I. What is the Energy Charter Treaty?
The Energy Charter Treaty (ECT) was signed on December 17, 1994 in Lisbon. The ECT holds significant importance in international law as the first multilateral document aimed at protecting international investments in the energy sector.
ECT – Energy Charter Treaty was signed by Turkey on December 17, 1994. It was approved on February 6, 2000 through Law No. 4519, which approves the Final Act of the European Energy Charter Conference, the Energy Charter Treaty, the Decisions Comprising the Annex to the Energy Charter Treaty, and the Energy Charter Protocol on Energy Efficiency and Related Environmental Matters.
The objective of the Energy Charter Treaty is stated in Article 2 as follows: “This Treaty establishes a legal framework to promote long-term cooperation in the energy field, based on the principles and objectives of the ‘European Energy Charter,’ with the principle of complementarity and mutual benefit.” (BAKLACI, Pınar / AKINTÜRK, Esen; Energy Charter Treaty, DEU Journal of Business Administration, Volume 7, Issue 2, 2006, p. 98.) (For the full text of Law No. 4519, see: http://www.mevzuat.gov.tr/Metin1.Aspx?MevzuatKod=1.5.4519&MevzuatIliski=0&sourceXmlSearch=4519&Tur=1&Tertip=5&No=4519)
II. The Importance of Article 10 of the Energy Charter Treaty
Due to the long-term and high-capital nature of projects in the energy sector, trust and stability are crucial in the relationship between investors and host states. Establishing an international legal framework to protect foreign investors from risks holds vital importance from the perspective of foreign investors. Therefore, foreign investors prefer states that have strong, stable, transparent, multilateral, and bilateral agreements. (AKINTÜRK, Esen; Energy Charter Treaty and Principles for the Protection of Investments, International Law and Policy, Volume 7, Issue 27, pp. 53-54.)
III. Principles Contained in Article 10 of the Energy Charter Treaty
Article 10 of the Energy Charter Treaty (ECT) includes a set of principles. These principles provide a legal basis for claims that foreign investors may raise. Failure to fulfill the obligations of fair and equitable treatment, failure to provide full protection and security, causing harm to investments through unreasonable or discriminatory measures, and violations of the obligation to provide minimum treatment under international law can be considered as violations.
1. Fair and Equitable Treatment
According to the provisions of the Energy Charter Treaty (ECT), each treaty party shall, in accordance with the provisions of this treaty, promote and create stable, fair, favorable, and transparent conditions for investments in its territory by investors of other treaty parties. These conditions should include a commitment to always provide fair and equitable treatment to investors of other treaty parties (Article 10(1), second sentence).
The application of the principle of fair and equitable treatment to each case will involve a detailed assessment.
Arbitral tribunals have recommended the use of criteria such as the fairness and equity of the treatment applied, the protection of the investor’s legitimate expectations, the avoidance of coercion or duress, compliance with procedural rules and laws, non-arbitrariness, non-discrimination, and good faith. (See: Petrobart v. Kyrgyzstan, Plama Consortium Limited v. Bulgaria, AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary awards.)
2. Transparency
Transparency is seen as an important element in preserving the legitimate expectations of investors and the stability of the legal framework. It is generally understood as the publication of all legal rules that affect investors by the host state.
Article 10 of the Energy Charter Treaty (ECT) mentions the requirement for parties to create stable, fair, favorable, and transparent conditions. The treaty imposes an obligation on the parties to publish and make their laws, regulatory administrative measures, and procedures transparent, open, and accessible in matters covered by the treaty. Additionally, the establishment of information disclosure institutions is necessary for the information acquisition of investors and parties. (AKINTÜRK, Esen; op. cit., p. 63)
3. Full Protection and Security
The principle of full protection and security entails the obligation of the host state to take effective measures to protect the investment from adverse effects. These adverse effects can stem from acts of private individuals or actions of the host state or its entities.
The principle of full protection and security primarily aims to protect the investor from physical attacks, but it is also considered to encompass legal protection in modern times.
