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Memorandum on Possible Implications under Denmark’s Investment Treaty
Commitments of the Draft Bill to Amend the Danish Continental Shelf Act
(submitted for public consultation on 23 June 2017)
Prof. Dr. Stephan Schill, LL.M. (NYU)*
Executive Summary
The proposed amendment of the Danish Continental Shelf Act raises concerns as to its lawfulness
under the obligations Denmark has undertaken under the Energy Charter Treaty (ECT) as it would
apply to the pending application for a construction permit by Nord Stream 2 AG. The ECT applies to
Nord Stream Pipeline 2 (NSP2) because both Denmark and Switzerland are Contracting Parties to the
ECT, and because Nord Stream 2 AG qualifies as a Swiss investors (under Article 1(7)(a)(ii) ECT) that
has made an ‘investment’ in Denmark pursuant to Article 1(6) ECT. Only with respect to the part of
the pipeline that is set to be built in Denmark, Nord Stream 2 AG has spent sums in the order of 60
million Euros for administrative steps, contracts and expenditures, including for permitting, surveying
and logistics.
The ECT provides for protection under international law to investments in the energy sector
made by investors from another contracting state. This protection is independent of Denmark’s
domestic, including constitutional law and the law of the European Union. The ECT protects, inter
alia, against expropriations and measures having an equivalent effect that are not accompanied by
compensation (Article 13 ECT). It also requires contracting states to provide for ‘stable’ and
‘transparent’ investment conditions and ‘fair and equitable treatment’ (Article 10(1) ECT). Moreover,
under Article 10(12) ECT states have to provide in their domestic law for ‘effective means for the
assertion of claims and the enforcement of rights with respect to investments’. Foreign investors can
claim for any damages resulting from breach of these commitments through the investor-state
dispute settlement mechanism provided for in Article 26 ECT.
The introduction of the new requirement arguably has an effect that is equivalent to an
expropriation, if applied retroactively to deny NSP2, thus contravening Article 13 ECT. Since NSP2
cannot be implemented without the construction permit, an amendment of the Danish Continental
Shelf Act that would allow the refusal of the applied-for permit would destroy Nord Stream 2 AG’s
investment. Such a refusal would only be legal under Article 13(1) ECT if accompanied by
compensation. In addition, the fact that no reasons have to be provided by the Ministry for Foreign
Affairs in providing its recommendation against a project prevents Nord Stream 2 AG from having
recourse to the prompt review required by Article 13(2) ECT.
The proposed amendment of the Danish Continental Shelf Act arguably also violates the right
to stable and transparent investment conditions and to stability under the fair and equitable
treatment granted by Article 10(1) ECT. This provision protects against unreasonable and
*
Professor of International and Economic Law and Governance, University of Amsterdam; Rechtsanwalt
(RAK Frankfurt); Attorney-At-Law (New York); Member of the List of Conciliators of the International Centre for
Settlement of Investment Disputes (ICSID); Editor-in-Chief of The Journal of World Investment & Trade.
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disproportionate change of the regulatory framework in place, in particular if that change applies
retroactively. Furthermore, Nord Stream 2 AG has a legitimate expectation that its application for a
construction permit is dealt with under the existing regulatory framework. The retroactive
introduction of the new requirement would upset the stability required by Article 10(1) ECT. This is
all the more the case as the virtually identical Nord Stream Pipeline 1 had been approved by Danish
authorities in the past.
The introduction of the new requirement is also not an exercise of Denmark’s legitimate
‘right to regulate’ as the proposed bill excludes central due process rights, such as a reason-giving
requirement, prior consultation and access to documents, which are usually available under Danish
administrative law. Instead, the lack of those, as well as the uncertainty for foreign investors to know
beforehand what criteria their project has to fulfill to meet Denmark’s foreign-, security- and defense
policy interests, arguably breaches the obligation under Article 10(1) ECT to provide transparent
investment conditions. In addition, the exclusion of the reason-giving requirement arguably also
results in a breach of Article 10(12) ECT, which requires states to provide in their domestic laws
effective means for the assertion of claims and the enforcement of rights with respect to
investments.
Finally, in addition to liability under the ECT, the proposed amendment to the Danish
Continental Shelf Act may also expose the Kingdom of Denmark to international responsibility,
including for the payment of damages, for breach of its commitments to promote and protect foreign
investments under the bilateral investment treaty between Denmark and the Russian Federation in
light of the detrimental economic effects it has on the investment of the sole shareholder of Nord
Stream 2 AG and Nord Stream AG, the Russian energy company Gazprom, in NSP2.
I.
Summary of Instructions
1.
I have been asked by Nord Stream 2 AG, Baarerstrasse 52, CH-6300 Zug, Switzerland to
provide, in the form of a short legal analysis, possible arguments based on the law of international
investment protection against the amendment of Denmark’s Continental Shelf Act, respectively the
application of this amendment to Nord Stream 2 AG’s existing application for the necessary
(construction) permit for the Nord Stream Pipeline 2 (NSP2). The resulting arguments are set out
below (Parts III and IV), preceded by a summary overview over the content and mechanism of
protection offered by international investment treaties (Part II).
