[et_pb_section fb_built=”1″ _builder_version=”4.5.1″ _module_preset=”default”][et_pb_row _builder_version=”4.5.1″ _module_preset=”default” min_height=”181px” custom_padding=”|0px||||”][et_pb_column type=”4_4″ _builder_version=”4.5.1″ _module_preset=”default”][et_pb_text _builder_version=”4.5.1″ _module_preset=”default” inline_fonts=”Cormorant Garamond,Molengo,Cormorant,Cormorant Infant”]<\/p>\n
Abstract<\/span><\/strong><\/span><\/p>\n The Energy Charter Treaty (hereinafter \u201cECT\u201d or \u201cTreaty\u201d) is a multilateral agreement that was signed in the early 1990s. The ECT guarantees protection to investments in the energy sector and provides for a dispute resolution mechanism between Contracting Parties. It has been \u201ctested\u201d in a number of large-scale disputes, including the Yukos case<\/em>, which concerned, inter alia, the issue of provisional applications of the ECT by the Russian Federation. From the application of the ECT in the past, it was seen that the functioning of ECT-based tribunals lacked predictability and certainty. Therefore, it was decided that the Treaty needed to be reformed to address the concerns of Contracting Parties with respect to consistency in dispute resolution, the right to regulate such issues as environmental protection, as well as Fair and Equitable Treatment (FET) and the Most-Favoured Nation (MFN) clauses.<\/span><\/p>\n \n Timeline of the Reform<\/span><\/strong><\/span>\u00a0<\/span><\/strong><\/p>\n The discussion on the potential reform of the ECT commenced in 2017 at the Energy Charter Treaty Conference. The Strategy Group was established to handle discussions on the reform.<\/span><\/p>\n In 2018, the Conference approved a list of topics for the modernization of the Treaty, which included, inter alia<\/em>, pre-investment, the definition of the word \u201ccharter<\/em>\u201d, definitions of \u201cinvestment\u201d and \u201cinvestor\u201d, right to regulate, MFN and FET clauses, transparency, third-party funding, etc.<\/span><\/p>\n In 2019, some policy options for modernization were approved. Later, in 2020, the discussion took an active turn, and four rounds of negotiations were held. After the last round, when the Modernisation Group finalized the discussions on the abovementioned issues, the Energy Charter Conference was held in December 2020. In 2021, the Modernisation Group further held nine rounds of negotiations, advancing the aspects of the reform in connection with the definition of \u201cinvestment\u201d, the MFN clause, frivolous claims, security for costs, and third-party funding. In 2022, six additional rounds were held. Finally, on 24 June 2022, the Contracting Parties reached an agreement regarding the upcoming reform by issuing the<\/span>Public Communication<\/a> on the finalization of the negotiations.<\/span><\/span><\/p>\n <\/span><\/p>\n Main Achievements<\/span><\/strong><\/span>\u00a0<\/strong><\/p>\n As a result of the discussions held in the previous years, in June 2022, the Commission came to an agreement to build the modernization in three directions, called the<\/span>\u201cthree pillars\u201d<\/a>, which are as follows:<\/span><\/span><\/p>\n The most significant changes were made to the definitions of \u201cinvestor\u201d and \u201cinvestment\u201d. The drafters of the amendment decided to introduce a criterion that assets need to comply with for them to constitute \u201cinvestments\u201d under the ECT. The criterion resembles that of the Salini test<\/em> and includes the commitment of capital, gain or expectation of profit, duration<\/em>,<\/em> and assumption of risk. <\/em>Furthermore, investments are now to be made expressly in accordance with the laws of the host Contracting Party in order to be protected under the ECT. The new version of the definition of \u201cinvestor\u201d excludes individuals with the nationality or permanent residence of the Contracting Party at the time of the investment. Moreover, an investor must now comply with the requirement of having \u201csubstantial business activities\u201d by showing that it has a physical presence, staff, generation of profits, or payment of taxes in the area of a host Contracting Party. Investment, in its turn, excludes administrative or judicial decisions, as well as arbitral awards from the scope of the protection. Additionally, the category of claims for money, contained in Art.1(6), is limited to exclusively those claims which do not arise from solely commercial transactions. The changes also concern specific<\/span>public debt instruments<\/a>, which are also excluded from the scope of investment protection.