EU notifies exit from Energy Charter Treaty and puts an end to intra-EU arbitration proceedings

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The EU has taken the final step to exit the Energy Charter Treaty (ECT), a multilateral trade and investment agreement applicable to the energy sector, which is not compatible with the EU’s climate and energy goals under the European Green Deal and the Paris Agreement.

Two written notifications have been sent by the Council and Commission to the Government of Portugal, which is the official depositary of the Treaty, notifying respectively the withdrawal of the European Union and Euratom. The withdrawals will take effect in one year. These notifications follow the agreement between EU Energy Ministers last month on the Commission’s proposals to pursue the withdrawal and Treaty modernisation in parallel.

This week, the Union and its Member States have also reached a formal agreement to put an end to the continuation of intra-EU arbitration proceedings under the ECT that are contrary to Union law. More specifically, the agreement is aimed at clarifying, for the benefit of courts and arbitral tribunals, that the arbitration clause provided in the ECT does not apply – and never has – in the relations between an EU investor and an EU country.

The agreement follows the Komstroy judgment, in which the Court of Justice held that the arbitration clause of the ECT must be interpreted as not applicable to disputes between a Member State and an investor from another Member State concerning an investment made by the latter in the first Member State. In other words, under Union law, within that framework, arbitration awards are invalid and as such unenforceable anywhere in the Union.

This judgment binds all Member States and their domestic courts. However, the clear case law of the Union courts has not always been respected by arbitral tribunals, which have continued to accept jurisdiction and hand down awards in intra-EU proceedings. The Member States, the EU and Euratom therefore decided to negotiate an agreement under public international law to settle this matter. The 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 Member States and the Union further agreed to accompany the closing of negotiations on the agreement with a Declaration on the legal consequences of the Komstroy judgment. That Declaration was signed on 26 June. The 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.

Both texts reflect the case law of the Court of Justice of the European Union and are entirely in line with the established position of the Union as expressed on numerous occasions including in open court in third country jurisdictions. The Energy Charter Treaty Secretariat has been informed of this agreement.

Background

The Energy Charter Treaty is a multilateral trade and investment agreement applicable to the energy sector that was signed in 1994 and entered into force in 1998. The European Union is a Contracting Party to that Treaty, together with Euratom, 22 EU Member States (as of 26 June 2024), as well as Japan, Switzerland, Turkey and most countries from the Western Balkans and the former Union of Soviet Socialist Republics, with the exception of Russia and Belarus. In terms of the EU Member States, Italy unilaterally withdrew in 2015. France, Germany, Poland and Luxembourg have already exited the ECT. Slovenia, Portugal and Spain have also initiated a procedure of withdrawal.

The Commission has negotiated a modernisation of the ECT on behalf of the EU to bring it in line with the Union’s climate and energy goals, and its investment protection framework. However, due to a lack of majority support from the Member States, the EU has not yet voted for the modernisation of the ECT. The Commission has subsequently proposed for the EU, Euratom and the Member States to withdraw from the unmodernised Treaty, mostly due to concerns over protection of fossil fuels investments. Under the Belgian Presidency of the EU, last month an agreement was found with Member States to proceed with the withdrawal and the modernisation process in parallel.

At the same time, the Commission has been engaged with the Member States for years to clarify the legal context for disputes under the ECT. In October 2022, the Commission sent a Communication to the Council, the European Parliament and the Member States setting out its intention to open negotiations on an agreement between the Union, Euratom and the Member States in relation to the interpretation of the Energy Charter Treaty that would include, in particular, a confirmation that the Energy Charter Treaty does not apply intra-EU and therefore, it cannot serve as a basis for arbitration proceedings.

The Union joined the Energy Charter Treaty with partner countries around the world as part of its external energy policy. The offer to arbitrate disputes contained in that Treaty was never intended to supplant the system of judicial protection set up under the EU Treaties. In its Komstroy judgment, the CJEU recognised that this was the only proper way to interpret the Energy Charter Treaty.