2.
The present analysis is ultimately to be used as a basis to address a more general audience in
the context of ongoing public consultation procedures in Denmark relating to the above mentioned
legislative amendment in order to protect commercial interests of Nord Stream 2 AG. I have not been
asked, however, to provide a comprehensive expert analysis of the implications of the proposed
amendment and its application to NSP2 under the investment treaties to which Denmark is a party. I
do therefore not take a view on the lawfulness or unlawfulness of the above mentioned measures
under international investment law, nor do I advise on the legal, political, economic and other risks of
such arguments. For this reason, legal or other counterarguments to the arguments presented below
are only occasionally, and certainly not comprehensively, addressed. Similarly, the arguments in
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favor of the positon of Nord Stream 2 AG are not comprehensively, but only occasionally, backed up
by authorities. Any of this would require more in-depth expert analysis.
3.
What is also not addressed in the present memo are possible arguments, in light of the
specific factual circumstances, against the proposed amendment of the Danish Continental Shelf Act
based on limitations under the United Nations Convention on the Law of the Sea (UNCLOS) of ‘the
right of the coastal State to establish conditions for cables or pipelines entering its territory or
territorial sea’ mentioned in Article 79(4) UNCLOS or limitations of Denmark’s sovereignty stemming
from the transit rights laid down in Article 7 of the Energy Charter Treaty (ECT). Possible breaches of
these commitments could potentially be used to claim an independent breach of Article 10(1)
sentence 4 ECT, which requires treatment of foreign investors that is no ‘less favorable than that
required by international law, including treaty obligations.’ To pursue this avenue of argument
further would equally require more in-depth research and expert advice.
4.
For purposes of the present analysis, I have been provided with the following documents and
information, the content and veracity of which I have not, however, verified:
−
−
the ‘Draft Bill to Amend the Danish Continental Shelf Act’ (undated);
the ‘Consolidated Act no. 1101 ... on the Continental Shelf’, which includes the amendments
proposed by the above draft bill;
a summary of the core changes affecting the interests of Nord Stream 2 AG in the successful
implementation of NSP2; and
a draft ‘Memo on Constitutional Issues in the Draft Bill” by the law offices of Bech-Bruun,
Copenhagen, dated 6 July 2017.
−
−
5.
According to the information provided to me, the draft bill, if it enters into law, will have the
following consequences:
a. A permit for laying of transit pipelines in the territorial waters will only be issued if this is
compatible with national foreign-, security- and defense policy interests.
b. The Minister for Energy, Utilities and Climate will obtain a recommendation from the
Minister for Foreign Affairs that include national foreign-, security- and defense policy
interests. The recommendation of the Minister for Foreign Affairs will either be positive or
negative (nothing in between). In case the recommendation of the Minister for Foreign
Affairs is positive, the permit application will be subject to the usual environmental and
safety assessment. In case the recommendation of the Minister for Foreign Affairs is
negative, the Minister for Energy, Utilities and Climate must decline the permit application
on this basis.
c. The recommendation of the Minister for Foreign Affairs regarding national foreign-, security-
and defense policy interests will be based on a wide, political discretionary basis. A number
of diversified considerations can be included in the recommendation, including
considerations for national security and defense, politics, economics and/or military
capacities, and foreign policy, including European and alliance interests.
d. The recommendation of the Minister for Foreign Affairs will not be a decision falling within
the scope of the Public Administration Act, therefore the Minister for Foreign Affairs is not
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subject to the rules under the Public Administration Act regarding consultation with parties
involved, access to documents, or the obligation to provide justification for the
recommendation.
e. The Minister for Energy, Utilities and Climate’s decision to decline the permit application on
the basis of the recommendation of the Minister for Foreign Affairs cannot be appealed to
another public authority. The case can be brought before the Danish courts by instituting
legal action against the Minister for Energy, Utilities and Climate. The limitation period is 6
months.
f.
The act for the amendment of the Continental Shelf Act is presumed to enter into force on 1
January 2018.
g. The act will apply to applications for laying of pipelines which are received before the act
enters into force, but where the processing of the applications is not finalized. This means
that the permit application for the Nord Stream 2 pipeline project may be subject to the act if
the permit application is not processed by 1 January 2018.
h. Companies are obliged to inform the Danish Public Administrations about material changes
within 3 days.
6.
It is my understanding that the Danish Government, or any of its ministries or agencies, has
not entered into any specific agreements with Nord Stream 2 AG relating to NSP2, nor has given
individual assurances that the applied-for construction permit would be granted under the present
legislation. What I understand to be the case under Danish law, however, is that under the existing
legislation the applied-for construction permit can only be refused based on environmental and
safety concerns and that such concerns are not present, in particular given that NSP2 is to follow
exactly the same course as the existing Nord Stream 1 pipeline and does not raise any different
concerns in terms of environmental impact or safety. Finally, I understand that Nord Stream 2 AG
does not have subsidiaries that are directly engaged in the pipeline project, neither in Denmark nor
elsewhere, but is itself the entity undertaken the planning, construction and later operation of the
pipeline. Nord Stream 2 AG, I understand, is wholly owned by the Russian company Gazprom. NSP2 is
in turn co-financed on a non-equity basis by major energy companies from Austria, France, Germany,
and The Netherlands.
