Call for Contributions – EFILA Blog

efila3-300x85

Given the present debate – on both sides of the Atlantic (and beyond) – surrounding the future of ISDS and bilateral investment treaties, the EFILA Blog editorial board believes that a veritable dialogue must take place, allowing all arguments to be heard and all diverging positions to be defended. Discussing the status of an international regime should take place at the very center of the legal community itself and not be left as a mere political bargaining chip.

For these reasons, EFILA offers its Blog as a space for open dialogue, welcoming any contribution that pertains to the field of of international (investment) law and arbitration, EU law and public policy, as well as the dynamics of these multiple legal, political and economic spheres. Moreover, the new impetus of signing regional free trade agreements in Asia-Pacific is of utmost interest for the existing dialogue, showing how other parts of the world advance their investment cooperation despite this troubled global background.

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

The ‘Mixed’ Future of the EU’s Investment Law and Arbitration Policy

by Nikos Lavranos, Secretary General of EFILA*

The year 2016 must be considered a real “annus horribilis” for the EU’s investment law and arbitration policy. The following list is just an incomplete overview of the failures of the European Commission to deliver any positive results:

  • TTIP was not concluded within the presidency of the Obama Administration and seems to be put in the freezer by President-elect Trump;
  • Even after Wallonia has been appeased, CETA is still not certain of being actually ratified by all Member States and enter fully into force, since the Court of Justice of the EU (CJEU) is going to opine on the compatibility of the investment court system (ICS) with EU law;
  • AG Sharpston recently delivered her opinion on the EU-Singapore FTA, arguing that this FTA must be concluded as a “mixed” agreement, i.e., signed and ratified by all Member States and the EU. Consequently, also this FTA will most likely face similar difficulties as CETA, in particular since it still contains the ostracized “old school” ISDS provisions.
  • The European Commission intensified its efforts of destroying the intra-EU BITs by mounting infringement proceedings against 5 Member States and by prohibiting Romania to pay out the $ 250 million Micula award and thereby fulfilling its international.
  • Similarly, the European Commission continues to intervene in all intra-EU BITs and intra-ECT disputes, trying to prevent European investors to rely on the rights granted to them by these treaties, which are still valid and in force.

In short, after 7 years since the EU obtained exclusive competence for “foreign direct investments”, the EU’s investment policy is not only practically absent but has – more importantly – created legal uncertainty and cast doubt as to the investment climate and the rule of law within the EU. This is even more disappointing in light of the unprecedented financial and economic crisis, which has hit most of the EU Member States and continues to smoulder beneath the surface. Instead of attracting new foreign direct investments, which would create jobs, the European Commission has been financing anti-ISDS, anti-investment and anti-globalization groups to scare the general public and media about something that has been in place for more than 50 years.

Looking ahead, the year 2017 should be used for pause and reflection, and ultimately, change of the chosen path.

After the CETA-drama and the Opinion of the CJEU on the EU-Singapore FTA, which will most likely follow AG Sharpeston’s analysis, the European Commission should – for a start –

accept and embrace “mixity” as the new reality. This would be a very important move by the European Commission because it could allow her to stop fighting with the Member States about competences, thereby enabling it to spend her resources on more relevant issues.

As the CETA-drama has aptly demonstrated, involving the Member States – including their regional parliaments – is a necessity in order to create any sufficient level of support for FTAs. In other words, “mixity” is a tool for increasing democratic involvement and control by the Member States and their voters. In light of the rising populism in Europe – and in light of the upcoming elections in France, Germany and Netherlands which all will take place in 2017 – this point should not to be underestimated.

In this connection, it may be advisable if the European Commission would apply the motto “less is more”. Currently, the European Commission is negotiating more than a dozen FTAs ranging from China to Tunisia. Considering the efforts, time and resources necessary for negotiating and concluding just one FTA, a prioritization of all these FTA-negotiations is essential.

In the second place, the European Commission and the European Parliament should stop stirring up the hysteria again investors, investment protection and arbitration. Investment protection and arbitration have been important and necessary elements for the promotion and protection of European investments and investors investing abroad and thereby creating jobs in Europe as well as improving the economic development in the countries of their investment destinations. Moreover, investment treaties continue to have an important role as a tool for improving the rule of law situation in many countries in the world.

Therefore, in the third place, the discourse has to change towards how investment treaties can be used as a tool for improving the functioning, efficiency and transparency of state organs across the board, in particular with the aim of eradicating corruption. This would not only benefit foreign investors but – more importantly – domestic investors and the general public.

In sum, 2017 should be the year in which the demonization of investment treaties, investment protection and arbitration has to end. Instead of spreading myths and hysteria, all relevant stakeholders should calm down and return to a fact- and merit based discourse.

As in the past years, EFILA will continue to exactly do that.

Starting with our 3rd Annual Conference on 23 February in Vienna.

At the same time calling for submissions of papers for the European Investment Law and Arbitration Review.

By requesting blogpost submssions for the EFILAblog.

By submitting its views to the public consultation on the investment court system.

Finally, by hosting the next Annual Lecture, which will be delivered by a well-known arbitration expert, sometime in the fall of 2017.

With this hopeful outlook, I wish you all a very peaceful new year.


