What is the Energy Charter Treaty?
The ECT is a legally binding IIA which was intended to promote inter-governmental cooperation in the energy sector and facilitate investment in fossil fuels. It was born out of the break-up of the Soviet Union and first signed in December 1994. The ECT is one of around 2,500 IIAs. It has been ratified by more states (56), and has given rise to more claims (162), than any other IIA.
The ECT contains mutual undertakings, made by nationals of the signatories, for the promotion and protection of investments in the energy sector in each other’s territories. These include commitments by the contracting states to accord investments of investors from other contracting states fair and equitable treatment and constant protection and security. These protections are directly enforceable under the investor-state dispute settlement provisions pursuant to which investors can bring claims directly against a contracting state through arbitration instead of through the local courts.
Who is protected by the ECT?
Any national (including body corporates) of a contracting state to the ECT which holds a covered investment in the territory of another contracting state may benefit from the protections in the ECT.
“Investment” is defined broadly in the ECT as “every kind of asset” and includes “tangible and intangible, and movable and immovable property”, “a company or business enterprise”, “claims to money” or “any right conferred by law or contract”. To fall within the scope of the ECT, the “investment” must be associated with an economic activity in the energy sector.1
Examples of protected investments under the ECT include: shares in a Spanish company which had rights to three solar power plants in Spain;2 ownership of a local subsidiary in Albania which owned and operated a tank farm;3 a shareholding in a Hungarian electricity company;4 a shareholding in two Turkish utility companies which had concluded electricity concession agreements with the Turkish Ministry of Energy;5 and a shareholding in a Hungarian company which owned and operated a power plant in Hungary.6
Why has the United Kingdom chosen to withdraw?
On 22 February 2024, the UK announced that it was withdrawing from the ECT, claiming that it is “no longer fit for purpose”.7
The UK is the eleventh party to announce its withdrawal, following in the footsteps of, amongst others, France, Germany, Spain, the Netherlands and Luxembourg. In July 2023, the European Union also proposed a coordinated withdrawal by the Union and all its member states on the basis that the European Commission “considers the Treaty to be no longer compatible with the EU’s climate goals under the European Green Deal and the Paris Agreement, predominantly due to concerns over continued fossil fuel investments”.
This widespread denouncement of the ECT follows efforts over a five-year period to modernise its text to better align it with modern energy priorities and commitments on climate change.
Stakeholders highlighted the perceived constraints on the signatory states’ regulatory space to adopt energy transition policies as well as continued support and protection for investments in fossil fuels in contradiction of net zero targets (see, for example, the pending claim against the Netherlands arising out of its 2019 law prohibiting the use of coal for electricity production8 and the claim brought by a UK investor against Italy in connection with the latter’s reintroduction of a ban on oil and gas exploration in a coastal area9).
Reflecting these concerns, the proposed amendments included broader coverage for renewable energy investments and the ability for each contracting state to unilaterally exclude investment protections for fossil fuels in its territory.
Despite reaching an agreement in principle on the revised text in June 2022, the parties were ultimately unable to reach a common position, prompting a series of withdrawals by EU member states.
Who is affected by the UK’s withdrawal from the ECT?
Those affected are: (1) UK investors i.e. companies and other entities incorporated or established in the UK (or British nationals) that invest in the energy sector in any country that is a contracting state to the ECT; and (2) investors from outside the UK who invest in the UK energy sector (i.e. through the ownership of shares in a UK company in the energy sector, or through otherwise owning assets in the UK energy sector).
When will the withdrawal take effect?
Withdrawal will take effect one year from the date of receipt of formal notification of withdrawal by the Depositary of the ECT. After this date, new investments of UK investors (or investments of inward investors into the UK energy sector) will no longer be protected by the ECT. However, the ECT contains a so-called “sunset clause” which states that the provisions of the ECT will continue to apply to investments made prior to the date of withdrawal for a period of 20 years. This means that any investments of UK investors (or investors from other withdrawing states), as well as investments of inward investors, will continue to benefit from the protections in the ECT for a further 20 years. This means that any investments of UK investors (or investors from other withdrawing states), as well as investments of inward investors, will continue to benefit from the protections in the ECT for a further 20 years.
Impacted investors with existing long-term investments will accordingly need to consider whether they would have recourse to alternative IIA protection after the expiry of the sunset clause.
What does withdrawal mean for investors?
Once withdrawal takes effect, new investments will not be protected under the ECT. However, the ECT is just one of many bilateral and multilateral IIAs which include investment protection mechanisms. Like the ECT, other IIAs commonly include a suite of legally binding rights and protections including:
- National treatment – requiring that foreign investors be treated no less favourably than local investors who are nationals of the host state.
- Most-favoured nation treatment – a powerful tool that requires a state party to an investment treaty to provide investors with treatment no less favourable than the treatment it provides to investors of another state under other investment treaties, and that can be invoked to import protections from other investment treaties.
- Fair and equitable treatment – imposes an obligation on host states to accord fair and equitable treatment to foreign investments, including guarantees of (i) protection against a denial of justice; (ii) procedural fairness, due process and transparency; (iii) freedom from coercion or harassment; and (iv) protection of the investor’s legitimate expectations.
- Expropriation – the taking by a state (through, for example, nationalisation) of an investment which essentially deprives the investor of the entirety of its interest. Expropriation can be lawful if it is for a public purpose and is not discriminatory, but only if prompt, adequate and effective compensation is paid to the investor. Otherwise expropriation is unlawful and requires full reparation of all losses. Expropriation can be either direct or indirect. Indirect expropriations entail “unreasonable interferences”, the “prevention of enjoyment” or the “deprivation” of the property rights of foreign investors (so-called “creeping” expropriation).
When planning an investment in a foreign jurisdiction, it is important to consider the availability of investor protections and to structure the investment so as to take advantage of applicable treaties and domestic investment laws. A foreign investor seeking treaty protection must first comply with a nationality requirement that the investor be a national of the state party to the investment treaty that is not the host state. In other words, the investor must be either a company incorporated in another state party that is not the host state or a private individual who is a national of that other state party (subject to other requirements as provided by the relevant treaty). Secondly, foreign investors must have made a qualifying investment in the host state, as defined under the applicable IIA. Potential investors should consider how to structure their investment so that these criteria will be deemed satisfied should a dispute arise.
- This is defined as “an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing or sale of Energy Materials and Products”. Energy Materials and Products are classified by reference to the Harmonized System of the World Customs Organization.
- Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain (ICSID Case No. ARB/14/1),Award dated 16 May 2018.
- Mamidoil Jetoil Greek Petroleum Products Société S.A. v. Republic of Albania (ICSID Case No. ARB/11/24), Award dated 30 March 2015.
- AES Summit General Limited and AES-Tisza Erömö Kft v. Republic of Hungary (ICSID Case No. ARB/07/22), Award dated 23 September 2010.
- Europe Cement Investment & Trade S.A: v. Republic of Turkey (ICSID Case No. ARB(AF)/07/2) , Award dated 13 August 2009.
- Electrabel S.A. v. The Republic of Hungary (ICSID Case No. ARB/07/19), Decision on Jurisdiction, Applicable Law and Liability, Award dated 30 November 2012.
- questions-statements.parliament.uk
- RWE AG and RWE Eemshaven Holding II BV v. Kingdom of the Netherlands (ICSID Case No. ARB/21/4).
- Rockhopper Exploration Plc, Rockhopper Italia S.p.A. and Rockhopper Mediterranean Ltd v. Italian Republic (ICSID Case No. ARB/17/14), Award dated 23 August 2022.
In-depth 2024-050
