The Commission´s and ECJ´s Approach to Investment Arbitration

Juliane Kokott, Advocate General at the European Court of Justice, discusses two developments in the area of investment law. This blog series features two posts by AG Kokott on (I) intensified investment screening and (II) on the ECJ-induced termination of intra-EU investment treaties, including some extraterritorial aspects.

This blog post is based on a speech originally delivered at the 2024 CELIS Forum on Investment Screening (CFIS) in Paris. The views and opinions expressed in this post are those of the author in her personal capacity.

 

The EU Commission considers intra-EU Bilateral Investment Treaties (BITS) “to be an impediment to the single market” and has paved the way to terminating them:[1] In May 2020, 23 Member States of the EU signed an Agreement for the Termination of all Intra-EU Bilateral Investment Treaties[2] which entered into force in August of that year.[3] Four EU Member States, though, – Austria, Finland, Ireland and Sweden –, have not signed the Agreement.[4] Also, companies may try to secure investment treaty protection by corporate restructuring channeling their investments through their subsidiaries in non-signatory countries.

The termination of intra-EU BITs is a consequence of the ECJ´s 2018 Achmea judgment[5]: A Dutch undertaking had invested in the Slovak health sector. Subsequent Slovak legislation prohibited the distribution of profits from the health sector to private parties. Achmea brought action before an arbitral tribunal set up in Frankfurt/Germany under the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic of 1992. In those arbitration proceedings the Slovak Republic successfully raised an objection of lack of jurisdiction of the arbitral tribunal. The ECJ indeed ruled that EU law[6] precludes provisions in international agreements between Member States “under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.”[7] According to the ECJ, such arbitration violates the autonomy of EU law as there is "one court and one court only, i.e. the Court of Justice"[8] which has the final say on how to interpret EU law. This allegedly promotes the values of the rule of law and the principle of equality in and outside the EU.[9] The opposite view is that the rule of law requires states to comply with their commitments entered into in international treaties.[10] Interestingly, by implementing the ECJ´s judgment, Member States have to break public international law while at the same time respect of public international law is one of the core principles of the EU.[11] As the UK High Court held: "Spain finds itself on the horns of a juridical dilemma, with its obligations under the ECT for dispute resolution (which treaty plainly incorporates the ICSID Convention) now found by the CJEU to conflict with the law of the EU".[12] Due to "sunset clauses", this dilemma for EU Member States will last for another twenty years despite EU´s Agreement for the Termination of all Intra-EU Bilateral Investment Treaties. Thus, in order to protect investments made, the provisions of the ECT "shall continue to apply ... as of the date when that Contracting Party’s withdrawal from the Treaty takes effect for a period of 20 years from such date."[13]

The consequences of the Achmea - Komstroy saga are not restricted to the EU by two reasons. First, investment disputes may relate to the interpretation both of the BIT and of EU law, the ECJ held.[14] Insofar as free movement of capital should be concerned, that freedom also applies to third States. Then, the argument of protecting the autonomy of EU law would theoretically also cover BITs concluded with third States.

Second, there are consequences for the international system, in particular regionalization and difficulties for companies based in EU Member States to enforce arbitral awards in third countries. Contrary to Article 27 of the Vienna Convention on the Law of Treaties,[15] Achmea - Komstroy open the door for any state to rely on domestic law or the law of a regional organization to avoid obligations arising from international treaties.[16] Third countries courts now also give primacy to the seat courts.[17] States argue that it is the responsibility of the seat court "to decide independently and de novo whether the parties agreed to arbitrate under the ECT (Energy Charter Treaty)". The Russian Federation pleads that significantly such "interpretation is also supported by the European Union and the Kingdom of Spain".[18] I am not sure whether it will encourage investments for green transition when investors now have to resort to the host countries´ domestic courts.[19]

Moreover, implementing arbitral awards can be unlawful State aid in the EU. Interestingly, the ECJ has ruled so in March of this year,[20] thus after Brexit, with regard to the UK: According to the ECJ, the UK violated EU law, because the UK Supreme Court allowed enforcement of an ICSID award.[21] The ICSID award[22] had ordered Romania to compensate Micula, a Swedish company, for the EU induced withdrawal of its investment incentive scheme (“EGO 24”).[23]

