, as the suggestion is that Member States did not enter into the ECT of their free will. If the reasoning were to be followed by international tribunals, it would lead to the absurd result that the ECT has a different meaning (or even legal status) on a case-by-case basis, depending on the parties to the relevant dispute. The multilateral nature of the ECT does matter as it is the common intention of all the parties, and not only some of them, that needs to be established pursuant to Article 31 of the Vienna Convention on the Law of Treaties.
It remains to be seen what consequences Member States will seek to draw from this decision. At least as a matter of international law, an instrument similar to the agreement for the termination of bilateral investment treaties (reported on here) is unlikely to be an option as a three-fourths majority of the Contracting Parties to the ECT is required to amend the ECT. However, the decision is likely to accelerate the Commission’s ongoing efforts to renegotiate the ECT.
Meanwhile, in particular in the case of intra-EU disputes, investors are advised to opt for arbitration under the auspices of the International Centre for Settlement of Investment Disputes or, if not available, avoid an EU seat. Where possible, investors may also look to enter into a specifically-negotiated agreement with the relevant Member State. Where no dispute is in existence or reasonably foreseeable, EU investors should consider (re)structuring their investments from outside the EU.
In case of a favourable award in an intra-EU dispute, investors will need to identify commercial assets not covered by immunity, and seek enforcement, most likely outside the EU.