The Contents of the European Investment Law and Arbitration Review, Vol. 5 (2020)

Prof. Nikos Lavranos & Prof. Loukas Mistelis (Co-Editors in Chief)

We are very pleased and proud to present the fifth issue of the European Investment Law and Arbitration Review (EILA Rev) 2020.

As of 23 December 2020, all articles of this volume can be ordered online at Brill Publishers:

The stormy developments of the past years regarding international investment law and arbitration broadly understood, which to a large extent were driven by various EU institutions – European Commission, Court of Justice of the EU and the European Parliament – have confirmed the need for a legal journal such as this Review that exclusively tracks these developments and provides a forum for debate on the current state of affairs and future developments.

The Achmea judgment, the termination agreement regarding intra- EU BITs, CETA, Opinion 1/17, Brexit, the ISDS reform efforts in the UNCITRAL Working Group III and the ECT, are just a few of the topics that have been featured and continue to feature in a broad range of different contexts in this Review.

This issue opens with an article by Sarah Vasani and Nathalie Allen, which highlights the need of effective investment protection in order to ensure that the Paris Climate targets are reached by an increase in foreign direct investments in renewable energy. Often investment protection and environmental protection are presented as opposing, mutually exclusive interests; however, the authors convincingly argue that the contrary is true.

Elizabeth Chan’s article turns to Brexit and its potential for post- Brexit UK to design its foreign investment policy anew – independent from the EU.

Subsequently, Alexander Leventhal and Akshay Shreedhar analyze the practice of the European Commission intervening in arbitration proceedings by way of using amicus curiae briefs. They discuss the question whether, and if so, to what extent the European Commission can be considered a neutral friend of the tribunal or rather must be considered a third party with a particular interest – usually in support of the Member State concerned – which would have to be qualified as a potential abuse of the amicus curiae briefs tool.

Brady Gordon’s article provides a critical and sceptical analysis of the CJEU’s case law regarding CETA.

This is followed by David Sandberg and Jacob Rosell Svensson’s article regarding the implications of Achmea for national court challenge proceedings. They highlight the huge impact of Achmea for many on- going proceedings before domestic courts in various jurisdictions.

Samantha Rowe and Nelson Goh (former Managing Editor of this Review) explain how perceived norm conflicts regarding the January 2019 EU Member States Declarations on the consequences of the Achmea judgment can be resolved through principles of treaty interpretation.

Nikos Lavranos concludes this series of Achmea related articles by offering his analysis on the recently signed termination agreement, which would effectively terminate most intra-EU BITs.

As in the past years, we also run an Essay Competition, which resulted in many outstanding submissions. Indeed, this year the quality was so high that the Editorial Team decided to award, next to the first prize winner, two joint second prize winners rather than a second and third prize winner.

Crawford Jamieson is the first prize winner of the Essay Competition 2020 with his submission, which assesses the CJEU’s decisions in Achmea and Opinion 1/ 17 regarding CETA in light of the proposed Multilateral Investment Court (MIC). He shows that there are considerable flaws and inconsistencies in the CJEU’s jurisprudence, which can only be explained by political motivations in order to lend support to the MIC.

Joint second prize winner, Robert Bradshaw, illustrates with his submission that international investment law is in need of a proportionality test. The other joint second prize winners, Florence Humblet and Kabir Duggal, provide an extensive analysis for using Article 37 of the EU Charter as a defence for Climate Change and environmental measures in Investor-State arbitration disputes.

The case-note section is opened by Cees Verburg who analyses the Hague Court of Appeals’ decision, which overturned the lower courts’ decision to annul the USD 50 billion Yukos award. This decision reinstated the award, while at the same time triggered an appeal by the Russian Federation before the Dutch Supreme Court. Thus, there will be another, final, round.

Bianca McDonnell examined the Adamakopoulos v. Cyprus Decision on Jurisdiction by the ICSID arbitral tribunal. This decision is particularly interesting regarding the dissenting opinion of one arbitrator concerning the alleged incompatibility of the bit s and the EU Treaties as well as regarding the aspect of the mass claim nature of the proceeding.

Finally, Alesia Tsiabus and Guillaume Croisant discuss the lessons learned from the Micula saga for the relationship between international investment law and EU competition law.

The focus section on the Young ITA event on investment arbitration and the environment continues the theme, that was initiated by the first article in this Review. The focus section encompasses several written contributions of the presentations given at the Young ITA event held on 5 November 2019 in London.

This section is opened by an extensive analysis of Laura Rees-Evans in which she explains the recent developments and prospects of reform regarding the protection of the environment in international investment agreements.

Crina Baltag looks at the doctrine of police powers in relation to the protection of the environment, while Anna Bilanova explains the option of using environmental counterclaims. This is followed by a discussion of Guarav Sharma on environmental claims by States in investment treaty arbitration.

Finally, Nikos Lavranos, the other Co- Editor-in-Chief of this Review, looks at the (ab)use of third- party submissions in investment treaty arbitration proceedings.

The EFILA focus section contains a summary of the keynote delivered by Meg Kinnear at the 5th EFILA Annual Conference with a particular focus on using ADR tools in investment disputes.

This is followed by the text of the 5th EFILA Annual Lecture delivered by Prof. Laurence Boisson de Chazournes on navigating multiple proceedings in the light of the proliferation of courts and tribunals.

Finally, three book reviews wrap up this issue. Nikos Lavranos looks at the new Practical Commentary on the ICSID Convention, while Nelson Goh (former Managing Editor of this Review) reviews a Case Book on International Law in Domestic Courts and Trisha Mitra (Co- Managing Editor of this Review) examines the book on the future of Investment Treat Arbitration in the EU.

We are confident that this year’s 480 page volume underscores again the raison d’être for publishing this Review, which covers such a dynamic field of law.

In order to produce an interesting volume next year yet again, we invite unpublished, high-quality submissions (long and short articles as well as case notes) that fall within the scope of this Review.

The Call for Papers and the house style requirements are published on the Review’s website:

In addition, we will also again run an Essay Competition. All information regarding the 2021 Essay Competition will be published on the Review’s website:

Table of Contents of the European Investment Law and Arbitration Review 2020

Articles

1 No Green without More Green: The Importance of Protecting FDI through International Investment Law to Meet the Climate Change Challenge 3

Sarah Z. Vasani and Nathalie Allen

2 The UK’s Post- Brexit Investment Policy: An Opportunity for New Design Choices 40

Elizabeth Chan

3 The European Commission: Ami Fidèle or Faux Ami? 70

Alexander G. Leventhal and Akshay Shreedhar

4 A Sceptical Analysis of the Enforcement of ISDS Awards in the EU Following the Decision of the CJEU on CETA 92

Brady Gordon

5 Achmea and the Implications for Challenge Proceedings before National Courts 146

David Sandberg and Jacob Rosell Svensson

6 Resolving Perceived Norm Conflict through Principles of Treaty Interpretation: The January 2019 EU Member State’s Declarations 167

Samantha J. Rowe and Nelson Goh

7 The World after the Termination of intra-EU BITs 196

Nikos Lavranos

Essay Competition 2020

8 Assessing the CJEU’s Decisions in Achmea and Opinion 1/ 17 in Light of the Proposed Multilateral Investment Court – Winner of the Essay Competition 2020 215

Crawford Jamieson

9 Legal Stability and Legitimate Expectations: Does International Investment Law Need a Sense of Proportion? – Joint 2nd Prize Winner of the Essay Competition 2020 240

Robert Bradshaw

10 If You are not Part of the Solution, You are the Problem: Article 37 of the EU Charter as a Defence for Climate Change and Environmental Measures in Investor- State Arbitrations – Joint 2nd Prize Winner Essay Competition 2020 265

Florence Humblet and Kabir Duggal

Case- Notes

11 The Hague Court of Appeal Reinstates the Yukos Awards 299

Cees Verburg

12 Theodoros Adamakopoulos and Others v. Republic of Cyprus, ICSID Case No Arb/15/49, Decision on Jurisdiction, 7 February 2020 315

Bianca McDonnell

13 Investment Arbitration and EU (Competition) Law – Lessons Learned from the Micula Saga

Alesia Tsiabus and Guillaume Croisant 330

Focus section on the Young ITA Event: Investment Arbitration and the Environment – Emerging Themes

14 The Protection of the Environment in International Investment Agreements – Recent Developments and Prospects for Reform 357

Laura Rees- Evans

15 Investment Arbitration and Police Powers: Emerging Issues 392

Crina Baltag

16 Environmental Counterclaims in Investment Arbitration 400

Anna Bilanová

17 Environmental Claims by States in Investment Treaty Arbitration 412

Gaurav Sharma

18 The (ab)use of Third- Party Submissions 426

Nikos Lavranos

Focus Section on EFILA

19 ADR in Investment Disputes: The Role of Complementary Mechanisms – Keynote to the 5th EFILA Annual Conference 2020 439

Meg Kinnear

20 The Proliferation of Courts and Tribunals: Navigating Multiple Proceedings – 5th EFILA Annual Lecture 2019 447

Laurence Boisson de Chazournes

Book Reviews

21 The ICSID Convention, Regulations and Rules – A practical Commentary 471

Nikos Lavranos

22 International Law in Domestic Courts: A Case Book 473

Nelson Goh

23 The Future of Investment Treaty Arbitration in the EU: intra-EU BITs, the Energy Charter Treaty, and the Multilateral Investment Court 475

Trisha Mitra

Taking Investors’ Rights Seriously: The Achmea and CETA Rulings of the European Court of Justice do Not Bar Intra-EU Investment Arbitration

Prof. Dr. Alexander Reuter *

The ECJ’s Achmea and CETA rulings [1]; as well as the entire debate conducted on the issue so far, disregard one legal factor, that is, the binding legal effect of investors’ rights under investment treaties. That factor is, however, at the heart of the matter and decisive. Under EU procedural law that factor can be raised at any time as a “fresh issue of law”. Thus, the Achmea and CETA rulings of the European Court of Justice do not bar intra-EU investment arbitration.

This proposition is not to contribute to the voluminous debate on Achmea and on the compatibility of intra-EU investment arbitration with TFEU art. 344, 267 and 18 or other EU governance principles such as the “principle of mutual trust”. In contrast, that proposition is based on investors’ rights under public international law as third parties, and the binding effect on the EU, its institutions and its member states of such rights. In addition, under the criteria developed by said ECJ rulings, intra-EU ISDS under the ECT fares better than the CETA.

The above propositions are set out in more detail by the author in the Heidelberg Journal of International Law (HJIL) (Zeitschrift für ausländisches öffentliches Recht und Völkerrecht; ZaöRV). [2]

A)   Third party rights under public international law

In Achmea the European Court of Justice (”ECJ“) found intra-EU investment arbitration under the bilateral investment treatybetween Slovakia and the Netherlands to violate the principles of mutual trust and sincere cooperation amongst EU member states, the supremacy of EU law and the protection of the ECJ’s own competence to ensure the uniform application of EU law. All of these principles concern the internal governance of the EU, its member states and its institutions, not investors’ rights. On the other hand, in the last years a great many arbitral tribunals dealt with intra-EU investment arbitrations, most of them under the Energy Charter Treaty (“ECT”), a multilateral investment treaty to which the EU has acceded. None of these tribunals found the proceedings to be incompatible with EU law. [3] The tribunals refer to the general interpretation rules of the Vienna Convention on the Law of Treaties (VCLT) and, as one tribunal has worded it, a carve-out for intra-EU conflicts would be “incoherent, anomalous and inconsistent with the object and purpose of the ECT”, the rules of international law on treaty interpretation, in particular the universal recognition of “the principles of free consent and of good faith and the pacta sunt servanda rule”. [4]

This is in line with the intent of the EU institutions involved with the accession by the EU to the ECT. The internal documents preparing the accession demonstrate that the EU did not intend the ECT to distinguish between intra-EU and extra-EU disputes. In line therewith, the ECT, as adopted not only by all EU member states, but by both the European Commission and the European Council, does not contain any indication that differing rules should apply “intra-EU” on the one hand and in respect of non-EU parties on the other hand. In contrast, by a declaration made when acceding to the ECT (see Annex ID to the ECT) [5] , the European Communities did not only set forth that the “European Communities and their Member States” are “internationally responsible” for the fulfillment of the ECT, it also expressly mentions the “right of the investor to initiate proceedings against both the Communities and their Member States”. Additionally, the declaration expressly deals with the role of the ECJ and documents that the EU acceded to the ECT in full cognizance of the fact that the ECJ can be involved in such proceedings only (1) “under certain conditions” and in particular only (2) “in accordance with art. 177 of the Treaty” [now TFEU art. 267]. Hence, the declaration expresses the acceptance by the EU of the curtailment to the competences of the ECJ resulting from investment arbitration under the ECT.

