What is the ECT?
The ECT is a multilateral treaty which seeks to promote international investment in the energy sector. It provides protection for the investments of investors in the energy sector from State conduct that breaches its terms. More than 50 States are Contracting Parties to the ECT. Investments are protected through the ability of investors to bring international arbitration proceedings against the host State of their investment. International tribunals may award damages to investors if a State has been found to have breached the ECT, such as by failing to accord the investment of an investor fair and equitable treatment, or through unlawfully expropriating an investment.
A significant number of UK investors have brought claims against a variety of States under the ECT. Many of those cases relate to investments made in the renewable energy sector, in addition to claims relating to fossil fuel investments.
Stalled modernisation talks have prompted a series of denouncements of the ECT
The UK will become the 11th Contracting Party to announce its intention to withdraw from the ECT in recent years. The ECT Secretariat has conducted a detailed process to seek to modernise the text of the ECT over the course of more than five years. In particular, the proposed modernised text sought to provide a broader coverage for renewable energy investments by making clear provision for the protection of investments relating to carbon capture, usage and storage, and green hydrogen. The text also proposed a carve-out which would allow Contracting Parties to exclude investment protection for fossil fuels in their territories, considering their individual energy security and climate goals.
While an agreement in principle was reached in relation to the proposed modernised text, a vote on the text arranged for November 2022 was postponed as a result of the failure of EU Member States to agree on a common position. This was followed by a recommendation from the European Commission that EU Member States should withdraw from the ECT. France, Germany, and Poland’s withdrawal from the ECT became effective at the end of 2023. Luxembourg’s withdrawal will become effective by mid-2024, and the Netherlands, Slovenia, Spain, Denmark, Ireland, and Portugal have also announced their intention to withdraw.
In September 2023, the UK Government announced that it would be “reviewing its membership” of the ECT if the Contracting Parties did not reach agreement on a modernised text by November 2023. Broadly, and in contrast to the EU Member States, the UK was a strong advocate for the proposed modernised text, in particular its stronger focus on promoting clean, affordable energy. The Minister of State for Energy Security and Net Zero, Graham Stuart MP said that “[r]ather than being stuck indefinitely with an outdated treaty, the UK wants to see an agreement on a modernised treaty as quickly as possible.”
However, no progress was made in relation to the modernised text, with the UK Government expressing the view that “[t]he European Parliament elections in 2024 mean modernisation could now be delayed indefinitely.”
When will the UK withdraw from the ECT?
Under Article 47(2) of the ECT, withdrawal from the ECT takes effect upon the expiry of one year after the date of the receipt of the notification of withdrawal by the Depository of the ECT. The UK Government’s announcement stated that the UK “will now instigate” the UK’s withdrawal from the ECT, but as of the date of writing, a formal notification of withdrawal would not appear to have been notified to the Depository of the ECT yet. This likely can be expected to be notified soon. While some States have specific constitutional requirements for treaty withdrawals, the UK Government is responsible for negotiating, signing, ratifying, amending, and withdrawing from all international treaties involving the UK under its prerogative powers. While Parliament has some role in relation to treaties under the Constitutional Reform and Governance Act 2010, this does not apply to any withdrawal from a treaty.
What happens after the UK’s withdrawal takes effect?
The UK’s withdrawal from the ECT does not mean an immediate end of claims by UK investors or claims against the UK under the ECT. Article 47(3) of the ECT is the “sunset clause.” It says that the provisions of the ECT shall continue to apply to investments that had been made as at the date of withdrawal taking effect for a period of 20 years.
Therefore, any investments of UK investors which had been made prior to the UK’s withdrawal taking effect in another Contracting Party (including those States that have withdrawn, to which the sunset clause also will apply) will continue to be entitled to the protections set out in the ECT for 20 years after withdrawal. New investments made after the withdrawal takes effect will not be entitled to protection.
Authored by Markus Burgstaller, Ben Sulaiman, and Scott Macpherson.
