Schrödinger’s Investment: the EU’s General Court Considers that the Compensation Ordered by the Micula Tribunal is Not a Form of State Aid (Although it Might as Well Have Been)

Alexandros Catalin Bakos, LL.M. Candidate, Utrecht University

In a somewhat fortunate turn of events for the stability (or what is left of it in any case) of the intra-European Union (intra-EU) investment treaty system, the General Court of the European Union (GCEU) has annulled the EU Commission’s decision rendered against Romania for illegal state aid concerning the enforcement of the Micula arbitral award. Although the GCEU’s decision may be good news for the investors themselves, it does nothing to allay fears regarding the future of intra-EU ISDS. In the grand scheme of things, the effects which culminated with the Achmea judgement are still there.

This latest installment in the long-running saga of intra-EU investment treaties and their conflict with the EU legal order does not substantially change the paradigm. In fact, one may argue that it complicates the matters: the only certain conclusion that can be derived from the General Court’s decision is the fact that there can be no conflict between EU State Aid rules and intra-EU Bilateral Investment Treaties (BITs)/awards based on such treaties if the compensation ordered by the tribunal relates to measures which were taken prior to the entry into force of EU law. However, the Court did not analyze what is the situation of compensation which needs to be paid for measures adopted after the entry into force of EU law.

In any case, before continuing with the decision’s analysis, a short recap of the major developments in this situation is in order.

How did we get here? 

Prior to joining the EU, the Romanian state offered the Micula brothers and the companies controlled by them (the investors) certain custom duty exemptions and other tax breaks (the GCEU’s decision, paras. 5-6). Later, in 2004 and 2005, those exemptions and breaks were suddenly repealed, in an effort to ensure compliance with the EU laws on State Aid – which would become effective from 1 January 2007 (the GCEU’s decision, para 12). Because of this, the investors began ICSID arbitration proceedings, challenging the compliance of the measure with the applicable BIT (the 2002 Sweden-Romania BIT). The arbitral tribunal found in the investors’ favour and ordered Romania to pay compensation amounting to approximately €178 million. The court’s finding was based on a violation of the fair and equitable treatment standard. More specifically, on behaviour contrary to the legitimate expectations of the investors. This is of utmost importance, as what was considered to be in breach of the treaty was not the repealing of the exemptions itself, but the manner in which this occurred. The arbitral tribunal expressly found that ‘by repealing the […] incentives prior to 1 April 2009, Romania did not act unreasonably or in bad faith […] [H]owever […] Romania violated the Claimants’ legitimate expectations that those incentives would be available, in substantially the same form, until 1 April 2009. Romania also failed to act transparently by failing to inform the Claimants in a timely manner that the regime would be terminated prior to its stated date of expiration. As a result, the Tribunal finds that Romania failed to “ensure fair and equitable treatment of the investments” of the Claimants in the meaning of Article 2(3) of the BIT’ (para. 872 of the award).

Subsequently, the investors sought the enforcement of the award. However, this proved difficult because the EU Commission intervened and tried to prevent Romania from enforcing the award. The former argued that an enforcement would constitute a form of illegal state aid. After Romania, nonetheless, partially paid the award, the EU Commission officially adopted a decision against the Romanian state for breach of State Aid rules. The Commission’s argument was that this payment would, in essence, favour the investors in the same way in which the exemptions favoured them in the first place. Romania, thus, was under an obligation to stop paying the award and to recover the amount which had been paid so far. This was eventually challenged by the investors before the GCEU and the judgement analyzed here is the European Court’s decision regarding that challenge.

This turn of events determined other courts where enforcement of the award was sought to stay the proceedings until the European Court will have rendered an award concerning the challenge to the EU Commission’s decision on illegal state aid (see here for an example).

What does the GCEU’s decision entail and what does it not entail?

The GCEU found that the compensation rendered by the Micula arbitral award could not be considered illegal state aid, at least as it regards events which took place before Romania’s accession to the EU (para. 109 of the GCEU’s decision).

The essence of the GCEU’s arguments is based on a clear establishment of the temporal nexus to which the arbitral award referred (paras. 71-93 of the GCEU’s decision). To this end, the Court clarified that all the relevant issues (including the events which gave rise to the right to compensation) arose and produced effects before Romania’s accession to the EU (para. 71). In that respect, even if the arbitral tribunal’s award was rendered after EU law became applicable to Romania, it merely ‘retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession’ (para. 84 of the GCEU’s decision). Accordingly, even if the award was rendered after Romania’s accession to the EU, ‘the Commission retroactively applied the powers which it held under Article 108 TFEU and Regulation No 659/1999 to events predating Romania’s accession to the European Union. Therefore, the Commission could not classify the measure at issue as State aid within the meaning of Article 107(1) TFEU’ (para. 92 of the GCEU’s decision).

What is interesting, though, is that the GCEU referred only to a part of the compensation as not being under the Commission’s power of review. It did not exclude the entirety of the award from the Commission’s reach: ‘as regards the amounts granted as compensation for the period subsequent to Romania’s accession to the European Union, namely, the period from 1 January 2007 to 1 April 2009, even assuming that the payment of compensation relating to that period could be classified as incompatible aid, given that the Commission did not draw a distinction between the periods of compensation for the damage suffered by the applicants before or after accession, the Commission has, in any event, exceeded its powers in the area of State aid review’ (para. 91 of the GCEU’s decision). In other words, had the Commission distinguished between the pre-accession and the post-accession periods, the decision may not have been annulled after all (or may have been only partially annulled).

Clearly, the GCEU left open the possibility of finding an incompatibility between State Aid rules and the observance of an arbitral award rendered for acts which occurred after EU law became applicable. And this is what the decision does not entail: it does not clarify whether compensation payable on the basis of an arbitral award is contrary to EU State Aid rules.

It is true that the Court began an analysis of whether compensation offered on the basis of an arbitral award can be considered State Aid, but it stopped short of drawing any relevant conclusions. It limited itself to referring to the general conditions necessary for State Aid to arise (paras. 100-103 of the GCEU’s decision) and concluded that it cannot be considered that the compensation amounted to a form of illegal State Aid, at least not until the accession period. However, after the accession period, the analysis would advance to the issue of whether the objective elements of illegal State Aid were present: this, however, was not undertaken by the Court. It never determined whether the measure was imputable to Romania. And one can clearly see why the Court avoided this. It would be very hard to argue that the compensation ordered by the arbitral award can amount to illegal state aid.

Firstly, how can one impute an investment tribunal’s award to Romania? This would mean that Romania had control over the arbitrators, which is clearly not the case. Quite the opposite, as otherwise arbitration would not have been used so often in the settlement of investor-state disputes. Neutrality is one of the reasons ISDS exists. Additionally, for state aid to exist, one needs to demonstrate effective control of the state over the body which adopts the decision alleged to constitute such state aid (para. 52 of the Stardust case – France v. Commission, Case C-482/99). As shown earlier, this is clearly not the case with an investment arbitral tribunal.

Moreover, the GCEU mentioned that ‘compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid’ (para. 103 of the GCEU’s decision). This must be read together with the Court’s earlier judgment in the Asteris case. The basis of this case-law is that ‘State Aid […] is fundamentally different in its legal nature from damages which the competent national authorities may be ordered to pay individuals in compensation for the damage which they have caused to those individuals’ (para. 23 of the Asteris judgment). In this context, one must tread carefully before concluding that the subsequent compensation is, in fact, a hidden form of State Aid. Given the evident difference between the two, it is of utmost importance to demonstrate in-depth that in a specific case this difference is diluted.

One underlying premise for this difference to be able to disappear is for the EU Member State to actually be the one which formally re-institutes the illegal aid through the formal measure of compensation. The two measures – the initial state aid and, subsequently, the compensation for the withdrawal of the unlawful measure – must be seen as a whole, as having one purpose and as being able to be imputed to one entity – in this case, the Romanian state. In the Micula case, though, this was not present. The initial measure was indeed adopted by the Romanian state. The compensation, though, was decided by an objective and neutral tribunal. They are related, but they do not constitute one whole. Not to mention the fact that it can be very hard to argue that compensation on the basis of an award could offer unjustified economic advantages.

