Dr. Patricia Nacimiento and Jacky Lui on "International Dispute Resolution in the Energy Sector"
On the 19th of January 2024, the IDR LL.M. class had the pleasure of hosting Dr. Patricia Nacimiento and Mr. Jacky Lui, partner and foreign lawyer, respectively, at Herbert Smith Freehills. They discussed the exciting topic of "International Dispute Resolution in the Energy Sector" and shared updated and intriguing data with the class. The lecture was divided into five categories, which we will delve into.
1. The Importance of the Energy Sector
The speakers started the lesson stating that energy is categorized as a "public service", and it holds societal relevance as the lack of its supply has impacts on public health, education, and economic development. In terms of the EU economy, the European Green Deal plays a crucial role in setting goals to transform the EU economy for a sustainable future. This includes a zero-pollution ambition for a toxic-free environment, mobilizing the industry for a clean and circular economy, preserving and restoring ecosystems and biodiversity, etc.
It was also highlighted the efforts in making the energy transition from fossil fuels, such as crude oil, natural gas, coal, and peat, to renewable energy sources like solar, wind, water, geothermal energies, and others. An interesting point was made about the impact of the COVID-19 pandemic, as the response to the global energy crisis provided a significant boost to global clean energy investment, resulting in a substantial reduction in the use of fossil fuels and an increase in clean energy. Continuing with the discussion of recent global events, the speakers underscored that the cuts in Russian gas deliveries to Europe have prompted heightened investments in alternative supply sources and LNG (liquified natural gas) infrastructure.
2. Investment Disputes in the Energy Sector
The lecturers provided us with some interesting data regarding investment disputes in the Energy Sector, which constitutes 31% of ISDS cases. Breaking it down, the majority of these disputes originate from the fossil fuel energy sector (60%), followed by low-carbon energy (36%), with the remaining 12% attributed to other sources. Another interesting piece of information shared with the class was that, by a geographical distribution, fossil fuel arbitrations are primarily concentrated in South/Latin America (32%), followed by Asia and the Pacific (23%), Europe (21%), Africa (11%), the Middle East (8%), North America (3%), and Arab states (2%).
3. Legal Instruments for Energy Sector Disputes
The speakers began pointing out the International Investment Agreements (IIAs). Commonly, the protections under IIAs include National Treatment, Most Favored Nation treatment, Fair and Equitable Treatment, Full Protection and Security, and Expropriation. Nowadays we have 2584 IIAs in force and they continue to be negotiated and signed, but at a slower rate than the 1990s-2000s.
Shifting our attention to the Energy Charter Treaty (ECT), a multilateral investment agreement signed in 1994, designed to enhance energy security, the treaty encompasses standards such as Fair and Equitable Treatment, Full Protection and Security, Expropriation, Umbrella Clause, Tax Carve Out, and an arbitration-based Dispute Settlement Mechanism (art. 26 ECT). Recent developments highlighted by Dr. Patricia Nacimiento and Mr. Jacky Lui include significant modernization efforts, exemplified by the Achmea/Komstroy judgments from the European Court of Justice. Withdrawal dynamics were also discussed, with Italy, Russia, France, Germany, Luxembourg, and Poland either withdrawing or expressing intent due to unsuccessful renegotiation attempts. The European Commission proposed a coordinated withdrawal by the European Union and its Member States, and various other nations, such as Netherlands, Slovenia, Spain, Denmark, Ireland, and Portugal, announced their unilateral intention to leave the ECT.
Another legal instrument for resolving energy sector disputes showcased by the lecturers involves Investment Contracts or Contracts with State-Owned Entities (SOEs). SOEs frequently play a role in energy projects, and ventures with them can bring benefits to the state while providing certainty to investors. Examining the contents of these contracts, it is revealed that they are significantly more commercially motivated. The utilization of arbitration as a means of settlement between private parties is a prominent feature, with an emphasis on commercial arbitration rather than an Investor-State Dispute Settlement (ISDS) proceeding. This choice ensures confidentiality, preventing the politicization of proceedings, unless the SOE is under strict reporting or disclosure obligations. Furthermore, the use of commercial arbitration facilitates easier access to procedural tools, such as set-offs and counterclaims, as well as the joinder of third parties.
Finally, concerning the relevance of domestic law in investment cases, Dr. Patricia Nacimiento and Mr. Jacky Lui underscored that claims against a host state may arise due to various domestic law issues. These include disputes related to subsoil use rights and a state's permanent sovereignty over its natural resources. The nature of rights under mining licenses and concessions becomes relevant in expropriation cases.
4. ESG considerations in the Energy Sector
The acronym "ESG" has gained attention over the past decades, representing "Environmental, Social, and Governance." Dr. Patricia Nacimiento and Mr. Jacky Lui provided a brief historical background, noting that host states have sought to enforce investor obligations under Bilateral Investment Treaties (BITs). An illustrative case is Urbaser v Argentina, involving a counterclaim by the host state alleging human rights violations related to access to water.
In contemporary contexts, ESG has become a prerequisite for international finance, especially for large-scale projects in the energy sector that often necessitate global funding. The emphasis on ESG in financing is crucial as it imposes compliance requirements on projects.
The speakers highlighted instances of ESG in investment disputes, citing cases like RWE v Netherlands and Rockhopper v Italy, where the central themes revolve around investment protection and environmental conservation. They also referenced Copper Mesa v. Ecuador, where the focal points include investment protection and indigenous rights.
5. Substantive Protections in ISDS in Energy Disputes
In the concluding segment of the lecture, Dr. Patricia Nacimiento and Mr. Jacky Lui highlighted key aspects, including the Expropriation/Police Powers Doctrine, Fair and Equitable Treatment (FET), Full Protection and Security (FPS), Umbrella Clause, Tax Carve-outs, and the Dispute Resolution clause. They presented compelling arguments surrounding these substantive protections, reinforcing the discussion with pertinent case law and references to legal doctrines. This not only served as an excellent conclusion to the lecture but also provided the IDR LLM class with a comprehensive review of the subject.
After such a rich lecture, loaded with important and updated information, the students were inspired to delve deeply into investment arbitration, particularly in the energy sector. The complexity of the cases and the growing significance of the subject make it an intriguing focal point for further studies and practical exploration in international dispute resolution. We extend our gratitude to Dr. Patricia Nacimiento and Mr. Jacky Lui for their time and insightful lecture. It was truly enlightening!
Carolina Solis Villares, IDR LL.M. Candidate, 2023/2024