Modernizing the Energy Charter Treaty: What about termination?

In late 2018, the Energy Charter Conference agreed to a list of topics to be discussed in connection with the so-called “modernization” of the 51-party ECT,[1] such as the definitions of investment and investor, the right to regulate, the definition of indirect expropriation, the umbrella clause, frivolous claims and third-party funding. Commentators have pointed out that although this list includes many important issues, strangely, two of the most important general topics are omitted: ISDS and climate change.[2] These omissions are stark given that they occur at a time when in-depth discussions on ISDS reform are taking place in multiple forums (including under the auspices of the EU and UNCITRAL) and when the need for a major shift towards renewable energy is widely recognized as urgent and essential to the future of the planet.

In this piece I discuss a third, related omission from the list of topics for discussion in modernizing the ECT: the termination of the treaty itself or withdrawal from the treaty by one or more parties, including the treaty’s survival clause. A key means of reforming international investment law today is by reaching better agreements and drafting better provisions. A corollary of such progress is the need to end older agreements[3] that lack more nuanced clarifications (for example, to the meaning of FET[4] or expropriation)[5] or appropriate exceptions (for example, for health objectives).[6] Similarly, newer investment agreements often include procedural improvements in ISDS, for example, addressing concerns with the potential for conflict of interest,[7] non-transparency[8] or attacks on legitimate public welfare measures.[9] The continuation of old-generation agreements that lack substantive or procedural improvements risks undermining reforms in modern agreements, because of the potential for the use of corporate restructuring[10] or the invocation of MFN clauses[11] to take advantage of the most investor-friendly treaties.

1. Termination or withdrawal if climate-friendly modernization fails

The topic of termination or withdrawal from the ECT is related to the topic of climate change because if a climate-friendly ECT cannot be achieved then termination or withdrawal may be the next best option for supporting a major transition from fossil fuels to clean energy.[12] The ECT is of primary significance to such a transition because of its focus on the energy sector.

Concluded in 1994, the ECT “establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the [European Energy] Charter.”[13] The ECT specifically addresses “Environmental Aspects” in Article 19, which calls on parties to “strive to minimise in an economically efficient manner harmful Environmental Impacts”’ and to ”strive to take precautionary measures to prevent or minimise environmental degradation.” Parties are to “take account of environmental considerations throughout the formulation and implementation of their energy policies.”[14]

The objectives of the non-binding International Energy Charter adopted more recently in 2015 as a “declaration of political intention”[15] include “sustainable energy development, improving energy security and maximising . . . efficiency” in an “environmentally sound” manner.[16] These same provisions support action “encouraging the clean and efficient use of fossil fuels,” “use of renewable energy sources and clean technologies, including clean fossil fuel technologies,” “sharing of best practices on clean energy development and investment,” and “promotion and use of low emission technologies.”[17]

In order to concretize the modernizing of the ECT, the treaty itself needs to be reframed[18] to align with the United Nations Framework Convention on Climate Change (which entered into force on March 21, 1994 and today has 197 parties), the Paris Agreement (which entered into force on November 4, 2016 and now has 185 parties) and the SDGs adopted at the United Nations Sustainable Development Summit in 2015.[19] Put simply, for climate goals to be achieved, the ECT must introduce a distinction between investments based on fossil fuels and those based on renewable energy.[20]

The goal of climate-friendly modernization of the ECT is vitally important but also highly ambitious, and apparently presently overlooked. In these circumstances the need to examine termination and withdrawal as alternatives is heightened. The potential for failure on the climate front provides a reason beyond the Achmea judgment by the CJEU[21] for EU parties to the ECT to start discussing the existing provisions on termination and withdrawal. That judgment has raised a question whether intra-EU ISDS claims[22] are possible under the ECT. The European Commission[23] and most EU member states say no;[24] some treaty-based investment arbitration tribunals have nevertheless continued to find jurisdiction over such claims.[25] Just as some EU member states have begun to terminate their intra-EU BITs, so too may they need to consider withdrawing from the ECT, whether on the basis of Achmea or their targets under the Paris Agreement.

2. Dealing with the survival clause

Withdrawal of a party from the ECT is more complicated than might be expected yet emblematic of problems that often arise in terminating IIAs. The main reason for such problems is the inclusion of so-called survival clauses in many such agreements, including the ECT. ECT Article 47 (Withdrawal) allows a party to notify that it is withdrawing from the treaty, taking effect one year after receipt or later as specified in the notice. However, Article 47(3) contains a survival clause:[26]

The provisions of this Treaty shall continue to apply to Investments made in the Area of a Contracting Party by Investors of other Contracting Parties or in the Area of other Contracting Parties by Investors of that Contracting Party as of the date when that Contracting Party’s withdrawal from the Treaty takes effect for a period of 20 years from such date.

