The 2015 EFILA Inaugural Lecture: Escaping from Freedom?

We are pleased to offer you the full text of the 2015 EFILA Inaugural Lecture by Sophie Nappert, “Escaping from Freedom? The Dilemma of An Improved ISDS Mechanism“, delivered on 26 November 2015 in London.

In times such as ours, when freedom is often abandoned for security to be gained, Sophie Nappert’s lecture is a vindication of freedom endorsed by law.

Executive Summary

ISDS in its current international arbitration format has attracted criticism. In response, the EU proposal for ISDS in the TTIP consists of a two-tiered court system, comprising an appeal mechanism empowered to review first-instance decisions on both factual and legal grounds and, the EU says, paving the way for a “multilateral investment court”.

The EU proposal envisages that the courts of first instance and appeal be composed of pre-ordained, semi-permanent judges randomly assigned to cases and subject to compliance with a Code of Conduct worded in general terms.

As it stands the EU proposal walks away from the international arbitration format, and consequently the application of the New York Convention.

The Lecture expresses surprise at the EU proposal of a court mechanism given the CJEU’s unambiguous, historical unease with other similar, parallel international court systems, as most recently expressed in its Opinion 2/13 of 18 December 2014 on the draft Accession Agreement to the
European Convention on Human Rights.

The Lecture examines whether, and how, the EU proposal might provide solutions to critical issues presented in two recent cases taken as illustrations – the Awards in the cases of the Yukos shareholders against the Russian Federation, as well as the case of Croatia v Slovenia currently pending in the PCA.

The Lecture remarks that appeal mechanisms are not free from difficulty, not least of which the real risk of inconsistent decisions between the first and appeal instances, due to different, equally valid approaches to a developing area of international law.

The Lecture also notes that the proposed Code of Conduct provides no practical sanctions to deal with instances of arbitrator misconduct such as that featured in the Croatia v Slovenia matter, and expresses surprise that ethical challenges are to be decided by fellow Judges – probably one of the most problematic features of the current ICSID system.

The Lecture proposes a third way, aimed at addressing these concerns, whereby a Committee – stroke – Interpretive Body, informed by the intentions of the TTIP Parties, would take over the development of TTIP jurisprudence in a more linear and consistent manner, with a longer-term view, whilst ad hoc arbitration tribunals in their current form would focus on the settlement of the discrete factual dispute.

Dissociating the settlement of the factual dispute from the broader interpretive exercise would create a repository of the TTIP jurisprudential function, allowing for a more harmonious and authoritative development of TTIP interpretation and law and alleviating the phenomenon of “overreaching” currently burdening ad hoc tribunals – arguably the real source of the criticism aimed at ISDS.

The Committee/Interpretive Body could also more credibly act as decision-maker in ethical challenges than would fellow Judges, provided the Code of Conduct is reviewed to allow for realistic standards and practical sanctions.

This proposed “third way” retains the arbitration features necessary for the application of the New York Convention, and is not inconsistent with the EU’s own proposal, building as it does on Article 13(5) which contemplates an overseeing Committee that would be well-placed to take over the above role.

See the full text of the Lecture here.

A BIT-By-BIT Understanding of the EU’s Present & Future Investment Agreements

by Emma Spiteri-Gonzi*

Anyone with an interest in European investment and trade will undoubtedly have heard of the EU-US TTIP or, to use its full name, the Transatlantic Trade and Investment Partnership. Naturally, this makes sense as the US is the EU’s top trading partner and a trade agreement of this significance would unquestionably make headlines. The reality, however, is slightly different and the TTIP has made headlines for all the wrong reasons. One of these is the controversy generated from its investment chapter, more specifically its investor state dispute settlement provisions (ISDS). The aim of this piece is to shift focus away from this arduous debate and instead take a glance at the whole of the EU’s trade policy agenda.

Amidst the controversy of the TTIP negotiations the EU has already concluded a free trade agreement (FTA) with South Korea. The final text of the EU-Singapore FTA was also agreed upon, along with five Economic Partnership Agreements (EPAs) with Cote d’Ivoire, Cameroon, the Southern African Development Community, Ghana and the East African Community. These new generation EU investment agreements form part of an ambitious trade agenda by way of the EU’s Common Commercial Policy (CCP), Articles 206 and 207 of the Treaty on the Functioning of the European Union (TFEU), which call for the ‘harmonious development of world trade’ and ‘the progressive abolition of restrictions on foreign direct investment’. Prior to the CCP EU Member States entered into their own investment agreements with third countries. The first bilateral investment treaty was the German-Pakistan BIT, a bit ironic given the heated opposition to TTIP from that member state.  After the German-Pakistan BIT individual member states concluded around 1200 bilateral investment treaties. The Commission is now tasked with finding a consensus approach to trade agreements amongst member States.

