Autumn 2015

Further attempts by the European Commission to eradicate intra-EU BITs

Introduction

Recently, the European Commission (the “Commission”) has displayed a significantly more proactive approach in its attempts to eradicate bilateral investment treaties between European Union (“EU”) Member States (“intra-EU BITs”). Since the accession of ten States to the EU in 2004, two States in 2007 and one additional State in 2013, there are almost 200 BITs in force between EU Member States. The Commission claims that such treaties are incompatible with the EU legal order.

In recent years, investors have persistently sought to vindicate rights and protections promised under intra-EU BITs before investment tribunals. Respondent States and the Commission have reacted in a number of ways, including by making jurisdictional objections and asserting that BIT obligations have been superseded by EU law. In those awards which have entered the public domain to date, arbitral tribunals have generally rejected these arguments and assumed jurisdiction.

With increasing regularity, the Commission has intervened in such cases by submitting amicus curiae briefs or other written communications, the object of which is generally to persuade investment tribunals to decline jurisdiction. This objective is sometimes, though not always, shared by the respondent State in question. In 2006, the Commission expressed its views in a letter and note which were communicated to the tribunal and ultimately reproduced in the 2007 Partial Award in Eastern Sugar v. Czech Republic (SCC Case No. 088/2004). (Prof. Robert G. Volterra, Partner at Volterra Fietta, acted as co-arbitrator in this case.) In 2009, the Commission submitted amicus curiae briefs to two tribunals constituted under the ICSID Convention in the Electrabel v. Hungary (ICSID Case No. ARB/07/19) and AES v. Hungary (ICSID Case No. ARB/07/22) cases. In 2010, the Commission made a written submission in Eureko v. Slovak Republic (PCA Case No. 2008-13). In April 2015, a jurisdictional award in EURAM v. Slovakia (PCA Case No. 2010-17), originally issued in 2012, was made public, revealing that the Commission had also intervened in this case, in 2011. In May 2014, the Commission again submitted an amicus curiae brief in U.S. Steel v. Slovakia (PCA Case No. 2013-6). (Prof. Robert G. Volterra, Partner at Volterra Fietta, acted as co-arbitrator also in this case. In June 2014, the case was discontinued pursuant to the parties’ agreement. The Commission’s amicus curiae brief was subsequently rendered public through IA Reporter.)

A review of the Commission’s actions in these high-profile cases provides background to the more recent and more assertive actions of the Commission with regard to intra-EU BITs, which include attempting to block the payment of awards under such treaties and instituting infringement proceedings against States parties to them.

Amicus curiae interventions by the Commission in intra-EU investment arbitration cases

Arguments advanced by the Commission

In its amicus curiae interventions in the investment arbitration cases mentioned above, the Commission has put forward a range of inter-related arguments, which are summarised here.

(1) Article 351 of the Treaty on the Functioning of the European Union (“TFEU”), which preserves the validity of treaty obligations incurred by EU Member States prior to their EU membership, is no longer applicable once all parties to a treaty have become parties to the EU.
(2) There is no need for investment agreements within the EU single market and their content has been superseded by EU law upon accession of the State in question. There are equivalent substantive protections under EU law and the matters regulated in investment agreements fall within the scope of the EU treaties.
(3) The settlement of investment claims by arbitral tribunals may result in the issue being arbitrated without relevant questions of EU law being submitted to the Court of Justice of the European Union (“CJEU”).
(4) Allowing investor-State arbitration in the intra-EU context could open up the possibility of forum shopping by investors, who might submit claims to arbitration instead of, or in addition to, national or European courts.
(5) The application of BITs without consideration of EU law may result in unequal treatment of investors from different Member States within the EU, a discrimination that is prohibited by EU law.
(6) In the view of the Commission, the EU is a “supra-national organisation with the force to take binding decisions over its Member States”, and hence “one legal space”. Investors with the nationality of one EU State cannot, therefore, rely on investment agreements to bring claims against another EU State, particularly where the action in issue is rooted in a measure mandated by EU law.
(7) Investment agreements may conflict with EU law, e.g., in relation to State aid. For instance, in Electrabel v. Hungary, the Commission argued that “compliance by an EU Member State with the legal obligations stemming from [EU] State aid law cannot be regarded as a violation of the Energy Charter Treaty, as long as the [EU] is considered to protect investor’s [sic] rights” (para. 4.104).
(8) In the event of conflict between EU law and BIT provisions, EU law should prevail. The principle of supremacy of EU law applies also to pre-accession bilateral agreements between Member States, which means that the rule of pacta sunt servanda does not apply to non-conforming agreements between EU Member States. Provisions of an international agreement cannot, under EU law, justify a possible breach of EU law; nor can a private party rely on such an agreement to take advantage of dispute settlement mechanisms which conflict with EU law.
(9) Article 344 TFEU (under which Member States undertake not to submit a dispute concerning the interpretation of application of the EU Treaties to any other method of settlement than those provided for therein) implies that a Member State cannot make use of settlement procedures provided for in a BIT insofar as the dispute concerns a matter falling under EU competence. Member States must not weaken the EU legal system by referring disputes involving EU law to external tribunals or offering investors the option of referring such disputes to such tribunals.
(10) Termination of intra-EU BITs is not automatic, but must be carried out in accordance with the procedures provided for in the relevant BITs. However, in the Commission’s opinion, intra-EU BITs should – and indeed must – be terminated insofar as their scope falls within EU competence.

