The European Commission has initiated infringement proceedings against Hungary for challenging the EU’s stance on intra-EU investment arbitrations under the ECT. As discussed in this article, while the Commission’s position may be consistent with EU law, it is plainly inconsistent with international law and threatens to undermine the EU’s integrity as a reliable actor on the international legal plane.

On 27 June 2024, the EU formally announced its withdrawal from the ECT, with the withdrawal set to take effect one year later. This decision makes the EU the 10^th party to officially withdraw from the ECT, following in the footsteps of Italy, France, Germany, Poland, Luxembourg, Slovenia, Portugal, Spain, the United Kingdom, and the Kingdom of the Netherlands.[1] Despite these departures, 43 contracting states remain bound to the ECT (including 18 EU Member States)[2] having not yet issued formal notifications of withdrawal.

On 28 June 2024, the EU, together with 26 of its member states, adopted a Declaration addressing the legal implications of the #Komstroy judgment of the Court of Justice of the European Union (CJEU), which ruled that the ECT’s arbitration clause does not apply to disputes between an EU member state and an investor from another EU member state, thereby confirming the Commission’s long-standing position that intra-EU investment arbitrations under the ECT are incompatible with EU law.

The Declaration proposes eliminating the ECT’s sunset clause for future intra-EU disputes and seeks to retroactively invalidate its applicability to ongoing intra-EU arbitrations, reflecting pressure from certain member states facing such cases. As a result, the Declaration posits that Article 26 ECT (the ECT’s arbitration clause) was never intended to cover intra-EU disputes, and Article 47(3) (the ECT’s sunset clause, which affords investors a further 20 years of protection after an ECT contracting party terminates the treaty) should not extend to these or any other cases that investors may bring.

The Declaration, however, lacks endorsement from all EU member states (or all ECT contracting parties, for what matters): Hungary has issued a #unilateral declaration, asserting that the Komstroy judgment should only affect future intra-EU investment arbitrations and that this effect should commence only upon the amendment of the ECT.

The Commission viewed Hungary’s unilateral declaration as a direct contradiction to the CJEU’s Komstroy judgment and a breach of the duty of sincere cooperation, asserting that Hungary’s position undermines foundational principles of EU law, including autonomy, primacy, effectiveness, and uniform application. As a result, the Commission has issued a formal notice to Hungary, initiating infringement proceedings under the EU Treaties. Hungary has two months to address the Commission’s concerns, failing which the matter may be escalated with a reasoned opinion, potentially leading to litigation before the CJEU. If the CJEU sides with the Commission, the CJEU may declare that Hungary breached EU law by issuing its unilateral declaration, instead of subscribing to the Declaration. Whether the Commission would then be able to force Hungary to subscribe to the Declaration through periodic penalties or fines, if necessary, is an open question.

While the infringement procedure may underscore the Commission’s commitment to police the primacy and autonomy of EU law, without (at least) Hungary’s consent, the purported retroactive amendment of the ECT as between all EU member states by way of the Declaration appears inconsistent with the Vienna Convention on the Law of Treaties (VCLT), which codifies customary rules of international law and to which all EU member states (along with most members of the United Nations) have subscribed. That is because, as discussed below: first, the Declaration seeks to specifically interpret or modify the ECT’s provisions, without having the consent of all ECT contracting parties (or even all EU member states), in violation of Articles 31 and 41 of the VCLT; and second, the Declaration seeks to retroactively bind investment tribunals in pending investment cases.

Is the Declaration a Valid and Binding Interpretation and/or Modification of the ECT?

To the extent that the Commission considers that the Declaration constitutes an interpretation of the ECT under customary international law, then that interpretation shall be made in accordance with Articles 31 and 32 of the VCLT.

Under Article 31(2)(b) VCLT, the Declaration may be deemed as an “instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.” The “instrument” proposed by the Commission, however, has not been yet accepted as is by all ECT contracting states, or even all EU member states, and cannot, therefore, be taken into account for the purposes of a binding interpretation of the ECT (even between the EU member states only).