* Nikos Lavranos, Secretary General of EFILA, visiting professor Verona University, Fellow at the WTI.

 

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

by Artemis Malliaropoulou*

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

[vi]    Ibid.

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

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

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

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

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

[xii]    El Paso, op.cit., para. 374.

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

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

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

[xvi]   C-78/74, op.cit.

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

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

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

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

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

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

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

The love-hate story of arbitral jurisdiction over claims against states in the EU

by Emanuela Matei, Associate Researcher – CELS*

Staging the scene

In October 2013 the European Commission issued a note entitled ‘Platform for Good Tax Governance: Addressing the remaining cases of double taxation in the single market: means to foster arbitration’ in which it exposed the limitations of the EU Arbitration Convention 90/463/EEC. It affirmed that whenever a case covered a situation where no DTC was applicable, the domestic rules have been proven insufficient in regard of the pursuit to eliminate double taxation. The Commission recommended the renegotiation of the existent intra-EU DTCs in order to introduce an arbitration clause. Another option would be the adoption of a directive providing for an arbitration clause. On the other hand, the harmonisation of the rules applicable in the context of DTCs has been regarded as too invasive vis-à-vis the tax autonomy of the Member States.

In the meanwhile, the Commission has been fighting a whole different battle in the field of intra-EU BITs, where actually the elimination of the arbitration clause is one of the main issues. Since the Member States have not acted in order to displace the alleged incompatibilities, the Commission envisages a discussion with the Member States and all interested parties regarding the further improvement of investment protection within the EU.

In the OECD setting, the BEPS project that mainly addresses the risk of double non-taxation would have been incomplete if the elimination of double taxation had been left outside. The question of effective dispute resolution has been addressed in Action 14 of the BEPS. The main topic relates to supplementing the existing provisions of the tax treaties with a mandatory and binding arbitration provision. Exactly as the Commission, the OECD remarks that many DTCs do not contain such a clause and some other DTCs do not guarantee that the access to arbitration is actually recognised.

As it stands now, the EU law does not provide protection against double taxation beyond the scope of the principle of non-discrimination and the four economic freedoms. On the other hand, the issue of double non-taxation is caught under the scope of State aid prohibition[1]. Disfavouring investors is allowed under EU law, as long as the tax measure is not discriminatory. If the tax measure distorts competition, the Commission should react as mentioned above in accordance with the provisions of Article 116 TFEU.

The division of competences in taxation matters reminds you of a quantum system existing in a combination of multiple states that may lead to different outcomes. The multitude of states collapses into a state or another as soon as the system interacts with the external world. In a similar manner, the limits of the national tax autonomy are not predetermined, but only determinable through interpretation, so the matter of jurisdiction to resolve a question entangled with taxation will never be a definitely closed file.

The parallel universe of international investment law

External investment may fall either under the provisions of Articles 206-207 TFEU, if the investment comes from a third country or within the scope of internal market rules, if the investment comes from another Member State. Intra-EU investments fall within an area of shared legislative competence. Taxation measures may attract investments from abroad or put the investor off the idea to move to a different Member State.

The substantive protection derived by investors from the network of BITs is clearly superior, since it includes protection against measures which are not discriminatory in the meaning of Article 18, 49 or 63 TFEU. However, the remarkable difference in favour of the BIT regime can be noticed in the field of procedural rights. The fact that individuals do not have locus standi before the CJEU is the biggest impairment in this context.

The effectiveness of the protection granted by EU law to the intra-EU investor depends on the sincere cooperation of each Member State to take any action that might be necessary in order to achieve the expected results. In Cilfit, the CJEU affirmed that if the correct application of EU law is so obvious as to leave no scope for any reasonable doubt as to the way in which the question raised is to be resolved, the national court may refrain from submitting that question for a preliminary ruling and take upon itself the responsibility for resolving it. Furthermore, it must be established in detail that there is no such doubt[2].

[A] court against whose decisions there is no judicial remedy under national law is required, when a question of EU law is raised before it, to fulfil its obligation to bring the matter before the Court of Justice, unless it has established that the correct application of EU law is so obvious as to leave no scope for any reasonable doubt and that the existence of such a possibility must be assessed in the light of the specific characteristics of EU law, the particular difficulties to which its interpretation gives rise and the risk of divergences in judicial decisions within the European Union[3].

The obligation to refer for a preliminary ruling is strict in the case of courts of last resort, though in practice, national courts may still make use of Cilfit in order to avoid a request for a preliminary ruling. I would also dare to affirm that generally in any domain of science, less you know about a subject, clearer things appear to be. In case that certain national courts still do not dispose of human resources with sufficient knowledge of EU law, the intricacy of a certain question of EU law would not be easily accessible to them. It is very probable that in such a case, the plaintiff will not be able to obtain damages by making use of Köbler doctrine, since the infringement will not be manifest[4]. The Commission as well does not have an outstanding record of starting infringement proceedings in order to discourage the  practice of making use of a broader interpretation of the Cilfit-exception.

