Dechert OnPoint: Georgia & the Energy Charter Treaty

The 1994 Energy Charter Treaty (“ECT”) was ratified by Georgia on 22 February 1995 and entered into force on 16 April 1998 (the “Effective Date”). With regard to related agreements, Georgia also became party to the 1994 Protocol on Energy Efficiency and Related Environmental Aspects and the 1998 Amendment to the Trade related provisions of the ECT. The ECT establishes legal protections for foreign investment in the energy sector, provides for the transit of energy and energy products without discrimination as to origin, destination or ownership, promotes transparency and competition, and aims at bringing about non-discriminatory access to the sector.

Importantly, the ECT provides a comprehensive system for settling investment disputes, which is similar to that offered by the bilateral investment treaties (“BITs”) concluded worldwide. Under the ECT, the most important mechanism for settling investor–state disputes is final and binding arbitration before the International Centre for the Settlement of Investment Disputes (the “ICSID”) or the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC”), or ad hoc arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”).

Dechert is publishing a series of OnPoint articles providing review and explanation of Georgia’s basic obligations under the ECT. This edition of OnPoint provides an overview of the investment aspects of the ECT.

THE MAIN OBLIGATIONS OF MEMBER STATES REGARDING INVESTMENT

Part III of the ECT, titled “Investment promotion and protection”, offers protections comparable to those provided by most BITs. The rights guaranteed under the ECT include fair and equitable treatment, constant protection and security of investments, prohibition of discriminatory measures, most-favored-nation treatment, and payment of prompt, adequate and effective compensation for any nationalization, expropriation or other measures having an effect equivalent to nationalization or expropriation. However, it’s first necessary to consider what those rights actually cover and who can benefit from them.

Definition of investments under the ECT:

The term “Investment” is defined at Article l(6) of the ECT. This provision provides a non-exhaustive enumeration of the types of assets that can be considered investments. Adopting an approach similar to that of many BITs, this definition extends its coverage to “every kind of asset” which may be “owned or controlled directly or indirectly” by an investor. The Treaty itself provides guidance as to the meaning of “control” in the Understandings to the Final Act of the European Energy Charter Conference. According to the final act, “control” of an Investment means “control in fact”, which is determined after an examination of the circumstances of each situation.

As for the time period of the ECT’s application, “Investment” includes all investments whether existing at the time of or made after the date of entry into force of the ECT, provided that the treaty applies to matters affecting existing investments after its entry into force.

Article l(6) of the ECT further stipulates that the term “Investment” refers to any investment associated with an economic activity in the energy sector, something consistent with the sectoral nature of the ECT. Article l(5) of the ECT defines “economic activity in the energy sector” as “economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included -in Annex NI, or concerning the distribution of heat to multiple premises.”

Definitions of an investor under the ECT:

The definition of “Investor” is provided in Article l(7) of the ECT, according to which an “Investor” is “any natural person having the citizenship or nationality of or who is permanently residing in a Contracting Party in accordance with its applicable law and any company or other organization organized in accordance with the law applicable in a Contracting Party.”

THE PROTECTIONS GUARANTEED TO INVESTMENTS UNDER THE ECT

The ECT establishes that an investment made by an Investor of another Contracting Party must be treated no less favorably than the investments of domestic investors (“national treatment” or “NT”) or investors of any third country (“most favored nation” treatment or “MFN”). Apart from standard exceptions (e.g. on grounds of national security), the only specific exception to the better of MFN or NT rule is in respect of direct taxes; here fairness requires that the taxation of the parent country be taken into account. This rule of according “national treatment” also applies to portfolio investment, thus reassuring those who wish to buy shares in an enterprise controlled by a domestic company.

Apart from the above, the ECT lays down certain legal requirements of the contracting parties, including:

• Fulfilling any obligations a Contracting Party has entered into with an investor of another Contracting Party;

• Permitting investors to employ key personnel of their choice, regardless of nationality, so long as such personnel have work and residence permits;

• Paying compensation for any losses suffered by a foreign investor in time of war or civil disturbance at least as fully as for losses suffered by the country’s own nationals and prompt, adequate and effective compensation if the loss results unnecessarily from the country’s own actions;

• Paying prompt, adequate and effective compensation for any assets expropriated. The compensation has to amount to the market value immediately before it was affected by the intention to expropriate; and

• Allowing a foreign investor to freely transfer out of the country, in fully convertible currency, the capital he/she invested as well as any associated earnings.

On a more general note, the obligations of contracting parties include the encouragement and creation of stable, equitable, favorable and transparent conditions for the Investors of other Contracting Parties to make Investments in its Area. Such conditions include the commitment to accord fair and equitable treatment at all times to Investments of Investors of other Contracting Parties.

Investments shall also enjoy 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.

CONCLUSIONS

The ECT and its related obligations are of great importance for Georgia as it wishes to expand its impact on the region’s energy efficiency and to better exploit its energy resources. In that light, we will continue to review the different aspects of the treaty in our upcoming editions of Dechert OnPoint.

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Note: This article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by associates Irakli Sokolovski, Ana Kostava, Ana Kochiashvili and Natia Lapiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, an international specialist Law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.