Why Komstroy Cannot be the Last Word: more investment into greening the economy requires to bury Achmea, Komstroy, Micula and others (Part II)

By Herbert Woopen[1]

In Part I, this post explored and analysed domestic regulations in Italy concerning investment and ECJ’s decisions stemming from those. Now, Part II will look at international law solutions and will analyse how the European Union could and should amend past erroneous decisions.

III. The role of International Law where EU Law fails to perform

The previous observations, sadly enough, raise the question of where justice can be reached if EU institutions fail to perform according to their mission. This had widely been held to be the international commitments of the EU as subscribed in various international Treaties. And yet, we have been in for another unsuspected and deeply disappointing surprise.

To underline that the author is well aware of criticism of the arbitral system as such and understands the political intention to reduce its role in Investor-State-Disputes, a fundamental analysis of the issue may take some space here before coming to the practical consequences of the situation as he sees the current needs to act.

1. Doubts regarding ISDS

Property rights have been subject of intense consideration in a highly praised book of 2019 by Katharina Pistor: “The Code of Capital. How the Law Creates Wealth and Inequality”.[2] If law, writes Pistor, having encoded the sources of private wealth over centuries, is to truly serve the interests of “We, the people” rather than predominantly of “the capital”, it needs to incrementally roll back the characteristics of Priority, Durability, Universality and Convertibility obtained for profit-generating assets by an elite of lawyers predominantly from London and New York. A major stumbling block, according to Pistor, are ISDS mechanisms obtaining damages for “unfair and unequal treatment” in private arbitration tribunals. Solidifying particular expectations from contracts into property rights considered to have been expropriated, contrasts with democratic states’ needs to adapt to changing circumstances and priorities and to keep and regain the ability to control creation and distribution of wealth.

In such vein, even the Financial Times, not suspicious of socialist tendencies, has called as early as 2018 for a renewal of the social contract between Capital and Society, to reform out-of-date regulatory models and start rethinking models that were built around willingness to arbitrage regulations and tax law and to pursue the idea of a humane, mutually beneficial interdependence between business and workers.

2. Achmea as a trigger

In its judgment of 6 March 2018, in the case of Achmea, the ECJ developed, surprisingly, a line of arguments by which it took the view that EU law takes precedence over BITs signed by sovereign states. The “pretext” chosen was that letting international law prevail would be capable of leading to a situation in which an arbitral tribunal would rule in disputes concerning the application or interpretation of EU law, which according to the ECJ, would go against the core of EU law – that is against the autonomy and supremacy of EU law enshrined in, inter alia, Art. 344 TFEU. The first review of that decision was published by Burkhard Hess.

The Achmea judgment triggered the 2020 Termination Agreement for almost all intra-EU BITs, but not all 27 EU Member States signed it. Most, pushed by the European Commission, subscribed to disregarding their signatures under bilateral and multilateral investment treaties. A handful of them, however, only followed suit for bilateral investment treaties and remained silent on multilateral investment treaties – among them remarkably Sweden which was still expecting, and rightly so, the arbitral award under the ECT for its state company Vattenfall (expropriated in Germany due to that country’s ill-prepared exit from nuclear energy). The case was settled by a payment of € 1.425 bn by Germany to Vattenfall, 30% of the € 4.7 bn claimed, dismissing the objection by the respondent (in paras 144-150, 166-168) that the ECT should not be applied for intra-EU disputes. The only Member State to explicitly reject a recognition of effects of the Achmea judgment for the multilateral treaty ECT was Hungary.

Most recently, in 2021, the European Commission has even launched another round of infringement proceedings against several EU Member States (Austria, Belgium, Italy, Luxembourg, Portugal, Romania and Sweden), for their failure to terminate their intra-EU BITs. The Commission has previously done so in 2020, against Finland and the UK; in 2016 against Austria, the Czech Republic, the Netherlands, Romania, Slovakia and Sweden; and back in 2015 for the first time against Austria, the Netherlands, Romania and Sweden.