Secondly, one other condition for the compensation to be considered as re-instituting the illegal State Aid is for the compensation to be structured so as to replace the illegal measure itself. Nonetheless, this was not the case with the Micula award. One aspect must be taken into consideration in order to understand the difference between the customs and tax incentives themselves (the illegal State Aid) and the arbitral award. As mentioned at the beginning of this post, it was not the withdrawal of the incentive schemes that was considered to be the basis of compensation. What led to the present outcome was the manner in which the withdrawal took place, essentially leading to an infringement of legitimate expectations. Those are different and it is clear that, in any case, this would not be a case of re-instituting said state aid through the backdoor.

As such, the GCEU’s award is clearly not a silver lining for intra-EU ISDS, as it does not clarify – in the end – the most important aspect: can compensation rendered by an arbitral award be considered illegal state aid? In this context, when one thinks about the general scheme of things, it becomes evident that nothing has really changed: Achmea is alive (the effects have come sooner rather than later). Additionally, nobody knows its scope, especially when it comes to the Energy Charter Treaty’s (ECT) arbitration mechanism. Although arbitral practice seems to insist that Achmea does not preclude intra-EU ISDS on the basis of the ECT, what is eagerly waited is the CJEU’s position on this. After this, the CETA opinion – although reconciling ISDS with EU law when there is a third party (a party outside the EU) involved – does not mean the endorsement of intra-EU ISDS; it can clearly be seen that the EU’s position within UNCITRAL’s Working Group III is still the one we have been used to for so long: ISDS must be replaced with a standing court.


[1] LL. M. candidate in Law and Economics at Utrecht University.

Report on the 4th Annual EFILA Lecture delivered by Prof. George A. Bermann (Columbia University New York, School of Law), Brussels 25 October 2018

by Adam Marios Paschalidis (NautaDutilh)

Recalibrating the European Union – International Arbitration Interface

Introduction

The 2018 Annual EFILA Lecture by Prof. George A. Bermann (Columbia University School of Law), continues the successful Annual EFILA Lectures series, which were previously delivered by Sophie Nappert (2015), Johnny Veeder (2016) and Sir Christopher Greenwood (2017).

Before giving the floor to Prof. Bermann, Prof. Dr. Lavranos, Secretary General of EFILA set the scene of the Lecture by referring to the EU’s recent trend of re-considering the inclusion of the investment court system (ICS) in its FTAs. While the ICS has been included in EU-Singapore FTA, EU-Vietnam FTA, EU-Mexico FTA and CETA, this is not the case anymore in EU-Japan FTA, and neither is it on the table for the EU-Australia and New Zealand FTAs, whose negotiation phase started after the CJEU’s Opinion on the EU-Singapore FTA in which the CEJU determined that the competence on investor-state dispute settlement (ISDS) provisions is mixed. He, also, referred briefly to the Vattenfall arbitral tribunal on the Achmea issue and predicted that the ECT-related disputes will be the next theatre to watch in the upcoming years.

By way of introduction, Prof. Bermann considered as a fact that there is little new to be said with regard to the EU law-International Arbitration interface, since a lot of ink has already been spilled on this subject. Furthermore, he clarified that the purpose of his speech is to trigger a constructive discussion through the identification of some EU policy features that, if “revisited”, would promote a better relationship between the two regimes. Moreover, he expressed that the relationship between EU law and International Investment Arbitration is experiencing the most dramatic confrontation amongst other legal order’s interactions. In that regard, he further added that, despite the considerable level of fragmentation, different legal orders seldom collide on such a considerable level.

The Lecture was divided primarily in three parts. Firstly, he referred to the initial stages of European law and its rather scattered interaction with international (private) law. He then proceeded with the main part of his Lecture. In that respect, by eloquently addressing the different phases Community law has undergone, he identified three particular features of EU policy, which have affected the interaction between the European and Investment Arbitration legal framework. At the end of his Lecture, he shared his opinion concerning the future image of the ISDS regime and how EU law can be “refurbished” in parallel to the already accelerated re-examination of the ISDS regime.

Initial stages of EU law and its interaction with international (private) law

Prof. Bermann noted that at first EU law and international private law, especially international arbitration, were experiencing a status of “peaceful co-existence”, as early European law was exclusively focused on regulating the Union’s internal matters. As such, both European Treatises, the European Common Commercial Policy, the European Common Agricultural Policy, the European Common Fisheries Policy and so forth were adopted primarily for internal consumption. The result of this “introversion” was that legal instruments, which were also addressing some “external” aspects of the Union’s law, for instance private law affairs, were adopted outside the EU structures and in the form of conventions, such as the Brussels and Rome Conventions. At this point, Prof. Bermann made specific reference to the absolute exclusion of international arbitration from the content of the above mentioned conventions.

However, since the signing of the Amsterdam Treaty a dramatic shift has become evident. Amongst many other reforms, the regulation of private international law became part of the European Community column. As such, the European Union realised a wider role on that field, driven perhaps by its will to achieve a higher level of federalisation. Therefore, European legal instruments began to deal with private international law affairs as the European Commission was gaining more and more competence to address them. Unsurprisingly enough, the Court of Justice of the EU (CJEU) could not remain silent in light of this wave of “extroversion” and started assuming exclusive jurisdiction in a variety of cases. Both of the abovementioned escalations placed European law, as Prof. Bermann illustratively put it, in orbit of collision with international private law, especially international investment law. At this point, it should be mentioned that Prof. Bermann referred to the rise of ISDS arbitration and leading to a quantum shift as an additional crucial factor for the tension amongst the two regimes. Once again, however, he stressed that the purpose of his Lecture was to identify the changes that took place on the EU’s side of the equation.

EU law changes and their impact in investment arbitration

Prof. Bermann underlined three EU law features that have evolved or have been “invented”, thus influencing its correlation with International Investment Arbitration. However, before presenting them he pointed out that the impact of the first two is relatively limited in comparison to the third one.

First of all, European legal instruments initiated by the European Commission assumed wider roles and attempted to regulate fields of law, that fell under the Member States competence at the first stages of the Union. New legal instruments concerning private and commercial relationships were adopted, thus placing EU law, which would arise previously primarily as a defence in arbitral proceedings, in orbit of collision with international commercial arbitration.

As a second EU law feature that contributed to the prospective/already existing confrontation of the EU legal order with investment arbitration, Prof. Bermann specifically referred to the notion of the private enforcement of EU competition law. Stemming primarily from the CJEU judgment in the EcoSwiss case, this special element of EU law could provide a domestic court with the power to place an arbitral award under a special scrutiny regime, and even reject its enforcement on European public policy grounds. In that respect, two facts are of particular interest. First, he referred to the undefined level of review (deferential or non-deferential) that a domestic court can exercise. Second, he was concerned with the possibility of this ground being investigated by a domestic court on its own motion, irrespective of a party’s previously raised objection. Moreover, Prof. Bermann took his thoughts one step further and directed the audience’s attention to the fact that the precise rationale of the EcoSwiss decision could be utilized by the CJEU in different legal contexts and relationships as well.

Before resuming with the identification of the third EU policy feature, Prof. Bermann concluded that both aforementioned features provided the appropriate fuel for a new EU norm to arise, namely, that of European public policy. He even expressed his concern with regard to the implications European public policy will have in the substantive level of the EU law-International Investment Arbitration interface.

With the aforementioned last consideration, Prof. Bermann proceeded to the third European law element, that according to him affects the interaction between EU law and International Investment Arbitration the most. Prof. Bermann noticed that the concept of “autonomy of EU law” constitutes a rather recent trend in CJEU’s decisions. As found in some of the Court’s Opinions, including the Opinion 2/13 on the EU’s accession to the ECHR and in the Achmea case as well, it seems that the CJEU reserves its right to interpret EU law. In fact, not only does it reserve it, but it also assumes a monopoly in applying it. According to Prof. Bermann, the origin of the “EU law’s autonomy” concept can be traced back to the notion of the EU law’s primacy over the domestic law of the Member-States, as the CJEU held already found in Van Gend en Loos and Costa v. ENEL.

However, Prof. Bermann considered that there is a significant gap between these two EU law concepts (autonomy of EU law and primacy of EU law). On the one hand, the legal norm of “primacy” is expected to operate in intra-EU conflicts of law. On the other hand, the “autonomy of EU law” has been invented in order to interact with the international legal order. As it was articulated in its series of Opinions, the CJEU stands in opposition to any EU’s accession in international treaties that establish a Court or Tribunal whose decisions have an “adverse effect on the autonomy of the EU’s legal order”. In that regard, Prof. Bermann was astonished to note there is no other legal order that purports to disallow foreign courts to interpret its law.

