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European court rules companies cannot sue EU states over environmental laws

Out-Law News | 11 Oct 2021 | 3:04 pm | 2 min. read

The Court of Justice of the EU (CJEU) has ruled that the international treaty used by energy companies to claim compensation from member states who frustrate their investments is incompatible with EU law.

Ruling in a case brought by the Republic of Moldova against Ukrainian energy company Komstroy, the CJEU said companies cannot use the investor-state dispute settlement (ISDS) mechanism in the Energy Charter Treaty (ECT) to sue member states for taking action against climate change, as this undermines the role of EU courts.

The ECT is a multilateral agreement signed in 1994 that sets out the framework for energy cooperation and promotes open and competitive energy markets between its members. However, foreign investors have used the ISBS mechanism to claim compensation from governments for changes in social or environmental laws that impact their businesses.

Energy disputes expert Pamela McDonald of Pinsent Masons, the law firm behind Out-Law, said the decision favoured member states attempting to implement greener initiatives and regulations. “The CJEU’s decision sets a precedent that governments who are party to the treaty should be able to act on climate change without fear of arbitration challenge from companies investing in non-renewable energy,” McDonald said.

Pamela McDonald

Pamela McDonald

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The case provides EU member states who wish to implement climate conscious policies a degree of security to continue those initiatives without the fear of arbitration from investors

The CJEU ruled that investment arbitrations brought under the ECT by investors based in one EU member state against another EU member state are incompatible with EU law.

The case arose after a legacy company of Komstroy brought an arbitration claim against Moldova over a contract for the sale of electricity. It was referred to the CJEU by the Court of Appeal in Paris, which said the contract did not constitute an “investment” within the meaning of the ECT.

The CJEU agreed with the referring court. It said article 26 of the ECT, which sets out the procedure of disputes between an investor and a contracting party, must be interpreted as not being applicable to disputes between a member state and an investor of another member state concerning an investment made by the investor in the first member state.

The CJEU said a contract for the supply of electricity which is not connected with an investment does not constitute an “investment”, and therefore the ISDS did not apply.

McDonald said the case set a precedent for future claims which may arise from disputes between member states and foreign investors.

“It provides those member states who wish to implement climate conscious policies a degree of security to continue those initiatives without the fear of arbitration from investors, and it sets a trend for future court decisions regarding this type of dispute between foreign investors and member states,” McDonald said.

McDonald said EU member states would now seek to rely on the ruling as a defence against arbitrations brought under the ECT.

“Member states striving to implement climate conscious policies will be able to look at this outcome and feel a degree of protection against energy companies in arbitrations under the treaty. Businesses should be aware that this defence now exists, and the implications which may arise in future claims using the ISDS legal mechanism in the ECT,” McDonald said.

“There is a consensus that the ECT is outdated as it does not comply with the EU’s reformed approach on investment policy and climate policy commitments in member states. In the future, member states may push towards a withdrawal from the ECT. If that is the case member states withdrawing from the ECT should consider agreeing amongst exiting states to neutralise the sunset clause, which allows investors to continue to bring ISDS claims related to existing investments for another 20 years after withdrawal,” McDonald said.