Executive summary: Two ICSID tribunal have ruled that the Energy Charter Treaty does not confer jurisdiction on them to hear disputes between EU Member States and investors from other EU Member States. On 11 October 2024, two ICSID tribunals for the first time upheld the "intra-EU objection" and confirmed that they do not have jurisdiction to hear disputes between EU Member States and investors from other EU Member States under the Energy Charter Treaty (ECT). These decisions constitute a major development, as previous ICSID tribunals had not applied the intra-EU objection in the same way. The cases were brought by the Belgian company Sapec, S.A. and the Danish company European Solar Farms A/S, which sought compensation from Spain for changes to its renewable energy support scheme. The tribunals ruled that they could not adjudicate on disputes between EU Member States and intra-EU investors due to the primacy of EU law. This decision aligns ICSID tribunals with the position taken by the European Commission and EU courts, and may bring to an end the debate on the application of the intra-EU objection in investment arbitrations.
An ICSID Arbitral Tribunal has once again addressed the so-called "intra-EU objection," affirming this time the primacyof European Union (EU) law in determining its jurisdiction under the Energy Charter Treaty (ECT), and ultimately concluded that arbitral tribunals lack jurisdiction to resolve disputes between an EU Member State and an investor from another EU Member State.
On 11 October 2024, two arbitral awards were issued in which the ICSID arbitral tribunals found that they had no jurisdiction to hear investment disputes between national investors of EU Member States and Spain, according to a press release issued by the Spanish government.
The cases in question are the following: the first, filed by Sapec, S.A., a company based in Belgium, in August 2019 (ICSID Case No. ARB/19/23), in which it sought 27.4 million EUR from the Kingdom of Spain, in addition to interest and costs; and the second, filed by the Danish company European Solar Farms A/S (ESF) in December 2018 (ICSID Case No. ARB/18/45), in which it sought 45.1 million EUR in compensation, in addition to interest and more than 4 million EUR in costs.
While the decisions are not yet publicly available and the precise reasoning is not known, the Spanish government has indicated that in both cases the ICSID tribunals, following very similar reasoning, have endorsed the argument put forward for more than a decade by Spain and other European States, as well as by the European Commission, according to which the participation of the EU in the ECT as a regional economic interest organisation has introduced into its scope the supremacy of EU law in the field of competences transferred to the EU by the Member States.
In Spain's view, these decisions would "settle the debate" on the alleged differences in the treatment of the intra-EU objection by tribunals established under ICSID rules and those established under the rules of the Stockholm Chamber of Commerce (SCC). In June 2022, an Arbitral Tribunal constituted under the SCC rules declared for the first time in Green Power K/S and Obton A/S v. Spain (SCC Case No. V 2016/135) the lack of jurisdiction of arbitral tribunals to hear intra-EU disputes under the ETC, as reported by iarbnews here. However, the same arbitral tribunal had made it clear that this reasoning was not applicable to ICSID arbitrations, as these were purely international in nature, had no connection to any domestic jurisdiction and no seat and, therefore, were not subject to the domestic lex arbitri of the seat in an EU Member State.
Dean Ehrlich
The ECT was signed in December 1994 and entered into legal force in April 1998. The signatory parties include both the EU and Euratom.
The treaty offered additional guarantees to Western investors who wanted to do business in the former Soviet states, which were then in transition to a market capitalism model and had many untapped fossil resources.
In addition, Article 26 of the ECT contains a standing offer to arbitrate investment disputes between States and foreign investors.
It was not until 2008, in Electrabel S.A. v. Hungary (ICSID Case No. ARB/07/19), that the so-called "intra-EU objection" began to be raised. According to this objection, the arbitration clause provided for in Article 26(2)(c) of the ECT must be interpreted as inapplicable to disputes concerning an investment made by an investor from one EU Member State in the territory of another EU Member State.
By then, both the EU Commission and the EU Member States started to raise the inoperability of Article 26 of the ECT between EU investors and EU Member States, i.e. that the ECT does not contain a valid offer to arbitrate intra-EU disputes.
However, it took ten years for this position to be accepted by the courts, more precisely by the Court of Justice of the European Union (CJEU) in the landmark cases Achmea B.V. v. Slovak Republic (PCA Case No. 2008-13), Komstroy v. Republic of Moldova (UNCITRAL) and PL Holdings S.à.r.l. v. Republic of Poland (SCC Case No. V 2014/163).
CJEU’s Decisions in Achmea, Komstroy and PL Holdings
In the Achmea judgement, the CJEU held that arts. 267 and 344 Treaty on the Functioning of the European Union (TFUE) preclude a provision in an international agreement concluded between Member States, such as Article 8 of the Netherlands-Czech and Slovak Federative Republic BIT, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.
By concluding such an agreement, the Member States agree to exclude from the jurisdiction of their own courts and, therefore, from the system of judicial remedies which Article 19(1)(2) of the Treaty on European Union (TEU) requires them to establish in areas covered by EU law, disputes which may relate to the application or interpretation of that law.
In CJEU’s view, such an agreement may mean that these disputes are settled in a manner which does not ensure the full effectiveness of Union law and are incompatible with Articles 267 and 344 of the Treaty on the Functioning of the European Union;
Moreover, it was clear for the CJEU that the Arbitral Tribunal did not form part of the EU judicial system which the Article 19(1)(2) TEU obliges the Member States to establish in areas covered by EU law.
Consequently, according to the CJEU, Slovak Republic's consent to the arbitration system set out in the BIT ceased to be applicable after its accession to the European Union.