II.
Protection Mechanisms Offered by International Investment Treaties to Which
Denmark Is a Party
7.
Foreign investors in the European Union (EU) do not only enjoy the protection of their
economic activities under domestic law, as well as EU law. They can also, under certain
circumstances, avail themselves of independent protection under international law, in particular
based on international investment treaties to which the host state and the investor’s home state are
party.
8.
These treaties, which are generally concluded on a bilateral basis, but also include
multilateral agreements, such as the North-American Free Trade Agreement (NAFTA) or the Energy
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Charter Treaty (ECT),
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provide for protection of foreign investors against a catalogue of undue
government interferences with a foreign investment and allow investors to claim for damages arising
out of that interference directly against the host state through investor-state dispute settlement
mechanisms provided for under the treaties. Dispute settlement options usually include investor-
state arbitration (under a variety of arbitration rules) without the need for prior recourse to the
domestic courts of the host state.
9.
On substance, investment treaties generally provide for protection against (direct and
indirect) expropriations without compensation, national and most-favored-nation treatment, ‘fair
and equitable treatment’, which includes the protection of ‘legitimate expectations’, a certain degree
of consistency, predictability, and stability of the regulatory framework, transparent procedures, due
process rights and the right to access to justice, ‘full protection and security’, protection against
arbitrary and discriminatory measures, and a right to free capital transfer.
10.
In the present situation, Nord Stream 2 AG could potentially avail itself of protection under
the ECT (in particular Articles 10 and 13) (see Part III). Gazprom, in turn, as Nord Stream 2 AG’s sole
shareholder could, albeit to a more limited extent, avail itself of protection under the bilateral
investment treaty between Denmark and the Russian Federation (Denmark-Russia BIT) (Articles 2, 3
and 4)
2
(see Part IV).
11.
The protection granted under the ECT and the Denmark-Russia BIT provides possible
arguments against the proposed amendment of Denmark’s Continental Shelf Act, respectively
against the application of this amendment to Nord Stream 2 AG’s existing application for the
necessary (construction) permit for NSP2.
3
Investment treaty commitments would likely not be
violated by the amendment as such, but by its application to the concrete project. Furthermore, only
if the permit in the end is refused will there be any damage and hence a breach of Denmark's ECT
commitment. If the permit is granted even under the new criteria, there is nothing to complain
about. However, the bill suggests already that the new criteria will also apply to existing applications.
For this reason, it is arguable that the proposed amendment as such already affects Nord Stream 2
AG’s investment treaty rights as it creates an uncontrollable risk of refusal.
12.
Protection against such measures under these treaties requires 1) that the respective treaty
applies (namely that the activities thus far undertaken qualify as a covered ‘investment’ which is
made by a covered ‘investor’) and 2) that the measures in question interfere with one of the rights
laid down in the respective treaty.
Energy Charter Treaty (signed 17 December 1994, entered into force 16 April 1998) 2080 UNTS 95.
Agreement between the Government of the Kingdom of Denmark and the Government of the Russian
Federation concerning the Promotion and Reciprocal Protection of Investments, signed 4 Nov 1993, entered
into force 28 August 1996.
3
Other investment treaties of Denmark do not seem to be of direct relevance as none of the entities
co-funding NSP2, provided their financing qualified as an investment, seems to be from a state that has an
investment treaty with Denmark other than the ECT. The possible protection of the co-financiers is, therefore,
not further addressed in the present memo as no additional investment treaties other than the ECT would be
available in the relationship between Denmark and the co-financiers’ home states. What is also not considered
in the present text is whether shareholders of Gazprom could be protected under an investment treaty with
Denmark.
2
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III.
Responsibility of Denmark for Breach of the Energy Charter Treaty
13.
The proposed amendment of the Danish Continental Shelf Act, respectively its application to
Nord Stream 2 AG’s application for a construction permit for NSP2, raises concerns about compliance
of Denmark with its commitments concerning the protection of foreign investors and their
investments under the ECT. This is particularly the case as the application of the proposed
amendment can be argued to qualify as a retroactive under the theory that an investment of Nord
Stream 2 AG already exists and that Nord Stream 2 AG had the legitimate expectation that a permit
would be granted under the existing legislative framework. This notwithstanding the notion of
retroactivity that international investment law operates with is unsettled. The qualification of the
proposed amendment as retroactive would, however, maximize the exposure to risk that Denmark is
facing under its investment treaty commitments.
1.
Overview over the Protection Granted under the ECT to Foreign Energy Investors
14.
