Arbitration is a cornerstone of the international trade system, providing investors with a mechanism to legally challenge government policies that violate earlier agreements. Crucially, this is not only something that benefits big investors, but ultimately is good for the economy as a whole. Just imagine how many big investment decisions would not be approved if investors had no means of legal redress against governments not holding up their side of the bargain.
A key player in the international arbitration system is the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), founded in 1966 and based in Washington D.C. Many so-called Bilateral Investment Treaties (BITs) contain arrangements permitting investors to take their case to private arbitration panels against governments that have signed up to the ICSID.
Moreover, there are also multilateral investment treaties, such as the Energy Charter Treaty (ECT), which offer investors the opportunity to legally challenge governments at private arbitration tribunals. Under the terms of the ECT, for example, the Russian state was ordered in 2014 to pay a record-breaking award of 50 billion USD to the shareholders of Russian company Yukos, which had been all but expropriated by the Kremlin.
Is an EU ECT exit coming up?
This is all well and good for investors, but, hot off the press, Euractiv reports that certain EU member states are now keen to withdraw from the Energy Charter Treaty (ECT), which, according to its critics, impedes international efforts to phase out fossil fuels.
Leaked diplomatic cables seen by Euractiv reveal that the governments of Germany, the Netherlands, Poland and Spain are frustrated with attempts to reform the ECT. They apparently doubt that the EU can fulfil its mandate of aligning the treaty with the Paris Agreement on climate change, though as far as Poland is concerned, their changing stance may also have something to do with the Polish government’s exposure to damages as a result of the ECT.
#ICYMI – More 🇪🇺 countries have shown signs of impatience with the ongoing reform of the Energy Charter Treaty, which critics say impedes international efforts to phase out fossil fuels, according to leaked diplomatic cables seen by @FredSimonEU. 👇 https://t.co/TalSOhxX72
— EURACTIV (@EURACTIV) May 21, 2022
For their part, the German government is composed of Greens who are lining up firmly against the ECT, and the Dutch government is being sued by energy utilities RWE and Uniper over its planned coal phase-out.
Inversely to what climate campaigners suggest, however, the ECT is not only referred to by fossil fuel interests. Renewable energy investors have also used this international treaty to protect their investments from the heat of arbitrary government policies. In a notable 2018 case, the Spanish government was ordered in an ICSID case to pay a 101 million euro arbitration award to renewable energy investor Antin, after the tribunal had ruled that Spain had breached the fair and equitable treatment standard in Article 10(1) of the Energy Charter Treaty.
That award is only one of many imposed on the Spanish government, as penalty for having introduced drastic changes in 2013 to its financial support scheme for renewable energy installations, created in 2007. Spain’s policy changes frustrated investment activities and diminished the expected returns, according to investors, and the ICSID tribunal agreed.
Since then, the Spanish government has frantically dodged and resisted paying up, even attempting to annul the awards through legal channels: to no avail however – the investor claims are deemed justified.
So perhaps it is no surprise to see, from the diplomatic cables obtained by Euractiv, that “Spain also made it clear that it would consider an exit scenario, as it did not see how the Energy Charter Treaty could be adapted to the Paris Agreement.”
Challenged for having changed the rules of the game, Spain and other EU countries are now pushing to effectively eliminate judicial oversight over respecting the rules of the game, using the Paris Agreement as an excuse.
On the margins, the European Commission attempting is also trying to use state aid rules as justification for allowing the likes of Spain to wriggle out of paying damages to bruised investors, who acted in good faith when they trusted the promises made by the Spanish government. The excuse deployed by the Commission is that Spain’s 2007 scheme was not notified to the European Commission for approval under state aid rules. According to the Commission, the Antin v Spain award therefore constitutes “state aid”, as a spokesman claims that it grants the investor an advantage equivalent to those provided for by the non-notified 2007 scheme. This is indeed a somewhat creative way to default on promises made.
"In defense of international arbitration as a means to promote foreign investment"
New article, by @pietercleppe: https://t.co/ZEesv8x0uc #ISDS #ICS— BrusselsReport.EU (@brussels_report) January 17, 2022
Shaking off independent private arbitrators
It will come as no surprise to cynics that, in their quest to shake off those independent private arbitrators forcing them to respect the rule of law, EU Member States are being aided by the EU’s very own highest court, the European Court of Justice. In 2018, it ruled, in its “Achmea” judgement, that investor-to-State arbitration in an intra-EU context was illegal, suggesting that it undermines the system of legal remedies foreseen in the EU Treaties for resolving such disputes.
One door, however, is still open : it is possible for utility companies to sue EU member state governments if they are incorporated in a non-EU country that is also a member of the Energy Charter Treaty. For that reason, the Belgian government has just asked the European Court of Justice to rule on the question of whether investment protection clauses in the ECT – a multilateral treaty – are legal under EU law.
Whether withdrawing from the ECT will actually shield Member State governments from their liability for having reneged on the terms of their deals with investors is still under question. According to the European Commission, withdrawing from the ECT would trigger a sunset clause, which would allow investors to sue governments for another 20 years.
Perhaps instead, EU countries should simply practise what they preach and learn to stick to their agreements.
