THE AUTHOR:
Santiago Dutra, Associate at Linklaters
What is the ECT and Why Has the UK Withdrawn From It?
Signed in 1994, the Energy Charter Treaty (1994) (“ECT”) was established to promote international investment in the energy sector, and has historically provided protections for investors in fossil fuels. However, over time, the ECT was deemed inadequate by its contracting-parties for meeting their climate objectives, including those under the 2016 Paris Agreement. This was particularly problematic as regulatory changes intended to address climate change often faced legal challenges from foreign investors whose investments were adversely affected. Despite extensive negotiations among European countries to modernize the ECT to better support these goals (See, A Review of the ECT Modernisation Efforts: The Agreement in Principle), no consensus has been reached so far.
Consequently, in September 2023, the United Kingdom (“UK”) announced that it was reviewing its membership of the ECT if the contracting parties did not reach an agreement on its modernization by November 2023. In February 2024, the UK followed through on its statements. After the failure of efforts to align the treaty with net zero goals, the UK confirmed its withdrawal to better support the country’s transition to net zero and strengthen its energy security.
On 26 April 2024, the United Kingdom notified its withdrawal from the ECT to the Government of Portugal, the official depositary of the treaty, initiating the withdrawal procedure outlined in Article 47 of the ECT. In doing so, the UK joined nine European Union (“EU”) member-states, including Italy, France, Spain, and the Netherlands, which had already taken this step. Shortly thereafter, the EU and Euratom notified their own withdrawal on 27 June 2024.
How Will the UK’s Exit Impact Energy Sector Investments?
The implications of the UK’s withdrawal, both for UK investors in other ECT contracting-party and for investors from another ECT contracting-party in the UK’s energy sector, will depend on the status of their investment. Those who have already made an investment have little to worry about in the short to medium term. However, those in the process of investing or planning to do so should consider speeding up that process or at least planning accordingly.
Under Article 47(2) of the ECT, a withdrawal will only take effect upon the expiry of one year after the date of receipt of the notification by the depositary (the “notice year”). This means that the UK will remain a party to the ECT until 27 April 2025 (the “cut-off-date”), during which time all the rights and protections granted by the ECT will remain unchanged. However, the notice year has further implications for those investors who are yet to make their investments.
Under Article 47(3) of the ECT (the “sunset provision”), the ECT protections will continue to apply to those investments made prior to the cut off-date for another 20 years, until 27 April 2045. This means that the notice year is the last opportunity for prospective investors to obtain the ECT’s protections for their investments.
The ECT’s sunset provision expressly covers investments made before the cut-off date in the UK by investors from other ECT contracting parties, as well as those made by UK investors in the latter. However, protection may depend on whether the non-UK investor’s home-state or the state where the UK investor has invested:
- remains part of the ECT, or,
- has also withdrawn from it but is still covered by the sunset provision.
Following the end of the sunset provision on 27 April 2045, the ECT protections will cease to apply to all UK investors abroad and foreign investors in the UK.
What Factors Should Investors Keep in Mind Going Forward?
Following the UK’s notice of withdrawal, a new temporal consideration arises in addition to the usual requirements of satisfying the definition of “investment” and “investor” under Articles 1(6) and 1(7) of the ECT. The point in time at which said investment was or will be considered “made” becomes essential for it to be covered by the ECT’s sunset provision, as only those made before 27 April 2025 will be included.
Accordingly, the investment date will determine if an ECT arbitral tribunal has temporal jurisdiction over disputes between the investor and the host state (be it the UK or the state where the UK investors made their investment). Respondent states are likely to challenge the arbitral tribunal’s temporal jurisdiction moving forward, particularly in cases where the investment was made close to or after the notice of withdrawal.
How Is Investment Timing Determined?
The date an investment is made is a fact-sensitive determination which must be assessed on a case-by-case basis. Article 1(8) of the ECT defines “Making of Investments” as “establishing new Investments, acquiring all or part of existing Investments or moving into different fields of Investment activity.” However, by itself, this provision offers little guidance.
