In this Newsletter’s second edition we discussed PRI coverage for international arbitration outcomes. We invited Craig S. Bamberger to discuss the Energy Charter Treaty, one important foundation for bringing investment disputes to arbitration.

The Energy Charter Treaty (ECT) is little known in the US, but since opening for signature in December 1994 it has gone into force in 46 States of Europe and Asia. It affords investors in energy-related assets legal protections against host countries that are comparable to the protections sometimes available under bilateral investment treaties. What makes the ECT’s legal protections especially valuable is its provision for compulsory arbitration at the option of the foreign investor for an alleged breach of the Treaty’s investment provisions. Awards rendered pursuant to the Treaty’s provisions could be the basis for CEN or Arbitral Award Default coverage.

This feature has proved increasingly popular among investor litigants. At least 14 investor-State arbitrations are publicly known to have been initiated under the ECT at the International Centre for Settlement of Investment Disputes (ICSID) or the Arbitration Institute of the Stockholm Chamber of Commerce, or under the rules of the United Nations Commission on International Trade Law (UNCITRAL); one cannot be certain of the actual number, in the absence of any general requirement for public disclosure. All but one of the 14 known arbitrations have been against formerly Communist countries (the exception being an arbitration against Turkey). Two of the 14 have culminated in decisions, in which monetary awards were rendered against Kyrgyzstan and Latvia, respectively.

Russia signed the ECT and has continued to participate actively in the business of the conference in which the ECT contracting parties meet and in its secretariat, but has refused to ratify the Treaty. Nonetheless, as a signatory which was not among those few signatories who opted out of “provisional application” of the Treaty, Russia is bound to apply the ECT “provisionally,” “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.” Accordingly, shareholders of the Russian oil company Yukos have initiated arbitration under the UNCITRAL rules against the Russian Government over the alleged expropriation of the assets of that company, asking some $33 billion in damages.

Since the US and Canada have elected not to sign the ECT, US and Canadian investors only can avail themselves of the Treaty’s protections through entities organized in ECT contracting parties. Any US or Canadian investor contemplating this needs to be aware of ECT Article 17(1), which allows a host government to deny the Treaty’s investment protections to an entity owned or controlled by citizens or nationals of a State that is not an ECT contracting party, if the entity has no substantial business activities in the State in which it is organized. In a jurisdictional ruling, an ICSID panel in an arbitration against Bulgaria held that a host country may not exercise its Article 17(1) right retrospectively, to existing investments, for the reason that such exercise would breach existing investors’ legitimate expectation that they would enjoy the investment protections of the ECT, and deny to potential investors any certainty when planning investments that they would come under or fall outside of the Treaty’s umbrella of protection. In opposition to this view, it has been argued by commentators that Article 17(1) itself puts investors on notice of the need to seek assurances from the host State, and that, in contrast with situations where foreigners are invited by tender to invest in large or strategic projects, a host state may not be aware of the establishment of a new investment in its territory, or the nationality of the investor or of those who own or control the investor. More doubtless remains to be said about the application of Article 17(1).

Thus far (with one possible exception about which public information is lacking), it appears that all known ECT investor-State arbitrations have been initiated in the names of the foreign investors, rather than in the name of a domestic entity in the host country in which the foreign investors hold interests. The latter approach may have particular advantages for investors in cases where a fragmentation of ownership creates a potential for multiple and possibly divergent claims over the same underlying factual circumstances. Some attorneys privately have expressed uncertainty whether the ECT permits that approach. The States participating in the conference in which the ECT was negotiated, however, clearly voiced their collective intention to allow investor-State arbitrations to be brought in the name of a domestic entity in which the foreign investors hold interests. It may be necessary for investors wishing to pursue that approach to be prepared to introduce evidence of the negotiating countries’ intention. ■


Mr. Bamberger is a legal consultant in the Washington, DC area. In 1992-1994, while serving as General Counsel of the International Energy Agency in Paris, he chaired the legal advisory committee to the conference in which the Energy Charter Treaty was negotiated.