Since 2010 the overall number of infringement procedures has decreased, while the number preliminary rulings under Article 267 TFEU has significantly increased[5]. However, these numbers do not say anything about compliance with the duty to refer for a preliminary ruling and they do not provide any guarantee that the interpretation given by the CJEU has been applied correctly in practice by the national courts. The inability of EU law to effectively defend the implied right of an individual to have a question referred to the CJEU for a preliminary ruling invites the question whether international investment law should provide legal protection via its traditional means i.e. through investor-state arbitral proceedings.

As discussed above, the source of conflict is often the reverse coin of a certain competence. It is not the right to impose taxation, but the decision to abstain from it that may cause problems. It is not the right to allow free movement of capital from and to third countries, but the ability to impose restrictions on it that generated a number of infringement proceedings in EU law. It appears obvious that EU law allows Member States to restrict the protection of the foreign investor in cases where the IIA standard would not. In other cases, the EU law itself contains restrictions that the Member State must apply.

The judicial system of the European Union has nonetheless been created as a complete system of legal remedies and procedures designed to ensure review of the legality of acts of the EU institutions. The Member States are not allowed to confer the jurisdiction to adjudicate disputes between individuals on ‘a court created by an international agreement which would deprive those courts of their task, as ordinary courts within the European Union legal order, to implement European Union law and, thereby, of the power provided for in Article 267 TFEU, or, as the case may be, the obligation, to refer questions for a preliminary ruling in the field concerned[6].

Concerning disputes between Member States in relation to the application of the ECHR within the scope ratione materiae of EU law, the CJEU held that only an explicit exclusion of the ECtHR’s jurisdiction would be compatible with EU law[7]. The tasks attributed to the national courts and the CJEU are deemed indispensable for the preservation of the very nature of the law established by the Treaties[8]. It must be underlined that the Commission has been in favour of establishing a system of external judicial control in many occasions including the adhesion to the ECHR, and agreed with the adoption of an arbitration clause in CETA, TTIP and FTAS[9]. The answer provided by the CJEU until now has been different from the opinion of the Commission.

In a recent request for preliminary ruling the Bundesgerichtshof asked the CJEU whether the application of an ISDS provision in an intra-EU bilateral investment protection agreement would be precluded by Article 344 TFEU or Article 267 TFEU or Article 18 TFEU[10].  Article 344 TFEU merely prohibits Member States from submitting a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for in the Treaties[11]. The theory projected by the Commission in Micula is that by abiding by the rules of the BIT, the Member State in question endorses the submission of disputes concerning the interpretation or application of the Treaties to the arbitral tribunal[12]. The Bundesgerichtshof in Achmea expresses the opposite opinion, namely that only if the plaintiff is a Member State, then the Article 344 TFEU would apply[13].

Article 267 TFEU aims to avoid divergences in the interpretation of European Union law which the national courts have to apply[14]. In Achmea, the arbitral decision has been adopted under the UNCITRAL rules and therefore it shall be enforced in accordance with the New York Convention that allows the domestic court to take into consideration the issue of public policy. The domestic court would have thus the opportunity to refer for a preliminary ruling in this context. The situation is different under the ICSID convention though. In any case, the Bundesgerichtshof finds in its referral no case of incompatibility with Article 267 TFEU.

The Bundesgerichtshof reasoned on the other hand that the application of the ISDS clause might be precluded by Article 18 TFEU. The Bundesgerichtshof proposed in this case to extend the higher level of protection to all investors in a similar position. Apparently, this solution seems to be elegant and certain, however in my view the issue of potential incompatibility is more intricate than it may look at first sight. A higher level of investor protection may potentially counteract the effective application of a provision of Union law protecting a specific interest of the EU[15]. Because the risk of such conflicts exists, the exercise of balancing effectiveness against investor protection must be performed by the competent court or tribunal. The role of the CJEU is to ascertain that the court that performs the assessment does not rely on an erroneous or divergent interpretation of EU law. As I mentioned before, the Cilfit doctrine does not provide a sufficient insurance that national courts apply Union law consistently with the interpretation adopted by CJEU, but at least Member States may be brought to Court for not complying with EU law obligations.

However, the investor has no means to bring a case against the Member State before the CJEU, even if an instance of unfair unequitable treatment under the BIT-rules also implied an infringement of EU law. It could be argued that the arbitral proceedings do not constitute alternative means in relation to proceedings established under EU law. The path paved by Köbler does not constitute a genuine alternative to the system of international arbitration, since it fully relies on domestic remedies and the general principle of state liability for breaches of international law obligations[16].

The protection offered by Köbler jurisprudence is limited to serious infringements of individual rights conferred by EU law, thus its scope is far narrower than under IIA law. The state liability established by CJEU in Köbler aims to fill the gap left behind by the authors of the Treaties and it employs the notion of common legal traditions of Member States that enshrines a set of rules regarding a minimum standard of protection[17]. Moving beyond this minimum standard would require an amendment of the Treaties in the sense of extending the locus standi of individuals under EU law.

The opinion of Bundesgerichtshof that the higher standard imposed by the arbitration clause should be extended to cover all similar situations may be attuned with the principle of equivalence imposed on the domestic system of remedies in matters where the protection of rights derived from EU law is at stake. The CJEU held that ‘in the absence of [EU] rules governing the matter, it is for the domestic legal system of each Member State to designate, with due observance of the requirements stemming from [Article 47 of the Charter] and the principles of effectiveness and equivalence, the courts and tribunals with jurisdiction and to lay down the detailed procedural rules governing actions brought to safeguard rights which individuals derive from [EU] law[18].

