Can investor-State dispute settlement under the Energy Charter Treaty successfully protect the environment?
Counterclaims in investment arbitration are gradually developing with the aim to counter environmental harm. The Energy Charter Treaty, as an investment agreement, falls short of offering this protection.
The Energy Charter Treaty (ECT) is a multilateral framework signed in September 1994 and which entered into force in April 1998. As of today, 53 States have signed the ECT. Its purpose, stated in Article 2, is to ‘promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter’. In light of the rising environmental concerns in international law, the ECT could provide a practical framework for environmental protection. However, despite its objective to ‘minimize environmental problems’ provided for in Article 1, the investor-State dispute settlement (ISDS) mechanism under Article 26 of the ECT falls short of reaching this aim.
Environmental counterclaims: Protecting the environment in investment arbitration
The interim decision on the environmental counterclaim in Perenco v. Ecuador (‘Perenco’) set an example for environmental considerations in international investment arbitration. In its 187-page decision, the tribunal permitted Ecuador to bring a counterclaim against the investor based on the alleged breach of Ecuadorian environmental law and, in its final award, held the company liable for causing environmental damage, thus awarding Ecuador USD 54 million. However, in the case of an international investment agreement such as the ECT, the admission of State counterclaims for environmental damage is not so straightforward and a close look should be taken at the consent of the Parties embedded in the Treaty.
Environmental counterclaims and the ECT: Establishing jurisdiction despite the lack of obligations
Whether an arbitral tribunal will admit counterclaims depends on four key requirements:
- The rules of the institution;
- The jurisdiction of the tribunal to entertain counterclaims;
- The admissibility of the counterclaim;
- The existence of obligations owed by investor.
Two preliminary observations should be made here. First, all three institutions made available in the ECT (ICSID, UNICITRAL and SCC) possess rules on the admission of counterclaims. Second, the admissibility of counterclaims is outside the scope of this contribution as it can only be assessed on a case-by-case basis.
Dispute settlement mechanisms under the ECT are provided for in Part V of the text. Article 26 provides that ‘disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III’ (emphasis added) may be submitted for arbitration.
In the case of the ECT, the compromissory clause is drafted in a narrow way, limiting the jurisdiction of the tribunal to ‘an alleged breach of an obligation of the former’ (emphasis added) – i.e. the State. A similar clause can be found in the Greece-Romania Bilateral Investment Treaty (‘BIT’) which was interpreted by a tribunal in the Spyridon Roussalis v. Romania award as ‘limit[ing] jurisdiction to claims brought by investors about obligations of the host State’. Conversely, in the cases of Hamester v. Ghana and Antoine Goetz v. Burundi, the tribunals opted for a controversial interpretation of the compromissory clause found in the relevant BITs, coming to the conclusion that by consenting to ICSID jurisdiction, the Parties consented to the admission of counterclaims in accordance with the applicable rules of the tribunal. The consequent dichotomy in the reasoning by the tribunals in Roussalis v. Romania and Goetz v. Burundi creates further uncertainty as to how consent to counterclaims should be interpreted. In the case of the ECT, however, one may have recourse to Article 31(1) of the Vienna Convention on the Law of Treaties to advocate for the Goetz approach. This article provides that a treaty shall be interpreted in good faith in accordance with, inter alia, its object and purpose. Therefore, in light of the objective of the ECT to ‘minimize environmental problems’ as stated under Article 1 (‘Objectives’), an interpretation of the compromissory clause allowing a host State to file counterclaims for the alleged environmental damage caused by the investor should be welcomed.
Nevertheless, not only does this interpretation undermine the strict notion of consent, it falls short of triggering the responsibility of the investor. It should be recalled that the jurisdiction of the tribunal under the ECT is limited to ‘breaches […] under Part III’ – i.e. of the ECT itself. However, the treaty only provides obligations for the State. Therefore, even if a tribunal were to establish its jurisdiction over counterclaims, it would find itself unable to rule over them on the merits.
The ISDS mechanism of the ECT falls short of adequately providing a framework for the protection of the environment. If a tribunal could adopt a broad interpretation of Article 26 of the ECT to extend its jurisdiction over counterclaims, the ECT would first have to be amended to provide for obligations owed by the investor or, alternatively, as was the case in Perenco, by referring to domestic law.