{"id":7923,"date":"2020-06-20T08:42:50","date_gmt":"2020-06-20T13:42:50","guid":{"rendered":"http:\/\/www.iisd.org\/itn\/?p=7923"},"modified":"2024-08-09T18:30:59","modified_gmt":"2024-08-09T16:30:59","slug":"eu-releases-proposal-for-ect-modernization","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2020\/06\/20\/eu-releases-proposal-for-ect-modernization\/","title":{"rendered":"EU Releases Proposal for ECT Modernization"},"content":{"rendered":"

The EU<\/span> released<\/a> a proposal for the modernization of the\u00a0 ECT<\/span><\/a> on May 27, 2020.\u00a0 This latest draft of the EU\u2019s proposal includes changes to the treaty\u2019s definition of investment, an affirmation of parties\u2019 right to regulate, a narrower definition of FET<\/span>, 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.<\/p>\n

The proposal is the product of several rounds of talks with EU member states after the European Council approved<\/a> negotiating directives for the EU\u2019s participation in negotiations to modernize the ECT in September 2019. The Energy Charter Conference had settled on a list of topics<\/a> to be included in the modernization process in November 2018.<\/p>\n

A copy of a revised draft proposal<\/a>, dated April 17, 2020, was released by Euractiv.com and included an explanatory note, outlining updates made since the circulation of an earlier draft<\/a> in March. This news item makes reference to both the latest version as well as the draft\u2019s explanatory note.<\/p>\n

Updated definitions of investment and investor<\/h3>\n

Articles 1.6 and 1.7 of the ECT provide definitions of investor and investment, respectively. To ECT\u2019s list of assets \u201ccontrolled directly or indirectly\u201d by an investor, the EU\u2019s proposal adds the following criteria: an investment must be of\u00a0 \u201ca certain duration\u201d and possess \u201cother characteristics such as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk.\u201d The explanatory note clarifies that \u201ca certain duration\u201d is a mandatory characteristic, in a change from the March draft. The draft further clarifies that \u201ca simple loan or financial contribution\u201d does not qualify as an investment.<\/p>\n

The term \u201cInvestment\u201d in the proposal refers to all investments made in accordance with \u201cthe applicable law and the law of the host Contracting Party.\u201d<\/p>\n

Investors must be \u201cengaged in substantive business activities in the territory of that Contracting Party.\u201d\u00a0 This definition is likely aimed at addressing the use of \u201cletterbox\u201d companies to bring claims under the ECT, frequently the case<\/a> with Dutch claimants in ECT disputes.<\/p>\n

Proposal highlights environmental concerns<\/h3>\n

The EU proposal includes a new article explicitly affirming contracting parties\u2019 right to regulate<\/a> in order to achieve \u201clegitimate policy objectives, such as the protection of the environment, including combatting climate change,\u201d among others.<\/p>\n

Other newly proposed articles explicitly mention states\u2019 international commitments to protect the environment, such as the Rio Declaration of 1992 and the UN\u2019s SDGs and reaffirm the right of parties \u201cto adopt or maintain measures to further the objectives\u201d of the environmental agreements to which they are a party.<\/p>\n

Narrower definition of FET<\/h3>\n

Article 10.1 of the ECT \u2013\u00a0 on the promotion, protection, and treatment of investments \u2013 includes a reference to FET<\/a>, but no definition. The EU\u2019s proposal provides a series of measures which would amount to a breach of FET, including:<\/p>\n

(a) denial of justice in [domestic judicial] proceedings; or<\/p>\n

(b) fundamental breach of due process; or<\/p>\n

(c) manifest arbitrariness; or<\/p>\n

(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or<\/p>\n

(e) abusive treatment such as harassment, duress, or coercion.<\/p>\n

This section of the proposal further notes that an investor\u2019s \u201clegitimate expectations\u201d may be considered by a tribunal when considered a potential breach of FET.<\/p>\n

Proposed dispute settlement provisions include reference to a multilateral investment court and frivolous claims<\/h3>\n

Article 26 of the ECT provides for investor\u2013state dispute settlement under ICSID<\/span>, ICSID (AF), UNCITRAL<\/span>, or SCC<\/span> rules. While absent from the version of the proposal circulated in March, the latest version includes as a possibility \u201cthe rules of a multilateral investment court<\/a>.<\/u>\u201d\u00a0 The new proposal also notes that nothing in the proposed revisions has any impact on the EU\u2019s goal of establishing an Investment Court System.<\/p>\n

The proposal also suggests a new article addressing procedures to facilitate the dismissal of frivolous claims.<\/p>\n

Other new additions<\/p>\n

The proposal includes references to several other topics that do not appear in the current ECT.<\/p>\n

The draft includes an article on third parties that would allow the intervention of \u201cany natural or legal person who can demonstrate a direct and present interest in the result of the dispute.\u201d<\/p>\n

Under the EU\u2019s proposal, parties to a dispute would have to disclose third-party funding<\/a> relationships.<\/p>\n

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 \u201cif 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.\u201d<\/p>\n

The proposal additionally contains an article addressing the valuation of damages, which states that \u201cmonetary damages shall not be greater than the loss suffered by the investor\u201d and that the tribunal \u201cshall not award punitive damages.\u201d<\/p>\n

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.<\/p>\n