By Guofang Xue[1]
Introduction
While the EU and its Member States have decided to withdraw from the Energy Charter Treaty (“ECT”), citing the ECT’s incompatibility with green energy goals, Switzerland remains mindful of such a decision’s potential impact on Swiss energy companies and investment funds. In a landmark judgment dated 3 April 2024 (Case No. 4A_244/2023), the Swiss Supreme Court (“SSC”) held that the arbitral tribunal had jurisdiction to hear intra-EU dispute based on Article 26 ECT, which notably provides that “[s]ubject only to subparagraphs [26(3)](b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration”. This should come as no surprise since Switzerland has consistently adopted favourable policies towards intra-EU investment protection. For example, prior to the ruling, the Head of International Affairs of the Swiss Federal Office of Energy (“SFOE”) stated that Switzerland would not follow EU Member States in their exit from the ECT. Nevertheless, this decision is pivotal in trying to clarify the ongoing question: in case there is a conflict between the ECT and the EU law, which law shall prevail?
This blog post will first outline the SSC’s decision, analyse the international law rules governing the relationship between EU law and the ECT, and finally consider the wider implications of the case.
Background
In 2007 and 2008, Spain adopted a series of measures to encourage investments in renewable energies, including feed-in-tariffs (“FITs”). Under this regime, the supplies could obtain the payment of a fixed amount of money per unit of electricity supplied to the grid for the first 25 years of operation. This resulted in an unprecedented solar photovoltaic (“PV”) boom in the deployment of modules, according to the report published by the International Institute for Sustainable Development. Among others, EDF Energies Nouvelles S.A. (“EDF”) – a French power company – acquired twelve photovoltaic installations in Spain. In 2013 and 2014, due to its tariff shortage, Spanish policymakers amended favourable legislation on renewable energy with fewer benefits to investors.
As a consequence, EDF, as many others, initiated arbitration proceedings against Spain in 2016 under the ECT. The tribunal seated in Geneva found in favour of EDF and ordered Spain to pay compensation to EDF in the sum of 29.6 million euros for breach of the ECT’s fair and equitable treatment standard.
Subsequently, Spain lodged an appeal in civil matters before the SSC, based on Art. 190(2)(b) of the Swiss Private International Law Act, aiming to set aside the said Award. Spain contested the tribunal’s jurisdiction for wrongfully admitting its jurisdiction for an intra-EU dispute. Spain argued that the arbitration clause in Article 26 ECT was incompatible with EU law and that EU law prevailed over the ECT. Spain mainly based its arguments on the Komstroy decision, which stated obiter that Article 26 ECT was incompatible with EU law. Specifically, Spain argued that:
- Spain’s consent to arbitration under the ECT did not extend to intra-EU disputes; and
- Article 26 ECT was incompatible with EU law, which prevails over the ECT.
The SSC Decision
1. Komstroy failed to consider international law and did not bind non-Member States
Before addressing the jurisdiction concern, the SSC had to determine whether it should follow the Achmea and Komstroy rulings. The SSC noted that EU national courts were obliged to ensure compliance with EU law by following the two rulings, which found that “an arbitration clause inserted into a BIT concluded by two EU Member States, as well as application of Article 26 ECT as between two Member States, were contrary to EU law.” (paras 7.6.5-7.6.6). The SSC, however, was “not convinced by the reasoning adopted by the CJEU in the Komstroy judgment since it is essentially, if not exclusively, based on the requirement of preserving the autonomy and specific nature of EU law, without taking international law or the rules on the interpretation of the treaties into account” (para. 7.8.2). In any event, the SSC emphasised that the jurisprudence of the CJEU only binds the EU Member States and not “the State judge called upon to rule on an appeal against an award rendered by an arbitral tribunal sitting in Switzerland” (para. 7.6.5). All in all, the SSC concluded that in matters where there was a controversy as to the interpretation of foreign law, the Swiss courts would defer to the highest court of the country that enacted that law. As such, the SSC “will not attach particular value to the judgment rendered by the CJEU in the Komstroy case but will, on the contrary, endeavor to itself seek the meaning and the scope of Art. 26 ECT and, to determine, as applicable, whether EU law can effectively call into question the validity of the consent that the Appellant State gives to the implementation of arbitration to settle the dispute between it and the Respondent” (para. 7.6.5).
2. The rule of lex posterior embodied in Article 30(3) VCLT was inapplicable
As follows, the SSC disagreed with Spain’s argument as to the applicability of the rule of lex posterior embodied in Article 30(3) VCLT in this question. The rule of lex posterior provides that provisions of a later treaty shall prevail over incompatible provisions of an earlier treaty concluded between the same contracting parties and relating to the same subject matter.
In reaching this conclusion, the SSC emphasized that the subject matters of the two instruments differ. In essence, the ECT aims to promote energy cooperation in the long run, whereas the Treaty on the Functioning of the European Union (“TFEU”) seeks to address the “functioning of the Union and determines the areas of, delimitation of, and arrangements for exercising its competences” (Article 1 TFEU). Consequently, it is impossible to conclude that EU law would take precedence over the ECT based on the rule of lex posterior (para. 7.8.3.2).
3. Article 16 ECT helps to resolve the friction between the ECT and EU law
Added to that, the SSC held that in view of Article 31 VCLT, the ECT must be interpreted in good faith, in accordance with the ordinary meaning to be given to its terms in their context in light of its object and purpose. In order to determine whether Article 26 ECT excludes intra-EU arbitration, the SSC noted that Article 16 ECT (the non-derogation clause) governs the relationship between the ECT and international law. According to this non-derogation clause, other international treaties cannot be interpreted as derogating from the provisions of Parts III or V of the ECT, in particular Article 26 ECT. This specific conflict of law clause confirms the right of the investors to submit the dispute to the arbitration in accordance with Article 26 ECT as it provides more benefit to the investor, “who under Article 26 can chose “jurisdictional authority of its choice (State courts or arbitral tribunals)” (para. 7.8.3.2). This choice is absent from the TFEU.
