Investment treaty arbitration

Matt Harnett:

My name is Matt Harnett. I'm a senior associate in Ashurst International Arbitration practice. And I'm joined today by Emma Johnson and Tom Cummins, partners in our team based in London. Throughout this series, we've been aiming to provide you with key updates and insights relevant to disputes in the energy and resources sector. We're going to be talking today about investment treaty arbitration. One update that many law firms have been talking about for a while now is in relation to disputes concerning intra-EU investments, by which I mean investments made by investments from one EU state in projects, assets, or transactions in other EU states.

Matt Harnett:

This has become a bit of a hot topic because of a number of European Court of Justice rulings that disputes relating to such investments cannot be arbitrated. And this is back when everyone's minds recently, after a tribunal very recently decided to decline jurisdiction, to hear an investment arbitration under the Energy Charter Treaty. But before we get into the detail, I'm conscious that I've just used a number of technical terms. So let's start with the basics. Emma, can you please explain to our listeners what we mean when we talk about investment protection and investment treaty arbitration?

Emma Johnson:

I should probably start by saying that this is quite a technical, legal topic, but there were hoping after a bit of background to set the scene here, to draw out some of the practical implications for our listeners. So what we're talking about with investment protection and investment treat arbitration is the protection of the rights of investors from one state in relation to the in investments that they make in another state.

Emma Johnson:

An investment protection is typically secured under applicable treaties, which are creatures of public international law. And I'll come onto why that's relevant shortly, but there's effectively a global system of Bilateral Investment Treaties or BITs, each of which is signed by two states. And there's also a series of multilateral treaties. One of which is called the Energy Charter Treaty or the ECT, and those treaties are what we're talking about here.

Emma Johnson:

They place obligations on the states that sign them, such as an obligation to treat investors from the counterparty state in the same manner to which they treat their own nationals. And they also put obligations on the state parties not to expropriate or nationalize an investors' investment without paying adequate compensation. So in effect, what these treaties do is provide investors, making investments outside of their home state, with guarantees that certain minimum standards of treatment will be applied by the state that is hosting their investment. And provide those investors with a right to commence arbitration proceedings, and that's proceedings against the state, if those minimum standards are not observed.

Emma Johnson:

Now, I said a few seconds ago that these treaties are creatures of public international law, and that's relevant because it doesn't matter if the laws of the state where the investment is made change after that investment is made. Where that happens, the investor retains a right to pursue a claim against the state. It retained its rights to expect those minimum standards of protection to be afforded to its investment, and if it's denied the full and proper enjoyment of its investment in a host state, then it can pursue the state that has infringed its rights.

Matt Harnett:

Okay. That makes sense. So, Tom, what is the Achmea decision that everyone has been talking about recently?

Tom Cummins:

Well Matt, Achmea was a 2018 decision, which was handed down by the Grand Chamber of the European Court of Justice. And it arose from a claim by a Dutch investor. So this company Achmea, which is an insurance company, which commenced an arbitration against Slovakia under the Netherlands-Slovakia Bilateral Investment Treaty, and Achmea was successful. And it obtained an award in its favor. And we don't need to go into the detail of the dispute. It was a case that arose out of the reversal of certain reforms to the health insurance market in Slovakia, but that arbitration was seated in Frankfurt, in Germany.

Tom Cummins:

And so German procedural law applied to the arbitration, and in its award, the arbitral tribunal ordered Slovakia to pay Achmea damages of just over 20 million euros. Now, understandably Slovakia wasn't very happy about that outcome. And what it decided to do was bring an action in the German court seeking to set aside that arbitration award, and the German courts looked at this and ultimately the German Federal Court of Justice asked the ECJ, the European Court of Justice, whether the relevant treaties, the treaties on the function of the European Union prevented European investors from relying on arbitration clauses in intra-EU BITs.

Tom Cummins:

So in other words, Bilateral Investment Treaties between two European Union member states. And in short, the European Court Justice said, "Yes, that is the case. The treaties prevent investors relying on arbitration clauses in those circumstances." And the findings of the court were as followed. I'm just going to read a brief excerpt from the judgment. They said, "Article 267 and 344 of the treaties on the functioning of the European Union have to be interpreted as precluding a provision in an investment agreement concluded between member states, under which an investor from one of those member states may in the event of a dispute concerning investments in the other member state. Bring proceedings against the latter member state, before an arbitral tribunal whose jurisdiction that member state is undertaken to accept."