For a moment, let’s ignore the hyperbolic headlines (e.g. ‘Trojan TTIP’) and review instead what these new generation agreements will mean for us. The Commission has said that if the EU was to complete all its current free trade talks tomorrow, it could add 2.2% to the EU’s GDP or €275 billion. This is equivalent to adding a country as big as Austria or Denmark to the EU economy. The agreements will cover goods, services, intellectual property and the procurement by government agencies of goods and services for a public function. Furthermore, these agreements will set out provisions on regulatory coordination and cooperation to facilitate trade in the covered areas, as well as establish rules to govern what qualifies as an investment and who qualifies for protection as an investor. They will contain commitments on customs duty reduction, access to services markets, and also consolidate and regulate technical barriers to trade (TBT) such as technical regulations relating to labeling or marking requirements.

The EU is also undergoing treaty negotiations with its second and third largest trading partners, China and the ASEAN [1] countries respectively. Chinese EU trade negotiations have reached their seventh round, with the eighth round scheduled to take place in Brussels at the end of November 2015. Also underway are negotiations for a FTA with JAPAN. Negotiations with Japan, the EU’s second biggest trading partner in Asia, are in their twelfth round, though as yet no agreement on an investment chapter has been reached. A Deep and Comprehensive Free Trade Agreement (DCFTA) with Morocco has entered the fourth round of negotiations. And, with recent or coming regime change in India, Burma and Argentina those countries are destined to move up the ladder on the EU’s trade negotiation agenda.

With Canada, the EU’s twelfth most important trading partner, the EU has concluded a Comprehensive Economic Trade Agreement (CETA). This agreement’s investment chapter is the investment chapter on which the TTIP’s investment chapter was modeled. Yet, the CETA managed to reach final form without attracting the scrutiny of TTIP critics. The EU has also entered into a DCFTA with Moldova and Georgia, which began to apply provisionally from September 2014. The EU-Ukraine DCFTA was completed and provisional application will begin once it has been ratified.

With the proliferation of present and pipeline new generation EU investment agreements, do critics use time wisely merely focusing on the TTIP and tarnishing ISDS? We stand to miss the forest for the trees. Europeans ought not lose focus on the end goal, the creation of favourable investment climate and the economic rewards that come with it.


[1] The EU is currently negotiating with three Association of Southeast Asian Nations (ASEAN) countries Malaysia, Vietnam and Thailand.


* Emma Spiteri Gonzi, Legal Counsel- Nemea Bank Plc.

UPDATE: EFILA Annual Lecture 2015 – Sophie Nappert

Due to the present situation in Brussels, the EFILA annual lecture will be transferred to London. The date and time of the lecture will be maintained, i.e. 26 November, 5.00 o’clock PM.

More precisely, the new venue of the lecture delivered by Sophie Nappert will be:

Allen & Overy LLP
One Bishops Square
London
E1 6AD Telephone Number+44 20 3088 0000

Please register for the event at the following e-mail address: Laura.Weston@allenovery.com

AIA and EFILA Event: Seminar on Arbitration and EU Law

Seminar on Arbitration and EU Law – 7th April 2016, Brussels, Belgium

 

 

Over the years, there has been increasing EU activity in private international law. The interaction and relationship of EU law and international commercial arbitration has had growing interest over the years. In this course, we will consider the key changes in the Brussels Regulation (recast) for commercial parties, the consequences and interpretation of the arbitration exceptions and the relationship between EU state aid and investment protection under bilateral investment treaties.  We will also discuss the procedure, minimum standards, application of Article 6 of the European Convention on Human Rights and compare BITs and EU law in investment arbitration.

 

Confirmed speakers for this event are Mr. K. Adamantopoulos, Mr. Jean-François Bellis, Mr. George A. Bermann, Mr. Damien Geradin, Mr. A. Komninos, Mr. N. Lavranos and mrs. Z. Prodromou.

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The Greek Sovereign Debt Rescheduling, EU Bail-In and Investment Arbitration

by Prof. Georges Affaki*

Many readers of this Blog spent the summer watching the brinkmanship of the Greek national debt third bailout unfold. Few were aware that part of that debt was being bitterly fought in fora other than the European Commission or the Greek Parliament: investment arbitral tribunals. This article reflects on the future of sovereign debt-related claims before investment arbitral tribunals in the wake of the Poštová Banka award and assesses the impact of recent EU bail-in regulation on property rights and possible challenges thereto.

A creditor of Greek sovereign bonds (GGBs), Poštová Banka claimed before ICSID that the Greek law ordering a forced exchange of its bonds violated its investor rights. It was arguably encouraged by a line of case law where ICSID tribunals have construed the concept of a qualifying investment broadly so as to cover financial instruments. The alternative would have brought the claimant to submit its case to Greek courts pursuant to the jurisdiction clause in the bonds.

