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The dispute settlement mechanism of the Energy Charter Treaty (‘ECT’) has been proving to be an obstacle for States in their quest to meet climate obligations. The ECT aims to ensure the protection of investments and in turn investors. Any measure implemented by a State that can causes a negative effect to these investments can be subjected to litigation. Often the measures that States implement are in relation to combating climate which in turn changes the environment of the investment – usually in a preventative manner and thus bearing a negative effect. Therefore, whenever a State aims to introduce domestic measures to fight climate change, that in turn influence said investments, it will have to fear ECT arbitration proceedings resulting in large numbers of compensation to be paid to investors. As a result, it can be presumed that States are incentivized not to alter any legislation or policy that will allow the investor to challenge it. This is hugely problematic in an era where climate change is threatening life as we know it on this planet. Reforming the ECT with all the Member States takes too long to be a real solution. What is more, due to a 20-year sunset clause withdrawal from the ECT does not take the problem away either. The only viable solution, therefore, is that arbitrators interpret the ECT differently, in line with the imperatives of our times of crisis.

Reforming and Withdrawal are No Serious Options:

Reforming the Treaty would require every single party to the ECT to agree to a change in its text, which is a challenging task. Moreover, where withdrawal is plausible under Article 47(2), Article 47(3) throws a spanner in the works. Article 47(3) is commonly referred to and known as the “sunset clause.” This clause means that even post-withdrawal, there is a period of 20 years where the ECT will continue to apply to pre-existing qualifying investments. These solutions are plausible but would be extremely time-consuming.

International law, and international investment law within it, are constantly evolving and changing. Henceforth, the interpretation of them should too. Not only would this reinterpretation make sense in this regard of time progression but would allow for some alleviation on States in relation to the ECT before a more long-term solution can be sourced. Climate change is a prevalent issue. It is in no way showing signs of rapidly slowing down, but rather the opposite. There is thus a call for everyone to do their share in relation to climate change. States need to be allowed to implement legislation and policy without the fear of having to pay extreme amounts in compensation. In the context of the ECT, arbitrators have an important role to play through their main role as interpreters.

Interpretations by Arbitrators

It is generally accepted that when it comes to the dispute settlement of a treaty provision, it often comes down to interpretation. These interpretations indirectly form part of the legal regime as they show the way the law is to be understood and applied. In the case of the ECT, interpretation is conducted by the arbitrators that hear and decide whether there has or has not been a violation of a norm. Therefore, it can be suggested that arbitrators in this way add to the way the law is understood and applied. International investment law does not have a system of precedent, and thus the interpretation of norms may differ from case to case even if the substantial facts are similar. More specifically, certain terms/provisions have no fixed definition or understanding around them. This is one of the greater faults of the system, as the lack of clarity and high ambiguity of terms makes it a challenge for parties to know what is expected of them or how the terms operate in practice. This is normally seen as placing an immense amount of burden on States and limiting their abilities to focus on obligations that are of greater importance, at least currently, regarding climate. However, it can also be understood as a strong, enabling feature of the system: earlier, more conservative, decisions do not necessarily restrict. Arbitrators issuing more climate-friendly interpretations in the future, thus giving States higher incentives to meet their climate obligations.  But this requires these climate- friendly interpretations to be given first.

To achieve these climate-friendly interpretations, one option could be to re-interpret the very notion of “compensation” included in Article 12?” In international investment law there is a long-standing debate about the proper standard of compensation. The first alternative, the Hull formula, is “prompt, adequate and effective compensation[1]” which is often interpreted as the fair market value of the investment plus expected profits. The second alternative is “appropriate” compensation, the value which changes depending on the circumstances.

