The International Business Transactions Blog

Arbitration Frustration in the EU Energy Sector: A Ban on Intra-EU Arbitration under the Energy Charter Treaty

By BethEl Nager
Law Student Editor

On September 2, 2021, the Court of Justice of the European Union (CJEU) issued a milestone ruling in Republic of Moldova v. Komstroy LLC, holding that the Energy Charter Treaty (ECT) could no longer be used in the European Union (EU). This new order prohibits the use of the ECT’s arbitration provision between EU countries, strengthening the EU’s control over energy investments. In addition, the EU is concerned about the binding nature of arbitral awards that have no possibility of a substantive appeal to EU courts and their juxtaposition with EU laws.

The Energy Charter Treaty 

The ECT, signed in 1994, is an international agreement that created a framework for cooperation between energy companies to strengthen the rule of law on energy issues and promote cross-border energy governance and international energy security. It allows  energy entities to sue foreign governments over government measures affecting energy resources. The ECT also provided for investment into energy-related businesses and set a baseline on legal guarantees for investors. For example, governments are not allowed to expropriate property without the permission of the owner without just compensation. Furthermore, the treaty offers investors the option to resolve energy-related disputes with other countries in court or through international arbitration.

Historical Background 

In the 2018 Achmea decision, the Grand Chamber of the CJEU determined that international arbitral decisions fell outside of EU institutions. An international arbitration agreement involving an investor and host state, both of which are in the EU, would preclude resort to the CJEU, even though the dispute might involve an interpretation of EU law. The court found that “a bilateral agreement between member states, under which investors from one member state can bring proceedings against another member state in an arbitral tribunal, contravene EU law.” Achmea effectively established that international arbitration is not an appropriate forum for bilateral investment treaty disputes when the dispute is between an EU member state and an investor from another EU member state, so-called “intra-EU disputes.” 

After this decision, there was conflict between different countries as to whether an international arbitral proceeding in intra-EU disputes violated EU law. In 2019, the Paris Court of Appeal asked for clarification regarding the application of the ECT. The Paris court needed direction prior to a hearing on a $49 million ECT award won by Komstroy, a Ukrainian organization, against the Republic of Moldova. In this situation, none of the parties voiced an ECT concern. Instead, the European Commission and various EU member states intervened.

The Komstroy Ruling

Between 2018 and 2021, there was great uncertainty about the applicability of the Achmea decision to existing treaties. In 2020, many of the EU countries agreed to halt implementing their bilateral investment treaties with other EU countries. Despite this agreement, some EU countries emphasized that the court’s ruling had “‘legal consequences’ for the ECT—a multilateral treaty whose signatories include non-EU states.” The goal was for the court to determine whether Achmea applied to the ECT. Eventually, the court clarified that any agreement entered into by an EU company is governed by EU law and thus cannot be arbitrated internationally.

The CJEU ruled in Republic of Moldova v. Komstroy LLC that the ECT’s arbitration process, which resolved longrunning controversies, would undermine the role of EU courts. This reflects that belief that conflicts surrounding EU laws should be handled within the EU court system. By negating the arbitration process, the CJEU invalidated the longstanding use of arbitration under the ECT in intra-EU disputes.  Many energy investors and countries are now concerned about the costs and legal uncertainty of disputes that may arise under the ECT, because a decision of the CJEU cannot in itself negate treaty obligations such as the ECT’s arbitration clause. This reversal of long-standing policy represents one of the EU’s many efforts to federalize legal procedures that might raise questions of EU law in some measure and therefore to create a unified interpretation of that law, but at some cost to the security of foreign investors in the EU energy sector, who may fear that the EU judicial system will be less impartial than an arbitral tribunal might be.