Poštová Banka had purchased series of dematerialised GGBs. Because it is not approved by the Bank of Greece as a primary securities dealer, it had in fact purchased rights in a portfolio of GGBs through Clearstream. Greece argued that the claimant’s rights were not protected investments under either the BIT or the ICSID Convention. It argued that that Poštová Banka had never held GGBs, but has acquired a stake in a pool of fungible interests in GGBs on the secondary market. The claimant relied heavily on the Abaclat award where the tribunal upheld its jurisdiction in respect of Italian bondholders’ rights in Argentine bonds purchased from Italian banks, not from Argentina itself. The majority had rejected attempts to separate the primary and secondary markets, in effect finding that investors in the secondary market had provided a contribution to the host State.

The claimant needed also to evidence that its investment is made in the territory of the host State. Contrary to an infrastructure project, the localisation of dematerialised financial instruments may prove challenging. The first ICSID award to rule that financial instruments warranted a specific territorial connection test was Fedax. The tribunal ruled that funds involved in financial transactions need not be physically transferred to the territory of the beneficiary; they can be put at its disposal outside its territory. The majority in the Abaclat and in the Deutsche Bank ICSID awards followed that reasoning. Poštová Banka argued that it was sufficient that its funds were put at the disposal of Greece to foster its economic development, without needing to be linked to a specific project.

Similar to many treaties, the Slovak-Greek BIT provides a broad definition of “investment” followed by a list of examples including corporate debentures and loans. The tribunal did not agree that this means that any category of assets may qualify as an “investment”. It ruled that interpreting a treaty in good faith requires providing some meaning to the examples listed. After offering a review of elementary banking law concepts underscoring the difference between GGBs and corporate debentures or loans, the Tribunal concluded that the GGBs were not qualifying investments under the treaty and, as such, it lacked jurisdiction to rule on the dispute. The majority offered some comments as to whether the GGBs amounted to a qualifying investment under the ICSID Convention. Contrary to the earlier part of the award, they are less persuasive. In particular, it ventured to propose that financial instruments that are not linked with an economic venture cannot be considered as investments per se.

Until the Poštová Banka award, the award on jurisdiction in Abaclat was considered as a persuasive precedent that any forced rescheduling of national debt, haircuts, compulsory introduction of collective action clauses, conversion to equity and other forms of State interference in the terms of sovereign bond loans would lead to a vindication of holdout creditors by way of awarding damages under the relevant investment treaty. The award in the Poštová Banka case demonstrates the limit of that reasoning: similarly-worded broad definitions of “investment” in BITs may lead to different awards.

While the majority reasoning concerning the objective characterisation of an investment under article 25 of the ICSID Convention is unconvincing, the unanimous decision of the tribunal to give effect to the non-exhaustive list of illustrations of investments provided in the treaty, as opposed to stopping at the general definition of investment, is well argued and supported by a cogent interpretation of the Vienna Convention. In the end, each case will stand on the merit of its own facts and the terms of the particular BIT.

On 5 August 2015, Poštová Banka filed an application for partial annulment of the award.

Prospects for the future: EU bail-in and investment arbitration.  As indicated above, the Greek bond exchange act import a bail-in feature that requires creditors, rather than tax payers, to bear the loss. On 15 April 2014, the European Parliament adopted the Bank Recovery and Resolution Directive (BRRD). It requires shareholders and unsecured creditors to bear the costs of recapitalising failing banks in the case of a resolution. This is achieved by canceling shares and writing down debt or converting it into equity which is expected to increase the immediate loss-bearing capacity of the failing bank. It could be argued that measures of this type amount to an interference with constitutional and ECHR-protected fundamental rights to property. While the challenge of the Greek austerity measures before the ECHR has shown that a law that does not leave creditors worse off than what would be their situation in an insolvency is unlikely to be found a violation of their right to property, bailed-in creditors and shareholders of failing banks may seek to assert that the bank resolution decision violates investment law. Rather than arguing that EU law (in this case, the BRRD) itself violates investment law, they might argue that it is the resolution decision itself which does so.

A possible ground for that argument could be expropriation: where the cancellation or conversion of debt deprives the creditor of its original property. As such, it could be considered an expropriation even if the creditor obtains new shares in return. Such a claim would be justified if the claimant establishes that the expropriation was implemented for a purpose other than a legitimate public purpose, was discriminatory or was made without proper compensation. Like the ECHR, an investment arbitration tribunal is expected to recognise a resolution authority’s margin of appreciation when deciding when a resolution decision is to be taken. Should that decision appear to have been taken while the bank was not likely to fail, the bailed-in creditor’s case would have significant chances of success.

As an alternative to expropriation, the bailed-in creditors might argue the violation of their right to fair and equitable treatment. The outcome will largely depend on whether those creditors were given a right to challenge the resolution decision in judicial proceedings that protect their right to due process. An alternative could be a challenge of the proportionality of the decision. The resolution authority would likely counter that the BRRD requires that bail-in only be considered when the other resolution tools listed in BRRD article 37 do not allow bank recapitalisation. This leaves the lack of transparency of the administrative process and the absence of planned consultation with creditors as grounds for a possible challenge. The future will tell how arbitral tribunals will assess these complex parameters.


