Home Jurisdiction Green Power vs. Spain: The first decision to ever uphold the intra-EU objection. Is this a turning point for ECT arbitrations?

Green Power vs. Spain: The first decision to ever uphold the intra-EU objection. Is this a turning point for ECT arbitrations?

0

Summary

  • For the first time, an investor-state tribunal upheld the intra-EU objection, finding that the ECT does not include a valid arbitration offer when applied intra-EU
  • The court’s finding is based on the seat of arbitration being Stockholm and Swedish law (which incorporates EU law) being applicable to the arbitration agreement
  • The tribunal pointed out that ICSID arbitrations – which have no seat and are established under international law – are something different

The legal context of the intra-EU objection

In 1994, the EU and its Member States – together with nearly 40 other countries around the world – signed the Energy Charter Treaty (ETC). One of the main objectives of the ECT – concluded in the aftermath of the collapse of the Soviet Union – was to establish open and non-discriminatory energy markets, thus promoting capital flows in the energy sector. . Notably, the ECT included provisions on investment protection as well as – in its Article 26 – a standing offer for arbitration of investment disputes between states and foreign investors. This has made the ECT the most widely used investment protection treaty in the world.

One of the first intra-EU arbitrations dealing with the so-called intra-EU objection was launched in 2008 by Belgian investor Electrabel against Hungary (which had in the meantime joined the EU) and stemmed from the termination of a power purchase agreement. Already then, the European Commission as well as the EU member states interviewed argued (albeit inconsistently) that Article 26 TEC was inoperative between EU investors and EU member states. EU. In other words, the ECT would not contain a valid offer for arbitration of intra-EU disputes.

More than ten years later, the Court of Justice of the European Union (CJEU) confirmed this position in three landmark decisions from the point of view of EU law:

  • in March 2018 at Slovakia v Achmea it found that an arbitration agreement included in an intra-EU bilateral investment treaty was incompatible with EU law – on the grounds that it undermined the autonomy and uniform application of law of the EU. It was therefore deemed incompatible with Articles 267 and 344 of the Treaty on the Functioning of the European Union;
  • in September 2021 at Moldova v Komstroy the CJEU essentially extended the Achmea reasoning in Article 26 of the TEC, when applied intra-EU; and
  • in October 2021 at Poland v PL Holdings the same finding has been extended to a tacit ad hoc agreement between EU investors and an EU Member State.

CJEU case law notwithstanding, ECT investor-state tribunals have so far consistently rejected jurisdictional objections from EU member states, on the grounds – among other things – that arbitral tribunals derive their legitimacy from the ECT, a treaty organization operating in the field of public international law – not the EU legal order. They were therefore not bound by the decisions of the CJEU.

The Green Power against Spain decision

In Green Power against Spain, which concerned a claim by a Danish investor regarding Spain’s repeal of its renewable energy incentive scheme, the arbitral tribunal reached – for the first time – a different conclusion. She found that Article 26 of the ECT did not include a valid standing offer to arbitrate investment disputes between EU investors and EU member states. The tribunal reached this conclusion on the basis of (i) the law applicable to the arbitration agreement, namely Article 26 of the ECT, and (ii) the ECT as a whole.

With regard to the law applicable to questions of jurisdiction, however, the tribunal concluded that EU law applies to the determination of the tribunal’s power to decide the dispute. He did so on the basis of the specific characteristics of the current arbitration, an arbitration at the seat of Stockholm conducted under the arbitration rules of the Stockholm Chamber of Commerce (CCS). In the absence of a specific agreement between the parties on the law applicable to the tribunal’s jurisdiction or a specific provision to that effect in the ECT, the tribunal considered the Swedish law on arbitration, as a rule procedurally relevant default under the seat of arbitration being Stockholm. Section 48 of the Swedish Arbitration Act provides that in the absence of agreement between the parties on the law applicable to the arbitration agreement, the arbitration agreement is governed by the law of the seat of arbitration. In the Green energy dispute, that law was Swedish law, which also incorporates EU law.

The tribunal also looked at the ECT as a whole and, departing from what had always been held by all previous ECT tribunals, it concluded that the treaty itself required consideration of the law of the EU. As the court put it: you have to “overcome the binary logic from either an ‘inside’ or an ‘outside’ point of view”. It reached this conclusion on the basis of the following elements, which – in the view of the tribunal – recognize and integrate EU law into the ECT:

  • certain provisions of the ECT including the definition of “Contracting Party”, “Regional Economic Integration Organization”, “Area of ​​a Contracting Party” as well as Article 25 of the TEC on Economic Integration Agreements;
  • related instruments made in the context of the conclusion of the ECT, including EU Statement 5 to the Final Act of the European Energy Charter Conference (referring to the EU economic integration process) as well that the EU statement, opting for the TCE fork -provision down the road; and
  • subsequent agreements and practices, in particular the statement made by most EU Member States (including Spain – as the respondent state – and Denmark – as the home state of the investor) on the legal consequences of Achmeaas well as the separate statement of five EU member states (including Sweden, relevant as the seat of arbitration in this case).

Having established the relevance of EU law to determine its jurisdiction under the ECT, the tribunal then relied on CJEU rulings in Achmea, Komstroy and PL Holdings conclude that Article 26 of the ECT did not contain a valid standing offer to arbitrate investment disputes between an EU investor and an EU Member State. Jurisdiction was therefore denied.

And after?

The Green energy The decision appears to have been driven primarily by the specific factors of the case at hand, i.e. an SCC arbitration sitting in the EU. The tribunal’s finding that EU law applies to matters concerning its jurisdiction is indeed strictly circumscribed to its finding that – in the absence of any agreement between the parties – Swedish arbitration law requires the application of Swedish law (as the law of the seat) and, it follows, EU law, when interpreting and applying the arbitration agreement.

The same conclusion would therefore not apply to ECT arbitrations sitting outside the EU (eg Switzerland or the UK) or to ECT arbitrations conducted under the auspices of the ICSID Convention. As has been repeatedly emphasized by the Green energy court, ICSID arbitrations are quite different, in that they are creatures of international law unrelated to any national jurisdiction. They have no seat and no lex arbitri. ICSID arbitrations and awards should therefore, in principle, remain immune to Green energy reasoning of the court.

However, the court’s discussion of the ECT’s recognition and incorporation of EU law contrasts with the constant case law developed by previous investor-state tribunals and it is to be expected that EU member states will seek to replicate the arguments against the jurisdiction of ECT tribunals in intra-EU disputes, including in the ICSID context. In any case, it remains to be seen whether other ECT tribunals, ICSID or non-ICSID, will now turn to the Green Power decision for guidance. The conflicts between EU law and the ECT are still unresolved.

Meanwhile, it was announced last week that ECT contracting states had reached an agreement in principle on a revised text of the ECT. This concludes a five-year negotiation process. Among the most significant amendments, the revised text includes a provision excluding the intra-EU application of the ECT arbitration clause. Once the new text enters into force – at the earliest in 2023 – the ECT will no longer serve as the basis for intra-EU arbitrations. Appropriate structuring of investments to ensure conventional protection of investments made within the EU (eg through UK subsidiaries) will therefore become paramount.

Appropriate investment structuring to ensure conventional protection of investments made within the EU (e.g. through UK subsidiaries) will soon become paramount