In the Plama-Bulgaria case, the arbitral tribunal stated that the principle of full protection and security includes the obligation to create an effective structure ensuring security, and it develops in the context of providing physical security. Some courts have included legal security in the scope of protection under this principle, which makes it closely related to fair and equitable treatment. (AKINTÜRK, Esen; op. cit., p. 65)
In the AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary case, the arbitral tribunal expressed the view that the principle of providing full protection and security to investments imposes an obligation on the state to take reasonable measures to protect investors or provide them with the means to protect themselves. However, this obligation cannot be considered as absolute and devoid of fault or liability. (AKINTÜRK, Esen; op. cit., p. 65)
4. Unreasonable and Discriminatory Measures
The first paragraph of Article 10 of the Energy Charter Treaty (ECT) stipulates that none of the treaty parties shall, in any way, harm investments through unreasonable or discriminatory measures that affect the operation, maintenance, use, enjoyment, or transfer of such investments. The principle of refraining from using unreasonable or discriminatory measures aims to prevent the host state from causing harm to investors through arbitrary sanctions or subjecting them to discrimination. Arbitral tribunals have considered the principle of making comparisons among similar cases when evaluating whether discrimination exists under the ECT. They have found violations when unreasonable or discriminatory measures were employed (Nykomb Synergetics Technology Holding AB v. Latvia). (AKINTÜRK, Esen; op. cit., p. 67.)
5. No Less Favorable Treatment Than That Required by International Law
Including Treaty Obligations According to the regulation stipulated in the first paragraph of Article 10 of the ECT, “...under no circumstances shall any requirements be imposed that are less favorable to the investments concerned, including those imposed by international law.” This provision establishes the limit for the minimum treatment that should be applied.
Although the principle of fair and equitable treatment under the ECT provides more protection than the minimum standards of international law, it is acknowledged that the minimum standards are set by international law. (AKINTÜRK, Esen; op. cit., p. 68.)
6. Umbrella Clause
According to the final sentences of Article 10 of the ECT, “Each Contracting Party shall observe any obligations it has entered into with an Investor or Investments of an Investor of any other Contracting Party.” This clause implies that if the host state breaches its contractual obligations, it also violates the ECT. When a breach of a bilateral agreement between the investor and the host state occurs, it is considered a violation of the international treaty. This clause is referred to as the “umbrella clause“
Article 22 of the ECT states that “Activities of state-owned enterprises in connection with the sale of goods and services shall be conducted in accordance with the obligations of the Contracting Party under this Part III. A Contracting Party shall not encourage the State enterprises to act in a manner inconsistent with the obligations of that Contracting Party under other provisions of this Treaty. Each Contracting Party shall ensure that the powers delegated to administrative authorities are exercised in conformity with the obligations of that Contracting Party under this Treaty. No Contracting Party shall encourage or require any special rights or privileges for the institutions granted exclusive or special privileges that are inconsistent with the obligations of that Contracting Party under this Treaty.” This provision allows for recourse to investment arbitration in cases where regulatory bodies or entities fail to comply with contractual obligations. (ÇAL, Serdar; International Investment Arbitration, pp. 340-341.)
7. National Treatment or Most Favored Nation Treatment Whichever is More Favorable
The principle of national treatment requires the host state to provide the same treatment to the investments of other treaty parties as it provides to its own citizens or companies.
The principle of most favored nation treatment ensures that investments benefit from more favorable treatment than that provided by the host state to investments of third-state citizens or companies.
By including the principle of applying whichever treatment is more favorable between national treatment and most favored nation treatment under the ECT, the conditions under which the investor can benefit are expanded. It should be noted that this principle recognized by the ECT applies not only to the investor but also to the investment and related activities. Additionally, the ECT obliges the contracting states to submit a report summarizing the laws, regulations, and other measures regarding exceptions to national treatment or most favored nation treatment introduced for investments made by foreign investors to the Energy Charter Secretariat. (AKINTÜRK, Esen; op. cit., pp. 71-72.)
III. The Energy Charter Treaty and the Pre-Investment Phase
Article 10 of the Energy Charter Treaty (ECT), titled “Promotion, Protection, and Liberalization of Investments,” introduces both advisory and binding rules.
When examining the provisions of the ECT regarding the protection of investments, a distinction can be observed between the “pre-investment phase” and the “post-investment phase,” which occurs after investments are made.
Due to the wording used in the ECT regarding the pre-investment phase, it can be understood that the regulations made during this stage are not as binding as those made after the investment is made. The ECT primarily introduces advisory rules for the pre-investment phase. This situation raises the question of the extent to which investment arbitration, as stated in Article 26 of the Treaty, can be pursued during the pre-investment phase.
During the pre-investment phase, the ECT imposes an obligation on the parties to make efforts to provide either national treatment or most favored nation treatment to foreign investors, whichever is more favorable. (AKINTÜRK, Esen; op. cit., pp. 56-58)
IV. Conclusion
The principles introduced by Article 10 of the Energy Charter Treaty effectively protect international energy investments against interventions by host countries. Additionally, these principles provide legal protection for investments and investors, ensuring a transparent and stable investment environment for investments made by countries party to the Energy Charter Treaty.
Memduh Remzi BAL
Lawyer / Attorney in Turkey
International Trade Law Firm in Istanbul Turkey
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