The ECT provides protection under international law to investments in the energy sector
made by investors from another Contracting State. This protection is independent of both Danish
law, including Danish constitutional law, and EU law.
15.
Substantive investment protection under the ECT includes, inter alia, protection against
expropriations and measures having equivalent effect that are not accompanied by compensation
(Article 13 ECT), protection against measures that contravene an investor’s right to a ‘stable’
investment conditions and to ‘fair and equitable treatment’ (Article 10(1) ECT), and protection
against measures that interfere with any obligation the Contracting State has entered into with
foreign investors (Article 10(1) ECT). Moreover, Article 10(12) ECT requires States to provide in their
domestic law for ‘effective means for the assertion of claims and the enforcement of rights with
respect to investments’.
16.
A possible infringement of all of these rights is at stake in respect of the proposed
amendment to the Danish Continental Shelf Act and its application to NSP2, as explained in more
detail below. Ultimately, these rights can be enforced by foreign investors asking for the payment of
damages arising out of internationally wrongful behavior through the investor-state dispute
settlement mechanism provided for in Article 26 ECT.
2.
Application of the ECT to NSP2
17.
The ECT applies to NSP2. Both Denmark and Switzerland are Contracting Parties to the ECT.
As a corporation under Swiss Law, Nord Stream 2 AG qualifies as an ‘investor’ in the sense of Article
1(7)(a)(ii) ECT. Nord Stream 2 AG is, as required by that provision, ‘a company … organized in
accordance with the law applicable in [Switzerland]’.
18.
Nord Stream 2 AG also has an ‘investment’ in Denmark as defined in Article 1(6) ECT.
Pursuant to that provision
‘Investment’ means every kind of asset, owned or controlled directly or
indirectly by an Investor and includes:
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(a) tangible and intangible, and movable and immovable, property, and any
property rights such as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity
participation in a company or business enterprise, and bonds and other debt of
a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an
economic value and associated with an Investment;
(d) Intellectual Property;
(e) Returns;
(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.
…
‘Investment’ refers to any investment associated with an Economic Activity in
the Energy Sector …
19.
‘Economic Activity in the Energy Section, in turn, is defined in Article 1(5) ECT to mean
an economic activity concerning the exploration, extraction, refining,
production, storage, land transport, transmission, distribution, trade, marketing,
or sale of Energy Materials and Products …
20.
The notion of what is protected under the ECT as an investment is particularly broad. It
includes ‘every kind of asset’, including, but not limited to, those specifically listed, which is
‘associated with’ ‘an economic activity concerning the exploration, extraction, refining, production,
storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and
Products’. Transmission includes the operation of a gas pipelines.
4
21.
Against this broad definition, it is clear that NSP2 itself qualifies as an investment made by
Nord Stream 2 AG. This project also has a territorial nexus to Denmark as it passes through Danish
territorial waters and Denmark’s Exclusive Economic Zone, which are both part of the ‘Area’ to which
the obligations under Articles 10 and 13 ECT apply territorially.
5
22.
Furthermore, already at the present stage, Nord Stream 2 AG has not only incurred pre-
investment expenditure,
6
but has made substantial commitments towards the planning and
4
This is clarified by Article 7(10)(b) ECT, which states that transmission of energy is at stake in the
context of gas pipelines. Article 7(10)(b) ECT mentions ‘high-pressure gas transmission pipelines’ among the
‘Energy Transport Facilities’ it defines.
5
See Article 1(10) ECT (‘“Area” means with respect to a state that is a Contracting Party:
(a) the territory under its sovereignty, it being understood that territory includes land, internal waters and the
territorial sea; and (b) subject to and in accordance with the international law of the sea: the sea, sea-bed and
its subsoil with regard to which that Contracting Party exercises sovereign rights and jurisdiction.’).
6
Note that some investment treaty tribunals have doubted whether pre-investment expenditure is
protected under investment treaties. See eg
Mihaly International Corporation v. Democratic Socialist Republic
of Sri Lanka,
ICSID Case No. ARB/00/2, Award (15 March 2002) paras 48-51;
William Nagel v Czech Republic,
SCC Case 049/2002, Award (9 September 2003) paras 325-329. Others consider that there already is an
investment even prior to permits or licenses being issued provided that the project is sufficiently concrete and
has advanced beyond the initial planning stages. See
Nordzucker AG v. Poland,
ad hoc Arbitration, Partial
Award (10 December 2008) paras 160-185,
PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited
Sirketi v. Republic of Turkey,
ICSID Case No. ARB/02/5, Award, 19 January 2007, para 304 (‘An investment can
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implementation of the NSP2, which is covered as an investment under the ECT. Only with respect to
the part of the pipeline that is set to be built in Denmark, Nord Stream 2 AG has spent sums in the
order of 60 million Euros for administrative steps, contracts and expenditures. This includes
investment for permitting, surveying and logistics, including a contract with the Danish company Blue
Water Shipping for transport of the pipes of a value of some 40 million Euros. The investment for the
pipes to be placed in Denmark amounts to around 260 million Euros. These investments have been
made in reliance on the continuous validity and application of the domestic legal framework in place
in Denmark, which governs the need for, but also the right to, as well as the administrative
procedure for applying for, a construction permit for the part of NSP2 that crosses Danish territorial
waters.
