No Longer Feeling the Energy

On 25 August 2022, the government of Poland surprised all when it sent a previously approved (but unannounced) bill (“Ustawa”¹⁾) on the termination of the Energy Charter Treaty (ECT) to the State’s lower chamber (Sejm). The ECT is the biggest multilateral investment treaty in the world and the only one to exclusively regulate cooperation in the energy sector. Nowadays, it is also one of the most scrutinised and criticised international investment agreements (IIAs) and one that has been subject to an ongoing modernization process.

Poland’s surprise decision comes at a crucial time for the ECT. Its modernization process is to be completed on 22 November 2022 with, hopefully, the approval of a new text. However, many public and private actors believe it is beyond saving and that the only solution is an ‘en masse’ coordinated withdrawal of most of its 54 signatories. Indeed, politicians of Netherlands, Spain, and very recently Ireland, have advocated for this route. Whilst we cannot know whether (and how many) other States will decide to follow in Poland’s (and Italy’s – which withdrew in 2016) footsteps, it is important to understand and assess policy reasons behind such decision. After all, investment in energy (transition) is of huge importance in today’s reality. And despite what some seem to argue, foreign investors need to be assured that their investment will have adequate levels of (legal) protection in host States. Indeed, what is often ignored is that the ECT covers investments in the sought-after renewable energy sector, without which transition to clean energy is moot.

Draft Law and the Explanatory Note

The bill itself is very straightforward, with only two Articles: Art. 1 gives the President the power to withdraw from the ECT, Art. 2 gives the timeline of 14 days for the law to come into effect. What is more extensive, and the subject of the analysis below, is the 9-page explanatory note (“Uzasadnienie”), attached to the draft law.

The explanatory note is structured along three substantive headings (loosely translated as): “Explaining the need and purpose of withdrawing from the ECT”, “Differences between the current and proposed legal status”, and “Expected legal, social, economic, financial and political consequences of the withdrawal”.

Although the withdrawal was welcomed by environmental activists, environmental reasons do not feature heavily in Poland’s decision to withdraw. Instead Poland seems to base its decision on 3 aspects: lack of conformity of the ECT with EU law (1.), ongoing financial costs related to its continuing membership to the ECT (2.) and faults within the ECT itself (3.).

Reason 1: Lack of conformity of the ECT with EU Law

The document acknowledges that due to its character, the ECT binds Poland – not just because it is an international treaty but also through EU law, as the EU is a party to the ECT. The reasoning then goes on to describe how intra-EU ECT claims under Art. 26 (ECT’s dispute settlement clause), are not in conformity with EU law. The document speaks of the lack of respect for the autonomy of EU law by the international arbitral tribunals established under this provision, as well as of the threat this continues to pose for principle of mutual trust between EU Member States. In the reasoning, Poland relies on CJEU judgments of Achmea and Komstroy. As an annex to the reasoning, Poland also included a declaration on interpretation, invoking Art. 30(4) VCLT and stating that the arbitral clause of Art. 26 is incompatible with EU law, concluding that “arbitral tribunals established under the ECT to resolve investments dispute between investors from EU Member States and the Republic of Poland do not have jurisdiction to hear cases due to the lack of a valid consent to arbitrate.” Poland acknowledges one of the most recent arbitral awards that of Green Power v. Spain, where the tribunal agreed with the respondent State that it lacked jurisdiction to hear the intra-EU dispute.  However, in its reasoning Poland points out that many other tribunals declared that they are not bound by EU law, and highlights that arbitral tribunals remain outside the control of national courts.

Notwithstanding the irony of Poland posing as the protector of trust within the EU, the document sheds an interesting and valuable light on the ongoing modernization process, and especially, on the question of excluding intra-EU arbitrations from the scope of Art. 26. It confirms that the EU is represented in the negotiations by the European Commission (EC) but reveals that the negotiating mandate of the EC does not encompass, in its scope, the issue of including in the modified Treaty a clause exempting intra-EU application of Art. 26 of the ECT. The explanatory note is silent on EC’s mandate relating to Art. 25. The document then goes on to argue that it would not be satisfied even if “an agreement on modernization which takes into account Poland’s expectations were reached [as] the process of ratifying amendments to the ECT would take long years, given the number of states party to the treaty.” However, despite acknowledging the longevity of the ECT after a Party’s withdrawal – 20 years under the sunset clause – Poland seems more focused on the future and highlights that the clause will exclude new investments.

Reason 2: Costs of ECT arbitration

Poland highlights that up to now it has been sued under the ECT “on many occasions”, notwithstanding that the ECT Secretariat puts that number relatively low, at 5 (out of 150 publicly known ECT cases). And although Poland does not address damages it has had to pay under the ECT, it admits that it has paid considerable sums for the procedural aspects of dispute settlement under the Treaty (arbitrators wages, witness statements, translations, etc.). It concludes, therefore that the withdrawal could significantly reduce the financial burden on the state. Seemingly as a cost/benefit analysis, in the same paragraph, the document highlights that “no Polish investor has so far initiated proceedings under the ECT. Analyses by the Ministry of Climate and Environment and the Ministry of State Assets indicate a lack of interest by Polish operators in the treaty protection offered by the ECT.” Notably, Poland seems to have missed the case of Cementownia v. Turkey, a case of a Polish investor bringing a claim under the ECT against Turkey for USD 4 billion.

