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  • Pritha Lahiri

The Komstroy Ruling: The EU and the ECT Saga Continues


The Investment Treaty regime is centred on adjudicating investment disputes through International Investor-State arbitration. Over the past few decades, international investment law has developed dramatically, giving rise to numerous legal problems. One of those concerns is particularly seen in how European Union ("EU") legislation and the Energy Charter Treaty ("ECT") interact.

In particular, when it comes to Article 26 (the ECT's dispute resolution process) and its application in the intra-EU context, the relationship between the ECT and EU law is marked by complexity and legal uncertainty. Since the Achmea decision in 2018, the Court of Justice of the European Union ("CJEU") has been in the spotlight, and in 2021, the Komstroy decision brought its attention to a new level.

In light of these developments, the present article analyzes the muddy waters of the EU Law and the ECT. It further discusses the future developments that can be expected out of the ruling by the CJEU.

The Energy Charter Treaty: A background

The ECT is a multilateral investment treaty signed in the year 1994. It was passed to promote investments in the energy industry, specifically by granting investment protection rights to energy investors in foreign states. The European Union, its member states, and other non-member states are among those who have signed it. One of the critical aspects of the ECT is that it gives individual investors the right to commence an arbitration proceeding against a host state under Article 26 of the treaty if one of the provisions is breached. As a result, Article 26 offers investors a very effective procedure for resolving disputes outside the purview of national courts.

Being a multilateral treaty, the ECT's provisions have been enforced consistently among its signatories, making it one of the most frequently invoked investment protection agreements concerning international investment disputes, including the EU. Due to claims that such arbitration processes undermine the judicial independence of the EU legal system as enshrined in the constitutional framework of the EU Treaties, the topic of investor-State dispute settlement inside the EU has gained attention. In its recent judgement in Komstroy, the CJEU) imprinted the same rationale and limited the effects of international tribunals on internal EU governance. In doing so, however, it sidelined the International Law principles regarding treaty interpretation.

The Beginning of the End: Early signs of conflict

The Achmea Ruling

The CJEU ruled that the arbitration clause under Article 8 of the Netherlands-Slovak Bilateral Investment Treaty ("BIT") is incompatible with EU law and order, making it obsolete. This case is known for completely disregarding the rules of public international law while upholding the supremacy of EU law. The CJEU additionally noted that because these issues are referred to tribunals outside the EU's authority, arbitration proceedings under the BIT may impair the effectiveness of EU legislation.

Although the Vienna Convention on the Law of Treaties (“VCLT”) is the international instrument that governs the conclusion, interpretation, validity, and invalidity of treaties, the CJEU surprisingly did not make a peep about it. Additionally, despite the fact that the New York Conventiongoverned the dispute, the CJEU made no mention of the convention.

European Commission's Intervention

The European Commission has represented itself as an amicus-curiae before domestic courts and arbitral tribunals in nearly all intra-EU disputes, including those arising from BITs and ECTs, which has exacerbated the issue.

It has also lately started infringement proceedings against EU members like Sweden, Portugal, Romania, Luxembourg, and Austria for failing to terminate the intra-EU BITs.

The Komstroy Ruling: A Rippling Implication on the ECT

This case involves a dispute over an energy contract under the ECT between Komstroy and a few state-owned companies in Moldova (SOEs). The United Nations Commission on International Trade Law (“UNCITRAL”) Rules were then followed to initiate arbitration, which was later contested at the Paris Court of Appeal. The Parisian Court subsequently asked the CJEU for a preliminary ruling on the matter.

The main issue was whether Intra- EU arbitration under Article 26 of the ECT is in sync with the EU legal system. In assessing the issue, the CJEU relied on the judgment of Achmea and held that it has jurisdiction under Article 267 TFEU due to the following reasons- i) ECT is an integral part of the EU legal order because EU is a signatory to the ECT ii) Since the seat of arbitration was in Paris, the law of the land would be European Law and iii)To prevent differences in the future regarding the interpretation and in the interest of the EU legal order. By exercising its jurisdiction under Article 267, the CJEU, in a landmark move, ruled that Article 26 of the ECT is incompatible with the EU Law.

The CJEU confirmed its jurisdiction to interpret the ECT, although the underlying award involved the application of the ECT to a dispute between an investor from a non-EU country (Ukraine) and another non-EU country (Moldova), failing to address the VCLT principles, which is the fundamental source when it comes to the interpretation of treaties. Ironically, Article 3(5)of the Treaty on European Union, which outlines the EU's founding principles, and Article 216 of the Treaty on the Functioning of the European Nation, which addresses the EU's organizational structure, both demonstrate that the EU is committed to upholding and working to develop international law and that the international agreements it has made are legally binding.

Even though this decision suggests that investor-state arbitration should no longer be used to resolve intra-EU disputes under the ECT, the other non-EU ECT Parties and their courts (on issues relating to the recognition or enforcement of ECT arbitral awards), as well as the arbitral tribunals established to consider the ECT itself, may not be impacted by the Komstroy judgement per se. This is primarily due to the fact that the International Centre for Settlement of Investment Disputes ("ICSID") or the UNCITRAL Arbitral Tribunals established for dispute resolution under Article 26of the ECT are mandated to apply PIL rules and construe the ECT in accordance with Article 31 VCLT(General Rules of Treaty Interpretation).

