Komstroy Decision: End of an Era for Intra – EU ECT Arbitration or Not?

Introduction

The Court of Justice of the European Union (“CJEU”) in the Republic of Moldova v. Komstroy LLC (“Komstroy”) rendered a contentious decision which is likely to create controversies on intra-EU arbitrations governed under the Energy Charter Treaty (“ECT”).[1]

According to the CJEU, arbitrating in investment disputes between EU Member States is contrary to EU Law in cases where the dispute is governed by the ECT. The CJEU also ruled that acquisition of a debt claim arising from an electricity supply contract does not constitute an “investment” as per the ECT.

The background of the decision will be given below, which will be followed by an assessment on the reasoning of the CJEU in its decision.

The Background

By concluding of series of contracts in 1999, Ukrenergo — a Ukrainian electricity producer, sold electricity to Energoalians — a Ukranian distributor. The latter sold electricity to Derimen, a company registered in British Virgin Islands, which supplied electricity to the Moldovan state-owned enterprise Moldtranselectro.

Derimen paid Energoalians the full amounts due for the electricity purchased, whereas Moldtranselectro failed to pay the amounts due to Derimen. By May 2000, Derimen transferred its right to claim for debt from Moldtranselectro to Energoalians, who later on initiated an arbitration against the Republic of Moldova (“Moldova”) by arguing that the State infringed[2] the ECT and the Moldova-Ukraine Bilateral Investment Treaty (“BIT”).[3]

In October 2013, a Paris-seated Arbitral Tribunal (“Tribunal”) concluded that Moldova was liable for breaching the ECT’s fair and equitable treatment standard. The award was rendered by a majority, since the Chair of the Tribunal issued a dissenting opinion arguing that acquisition of a right to claim for a debt by Energolians did not constitute an investment under the ECT.

In November 2013, Moldova initiated a setting-aside procedure against the arbitral award before the Paris Court of Appeal (“CoA”). Meanwhile, another Ukrainian company, Komstroy, became a successor-in-law to Energoalians. In April 2016, the Paris CoA agreed with the dissenting opinion of the Chair and annulled the arbitral award, on the ground that the Tribunal lacked jurisdiction, due to the fact that a capital or economic contribution would suffice as an investment under the ECT, but acquisition of a debt arising under a commercial transaction would not.

Komstroy appealed against the annulment decision before the Court of Cassation. In March 2018, the annulment decision was overturned. In its decision, the Court of Cassation underlined that the Paris CoA had interpreted the concept of “investment” by adding a condition to it not provided for in the ECT.

Accordingly, the arbitral award against Moldova was reinstated. In its second review, the Paris CoA stayed the proceedings and referred the question of the interpretation of the term “investment” under the ECT to the CJEU.

The Komstroy Decision of the CJEU

Although referral to the CJEU contained a question on the interpretation of “investment” under the ECT, the assessment of the CJEU went far beyond this issue. In March 2021, Advocate General (“AG”) Szpunar opined not only on the scope of investment within the ECT, but also assessed the validity of intra-EU arbitrations under the ECT. [4]

Since the dispute at issue was not intra-EU, the jurisdiction of the CJEU was highly controversial. The CJEU confirmed its jurisdiction by underlining that:

  • the EU has an interest in the uniform interpretation of the ECT provisions,
  • having Paris as the seat of the arbitration calls for the application of EU law by the French courts and
  • 19 TEU requires ensuring compliance with EU law.

The CJEU continued its assessment by referral to the primacy and autonomy of EU law by adding that:

  • uniform interpretation of EU law is crucial,
  • there is a risk that arbitral tribunals constituted under Art. 26 of the ECT might interpret and apply EU law,
  • in cases where such tribunals are located outside the EU judicial system, they cannot be regarded as EU Member State courts under Art. 267 TFEU,
  • awards rendered by such tribunals governed by the ECT cannot be reviewed by EU Member State courts, thus creating a risk of no-referral to the CJEU for questions of EU law.

The CJEU answered the referral question of the Paris CoA in the affirmative. Thus, it concluded that acquisition of a claim arising from an electricity supply agreement does not constitute an “investment” since (i) the asset at issue cannot be regarded as undertaking an economic activity in the energy sector as per the ECT and (ii) supply of electricity is a commercial transaction which cannot in itself constitute an investment.

Analysis of the Komstroy Decision

Komstroy seems to have been rendered as a complementary tool for the EU’s ongoing work on elimination of recourse to arbitration in intra-EU investment disputes. It follows the reasoning of the Achmea decision of the CJEU.[5]

The Termination Agreement[6] of intra-EU BITs does not cover investment disputes governed under the ECT[7]. Moreover, numerous tribunals dealing with intra-EU investment disputes under the ECT has been resisting the extension of Achmea and refusing to decline jurisdiction in disputes brought before them.[8] Considering these, the CJEU’s position in Komstroy becomes not surprising at all. The CJEU is likely to block such resistance to the extension of Achmea’s reasoning in ECT governed disputes until the EU takes a concrete step on the termination/or modernization of the ECT.

Yet, it is highly debatable whether the CJEU had grounds for extending Achmea reasoning to Komstroy, considering that Komstroy is an extra-EU dispute with Ukranian and Moldovian parties, with no question of EU law at stake.[9] What is crucial in terms of international law is that the CJEU’s narrow conclusion on the notion of “investment” under the ECT[10] is contrary to the jurisprudence of investment tribunals.[11]

The CJEU’s position on invalidating referral to arbitration as per the ECT is likely to create further controversies and resistance by arbitral tribunals, considering that the ECT is a multilateral treaty. It should not be omitted that the EU is a party itself and bound by the obligations arising from the ECT. In the words of the Escosol Tribunal[12], EU law and the ECT belong to separate sub-systems of international law, where they co-exist with no precise hierarchy.[13]

Conclusion

Following the path of Achmea, the CJEU has rendered another controversial decision in terms of referral to arbitration in intra-EU investment disputes. This time, the CJEU specifically focused on incompatibility of the ECT governed disputes, which were out of the scope of Termination Agreement leading to termination of intra-EU BITs.

The Komstroy decision is far from being convincing since the CJEU ruled in an extra-EU dispute having no question of EU law at stake. It is also controversial since not only Member States, but also EU institutions are bound by the ECT.[14] Blocking referral to arbitration in ECT disputes, which is a right derived from the ECT, should not be in the hands of an EU institution which is in fact legally bound by the provisions of that multilateral treaty.


(Authored by Tilbe Birengel and first published by Erdem & Erdem on October 2021)


[1] Judgment of the Court (Grand Chamber) of 2 September 2021, Republic of Moldova v Komstroy LLC , a company the successor in law to the company Energoalians, C-741/19, ECLI:EU:C:2021:655.

[2] Energoalians’ claims against Moldova included breach of treatment standards such as: indirect expropriation, infringement of fair and equitable treatment/minimum standard of treatment, discrimination, and denial of justice.

[3] The Republic of Moldova – Ukraine Bilateral Investment Treaty (“BIT”), signed on 29.08.1995, entered into force on 27.05.1996. For access: Moldova, Republic of – Ukraine BIT (1995) | International Investment Agreements Navigator | UNCTAD Investment Policy Hub, (access date: 01.10.2021)

[4] Opinion of AG Szpunar of 03.03.2021, Republic of Moldova v Komstroy LLC, C-741/19, ECLI:EU:C:2021:164.

[5] The Judgment of the Court (Grand Chamber), Case C‑284/16, Slowakische Republik (Slovak Republic) v Achmea BV, Case C-284/16, ECLI:EU:C:2018:158, 06.03.2018.

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