\u00a0<\/span><\/span><\/p>\n In order to add certainty to the definition of \u201cFair and Equitable Treatment\u201d, a new article on FET has been added, and it provides a list of specific measures that can be considered violations of FET. The list will include, inter alia<\/em>, the<\/span>frustration of an investor\u2019s legitimate expectations<\/a>.\u00a0<\/span><\/span><\/p>\n The amendment provides clarifications on the notion of \u201cDirect Expropriation\u201d, and incorporates a proper definition of the term \u201cIndirect Expropriation\u201d, specifying the list of factors that assist in drawing a line between the two concepts. The MFN clause has also been modified, and the new provision stipulates that the MFN treatment clause shall not extend to dispute settlement procedures.<\/span><\/p>\n Finally, a provision on the Contracting Parties\u2019 \u201cright to regulate\u201d is to be incorporated into the ECT, in order to reaffirm the Parties\u2019 rights to safeguard public policy objectives, such as<\/span>climate change mitigation, protection of public health, safety, or public morals<\/a>, etc.\u00a0<\/span><\/span><\/p>\n The dispute settlement area is also to be modified and supplemented by the following mechanisms:\u00a0<\/span><\/p>\n The amended version of the ECT will finally resolve the issue of whether the dispute settlement mechanism and other provisions of the ECT apply to Member-States of the same Regional Economic Integration Organization (REIO) \u2013 the drafters have highlighted that Articles 7 (Transit<\/em>), 26 (Investment Dispute Settlement), 27 (Disputes between Contracting Parties), and 29 (Trade with non-WTO members) shall not apply to the members of the REIO in their mutual relations.<\/span>\u00a0<\/span><\/span><\/p>\n The other agreed changes concern some general principles on transit, sustainable development, corporate social responsibility, and pre-investment.<\/span>\u00a0<\/span><\/span><\/p>\n The final draft text of the updated ECT is expected to be communicated to the Contracting Parties for review on 22 August 2022 and for further adoption by the Energy Charter Conference<\/span>on 22 November 2022<\/a>.<\/span><\/span><\/p>\n <\/span><\/p>\n Definition of \u201cInvestment\u201d<\/span><\/strong><\/span>\u00a0<\/strong><\/p>\n It is hard to disagree with the opinion of D. Geraets and L. Reins, as expressed in the Commentary to the ECT, that the<\/span>\u201ckey to any investment treaty is the definition of \u2018Investment\u2019\u201d.<\/span><\/em><\/a> Indeed, the definition of investment in the Bilateral Investment Treaty (BIT), or any other instrument, is crucial to ensure certainty and predictability in international arbitration awards. If we turn to the ECT,<\/span>Art. 1(6)<\/a> provides the following definition of investment:\u00a0<\/span><\/span><\/p>\n \u201cInvestment\u201d means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:<\/em><\/span><\/p>\n (a) \u00a0tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;<\/em><\/span><\/p>\n (b) \u00a0a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;<\/em><\/span><\/p>\n (c) \u00a0claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;<\/em><\/span><\/p>\n (d) \u00a0Intellectual Property;<\/em><\/span><\/p>\n (e) \u00a0Returns;<\/em><\/span><\/p>\n (f) \u00a0any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.<\/em><\/span><\/p>\n A change in the form in which assets are invested does not affect their character as investments and the term \u201cInvestment\u201d includes all investments, whether existing at or made after the later of the date of entry into force of this Treaty for the Contracting Party of the Investor making the investment and that for the Contracting Party in the Area of which the investment is made (hereinafter referred to as the \u201cEffective Date\u201d) provided that the Treaty shall only apply to matters affecting such investments after the Effective Date.