In addition, Prof. Bermann invited the audience to “see” the bigger picture. As such, he remarked that the concept of EU law’s autonomy is expected to create turbulence and confusion concerning the EU’s and its Member States’ international legal standing. Obviously, such a monopoly of interpretation can be abused by the CJEU to form a potential rejection of a claim against the EU or one of its Member States. Even worse, the CJEU could force a domestic court not to enforce a decision or award that stands in contradiction with any part of the EU’s superior legal framework. However, Prof. Bermann did also refer to attempts to moderate/limit the concept of autonomy of EU law with respect to CETA and the ICS system contained therein, which, however, awaits approval by the CJEU in Opinion 1/17.

Furthermore, Prof. Bermann accepted that there is a fundamental difference between the CJEU’s Opinions and its Decisions. The Court’s Opinions, such as Opinion 2/13, were asked in order to predict incompatibilities between two separate legal regimes before signature. On the other hand, the Court’s Decisions like Achmea touched upon a Treaty’s validity after having been signed. As such, the Achmea decision “condemned” a Treaty and “dishonoured” an award, creating a considerable level of precedence. Additionally, Prof. Bermann considered that, although the Court in Achmea reassured the validity of investment treaties like the ECT or the CETA, it made clear that it reserves the exclusive right to interpret EU law.

Last but not least, Prof. Bermann could not help but notice the possible startling outcome of the combination of the CJEU’s monopoly of interpretation with the notion of EU public policy. In that regard, he referred to the Micula case, where the CJEU considered the domestic court’s level of scrutiny as insufficient. As such, the CJEU gave a substantive law dimension to the level of control, which a domestic court should exert when confronted with the recognition and enforcement of an arbitral award. Prof. Bermann took his consideration a step further and “painted” a realistic picture of the CJEU’s demands from a domestic court to reject the enforcement of a decision against the EU itself on public policy grounds.

Future image of Investor-State Dispute Settlement (ISDS)

Taking a third person’s sight in respect of European political and legal dynamics, Prof. Bermann specifically mentioned the need for the ISDS system to be re-examined in its entirety. Being a member of the Gabrielle Kaufmann Kohler academic forum, which has been created in the context of the UNCITRAL Working Group on ISDS reforms, Prof. Bermann called for a reconsideration of the basic features of investment arbitration, as this will prove useful in its interaction with EU law as well. At the same time he also referred to the possible steps, which the EU institutions and EU law could take in order to optimize its interaction with international investment arbitration. As such, a clearer delineation and clarification of the aforementioned EU law concepts, such as “European public policy”, “EU law autonomy” and the extent of an arbitral award’s substantial review by domestic courts could be helpful. Last but not least, Prof. Bermann made specific reference to the potential use of the CJEU’s “proportionality” principle in the “re-calibration” of the EU law-Investment Arbitration law relationship. He also expressed his discomfort of the absence of a constructive dialogue between EU institutions and International Arbitration institutions.

 

Q&A session moderated by Mr Kamil Zawicki (KKG)

The following four points of discussion formed the core of the Q&A session.

First, a comment was raised with regard to the relationship between CJEU’s Opinions and post treaty decisions/judgments. It was stated that there is a considerable difference between the two. The first has to do with a matter that may raise concerns in the future and are non-binding, whereas the Court’s decisions/judgments deal with a specific case and provide a solution based on the facts of the case. On this point, Prof. Bermann argued that CJEU’s Opinions are quite abstract and cannot anticipate which points of concern will arise at a later stage. They represent a special kind of precedent and are rarely not followed by the EU’s organs, despite the fact of not being binding. As for the Court’s decisions/judgments, he stated that they refer quite often to generic norms, although they deal with the particular facts of the case at hand.

Second, a question was raised concerning what  possible considerations an arbitrator is forced to make when sitting in ICSID arbitration proceedings, which take place in an EU Member State. Prof. Bermann replied that firstly an arbitrator should take  into consideration  his/her mandate to deliver an enforceable award. Secondly, he noted, in response to another point raised, that the interpretation of the Achmea case should be the same under intra-EU BITs, the ECT and the ICSID contexts. However, Prof. Bermann made a comment of significant value with regard to this question. He stated that even an award delivered in a seat of arbitration located outside the EU, such an award could still be annulled or not enforced for reasons of comity.

Third, a significant difference between the EcoSwiss case and the Achmea case was underlined. It was mentioned that in EcoSwiss the CJEU forced the Dutch courts to annul the arbitral award at hand. On the other hand, in Achmea the CJEU found that the arbitration clause was incompatible with the EU law, thus leaving more space for the domestic court’s deliberation. Prof. Bermann acknowledged the point raised, but he then turned the discussion on the EU law dynamics. Therefore, a domestic court cannot do much when confronted with the notion of EU law’s supremacy over domestic law. At this point, Prof. Lavranos added that indeed there is no room left to a domestic court to decide otherwise. Prof. Lavranos, also, referred to the need for widening the preliminary ruling system. In that respect, he expressed that it is of utmost importance that arbitral tribunals are provided with the right to request a preliminary ruling from the CJEU in case EU law is at issue. According to him, this crucial step would simplify the current situation in terms of consistency and predictability.

Fourth, a rather crucial remark was raised in respect of a very interesting feature of the Achmea case. In that regard, it was mentioned the Achmea case dealt primarily with the preliminary question of the presence or absence of the State’s relevant consent. The CJEU based its interpretation on the fact that the Member States compromised a part of their sovereignty by signing the Lisbon Treaty. Therefore, the CJEU can invoke the “supreme” instruments of EU law in order to determine the element of consent. At this point of the session, a debate took place with regard to the interpretation of Art. 54 ICSID “as it if were a final judgment of the courts of a constituent state”. It was mentioned by the audience that Art. 54 ICSID does not prevent a State from not enforcing an award on one of the grounds for annulment under ICSID or the ones for refusal of enforcement under the New York Convention. Prof. Bermann responded to the second point by mentioning that this depends on a particular State’s reading of the provision and exemplified his position by referring to the US framework concerning ICSID awards under which this kind of decisions are immune.

As far as the interpretation of a consent’s validity and its co-relation with EU law is concerned, Prof. Bermann made the following remarks. He firstly admitted that the supremacy of the EU law is a norm that should be taken into consideration when discussing the interaction of the EU’s and its Member States’ legal frameworks. However, when the concept of “supremacy” transforms into the one of “autonomy” and is used against the international legal order, problems as the one in the Micula case will arise. He further supported his opinion by inviting the audience to adopt a broader view beyond intra-EU BITs and imagine how an individual would investigate the existence of a consent from an international law perspective, by making reference to the Vienna Convention and its relevant provisions. As a last point, Prof. Bermann subscribed that a State is still considered a subject of international law, despite being a member of the EU.

Legitimate expectations in the TTIP proposal, in CETA, in EU law and in international investment law: a paradigm of Heraclitean hidden harmony?

by Artemis Malliaropoulou*

The problems are solved, not by giving new information, but by arranging what we have known since long.” ― Ludwig Wittgenstein, Philosophical Investigations, 1953

The wording of the European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP signals, among other questions, the necessity to conduct further research and elaborate on the ambit of legitimate expectations in international investment law as well as in EU law and compare the standard of protection provided so far with potential differences in interpretation arising out of the Public Consultation Paper’s clarification. It is stated that: “The “legitimate expectations” of the investor may be taken into account in the interpretation of the [FET] standard. However, this is possible only where clear, specific representations have been made by a Party to the agreement in order to convince the investor to make or maintain the investment and upon which the investor relied, and that were subsequently not respected by that Party. The intention is to make it clear that an investor cannot legitimately expect that the general regulatory and legal regime will not change. Thus the EU intends to ensure that the standard is not understood to be a “stabilisation obligation”, in other words a guarantee that the legislation of the host state will not change in a way that might negatively affect investors.[i]”.