B)   Taking investors’ rights seriously: Their binding effect within the EU

The reason for this discrepancy between the findings of the ECJ and those of the arbitral tribunals can already gleaned from the above: While the tribunals deal with investors’ rights under the relevant investment treaties, the ECJ is concerned with intra-EU governance issues. [6] However, governance issues do not do away with the fact that investment treaties form part of public international law and bestow private investors with the rights (1) that the host state comply with the treaty’s protection standards and (2) to take the host state to arbitration. Such private enforcement is even one of the essential features of investment treaties. [7] Which consequences does this have within the EU?

Even the ECJ concedes that public international law treaties must be interpreted in accordance with the VCLT, notably “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”. Thus, for purposes of public international law, the ECJ must be taken to recognize (1) that investment treaty rights vest with the investors and (2) the fact that all arbitral tribunals involved have affirmed the ECT, under public international law, to cover intra-EU investments. There is no indication that such a long, uniform and unequivocal line of arbitral holdings does not constitute an interpretation of the ECT “in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose”.

In turn, under TFEU art. 216(2) “Agreements concluded by the Union are binding upon the institutions of the Union and on its Member States”. Admittedly, the ECJ makes an internal exception to TFEU art. 216 (2), that is, an exception as regards the parties to the EU Treaties, the EU and its institutions: Vis-a-vis these parties the ECJ confines the binding effect of treaties under art. 216 to supremacy over secondary EU law, and carves out primary EU law. [8] However, this internal limit to the effect of public international law treaties does not apply to third parties. Vis-à-vis third parties, under public international law the EU is bound by the treaties it has concluded. [9] The ECJ has held „that the Community cannot rely on its own law as justification for not fulfilling [the international treaty at bar].“ [10] As private investors are third parties, this holds true for them as well, and all the more so as their means to analyse the internal governance rules of the EU (or a host state) for potential infringements which may impact the validity of the treaty or of obligations contained therein, are substantially lower than the means of the other state parties which negotiated, concluded, and agreed on the ratification process for, the relevant treaty. In short: Pacta sunt servanda, in particular where investors have made investments which they cannot undo. [11]

In this connection it is irrelevant that intra-EU investment arbitration is typically directed against the relevant host state, not against the EU. As a party to the ECT, the EU is bound not to obstruct the due implementation of the rights and obligations of investors and the relevant host states. In contrast, the obstruction by the EU of the due implementation of the ECT would constitute a treaty violation in itself. [12]

C)   Consequences for Intra-EU bilateral investment treaties

The above considerations do not directly apply to bilateral investment treaties (“BITs”) between EU member states, to which the EU has not acceded. However, rights vesting under a BIT are not without protection under EU law either: First, where a host state has acceded to the EU after it has entered into a BIT, TFEU art. 351 grandfathers rights of investors as third parties. Second, there may have been acts or omissions of the EU in connection with the relevant treaty. Third, while, in general, determining EU law with retroactive effect, under its case-law the ECJ may be “moved” to carve-out “existing relationships” from such effect. [13]

D)   No precedent character of Achmea and CETA

Invoking investors’ rights is not precluded by a “precedent” character of Achmea or CETA: Preliminary rulings under TFEU art. 267 only bind the national court, and thus the parties, to the main proceedings in question [14] . Nevertheless, referral procedures under TFEU art. 267 have the purpose to have EU law interpreted for the EU as a whole and thus have a factual precedent effect. [15] However, the ECJ has confirmed the right to make a (further) reference on a “fresh question of law” or “new considerations which might lead the ECJ to give a different answer to a question submitted earlier”. [16] As a result, Achmea and CETA have no binding or precedent effect beyond the considerations they have dealt with.

These considerations do not include investors’ rights: Achmea, as already mentioned, is confined to EU governance issues. CETA, in contrast, did not fail to consider the position of investors. However, these were ex ante considerations, not the protection of investors who have already made investments in reliance on a treaty. It did thus not deal with a treaty which had already been concluded, had come into force, had bestowed rights on investors, and in reliance on which investors had made investments. [17]

In contrast, the ECT is a concluded treaty which has been in force for many years and under which investors have already made a great many intra-EU investments. Thus, when making their investments, investors were entitled to have the expectation that the ECT would be respected by its parties, including the EU.

E)   Applying the criteria of the CETA Opinion

In the alternative: If one (contrary to the above) were to disregard investors’ rights under public international law, the question arises how the ECT would fare under the criteria selected by Achmea and CETA to assess the compatibility of intra-EU investment arbitration with EU law. A detailed analysis shows that the ECT does not run aful of, but meets, those criteria. [18]

F)   A matter of justice

The conclusion is: Investors are entitled to rely on their investment treaty rights. Under public international law, the EU position regarding intra-EU ISDS is, as the Vattenfall tribunal has expressed it, “unacceptable”, “incoherent”, “anomalous and inconsistent”. [19] This is corroborated by the described conduct of the EU when negotiating and acceding to the ECT. Hence, that investors should not be bereaved of their vested rights is a matter of material justice. This holds all the more true where the EU was instrumental in soliciting the investments and changed its position only at a point in time when such investments had been made. [20]


* Rechtsanwalt and Attorney-at-Law (New York)
Partner, GÖRG Partnerschat von Rechtsanwälten
Cologne

[1] ECJ, 6 March 2018, Case C‑284/16, Achmea; ECJ, ECJ, Opinion 1/17 of 30 April 2019, CETA.

[2] Issue 80 (2/2020), pp. 379 – 427.

[3] Cf. Foresight v. Spain, SCC Arbitration V 2015/150, Award, 14 November 2018, para. 221, with a list of awards affirming intra-EU arbitration; Reuter, note 2, Part B IV.

[4] Vattenfall et al. v. Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue, 17 August 2018, paras. 154/155; Reuter, note 2, Part B

[5] https://energycharter.org/fileadmin/DocumentsMedia/Legal/Transparency_Annex_ID.pdf

[6] The reasons for that stance may be institutional rather than legal: Organizations innately tend to attach high priority to their own competences and inter-institutional governance.

[7] MacLachlan/Shore/Weiniger, International Investment Arbitration, 2007, paras. 1.06, 2.20, 7.01; Reuter, note 2, Part B.

[8] ECJ, 10 January 2006, C-344/04, IATA and ELFAA, para. 35.

[9] For more details Reuter, note 2, Part D.

[10] ECJ, 30 May 2006, Joined Cases C-317/04 and C-318/04, European Parliament v Council, para. 73.

[11] For more details Reuter, note 2, Part D.

[12] As for the liability of the EU on the one hand and member states on the other hand in connection with mixed investment agreements in general Armin Steinbach, EU Liability and International Economic Law, Hart Publishing 2017, pp. 133 et seq., pp. 141 et seq.

[13] For more details Reuter, note 2, Part D; as regards the carve-out ECJ, 13 May 1981, Case 66/80, International Chemical Corporation, paras. 13/14; see also ECJ, 8 April 1976, Case 43/75, Defrenne v Sabena, paras. 71/72.

[14] ECJ, 29 June 1969, Case 29/68, Milch-, Fett- und Eierkontor GmbH v Hauptzollamt Saarbrücken, para. 3.Wegener in Calliess/Ruffert, EUV/AEUV, 5th ed. 2016, art. 267, para. 49.

[15]     ECJ, 24 May 1977, Case 107/76, Hoffmann-LaRoche/Centrafarm, para. 5; Reuter, note 2, C III.

[16] ECJ, 5 March 1986, Case 69/85, Wünsche Handelsgesellschaft GmbH & Co. v. Germany, para. 15; For more details Reuter, note 2, Part B III.

[17] For more details Reuter, note 2, Part B III 3.

[18] For more details Reuter, note 2, Part D.

[19] See note 4.

[20] Reuter, note 2, Part E.

Report on the 5th EFILA Annual Conference held on 30th January 2020 in London

by Dr. David Pusztai (Quinn Emanuel Urquhart & Sullivan, LLP

The European Federation for Investment Law and Arbitration (EFILA) held its 5th Annual Conference on 30 January 2020 in London, with a focus on Investment Arbitration in the EU: Alternatives to Intra-EU BITs”. As the Secretary-General of the International Centre for Settlement of Investment Disputes, Meg Kinnear, noted in her keynote speech, there is no small irony in alternative dispute settlement” today being understood as a reference to alternatives of investment arbitration. Arbitration has traditionally been perceived as the epitome of alternative dispute settlement mechanisms, yet today the attention shifts to its alternatives: back to domestic court proceedings, to conciliation, mediation and fact findings.

The Secretary-General stressed that ICSID responds to the call for alternatives. Kinnear discussed proposed changes to the ICSID Conciliation Rules, as well as the proposed mediation and fact-finding rules in great detail. The upshot of consultation with stakeholders at the ICSID level was that parties expect less formalism, more flexibility in procedures, and more available procedural options. These considerations have been key pointers in articulating the new rules for ADR at ICSID. The Secretary-General also highlighted the inevitable challenges of bringing a project of alternative investment dispute resolution to success. Among these challenges, Kinnear pointed to the unique combination of skills expected from an investment dispute mediator or conciliator. Both a deep understanding of investment disputes and their legal framework, and experience and suitability as a mediator will be required from individuals mediating investment disputes. As several contributors also underscored during the conference, States need to form an official position as to whether they are willing to engage in ADR processes. In most cases, this would require implementing changes to domestic regulatory and institutional frameworks which have been designed for invesment arbitrations, and cannot accomodate other forms of investment dispute resolution.

The keynote speech was followed by a discussion between Monty Taylor of Arnold & Porter, Professor Stephan Schill of the University of Amsterdam, Dr Paschalis Paschalidis of Shearman & Sterling and Arne Fuchs of McDermott Will & Emery, moderated by Lord Goldsmith QC. Whilst endorsing the development of alternatives to arbitration, the participants voiced several concerns that put into doubt the feasibility of ADR in the investment dispute resolution context. It was raised whether governmental officials tasked with decision-making in the course of investment dispute mediations can realistically be expected to undertake full responsibility for the outcome of the dispute settlement process. Incentivising both government officials and ultimate political decision-makers to approach ADR processes in an efficient manner was described as a potential hurdle for ADR to succeed as an investment dispute settlement tool. The panelists also discussed whether alternative dispute settlement procedures risk contracting out” of public law structures and accountability mechanisms, and stressed the need for adequate safeguards against corruption tainting the process. The extent to which ADR can substitute (as opposed to complement) investor-State dispute settlement for EU investors was considered doubtful as long as third State investors retain the leverage of potential investment treaty claims against European Governments.

Three further panels addressed alternatives to investment arbitration from various angles throughout the day. The panel discussions were opened by Professor Loukas Mistelis, the Chair of the Executive Board of EFILA, who commented on contours of the emerging new era of investment protection: investment law being potentially submerged in international trade law, and the potential return of contract-based investment disputes. The first panel, chaired by Judge Christopher Vajda of the Court of Justice of the EU, considered investment protection under EU law. Judge Vajda outlined the pertinent case law of the Court of Justice, and explained the Court’s interpration of the scope of the Charter of Fundamental Rights, which is expected to be a potential legal basis for investment claims pursued before courts of Member States in the future. The panelists, Alejandro Garcia of Clyde & Co, Dr. Patricia Nacimiento of Herbert Smith Freehills Germany LLP and Dr. Alexandra Diehl of White & Case addressed the status quo of investment protection post-Achmea. The discussion covered the competing theories on the nature of investor rights and whether the termination of sunset clauses can pre-empt recourse to investment tribunals; the leaked draft of the Plurilateral Agreement” being negotiated by EU Member States with a view to terminating intra-EU investment treaties; and changes required in the system of judicial protection under EU law from the perspective of investment protection.

