Looking Outside the EU May Hold the Key for Future Intra-EU ECT Arbitrations
Arijit Sanyal, Associate at Skywards Law
Fatima Ashri, Trainee Associate at Baker McKenzie
Have intra-EU arbitrations under the Energy Charter Treaty (“ECT”) come to an end? It does not seem so, as the clash of legal orders has become intense. It all started with the Court of Justice of the European Union’s (“CJEU”) opinion in Republic of Moldova v. Komstroy (“Komstroy”) that Article 26(2)(c), ECT was incompatible with the autonomous legal order of the European Union (“EU”). Since such tribunals could not request a preliminary ruling, EU law could be interpreted inconsistently. Consequentially, CJEU’s previous judgment in Slovak Republic v. Achmea B.V (“Achmea”) extends to arbitrations initiated under the ECT. Further, courts of the Member States have given teeth to CJEU’s observations and refused to enforce intra-EU awards, for instance, in Kingdom of Spain v. Novenergia (“Novenergia II”).
Conversely, enforcement courts outside the EU, for instance, in the U.K. or the U.S. have not considered intra-EU objections as a ground for refusing enforcement. For instance, two intra-EU ECT awards, in Nextera Energy Global Holdings B.V. v. Kingdom of Spain (“NextEra”) and Infrastructure Services Luxembourg S.A.R.L. (formerly Antin) v. Kingdom of Spain (“Antin”), have been recognised in the U.S and the U.K. Against this backdrop, the blog discusses the prospects of enforcing intra-EU awards outside the EU and if investors can still initiate fresh claims under the ECT, and seek to enforce such awards.
CJEU’s ruling in Achmea and Komstroy sends a clear message that Intra-EU arbitrations, including ECT arbitrations, are inconsistent with the autonomy of the EU’s legal order. However, at the enforcement stage outside the EU, such awards have been treated differently. With the clash of legal orders getting intense, it is pertinent to analyse what the future holds for intra-EU arbitrations under the ECT and what measures may come to an investor’s rescue.
Enforcement of Intra-EU Awards Outside EU
In NextEra, the investor petitioned the District Court of Columbia (“DC”) to confirm the award and grant injunctive relief against Spain. Spain argued that it enjoyed sovereign immunity under Section 1605(a)(6), Foreign Sovereign Immunities Act (“FSIA”). Hence, for the DC to uphold jurisdiction, there needed to be a valid arbitration agreement. In Spain’s view, Article 26(2)(c) of the ECT contemplated a dispute that could not be referred to arbitration; consequently, the requirement for a valid arbitration agreement under the FSIA was not met. However, the DC rejected Spain’s argument and held that for a court to uphold jurisdiction under the FSIA, it had to determine the existence of a valid arbitration agreement. The DC distinguished that the issue of a tribunal hearing intra-EU ECT claims concerned the arbitrability of such Claims, which was not a ground under the FSIA. Since a valid arbitration agreement existed in DC’s view, sovereign immunity could not be used by Spain, and their motion was dismissed.
Similarly, in Antin, before the High Court of England and Wales (“HC”), Spain contested the HC’s order for recognition of the award. Spain argued that the subject matter of the arbitration concerned the interpretation of EU law in an intra-EU arbitration; hence, the tribunal had no jurisdiction. Rejecting Spain’s request, the HC observed that the primacy of EU law cannot be used to override UK’s treaty obligations. The HC further observed that for Spain’s arguments to be accepted, there should have been an amendment to the multilateral treaties in question, i.e., ECT, as per Articles 40 and 41 of the Vienna Convention on Law of Treaties (“VCLT”). Since Spain or other Member States had failed in this regard, they could not be allowed to dilute UK’s treaty obligations by relying on CJEU’s ruling.
Future of Intra-EU Arbitrations
NextEra and Antin demonstrate that Spain’s attempts to resist recognition and enforcement have failed in jurisdictions where intra-EU objections are not grounds to refuse enforcement. This, along with other factors discussed below, demonstrate that investors may still be able to enforce their awards and initiate new proceedings, though with certain limitations.
First, investors may seek to enforce intra-EU awards outside the EU. For instance, US Courts have considered intra-EU objections as an arbitrability issue, which is not a ground under the FSIA. Consequentially, investors can seek enforcement of awards in the US, by proving that a valid arbitration agreement existed. However, with the DC rendering an opposite decision and confirming intra-EU objections in Blasket Renewables Investment v Kingdom of Spain (“Blasket”), it will have to be seen how enforcement of intra-EU awards shape up in the US. Similarly, investors may attempt to enforce their awards in the U.K, where courts have adopted a favourable approach by upholding U.K’s treaty obligations over EU’s concerns.