In turn, under Article 31(3)(c) VCLT, the Declaration could constitute a “subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions.” But again, this “subsequent agreement” should be a common act or undertaking between all the parties to the ECT (which includes all EU member states, as well as Japan and Australia, among many other states). Subsequent agreements among a limited number of parties may (at best) constitute “subsequent practice,” under Article 31(3)(b) VCLT, only provided that such subsequent agreements, taken together, establish an agreement between all the parties regarding the interpretation of the treaty. This is, obviously, not the case here given that Hungary (without even starting to discuss the position of the other contracting parties to the ECT) has opted for a different interpretation of the ECT’s arbitration and sunset clauses. This means that the Declaration does not establish an agreement between all the parties (or even between all EU parties) regarding the interpretation of the ECT and may only be used, in principle, as a “supplementary means of interpretation” under Article 32 VCLT. 

But even that seems unlikely as the Declaration does not constitute part of “the preparatory work of the [ECT] and[/or] the circumstances of its conclusion,” and can only be used under the ambit of Article 32 VCLT to confirm the meaning resulting from the application of Article 31 VCLT or to determine the meaning when the Article 31 VCLT interpretation leaves the meaning ambiguous or obscure, or leads to a manifestly absurd or unreasonable result.  

As such, as a unilateral statement (in that it is not supported by all ECT contracting parties, not even all EU parties), the content of an interpretative declaration such as the one proposed by the EU is not binding without the assent of all of the other ECT states.

On the other hand, to the extent that the EU proposes that the Declaration constitutes an “agreement to modify [the ECT] between certain of the parties only” under Article 41 VCLT, Article 41 provides that the conclusion of an inter se agreement must be either expressly admitted by the main treaty, or at least be consistent with its object and purpose. But importantly, here, even if an inter se “agreement” between the EU and its member states as to the (in)applicability of the ECT’s arbitration and sunset clauses were indeed consistent with the ECT’s object and purpose, what is missing is the fundamental element for applying Article 41 VCLT: an agreement. Hungary’s consent to be bound by the Declaration as is (that is, to invalidate the ECT’s arbitration and sunset clauses retroactively) is nowhere to be found.   

Can the Declaration Be Applied Retroactively?

Even assuming that the Declaration constituted a valid and binding interpretation or inter se amendment of the ECT under the VCLT, the retroactive imposition of such an interpretation on tribunals already seized with arbitrating intra-EU investment disputes under the ECT presents a distinct and contentious issue.

The retroactive application of the Declaration to disputes that predate its issuance could unjustly jeopardise the rights of investors, as provided for in the ECT, as the Declaration’s proposed interpretation of the ECT’s arbitration and sunset clauses was neither in effect at the time the investments had been made nor when the disputes had arisen and the arbitration proceedings were initiated. Consequently, compelling a tribunal to adhere to the Declaration in such pending cases risks a significant erosion of investor protections under the ECT, thus violating the principle of legal certainty that underpins international investment law.

The Commission’s position, therefore, appears inconsistent with these provisions of customary international law, as it attempts to unilaterally and retroactively alter the interpretation and application of the ECT without the necessary consent of all contracting parties. However, as held by the CJEU in its seminal Western Sahara judgment, the EU is “bound … when exercising its powers, to observe international law in its entirety, including not only the rules and principles of general and customary international law, but also the provisions of international conventions that are binding on it.”

Against this background, the EU’s approach to retroactively applying the Declaration raises significant concerns about the implications behind such measure under international law. The EU has not—and indeed cannot—demonstrate that its proposed interpretation of the ECT, which seeks to retroactively cancel acquired rights, is necessary to ensure the consistency and autonomy of EU law, at the expense of violating the EU’s and its member states’ obligations under customary international law.

This situation purportedly presents a conflict between enforcing legal uniformity within the EU and adhering to the established principles of international treaty law. However, this is a false dichotomy. There is no inherent tension between maintaining the consistency of EU law and respecting the obligations of international treaty law. The EU, if it so chooses, can uphold its fundamental principles without undermining the foundational tenets of international law, including the principles of state sovereignty, legal certainty, and the non-retroactive application of legal instruments.

By attempting to compel state consent to a flawed interpretation of international law through infringement proceedings against Hungary, the EU risks eroding the integrity of international law and setting a troubling precedent where regional interests are prioritised over universally accepted norms of customary international law. This approach not only compromises the respect for international treaties but also undermines the EU’s standing as a trustworthy actor in the international legal plane.

by Maria Paschou, Dániel Dózsa, and Dalibor Valinčić

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[1] See International Energy Charter, News, Written Notification of Withdrawal from the Energy Charter Treaty, available at: https://www.energycharter.org/media/all-news/ (accessed on 22 August 2024).

[2] These are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Romania, Slovakia, and Sweden.