23.
What is also highly relevant is that at the time of making its investment and applying for the
construction permit, Nord Stream 2 AG could rely on the fact that NSP2 is scheduled to follow exactly
the same route as the Nord Stream 1 pipeline and does not raise any different environmental or
safety concerns. Consequently, the granting of the necessary construction permit is a mere technical
step in the realization of NSP2, and does not constitute a condition of the project the meeting of
which was subject to any commercial or political risk.
3.
Interference with Substantive Rights under Article 13 ECT
24.
The investments of foreign investors in the energy sector, such as the investment of Nord
Stream 2 AG in NSP2, are protected under Article 13 ECT against expropriations and measures having
equivalent effect that do not meet the stipulated requirements (public purpose, non-discriminatory
application, due process, and compensation).
25.
Article 13 ECT provides in relevant part
(1) Investments of Investors of a Contracting Party in the Area of any other
Contracting Party shall not be nationalised, expropriated or subjected to a
measure or measures having effect equivalent to nationalisation or
expropriation (hereinafter referred to as ‘Expropriation’) except where such
Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective
compensation.
Such compensation shall amount to the fair market value of the Investment
expropriated at the time immediately before the Expropriation or impending
Expropriation became known in such a way as to affect the value of the
Investment (hereinafter referred to as the ‘Valuation Date’).
…
(2) The Investor affected shall have a right to prompt review, under the law of
the Contracting Party making the Expropriation, by a judicial or other competent
take many forms before actually reaching the construction stage, including most notably the cost of
negotiations and other preparatory work leading to the materialization of the Project…’).
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and independent authority of that Contracting Party, of its case, of the valuation
of its Investment, and of the payment of compensation, in accordance with the
principles set out in paragraph (1).
…
26.
Since NSP2 cannot be implemented without the construction permit to be granted by
Denmark, an amendment of the Danish Continental Shelf Act that would allow the refusal of the
applied-for permit would arguably destroy the entire investment. While Nord Stream 2 AG would not
be formally expropriated, a refusal to grant the permit could be argued to have an effect that is
equivalent to an expropriation. Such a refusal, even if for a public purpose, would then require
compensation of Nord Stream 2 AG.
7
In addition, the fact that no reasons have to be provided by the
Ministry for Foreign Affairs in providing its recommendation against the project, would not allow
Nord Stream 2 AG to have recourse to the prompt review required by Article 13(2) ECT.
4.
Interference with Substantive Rights under Article 10 ECT
27.
In addition to a possible breach of Article 13 ECT, Article 10 ECT grants a variety of rights to
investments in the energy sector by foreign investors, such as NSP2.
28.
Article 10 ECT provides in relevant part
(1) Each Contracting Party shall, in accordance with the provisions of this Treaty,
encourage and create stable, equitable, favourable 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 favourable 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.
…
(12) Each Contracting Party shall ensure that its domestic law provides effective
means for the assertion of claims and the enforcement of rights with respect to
Investments, investment agreements, and investment authorisations.
29.
Article 10 ECT contains a number of different standards of protection of foreign investors in
the energy sector that are relevant for assessing the lawfulness of the proposed amendment of the
Danish Continental Shelf Act under the ECT. These are first the duty to provide a stable legal
framework, the duty to protect an investor’s legitimate expectations as part of the duty to provide
A similar argument was raised by Swedish power producer Vattenfall in its first claim against Germany
under the ECT concerning the refusal of the City of Hamburg to grant an operating license for a coal-fired
power plant with the specification and environmental conditions that were informally agreed between the
immediately preceding City Government and the power company. See
Vattenfall AB, Vattenfall Europe AG and
Vattenfall Europe Generation AG and Co. KG
v.
Federal Republic of Germany,
ICSID Case No. ARB/09/06,
Request for Arbitration (30 March 2009) para 54(v) <https://www.italaw.com/sites/default/files/case-
documents/ita0889.pdf> accessed 12 July 2017.
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fair and equitable treatment against unreasonable and disproportionate change of the regulatory
framework in place, the duty to provide transparency, the duty to observe any obligations entered
into with a foreign investor, and the duty to provide effective means for asserting claims and
enforcing rights. All of these rights can be argued to be affected by the proposed amendment of the
Danish Continental Shelf Act.
a.
Stability and Protection of Legitimate Expectations
30.
Article 10(1) ECT provides protection to foreign investors in the energy sector, such as Nord
Stream 2 AG, against unreasonable and disproportionate changes of the regulatory framework in
place. This duty can be grounded in either the duty to ‘create stable ... conditions for Investors … to
make Investments’ laid down in Article 10(1) sentence 1 ECT, the duty to provide a stable legal
framework as part of the fair and equitable treatment standard, or the duty to protect an investor’s
‘legitimate expectations’ as part of the standard of fair and equitable treatment mentioned in Article
10(1) sentence 2 ECT.
