Germany favours substantial reform of the Energy Charter Treaty

Published: 08 April 2020 Authors: Sebastián Mantilla Blanco and Stefan Talmon

With 52 parties, the Energy Charter Treaty (ECT) is one of the most important multilateral investment treaties. Germany signed the ECT on 17 December 1994 and ratified it on 16 December 1997. The ECT has a prominent place in the German investment treaty landscape. By March 2020, German investors had been  party to 25 ECT arbitration proceedings and Germany had appeared as a respondent in three ECT arbitrations. The European Union (EU) and its Member States, including Germany, were leading an effort to amend and modernise the ECT. In response to a parliamentary request for information, the Federal Government on 21 February 2020 clarified several aspects of the German position on the future of the ECT.

The Federal Government confirmed that, at the moment, it is not considering withdrawing from the ECT. On the contrary, it supports a modernisation of the ECT modelled on chapter 8 of the Comprehensive Economic and Trade Agreement between Canada and the EU (CETA), and the inclusion of provisions implementing the Paris Agreement and the transformation of the energy sector.

The ECT and renewables

Many aspects of the intended changes to the ECT are aimed at ensuring that the ECT will pose no obstacles to Germany’s transition to renewables. According to the Federal Government, differential treatment of investments in renewables and investments in other energy sectors is already consistent with the national treatment (NT) and most-favoured-nation treatment (MFN) standards set out in Article 10(7) ECT. The Federal Government declared:

“The current ECT does not guarantee equal treatment of investments in different energy sources. On the basis of the equal treatment requirements of Article 10(7) ECT (most-favoured nation and national treatment principles), investors can only invoke a right to equal treatment with other investors who are in similar situations. This means that even under the current ECT, investors who have invested in different energy sources can be treated differently. Thus, even today, the ECT does not hinder the promotion and expansion of renewables.”

In response to the question of whether Germany would favour putting an end to the protection of investments in fossil fuels as a means to achieve the goals of the Paris Agreement, the Federal Government explained that

“investment protection should offer protection under international law against State measures that constitute a gross violation of the rule of law (expropriation without compensation, discrimination, denial of due process, etc.). The granting of such protection follows from the principle of the rule of law and cannot be made dependent on a particular energy source.”

Nevertheless, the Federal Government was in favour of including an express reference to the Paris Agreement in the ECT. Such reference should facilitate and ensure a harmonious application of the two treaties. The Federal Government stated:

“As part of the modernization of the ECT, the Federal Government and the EU must make it clear that the ECT does not hinder the implementation of the Paris Agreement and the achievement of the goals set there.”

No significant changes to pre-investment phase protection

The ECT contains several provisions which refer to the so-called pre-investment phase; that is, the period of time which precedes the actual making of the investment. For example, Article 18(4) ECT provides that “the Contracting Parties undertake to facilitate access to energy resources”. These provisions are characterized by soft, undemanding language. The Federal Government made clear its position that any amendments to the ECT would not include issues concerning the pre-investment phase, stating:

“The Federal Government and the other EU Member States are opposed to making the pre-investment phase the subject of the modernization negotiations. In any case, any provisions regarding the pre-investment phase must not be subject to dispute settlement. In this way, the EU wants to preserve the freedom of action required for the promotion of renewables by all contracting States. Furthermore, regulations such as those relating to transit must not contradict the principles of EU law.”

Substantive standards of investment protection: is CETA a window into the future?

With regard to the ECT’s substantive provisions on investment protection, the Federal Government favoured a clarification of current protection standards, adopting a CETA-inspired wording. It stated:

“The Federal Government welcomes the clarification of the protection standards for investments in the ECT based on Chapter 8 of CETA, as pursued by the EU. This clarification serves to make it clear that the ECT only provides protection against  interference with investments that grossly violates the rule of law, and that legitimate State regulation does not give rise to claims for compensation.”

Germany especially expected that an amended ECT text, modelled on Chapter 8 of CETA, would clarify the scope of application of the standard of fair and equitable treatment (FET) in Article 10(1) ECT and the expropriation clause in Article 13 ECT.

A CETA-inspired approach would entail fundamental changes to the structure of the ECT’s substantive protection standards. This holds particularly true for the FET standard. In its current form, Article 10(1) ECT expresses the Contracting Parties’ “commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment”. The ECT does not provide further specification of the obligation to provide “fair and equitable treatment” to covered investments. By contrast, Article 8.10(2) CETA includes a list of possible breaches of the FET standard, such as denial of justice, fundamental breach of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds, and abusive treatment. In addition, Article 8.10(3) CETA creates a mechanism of review, which allows the parties to constantly update the content of the FET obligation. An adjustment of Article 10(1) ECT based on CETA could also entail a restrictive definition of “legitimate expectations” protected under the FTE standard. In particular, it could be specified that such expectations must emanate from “specific representations” attributable to the host State (cf. Article 8.10(4) CETA).

