The echo of the Achmea judgment continues: The ECT is inapplicable with EU law

In Komstroy v. Moldova, the CJEU ruled that investment arbitration pursuant to the Energy Charter Treaty between an EU investor and EU host state is incompatible with EU law.
 
In the Achmea decision, the CJEU ruled that the arbitration clause in the Slovakia-Netherlands BIT  has an adverse effect on the autonomy of EU law and is therefore incompatible with EU law.

In the recent Komstroy decision, the CJEU ruled that investment arbitration pursuant to the Energy Charter Treaty between an EU investor and EU host state is similarly incompatible with EU law, in the same way as investment arbitrations brought under a BIT (as decided in the Achmea decision). 

Background

The dispute in Komstroy started in the 1990s and arose out of an energy contract between Komstroy's predecessor and certain Moldovan state-owned enterprises (SOEs).

The investor alleged that the SOE (thus the State) did not uphold its contractual obligations, and therefore commenced arbitration proceedings.

The seat of arbitration was Paris, the arbitration was governed by the UNCITRAL arbitration rules, and the Tribunal found that Moldova breached its obligations under the ECT.

Subsequently, Moldova commenced set aside proceedings before the French courts, arguing that the energy contract was not an 'investment' as meant in the ECT, and therefore the Tribunal had no jurisdiction.

Moldova was successful before the Cour d'appel de Paris, which set aside the award. However, the French Cour de Cassation did not agree with the findings of the Cour d'appel and set aside its judgment.

When referred back to the Cour d'appel, Moldova once again argued that there was no investment. The Cour d'appel de Paris therefore requested the CJEU's assistance with the interpretation of the term 'investment' under the ECT (under both article 1(6) and 26(1) ECT).

Even though only prejudicial questions were asked about the interpretation of 'investment', the Advocate General (Maciej Szpunar) argued that the findings of the Achmea case were similarly applicable to the Komstroy case.

It was not clear whether the CJEU would address the Achmea arguments of the Advocate General.

Judgment

The CJEU discussed three issues in the present case. First, the jurisdictional matters, second the Achmea issues, and lastly the interpretation of 'investment'.

Jurisdiction

The CJEU began by addressing the arguments relating to the lack of jurisdiction made by the Council of the European Union (EC), Komstroy and a handful of Member States.[1]  

The objecting parties argued two points: that there is no jurisdiction since EU law is inapplicable to the dispute at hand, and that the parties are non-EU Member States.[2]

The CJEU was not persuaded by the parties and gave its reasoning as to why it has jurisdiction based on article 267 TFEU.

First, since the EU is also a signature party to the ECT it is therefore also "an integral part of the legal order […]".[3]

Second, if it is in the interest of the EU to forestall future differences of interpretation, the CJEU may give its interpretation of provisions of an international agreement that can apply both to situations falling within the scope of EU law and to situations that are not covered by it.[4] 

Third, the seat of arbitration was in Paris, therefore the lex fori is French and thus European law, on which it has jurisdiction.[5]

Achmea case

Before continuing to the findings of the CJEU, we address briefly the differences between the Achmea case and the Komstroy case.

The Komstroy case involves two States that are not EU Member States without any investment in the EU, whereas the Achmea case did involve two Member States with an investment in the EU.

Also, in the Achmea case, the prejudicial question concerned the compatibility of intra-EU BIT arbitration, whereas in the present case the questions concerned the interpretation of 'investment'. Yet, the CJEU saw reason to apply the Achmea ruling to the Komstroy case.

Though it was initially uncertain whether the CJEU was going to address the Advocate General's arguments, the CJEU appeared keen to consider the Achmea issue, and a significant part of its (rather) short judgment is dedicated to the effects of the Achmea case on ECT arbitration.

The CJEU first established that an arbitral tribunal, as referred to in article 26(6) ECT, is required to interpret and apply EU law. An arbitral tribunal constituted under the ECT is equally related to the EU's legal order, as a tribunal under a BIT is related to the EU's legal order (which was the case in the Achmea decision).

Similarly, as decided in the Achmea case, ECT tribunals are not subject to the same mechanism capable of ensuring the full effectiveness of the rules of the EU, such as review by a court, or referring prejudicial questions to the CJEU.[6]

Therefore, the CJEU came to the conclusion that intra-EU ECT arbitration proceedings under article 26(2)(c) ECT are (also) incompatible with EU law.[7]

Investment

The CJEU also addressed the original question that the Cour d'appel de Paris dealt with: was there an investment in Komstroy?

The CJEU responded negatively. An 'investment' as meant in article 1(6) ECT, requires the presence of two conditions: first, it must concern an asset of a type owned or controlled directly or indirectly by an investor and, second, that asset must include at least one of the elements referred to in point (a) to (f) of that provision.[8]

These conditions are not met according to the CJEU and the court concluded that a mere supply contract is a commercial contract, which cannot, in itself, constitute an 'investment'.[9]

So Komstroy made no investment, and as a result, the dispute settlement mechanism provided in the ECT is not applicable.

In its decision the CJEU distinguished commercial arbitration and investment arbitration as referred to in article 26 ECT. The CJEU finds that commercial arbitrations "originate in the freely expressed wishes of the parties concerned".[10]

So the findings in this decision are not applicable to commercial arbitration.

The Brexit effect on the CJEU judgment

Since the UK left the EU, the Komstroy judgment does not have an effect on current and (foreseeable) future cases between UK investors and EU Member States, nor cases between EU Investors and the UK.

The conclusion of the CJEU in Komstroy does not affect the law of the UK and therefore (since the UK is an ECT signature state) an ECT claim from a UK investor against an EU Member State does not fall within the scope of the CJEU's judgment.

An energy investor may want to channel its European energy investment through the UK: this investment would be located in a jurisdiction with a robust legal system and be fully protected through the ECT, a protection that EU investors do not seem to be able to enjoy.   

Conclusion

In Komstroy, the CJEU decided the dispute settlement clause contained in the ECT is incompatible with EU law when it involves an EU investor and an EU host state, and arrived at this conclusion by applying the Achmea reasoning to the ECT.

Even though it was of no significance for the case itself (since there was no EU investor, nor EU host state), the CJEU gave a clear indication on how it interprets the ECT in the EU law context.

What the long-term effects of this judgment are yet to be seen. The ruling between this case and the Achmea case are similar; the latter even led to a Termination Agreement. However, this Termination Agreement did not stop arbitral tribunals continuing arbitration cases,[11] and it is to be expected that tribunals will continue commenced and pending intra-EU ECT cases.

To avoid any complications with their ECT awards, it is in the interest of investors to commence ECT arbitration under the ICSID Convention: the award given in these procedures are the result of international law, and are a part of a self-contained legal system.

The Komstroy judgment will not affect their existence and legitimacy, since they are independent from national- and EU law.

As we noted in our previous article, the UK preserves its BITs with different EU Member States and since it is not affected by the Komstroy judgment and is geographically located on the doorstep of the EU, the UK can be considered a very attractive location for investment protection in EU Member States.

Fieldfisher's leading International Arbitration Group can advise on such issues that may allow investors to (re)gain (energy) investment protection under relevant EU Member States.

This article was authored by Joost van Dam, dispute resolution associate in Fieldfisher's Amsterdam office and Marily Paralika, international arbitration partner in Fieldfisher's Paris office.