International Investment Treaties: Curse or Blessing for the Energy Revolution? – Part II

This article was written for the University of Westminster.

International law on the protection of foreign investment may impose excessive constraints on the freedom of states. But without international treaties, global companies may not invest in foreign countries – think about security, change in political administrations, shift in public perception, etc. This applies especially for the energy industry where contracts are signed for long-term periods. So: Are International Investment Treaties (IITs) a curse or a blessing for the governments and their plans for the energy revolution?

Read part one to learn more about the history and function of International Investment Treaties.

Why IITs are essential for foreign investors

It is understandable that a private company needs certain securities when making new investments. As described in the first chapter, this security is provided by national laws in its own country. However, if the investment is made abroad, other levers must be used. Of course, the company can also sue abroad directly at the national court if it feels unfairly treated. However, this is often regarded as too little objective – because ultimately even the most objective national court still represents the interests of its country. For this reason, IITs have been developed which guarantee the foreign investor greater security, fair and equitable treatment and the protection of expropriation – and at the same time define the framework conditions for an appeal. Most IITs give the investor the right to sue the host country directly at an international arbitration court – often the ICSID in Washington. As an independent body, this should serve to ensure a fairer arbitral award. In the energy industry, very large investment sums are often required to build up the sector. This applies equally to the oil industry, nuclear energy, and for renewable energy sources (e.g. on- and offshore wind farms). These high sums mean that the break-even point lies in the far future. For this reason, contracts in the energy sector are usually very long-termed and often guarantee rights for several decades. The companies are thus profiting very strongly from IITs, as they minimize the threat of a large economic loss due to changed political conditions. In Europe, this usually proceeds under the responsibility of the ECT. The next paragraph describes a concrete case which is currently pending at ICSID and involves two European parties: The Swedish energy company Vattenfall AB and the Federal Republic of Germany.

In 2011, Japan was struck by a tsunami that caused a nuclear catastrophe at the Fukushima reactor. For weeks, newspapers were full of new articles about this nuclear accident and the public perception about the “dangerous nuclear energy” manifested itself. In Germany, this debate led the government to add the 13th Amendment to its Atomic Energy Act. The 13th amendment stated to phase out nuclear power until 2022 and to shut down the oldest reactors in the country immediately (The Federal Office for Radiation Protection (Bundesamt für Strahlenschutz – BfS), 2013), although the official runtime was not yet over. This had consequences for some German energy operators and also for a foreign investor. Vattenfall AB, the national Swedish energy group, held large shares in two nuclear power plants which were asked to shut down immediately (Bernasconi-Osterwalder and Dietrich Brauch, 2014). For Vattenfall, this decision meant severe cuts in its business activities. This becomes obvious when analysing the company’s key figures for the German market, Vattenfall employs over 6,000 workers and achieved a turnover of € 6.19 billion in 2016. In addition, nuclear energy is responsible for over 40% of the company’s energy production matrix. While the German companies had to sue at the Bundesverfassungsgericht (national court), Vattenfall was able to choose a different path and submitted a request for arbitration at ICSID in May 2012. Vattenfall invoked three provisions in the Energy Charter Treaty (Bernasconi-Osterwalder and Hoffman, 2012):

  1. The provisions for protection against expropriation without compensation
  2. The obligation on fair and equitable treatment and the non-impairment through unreasonable or discriminatory measures
  3. The duty to observe any obligations vis-à-vis an investor or investment (umbrella clause)

The secretary-general of ICSID registered the request and agreed to be responsible for this issue (ICSID, 2019). Case No. ARB/12/12 was set up and now deals with the claims arising out of Germany’s enactment of legislation to phase out nuclear power plants in the country by 2022. The claimed sum is estimated to be around € 4.8 billion, however, since most negotiations are taking place behind closed doors only little is known and the claim, in reality, could be substantially higher. According to the arbitration rules of the ICSID convention, both parties, the claimant (Vattenfall AB) and respondent (Germany) appointed one arbitrator each and agreed jointly on a president (Albert Jan van den Berg). Over the next few years, the court gathered evidence and held negotiations with both parties, with the first official arbitration attempts finally taking place in Washington in October 2016. This, as a matter of fact, was broadcasted live. Apart from that, the public is in the dark and although it was expected that the arbitration would be swift, the court has not yet come to a decision. This is mainly caused by Germany, which repeatedly tried to delay the court’s decision (application to have all arbitrators disqualified) and even tried to withdraw jurisdiction from the ICSID (based on the ACHMEA verdict by the Court of Justice of the EU). All those attempts failed, though, but it shows how uncertain Germany is about the outcome of the tribunal.