* Prof. Georges Affaki, Independent Arbitrator, France.

ISDS in TPP and TTIP Negotiations – Lessons for the EU

by Prof. Loukas Mistelis, QMUL*

The Transatlantic Trade and Investment Partnership (TTIP) and, in particular, its Investor-State Dispute Settlement provisions (ISDS) have been the focal point of an intense and polarising debate within the EU. Opponents of TTIP, on the one hand, reject the very idea of a new multilateral trade and investment agreement and see this as a threat to democracy and unconditional surrender to global commercial interests, a development that fully undermines sustainable development and growth. Proponents of TTIP, on the other hand, argue that globalisation of trade is a fact and a developmental process so that the focus should now be on better treaty making; they suggest that globalisation empowers consumers and new multilateral agreements can effectively promote a social and human rights agenda.

In relation to ISDS (or what it used to be called Investment Treaty Arbitration) the attack is even more aggressive. While the negotiating parties consider whether TTIP should offer the opportunity to an investor to sue in arbitration a state signatory to the agreement (since the state is deemed – by virtue of the signature of the treaty and the relevant provisions of the treaty – to have consented to such arbitration), a number of NGOs and a good part of the press, including several well-established newspapers left-of-centre argue that ISDS is a threat to national sovereignty and a vehicle for further privatisation of justice for the benefit of few very wealthy arbitration lawyers and arbitrators. It is also suggested that ISDS cases are designed for the benefit of investors. This, however, is not corroborated by facts.

The EU itself, in its discussion of ISDS (pp. 7-8) summarised that:

  • 37% (132 cases) had been decided in favour of the State, with all claims dismissed either on jurisdictional grounds or on the merits;
  • 28% (101 cases) had been settled;
  • 25% (87 cases) were found in favour of the investor, with monetary compensation awarded;
  • 8% (29 cases) had been discontinued for reasons other than settlement or for unknown reasons;
  • 2% (7 cases) had found in favour of the investor, yet no monetary compensation had been awarded.

In other words in 73% of the cases the state prevailed or settled the cases while in only one in four cases (25%) a damages award was rendered.

In relation to EU Member States the data is even more compelling:

  • In 44% of the cases, all claims were dismissed or jurisdiction was declined;
  • In 36% of the cases, the dispute was settled or otherwise discontinued;
  • In 20% of the cases, the dispute led to an award upholding claims in part or in full.

In 80% of the cases involving an EU Member State as a respondent the state prevailed or settled the matter while only in one in five cases a damages award was rendered.

It is noteworthy that the arbitration community as well as the business community have not been particularly vocal or proactive in this debate, save for a few specialist conferences. It has also been rather impossible to bring together a wider and open public debate despite several efforts of EFILA and other organisations to engage in constructive discussions with NGOs.

In the recently published report of the US-EU TTIP Negotiations, which took place in Washington, D.C and Miami in October 2015, there is no reference to ISDS. This is particularly interesting given that the EU through Commissioner Malmstrom published on 16 September 2015 a comprehensive proposal for a permanent Investment Court System. I suspect that the EU Commission proposal was published too late to be tabled for and discussed during the October negotiations. From the EU press release one can draw the conclusion that the EU Commission is confident that it had addressed various concerns voiced by parts of the press and NGOs. It will be significant to see the reactions of Member States and the EU Parliament. See, for example, the brief report which indicates that the UK government appears to favour a traditional ISDS mechanism but also note that this is not the official UK government response.

This post does not address the merits and disadvantages of a permanent investment court but addresses the question of negotiation strategy and policy. The investment court system proposal was discussed in another EFILA Blog post on 14 October 2015. It perhaps useful to add here merely that the reaction of the USTR Ambassador Froman to the EU suggestion was lukewarm.

While the EU was authorised by the Member States in 2013 to conduct the TTIP negotiations it seems that the negotiations will take some time to conclude. The US presidential elections in 2016 will slow down the negotiations at least until mid or late 2017. A conclusion of TTIP will not be on the agenda for a few years to come.

This is in stark contrast with the conclusion of the Trans-Pacific Partnership (TPP text) which the US accelerated and recently completed. TPP has been signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US in Atlanta a few days ago. The TPP negotiations started in 2008 and it took good seven years to conclude.

The text of TPP will be scrutinised by the EU negotiators, the EU Commission and the Member States. It would suffice to say here that TPP is largely a typical US Trade and Investment Agreement with some variations from previous texts and that ISDS is included. It contains substantive protections found in many investment agreements and essentially mirrors the provisions found in the 2012 US Model BIT. As such TPP differs from the EU-Canada Comprehensive Economic Trade Agreement (CETA) and the EU-Singapore Free Trade Agreement.  For example, it grants minimum standard of treatment in accordance with customary international law. It is also reported that TPP includes a code of conduct (code of ethics for arbitrators) while at the same time more power is conferred upon arbitrators to dismiss summarily frivolous claims. There is also an exclusion for tobacco companies from using ISDS, further enhancing and strengthening the regulatory space of states.

