Spain and other EU member states announce their withdrawal from the ECT: what are the implications for investors and arbitrations?

In early October 2022, Spain’s Minister for Energy and Ecological Transition announced the country’s intention to withdraw from the Energy Charter Treaty (ECT). This development comes in the context of similar announcements and formal steps recently taken by a number of EU Member States planning to withdraw from the treaty. Poland’s lower legislative house has recently adopted a draft law on the country’s unilateral withdrawal from the ECT (with approval from its upper house still pending), allegedly grounded on the treaty’s incompatibility with EU law. France and the Netherlands have also announced their intended exit. While the European Commission is currently pushing for acceptance of a modernized ECT, with a decisive vote scheduled for late November 2022, media reports claim that some countries are organizing a mass EU withdrawal from the treaty.

The stated reasons behind Spain’s disengagement appear to be discomfort with the results of the ECT modernization process. According to the Spanish Minister for Energy and Ecological Transition, the revised ECT text is not sufficiently aligned with the Paris Agreement, which mandates a reduction in countries’ carbon footprint and the implementation of significant changes to make their infrastructure more sustainable. However, another persuasive reason probably lies in the multiple arbitration claims (55 reported cases to this date, 51 of them under the ECT) brought by foreign investors against Spain in recent years following the country’s repeal of its renewable energy incentive scheme between 2010 and 2014.    

How did we get here?

The ECT was signed in 1994 by the EU and its Member States and almost 40 other countries around the world, with membership growing to over 50 contracting parties as of today. The ECT sought to establish open and non-discriminatory energy markets, promote international cooperation and foster capital flows in the energy sector. The treaty incorporated substantive investment protection provisions similar to those typically found in BITs. Of note, it also included in Article 26 a standing offer to arbitrate investment disputes between states and foreign investors under the ICSID Convention and Rules, the UNCITRAL Rules, or the Stockholm Chamber of Commerce (SCC) Rules.

The evolution of the ECT and intra-EU arbitrations

Following the ECT’s entry into force, and especially during the last decade, EU Member States have increasingly found themselves acting as respondents in investment arbitrations brought under this treaty (150 cases to date, of which 117 have been initiated since 2012). A large portion of these disputes have arisen out of changes in countries’ regulatory regimes governing renewable energies. Spain, for example, has been a respondent in 51 cases under the ECT, following its repeal of its renewable energy incentive scheme in the early 2010s. In fact, the ECT now ranks as the investment protection treaty that has been most relied upon in investment arbitrations.

In parallel, and as a consequence of this considerable increase in investment claims brought against EU Member States, the ECT has also been at the forefront of a protracted legal saga regarding the compatibility of intra-EU arbitrations under the treaty with EU law. For over ten years, the EU Commission as well as respondent EU Member States have been arguing that Article 26 of the ECT is inoperative between EU investors and EU Member States. The contention is that the ECT does not contain a valid offer to arbitrate intra-EU disputes due to incompatibility with EU law. This argument is commonly known as the “intra-EU objection”.

From 2018 onwards, the Court of Justice of the European Union (CJEU) has upheld this position with the landmark decisions Slovakia v Achmea (2018), Moldova v Komstroy (2021), and Poland v PL Holdings (2021). This string of decisions has established that arbitration agreements enabling investment arbitrations between EU investors and EU Member States, whether contained in an intra-EU BIT, the ECT, or a tacit ad hoc agreement, are incompatible with EU law.

Until recently, investment tribunals in intra-EU arbitrations had consistently rejected the intra-EU objection raised by respondent EU Member States. In February 2020, for the first time, in Theodorus Adamakopoulos and Others v Cyprus, a dissenting arbitrator opined that jurisdiction under an intra-EU BIT should be declined (Greece – Cyprus BIT and Cyprus – BLEU BIT). In June 2022, the tribunal in Green Power v Spain, a case brought under the ECT, was the first to fully uphold an intra-EU objection, in this case raised by Spain. The tribunal relied upon EU law and the CJEU’s decisions in Achmea, Komstroy and PL Holdings to deny jurisdiction. As reported separately, the Green Power arbitration was conducted under the SCC rules and seated in Stockholm. The tribunal’s reasoning was based on the applicability of EU law to issues concerning its jurisdiction, as it was seated in the EU. Accordingly, the Green Power tribunal’s reasoning would, in principle, not apply to ECT arbitrations seated outside the EU or to ECT arbitrations conducted under the ICSID Convention, which are not connected to any domestic jurisdiction, as they are delocalized. In October 2022, the tribunal in Portigon v Spain, an intra-EU ICSID case brought under the ECT, issued a decision on Spain’s request for reconsideration of the intra-EU objection in light of the CJEU’s Komstroy decision, with a tribunal majority deciding to confirm its previous dismissal of Spain’s intra-EU objection.[1]   

The ECT modernization process

The modernization process of the ECT was driven by a paradigm shift. For the first time, treaty claims were being brought against European states. Criticism began to flow in all directions. Some argue that the ECT was signed in a context where energy needs were very different from today. However, more generally, the underlying issue that justified a review of the text, was that the ECT limits states' capacity to legislate on key issues such as the promotion of energy transition and the development of social policies to reduce energy poverty.