This case study displays in what a difficult situation a foreign investor in the energy sector can find itself in if host countries make short-term changes to legislation due to changing environmental situations. Although this specific case may only be linked to the energy revolution to a limited extent (nuclear energy is rather clean), it becomes clear what a dilemma both parties can find themselves in. In addition to a large financial loss for Vattenfall, there is more at stake. For instance job security and general uncertainty about future investments, and also their general reputation in Germany. It is difficult for a company to explain to its customers in the host country why they are suing the host country for damages, which would consequently be paid with taxpayers’ money. The next chapter shows the advantages and disadvantages of IITs from the point of view of the host country and will again use the Vattenfall AB vs Federal Republic of Germany case to illustrate the impact.

Opportunities and threats for countries’ energy transition plans

Foreign Direct Investment (FDI) can provide a great service to a country in both the short and long term. Of course, this applies to different sectors of the economy, but it is of high importance to the energy sector. Especially energy-exporting and developing countries, which do not have the necessary capital themselves, may benefit as foreign investors can boost the energy sector, improve the economic performance, create jobs and thus improve welfare. But energy-importing countries, too, are dependent on investors who often do not come from their own countries. Think, for example, about expensive gas pipelines, the operation of nuclear power plants and, more recently, the development of renewable energy sources such as wind farms, solar and thermal power plants, or also hydroelectric power plants. Last but not least, investors often bring with them urgently needed knowledge and technologies that are simply not available in the host country. As explained in the previous chapter, contracts with investors are usually concluded on a very long-term, ensuring that the business is worthwhile for the investor. And this is where the challenges for the host country begin. Political, economic, ecological or social situations may change quickly, and the host country must adapt its framework conditions. While the local companies have to adapt to these changed conditions and have to resort to the national court in case of replacement claims, the foreign investor can invoke international law under the conditions described in the previous chapters. The next paragraph takes up again the case study of Vattenfall AB v. the Federal Republic of Germany and shows this time the perspective of the host country.

Nuclear energy has always had a hard standing in Germany as Appunn (2018) describes. 28.000 people occupied the construction site of a new reactor in Wyhl in 1975, 200.000 people demonstrated in Hannover and Bonn in 1979 after the Three Mile Island accident in the USA. The Chernobyl catastrophe in 1986 further fuelled the fear of a nuclear catastrophe in Germany. And in the 1990s, there were more demonstrations devoted mainly to final storage sites. As we can see from a political point of view, nuclear power plants have been a hot potato for a long time. The Fukushima catastrophe in 2011 consequently brought back the fear of a nuclear accident in Germany. At the same time, intensive discussions took place on how to achieve the energy revolution and how to move the best towards a low-carbon economy (Appunn, 2018). Having all this background, the Bundestag (German parliament) decided in the same year to carry out a radical nuclear phase-out, whereby eight plants were ordered to shut down immediately as well as all others until 2022. Over 80% of the parliamentarians voted for this request, which was added as the 13th Amendment to the Atomic Energy Act. Various newspaper polls showed that a large majority of the population agreed with this policy, too. In the industry, on the other hand, this decision was controversial, especially of course among the participating energy operators, who accused the federal government of breaching existing contracts. Those national energy companies subsequently sued the Federal Republic of Germany at the Bundesverfassungsgericht (German Federal Constitutional Court) and, some four years later, in December 2016, were partially justified. The court ruled that the 13th amendment was at least partially unconstitutional, but not an expropriation (Bundesverfassungsgericht, 2016). However, the court also found that “accelerating the nuclear energy phase-out and thereby limiting the residual risk associated with nuclear energy was a legitimate objective. Furthermore, setting fixed end dates and striking the previously granted additional electricity output allowances were suitable means to fulfil this objective” (Gesley, 2016). As already described in detail in chapter two, a foreign investor, Vattenfall AB, decided to file a complaint before the ICSID. The officially known claim amounts to € 4.8 billion, which is an extremely high sum even for an economically strong country like Germany. The outcome of this case is elementary for the country on several levels. In addition to the financial outlay, politicians will have to explain why they neglected or oversaw contracting rights of private companies while voting for the 13th amendment. Also, the question is raised as to what extent international law takes precedence over German law, which allows Germany to carry out its energy revolution in a self-determined manner. In the future, Germany would like to separate itself not only from nuclear power but also from coal power and may run into similar issues. If ICSID should rule against Germany, the verdict may have a significant influence on how Germany will administer its energy policy in the upcoming years. And not only Germany is concerned by it, the other signatories of the ECT, too, wait for the judgement, fearing that they may have to deal with similar complaints soon. Italy, as an example, announced to withdraw from the ECT and literature identifies the recent wave of ECT arbitrations and the fear of lawsuits as one of the reasons (Iacob and Cirlig, 2016). However, Italy does not get off easily as the ECT, as many other BITs and MITs, contains a so-called sunset clause. Article 47(3) states that “the provisions of this treaty shall continue to apply to investments made in the area of a contracting party by investors of other contracting parties or in the area of other contracting parties by investors of that contracting party as of the date when that contracting party’s withdrawal from the treaty takes effect for a period of 20 years from such date.” This widespread clause was established to safeguard investors right in a fast-changing political climate and means that Italy will still have to face potential legal claims for almost the next two decades (Iacob and Cirlig, 2016).

