In a 2016 ruling, the Paris Court of Appeal set the award aside on the ground that the arbitral tribunal lacked jurisdiction over the dispute. The Parisian court first ruled that the “claims to money” referred to in Article 1(6)(c) ECT are claims pursuant to a contract associated with an investment and that an “investment” involves a contribution of capital or resources. It concluded that in the case at hand, the claim arose out of a contract for the supply of electricity that did not involve any “contribution” and thus could not be classified as an investment. Following an appeal by Komstroy, the French cour de cassation quashed the Paris Court of Appeal’s decision in 2018, reinstating the award on the basis that the Paris Court of Appeal had wrongly introduced a jurisdictional requirement not contained in the ECT, namely, the condition of a contribution of capital or resources.

The case was remanded to the Paris Court of Appeal, which decided on September 24, 2019 to suspend proceedings in order to put the following questions to the CJEU:

• Whether  Article 1(6) ECT shall be interpreted in a sense that a debt arising out of an electricity sales contract that did not involve any form of contribution from the investor to the host State can be regarded as an “investment”;
• Whether Article 26(1) ECT shall be interpreted in a sense that the assignment of a non-ECT economic operator’s debt (Derimen’s) to an investor from an ECT contracting State (Energoallians/Komstroy) can be regarded as an investment; and
• Whether Article 26(1) ECT shall be interpreted in a sense that a debt arising from an electricity sales contract delivered to the border of the host State can be regarded as an investment made “in the area” of the host State, where no economic activity has actually been carried out on its territory.

On September 2, 2021, the CJEU gave its interpretation of the notion of investment under the ECT. However, the implications of this decision run much wider and deeper than the mere notion of investment under the ECT, as the CJEU also took the opportunity to rule that ECT-based intra-EU arbitrations are contrary to EU law.

As explained above, the debate before the French courts focused on whether the tribunal had ratione materiae jurisdiction over Komstroy’s claims. However, at the hearing before the CJEU, the European Commission and several EU Member States “hijacked” the debate and introduced the question of the validity of intra-EU ECT arbitration, even though the dispute at issue involved a non-EU investor and a non-EU Member State.

The CJEU’s ruling

The CJEU’s jurisdiction to rule that ECT-based intra-EU arbitrations are contrary to EU law was debatable and disputed, given the fact that the dispute was between a non-European investor and a non-Member State.

The CJEU nevertheless upheld its jurisdiction on the basis of Article 267 of the Treaty on the Functioning of the European Union (TFEU),³ and the fact that the questions referred to it concerned the notion of investment,⁴ with investments falling under EU’s competence.⁵

The CJEU noted that it does not, in principle, have jurisdiction to interpret the application of an international agreement to disputes not covered by EU law. Nevertheless, it upheld jurisdiction, largely on account of (i) the EU’s interest in the uniform interpretation of the disputed provisions, and (ii) the fact that the seat of arbitration was Paris, France. According to the CJEU, this situation called for the application of EU law by the French courts and the ensuing obligation to ensure compliance with EU law in accordance with Article 19 TFEU.⁶

Regarding the merits of the dispute, first, the CJEU proceeded by justifying its right to decide the issue of the validity of the ECT arbitration clause in intra-EU disputes (an issue irrelevant to the dispute before it, which involved non-EU parties). According to the CJEU, answering the questions referred to it required it to clarify which disputes may be brought to arbitration pursuant to Article 26(2)(c) ECT.⁷ Then, all the while admitting that the dispute at hand was an extra-EU dispute, the CJEU simply stated that (i) this does not preclude its jurisdiction, and (ii) it cannot be inferred that Article 26(2)(c) ECT also applies to intra-EU disputes.⁸

The CJEU went on to follow the reasoning it had previously developed in Achmea (another landmark ruling in which it declared arbitration based on intra-EU bilateral investment treaties to be invalid), recalling the autonomy of the EU legal system and the necessity to preserve it, notably by putting in place a judicial system that ensures consistency and uniformity in the interpretation of EU law. Then, it examined whether the conditions set in Achmea for arbitration to be valid were fulfilled. In the case of Article 26 ECT, the CJEU noted that:

• Arbitral tribunals constituted under Article 26(6) ECT are required to interpret, and even apply, EU law;
• Such tribunals are not located within the judicial system of the EU, and cannot be regarded as a court or tribunal of a Member State within the meaning of Article 267 TFEU; and
• Awards rendered pursuant to Article 26 ECT are not subject to review by a court of a Member State capable of ensuring full compliance with EU law and guaranteeing that questions of EU law can, if necessary, be submitted to the CJEU for a preliminary ruling.

Second, the CJEU turned to the initial question referred to it by the Paris Court of Appeal, holding “that the acquisition…of a claim arising from a contract for the supply of electricity, which is not connected with an investment…does not constitute an ‘investment’ within the meaning of [Articles 1(6) and 26(1) ECT].”

The CJEU’s analysis focused on two questions relating to the definition of “investment” in Article 1(6) ECT:

Does the contract involve an “investment” as defined at the first subparagraph of Article 1(6) ECT, as: (i) “every kind of asset, owned or controlled directly or indirectly by an investor” (ii) including one of the elements listed in paragraphs a–f of that provision?

