Sunset Clause of the Energy Charter Treaty — Will It Protect Your Current or Future Investments?
As I reported earlier, Belgium, France, Germany, the Netherlands, Poland, Slovenia, and Spain have announced their intention to withdraw from the Energy Charter Treaty (“ECT” or “Treaty”). The ECT is a multilateral treaty that has been protecting investments in the energy sector for the last two decades. I also mentioned that the sunset clause extends the protections of the ECT for 20 years after the respective States withdraw from the ECT. Below I analyze the subset clause in more detail.
The Sunset Clause of the Energy Charter Treaty
The ECT is a multilateral treaty that protects from unlawful expropriation, discrimination, unfair and inequitable treatment and provides most constant protection and security to qualifying investors and their investments in the energy sector of the ECT Contracting Parties. An aggrieved qualifying investor who suffers losses from unlawful conduct of an ECT Contracting Party may bring an international arbitration claim against its host State under the ECT.
Recently, several States announced their intention to withdraw from the Treaty altogether. Such countries include Belgium, France, Germany, the Netherlands, Poland, Slovenia, and Spain. Italy withdrew from the ECT on 1 January 2016.
Qualifying renewable energy investors who have already made their investments through or in the Contracting Parties that intend to withdraw from the ECT are, however, expected to enjoy ECT protections for 20 years after the respective Contracting Party withdraws from the Treaty. This 20-year term is established in the sunset clause of the ECT, Article 47(3).
Moreover, any withdrawal from the ECT takes effect one year after the ECT Depositary receives notification of withdrawal from the respective withdrawing State. Qualifying investors from or to the withdrawing ECT Contracting Party who make their investments within a year after the notification is received are therefore also expected to enjoy ECT protections for the next 20 years.
Attempts to Neutralize the Sunset Clause
The ECT Secretariat has opined that the Contracting Parties may terminate or withdraw from a treaty due to the unforeseen “fundamental changes of circumstances” in accordance with “a well-established rule under customary international law” enshrined in Article 62(1) of the Vienna Convention of the Law of Treaties. The unforeseen “fundamental changes of circumstances”, according to the Secretariat, require (i) a showing of the changed circumstances that were “essential” for the decision to enter into the treaty, and (ii) a demonstration of a “radically” transformed obligations that the changes of circumstances brough about that render further implementation of the treaty unduly burdensome.
In addition, several commentators have suggested, the ECT Contracting Parties who wish to withdraw from the Treaty and/or shorten the sunset clause, may conclude an agreement between themselves to that affect (an inter se agreement). Article 41 of the Vienna Convention on the Law of Treaties provides that, in given circumstances, “two or more of the parties to a multilateral treaty may conclude an agreement to modify the treaty as between themselves alone.” Such inter se agreement, amending and/or shortening the sunset clause, therefore would be applicable between the Parties that sign the agreement. Moreover, the inter se agreement would be allowed only if it does not affect the rights of other ECT Contracting Parties. Accordingly, the current version of the ECT and the sunset clause would still apply between the States that conclude the inter se agreement and those who decide not to do so. Investors from the ECT States that decide not to conclude the inter se agreement could still initiate arbitration against the States that conclude such agreement, and the other way around.
Moreover, Article 41(b)(ii) of the Vienna Convention on the Law of Treaties requires that the contemplated inter se agreement “does not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole”. The inter se agreement to amend the ECT and its sunset clause therefore may be subject to a challenge and considered ineffective.
As of today, the sunset clause therefore still protects for at least the next 20 years the existing qualifying investors and their investments, as well as the investments made within a year from the moment the relevant Contracting Party submits its notification of withdrawal. Whether the sunset clause would be amended in any way, as well as whether such amendment would be effective, remains to be seen.
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