European parliament calls for EU to exit the Energy Charter Treaty

The European Parliament passed a resolution on 24 November 2022 calling on the European Commission to immediately begin a co-ordinated exit from the Energy Charter Treaty (ECT). 

The resolution took into account the numerous withdrawals from the ECT announced over the past few months by Member States, including the latest withdrawal announcements made by Luxembourg, Germany and Slovenia in November. When combined, the withdrawing States represent more than 70% of the EU's population. The resolution also took note of the EU's recent resolutions passed at COP27, and made its views very clear that the ECT "no longer serves the interest of the European Union, especially with regard to the objective to become climate neutral by 2050", and was therefore "incompatible with EU law and EU policy".

This came only two days after the vote on whether to adopt a modernised version of the controversial ECT was suspended after member states failed to agree on whether to support the proposed reforms. The reform of the ECT was meant to ensure that the Treaty was compatible with the Paris Agreement on climate change, but the numerous withdrawals of contracting states in the past months, culminating in the European Parliament's unwavering resolution has sent a strong message that Europe does not feel that objective has been met.

While other investment treaties have undergone a similar re-assessment, the ECT has faced the most scrutiny presumably because it is the most litigated of all investment protection agreements, resulting in some of the largest financial penalties if a State falls foul of a subsequent ISDS procedure. Recent studies have calculated that, under the current version of the ECT, countries that terminate fossil fuel projects to meet their net-zero objective by 2050 could face up to $340 billion in legal claims from oil and gas investors.

Is the sun setting on the sunset clause?

Running for the exit, however, does not resolve the issue in the short (or even medium to long) term, as the ECT's sunset clause (Article 47) means that states remain liable under the Treaty for 20 years after the withdrawal takes effect (although only existing investors are protected). Many supporters of the ECT therefore highlight that withdrawal instead of signing up to the modernised treaty has the paradoxical effect of prolonging investor-protection under the existing regime.  

The European Parliament's resolution similarly placed a lot of emphasis on the 20-year sunset clause, noting its worries as to the long-term restraints it places on withdrawing states. As a result, the resolution confirmed that the European Commission had also prepared a draft inter se agreement which clarifies that the ECT and its sunset clause do not (and never did) apply in an intra-EU context. The impact of such agreement, if reached between the relevant Member States, would result in the application of the sunset clause being excluded between willing contracting parties. Practically speaking, it would mean that investor protection under the ECT would no longer continue in any of the territories which sign up to the inter se agreement for the usual 20 years following a states' withdrawal from the treaty.

As the ECT does not expressly mention modification, it is governed by the default rule in Article 41 of the Vienna Convention on the Law of Treaties (VCLT). This rule provides that “[t]wo or more of the parties to a multilateral treaty may conclude an agreement to modify the treaty as between themselves alone,” provided such modification does not:

• “affect the enjoyment by the other parties of their rights under the treaty or the performance of their obligations.” (Article 41 (b)(i) of the VCLT); or 
• “relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole” (Article 41 (b)(ii) of the VCLT).

It is therefore unclear how arbitral tribunals will interpret any inter se agreement in light of Article 41 of the VCLT. While modification could be achievable, there is a possibility that tribunals may still accept jurisdiction on the basis that any attempt to neutralise the sunset clause is considered "incompatible with the effective execution of the object and purpose of the treaty as a whole". If, however, the inter se agreement is deemed compatible with the ECT, investors (particularly those in the fossil fuel sector) will no doubt see a radical shift in the European landscape, away from the investment protections they are so used to enjoying and towards a much harsher climate in those withdrawing states who are parties to the EC's inter se agreement.

Conclusion 

Investor protections under the ECT are likely to remain in place for a significant period of time, even in states that exit the Treaty. Neutralisation of the sunset clause via an inter se agreement is theoretically possible but is clouded by legal uncertainty. The multitude of other bilateral or multilateral investment treaties, by which the states withdrawing from the ECT will still be bound, should also not be forgotten. While withdrawal will eventually free states from their obligations under the ECT, this will likely only materialise in the long term and ultimately failure by Member States to reach consensus on modernising the Treaty means that the old regime is here to stay (at least for now). 

If you'd like to know more about what this might mean for you or your business, reach out to a member of our Disputes & Investigations team.