In the affirmative, is the contract associated with an economic activity in the energy sector as per subparagraph 3 of the provision?

The CJEU answered the first question in the negative: the asset in question does not constitute an investment listed at Article 1(6)(a–f), since the acquisition of a claim arising out of a simple contract for the sale of electricity cannot, in itself, be regarded as aiming at undertaking an economic activity in the energy sector as per Article 1(6)(f) ECT.

The Court also ruled that the claim does not arise from a contract connected with an investment under Article 1(6)(c) ECT as the contractual relationship concerned only the supply of electricity, that is, a commercial transaction which cannot, in itself, constitute an investment (irrespective of whether an economic contribution is necessary for a given transaction to constitute an investment).

Key takeaways

The CJEU’s ruling stands as a strong reaffirmation of its strict stance regarding intra-EU investments. Although the CJEU upheld its jurisdiction, the case at hand was arguably not best suited to rule on the validity of intra-EU arbitrations based on the ECT, as: (i) this was not the question referred to the CJEU, (ii) the dispute was not intra-EU and EU law was not directly applicable, and (iii) no EU public policy concerns were raised.

Nevertheless, this makes the CJEU’s message all the more stronger:

• ECT-based intra-EU investment arbitrations shall be declared invalid: there are reports of 98 ECT-based cases currently pending against EU Member States, a number of which are intra-EU;
• Awards already rendered in intra-EU arbitrations seated in a Member State on the basis of the ECT will not be enforced by courts of EU Member States, unless such courts attempt to resist the CJEU’s decision; and
• The EU is on its way to establishing a European foreign investment law with a restrictive definition of the term “investment.”

Analysis and recommendations

• Much like the Achmea decision, the Komstroy decision will likely boost the EU Member States’ attempts, in ECT-based intra-EU arbitrations, to have claims brought by investors dismissed (in this respect, the fact that the French government’s reaction to the Komstroy ruling was to recommend that French investors avoid initiating new ECT-based arbitration proceedings against EU Member States is especially noteworthy);
• However, just as Achmea did not deter tribunals from continuing to uphold jurisdiction over intra-EU arbitrations under bilateral investment treaties (BITs) (since Achmea, the objection now referred to as the “Achmea jurisdiction objection” has been rejected on 56 occasions, including in 35 ECT-based arbitrations), Komstroy is unlikely to produce a different result on pending ECT-based arbitration (given that the reasoning is identical to Achmea).
• The Komstroy decision adds enhanced risk for investments in the EU in the energy sector. First, awards rendered in intra-EU investment disputes seated in the EU may be either annulled by the courts of the seat, or enforcement shall be denied in the EU. Second, the Komstroy ruling continues to reinforce the discrimination between, on the one hand, EU investors who are deprived of arbitration for intra-EU disputes and, on the other, non-EU investors, who will continue to benefit from this dispute settlement mechanism. This has been expressly acknowledged by the CJEU, which has ruled that EU Member States will remain bound by their international agreements towards non-EU investors.
• Before investing in the EU, a question for any investor will be how and where will it be possible to enforce an arbitral award against the host State if a dispute against the host State arises? While there is no “one size fits all” answer, the following recommendations regarding the dispute settlement mechanism can be made:

(1) Structure an investment so that if a dispute arises with an EU Member State, such dispute is not an intra-EU dispute. This can be achieved before any dispute arises by, for example, investing through a subsidiary (a special purpose vehicle) in a non-EU jurisdiction that has BITs in place with EU Member States.

(2) Include a bespoke arbitration clause in the relevant investment contract so that there is a benefit from the commercial arbitration exception recognized by the CJEU.

(3) Choose ICSID arbitration, as such proceedings derive from international law, and since their existence and legitimacy are independent from national and EU legal orders, they may be less impacted by the CJEU rulings.

(4) If none of the above are possible, consider referring the dispute to arbitration under a BIT or the ECT, but with a seat of the arbitration outside of the EU.

(5) In any event, anticipate from the outset the enforcement of any award outside of the EU (for example, in the UK or the United States), where national courts have so far remained unimpressed by the Achmea ruling and the EU law primacy.

In conclusion, it is noteworthy that the Komstroy ruling also fits into the larger EU efforts to reshape investment law, including the ECT. The decision is likely to give new impetus to the discussion on the introduction of a multilateral investment court promoted by the EU Commission. In the context of the ECT modernization, the judgment perfectly fits with the EU Commission’s reform proposal for the ECT of October 2020. The Achmea ruling led to the termination of intra-EU BITs, however, it remains to be seen what will happen with the ECT in the EU. The termination of the treaty, although requested by some NGOs, remains largely unachievable (this would require 75 percent of the votes of the Member States – who are obviously not only European). In its press release, the French government merely referred to the need to take the appropriate measures to clarify the ECT legal status within the EU.

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1. Art. 26 (2)(c).
2. Case C-741/19, Republic of Moldova v. Komstroy LLC.
3. Art. 267, para. 22 TFEU.
4. Id. para. 25.
5. Id. para. 26.
6. Id. para. 34.
7. Id. para. 40.
8. Id. para. 41.