CETA, as a point of comparison, makes clear from the outset that the EU and Canada preserve their right to regulate and to achieve legitimate policy objectives, such as public health, safety, environment, public morals, social or consumer protection and the promotion and protection of cultural diversity. This is a clear instruction to the tribunal for the interpretation of the investment provisions. It is also explicitly foreseen that Governments can change their laws, including in a way that affects investors’ expectations of profit and that the application of EU’s state aid law does not constitute a breach of investment protection standards[ii]. Paragraph 2 of the Article 8.9 states that: “For greater certainty, the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section.”

Unlike many agreements encompassing investment protection, CETA expressly deals with the issue of the role that legitimate expectations play in finding a breach of the FET standard. It limits their applicability to situations where a State party made a specific representation to the investor and subsequently frustrated it. Paragraph 4 of the Article 8.10 states that: “When applying the above fair and equitable treatment obligation, a Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.”.

It is worth mentioning four questions, as a minimum basis, arising out of the CETA text. First, the language of the provision leaves it up to the tribunal whether legitimate expectations must be considered or not[iii]. This uncertainty does not seem to be in line with the nature of legitimate expectations as seminal part of the FET standard and fundamental principle of EU law. Second, it remains unclear what a specific representation is and if the precedent in international investment law cases is going to be followed. A report[iv] of the International Institute of Sustainable Development points out the vagueness of this provision by a comparison with a previous draft for an umbrella clause. This clause specifically mentioned “any specific written obligation”. In comparison with the reference in paragraph 4 of the fair and equitable treatment provision to a “specific representation”, it shows clearly that “a specific representation is more open than a specific written obligation.”.

However, it should be pointed out that the requirement of a specific written obligation does not correspond to an existing precedent in EU law or in international investment law. Third, there is a lot of jurisprudence on the question of legitimate expectations based on objective criteria. Decisive is what a “reasonable investor is entitled to expect on the basis of the host State’s representations”[v], however, it is not clear if this “objective test” is going to be followed. Fourth, it seems that the expectation must be present at the time of the investment or maintenance of the investment[vi], which is in line with existing case-law. It is not clear whether it will be up to arbitral tribunals to interpret at what point investors’ expectations have been legitimate.

As arbitration scholars find the roots of legitimate expectations in investment law in the 2003 award “Tecmed v. Mexico”[vii], it could be rightfully supported that this principle is entering its adolescence in this field[viii], while in the EU law field it is in its forties.

In international investment law the concept of legitimate expectations has developed to be at the heart of the FET standard. In a nutshell, under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Investors’ expectations can be based on governments’ written commitments to investors (e.g., contractual commitments beyond mere contractual expectations), governments’ representations vis-à-vis specific investments (e.g., direct and public endorsements), or host countries’ unilateral representations (e.g., favorable regulatory frameworks) as they existed at the time of an investment[ix].

Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze[x]. Given the State’s regulatory powers, in order to rely on legitimate expectations the investor should inquire in advance into the prospects of a change in the regulatory framework in light of the then prevailing or reasonably to be expected changes in the economic and social conditions of the host State[xi]. No reasonable investor can have an expectation of an unaltered regulatory framework, unless very specific commitments have been made towards it or unless the alteration of the legal framework is total[xii].

In EU law legitimate expectations is a concept derived from German law, where it is known as Vertrauensschutz which was originally translated in English as “protection of legitimate confidence”; a translation that corresponded more closely to the French concept of “protection de la confiance légitime”[xiii]. This was thought to be misleading in English and henceforth the term “legitimate expectations” has been used[xiv]. This term indicates that administrative acts lato sensu[xv], in the absence of overriding public interest, must not violate the legitimate expectations of those concerned and it presupposes a careful balancing of conflicting rights-principles. From its early case-law, the Court of Justice of the EU has recognized that legitimate expectations form part of the European legal order[xvi] and provided EU citizens with a subjective right that justified expectations, which have been raised by the administration will actually be realized[xvii]. The principle of legitimate expectations is considered to be an assurance that the administration achieves its objectives while protecting the individual’s expectations and it has been used as a rule of interpretation[xviii], a ground for annulment[xix] or a basis for an action for damages for non-contractual state or EU liability.

The right to rely on that principle requires that three conditions are satisfied. First, precise, unconditional and consistent assurances originating from authorized and reliable sources must have been given by the state’s authorities to the person concerned. Second, those assurances must be able to give rise to an expectation which is legitimate for the person to whom they are addressed. Third, the assurances given must be consistent with the applicable rules[xx]. However, it is highlighted that, despite its status as a fundamental principle, economic operators are not justified in having a legitimate expectation that an existing situation which is capable of being altered by the EU institutions in the exercise of their discretion will be maintained, particularly in fields whose subject matter involves constant adjustment to reflect changes in the economic situation. The Court has held that, even if the European Union were first to have created a situation capable of giving rise to legitimate expectations, an overriding public interest may preclude transitional measures from being adopted in respect of situations which arose before the new rules came into force but which are still subject to change[xxi].

Nevertheless, in particular situations, where the principles of legal certainty and of the protection of legitimate expectations so require, it may be necessary to introduce transitional arrangements appropriate to the circumstances. Thus, the Court has held that a national legislature may breach the principles of legal certainty and of the protection of legitimate expectations when it suddenly and unexpectedly adopts a new law which withdraws a right that a category of taxable persons enjoyed until then, without allowing them the time necessary to adjust, when the objective to be attained did not so require[xxii].

The adverb “may” that accompanies the phrasal verb “take into account” in the context of the European Commission’s Public Consultation Paper, which is similar to the CETA wording, followed by a one-sided or superficial elaboration of a fundamental principle of EU law and international investment law may generate ambiguous outcomes. As soon as investors’ expectations are examined and considered to be justified, it is not clear why then they must not be balanced with the conflicting public interest at stake (or with the legitimate expectations of the state[xxiii]), applying the proportionality test. Bearing in mind the need for any type of dispute resolution mechanism created to not only do justice, but to be seen to be doing justice, a thorough research of the area is required and any attempt by policy makers (and later by adjudicators) to formulate sensitive concepts without following the precedent developed in the respective fields of law should state expressis verbis the reasons why that precedent should not be followed.


* Artemis Malliaropoulou, Visiting lawyer at the ICC (International Criminal Court) and visiting scholar at the University of Vienna.


[i]      European Commission Public Consultation Paper on modalities for investment protection and ISDS in TTIP, Question on FET standard, p.6, http://trade.ec.europa.eu/doclib/docs/2014/march/tradoc_152280.pdf

[ii]     http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf

Legitimate expectations are also mentioned in paragraph 2 of the Annex 8-A as one of the factors that should be taken into consideration in the context of the determination of whether a measure or series of measures of a party, in a specific fact situation, constitutes an indirect expropriation The extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations.

[iii]    Ursula Kriebaum, FET and Expropriation in the (Invisible) EU Model BIT, 2014 (15) The Journal of World Investment & Trade, p. 476.

[iv]    Nathalie Bernasconi-Osterwalder, Howard Mann‚ A Response to the European Commission’s December 2013 Document “Investment Provisions in the EU-Canada Free Trade Agreement (CETA)”, International Institute of Sustainable Development 2014, 7, http://www.iisd.org/pdf/2014/reponse_eu_ceta.pdf

[v]     Ursula Kriebaum, op.cit., pp. 476-479.

[vi]    Ibid.

[vii]    Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003).

[viii]   Lucy Reed and Simon Consedine, Chapter 20: Fair and Equitable Treatment: Legitimate Expectations and Transparency in Meg N. Kinnear, Geraldine R. Fischer, et al. (eds), Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International 2015, p. 283.

[ix]    Christoph Schreuer and Ursula Kriebaum, At what time must legitimate expectations exist?, in Jacques Werner and Arif Hyder Ali, eds., Law Beyond Conventional Thought, London: Cameron May, 2009, pp. 265-276.

[x]     El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011), para. 372.

[xi]    Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016), para 427.

[xii]    El Paso, op.cit., para. 374.

[xiii]   Trevor C. Hartley, The Foundations of European law, 2008 OUP, p.149.

[xiv]   John A. Usher, The influence of national concepts on decisions of the European Court, 1976, 1ELR p.363.

