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31 January 2019
The US District Court for the District of Columbia recently lifted a stay of proceedings to confirm an award issued by an ad hoc tribunal in Paris under the Energy Charter Treaty (ECT). The award had been rendered in favour of Ukrainian investor Energoalians SARL against the Republic of Moldova. In its opinion and order issued on 13 November 2018, the US district court considered six factors in reaching its decision.(1) The district court noted in particular that the French Court of Cassation had overturned a decision of the Paris Court of Appeal setting aside the award. The stay was lifted despite the fact that the Court of Cassation had sent the case back to the Paris Court of Appeal, and that decision has not yet been handed down. On this point, the US district court noted that the Paris court would be considering only "the argument that the arbitral award is contrary to public policy".(2)
The arbitral award,(3) as well as the French court decisions mentioned in the US district court's opinion and order, have been partially reported elsewhere.(4) This article revisits the relevant facts and issues that gave rise to the setting aside of the award in France, and the subsequent reversal at the highest instance. Contrary to the US district court's understanding, the remitted case will actually be reviewed de novo by a different bench of the Paris Court of Appeal, and that review will not be limited to public policy.
On 1 February 1999 a tripartite electricity supply contract was concluded between the Ukrainian state-owned entity Ukrenergo, Ukrainian private company Energoalians SARL and Moldovan state-owned company Moldtranselectro. Under this contract, Energoalians was to purchase electricity from Ukrenergo (which produced the energy) for the purpose of exporting electricity to Moldova through Moldtranselectro.
On 24 February 1999 a related tripartite electricity supply contract was concluded between Energoalians, Moldtranselectro and BVI company Derimen Properties Ltd. In it, Energoalians undertook to supply electricity to Derimen, which in turn undertook to buy it for supply to Moldtranselectro. After the conclusion of this contract, the electricity supply arrangement among the four parties stood in essence as follows:
During the course of this arrangement, Moldtranselectro failed to make certain payments to Derimen.
On 30 May 2000 Derimen assigned to Energoalians its right to claim debts arising from Moldtranselectro's failure to make payments under the electricity supply contract of 24 February 1999.
In 2010, following a failed attempt to resolve a dispute between Energoalians and Moldova regarding payment of these debts, Energoalians commenced arbitration against Moldova under both the ECT and the 1995 Ukraine-Moldova bilateral investment treaty (BIT). Energoalians alleged, among other things, that it had invested in the right to recover debts that Moldtranselectro owed for energy supplied during 1999 and 2000 and that Moldova had adopted measures that effectively destroyed its investment. The impugned measures included reorganisation of Moldtranselectro and decisions from the Moldovan Court of Accounts. Energoalians argued that these actions had breached the ECT and the Ukraine-Moldova BIT.
In an award dated 23 October 2013, a three-member ad hoc United Nations Commission on International Trade Law (UNCITRAL) tribunal seated in Paris, composed of Dominic Pellew (chair), Mikhail Savranski (claimant's nominee) and Victor Volcinski (respondent's nominee), dismissed the claims under the Ukraine-Moldova BIT for want of jurisdiction. However, in relation to the claims brought under the ECT, the tribunal upheld jurisdiction and found Moldova liable, ordering the state to pay around $49 million in compensation.
Pellew dissented,(5) disagreeing with the conclusion that the tribunal had jurisdiction under the ECT. In his view, for an investment to be protected under the ECT, it must involve an "economic process of investment of capital". Such a process would typically be characterised by the presence of a contribution to the economy of the host state, as well as commercial risk and duration. Noting that it was unclear whether Energoalians paid anything to acquire the debts, he concluded that Energoalians had invested neither capital nor effort in return for the right to claim the relevant debts. Rather than contributing to Moldova's economy, in his view, the debt cession had imposed a burden on the country. He further noted that the debt was already due when it was acquired, compromising the duration criteria, and considered that, in the absence of further investment, a mere claim to money arising from debts acquired with no contribution (monetary or otherwise) was not a protected investment under the ECT.
On 25 November 2013 Moldova sought to set aside the award of 23 October 2013 in the Paris Court of Appeal on the dual bases that the tribunal had wrongly upheld jurisdiction and that enforcing the award would violate international public policy.
On 12 April 2016 the Paris Court of Appeal concluded that the tribunal had wrongly upheld jurisdiction under the ECT and accordingly set aside the award.(6)
The court first observed that the tribunal would have had jurisdiction under the ECT only if Energoalians was an investor and the dispute between it and Moldova concerned an investment made in the territory of Moldova. The court concluded that Energoalians was an 'investor', as defined under Article 1(7)(a)(ii) of the ECT. As such, the decision turned on whether the debt Energoalians acquired from Derimen constituted an 'investment', as defined under Article 1(6) of the ECT.
The court noted that although 'investment' encompassed "every kind of asset, owned or controlled directly or indirectly by an Investor", the broad definition in Article 1(6) of the ECT was followed by a list of protected assets introduced by the proviso "and includes". Next, the court analysed whether Energoalians's acquired debt was an asset under Article 1(6)(c) or (f), which read as follows:
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.
