Green Power and the Protections of Intra-EU Energy Investment

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The tribunal in Green Power v. Kingdom of Spain declined jurisdiction, finding that the parties had not validly consented to arbitration under the Energy Charter Treaty.

A tribunal seated in Sweden has become the first to uphold the “intra-EU objection” in an arbitration under the Energy Charter Treaty (ECT) administered by the Stockholm Chamber of Commerce. The tribunal found that it lacked jurisdiction to hear a dispute between two Danish solar energy investors — Green Power and SCE (the Claimants) — and the Kingdom of Spain on the basis that Spain’s standing offer to arbitrate under Article 26 of the ECT was invalid as a matter of EU law. The unprecedented decision gives effect to a series of seminal judgments of the EU Court of Justice (CJEU) which held that intra-EU investment arbitrations are incompatible with the primacy of EU law and the unity of the EU legal order.

The Dispute

Between 2008 and 2011, the Claimants made multiple investments in Spain’s solar energy sector following the introduction of favourable tariffs for renewable energy producers. However, between 2012 and 2014, Spain rolled back these tariffs with a less remunerative regime. In response to these regulatory changes, the Claimants initiated arbitration proceedings under the ECT in September 2016 for alleged breaches of the applicable treaty protections. Pursuant to Article 26(4) of the ECT, the Claimants selected SCC arbitration and agreed to a seat in Stockholm.

Since 2016, the CJEU has issued multiple decisions in which it has held that intra-EU investment disputes are incompatible with EU law. In 2018, in Slovakia v. Achmea, the CJEU held that arbitration agreements in intra-EU bilateral investment treaties are incompatible with the primacy and unity of EU law and inconsistent with Articles 267 and 344 of the Treaty on the Functioning of the European Union. In 2021, the CJEU extended this reasoning to intra-EU disputes under the ECT (Moldova v. Komstroy) and intra-EU ad hoc arbitrations (Poland v. PL Holdings).

The Tribunal’s Reasoning on the Intra-EU Objection

Spain objected to the tribunal’s jurisdiction on the basis that, inter alia, Article 26 of the ECT does not constitute a valid standing offer to arbitrate as a matter of EU law. Spain had previously raised this objection in dozens of ECT arbitrations all based on similar facts, which was rejected by the tribunals each time. However, in Green Power the Swedish tribunal ultimately upheld Spain’s objection — that the tribunal lacked jurisdiction ratione voluntatis.

The tribunal embarked on its analysis on the basis that, as part of its compétence de la compétence, it must satisfy itself of its jurisdiction over the claims and consider ex officio all considerations relevant to jurisdiction.

The tribunal reasoned as follows:

  • The tribunal began with an analysis of Article 26(6) of the ECT, which provides that disputes shall be decided in accordance with[the ECT] and applicable rules and principles of international law.” The tribunal held that Article 26(6) did not reflect a clear agreement between the parties as to the law applicable to jurisdiction. Having adopted this view, the tribunal then undertook a contextual analysis to conclude that the Article 26(6) choice of law provision applied to the merits of the dispute alone. The tribunal also held that the SCC arbitration rules likewise only addressed the law applicable to the merits.
  • The tribunal went on to consider other relevant sources of law governing jurisdiction, specifically the lex loci arbitri or the law of the seat. The tribunal noted that the Claimants could have opted for arbitration under the ICSID Convention, which does not provide for a lex loci arbitri, but instead opted for SCC arbitration with an agreed seat in Sweden. The tribunal relied on section 48 of the Swedish Arbitration Act — which provides that an arbitration agreement is to be governed “by the law of the country in which, by virtue of the agreement, the proceedings have taken place or shall take place” — to conclude that EU law, which forms part of the national legal order of Sweden, applied to the question of jurisdiction. The tribunal thus concluded that while Article 26 of the ECT would be the starting point of its analysis it had to have regard to other rules of international law and domestic law, as relevant for each question.
  • Turning back to Article 26 of the ECT, the tribunal engaged in a detailed interpretation of the ECT pursuant to customary international law principles of treaty interpretation under the Vienna Convention on the Law of Treaties (VCLT). The tribunal deemed the question of jurisdiction under the ECT to be “inconclusive”. The tribunal took the view — based on a number of provisions in the ECT, declarations, and other materials — that the ECT recognised that States may enter into a “network of special legal relations among them”. In a departure from previous awards, the tribunal concluded that EU law is a relevant source of interpretation of Article 26 of the ECT pursuant to Article 31(3)(c) of the VCLT.
  • Based on Swedish lex loci arbitri and its interpretation of Article 26 of the ECT the tribunal examined EU law, in particular the CJEU’s judgments in Achmea and Komstroy. It concluded that Spain’s standing offer to arbitrate in Article 26 of the ECT was invalid by virtue of the unity and primacy of the EU legal order. In this regard, the tribunal opined that EU law had the status of “lex superior” in the legal relations between Denmark and Spain.

Key Considerations

At a time of need for massive investment in the EU energy sector, the decision highlights the problems with the protection of intra-EU investments. The tribunal’s conclusion departs from previous case law to give effect to the ECJ’s jurisprudence on intra-EU investment arbitration. In some respects, the Green Power tribunal’s decision reflects the particular circumstances of that case, specifically the Claimants’ choice of SCC arbitration and agreement to seat the arbitration in Stockholm, which triggered the application of the Swedish Arbitration Act as the lex loci arbitri. The decision may be distinguished on these grounds from the majority of intra-EU arbitration awards rendered in ICSID arbitrations. However, the tribunal’s interpretation of Article 26 of the ECT could also be relevant for ICSID arbitrations. In particular, the tribunal’s reliance on the declarations of EU Member States following Achmea as an “authentic interpretation” of the ECT will likely be controversial.

The award thus gives rise to several important considerations for parties to ongoing and future intra-EU investment disputes:

  1. The tribunal’s reasoning will likely be adopted by Respondent States to challenge jurisdiction in intra-EU arbitrations, particularly those arbitrations seated within the EU. However, the analysis on the lex loci arbitri would not necessarily apply to intra-EU arbitrations seated in third states, such as the UK, or to intra-EU ICSID arbitrations until the ECT modernisation takes effect.
  2. Going forward, parties contemplating intra-EU claims under the ECT should therefore carefully consider the choice of forum and the choice of seat under Article 26(4) of the ECT, which allows investors to opt to resolve their disputes either by ICSID arbitration, ad hoc arbitration under the UNCITRAL rules, or SCC arbitration. ICSID arbitration will continue to be the safest option for investors in intra-EU disputes under the ECT.
  3. In the context of the widespread and mounting challenges to intra-EU investor-state dispute settlement, investors should consider investment restructuring to maximise treaty protections. Doing so will be imperative in light of the proposed modernisation of the ECT, which includes an amendment that confirms that the arbitration clause under the ECT will no longer apply to intra-EU disputes. In order to be effective, investment restructuring should be carried out before disputes are foreseeable.

Although the Green Power award is notable as the first award in which a tribunal has declined jurisdiction over an intra-EU arbitration, at least parts of the tribunal’s reasoning would likely not apply to ICSID arbitrations. Instead, the proposed preclusion of intra-EU arbitrations as part of the modernisation of the ECT will likely have a greater and more definitive impact. The gradual erosion of protection for intra-EU investments in the energy sector may however result in such investments increasingly being structured through non-EU jurisdictions, at least until the EU offers protections similar to those in the existing ECT, including effective dispute resolution.

This post was prepared with the assistance of Matthew Unsworth in the London office of Latham & Watkins.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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