Conclusion

Does international law on the protection of foreign investment impose excessive constraints on the freedom of states to regulate their energy sector in the national interest? And are IITs more of a curse or blessing for the Energy Revolution? This essay has attempted to shed light on those two questions while analysing different perspectives and also highlighting the interests and fears of the parties involved. For foreign investors, disputes usually involve financial losses and security aspects. Points that have been assured to them contractually, and often in the long term. And for their country of origin, it is a matter of ensuring that national companies can also be protected abroad to the best of their ability. For the host country, one might argue, there is much more at stake. With increasing frequency, they have to justify themselves before international arbitration tribunals and more often they have to pay out high awards. The outcome of the described case study is also eagerly awaited by other nations because it can have a fundamental influence on their energy revolution strategies, too. If Germany is found guilty, the planned energy transition could be postponed by years. This puts developed countries, in particular, in a dilemma because they have signed internationally binding agreements such as the Paris Agreement and committed themselves to reducing greenhouse gas emissions and to working towards a low carbon economy with appropriate measures. In the current situation, it can, therefore, be argued that IITs such as the ECT have a negative impact on the energy transition and thus stand in sharp contrast to the climate change debate. However, one can also argue the other way around and say that it is IITs that make global investments in renewable energy sources possible and thus taking a central role in a rapid energy turnaround.

In my view, the answer to the opening question is “yes”: International law, linked with the signing of IITs and potential ISDS cases, can indeed represent a major hurdle for states, especially in the energy sector and in the context of climate change. The implementation of set climate targets can actually be slowed down by international law, and the question arises whether the well-being of multinational companies should take a higher priority than the well-being of the planet earth. Finally, companies may also be accused of having been passive about the energy revolution for too long and of actually having had the chance to prepare for legislative changes a long time ago. Moreover, it is legitimate to ask how “fair and equitable” international arbitration tribunals are for local companies which cannot appeal to these courts. And last but not least, it is difficult to have to explain to the public that under international law their taxpayers’ money is invested in awards for foreign multi-million dollar corporations. The growing criticism on the impact of ISDS claims from the point of view of the host country is therefore justified, so yes, international law on the protection of foreign investment imposes excessive constraints on the freedom of states. And yet I believe that IITs are important for the economic development, for supporting developing countries, for the energy revolution, and that it can increase overall welfare. They provide a clear framework, increase security for investors and define the rules of the free market (Iacob and Cirlig, 2016). They make it easier for knowledge, technology, and capital to be available worldwide, and for several decades IITs have been relatively uncontroversial and very useful. The fact that international arbitration courts are responsible for dealing with those claims rather than national courts, and hence apply international law, is also justified. National courts can hardly judge objectively in such important cases, especially since in some countries of the world there is no classical separation of powers, as is customary in democratic countries. It is also a fallacy to believe that a country can simply withdraw from treaties and then lull itself into a sense of safety from international lawsuits. As this essay showed, sunset clauses often oblige countries to comply with existing treaties for a further 20 years.

