Legal expert: ECT withdrawal ‘is the only possible course of action’
Following the decision by several EU member states to leave the controversial Energy Charter Treaty (ECT), the European Commission must now put proposals on the table for the EU to withdraw collectively, says Lukas Schaugg.
- Solution to ECT reform standoff must be both legal and political
- Legally, the EU must reaffirm its primacy over the ECT with an inter se agreement
- Similar agreements could also be concluded between the EU and other ECT member countries
- Politically, solutions exist to neutralise the ECT’s so-called “sunset clause”
- The “Nuclear option” would be for the EU and its member states to ignore decisions made by ECT tribunals
After a failed attempt to reform the Energy Charter Treaty (ECT), the European Union is now considering its next move. With a growing number of EU countries announcing their decision to withdraw from the treaty, the main challenge now is to prepare an EU withdrawal and to neutralise the sunset clause, which protects fossil fuel investments for another 20 years even after countries leave. What can be done about this? Can the sunset clause be effectively neutralised by an intra-EU agreement? And what about other non-EU ECT countries?
In arbitral proceedings based on the ECT, the Commission has also always taken the view that tribunals would be wrong in assuming that the treaty applies to intra-EU relations.
However, the reality of arbitral decision-making has been somewhat different. We have seen arbitral decisions that have awarded compensation to investors in respect of investments made in an intra-EU context.
That raises the question: will arbitral tribunals follow any of the measures that the EU may adopt?
Arbitral tribunals tend to ignore EU law. This is something the Commission has actually been complaining about, using it as an argument in support of the ECT’s modernisation process.
Exactly. However, this is where the Commission is being somewhat selective in its assessment. Because the question whether arbitral tribunals are following or not following EU law may well apply to both scenarios – a reform of the treaty and a withdrawal from the treaty.
In both scenarios, you have a risk that arbitral tribunals will not follow the intention of the EU and its Member States.
What can be done about the sunset clause in the absence of treaty reform? Because without support from big EU Member States like France and Germany, the ECT reform process now seems dead in the water. And regarding relations with non-EU countries, the ECT would continue having primacy over EU law. It seems an alternative solution must be found.
This is a key question, and obviously, a lot of lawyers are thinking about this in capitals across the EU.
A solution has to be at least twofold – legal and political.
There could also be additional agreements with non-EU ECT contracting parties. Balkan countries, for instance, which are currently considering acceding to the EU, may be willing to conclude an agreement with the EU to neutralise the sunset clause, saying it no longer applies.
To suggest otherwise would create a dangerous precedent restricting the ability of states to modify treaties among themselves on the basis of mutual consent. This is enshrined in international law, as reflected in the Vienna Convention on the Law of Treaties.
Okay, so this is the legal route. What are the political options now?
Moreover, different initiatives have been launched to reform international investment policy, including the investor-state dispute settlement system, which has attracted so much criticism about the ECT.
On the bilateral level, some countries have been renegotiating or terminating their bilateral investment treaties. At the global level, the United Nations Conference on Trade and Development (UNCTAD) has suggested reform packages for developing countries to renegotiate their investment treaties.
More broadly, under the auspices of the United Nations Commission on International Trade Law (UNCITRAL), there has been a process – and it’s been ongoing for several years now – to reform investor-state arbitration at the UN level. The EU is actively participating in that process.
This is indeed the Commission’s favoured route, with the proposal to introduce a Multilateral Investment Court. But that process is currently stuck, I understand.
If arbitral tribunals were to disregard states’ attempts to neutralise the sunset clause in the ECT, then that would obviously increase the pressure on the Commission and on the international community to take more decisive action.
This would be another example demonstrating that investor-state arbitral tribunals have severely undermined states’ role as masters of their treaties, which is a fundamental tenet of Public International Law.
This is the so-called right to regulate, which the EU attempted to reaffirm as part of the ECT reform process, right?
Yes, but it goes further than that. Because ignoring attempts to neutralise the sunset clause actually ignores the capacity of states and the EU, for that matter, to reform a treaty. This is a question that is even more fundamental than the right to regulate foreign energy investment. Such an issue should not be up for private arbitral tribunals to determine.
This could, for example, concern the enforcement of arbitral awards. EU courts are already required under EU law not to enforce such awards. But the EU Member States could then take more formal steps to show they are no longer willing to enforce the awards that these tribunals render under Public International Law.
So, the EU could simply declare that it no longer recognises these tribunals?
Yes, and it has already done so to some extent. The European Court of Justice and courts of the EU Member States have held multiple times that investor-state arbitral tribunals lack jurisdiction in the intra-EU context. And the Commission has also consistently argued this in its submissions to arbitral tribunals in specific cases.
Without enforcement, the whole system would lose its teeth.
That would be the nuclear option, no? Do you think they are conscious within the Commission that such a possibility exists? And if so, why have they not threatened to use it before?
So far, the Commission has put all its efforts in the reform process – whether the ECT reform or the establishment of a Multilateral Investment Court. These kinds of international reform processes are often path-dependent, meaning that you are always going to try and find a solution within the existing framework of the process.
