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Energy Charter Treaty and Turkey's Approach

Turkey’s Standing for the Evaluation of the Investment Environment under the Energy Charter Treaty

International investment law covers the promotion of foreign investments and their protection against undue interferences by the Host States. Establishing a favorable investment climate is now recognized as a crucial requirement of economic development. The primary sources of international investment law are bilateral and multilateral investment treaties (BITs-MITs), especially for specific investment areas or sectors with an investment protection regime like the Energy Charter Treaty (ECT). By establishing standards for legal stability and predictability of Host States’ actions, this kind of protection contributes to establishing a warm climate for foreign investors who are keen on being an actor in the economic progress of the Host State in the energy sector.

The Energy Charter Treaty and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects were signed in December 1994 and entered legal force in April 1998. The Treaty was developed based on the 1991 Energy Charter. While the latter document was drawn up as a declaration of political intent to promote energy cooperation, the Energy Charter Treaty is a legally binding multilateral instrument. Providing adequate protection and due process, mainly through the guarantee of ‘fair and equitable treatment’ and ‘full protection and security,’ international investment law ECT has intense repercussions on the legal system of the host States where it enhances the rule of law.

The general clause of ECT Article 10.1 provides: “Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favorable and transparent conditions for Investors of other Contracting Parties to make investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favorable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”

Article 10.3 of the ECT requires the most-favored-nation treatment. The ECT covers entry and stays of crucial personnel (Article 11), compensation for losses in case of emergencies or conflict (Article 12), conditions for expropriation including compensation (Article 13), and transfers related to investments (Article 14). The Treaty accepts the contracting States’ sovereignty over energy resources within international law. Thus, the State Parties enjoy the right to determine access to energy resources and property systems (Article 18). The dispute settlement regime (Articles 26 and 27) refers to investor-State arbitration (Article 26) as well as to State-to-State arbitration (Article 27). As to the law applicable to disputes, Article 26.6 of the ECT refers entirely to the Treaty itself and other rules and other standards of international law: “A tribunal [ ...] shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law”. In that regard, arbitral awards issued are binding and final upon the parties (Article 26.8 of the ECT).

Turkey, both as a part of ECT (signed on 17 December 1994; ratified on 13 February 2001 and entered into force on 4 July 2001) and energy transit routing, has a great deal in establishing a secure environment for energy investments. In today’s transition period that necessitates a delicate balance between geographic players and in the light of an increasing need for “renewable energy,” Turkey supports the green revolution in energy sources and is eager to provide much more protection for investors either in pre-investment or in post-investment stages. For this purpose, at the end of the Energy Charter Conference in September 2019, Turkey has proposed some policy options for ECT modernization.

Turkey is also a party to the ICSID Convention (Convention on the Settlement of Investment Disputes Between States and Nationals of Other States) and its dispute settlement mechanism. However, in its BITs, Turkey intends to cover investments only in the post-establishment phase. Additionally, under its notification submitted to ICSID on March 3, 1989, under Article 25/4 of the ICSID Convention, Turkey stated that: “only the disputes arising directly out of investment activities which have obtained the necessary permission, in conformity with the relevant legislation of the Republic of Turkey on foreign capital, and that have effectively started shall be subject to the jurisdiction of the Center…” pursuant to Article 25(4) of the ICSID Convention”. In this respect, an ICSID arbitral tribunal has jurisdiction to rule on investment disputes arising out of agreements that are already started to be performed. It is worth noting that Turkey’s notification regarding the concept of investment under art. 25/4 of the ICSID Convention is interpreted separately from its consent to arbitrate before ICSID (PSEG v. Turkey, Decision on Jurisdiction, 4 June 2004, pgf 136).

It is worthy and valuable to briefly mention some of the issues to be improved that Turkey faces in the practice of the ECT.

  • Turkey uses a non-exhaustive, illustrative list of “investment” definitions; giving reference to characteristics of investment (Salini Test), including; such characteristics as the commitment of capital or other resources, the expectation of gain or profit, the assumption of risk, contribution to the economy, or a specific duration to exclude a one-time speculative type of investments from the scope of its treaties. According to the Turkish Law approach, an “investment” shall fulfill specific characteristics, such as the commitment of capital, the expectation of profit, the assumption of risk, the contribution to the host economy, a particular duration, investment to be per the laws and regulations of the host State at the time when the investment is made.

  •  Another critical issue in this regard is interpreting the “fair and equitable treatment” standard. Turkey prefers to establish a closed list of measures that are considered a breach of the “fair and equitable treatment” standard as it was done under recent IIAs to prevent the broad interpretations of the arbitral tribunals about the meaning of “fair and equitable” treatment.

  • It has been observed that some investors have tried to use the more favorable procedural and dispute resolution provisions in a country’s web of investment treaties through the use of the most favored nation (“MFN”) clause to benefit from these more favorable provisions. Turkey proposes to specify that MFN treatment does not include procedural and dispute resolution provisions, or mechanisms found in other International Investment Agreements (IIAs), either existing or future IIAs, and to clarify that the MFN obligation requires a comparison of investors/investments that are “in like circumstances” or “in like situations.”

  • Clarification of the ‘most constant protection and security’ refers only to physical protection introduced in the recent IIAs would seem to codify the dominant opinion of the ECT arbitral tribunals. Furthermore, under its IIAs, Turkey follows a method of linking “full protection and security” to customary international law to limit broad interpretations by the arbitral tribunals. It could be clarified that ‘most constant protection and security’ refers only to physical security. Accordingly, Article 10(1) of the ECT could be amended to reflect such a clarification.

  • There is a general trend to clarify the notion of “indirect expropriation” which constitutes one of the significant problems in the investment protection regime. As a rule, this clarification codifies conclusions reached by the arbitral tribunals. Turkey follows this policy to clarify “indirect expropriation” in its IIAs. In that regard, it would be helpful to explain the notion of indirect expropriation within the ECT or an Annex on “Indirect Expropriation” as it was done between Turkey-Mexico BIT (2013) and Turkey-Lithuania BIT (2018). Significantly, Article 13 of the ECT could be clarified by establishing criteria for “indirect expropriation,” notably referring to the measure's economic impact and character.

  • Having faced litigations brought by its investors under the ECT and its BITs, Turkey has adopted a policy to incorporate a comprehensive and detailed “Denial of Benefits Clause” in its IIAs to exclude shell companies, as well as third-country investors and its investors from the coverage of the term “investor” to prevent frivolous claims. The definition of “own or control” may also be provided to define who the actual owner of an investment is. Thus, Article 17 of the ECT could be rephrased to prevent a Contracting Party’s investors from benefiting from the ECT and bringing claims against its State.

  • Turkey has been subject to many cases based on frivolous claims. Early discharge of frivolous lawsuits is essential, and ordering security costs for the litigant would contribute to preventing such cases. Furthermore, it is supposed that Third-Party Funding provisions may help decrease the number of frivolous and unmeritorious claims submitted to international arbitration.

  • Another debated issue relates to the amendments to the third-party funding provisions. The new approach imposes an obligation on the parties to disclose whether they have Third-Party Funding, the source of the funding, and to keep such disclosure of information current throughout the proceedings. Transparency in third-party financing will reduce the number of frivolous cases. Thus, it is proposed to draft a “Declaration on Third-Party Funding” with substantive content concerning the result of the UNCITRAL related discussions.

    @Ömer Kesikli

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