In our Solar Wars series of articles we considered the numerous claims brought against Spain, Italy and other EU Member States under the Energy Charter Treaty (ECT), brought by investors following the curtailment of those states’ renewable incentive schemes.
We also considered the European Commission’s (EC) opposition to those claims; the judgment of Court of Justice of the EU (CJEU) in Slovak Republic v Achmea (Case C-284/16) which found that intra-EU investor-state arbitration contravenes EU law; and the rejection of that approach by numerous arbitral tribunals. As matters stand, the European Commission (EC) and investor-state arbitral tribunals are at loggerheads.
However, it is possible that amongst the predictions of economic catastrophe, food and medicine shortages and social unrest, Brexit might offer an unlikely silver lining: it is possible that the UK will become the go-to offshore jurisdiction for EU companies wishing to make investments into other EU countries generally, and specifically in the energy sector.
A clash of wills
Solar Wars Parts III – VII explained how the EC is of the view that EU law provides a comprehensive and exclusive system for the protection of intra-EU investments, and investors must bring claims for breaches of those protections in Member State courts. The Court of Justice of the EU (CJEU) held in Slovak Republic v Achmea (Case C-284/16) that intra-EU investor-state arbitrations under bilateral investment treaties between EU states violated EU law.
However, the Energy Charter Treaty (ECT) – a multilateral treaty to which the EU itself is signatory – allows investors to sue host states in a neutral venue, before heard an independent and impartial arbitral tribunal. In the second half to 2018, a number of arbitral tribunals have considered the Achmea judgment and the EC’s views, and decided that they do have jurisdiction to hear ECT claims by EU investors against EU states.
Where do we go from here?
The situation is unsatisfactory to say the least. Claimants who defeat Member State/EC objections to jurisdiction may find that their victory is pyrrhic: even if they succeed in obtaining a substantive award, Member States will not pay out (even if they want to, the EC has prohibited them from doing so as such action would constitute ‘illegal state aid’ as per the Decision).
That leaves the claimant with the option of enforcing the award via the courts of the defendant state or another jurisdiction in which the defendant state has assets. The claimant can do so either pursuant to the New York Convention or (if the arbitration has been conducted pursuant to ICSID rules) the ICSID Convention:
- The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards requires signatory states to enforce a foreign arbitral award as if it were a judgment of their domestic courts. There are limited grounds on which enforcement of an award can be refused under Article V of the Convention, but these include the invalidity of the arbitration agreement; the tribunal exceeding its authority; the non-arbitrabilty of the subject-matter of the award; and enforcement being contrary to the public policy of that state in which enforcement is sought.
Clearly there is a real risk that EU Member State courts will not enforce an intra-EU ECT award under New York Convention on these grounds, as they are bound by EU law and in particular the Achmea decision. Whether non-EU state courts would refuse to enforce an award on those grounds is an open question.
- Articles 53 and 54 of the ICSID Convention provides that an ICSID award is final and binding, and immune from appeal or annulment, and must be enforced as a final domestic judgement of the court of the defendant state. The only grounds for challenge are the limited grounds for annulment by an ICSID annulment tribunal in Article 52. Not implementing an award is a violation of international obligations, and during recognition and enforcement in domestic courts, the domestic court’s authority is theoretically limited to only verifying that the award is authentic.
So, in theory ICSID awards are enforceable ‘automatically’. However, Romania has been largely successful in obtaining stays of enforcement in EU national courts pending the outcome of its challenge to the ICSID award in the General Court of the European Union (GCEU) in Micula v Romania. That challenge has yet to be decided, but if the GCEU finds that the award can be resisted because it conflicts with EU law, that will place EU national courts in a very difficult position.
All this means that future and even pending intra-EU ECT arbitrations might be stifled – even though claimants can take heart from the consistent rejection of Achmea by arbitral tribunals, many of the claims rely on third party funding, and many third party funders may baulk at the exposure given the obstacles to obtaining payment of an award.
Brexit: an unexpected solution?
Against this background, Brexit might actually provide a solution for existing intra-EU ECT arbitrations and, more significantly, for future investments and claims.
The draft interim arrangements agreed between the UK and the EU provide that when the UK leaves the EU at the end of March 2019, the UK will continue to apply EU law for the 21-month ‘transition period’. After that, the UK will no longer be bound by EU law, although the EU (Withdrawal) Act provides that UK courts, other than the Supreme Court, will continue to be bound by EU laws and court decisions made before Brexit. Of course, if there is a ‘No Deal Brexit’ the transition arrangements will also fall away and the position in April 2019 will be as it is envisioned to be in January 2021.
If an EU claimant with an ECT award (or indeed another BIT award) against an EU Member State applied to enforce the award in England, how would a post-Brexit, post-transition period/No Deal English court approach the task of balancing Achmea against the UK’s obligations under the ICSID Convention? Further, even if enforcement is sought under the New York Convention how would the court approach a tribunal’s express rejection of the applicability of Achmea when assuming jurisdiction? English courts are generally viewed as being pro-arbitration and might possibly enforce an award in the face of Achmea-related objections even before Brexit; one might expect that the prospects of doing so following Brexit are even stronger.
Perhaps more significant, though, is the prospect of an EU investor structuring a future investment into an EU Member State via a UK company. Once the UK has left the EU, an ECT arbitration brought by a UK company against an EU Member State or by a Member State company against the UK will no longer be an intra-EU arbitration and hence Achmea should not apply at all. The fact that a UK investor company is owned and/or controlled by an EU company should be irrelevant: investment treaty tribunals generally decline to look beyond the place of incorporation of the investor company in determining nationality (see for example Charanne and Saluka Investments BV (The Netherlands) v The Czech Republic, PCA (2006)).
Of course, a decision about how to structure an investment is unlikely to turn solely on the ability to bring an ECT or BIT arbitration claim. Other factors such as tax efficiency, availability of funding, ability to repatriate funds, ease of doing business, the availability of legal protection and language will all play significant roles. But the UK offers most, if not all, of those benefits, as well as physical proximity to the EU and the presence of a highly-trained, sector-experienced workforce. If one adds to that the potentially greater protection of the ECT which might be available in a post-Brexit UK, the scales might just be tipped in favour of investing via a UK company.
‘All we know is that we don’t know’, as a popular song goes, and that applies very much to Brexit. We don’t know what shape Brexit will take. If a wide-ranging trade deal is agreed between the UK and the EU, it might supersede the ECT and provide for investor-state disputes to be resolved in a different manner than arbitration. However, pursuant to article 47(3) ECT the post-withdrawal period during which the ECT will continue to apply to pre-existing qualifying investments, commonly known as the ‘sunset period’, is 20 years. Thus, those investors who make qualifying investments prior to the UK withdrawing from the ECT would will still enjoy the protections of the ECT for 20 years after that date.
Moreover, even without Brexit, there is uncertainty regarding ECT claims in future. Consultation on the reform of the ECT is currently underway and it is possible that investor-state arbitration will be replaced by some other form of dispute resolution.
Consequently, making any predictions is a difficult exercise. Nevertheless, it is possible that Brexit will offer a way through the Achmea-ECT stalemate for existing claimants and future investors.