Komstroy V. Moldova: A Case of Kicking Away of the EU on Investment Arbitration Vide the Ect

Tejas Sateesha Hinder & Arushi Bhagotra

B.A. LLB (Hons.)

National Law Institute University, Bhopal, India

Introduction

The Energy Charter Treaty (hereinafter “ECT”) has been a hot subject in international forums, particularly in the European Union (hereinafter “EU”), where the European Commission declared the treaty ‘obsolete‘ in 2020. In the case of Komstroy v. Moldova, the Court of Justice of the European Union (hereinafter “CJEU”) issued one of its most anticipated rulings on the interpretation of the ECT in September 2021, holding that intra-EU arbitration based on the dispute redressal mechanism established under Article 26 of the treaty is incompatible with the EU legal order’s autonomy. It’s worth mentioning that the case before the CJEU was of a foreign nature, which means that neither the EU nor its member states were involved.

What is notable about this decision is that it has Europeanized the current issue by examining it purely through the lens of EU law, thus ignoring the International Law Rules.

The purpose of this essay is to examine the CJEU’s decision from the perspective of international law. It also gives insight into the judgment’s potential implications for future intra-EU investment arbitration.

Case Background

The Energy Charter Treaty (“ECT”) is an international investment treaty signed in 1994 with the main purpose of building an energy cooperation framework while simultaneously assuring global security and stability in energy markets.

The issue revolves around a disagreement that dates back to the 1990s, when Komstroy’s predecessor had an energy contract with several Moldovan state-owned companies (SOEs), and it was claimed that Moldova had violated the contract’s terms. Following the breach of contract, an arbitration hearing was held in Paris under the norms of the United Nations Commission on International Trade Law (“UNCITRAL”). The tribunal decided in favor of Komstroy, finding that Moldova had broken its ECT obligations. Moldova filed an appeal before the Paris Court of Appeal, and the Court overturned the tribunal’s decision. Following this appeal, Komstory sought a retrial of the verdict, and the Paris Court of Appeal sent the matter to the CJEU for a preliminary ruling, especially on the meaning of “investment” as defined in Article 1(6) of the ECT. Three major concerns concerning jurisdiction and investment were examined by the CJEU. It’s worth noting that the sole link between this case and the EU was the Arbitration Tribunal’s location in Paris.

Side-lining the PIL Rules: Inherent loopholes in the ruling

In determining whether intra-EU arbitration under the ECT is consistent with EU law, the CJEU noted that the ECT is an act of EU law in and of itself, and as such, they can interpret and apply EU law to it, and the CJEU proceeded with their reasonings based on this basis.

The CJEU has placed a strong emphasis on the judgment of Slovak Republic v. Achmea, which is well-known for disregarding Public International Law (hereinafter “PIL”) principles and holding that it has jurisdiction under Article 267 of the Treaty on the Functioning of the European Union  (hereinafter “TFEU”) for the following reasons:

• ECT is an integral part of the EU legal order because of EU being a signatory to the ECT
• Since the seat of arbitration was in Paris, the law of the land would be European Law and
• To prevent differences in the future regarding the interpretation and in the interest of the EU legal order.

 Even while the controversy involves an international treaty, the CJEU did not follow the treaty interpretation rules set down in the Vienna Convention on Law of Treaties (hereinafter “VCLT”). When it comes to treaty interpretation, the VCLT is the most important source. “Affirming that treaty disputes, like other international disputes, should be handled by peaceful methods and in accordance with the principles of justice and international law,” the preamble declares expressly. Treaty interpretation guidelines are also addressed in Article 31(1) of the treaty, which states that a treaty must be construed in good faith in light of its goal and purpose, and according to the usual meaning of its contents in their context. The word “Context” is expanded in Article 31(2) to encompass the preamble, annexes, and any agreement or instrument between the parties relating to the signing of a treaty.

Further references to Article 3(5) of the Treaty on European Union (hereinafter “TEU”) and Article 216 of the TFEU show that the EU is committed to the strict observance and development of international law, as well as the fact that the EU’s international treaties are legally binding.

In the case of Firma E. Merck v. Hauptzollamt Hamburg Jonas, the CJEU summarized its interpretative approach by holding that “it is vital to consider not only the wording of a provision of law but also the context in which it appears and the purpose of the regulation of which it is a part while interpreting it.” However, when interpreting the treaty in the Komstroy decision, the Court preferred to keep mute on these important criteria.

