ECJ, EU trade latest, In-depth briefings, ISDS ICS

Insight: The end of intra-EU BITs – what next?

So what are the wider implications Tuesday’s Court of Justice of the European Union’s Achmea vs Slovakia ruling? Nikos Lavranos discusses the consequences for the EU’s investment court plans in CETA or at the multilateral level, Energy Charter Treaty arbitration, and the state of the rule of law in the EU.

 

Readers will recall the innovative opinion of advocate general Wathelet in the Achmea v. Slovak Republic case some six months ago. In that opinion, he argued that intra-EU bilateral investment treaties and investment treaty arbitration – ISDS – based on those BITs is perfectly in line with EU law. More specifically, he opined that arbitral tribunals established on the basis of intra-EU bilateral investment treaties should be considered similar to domestic courts of the bloc’s member states.

 

This would, on the one hand, allow such arbitral tribunals to request preliminary rulings from the CJEU in case EU law is 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 maintained the 190 existing intra-EU BITs while at the same time ensuring that their application and interpretation are consistent with EU law.

 

However, the Luxembourg court wasn’t ready to follow the advocate general on the case. Instead, it 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 of Human Rights, the court 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 Achmea judgment is remarkably short and leaves many questions unanswered.

 

No more intra-EU ISDS proceedings

 

Since the court concluded that an ISDS provision as contained in the Netherlands-Slovak BIT is incompatible with EU law, all 190 intra-EU BITs, which contain a similar ISDS provision cannot be invoked anymore by European investors against EU member states.

 

According to Article 351 of the Treaty on the Functioning of the EU, member states are required to resolve any disputes between their international agreements and EU law. The court did not say anything as to the necessary steps the member states have to take: are they required to either renegotiate their intra-EU BITs by removing the ISDS provisions or terminate them altogether? The latter option is obviously the ‘solution’ preferred by the European Commission.

 

Domestic courts – the only option

 

In yesterday’s judgment, the CJEU relied heavily on the importance and exclusivity of the EU’s preliminary ruling system. Since the court ruled that international arbitral tribunals cannot be considered to be domestic courts of the member states, they are barred from requesting preliminary rulings from the CJEU. As a result, the  judges 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 the member states for protecting their rights. As is well known, the judicial system in many member states is malfunctioning, slow, corrupt and under political pressure of the government.

 

The fate of ongoing intra-EU BITs disputes

 

It is noteworthy that the European court did not attach any temporal limitations to its judgment or include any transitional period. This raises the question of the fate of ongoing intra-EU BITs disputes.

 

From the perspective of legal certainty, disputes which have been initiated prior to the Achmea judgment should go ahead. However, the sweeping language in the Achmea judgment makes it unlikely that arbitral tribunals will feel comfortable to continue the cases. At the very least, respondent member states will use the Achmea judgment as an objection to continuing any intra-EU BITs ISDS proceedings.

 

The court further failed to make any distinction between ongoing International Convention fort the Settlement of International Disputes and non-ICSID proceedings. As is well-known, World Bank hosted ICSID awards are automatically recognisable and enforceable in all 150 contracting parties of 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 have a seat outside the EU, such as Geneva or New York, and therefore will not necessarily care about EU law or what the court decides. For example, why should an arbitral tribunal hearing an intra-EU BIT dispute with seat in New York be obliged to follow the Achmea judgement?

 

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 the investors.

 

More specifically, can member states recoup such payments from investors because the whole arbitration procedure was based on an ISDS provision, which is incompatible with EU law? Could such payments 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, there is no guidance these issues in the ruling.

 

The Energy Charter and Investment Court System

 

The Achmea judgment will most likely also have wider implications for intra-EU disputes initiated under the Energy Charter Treaty as well as and for the EU’s proposed Investment Court System included in CETA and Multilateral Investment Court – MIC – which is being negotiated within UNCITRAL in Geneva.

 

As regards intra-EU ECT disputes, it would seem that the Achmea judgement applies, which means European investors could no longer rely on the ECT to bring cases against member states.

 

This could, in effect, abruptly end the more than the 30 ECT disputes that 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, for Spain, which recently lost two ECT cases and has been ordered to pay almost 200 million euros in total in damages.

 

As regards the compatibility of the ICS with EU law, a question Belgium has asked the court to examine, it seems that the Achmea judgement already contains 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, the EU or member states, CETA allows the appeal tribunal of the ICS to review points of fact. This includes also domestic law, and that means EU law as far as the bloc and its member states are concerned.

 

Because 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 to introduce the possibility to request preliminary rulings from the CJEU, the ICS will be deemed incompatible with EU law. So far, the court has deemed even the possibility of requesting preliminary rulings from it – a solution envisaged for the European Court of Human Rights – insufficient to guarantee its final and ultimate authority over EU law.

 

The same applies to the proposed multilateral court. In other words, if this MIC is – even potentially – able to interpret and apply EU law, it will not be accepted by the EU’s top court.

 

Less rule of law within the EU

 

The 10-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 or MIC are no longer permissible on EU territory.

 

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 expropriation or discriminatory measures against foreign investors without punishment. As a result, rule of law standards – which are already deteriorating in many parts of the EU – will be further weakened.

 

Everybody would agree that this is not a desirable result for anybody.

 

Nikos Lavranos is Guest Professor of International Investment Law, Free University, Brussels, and a regular contributor to Borderlex.

 

 

 

Opinions reflected in Borderlex columns are those of their authors alone.

One Comment

  1. Lillian.Andenaes@nfd.dep.no

    An interesting analysis. I couldn’t agree more with the conclusions, the judgement will not contribute to more legal certainty or other rule of law standards. This will primarily hurt Member States with a weak national court system – increasing the risk for many investors. I will be interesting to see how this story evolves…
    Lars Erik

Leave a Comment

Your email address will not be published. Required fields are marked *

*