In providing for the enforcement of the ICSID award, the UK Supreme Court complies with public international law. The Swiss Federal Court, for example, shares that opinion. This court, the Swiss Bundesgericht, gives a careful interpretation of the Energy Charter Treaty (EC), the Vienna Convention on the Law of Treaties and Article 344 TFEU.[24] Accordingly, the fact that States party to the ECT have decided to transfer certain areas of competence to the EU does not mean that they are no longer bound by the provisions of an international treaty they have ratified, including in relations between EU Member States.[25]

Moreover, the European Court of Human Rights held last year, that non-enforcement of an arbitration award made by the International Court of Arbitration of the International Chamber of Commerce constituted a violation of the right to property.[26] Also, apparently not all arbitral tribunals comply with the ECJ´s Achmea judgment.[27]

In trying to prevent the implementation of the ICSID award even by the UK, the ECJ, on the other hand, strengthens its Achmea doctrine, further underlining its restrictive view on investment arbitration in the EU.[28]

Unlike the UK Supreme Court, the German[29] and other Member States´[30] courts observe the ECJ´s judgment and disregard intra- EU arbitration agreements. This summer, the German Federal Constitutional Court/Bundesverfassungsgericht rejected Achmea´s constitutional complaint against the German Supreme Court´s decision disallowing the implementation of the Achmea arbitral award. The German constitution is integration friendly. Therefore, the requirements for substantiating constitutional complaints concerning the ECJ´s caselaw are particularly high (, as the German constitutional court explained in detail). The complainant, Achmea company, did not meet those high requirements when arguing that the Federal Court of Justice should not have considered itself bound by the requirements of the ECJ´s Achmea judgment because it constituted an ultra vires act.

According to the German Constitutional Court, there was a lack of substantiated arguments that (1.) the application of the law by the ECJ in its Achmea judgment was manifestly unjustifiable (2.) and that it leads to a structural shift of competences to the European Union at the expense of the Member States.[31]

Thus, intra-EU arbitral awards are not enforced in Germany. However, German courts until now do not adopt anti-enforcement injunctions against investors; so far they do not prevent investors from enforcing intra-EU arbitral awards in third countries.[32] The defendant state Spain had argued that the principle of effectiveness of EU law required that the enforcement of the arbitral award also be prevented outside the European Union. But the German court (LG Essen) retorted that the "effet utile" of Union law does not prevail over the respect for the state sovereignty ("judicial sovereignty") of third countries. Inspired by the EJC, whose more recent caselaw concentrates on adjudicating values, the LG Essen continues -- direct quote: "However, if this foreign sovereignty is impaired by the imposition of a litigation ban outside the European Union, a part of the common values is abandoned. Common values cannot be safeguarded by a breach of themselves."[33]

 

Conclusion

The interplay between the ECJ and the EU legislator is different in the area of investment arbitration. Both, the ECJ and the Commission which, in the EU, has the right to legislative initiative, pursue the same approach: Eliminating investment arbitration within the EU and possibly, in certain cases, also where third countries are involved. However, it proves difficult to enforce EU´s contra-arbitration approach outside the EU.

 

 

 

[1] Agreement of 29.5.2020 for the termination of Bilateral Investment Treaties between the Member States of the European Union, OJ 169/1; Fact Sheets on the European Union, European Parliament, Free movement of capital.

[2] Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union of 29.5.2020, OJ L 169/1.

[3] Following ratification by the Kingdom of Denmark (6 May 2020) and Hungary (30 July 2020), cf. Art. 16.

[4] S.a. D. Bray/S. Kapoor, Agreement on the Termination of Intra-EU BITs: Sunset in Stone?, Kluwer Arbitration Blog, 4.11.2020.

[5] ECJ, judgment of 6.3.2018 - C‑284/16 – Achmea, ECLI:EU:C:2018:158.

[6] Articles 267: “The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings …” and 344 TFEU: “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.”

[7] ECJ, judgment of 6.3.2018 - C‑284/16 – Achmea, ECLI:EU:C:2018:158.

[8] K. Lenaerts, No Member State is More Equal than Others, Verfassungsblog on matters constitutional, 8.10.2020, p.2

[9] K. Lenaerts/J. Gutiérrez-Fons, Epilogue. High Hopes: Autonomy and the Identity of the European Union, in: J. Lindebohm/R. Wessel (eds.), The Autonomy of EU Law, Legal Theory and European Integration, 2024, European Papers www.europeanpapers.eu ISSN 2499-8249 Vol. 8, 2023, No 3, pp. 1495-1511, 1507.