The key conclusion to draw from the ISDS provisions in TPP is undoubtedly a strong and unequivocal endorsement of the current practice of private arbitration of investment disputes (traditional ISDS) where the focus has moved to substantive protection rules rather than arbitration as a method. In this respect TPP dispelled ISDS myths and focused on facts.

In light of the recently concluded TPP it is tactically unhelpful that the EU has published an alternative ISDS Model at this stage of negotiations. One could easily argue that the TPP model for ISDS is “state of art”, widely accepted by a number of developed economies such as Canada, the US, Australia, Japan and Singapore (in fact 40% of the world’s GDP) and that the EU should also operate in a similar system, increasing multilateralism rather than introducing further fragmentation of international investment law. It is also expected that both the EU and the US take a central role in promoting free trade and investment promotion and protection and it would be awkward, to say the least, to have different standards of investment promotion and protection depending on who the counterpart is. The introduction of “formal” discrimination could have negative impact of the global role of the EU as a preferred trading partner of developing countries.

Tactically a very early announcement of the EU basis of negotiation on ISDS in TTIP looks very much like a game theory faux pas. Or it may well be a very shrewd tactic. Any draft which is proposed to merely satisfy domestic or regional needed of the proposing side can be used by the other side to the proposing side’s detriment if the need for a quid pro quo settlement arises. Alternatively it may a tactic to silence the opponents of ISDS by proposing something that can easily be rejected so that both sides would, for example, be satisfied with a permanent investment appellate body while retaining private arbitration at first instance. In such a case the EU could argue that they fought hard for a permanent two-instance investment court and the permanent appellate body is a great success.

Rejecting private arbitration while the statistics are clear that most cases are in favour of states rather than investors and while it is also widely accepted that we should not be depriving investors the access to arbitration (or ISDS) seems to parochial rather than modern and protectionist rather than liberal. The attention should move to improving ISDS and private arbitration by drafting clearer treaties, better procedural rules and enforceable codes of conduct. Polarising the debate does not allow space for regulatory nuances nor does it help to create a convergent if not harmonised investment protection and promotion regime.


* Prof. Loukas Mistelis, Clive M. Schmitthoff Professor of Transnational Commercial Law and Arbitration, Queen Mary University of London, School of Law.

Just Because State Aid Is The Best Hammer Does Not Mean That All Issues Are Nails (Part II)

by Emanuela Matei, Associate Researcher – CELS*

This article represents Part 2/2 of a larger material regarding the interaction of EU state aid rules and international investment law in the context of recent EC Decisions. Part 1/2 was published earlier this week.

B.  Selectivity

Whether a regulatory measure is selective shall be examined within the context of the particular legal system by verifying whether the measure constitutes an advantage for certain undertakings in comparison with others, which are in a comparable legal and factual situation. Since the present case concerns a regional scheme, the financial autonomy of that region may justify a differentiation[i]. However, the mere fact of acting on the basis of a regional development or social cohesion policy would be insufficient in itself to justify a measure adopted within the framework of that policy[ii]. The disfavoured regions do not enjoy fiscal autonomy, thus the regional character of the measure would be sufficient to prove the selectivity of the aid. The Commission chose nonetheless a different line of argumentation.

‘…compensation for damages will not selectively benefit an individual undertaking only insofar as that compensation follows from the application of a general rule of law for government liability which every individual can invoke, so that it excludes that any compensation granted confers a selective benefit on certain groups in society’.

The Commission affirms that the compensation does not follow from the application of a general rule of law for government liability, since the access to justice is restricted to certain groups of individuals, i.e. foreign investors covered by the BITs. It concludes that to the extent that paying compensation awarded to an investor pursuant to a BIT amounts to granting an advantage, the advantage is selective.

In my view, first and most important, it is not necessary to go so long in order to prove the selectivity of the measure, since the scheme is regional and the award does nothing more than re-establishing the facilities granted by that scheme.

Secondly, if such definition of selectivity were admitted by the CJEU, the scope of the State aid would go beyond ‘wide’. It would potentially cover all situations, where a conflict between a State and an undertaking can be solved by arbitration. It would outlaw investor-State arbitration as such. The current solution for investor protection is based on a network of BIT-agreements including an ISDS-clause together with a worldwide affiliation to the ICSID Convention. The complexity of this structure consists in its apparent bilateralism and inward transnationalism. The Micula dispute may appear to be an issue between Romania and two associated Swedish investors, but in reality, it concerns the reliability of the current system of investor protection.

