Yes, the Achmea and Komstroy judgments provide new insights that can strengthen Spain’s defense in ECT-based arbitration cases. These insights revolve around jurisdictional challenges, the interplay between EU law and the ECT, and enforcement strategy. Here’s how Spain can leverage these arguments:
1. Strengthened Jurisdictional Objections (Intra-EU Disputes)
- EU Law Supremacy:
Spain can argue that, per Achmea and Komstroy, the ECT’s arbitration clause (Article 26) is inapplicable to disputes between EU Member States. These judgments confirm that such arbitration undermines the autonomy of EU law.- Komstroy explicitly extends the Achmea reasoning to the ECT, reinforcing Spain’s objection to arbitral tribunals’ jurisdiction over intra-EU disputes.
- Binding Precedents for EU Courts:
Spain can invoke these rulings in EU Member State courts to challenge the validity of arbitral awards, aiming to have them annulled or enforcement denied based on incompatibility with EU law.
2. Public Policy Defense in EU Courts
- Public Policy Exception:
When opposing enforcement of awards in EU courts, Spain can argue that enforcing such awards violates the public policy of the EU, as it conflicts with the fundamental principles of EU law established in Achmea and Komstroy. - State Aid Rules:
Spain could further argue that compensatory payments ordered by arbitral awards may constitute unlawful state aid under EU law, providing additional grounds to resist enforcement.
3. Fragmentation of Enforcement Landscape
- Inconsistency Between EU and Non-EU Jurisdictions:
Spain can highlight the legal uncertainty caused by the divergence between EU and non-EU courts on ECT enforcement.- Within the EU, courts have invalidated or refused to enforce awards based on the Achmea and Komstroy rulings.
- Outside the EU, courts (e.g., U.S., Switzerland, UK) often disregard these rulings, prioritizing the ECT and ICSID Convention over EU law.
- Strategic Litigation:
Spain can strategically focus on contesting enforcement in EU jurisdictions, where the Achmea and Komstroy rulings are more likely to be respected. This approach could reduce Spain’s financial exposure.
4. Reframe Energy Reforms as Necessary and Lawful
- Aligning with EU Directives:
Spain should stress that its energy reforms were undertaken to comply with EU climate and energy goals, such as the Green Deal and Paris Agreement. This strengthens its argument that the reforms were not arbitrary but necessary to fulfill legal obligations. - Proportionality and Public Interest:
Reiterate that the regulatory changes were proportionate responses to economic crises and the need to ensure sustainable energy policy, aligning with EU principles.
5. Push for Unified EU Position on ECT Withdrawal
- Leverage EU’s Coordinated Withdrawal:
Spain can argue that its withdrawal from the ECT, alongside other EU Member States, reflects a consensus that intra-EU disputes should be resolved within the EU legal framework. This bolsters Spain’s stance that arbitration under the ECT for intra-EU cases lacks legitimacy.
Conclusion
Spain’s defense gains significant strength from the Achmea and Komstroy judgments, particularly in intra-EU disputes. By focusing on jurisdictional challenges, public policy defenses, and alignment with EU climate goals, Spain can effectively limit its liability and challenge enforcement within the EU. However, Spain must remain cautious about enforcement risks in non-EU jurisdictions and tailor its strategy accordingly
Komstroy and its impact on intra-EU arbitration under the ECT
In September 2021, the CJEU in Komstroy v Moldova directly addressed the question of intra-EU disputes under the ECT for the first time. This post will examine the implications of that decision for intra-EU arbitrations in light of recent ICSID cases that have addressed the issue.
The CJEU’s decision in Komstroy
In Komstroy, a Ukrainian company brought an arbitration against the Republic of Moldova under the ECT, and an award was rendered in favour of the claimant in an arbitration seated in France. Moldova sought to set aside the award under the French Code of Civil Procedure on the basis that the dispute did not involve an “investment” within the meaning of the ECT. The French courts referred the dispute to the CJEU for a preliminary ruling on that issue, among others.
Although the issue of whether the arbitration mechanism under article 26 of the ECT is applicable to intra-EU disputes was not directly referred to the CJEU, the CJEU nevertheless took the opportunity to address the question. It observed that since the ECT is an act of EU law, an arbitral tribunal constituted under article 26 may be required to interpret, and even apply, EU law in a dispute. However, such a tribunal is not located within the judicial system of the EU, and awards rendered under article 26 are not subject to review by a court of a member state. This means that the questions of EU law involved in such a dispute cannot be submitted to the CJEU for a preliminary ruling, and so the full effectiveness of EU law would not be guaranteed.
