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At the Crossfire Between Energy Charter Commitments and EU Prohibitions

Diego Zannoni, Docente a contratto di Diritto dell’Unione europea, Università di Padova

Negli arbitrati in materia di energie rinnovabili incardinati ai sensi della Carta dell’e­nergia (TCE), gli Stati membri dell’UE fanno leva sugli obblighi loro incombenti e derivanti dai Trattati UE per eccepire il difetto di giurisdizione degli arbitri e per sviluppare le loro difese nel merito. L’argomentazione sostanziale paradigmatica fa leva sul fatto che il diritto dell’UE impone il recupero degli aiuti di Stato illegittimi. In tale contesto ci si propone di chiarire il rapporto esistente tra il principio del trattamento giusto ed equo di cui all’Articolo 10 TCE e il principio del legittimo affidamento che emerge dalla giurisprudenza della Corte di giustizia dell’UE, valutando altresì se siffatti principi possano o debbano coincidere. Saranno esaminati i metodi che potrebbero essere usati per superare le eventuali antinomie fra Carta dell’Energia e diritto dell’UE, tanto dai tribunali arbitrali quanto dai tribunali nazionali, in sede di revisione dei lodi emessi dai primi. Si accerterà quindi se gli sviluppi in atto a livello dell’UE saranno in grado di risolvere tali antinomie o, almeno, di mitigarle. Verrà infine proposto un diverso forum di risoluzione delle controversie in materia di investimenti, che potrebbe essere meglio coordinato con la struttura giuridica e giudiziaria dell’UE.

In renewable energy arbitrations under the Energy Charter Treaty, EU Member States invoke obligations under EU law as a jurisdictional or substantive defence. The paradigmatic substantive argument is that EU law mandates the withdrawal of illegal State aid in reliance on which an investor entered that market. In this context, the relationship between the fair and equitable principle under Article 10 ECT and the principle of legitimate expectations emerging from the case law of the ECJ will be clarified. It will further be assessed whether these two principles do or should coincide. This article examines the possible methodologies for addressing these tensions both in arbitral tribunals and in reviewing EU courts, and assesses whether the current developments taking place at EU level are capable of solving or at least mitigating them. A different investment dispute resolution forum will be proposed, which might be better coordinated with the EU legal and judicial structure.

KEYWORDS

Energy Charter – Renewable energy – Fair and equitable treatment – Interpretation in conformity – Legitimate expectation

Sommario:

I. Introduction - II. The 'lesser evil' solution to the conflict - III. The diversity-of-nationality requirement and the implicit disconnection clause - IV. The implications of EU law autonomy - V. The alternative paths available - VI. Ex post review of arbitral awards - VII. Does secondary EU law prevail over the ECT? - VIII. Interpretation of EU law in conformity with the Energy Charter and vice versa - IX. Towards a new investment dispute resolution forum for the ECT? - NOTE


I. Introduction

The rising costs to the State of supporting solar photovoltaic plants as a consequence of the so-called solar boom, and in tandem with a global financial crisis, have prompted some EU Member States to scale back their original investment incentives, both in terms of amount and duration. This has resulted in numerous arbitral proceedings where investors have claimed that such regulatory changes were in breach of the fair and equitable treatment standard afforded by the Energy Charter Treaty (ECT) [1]. Indeed, in arbitral practice, the fact that a State cannot generate legitimate expectations of a stable legal environment to induce investors to make an investment, and later ignore such expectations, is grounded on the fair and equitable treatment standard [2], often in combination with the international customary law principle of good faith [3]. The tribunal in CMS v. Argentina, for instance, observed that the stability of the legal and business framework is an essential element of fair and equitable treatment [4]. This is perhaps even more true for the investments protected by the ECT, because it expressly refers to the host State’s duty to create ‘stable’ and ‘transparent’ conditions for foreign investments, as well as to the «commitment to accord at all times […] fair and equitable treatment» [5] to such investments, giving particular weight to long-term stability. The EU Commission, along with intervening as amicus curiae in renewable energy arbitrations, and respondent States have nonetheless taken the position that regulatory changes, and the resulting deviations from the obligations established in the ECT, were needed precisely to comply with EU rules on State aids [6]. As long as incentives are qualified as prohibited State aid by the EU Commission, Member States’ domestic courts seized in connection with the enforcement of ECT awards in favour of the investors are faced with a dilemma. They are requested to enforce an award pursuant to an international commitment undertaken by the State but, in so doing, they breach EU law. In fact, the ‘damages’ to be awarded to the investor would de facto re-allocate the forbidden economic benefit to the enterprise and perpetuate the illegal distortion of the market [7]. Compliance with the award could prompt the EU Commission to initiate an infringement procedure [8]. [continua ..]