On 2 September 2021, the CJEU delivered its preliminary ruling in Republic of Moldova v Komstroy. The ruling concerned the interpretation of Article 1(6) and Article 26(1) of the ECT at the request of the Cour d’appel de Paris – seized at that moment with an annulment action regarding an arbitral award made on 25 October 2013 in terms of the procedure provided for in Article 26(4)(b) of the ECT.
The CJEU held that while Member States may still be required to comply with the ECT’s dispute resolution mechanisms concerning an investment made by an investor from a third state in a Member State’s territory, the dispute resolution mechanisms provided for in the ECT cannot be applied to disputes concerning an investment made by an investor from one Member State in the territory of another Member State. It therefore concluded that – in order to preserve the autonomy and particular nature of EU law – Article 26(2)(c) of the ECT must be interpreted as inapplicable to disputes concerning an investment made by an investor from one Member State in the territory of another Member State.
The CJEU essentially extended the Achmea reasoning to Article 26 of the ECT, when applied intra-EU.
In its Judgment of 26 October 2021 on the Request for a preliminary ruling in Republiken Polen v PL Holdings Sàrl, the CJEU concluded that Articles 267 and 344 of the Treaty on the Functioning of the European Union (TFEU) must be interpreted as precluding national legislation which allows a Member State to conclude with an investor from another Member State an ad hoc arbitration agreement which allows arbitration proceedings initiated under an invalid arbitration clause such as that referred to in Achmea to be continued.
Green Power Partners K/S (Green Power) and SCE Solar Don Benito APS (SCE) v the Kingdom of Spain
Green Power and SCE were Danish companies that made investments in the Kingdom of Spain in reliance on economic subsidies granted by the Spanish state in 2007 with the goal of attracting investment in renewable energy production, including photovoltaic installations, within its territory.
However, in the wake of 2008 financial crisis, Spain rolled back some of those incentives, which led to multiple arbitration claims, including the one filed by Green Power and SCE before the Arbitration Institute of the Stockholm Chamber of Commerce on 8 September 2016, claiming EUR 74 million in compensation following Spain’s alleged violation of the ECT and international law.
In turn, Spain objected the Tribunal’s jurisdiction ratione personae and ratione voluntatis. After pointing out that Article 26 of the ECT relates to disputes between a contracting party and an investor of another contracting party, it argued that the EU should be considered a single contracting party to the ECT. Therefore, Article 26 of the ECT should not apply to that dispute because both the respondent and the investors’ home State were EU member states. As a result, the tribunal lacked jurisdiction ratione personae. Moreover, Spain relied on the CJEU’s decisions in Achmea and Komstroy cases and contended that the Tribunal lacked jurisdiction ratione voluntatis because the EU law should prevail over Article 26 of the ECT, according to which Spain’s offer to arbitrate under Article 26 ECT was inapplicable.
Having noted that that Article 26(1) of the ECT refers only to the merits of the disputes, the ad hoc Tribunal held that Article 26(6) only provides for the applicable law on the merits of the dispute. Therefore, there was no agreement between the disputing parties on the applicable law on jurisdiction.
The Tribunal dismissed the objection to jurisdiction ratione personae, because, according to Article 31(1) of the VCLT, the terms “contracting party” and “investors of another contracting party” mentioned in Article 26(1) of the ECT should be interpreted “in accordance with the ordinary meaning to be given to the terms”. In this case, Spain and Denmark were EU Member States as well as ECT contracting parties with respect to each other. The Tribunal concluded that EU and EU Member States coexist for the purpose of Article 26(1) of the ECT and dismissed the respondent’s objection to jurisdiction ratione personae.
Then, the Tribunal upheld the Respondent’s jurisdictional objection ratione voluntatis. Having established the relevance of EU law in determining its jurisdiction under the ECT, the SCC Tribunal relied upon the CJEU’s decisions in Achmea, Komstroy and PL Holdings to conclude that Article 26 of the ECT did not contain a valid standing offer to arbitrate investment disputes between an EU investor and an EU Member State and, therefore, it had no jurisdiction over the case.
However, the Tribunal noted that this conclusion was not applicable to Arbitral Tribunals constituted under the ICSID Convention, as these were of a purely international character, had no connection to any domestic jurisdiction and no seat. As such, they were not subject to the domestic lex arbitri of the seat in an EU Member State.
On the contrary, the Tribunal noted that ICSID Tribunals routinely rely on the ICSID Convention, particularly - but not only - on its Article 25, as part of the law applicable to the determination of jurisdiction, as they did in Electrabel v. Hungary and Vattenfall v. Germany.
The SCC tribunal thus made a clear distinction between SCC arbitrations seated in the EU and ECT arbitrations seated outside the EU (e.g. in Switzerland or the UK) or ECT arbitrations under the auspices of the ICSID Convention, to which Spain refers in its press release, and which the ICSID Awards rendered on 11 October 2024 would have allegedly put an end to.
Dispute Background
As we have previously pointed out in several similar cases against the Kingdom of Spain (see here, and here, among others), during the late 1990s, Spain began offering financial incentives to attract investors to its renewable energy space. These included a premium to supplement the market price of electricity produced by renewable energy sources. In the ensuing years, Spain made various adjustments to the incentives, including by introducing regulated electricity tariffs. In 2007, Spain increased the premium and regulated tariff afforded to electricity produced by solar thermal plants, indicating that the rates would remain in place for at least 25 years.
Beginning in 2012, however, Spain began walking back these incentives and imposed a seven percent tax on the production of electric power.
Spain's decision to decrease the financial incentives caused most of investors in the photovoltaic sector (among them Sapec, S.A. and European Solar Farms A/S), to resort to arbitration through the ECT and the ICSID Convention.