On that basis, the CJEU determined that, by providing for recourse to an arbitral tribunal to interpret EU law outside of the EU legal order, article 26 of the ECT is not compatible with EU law. Therefore, the dispute resolution mechanism under the ECT cannot apply within the EU legal order. The fact that the ECT is a multilateral investment treaty rather than a bilateral one made no difference to this conclusion.
In adopting this approach, the CJEU has essentially clarified that its reasoning in Achmea also applies to intra-EU investment arbitration under the ECT, which many have long suspected would be the case.
Implications of Komstroy on intra-EU ECT arbitrations
That said, does the confirmation in Komstroy that the Achmea reasoning applies to multilateral investment treaties like the ECT mean that ECT tribunals will now be more likely to decline jurisdiction to hear disputes between EU investors and an EU member state?
To date, two ICSID tribunals in particular have substantively considered this question: Infracapital F1 Sarl v Spain and Kruck v Spain. These cases were determined in a context where the tribunals had already issued decisions on jurisdiction based on an intra-EU objection prior to Komstroy, and Spain was seeking to re-open the decisions on the basis that Komstroy should be taken into consideration. Both tribunals rejected the argument that Komstroy should be a basis for declining jurisdiction under the ECT. In doing so, they pointed to a number of key reasons not to apply the CJEU’s reasoning in Komstroy to each case.
First, it is international law, not EU law, that applies to determine a tribunal’s jurisdiction. Under the principles of international law, the express words of the ECT cannot have different meanings as between different configurations of EU and non-EU contracting parties and their investors. The CJEU’s premise that there should be separate treatment for intra-EU disputes and non-intra-EU disputes is unsupported by the provisions of the ECT and its objectives.
Second, where the claimant has a right to arbitration under the express terms of the ECT, nothing in the ECT gives a tribunal the authority to disregard or modify the explicit provisions of the ECT and decline jurisdiction on the basis of a contracting party’s obligations under a different legal order. Komstroy can therefore have no relevance in determining the question of jurisdiction.
Third, both the EU member states and the EU itself have acceded to the ECT. When they did so, they could have made special provision for intra-EU disputes, but did not do so. Accordingly, the contracting parties did not provide arbitral tribunals with any legal basis for refusing to interpret and apply the ECT in accordance with its plain terms.
Fourth, it would be improper to remove the tribunal’s jurisdiction to decide the claimants’ claims based on the Komstroy judgment when the judgment was issued several years after the claimants had filed their request for arbitration. Given the perfection of Spain’s consent to arbitration prior to Komstroy, that consent cannot be retroactively invalidated.
Questions left open
The contrasting positions of the CJEU in Komstroy and the tribunals in Infracapital and Kruck leave some key questions open, including in particular:
Are future arbitral tribunals likely to continue the trend set by Infracapital and Kruck by exercising jurisdiction over any new proceedings post-Komstroy?
If tribunals do adopt this approach, will Komstroy make it more difficult to enforce an intra-EU ECT award within EU Member States, now that the CJEU has pronounced an incompatibility of Article 26 of the ECT with the EU legal order?
The CJEU has ruled that intra-EU arbitration under the Energy Charter Treaty is incompatible with EU law. The decision, Moldova v. Komstroy, is consistent with the CJEU’s March 2018 ruling in Slovak Republic v. Achmea that arbitration clauses in intra-EU bilateral investment treaties are inconsistent with EU law.
- The CJEU also held that the debt derived from an electricity supply contract at issue in Komstroy did not constitute a protected “investment” for purposes of the ECT.
- Investors can now expect further Achmea-based objections to jurisdiction of intra-EU ECT tribunals and enforcement of intra-EU ECT awards.
On September 2, 2021, the Court of Justice of the European Union (the “CJEU”) ruled in Moldova v. Komstroy that the investor-State dispute settlement mechanism in Article 26 of the Energy Charter Treaty (“ECT”) is incompatible with European Union (“EU”) law, insofar as it permits arbitration between EU investors and EU Member States. The CJEU adopted the same reasoning as its Achmea judgment concerning bilateral intra-EU treaties. The judgment is in line with the position of the European Commission and the majority of EU Member States and the opinion of CJEU Attorney General Szpunar, as we reported here and here. The CJEU also ruled that the investors’ debt claim under an electricity supply contract in the underlying arbitration did not constitute a protected “investment” under the ECT’s definition of the term.
Komstroy was one of several cases pending before the CJEU in which the Court was asked to determine whether intra-EU ECT arbitration is compatible with EU law. In arbitrations involving EU Member States and investors under the ECT, investors can now expect objections to the jurisdiction of arbitral tribunals and enforcement of the resulting arbitral awards.