<\/em><\/span><\/p>\n \u201cInvestment\u201d refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as \u201cCharter efficiency projects\u201d and so notified to the Secretariat.\u201d<\/em>\u00a0<\/em><\/span><\/p>\n Several international investment tribunals have highlighted, in a number of cases, that the definition is broad and leaves room for interpretation, which is, in fact, a blessing and a curse. On the one hand, such a wide definition allows the demonstration of an inclusive approach to investors\u2019 assets. However, on the other hand, the non-exhaustive asset-based definition usually creates a problem for the tribunal when it comes to interpretation. Usually, while constructing the provisions of a Treaty, arbitrators turn to the<\/span>Vienna Convention on the Law of Treaties<\/a> (VCLT), which provides that, as a general rule, the \u201cordinary meaning\u201d of the term is to be given to the term of the instrument. Consequently, the set of tools available to tribunals is rather limited, which makes the task of arbitrators more difficult, especially taking into consideration the broadness of the definition and the variety of forms that the investments might take. Therefore, the decision to draw a line and limit some of the categories that should not fall within the scope of the protection of the ECT might enhance legal certainty when it comes to the interpretation of the definition of investment.\u00a0<\/span><\/span><\/p>\n The following introduced measures are aimed at achieving exactly these goals \u2013 in the new version of Art. 1(6), an investment shall comply with the list of characteristics (which are, in fact, the criteria of the Salini test), namely, the commitment of capital, the expectation of gain or profit, certain duration, or<\/em> the assumption of risk. This amendment will definitely change the approach of the arbitrators to the interpretation of investment under Art. 1(6) of the ECT, since previously, the position of the arbitrators in the matter of whether an investment shall be construed in accordance with its meaning under international law<\/em>, can be summarized in the approach taken by the tribunal in Luxtona Limited v. Russia<\/em> \u2013 herein, the arbitrators highlighted that Art.1(6) contains a \u201cwide and open-ended<\/em>\u201d definition of investment and that there had been no instances when any tribunal had suggested that an investment should be interpreted in accordance with the concept of investment under general international law. Moreover, it was stated that the Salini test was irrelevant for the purpose of attributing an investment under ECT. Such an approach was upheld by a number of tribunals, including those in Plama v. Bulgaria, Petrobart v. Kyrgyz Republic, Kardassopoulos v. Georgia, Amto v. Ukraine, Veteran Petroleum v. Russia, Electrabel v. Hungary<\/em>, and Stati v. Kazakhstan.<\/em>\u00a0<\/em><\/span><\/p>\n It was agreed to expressly exclude from the scope of the definition of investment, the following categories:<\/span><\/p>\n The decision to exclude those precise categories has a practical background, dictated by recent practices. For example, in Petrobart Ltd. v. The Kyrgyz Republic<\/em>, the tribunal considered that, under Art.1(6) of the ECT, the Claimant\u2019s claim for payment under the sales agreement for gas could constitute an investment, as it falls within the category of<\/span>\u201cright conferred by [\u2026] contract\u201d. <\/span><\/a><\/span><\/p>\n Another example is when a Swiss company was claiming that an arbitral award might be considered an investment under the BIT, with the asset-based definition of investment. In particular, in the case Romak v. Uzbekistan, <\/em>which dealt with the issue of whether an arbitration award can be considered an investment under the definition of an investment contained in the BIT. Although the mentioned case was not ECT-based, the definition of investment in the<\/span>Switzerland-Uzbekistan BIT<\/a> was an asset-based definition, similar to the ECT\u2019s Article 1(6), which went as follows:\u00a0<\/span><\/span><\/p>\n “Article 1<\/em><\/span><\/p>\n Definitions<\/em><\/span><\/p>\n [\u2026]<\/em><\/span><\/p>\n 