ECT tribunal upholds intra-EU treaty jurisdictional objection for the first time

Green Power K/S and SCE Solar Don Benito APS Vs. Kingdom of spain, SCC Case No. V2016/135

In its June 2022 award, an ad hoc tribunal denied jurisdiction over an intra-EU claim brought by Danish investors Green Power Partners K/S (Green Power) and SCE Solar Don Benito APS (SCE) against the Kingdom of Spain (the respondent). This marks the first time an ECT tribunal accepted a respondent’s objection based on the intra-EU nature of the claim.

Background and claims

Green Power and SCE (the claimants) made investments in Spain’s solar energy market and intended to profit from the applicable regulatory framework, which provided a favourable feed-in tariff (FiT) regime. The dispute arose when Spain progressively altered its regulatory framework to reduce the FiT that allegedly impacted the claimants’ investment and breached Spain’s obligations under the ECT. Relying on Article 26(4)(c) of the ECT, the claimants filed for arbitration administered by the Arbitration Institute of the Stockholm Chamber of Commerce on September 8, 2016.

Objections to jurisdiction

The respondent raised objections to jurisdiction ratione personae and ratione voluntatis. It noted that Article 26 of the ECT refers to disputes between a contracting party and an investor of another contracting party (para. 173). It argued that the EU should be considered a single contracting party to the ECT (para. 173); hence, Article 26 of the ECT should not apply to the current case because the respondent and the home state of the claimants (i.e., Spain and Denmark) are both EU member states. As a result, the tribunal lacks jurisdiction ratione personae (para. 120). Moreover, the respondent relied on the CJEU decisions Achmea and Komstroy and contended that the current tribunal lacks 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 is inapplicable (para. 121).

The tribunal held that the applicable law clause in the ECT refers to the merits of the case, not jurisdiction

Article 26(6) of the ECT provides that “a tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” The tribunal examined the context of Article 26(6) of the ECT and discovered that Article 26(1) of the  ECT refers only to the merits of the disputes (para. 157). Therefore, Article 26(6) only provides applicable law on the merits of the disputes. As a result, there was no agreement between the disputing parties on the applicable law on jurisdiction (para. 158).

Tribunal determined EU law as the applicable law to jurisdictional matters

The tribunal took Article 26 of the ECT as a starting point to ascertain the applicable law to jurisdiction. It noted that the claimants’ choice to have Stockholm as the seat of arbitration has attracted the Swedish Arbitration Act (SAA) as the applicable lex arbitri (para. 162). According to Section 48 of the SAA, lex arbitri should be applied in the absence of an arbitration agreement (para. 165).

Moreover, the tribunal stated that the selection of the seat in Sweden, an EU member state, also attracts the application of EU law to jurisdictional matters, as EU law is part of the law in force in Sweden (para. 166). In this regard, the tribunal referred to the previous CJEU decision in the Achmea judgment and the arbitration award in Electrabel v. Hungary, both recognizing the nature of EU law as part of the domestic law as well as international legal regime of the EU member states (paras. 166, 171). Therefore, the tribunal decided that EU law, as part of the Swedish legal system, should be applied to determine its jurisdiction.

Tribunal dismissed jurisdictional objection ratione personae

The tribunal dismissed the objection to jurisdiction ratione personae. It explained that according to Article 31(1) of the VCLT, the terms “contracting party” and “investors of another contracting party” in Article 26(1) of the ECT should be interpreted “in accordance with the ordinary meaning to be given to the terms” (para. 187). In the present case, Spain and Denmark are EU member states as well as ECT contracting parties with respect to each other (para. 189). The tribunal then referred to the Statement submitted by the European Communities to the Secretariat of the Energy Charter pursuant to Article 26(3)(b)(ii) of the Energy Charter Treaty, which expressly stated that “[the] Communities and the Member States will, if necessary, determine among them who is the respondent party to arbitration proceedings initiated by an Investor of another Contracting Party” (para. 192). Drawing on this, 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 (para. 194).

Tribunal upheld jurisdictional objection ratione voluntatis.

On the issue of jurisdiction ratione voluntatis, the disputing parties focused on the question of whether Spain has made the unilateral offer to arbitrate required by Article 26 ECT.

The tribunal started its analysis by applying Article 31 of the VCLT to determine the ordinary meaning and context of relevant terms of the ECT, as well as the object and purpose of the treaty. The tribunal admitted that the plain meaning of Article 26(3)(a) suggests contracting parties’ unilateral and unconditional offer to arbitrate (para. 341). However, it was concerned that wrapping up the analysis at this point would not only ignore the complexities of the current case (para. 343) but also turn treaty interpretation into an exercise in abstraction (para. 344). The tribunal thus decided to extend its analysis to the context of Article 26 of the ECT. To this end, it took into account the entire text of the ECT and other instruments made in connection with the conclusion of the treaty, along with subsequent agreement and practice.

The tribunal noted that the text of the ECT explicitly recognizes the possibility for a group of countries to enter into a network of special legal relations among themselves (para. 350). As such, Article 1(2) of the ECT provides the definition of “Contracting Parties” to include Regional Economic Integration Organization (REIO) like the EU; Article 1(3) of the ECT defines REIO as an organization whereby member states have “transferred competence over certain matters a number of which are governed by this Treaty, including the authority to take decisions binding on them in respect of those matters”; Article 1(10) of the ECT defines the term “Area” of a “Contracting Party,” including that of an REIO; Article 25 of the ECT provides that the network of legal relations among the countries subject to an REIO may be different from the relations between a state party to the REIO and an ECT contracting party that is not a party to the REIO (para. 350).