Reactions of the tribunals

Tribunals have so far not been swayed by the Commission’s arguments. They have generally noted that the submissions of the Commission are of persuasive force at best and have sometimes stated explicitly that they do not agree with the Commission’s position.

When defining their jurisdiction, tribunals have looked to public international law, to the treaty under which the claim is brought and the consent of the parties to that treaty to submit to arbitration. For instance, the Electrabel tribunal underlined that “several of the Commission’s submissions cannot be taken into account in this arbitration, because they are based on a hierarchy of legal rules seen only from the perspective of an EU legal order applying within the EU” (para. 4.112). Tribunals have also pointed out that the claims brought by claimants were formulated based on investment agreements such as the ECT or a BIT and did not as such implicate EU law.

Tribunals have held that Article 344 TFEU did not imply that the ECJ has an “interpretative monopoly” in relation to EU law: courts and arbitration tribunals throughout the EU interpret and apply EU law daily. Consequently, tribunals have not been persuaded to decline jurisdiction on this basis. Moreover, tribunals have interpreted Article 344 TFEU as applying exclusively to disputes between EU Member States inter se and therefore irrelevant to disputes between an EU Member State and an investor from another EU Member State. The argument that Article 344 TFEU should, through the operation of Article 30 of the VCLT, be held to take precedence over dispute settlement provisions of BITs has also been rejected.

The argument that the investor was to be regarded as an “EU investor” bringing a claim against an EU measure – thus depriving the dispute of its international element – was rejected in Electrabel.

Moreover, tribunals have rejected the notion that EU law has automatically superseded the BIT as a result of the respondent State’s accession to the EU. Significantly, tribunals have not accepted that the protections offered to investors under EU law are identical to those offered under BITs, holding that these respective bodies of law do not regulate the same subject matter. In particular, the Eastern Sugar tribunal noted that EU law lacked any form of guarantee matching the right of investors to address an international arbitration tribunal independent from the host State, which is a standard provision in most BITs. This prompted the Commission to point out in a later amicus curiae submission that it did not agree that the availability of investor-State arbitration was a key benefit for investors or that such arbitration was more efficient than redress through national courts or through a complaint to the Commission.

The Electrabel tribunal conceded that if there were a conflict between EU law and a BIT, Article 351 TFEU would require that EU law should prevail as between EU Member States. However, although judging EU law protections and protections under investment agreements to be different in scope and content, tribunals have failed to find any incompatibility between these instruments and have therefore seen no reason not to apply the relevant investment agreements.

Notably, the consistent rejection of the Commission’s arguments has not deterred the Commission from continuing to submit similar amicus curiae briefs in additional investment arbitration cases. Furthermore, lately, the Commission has taken to ever more assertive measures to block the application of intra-EU BITs and the enforcement of awards emanating from them.

The Commission steps up its response to intra-EU BIT cases

In Electrabel v. Hungary, the Commission contended that “the pre-eminence of EU law” has consequences for the implementation and enforceability of any award which contradicts EU law on State aid. According to the Commission, payments under awards or compensation consensually agreed for termination of contracts with investors are subject to EU law on State aid. Notably, the EU is not, and cannot become, a party to the ICSID Convention, which provides for automatic recognition of an ICSID award and enforcement of pecuniary obligations imposed by that award within the territories of its parties.

The Commission’s approach has since grown more aggressive. Significantly for the next case to be discussed in this review, the Commission argued in its amicus curiae submission in U.S. Steel v. Slovakia that “the use of the investor-State dispute settlement clause of bilateral investment treatments in cases such as the case at hand risks precisely circumventing the application of the Union system of State aid control. Such use of arbitration proceedings cannot be accepted from a Union law perspective.”