I would like to conclude this essay with a final look at climate change and the energy revolution, which is so important for it, arguing that while international law can generally restrict national governments, it is still a blessing. Because just as the ECT is subject to international law, so was the UNFCCC, the Kyoto Protocol and now the Paris Agreement. In my view, international law will play a major role in the future in achieving jointly formulated climate targets and sustainable development goals. Schrijver (2011) describes climate change as one of the greatest challenges currently facing international law. As early as 2008, the UN published a report stating that global warming may have implications for human rights. The rise in sea levels may also shift maritime borders and several island states risk losing their entire land. Last but not least, climate change also entails high costs and the question arises as to what extend the main perpetrators of climate change can be fined for these costs. All these issues will ultimately have to be regulated by international law if we want to tackle the climate challenge together.

Bibliography

Appunn, K. (2018) The history behind Germany’s nuclear phase-out, Clean Energy Wire. Available at: https://www.cleanenergywire.org/factsheets/history-behind-germanys-nuclear-phase-out (Accessed: 6 May 2019).

Bernasconi-Osterwalder, N. and Dietrich Brauch, M. (2014) ‘The State of Play in Vattenfall v. Germany II: Leaving the German public in the dark’, Internation Institute for Sustainable Development, (December).

Bernasconi-Osterwalder, N. and Hoffman, R. T. (2012) ‘The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the dispute Vattenfall vs. Germany (II)’, Internation Institute for Sustainable Development, (June 2012), pp. 1–8. Available at: http://www.tni.org/sites/www.tni.org/files/download/vattenfall-icsid-case_oct2013.pdf.

Brower, C. N. and Tepe, J. B. (1975) The Charter of Economic Rights and Duties of States: A Reflection or a Rejection of International Law? 9 Int’l Law.

Bundesverfassungsgericht (2016) Leitsätze zum Urteil des ersten Senats vom 6. Dezember 2016. Germany: BVerfG. Available at: https://www.bundesverfassungsgericht.de/e/rs20161206_1bvr282111.html.

ECT’s dirty secrets (2019) An explosion of cases, Energy Charter Dirty Secrets. Available at: https://www.energy-charter-dirty-secrets.org/ (Accessed: 6 May 2019).

Energy Charter Treaty (1994) The Energy Charter Treaty (With Incorporated Trade Amendment) and Related Documents. Lisbon.

Gesley, J. (2016) Global Legal Monitor, The Law Library. Available at: http://www.loc.gov/law/foreign-news/article/germany-compensation-to-utilities-for-acceleration-of-nuclear-energy-phase-out/ (Accessed: 6 May 2019).

Hobér, K. (2010) ‘Investment Arbitration and the Energy Charter Treaty’, Journal of International Dispute Settlement. Oxford University Press, 1(1), pp. 153–190.

Iacob, I.-G. and Cirlig, R.-E. (2016) ‘The Energy Charter Treaty and settlement of disputes – current challenges’, Juridical Tribune Journal = Tribuna Juridica. Bucharest: Societatea de Stiinte Juridice si Administrative (the Society of Juridical and Administrative Sciences), 6(1), pp. 71–83. Available at: http://search.proquest.com/docview/1806413582/.

ICSID (2019) ICSID Case No. ARB/12/12, Worldbank. Available at: https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/12/12 (Accessed: 6 May 2019).

International Energy Charter (2019) The Energy Charter Treaty, Energy Charter. Available at: https://energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/ (Accessed: 5 May 2019).

Ricupero, R. (2000) Bilateral Investment Treaties 1959-1999. Geneva. Available at: https://unctad.org/en/pages/PublicationArchive.aspx?publicationid=195.

Schrijver, N. (2011) ‘The Impact of Climate Change: Challenges for International Law’, in From Bilateralism to Community Interest. Oxford University Press.

Suavant, K. and Sachs, L. (2009) The effect of treaties on foreign direct investment bilateral investment treaties, double taxation treaties and investment flows. Oxford: Oxford University Press.

The Federal Office for Radiation Protection (Bundesamt für Strahlenschutz – BfS) (2013) ‘Act on the Peaceful Utilisation of Atomic Energy and the Protection against its Hazards ( Atomic Energy Act )’, 13, pp. 1–33.