However, even if the unfair treatment would in certain instances amount to an infringement of EU law, it is doubtful that the access to arbitral proceedings would constitute the benchmark for determining the equivalent treatment in matters of judicial protection of EU rights. It all comes down to one thing. The scope of a BIT is per definition limited to the natural or legal persons referred to in it. The Commission views this limitation as a reason to conclude that the intra-EU BITs – all of them – are not compatible with EU law, since by acceding to the EU, a Member State is obliged to grant the same advantages related to individual rights comprised within the scope of internal market law to all the other Member States.

In relation to the substantive rights guaranteed by a BIT and their wider application ratione personae adopted in order to cover the investors who are nationals of other Member States than the signatories of the BIT, one can suppose that this extension is – in theory – possible. However, in consideration of the procedural rights and the assessment of compatibility with EU law of a certain obligation derived from the enhanced version of the BIT, the possibility to extend the scope in order to cover natural persons not covered by the BIT is doubtful.

It is doubtful not only for reasons very well-established by the CJEU in its Opinions pursuant to Article 218(11) TFEU, but also because the access to arbitral proceedings is provided under the premise that based on the principle of reciprocity, the counterparty will match this benefit by assuming an identical obligation. The extension of the benefit must be matched by the extension of the obligation to guarantee the access to arbitral proceedings on all other Member States. It would definitely require harmonisation measures.

Moving from reciprocity towards the unconditional duty to carry out tasks flowing from the supranational law entails a big psychological stride in regard of sensitive domains, such as taxation or judicial remedies. It requires that the governments of the Member States refrain from (ab)using blue pills – false impressions of intact autonomy – and start to realise that harmonisation may offer a better way to maintain control over an issue, since this method would allow them to actually define in more concrete terms the limits of their duties under EU law. If the Commission plans to adopt a directive replacing the Arbitration Convention in order to enhance the protection of taxpayers, I see no reason why it could not consider a similar step in order to improve the protection of economic freedoms in general.


[1] Mc Donald’s SA 38945, 2016/C 258/03 and GDF Suez SA 44888, not published yet.

[2] Case C‑379/15 Association France Nature Environnement EU:C:2016:603 paragraph 52.  Under ECHR law, the national courts must state the reasons why they consider it unnecessary to seek a preliminary ruling. A refusal to refer a question for a preliminary ruling may constitute in itself a violation of Article 6 § 1 of the ECHR. However, again if the decision of the national court not to refer is based on an erroneous application of Cilfit, the ECtHR does not have jurisdiction to examine this question. In practice, a simple reference to Cilfit  finding that there was no reasonable doubt may be sufficient in order to avoid a breach of the right to a fair hearing within the meaning of Article 6 § 1. See Ullens de Schooten and Rezabek v. Belgium, nos. 3989/07 and 38353/07, § 62, 20 September 2011, and Dhahbi v. Italy, no. 17120/09, §§ 31-34, 8 April 2014.

[3] Case C‑379/15 Association France Nature Environnement EU:C:2016:603 paragraph 50.

[4] Case C-224/01 Köbler EU:C:2003:513 paragraphs 53 and 124.

[5] Report from the Commission on the Monitoring the application of Union law, 2014 Annual Report. COM/2015/0329 final.

[6] Opinion 1/09 EU:C:2011:123 paragraph 80.

[7] Opinion 2/13 EU:C:2014:2454 paragraph 213.

[8] Opinion 1/09 EU:C:2011:123 paragraph 85.

[9] Opinion 2/15, still pending, date of hearing 13 September 2016.

[10] Case C-284/16, Achmea, pending.

[11] Opinion 1/09 paragraph 63.

[12] Commission Decision 2015/1470 Micula points 102, 104, 112, 114.

[13] Bundesgerichtshof I ZB 2/15 Achmea ECLI:DE:BGH:2016:030316BIZB2.15.0.

[14] Opinion 1/09 paragraph 83.

[15] By analogy Joined Cases C-402/05 P and C-415/05 P Kadi EU:C:2008:461 paragraphs 353, 371-3. Case C‑105/14 Tarrico EU:C:2015:555 paragraphs 54-55, Case C‑237/15 PPU Lanigan EU:C:2015:474 paragraph 63.

[16] Köbler, supra footnote 4, paragraph 48.

[17] Lenaerts and Gutiérrez-Fons, 2010. The Constitutional Allocation of Powers and General Principles of EU Law, Common Market Law Review 47, pp 1635-6.

[18] Case C-583/11 P Inuit Tapiriit Kanatami and Others v Parliament and Council EU:C:2013:625 paragraphs 100 and 102.


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

The Provisional Application of CETA is Coming Close

by Nikos Lavranos, Secretary General of EFILA

The anti-CETA/TTIP campaign is reaching its climax.

After the anti-ISDS NGOs have managed to bring the TTIP-negotiations to halt – at least it has now been officially admitted that the negotiations cannot be concluded in 2016 and it remains unclear whether, and if so, how long the negotiations under the new US President will be under way.

