ECT modernization negotiations continue with two rounds over the summer as opposition mounts

Since we last reported on the process, there have been two virtual negotiation rounds on ECT modernization, taking place in the midst of increased civil society opposition to the agreement, particularly within the EU.

The fifth round took place in June 2021. Topics covered at the meeting, according to a public statement released by the modernization group, included the definition of transit; issues related to CSR and sustainable development; dispute settlement, with a focus on prevention and frivolous claims; security for costs; third-party funding (TPF) and valuation of damages; and, finally, the extent to which the UNCITRAL rules on transparency in ISDS should be adopted.

The sixth round of talks took place in July 2021 and covered pre-investment issues, regional economic integration organization, obsolete provisions, the definition of economic activity, and further issues related to investment protection. With regard to the latter, the public communication released after the talks notes that the definitions of investment, investor, and indirect expropriation, as well as denial of benefits, were discussed.

According to a statement put out by the EC, the sixth round made “substantial progress” related to investment protection specifically. Nevertheless, pressure within Europe to exit the ECT continues to mount; for example, as Slovenia assumed the presidency of the Council of the European Union in July, Slovenian NGOs have reportedly called on their government to push forward discussions of exit from the ECT entirely. In the lead up to COP 26, to be held in November 2021, European civil society organizations have called on European leaders to use the conference as a deadline to exit the treaty.

Meanwhile, on September 2, the CJEU opined in a preliminary ruling that the ISDS provision in the ECT was incompatible with EU law. According to the Court, the EU did not have the authority to remove from the EU jurisdictional system the settlement of a dispute between an investor from an EU Member state and another EU Member state. To do so, it stated, would imply questioning “the preservation of the autonomy and the specific character of the law established by the [European] treaties” (para 63). Despite the ECT being a multilateral agreement that also creates relationships with non-EU member states, this precluded “the ECT from being able to impose the same obligations on the Member states among themselves” (para 65). The ECT therefore had to be interpreted as not applicable to such disputes.

In taking this view, the Court confirmed that its reasoning in the landmark decision Achmea equally applied to the ECT. In Achmea, the CJEU had held that ISDS provisions in intra-EU BITs were incompatible with EU law, prompting EU member states to terminate such BITs.

While the new opinion was stated obiter and is not legally binding, it is a strong indicator that the Court will hold ECT-based ISDS to be incompatible with EU law in one of two upcoming decisions in 2022 – a request for opinion by the Belgian government and a request for a preliminary ruling by the Svea Court of Appeal. The opinion also raises the question of how arbitral tribunals and enforcement courts – especially in the US – will react when asked to rule on intra-EU disputes.