Things have changed a lot in the last two months with the European Parliament resolution backing an EU withdrawal from the ECT, which itself followed the decision of seven Member States to announce their intention to leave.
This exerts an entirely different pressure on the Commission to find a solution. So far, not everyone in the Commission seemed convinced that the system of investor-state arbitration was fundamentally flawed.
EU Member States have demonstrated clearly that they think very critically about this dispute settlement mechanism. They have also made clear that they think the ECT process does not go far enough when it comes to climate change and the need to end legal protection for fossil fuel investments. This creates a different landscape.
That said, more decisive steps at the enforcement stage would be an ultimate solution. But it is fairly clear that the Commission will have to conduct a legal assessment of the consequences of a coordinated withdrawal from the ECT. No matter what, they will have to look into that.
Let us look at the timeline now. As you explained, there is growing political momentum to think out of the box and find creative solutions to neutralise the sunset clause now after the failure to reform the ECT. But there is no timeline for this. And there is no timeline either to unblock negotiations on the UN Multilateral Investment Court. So, do you expect the EU to take a new initiative?
The first step is for the EU to clarify its own position. In the current situation, the ECT will continue to apply, which is a problem because the European Court of Justice has declared the ECT to be in violation of EU law. There is not only political pressure but also legal pressure on the Commission to bring the situation in line with EU law.
If the EU cannot reform the treaty, which is the case right now, then the only possible solution is to implement steps to withdraw. This needs to happen first.
In parallel, the Commission can already start reaching out to non-EU ECT contracting parties that might be willing to withdraw as well. The Commission has engaged in such bilateral outreach throughout the negotiations and is certainly continuing this behind the scenes.
The future of the ECT will also depend on the treaty’s institutional structure surviving a withdrawal of the EU. From the outset in the early 1990s, the EU has been the most potent driving force behind the ECT, contributing the largest share to the budget of the ECT secretariat.
Is there any other solution than a coordinated withdrawal for the EU and its Member States?
I do not see any other solution. The Commission may, of course launch a desperate push to try to find some sort of consensus on reform, but there is a very narrow chance that this will be successful.
I think a coordinated withdrawal of the EU and its Member States is the only possible course of action now.
It would also clarify and maybe solidify the negotiating position of the EU vis-à-vis non-EU ECT contracting parties. Because they can say, “Listen, our hands are tied, we’re going to withdraw. What is our post-withdrawal relationship going to be regarding energy investment?”
As is often the case in these types of high-profile negotiations, other considerations, such as trade-offs, may also come into play.
Of course, the EU cannot accept a situation where the UK or Switzerland becomes the forum shopping destination for arbitral tribunals where new procedures would be launched against its Member States. That would create negative publicity and increase pressure on the Commission to withdraw from the international architecture of investor-state arbitration.
How do you see things happening regarding the EU’s relations with non-EU ECT contracting parties?
That question presupposes that agreements similar to the ECT are necessary to promote trade and investment in the energy sector.
For a country like the UK, I do not think any agreement would be necessary to replace the ECT. A lot of this is already regulated in the Brexit agreement. Energy investment simply does not need to be regulated in the same way as it was in the ECT, which was negotiated in the 1990s – an entirely different geopolitical and climate change context.
Today, there is inconclusive evidence of whether investor-state arbitration actually promotes investment – it is rarely a consideration for investors when they make an investment decision. Other factors that depend on the quality and nature of the investment will be much more important, like the availability of infrastructure, a qualified workforce and so on.
So, you are saying the UK itself might be considering to withdraw from the ECT?
It is not out of the question. We tend to think of states as too opportunistic, but this is a multi-dimensional negotiation process involving several questions of policy – energy policy, investment policy, trade policy, etc.
The UK might just be willing to withdraw, and there might actually be more room for manoeuvre than one would think.
What about Switzerland and Japan: do you think they would have an interest in withdrawing as well?
It might be harder to convince them, given their stance on investment protection. But I do not think that Japan will become a major destination for forum shopping because the arbitration industry does not have a strong presence there.
Switzerland is a different question because it is often chosen as a seat in investor-state arbitrations. This has led to a strong presence of the arbitration industry. If Switzerland were to stay a contracting party within an imploding ECT and benefit from that by becoming the forum shopping destination of choice for ECT arbitration tribunals – that would expose Switzerland to a tremendous amount of pressure. And I am not sure it could sustain that.
To conclude, what are the next steps now for the EU regarding the ECT?
The Commission, together with states having announced withdrawals, must also work with those Member States that remain hesitant to ensure a collective withdrawal. A patchwork of membership is unacceptable because of the ECT’s status as a mixed agreement and the fact that it is currently incompatible with EU law.
Member States will be contributing to the debate as well via the European institutions.
Yes, the EU will determine its course of action as part of its usual decision-making involving the Member States and the European Parliament.
That is something I have been missing in the public communication of the Commission. The Commission’s strategy until now has been focused on persuading EU Member States to reform the ECT based on alleged concerns about the sunset clause and the consequences of failure.
Now that the reform process has failed, the Commission must change that strategy.