The attention has now turned to CETA, in particular the – finally – scheduled signature of it on 27 October 2016 between the EU and Canada, which would entail the immediate provisional application of most parts of CETA, i.e., the trade, services, customs, rules of origin chapters, which fall under the exclusive competence of the EU.

Since the European Commission accepted that CETA is to be ratified as a mixed agreement, the anti-CETA groups have been focusing their efforts to stop CETA in some of the Member States, in particular Germany, the Netherlands and Austria.

On 12 October 2016, the Dutch Parliament approved the provisional application of CETA. So, the anti-CETA groups lost in that Member States.

On 13 October 2016, the German Constitutional Court rejected their injunction in their entirety. Accordingly, the German Government is free to agree to the provisional application of those chapters, which clearly fall into the exclusive competence of the EU. Of course, it remains to be seen how the Court will decide on the merits. This decision will be interesting in the light of the CJEU’s Opinion on the EU-Singapore FTA, which revolves around the question whether, and if so, to what extent, this agreement is a mixed agreement.

At this point in time, Austria and Belgium, in particular the regional Parliament of Wallonia, are other potential candidates for blocking CETA.

But let us not forget the European Parliament (EP). Much to the dismay of many of the MEPs, the Legal Service of the MEP recently concluded that there are no legal obstacles for agreeing to CETA. It remains to be seen whether the necessary majority for a “yes” vote will be found in the EP, that is, Article 218 TFEU requires the “consent” of the EP.

In short, the final fate of CETA is still unclear and will remain so for some time. Nonetheless, the green lights by the Netherlands and in particular Germany for the provisional application of CETA are important signals, which should persuade the doubters in other Member States.

Of course, Canada is not the US, so if CETA finally would enter into force in its entirety (after it has been ratified by all Member States – maybe not by the UK anymore), this could help giving TTIP a positive boost it so desperately needs.

But that will depend on the outcome of a whole series of elections, not only in the US, but also in France, Germany and the Netherlands.

Meanwhile, the time should be used to remind policy makers and the general public of the overall huge benefits of trade and investment agreements for all.

NOTICE:

Register for the 2nd  EFILA Annual Lecture to be delivered by Johnny Veeder, QC, with the timely title:

“The Phoenix to emerge from the ashes of TTIP and CETA: an international appellate court for investment disputes in Europe …”

Click here for all information regarding registration:

http://efila.org/events/next-annual-lecture-2016/

SAVE the DATE:

23 February 2017 Vienna: 3rd EFILA Annual Conference!

Click here for the flyer: http://efila.org/events/next-annual-lecture-2016/

 

EFILA Annual Lecture 2016 – Johnny Veeder

On 9 November 2016 world renowned arbitrator Johnny Veeder QC will deliver the 2nd Annual EFILA Lecture.

The title of his Lecture is:

The Phoenix to emerge from the ashes of TTIP and CETA: an international appellate court for investment disputes in Europe

The topic is very timely and Johnny Veeder’s lecture will be thought-provoking. He continues the series of Annual Lectures organized by EFILA, which was successfully kicked off last year by Sophie Nappert’s Lecture that was awarded the GAR prize for best lecture.

The Lecture will take place on 9 November starting at 16.30 h at the Press Club in Brussels.

Registration is required. The fee is €40 (€51,78 incl. VAT). Payment has to be made online prior to the event.

Click here to download the flyer with all details:

http://efila.org/events/next-annual-lecture-2016/

Why the EU’s Foreign Direct Investment (FDI) Competence Should be Re-nationalized

by Nikos Lavranos, Secretary General of EFILA

At the last meeting of the Trade Policy Committee (TPC) at Full Members level, that is at Director General level, encompassing all MS and the European Commission, DG Demarty of the Commission is quoted as saying that the EU trade policy would have a “big credibility problem” if it could not ratify the CETA deal and added that it would be “close to death.”

He is definitely correct with this assessment, but he does not draw the necessary conclusions from this assessment, namely, that the Commission has spectacularly failed to provide the added value when the Member States rather unconsciously transferred the competence on foreign direct investment to the EU. This in turn leads to the conclusion that the trade and investment policy has been de facto re-nationalized.

In order to understand this conclusion, it is important to give a short historic overview of what has happened (or rather not) since the Lisbon Treaty entered into force in December 2009.

The unconscious transfer of the FDI competence

There seems to be no documented story on why, how and when exactly the FDI competence was transferred from the Member States to the EU. Anecdotal stories tell that in the very last minutes before the European Convention was concluded, which was tasked with drawing up a European Constitution, the European Commission rather secretly smuggled the three words “foreign direct investment” into the provision containing the exclusive trade competence of the EU.

At that time, since investment policy had been a purely national matter of the Member States, no investment policy or arbitration experts were present or involved in the drawing up of the European Constitution. Rather general EU law experts were doing the job, which were told since the EU’s internal capital market provisions already also apply to foreign investors, it makes sense as a sort of mirror provision to expand the EU’s competence to include foreign direct investment. In this context, it is interesting to note that nowhere was there any further definition or description of the scope of  FDI. As will be explained below, this lack of clarity is the root of the failure of the EU’s investment policy.