Determining the date an investment was made is often a straightforward exercise, for example when purchasing shares in a company. However, it can be more complex with investments such as construction of a power plant or similar energy infrastructure projects that go through several stages, including corporate decisions, contracts, financing, acquisition, construction, registration, and start-up. In these cases, ECT arbitral tribunals have usually referred to the date when the investor made an irreversible decision to invest, as seen in cases like Cavalum SGPS v. Spain, and JGC v. Spain. Tribunals have also highlighted that the timing of the investor’s decision to invest, rather than the timing of the investment’s individual stages, is crucial in these cases (see SunReserve v. Italy).
Another relevant issue is whether the various stages of an investments are made as a result of one or multiple investment decisions. For instance, if the construction of a power plant has started but is not completed by the cut-off date, the question arises: was the entire project the result of a single investment decision?
In SunReserve v. Italy, Final Award, 25 March 2020 the tribunal, analysed the definition of “making an investment” in Article 1(8) of the ECT, and concluded that the point in time when an investor decides to make its investments refers to the time when the investor actively decided to establish or acquire investments in the host-state. The fact that the investments happened to evolve over time as a result of any rights being conferred by statute or contract does not imply that each stage of evolution constitutes a distinct investment decision.
What Alternative Investment Protection Mechanisms Are Available?
Investors should also evaluate whether they can take advantage of investor protections offered by other international treaties as an alternative to the ECT. For example, the UK is currently a party to around 85 bilateral investment treaties (BITs) that are still in force. These BITs can offer a significant level of protection to foreign investors in the UK and UK investors abroad, provided there is a BIT with the respective country. This extensive network of BITs already covers a substantial portion of the investments currently protected by the ECT.
If the investment is currently not covered by any BIT, investors should consider restructuring their investment’s corporate arrangements to benefit from the protections offered by existing BITs. This is relevant for both new investors looking to enter the UK market or invest abroad, as well as for existing investors whose investments will extend beyond the ECT’s sunset provision (27 April 2045). As long as such restructuring occurs before any specific dispute arises, it is generally deemed acceptable (See, Structuring and Restructuring of Investments).
What Consequences if the UK Terminates the Sunset Provision?
Whether the UK can negotiate with another former ECT contracting party to terminate or neutralize the 20-year protection after 27 April 2025 is debatable. For instance, Article 16 of the ECT itself provides that nothing in a subsequent international agreement shall be construed to derogate from the ECT’s investor protections where the original provision is more favourable to the investor.
While the EU and its member-states have reached an inter se agreement to terminate ongoing intra-EU arbitration under the ECT and are likely aiming to neutralize the ECT’s sunset provision as well, this agreement does not apply to the UK post-Brexit, nor should it affect the rights of UK’s investors in EU member-states (or vice versa). Furthermore, the UK has not shown any intention of pursuing a similar agreement to date.
If the UK were to agree with another ECT contracting-party to terminate or neutralize the sunset provision, investors should consider promptly accepting the respective host-state’s standing offer to arbitrate under Article 26 of the ECT. Once an arbitration request is submitted, a party cannot unilaterally withdraw its consent to arbitration, even by terminating the treaty (See Magyar Farming v. Hungary and Adria Group v. Croatia).
The UK’s withdrawal from the ECT is a strategic step towards enhancing its regulatory autonomy and advancing its green energy agenda. However, the long-term impact on investor confidence, the continued protection of existing investments under the ECT’s sunset provision and other existing BITs, may pose significant challenges to drastic measures.
ABOUT THE AUTHOR
Santiago Dutra is an Associate in Linklaters’ international arbitration practice in London and Latin America. He has experience in international commercial and investment arbitrations, under the rules of different institutions such as LCIA, ICC, ICSID and UNCITRAL. He acts for clients in disputes across a range of subject-matter areas including energy (oil and gas, and renewables), mining, and construction. He also advises clients on public international law matters, international investment agreements and investment structuring. He is a lawyer from the University of Montevideo (Uruguay) and Antonio de Nebrija (Spain) and holds an LL.M from King’s College London (UK).
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
