Client Alerts

The ECJ rules that Slovakia did not breach an EU directive by complying with its obligations under a bilateral investment treaty

Volterra Fietta Client Alert
23 September 2011

By its Judgment dated 15 September 2011 in European Commission v Republic of Slovakia (Case C-264/09), the First Chamber of the European Court of Justice (‘ECJ’) ruled in favour of Slovakia in a case brought by the European Commission (‘Commission’). The case concerns the relationship between Slovakia’s EU law obligation to ensure non-discriminatory access to the electricity transmission network pursuant to Directive 2003/54/EC (‘Directive 2003/54’) and its obligation to protect investments, pursuant to a bilateral investment treaty (‘BIT’) with Switzerland (a non-Member State), made prior to Slovakia’s accession to the EU.

Background

The dispute stems from a contract dated 27 October 1997 (‘Contract’) between a Swiss company (Aare-Tessin AG für Elektrizität (‘ATEL’)) and a State-owned network operator in Slovakia (known as Slovenské elektráne a.s. and subsequently as Slovenská elektrizačná prenosová sústava a.s. (‘SEPS’)). Under the Contract, ATEL paid over 50% of the construction costs of the Lemesany-Krosno line from Poland to Slovakia, in return for a guaranteed right of priority access to the line between Poland and Hungary until 30 September 2014.

The Commission informed Slovakia that, by reserving such capacity for ATEL, Slovakia was in breach of Directive 2003/54 which obliges EU Member States to, inter alia, ensure that there is no discrimination between transmission system users. Slovakia responded that it was bound by the terms of the Contract and the BIT and, despite negotiations with ATEL to terminate and/or amend the Contract, ATEL was insisting on the performance of the Contract. Taking the view that Slovakia had failed to fulfil its obligations under Directive 2003/54, the Commission initiated proceedings against Slovakia.

The decision

After hearing the parties, the ECJ decided, inter alia, the following:
The guaranteed right of transmission granted to ATEL by Slovakia under the Contract, which lies at the heart of the dispute, has an economic value and therefore would qualify as an investment under the terms of the BIT.

The termination of this guaranteed right of transmission would adversely affect ATEL’s rights and would have the same effect as expropriation under the terms of the BIT.

Since Slovakia had international obligations to Swiss investors under the BIT, the guaranteed right of transmission granted to ATEL was justified in light of Article 307 of the EC Treaty even though it was not in compliance with Directive 2003/54.

ATEL made an investment in Slovakia
The Commission submitted that Slovakia failed to fulfil its obligations under Directive 2003/54 which requires non-discriminatory access to the transmission system. According to the Commission, the preferential right of transmission granted by SEPS to ATEL placed ATEL in a privileged position in relation to other users of the system. On the other hand, Slovakia argued that the Contract was not a contract for preferential access but an investment contract. Slovakia submitted that the preferential right of transmission was merely one way by which ATEL intended to recover its investment made under the Contract.

Since the BIT relates directly to investment protection, the ECJ held that it was appropriate to consider Slovakia’s defence on that basis. The ECJ noted that the BIT contained terms which safeguarded the protection of investment made by Swiss investors in Slovakia. However, in order to come within the ambit of the BIT, the ECJ first had to be satisfied that the preferential access granted to ATEL fell within the definition of ‘investment’ under the BIT.

The BIT defined investment as ‘every kind of assets’, in particular ‘monetary claims and rights to any performance having an economic value’. In the present case, by agreeing to pay for more than 50% of the construction costs of the transmission line from Poland to Slovakia, ATEL was able to negotiate a right of guaranteed transmission on that line for a specific capacity. The ECJ held that this right formed part of the contractually-stipulated remuneration provided for by way of consideration for ATEL’s financial contribution towards the construction costs of the transmission line in question. Moreover, it was clear to the ECJ that ATEL’s right of transmission had an economic value since it guaranteed ATEL’s access to the Slovak transmission system which it requires in order to sell electricity in Poland via Hungary. As a result, the ECJ agreed with the Opinion of the Advocate General that this arrangement negotiated by ATEL with SEPS must be regarded as an investment within the meaning of Article 1(c) of the BIT, which Slovakia was under an obligation to protect.

The termination of ATEL’s preferential right would have the same effect as expropriation
In relation to termination of the Contract, the Commission submitted that the BIT does not require Slovakia to maintain the Contract and Slovakia was perfectly free to terminate the Contract in order to comply with its obligations under Directive 2003/54. The Commission argued that terminating the Contract would not be a breach of the BIT as ATEL was in a position to anticipate the accession of Slovakia to the EU and Slovakia had not given any undertaking to the Swiss Confederation that it would not introduce regulatory amendments which could result in termination of the Contract before its expiry date.