Thirdly, concerning the ‘selective’ access to justice examined vis-à-vis the matter of State aid control, there is no difference between intra- and extra-EU BITs. There is nothing in the State aid law that stipulates that the prohibition of State aid only applies, if the investor-beneficiary is national of a Member State. If the definition of selectivity is derived from the application of an exceptional rule of government liability, which not every individual can invoke, the extra-EU BITs would also be deemed illegal, unless they could qualify for an exemption as stated by Article 351 TFEU.

C.  Upon an undertaking

An investor can be involved in FDI or could act as a portfolio investor. Micula brothers are direct investors with a long-term strategical approach, so normally, no distinction can be made between the legal situations of a direct investor, who is a natural person and a legal person as vehicle of direct investment[iii]. I agree with the Commission that in the present case no difference can be made depending on whether the compensation collectively awarded to all five claimants by the Tribunal is paid out to the shareholders or to the companies owned by them.

However, I must point out, an important factor. A distinction must be made between the grant upon an undertaking i.e. a single economic unit and the recovery of State aid that obviously must be applied in relation to a person. A shareholder, who is directly involved in the day-by-day management of fully owned companies will be covered by the notion of undertaking[iv]. In the present case, it is the award that states who is entitled to payment and the recovery of aid shall follow the same assessment, as long as the award does nothing more than restoring the fiscal facilities put in place by EGO 24.

The previously distinct line between the grant of aid to an undertaking as element of State aid definition, which is an abstract concept and the matter of recovery, which is a concrete device, a legal remedy, has been blurred by a recent CJEU ruling[v]. This new theory of a maintained separate legal personality of the State aid beneficiary in relation to its controlling shareholder – even if it appears to be inconsistent with the usual understanding of the doctrine of single economic unit – could support the argumentation claiming that the shareholders’ interests as natural persons would depart from the interests of the three corporate claimants[vi].

D.  Imputability

The question of imputability is theoretically the most interesting. The initial advantage is granted by Romania to investors established in a certain disfavoured region, but the enforcement of the award may be ordered by any of the ICSID-members, inside and outside the EU. Would such a payment still be imputable to Romania?

According to the Commission, the answer is affirmative, since the voluntary agreement of Romania to enter into the BIT created the conditions for the selective advantage resulting from the award. Is the act of signing a BIT five years before the accession to the EU illegal under EU law? Is there a direct causal relation between this act and the grant of State aid? If the act were illegal would the culpability be attributed to Romania alone? If Romania had chosen to terminate the BIT in January 2007, the BIT sunset clause would have nonetheless maintained the protection for investments already in place until 2027. It would not have changed anything with regard to the Micula dispute.

The adoption of EGO 24 is definitely an act of State, but the enforced payment of the award by means of seizing assets abroad ordered by foreign courts or bailiffs cannot be attributed to Romania based on the simple observation that Romania did not terminate its BIT in 2007 or because it entered into a BIT agreement in 2002. The question of imputability is extremely complex and the State aid instrument is in my opinion too blunt to be able to cope with this complexity. While a payment ordered by a Romanian court or bailiff is imputable to the Member State in line with the obligations assumed according to the Treaties, a payment ordered by a Belgian or an U.S. federal court cannot be imputable to Romania, unless it can be substantiated that the act of engaging in BIT agreements is illegal per se under EU law.

III.          Conclusions

According to the available information, the adoption of EGO 24 established a derogation from the regime of ‘normal taxation’ implying an economic advantage. This advantage is selective due to its regional character and as any other regulatory measure is imputable to the state. It is supported by state resources, as a negative advantage that consists in a derogation from generally applicable fiscal obligations. The measure has not been notified to the Commission and it has been found illegal by the Romanian Council of Competition in May 2000. According to Atzeni a compensation that restores an illegal State aid cannot be allowed under EU law, therefore the Asteris exemption is not applicable.

The Commission tries instead to prove that the enforcement of the award issued in 2013 would in itself constitute unlawful State aid. I disagree with this line of argumentation. First, it would be redundant to prove a distinct aid entailed by the enforcement of the award and secondly, it would lead to unreasonable implications. The fact that Romania signed the BIT five years before its accession to the EU and three years before even becoming an acceding country, supports the idea that Romania cannot be held culpable under EU law for the decision to engage in such agreements. If the signing of a BIT had been forbidden under EU law, the attention of the Commission should have been directed towards the other party of the agreement, Sweden, a Member State with full rights and obligations at the relevant time.

Concerning the allegeable obligation to terminate the BIT, it must be said, first that the measure would have no effect on present investments and secondly, that Romania cannot be held as solely responsible for the maintaining of a parallel system of protection that potentially could threaten the autonomy of the Union legal order. The legality of the BIT in question should not be examined in isolation, since the practicability of the present system of investor protection relies on a network structure and the privileged access to arbitration of foreign investors. By disconnecting one node from the network, the problems indicated by the Commission in its decision at point 66, namely, the fact that the current system of State liability is not applicable to any investor, will not be solved.

