Background

More than 10 of the Contracting Parties to the ECT have recently announced their withdrawal from the ECT.  Under Article 47(2) of the ECT, withdrawal takes effect upon the expiry of one year after the date of the receipt of the notification of withdrawal by the Depository of the ECT.  For some withdrawing parties, such as France, Germany, Poland, and Luxembourg, that withdrawal has already become effective.  Other withdrawals are due to become effective in the course of 2024 and 2025.  For example, the UK formally notified its withdrawal on 26 April 2024.*  On 30 May 2024, the European Council adopted the decisions that would pave the way for the EU and Euratom to withdraw.  On 28 June 2024, the European Commission announced that the EU and Euratom has formally notified their withdrawal from the ECT.

A key factor underpinning the decision of several EU Member States (and the EU itself) to withdraw from the ECT has been the jurisprudence of the Court of Justice of the European Union (CJEU) on the incompatibility of the ECT’s investor-state arbitration clause (contained at Article 26) with EU law.  In Slovak Republic v. Achmea B.V. (Achmea), the CJEU ruled that investor-state arbitration clauses in bilateral investment treaties (BITs) concluded between EU Member States are incompatible with EU law.  This led to significant debate as to what would happen with the ECT, a multilateral treaty which includes non-EU Member States among its Contracting Parties.  In Republic of Moldova v. Komstroy (Komstroy), the CJEU stated that Article 26 of the ECT was also incompatible with EU law and therefore would not cover intra-EU disputes.

Despite the CJEU’s judgments in Achmea and Komstroy, the vast majority of international tribunals in intra-EU disputes under both BITs and the ECT have refused to decline jurisdiction on intra-EU grounds.  This comprises more than 50 publicly known decisions.   In only one publicly known case, which was seated in an EU Member State, a tribunal declined jurisdiction on intra-EU grounds (Green Power v. Kingdom of Spain).

But the issue of an Award often is not the end of an investment dispute. If an investor succeeds in an intra-EU arbitration, it is very likely that the respondent state will seek both to challenge the award and resist enforcement on intra-EU grounds.  The courts of EU Member States, who are bound to apply EU law, have consistently set aside intra-EU awards, and refused enforcement.  However, as we have previously commented, recent decisions of courts located outside of the EU have reached different results.

The ECT’s sunset clause is designed to maintain protection for investments of investors for 20 years after withdrawal becomes effective

Article 47(3) of the ECT is the “sunset clause.”  It says that the provisions of the ECT shall continue to apply to investments that had been made as at the date of withdrawal taking effect for a period of 20 years.

Taking the UK as an example, once its withdrawal becomes effective on 26 April 2025, any investments already made in the UK by investors from other ECT Contracting Parties will continue to be entitled to protection under the ECT until 26 April 2045.  Any new investments would not be entitled to protection.

EU Member States sign a declaration and initial an inter se agreement on intra-EU arbitration under the ECT

The Declaration was signed by the 26 Member States and the EU on 26 June 2024.  On the same date, the Member States were asked to initial the Agreement, with text identical to the Declaration.** 

The text of the Declaration is available . It states that the relevant Member States “reaffirm, for greater certainty, that they share a common understanding on the interpretation and application of the Energy Charter Treaty, according to which Article 26 of that Treaty cannot and never could serve as a legal basis for intra-EU arbitration proceedings.” It further states that Article 47(3) of the ECT cannot extend, and could not have been extended, to intra-EU proceedings. Accordingly, the Declaration (and, it would appear, the initialled Agreement) seeks to disapply the sunset clause of the ECT in intra-EU disputes when a Member State withdrew from the ECT prior to the Agreement or if it withdraws from the ECT subsequently.

The Declaration is a political statement that has no legal effect, and the Agreement will only enter into force once ratified, accepted or approved.  This approach of issuing a political declaration in advance of a legally binding agreement has been adopted in the context of intra-EU investment treaties before.  On 15 and 16 January 2019, the then-28 EU Member States issued declarations undertaking to terminate intra-EU BITs.  Those declarations led to the signature of a treaty for the termination of intra-EU BITs by 23 of the 27 EU Member States on 5 May 2020.   

The text of the Agreement is substantially similar to a draft of the Agreement that was published by the European Commission on 5 October 2022 (available here).  The draft of the Agreement provided that it would enter into force 30 calendar days after the date on which the second instrument of ratification, approval or acceptance is received. The Declaration (and, it would appear, the Agreement) specifies that it only has inter se effect between its signatories.  This means that it only impacts the bilateral relations under the ECT between its signatories (and investors with the nationality of those states), rather than all of the Contracting Parties to the ECT, which includes non-EU Member States.

What does this mean for investors?

Assuming that the Agreement enters into force, it is likely that its parties (comprising some, but not all, of the Contracting Parties to the ECT) would seek to treat it as a subsequent agreement regarding the interpretation of the ECT.  This would give the Agreement significant interpretative weight in the context of interpreting Articles 26 and 47(3) of the ECT. 

For investors, the Agreement would not substantially change the treatment of intra-EU awards by the courts of EU Member States, either in relation to a challenge or on enforcement.  Before tribunals or courts located outside the EU, it is likely that respondent EU Member States will seek to argue that the Agreement should give significant interpretative weight to the arguments that: (i) Article 26 of the ECT does not apply to intra-EU disputes; and (ii) the sunset clause also does not apply in an intra-EU context.  The European Commission has commented that “[t]he agreement clarifies, for the benefit of courts and arbitral tribunals, that the arbitration clause provided in the ECT does not apply in the relations between an EU investor and an EU Member State.”

The question of whether a subsequent agreement can disapply a sunset clause, in particular in an inter se context, is currently relatively untested as a matter of international law.  Investors in the energy sector in the EU should continue to monitor developments closely as to how the Agreement may alter the relevant landscape, if at all.

Next steps

As mentioned, the Agreement will now have to be ratified by the relevant Member States.  It has been reported that with the initialling of the Agreement, Member States are launching their internal approval process for the Agreement.  For the potential accession of the EU and Euratom to the Agreement, a proposal will be presented setting out a proposal for a Council decision.

Hogan Lovells’ international arbitration team will continue to monitor any developments.

* See our article on the UK’s withdrawal here.  Spain gave written notice of its decision to withdraw from the ECT on 16 April 2024 (see here).

** On 28 June 2024, the European Commission issued a press release stating that “[t]he Declaration is effective as of its signature and will be later published in the Official Journal of the European Union.  The inter se agreement is now subject to internal procedures leading to its signature and entry into force.  For the Union and Euratom, the Commission is preparing the necessary proposals to authorise signature and adoption of the agreement.” (see here)