3. Changes intended for the future of Multilateral Investment Treaties

The political discussions about the future handling of ISDS in multilateral investment treaties for intra-EU conflicts have led to modernization efforts resulting in a preliminary set of changes to the ECT, agreed in principle on 24 June 2022, and intended to be adopted at the meeting of the contracting parties in Mongolia in November 2022. They include phasing out of investor-state disputes within the EU and specifically for fossil fuel projects 10 years after the revamped treaty enters into force, while other signatories like Kazakhstan and Japan will continue to shield such schemes.

The main idea followed by the EU since conclusion of the EU-Canada Trade Agreement (CETA) is to replace the current ISDS system with a new dispute settlement mechanism and move towards establishing a permanent multilateral investment court. This revised CETA text is also a clear signal of the EU’s intent to include this new proposal on investment in its negotiations with all partners.

Thus for the future, the ECJ, the European Commission and the Member States are unlikely to change their quest to significantly modify or even completely eradicate ISDS arbitration. That quest is already ongoing at the UNCITRAL Working Group III on ISDS reforms with the proposal of replacing ISDS with a permanent multilateral investment court (MIC).

4. ECJ rejecting to rule on compatibility of such change with EU law

The ECJ, asked to decide whether the modernization of the ECT under way will change the way ISDS in arbitration needs to be looked at, has rejected, in Opinion 1/20, a request by Belgium to rule on the compatibility of the suggested changes of the ECT with EU law. It considered such request as inadmissible due to lack of clarity of the future text. This is because it is not excluded that Art. 26 ECT might still become subject of the negotiations and future changes. At the same time, the Opinion in para. 47, confirms with reference to a previous decision (in Komstroy, paras 40-66), that the ECJ currently considers an interpretation of that article as required which excludes applying it to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State.

5. Further judgments and actions

In parallel, as outlined by Nikos Lavranos in his January 2022 publication, the European Commission continued to escalate the conflict by intervening in practically all intra-EU disputes (both those based on intra-EU BITs and those based on the ECT) as amicus curiae before arbitral tribunals as well as before domestic courts. However, so far, the European Commission has not been successful in convincing arbitral tribunals of its position that EU law prevents them from exercising their jurisdiction.

In contrast, domestic courts of EU Member States are applying the Achmea judgment, as, for example, the Frankfurt Court and the German Federal Supreme Court (BGH) have done in the Austria’s Raiffeisen Bank v. Croatia case (p. 18, paras 30-35). In applying the Achmea line of reasoning, the BGH rejected the idea put forward by the lower court that there cannot be a violation of European law when the national court has in a post-award review, as it is the case under German law, the possibility to submit a question of EU law, by means of preliminary ruling request, to the ECJ. This is, in the BGH’s perception of the ECJ’s view, because not every Member State offers such possibility under its national laws. As such, the reasoning of the lower court would therefore not accommodate for sufficiently close connection with EU law to ensure consistency across all Member States. In other words, possibility to submit the result of the arbitral procedure to the ECJ depends on the applicability of national law offering such recourse, which in turn depends on the claimant’s choice where the arbitral tribunal is situated, and not on whether the seat is in an EU Member State per se.

In that vein, the fact that there is no provision in European Law allowing or even requesting all national courts to submit arbitral decisions to the ECJ, in case they are based on questions of European law invalidates all arbitral rulings in ISDS. In other, more provocative words: The fact that the ECJ itself has not been open to receiving submissions by arbitral tribunals, from judges recognized by national laws, of questions on European law by way of a preliminary ruling procedure (Art. 267 TFEU), makes it impossible for the ECJ to secure consistency of application of European Law. Though, could we not thus claim that the ECJ has itself created a situation it contends to solve (with an unacceptable result)?

Moreover, in an unprecedented act, the European Commission prohibited Romania from fulfiling its international obligations of paying out the Micula award because that would supposedly constitute new, illegal state-aid. The Micula brothers successfully brought an action against the European Commission before the General Court of Justice of the EU. However, the European Commission appealed, and the Court of Justice set aside that judgment, agreeing with Advocate General Szpunar. The case has been remanded to the General Court and a new judgment is pending.