The applicants in the present case personify the global community of foreign investors and represent the interests pleading in favour of maintaining the system of protection that pre-existed the EU law. State aid control is the appropriate tool for treating bi-dimensional relations between States and undertakings, but it does not seem to be adequate for dealing with triangular relations between a State and the community of foreign investors represented by the web of transnational institutions established under international law. Such matters of incompatibility between the pre- and post-Lisbon system of investor protection or between pre- and post-accession State aid measures should have been addressed by making use of other more appropriate instruments.


[i] Case C-88/03, Portugal/Commission [2006] ECR I-07115 [67].

[ii] Idem [82].

[iii] Case C-222/04 Cassa di Risparmio di Firenze SpA and Others [2006] ECR I-00289 [112].

[iv] Case C-170/83 Hydrotherm [1984] ECR I-2999 [11].

[v] Case C‑357/14 P Dunamenti v Commission, not yet reported [115].

[vi] Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania, OJ L 232, 4.9.2015, p. 43–70 [59].


Emanuela Matei,  Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).

Just Because State Aid Is The Best Hammer Does Not Mean That All Issues Are Nails (Part I)

by Emanuela Matei, Associate Researcher – CELS*

This article represents Part 1/2 of a larger material regarding the interaction of EU state aid rules and international investment law in the context of recent EC Decisions. Part 2/2 will be published later this week.

 I.          Introduction

In May 2014, Obama defended a more relaxed foreign policy that entailed less military interventions, by stating, I cite: ‘Just because we have the best hammer does not mean that every problem is a nail[i]. The same observation can be made in relation to the Commission’s all-encompassing use of the versatile tool of State aid control. It would most probably not nail all forms of state liability. In particular with regard to regulatory measures adopted by a Member State before its accession to the EU, the application of State aid rules must be more precisely calibrated.

The Micula arbitral award established in December 2013 that by annulling an investment incentive scheme four years prior to its scheduled expiry in 2009, Romania failed to comply with its obligations assumed via the Romania-Sweden BIT, which had come into force in 2003.

In its decision of 30 March 2015, the Commission found that the compensation paid by Romania according of the named arbitral award breached the State aid prohibition. State aid is forbidden unless notified and approved by the European Commission. An extra intricacy of the present case relates to the fact that at the moment, when the notification had to be made, Romania was not yet a Member State of the Union. The standstill obligation existed according to the acquis, though the prerogatives of control were attributed to the Romanian Council of Competition.

II.      State aid Definition

According to the Commission, the revoked investment incentive scheme selectively favoured certain investors and was therefore deemed to be incompatible with the state aid rules. In order to classify a national measure as State aid, the following criteria must be examined and cumulatively fulfilled:

  • The measure must confer a selective economic advantage upon an undertaking;
  • The measure must be imputable to the state and financed through state resources;
  • The measure must distort or threaten to distort competition;
  • The measure must have the potential to affect trade between Member States.

Four conditions will be analysed in this post: the presence of an advantage, its selectivity, its imputability and the definition of an undertaking which may benefit from the aid.

A.  An economic advantage

A.1. A derogation from ‘normal taxation’ is an advantage

The concept of State aid is broader than that of a subsidy, since it comprises not merely positive benefits, such as subsidies themselves, but also interferences which, in diverse forms, mitigate the charges that are regularly included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are comparable in character and have the same effect[ii].

The concept of aid has constantly been interpreted by the CJEU as not covering measures that distinguish between undertakings in relation to charges, where that differentiation is the result of the nature and general scheme of the fiscal system. The very existence of an advantage may be established only when compared with ‘normal’ taxation’[iii].

The line of argumentation followed by the Commission asserts that ‘by repealing the EGO 24 scheme, Romania re-established normal conditions of competition on the market on which the claimants operate, and any attempt to compensate the claimants for the consequences of the revocation of the EGO 24 incentives grants an advantage not available under those normal market conditions’[iv]. I see no valid explanation for choosing the test of ‘normal market conditions’ instead of the benchmarking of ‘normal taxation’ in the present case.

In its recent negative decision in case SA.38375[v], the Commission repeats this choice while applying the ‘normal market conditions’ test (one form of it, the Market Economy Investor Principle) to a case concerning tax rulings, despite the fact that the measures concerned were administrative i.e. non-economic in nature[vi].

The Romanian legislation in Micula granted a derogation from the general regime of taxes and customs duties and the award re-established the initial economic advantage by ordering the compensation of those previously abolished fiscal facilities.

The AG Colomer[vii] has noticed in his Opinion in the Atzeni case that even if the entitlement to compensation is recognised, the amount prescribed cannot be equal to the sum that must be recovered according to the standstill prohibition enshrined in Article 108(3) TFEU and the article 14 of the Regulation No 659/1999[viii]. The Commission affirms that the Award was based on an amount corresponding to the fiscal facilities provided by EGO24 including lost profits plus interest.