Right to regulate: more room for green legislation

The Federal Government emphasized that, while the ECT provides a legal framework which fosters stability for investments in the energy sector, it respects each State’s right to regulate. Nevertheless, it was in favour of introducing into the treaty text provisions which underscored the host State’s regulatory freedom. It stated:

“The current ECT is intended to provide a stable legal framework for investments in the energy sector, to promote compliance with the rule of law in all Contracting Parties and to integrate the former Eastern Bloc countries into the global energy market. Under the current ECT, the Contracting Parties are free to adopt legitimate regulation in the energy sector. This includes both the necessary regulation for the transformation of the energy sector, regulation in the public interest in order to protect persons, the environment and nature, and sanctions in individual cases against investors who do not observe national laws. As part of the modernisation [of the ECT], these goals should be clarified and, once again, underscored.”

Previous statements suggest that the emphasis on the right to regulate seeks to facilitate the transformation of the German economy to renewables. On 12 November 2019, in a statement about the EU’s Negotiation Directives for the Modernization of the ECT, the Federal Government explained:

“In the Negotiation Directives (Council Document No. 10745/19 ADD 1) it is laid down that the right of the ECT Contracting Parties to adopt measures in order to achieve legitimate public aims is to be reinforced. The Negotiation Directives further stipulate that, in line with the EU’s redesigned concept for investment protection, it should be clearly stated that the clauses on investment protection must not be interpreted so as to require the Contracting Parties to desist from making changes to their laws, even if these changes have, for example, a negative impact on an investor’s expected profit. This reaffirmation of the State’s power to regulate is to provide States with the necessary leeway to take measures, inter alia, for the implementation of the transformation of the energy sector.”

Intra-EU disputes under the ECT: the legacy of the Achmea judgment

For Germany, one of the main issues concerning the ECT is its application to disputes between an EU Member State and an investor of another EU Member State (intra-EU investment disputes). In 2016, the German Federal Court of Justice submitted a request to the Court of Justice of the European Union (CJEU) for a preliminary ruling concerning the compatibility with EU law of an investor-State dispute settlement clause in the Netherlands-Slovakia Bilateral Investment Treaty (BIT). In its Achmea judgment of 6 March 2018, the CJEU ruled that Articles 267 and 344 of the Treaty on the Functioning of the EU must be interpreted as “precluding” an intra-EU investor-State arbitration clause, such as Article 8 of the Netherlands-Slovakia BIT.

Based on the CJEU’s ruling in Achmea, Germany raised a jurisdictional objection in Vattenfall v Germany, an investor-State arbitration under the ECT, arguing that the reasoning of the Court was equally applicable to intra-EU investment disputes under multilateral agreements such as the ECT, and that, therefore, the tribunal was lacking jurisdiction due to the absence of a valid arbitration clause. The objection was unsuccessful. Nevertheless, it remained the position of the Federal Government that the CJEU’s ruling in Achmea had a bearing on intra-EU investment disputes under the ECT. In a declaration of 15 January 2019 on the legal consequences of the CJEU’s judgment in Achmea and on investment protection in the European Union, Germany and 21 other EU Member States took the position that

“international agreements concluded by the Union, including the Energy Charter Treaty, are an integral part of the EU legal order and must therefore be compatible with the Treaties. Arbitral tribunals have interpreted the Energy Charter Treaty as also containing an investor- State arbitration clause applicable between Member States. Interpreted in such a manner, that clause would be incompatible with the Treaties and thus would have to be disapplied.”

However, six EU Member States were openly critical of the 22 Member States extending the ruling in the Achmea judgment to the investor-State arbitration clause in the ECT. In the absence of a specific judgment on this matter, they considered it “inappropriate” to express views as regards the compatibility with Union law of the intra-EU application of the ECT. While the Federal Government acknowledged this split in opinion, it continued to maintain its position that the ECT dispute settlement clause was not applicable between an EU member State and an investor of another EU Member State. In response to a parliamentary question on the consequences of the Achmea judgment on the ECT modernisation process, the Federal Government declared:

“As a small minority of EU Member States (Sweden, Finland, Hungary, Luxembourg, Slovenia and Malta) disputes the application of the judgment of the European Court of Justice of 6 March 2018 in Case C-284/16 (Achmea BV / Slovak Republic) to the ECT, and as, according to the competency framework, the position of the EU must be supported by all Member States, it is currently not clear in what form the judgment will have an impact on the modernisation process. It is Germany’s position that under EU law arbitration proceedings between an investor of a Member State and another Member State on the basis of the ECT are to be treated in the same way as arbitration proceedings between an investor of a Member State and another Member State on the basis of a bilateral investment protection and promotion agreement.”

