The European Commission has called on Hungary to comply with EU rules on investor-state arbitration. Brussels has also launched infringement proceedings by sending a formal notice. This means that energy companies from one member state do not have the right to sue the governments of other EU member states, a position Budapest disputes.

The European Union is threatening Hungary with further legal action if it does not bring its conduct into line. The dispute stems from Hungary allowing oil company MOL to use the controversial Energy Charter Treaty to sue another EU member state. Such a move is in direct conflict with a ruling by the European Court of Justice.

The Commission has given Budapest two months to address the issues raised. The ball is now in Hungary’s court. If it fails to respond satisfactorily, further steps may follow, likely culminating in a case before the Court of Justice of the European Union and hefty fines.

The Energy Charter Treaty was established in the 1990s to protect investment in politically and economically unstable post-communist countries. In practice, however, energy companies often used it to sue European countries, seeking compensation for expected profits lost as a result of changes in government policy—particularly policies aimed at reducing emissions.

One of the best-known examples is the lawsuits brought by energy companies seeking billions in compensation after the Netherlands decided to gradually close its coal-fired power plants.

A major turning point came with the Court of Justice of the EU’s 2021 ruling in the “Komstroy” case, which established that the right to sue governments does not apply to investments made by domestic companies in another EU member state. EU investors seeking to sue another EU member state must therefore turn exclusively to courts within the European Union.

Budapest advances its own interpretation of the law

All EU member states except Hungary agreed that the investor-state dispute settlement mechanism did not apply within the Union. Budapest, however, argues that this interpretation should apply only to future investments.

In the proceedings, the Commission says that Hungarian company MOL asked a court in a third country to recognise and enforce an arbitral award it had obtained against an unnamed EU member state. A company controlled by MOL has also recently launched further legal proceedings, again against an unnamed EU country.

Specific information about either case is not publicly available. The first likely concerns a request for a US court to order Croatia to pay MOL compensation of 222 million euros. The dispute followed Croatia’s decision to cancel MOL’s investment after it was found to be linked to a bribe paid to the country’s then prime minister.

In June, the European Union officially withdrew from the Energy Charter Treaty. However, it remains in force until 2045.