Intra EU Investment Arbitration Under Energy Charter Treaty: Can It Be Replaced ? Submitted by Kabir Singh, LLM (Netherlands)

 The EU has made its stance clear that investment arbitration in intra EU BITs are incompatible with EU law after the preliminary ruling by the CJEU in the case of Slovakische Republic Vs Achmea (C284/16). This is also evident from the recent termination of the intra EU BITs by most of the member states by a Plurilateral Treaty which provides in Article 2 and 3 that the sunset clauses contained in those treaties shall not produce legal effect. However, the Plurilateral Treaty is not applicable to Energy Charter Treaty (ECT), which is a multilateral treaty to which the EU and as well as its member states, except Italy, are contracting parties. The ISDS provision in the ECT continues to be a legal basis for initiation of arbitration proceedings. Nonetheless, a situation can be seen as emerging, although hypothetical, that the Achmea ruling and the Plurilateral Treaty are applicable to the ECT and as a consequence of which investment arbitration is not available to foreign investors to challenge the regulatory actions of the member states. 

What then are the alternatives to intra EU investment arbitration under the ECT and whether they are effective? 

This article would attempt to identify the flaws with the prospective alternatives to intra EU investment arbitration under the ECT, and state the reasons why investment arbitration, as a means of resolution of intra EU investor state disputes under the ECT, shall not be replaced. In order for the effective replacement of intra EU investment arbitration, the alternatives should be analysed on the basis of: rule of law (access to justice), legitimate expectations of foreign investors, right to regulate of the host state, and dealing with legitimacy concerns of investor state arbitration. Because of the word limit, all the criteria would not be taken up for the analysis. 

National Courts of Member States 

The national courts of the member states are an alternative to investment arbitration under ECT as there is a fork in the road provision in Article 26(2) of the ECT which authorizes a foreign investor to submit a dispute against a contracting state either before their courts or administrative tribunals or pursue investment arbitration. However, the national courts of the member states are not considered to be 'well positioned' to adjudicate on treaty claims of the foreign investors [fn] Stephen Schill 'In defence of International Investment Law'(2016) European Yearbook of International Economic Law,6.[/fn]. This is because the national courts of member states do not ensure the requirements of rule of law such as judicial independence, effectiveness and access to justice are provided to the foreign investors [fn] Marko Bronckers 'Is Investor State Dispute Settlement superior to litigation before domestic courts?' 2015(3) Journal of International Economic Law, 17 [/fn]. There are also allegations of corruption against the judicial system of several member states. 

Apart from the investment treaty claims, a foreign investor may also challenge the actions of the host state by bringing a claim under EU law and/or national law of the host state. However, under Article 345 TFEU, EU law cannot interfere with the rules of property protection in the national laws of the member states. This is subject to a caveat under Article 51 Charter of Fundamental Rights (CFR) which states that the member states are required to observe the EU law when they are implementing an EU measure. This implies that the foreign investor would not have any recourse under EU law when the member state is not implementing EU law. Even if EU law is available for recourse against the actions of a host state, EU law does not provide equivalent protection to foreign investors as available under ECT. There is no equivalent of fair and equitable treatment as available in the ECT under EU law [fn] Gloria Alavarez 'Redefining the relationship between Energy Charter Treaty and the treaty of Functioning of European Union: From a normative conflict to Policy Tension' (2018) 2(33),575 [/fn]. The protections provided by EU law such as equal treatment and legitimate expectation of the foreign investors are qualified by the EU treaties as the actions take in public interest do not warrant protection. Further, the protection of property under EU law, comprising of Article 17 of the CFR and Article 1 Protocol 1 of the European Convention of Human Rights give priority to public policy objective of EU over the legitimate expectations of the foreign investors. On the other hand, under Article 13 of the ECT, the emphasis is on the protection of the interest of the foreign investor against the regulatory measure of the host state as public interest is only one of the four grounds for assessment of expropriation. The national courts of member states also provide for less compensation against expropriation than the fair market value of the property as the compensation is dependent on proportionality of the expropriation measure to the public policy objective [fn] Gloria (s. 3), 578 [/fn] . Thus, it would not be wrong to state that since the scope and objective of EU law and ECT are different, it leads to difference in the scope of protection available to foreign investors. 

Investment Court System or Multilateral Investment Court: 

Another alternative for intra EU investment arbitration under ECT is Investment Court System (ICS) or Multilateral Investment Court (MIC) as proposed in the EU-Canada Trade and Economic Agreement (CETA). An ICS is a 'court like system' with an appeals facility, consisting of permanent tenured members. It has been proposed by EU at the sessions of UNCITRAL Working group III for the establishment of a multilateral framework for settlement of investment disputes which shall replace ISDS, with a permanent MIC and appellate mechanism. The negotiating directive of the EU for reform of ECT also provides for establishment of MIC to settle investor state disputes, available here. 