The ECT and the project of a multilateral investment court

Germany has for a long time been in favour of investor-State arbitration. In 2009, the Swedish energy company Vattenfall brought a multi-billion claim against Germany before an arbitral tribunal established under the ICSID Convention. When asked in February 2010 whether such proceedings should be prevented in the future by a change of investment law, the Federal Government replied:

“The Energy Charter Treaty, as well as bilateral investment promotion and protection agreements, guarantee a minimum standard of the rule of law for investors together with a direct opportunity to bring a claim against a contracting party. In this respect, international investment protection law supplements and substantiates the protection of individual legal rights, as guaranteed in the [German] Basic Law and the European Convention on Human Rights. Moreover, the Energy Charter Treaty contributes to the spread and strengthening of the rule of law worldwide. The policy of the Federal Government therefore strongly supports the goals of the Treaty.”

There seems to have been a shift in the German position on investor-State arbitration in recent years. While the Federal Government still takes the position that an international dispute settlement mechanism should complement and augment the substantive protection standards set forth in the ECT, it now favours a multilateral investment court over ad hoc arbitral tribunals. In response to the parliamentary request for information, the Federal Government stated on 21 February 2020:

“The Federal Government and the other EU Member States are committed to ensuring that, inter alia, the results of the multilateral negotiations on the reform of investor-State dispute settlement in Working Group III of the United Nations Commission on International Trade Law (UNCITRAL) and at the International Centre for Settlement of Investment Disputes (ICSID) will be applicable to the ECT. They also want to work towards making a future multilateral investment court applicable to the ECT.”

The statements of the Federal Government on the “modernisation” of the ECT indicate that it is Germany’s aim to ensure a high degree of regulatory freedom in the energy sector. Such freedom could facilitate a more rapid transition from fossil fuels to renewables. The right to regulate will likely be at the heart of any ECT modernisation negotiations. The Federal Government seems to favour a reformed ECT modelled on CETA. This could lead to the incorporation into the ECT of a provision on “Investment and Regulatory Measures” similar to Article 8.9 CETA. Recourse to CETA could also result in detailed substantive protection clauses. There are some pitfalls with this approach, however. CETA may not be the most adequate model for the amendment of the ECT. For example, Article 8.10(3) CETA provides that “the Parties shall regularly, or upon request of a Party, review the content of the obligation to provide fair and equitable treatment”. In the framework of CETA, this review takes place through the CETA Joint Committee, a bilateral body of the EU and Canada established under CETA Article 26.1. This process might prove difficult to adapt to a multilateral treaty with 52 Contracting Parties such as the ECT. Constant review of the FET standard could indeed turn into a demanding and virtually impossible undertaking.

With regard to the procedural and institutional modernisation of the ECT, the Federal Government wants to replace the current dispute settlement mechanism in Article 26 ECT with a multilateral permanent investment court. This will depend not least on whether parallel negotiations on a multilateral investment court in other fora are successful. In the likely event that such negotiations will take longer than expected, the question remains whether Germany would support the creation of an own ECT Tribunal modelled on Chapter 8, Section F, of CETA. The modernised ECT, however, could also include a clause similar to Article 8.29 CETA which provides that the Contracting Parties shall pursue the establishment of a multilateral investment tribunal and, once that multilateral mechanism is established, a decision shall be taken providing that investment disputes are to be decided pursuant to that mechanism.

The Federal Government’s statements on the future of the ECT indicate that the modernised ECT could be greener, State-friendlier, and more institutionalized than the present Treaty. Considering the importance of the ECT in the investment treaty landscape, this could signify a general trend in international investment protection.

Category: International economic law

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Authors

  • Dr. Sebastián Mantilla Blanco, LL.M. is a Postdoctoral Research Associate at the Institute of Public Law of the University of Bonn.

  • Stefan Talmon is Professor of Public Law, Public International Law and European Union Law, and Director at the Institute of Public International Law at the University of Bonn. He is also a Supernumerary Fellow of St. Anne’s College, Oxford, and practices as a Barrister from Twenty Essex, London. He is the editor of GPIL.

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