ABOUT ENERGY

1. ENERGY ARBITRATION

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 capital investments and high technology. Contracts are typically on a long-term basis and they are signed not only between private parties but also between investors and states. Disputes usually relate to the political aspects, technical details, and time aspects such as adverse effects arising during performance of the contracts. The legal issues often arise from hardship clauses, non-existing or not sufficiently flexible price revision, 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 the opportunity to bring arbitration claims against states directly, rather than having to seek redress in domestic courts. The investor-state claims in the energy sector are often based upon a breach of the Energy Charter Treaty (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 protection treaties signed by state parties but set forth ISDS procedures. This may be the case when the level of protection 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 by European investors against other European states. Since 2013, several investment treaty claims have been 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 return on 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 deem necessary (particularly following the economic crisis) and given that the regulatory changes did not discriminate against foreign investors. Therefore, the states argue that investors cannot expect that the state guarantees a fixed return on their investments.

An important discussion in the pending cases relates to the compatibility of ISDS procedures under investment protection treaties with the European legal order. As a result of such discussions, the European Commission has participated as amicus curiae in the cases filed against EU Member States by investors from other European countries as per ISDS procedures. The purpose of the participation of the European Commission is to convince the investment treaty tribunals to decline jurisdiction. While arbitral tribunals have systematically rejected the position of the European Commission, the discussion has taken a new turn based on a very recent judgement of the European Court of Justice (ECJ).1 According to the ECJ, the investor state clause in an investment protection treaty between two European states is against European legal order since it establishes a mechanism that cannot ensure that a dispute over the application or interpretation of EU law shall be decided by a court within the judicial system of the EU. It is unclear whether the judgement of the ECJ will support the European Commission's position regarding the ISDS procedures of the ECT, to which the EU itself is a signatory, and how the claims of European energy investors against other European states shall be affected.

Since these discussions have started in Europe, Latin American states such as Bolivia, Ecuador and Venezuela have expressed their opposition to ISDS by withdrawing from the International Centre for Settlement of Investment Disputes (ICSID). ICSID is the key institution in the ISDS framework since awards rendered under the ICSID Convention are directly enforceable against state parties, without going through enforcement procedures. These changes might affect disputes in the field of energy arbitration as, according to the statistics of ICSID, approximately 41% of all ICSID cases are energy related. It is also important to note that China, one of the largest energy importers, is not a member of the ECT but only an observer.

In order to attract a sufficient amount of investments to meet the growing need of global energy demand; it is key to provide legal confidence to investors. The promise of international arbitration under ISDS procedures, as the most effective way of solving disputes in the energy area, is the most important protection provided to investors. This aspect should not be overlooked by states when forming their governmental policies as the energy sector continues to evolve.

Finally, there remains the challenging question of how investors should select the counsel advising them on their grievances. Given the complexity of energy investments, the expertise and experience of the lawyers dealing with energy disputes are essential. They must not only have the necessary legal knowledge, but also know the technical industry as well as the political landscape to develop strategies that provide for sustainable long-term results. The following aspects require particular attention:

-Investment protection measures provided for under different legal instruments (ECT, applicable bilateral investment treaty or investment contract) and which might be applicable to the dispute must be carefully assessed to decide which instrument provides the most effective protection;

-in cases of contractual claims lawyers must carefully assess whether contractual claims are elevated to the level of investment treaty claims under the umbrella clauses which may be set forth in the applicable investment protection treaties;

-notification of the claims and negotiations in good faith with a view to settle the dispute prior to arbitration 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 to convince the tribunal;

-pro-active development of strategies in technical versatile discussions – if the lawyers know the industry sufficiently well – brings a major benefit in the flexibility and dynamics of the procedures; and

-in-depth legal arguments and sustainability in pleadings which goes together with industry expertise is necessary.

Furthermore, layers of complexity with respect to international law, such as sanction regimes (e.g. EU sanctions against Russia), do have major effects also on the energy sector or industries providing services to energy companies and need to be treated diligently by multi-branch teams combing efforts and knowledge to effectively cover all legal areas.

This high demand in expertise represents a challenge for future claims as it leads to a limited pool of lawyers. The risk is not only over-burdened counsel and arbitrators who must come up with efficient case management procedures, it also raises potential issues of conflict of interests as arbitrators may be faced with similar issues and the same state parties and legal positions on their claims.

CEYDA AKBAL SCHWIMANN

Consultant

Wolf Theiss, Austria

+43 1 51510 5752

ceyda.akbalschwimann@wolftheiss.com

GERHARD DILGER

Consultant

Wolf Theiss, Austria

+43 1 51510 5433

gerhard.dilger@wolftheiss.com