French court upholds literal interpretation of investment treaty

Out-Law | 13 April 2018

French court upholds literal interpretation of investment treaty

ANALYSIS: A recent decision under the Energy Charter Treaty (ECT) by France’s highest court appears to signal a return to a literal interpretation by the French courts of international treaties.

The Court of Cassation, France’s Supreme Court, reinstated a $49 million award against Moldova that had been set aside by an investment treaty tribunal on jurisdictional grounds two years ago. Its decision indicates that, if host states wish to limit the material application of investment treaties, they must themselves define the types of ’investment’ they wish to protect.

The dispute arose from a failure to pay a debt owed under a contract for the supply of electricity. Ukrainian company Energoalians had agreed to supply electricity to a Moldovan state-owned company, with payments passing through an entity in the British Virgin Islands (BVI). When Moldova defaulted on a $22m payment for the electricity supplied by Energoalians, the BVI entity transferred its right to claim for the debt to the company, which then began treaty arbitration proceedings against the state.

In the Paris-seated arbitration, brought under both the 1996 Ukraine-Moldova Bilateral Investment Treaty and the ECT, the tribunal found that Moldova had breached the ECT’s fair and equitable treatment standard, but declined jurisdiction under the other treaty. It awarded Energoalians $49m.

In 2016, Moldova succeeded in setting aside the award before the Paris Court of Appeal. Although the judges agreed that Moldova was in breach of the fair and equitable standard under the ECT, they decided that the tribunal did not have jurisdiction. The judges considered that, under the ECT provisions, investments require an economic contribution. They ruled that the disputed investment in the case - the debt acquired from the BVI entity originating from the electricity supply contract - could not fall within the meaning of an ’investment’ under the ECT.

The Court of Cassation quashed this decision, and reinstated the original award, on 28 March 2018.

In its judgment, the court said that the appeal court had introduced a condition which the ECT did not contain. It said that the ECT does not specify the criteria that characterise an investment, but only provides a non-exclusive list of the types of assets that can be considered an investment. In deciding that the debt arising from the contract could not be an investment because of the reasons specified, the Paris Court of Appeal had in effect introduced a condition that did not exist in the ECT itself.

The case has now returned to the Paris Court of Appeal, where the other arguments to set aside the arbitral award put forward by Moldova will be considered.

Leonardo Carpentieri is an international arbitration expert at Pinsent Masons, the law firm behind

source: Out-Law