EU highest court declares intra-EU disputes under the Energy Charter Treaty incompatible with EU law

Executive Summary

• On 2 September 2021 the Court of Justice of the European Union (CJEU) in Komstroy v Republic of Moldova decided that investment arbitrations brought under the Energy Charter Treaty (ECT) by investors of an EU Member State against another EU Member State are incompatible with EU law;
• The Komstroy decision seeks to extend the scope of the previous Achmea decision, which declared that EU law precludes intra-EU arbitrations based on bilateral investment treaties between two EU Member States (intra-EU BITs), also to the ECT;
• This should not have a major impact on the current status of intra-EU ECT arbitrations brought under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID), which are in principle not affected by EU law and its developments. Yet, the Komstroy decision may further decrease the chances of successful enforcement of any resulting award within the EU;
• Non-ICSID intra-EU ECT arbitrations seated in the EU are, on the other hand, more likely to be affected by this development either in the course of the arbitration itself or in subsequent annulment proceedings.   

The Komstroy decision by the CJEU 

The proceeding before the CJEU originates from the request of a preliminary ruling by the Paris Court of Appeal under Article 267 of the Treaty on the Functioning of the European Union (TFEU) in the context of the set aside proceeding of the ECT award in Energoalliance (now Komstroy) v the Republic of Moldova. The CJEU was asked whether under EU law the scope of the definition of protected investments under the ECT could also extend to credits arising from commercial transactions. Although neither the Paris Court of Appeal nor Komstroy or the Republic of Moldova requested the CJEU to rule on the intra-EU applicability of the ECT, the EU Commission as well as a number of EU Member States did so.

Earlier this year the Advocate General Maciej Szpunar had already issued his opinion that the ECT did not apply to intra-EU disputes. The CJEU followed the Advocate General’s approach.

In a rather short decision the CJEU essentially extended the scope of its previous ruling in Slovakia v Achmea of March 2018 to the ECT. In its Achmea decision, again in the context of a preliminary ruling incidental to an annulment proceeding, the CJEU decided that arbitration clauses included in intra-EU BITs were incompatible with Articles 267 and 344 of the TFEU. The court reasoned that so-constituted arbitral tribunals, despite being unable to seek preliminary rulings from the CJEU, might be called to apply or interpret EU law thus jeopardising the uniform application of EU law and the autonomy of its legal order.

In the very same vein, the CJEU now clarified that the same reasoning also applies to intra-EU ECT arbitrations. This was notwithstanding the fact that the Achmea decision appeared to draw a distinction between bilateral treaties which the EU is not party to (ie the intra-EU BITs) and multilateral treaties to which the EU is also a party (ie the ECT). The Komstroy decision  ignored this distinction completely.

As in the Achmea decision, the CJEU did expressly carve-out commercial arbitration. It follows that intra-EU commercial arbitrations (including those with states or state-owned entities) should remain unaffected by the Komstroy decision.  

Potential consequences on pending and concluded intra-EU ECT arbitrations 

The Komstroy decision will certainly be relied upon by respondent EU Member States involved in ECT arbitrations brought by EU investors to strengthen their attempt to have the relevant claims dismissed, either by objecting to the jurisdiction of the arbitral tribunal, seeking annulment of awards or resisting their enforcement. Yet, the actual legal effects of the CJEU’s decision on pending and concluded intra-EU ECT arbitrations are likely to depend on their specific circumstances.

ICSID arbitrations and awards

The effects of the Komstroy decision on ICSID arbitration proceedings and awards should in principle be minimal. Arbitrations brought under the auspices of the ICSID Convention and their resulting awards are creatures of international law and are part of a self-contained legal system. Their existence and legitimacy are independent from any national legal order, which should also include EU law. ICSID arbitrations have no arbitral seat linking them to any specific jurisdiction. EU law and its developments thus should in principle not affect ICSID arbitrations. Indeed, despite the Achmea decision, all ICSID arbitral tribunals in intra-EU BITs arbitrations have upheld their jurisdiction over intra-EU claims. It seems therefore reasonable to expect a similar outcome for all pending ICSID intra-EU claims brought under the ECT.

Enforcement of intra-EU ICSID awards rendered under the ECT within the EU already involved significant risks, mainly related to possible refusal of enforcement by domestic EU courts on public policy grounds. After the Komstroy decision this risk is certainly enhanced. Extra-EU enforcement remains the most advisable option where available. A number of judicial decisions in the UK, the US and Australia provide comfort as to the irrelevance of EU law (and its developments) in enforcement proceedings outside the EU. It will be of great interest for intra-EU investors to see to what extent US and other non-EU courts will take the Komstroy decision into consideration in the various pending enforcement proceedings of intra-EU ECT awards.

Non-ICSID arbitrations and awards

Pending non-ICSID intra-EU ECT arbitrations (eg ad hoc arbitrations as well as arbitrations conducted under the rules of UNCITRAL or the Stockholm Chamber of Commerce) seated in the EU will likely be affected by the Komstroy decision. These arbitrations, unlike ICSID ones, are grounded on the domestic jurisdiction of their seat. Thus, ECT arbitrations seated in the EU are – procedurally – subject to the domestic law of the EU Member State and, in turn, to EU law. Domestic courts are competent to hear applications to set aside awards so rendered. Following the Komstroy decision, EU claimant-investors in these arbitrations are at greater risk of either failing to establish jurisdiction over their intra-EU claims or seeing their awards be annulled in set aside proceedings.

Concluded arbitrations, where the time limit to seek the award’s annulment has elapsed already, may nevertheless escape from the effects of the Komstroy decision if enforcement of the relevant award is sought outside the EU.