Background to the Energoalians (now Komstroy) v. Moldova Dispute. Pursuant to contracts concluded in 1999, Ukrainian electricity producer Ukrenergo sold electricity to Ukrainian electricity distributor Energoalians, which resold it to a British Virgin Islands company, Derimen. Derimen in turn resold electricity to the Moldavian public company Moldtranselectro. In 2000, Derimen sold its claim to payment from Moldtranselectro back to Energoalians. Moldtranselectro failed to pay in full, and Energoalians eventually commenced arbitration proceedings against Moldova under the ECT.
In October 2013, a Paris-seated tribunal found (by majority) that Moldova had breached the ECT and ordered Moldova to pay damages to Energoalians. Moldova sought to set aside the award in the French courts, arguing that the tribunal lacked jurisdiction because there was no protected investment.
On 24 September 2019, the Paris Court of Appeal stayed the set-aside proceedings and referred three questions regarding the ECT’s definition of “investment” to the CJEU for a preliminary ruling. Although the case involved a non-EU investor and a non-EU respondent State, the European Commission and several Member States called on the CJEU to also rule whether, following its judgment in Achmea, intra-EU ECT arbitration was incompatible with EU law. The Commission, Spain, Italy, Germany, France, Poland and the Netherlands took the position that it was incompatible for the same reasons as in Achmea, while Hungary, Finland and Sweden argued that Achmea’s holding should not extend to the ECT (consistent with their January 2019 declaration, reported here).
Earlier this year, Attorney General Szpunar opined that the ECT was indistinguishable in material respects from the intra-EU bilateral investment treaty at issue in Achmea—even though the EU is itself a party to the ECT—and concluded that the investor-State arbitration mechanism in Article 26 of the ECT was detrimental to the autonomy of EU law and the principle of mutual trust between Member States (as we reported here). AG Szpunar also concluded that the commercial transaction at issue in the Komstroy case was not a qualifying investment for purposes of the ECT, including because it did not satisfy the ECT’s dual textual requirements of being “associated with an Economic Activity in the Energy Sector” and “pursuant to [a] contract having an economic value and associated with an Investment.”
The CJEU’s Judgment. The main takeaways of the CJEU’s judgment are as follows.
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- The CJEU has jurisdiction to interpret the ECT, even in a non-EU dispute. The CJEU rejected arguments by the Council of the EU and the Hungarian, Finnish and Swedish governments that it was not competent to rule in a non-EU dispute and held that it is competent to interpret all acts adopted by EU institutions, including international treaties such as the ECT. The Court added that, where a provision of an international agreement may apply equally to EU and non-EU law disputes, there is a clear interest in promoting that provision’s uniform interpretation, irrespective of the conditions in which it is applied, in order to avoid interpretive divergence.
- Intra-EU ECT arbitration is incompatible with EU law. The CJEU ruled that “the preservation of the autonomy and specific character of EU law” precludes the ECT from imposing obligations on Member States to arbitrate disputes with other Member State national investors. Referring to the Achmea judgment and AG Szpunar’s opinion, the Court concluded that Article 26 of the ECT was detrimental to the principle of autonomy of EU law because ECT tribunals cannot seek a reference from EU courts on the interpretation of provisions of EU law that they may be called upon to apply.
The Court drew a distinction with commercial arbitration on the basis that commercial arbitration derives from party autonomy rather than a multilateral (or bilateral) treaty. The Court further noted that compliance with EU law’s fundamental provisions may be examined in the context of limited court review of commercial awards and, where appropriate, the enforcing court could seek a CJEU reference for a preliminary ruling.
- No protected investment. The CJEU agreed with AG Szpunar that there was no protected investment under the ECT because the underlying supply contract from which the debt arose did not meet ECT Article 1(6)’s specific requirements that an asset be “associated with an Economic Activity in the Energy Sector” and that claims to money be “pursuant to [a] contract having an economic value and associated with an Investment.” In parallel, the EU has proposed amending the definition of “investment” under the ECT as part of the overall “modernization” of the treaty.
Implications for Investors. As they have done since the Achmea judgment, EU Member States will likely continue to make Achmea-based objections to arbitral tribunals’ jurisdiction under both ECT and intra-EU treaties. Arbitral tribunals overall continue to reject them, however. These opposing views are most likely to play out at the post-award stage, where the European Commission has been intervening to support requests for set-aside proceedings and oppose enforcement of intra-EU awards.
Accordingly, investors considering intra-EU arbitration, whether under the ECT or a bilateral treaty, may need to be ready to play the long game. At the same time, the EU and several Member States are pursuing various initiatives, especially in the renewable energy sector, aimed at creating a favorable investment climate and new investment opportunities. Appropriate investment structuring can maximize the availability of international arbitration for such projects despite the uncertainty that the Achmea and Komstroy judgments have created for intra-EU investors.