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II. The 'lesser evil' solution to the conflict

One may pragmatically argue that EU Member States would be better off if their domestic courts refused to execute an ICSID award in conflict with EU law [15]. After all, a claim for international liability for the breach of such a convention is unlikely to be raised, since the claiming State would be another EU Member State and would be prevented from doing so under EU law. Likewise, the remedy of diplomatic protection, which, pursuant to Article 27 par. 1 of the ICSID Convention, would be revived in cases of failure to abide by the award, is virtually ineffective for the same reason. On the contrary, any breach of EU law by a domestic court would entail a risk of sanctions under Art. 260 par. 2 TFEU and – under the Francovich-Brasserie du Pêcheur case law – liability claims against a Member State both by the EU for violation of EU law and by third parties allegedly injured as a result of illegal State aid having been granted. This is a much more substantial risk for a Member State than that of potential international litigation between Member States for breaches of ICSID. Clearly enough, such pragmatic proposal not to execute an arbitral award is not completely satisfactory. If the losing Member State has assets in a third country, which is not a member of the EU and therefore not bound to ECJ judgements, such assets could potentially be seized so that foreign investors could recover the compensation awarded by arbitral tribunals subject to the applicable rules relating to the immunity of foreign States [16]. Such development is already taking place in the case of the first arbitral award being annulled on the basis of the Achmea decision in Novenergia v. Spain [17]. At the same time, foreign investors could move their assets outside the territory of EU Member States in order to defend themselves from possible seizures or confiscation measures for the recovery of possible State aid by the defendant Member State, as required by the EU Commission.

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III. The diversity-of-nationality requirement and the implicit disconnection clause

To resolve a conflict between ECT and EU law, a first abstract solution is conceivable, namely, to argue that the ECT is upstream inapplicable to resolving intra-EU disputes. This is the position of both respondent States and the EU Commission, who has been intervening as amicus curiae in a number of arbitrations. Nevertheless, arbitral tribunals have so far always rejected such position, and retained their jurisdiction on the cases submitted to them from time to time [18]. Firstly, arbitral tribunals do not accept that, as a result of the EU’s status as a signatory of the ECT, the diversity-of-nationality requirement of Art. 26 is not satisfied [19]. Instead, they emphasise that the EU’s status as a party to the ECT does not mean that EU Member States “ceased to be” parties to the ECT in their own right [20]. Moreover, given that there is no transnational body of EU law regulating the organisation of business units, a matter that remains subject to Member States’ domestic law, there can be no “EU Investors” [21]. It is true that, in a statement submitted to the ECT Secretariat, the EU Commission argued that the EU had not assented to arbitration under the ECT with regard to any case brought by EU nationals because «the Communities’ legal system provides for means» of resolving such disputes [22]. Nevertheless, while the statement was issued by and on behalf of the EU only, investors’ claims have been based on actions of EU Member States, and have been consistently directed against them [23]. Moreover, to exclude the possibility of submitting a dispute to international arbitration rather than to EU courts seems to be precluded by Art. 16 ECT [24] in combination with Art. 41 VCLT, because having a further option at one’s disposal is per se «more favourable to the Investor or the Investment» and international arbitration, ensuring speed and efficiency, may be more attractive to investors. A further argument was developed by the EU Commission, arguing that, while the ECT does not contain an explicit disconnection clause that would render it inapplicable in intra-EU disputes, such restriction is nonetheless inferable from the treaty’s context, purpose, and drafting history. The disconnection clause is, in other words, implicit, and its purpose is precisely to dissociate Member States, in relations inter [continua ..]