[xv]    There is no uniformity as far as the definition of an administrative act is concerned. The 2004 Recommendation of the Council of Europe provides the following one: “legal acts- both individual and normative- and physical acts of the administration taken in the exercise of public authority which may affect the rights or interests of natural or legal persons or situations of refusal to act or an omission to do so in cases where the administrative authority is under an obligation to implement a procedure following a request”. It is worth mentioning that this definition compared to others is much more concrete, and includes not only acts but also omissions and refusals in cases where the administration has no discretionary powers, while it refrains from including any obligation of an act to directly affect rights/ interests.

[xvi]   C-78/74, op.cit.

[xvii]  T-199/99 Sgaravatti Mediterranea Srl v Commission of the European Communities [2002] E.C.R.II-03731.

[xviii]  C-78/74 Deuka, Deutsche Kraftfutter GmbH, B. J. Stolp v Einfuhr- und Vorratsstelle für Getreide und Futtermittel [1975] E.C.R.421.

[xix]   C-112/77 August Töpfer & Co. GmbH v Commission of the European Communities [1978] E.C.R.1019.

[xx]    C- 566/14 P,  Jean-Charles Marchiani v European Parliament, Judgment of the Court (Grand Chamber) of 14 June 2016, para. 77 and the case-law cited; Joined Cases T‑50/06 RENV II and T‑69/06 RENV II, Ireland and Aughinish Alumina Ltd vs. European Commission, Judgement of the General Court (First Chamber, Extended Composition) dated 22 April 2016, para. 213 and the case-law cited.

[xxi]   C- 526/14, Tadej Kotnik and Others v Državni zbor Republike Slovenije – Request for a preliminary ruling from the Ustavno sodišče Republike Slovenije, Judgment of the Court (Grand Chamber) of 19 July 2016, paras. 66, 68 and the case-law cited.

[xxii]  C-332/14, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft GbR v Finanzamt Krefeld – Request for a preliminary ruling from the Bundesfinanzhof, Judgment of the Court (Fourth Chamber) of 9 June 2016, paras. 56-58 and the case-law cited.

[xxiii]  Karl P. Sauvant and Güneş Ünüvar, Can host countries have legitimate expectations?, Columbia FDI Perspectives, No. 183, September 26, 2016.

Call for Contributions: EFILA Blog

Given the present debate surrounding the investment and EU law community (enhanced by the Brexit, the TTIP or CETA negotiations), the EFILA Blog editorial board believes that a veritable dialogue must take place, allowing all arguments to be heard and all diverging positions to be defended.

Therefore, The EFILA Blog editorial board welcomes any contribution that pertains to the field of of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres.

If you are interested in submitting any material to the EFILA Blog, please contact our Managing Editor, Horia Ciurtin, at the following e-mail address: h.ciurtin@efila.org

 

Intra-EU BITs in a Fragile Union: On Non-Papers and Other (Legal) Demons

 

by Horia Ciurtin LL.M., Managing Editor of the EFILA Blog*

The Geo-Economic ‘Great Game’ and Its Symbolic Requirements

The Commission’s endless troubles with intra-EU investment treaties appears as a benchmark for its ability to develop a coherent trade and investment policy. Every single state and non-state stakeholder across the globalized agora is closely watching the manner in which the EU power is shifting from its soft forms to more ‘classical’ forms of constructing internal and external authority. In this sense, the handling of its own member states and their BITs is perceived as a litmus test for the Commission’s capacity to order itself internally and, thus, its future ability to project a coherent stance outward.

Therefore, reaching – or imposing – an internal consensus on the intra-EU BITs is a pre-condition for the EU becoming a truly relevant international player, detaching its future FTAs from those concluded before by member states. In this sense, the Commission is itself constrained to break loose from the MFN network laid down in prior bilateral treaties and to cut off national cabinets from their international capacity in investment law. Autonomy of the EU in foreign (economic) affairs is the keyword for Brussels. Autonomy from its members, autonomy from its often turbulent civil society and autonomy from other international organizations.

In this sense, as the Commission’s goal is to prevent ‘dangerous’ overlaps of projected (and symbolic) authority inside and outside the Union, it feels that the internal network of BITs must be first dismantled. And the extra-EU BITs are next on the list. More precisely, EU law cannot appear to be overrun by other norms within the realm subjected to the control of the Commission. Allowing such a phenomenon would immediately be perceived as a weak spot in the EU’s impenetrable normative armour by all the other actors from the global arena.

In such a geo-economic ‘great game’, no player can be perceived as lacking the force – or determination – to present a unitary and coherent stance. Everything is about leverage in negotiations. And no hesitating actors are allowed at the table.

Act I, A Euro-Tragedy Commencing: Carrying a Big (Legal) Stick

Somehow strangely for its previous benign image, the Commission appears to have lately got fond to Roosevelt’s principle of “speaking softly and carrying a big stick”. The infringement stick carried around and shown vigorously to (some) member states is a symbolic move to show that it really means to end the BIT regime.

After speaking softly – in the parlance of EU law supremacy and unitary treatment for European economic actors – the Commission decided to commence proceedings against those five member states who have been involved in finalized investment arbitrations (either on the claimant side or as respondents): Austria, the Netherlands, Romania, Slovakia and Sweden.

Not immediately compliant with the EU’s newly-discovered policy of terminating such BITs, these five member states found themselves at the whim of the Commission which not only argued for a coherent and non-discriminatory regime for all European investors, but also demanded that they dismantle the investment regime in a manner that might be at odds with good practices in international law.

More precisely, the request to strip away the effects of the so-called ‘sunset clauses’ is largely seen by many specialists in the field as a dishonest artifice on behalf of the signatory sovereigns (or those who push states to such a conduct. In addition, a paradox of the Commission’s stance is to ask investors from one state or another to entirely exclude (independent) arbitration as a justice mechanism and rather imbue this task upon national courts which the Commission itself criticizes on numerous occasions. While international arbitrators are relieved of this function, regular courts (sometimes under MCV scrutiny) from member states – often partisan with their national authorities – are considered as the only ones to properly protect investors’ rights.

When analyzing the distribution of states which have been subjected to this first wave of infringement proceedings, it can be seen that – with the relative exception of the Netherlands – none of them is a traditional or big EU player. For instance, despite the settlement in the Vattenfall v. Germany I case, Germany was not part of this lot. The other EU actors (such as the Franco-German entente or the British outlier) were just ‘warned’ and shown indirectly – but with deference – what could happen in case of non-compliance.

These initial five states rather represented the symbolic sacrifice, meant to give an example (a bad one) to the whole Union, in contrast with the two ‘good’ states (Italy and Ireland) that renounced the ‘treacherous ways’ of intra-EU BITs. Commissioner Jonathan Hill expressly made this point when arguing that “Intra-EU bilateral investment treaties are outdated and as Italy and Ireland have shown by already terminating their intra-EU BITs, no longer necessary in a single market of 28 Member States”.

And thus, the scene was set for the evolution of an unplanned dramatic dynamics.

Act II, A Euro-Comedy Unfolding: Impossible Solutions to Unknown Dilemmas

While it would have been predictable for the five infringing states to take either take a common position against the Commission or to tacitly comply, nobody foresaw that only two of them (Austria and the Netherlands) would attract other non-infringing states (France, Germany and Finland) and together make a counter-offer to the European executive. Their peculiar ‘Non-Paper’ was submitted to the Council – and not directly to the Commission – in a move that emphasizes a more profound power-game within the Union. Concentrating five states from the more prosperous and stable core of the EU (including the Franco-German bloc), with more leverage in negotiations and with a potential to coagulate a larger participation from the remaining member states, this Non-Paper essentially polarized the discussion on a different path, i.e. what comes after the termination of BITs.

While in principle agreeing to the immediate phasing out of investment treaties (obliterating the ‘sunset clauses’ and their effects), the Non-Paper establishes one single condition: general, coordinated and multilateral termination. This might prove feasible on the short term. However, it seems rather strange – given the history of the EU and its numerous normative impasses – to request a similar step in re-building investor protection.

In other words, the Non-Paper does not wish for a multilateral reform of the system – in conformity with EU law desiderates – but rather its total obliteration and then constructing it again from scratch. Although, not very differently. From a substantial perspective, the drafters of the Non-Paper advocate – more or less – the same standards used in classical BIT, but ‘codified’ for all member states and in a EU framework presenting an undisputable degree of deference to European law.