Second, investors may consider bringing claims under ECT’s ad-hoc option before tribunals seated in countries outside the EU’s legal system, as such tribunals do not have an obligation to apply EU law. This option will shield intra-EU arbitrations from a position taken by the Member States that “rules of international law” within Article 42 of the ICSID Convention include treaties of the EU. The CJEU’s judgments in Achmea and Komstry have been concerned with the interpretation of EU law, with no indication about how proceedings with a law other than EU law applicable will be dealt with. Consequentially, arbitration proceedings seated in non-EU ECT Member States, such as Switzerland or the UK, can be insulated (in theory) from intra-EU objections as a different set of laws govern the proceedings.
For instance, ad-hoc arbitrations seated in Switzerland can insulate the proceedings due to the default application of the Swiss Private International Law Act (“PILA”). Article 176(1), PILA is attracted automatically to Swiss seated arbitrations if at least one of the parties to the arbitration agreement is not domiciled in Switzerland. Considering that the Respondent State can never be domiciled in Switzerland, the requirement for applying Swiss PILA will be satisfied. Further, the validity of an arbitration agreement under Swiss PILA is evaluated against the most favourable [Muller & Riske in Arroyo eds. 81] among the rules of law chosen by the parties; the law applicable to the main contract or Swiss law under Article 178(2), Swiss PILA.
Even if such tribunal does consider intra-EU objections, the choice of law rule will make way for Article 177(1) of the Swiss PILA for governing the validity of the arbitration agreement as it is more favourable since it is concerned with the writing requirement only. As observed by Voser & Nessi, when Swiss law applies, there is no obligation for the tribunal to apply or interpret EU law for assessing the validity of an arbitration agreement [Voser & Nessi in Baltag eds. 123]. Additionally, Switzerland is not a Member State. Hence, a departure from EU law is warranted by Article 34 of the Vienna Convention on Law of Treaties (“VCLT”). In this regard, Voser & Nessi have further observed that Article 26(2)(c) of the ECT would constitute a valid arbitration agreement since a) it satisfies the writing requirement under Article 178(1), PILA, and b) recourse need not be made to Achmea and Komstroy since a Swiss seated tribunal is under no obligation to consider EU law [Voser & Nessi in Baltag eds 123].
This approach has been followed by ad-hoc arbitral tribunals, for instance, in Cairn Energy PLC v. Republic of India (p 819) and Muszynianka v. Slovenia (p 158), where it was observed that the arbitration is governed by the law of the seat, with the inclusion of its mandatory provisions. Consequentially, issues such as jurisdiction, arbitrability, etc., shall be governed by the law of the seat. In this background, it can be argued that if intra-EU objections are not considered as grounds for refusing jurisdiction or arbitrability or are not considered as violating public policy of that seat, proceedings and an eventual award will most likely be shielded from intra-EU objections of Member States. Consequentially, intra-EU objections should not affect the arbitration proceedings seated outside the EU if the lex arbitri does not concern itself with intra-EU objections in any way whatsoever.
At the time of writing this blog, most intra-EU ECT awards have survived before the annulment committee. While investors have tasted success before enforcement courts outside the EU, courts of Member States have held their ground and refused to enforce intra-EU awards. However, the approach of initiating ad-hoc arbitrations in a non-EU seat may still allow investors to initiate fresh claims, at least for some years to come. In theory, such awards should also be enforceable because CJEU’s observations concerned the interpretation of EU treaties only and did not extend to another set of laws. However, this approach has its own limitations as it will only be open to investors who have structured their investments in Switzerland. The prospects of applying a non-EU law seem promising, not just for enforcement within the EU but in the US as well, in case Blasket is upheld by a superior court. Consequentially, there is still hope for European investors to enforce existing awards outside the EU on one and initiate fresh claims under the ECT if their investments are structured in a supportive way. However, only time will tell whether intra-EU ECT arbitrations seated outside the EU will work or face hurdles that are not yet known.
ABOUT THE AUTHORS
Arijit Sanyal is an Associate with the International Disputes Team at Skywards Law, New Delhi. His work involves domestic and international arbitration proceedings, administered by institutions and on ad-hoc basis; civil litigation before the High Court of Delhi and Supreme Court of India and advising clients on corporate matters across Asia-Pacific and Europe. Arijit is a Core Team Member of the Moot Alumni Association of the Vis Moot.
Fatima Ashri is a Trainee Associate in Baker McKenzie‘s Riyadh office. She currently focuses on corporate and security matters and is actively involved in advising both Saudi Arabian and foreign clients on a wide range of corporate and commercial transactions. Additionally, Fatima is actively involved with the arbitration community and has competed in the Vis Moot twice and received numerous individual and team awards, including Best Pleader at the MENA Pre Moot, and an Honourable Mention for the Eric Bergsten Award at the 30 Vis Moot 2023.