In another turn of events, the ECJ denied in the case of PL Holdings ad hoc arbitration, by concluding that an ad hoc arbitration agreement with the same content as a clause in a BIT would, in fact, entail a circumvention of the obligations arising for that Member State under the Treaties and, specifically, under Art. 4(3) TEU and Arts 267 and 344 TFEU, as interpreted in the Achmea.

With Komstroy, the ECJ extended its jurisdiction of denying consent and jurisdiction to arbitral tribunals also to the multilateral treaty ECT, even though doing so only in an obiter dictum (paras 43-45, 52, 62-66) which was made entirely without cause and became even more surprisingly, very extensive.

6. Criticism of the reasoning of ECJ and European Commission

Considering this confusing picture of questioning the allegiance to international law to such an unprecedented extent, by a community of States which hails itself to be the “Area of Freedom, Security and Justice (Art. 67-89 TFEU), the arguments brought forward need to be looked at more closely. As Nikos Lavranos summarises the development (paraphrased):

The root cause of the dilemma is the protection of the principles of autonomy, consistency, uniformity, full application and supremacy of EU law, and the idea of seeing the ECJ as the highest court of the continent – at all times and in all cases. The ECJ has also in other contexts strived to protect its final authority against public international law: in the Kadi case with respect to UN Security Council resolutions based on Art. 103 of the UN Charter, and similarly towards the European Court of Human Rights (ECHR) and the WTO Appellate Body.

But, asks Lavranos, can an international arbitral tribunal deciding on a specific case of investment law be able to endanger the autonomy, consistency, uniformity, full application or supremacy of the EU legal order to any discernible level? A legal order developed over the past 50 years with such a solid constitutional foundation and a supreme court that is more powerful than any other (international or constitutional) court in the world? Could the Achmea or Komstroy arbitral tribunals seriously have been ever able to be the slightest threat to these fundamental principles of EU law?

Even if so, he contends, the simple solution for avoiding this permanent conflict was already proposed by Advocate General Wathelet in his Opinion in Achmea, i.e. to allow or even require arbitral tribunals to request preliminary rulings from the ECJ in case EU law issues are at stake. This is precisely the solution that the Andean Community Court of Justice, the equivalent of the ECJ, adopted. Accordingly, this conflict between EU law and international investment law could have easily been avoided.

Lavranos continues that:

The simple point is that all these EU law principles work very well internally but are alien at the public international law level where all international treaties are treated equally (with the exception of Article 103 UN Charter[3]). In other words, the horizontal nature of public international law simply clashes with the vertical, supremacy, and autonomy-loaded, EU legal order. […] The autonomy, uniformity and supremacy of EU law are alien principles to public international law.

It needs to be added that the approach chosen by ECJ and European Commission disregards the limits of empowerment granted to the EU. As a contractually based entity, it cannot dispose of more powers than its Members, the Member States, have granted this special entity to exercise. For Germany, former constitutional judge Paul Kirchhof has recently laid out in a cautious but nevertheless clear way that the ECJ has gone ultra vires in its approach against intra-EU arbitration. Under the heading “Precedence of the law – On the limits of the application precedence of European Law” he explicitly refers to the arbitration jurisdiction which should rather be solved by proper interpretation of the respective treaty law and reminds the ECJ that rules which cannot be derived from the specific provisions of national constitutional law for the enactment of European law are nothing else but “non-law” and can therefore not claim to take precedence over national (constitutional) law. And the ECT, to recall the example above, is an international treaty with explicit empowerments of arbitral tribunals without any empowerment having been granted to the EU to abolish existing international commitments of Member States, even less so such a power to abolish Member States’ commitments to the ECT because the EU is a signatory in its own right and bound by its provisions.

7. Doom looming ahead

Having digressed for so long and in such intensity from convincing arguments, it may become difficult for the Commission and ECJ to find a way out of the impasse chosen. However, the alternative is to take an extreme financial risk for the Union which is already stressed financially to the margins of its financial capacity due to the pandemic, the war in Ukraine, the ensuing energy crisis and resulting inflation. To be more specific: there is an imminent danger for the EU budget from the violations of the ECT by the ECJ and EU Commission who are both (!) organs of the EU for which the Union is liable under Art. 340 TFEU. It may be true that damages for treaty violations by a court as an organ of a state require a very high level of law infringement. Only this can ensure that judges who ideally are independent of the other powers in a Public Community are not being influenced in their future behaviour and impinged in their independence. As per case law, only full denial of justice or denial of ordinary procedure or open wilfulness or blatant unfairness could be sufficient to reach that level of relevance. But who would dispute that retroactive denial of submission to arbitration in an internationally binding treaty is exactly such a blatant denial of justice?