31.
In fact, as the Tribunal in
Plama v. Bulgaria
has found, the duty to provide a stable legal
framework mentioned in the first sentence of Article 10(1) ‘extends ... to all stages of the Investment
and not only to the pre-Investment matters’.
8
As regards the fair and equitable treatment standard,
it is equally widely accepted that this standards contains to duty to provide a stable legal framework,
either as an independent element of fair and equitable treatment,
9
or as part of the duty to protect
the legitimate expectations of foreign investors against change.
32.
The duty to provide a stable legal framework encompasses ‘the “reasonable and justifiable”
expectations that were taken into account by the foreign Investor to make the Investment.’
10
While
often used to address non-compliance with contractual promises or other specific assurances made
by the host state, various tribunals have also considered that legitimate expectations could
encompass the observance and application of a host state of its own laws, including those relating to
the grant of an administrative license or permit.
11
While the protection of an investor’s legitimate
Plama Consortium Limited v. Bulgaria,
ICSID Case No. ARB/03/24, Award (27 January 2008) para. 172.
See
Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic,
ICSID Case No. ARB/14/3,
Award (27 December 2016) para 315(c).
10
Plama Consortium Limited v. Bulgaria,
ICSID Case No. ARB/03/24, Award (27 January 2008) para. 176.
See also
Electrabel S.A. v. Hungary,
ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and
Liability (30 November 2012) para 7.75 (stating that ‘[i]t is widely accepted that the most important function of
the fair and equitable treatment standard is the protection of the investor’s reasonable and legitimate
expectations’).
11
See eg
Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States,
ICSID Case No.
ARB(AF)/00/2, Award (29 May 2003) para 154 (stating that fair and equitable treatment ‘requires the
Contracting Parties to provide to international investments treatment that does not affect the basic
expectations that were taken into account by the foreign investor to make the investment. The foreign investor
expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its
relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will
govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to
be able to plan its investment and comply with such regulations.’). Other tribunals are critical whether
legitimate expectations can arise from general, legislative provisions; they instead require specific, individual
assurances. See eg
Crystallex International Corporation v. Bolivarian Republic of Venezuela,
ICSID Case No.
ARB(AF)/11/2, Award (4 April 2016) para 552;
Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal
Hermanos S.A. v. Uruguay,
ICSID Case No. ARB/10/7, Award (9 July 2016) para 426. Still, even in such cases,
9
8
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expectations does not freeze the legal and regulatory and framework in place, it can be violated
when conditions for the approval of a license or permit are changed through subsequent alteration in
the regulatory framework.
12
33.
Regulatory change has been found to be in breach of the protection of an investor’s
legitimate expectations in particular in situations where the change was ‘fundamental’ and did not
take into account the circumstances of existing investments made in reliance upon the prior regime.
As the Tribunal in
Eiser Infrastructure v. Spain
recently held:
Taking account of the context and of the ECT’s object and purpose, the Tribunal
concludes that Article 10(1)’s obligation to accord fair and equitable treatment
necessarily embraces an obligation to provide fundamental stability in the
essential characteristics of the legal regime relied upon by investors in making
long-term investments. This does not mean that regulatory regimes cannot
evolve. Surely they can. ‘[T]he legitimate expectations of any investor [...] [have]
to include the real possibility of reasonable changes and amendments in the
legal framework, made by the competent authorities within the limits of the
powers conferred on them by the law.’ However, the Article 10(1) obligation to
accord fair and equitable treatment means that regulatory regimes cannot be
radically altered as applied to existing investments in ways that deprive
investors who invested in reliance on those regimes of their investment’s
value.
13
34.
Thus, while certain changes – in the sense of evolution of the regulatory framework – are
possible and are to be expected by foreign investors, the fair and equitable treatment standard
under Article 10(1) ECT protects against radical and fundamental changes to a host state’s regulatory
framework in place.
35.
The proposed amendment of the Danish Continental Shelf Act violates the stability
requirement arising from Article 10(1) ECT. Nord Stream 2 AG has a legitimate expectation that its
application for a construction permit is dealt with under the existing regulatory framework. The
retroactive introduction of a new requirement, namely that the project must also be in line with
Denmark’s national foreign-, security- and defense policy interests, could, if applied to NSP2, result in
the effective destruction of Nord Stream 2 AG’s investment, without taking into account the
investor’s reliance on being treated under the regulatory presently in place. This is all the more the
tribunals often consider that regulatory change must be proportionate. See
Blusun S.A., Jean-Pierre Lecorcier
and Michael Stein v. Italian Republic,
ICSID Case No. ARB/14/3, Award (27 December 2016) para 372 (stating
that ‘[i]n the absence of a specific commitment, the state has no obligation to grant subsidies such as feed-in
tariffs, or to maintain them unchanged once granted. But if they are lawfully granted, and if it becomes
necessary to modify them, this should be done in a manner which is not disproportionate to the aim of the
legislative amendment, and should have due regard to the reasonable reliance interests of recipients who may
have committed substantial resources on the basis of the earlier regime.’).