Tom Cummins:

It's obviously a bit of a mouthful, but the basic essence of that was you can't arbitrate investment claims between an investor from one member state and a member state of the European Union. And what that means practically is that the Court of Justice of the European Union took the view that where EU law would fall to be applied in an investment arbitration, that arbitration agreement is unenforceable. And the way in which the court of justice got to this conclusion was through the finding that a tribunal constituted pursuant to one of these intra-EU agreements, wasn't a court or tribunal within the judicial system of the European union.

Tom Cummins:

And because an arbitral award issued by such a tribunal was to be final and binding with limited scope for review by the courts of the seat, such a dispute resolution mechanism could lead to an outcome that prevented disputes involving EU law from being resolved in a manner ensuring the full effectiveness of EU law. And so the provision of Netherlands-Slovakia Bilateral Investment Treaty, on which Achmea had relied when it brought its proceedings against Slovakia, providing for investment arbitration, therefore was found to have an adverse effect on the autonomy of EU law.

Tom Cummins:

So all very complicated, a lot of head scratching amongst legal scholars about this case and what it meant, and whether it was right or not. But in practical terms, the upshot of this was that the Dutch investor, having gone through the arbitral process seeking to enforce its rights was left unable to recover the damages that the tribunal had ordered Slovakia to pay it.

Matt Harnett:

I see. Obviously very unhelpful for the investor in that case, but that's just one case. So what's happened since Achmea? Has it had a wider impact and prevented other European investors from pursuing investment treaty claims against European member states?

Tom Cummins:

Well Matt, Achmea made a lot of waves. It was a pretty high profile, significant decision, and there have been a number of developments since then. I think probably the first one to talk about was not a decision of a court or tribunal, but in January 2019, a number of European Union member states, which included the UK, because it was an EU member state at that time, they issued a declaration about the legal consequences of the ECJ's judgment in the Achmea case. And that declaration included their thoughts on what they intended to do about this legal development. Well, in summary, what those states said was that they were going to commit to terminate all of their intra-EU BITs. So in other words, those BITs between EU member states. They committed to bring to an end any existing intra-EU investor-state arbitrations, and they committed to discuss the consequences of the Achmea decision for arbitrations under the Energy Charter Treaty.

Tom Cummins:

Now, following that declaration in 2019, fast forward to May 2020, 23 EU member states entered into an agreement which terminated their intra-EU BITs. Now from a UK perspective, the significance of that is that the UK was not a party to that agreement. The UK has not gone down that route yet, but not withstanding these developments, these acts of the member states. Various arbitral tribunals impaneled in investor-state arbitrations, have continued to accept jurisdiction to hear intra-EU investment arbitrations. And in those cases, EU member states have sought to rely on the Achmea judgment, and the EU has itself intervened and made submissions in various cases for those tribunals have said, "No, we think we do still have jurisdiction under the relevant law." And there have also been attempts by EU member states with adverse awards against them, so states that have lost arbitration, they have sought to resist enforcement of those awards on the basis of the Achmea decision, but courts outside European union and have not really paid Achmea much heed.

Tom Cummins:

So for instance, attempts to enforce arbitration awards against a EU member states in the US have been permitted to go ahead, even though those arbitration awards emerge from intra-EU proceedings. However, I think I should say that at the same time, there have been more and more of these Achmea type cases popping up in European courts. And that has resulted in referrals to the European court of justice. And they have been asked repeatedly to rule on whether intra-EU investment arbitration is compatible with EU law. And in terms of significant judgements, following this line of reasoning, back in October 2021 in the Poland against PL Holdings case, the court of justice of the European union held that EU member states couldn't agree ad hoc arbitration agreements with investors from EU member states, which would permit those investors to commence investor-state arbitration proceedings.

Matt Harnett:

Emma, everything Tom has said so far has been about the extent to which investors can rely on Bilateral Investment Treaties between EU member states, isn't it? Doesn't that mean that European investors with investments in the EU are still okay to rely on investment protections such as in multilateral treaties, such as in Energy Charter Treaty?

Emma Johnson:

That's right, Matt. I think up until this point, we have been speaking about the position under Bilateral Investment Treaties between two EU member states, but things have moved on more recently, and some cases including just in the last couple of weeks, have set out the position under the Energy Charter Treaty. Now just be before I get into that, and for those not familiar with the Energy Charter Treaty or the ECT, it's a multilateral investment agreement. It contains the investment protection provisions such as a right to compensation in the of expropriation, fair and equitable treatment, and a right to arbitrate, just in the same way that Bilateral Investment Treaties contain those protections. The ECT applies specifically to investments in the energy sector, and it's been signed by a number of states, including EU member states and the EU in its own right has signed the treaty.