Reason 3: Perceived faults within the ECT

The drafters of the document compare the ECT to “modern investment agreements” such as the EU-Canada Trade Agreement (CETA), arguing that unlike these  agreements, ECT does not enable tribunals to recognise that parties may take measures “necessary for the protection of public safety or public morals, the maintenance of public order, the protection of human, animal or plant life or health, provided that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between parties where similar conditions prevail, or a disguised restriction on trade between the parties.” On this aspect, Poland concludes that an arbitral tribunal deciding a dispute under the ECT is not bound by the principle of respect for the state’s right to regulate. Indeed, Poland observes, in contrast to new generation agreements, such as CETA, the ECT does not include a definition of the Fair and Equitable Treatment (FET) standard, resulting in, what Poland argues, a low degree of predictability of arbitral tribunal awards. Furthermore, again with regard to the FET standard included under the ECT, Poland also notes that it can result in the so-called “chilling effect”. Interestingly, Poland does not admit or argue that it itself is the victim of the “chilling effect” of investor-state dispute settlement (ISDS), e.g., that ECT prevented the Government from enacting regulations but rather, as most commentators in the field, it simply argues that it could happen.

Differences between the current and the proposed legal status

In the next substantive part, the document looks at the alternative avenues for investors to assert their rights. Poland highlights that after its withdrawal, foreign investors will not be able to bring claims regarding investments made after the withdrawal. The document does not make mention of other IIAs (whether bilateral or multilateral investment treaties – BITs or MITs) that Poland will still be bound by. Instead, it proposes new avenues for the settlement of disputes, arguing that investors will be able to bring claims in front of national courts or “in certain situations” to the ECtHR and to “some” human rights organs of the UN. The reasoning also foresees, though does not name so explicitly, future investment contracts between the State and individual investors, which could also include arbitration clauses. Finally, this section also re-reiterates Poland’s lack of consent to arbitrate intra-EU investor-state disputes.

Potential consequences according to Poland

In its reasoning, Poland outlines what it considers to be the main consequences of the withdrawal, under the headings: “Legal Consequences”, “Political Consequences”, “Economic Consequences”, “Financial Consequence” and “Social Consequences”. It proclaims that in all the above-mentioned areas, the effects of the withdrawal from the ECT will be positive for the country.

Under “Legal Consequences”, Poland argues that the withdrawal will not materially change the position of foreign investors, as those will still be protected by the Polish Constitution, international law (ECHR and ICCPR) and EU Law, to the same degree as under the ECT. The only change the investors will face, according to Poland, is that their claims will now have to be brought in front of national courts, the ECtHR or UN bodies. The document then asserts that since court decisions are more predictable, withdrawal from the ECT will actually result in more legal predictability. Subsequently, the reasoning highlights that Poland will not set precedent for the withdrawal as Italy has already done so in 2016 and, as per Opinion of AG Hogan on Opinion 1/19, Member State may withdraw from a mixed agreement as long as part of the agreement still falls within the competence of the States.

“Political Consequences” contains perhaps the most flowery language. This section begins with stipulating that in contrast to the withdrawal from BITs, withdrawal from the ECT will not cause controversy in international relations. Au contraire, withdrawal from the ECT will “strengthen Poland’s position as a country consistently pursuing its own interests on the international stage. It will also demonstrate Poland’s commitment to EU law.”

Under “Economic Consequences”, the drafters point to what they describe as “OECD analysis” on ‘Freedom of Investment Process: Societal Benefits and costs of investor protection in IIAs’. However, this author’s research yielded only the following Working Paper, which “should not be reported as representing the official views of the OECD”. At the time of writing, the author was unable to locate the, perhaps classified, document DAF/INV/WD(2015)1/REV3 Poland relies on. In any case, the drafters agree that the analyses within the document correspond to the country’s own experience, in that there is no evidence that access to ISDS contributes to FDI inflows. And together with other reasons, Poland will not suffer economically from its withdrawal.

While the language of “Political Consequences” might be flowery, the language of “Financial Consequences” is almost confrontational and most in line with some of the current criticisms of the ECT. Here, the drafters mention the “risks of being charged with damages for alleged violations of investors’ rights. This is particularly important in the context of the accelerating energy transition, which will be hampered if investments made as part of it are accompanied by the need to pay high compensation on the basis of vague treaty standards to fossil fuel investors.”

Finally, “Social Consequences” reiterate the dangers of regulatory chill, which will be overcome by withdrawal from the ECT.

Concluding Remarks

As highlighted, parts of Poland’s reasoning seemingly find fault in the ISDS process as a whole, rather than explicitly in ECT. Having said that, Poland does not provide any information on the country’s future in international investment arbitration, notwithstanding the fact that there are still currently 36 BITs in force; or that as a Member State to the EU, it is party to many more, many of which have just as ‘unpredictable’ standards as the ECT and give rise to similar procedural costs. The reasoning does, however, shed some light on how an EU Member State perceives the negotiations on the modernisation of the ECT. We will see if more States will decide to follow suit before the end of the modernisation process in November 2022.

Furthermore, there is nothing that could explain the timing of the decision. At least for now, there are no signs of an ‘en masse’ coordinated withdrawal, as envisaged by some environmental lawyers and activists, as well as some politicians. What needs to be pointed out, however, is Poland’s recent decision to again allow investment in on-shore wind farms – it would be a shame if renewable energy companies, which statistically have been claimants in ECT cases more often than oil or gas companies, would feel suddenly discouraged from investing in Poland.