Whether or not the anecdotal stories are true, the fact is that after the European Constitution was re-labelled as Lisbon Treaty, FDI became part of Art.207 TFEU, which used to be the old Art.133 EC, covering the European Common Commercial Policy, in particular WTO law.

So, when the Lisbon Treaty entered into force in late 2009, neither the Member States nor the Commission really knew what this meant.

Mixity: the big elephant in the room

But from the very beginning, it was clear that there was one big elephant in the room, named “mixity”.

The mixity issue surfaced regularly at various levels and has created constant tensions between the Member States and the European Commission.

The first issue where mixity came up was regarding the scope of the FDI competence.

While most Member States understand FDI in a narrow sense, encompassing  only direct investments, the Commission naturally construed it broadly, covering also indirect investments.

These divergent views have been simmering in the background all the time with occasional burst outs. For example, when Member States or rather the Council issued negotiating mandates to the Commission for FTAs. The Member States always stressed that they assumed these FTAs should be mixed, whereas the Commission always claimed that they are in principle EU exclusive, and in any case this would depend on the final content of the FTAs.

In other words, this issue was never settled and it appeared that only the Court of Justice of the EU (CJEU) could settle this for good. Indeed, Karel de Gucht, the former Trade Commissioner, was so fed up about the mixity issue, that in his final day in office he brought the question to the CJEU. He asked the CJEU for an opinion as to whether the EU-Singapore FTA is mixed or EU exclusive. The Commission obviously being of the opinion that it is EU exclusive.

Mixity as a political appeasement instrument

 

While the general public has largely been unaware of the EU-Singapore FTA and the mixity issue before the CJEU, the widespread political hysteria against TTIP, and to lesser extent against CETA, has forced the Commission to adopt a selective U-turn on the mixity issue.

First, with regard to TTIP, Commissioner Malmstrom rather quickly understood that in order to save TTIP and obtain some minimum acceptance in several key Member States, such as Germany, France, Netherlands and Austria, a vote by the respective national parliaments is an absolute precondition for getting the TTIP deal done. Accordingly, Malmstrom has been touring most Member States assuring them that their parliaments will be voting on TTIP.

Second, and in contrast to the politically sensible U-turn regarding TTIP, which though is in clear conflict with the Commission’s longstanding view that it is exclusively competent for all investment issues, Malmstrom, and her adjutant Demarty, until very recently maintained their position that CETA should be ratified as an EU-exclusive agreement. After all, CETA and in particular the hated ISDS provisions have been drastically reformed, so all concerns have been addressed and a vote by the European Parliament on CETA should give sufficient comfort to the Member States and their citizens.

But the massive critique against any trade deal in the Member States has been gaining so much momentum that the Commission had to give in – also regarding CETA. Thus, CETA will be ratified as a mixed agreement, which may take several years before all parliaments (it appears that also several regional parliaments will vote on it as well) have ratified it.

This brings us to the third thorny issue, namely the so-called “provisional application” of CETA (or any other trade deal). It has become tradition in the past to apply trade deals provisionally as soon as the Council signs it off, while awaiting the conclusion of the whole ratification process. The obvious advantage of this is that the benefits of the trade deal can be reaped immediately, notwithstanding the non- fulfillment of the formal legal requirements. The question, which pops up in this context is, which parts of the trade deal can be immediately “applied provisionally”? That depends on which parts of the trade deal are considered to fall in the exclusive competence of the EU and which parts are still wholly or partly with the Member States’ competence.

Again, the Commission started off from its maximum position that the whole treaty should be provisionally applied. But the Member States – having realized how far the Commission is ready to go in order to save the CETA deal – came up with a whole list of policy areas (which most likely will be extended after the summer break), which are to be excluded from the provisional application of CETA. In addition to investment protection rules, Member States have flagged in particular transport, sustainability chapter in parts, culture subsidies, mediation and criminal sanctions to protect intellectual property, as areas to be excluded from provisional application.

The Commission already has accepted that investment rules should be excluded but continues to fight any further expansion of the list, arguing that this would undermine any meaningful provisional application.

This battle will go for some weeks ahead, but the intention is that CETA is finally signed at the EU-Canada summit on 27 October 2016. Accordingly, sometime in early October the Member States and the Commission must agree on the list of policy areas, which de facto are considered to be mixed.

The de facto re-nationalization of the trade and investment policy

Again, it can be expected that the Commission will be flexible in order to get the deal done, which only  enhances the position of the Member States.

That will be even more so in the case of TTIP, which is far more important (politically and economically speaking), but also far more contagious and politicized in the public debate. Member States have realized that they are in a much stronger position if they appear to be critical or outright against TTIP rather than in support of it. Consequently, citing domestic public outcry against TTIP, Member States can not only request that TTIP must be mixed, but can extract further demands from the Commission, such the exclusion of certain policy areas or further “improvements” of highly politicized areas such as regulatory cooperation, geographical indications, agricultural etc.