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International Investment Treaties: Curse or Blessing for the Energy Revolution? – Part I

This article was written for the University of Westminster.

International law on the protection of foreign investment may impose excessive constraints on the freedom of states. But without international treaties, global companies may not invest in foreign countries – think about security, change in political administrations, shift in public perception, etc. This applies especially for the energy industry where contracts are signed for long-term periods. So: Are International Investment Treaties (IITs) a curse or a blessing for the governments and their plans for the energy revolution?

By signing the Paris Agreement at the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties 21 (COP21) in 2015, the majority of states committed themselves to actively combat climate change and to limit global warming to a maximum of 2° Celsius above pre-industrial levels. To achieve this goal, most signatories agreed that renewable, clean energy sources should be promoted while the use of hydrocarbon products ought to be reduced. This impacts energy producers who will have to reshape their business model if they seek to maintain their market position despite the planned energy turnaround. However, not all players seem to be affected equally. While domestic companies have to implement national laws immediately, foreign investors are to a certain extent subject to international laws. The only requirement is that both the host country and the investor’s country of origin signed bilateral or multilateral investment treaties, so-called IITs (international investment treaties). For government and national courts, this is a tough nut to crack, considering that the investments rely on long-term contracts that legitimize current business practices and guarantee security. Hence, the energy transformation can either become a very expensive undertaking or may be implemented with severe delays. This can be very unsatisfactory for states and implies that the international law on the protection of foreign investment imposes excessive constraints on the freedom of states. The most recent developments show that the concern of states is indeed justified; the number of claims from foreign investors has risen steadily during the last decade, the outcome of court cases is uncertain, and the potential awards are exorbitantly high. This essay discusses this proposition and is therefore split into four parts. The first chapter tells the story of bilateral investment treaties (BITs) and multilateral investment treaties (MITs) and illuminates the most important treaty in the energy industry; the Energy Charter Treaty. The second chapter looks at the securities and options for the foreign investor, while the third chapter explains the opportunities of foreign direct investment and the implications of BITs and MITs for the host country. Those two chapters are accompanied by a prominent case study, the case “Vattenfall AB against the Federal Republic of Germany”. The last chapter discusses the essay question and argues that international law indeed imposes constraints on the freedom of states – but that there are a number of arguments why this will not change soon.

International treaties and agreements protecting foreign investors

If companies are to invest for the long term, they need a guarantee that they can actually make their business a success. However, what at first glance sounds elementary quickly turns into a very complex situation, especially if the investment takes place in a foreign country. In that case, the protection and interests of the own country disappear, and one is dependent on the host country, hoping that it pursues the same political, economic and social goals. Question marks may arise quickly when thinking about a change in political leadership or changing environmental conditions. If the risk is perceived as too high, the investor will not be willing to set up business or, if the operation is already ongoing and gets tough, may think about leaving the country. For the host, this implies that the investment and foreign knowledge will either never reach its country or that it will be deducted at unfavourable times. For the company, in contrast, this often comes with an (existential) financial loss. This is where international law steps into the game; for more than a century, countries have been trying to mitigate this threat through mutual agreements.