The second panel of the day, moderated by Professor Nassib G. Ziadé (CEO of the Bahrain Chamber for Dispute Resolution (BCDR- AAA)), focussed on Alternative tools for effective investment/investor protection”. The panel, comprising Mark Appel, Mélida N. Hodgson of Jenner & Block, Eloïse M. Obadia of the International Finance Corporation and Professor Gerard Meijer of Linklaters, discussed in particular the ongoing reform process at ICSID. The central point of the debate, with several contributions from the audience, was how to reconcile the public demand for greater transparency and accountibility in investment dispute settlement with the indispensable confidentiality that mediation or conciliation processes require. A halfway house” approach was considered by the panelists, whereby the fact of the dispute settlement would be public, third party interests would be chanelled into the process, all the while preserving the confidentiality of the proceedings strictly speaking. Echoing the concerns discussed in Meg Kinnear’s keynote speech, the panelists shared the view that awareness and readiness of governments to accomodate ADR at a regulatory level is paramount for ADR to succeed.

The third and final panel discussion of the conference was dedicated to the future of the Energy Charter Treaty and energy investment disputes more broadly. Dr. José Ángel Rueda García of Cuatrecasas presided the panel, with the participation of Robin Rylander of Mannheimer Swartling, Dr. Wojciech Sadowski of KL Gates, Luciana Ricart of Curtis, Mallet-Prevost, Colt & Mosle and Quentin Declève of Van Bael & Bellis. The conversation spanned the overview of pending challenges to ECT awards (specifically SCC awards under challenge before Swedish courts), the ongoing reform of the Energy Charter Treaty (ECT), whether the current system of energy dispute settlement is broken and whether the ECT permits the termination of intra-EU ECT protections. Contributions from the audience triggered further discussion of whether the future regulation of the energy sector, in particular of fossil fuels or nuclear energy, raises public policy concerns analogous to industries where consensus recognises that it is appropriate to afford policy makers and regulators more discretion in interfering with proprietary rights (such as gambling or the tobacco industry).

The conference concluded with Professor Nikos Lavranos, Secretary General of EFILA, and Professor Loukas Mistelis, Chair of the Executive Board of EFILA, thanking the participants for their contributions, announcing the winner of the 2019 EFILA Young Practitioners and Scholars Essay Competition, and inviting submissions for the 2020 round.

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.

Post-Achmea Energy Charter Treaty Coherence and Stability: Upheld or Hindered?

Alexandros Catalin Bakos, LL. M.*

[…] but this is not where or how it ends. Fate promises more twists before this drama unfolds…completely (in-game dialogue from the intro scene of the video game Soul Reaver 2).

The EU’s backlash against intra-EU (Bilateral?) Investment Treaties – intra-EU (B)ITs – reached its peak when the CJEU issued its decision in the Achmea (C-284/16) case. According to the CJEU, intra-EU BITs such as the one analysed in the Achmea case are contrary to EU Law because they created a parallel jurisdiction (that of investment arbitration tribunals) to that of the domestic judicial courts. Such a jurisdiction may impair especially the consistency, full effect and autonomy of EU Law because investment arbitration tribunals are not able to rely on instruments such as the preliminary question (§§ 35-60 of the Achmea decision). Although the Achmea decision has been criticised (here and here), the present analysis is not concerned with the merits of the decision itself. The object of this analysis regards the effects of the Achmea decision on the Energy Charter Treaty’s (ECT) provisions on investment. This is of high practical importance since the International Investment Agreement which is most commonly invoked in intra-EU investment disputes is the ECT. An analysis of this issue raises the following questions:

Firstly, what are the immediate effects of the CJEU’s judgement on Article 26 (3) (a) of the ECT (the ECT’S Investor-State Dispute Settlement  – ISDS – provision)? Any analysis should begin with an analysis of the meaning of intra-EU BITs and if that meaning shall extend to the ECT – a treaty to which the EU is a formal party –, as well. As will be seen, the fact that the EU is a formal party to the ECT is of high importance (1).

Secondly, if it is to be considered that the Achmea decision does refer to the ECT, as well, and, as such, that it is conflicting with the ECT ISDS provision as regards EU Member States parties to the ECT, it must be seen whether the practice of terminating the intra-EU BITs between EU Member States can be undergone in the case of the ECT, as well. As such, could EU Member States – only as between themselves – denounce – partially or in its entirety – the ECT (2)?

The last point of this analysis is whether the EU’s international responsibility under Public International Law could be engaged for the Achmea decision – provided it is considered that the Achmea decision does refer to the ECT, as well. This question arises since the EU is a formal party to the ECT and an analysis needs to be made as regards the compliance of such an act – the Achmea decision – with the ECT (3).

Before concluding, I will address a less evident but very important issue generated by the Achmea decision – again, provided it is considered to refer to the Energy Charter Treaty, as well. The issue regards the systemic effects of the decision on the International Legal Order (4).

  1. What is the meaning of intra-EU BITs? If it covers the Energy Charter Treaty – as between EU Member States –, how does it affect the ISDS provision therein?

The departing point of analysis is the Achmea decision itself. The CJEU expressly made a differentiation, within the decision between investment treaties to which the EU was a formal party and those to which it was not (see §§ 57-58 of the Achmea decision). Essentially, this differentiation was made in the context of describing the characteristics of the BIT which was thought to conflict with the EU legal order (§58). Moreover, the EU pointed out that an international agreement which sets up a dispute resolution mechanism and is binding on the EU institutions is not in principle incompatible with EU law (§57).  It is hard to conceive that the CJEU made this differentiation by accident. In fact, it can be reasonably derived from here that the CJEU wanted to limit the scope of the decision’s effects by referring expressly to treaties to which the EU was not a formal party.

As the CJEU itself referred to international agreements to which the EU was a formal party and as the ECT is such an agreement, it follows that the CJEU considers that a different legal treatment shall be applied to such agreements – in this particular situation, to the ECT – than to intra-EU BITs – to which the EU is not a formal party. It can reasonably be inferred that this differentiation is based the principle of pacta sunt servanda (Article 26 of the 1969 Vienna Convention on the Law of Treaties – VCLT) which binds the parties to an international treaty. This principle is doubled within the EU legal sphere by Article 216 (2) of the TFEU: agreements concluded by the Union are binding upon the institutions of the Union and on its Member States. As such, for the Achmea decision to be compatible with the obligations deriving from the ECT – especially the obligation contained in Article 26 (3) of the ECT – and those incumbent on the EU institutions by virtue of Article 216 (2) of the TFEU, any interpretation of the Achmea decision, in order not to be unreasonable and self-contradictory, must be made to the extent that the CJEU did not refer to the ECT in its decision. If the CJEU had wanted the Achmea decision to refer to the ECT, it would have expressly mentioned this so as not to create confusion as regards a possible infringement of Article 216 (2) TFEU – in addition to the infringement of the ECT. In other words, the CJEU must have been aware that it was under a duty, if it had wanted the Achmea decision to refer to the ECT, to actually explain why such a decision would not have contradicted Article 26 (3) of the ECT and Article 216 (2) of the TFEU. Not doing this, the CJEU basically concluded that the ISDS provision in the ECT is not contrary to the EU legal order. Moreover, in this context, it is hard to envision that the EU would have entered into ECT negotiations and would have subsequently become a party to the ECT had it considered the ECT as contrary to EU Law (RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of Spain (ICSID Case No. ARB/13/30). Decision on Jurisdiction, § 76).

At this point, although the previous conclusion seems logical and necessary, there are analyses that accept the possibility that the Achmea decision referred to the ECT, as well (here and here). Moreover, it has been argued, constantly, before arbitral tribunals applying the ECT that the ISDS provision contained within the ECT is incompatible with EU Law (RREEF v. Kingdom of Spain. Decision on Jurisdiction, §§ 40 – 50; Charanne B.V., Construction Investments S.A.R.L. v. The Kingdom of Spain. Final Award, Court of Arbitration of the Chamber of Commerce, Industry and Services of Madrid (Arbitration No.: 062/2012), unofficial translation by Mena Chambers, §§ 207 – 224; Masdar  Solar & Wind Cooperatiff U.A. v. Kingdom of Spain. Award (ICSID Case No. ARB/14/1), §§ 296 – 300, § 305 and § 325). In all the cited cases, jurisdiction was upheld by the arbitral tribunals. It was considered that there was no conflict under Public International Law between the ECT and the EU Law. However, there are some arguments relied on to support the contention that a tribunal does not have jurisdiction over intra-EU disputes based on the ECT which I would like to mention here – not exhaustively, but only as examples – in order to clarify the debate. For example, it was argued that there existed an implicit disconnection clause within the ECT as regards intra-EU ECT disputes, because of the nature of the EU Legal Order. The effect of such a clause would be that in intra-EU investment disputes EU Law would derogate from the ECT, rendering the latter inapplicable. Moreover, it was argued that there was no difference between the territory of the home state and that of the host state when both were EU parties. As such, the condition that the territories of the host state and of the home state must be different (Article 1 (10) (a) and (b) of the ECT) was not satisfied (the Charanne Award, § 214).

The argument that the ECT impliedly included a disconnection clause which rendered the ECT inapplicable as between EU Member States is flawed on different levels:

Firstly, an implied disconnection clause would run contrary to the pacta sunt servanda principle – the implied disconnection clause is nothing more than a speculation relied on to avoid treaty obligations. Moreover, the same pacta sunt servanda principle is contrary to an implied disconnection clause if such clause is not expressly contained in the ECT. This is because obligations must be observed as agreed by the parties and supposing the existence of an implied disconnection clause would actually be contrary to Article 31 (1) of the VCLT, which sets up an interpretation of the treaty according to the ordinary meaning to be given to the terms of the treaty. This latter point regarding interpretation on the basis of Article 31 of the VCLT was reinforced by the Charanne tribunal (§ 437).

Secondly, the negotiating history of the ECT shows that, although a disconnection clause was proposed by the European Community bloc and expressly rejected, the EU still became a party to the ECT. This essentially means that the parties rejected the disconnection clause and any interpretation to the contrary would be unjustified under Article 32 of the VCLT, which in this case would mean reliance on the negotiating history to confirm the initial interpretation (see, for the use of Article 32 of the VCLT as a means to confirm the interpretation made under Article 31 of the VCLT, Mark E. Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties, Martinus Nijhoff Publishers, Leiden, Boston (hereinafter referred to as Villiger), 2009, pp. 446-447).

As regards the territorial identity in the case of the host and the home state of the investor, this argument was rebutted, as well. It was found that being a state party to a Regional Economic Integration Organization (REIO) and party to the ECT while that REIO (the EU, in the present case) is a party to the ECT, as well, does not create an identity between the territory of the state and that of the REIO. This is true as long as the REIO and the state party to the REIO can both have individual standing as respondents under the ECT (Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. The Kingdom of Spain. Final Arbitral Award, Arbitration Institute of the Stockholm Chamber of Commerce (2015/063), § 453).

Notwithstanding all the above arguments, there was even an arbitral tribunal which ruled expressly that the Achmea decision did not apply to the ECT: the Masdar tribunal (§§ 678 – 683) effectively ruled that the Achmea decision is limited to intra-EU BITs, excluding, thus, multilateral investment treaties such as the ECT.

  1. Could EU Member States – only as between themselves – terminate – partially or in its entirety – the ECT?

If it was considered that the Achmea decision, in spite of the above, would apply to the ECT, as well, this would raise another practical issue: could the EU Member States terminate the ECT between themselves, similarly to what has been done regarding intra-EU BITs? How would this work? Would this be a partial termination – only as regards Article 26 (3) of the ECT – or a complete termination? Such questions raise issues of treaty termination by reference, especially, to the object and purpose of that treaty. In order to answer the previous questions, the analysis is divided in two parts: firstly, the issue of treaty termination as regards the possibility of only certain parties to the treaty to proceed to this end shall be addressed (a). Subsequently, it must be seen whether a partial termination of the ECT – as regards Article 26 (3) only – is indeed a real possibility when tested against the object and purpose of the Energy Charter Treaty (b).