[10] F. Weyland/J.-C. Spetzer, Casenote on BGH - 1 ZB 43/22, TLJ 2023 127 et seq., 130 et seq., 132.

[11] Art. 21 (2)(b) and (3) TEU. S.a. C. Tietje, EU-Recht bricht Völkerrecht? Der Trugschluss der europäischen Calvo-Doktrin, Verfassungsblog, 16.6.2023.

[12] UK High Court, jugdm. of 24.5.2023 - [2023] EWHC 1226 (Comm) - Infrastructure Services Luxembourg S.A.R.L., Energia Termosolar/Spain, [2023] EWHC 1226 (Comm), para. 80.

[13] Art. 47(3) ECT.

[14] ECJ, judgment of 6.3.2018 – C-284/16 – Achmea, ECLI:EU:C:2018:158, no. 58.

[15] Article 27 VCL: "Internal law and observance of treaties A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46."

[16] S.a. F. Weyland/J.-C. Spetzer, Casenote on BGH - 1 ZB 43/22, TLJ 2023 127 et seq., 130 et seq., 131. Apperently, the Achmea - Komstroy approach also allows for forum shopping, id. 131.

[17] Cf. e.g. Sue Ng, The Deutsche Telekom v India Saga: Multi-Jurisdictional Proceedings, Transnational Issue Estoppel and Primacy, Arbitral Award, Enforcement, Germany, Primacy Principle, Set aside an international arbitral award, Singapore, Transnational Issue Estoppel, USA, Kluwer Arbitration Blog, 18..3.2024 with references.

[18] U.S. District Court, District of Columbia, dec. of 9.8.2023 - Case No. 1:14-cv-01996-BAH  - doc. 267,  p. 2.

[19] S.a. A. Masser, Investor-State Arbitration and Public International Law -- Quo Vadis? - The Dangerous Stance of the EU and its Member States to Investor-State Arbitration - , TLJ 2023. 97 et seq.

[20] ECJ, judgment of 14.3.2024 – C-516/22.

[21] UK S.Ct., judgment of 19.2.2020, [2020] UKSC 5, UKSC 2018/0177, Justices Lady Hale, Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Sales. For a more recent UK High Court judgment rejecting Spain´s independently from (not grounded in the consequences of) Brexit: UK High Court, jugdm. of 24.5.2023 - [2023] EWHC 1226 (Comm) - Infrastructure Services Luxembourg S.A.R.L., Energia Termosolar/Spain, [2023] EWHC 1226 (Comm), para. 80: "with the greatest of respect to the CJEU, it is not the ultimate arbiter under the ICSID Convention". S.a. C. Edworthy/J. Pratt, English High Court Rejects Spain´s Attempt to Resist Enforcement of an ICSID Convention Award, TJL 2023, 104 et seq., 107.

International Institute for Sustainable Development, Investment Treaty News, 13.1.2024, Another tribunal to reject the Achmea-based jurisdictional objection, Adria Group B.V. and Adria Group Holding B.V. v. The Republic of Croatia, Decision on Intra-EU Jurisdictional Objection, ICSID Case No. ARB/20/6.

[22] ICSID Award of 11.12.2013 -Case No. ARB/05/20.

[23] For the rich procedural history of the Micula saga, s.a. GC, judgment of 18.6.2019 - T‑624/15, T‑694/15 and T‑704/15; ECJ, judgment of 25.1.2022 - C-638/19 P - Commission v European Food; EU Commission Decision 2015/1470 of 303.2015; GC, pending case T-694/15 RENV  - Micula/Commission

[24] On Art. 344 TFEU Bundesgericht /Tribunal fédéral /Tribunale federale /Tribunal federal, judgm. 4A_244/2023 of 3.4.2024, ___________________7.8.2.