This clause means that a party that withdraws may still be subject to ISDS claims for two decades after they have officially withdrawn from the ECT, with respect to investments made before the date of withdrawal. For a party withdrawing from the ECT as a means of climate change reform or investment reform more generally, this lengthy additional period will likely be unpalatable. Italy, for example, withdrew from the ECT as of January 1, 2016 and yet faces numerous additional ISDS claims.[27] Moreover, disputes may arise regarding the interpretation and application of the survival clause. Similar issues exist with respect to a state that withdraws from provisionally applying the treaty, as Russia has done.[28]

When terminating IIAs in general, parties are free to agree to modify or exclude the impact of a survival clause at the same time.[29] For example, they can agree to a shorter survival period or to its elimination, such as when replacing the IIA with a newer version. For example, Australia recently agreed to end its older BITs with Hong Kong[30] and Uruguay[31] upon entry into force of newer agreements, while also agreeing to abrogate the earlier survival clauses.

While all the ECT parties might conceivably agree to terminate the treaty along with its survival clause, overriding the survival clause is not an option when one or a few ECT parties seek to withdraw from the treaty. Removing or revisiting the survival clause, for example to replace it with a shorter period or allow a waiver in certain circumstances, is something the ECT parties should at least be discussing.

Similarly, the absence of provisions in the ECT for termination or expiry of the treaty itself should be reconsidered in the current modernization process, particularly in view of the potential adverse impact of the current treaty on the SDGs and the Paris Agreement.

Author

Tania Voon is a Professor in Law at the University of Melbourne and a Member of the Roster of Panelists for the Energy Charter Treaty.

Notes

[1] International Energy Charter. (2018). Approved topics for the modernisation of the Energy Charter Treaty. Retrieved from https://energycharter.org/media/news/article/approved-topics-for-the-modernisation-of-the-energy-charter-treaty

[2] Bernasconi-Osterwalder, N. & Brauch, M. D. (2019, February). Redesigning the Energy Charter Treaty to advance the low-carbon transition. Transnational Dispute Management, 1 (2019), p. 5. Retrieved from https://www.transnational-dispute-management.com/article.asp?key=2632; also available at https://www.IISD.org/library/redesigning-energy-charter-treaty-advance-low-carbon-transition

[3] See Voon, T. & Mitchell, A. (2019, May 18). Old agreements must be terminated to bring life to investment. East Asia Forum. Retrieved from https://www.eastasiaforum.org/2019/05/18/old-agreements-must-be-terminated-to-bring-life-to-investment

[4] See, for example, Free Trade Agreement between Canada and the Republic of Korea, September 23, 2014 (entered into force January 1, 2015), Art. 8.5.2. Retrieved from https://investmentpolicy.UNCTAD.org/international-investment-agreements/treaties/treaties-with-investment-provisions/3486/canada—korea-republic-of-FTA-2014-

[5] See, for example, Government of India. (2015). Model text for the Indian bilateral investment treaty, Art. 5.5. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3560/download

[6] See, for example, Singapore–Australia Free Trade Agreement, February 17, 2003 (entered into force July 28, 2003, as amended from December 1, 2017), Ch. 8, Art. 19. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaties/treaties-with-investment-provisions/3317/australia-singapore-fta

[7] See, for example, Kingdom of the Netherlands. (2018, October 18). Netherlands model investment agreement, Art. 20.6–20.7. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5832/download

[8] See, for example, Comprehensive Economic and Trade Agreement between Canada and the European Union, October 30, 2016 (entered into force provisionally September 21, 2017), Art. 8.36. Retrieved from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:22017A0114(01). See also United Nations Convention on Transparency in Treaty-Based Investor–State Arbitration, December 10, 2014 (entered into force October 18, 2017). Retrieved from https://www.uncitral.org/pdf/english/texts/arbitration/transparency-convention/Transparency-Convention-e.pdf

[9] See, for example, Free Trade Agreement between Australia and the People’s Republic of China, June 17, 2015 (entered into force December 20, 2015), Art. 9.11.4. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaties/treaties-with-investment-provisions/3572/australia—china-fta-2015-

[10] See Voon, T., Mitchell, A. & Munro, J. (2014). Legal responses to corporate manoeuvring in international investment arbitration. Journal of International Dispute Settlement, 5, 41–68.