12
For a case concerning the alteration of assessment criteria for the grant of an environmental permit
through reinterpretation of the statutory framework see
William Ralph Clayton, William Richard Clayton,
Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Canada,
UNCITRAL, PCA Case No. 2009-04,
Award on Jurisdiction and Liability (17 March 2015) paras 446-454 (for a summary of the tribunal’s
considerations under the fair and equitable treatment provision in NAFTA).
13
Eiser Infrastructure Limited and Energia Solar Luxembourg S.À R.I. v. Kingdom of Spain,
ICSID Case No.
ARB/13/36, Award (4 May 2017) para 382 (quoting
El Paso Energy International Co. v. Argentine Republic,
ICSID
Case No. ARB/03/15, Award (31 October 2011) para 400).
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case as the (from an environmental and safety perspective identical) Nord Stream 1 pipeline had
been approved by Danish authorities in the past. If used to ultimately refuse the implementation of
NSP2, the proposed legislative change would contravene the stability requirement under the ECT and
Nord Stream 2 AG’s legitimate expectations.
36.
The introduction of the new requirement is also not an exercise of Denmark’s legitimate
‘right to regulate’. While the national foreign-, security- and defense policy qualifies as a public
purpose, the proposed bill excludes central due process rights, such as a reason-giving requirement,
prior consultation and access to documents as under regular administrative procedure in Denmark.
For this reason it cannot be regarded as part of the regular and to-be-expected exercise of Denmark’s
right to regulate.
b.
Transparency
37.
In addition to stable conditions, Article 10(1) sentence 1 ECT also requires transparent
conditions for investments. This has been understood by arbitral tribunals to
indicate an obligation to be forthcoming with information about intended
changes in policy and regulations that may significantly affect investments so
that the investor can adequately plan its investment and, if needed, engage the
host State in dialogue about protecting its legitimate expectations. Finally, the
term ‘favourable’ suggests the creation of an investor-friendly environment.
14
38.
Similarly, the requirement of transparency has also been understood by tribunals to be an
element of the duty to grant foreign investors fair and equitable treatment.
15
Non-transparent
government action, including in administrative decision-making, can therefore constitute breach of
the fair and equitable treatment standard.
16
39.
The proposed amendment to the Danish Continental Shelf Act could be argued to violate the
transparency requirement because the criteria applied by the Ministry for Foreign Affairs in
determining whether a pipeline project in Danish territorial waters conforms to, or contradicts,
Denmark’s foreign-, security- and defense policy interests is unclear and unpredictable and does not
allow foreign investors to know beforehand what criteria their respective project has to fulfill. In
addition, a violation of the transparency requirement could be said to result from the fact that the
Ministry for Foreign Affairs is not required to provide reasons for a decision determining the
incompatibility of a pipeline project with Denmark’s foreign-, security- and defense policy interests.
Electrabel S.A. v. Hungary,
ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and
Liability (30 November 2012) para 7.79.
15
See
Metalclad Corporation v. Mexico,
ICSID Case No. ARB(AF)/97/1, Award (30 August 2000) para 76;
Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States,
ICSID Case No. ARB(AF)/00/2, Award (29
May 2003) para 154.
16
For the situation where the secret awarding of licenses was found to be in breach of fair and equitable
treatment see
Joseph C. Lemire v. Ukraine,
ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability (21
January 2010) para 418. In the same way, a secret refusal of a permit could constitute breach of fair and
equitable treatment.
14
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c.
Observance of Obligations-Provision
40.
The amendment of the Danish Continental Shelf Act, and a subsequent refusal of the
construction permit based on newly introduced grounds to NSP2, could also be argued to breach the
duty under Article 10(1) ECT to ‘observe any obligations’ the state has entered into with foreign
investors . Such ‘obligations’ under Article 10(1) ECT have been understood, at least by some arbitral
tribunals, as encompassing not only contractual commitments between a foreign investor and the
host state, but also commitments that are based on statutory provisions.
17
41.
In the present case, the obligation in Denmark under the present legislation to grant a
construction permit when the statutory conditions are met, in particular when taking into account
the identical nature of the Nord Stream 1 and 2 pipelines could be argued to contain such a
commitment. This commitment could be argued to be breached if new licensing criteria are
retroactively introduced and used to refuse the construction of the pipeline in question.
42.
However, as compared to the arguments relating to the duty of stability under the fair and
equitable treatment standard contained in Article 10(1) sentence 2 ECT, the argument based on
breach of the observance of obligations-provisions are weaker.
d.
Effective Means for Review (Article 10(12) ECT)
43.
Under Article 10(12) ECT ‘[e]ach Contracting Party shall ensure that its domestic law provides
effective means for the assertion of claims and the enforcement of rights with respect to
Investments, investment agreements, and investment authorisations.’
44.
