The energy sector is a complex industry comprising of oil & gas, LNG, electricity, renewable energy,mining and environmental sectors. Due to their complexity, energy investments involve large capitalinvestments and high technology. Contracts are typically on a long-term basis and they are signed not onlybetween private parties but also between investors and states. Disputes usually relate to the politicalaspects, technical details, and time aspects such as adverse effects arising during performance of thecontracts. The legal issues often arise from hardship clauses, non-existing or not sufficiently flexible pricerevision, regulatory changes and termination clauses.
Due to the involvement of foreign investments, international arbitration under investor-state dispute settlement(ISDS) procedures is not infrequent in the energy sector. Under ISDS procedures, investors have theopportunity to bring arbitration claims against states directly, rather than having to seek redress in domesticcourts. The investor-state claims in the energy sector are often based upon a breach of the Energy CharterTreaty (ECT), which provides the legal framework for the promotion and protection of energy investment,trade, transit and dispute resolution. Some claims are based upon a breach of bilateral investment protectiontreaties signed by state parties but set forth ISDS procedures. This may be the case when the level ofprotection provided in the applicable bilateral investment treaty is higher than that under the ECT.
A striking feature of the energy arbitration landscape is the number of renewable energy claims byEuropean investors against other European states. Since 2013, several investment treaty claims havebeen filed in the field of renewable energy against European states based upon alleged breach of the ECT.These claims arise from certain changes to the renewable energy support schemes in these countries,which have effectively reduced the anticipated level of feed-in-tariffs or green certificate subsidies.Investors allege that these changes have detrimentally impacted their reasonable expectations for a returnon their investments. There are currently more than 40 such claims against Bulgaria, the Czech Republic,Italy and Spain. The states' defence is based on their right to regulate the energy sector as they deemnecessary (particularly following the economic crisis) and given that the regulatory changes did notdiscriminate against foreign investors. Therefore, the states argue that investors cannot expect that thestate guarantees a fixed return on their investments.
An important discussion in the pending cases relates to the compatibility of ISDS procedures underinvestment protection treaties with the European legal order. As a result of such discussions, the EuropeanCommission has participated as amicus curiae in the cases filed against EU Member States by investorsfrom other European countries as per ISDS procedures. The purpose of the participation of the EuropeanCommission is to convince the investment treaty tribunals to decline jurisdiction. While arbitral tribunalshave systematically rejected the position of the European Commission, the discussion has taken a newturn based on a very recent judgement of the European Court of Justice (ECJ).1 According to the ECJ, theinvestor state clause in an investment protection treaty between two European states is against Europeanlegal order since it establishes a mechanism that cannot ensure that a dispute over the application orinterpretation of EU law shall be decided by a court within the judicial system of the EU. It is unclearwhether the judgement of the ECJ will support the European Commission's position regarding the ISDSprocedures of the ECT, to which the EU itself is a signatory, and how the claims of European energyinvestors against other European states shall be affected.
Since these discussions have started in Europe, Latin American states such as Bolivia, Ecuador andVenezuela have expressed their opposition to ISDS by withdrawing from the International Centre forSettlement of Investment Disputes (ICSID). ICSID is the key institution in the ISDS framework sinceawards rendered under the ICSID Convention are directly enforceable against state parties, withoutgoing through enforcement procedures. These changes might affect disputes in the field of energyarbitration as, according to the statistics of ICSID, approximately 41% of all ICSID cases are energyrelated. It is also important to note that China, one of the largest energy importers, is not a member ofthe ECT but only an observer.
In order to attract a sufficient amount of investments to meet the growing need of global energy demand; itis key to provide legal confidence to investors. The promise of international arbitration under ISDSprocedures, as the most effective way of solving disputes in the energy area, is the most importantprotection provided to investors. This aspect should not be overlooked by states when forming theirgovernmental policies as the energy sector continues to evolve.
Finally, there remains the challenging question of how investors should select the counsel advising themon their grievances. Given the complexity of energy investments, the expertise and experience of thelawyers dealing with energy disputes are essential. They must not only have the necessary legalknowledge, but also know the technical industry as well as the political landscape to develop strategiesthat provide for sustainable long-term results. The following aspects require particular attention:
-Investment protection measures provided for under different legal instruments (ECT, applicablebilateral investment treaty or investment contract) and which might be applicable to the disputemust be carefully assessed to decide which instrument provides the most effective protection;
-in cases of contractual claims lawyers must carefully assess whether contractual claims areelevated to the level of investment treaty claims under the umbrella clauses which may be setforth in the applicable investment protection treaties;
-notification of the claims and negotiations in good faith with a view to settle the dispute prior toarbitration proceedings is a key procedural phase which must be carefully handled;
-extensive technical approaches are necessary to identify the winning argument;
-the language of the experts must be translated precisely and accurately into legal pleadings toconvince the tribunal;
-pro-active development of strategies in technical versatile discussions – if the lawyers know theindustry sufficiently well – brings a major benefit in the flexibility and dynamics of theprocedures; and
-in-depth legal arguments and sustainability in pleadings which goes together with industryexpertise is necessary.
Furthermore, layers of complexity with respect to international law, such as sanction regimes (e.g. EUsanctions against Russia), do have major effects also on the energy sector or industries providing servicesto energy companies and need to be treated diligently by multi-branch teams combing efforts andknowledge to effectively cover all legal areas.
This high demand in expertise represents a challenge for future claims as it leads to a limited pool oflawyers. The risk is not only over-burdened counsel and arbitrators who must come up with efficient casemanagement procedures, it also raises potential issues of conflict of interests as arbitrators may be facedwith similar issues and the same state parties and legal positions on their claims.