  • The possibility of certain parties to a multilateral treaty to denounce it only as between themselves:

The ECT provides in Article 47 (1) that […] a Contracting Party may give written notification […] of its withdrawal from the Treaty. While this clarifies the general issue of withdrawal, the question remains whether the EU Parties can denounce the ECT as between themselves only. It is considered that a partial withdrawal vis-à-vis several, but not all of the other parties, is possible (Thomas Giegrich in Oliver Dörr, Kirsten Schmalenbach (editors), Vienna Convention on the Law of Treaties. A Commentary, Springer – Verlag Berlin Heidelberg, 2012, pp. 952-953, § 25). However, while this may seem possible, generally, serious issues may arise when attempting to terminate the ECT as between certain parties to it only. This can be seen when interpreting Article 47 (1) of the ECT according to Article 31 of the VCLT – in the light of the object and purpose of the ECT. As will be demonstrated within (b) of this part of the analysis, a partial termination of the ECT would effectively create micro-regimes within the ECT and this would be against the object and purpose of the ECT. Would termination between certain EU parties not have the same effects? More specifically, coherence as to measures in the energy sector would be affected if what is applied under the ECT between EU and non-EU parties would not be applicable between EU parties. Any policies, in this context, lose their cogency, because of lack of (even legal) coherence. In effect, this would defeat the object and purpose of the ECT, since coherent policies are incredibly important in the energy sector – for example, major infrastructure projects, such as pipelines, usually span over several states. Because of all this, it can be argued that Article 47 (1) of the ECT must be interpreted as precluding termination between EU Member States only.

  • Is it possible to partially terminate the ECT as regards the ISDS provision?

Partially terminating the treaty, while possible (Villiger, p. 685), is more problematic, in the present context. Article 44 (1) of the VCLT provides that withdrawal from a treaty, where provided expressly by that treaty, may be undertaken only with respect to the whole treaty unless the treaty otherwise provides or the parties otherwise agree. Accordingly, since there is no express provision as to partial termination within the ECT, the only legal basis for partially terminating the ECT as between the EU Member States would be if the ECT parties agreed. Nonetheless, even if there is no provision as to partial termination in Article 47 (1) of the ECT, an analysis of the remainder of Article 44 (2) – (4) of the VCLT – which sets out, exceptionally, the legal regime of severability, especially when there is no express provision as to partial termination – can still be undertaken (Villiger, p. 563). In this respect, Article 44 (3) provides a series of conditions which must be met – cumulatively (see the term and at the end of indent (b)) – for separability to be possible.

A problem with such an outcome is that one of the conditions provided for in Article 44 (3) of the VCLT is not met: that the clause which is sought to be terminated does not hold a high importance in the general architecture of the treaty. Or, in the words of Article 44 (3), that acceptance of the clause – which is sought to be terminated – was not an essential basis of the consent of the other party or parties to be bound by the treaty as a whole. This is essentially an indirect reference to the object and purpose of the treaty.

The importance of the ISDS provision – which is the clause which the EU Member States would want to terminate –, in this context, is fundamental. Firstly, an investment treaty lacking an ISDS mechanism would be devoid of all practical effect (Opinion of Advocate General Wathelet in the Achmea case, § 207; although the AG referred to BITs in the context of this statement, the reasoning can easily apply to any investment agreement since the importance of ISDS is the same). Secondly, it can be seen that a proper investment framework is an important element needed to attain the object and purpose of the Energy Charter Treaty. This is demonstrated by the ECT’s preamble, which repeatedly mentions the importance of a proper investment regime to the attainment of the ECT’s goals.

In this context, in order to understand the impact of a partial termination of the ECT as between EU Member States in the case of the ISDS provision of the ECT and the relationship of the ISDS provision to the object and purpose of the ECT, consider the following: if EU Member States were able to denounce the ISDS clause of the ECT as between them and leave the treaty in effect between them and the other parties – from outside the EU –, this would, effectively, create micro-regimes within the ECT system – especially since energy investment in the EU by investors from within the EU would not be covered by the ECT anymore or, at least, not by the ISDS clause. Would this not defeat the object and purpose of the treaty, since such a fragmentation would hinder the possibility of attaining the objectives the treaty was supposed to achieve? Perhaps the most important objective the ECT set out to achieve was a “level playing field for investment in the energy industry, which is notoriously complex, expensive and long-term in nature (Norah Gallagher, The Energy Charter Treaty (1994) (ECT), WORLD ARBITRATION REPORTER 2d Edition, p. 3). Additionally, proper investment in the energy sector is needed for attaining security of supply (Sanam S Haghighi, Energy Security. The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Contracts, Hart Publishing, Oxford and Portland, Oregon, pp. 24-25).This is because investments in the energy sector are characterised by a Return of Investment spanning sometimes even several decades. Thus, an investor wants to be assured that the protections will be in place over such a time-span. However, lack of such protections – which refers to the existence of ISDS, as well – may disincentivise a potential investor to invest in the energy sector. And this is how security of supply may be compromised, in addition to compromising the object and purpose of the ECT, in the first place.

The previous considerations can reasonably lead to a conclusion that any termination as regards the ISDS provision of the ECT is not possible owing to the provisions of Article 44 (3) of the VCLT, because of the importance of ISDS to the object and purpose of the ECT. What this means, effectively, is that EU Parties have only one choice: termination of the ECT as between themselves – whether in its entirety or only partially – only by agreement between all the parties to the ECT. Such an outcome is hard to imagine: non-EU ECT parties’ companies have subsidiaries registered in the EU. If the intra-EU investment regime in energy matters governed by the ECT were to be affected (or even the ECT in its entirety as between EU Member States), this would effectively affect such companies. Because of this, it is highly unlikely that the other ECT Parties would agree to partial termination of the ECT as between EU Member States – either as to the entire treaty or only regarding Article 26 (3) of the ECT.

As such, it has to be concluded that EU Member States which are parties to the ECT cannot, only on the basis of their own will, terminate the ECT as between themselves – neither completely nor partially. And since it is practically very hard to envision acceptance by the non-EU parties – among them existing energy-exporting states which hold negotiating power – as regards intra-EU ECT termination, the answer must be that, for practical purposes, it is more likely that the EU Member States cannot terminate the ECT.

  1. Could the EU’s international responsibility be engaged for the Achmea decision?

Whatever the answers to the previous enquiries are, the EU is bound by the provisions of the ECT which it accepted when it signed and ratified the treaty. As such, if the Achmea decision refers to the ECT, it is  contrary to the provisions of the latter. In this context, an analysis must be undertaken regarding the responsibility of the EU for internationally wrongful acts. However, such an analysis implies two different steps: firstly, it needs to be seen whether the responsibility of international organisations for internationally wrongful conducts exists under International Law (a). If it can be demonstrated that such responsibility indeed exists, it must be seen if the Achmea decision can lead to engaging the responsibility of the EU (b).

  • Does responsibility for internationally wrongful acts exist in the case of International Organisations?

The idea behind the existence – or lack – of responsibility for internationally wrongful acts committed by IOs is a complex one and it is not my attempt, within the present analysis, to exhaustively address it. However, for clarity of the argument, before analysing the issue of the Achmea case, the following need to ascertained: firstly, is there any legal basis for responsibility of IOs? Secondly, what is the scope of such responsibility in the case of the IOs and, specifically, in the case of the EU?

It is accepted in legal literature that there exists a legal basis for the responsibility of IOs (Mirka Möldner, Responsibility of International Organizations – Introducing the ILC’s DARIO, in A. von Bogdandy and R. Wofrum (eds.), Max Planck Yearbook of United Nations Law, Volume 16, 2012, pp. 286-287; Konrad Ginther, International Organizations, Responsibility, in Rudolf Bernhardt (ed.), Max Planck Encyclopedia of Public International Law. International Organizations in General. Universal International Organizations and Cooperation, Elsevier Science Publishers B.V., Amsterdam, The Netherlands, 1983, p. 162). Whether this is based on custom, principle or even the international legal personality of the IO is not important for present purposes (although it is accepted that the legal source for responsibility of IOs for internationally wrongful acts could be any of the previously-mentioned sources). However, what must be mentioned, here is that it can hardly be argued that there exists a single unified regime regarding the framework of international responsibility of IOs for internationally wrongful acts (see p. 5 of the linked article). The difference between IOs, their legal characteristics – such as the principle of speciality – do not justify a single legal regime (Ibid.). As such, I will not pursue this analysis by relying on the general framework set by the International Law Commission’s Draft Articles on Responsibility of International Organizations (DARIO). They are not considered to reflect customary international law (p. 9 of the linked article) and, at the same time, they offer a general framework whereas I referred earlier to the fact that hardly any general regime can be considered to exist to this end. What I will do, instead, is look for any legal elements which could justify the responsibility of  the EU for internationally wrongful acts.

A solution can be found in one of the EU’s internal acts themselves: EU Regulation No. 912/2014 establishing a framework for managing financial responsibility linked to investor-to-state dispute settlement tribunals established by international agreements to which the European Union is party. It is provided there that financial responsibility arising from a dispute under an agreement (IIA) shall be apportioned to the Union when such financial responsibility arises from treatment afforded by the institutions, bodies, offices or agencies of the Union (a) or when such financial responsibility arises from treatment afforded by a Member State where such treatment was required by Union law (Article 3, 1. of Regulation No. 912/2014). It is true that this provision refers to financial responsibility – which entails an obligation to pay a sum of money awarded by an arbitration tribunal or agreed as part of a settlement and including the costs arising from arbitration (Article 2 (g) of Regulation No. 912/2014) – and not exactly to what is commonly understood as responsibility for internationally wrongful acts. However, such financial responsibility cannot exist in a void. Unless a violation of an IIA occurred (under Public International Law, this is a violation of the primary norms which triggers the secondary norms on responsibility and, specific to the present regulation, the norms on reparation – financial responsibility), financial responsibility would not exist. Moreover, the premises for engaging the financial responsibility of the Union is that the Union was actually the catalyst to the infringement of the IIA (under Public International Law, this would actually refer to attribution of the acts to the EU). It is doubtful that the EU would have adopted such a legally binding document on itself unless it had considered that there existed an obligation under Public International Law to provide reparation for internationally wrongful acts which could be attributed to it (this being a sign that the EU acted out of a sense of obligation when it bound itself to the triggering of its financial responsibility for internationally wrongful acts caused by it – essentially, this would be the opinio juris of the customary norm on responsibility). And because the secondary norms on responsibility for internationally wrongful acts are inextricably linked to the primary obligations of the States/ International Organisations under Public International Law and, in all actuality, cannot exist if the primary ones are not breached, one can only analyse the law on responsibility of IOs for internationally wrongful conducts in this context. As such, the entire procedure would be: firstly, an analysis of the breach of the primary norm would be made; secondly, attribution of the initial violation would be undertaken, which would result in engaging the responsibility of the perpetrator; finally, reparation would occur – which is what the financial responsibility actually means. Because of this procedure, there cannot exist reparation – financial responsibility – without attribution and, continuing the reasoning, without a breach of the primary norm. Thus, the EU actually conceded within Regulation No. 912/2014 that it considered itself bound by the customary norm on responsibility of IOs for internationally wrongful acts – and, implicitly, that this is part of International Law.

