European court rules companies can’t sue EU states over environmental laws

The CJEU has ruled that investment arbitrations brought under the ECT by investors based in one EU member state against another EU member state are incompatible with EU law.

The case arose after a company inherited from Komstroy filed for arbitration against Moldova over a power sales contract. It was referred to the CJEU by the Paris Court of Appeal, which declared that the contract did not constitute an “investment” within the meaning of the ECT.

The CJEU agreed with the referring court. He stated that Article 26 of the TEC, which defines the procedure for disputes between an investor and a contracting party, must be interpreted as not being applicable to disputes between a Member State and an investor of another Member State concerning an investment made by the investor. in the first Member State.

The CJEU said that an electricity supply contract that is not linked to an investment does not constitute an “investment”, and therefore ISDS does not apply.

McDonald said the case sets a precedent for future claims that may arise from disputes between member states and foreign investors.

“It provides member states that wish to implement climate-conscious policies with a degree of security to pursue such initiatives without fear of investor arbitration, and it sets a trend for future court rulings regarding this type of dispute between foreign investors and member states,” said McDonald.

McDonald said EU member states would now seek to rely on the ruling as a defense against arbitrations brought under the ECT.

“Member states that strive to implement climate-conscious policies will be able to look at this outcome and feel some degree of protection against energy companies in arbitrations under the treaty. Companies should be aware that this defense now exists and the implications that may arise in future claims using the ISDS legal mechanism in the ECT,” McDonald said.

“There is a consensus that the ECT is outdated because it is not in line with the EU’s reformed approach to investment policy and climate policy commitments in member states. In the future, member states could push for a withdrawal from the ECT. If so, Member States withdrawing from the ECT should consider agreeing between the exiting States to override the sunset clause, which allows investors to continue to bring ISDS claims related to existing investments for another 20 years after withdrawal,” McDonald said.