Emma Johnson:

Now, historically there have been dozens of claims brought against EU member states by investors. And that's particularly the case recently in relation to the renewable sector where attempts by governments to scale back subsidies that have previously been offered to incentivize investment in the renewable sector have been changed, scaled back or withdrawn. And that has led to a [inaudible 00:12:41] of investment treaty arbitrations. The position in terms of arbitration between EU-based investors and EU member states under the ECT was dealt with in September 2021 by the CJEU, issued a ruling in relation to a case called Moldova and Komstroy, and that started out as an investment treaty arbitration under the Ukraine-Moldova BIT and the ECT.

Emma Johnson:

The arbitration was seated in Paris and effectively concluded that was to just over $45 million to the Ukrainian investor. Now, rather than comply with that award, Moldova went to the Paris Court of Appeal, Paris, because of the Paris' seat in the arbitration, and it asked it to set aside the award, the Paris Court complied, set the award aside on the basis that tribunal had lack jurisdiction over the dispute. That decision was appealed by the Ukrainian investor, the decision was overturned and it ended up being remitted back to the Paris Court of Appeal. And at that point, the Paris Court of Appeal put a number of questions to the CJEU.

Emma Johnson:

The European commission and several EU member states intervened in those proceedings, and ultimately the CJEU decided in September 2021, that ECT based intra-EU arbitrations. So arbitrations commenced by an investor holding the nationality of one EU member state against another EU member state, a country to EU law. So again, what they effectively did was clarify that investment arbitration under the ECT is not going to work where you've got two EU parties involved.

Emma Johnson:

And the most recent development here is just a few weeks ago, where a Stockholm seated SCC investment arbitration tribunal in the Green Power and Spain case, decided to decline jurisdiction. That arbitration had been commenced by a Danish investor under the ECT, and the tribunal followed the line of reasoning of the CJEU in relation to the Moldova and Komstroy case, and found that it couldn't entertain intra-EU ECT arbitration. So that really is the most up to date position and has been making waves in the arbitration community ever since.

Matt Harnett:

So where does all of this leave investors with investments in the EU?

Emma Johnson:

Well, I guess Matt, that at first blush, you'd be correct to think that investors with the nationality of an EU member state will not be able to pursue investment protect rights and remedies against other EU member states. And at a very high level reading of some of these decisions, you would be right in coming to that conclusion. But I think the reality is actually more nuanced than that. Yes, the cases that we've been talking about have left EU investors unable to pursue investment arbitrations under intra-EU BITs and under the ECT where their claim is against an EU member state. But those cases have involved arbitrations under the [inaudible 00:16:00] rules, they've been seated in European cities. The tribunal in the Green Power case that I just mentioned was very, very careful to emphasize repeatedly. That the selection of Stockholm at the seat of the arbitration was relevant and that it meant EU law was applicable to the arbitration.

Emma Johnson:

Similar reasoning was applied Komstroy. And so, there remains a question really whether ICSID Arbitration, which does not involve the choice of a geographically designed seat, would be susceptible to the same line of argumentation, and the same application and outcome in terms of EU law. Just to note here, ICSID Arbitration for those unfamiliar, is arbitration which is conducted under the supervision of the international center for the settlement of investment disputes. That's an arm of the World Bank. It's not subject to the supervision of any national courts, and it's a delocalized process, there's no choice of a seat. The Green Power Tribunal, as I said, referred extensively to the fact that in that case, they were dealing with a Stockholm seat, and that it wasn't an ICSID Arbitration. And they referred back to cases that were ICSID Arbitrations, where different outcomes were reached a case in the Green Power case.

Matt Harnett:

So Emma, does this all mean on a practical level?

Emma Johnson:

To my mind what that means is that, if you are a European investor and you've got an investment in an EU member state, then opting for ICSID Arbitration where you've got a right to do that, or commercial arbitration with the seat outside of the EU. That may well remove as far as possible, the ability of the state party or the EU as a third party intervener to challenge admissibility and jurisdiction on the basis that EU law is going to fall to be applied, which is an exercise reserve solely for the CJEU.