Historically, the development of international agreements and treaties can be divided into three phases. As Kenneth J. Vandevelde writes in “Brief history of international investment agreements”, published by (Suavant and Sachs, 2009), the first agreements were already in place in the 18th century, for example the bilateral treaties of “Friendship, Commerce and Navigation”, which were applied by the United States to guarantee “special protection” for national companies working in the territory of a host country. Interesting to note; already these first contracts contained a clause for “compensation for expropriation”, which plays a central role in today’s treaties. This first phase, the so-called Colonial Era, was followed by the Postcolonial Era after the Second World War. The General Agreement on Tariffs and Trade (GATT) was established by the Allies in 1947 to liberalize world trade. This shifted the focus of legal frameworks from the previous bilateral agreements to multilateral agreements (Suavant and Sachs, 2009). A new challenge arose in the early 1970s. During the UN General Assembly 1974, socialist and developing countries demanded the right to expropriate foreign companies without having to pay compensation or an appropriate acquisition price. These states were in the majority. Consequently, and in the same year, the Charter of Economic Rights and Duties of States (CERDS) was adopted. The Charter declared that each state has the right “[t]o nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the state adopting measures, taking into account its relevant laws and regulations and all circumstances that the state considers pertinent” (United Nations, 1974). This statement contained two key elements; the wording “should be paid” instead of “must be paid” and the fact that national law was responsible for the definition of the compensation rather than an international court (Brower and Tepe, 1975). In order to counter the risk of expropriation, the developed countries decided to conclude further BITs to protect their national companies. Those treaties dealt exclusively with investments and were largely negotiated between a developed and a developing country. Between 1959 and 1989, 386 such agreements were concluded (Ricupero, 2000). The fall of the Soviet Union, global market liberalization and rising powers in Asia signalled a further tipping point with a major impact on BITs. The number of bilateral investment treaties exploded, increasing from less than 400 treaties to over 2800 by the mid-2000s (Suavant and Sachs, 2009). Along with a number of other trade agreements, such as the North American Free Trade Agreement (NAFTA) between Mexico, Canada and the US, agreements for industry-specific topics popped up such as the European Energy Charter (EEC) which was signed in 1991. The EEC, however, was a political declaration only and did not constitute a binding international treaty. Yet, it paved the way for another highly influential treaty; the 1994 Energy Charter Treaty (ECT). As this essay deals with the energy industry, the general focus lies – especially in the following paragraphs – on explaining the ECT as well as outlining the implications this treaty has for its signatories.

The ECT is a multilateral framework which is currently ratified by 52 parties, amongst which the European Union and Euratom. It is worldwide the only multilateral framework covering exclusively the energy sector, was developed in 1994 in Lisbon and entered into legal force in April 1998. One of its main goals was to integrate the energy markets of the former Soviet Union states into the world market. In summary, the Treaty covers four key areas: 1) The protection of foreign investments, based on the extension of national treatment, 2) Non-discriminatory conditions for trade in energy materials, products and energy-related equipment, 3) the resolution of disputes between investors and host states, and 4) the promotion of energy efficiency and attempts to minimise the environmental impact of energy production and use (International Energy Charter, 2019). The framework is set up according to the rules of GATT (today World Trade Organization) in order to cover trade aspects, but it is also responsible for foreign direct investment (FDI) issues.

Under what circumstances an investor may pose a claim is defined in Part III of the ECT, which explains the investment promotion and protection. An investor thereby is defined as a “natural person having the citizenship or nationality of, or is a permanent resident in, a contracting state in accordance with its applicable law, or a company or other organization organized in accordance with the law applicable in that contracting state” (Hobér, 2010). Article 10(1) of the ECT explains the minimum standard of investment protection after the post-investment phase and sets out basic principles.

  • The first principle says: “Such conditions shall include a commitment to accord at all times to investments of investors of other contracting parties fair and equitable treatment” (Energy Charter Treaty, 1994) ,whereby “such conditions” are defined as an environment that encourages and create stable, equitable, favourable and transparent conditions for Investors (Energy Charter Treaty, 1994). Hobér (2010) describes that despite the fact that fair and equitable treatment (FET) are frequently applied in BIT tribunals and NAFTA arbitrations, the exact scope is not clearly defined and may lead to a flexible standard. This challenges both arbitrators and counsels in order to establish a source for good-government conduct – and not being alleged to decide on an individual perception of what is fair and equitable (Hobér, 2010).
  • The second principle says that “investments shall also enjoy the most constant protection and security” (Energy Charter Treaty, 1994) which, again, is not clearly defined. Academic literature argues that, amongst other things, it shall protect the investment against physical attacks.
  • The third principle is the discrimination clause, which is defined by the ECT (1994) as followed: “No contracting party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such investments be accorded treatment less favourable than that required by international law, including treaty obligations.” This principle sometimes overlaps with the principle of FET.
  • The fourth principle is the so-called umbrella clause which tells each party to “observe any obligations it has entered into with an investor or an investment of an investor of any other contracting party” (Energy Charter Treaty, 1994). This principle refers to pacta sunt servanda which is often applied in international treaties.