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IV. The implications of EU law autonomy

The argument on the need to protect the autonomy of EU law and its constitutional features is well-established in ECJ case law. In the MOx Plant judgement, the Court interpreted Art. 344 TFEU, which demarcates exclusive jurisdiction over EU law disputes, to mean that Ireland was precluded from using the dispute settlement mechanism provided by UNCLOS in a case against another Member State, when the application of UNCLOS provisions fell within EU competence and thus raised questions concerning the interpretation of EU law [30]. On the other hand, in the Advisory Opinion on the Creation of a Unified Patent Litigation System, the ECJ stated that the creation of a Patents Court would not be in conflict with Art. 344 TFEU, because the jurisdiction which the draft agreement intended to grant to the Patents Court related only to disputes between individuals [31]. Thus, from a combined reading of the two opinions, one can conclude that Art. 344 TFEU prohibits a Member State from submitting to an arbitral tribunal any dispute with another Member State involving questions relating to the interpretation or application of EU law, and that Member States are instead not bound by Art. 344 TFEU if there is a dispute between individuals. However, this does not say anything regarding a dispute between a Member State and a private individual, such as a foreign investor in the event of investment arbitrations. In Achmea, with reference to a Bilateral Investment Treaty (BIT), the ECJ solves such conundrum in the sense that mechanisms for settling disputes between an investor from one Member State and another Member State could undermine the system of legal remedies provided for in the EU Treaties and thus jeopardize the autonomy, effectiveness, and primacy of EU law [32]. Thus, the incompatibility of the arbitral clause with EU law was once again deduced from the broad constitutionalist argument on the need to protect the autonomy of EU law and its basic features, even when any interference with them is merely hypothetical. One may argue that the same conclusion, properly corrected bearing in mind the ECT’s peculiarities, should be extended to the ECT arbitral clause [33]. On the other hand, arbitral tribunals deny the possible application of Article 344 TFEU to disputes between investors and host States, mainly focusing on the literal interpretation of the norm [34]. The real issue is that, for the purpose of preliminary [continua ..]

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V. The alternative paths available

It seems that the invalidity of the ECT arbitral clause is not an inevitable outcome because alternative paths are available to achieve legally more coherent and sustainable outcomes. One option would be to recognise the investment arbitration tribunals as part of the Member States’ judicial system [51]. Some cases decided by the ECJ seem to open some room for a qualification of investment tribunals established under treaties concluded by the EU as a “court or tribunal of a Member State” under Art. 267 TFEU [52]. The wording itself of Art. 267 TFEU has already been extended before. One example concerns the Benelux Court of Justice, which is a court not of a but of several Member States, and was deemed to fall under Art. 267 TFEU as well [53]. In line with these developments, both Advocate General Wathelet in the Achmea case [54] and the authoritative literature [55] advocated that preliminary rulings referrals to the ECJ should be admitted by investment tribunals, in particular in view of their different nature vis-à-vis commercial arbitral tribunals, as regards their legal origin (established by an international treaty), their permanent nature [56], and the compulsory jurisdiction they ensure. Moreover, since the ECT entitles the investor to pursue its case either in a national court of the host State or in an arbitral tribunal, one may argue that arbitral tribunals are substitutes of, and thus equivalent to the national courts and form part of the judicial system of the respective Member State in that capacity [57]. A mechanism allowing for direct referrals from arbitral tribunals to the ECJ would at least in theory guarantee sufficient guidance on EU law and close any potential gaps in relation to the correct interpretation and application of EU law. Whether or not a preliminary ruling referral by an arbitral tribunal will be admitted by the ECJ, there may be other possible ways to involve the ECJ [58]. The EU Commission is free to initiate an infringement procedure against a Member State, even if an arbitration proceeding is pending against the same State for the same facts, or against a Member State which, in execution of the award, would be acting in violation of EU law [59]. The next step is to assess whether the ECJ’s final scrutiny of the uniform application and interpretation of EU law may be postponed and ensured during [continua ..]