In brief, rather than prioritizing the VCLT’s provisions, the CJEU used EU Constitutional Law principles in reading the ECT by highlighting the EU legal order’s autonomy, masking the PIL principles that should have been the Hon’ble Court’s principal priority.

Implications on the future of arbitration under the ECT

Despite the CJEU’s reading of the ECT, the current judgement appears to have no bearing on a tribunal’s jurisdiction. This is partly because the International Centre for Settlement of Investment Disputes (“ICSID”) or UNCITRAL Arbitral Tribunals created for dispute settlement under the ECT under Article 26 are required to apply PIL rules and interpret the ECT in line with Article 31 of the VCLT. While it is possible to give priority to EU law when applying such law, it cannot be done based on EU constitutional law, as the current ruling has reasoned.

Rather than EU Law, these Arbitral Tribunals are governed by international treaties and the PIL mechanism containing a state’s offer to arbitrate (such as the ECT). These tribunals have Kompetenz- Kompetenz, or the ability to rule on jurisdictional questions, as stated in Hochtief v. Argentina. The parties have numerous choices under Article 26(1) to (5) ECT to pick a particular tribunal (such as ICSID/Ad-hoc/Tribunals under UNCITRAL law, etc.) to initiate the arbitration. Article 25 of the ICSID Convention gives ICSID tribunals the authority to hear ECT cases. Tribunals draw analogous competence from Article 16 of the UNCITRAL Model Law on International Arbitration, which gives them the ability to arbitrate on such problems.

Under Article 25 of the ICSID Convention and Article 7 of the UNCITRAL Model Law on International Commercial Arbitration, consent to arbitration is a condition for a tribunal’s jurisdiction. These courts must have ratione voluntatis jurisdiction, which implies that the parties’ consent to the arbitration must be legal and voluntary. One fascinating aspect of this is that once a State has agreed to arbitrate disputes with investors in a binding international treaty and an investor has accepted the standing offer to arbitrate (by filing a Request for Arbitration with an Arbitral Institution), the State cannot rely on its “internal law” to avoid its treaty obligations.

The same premise is reiterated in VCLT Article 27. Using the same logic as in the Komstroy case, a violation of EU constitutional law cannot override or invalidate an EU Member State’s unequivocal assent to arbitration under Article 26(1) ECT.

Takeaways from the ruling 

Critical Issues

While this decision will have no substantial impact on the way arbitral tribunals operate, it does raise the important problem of enforcing an intra-EU judgement outside of the EU. The judgement might lead to EU member states contesting the registering of any awards in local courts on the grounds that they violate EU law. As a result of the CJEU’s ruling, the chances of any intra-EU award being successfully enforced in domestic courts may be reduced. Before beginning arbitration under the ECT, investors will need to carefully consider non-EU options for both the seat of any arbitration and any potential enforcement action.

Along with the issue of enforcement, this judgement also raises the question of the CJEU’s legitimacy. First, because the dispute did not involve EU legislation, it was not immediately applicable to the parties; second, EU public policy was not impacted; and third, the legitimacy of the ECT arbitration was not addressed to the court. Such an approach has the potential to lead to lengthy discussions between the ECT contracting parties and the EU on the interpretation of the ECT’s numerous provisions.

The Road Ahead

The Komstroy ruling is only the tip of the iceberg which has the potential to erode intra-EU treaty arbitrations under the ECT over time. Thus, it is essential to fix the unstable ground of investment arbitrations in the EU without much delay. With this objective, the European Commission proposed a legislative initiative last year aimed at clarifying and supplementing EU legislation on cross-border investment within the EU, which included the creation of an Ombudsman-like EU administrative body as well as a specialized investment court.

Proposals also included the introduction of “Single Digital Gateway” and expanding the realm of ‘Solvi’ (a conflict redressal service offered by the national administration). However, these changes are still in the planning stages, and it has to be seen if they will provide appropriate protection to investors. U investors should use extreme caution in their investments for the time being. They should organize their investments to take advantage of investment treaty protection while avoiding clashes with the CJEU.

Suggested citation: Tejas Sateesha Hinder & Arushi Bhagotra, Komstroy V. Moldova: A Case of Kicking Away of the EU on Investment Arbitration Vide the Ect, Canadian Institute for International Law Expertise (CIFILE), Canada, May 16, 2022, https://cifile.org/2022/05/komstroy-v-moldova-a-case-of-kicking-away-of-the-eu-on-investment-arbitration-vide-the-ect/