Dispute Resolution under the Energy Charter Treaty in a Nutshell

Note no. 1
April 10, 2017

I. Introduction

Mindful of the volatile climate in the oil and gas energy sector and of the surge of renewables, there is little doubt that international energy disputes are bound to rise. Until now, investors have brought 101 cases to international investment arbitration under the dispute resolution mechanism of the Energy Charter Treaty (“ECT”). The ECT is hence considered the most commonly invoked investment agreement in the energy industry. This short note intends to pinpoint the ECT’s most relevant provisions addressing the dispute resolution mechanism.

II. Dispute Resolution Mechanism

The dispute resolution mechanism is embedded in Article 26 of the ECT and entitles the aggrieved investor to initiate legal action against the ECT host state for violation of its obligation to provide a high level of protection for foreign investors.

a)  Amicable Settlement

Article 26(1) of the ECT provides the first tier of a two tiered mechanism, requiring the parties to first endeavor to settle their potential dispute through mutual settlement negotiations. Typically, the investor sends a notice of dispute including a request for an amicable settlement to the central authorities of the host state.

Following dispatch of such notice, Article 26(2) of the ECT provides an investor with a so-called cooling-off period of three months before the investor may proceed with formal dispute resolution. However, various tribunals have not considered this cooling-off period to be a jurisdictional requirement, particularly where it was evident that such negotiations would be futile and the three-month period would be an unnecessary formality. [1]  

b) Investor’s Right to Choose Forum

If the dispute is not settled amicably, the aggrieved investor is entitled under Article 26(2) of the ECT to choose the available forum for asserting its claims as follows: (i) before the courts or administrative tribunals of the ECT host state, (ii) in accordance with any applicable previously agreed dispute settlement procedure, or (iii) before an international arbitral tribunal. Importantly, the ECT does not require the investor to exhaust local remedies in the ECT host state’s courts under the domestic law.

This provision also provides for a so-called “fork-in-the-road” rule, requiring the investor to choose whether to litigate or arbitrate the claims, or whether to follow the previously agreed dispute resolution procedure. Hence, this provision avoids forum shopping where the investor would switch from one forum to another. It also prevents the state court and arbitral tribunal from rendering irreconcilable decisions.

Typically, investors opt for international arbitration, particularly because asserting claims before national courts would usually give rise to doubts as to the independence and impartiality of the host states’ judicial system.

If the investor waltzes into the international arbitration option, the ECT enables the investor to submit its claims to one of three arbitration fora under Article 26(4) of the ECT: International Centre for Settlement of Investment Disputes (ICSID); ad hoc arbitration under UNCITRAL rules, or Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

The ECT disputes submitted to arbitration are thus heard under ICSID rules, UNCITRAL rules, or SCC rules. These rules determine the entire procedural framework within which the arbitral proceedings are administered, each of them having inherent particularities that the investor must carefully assess beforehand.

c)  Unconditional Consent to Arbitrate (Arbitration Agreement)

Under Article 26(3) of the ECT, the ECT host state grant foreign investor an unconditional consent to raise potential claims in international arbitration. The unconditional consent to arbitration is at the heart of the ECT and such consent cannot be revoked. An ECT host state may not later contest the jurisdiction of an arbitral tribunal arguing that it has not agreed with the arbitral proceedings mechanism. Therefore, the seized tribunal is to be satisfied that a valid arbitration agreement between the investor and the host ECT state exists.

Additionally, withdrawal from the ECT would not help the ECT host state avoid the agreed arbitration fora. In particular, Article 47 of the ECT provides for a so-called “sunset provision,” under which the withdrawing state is required to continue protecting and promoting the existing investments in its area for a period of 20 years following such withdrawal. Hence, the sunset clause significantly prolongs the ECT state’s consent to arbitrate.

d)  Applicable Law

Under Article 26(6) of the ECT, disputes submitted to arbitration are decided in accordance with the ECT provisions and system of rules and principles of international law. The arbitral tribunals also take into consideration other arbitral awards, even though there is no binding stare decisis doctrine in the investment arbitration.

The ECT states cannot resort to their national or municipal laws to justify their failure to observe the substantive obligations under the ECT or principles of international law. Nor can they resort to their own judicial settlement mechanism to undermine the arbitration settlement mechanism afforded to the investor. This reflects the fact that the investor’s claims against the ECT state for the violation of ECT substantive obligations are international law claims, not claims under the national laws of the ECT state.

e)  Enforcement

Article 26(8) of the ECT contains a specific obligation of the ECT states to carry out the arbitral award without delay. However, the ECT does not contain a specific enforcement regime. Thus, the enforcement regime is, in principle, twofold: (i) ICSID awards are enforced under the ICSID Convention as if they were final judgments of courts in the host ICSID state and (ii) non-ICSID awards are enforced under the New York Convention which contains very limited grounds for refusing the enforcement of such awards.

III. Concluding Remark

The ECT serves as an effective tool to clampdown the ECT host state, which seeks to turn its back to its substantive obligations under the ECT, by providing the investor with the possibility to assert its claims before neutral arbitration fora. Another advantage of the ECT is that the ECT claims are decided under ECT provisions and the regime of international law, not under domestic laws. It is thus fair to conclude that the ECT is becoming increasingly relevant and important in the modern global world, intertwined by high energy demand and a changing energy marketplace.

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