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VI. Ex post review of arbitral awards

The EU legal regime concerning the recognition of judgments in civil and commercial matters does not apply to arbitral awards [60]. Therefore, the validity and enforceability of awards remains a matter to be ascertained by Member State law, or rather by international conventions applying to this topic as introduced in national legal systems. The New York Convention, for example, which has been ratified by all Member States, provides that recognition and enforcement of an arbitration award may be refused on certain specific grounds, among them the public policy of the country where such recognition and enforcement are sought [61]. The ECJ ruled that where, by domestic rules of procedure, a national court is required to grant an application for annulment of an arbitration award «founded on failure to observe national rules of public policy, it must also grant such an application where it is founded on failure to comply with [EU] rules of this type» [62]. This is because domestic courts are under an obligation to ensure the effet utile of EU law by challenging the enforcement of an arbitral award contrary to mandatory EU law under relevant international conventions. The potential for notions of EU public policy, as elaborated by the ECJ, to render arbitral awards susceptible to annulment in a court of the arbitral situs, or to non-recognition and non-enforcement elsewhere, is already well documented in competition and consumer law [63]. It could be critically noted that, under EcoSwiss, in proceedings related to an international arbitration, there is only an obligation to apply EU law if the relevant EU provision is sufficiently fundamental in constituting EU public policy [64]. From this premise, one may infer that any non-fundamental provisions will remain unapplied to the extent that they cannot be incorporated into other, more general mandatory principles. In the light of this limitation, the ECJ concluded in the Achmea case that an ex post review cannot assure the uniform and effective interpretation and application of EU law [65]. However, an alternative path of reasoning could be followed. The factors cited by the ECJ to conclude that a violation of an EU norm shall be treated as a violation of EU public policy – namely, the mandatory nature of the norm, its correspondence to a task of the EU, the importance of the underlying public [continua ..]

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VII. Does secondary EU law prevail over the ECT?

nce the invalidity of the ECT arbitral clause has been ascertained not to be an inevitable outcome, the next step is to verify what role EU law is called upon to play in a dispute, particularly where a EU Commission decision qualifies the incentives granted by the host State as unlawful State aid. Under the terms of Art. 26 ECT recalled above, arbitral tribunals shall decide the issues under dispute in accordance with the «applicable rules and principles of international law» [73]. According to a first interpretation, a Member State may plead that EU law must be applied in the dispute in conjunction with other applicable international law, or at least inform the interpretation of the applicable law under Art. 31 (3) (c) of the VCLT. In the Electrabel case, the arbitral tribunal maintained that EU law as a whole was part of the international legal order, and was therefore applicable without the need to draw a material distinction between EU Treaties and secondary EU law. Indeed, since all EU legal rules are part of a regional system of international law, they have an international legal character [74]. In concrete terms, for example, Art. 117 TFEU precluding «any aid granted by a Member State or through State resources […] incompatible with the internal market» is an international rule and its necessary implementation through a binding decision by a “non-national” organ (the EU Commission) created by the same EU Treaty has the same status [75]. Thus, a EU Commission decision should be applied by arbitral tribunals in virtue of Art. 26, par. 6 ECT. Once this premise is accepted, the real issue is solving the potential conflict between EU law and the ECT. The Tribunal in Electrabel argued that any inconsistency between the two legal orders should be solved through the prevalence of EU law [76]. Such position is untenable and has been refuted by all other arbitral tribunals [77]. Firstly because the ECT itself is part of EU law [78] and, in the EU internal hierarchy of norms, international agreements which are binding for the EU take precedence over EU secondary law [79]. Indeed, secondary acts of EU law are invalid when they are in conflict with international agreements to which the EU is a party, and their provisions by their nature and specificity permit their invocation for that purpose [80]. Even if an international agreement lacks direct effect, [continua ..]