In addition, three procedural options are presented: one momentarily impossible, one politically improbable and one virtually unchanged. Either using the European Court of Justice as an ISDS (or, rather, ICS) EU-inspired proxy, or creating an autonomous body for exactly this type of disputes, or using the PCA under a limited and custom-made procedural framework. Apparently, this last alternative is the preferred one on the short-term, allowing a truly arbitral institution (one of the most prestigious, indeed) to administrate the future investment cases.

Therefore, all changes but everything stays the same.

Awaiting for the Grand Finale: Switching Centers, Merging Peripheries

In reality, this latest Non-Paper (rather a ‘Non’ than a ‘Paper’) might be reasonably perceived as a smoke and mirrors maneuver to coagulate a different type of EU-wide policy. Both the Commission, the ultra-compliant member states and the recalcitrant ones risk to be left on the margins, as a new ‘core’ tends to form. The stake of this strategic gamble is to determine who shall be the ‘center’ and who shall lie on the ‘periphery’.

For a coherent investment regime to emerge inside and outside the Union, perhaps, a less radical stance is needed from all sides involved. The internal power struggles of the EU might uncontrollably spill over its borders and affect its negotiations with other global players, if a majoritarian consensus is not soon reached. The Commission’s push on member states to dismantle the present BIT network might have worked with Italy or Ireland (and seems to be going well with Denmark and the Czech Republic), but it has attracted none of the big power brokers.

On the contrary, the Commission’s attitude managed to bring together the Franco-German entente with the Dutch key player, allowing for a nascent alternative consensus to be formed outside its reach. In parallel, the ground is also fertile for a grouping of dissenting states, including the UK (if it decides to remain in the EU) and Sweden (whose investors are involved in consistent ISDS proceedings) which might form another ‘center’, opposing the Commission’s mission to dismantle the BIT regime.

In such conditions, the global ‘great game’ and the EU’s future as a major international player might well be undermined by its internal divisions. As all enduring troubles, the EU’s start at home. Trying to exert too much force on a very limited – and largely marginal – issue tends to spiral into opposition. Preventing such dissensus to turn to outright defiance entirely rests with the Commission. The velvet gloves must come back on …


 * Horia Ciurtin, Managing Editor, EFILA Blog; Expert, New Strategy Center; Legal Adviser – International Arbitration, Scandic Distilleries S.A;  [see SSRN author page].

 

The Helping Hand of the MFN for the Intra-EU Bilateral Investment Treaties

Rimantas Daujotas, Motieka & Audzevicius PLP*

As it was recently announced, Slovakia has succeeded in referring the legality of intra-EU bilateral investment treaties to the European Court of Justice, as part of its bid to stop Dutch insurer Achmea from enforcing a €22 million UNCITRAL award. In a decision on 3 March 2016, Germany’s Federal Court of Justice ruled that it would make a preliminary reference to the ECJ on the question of whether the arbitration clause in the Slovakia-Netherlands bilateral investment treaty conflicts with EU law.

Achmea won the award in 2012 from a tribunal at the Permanent Court of Arbitration in The Hague. The tribunal found the state had breached the Slovakia-Netherlands BIT when it adopted measures prohibiting private health insurers from distributing profits to shareholders. Those measures were overturned by Slovakia’s Constitutional Court in 2010.

But Slovakia argued that the tribunal lacked jurisdiction because the BIT’s offer to arbitrate disputes expired when the state acceded to the European Union. It also contended that the tribunal failed to apply EU law, which the state argued forbids arbitration of investor-state disputes under intra-EU BITs where questions of EU law are involved.

In 2014, the Higher Regional Court of Frankfurt am Main dismissed Slovakia’s argument, ruling that the EU law in question merely prevents member states from submitting EU law disputes with one another to arbitration. Disputes between states and EU national private investors, the court said, could still go to arbitration. Based on the decision of 3 March 2016 by Germany’s Federal Court of Justice, that question will now go to the European Court of Justice to be decided.

The preliminary reference asks the ECJ to consider whether the BIT’s arbitration clause is consistent with Article 344 of the EU Treaty, which provides that “member states undertake not to submit a dispute concerning the interpretation or application of the [EU] Treaties to any method of settlement other than those provided for therein.” It also asks whether the arbitration clause in the Netherlands-Slovakia BIT constitutes discrimination against EU nationals whose home states do not have such a treaty with either the Netherlands or Slovakia, and therefore cannot benefit from the treaty’s arbitration clause. It notes, however, that should the clause be ruled discriminatory, that would not necessarily make it a dead letter: rather, the court suggests, any EU national might be able to access the arbitration clauses of any intra-EU BIT.

The last point of the Germany’s Federal Court ruling is particularly interesting, as it potentially argues on the possibility of any EU national to be able to access the arbitration clauses of any intra-EU BIT. Scholars and practitioners, such as Nikos Lavranos, secretary general of ISDS think tank EFILA, said that EU discrimination law might open the BITs’ arbitration provisions up to all EU nationals – “All EU investors should be treated the same, even if formally the BITs only apply to the signatory parties and their nationals, they should under EU law be open to all EU investors. We all have EU nationality, and discrimination on grounds of nationality is clearly prohibited under the treaties. The BITs have to be interpreted in light of that aspect of the EU treaties”.

The argument that all EU companies have EU nationality is particularly relevant. Similar issue was raised by the respondent in Poštová banka and Istrokapital v. Greece where the Respondent argued that as a societas europeas (“SE”), Istrokapital was formed and existing under the law of the EU and not under Cypriot law. In view of the fact that the EU is not a Contracting State of the ICSID Convention, Istrokapital allegedly did not qualify as an investor under Article 25(1) of the ICSID Convention. In addition, the Respondent contended that if, due to its SE nature, Istrokapital was considered to have been incorporated in Cyprus, as Claimants claimed, it had to be equally considered as incorporated in any of the other EU Member States, including Greece, and would therefore bear Greek nationality as well.

Claimants, on the other hand, argued that the nationality of a juridical person under Article 25(1) of the ICSID Convention is determined by its place of incorporation or registered office. Thus Claimants contended that the Respondent’s arguments to the effect that Istrokapital was not deemed a “national of another Contracting State” under Article 25 of the ICSID Convention mischaracterized and disregarded applicable EU law. Claimants asserted that pursuant to the European Company Regulation, SEs must be treated as public limited-liability companies of the Member State in which they have their registered office. Moreover, Claimants sustained that, per the European Company Regulation, SEs are domiciled in one single State and the fact that they can transfer their registered office within the EU did not mean that they had multiple nationalities or no nationality because such transfer was subject to registration in a Member State at a time.

Unfortunately, the tribunal firstly concluded that it lacked jurisdiction ratione materiae to entertain the dispute and deemed not necessary to examine the remaining objections to jurisdiction concerning absence of jurisdiction ratione personae and ratione temporis.

However, arguments of both sides seem particularly relevant when discussing whether all EU companies have EU nationality and any EU national might be able to access the arbitration clauses of any intra-EU BIT. Notwithstanding the problem concerning EU not being signatory to ICSID Convention (which may be rebutted by the fact that tribunal’s jurisdiction is firstly derived from the relevant BIT or that it would not work in non-ICSID arbitrations), another important aspect should be considered when discussing assess to any intra-EU BIT by EU nationals and that is – the MFN clause.

It is clear that all or most of the intra-EU BITs include the MFN clause which particularly prohibits discrimination on grounds of nationality. Thus, due to the MFN clause, distinctions based on nationality or additional requirements concerning nationality which are not allowed at the merits stage of the dispute, should also be prohibited when considering the jurisdictional phase of the dispute.

For example, if the MFN clause is also applied to the definition of the investor, i.e. to the requirements the investor should possess in order to be afforded protection granted under the basic treaty, does it mean that treatment afforded under the third party treaty (also intra-EU BIT) which is more favourable (e.g. less nationality based requirements) should also be applied to the investor bringing its claim under the basic treaty? In particular, could the investor use more favourable intra-EU BIT in order to be afforded protection under the basic treaty (also intra-EU BIT)? It is clear that this is a question of the scope of the MFN clause and since the definitions of “investor” and “investment” are pre-conditions of the investment-treaty tribunal’s jurisdiction, these questions could only be answered while analyzing the basis for the tribunal’s jurisdiction and relationship of the MFN clause thereof.