As regards Article 1(6)(c), the court reasoned that claims to money not associated with a protected investment under the ECT could not constitute protected assets. According to the court, the ordinary meaning of the term 'investment' in this context and in the light of the ECT's object and purpose requires the "condition of contribution", the absence of which placed the asset in question outside the treaty's scope. It thus concluded that Energoalians's entitlement to repayment was not protected under the ECT, holding that:
the acquisition of a right to claim money which originates from a contract for the supply of electricity cannot constitute an investment within the meaning of the ECT in the absence of a contribution.
According to the court, Energoalians's asset had also failed to satisfy Article 1(6)(f) because it "concerns a monetary claim without the right to exercise an economic activity in the energy sector". The court reiterated that Energoalians's claims to money that Moldtranselectro had owed to Derimen "has as its sole object the sale of electricity".
Komstroya, as successor in interest to Energoalians since October 2014, appealed this decision to the French Court of Cassation.
On 28 March 2018 the First Civil Chamber of the French Court of Cassation reversed the Paris Court of Appeal's decision setting aside the award against Moldova.(7) The effect of this was to render the Parisian court's decision void "in all its provisions".
The Court of Cassation observed that the award had been set aside on the basis that the acquisition of a right to claim money arising from a debt linked to an electricity supply contract cannot constitute an 'investment' under the ECT "in the absence of contribution". Noting that the ECT does not specify "the criteria characterizing an investment" and that the treaty provides a non-exhaustive list of assets that qualify as investments, the Court of Cassation concluded that by requiring contribution for an asset to qualify as an investment under the ECT, the Paris Court of Appeal had "added a condition that the treaty does not provide for".
The Court of Cassation remanded the case to be reconsidered by a differently constituted bench of the Paris Court of Appeal.
In adjudicating a case that has been remanded, the Paris Court of Appeal will in practice comply with the Court of Cassation's decision. This is so whether that decision was issued by a chamber or by the Plenary Assembly of the highest instance court, although by law only decisions by the Plenary Assembly must be complied with by a court of appeal on the points of law.(8) Moreover, once the case has been remanded, the Paris Court of Appeal will review de novo all points of fact and law relevant to the parts reversed by the Court of Cassation, and parties are normally allowed to raise new arguments and adduce new evidence.(9) Given that a chamber (and not the Plenary Assembly) of the Court of Cassation reversed the 12 April 2016 Paris Court of Appeal decision "in all its provisions", the lower court is not strictly bound by the Court of Cassation's decision and reasoning. Therefore, the case may be fully reargued and reconsidered before different court of appeal judges.
As it stands, the prevailing jurisprudence in France on the definition of 'investment' under the ECT seems to include two basic points:
Other positions are less clear, including the scope of Article 1(6)(f) of the ECT. The Paris Court of Appeal appears to have understood this article to exclude debts that do not accord the creditor the "right to engage in economic activity in the energy sector".(11) It further appears to have suggested that a contract for the sole purpose of selling electricity would not qualify as an ECT protected investment; as such, a right to claim debts arising from such an unprotected contract would equally fall outside the scope of the ECT.
These points were formally canvassed by the petitioner before the Court of Cassation, but were left substantially unaddressed in the reasoning of the 28 March 2018 judgment. The ball is therefore back in the Paris Court of Appeal which must decide, after a de novo review of the merits of the petition, whether to set aside the award. Regardless of the outcome, the Paris Court of Appeal will have another chance to shed more light on the 'French way' of interpreting the definition of 'investment' under the ECT.
For further information on this topic please contact Yuri Mantilla at Freshfields Bruckhaus Deringer by telephone (+33 1 4456 4456) or email (email@example.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
(4) See, for example, "Breaking: Energy Charter Treaty award is set aside in seat of arbitration, as court finds that contract debts did not qualify as a protected investment", Investment Arbitration Reporter, 13 April 2016; "Energy Charter Treaty award is revived by court, re-stoking debate as to whether a 'contribution' is an essential feature of an investment – or whether a mere 'claim to money' also qualifies", Investment Arbitration Reporter, 10 April 2018.
(8) See French Code of Civil Procedure, Article 626: "En cas de cassation suivie d'un renvoi de l'affaire à une juridiction, celle-ci est désignée et statue, le cas échéant, conformément à l'article L 431-4 du code de l'organisation judiciaire." ("In the event of cassation followed by a remand of the case to a court, the latter shall be appointed and shall rule, where appropriate, in accordance with Article L. 431-4 of the Code of Judicial Organization."); French Code of Judicial Organisation, Article L 431-4: "En cas de cassation, l'affaire est renvoyée, sous réserve des dispositions de l'article L. 411-3, devant une autre juridiction de même nature que celle dont émane l'arrêt ou le jugement cassé ou devant la même juridiction composée d'autres magistrats. Lorsque le renvoi est ordonné par l'assemblée plénière, la juridiction de renvoi doit se conformer à la décision de cette assemblée sur les points de droit jugés par celle-ci." ("In the event of cassation, the case shall be remanded, subject to the provisions of Article L411-3, to another court of the same nature as the court from which the decision or judgment was quashed or to the same court composed of different judges. Where the remand is ordered by the plenary assembly, the court ruling on remand must comply with the decision of that assembly on the points of law decided by it.").
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