2. The term \u201cinvestments\u201d shall include every kind of assets and particularly:<\/em><\/span><\/p>\n (a) movable and immovable property as well as any other rights in rem, such as servitudes, mortgages, liens, pledges; <\/em><\/span><\/p>\n (b) shares, parts or any other kinds of participation in companies; <\/em><\/span><\/p>\n (c) claims to money or to any performance having an economic value; <\/em><\/span><\/p>\n (d) copyrights Industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), technical processes, know-how and goodwill; <\/em><\/span><\/p>\n (e) concessions under public law, including concessions to search for, extract or exploit natural resources as well as all other rights given by law, by contract or by decision of the authority in accordance with the law. <\/em><\/span><\/p>\n [\u2026]\u201d<\/em>\u00a0<\/span><\/p>\n The tribunal in that case brought up the concept of the \u201cinherent meaning of investment\u201d, pointing out that the mere fact that an asset in dispute might fall into one or more of the categories listed in the definition, is not enough to consider such an asset as an investment because the term investment<\/span>\u201chas a meaning in itself and cannot be ignored [\u2026]\u201d<\/a>. The tribunal further examined the Claimant\u2019s assets, relying on the criteria of contribution and assumption of risk, and concluded that the arbitration award could not be considered an investment since, firstly, the Claimant had made no contribution to the territory of Uzbekistan, and, secondly, the Claimant had never assumed any<\/span>\u201cinvestment risk\u201d<\/a> (here, the arbitrators drew a line between ordinary \u201ccommercial\u201d risk and \u201cinvestment\u201d risk).\u00a0<\/span><\/span><\/p>\n Therefore, the new version of the definition of investment under the ECT will limit the scope of assets, providing a mechanism aimed at limiting the possibility of intentionally using<\/em> the broad definition contained in Art.1(6) to extend the protection of the ECT to an unpredictable variety of assets.<\/span><\/p>\n <\/span><\/p>\n Disputes between Members of Regional Economic Integrational Organization<\/span><\/strong><\/span>\u00a0<\/strong><\/p>\n The decision of the Court of Justice of the European Union (CJEU) in the Komstroy v. Moldova<\/em> case paved the way for respondents in investment proceedings to raise an objection to the jurisdiction of the tribunals under the ECT, based on the argument that Art. 26 of the ECT shall not be applicable to disputes between EU member-states. The typical argument included the same approach to the issue as was taken by the respondent in NextEra Energy v. Spain<\/em> wherein the respondent State had argued that both Spain and the Netherlands were members of the EU when they joined the ECT. Therefore, the Claimant could be considered to be the investors of \u201canother Contracting Party\u201d, as envisaged by Art. 26 of the ECT. Additionally, the respondent submitted that EU law, as a part of international law, shall prevail over the ECT if there is any conflict over the norms. The tribunals, in their majority, dismissed intra-EU objections on the following grounds:\u00a0<\/span><\/p>\n Therefore, the interpretation of Art. 26 of the ECT in accordance with its ordinary meaning does not allow one to come to the conclusion that the Contracting Parties<\/span>intended to exclude intra-EU disputes from the scope of the dispute resolution clause<\/a>. However, in June 2022, the Stockholm Chamber of Commerce (SCC) tribunal in a renewables dispute against Spain, for the first time, upheld the intra-EU objection raised by Spain. The tribunal agreed that EU law should be \u201clex superior\u201d<\/em> and, consequently,<\/span>shall override the EU members\u2019 obligations<\/a> under the ECT. Therefore, there is still room for discussion about whether the practice will take a new direction after this award. However, nevertheless, the tribunal\u2019s approach will have an impact on further consideration of the intra-EU objections, although there is no concept of stare decisis<\/em> in investment arbitration.\u00a0<\/span><\/span><\/p>\n <\/span><\/p>\n Conclusion<\/span><\/strong><\/span>\u00a0<\/strong><\/p>\n\n
\n
\n
\n