It was held in the Achmea ruling that the arbitral tribunal constituted by the BIT in issue could interpret EU law which was considered to be in breach of the exclusive competence of the CJEU (para 58). The same argument is equally applicable to the proposed ICS as it may have to interpret EU law in certain circumstances. It has been ensured in Article 8.31 CETA that the investment court shall not determine the legality of an EU act by providing that the investment court shall only consider EU law as a fact, the meaning of EU law given by the investment court shall not be binding on the EU judicial system, and referring to the prevailing interpretation of EU law given by the EU courts. However, the investment court may be required to interpret EU law to determine legality of an act in case of breach of contract or change in regulatory framework. Since under ECT the protection granted to foreign investors are subject to right of the host state to regulate in public interest. If the investment court replaces investment arbitration under ECT, it would need to consider the standard of public interest established by the member state or EU courts in order to determine the breach of substantive protection under the ECT. Thus, the investment court may have to indirectly make a determination regarding the legality of EU measure in case of adjudicating on the breach of substantive provisions of the ECT.

 However, in Opinion 1/17, while upholding the ISDS in CETA, the CJEU held that the investment court shall not 'call into question the level of protection of public interest determined by EU in a democratic process', during the process of adjudicating on the breach of investment protections provisions under CETA, and restricted the right of investment court to grant protection only in cases of grave abuse of sovereign power [fn] Steffen Hindelang, 'The price for a seat at the ISDS reform table: CJEU clearance of EU investment policy in Opinion 1/17 and impact on EU constitutional order' in Andrea Biondi and Giorgia Sangiuolo (eds), Judicial Protection and EU Free Trade Agreements, LAwTTIP Book Series (Edward Elgar Publishing, forthcoming 2020) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3548204>  May 28, 2020, 8 [/fn]. Nevertheless, the interpretation of grave abuse of sovereign power is subject to the interpretation of the investment court, which for the said purpose may determine the legality of a member state or EU act. Moreover, the investment court may still be required to determine the legality of an EU measure which is 'applied in a manner that constitute a means of arbitrary or unjustifiable discrimination between the parties, where like conditions prevail' or 'constitutes disguised restriction on trade in service' [fn] Hindelang (s.5), 8 [/fn]. The same argument is also relevant for Article 24 ECT. 

Moreover, the ICS and MIC also face legitimacy issues as only the contracting states have the power of appointment of judges and the foreign investors do not have an equal say. 

State to State Dispute Settlement 

The possibility of state to state dispute settlement is provided in Article 27 of the ECT. It provides that the contracting parties shall settle their dispute through diplomatic channels or if the disputes cannot be resolved by former, through ad-hoc state to state arbitration under UNCITRAL rules. According to customary international law principles, the diplomatic channels can only be utilized after domestic remedies have been exhausted by the foreign investors before the nations courts of the host state. The exhaustion of local remedies before the national courts of the member states is problematic as has been mentioned above. The diplomatic espousal by the home state of the claim of its investor also suffers from problems concerning access to justice for foreign investors. 

Investor State Arbitration based on Domestic Legislation: 

Some states provide their consent for investment arbitration with foreign investors in their national legislation. It constitutes a form of standing offer to arbitrate to whole foreign investment community. When a foreign investor makes a request for initiation of investment arbitration, the standing offer to arbitrate is perfected and thus, the foreign investor and the host state enter into an arbitration agreement. However, the disadvantage of this form of dispute settlement is that the host state has discretion to amend or withdraw the consent to arbitrate by altering the law [fn] Steffen Hindelang, ‘Study on Investor-State Dispute Settlement (ISDS) and Alternatives of Dispute Resolution in International Investment Law’ in Pieter Jan Kuijper, Ingolf Pernice, Steffen Hindelang, Michael Schwarz and Martin Reuling, Investor-State Dispute Settlement (ISDS) Provisions in the EU’s International Investment Agreements. Volume 2 – Studies (European Parliament 2014), 2.3.2.2.1.2.2 available at , accessed on May 28, 2020 [/fn]. Another issue is that in cases of ambiguous consent to arbitrate provided in the national legislation, there may be disagreement between the foreign investor and the host state regarding the scope and content of consent to arbitration. 

Conclusion: 

The above analysis shows that if intra EU investment arbitration under the ECT is replaced by any other alternative, the foreign investors would be left with less favourable rights. This would violate Article 16 ECT which provides that the ISDS provisions of any treaty entered into by two or more contracting states which provides for less favourable treatment to foreign investors than those available under the ISDS provisions of ECT, would not override the provisions of ECT. If the EU makes an amendment to ECT for dealing with intra EU investment disputes, the investors would lose a more favourable right, which would be a breach of ECT. Further, under principles of customary international law, the EU cannot deny its obligations to provide access to investment arbitration by making a retrospective amendment to the ECT by relying on its internal governance rules. Moreover, the investor rights under the ECT are derived from pubic international law, and not from the EU treaties, which cannot be foregone by retrospective application of EU treaties. Thus, the arguments in favour of intra EU-investment arbitration and lack of any affective alternative, suggest that intra EU investment arbitration under the ECT shall not be replaced.