[11] See, for example, Batifort, S. & Heath, J. B. (2017). The new debate on the interpretation of MFN clauses in investment treaties: putting the brakes on multilateralization. American Journal of International Law, 111(4), 873–913.

[12] Bernasconi-Osterwalder, N. (2018, June 19). How the Energy Charter Treaty could have costly consequences for governments and climate action. IISD Blog. Retrieved from https://www.iisd.org/blog/how-energy-charter-treaty-could-have-costly-consequences-governments-and-climate-action

[13] Energy Charter Treaty, December 17, 1994, Art. 2. Retrieved from https://energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf

[14] Ibid., Art. 19.

[15] International Energy Charter. (2016, June 23). The International Energy Charter. Retrieved from https://energycharter.org/process/international-energy-charter-2015/overview

[16] International Energy Charter. (2015). International Energy Charter. Title I: Objectives. Retrieved from https://energycharter.org/fileadmin/DocumentsMedia/Legal/IEC_EN.pdf

[17] Ibid.

[18] Bernasconi & Brauch (2019), supra note 2, pp. 2–3.

[19] United Nations General Assembly, Resolution Adopted by the General Assembly on 25 September 2015 – Transforming our World: the 2030 Agenda for Sustainable Development, UN Doc. A/RES/70/1 (October 21, 2015). Retrieved from https://undocs.org/A/RES/70/1

[20] Bernasconi & Brauch (2019), supra note 2, p. 4.

[21] CJEU, Case C-284/16, Slovak Republic v Achmea (Judgment of the Court (Grand Chamber, March 6, 2018)). Retrieved from http://curia.europa.eu/juris/document/document.jsf?docid=199968&doclang=EN

[22] See UNCTAD. (2018, December). Fact sheet on intra-European Union investor–state arbitration cases. IIA Issues Note 3. Retrieved from https://investmentpolicy.unctad.org/publications/1193/fact-sheet-on-intra-european-union-investor-state-arbitration-cases

[23] Eiser Infrastructure Limited and Energia Solar Luxembourg SARL v. The Kingdom of Spain, Proposed brief of the European Commission on behalf of the European Union as amicus curiae in support of the Kingdom of Spain (United States District Court for the District of Columbia, filed March 13, 2019). Retrieved from https://www.italaw.com/cases/documents/7286

[24] European Commission. (2019, January 17). Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection. Retrieved from https://EC.europa.eu/info/publications/190117-bilateral-investment-treaties_en

[25] See, for example, 9Ren Holdings SARL v. The Kingdom of Spain, ICSID Case No. ARB/15/15, Award, May 31, 2019. Retrieved from https://www.italaw.com/cases/7374

[26] Energy Charter Treaty, supra note 13, Art. 47(3).

[27] See, for example, Eskosol SPA in liquidazione v. Italian Republic, ICSID Case No. ARB/15/50, Decision on Italy’s request for immediate termination and Italy’s Jurisdictional objection based on inapplicability of the Energy Charter Treaty to intra-EU disputes, May 7, 2019. Retrieved from https://www.italaw.com/sites/default/files/case-documents/italaw10512.pdf

[28] See Voon, T. & Mitchell, A. (2017). Ending international investment agreements: Russia’s withdrawal from participation in the Energy Charter Treaty. AJIL Unbound. 111, 461–466. Retrieved from https://www.cambridge.org/core/services/aop-cambridge-core/content/view/E44E5A4DAB45B4767CC357EC948B189A/S2398772317001039a.pdf/div-class-title-ending-international-investment-agreements-russia-s-withdrawal-from-participation-in-the-energy-charter-treaty-div.pdf

[29] See Voon, T., Mitchell, A. & Munro, J. (2014). Parting ways: the impact of mutual termination of investment treaties on investor rights. ICSID Review, 29(2), 451–473; Voon, T. & Mitchell, A. D. (2016). Denunciation, termination and survival: the interplay of treaty law and international investment law. ICSID Review, 31(2), 413–433.

[30] Investment Agreement between the Government of Australia and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China, March 26, 2019 (not yet in force), Art. 40.2. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaties/treaties-with-investment-provisions/4893/australia—hong-kong-investment-agreement-2019-

[31] Agreement between Australia and the Oriental Republic of Uruguay on the Promotion and Protection of Investments, April 5, 2019 (not yet in force), Art. 17.5. Retrieved from https://investmentpolicy.unctad.org/international-investment-agreements/treaties/bilateral-investment-treaties/4895/australia—uruguay-BIT-2019-