One must admit the possibility that a counterargument can be brought as regards the previous argument along the following lines: Regulation No. 912/2014 is a legally binding instrument for intra-EU relations and, as such, it does not reflect opinio juris as regards a customary norm on responsibility of IOs for wrongful acts on part of the EU. While prima facie this could seem true, a look at the context and language of the Regulation would render such a counterargument moot. Firstly, the Regulation is concerned with the EU’s external relations with other subjects of International Law. This means that it reflects the EU’s perspective on the international law of Multilateral Investment Treaties, which is, in the end, concerned with primary obligations of Public International Law. Secondly, it is expressly provided within the Regulation what shall happen when the EU is a respondent in arbitration proceedings initiated by a claimant (Article 4 of Regulation No. 912/2014). Both the previous considerations clearly state that the Regulation reflects the EU’s opinion as to its legal relations under Public International Law. Because of this, the conclusion that the Regulation No. 912/ 2014 reflects the EU’s opinio juris as regards responsibility of an IO for internationally wrongful conducts – at least those in breach of a Multilateral Investment Treaty, if it is considered that different customary rules apply (or do not exist) when different regimes are concerned – is valid.

Another counterargument which could be brought against the international responsibility of the EU is that a  custom as the one mentioned earlier is hard to ascertain due to lack of clarity regarding the practice element of a custom. In any case, the legal basis for engaging the EU’s responsibility for internationally wrongful acts does not even have to be a custom. As mentioned earlier, the source of such responsibility could be a principle of law. Moreover, an unilateral act could give rise to obligations under International Law (Wilfried Fiedler,  Unilateral Acts in International Law, Rudolf Bernhardt (ed.), Encyclopedia of Public International Law. History of International Law. Foundations and Principles of International Law. Sources of International Law. Law of Treaties, Elsevier Science Publishers B.V., 1984, pp. 517-518 and 522). Regulation No. 912/2014 is such an unilateral act  (from an International Law point of view, as it concerns the EU as a single entity) for purposes of ascertaining an obligation of reparation on the part of the EU – an obligation which could not logically exist without engaging the responsibility of the EU. What is relevant, however, is that Regulation No. 912/2014 demonstrates more than the EU’s opinion juris as regards its international responsibility for internationally wrongful acts in investment matters. The position of the EU is that there indeed is a legal obligation (this can be ascertained from the mandatory language employed within Regulation No. 912/2014 and from its binding character) and not just a sense of a legal obligation to provide reparation for internationally wrongful acts attributed to the EU in the sphere of investment agreements to which the EU is a party. In other words, the source of the legal obligation must not necessarily be the custom; it can be any of the previously-mentioned sources. And, continuing the reasoning, this demonstrated the existence of international responsibility on the part of the EU for such internationally wrongful acts.

As for the legal forum where the responsibility of the EU for violations of the ECT could be engaged: that would be an arbitral tribunal which shall rule upon issues concerning the ECT – this is supported by Regulation No. 912/2014 and was reinforced by an arbitral tribunal (Electrabel S.A. v. The Republic of Hungary (ICSID Case No. ARB/07/19). Decision on Jurisdiction, Applicable Law and Liability, § 3.21).

  • Can the Achmea decision be considered a breach of the ECT and, as such, entail the responsibility of the EU?

It was demonstrated that the EU’s responsibility can be engaged for breaches of international investment agreements and, moreover, that the EU itself acknowledges this by undertaking the obligation to repair the harm caused by its acts or by those of EU Member States generated by it. This means that there is legal basis for attribution and reparation of the wrongful act. As such, is the Achmea decision such an act? At this point in time, it is too early to tell clearly. The premise of this part is that the Achmea decision refers to the ECT. Thus, the effects would be that EU Member States, sitting as respondents in intra-EU arbitration on the basis of Article 26 (3) of the ECT, would be in breach of EU Law. Contrariwise, respecting the Achmea decision would entail breaching Article 26 (3) of the ECT. As such, if an arbitral tribunal found such a breach, attributed it to the EU and, moreover, found that such breach gave rise to an obligation of reparation (financial responsibility), this would demonstrate that the EU’s responsibility for the Achmea decision could be engaged. However, this would not be a typical investment arbitration as the tribunal would not be judging a violation of investment standards of protection. It would be effectively analysing a violation of the arbitration clause in the ECT. Nonetheless, there is the possibility that this violation could give rise to a claim based on the Fair and Equitable Treatment standard, for violation of legitimate expectations as regards dispute settlement. But even if the claim is based only on a violation of Article 26 (3), legal cause for such a claim would still exist. This is because the applicable law would be the ECT in its entirety, not only the investment standards of protection (Article 26 (7) of the ECT). What remains to be seen is whether the Achmea decision itself is enough for a claim against the EU or if EU Member States need to act on the basis of the Achmea decision in order to generate a claim against EU. Practically, it is more likely that the latter would be the case, since harm would be easier to assess in that context.

In conclusion, the Achmea decision – if it is considered that it refers to the ECT, as well – can potentially give rise to the engaging of the EU’s international responsibility for internationally wrongful acts.

  1. Systemic effects of the Achmea decision:

As mentioned in the beginning, this point of analysis is applicable only if it is considered that the Achmea decision refers to the Energy Charter Treaty, as well.

When I analysed the applicability of the Achmea decision to the Energy Charter Treaty, I referred to the negotiating history of the ECT. I mentioned, in that context, that the negotiating parties rejected a proposal by the European Commission to derogate from the rules of the ECT – even those concerning the dispute-settlement clause in Article 26 (3) – as between the EU Parties. Nonetheless, the EU still signed and ratified the ECT, essentially admitting under Public International Law that the ECT shall be applicable to the EU parties.

This has strong implications, from a systemic point of view: if the EU is concerned about rule of law standards – especially coherence –, it has to take into account the obligation under Article 26 (3) of the ECT taken together with the representations it made during negotiations to the ECT. The issues of coherence regard the relations between the EU and the other parties to the ECT – even EU Member States which, under Public International Law, are different formal parties to the ECT than the EU and their interests may not always converge. Here, coherence is a fundamental aspect of the liberal doctrine within International Relations which comes to explain the functioning of the Public International Law mechanism (Andrea Bianchi, International Law Theories. An Inquiry into Different Ways of Thinking, Oxford University Press, Oxford, United Kingdom, 2016, pp. 113-114). In other words, coherence is a fundamental pillar of the rules-based international order on which especially the Western Powers seek to rely. Since the rules-based international order manifests itself within an anarchic world where a central executive agency which could guarantee the enforcement of the rules does not exist, coherence has a special meaning in this context. And since the liberal theory of international relations which I mentioned earlier and which underpins a great number of arguments regarding the effectiveness of international law as a part of a rules-based international order, is based, among others, on international cooperation and mutual benefits, coherence is, effectively, necessary for such cooperation and trust to exist. Because of this, without coherence there would hardly be any stable international legal order. In other words, when one of the major economic actors in this system – the EU – is not coherent in its approach to its international obligations and is actually trying to enforce its views regarding the supremacy of EU Law to the detriment of International Law upon its member states, any feeling of mutual benefits and international cooperation is eroded. Trust in the actions of the major international actors becomes scarce and incentives actually appear which determine the other actors to start ignoring international rules, as well. This is basically the prisoner’s dilemma after one of the parties deflected. One can easily imagine the future responses of the other parties after experiencing the real risk of deflection and wondering whether such deflection is recurrent. And this is how cracks appear in the current international law architecture. As such, the most important actors of such an international order – the EU being among them – have a special duty to ensure that this order is maintained and that the mechanism which underpins the effectiveness of this order is properly functioning. Thus, the EU – a proponent of the rules-based international order – should reassess its approach to its international obligations and, in this specific case, to the ISDS provision within the ECT.

  1. Conclusion:

There is no clear and predictable answer as to what will happen after the Achmea decision as regards the Energy Charter Treaty. The variables are numerous and they are generated by decisions adopted by different actors: the ECJ – in its future decisions and opinions on the issue of ISDS, such as the opinion requested by Belgium regarding investment provisions contained in CETA; the EU Member States – who have yet to decide what will their approach to the ECT be after some of them decided to terminate intra-EU BITS; and, finally, arbitral tribunals who are faced with challenges to their jurisdiction, requests to reopen proceedings or to review their decisions or simply the fact that such tribunals are faced with an additional element which must be accounted for when adopting decisions to the ECT cases which are still pending before them. However, what is certain is that the whole issue has gone past the point where the catalyst to future evolutions was the CJEU. While the CJEU still plays an important role in this whole issue – perhaps the most important one –, it is not alone anymore in influencing the final outcome. Nonetheless, it can still find a way to balance the interests and recreate a framework of relative predictability. But in order to do this it must account for several considerations: it must understand that the EU legal regime is not a self-contained one and any future decision on the part of the CJEU as regards ECT Arbitration has several implications which are, in essence, produced under the framework of Public International Law and not only under the framework of EU Law. Ignoring those aspects may lead to severe hidden consequences which nobody would desire: weakening of the ECT and more unpredictability in the energy sector; questions of responsibility under Public International Law for internationally wrongful acts; and, perhaps most important, problems of coherence both at International and EU regional level. In the end, all the above create problems of legitimacy and one can ask himself: are the consequences really bringing more benefit than harm?


* I am aware of the European Commission’s latest Communication on Protection of intra-EU investment (19.7.2018). And while it is true that the Commission expressly referred to the Energy Charter Treaty investor-State arbitration mechanism established in Article 26 of the Energy Charter Treaty as being covered by the Achmea decision (pp. 3-4 and 26 of the cited Communication), the present analysis is still relevant, as are the arguments herein. This is because of two reasons: firstly, the aforementioned Communication is, essentially, the EU Commission reinforcing its traditional position as regards intra-EU investment arbitration. However, this is not a new position on the part of the EU Commission, as it has repeatedly argued against the incompatibility between intra-EU Investment Treaties (including the investment provisions of the Energy Charter Treaty) and the EU Legal Order. Secondly, the EU Commission’s Communication does not clarify the Achmea decision itself. Unless the CJEU expressly and unambiguously considered the Energy Charter Treaty as being contrary to the EU Legal Order, the questions regarding the scope of the Achmea decision and its applicability to the Energy Charter Treaty would still exist.

The Relationship between EU State Aid law and Obligations Arising under Investment Treaties

by Alexandros Catalin Bakos, LL.M 

I. Introduction:

In recent years, a series of debates have emerged in regard to the relationship between the EU State Aid law[1], on the one hand, and obligations arising under Investment Treaties (to which the EU is not a formal party)[2], on the other hand. Those debates manifest themselves at different levels and have powerful implications: firstly, they clarify the scope of State Aid law and its relationship with one of the most important fields – that of Investment Law. Secondly, they clarify – or complicate, depending on the vantage point from which one analyses the issue – the relationship between EU law and Public International Law[3]. And, thirdly, they raise questions of interpretation of EU law, especially from a historical interpretation point of view and from a teleological point of view – this is a great tool to understand the limits of EU law (the real limits, not the attempts to politically force an interpretation which extends the limits of EU law beyond what the Member States had envisioned initially).

Needless to say, the practical importance of the relationship between State Aid law and obligations arising under ITs can hardly be overstated. One can only look at the recent Micula affair[4] and the unenviable position in which Romania finds itself: on the one hand, it is faced with severe opposition from the European Commission as regards the observing of certain obligations arising under ITs (more specifically, the obligation to pay compensation to the Micula brothers as the final award against Romania dictates). On the other hand, Romania cannot outright ignore the legal framework set by the ITs (including the binding effect of the awards within this field) and show total disregard to the interests (and even rights) of investors.

As such, I endeavour in this study to provide an analysis of this relationship between State Aid law and obligations arising under ITs. I will focus my attention only on the first tier of this issue – the relationship between State Aid law and obligations arising under ITs themselves – and, as such, I will not analyse more general issues such the relationship between General Public International Law and EU law. Moreover, I will ignore general issues of interpretation of EU law. However, those issues will be touched upon where relevant for the analysis conducted through the present study.

II. Analysis:

Before starting, it should be stated that this analysis is composed of two parts. Firstly, I will analyse the relationship between State Aid law and obligations arising under ITs signed by EU Member States (intra-EU ITs) (1). Subsequently, I will analyse what the relationship between State Aid law and obligations arising under ITs when the ITs’ signatories are both from within the EU and from outside the EU (2).