The compensation provided for by the Award is based on an amount corresponding to the customs duties charged on raw materials, lost profits and interest on the total sum of damages awarded[ix].

However, the calculation of State aid cannot be based on the Award, but it must be assessed independently taking into consideration the difference between the ordinary expenses and the subsidised expenses under EGO24 with reference to the situation prior to payment of the aid[x]. In Dunamenti it has been established that even if the Article 107 TFEU became applicable on the accession date, the analysis of the measure must be done in the context of the period in which it had been granted.

The relevant factual circumstances of the grant cannot be disregarded solely because they have preceded the accession[xi]. In case, the Award exceeded the amount of aid granted under EGO24, which is the regulatory measure examined by the Romanian Council of Competition in its decision of May 2000, this excess cannot be deemed to constitute indirect State aid as established by the Atzeni Opinion.

A.2.   Compensation for damages is not an advantage

The principle of State responsibility for loss and damage caused to individuals because of breaches of European Union law for which the State can be held liable is enshrined by the system of the treaties on which the European Union is based[xii]. In Asteris, the CJEU established that State aid is fundamentally different in its legal nature from the amounts paid to individuals as compensation for the damage caused by public authorities and that, in consequence, such damages do not constitute aid for the purposes of Articles 107 and 108 TFEU[xiii].

Acknowledging the fact that EU law does not allow an unconditional permeation of obligations derived from international law, the main difference between a Micula entitlement and the Asteris right to bring an action for payment is the source of the obligations on which the claim for payment is based.[xiv] Greece was expected to implement EU law obligations, while Romania is responsible for implementing an obligation arisen from a BIT and affirmed by an ICSID-award.

The CJEU recognised a distinction between an action for damages under Article 340 TFEU and an action for payment concerning the liability of the national authorities responsible for implementing Union law, which individuals are seeking to establish before national courts[xv]. Hence, it can concluded that the Asteris liability is a distinct case, since it does not entail a sufficiently serious breach of an EU law obligation borne by the State.

On the other hand, the entitlement to payment in Micula ought to be interpreted in the light of the relevant rules of customary international law, which is part of the Union legal order and is compulsory for its institutions[xvi]. The BITs obligations go beyond the field of customary international law, ensuring a higher level of protection for the investor that can be recognised under EU law, only if it concurs with the specific characteristics and the autonomy of the Union legal order[xvii]. The Commission considered that the BIT obligations were not conform to EU law and subsequently, the action for payment could not be supported by an Asteris claim.


[i] Read more at: http://www.nationalreview.com/corner/378955/obama-west-point-because-we-have-best-hammer-does-not-mean-every-problem-nail-andrew.

[ii] Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority [1961] ECR 1.

[iii] Case 173/73 Italy/Commission [1974] ECR I- 00709 [15].

[iv] Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania, OJ L 232, 4.9.2015, p. 43–70 [92].

[v] Commission Decision, State aid SA. 38375 (2014/NN) (ex 2014/CP) Brussels, 11.06.2014. The final decision of 21 October 2015 not yet published. Read also my commentary (click here).

[vi] Read more at: http://www.kluwertaxlawblog.com/blog/2015/10/28/the-interplay-between-the-state-aid-rules-and-other-beps-preventing-tools-sa-38375/.

[vii] AG Opinion, AG Colomer, Joined Cases C-346/03 and C-529/03 Atzeni [2006] ECR I-01875 [198].

[viii] ‘It should be noted that, if an entitlement to compensation is recognised, the damage cannot be regarded as being equal to the sum of the amounts to be repaid, since this would constitute an indirect grant of the aid found to be illegal and incompatible with the common market’.

[ix] Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania, OJ L 232, 4.9.2015, p. 43–70 [123].

[x] Case T‑473/12 Aer Lingus, not yet reported [83]. See, to that effect, C‑277/00 Germany /Commission [2004] ECR I-03925 [74-5].

[xi] Opinion AG Wathelet, Case C‑357/14 P Dunamenti Erőmű, not yet reported [121].

[xii] Joined Cases C-6/90 and C-9/90 Francovich and Others [1991] ECR I-5357 [35]; Joined Cases C-46/93 and C-48/93 Brasserie du Pêcheur and Factortame [1996] ECR I-1029 [31]; and Case C‑445/06 Danske Slagterier [2009] ECR I‑0000 [19].

[xiii] Joined cases 106 to 120/87 Asteris/Greece (Asteris III), [1988] ECR I-05515.

[xiv] Opinion 2/13 of 18 December 2014, not yet reported [201].

[xv] Asteris III [25-6].

[xvi] Case C‑179/13, Evans, not yet reported [35]

[xvii] Opinion 2/13 of 18 December 2014, not yet reported [174].


Emanuela Matei,  Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).