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

Executive summary

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

The legal background to the intra-EU objection

In 1994, the EU and its Member States – together with almost other 40 countries around the world – signed the Energy Charter Treaty (ECT). One of the main purposes of the ECT – concluded in the aftermath of the collapse of the Soviet Union – was to establish open and non-discriminatory energy markets, thereby fostering capital flows in the energy sector. Notably, the ECT incorporated investment protection provisions as well as – in its Article 26 – a standing offer to arbitrate investment disputes between States and foreign investors. This has made the ECT the most relied upon investment protection treaty around the world.

One of the first intra-EU arbitrations dealing with the so-called intra-EU objection was initiated in 2008 by Belgian investor Electrabel against Hungary (which had in the meantime acceded to the EU) and arose out of the termination of a power purchase agreement. Already then, the EU Commission as well as respondent EU Member States have argued (albeit inconsistently) that Article 26 of the ECT was inoperative between EU investors and EU Member States. In other words, the ECT would not contain a valid offer to arbitrate intra-EU disputes.

More than ten years later the Court of Justice of the European Union (CJEU) upheld this position with three landmark decisions from an EU law perspective:

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

Notwithstanding the case law of the CJEU, ECT investor-State tribunals had so far consistently dismissed EU Member States’ jurisdictional objections, on the ground – among others – that arbitral tribunals derive their legitimacy from the ECT, an international treaty operating in the realm of public international law – and not from the EU legal order. They were thus not bound by the CJEU’s decisions.

The Green Power v Spain decision

In Green Power v Spain, which involved a claim brought by a Danish investor over Spain’s repeal of its renewable energy incentive scheme, the arbitral tribunal reached – for the first time – a different conclusion. It held that Article 26 of the ECT does 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, ie Article 26 of the ECT, and (ii) the ECT as a whole.

With respect to the law applicable to jurisdictional issues, however, the tribunal concluded that EU law applies to the determination of the tribunal’s power to decide the dispute. It did so based on the specific characteristics of the arbitration at hand, a Stockholm-seated arbitration conducted under the arbitration rules of the Stockholm Chamber of Commerce (SCC). Absent 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 looked at the Swedish Arbitration Act, as the relevant default rule on procedure by virtue of the seat of arbitration being Stockholm. Article 48 of the Swedish Arbitration Act indeed provides that absent an agreement of the parties on the law applicable to the arbitration agreement, the arbitration agreement shall be governed by the law of the seat of arbitration. In the Green Power 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 consistently been held by all previous ECT tribunals, it concluded that the treaty itself required that account be taken of EU law. As the tribunal put it: one “must overcome the binary logic of an either ‘insider’ or ‘outsider’ perspective”. It reached this conclusion based on the following elements, which – in the eyes of the tribunal – acknowledge and incorporate EU law into the ECT:

• certain ECT provisions including the definition of “Contracting Party”, “Regional Economic Integration Organisation”, “Area of a Contracting Party” as well as Article 25 of the ECT on economic integration agreements;
• related instruments made in connection with the conclusion of the ECT, including the EU’s Declaration 5 to the Final Act of the European Energy Charter Conference (referring to the EU’s economic integration process) as well as the statement by the EU, opting-in to the ECT fork-in-the-road provision; and
• subsequent agreements and practice, in particular the declaration made by most EU Member States (including Spain – as the respondent State – and Denmark – as the investor’s home State) on the legal consequences of Achmea, as well as the separate declaration of five EU Member States (including Sweden, relevant as the seat of the arbitration in this case).

Having established the relevance of EU law in determining its jurisdiction under the ECT, the tribunal then relied upon the CJEU’s decisions in Achmea, Komstroy and PL Holdings to 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 thus denied.

What’s next?

The Green Power decision appears to have been mainly driven by the specific factors of the case at hand, ie an SCC arbitration seated in the EU. The tribunal’s finding that EU law applies to issues concerning its jurisdiction is indeed strictly circumscribed on its conclusion that – absent any agreement between the parties – the Swedish Arbitration Act demands 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 seated outside the EU (eg in Switzerland or the United Kingdom) or to ECT arbitrations brought under the auspices of the ICSID Convention. As repeatedly stressed by the Green Power tribunal, ICSID arbitrations are altogether different, insofar as they are creatures of international law bearing no connection to any domestic jurisdiction. They have no seat and no lex arbitri. ICSID arbitrations and awards should therefore, in principle, remain immune from the Green Power tribunal’s reasoning.

However, the tribunal’s discussion concerning the ECT’s acknowledgment and incorporation of EU law stands in contrast with the jurisprudence constante developed by previous investor-State tribunals and it is to be expected that EU Member States may seek to replicate the arguments to object to ECT tribunals’ jurisdiction in intra-EU disputes, including in an ICSID context. In any case, it remains to be seen whether other ECT tribunals, ICSID or non-ICSID, will now turn to seek guidance from the Green Power decision. The conflicts between EU law and the ECT remain unsolved.

In the meantime, it was announced last week that ECT Contracting States reached an agreement in principle on a revised ECT text. This concludes a five-year negotiation process. Among the most significant amendments, the revised text includes a provision precluding the ECT arbitration clause from applying intra-EU. Once the new text enters into force – in 2023 at the earliest – the ECT will no longer serve as a basis for intra-EU arbitrations. Proper investment structuring to secure treaty protection of investments made within the EU (eg through UK subsidiaries) will therefore become paramount.