  1. The relationship between State Aid law and obligations arising under ITs signed by EU Member States (intra-EU ITs):

(a) Scope of analysis:

The problem with intra-EU ITs and State Aid law seems to be that compensation given to investors by member states, as a result of an investment tribunal award, is considered illegal state aid, in cases such as the Micula one.[5] As such, the analysis should address the following: can an investment award rendered by an investment tribunal on the basis of an intra-EU IT be considered illegal State Aid? If so, when can it be considered as such (b)? Following, the next question should be: notwithstanding specific issues of whether enforcement of an investment arbitral award can be considered illegal State Aid, is it justified to ever argue for the termination of an intra-EU IT relying on State Aid law? In other words, can the intra-EU IT, by itself, be considered as violating EU rules on State Aid (c)?

(b) Can an investment award rendered by an investment tribunal on the basis of an intra-EU IT be considered illegal state aid? If so, when can it be considered as such?

In order to address this question, the first issue which must be clarified is what exactly is considered illegal state aid[6]: under Article 107 of the Treaty on the Functioning of the European Union[7], state aid refers to any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods in so far as it affects trade between Member States.[8]

In other words, a number of four conditions must be met in order for a measure to be considered State aid: the State must intervene through that measure (and that measure must be imputable to the state[9]); the beneficiary of the intervention must be conferred an advantage; competition must be distorted; and the intervention must be likely to affect trade between member states.[10] As such, (when) is an investment award rendered by an arbitral tribunal on the basis of an intra-EU IT considered State Aid? In order to answer the question, a qualification of an investment award which leads to an obligation on the State to pay compensation to a wronged investor must be made (including its subsequent enforcement).[11] In simple terms, an award is a final judgement or decision, esp. one by an arbitrator or by a jury assessing damages.[12] Continuing, the enforcement of an award is the act or process of compelling compliance with a law, mandate, command, decree, or agreement.[13]

Of course, there is a question which arises, at this moment: supposing an arbitral tribunal renders an award against an EU member-state based on an intra-EU IT and the State enforces it, what is the legal basis for that? The answer can be found in the two most relied-on arbitration frameworks: the ICSID[14] Convention on the Settlement of Investment Disputes between States and Nationals of Other States[15] which provides that the award given under its framework shall be binding on the parties[16] and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards[17] which provides that each Contracting State shall recognize arbitral awards as binding and enforce them[18]. Thus, an obligation to respect and enforce arbitral awards arises for the state under Public International Law.[19]

This leads to an important question regarding State Aid law: is the condition that the measure must be imputable to the State met? The issue of imputable conduct has been defined by the CJEU as follows: this condition is met when the decisions of Member States by which, in pursuit of their own economic and social objectives, they give, by unilateral and autonomous decisions, resources to undertakings or other persons or procure for them advantages intended to encourage the attainment of the economic or social objectives sought.[20]

Can arbitral awards which are enforced as an obligation under Public International Law be considered as being unilateral and autonomous? Enforcement is, in the end, the latter part of a judicial proceeding. There is nothing autonomous or unilateral about it. And it would be artificial to separate the arbitral decision itself from the enforcement. Just because there is no central executive authority to enforce decisions rendered under Public International Law does not mean that the enforcement of those awards can be separated from the framework in which they arose: obligations owed to other legal subjects which, usually[21], have as their ultimate basis a treaty or customary relationship (a bilateral or multilateral relationship).

This view is shared by two other authors who base their approach on the fact that, when enforcing arbitral decisions, states do not act in their sovereign powers, but as agent(s) of the international community[22]. And there is undeniable merit to this view: that States, when undertaking obligations in their sovereign capacity, are giving up part of their sovereignty.[23] Moreover, even EU official bodies have constantly repeated this fact.[24] In other words, because States give up part of their sovereignty when undertaking legal obligations, they can no longer act unilaterally and autonomously within the fields and situations where they are under certain obligations.

Therefore, it can be concluded that, under EU law, as a rule, a state acting on the basis of an investor-state arbitration award, is not acting unilaterally and autonomously and, as such, the analysed measure regarding a possible issue of illegal State Aid cannot be imputable to the State – a condition for a measure to be considered State Aid.

In the following, I shall research whether there are exceptions to this rule and, as such, whether certain cases of compensating investors as a consequence of an arbitral award can be considered illegal State Aid. A practical case may offer better insights into this question.

Perhaps the most important case for the present analysis which could demonstrate whether there can exist exceptions to the rule that enforcement of arbitral awards rendered within the framework of ITs is not illegal State Aid is the Micula case. In short, this is what happened: the Micula brothers were handed, on the basis of a BIT (the Romanian – Swedish Bilateral Investment Treaty) certain custom duty exemptions. This happened before accession to the EU by Romania. Subsequently, close to the moment of accession (in 2004), Romania repealed the said exemptions, as a compliance mechanism with EU State Aid rules. On the basis of this measure, the Micula brothers challenged the measure in an arbitral tribunal under the relevant IT.

During proceedings, the EU Commission intervened as amicus curiae, effectively arguing against any reinstatement of the exemptions since that would amount to illegal State Aid. However, the arbitral tribunal ignored the Commission’s arguments and found against Romania, effectively ruling that a breach of the claimants’ legitimate expectations occurred, awarding damages.[25] As such, the claimants sought the enforcement of the arbitral decision in Romanian courts. They succeeded although the Commission had once again intervened looking to oppose the enforcement. This led the Commission to open a formal investigation into what they argued could constitute illegal State Aid. It was eventually decided by the Commission that the enforcement of the award (the payment of compensation) constituted illegal State Aid[26] and this bore upon Romania the obligation to recover the awarded compensation.[27] Moreover, the Micula brothers challenged the Commission’s decision in the CJEU, the case pending before the Court at the moment (case T-646/14).[28]

The entire Micula case complicates the matters. In order to better analyse the whole issue, two elements should be separated from the facts: on the one hand, there is the issue of the initial exemption, itself. Romania effectively considered the initial exemption to be illegal State Aid and, as a consequence, repealed it. Moreover, it seems that a formal analysis into the whole exemption leads to the same conclusion: this is an act imputable to the State, which offers the beneficiary an economic advantage, distorts competition and can affect trade between Member states. What complicates matters is that the relevant BIT, on the other hand, protects the legitimate expectations, not a specific exemption such as the custom duties exemption offered by Romania. Of course, once a specific benefit offered to the investors generated legitimate expectations, the standard of legitimate expectations set by the BIT becomes applicable and enforceable. However, there is a difference between the exemption and the obligation to guarantee legitimate expectations.

But the questions which have to be addressed now are: firstly, at the moment of the granting of the exemption, which was fairly close to the moment of Romania’s accession to the EU, were the exemptions granted by the Romanian State to be considered as having generated legitimate expectations? And secondly, what is the basis for ignoring the investment tribunal’s award, by the European Commission? I have already mentioned that I do not consider the EU Legal Regime as being totally autonomous. Thus, it is not separated from the framework of general Public International Law. It is just a system which, from a Public International Law point of view, is in (apparent) conflict with another system: that of Foreign Investment Law. Thus, which is to be considered as having primacy and why?

I will now address the first question: I argue that legitimate expectations indeed existed. I base my claim on two elements: firstly, the arbitral tribunal’s decision to award compensation to the Micula brothers, as a result of the repealing of the custom duties incentive scheme[29]. Secondly, it has been found in case-law regarding Foreign Investment that if a benefit awarded by a State to an investor was presented, by representations made to the investor, as having been in compliance with the legal requirements of the host state, the investment must be awarded the expected degree of protection (by respecting the awarded benefits on which the investor relied), even if, in reality it conflicts with the host state’s law.[30] It is true that in the previously-mentioned case the claimant relied on the principle of estoppel[31], which is a specific application of the legitimate expectations doctrine[32], but the principles applied in the Kardassopoulos v. Georgia case clarify the issue for the Micula case, as well.

Thus, it is not for the investor to bear the risk of an investment which is non-compliant with the legal rules of the host state, when the host state created the expectation of conformity. And this is what happened in the Micula case, because the investment had been protected for a few years, before the repealing of the incentive scheme, creating the proper expectations of legitimacy and legality. Therefore, legitimate expectations existed and were violated by Romania through its repealing act.

Subsequently, there is the issue of analysing the (apparent) conflict between obligations arising under BITs and ones arising under EU law. As mentioned earlier, those are two conflicting legal systems with no apparent hierarchy between them (neither the obligations under foreign investment law nor the ones under EU State Aid law can be considered jus cogens – norms of a peremptory character under International Law, from which no derogation is admitted; in other words, norms of a superior value). Therefore, because those norms are considered to be of equal value, the (apparent) conflict must be settled by relying on the principle of lex posterior derogat (legi) priori.[33]

Under this framework, it can be argued that the subsequent legal regime implemented by the EU State Aid legal regime would derogate from schemes of custom duties exemption such as the one presented earlier. Such exemptions constitute State Aid and since both Romania and Sweden are part of the EU Legal Regime, it can be considered that they have derogated from the possibility to implement such State Aid. As such, if there had been an obligation under the ITs to grant such an economic advantage to the investors, there could have been a real conflict between the ITs and the EU State Aid rules.

However, there did not exist any such obligation. And this is why I mentioned earlier that there was just an apparent conflict between those two international legal regimes – the EU legal regime and the Foreign Investment legal regime – and not a real one. The obligations under ITs are not conflicting with the EU State Aid Rules. What is conflicting is the effective benefit given by the Romanian State to the Micula brothers. While this is inherently linked to the IT, it is not identified with it. This may be a nuance, but it is an important one. It demonstrates that, at least as to the relationship between obligations arising under intra-EU ITs and EU State Aid rules there is no formal conflict.

Thus, this custom duties exemption is a different thing to the protection of legitimate expectations – the ones which are actually protected by the Romanian – Swedish BIT –, expectations which had been created before the EU laws prohibiting State Aid became effective. The legitimate expectations, as mentioned earlier, must be protected, even more so when the investors acted in good faith by relying on the representations of the Romanian officials.

Moreover, it has been proved that payment of compensation as a result of an investment tribunal’s award is not a form of State Aid, because it is neither unilateral nor autonomous, as needed for measure to be imputable to the State and, as such, to be considered State Aid. Therefore, the answer to the second question must be that, while the custom duties incentive scheme constitutes State Aid, the protection of legitimate expectations – through granting compensation –, especially when they were created at a moment when the conflicting rules on State Aid had not been effective, is not State Aid.

As such, there is no obligation for Romania, neither under International Law nor under EU law to recover the paid compensation. However, there are two authors who argue that a compensation rendered as an enforcement of an arbitration award under Foreign Investment Law can constitute a violation of Article 107 of the TFEU if the action leading to an obligation to compensate consists of repealing benefits that are themselves illegal state aid under Article 107 of the TFEU[34]. While I do agree, in principle, with the authors and the opinion of Advocate General Ruiz-Jarabo Colomer in Joined Cases C-346/03 and C-529/03 that if an entitlement to compensation is recognized, the damage cannot be regarded as being equal to the sum of amounts to be repaid, since this would constitute an indirect grant of the aid found to be illegal and incompatible with the common market[35], I cannot agree that this is applicable always, as an absolute rule.

The issue should be assessed on a case by case basis. The authors’ and the Advocate General’s statements do not take into account the legitimate expectations created to the investor. And from an Investment Law point of view, not only does the investor have locus standi under arbitral proceedings in Foreign Investment proceedings, but he is considered a subject of Public International Law[36]. As such, who is to make a hierarchy between the investor’s interests – the protection of his legitimate interests – and those of another subject of Public International Law, the EU – where the fundamental interest is that of the effectiveness of the Internal Market, through a proper competition framework which underpins the functional trade between the EU Member States? From a public international law perspective, the EC legal system remains a subsystem of international law.[37]

Thus, I find such a hierarchy between a subject of Public International Law within the Investment Law field, on the one hand, and the officials of the EU, on the other hand, arbitrary and in violation of basic principles of Public International Law. Moreover, as has been stated somewhere else regarding a similar issue of EU law: just because something is mentioned repeatedly does not turn it into reality.[38]

(c) Notwithstanding specific issues whether enforcement of an investment arbitration award can be considered illegal State Aid, is it justified to ever argue for the termination of an intra-EU IT on the basis of that treaty violating the rules on State Aid prohibition?