Emma Johnson:

Alternatively, it might be that investors can seek to rely not on their own nationality, but on the nationality of another individual or entity and the chain of ownership, of the relevant asset or investment. And if that nationality is outside of the EU, that would also remove a state party's ability to argue these intra-EU points, but whether or not that's practically possible will depend on how investments are structured, how the class of entitled investors is defined in the relevant treaty, and whether the investment treaties, which could potentially be relied upon grant similarly, advantageous protections to the treaty that the first that the gate investor would like to rely on.

Emma Johnson:

So if you have got a shareholder somewhere in your chain of ownership, that has the nationality of a non-EU member state, and that state has a BIT with the EU member state in which the investment is located, or both states are party to a multilateral treaty, such as the ECT, then it might be that you set up your dispute with a different investor, so to speak, to avoid the intra-EU dispute categorization coming to light. Where that isn't an option and where ICSID Arbitration is not an option under the treaties that are in place, then it may be that European investors with investments in the EU have no option, but to try their look under an existing intra-EU treaty. But as Tom said at the start, various member states have signed up to that 2019 declaration that they're going to terminate their intra-EU BITs.

Emma Johnson:

So unless there's a provision in those treaties, that means that they remain in force for a period after termination, known as a Sunset Clause, that's likely to provide little help, at least in the longer term. Of course, there's no binding system of precedent in international arbitration. And so it may well be that different tribunals under different treaties reach completely different conclusions to what we've seen up until this point in time. And certainly we have seen instances of particular arbitrators being reluctant to follow, Achmea, Komstroy up until this point in time.

Emma Johnson:

But I think, practically speaking, even if subsequent tribunals do come to different conclusions, it's probably reasonable to expect that the state party where it's a EU member state is going to seek to rely on these developments, and to challenge admissibility and jurisdiction during the course of the arbitration, to challenge the award if one is issued against it, to resist enforcement if that is what the counterparty seeks to achieve. So all of this really does mean some uncertainty for investors, and the potential that they embark on a cause of action, which ultimately leaves them with a piece of paper, the tribunal's decision, that they can't do anything with, they can't convert into the compensation that they were ultimately seeking to recover.

Matt Harnett:

Tom, Emma just mentioned that investors could look to see whether there is another entity at the ownership chain that has nationality of a non-EU state, with which there is an investment treaty with the EU host state, as a means of taking the investor and its investment outside of the scope of these recent decisions. Where there isn't an individual or entity in the ownership chain with a nationality that would help for this purpose, could one be inserted? Could the investment be restructured to ensure that a treaty between an EU state and a third state could be relied on, rather than the relevant intra-EU treaty?

Tom Cummins:

Yeah, it's the obvious question to ask isn't it, Matt? And I think the answer is in theory, yes, a restructuring could take place to ensure that the investor can rely on a BIT or the ECT with the nationality of a non-EU member state. However, I think we should stress that restructuring for investment treaty protection isn't straightforward. And it's likely that if a restructuring exercise is brought to the attention of a state, then the state will criticize that, and it will seek to challenge an investor in any arbitration on the basis that the restructuring is an abusive process.

Tom Cummins:

And if that line of reasoning were to be accepted by an arbitral tribunal, then that would be a defense, which would result in the tribunal dismissing the claims made. How likely is it that such a defense would succeed? That really depends on the question of whether the dispute that is the subject of the arbitration was foreseeable at the time that the restructuring was carried out. And of course, that's a very fact dependent question, and the analysis is unlikely to be straightforward. So I think the advice would always be for investors who are contemplating doing this to speak to their legal advisors before embarking on a restructuring, just to ensure that it is done in a way that is most likely to permit the investor to be in a situation and arbitration where jurisdictional admissibility is upheld.

Tom Cummins:

For example, if you have a restructuring, which is done in order to take advantage of investment protection and the dispute that gives rise to the arbitration is already starting to crystallize, then that may well be seen as an abusive process. And there are many instances where tribunals have refused to take jurisdiction or have said that claims are not admissible as a result of that. So ideally what investors do is, they think about investment treaty protection and the way in which holding companies or entities of different nationalities are inserted in the structure at the outset of the investment, although of course, this isn't always possible. There may be other factors that make it challenging to insert particular companies into a structure.

Matt Harnett:

Okay. And Emma, what about investors that have British nationality? Are there any better off post Brexit? I mean, I suppose what I'm really asking is whether they're immune from tribunals, following the Achmea, Komstroy and Green Power reasoning, given that the UK is now out the EU. And so UK investors no longer have the nationality of an EU member stage.

