REUTERS | Yuriko Nakao

Black Tuesday: the end of intra-EU BITs

In his Opinion, Advocate General Wathelet in Achmea v Slovak Republic some six months ago argued that intra-EU bilateral investment treaties (BITs) and investment treaty arbitration based on those BITs are compatible with EU law. More specifically, he opined that arbitral tribunals established on the basis of intra-EU BITs should be considered similar to the domestic courts of EU member states. This would, on the one hand, allow such arbitral tribunals to request preliminary rulings from the Court of Justice of the European Union (CJEU) in EU case law at issue, while on the other hand, the CJEU would be able to ensure that these arbitral tribunals apply and interpret EU law according to its case law.

This was a very innovative approach, which would have maintained the 190 existing intra-EU BITs, while at the same time ensuring that their application and interpretation is consistent with EU law.

However, the CJEU did not follow the Advocate General. Instead, it has upheld its consistent jurisprudence regarding its relationship with other international courts and tribunals. In particular, in its Opinion 2/13 regarding the accession of the EU to the European Convention on Human Rights, the CJEU vehemently rejected the possibility that another international court or tribunal could be placed in a position to – even potentially – apply or interpret EU law without being under ultimate control of the CJEU itself. Moreover, in contrast to the extensive analysis of the Advocate General, the CJEU’s Achmea judgment is remarkably short and leaves many questions unanswered.

No intra-EU BITs ISDS proceedings any longer

Since the CJEU concluded that an investor state dispute settlement (ISDS) provision as contained in the Netherlands-Slovak BIT is incompatible with EU law, all 190 intra-EU BITs, which contain similar ISDS provisions, can no longer be invoked by European investors against EU member states.

According to Article 351 of the Treaty on the Functioning of the European Union (TFEU), member states are required to resolve any disputes between their international agreements and EU law. Although the CJEU did not say anything as to the necessary steps that member states must take, they are required, by virtue of Article 351 TFEU, to either renegotiate their intra-EU BITs by removing the ISDS provisions or, more likely, terminate them altogether. The latter option is obviously the “solution” preferred by the European Commission.

Domestic courts of the member states are the only option

In Achmea, the CJEU relied heavily on the importance and exclusivity of the preliminary ruling system. Since the CJEU ruled that international arbitral tribunals cannot be considered to be domestic courts of member states, they are barred from requesting preliminary rulings from the CJEU. As a result, the CJEU argued that it is unable to ensure that arbitral tribunals, if necessary, apply and interpret EU law consistently and uniformly.

Consequently, as of now, European investors can only turn to the domestic courts of member states to protect their rights. As is well known, the judicial systems in many member states are malfunctioning, slow, corrupted and under political pressure from governments.

The fate of on-going intra-EU BITs disputes

It is noteworthy that the CJEU did not attach any temporal limitations to its judgment or include any transitional period, which raises the question of the fate of ongoing intra-EU BITs disputes. For legal certainty, disputes which have been initiated prior to Achmea should go ahead. However, the sweeping language in the Achmea judgment makes it unlikely that arbitral tribunals will feel comfortable to continue cases. At the very least, respondent member sates will use Achmea as an objection for the continuation of any intra-EU BITs ISDS proceedings.

In this context, the CJEU also failed to make any distinction between International Centre for Settlement of Investment Disputes (ICSID) and non-ICSID proceedings. As is well known, ICSID proceedings take place within the self-contained regime of the ICSID Convention, and ICSID awards are automatically recognisable and enforceable in all 150 contracting parties to the ICSID Convention, without any review or interference by domestic courts. However, the CJEU does not give any guidance as to what should be done with intra-EU BITs ICSID disputes.

Similarly, the CJEU does not discuss the fact that many arbitral tribunals (whether ICSID or non-ICSID) have a seat outside the EU, such as Geneva or New York, and therefore will not necessarily care about EU law or what the CJEU decides. So, for example, why should an arbitral tribunal hearing an intra-EU BIT dispute with a seat in New York be obliged to follow Achmea or feel bound by EU law generally?

The (re)payment of awards

An interesting question arising out of the Achmea judgment concerns the issue of intra-EU BITs awards that have already been paid to investors. More specifically, can member states recoup such payments from investors because the whole arbitration procedure was based on an ISDS provision, which ab initio was incompatible with EU law? Could such payments of awards be considered as illegal state aid, which is the central question in the still pending Micula case? And what happens if investors refuse to pay back their awards? Again, no indications on these issues from the CJEU.

The ECT and ICS/MIC

In addition to the consequences discussed above, Achmea will most likely also have wider implications, in particular for intra-EU disputes initiated under the Energy Charter Treaty (ECT) and for the proposed investment court system (ICS) included in the Comprehensive Economic Trade Agreement (CETA) and the multilateral investment court (MIC), which is currently negotiated within UNCITRAL.

As regards intra-EU ECT disputes, it would seem that Achmea applies, which means that European investors can no longer rely on the ECT in order to bring cases against member states. This could, in effect, abruptly end the more than 30 ECT disputes which European investors have brought against Spain, Italy and other member states for the retroactive withdrawal of subsidies for renewable energy. Similarly, member states may not have to pay any ECT awards any longer, which would make a big difference. For example, Spain that has recently lost two ECT cases and has been ordered to pay almost EUR 200 million in total damages.

Moreover, it should be recalled that the ECT is a multilateral investment protection treaty, which grants rights to non-EU third states and their investors. Although it would seem that the CJEU could not diminish the rights of these investors without the consent of these states, Achmea may still have an impact, particularly in cases in which the seat of the tribunal is within the EU, for example Stockholm.

As regards the compatibility of the ICS with EU law, a question which Belgium has asked the CJEU to answer in its Opinion regarding CETA, it seems that Achmea already provides the answer.

Despite the fact that CETA contains a provision stating that any interpretations of EU law by the ICS would not bind the institutions of the EU or member states, CETA allows the appeal tribunal of the ICS to review points of facts, including domestic law. That means that EU law as far as the EU and its member states are concerned. Since the ICS cannot be considered a domestic court of the member states, it will also be barred from requesting preliminary rulings from the CJEU. Consequently, unless the ICS provisions are modified, in the sense that the ICS is required to request preliminary rulings from the CJEU whenever it is interpreting or applying EU law and that is bound by the CJEU, the ICS will be deemed to be incompatible with EU law. But even the existence of such a preliminary ruling possibility, which was envisaged for the European Court of Human Rights, was deemed by the CJEU to be insufficient to ensure its final and ultimate authority over EU law.

The same applies to the proposed MIC, which is currently negotiated within UNCITRAL. In other words, if this MIC is – even potentially – able to interpret and apply EU law, it will not be accepted by the CJEU.

Less rule of law within the EU

The ten year crusade of the Commission against intra-EU BITs has now been successfully concluded. Despite the fact that the CJEU left many questions unanswered, it is clear now that ISDS proceedings on the basis of intra-EU BITs, the ECT or the ICS/MIC are no longer permissible within the EU.

Whether or not one agrees with the Commission’s approach, the fact remains that, with the Achmea judgment, the level of investment and investor protection has been significantly reduced. This in turn will give member states more leeway to get away with expropriatory or discriminatory measures against foreign investors without punishment. As a result, the rule of law, which is already deteriorating in many parts of the EU, will be further weakened.

Finally and more generally, this judgment will diminish the EU and its member states as a place for investment treaty arbitration. This will in turn make other arbitration seats outside the EU, such as Geneva, Singapore, New York and post-Brexit London more attractive.

EFILA Nikos Lavranos

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