The view, as it stands right now on the scope and applicability of the MFN clause for jurisdictional purposes, is very divergent. Some practitioners had fiercely denied the possibility to apply MFN clause to either ratione personae or ratione materiae requirements.

However, applicability of the MFN clause to the jurisdictional provisions of the BITs was confirmed by the tribunals in Bayindir v Pakistan, MTD Equity v Chile were they argued that access to these procedural mechanisms is a part of the protection afforded under the treaty. The tribunal in Siemens v Argentina which considered the applicability of the MFN clause to dispute resolution provision had stated that “dispute settlement is as important as other matters governed by the BIT and is an integral part of the investment protection”. In RosInvestCo UK Ltd v Russia the tribunal held that the MFN clause in the UK-Russia BIT extended to dispute resolution provisions, however, the tribunal found that the UK claimant’s claims alleging breaches of the BIT’s expropriation provisions fell outside the scope of the BIT’s arbitration clause, which limited arbitration to a determination of the amount of compensation once expropriation had been established. Notwithstanding the latter, the tribunal concluded that it had jurisdiction over the expropriation claims because the Denmark-Russia BIT contained an arbitration clause broad enough to encompass the claims. Therefore, the UK-Russia BIT’s most-favored-nation clause allowed the claimant to expand jurisdiction ratione materiae.

Thus, taking into account the above, it seems that there are legitimate grounds to analyze the application of the MFN clause to the definition of investor or the ratione personae as well.

Since the prevailing view is that the appropriate comparator for the aggrieved investor are other investors in the same sector or who are competitors, a hypothetical scenario may be construed where two investors, legal persons, both from the EU invest in similar business sectors in other EU host-states. In this sample scenario, it is clear that the MFN clause would prohibit to impose heavier burdens for such similar investors coming from different EU Member states.

The result is that if one the EU investors is incorporated in the EU Member state or is incorporated as a societas europeas (“SE”) coming from other EU member state, it would only need to prove that it is constituted under the laws of any EU member state and nothing more, similarly as to the investor coming from other EU member state. Since Recital 6 and Article 1(1) of SE Regulation confirms that a SE derives its existence and legal personality from EU law, it could be claimed that such an investor is the EU national for the purposes of tribunal’s jurisdiction. That implies that other EU investors may not be afforded treatment less favourable than any other investor coming from the EU.  Now, if due to its SE nature, EU investor would be considered to have been incorporated in EU as a whole, it would be equally considered as incorporated in any of the other EU Member States, including the host-state. However, this does not seem a problem since most of the BITs also require to accord national treatment, that is, treatment no less favorable than that accorded to its nationals. Thus the result is the same as in the case of the MFN.

Effectively, based on this example, it could be argued that any intra-EU BITs, which provide any additional nationality requirements, in addition to the one which requires establishment in the EU Member state, would be contradictory to the MFN clause. Such a theoretical approach is confirmed by the analogous practice of investment treaty tribunals’ addressing the relationship between dispute resolution clauses or substantive protection clauses and the MFN clause referred to above.


Rimantas Daujotas – PhD Scholar at the Queen Mary University, Senior associate at Motieka & Audzevicius PLP

 

Can Investors Use the Proposed Unified Patent Court for Treaty Shopping?

Pratyush Nath Upreti*, Upreti & Associates

In recent years, there have been several discussions on Investor-State Dispute Settlement (ISDS) and its impact on states’ sovereign right to regulate. The latest cases of Philip Morris and Eli Lilly are evident where intellectual property claims were brought under the scrutiny of investment tribunals. These cases have received greater attention, bringing serious debate upon ISDS provisions in the ongoing Investment Agreementa, such as Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. On the other hand, the European Commission has proposed the Unified Patent Court (UPC) as a common patent court for all member states of the European Union. In other words, a step towards achieving further harmonization of the patent system in the European Union. On this note, let’s examine whether the proposed Unified Patent Court Agreement can be used to challenge IP claims under the ISDS.

Under International Investment Law, investment treaties offer an investor a choice of either ICSID or UNCITRAL arbitration. At the national level, an investor may choose European Court of Human Rights for additional claims of property rights or pursue a host country’s local court before the tribunal. The recent IIAs restrict investor to seek local remedies in the form of monetary compensation after consenting arbitration under the agreement. Although, forum shopping under investment law is not a new phenomenon. It rests on parties to choose the forum. But the important question is: can an investor have the liberty to do treaty shopping to enforce their intellectual property rights?

Treaty shopping refers to the strategy used by multinational corporations to ‘steal’ not only a higher level of protection, advantages or benefit, but also the jurisdiction of arbitral tribunals. For example, an Indian investor wants to protect its investment in South Africa, in spite of India does not have investment treaty with South Africa. This would be achieved by establishing a subsidiary Indian company in the country (China) in which South Africa has an investment treaty with.  For example, in China, the investor will be able to enjoy protection through treaty. In effect, investors tried to seek protection through China-South Africa treaty as corporate nationalities of China. The treaty shopping is mainly done (i) to seek to ensure treaty protection where none would otherwise be available (ii) to seek to benefit from specific substantive protections in particular treaties or (iii) to seek to benefit from certain procedural or other aspects of the dispute settlement provisions of a particular treaty.

In general, investors use treaty shopping through specific clauses of the investment agreement. But it may not always be so. Under the proposed Unified Patent Court, an investor may get the advantage of treaty shopping with respect to patent cases.  The preamble of the proposed Unified Patent Court states;

Considering that the Unified Patent Court should be a court common to the Contracting Member States and thus part of their judicial system, with exclusive competence in respect of European patents with unitary effect and European patents granted under the provisions of the EPC.”

Similarly, Article 1 of UPC states “The Unified Patent Court shall be the court common to the Contracting Member States and thus subject to the same obligations under Union Law as any national court of the Contracting Member States”.  In addition, Article 2 defines court as the Unified Patent Court created by the Agreement. The combined reading of the preamble and Article 1 of the UPC makes clear that for European Patent, Unified Patent Court is the National Court of Contracting Member States.

Now let’s turn into ongoing Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA). The case involves investment claims in tribunal on the ground that the patent invalidation by the Canadian Supreme Court violated the principle of fair and equitable treatment, as well as the expropriation of property. Although, it is very difficult to assume that arguments of Eli Lilly will succeed.  But in light of Eli Lilly case, an investor may challenge the decision of invalidity or any decision on patent given by UPC.

Article 32(1) describes UPC as having exclusive competence in respect of actions for revocation of Patents. Also, Article 65 empowers the court to decide on the validity of a patent on the basis of an action for revocation or a counterclaim for revocation. Thus, the Court may revoke a patent, either entirely or partly on the grounds referred in the EPC. So, revocation/invalidation of the patent under UPC may give rise to the expropriation of property and violate the legitimate expectation of an investor along with full protection and security to the investor.  It is important to note that these terminologies are the golden rules of investment agreements. However, lack of clear and reliable interpretation has given investors an opportunity to litigate intellectual property under investor-state dispute settlement.

When UPC is considered to be the national court of a contracting member state, an investor has an option of treaty shopping to bring the case to the tribunal under a particular BIT. Therefore, an unhappy investor may bring a claim against the decision of UPC (being the national court of all member states) on the basis of any IIAs agreed by any participating member state, as well as new EU IIAs. The objective of the investor is to bring claims under investor-friendly investment agreement. Therefore, the investor may eye on most favorable IIAs, to succeed in their favor.

For example, the Netherlands are considered as one of the liberal proponents of BITs in the world. The recent model BIT adopted by Netherlands has a very wide definition[1] of an investment. Unlike other BITs, it does not require the investor’s presence in a host state to qualify for an investment. Similar to the most liberal approach under BITs, the Dutch model protects investments irrespective of whether they are significant, lasting or any contribution to host country economic development are made in accordance with host country law. Moreover, any investor not satisfied by UPC decision has the option of bringing claims under the provision of Netherlands BITs. Thus, a Patent holder may treaty shop for the most convenient IIAs available in Europe. This may result in more frivolous IP litigation in investor-state dispute settlement.