In addition, as observed by the SSC, although the European Commission attempted to introduce a disconnection clause in the ECT, this did not appear in the ultimately adopted version of the ECT (para. 7.7.2).
With regard to these considerations, the SSC concluded that:
- the unconditional consent of Spain to the submission of any dispute to arbitration, includes intra-EU disputes (paragraph 7.76);
- there is no conflict between Article 26 of the ECT and EU Treaties (§ 7.8.2.);
- there is no reason to give EU law precedence over the ECT (paragraph 7.8.3.).
International Law and the Conflict Between EU Law and the ECT
The lack of clarification on the relationship between the ECT and EU law is exemplified by a number of different rulings over the years that deal with the nature of this relationship. For example, in the Electrabel v Hungary case, the tribunal held that EU law prevails over the ECT “in case of any material inconsistency” as opposed to the AES v Hungary case, in which the tribunal, in essence, considered EU law as national law and was mindful that “a State may not invoke its domestic law as an excuse for alleged breaches of its international obligations.”
In the past, the Vattenfall tribunal also relied on Article 16 ECT as lex specialis to resolve the conflict clauses. Indeed, the SSC made many affirmative references to the tribunal’s reasoning on the subject. The Vattenfall tribunal considered that lex specialis should determine which rule of international law shall prevail. In this regard, the Vattenfall tribunal emphasised that Article 16 ECT, being the lex specialis, shall prevail over the lex posterior of EU law (paras 217-218 Vattenfall decision). The tribunal held that EU law has no superiority over international law.
As discussed above, it is difficult to argue that the subject matter of the two instruments is the same. Added to that, the ECT could be the lex posterior for some EU member States, but lex prior for other EU Member States. Almost all EU Member States and the EU itself signed and ratified the ECT between 1994 and 2001.[2] The original fifteen Member States became the parties to the ECT when they were already part of the EU. For those EU Member States, the ECT has the status of lex posterior to the EU law, while for other Member States who joined the EU after they signed the ECT, the ECT is lex prior.
Some arbitral tribunals also noted that by signing the ECT, the EU itself has accepted the possibility of investment arbitration under Article 26 ECT.[3] Pursuant to Article 26(3)(a) ECT, the ratifying party, including the EU, agreed to give its “unconditional consent” to the submission of a dispute to international arbitration. In other words, the contracting parties to the ECT did not intend to place the authoritative interpretation of the ECT in the hands of the CJEU.[4] Article 27 VCLT further prohibits a State from invoking its internal law to justify its violation of international obligations. Accordingly, the CJEU’s power to interpret the international agreement to which the EU is a party shall be strictly limited to the circumstances concerning the EU legal order.[5]
However, it remains to be seen how future tribunals will deal with Article 16 ECT in relation to the obligations of States under international law now that the ECT has been terminated between EU Member States.
What are the wider implications of the Swiss ruling?
1. Amending the ECT – Politically Unfeasible?
Beginning in 2017, the Energy Charter Conference announced its intention to modernise the ECT and approved a list of topics for discussion. Amending the ECT pursuant to Article 42 ECT is one option for implementing Komstroy. On the basis of this amendment procedure, the contracting parties could introduce a disconnection clause into the ECT. However, as the EU has given its final green light to withdraw from the ECT, it seems impossible to see that modernization of the ECT will advance much further in the future.
2. EU-based fossil fuel companies may consider restructuring their investments in Switzerland
This ground-breaking ruling indicates that Switzerland remains a safe place for the investors to bring arbitration on basis of the ECT. EU investors may consider restructuring their investments through Switzerland, so as to benefit from the protection of the ECT. Switzerland generally adopts a liberal, pro-investment protection stance in international investment agreement negotiations. This is partially because Switzerland is a capital-exporting country, with its prosperity heavily dependent on foreign trade.
3. Enforcement outside the EU remains hard to predict
The decision of the SSC is another important piece in the wider discussion surrounding the question of enforcement of intra-EU arbitration awards outside of the EU. On the one hand, national courts outside of the EU appear to generally allow enforcement of intra-EU awards. For instance, Spain’s request for an anti-enforcement relief to annul the intra-EU ICSID award in the RWE v. Sapin case in the USA was dismissed by the German court. On the other hand, others, such as the US District Court for the District of Columbia in Blasket v. Spain, decline to enforce such awards on grounds that EU law renders such intra-EU awards invalid. It remains to be seen whether the Swiss decision will set a convincing precedent for similar enforcement proceedings.
Guofang Xue is an Associate at Zhonglun. She received an LLM from QMUL School of Law in 2022. The views represented herein do not represent the views of Zhonglun or any organization that the author is or has been associated with. ↑
Tom Fecak, ‘Chapter 5: Intra-EU International Investment Agreements’, International Investment Agreements and EU Law (Kluwer Law International 2016) 397. ↑
Julian Scheu and Petyo Nikolov, ‘The Incompatibility of Intra-EU Investment Treaty Arbitration With European Union Law – Assessing the Scope of the ECJ’s Achmea Judgment’ 62 Volume 61 · 2018 – German Yearbook of International Law 475, 18. ↑
Jed Odermatt, ‘Is EU Law International? Case C-741/19 Republic of Moldova v Komstroy LLC and the Autonomy of the EU Legal Order’ (2021) 2021 6 European Papers – A Journal on Law and Integration 1255, 1261. ↑
ibid. ↑