For the tribunal, the above treaty provisions indicate that certain matters among Spain, Denmark, and Sweden as EU member states are subject to special requirements under EU law (para 354). The tribunal further noted Declaration 5 in the Final Act of the European Energy Charter Conference in connection with Article 25 of the ECT, which stated that “the application of Article 25 of the Energy Charter Treaty will allow only those derogations necessary to safeguard the preferential treatment resulting from the wider process of economic integration resulting from the Treaties establishing the European Communities” (para. 357). For the tribunal, Declaration 5 is clear evidence that Article 25 of the ECT was specifically intended to apply to the EU as a process of economic integration, which includes matters relating to internal electricity, state aid, and the need for autonomy and primacy of EU law, among others (para. 358).

In addition, the tribunal also considered the EU’s Statement submitted by the European Communities to the Secretariat of the Energy Charter Treaty pursuant to Article 26(3)(b)(ii) of the Energy Charter Treaty at the time of the ratification of the ECT (para. 359), according to which the CJEU should remain competent for intra-EU investor–state disputes under the ECT (paras. 359–363).

As for subsequent agreements and practice, the tribunal pointed to three declarations made by EU member states, including the Declaration of the Representatives of the Governments of Members States of 15 January 2019 on the legal consequences of the Judgment of the Court of Justice in Achmea and on investment protection in the European Union (Declaration II). The tribunal was convinced that Declaration II represents the shared understanding and authentic interpretation of Spain and Denmark of their legal relationships under the ECT and EU law. Such understanding aligns with that adopted by the CJEU in the Achmea judgment and the later Komstroy judgment, which confirmed the reasoning of Achmea and extended it to Article 26 of the ECT. Such a proposition, as understood by the current tribunal, should be that the application of Article 26 of the ECT is incompatible with the EU treaties and therefore cannot serve as a basis for a unilateral offer of arbitration for an investor to accept (para. 372).

The tribunal then turned to Article 31(3)(c) for systemic integration, which puts ECT in a wider context, that is, to “any relevant rules of international law applicable in the relations between the parties” (para. 388). Relying on Richard Gardiner’s work on treaty interpretation, the tribunal first determined that regarding intra-EU legal relations, the application of EU law would not be precluded by the fact that the contracting parties to ECT are not all EU member states (para. 392). Second, the tribunal stated that in light of the Achmea and Komstroy judgments as well as other developments already reviewed by the tribunal, EU law should be considered “relevant” under Article 31(3)(c) of the VCLT to interpret Article 26 of the ECT.

As a result of the above analysis, the tribunal concluded that interpreting Article 26 of the ECT without resorting to EU law is inconclusive in the circumstances of the current case (para. 412).

Tribunal addressed the relevance of CJEU’s Achmea judgment

The CJEU Grand Chamber in the Achmea judgment addressed Article 267 of the TFEU concerning CJEU’s jurisdiction to give preliminary rulings on the interpretation of EU treaties and Article 344 TFEU on the preclusion of submission of disputes concerning the interpretation or application of the EU treaties to any settlement method other than those provided for in EU treaties. The tribunal considered CJEU’s Achmea judgment relevant to the present case for three reasons. First, the tribunal agreed with the CJEU Grand Chamber’s understanding that EU law should be applied to determine the validity of the offer to arbitrate by an EU member state, as it is both part of the domestic law in every EU member state and an international agreement between them (para. 422).

Second, the Achmea judgment declared that a provision in an international agreement like Article 26 of the ECT whereby an EU member state gives a unilateral offer for intra-EU arbitration conflicts with Articles 267 and 344 TFEU (para. 423).

Third, the Achmea judgment clarified the rationale behind the interpretation of Articles 267 and 344 of the TFEU, which is “to ensure that the specific characteristics and the autonomy of the EU legal order are preserved, the Treaties have established a judicial system intended to ensure consistency and uniformity in the interpretation of EU law” (para 426).

Tribunal applied the reasoning of Achmea Judgment to the present case 

The tribunal noted that to assess the validity of Spain’s unilateral offer to arbitrate intra-EU investment disputes under Article 26 of the ECT, relevant provisions in EU law including Articles 107, 108(2), 267, and 344 of the TFEU should be applied either as part of international law or as part of the law applicable to the arbitration agreement pursuant to the Swedish lex arbitri (para. 447).

The tribunal noted that both the CJEU and the EC have interpreted state aid determination in Articles 107 and 108(2) of the TFEU as a matter of public policy under EU law and have subjected it to the exclusive competence of EC (paras. 448–455). Furthermore, it determined that according to the Achmea judgment, Komstroy judgment, and EU case law in the same regard, some provisions of the EU treaties are deemed by EU member states under the ECT as lexi superior and overriding over other norms. As such, CJEU case law has ascertained that such norms include inter alia submitting a dispute to international adjudication (para. 471). Therefore, due to the autonomy and primacy of the EU law, Spain as an EU member state is precluded from offering arbitration in a dispute with investors from another EU member state (para. 456).

The decision in Green Power v. Spain thus marks the first award issued by an ISDS tribunal denying jurisdiction due to the intra-EU nature of the dispute. It remains to be seen whether other decisions will follow its reasoning.

Author

Anqi Wang is a postdoctoral researcher at the World Trade Institute, University of Bern, and she holds a PhD in international investment law from the same university.