This provision could be argued to be violated if the amendment of the Danish Continental
Shelf Act excludes due process guarantees, which are otherwise available under Danish
administrative law for the review of any other administrative decision, such as access to documents
or the duty to give reasons. These would be necessary in order to allow an affected investor, such as
Nord Stream 2 AG, effectively to ask Danish courts to review the decision of the Ministry for Foreign
Affairs recommending a refusal of the construction of the pipeline in Danish territorial waters.
18
Their
absence could therefore be argued to contravene the right granted in Article 10(12) ECT.
IV.
Responsibility of Denmark under the Denmark-Russia Bilateral Investment Treaty
45.
One can also consider the possibility of raising arguments as to the possible breach of the
Denmark-Russia BIT based on the fact that the sole shareholder of Nord Stream 2 AG is the Russian
See, eg,
Plama Consortium Limited v. Bulgaria,
ICSID Case No. ARB/03/24, Award (27 January 2008)
para 186 (suggesting that the ‘wide’ wording of ‘any obligation’ in Article 10(1) ECT ‘refers to any obligation
regardless of its nature,
i.e.,
whether it be contractual or statutory’).
18
Cf.
Chevron Corporation and Texaco Petroleum Company v. Ecuador,
UNCITRAL, Partial Award on the
Merits (30 March 2010) paras 241-248 (considering that a provision like Article 10(12) ECT would allow a
tribunal to consider the individual treatment of foreign investors in domestic courts and determine whether
they have been able to effectively enforce their rights in domestic courts).
17
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company Gazprom. While Gazprom is protected as an investor under that treaty
19
- but not the ECT
given Russia’s withdrawal from it in 2009 – and could be argued to already have an (indirect)
investment in Denmark in light of both the existing Nord Stream 1 project and because of the
activities already undertaken in connection with NSP2,
20
the Denmark-Russia BIT provides much
narrower substantive protections as compared to the ECT in the present type of situation, where a
project has not been approved, but is still in the process of obtaining the necessary permits for
construction and/or operation.
46.
In particular, and unlike under the Energy Charter Treaty, the Denmark-Russia BIT does not
provide independent protection under international law for the admission of new or the expansion
of existing investments. Instead, Article 2 only imposes a duty to ‘admit … investments in accordance
with its legislation’. While one could argue that this provision also protects against retroactive
changes to the domestic law that are introduced after an application for a necessary permit has been
made, such an argument is much weaker and more difficult to present than the arguments available
under the ECT.
V.
Conclusion
47.
All in all, I would suggest limiting arguments about the risks under international investment
treaties principally to those arising under the ECT. Under this treaty it can be plausibly argued that
the proposed amendment of the Danish Continental Shelf Act, and its application to the application
of Nord Stream 2 AG for a construction permit for NSP2, risk incurring Denmark’s international
responsibility. Nord Stream 2 AG can be argued to already have made an investment that is covered
by the ECT.
48.
The ECT, in turn, requires Denmark to provide for stable investment conditions, to protect
Nord Stream 2 AG’s legitimate expectations, to provide for transparent criteria for the decision on
applications for construction permits for pipelines in the territorial sea and provide transparency in
case an application is denied, and to provide for possibilities for affected investors to have decisions
effectively reviewed in domestic courts. In addition, arguments as to the duty to observe its
obligations under the existing statutory framework towards Nord Stream 2 AG could be added.
49.
None of these obligations are arguably met if the proposed criterion - that pipelines in the
territorial sea must pass be considered to comply with Denmark’s foreign-, security- and defense
Gazprom is an investor under Article 1(3)(b) of the Denmark-Russia BIT, as it is a corporation organized
in the territory of the Russian Federation in accordance with its legislation and is competent, in accordance
with Russian legislation, to make investments in Denmark. The fact that it is only a shareholder of a company
having an investment is generally not considered to be an obstacle to the protection
ratione personae
under
international investment treaties.
20
The notion of investment is defined in Article 1(1) of the Denmark-Russia BIT and covers, inter alia,
‘movable and immovable property’ lit e) ‘any rights, conferred by law or under contract, to undertake
economic activity, including rights to search for, cultivate, extract or exploit natural resources’. While not
explicitly in this respect, Article 1(1) of the Denmark-Russia BIT would likely also cover investments that are
made indirectly by Gazprom via its Swiss subsidiaries that have direct interests in the Nord Stream 1 and 2
projects. This is so because so-called indirect investments are mostly considered to be covered by the wide
notions of ‘investment’ adopted by international investment treaties.
19
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policy interests by the Ministry for Foreign Affairs - is applied retroactively to NSP2’s permit
application and used to refuse implementation of that project.
50.
With respect to the Denmark-Russia BIT, the possibilities of arguing for the existence of a
breach are more difficult. For this reason, I would at the most add one sentence to the text
submitted in reaction to the proposed bill about the possible exposure of Denmark to international
responsibility for breach of the Denmark-Russia BIT.
Amsterdam, 17 July 2017
(Prof. Dr. Stephan Schill)
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