Can the intra-EU IT, by itself, be considered as violating EU rules on State Aid? The answer, in my view, is in the negative. This is because investment treaties govern issues such as what constitutes an investment[39], admission of investments[40] or what protection does an investor receive once an investment has been made[41]. In other words, such ITs govern the abstract rules applicable to all investments, not referring to a certain specific investment (of course, the specific investment will benefit from the protection, but on the basis of fitting the framework set by the treaty, not by other means). As such, there is no obligation, ipso jure, to grant an economic advantage which can be considered State Aid under EU rules. The choice to grant that advantage is an economic/ political choice of the State, not an obligation under ITs.

Therefore, it can be concluded that investment treaties are not prohibited under State Aid rules. However, this doesn’t render the issue of the validity of intra-EU Bilateral Investment Treaties obsolete. On the contrary, this is a different discussion, which takes into consideration the common trade policy set by the 2009 Lisbon Treaty[42] and various issues such as questions of jurisdiction of investment tribunals when the parties are an EU Member and an investor from another EU Member[43]. Nonetheless, this is a different issue, going beyond the scope of the present analysis.[44]

  1. What does the relationship between State Aid law and obligations arising under ITs entail when the ITs’ signatories are both from within the EU and from without the EU:

This issue should be easier to analyse, given all that has been presented until now. One of the main problems with the relationship between the obligations arising under intra-EU ITs, on the one hand, and EU State Aid rules, on the other hand, was that the parties to the TFEU were, at the same time, parties to those intra-EU ITs. This situation complicated matters because the conflict was noticeable (although from a different perspective than the one of this analysis – that of the validity of intra-EU ITs). In the case of EU State Aid rules and obligations arising under ITs concluded with third parties, the simple answer is that, because the third party is not a party to the EU, the rules on State Aid are not opposable to it.[45] This does not mean that the EU party granting benefits to an investor from a third State, after the TFEU became effective, is not liable for violations of Article 107. But, at the same time, this will not have any bearing on the earlier obligations arising under the ITs. In that case, if the EU member state decides to repeal any State Aid benefit, it may be in compliance with EU rules on State Aid, but its responsibility will be engaged under customary international law for violating a legal obligation arising under ITs. As a consequence, this breach of international obligations gives rise to an obligation of reparation[46], which does not constitute State Aid – as has been proven in the first part.

III. Conclusion:

The debate over whether there exists a conflict between the legal regime instituted by ITs (excluding those where the EU is a party), on the one hand, and the EU’s legal regime, on the other, is neither straightforward nor devoid of political and economic implications. Through this study, I have analysed a part of this debate: the relationship between ITs, on the one hand, and the legal regime of State Aid law, on the other. I demonstrated, firstly, that obligations specifically arising under ITs are not, by themselves, in conflict with State Aid rules, because there is no ratione materiae identity.

In this context, I made a differentiation between the measures which can be considered illegal State Aid and the ITs (and their provisions such as the ones related to the protection of legitimate expectations), which, although inherently linked to such measures (such as in the Micula case) are, in the end, different. Continuing, I demonstrated why something which tends to be considered an absolute truth – the supremacy of EU law – must be qualified in the international sphere: there is no legal basis under Public International Law to consider such a supremacy when the EU legal regime is in conflict with other international legal regimes. And, finally, I analysed the situation where an IT has signatories both from within and without the EU There, I made a clear differentiation between what can amount to liability of an EU State for violations of Article 107 TFEU and responsibility of the same State under the Customary Law on State Responsibility for violations of obligations contained within ITs. I have shown how an EU State can infringe both legal regimes, at the same time, and why the EU legal regime is relative (and opposable) to the EU States only.


[1]Hereinafter referred to as State Aid law

[2] Hereinafter referred to as IT

[3] For a critique of the concept of self-contained regimes (the idea that supranational or international regimes, such as the EU, are self-contained and cannot be influenced by Public International Law rules, such as Treaty Law or the Law on State Responsibility), see Bruno Simma and Dirk Pulkowski, Of Planets and the Universe: Self-Contained Regimes in International Law, The European Journal of International Law, Vol. 17, no. 3, 2006, hereinafter cited as Simma and Pulkowski. This aspect of mutual influence between those regimes is of utmost importance to the present study, since the starting premise of the present study is that there is a mutual link between semi-autonomous regimes – such as the EU –, on one hand, and general Public International Law rules, on the other. See, for the opposite view (that the EU Legal Regime is an autonomous legal order which is not influenced by Public International Law), Laurens Ankersmit, Is ISDS in EU Trade Agreements Legal under EU law?, https://www.iisd.org/itn/2016/02/29/is-isds-in-eu-trade-agreements-legal-under-eu-law-laurens-ankersmit/ (last visited on 10/02/2018, at 20:58)

[4] Kelyn Bacon, BIT arbitration awards and State aid – the Commission’s Micula decision, http://uksala.org/bit-arbitration-awards-and-state-aid-the-commissions-micula-decision/ (last visited on 10/02/2018, at 20:53)

[5] Christian Tietje, Clemens Wackernagel, Outlawing Compliance? – The Enforcement of intra-EU Investment Awards and EU State Aid law, Policy Papers on Transnational Economic Law, June 2014, p. 2, hereinafter cited as Tietje, Wackernagel

[6] Although a thorough analysis should begin with what constitutes an undertaking, under EU law – since those entities are the beneficiaries of state aid –, I will not undertake such an analysis, for reasons of brevity. Thus, the analysis is considered to refer, implicitly, to such elements.

[7] Hereinafter, referred to as The TFEU

[8] EC (European Commission): Communication from the Commission: Draft Commission Notice on the notion of State aid pursuant to Article 107 (1) TFEU, § 5, p. 4

[9] Tamás Kende, Arbitral Awards Classified as State Aid under European Union Law, ELTE Law Journal 2015/1, p. 40

[10] http://ec.europa.eu/competition/state_aid/overview/index_en.html (last visited on 10/02/2018, at 02:55)

[11] It is true that the situation varies from one case to the other, but I have decided to begin the analysis by qualifying an investment award in abstracto, in order to assess its legality under EU State Aid law and only afterwards I shall address specific cases.

[12] Bryan A. Garner (Editor in Chief), Black’s Law Dictionary. Ninth Edition, WEST. A Thomson Reuters business, St. Paul, MN, USA, 2009, p. 157

[13] Idem, p. 608

[14] The International Centre for Settlement of Investment Disputes

[15] Hereinafter referred to as The ICSID Convention

[16] Article 53 of The ICSID Convention

[17] Hereinafter referred to as The New York Convention

[18] Article III of The New York Convention

[19] According to Article 26 of the 1969 Vienna Convention on the Law of the Treaties, every treaty in force is binding upon the parties to it and must be performed by them in good faith.

[20] Case 61/79, Amministrazione delle finanze del- lo Stato v Denkavit italiana [1980] ECR 1205, § 31

[21] Under Public International Law, the sources of legal obligations can include unilateral conduct or general principles of law, as well (see, for a comprehensive analysis, Malcolm N. Shaw, International Law. Seventh Edition, Cambridge, United Kingdom, 2014, Chapter 3: Sources, pp. 49-91). But, for the present study, this is not important, since obligations arising in Investment Law are based mostly on investment treaties (more specifically, obligations to respect and enforce arbitral awards are the relevant ones for the present analysis), while those based on general principles of law cannot be considered to have appeared from a consensual relationship between the parties to a dispute in a specific dispute. Anyway, from a strictly technical point of view, no matter the source of obligation, the ensuing legal relationship is, in the end, always (at least) bilateral (the correlative existence of the right and of the duty): Arthur L. Corbin, Rights and Duties, 33 Yale Law Journal 501, 1923-1924, p. 502. But what is important, as a bottom-line, is that an arbitral award (and the subsequent obligation of enforcement) arose under a legal relationship outside the scope of the State’s discretionary powers.

[22] Tietje, Wackernagel, p. 7

[23] Sir Hersch Lauterpacht, The Function of Law in the International Community, Oxford University Press, Oxford, United Kingdom, 2011, pp. 3-4

[24] For example, see Case 26/62, Van Gend en Loos [1963], p. 2, § 2 and Case 6/64, Costa v. Enel [1964], p. 594

[25] Ioan Micula, Viorel Micula and others v. Romania: Final Award (ICSID Case No. ARB/05/20)

[26] Article 1 of Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid […] implemented by Romania – Arbitral award Micula v. Romania of 11 December 2013

[27] All the factual information regarding the Micula affair mentioned so far has been gathered from: Kelyn Bacon, BIT arbitration awards and State aid – the Commission’s Micula decision, http://uksala.org/bit-arbitration-awards-and-state-aid-the-commissions-micula-decision/ (last visited on 10/02/2018, at 20:53)

[28] Volterra Fietta, Further attempts by the European Commission to eradicate intra-EU BITs, https://www.volterrafietta.com/further-attempts-by-the-european-commission-to-eradicate-intra-eu-bits/ (last visited on 10/02/2018, at 20:54)

[29] Ioan Micula, Viorel Micula and others v. Romania: Final Award (ICSID Case No. ARB/05/20)

[30] Ioannis Kardassopoulos v. Georgia: Decision on Jurisdiction (ICSID Case no. ARB/05/18, §§ 191-192)

[31] Andreas Kulick, About the Order of Cart and Horse, Among Other Things: Estoppel in the Jurisprudence of International Investment Arbitration Tribunals, The European Journal of International Law, Vol. 27, no. 1, p. 119

[32] I will not get into a detailed discussion of what constitutes estoppel and what is the difference between it and other institutions, such as the one of legitimate expectations. For a detailed analysis of estoppel in International Law and its application by the International Court of Justice, see Alexander Ovchar, Estoppel in the Jurisprudence of the ICJ. A principle promoting stability threatens to undermine it, Bond Law Review, Volume 21, Issue 1.

[33] http://www.oxfordreference.com/view/10.1093/acref/9780195369380.001.0001/acref-9780195369380-e-1282 (last visited on 10/02/2018, at 20:55)

[34] Tietje, Wackernagel, p. 7

[35] Joined  Cases C-346/03 and C-529/03. Opinion of Advocate General Ruiz-Jarabo Colomier, delivered on 28 April 2005, § 198

[36] See Robert McCorquodale, The Individual and the International Law Legal System, in Malcolm D. Evans (ed.), International Law. First Edition, Oxford University Press, Oxford, UK, 2003, pp. 299, 311-314 and 321-322

[37] Simma and Pulkowski, p. 516

[38] Ibid.

[39] Matthias Herdegen, Principles of International Economic Law. Second Edition, Oxford University Press,  Oxford, United Kingdom, 2016, pp. 444-446

[40] Idem, pp. 448-450

[41] Idem, pp. 448-477

[42] Francesco Montanaro and Sophia Paulini, United in Mixity? The Future of the EU Common Commercial Policy in light of the CJEU’s recent case law, EJIL: Talk! Blog, https://www.ejiltalk.org/united-in-mixity-the-future-of-the-eu-common-commercial-policy-in-light-of-the-cjeus-recent-case-law/ (last visited on 10/02/2018, at 20:55)

[43] Emanuela Matei, The love-hate story of arbitral jurisdiction  over claims against states in the EU, EFILA Blog, https://efilablog.org/2016/10/25/the-love-hate-story-of-arbitral-jurisdiction-over-claims-against-states-in-the-eu/ (last visited on 10/02/2018, at 20:56)

[44] For an analysis of this aspect, see: Nikos Lavranos, The Lack of Any Legal Conflict Between EU law and intra-EU BITs/ECT Disputes, EFILA Blog, 25 February 2016, https://efilablog.org/2016/02/25/the-lack-of-any-legal-conflict-between-eu-law-and-intra-eu-bitsect-disputes/ (last visited on 10/02/2018, at 20:55)

[45] The 1969 Vienna Convention on the Law of the Treaties provides, in Article 30 (3.) (b) that when the parties to a later treaty (as is the case when various ITs had existed before the TFEU became effective) do not include all the parties to the earlier one […] as between a State party to both treaties and a State Party to only one of the treaties, the treaty to which both States are parties governs their mutual rights and obligations.

