Energy Charter Treaty
Recent
developments
Recent developments
Italy set to quit Energy Charter Treaty: Although not confirmed publicly, it has been reported that
Italy has informed the Energy Charter Secretariat that it plans to withdraw from the ECT in early 2015.
It is thought that Italy is troubled by the membership fee and the fact that it is facing increasing numbers
of claims under the ECT. Importantly, the Treaty will continue to apply to investments already made for
20 years from the time it withdraws owing to the “sunset” provisions in the ECT.
An increasing number of cases against EU countries:
• 2010- 2 cases against EU countries.
• 2015- 26 pending cases against EU countries.
Fourteen investors in the
Spanish renewable energy
market filed an ECT-based
claim against Spain arising
out of changes to the
renewables subsidy. It is
reported that the group had
as much as €4 billion of
assets in Spain - PV
Investors v Spain.
A USD 50 billion award against Russia: An ECT Tribunal held Russia liable to some of Yukos'
shareholders for USD 50 billion in damages. Russia had until January 2015 to pay the award.
The claimants threatened to enforce the award against Russian sovereign commercial assets in the
150 countries party to the New York Convention. This is notwithstanding Russia's withdrawal from the
ratification of the ECT in July 2009 due to the 20 year “sunset” provision in the ECT.
Tensions with EU law: Recent decisions under the ECT (e.g. AES v Hungary) together with the
advent of the Lisbon Treaty question the compatibility of the two legal systems for EU Member
States. In AES the tribunal found that claims under the ECT should be viewed independently of EU
law. Further, given that under the Lisbon Treaty the EU is now the sole negotiator of foreign direct
investment treaties into the EU, many argue that disputes between Member States and EU-based
investors should be dealt with under EU law, thereby putting aside the application of the ECT
arbitration clause in intra-EU disputes.
EU targets energy sector with 'phase 3' sanctions: On September 8, 2014, the EU amended its
sectoral sanctions, added a number of companies to the sanctions list, including Rosneft, Transneft, and
Gazpromneft, and limited the export of energy-related equipment and technology to Russia which will be
permitted only with special authorization issued by EU. Authorization will not be granted for energy-related
equipment and technologies designated for deep water oil exploration and production, arctic oil exploration or
production and shale oil projects. These actions may appear to conflict with stated objectives of the ECT to
facilitate cooperation within the energy sector.
What is the Energy Charter Treaty?
The Energy Charter Treaty is a multi-national agreement signed in 1994 and entered into force in 1998. It is designed to establish an
international framework for cooperation in the energy industry, with a focus on the Eurasian energy market. It focuses on facilitating
trade, protecting investments and managing disputes. The overarching objective of the ECT is to establish a legal framework
conducive to economic growth by means of rules and measures designed to liberalise trade and investment flows in the energy sector,
and minimise the risks associated with energy-related trade and investments.
Who’s in the Energy Charter Treaty?
Key
Signatories* to the 1994 Energy
Charter Treaty, and members of
the Energy Charter Conference
Observers** to the Energy Charter Conference
due to their signing the 1991 Energy Charter
(without signing the 1994 Treaty)
Observers** to the Energy Charter Conference
by invitation of the Conference (without signing
the 1991 Charter or 1994 Treaty)
Neither signatories of the 1994 Treaty or
observers to the Conference
* ECT binding on signatories but note that ratification is still pending in
Australia, Belarus, Iceland and Norway with Russia and Italy having
both signalled their exit from the ECT.
** Observers to the Energy Charter Conference are not signatories to
the ECT. Their rights include attending Charter meetings, receiving
related reports, and participating in discussions.
Protected
Investments
4
Protected Investments
Protected investments are investments associated with "Economic Activity in the Energy Sector”, which means the exploration,
extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing or sale of every kind of asset owned
or controlled directly or indirectly by an investor of “Energy Materials and Products”. Examples include:
Investment in
environmentally friendly
cogeneration of heat and
power
Payments under an ordinary
sales agreement for gas
condensate
Construction of a tank farm
including the construction of
access infrastructure and its
operation
Investment in hydrocarbon
exploration and extraction
Protected
Investors
4
Protected Investments
The ECT provides protection for energy-related investments in ECT States to individuals who are citizens, nationals or permanent
residents of an ECT State and companies or other legal entites organised in accordance with the laws of an ECT State.
Locally incorporated companies are also protected against the host State if they are foreign controlled.
Dispute
Resolution
6
Dispute Resolution
The ECT gives parties three options to resolve disputes: (i) through the domestic courts of the host state, (ii) in accordance with a preagreed process or, (iii) international arbitration.
International arbitration is under (i) the ICSID Convention, (ii) the ICSID Additional Facility Rules or (iii) the rules of the Arbitration
Institute of the Stockholm Chamber of Commerce.
A provision in the ECT provides that for certain host states, a decision to invoke ECT rights in the domestic court of the said host
country may potentially foreclose treaty options. This is because of a “fork in the road” rule that investors should choose between
domestic or international procedures to resolve their dispute, but not both.
Cooling off period of at least three months enshrined in the ECT.
Substantive
Protections
7
Substantive Protections
Umbrella clause
Fair and equitable treatment
•
Obliges a host state to observe specific obligations to foreign
investors.
•
Tajikistan found to be in breach of the umbrella clause as it
failed to issue a licence despite contractual obligations stating
it needed to.
•
Need to treat investors and their investments in a transparent
manner.
•
The obligation to act in good faith towards investors and their
investments.
•
The obligation to afford due process to investors and their
investments.
National treatment and Most Favoured Nation treatment
•
Full protection and security
•
Includes the requirement to use due diligence to prevent
wrongful injuries to foreign investors and their investments
caused by third parties within their territory and, if not
possible, to compensate loss.
Effective means
•
Unreasonable or discriminatory measures
•
•
Key provision- invoked in very first ECT case- Nykong v
Latvia
The two components are independent of one another
This provision aims to provide a level playing field between
foreign and local investors, as well as between foreign
investors from different countries.
Ensures domestic legislation of the signatory states provides
effective means to assess and enforce claims regarding
investment agreements and authorisations.
Expropriation
•
Imposes conditions, including appropriate compensation for
any expropriations – cause of action in Yukos case.
Structuring - issues
to consider
Ed Poulton
Partner
Steve Abraham
Partner
•
•
T: +44 20 7919 1606
E: Ed.Poulton
@bakermckenzie.com
T: +44 20 7919 1440
E: Stephen.Abraham
@bakermckenzie.com
Ekaterina Finkel
Associate
Richard Allen
Associate
T: +44 20 7919 1756
E: Ekaterina.Finkel
@bakermckenzie.com
T: +44 20 7919 1984
E: Richard.Allen
@bakermckenzie.com
•
•
•
What is the nationality of the investor?
Is the contracting state a party to the
ECT? If so, in what category?
Is the transaction a qualifying investment?
If relevant, if SPV is incorporated in the
host state can it benefit from ECT?
What is the most appropriate dispute
resolution mechanism?