All this boils down to the conclusion that the Commission’s position that it has exclusive competence over all trade and investment aspects can simply not be maintained anymore by the Commission. Whereas the original idea might have been good to give the Commission a carte blanche because it presumably could negotiate better trade deals, it has become clear over the past 6 years that the Commission has failed to deliver. The main reason for that is that it “forgot” to take the Member States’ concerns serious and instead consistently opted to remind them that they have no say anymore on trade and investment issues. In other words, rather than working closely together with the Member States and carefully listen to them, the Commission did what it wanted. However, in the current political climate and with Brexit ahead of us, the support for the EU is rapidly dwindling. Instead, Member States are reasserting their powers again. Indeed, it is striking to see how easily and within months the Member States have been able to force the Commission to give up its almost sacred position of exclusive competence. The Commission has now seemingly adopted a more practical and realistic approach of accepting mixity for free trade deals. Although, it remains to be seen how it will handle the outcome of the Opinion of the CJEU regarding the EU-Singapore FTA.

In sum, it must be concluded that the transfer of the FDI competence to the EU has not yielded any results since the beginning. After 6 years no single trade deal has been fully signed, ratified and entered into force. In addition, the Commission is spreading doubts about the legal certainty of Member States’ BITs (both intra and extra) and is undermining the application of the ECT. Therefore, the Member States are only right in re-asserting control over trade and investment issues. Indeed, Brexit will offer an excellent opportunity to delete FDI from the exclusive EU competence, when the EU treaties have to be modified anyway.

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].

 

Brexit: Implications for the EU Reform of Investor-State Dispute Settlement

Sophie Nappert, 3 Verulam Buildings

Nikos Lavranos, EFILA

“Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.”

Investor-state dispute settlement (ISDS) is an international arbitration mechanism that allows an investor from one country to bring arbitral proceedings directly against the state in which it has invested, provided that the investor’s home country and the host country of the investment have so agreed by treaty (see box ISDSbelow). ISDS is currently found in most modern international trade and investment agreements.

In the period since the entry into force of the Treaty of Lisbon, conferring on the EU exclusive competence over foreign direct investment in the European space, the European Parliament and the trade ministers of key member states, such as Germany, France and the Netherlands, have perceived that ISDS presents a number of shortcomings. These concerns were crystallised in the responses to a public consultation on the Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated between the EU and the US (see Transatlantic Trade and Investment Partnership (TTIP): tracker).

ISDS

Investor-state dispute settlement (ISDS) is a dispute resolution mechanism modelled on international arbitration, allowing an investor from one country to bring arbitral proceedings directly against the country in which it has invested, pursuant to the provisions of a treaty between the investor’s home state and the state hosting the investment.

ISDS provisions are contained in most modern international agreements including free trade agreements, bilateral investment treaties and multilateral investment agreements. If an investor from one country (the “home state”) invests in another country (the “host state”), both of which have agreed to ISDS, and the host state violates the rights granted to the investor under the international agreement between the home state and the host state (such as the right not to have property expropriated without prompt, adequate and effective compensation), then that investor may take the host state to international arbitration rather than sue in the domestic courts of the host state.

As a result, the European Commission has now tabled a proposal for a new dispute settlement system, the international court system (ICS), to be used in the EU’s future trade and investment treaties and, in the Commission’s words, “paving the way for a multilateral investment court” (see Legal update, European Commission proposes Investment Court System for EU trade agreements).

Instead of investor-state disputes being determined by an arbitral tribunal appointed by the parties, the Commission’s proposal is to create a judicial, two-tiered body consisting of a Tribunal of First Instance and an Appellate Tribunal. Party-appointed arbitrators would be replaced with “judges” unilaterally pre-selected by the state parties. As a result, the resolution of investor-state disputes by way a one-shot final arbitral award will be replaced with a two-instance procedure allowing for appeals on points of both fact and law.

The ICS proposal constitutes a strong push towards the institutionalisation and judicialisation of investor-state dispute settlement and is inspired by the WTO (World Trade Organisation) dispute settlement model applicable to state-to-state trade disputes. The important hallmarks of arbitration such as flexibility, finality and party autonomy will be essentially erased (see box ICS proposal: the concerns).

The EU’s seismic shift on its ISDS policy coincides with the UK’s consideration of its future as a member of the EU. If Brexit comes to pass, there will be legal repercussions on a number of levels as regards the UK’s trade and investment commitments at international law, and the protections currently enjoyed by UK investors abroad, including the ability to enforce arbitration awards worldwide pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). This is uncharted territory in many respects, and the opacity surrounding the progress of the current negotiations on the TTIP with the US adds to the uncertainty and lack of clarity.

ICS proposal: the concerns

While ISDS has been tested for decades and is a known quantity, it remains to be seen whether the benefits claimed by the proponents of the ICS will actually materialise. The EU’s proposal assumes that the ICS will not be declared by the Court of Justice of the European Union to be incompatible with EU law, as the CJEU has done consistently for other international tribunals, latterly the European Court of Human Rights).

For example, critics of ISDS claim that it has failed to take proper account of other relevant policy areas such as human rights, environmental law, intellectual property law and the “regulatory policy space” of states generally. The current ICS proposal does not specifically address those issues, and thus on its face provides little more credibility and legitimacy than does ISDS.

Another example concerns the qualifications required by the “judges” and the process of their selection by the contracting parties.