A modernization process for the treaty was launched in 2017 and concluded in June 2022 when the Energy Charter Conference Member States reached an agreement in principle regarding a revised text of the ECT. The revised ECT text, together with a series of changes to other instruments, will be subject to a vote at the 33rd meeting of the Energy Charter Conference on 22 November 2022.

Among other amendments, the revised ECT text modifies the definitions of protected investment and investor, as well as the provisions establishing substantive protections, seemingly aiming to exclude certain types of activities and government measures from potential claims. Also of note, the revised text allows contracting states to exclude investment protection for fossil fuels in their territories. The EU, for example, has decided to phase out the protection of existing investments in fossil fuels over a transition period of 10 years and to exclude protection altogether for new investments.

Another significant amendment is a provision precluding the ECT arbitration clause from applying intra-EU. This means that 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. In addition, the EU Commission is proposing the adoption of a separate agreement between the EU, Euratom, and the EU Member States confirming that the ECT does not apply intra-EU, that it cannot serve as a basis for intra-EU arbitration proceedings, and that the sunset clause does not apply intra-EU.

Next steps

Withdrawal according to the ECT and Spanish law

States wishing to withdraw from the ECT must submit formal notification to the Depositary (as defined in Article 47 ECT). Withdrawal will not take place until one year after receipt of the notice or on a date specified in the notice, if later. The applicability of the treaty and, consequently, its protections over existing covered investments will remain effective for a further 20 years (Article 47.3 ECT). This means that contracting parties that withdraw from the ECT are bound by its provisions regarding existing investments for 21 years in total as from the date the Depositary receives the notification, or, if falling later, 20 years from such date as may be set out in the withdrawal notification.

In any case, the next steps to be taken internally in Spain to enable its withdrawal from the ECT are yet to be announced by the government. Under Spanish law, the procedure for denunciation or withdrawal from international treaties is the same as for their approval, which requires prior authorization from the Spanish Parliament (Cortes Generales) (Articles 94 and 96 of the Spanish Constitution).

At the time of writing there are no public reports of the government having initiated this procedure before Parliament, and the Depositary of the ECT has not received any formal notification from Spain. This means that an exit is by no means close.

What are the implications of Spain’s withdrawal for investors and arbitrations?

If the withdrawal process is duly completed, current arbitration proceedings against Spain should not be affected. In the same line, the protection granted to existing investments should not be affected by Spain’s withdrawal (if concluded). This is because the sunset clause of the ECT grants protection to investments already made in the territory of a withdrawing contracting party for a further 20 years. However, intra-EU proceedings seated in the EU may be affected following the recent Green Power v Spain decision, the first to uphold the intra-EU objection. By contrast, claimants in intra-EU proceedings seated outside the EU or arbitrations under the ICSID Convention may be more successful in overcoming intra-EU objections from respondent states.

At the end of the day, enforcing or monetizing any award remains key for prospective and actual claimants, and recent developments show potential options for pursuing enforcement outside the EU. For example, a recent decision by the US Court of Appeals for the DC Circuit may prove helpful to parties seeking to enforce intra-EU awards. The Federal Court of Australia has also allowed the recognition of an ICSID award despite Spain’s argument based on the non-arbitrability of intra-EU disputes under the ECT. Investors conducting business in countries that are parties to the ECT should carefully assess their treaty protection to ensure adequate options both for potential arbitrations and enforcement of a potential award.

Another potential scenario worth highlighting is the approval of the European Commission’s proposal of a separate agreement between the EU, Euratom, and the EU Member States confirming that the ECT does not apply intra-EU, and that the sunset clause does not apply intra-EU. It would remain to be seen how investment tribunals in intra-EU arbitrations would assess this agreement.

From a respondent state perspective, any contracting party that exits the ECT would not avoid facing new claims. This has been the case with Italy, which withdrew from the treaty in 2016 and has since received 7 [known] treaty claims. Those investors who made qualifying investments before Italy’s withdrawal took effect in January 2016 enjoy the protections of the ECT for 20 years thereafter i.e., until January 2036. For example, in August 2022, Italy was ordered to pay EUR 190m plus interest to Rockhopper Explorations – a UK oil and gas company.

Conclusion 

Following the announcements from Spain, France, and the Netherlands, it remains to be seen whether other states follow this ECT withdrawal trend in a domino effect, or they remain in the renegotiation process. The Spanish exit is far from being settled and the revised version of the ECT has not been approved yet. Although established energy investments seem not to be at risk at this stage, we encourage you to consult your Freshfields contact to discuss your particular situation. What is clearer than ever though is that proper investment structuring to secure treaty protection of investment within the EU is key.

[1]  The dissenting arbitrator opined that the tribunal lacked jurisdiction altogether as the ECT is not applicable in intra-EU disputes.