Preparations for another arbitration procedure against the EU itself will need to start soon now, when looking at Art. 46 TEU. It requires proceedings against the Union in matters arising from non-contractual liability to be introduced within five years from the occurrence of the event giving rise thereto. An interruption of the period of limitation can be obtained by an application to the relevant institution of the Union, but requires then to institute the proceedings at the ECJ within the period of two months (Art. 263 TFEU).

Considering Achmea as the first act of violating the EU’s commitment under IIAs (including the ECT) it is about time to start proceedings, e.g. in New York, Geneva or Singapore.

IV. An “off-ramp” – Securing the future and solving issues of the past smoothly by copying the Andean solution also for the past

While it looks like a very convincing solution to expand the CETA Court model of a standing multilateral investment court to future disputes, the reasonable proposal by Advocate General Wathelet in Achmea[4] appears to be the better solution for cases still pending and concluded. To solve those, an ad interim recognition of right and duty of arbitral tribunals to submit preliminary issues of EU law to the ECJ for preliminary ruling would suffice. The Court of the Andean Community applied this approach various times, for the last time shown on its website on 6 May 2021 (see also here). The Court simply considers judges of arbitral courts recognized by a Member State as national judges, within the meaning of the relevant provisions on the Court of the Andean Community, in order to ensure consistent application of the Andean Community Law – an easy and convenient solution to escape a highly problematic situation which the EU has created without necessity.

The EU should now, to avoid the danger of being sued in arbitration for blatant violations of the ECT for the acts of its Courts and of the Commission, settle amicably pending procedures; first, by allowing arbitral courts to decide and second, by not impeding enforcement of the awards granted. It should even go as far as revising its own judgments of the past that have severely damaged its credibility as a signatory to international treaties, and, if need be, grant arbitral tribunals the right to exceptionally reopen cases rejected in the wake of Achmea in order to submit doubtful issues of EU law relevant for the tribunal’s decision to the ECJ.

V. Concluding Remarks

The EU as a political entity aspiring to be an area of Peace, Security and Justice is in dire need of solving the issue of intra-EU ISDS in a convincing way. Advocate General Wathelet had already shown that reasonable path in his Achmea Opinion, and Nikos Lavranos has described the same by even pointing to a different region which has implemented the solution of integrating arbitral tribunals into a supra-national community of states. Clarifying such opportunity would only require a short EU regulation establishing a procedure analogous to the procedure foreseen in the Andean Community. This can and should be done even retroactively now because the ECJ had also retroactively and ultra vires devastated the credibility of the EU’s signature under the ECT (and possibly other international Treaties). It should expeditiously regain the path of legally fully acceptable arguments in order to come clean with its ambition set out in Article 21 (1) TEU:

[…]seeks to advance in the wider world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law.

The EU therefore can and should honour its signatures under bilateral and multilateral investment treaties and follow the example of the Andean Community.

  1. Dr. iur. Herbert WOOPEN, Docteur en droit (Clermont-Ferrand), is an Independent Lawyer in Cologne, Germany (RA-WOOPEN@netcologne.de).

  2. Katharina Pistor, The Code of Capital. How the Law Creates Wealth and Inequality, (2019); German: Der Code des Kapitals – Wie das Recht Reichtum und Ungleichheit schafft, (2020), page numbers quoted from the German edition. Below analysis is taken from pages 17, 26, 33-36, 46, 217-227, 244-249, 329, 348, 356, 364.

  3. Precedence of duties resulting from the UN Charter over other commitments from international treaties.

  4. Paras 85 (arbitral court is a court within the meaning of Article 267 TFEU), 87, 93 and 98 (with examples where the ECJ accepted such requests for preliminary rulings!), 273.

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