The proposal states that the only qualifications required of ICS “judges” for appointment to the Tribunal of First Instance is that they should be qualified for judicial office or a “recognised jurist”. For the Appeal Tribunal, the requirements are of qualification for the highest judicial office or being a “recognised jurist”. Interestingly, while the ICS proposal insists on expertise in public international law for its judges, expertise in investment law is deemed merely to be “desirable”. There is no requirement that (any of) the judges should demonstrate expertise in the policy areas that have fired up public debate and the anti-ISDS sentiment, such as human rights or environmental law.

The ICS proposal leaves the judge selection process entirely to the contracting parties. No transparency, public hearing or consultation with users or investors is currently envisaged. In addition, the “judges” are to be paid by the contracting parties and can be re-appointed by them. The anti-ISDS debate at the root of the ICS proposal claimed that the party selection and payment of arbitrators cast doubt as to the independence and impartiality of those arbitrators. The ICS proposal is open to precisely the same criticism.

Moreover, ISDS has been recognised as providing flexibility and a dispute resolution process which engages both parties, the state and the investor, on an equal footing. By contrast, the ICS replaces this flexibility with a fixed set of rules, removing any participation from the investor claimant regarding for example the choice of arbitration rules and the selection of arbitrators.

These points highlight some of the concerns which call for further reflection and analysis regarding whether the ICS proposal is the improvement on the arbitration-modelled ISDS claimed by its proponents.

We set out below some of the potential implications, at both macro- and micro-levels.

Macro-level implications

The first macro-level issue is that Scotland and Northern Ireland have indicated that they may not wish to remain part of the UK post-Brexit. The prospect of a fragmented Britain (no longer the UK) raises the question of whether the EU or the US would consider it worthwhile to negotiate a trade and investment agreement with a dismembered Britain. It also raises the question of what leverage Britain in its new incarnation would have in such treaty negotiations, as opposed to that which it now enjoys as part of the EU.

Another question is Brexit’s potential impact on the existing 100 or so bilateral investment treaties (BITs) that the UK has with individual EU member states (intra-EU BITs), as well as with third states. A post-Brexit British state might be able to keep all these BITs containing the classic ISDS provisions assuming that its respective state counterparties agreed.

In this scenario, Britain would avoid the untested ICS proposal and its potential shortcomings, and become an interesting safe harbour for foreign investors who may find it attractive to structure their investments through it, thereby avoiding the current insecurity created by the ISDS reforms. If it considers it necessary and useful, post-Brexit Britain could seek to negotiate BITs with the EU (as a single entity), as well as those countries with which the EU has either signed or is negotiating trade and investment agreements, namely Canada, China, the US, Singapore and Vietnam.

The question arises, however, whether Britain, which currently appears to favour retaining ISDS over the ICS, would be able to impose ISDS provisions on potential counterparties given the EU’s push for the ICS to apply to future trade and investment treaties, and the willingness of at least some of the countries on this list to accept ICS.

Britain’s ability to do this is likely to be affected by which dispute settlement system ends up being included in the TTIP. If the ICS comes to feature in the TTIP, ISDS in its current, arbitration-based form faces an uncertain future.

One important aspect of post-Brexit Britain retaining ISDS in its arbitration form rests on the question whether Britain in its new incarnation has the ability to remain a party to the New York Convention, to which over 150 states are parties, and which is a significant part of the protection afforded to investors by ISDS.

Micro-level implications

At a micro-level, the international investment agreements (IIAs) that have recently been agreed by the EU and its relevant trading partners, but are still awaiting signature or ratification (namely, CETA (the Comprehensive Economic and Trade Agreement with Canada), the EU-Singapore Free Trade Agreement (FTA) and the EU-Vietnam FTA), would have to be amended to reflect Brexit.

Whether these trading partners would consider it attractive to negotiate new deals with Britain is an open question. The time and effort involved in the negotiation and conclusion of IIAs is not to be underestimated. The intervening period would be marked by legal uncertainty, to the detriment of UK investors abroad and Britain’s economy.

Another question is whether Brexit would have any impact on the ongoing TTIP negotiations, in particular with regard to the EU’s internal process of consulting with member states in adopting certain negotiating positions. Prime Minister David Cameron is said to be in favour of closing the TTIP as soon as possible because he considers it to have the potential of delivering huge benefits for the UK. At the same time, he appears generally untroubled by the anti-ISDS debate currently raging in many other EU member states.

A real and potentially significant impact

In conclusion, Brexit’s impact on the EU’s trade and investment policy would be real, as would its impact on post-Brexit Britain’s geo-political clout in the trade and investment arena. In contrast, it might offer interesting advantages, for both the UK as a host state and for investors who perceive the EU’s current investment policy as counter-productive. These advantages, however, are likely only to be felt after a significant period of uncertainty whilst post-Brexit Britain finds its footing, and in the short term are outweighed by that uncertainty.

Finally, the prospect of Brexit might cause the European Commission, the European Parliament and other member states to re-think the scope of their proposed “reforms” of investment treaties and ISDS.


Sophie Nappert is an arbitrator in independent practice at 3 Verulam Buildings, and Nikos Lavranos is Secretary General at EFILA.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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