Energorynok had no ownership or control over energy-related economic activity; ECT case against Moldova dismissed

State Enterprise “Energorynok” (Ukraine) v. The Republic of Moldova, SCC Arbitration V (2012/175)

A January 29, 2015 award by a tribunal under the Arbitration Institute of the Stockholm Chamber of Commerce has recently become public. The tribunal dismissed the claims by Ukrainian state enterprise Energorynok against Moldova under the Energy Charter Treaty (ECT) for lack of jurisdiction.

Background and claims

In February 1995, the energy ministries of Ukraine and Moldova concluded an Agreement on the Parallel Operation of the Energy Systems of Ukraine and Moldova (the APO), vesting its performance in two state enterprises: Ukrenergo for Ukraine, Moldtranselectro for Moldova.

An overflow of electricity of 50,000,000 kWh occurred from Ukraine to Moldova in October 1998; under the APO, this overflow trigged Moldova’s obligation to compensate Ukraine in the amount of USD 1,662,297.81. Ukraine’s credit for the overflow was transferred from Ukrenergo to the claimant, Ukrainian state enterprise Energorynok, established in May 2000.

After trying unsuccessfully to obtain payment from Moldtranselectro for five years, Energorynok initiated a lawsuit in 2002 against Moldova’s energy ministry. This lawsuit resulted in a December 25, 2002 decision of the Economic Court in Kiev that ordered Moldova’s energy ministry to pay Energorynok USD 1,745,412.71 and litigation costs.

As Energorynok’s efforts to enforce the 2002 decision also failed, it initiated arbitration against Moldova under the ECT in December 2012. In particular, it argued that its claim to money under the 2002 decision was an investment under the ECT and that, by failing to enforce the decision, Moldova expropriated Energorynok’s investment and breached the fair and equitable treatment standard under the ECT. It sought compensation in the amount determined in the 2002 decision, plus interest, and arbitration fees and legal costs.

Moldova objects to jurisdiction; Energorynok insists it had “investment” under ECT

According to the tribunal, Moldova objected to the tribunal’s jurisdiction arguing that the 2002 Kiev court decision was “illegally and fraudulently obtained” and therefore did not deserve protection under the ECT, and that, even if this were not the case, Energorynok did not satisfy the criteria to bring an ECT claim (para. 77).

The tribunal reasoned that whether Energorynok had obtained the 2002 decision illegally and fraudulently was a question for the merits. Leaving that question to the side, it set out to look instead at whether it had jurisdiction, analyzing whether Energorynok had an “investment” under the ECT.

Relying on the definition of “investment” under ECT Article 1(6), Energorynok argued that its investment is a claim for money or the right to compensation for the overflow, and that this claim or right was an energy-related asset with an economic value. The claimant relied on Petrobart v. Kyrgyz Republic, which concluded that a contract, a court decision, and a claim to money concerning the sale of a gas condensate were “investments” under the ECT.

Tribunal looks at Petrobart and Electrabel to clarify circular definition of “investment”

In interpreting whether Energorynok had an investment, the tribunal looked mostly to Petrobart and to Electrabel v. Hungary, another ECT case. Both tribunals noted the ambiguous and unclear language in ECT Article 1(6)(c). In referring to “claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment,” the provision defines “investment” by resorting to a reference to “investment”—a circular definition raising logical problems.

The Petrobart tribunal concluded that, since the gas condensate sold was an energy material qualified as an “investment,” the claimant’s right to be paid for this gas condensate was also covered under “investment.” The Electrabel tribunal indicated that interpreting ECT Article 1(6)(c) depended on an overall assessment of the investment.

Energorynok failed to show ownership or control over energy-related economic activity

Applying these interpretations to the present case, the tribunal pointed out that the claimant, unlike Electrabel, was “not a shareholder in an entity directly or indirectly engaged in the underlying economic activities.” Furthermore, it indicated that Energorynok, unlike Petrobart, did not have “full control over its own sales and deliveries,” and was not “a full party to the sale and delivery contract” (para. 86).

The tribunal agreed with Energorynok that “ECT Article 1(6) requires the investor to own or control the asset” (para. 89). Yet the tribunal interpreted that, for the claim to money to qualify as an “investment” under Article 1(6)(c), the investor must also have ownership, control or a financial interest in the “investment” to which the claim was associated, that is, the underlying energy-related economic activity out of which the claim ultimately arose.

Indicating that Energorynok was not a party to the APO and, accordingly, had no right, obligation or role under the APO, the tribunal found that the claimant, even though owning or controlling a claim to money, did not have any ownership, control or interest in the “investment” to which the claim to money was associated—the transmission of electricity in Moldova. Accordingly, the tribunal found that Energorynok’s claim to money did not constitute an “investment” under the ECT, and dismissed the case for lack of jurisdiction.

The parties were ordered to bear arbitration costs equally, and each of them was ordered to bear its own legal costs and other expenses.

Notes: The SCC tribunal was composed of Nancy B. Turck (Chairperson appointed by the Arbitration Institute of the SCC), Joseph Tirado (claimant’s appointee), and Rolf Knieper (respondent’s appointee). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw6299.pdf

Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.