[46] See Article 31 of the ILC Articles on State Responsibility

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

 

ICSID Complaint as Alternative to Supplemental Filing

by Zoltán S. Novák, TaylorWessing

We are used to thinking of international investment arbitration as a remedy against unlawful nationalization, expropriation, and other high-profile state acts depriving a foreign investor of his or her investment. It is pretty rare that the unfair treatment the investor complains about is limited to a simple court order requesting supplemental filing in a legal procedure. Yet, this is exactly what gave rise to the ICSID case Dan Cake vs. Hungary, which was filed by the claimant in response to an order on supplemental filing that the claimant found too onerous. What makes the case even more remarkable is that the claimant won, at least as far as the State’s liability is concerned.

The case was based on a bilateral investment agreement concluded between Portugal and Hungary in 1992. In its decision on jurisdiction and liability, the ICSID Tribunal declared Hungary liable for the breach of the investment agreement. The Tribunal will decide on the amount of damages at a later date.

The case revolves around the liquidation of Danesita, Dan Cake’s Hungarian subsidiary, whose business consisted of supplying biscuits and cookies to Eastern Europe, Southern Europe, and Scandinavia. During its course of business Danesita incurred a debt to one of its suppliers. As a result, the supplier submitted a request for liquidation against Danesita in August 2006. Danesita ultimately paid its debt to the supplier, but failed to inform the bankruptcy court about this development. The bankruptcy court ordered Danesita’s liquidation in a final court order in November 2007.

In April 2008, in the midst of Danesita’s liquidation, Dan Cake tried to save its subsidiary by requesting that the bankruptcy court convene a composition hearing where it hoped to reach a settlement with all of Danesita’s creditors. Instead of convening the composition hearing right away, the bankruptcy court asked Dan Cake to submit some additional documents it deemed necessary for the adjudication of the motion. In the same order, the court expressed its view that the motion for a composition hearing did not warrant the stay of the liquidation procedure.

The court’s reaction, which implied that the liquidation of Danesita’s assets continued even if a composition hearing was eventually convened, discouraged Dan Cake from pursuing its plan to reach a settlement with the creditors. Accordingly, it decided not to submit the requested supplementary filing to the bankruptcy court. As a result, the court did not convene the composition hearing and Danesita was liquidated.

Instead of submitting the requested additional documents, Dan Cake filed a request for arbitration with the International Centre for Settlement of Investment Disputes in 2012. In its complaint, Dan Cake argued that the bankruptcy court’s order constituted a breach of Hungary’s obligation under the investment treaty to (1) ensure fair and equitable treatment of investments, and (2) not impair by unfair measures the liquidation of investments. According to the claimant, Dan Cake had a statutory right to a composition hearing. By demanding additional documents – not explicitly prescribed by law – as a condition of convening it while refusing to stay the liquidation, the bankruptcy court frustrated Dan Cake’s efforts to save its investment in an unfair manner.

Hungary denied its liability throughout the procedure. It argued that according to Hungarian law the goal of the liquidation procedure is to protect the interests of the creditors and not to reorganize the debtor company. Therefore, the bankruptcy court’s decision to ask for additional documents – deemed necessary by the judge for the protection of creditors – was in accordance with relevant Hungarian legislation and could not be deemed unfair.

The Tribunal agreed with Dan Cake. According to its decision, the seven additional documents required by the bankruptcy court were either unnecessary or impossible to submit within reasonable time. The Tribunal found even more manifestly unjust that the bankruptcy court explicitly ruled on the unwarrantedness of the stay of the liquidation without being asked to do so. As the bankruptcy court was found to be an agency of Hungary, the Tribunal concluded that, through the bankruptcy court’s order, Hungary breached its duty under the investment agreement to ensure fair and equitable treatment of investments to Dan Cake and to not impair, by unfair measures, the liquidation of its investments.

It is generally accepted that investment arbitration tribunals cannot act as appellate courts. Accordingly, the seemingly erroneous application of domestic law by a domestic court rarely leads an arbitration tribunal to find the State in breach of an investment agreement. Relying on previous precedent, the Dan Cake Tribunal itself set the standard of such a breach as high as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety”. It is remarkable that the Tribunal found this standard met by a simple court order for supplementary filing.

Even if the Tribunal’s conclusion is disputable, the facts of the case are far from unique. Foreign investors often face frustrating decisions by domestic courts and authorities, often unable to question effectively their lawfulness before domestic courts. This case demonstrates that foreign investors can use international investment arbitration as a last-resort chance to redemption if they find the decision unfair.

There are of course procedural obstacles that may prevent international investment arbitration from becoming a standard way of challenging such orders. The Hungarian-Portuguese investment agreement, for example, required that cases not arising from expropriation, nationalization and similar measures shall be submitted to the competent domestic courts before an arbitration procedure can be initiated. In the Dan Cake case this procedural obstacle was avoided by Hungary’s decision not to object to the Tribunal’s jurisdiction.

Nonetheless, as there are currently more than fifty investment agreements in force in relation to Hungary – including with countries such as Germany, Austria, France, Belgium, the United Kingdom, the United States, China and Russia – it is worth remembering that international investment arbitration is a viable option not only in the most obvious cases of nationalization and other such blatantly discriminatory acts on behalf of the state. These agreements can provide protection for a business even in such ostensibly mundane situations as a domestic court’s decision to request supplementary filings in a liquidation procedure.

The Tribunal’s decision to declare Hungary liable for the breach of the investment agreement in question shows that foreign investors have more wiggle room than usually assumed when it comes to the presumably final decision of a domestic court or authority, and that international investment arbitration is a tool worth considering when facing such challenges.

 

The Lack of Any Legal Conflict Between EU Law and Intra-EU BITs/ECT Disputes

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

A couple of weeks ago the first award in the series of more than 25 other solar energy cases against Spain was issued.

The case was brought by two companies based in Luxembourg and the Netherlands against Spain on the basis of the Energy Charter Treaty (ECT) arguing that Spain violated its ECT obligations when it adopted measures which retroactively reduced the agreed feed-in tariff and other commitments for solar energy installations.

The majority of the arbitral tribunal concluded that there was no violation of the FET-standard, neither was there a sufficiently serious destruction of the investments of the investors. In other words, the claim was rejected.

In this blogpost I do not want to discuss the outcome of the case, but rather want to highlight one important issue, which is underlying all disputes in which European investors bring a claim against an EU Member States, namely, the relationship between EU law and the hundreds of intra-EU BITs/ECT.

The argument, which has been repeatedly and consistently advanced in all intra-EU disputes by the European Commission and various EU Member States (in particular by Spain, Czech Republic, Slovak Republic) is that there is a legal conflict between EU law and the intra-EU BITs/ECT, which would somehow render the intra-EU BITs/ECT in-applicable or would prevent European investors from using them against EU Member States.

Several arguments have been put forward in this context, which can be summarized as follows.

The first argument, which was advanced in the earlier intra-EU BITs cases, such as in the Eureko v. Slovak Rep. case, by the European Commission (but not in this one anymore), was that due to the accession of the former Central and Eastern European countries to the EU in 2004 and 2007, the existing intra-EU BITs were superseded by EU law.

The second argument, which was also used in this case, is that Art. 344 TFEU would prohibit arbitration proceedings between a private party and a Member State. However, as the arbitral tribunal in this case correctly pointed out, Art. 344 TFEU “literally refers to inter-State disputes, rather than to disputes between EU Member States and private persons”. The numerous domestic court disputes that concern the interpretation of EU legislation belie Spain’s thesis that only EU institutions should have jurisdiction over disputes concerning EU law. For the tribunal, EU Member States could agree to arbitrate disputes that “may involve” EU law issues. Moreover, relying on the EcoSwiss case, the tribunal considered it “universally accepted” that arbitral tribunals have both the ability and the duty to apply EU law. Citing the Electrabel v. Hungary award, the tribunal construed Art. 344 TFEU as a guarantee that the CJEU has the final say on EU law in order to ensure its uniform interpretation. Also, citing Electrabel again, the tribunal underscored that the EU accepted the possibility of investor-State arbitration under Art. 26 ECT when it became a party to that treaty, which does not admit reservations (Art. 46 ECT).

The third argument, which was advanced by Spain, was that the ECT would contain a so-called “implied disconnection clause” for intra-EU disputes. Some international treaties to which all EU Member States are parties indeed contain “explicit disconnection clauses”, which provide that EU Member States will apply relevant provisions of EU law in their mutual relations instead of the international treaty that contains them. However, the ECT does not contain an “explicit disconnection clause”, and neither did the arbitral award accept the artificial construction put forward by Spain and the European Commission of an “implied disconnection clause”.

The fourth argument, again advanced by Spain in this case, was that investors of an EU Member State were simultaneously investors of the EU. Since the EU is a party to the ECT Spain claimed that EU Member State investors could not be considered as “an investor of another Contracting Party”. It was also argued that the definition of “territory” encompassed the territory of all Member States and thus the investors originated in the same “area” or “territory” as they made the investment. The tribunal correctly dismissed this artificial argument. It held that EU Member States did not lose their status as ECT parties when the EU ratified the ECT. Likewise, Spanish territory constituted the relevant “area” or “territory” for jurisdictional purposes and not the EU territory as a whole.

In line with all arbitral tribunals dealing with intra-EU disputes so far, also this tribunal fully rejected all the above mentioned arguments. From a legal point of view, of course, no other solution would be acceptable, since only the explicit termination of the BITs/ECT according to the applicable rules would cease the application of those investment treaties – and only after the sunset clause has expired. A recent example is the termination of the ECT by Italy as of 1 January 2016. But neither the accession of states to the EU nor any provision of EU law stands in the way of investor-State arbitration initiated on the basis of valid investment treaties.

However, more important than the legal conclusions are the political implications. Ever since the first intra-EU disputes popped up – probably the Eastern Sugar case decided in 2007 – the attempts of the European Commission to thwart the invocation of intra-EU BITs/ECT have failed across the board. Moreover, despite the rising number of intra-EU disputes, most Member States consider them still highly necessary and thus have not terminated them yet.

Frustrated by the fact that intra-EU disputes continue to pop up, the European Commission has decided to apply a triple “bazooka approach” to wipe out the use of intra-EU BITs/ECT once and for all.

First, the European Commission launched infringement procedures against 5 Member States because their intra-EU BITs supposedly violate EU law.

Second, in an unprecedented act, the European Commission prohibited Romania to fulfil its international obligations of paying out the Micula award because that would supposedly constitute new, illegal state-aid. The Micula brothers have brought an action against the European Commission, which is currently pending before the General Court of Justice of the EU. Recently, the European Commission went as far as trying to vacate the ICSID award by appealing before US courts.

Third, the European Commission continues to actively intervene in all intra-EU BITs/ECT cases by trying to convince the arbitral tribunals that they lack jurisdiction for the above-mentioned arguments.

While the third approach has so far failed with arbitral tribunals, it is going to be extremely interesting to see whether the first two approaches before the Court of Justice of the EU (CJEU) will eventually succeed.

If this “big bazooka approach” succeeds, it will obviously mean the end of intra-EU investment arbitration proceedings. The question then arises whether the remaining option of using national courts will be of any help for investors/claimants, in particular in light of the shortcomings of the judicial system in many EU Member States.

Thus, it can be concluded that there is no legal conflict between EU law and intra-EU BITs/ECT, but that does not – necessarily – mean that one cannot create a political conflict, which would result into a significant reduction of the level of investment/investor protection within the EU.

But, ultimately, it is for the arbitral tribunals and the CJEU to decide on the basis of the Rule of Law and to deliver justice.


* Nikos Lavranos, Head of Legal Affairs at Global Investment Protection AG; Secretary-General of EFILA.