The first alternative is incredibly daunting and disproportionate to States. It is unreasonable and practically impossible to predict what the expected profits would be given the array of economic factors, and potentially others, that need to be considered. Often, these external factors are not considered when determining the necessary compensation therefore falling short of an accurate and full interpretation. Adequate compensation has no one uniform meaning behind it. Some interpret it as the fair market value[2] others require compensation to be valued in accordance with “generally recognized principles of valuation.” This in turn leaves a large interpretive space resulting in different outcomes dependent on the manner in which this space is utilized.  If adequate were to imply full, then the latter would have been used. The way interpretation is constructed with regards to compensation, favors investors and unduly burdens States by limiting their regulatory space.

An Interpretative Change

The ECT could benefit from making use of a different form of interpretation to allow for States to have more regulatory freedom whilst still ensuring that they are held responsible for their actions. All the different forms of interpretation suggested are legally sound and applicable, as they are utilized in other spheres of international law.

1) Consistent Interpretation:

One option is consistent interpretation which aims to ensure that national law is interpreted in line with international law. The police powers doctrine provides that States possess an inherent right to regulate the protection of the public interest.[3] This doctrine applies in relation to States’ actions at a national law level and has been said to be in line with international law so long as it is not done in a discriminatory or unproportionate manner.[4] This doctrine highlights the importance of regulatory space which should be respected. If the national law of States were to, at the very least, be considered, then the importance of them having regulatory space will come to light. This regulatory space in turn will allow them to take steps and measures toward their climate obligations without feeling threatened to have to pay a burdensome amount of compensation. In addition, this approach would aid in creating unity within the law, with no version of interpretation being greater than the other whilst at the same time allowing for more legal certainty surrounding the interpretation of this term.

Police Powers Doctrine in Practice:

The Organization for Economic Co-operation and Development (OECD) stated that the police powers doctrine “is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police power of the State, compensation is not required. So long as a State reasonably and bona fide exercise their public powers in matters of public health will exclude compensation. This approach has been upheld in Tecmed v. Mexico and Philip Morris v. Uruguay. Therefore, if a State whilst imposing climate obligations does it in a reasonable, non-discriminatory, and bona fide manner and an investor suffers economically they need not necessarily be compensated.

2) Harmonious Interpretation:

An alternative to consistent interpretation is harmonious interpretation. This form states that if there are two international law legal texts that are being interpreted, they should be done in such a way so as that neither is redundant nor nullified[5] . This would thus mean that the ECT should be interpreted in a way that would not place pressure on obligations under other texts, such as the Paris Agreement. Currently, the threat of dispute settlement under the ECT is placing pressure on States and thus limiting their ability to implement obligations under the Paris Agreement or any other climate obligations. This approach will alleviate this and ensure the investors have their protection under the ECT and simultaneously States can act in accordance with their climate obligations.

3) Living Instrument Doctrine:

Finally, the ECT could benefit from utilizing the living instrument doctrine, which the European Court of Human Rights developed and uses to interpret the European Convention on Human Rights considering present-day conditions. Through this doctrine, the interpretation of the ECT would be done in such a manner as to take into consideration these present-day conditions. In this way, perhaps climate change will not be placed as inferior to investment law.

To conclude, by no means is “compensation” the only term that can be re-interpreted. The uncertainty surrounding fair and equitable treatment can also be subjected to this. What however should be clear from the above is that I make a call on arbitrators to interpret terms in new ways, not the same ones that have been utilized without change. Through reinterpretation States would still have to pay compensation, but simply a more reasonable amount. Ultimately, this is a call on arbitrators to allow more flexibility to State’s so that they can fulfil their climate obligations and their duties to the environment. A call on arbitrators to change the standard upon which they base interpretation.

[1] U.S Secretary of State Cornell Hull in note of July 21, 1938.

[2] Stated within certain BIT’s such as United States – Uruguay.

[3] A. Osman, ‘Police Powers Doctrine’ (2022)

[4] Confirmed that the police powers doctrine is in line with international law.

[5] A.B. Kafaltiya, ‘Interpretation of Statutes’ Universal Law Publishing (2009) at 5.

(Photo: Fré Sonneveld)