To the contrary, Slovakia argued that the withdrawal of this right by Slovakia would make ATEL subject to the same conditions as other market operators, even though the latter did not make any investments in the Slovak transmission system. This would amount to depriving ATEL of its rights and would breach Slovakia’s international obligations under the BIT and the Energy Charter Treaty, which forms an integral part of EU law. Slovakia submitted that even if the withdrawal of the guaranteed right of transmission did not meet the conditions of direct expropriation, it would certainly have the effect of indirect expropriation.
The ECJ started by pointing out that the BIT provides for broad investment protection, covering not only direct and indirect expropriation measures, but also measures which have an effect equivalent to expropriation. The termination of the Contract would have the consequence of depriving ATEL of its remuneration under the Contract and, as a result, the ECJ felt that such a measure would adversely affect ATEL’s rights and would have the same effect as expropriation under the terms of the BIT. In this connection, the ECJ further stressed that, although the BIT provides for entitlement to compensation for expropriation, the obligation to provide compensation in the event of expropriation does not have the effect of cancelling out Slovakia’s obligations under the BIT in respect of expropriation. Relying on the Opinion of the Advocate General, the ECJ also confirmed that Slovakia could not modify the terms or effects of the Contract by its legislation, or deprive the Contract of its legal effects as it would be tantamount to an indirect expropriation of ATEL’s rights under the BIT.

ATEL’s preferential access was justified in the current circumstances
The Commission argued that the breach of Directive 2003/54 could not be justified by reliance on Article 307 of the EC Treaty. It argued that Article 307 of the EC Treaty applied only where there was an incompatibility between EU law and the obligations which EU Member States have under agreements concluded prior to the date of their accession to the EU. According to the Commission, however, there was no incompatibility between the BIT and EU law. The Commission also submitted that, since the BIT did not require that the Contract be performed up to its expiry date, there was no obligation, within the meaning of Article 307 of the EC Treaty, which prevented Slovakia from terminating the Contract.

The ECJ noted that it was well-established that the purpose of Article 307 of the EC Treaty was to, inter alia, make clear that the application of the EC Treaty does not affect the duty of the EU Member State concerned to respect the rights of non-EU Member States under a prior agreement and to perform its obligations thereunder. The ECJ noted that the main thrust of Slovakia’s case depended on whether ATEL’s right of guaranteed access could be brought within the protection offered by the BIT. The ECJ held that if Slovakia was required under the BIT to fulfil obligations resulting from the Contract, any discriminatory treatment arising from the preferential treatment granted to ATEL would be justified even if it was incompatible with Directive 2003/54. The ECJ’s judgment relies heavily on the Opinion of the Advocate General, who firmly stated that Slovakia’s obligations to ATEL in breach of Directive 2003/54 were respected and upheld as a result of Article 307 of the EC Treaty.

Comments

The ECJ’s basic position was that EU Member States will not be held liable for any breach of EU directives, nor be forced to terminate an investment contract, in circumstances where: (i) the investment contract and investment treaty at issue were entered into prior to the host State becoming a member of the EU; (ii) the investor is from a non-EU Member State; and (iii) the investment treaty is with a non-EU Member State. It is open to question as to whether the Advocate General or the ECJ would have taken a different position if these three circumstances had not existed.

This case is of interest to all those following the Commission’s campaign to wrest control over the protection of foreign investment within the EU from Member States, including in relation to investment treaties with non-EU Member States. It represents yet another setback for the Commission’s thus far inchoate but apparently all-embracing ambitions in this respect. It is not the first time in the past few years that the ECJ has had to rap the Commission on the knuckles in the face of the Commission’s apparent determination to ignore the basic rules of public international law, including the Vienna Convention on the Law of Treaties and the Treaty of Rome itself. At a time when the Commission is seeking to alter the rules of international law to suit its conception of the primacy of EU law within the greater legal order, this case provides a clear and unequivocal reminder from the ECJ that the Commission must follow the rule of law. To the extent that the Commission does not seek to overturn the ECJ’s consistently expressed position by indirect means, and to the extent that this case can be relied upon as a precedent, the Judgment should provide a degree of certainty and comfort to investors from non-EU Member States in respect of their investments in EU Member States.