Emma Johnson:

I think potentially that category of investors are better off. Yes. So as you say, the UK is no longer part of the EU. And so investment arbitrations commenced by UK based or UK nationality investors under BITs with EU member states. They're not that they're not going to be intra EU arbitrations. They should be immune from the line of reasoning that was adopted in Achmea construing Green Power. Tom mentioned that the 2019 January declaration, and that the UK had signed that because at the time it was an EU member state. And the fact that one of the commitments in that declaration was that the UK would terminate its intra-EU BITs. That hasn't happened. The UK hasn't started to terminate its investment treaties, but the relevant point really is that there are only a very small number of intra-EU BITs in place anyway.

Emma Johnson:

So query really what treaties investors with English nationality could point to. You've then got the position under the ECT and who knows really what the EU would do if a tribunal granted relief in a net investment arbitration under the ECT that was started by a UK investor. There's been some attempt recently by the EU to hold the UK to its previous promises. There's been notification of infringement proceedings by the European commission in May 2020, and the issuing of a reasoned opinion in October 2020, in relation to the UK's failure to terminate its intra EU BITs is at the point in time when it was bound by EU law. So it's failure to terminate those treaties before Brexit, but there's been nothing further. There's been no follow up on those initial steps and no referral of a case to the CJEU.

Emma Johnson:

So it's certainly not inconceivable that tribunals will entertain claims by British investors against EU member states, only for those states in turn to seek to challenge jurisdiction, set aside awards re enforcement and, or for the EU itself to intervene and make submissions. And of course, to the extent that claims are brought into the ECT, it's probably also worth being aware of the fact that treaty is subject to a modernization exercise at the moment. And that exercise is also likely to result in some significant amendments to the scope of the treaty, which investors may find further narrows their ability to succeed in claims against EU member states.

Matt Harnett:

So on that, Tom, what is happening to the ECT? What's likely to change and how will it impact investors?

Tom Cummins:

Yeah, Matt, I think it is vital that we cover this topic because it's potentially significant for investors. It is a very interesting manifestation of the way in which the energy transition is flowing through into legal instruments and treaties. This modernization process of the Energy Charter Treaty has been ongoing since November 2017. And back then 53 states, which were parties for the treaty, they agreed that it needed to change. And in particular, they said "The treaty has to deal with the fact that it's offering significant protection to fossil fuel investors, but it doesn't cover a number of renewable energy and emerging technologies, since we have this big push across the world, really, but certainly the European Union to modernize and to green energy supply."

Tom Cummins:

Now, formal negotiations to give effect to those changes began in July of 2020. And on the 24th of June 2022, the Energy Charter secretariat announced a number of modernizations and changes. And what happens next is that a draft text is going to be circulated by the 22nd of August 2022 for adoption by the Energy Charter Conference later in the year, in November of 2022. The process is quite complicated, a lot of detailed changes to the mechanics of the treaty, but the most significant changes that have been announced include wording, which makes clear that intra-EU investment claims will not be possible under the Energy Charter Treaty.

Tom Cummins:

So picking up this theme that we've been discussing in the podcast. Secondly, there are updates being made to the treaty, to the list of energy materials and products, which is the list of things that can benefit from Energy Charter Treaty investment protection. That is being updated to bring within scope emerging technologies like hydrogen, biogas, biomass power generation.

Tom Cummins:

And finally there is a right, going to be inserted in the treaty, which enables contracting parties to exclude investment protection for fossil fuel investments. So practically speaking, I think this means that the Energy Charter Treaty will now formalize the position taken by the court of justice, the European union in Komstroy case. And of course the SCC tribunal in the Green Power case that we were looking at earlier. This is only going to make it more difficult for European investors to succeed in Energy Charter Treaty arbitrations against EU member states.

Tom Cummins:

And I think more generally these developments mean that states might seek to claw back investment protections that were previously offered to investments in the fossil fuel industries. So it may be that irrespective of nationality and these intra-EU arguments. Investors in the European fossil fuel industries may find themselves without the ability to bring ECT claims in the future.

Matt Harnett:

Thank you Tom and Emma. Unfortunately, that's all we have time for today. This is clearly a fast moving area, fraught with uncertainty and something anyone interested in knowing more about should speak about directly with you. You'll find our details on the Ashurst website, Ashurst.com. We're be back again soon with another topical installment of the podcast in energy resources [inaudible 00:30:30], but until then, back to listening and goodbye for now.