One of the most important substantive rules of the ECT is addressed in Article 13; expropriation. The ECT determines that “investments of investors of a contracting party in the area of any other contracting party shall not be nationalized, expropriated or subjected to a measure or measures having an effect equivalent to nationalization or expropriation […]” (Energy Charter Treaty, 1994). If expropriation occurs nonetheless, states are requested to compensate with the fair market value of the investment. Hobér (2010) notes that Article 13 does not differentiate between a “lawful” and “unlawful” expropriation as in a “lawful” case compensation would be seen as a precondition in order to be lawful, whereas in the latter case “compensation is equivalent to damages for the loss suffered by the investor” (Hobér, 2010). In case of a dispute, article 26 provides the arbitration rules for the investor-state dispute settlement (ISDS). Article 26, paragraph 4(a) defines the International Centre for Settlement of Investment Disputes (ICSID) as arbitration court for investor-state disputes, if both the contracting party of the investor as well as the contracting party are members of the ICSID Convention. Paragraph 4(b) claims that the dispute may also be submitted to “a sole arbitrator or ad hoc arbitration tribunal under the rules of the United Nations Commission on International Trade Law (UNCITRAL) or an arbitral proceeding under the arbitration institute of the Stockholm Chamber of Commerce” (Energy Charter Treaty, 1994). ICSID was established as an entity of the World Bank in 1966 and has become the world’s leading institution devoted to international investment dispute settlement.

In conclusion, this chapter presented the history of foreign investment law and outlined the framework of the ECT in depth. It showed the most important substantive rules which are treated in Article 10 and Article 13, as well as the dispute settlement provision which is defined in Article 26 and 27. A major takeaway is to understand that both BITs and MITs give foreign investors the right to bring claims directly against the host state, which is called investor-state dispute settlement (ISDS). While many ISDS cases are dealt under ICSID rules, it is not a must and there are other rules and institutions which could be applied. Vice-versa, the host state cannot claim its rights against a foreign investor in front of international courts but has to sue an investor at the own national court. The reason for this is that BITs and MITs are signed by countries only and not by the companies, which means that firms are protected by the treaties but are not a party of them. This has recently led to critical voices arguing that the ECT, for instance, does not guarantee an equal treatment but rather supports foreign investors. Critics also point out that only 19 claims were registered between 1998 and 2008, but that the number of claims has risen sharply since 2012, surpassing 110 claims by the end of 2017 (ECT’s dirty secrets, 2019). The next two chapters discuss the implication of the ECT for the signatories of the treaty (countries) and foreign investors under the perspective of climate change and energy transition. The theoretical description will be illustrated with the Vattenfall AB and others v. Federal Republic of Germany II case which started in 2012 and was still pending in April 2019.

Read blog II to learn more about why IITS are essential for foreign investors and what opportunities and threats they may bring for the countries energy transition plans.

Bibliography

Appunn, K. (2018) The history behind Germany’s nuclear phase-out, Clean Energy Wire. Available at: https://www.cleanenergywire.org/factsheets/history-behind-germanys-nuclear-phase-out (Accessed: 6 May 2019).

Bernasconi-Osterwalder, N. and Dietrich Brauch, M. (2014) ‘The State of Play in Vattenfall v. Germany II: Leaving the German public in the dark’, Internation Institute for Sustainable Development, (December).

Bernasconi-Osterwalder, N. and Hoffman, R. T. (2012) ‘The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the dispute Vattenfall vs. Germany (II)’, Internation Institute for Sustainable Development, (June 2012), pp. 1–8. Available at: http://www.tni.org/sites/www.tni.org/files/download/vattenfall-icsid-case_oct2013.pdf.

Brower, C. N. and Tepe, J. B. (1975) The Charter of Economic Rights and Duties of States: A Reflection or a Rejection of International Law? 9 Int’l Law.

Bundesverfassungsgericht (2016) Leitsätze zum Urteil des ersten Senats vom 6. Dezember 2016. Germany: BVerfG. Available at: https://www.bundesverfassungsgericht.de/e/rs20161206_1bvr282111.html.

ECT’s dirty secrets (2019) An explosion of cases, Energy Charter Dirty Secrets. Available at: https://www.energy-charter-dirty-secrets.org/ (Accessed: 6 May 2019).

Energy Charter Treaty (1994) The Energy Charter Treaty (With Incorporated Trade Amendment) and Related Documents. Lisbon.

Gesley, J. (2016) Global Legal Monitor, The Law Library. Available at: http://www.loc.gov/law/foreign-news/article/germany-compensation-to-utilities-for-acceleration-of-nuclear-energy-phase-out/ (Accessed: 6 May 2019).

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