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VIII. Interpretation of EU law in conformity with the Energy Charter and vice versa

It is here submitted that an increased judicial deference by arbitral tribunals to ECJ case law, and vice versa, will help reduce conflicts in decision-making, giving rise to a virtuous process of reciprocal improvement. Competition issues are not outside the ECT’s scope. Under Art. 6 ECT, State Parties shall work to alleviate market distortions and barriers to competition in the energy sector. Thus, the ECT seems to open the way to arguing that the legitimacy of investors’ expectations may be influenced by such issues as the impact, if any, of EU rules on State aid, which may require an EU Member State to terminate or adjust its renewable energy incentive regime [85]. But such assumption would be insufficient if one does not take into consideration that, not only under Art. 10 ECT, but also from the perspective of EU law, there may be legitimate expectations against regulatory changes and against the recovery of State aids, which are worth protecting. With regard to State aid recovery, the protection of legitimate expectations finds a normative basis in Art. 16 (1) of Council Regulation (EU) 2015/1589, according to whom the Commission shall not require recovery of the aid if this would be contrary to a general principle of EU law [86]. In this context, ‘general principle’ certainly embodies the principles of legal certainty and its corollary of protection of legitimate expectations [87]. The principle of protection of legitimate expectations as a lifeline to safeguard against the recovery of State aid is then remarkable when looking at the case law of the ECJ [88]. Thus, the real issue is to establish the relationship between the fair and equitable principle under Art. 10 ECT and the principle of legitimate expectations developed by ECJ case law, and to assess whether they do or should coincide [89]. According to the EU Commission, in an intra-EU situation, EU law is part of the applicable law, as it constitutes international law applicable between the parties to the dispute. As a result, based on the principle of interpretation in conformity, the principle of fair and equitable treatment cannot have a broader scope than the EU law notions of legal certainty and legitimate expectations in the context of a State aid scheme. In other words, the principle of legitimate expectations under the ECT is limited to the principle of legitimate expectations under EU law. Moreover, being part of EU law, an EU [continua ..]

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IX. Towards a new investment dispute resolution forum for the ECT?

Arbitral tribunals exclude any inconsistency between ECT and EU law [113]. Precisely because no inconsistency or disharmony between them has been found, they argue that no implicit disconnection clause is needed, whose purpose would be to resolve such a conflict [114]. For the same reason, the operation of Artt. 30 and 59 VCLT is excluded [115]. Thus, following the arbitral tribunals’ reasoning, EU nationals remain eligible to bring international arbitration claims under the ECT against other Member States. Contrary to that, the EU Commission tries to assert the exclusive jurisdiction of the EU courts at the expense of arbitration tribunals. The emphasis on the autonomy of EU law nonetheless risks to isolate the EU from a potentially rich and dynamic interaction and cross-fertilisation with other areas of international law, as well as a backlash from the EU’s international partners. Indeed, on one hand, a lack of coordination between the international and EU legal systems can lead to mutual incompatibilities and inconsistent decisions. On the other hand, such attitude on the part of the EU might produce negative effects on the economy of EU Member States, firstly because investment tribunals have the merit to offer independence of judicial review of government conduct where local courts may not be entirely impartial regarding claims by foreign investors [116]. Secondly, investors seeking the protection of the ECT, could be encouraged to move their seats to third countries, or at least to select a seat for arbitration outside the EU in order to limit the interference of EU law as lex loci arbitri. But this scenario is not unavoidable. Upstream, on the level of substantive EU law, a harmonisation of national support schemes for renewable electricity with better oversight and monitoring of the ways in which Member States achieve renewable energy targets, could help to prevent or limit many of the missteps made by Member States so far [117]. A further possibility could be to consider arbitral tribunals entitled to make preliminary ruling referrals. From the point of view of EU law, a clear advantage of the proposed direct referral mechanism would be to create the possibility of review for every relevant question of EU law, not only one that is fundamental enough to qualify as EU public policy, and thus fall under EcoSwiss. It would protect the ECJ’s authoritative power in relation to the interpretation [continua ..]

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NOTE

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