Hungary has recently seen claims brought against it by a Belgian investor for breaches of the Energy Charter Treaty (ECT) dismissed in the case of Electrabel S.A. v the Republic of Hungary (ICSID Case No. Arb/07/19).

The tribunal clarified the relationship between EU law and the ECT with respect to States having ratified the ECT prior to acceding to the EU. In intra-EU disputes involving recently acceded member states, EU law will prevail over the ECT where there are material inconsistencies between the two bodies of law.

Background

Electrabel S.A., a Belgian company, recently brought a case against Hungary for breaches of the ECT following Hungary’s pricing regime changes and its decision to terminate a power purchase agreement with Electrabel’s Hungarian subsidiary, Dunamenti Erómú. The agreement had been terminated following an EU Commission decision dated 4 June 2008 that such power purchase agreements constituted unlawful state aid. The tribunal ultimately dismissed all claims, save one relating to a breach of the fair and equitable treatment standard, judgment on which has been postponed until 2015.

In the process, interesting questions of jurisdiction and applicable law were raised. These issues are addressed in this update.

Both parties agreed that the tribunal had jurisdiction to oversee the dispute. The tribunal was nevertheless required to address the EU Commission’s jurisdictional objections which it submitted by way of amicus curiae brief. The EU Commission contended that the claims brought amounted to a challenge of an EU decision of the 4 June 2008 and therefore fell within the exclusive jurisdiction of the EU courts.

The tribunal was also required to determine the applicable law to the dispute and in doing so examined the hierarchy which applies between EU law and the ECT where there are material inconsistencies between the two.

Decision

Jurisdiction of the Tribunal

The tribunal dismissed the EU Commission’s jurisdictional submission that questions of interpretation of EU law fell exclusively under the jurisdiction of EU courts.

It concurred that EU Member States had agreed to submit questions of interpretation of EU law to the European Court of Justice (ECJ), now the CJEU. This, however, was not relevant to the case at hand as the claim was brought for a breach of the ECT not of EU law. In any event, the tribunal rejected the submission that the ECJ had sole jurisdiction to hear cases involving EU law. International courts and tribunals other than the ECJ regularly interpret and apply EU law, such as the International Court of Justice (ICJ) or tribunals hearing claims involving non-EU Member States which raise questions of EU Law. Furthermore, it added that, by becoming a party to the ECT itself, the EU had agreed itself to the submission of disputes arising under the ECT to arbitration.

Applicable Law

The tribunal found that, in accordance with the provisions of Article 26 of the ECT and Article 42 of the ICSID Convention, the applicable law was that of the ECT and applicable rules and principles of international law. It held that this encompassed EU law, which formed not only part of EU member states’ national law but also of international law.

Hierarchy of Law

Although it denied the existence of a general principle of international law compelling the harmonious interpretation of different treaties, the tribunal found that the ECT and EU law were regimes that could and should be harmoniously interpreted in this case.

The tribunal nevertheless went on to examine (obiter) what the position would be were there to be an inconsistency. It concluded that the position would be different where an investor-State dispute arises between one EU member state and one non-EU member state (extra-EU), on the one hand, and where it arises between two EU member states (intra-EU), on the other.

The tribunal held that, where a treaty was entered into between a non-EU member state and an EU member state before the EU member state’s accession to the EU, the provision of the earlier treaty would prevail. It reached this conclusion on the basis of Article 307 of the EC Treaty. This provides that the rights and obligations which arise from agreements entered into by EU member states and third countries prior to 1 January 1958 or, for acceding states, before the date of their accession, will not be affected by the entry into force of the EC Treaty.

However, where a treaty was entered into between two EU member states before one of them acceded to the EU, the provision of the later treaty (the EC Treaty in this case) would prevail. In reaching its conclusion, the tribunal relied on the principle of pacta sunt servanda contained in Article 30 of the Vienna Convention on the Law of Treaties 1969, which provides that, where subsequent treaties are entered into which relate to the same subject matter and the provisions of these are found to be incompatible, the provisions of the later treaty will prevail.

Maguelonne de Brugiere, Associate, Herbert Smith Freehills LLP, London