[25] Bundesgericht /Tribunal fédéral /Tribunale federale /Tribunal federal, judgm. 4A_244/2023 of 3.4.2024, 7.2.1. et seq., s.a. 7.8.2.: " pas convaincu par le raisonnement adopté par la CJUE dans l'arrêt Komstroy, puisqu'il se base essentiellement, sinon exclusivement, sur l'exigence de préservation de l'autonomie et du caractère propre du droit de l'UE, sans nullement tenir compte du droit international ni des règles d'interprétation des traités." Cf. also Art. 16 ECT: " Where two or more Contracting Parties have entered into a prior international agreement, or enter into a subsequent international agreement, whose terms in either case concern the subject matter of Part III or V of this Treaty, (1) nothing in Part III or V of this Treaty shall be construed to derogate from any provision of such terms of the other agreement or from any right to dispute resolution with respect thereto under that agreement; and (2) nothing in such terms of the other agreement shall be construed to derogate from any provision of Part III or V of this Treaty or from any right to dispute resolution with respect thereto under this Treaty, where any such provision is more favourable to the Investor or Investment."

S.a. C. Boog/A.-C. Cremades, Case Law, 1 Swiss Supreme Court Upholds Intra-EU Arbitration Award and Rejects ECJ´s Komstroy Ruling, TLJ 2024, 171 et seq., 173 Commentary: "the Supreme Court clearly expressed its sentiment that the ECJ had given priority to goal-oriented reasoning over rigorous legal analysis. This is indeed why the Komstroy ruling has been much critized."

[26] ECtHR, judgments of 30.6.2022 - 55617/17 -; of 7.2.2023 – BTS Holding, a.s./Slovakia (stroekn from the list due to friendly settlement: five million Euro compensation for damages).

[27] E.g. awards of 16.5.2018, Masdar Solar & Wind Cooperatief u.a./Kingdom of Spain, ICSID Case No. ARB/14/1, p. 99; of 15.6.2018, Infrastructure Services (Antin) v. Spain, Infrastructure Services Luxembourg S.à.r.l. and Energia Termosolar B.V. (formerly Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V.) v. Kingdom of Spain, ICSID Case No. ARB/13/31, nos. 153 et seq.; cf. also

Aceris Law LLC, Intra-EU Investment Arbitration: Impact of EU Member States’ Declarations in the Wake of Achmea, 06/05/2019, with references.

[28] Cf. also Hope/Ivars/Lazarchuk (Vinge), Last Gasps of Brexit: The CJEU Holds that the UK Breached EU Law in a Continuation of the Micula Saga, Kluwer Arbitration Blog, May 1, 2024.

[29] E.g. German Bundesgerichtshof/BGH Supreme Court orders of 27.7.2023 - I ZB 43/22, I ZB 74/22 und I ZB 75/22, Energy Charter; of 31.10.2018 – 1 ZB 2/15  - Achmea – discussing and denying an ultra vires act of the ECJ (nos. 80 et seq.); German Federal Constitutional Court/BVerfG, order of 23.7.2024 - 2 BvR 557/19 – Achmea – rejecting, for lack of standing, the constitutional complaint against the Supreme Court´s (BGH) judgment disregarding the Achmea arbitral award; OLG Cologne, order of 1.9.2022 - 19 SchH 14/21.

Other courts reject the Achmea doctrine, cf. England and Wales High Court (Commercial Court), Decision of 24.5.2023 - [2023] EWHC 1226 (Comm) -               Infrastructure Services Luxembourg S.À.R.L., Energia Termosolar B.V./Kingdom of Spain; s.a. International Institute for Sustainable Development, Investment Treaty News, 13.1.2024, Another tribunal to reject the Achmea-based jurisdictional objection, Adria Group B.V. and Adria Group Holding B.V. v. The Republic of Croatia, Decision on Intra-EU Jurisdictional Objection, ICSID Case No. ARB/20/6.

[30] For example Cour d'appel de Paris RG n° 20/14581 Pôle 5 - Chambre 16. judgm. n° 49 /2022 of 19.4.2022, Poland/ Société CEC PRAHA.

[31] German Federal Constitutional Court/BVerfG, order of 23.7.2024 - 2 BvR 557/19 – Achmea, nos. 65 et seq.

[32] Essen, Regional Court, judgm. of 12.4.2024 - 2 O 447/22 - Spain/RWE

[33] Essen, Regional Court, judgm. of 12.4.2024 - 2 O 447/22 - Spain/RWE (quoted from English version), p. 26, German version nos. 131 et seq., 146.