In December 2013, an ICSID tribunal awarded the claimants in Micula v. Romania (ICSID Case No. ARB/05/20) damages in the amount of EUR 82 million. The claim was brought by Swedish claimants under the Swedish-Romania BIT, alleging that Romania had revoked incentives and thereby infringed the legitimate expectations of the investors. In January 2014, the Commission informed Romanian authorities that any implementation of the award would constitute new State aid. In May 2014, the Commission decided to issue a suspension injunction, obliging Romania to suspend any action which could lead to the execution or implementation of any part of the award that had not already been paid. Any such execution or implementation would be deemed to constitute unlawful State aid, at least until the Commission had taken a final decision on the compatibility of that State aid with the internal market. In September 2014, the claimants in Micula v. Romania brought legal action against the Commission before the General Court of the European Union in order to have the injunction annulled (Case T-646/14).

The Commission requests the termination of intra-EU BITs by five Member States

Several tribunals have attributed some significance to the fact that, at the time when they considered the Commission’s position, the Commission had yet to initiate infringement proceedings against Member States for failing to terminate intra-EU BITs – one of the mechanisms at its disposal under EU law as guardian of the EU treaties. However, in the most recent development, the EU Commission has indeed taken such action.

The basis for infringement proceedings is set out in Articles 258 and 260 of the TFEU. If the Commission considers that a Member State has failed to fulfil an obligation under the Treaties, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations. If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice of the European Union. If the Court of Justice finds that a Member State has failed to fulfil an obligation under the Treaties, the State shall be required to take the necessary measures to comply with the judgment of the Court. If the Commission considers that the Member State concerned has not taken the measures necessary to comply with the judgment of the Court, it may bring the case before the Court after giving the State the opportunity to submit its observations. It shall specify the amount of the lump sum or penalty payment to be paid by the Member State concerned which it consider appropriate in the circumstances. If the Court finds that the Member State concerned has not complied with its judgment it may impose a lump sum or penalty payment on it.

On 18 June 2015, the EU Commission initiated infringement proceedings against five Member States with a view to compelling these Member States to terminate their intra-EU BITs: Austria, The Netherlands, Romania, Slovakia and Sweden. Moreover, the Commission has revealed that it is pursuing less formal procedures vis-à-vis the 21 other Member States which have declined to terminate their intra-EU BITs.

Concluding comments

The countries targeted in the infringement proceedings initiated in June 2015 do not appear to have been selected at random. The Micula v. Romania case revolved around the BIT between Sweden and Romania; the EURAM v. Slovakia case concerned the BIT between Austria and Slovakia; Slovakia’s BIT with The Netherlands was at issue in both Eureko v. Slovakia and US Steel v. Slovakia; finally, a Dutch BIT with the Czech and Slovak Federal Republic was the treaty under consideration in Eastern Sugar v. Czech Republic. This suggests that the European Commission is taking a much more active approach when embarking on a strategy to eradicate the problem of intra-EU BITs.

States which are found to be in violation of their obligations under the EU treaties may eventually be compelled to pay penalties to the EU. The Commission routinely asks the CJEU to impose a penalty based on the number of days during which the State remains in violation following the delivery of a judgment under Article 260, as well as a lump sum penalising the period of non-compliance between the first judgment on non-compliance under Article 258 and the judgment delivered under Article 260. The penalty normally requested by the Commission is currently EUR 670 per day, adjusted by coefficients taking into account various factors such as inter alia the seriousness of the infringement and the ability of the Member State to pay with a view to ensuring that the penalty has a deterrent effect. The lump sum requested is calculated at EUR 220 per day, subject to minimum levels set for each Member State. Thus, for example, the minimum lump sum for Sweden is currently set at approximately EUR 2.7 million and more than EUR 3.7 million for The Netherlands. The prospects of being obliged to pay such fines may induce EU Member States to comply more readily with the Commission’s requests.

For investors wishing to rely on treaties targeted by the EU, this may be a daunting prospect. It cannot be ruled out that investors’ ability to have recourse to international arbitration may be reduced as a result of the Commission’s actions. However, many BITs operate with a sunset clause, pursuant to which investments made prior to termination remain protected for a number of years thereafter (although, in a much-debated legal manoeuvre, some EU Member States have sought to amend their BITs by deleting this provision before terminating the BIT in question). In any event, the developments may put a use-by-date on a vital part of the global investment protection regime.

As a practical conclusion, EU investors planning new investments in another EU Member State might be well advised, to the extent that they are in a position to do so, to consider routing such investments via a non-EU Member State which has a suitable BIT with the EU Member State where they intend to invest. Similarly, existing intra-EU investments might usefully be rerouted via a non-EU Member State prior to the crystallisation of a dispute. From the Commission’s viewpoint, such extra-EU investment routing would be a good example of the application of the law of unintended consequences.