Public International Law versus autonomy of the EU: A Tale of Regime Clash?

The rulings in Achmea and Komstroy make it abundantly obvious that the principles of autonomy, consistency, uniformity, and supremacy of EU law—and, by extension, the CJEU's final interpretive power —apply at all times. The CJEU has previously felt that to safeguard its absolute power against the impacts of public international law, it was necessary to depend on the most fundamental elements of EU law.

A decade prior, in the landmark Kadi case involving the purported supremacy of UN Security Council Resolutions based on Article 103 of the UN Charter, the CJEU made it abundantly clear that a foreign treaty cannot impact the independence and supremacy of the EU legal order. The CJEU has also shown a similar attitude toward the WTO Appellate Body and the European Court of Human Rights (ECHR).

Contrarily, the concepts of EU primacy and autonomy are of little or no significance when viewed through the broader prism of Public International Law. International Law accords nation-states equal treatment. The preamble of the VCLT reflects this understanding by stating that while interpreting a treaty, it should take into consideration the principles of international law enshrined in the Charter of the United Nations -“equal rights and self-determination of peoples, of the sovereign equality and independence of all States, of non-interference in the internal affairs of States, of the prohibition of the threat or use of force and universal respect for, and observance of, human rights and fundamental freedoms for all." Such opposite notions conclude that the vertical, supremacy- and autonomy-driven EU legal structure and the horizontal nature of public international law do not mesh.

Intra-Eu ECT Arbitrations: What is Next?

The Komstroy ruling has left open a myriad of challenges which are as follows:

  • Question of Enforcement

In conformity with the Komstory decision, investors will be driven to pursue enforcement actions outside of the EU because EU national courts will be unable to uphold such decisions, including intra-EU ECT awards. As a result, the EU Member States will be less likely to conform to the arbitral awards. Although extraterritorial (outside of the EU) enforcement of awards might be more effective, the problem is particularly more complicated due to the European Commission's direct involvement as amicus curiae opposing enforcement of intra-EU awards by non-EU courts.

  • No clarity on the future of arbitrations

It is still unknown how investment arbitration tribunals in charge of annulment or set-aside awards proceedings would respond, given that they have so far entirely disregarded the Achmea decision. In order to take advantage of extra-EU bilateral investment treaties, investors may try to restructure their businesses or holdings outside of the EU. It is therefore essential for the regulators, arbitrators, and national courts to be aware of such attempts.

  • The Practice of EU State Aid

Investment arbitration awards rendered against the EU Member States may not be paid due to EU State Aid regulations. Without the European Commission's approval, Member States are not permitted to give enterprises an economic advantage that distorts trade and competition in the internal market. Further, state aid policies that distort or threaten to distort competition between the EU Member States are prohibited by Article 107 of the Treaty on the Functioning of the European Union (TFEU).

Given that intra-EU investment arbitration awards are based on arbitration terms that violate EU law, the Commission is unlikely to find them compatible with the internal market in the wake of Komstroy.

Way Forward

The Komstroy decision is just the tip of an iceberg that could eventually weaken intra-EU treaty arbitrations under the ECT. There is no "one size fits all" solution, although the following suggestions can be given in relation to the conflict resolution process:

First and foremost, the investment should be set up in a way that, even if a disagreement emerges with an EU Member State, it is not viewed as an intra-EU dispute. This can be accomplished by making an investment through a subsidiary in a non-EU country that has BIT agreements with EU member states.

Secondly, either UNCITRAL or ICSID arbitration should be selected as the arbitral tribunal. This is because the CJEU will not have an impact on these tribunals due to these being autonomous of EU legislative orders. These tribunals have, Kompetenz- Kompetenz, i.e., the ability to decide on jurisdictional questions, and they draw their authority from international treaties and the PIL mechanism containing a state's offer to arbitrate (such as the ECT), not from EU Law.

Thirdly, it is advisable that the location of the arbitration tribunal in the event of an arbitration dispute under a BIT or the ECT be outside of the EU. By doing this, CJEU will not be able to influence the awards.

Finally, the European Commission could be given the authority to negotiate the question of the intra-EU applicability of Article 26 ECT in the ongoing modernization of the ECT as a final potential option to resolve the dispute between the EU and the ECT. This will address the current dispute over jurisdiction and result in a uniform application of the ECT's provisions to all signatories.

Final Thoughts

The Komstroy ruling yet again has europeanised the dispute even when ECT is an international treaty, and the CJEU should have applied the rules of Public International Law. The problem may have origins in the EU's legal structure, which is not aligned with International Law. While there is no uncertainty that the CJEU views the ECT as being inapplicable for intra-EU disputes, and as a result, no arbitation proceedings may be brought by an investor from another EU member state against an EU member state, determining whether there will be an epilogue from member states, arbitral tribunals, domestic courts, and ultimately from the CJEU is still up in the air.

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