[1] Under 2004 Dutch Model BIT, definition of investment also includes goodwill, know-how, even right granted under public law, including rights to prospect, explore, extract and win natural resources.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by  upretipratyush@gmail.com

EFILA, AIA and CIArb Event in Brussels: International Arbitration and EU Law Issues

EFILA together with the AIA and the Chartered Institute of Arbitrators are co-hosting an event which focuses on some of the hot issues regarding the interaction between EU law and International Arbitration. Speakers will deal both with commercial arbitration and investment treaty arbitration issues, as well as their interaction with EU law.

This half-day event takes place in Brussels on 27 May.

See registration form here.

The Shortcomings of the Proposal for an “International Court System” (ICS)

by Dr. Nikos Lavranos LLM, Secretary General of EFILA*

During 2015 it became clear that the European Commission was under mounting pressure from the European Parliament (EP), Trade Ministers of several EU Member States, anti-ISDS NGOs and the media to propose more “reforms” of the investor-State dispute settlement (ISDS) system that is contained in CETA and envisaged to be included in TTIP as well.

EFILA decided to establish a Task Force – consisting also of non-EFILA members – to analyse the final proposal for a so-called “International Court System” (ICS), which the European Commission formally adopted on 12 November 2015 and transmitted it to the US as a basis for further negotiations within the context of the TTIP negotiations.

During the debate in the European Parliament and among several Trade Ministers of EU Member States one key issue pointing towards a “solution” and which was continuously repeated was the creation of a permanent investment court consisting of publicly appointed judges. It was argued that in contrast to the current system of ad hoc arbitration consisting of party-appointed arbitrators, which has been characterized as “private”, behind closed doors dispute resolution, which biased towards the investor, a permanent investment court with judges would ensure fairer and better adjudication of investment disputes. Another related key issue, which was considered important for a “solution” was the creation of an appeal mechanism. Again the rather simplified characterization that ISDS disputes have no appeal possibility and are completely beyond the control of national courts, was used as a justification for the need of an appeal mechanism.

The European Commission had to incorporate these points otherwise a ratification of TTIP by the EP and the Member States would seem rather illusory. Having had significant experience as a disputing party in the WTO, which happens to include the Appellate Body as a permanent (quasi)judicial body, it was a small step for the European Commission to copy and paste many of the WTO dispute settlement elements into its ICS proposal.

The structure of the 60-pages EFILA Task Force analysis is as follows:

Chapter 1 analyses not only the ICS proposal as such, but also the process that preceded the proposal. This is important in order to understand the political context in which this proposal is embedded. It critiques certain aspects of the ICS proposal and raises a number of issues which the Task Force considers should be addressed in developing the ICS proposal further.

Chapter 2 provides an extensive overview of the already existing forms of appeal and annulment of investment awards. It also highlights the reform efforts in this regard by the PCA and the ICSID Secretariat. This overview provides a detailed picture of the status quo (including both the mechanisms and methods of operation), from which the ICS proposal departs. This analysis also draws critical attention to features or elements of the current system of ISDS which could be addressed in developing the ICS proposal.

Chapter 3 turns towards the WTO dispute settlement system by first explaining the features of the appeal system and then by examining to what extent this system could successfully be transplanted into the ICS and the limitations in so-doing.

Finally, Chapter 4 wraps up this analysis by providing some general conclusions as to matters which require consideration by the Contracting Parties in developing the ICS proposal further. In particular, the issues highlighted concern the methods of selection of the judges (and the implications of a move towards a system whereby the Respondent maintains, but the Claimant is deprived of, a role), the size of the pool of candidates for the two-tiered system, the relationship between the ICS and the CJEU and how the ICS will operate in the wider context of resolution of investor-state disputes under other instruments.

The conclusions of the Task Force report can be summarized as follows:

  1. The paper concludes that the ICS proposal is, first and foremost, a bold move to appease the EP and the public opinion in many EU Member States, which are critical against TTIP generally, and in particular against including any type of ISDS. The ICS proposal attempts to make the inclusion of an investor-state dispute settlement mechanism in TTIP politically acceptable, while at the same time trying to address the perceived shortcomings of the existing ISDS.
  1. The paper notes that – in contrast to the public perception – mechanisms for limited review of investment arbitration awards are already in place, such as the ICSID annulment mechanism and the setting aside procedure for non-ICSID awards by national courts. These mechanisms – while not perfect – provide useful corrective tools.
  1. The analysis of the WTO dispute settlement mechanism illustrates that caution should be exercised in simply transplanting it to investor-state disputes. The reason is that WTO law is structurally different from investment law, serves different purposes and has different users.
  1. Generally, it can be concluded that the ICS proposal clearly breaks with the current party-appointed, ad-hoc ISDS as provided for in practically all BITs and FTAs. The main result is that it deprives claimants of any role in the appointment of the judges, while giving the respondent States the exclusive authority to do so, albeit in advance of a particular case. The appointment of the judges by the Contracting Parties raises several problems, which the ICS proposal does not sufficiently address.
  1. The pre-selection of the TFI and AT judges by the Contracting Parties carries the inherent risk of selecting “pro-State” individuals, in particular since they are paid by the States (or rather their tax payers) alone. Apart from this danger, it remains doubtful whether a sufficient number of appropriately qualified individuals with the necessary expertise can be found. This is particularly true since many professionals currently working in arbitration may be excluded on the basis that they could be considered to be biased. The pool of TFI and AT judges would seem to be limited to academics, (former) judges and (former) Governmental officials. That might not be sufficient to guarantee the practical experience and expertise needed and/or independence from the State.
  1. The standard of impartiality and independence of the judges is highly subjective, and their independence on a practical level is not assured by the proposed text. Also, the system of challenging TFI judges and AT members can be further criticised for envisaging that the presiding judge will decide the challenge against one of his own colleagues on the bench, rather a decision being made by an independent outside authority.
  1. The system of determination of Respondent (in the case of the EU or Member States), in particular the binding nature of that determination, which is done by the EU and its Member States alone, creates significant disadvantages for the claimant and does not allow the ICS tribunals to correct any wrong determinations. This could result in cases being effectively thrown out because of a wrong determination of the Respondent.
  1. Since the ICSID Convention is not applicable to the EU, the recognition and enforcement of

ICS decisions remains limited to the EU and the US. The proposal also fails to clarify the difficulties elated to the New York Convention 1958.

  1. The ICS proposal does not address the difficult legal situation between the CJEU and other international courts and tribunals. There is no reason to believe that the CJEU would be more positive towards the ICS as compared to its outright rejection of the European Court of Human Rights when it comes to the potential interpretation or application of EU law. Also, the CJEU’s consistent rejection of any direct effect of WTO AB panel reports – even those that have been approved by the DSB and after the implementation deadline has lapsed – raises doubts as to the legal effects of ICS decisions within the European legal order.
  1. In sum, the suggested creation of a two-tier (semi)permanent court system would give the Contracting Parties a significantly stronger role in the whole dispute settlement process – potentially at the expense of both the investor/claimant and the authority of the ICS. In particular, the appeal possibility carries the risk of burdening small and medium investors by increasing the potential length of the proceedings and costs.
  1. While the US position towards the ICS proposal remains unclear for the time being, it also remains unclear how the ICS proposal could be multilateralized. Indeed, the perceived shortcomings of the current ISDS system is based on the fact that more than 3,000 BITs/FTAs are in place, which have been concluded by practically all countries in the world. The ICS proposal – limited to TTIP and perhaps extended to CETA – does not change that. The way the UNCITRAL Transparency Rules of 2014 are incrementally applied by way of an opt-in system established by a separate international treaty could be a possible way forward.
  1. As the TTIP negotiations between the US and the EU are now focusing on the ICS proposal, this is a perfect moment to further improve the proposal by addressing the matters identified in this analysis.
  1. Finally, the US and the EU should also consider whether it would not be more preferable to modify and improve existing systems, such as turning the ICSID annulment procedure into a full appeal mechanism.

This in-depth analysis is very timely and arguably one of the first ones following the formal adoption of the ICS proposal by the European Commission last November.

The EFILA Task Force paper raises many issues and provides some answers, but certainly leaves many problems untouched. At the EFILA Annual Conference which will take place on 5 February in Paris, the last panel will specifically discuss this report. All members of the investment arbitration community are welcome to (still) register for the conference or to submit their constructive comments to Dr. Nikos Lavranos, LLM, Secretary General of EFILA, at: n.lavranos@efila.org

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.