EU Releases Proposal for ECT Modernization

The EU released a proposal for the modernization of the  ECT on May 27, 2020.  This latest draft of the EU’s proposal includes changes to the treaty’s definition of investment, an affirmation of parties’ right to regulate, a narrower definition of FET, and reference to a multilateral investment court. The proposal also suggests several additional articles on sustainable development, frivolous claims, security for costs, interventions by third parties, third-party funding, and valuation of damages.

The proposal is the product of several rounds of talks with EU member states after the European Council approved negotiating directives for the EU’s participation in negotiations to modernize the ECT in September 2019. The Energy Charter Conference had settled on a list of topics to be included in the modernization process in November 2018.

A copy of a revised draft proposal, dated April 17, 2020, was released by and included an explanatory note, outlining updates made since the circulation of an earlier draft in March. This news item makes reference to both the latest version as well as the draft’s explanatory note.

Updated definitions of investment and investor

Articles 1.6 and 1.7 of the ECT provide definitions of investor and investment, respectively. To ECT’s list of assets “controlled directly or indirectly” by an investor, the EU’s proposal adds the following criteria: an investment must be of  “a certain duration” and possess “other characteristics such as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk.” The explanatory note clarifies that “a certain duration” is a mandatory characteristic, in a change from the March draft. The draft further clarifies that “a simple loan or financial contribution” does not qualify as an investment.

The term “Investment” in the proposal refers to all investments made in accordance with “the applicable law and the law of the host Contracting Party.”

Investors must be “engaged in substantive business activities in the territory of that Contracting Party.”  This definition is likely aimed at addressing the use of “letterbox” companies to bring claims under the ECT, frequently the case with Dutch claimants in ECT disputes.

Proposal highlights environmental concerns

The EU proposal includes a new article explicitly affirming contracting parties’ right to regulate in order to achieve “legitimate policy objectives, such as the protection of the environment, including combatting climate change,” among others.

Other newly proposed articles explicitly mention states’ international commitments to protect the environment, such as the Rio Declaration of 1992 and the UN’s SDGs and reaffirm the right of parties “to adopt or maintain measures to further the objectives” of the environmental agreements to which they are a party.

Narrower definition of FET

Article 10.1 of the ECT –  on the promotion, protection, and treatment of investments – includes a reference to FET, but no definition. The EU’s proposal provides a series of measures which would amount to a breach of FET, including:

(a) denial of justice in [domestic judicial] proceedings; or

(b) fundamental breach of due process; or

(c) manifest arbitrariness; or

(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or

(e) abusive treatment such as harassment, duress, or coercion.

This section of the proposal further notes that an investor’s “legitimate expectations” may be considered by a tribunal when considered a potential breach of FET.

Proposed dispute settlement provisions include reference to a multilateral investment court and frivolous claims

Article 26 of the ECT provides for investor–state dispute settlement under ICSID, ICSID (AF), UNCITRAL, or SCC rules. While absent from the version of the proposal circulated in March, the latest version includes as a possibility “the rules of a multilateral investment court.”  The new proposal also notes that nothing in the proposed revisions has any impact on the EU’s goal of establishing an Investment Court System.

The proposal also suggests a new article addressing procedures to facilitate the dismissal of frivolous claims.

Other new additions

The proposal includes references to several other topics that do not appear in the current ECT.

The draft includes an article on third parties that would allow the intervention of “any natural or legal person who can demonstrate a direct and present interest in the result of the dispute.”

Under the EU’s proposal, parties to a dispute would have to disclose third-party funding relationships.

The proposal also includes a new article allowing a tribunal to order a claimant to post security for all or part of the costs of the proceeding “if there are reasonable grounds to believe that the Investor risks not being able or willing to honour a possible decision on costs issued against it.”

The proposal additionally contains an article addressing the valuation of damages, which states that “monetary damages shall not be greater than the loss suffered by the investor” and that the tribunal “shall not award punitive damages.”

Finally, the proposal includes an Annex that places several restrictions on the submission of investment claims related to public debt restructuring. The explanatory note attached to the April draft states that this was included in light of the COVID-19 pandemic.