REUTERS | Phil Noble

The decentralised implementation of the ISDS ban by EU domestic courts

Now that the dust has settled following the Achmea, Komstroy, Micula and PL Holdings judgments of the Court of Justice of the EU (CJEU), in which it banned intra-EU investor-state arbitration disputes (ISDS) based on bilateral investment treaties (BITs) and the Energy Charter Treaty (ECT) within the EU, the wider, decentralised implementation of this ISDS ban is becoming increasingly visible.

Arbitral tribunals still hold their position despite Green Energy award

With the exception of the recently issued Green Power award, which is so far the only award that accepted the Achmea based EU law jurisdictional objection, all other tribunals continue to hold their position and have rejected such objections, as for example in the Rockhopper and LSG awards.

Indeed, in the Kruck award issued on 14 September 2022, the tribunal reportedly found Spain again liable for violating the ECT because of the withdrawal of renewable energy subsidies.

Decentralised application of ISDS ban by domestic courts in the EU

However, the situation before domestic courts in the EU is exactly the opposite. Since EU law requires all domestic courts in the EU member states to follow the CJEU’s jurisprudence, respondent states are increasingly turning towards domestic courts using the EU law jurisdictional objection argument in order to stop ISDS proceedings.

For example, on 1 September 2022, the Higher Regional Court of Cologne reportedly granted the Netherlands’ request for a declaration that the ECT claims against it by RWE and Uniper were inadmissible. Although, the decision of the court is yet to be published, the court’s press release confirms that the ICSID claims are fundamentally not possible on the basis of CJEU’s jurisprudence banning ISDS claims.

While this domestic court decision cannot stop the ICSID proceedings as such, it is possible that the tribunals will take this court decision into account when deciding on their jurisdiction and the validity of the arbitration agreements.

In February 2021, the Frankfurt Higher Regional Court annulled intra-EU ISDS proceedings in the case of Austrian banks against Croatia. Following the CJEU’s line of argument, the German court ruled that there was no valid arbitration agreement between the parties since the ISDS clause in the Austria-Croatia BIT must be considered incompatible with EU law. On appeal, the Federal Supreme Court confirmed the decision of the Frankfurt court.

In January 2022, the Lithuanian Supreme Court ruled in the dispute brought by French company Veolia against Lithuanian that, as of the date of Lithuania’s accession to the EU, that is in 2004, the ISDS provision in the France-Lithuania BIT must be considered incompatible with EU law and thus the offer to arbitrate contained in the BIT could not have validly been perfected.

In April 2022, the Paris Court of Appeal annulled two arbitral awards (Slot Group and Strabag) which were rendered against Poland on the basis of similar reasoning.

In contrast, in April 2022, in the Mainstream Renewable Power case against Germany, the Higher Regional Court of Berlin rejected Germany’s request to throw out the case. The Berlin court reasoned that as this arbitration was administered under the ICSID Convention, it was not subject to oversight by national courts or the CJEU. However, this decision has been appealed before the German Federal Supreme Court, so a final decision is pending.

The end of intra-EU ISDS arbitration has arrived

The above examples show that – with very few exceptions – the domestic courts of the EU member states are faithfully implementing the ISDS ban imposed by the CJEU.

Initially, this was based solely on the CJEU’s jurisprudence but in the meantime the Termination Agreement terminating all intra-EU BITs and retroactively declaring all pending intra-EU BITs disputes to be invalid, has been ratified by most EU member states and thus provides an additional, firm legal basis for the domestic courts to throw out ISDS disputes.

Moreover, the ECT modernisation process has recently been concluded leading to a revised ECT text which has been leaked, and which is expected to be adopted in the coming months and enter into force next year. The EU and its member states used the opportunity of the ECT modernisation process to extend the ISDS ban to intra-EU ECT disputes. Consequently, once the revised ECT text enters into force, intra-EU ECT disputes will also be considered to be incompatible with EU law and thus will also be thrown out by the domestic courts in the EU member states.

In addition, as the CJEU’s Micula decision illustrates, the ISDS ban also affects the recognition and enforcement of awards. More specifically, in Micula the CJEU ruled that the payment of an award by the respondent state can be qualified as granting illegal state aid to the investor, which is prohibited as per EU state aid law.

Accordingly, even if an investor still wins a pending intra-EU ISDS dispute, it may be unable to get such an award recognised and enforced before EU domestic courts.

All in all, the conclusion must be drawn that the end of intra-EU ISDS arbitration has arrived, however, that does not mean that there are no alternative routes available.

First, restructuring outside EU jurisdictions, in particular through the UK will become increasingly interesting. The UK is still party to the ECT and still has several BITs with EU member states in place.

Second, if there is a choice regarding the seat of arbitration, this will increasingly be outside the EU in order to avoid the impact of the CJEU’s ISDS ban.

Third, enforcement and recognition of ISDS awards outside the EU, for example in the US, remains still possible and will probably become the default option.

ISDS arbitration remains an option only for a selected group

In sum, while the EU and its member states have largely achieved their objective of banning ISDS within the EU, ISDS proceedings are still possible, although that comes with additional complications and costs for the claimants.

The consequence of all this is that access to justice becomes limited to claimants who have sufficient financial resources or are backed by third party funders. This means that small and medium-sized enterprises are essentially excluded from using ISDS, whereas these companies are very often the victim of unfair treatment by respondent states. Consequently, the gap of effective legal protection is significantly widened within the EU.

Arguably, in these difficult economic times such a negative message is not really what is needed.

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