Emanuela Matei*
* Associate
Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in
European Business Law (Lund University, June 2012), Magister legum (Lund University,
June 2010), BSc in Economics & Business Administration (Lund University,
June 2009).
Introduction
On 18 June 2015 the European
Commission requested the termination of the intra-EU bilateral investment
treaties (BITs) concluded by Austria, Romania, Slovakia, Netherlands and Sweden.
The Commission argued that due to their accession to the EU, Member States
accepted that relations between them as to matters within the scope of conferred powers
are, as the CJEU said in Opinion 2/13 (on EU accession to the ECHR) “governed by EU law to the exclusion,
if EU law so requires, of any other law”.
A common feature of the European BITs and free
trade agreements (FTAs) is the presence of a clause on investor-state dispute
settlement (ISDS), which may involve concerns of inequality before the law in
the context of a limited access of individuals to the judicial system of the
EU. Moreover, issues of substantive discrimination are prompted by a frequently
reaffirmed superior level of protection of investment under the BIT compared
with EU law.
In 2003, the Commission, the U.S. government
and the acceding states from Central and Eastern Europe – apart from Hungary
and Slovenia – signed a memorandum of understanding, which aimed to
eliminate the possibility that American investors would use the BITs in order
to challenge regulatory or administrative measures adopted by the Member States
with the aim of complying with EU law.
By doing that the Commission has shown awareness concerning the imminent clash
displayed by cases like Micula, Eureko or Eastern Sugar.
In Micula v Romania, ICSID Case
No. ARB/05/20, the relevant law is the Romania-Sweden BIT ratified in 2003,
four years before the accession of Romania to the EU. The award issued in this
case ordered Romania to pay damages of approx. EUR 83 million (RON 367.4
million). The facts of the case depict the pre-accession situation and the
promotion of investments in specific disfavoured regions. Together with several
other cases – Electrabel, AES, and EDF – Micula reflects a specific
type of incompatibility: the clash between the state aid prohibition in EU law
and the maintenance of a preferential regime ordered by the international
investment law regime instituted by the BIT network. (For more on Electrabel, see the analysis of Matei and Ciurtin here).
The incompatibility with EU law of the fiscal
advantages offered to investors was established first by the Romanian
Competition Council and later by the Commission and the fiscal regime was abolished
before the accession. This act of abolition triggered the dispute before ICSID
(the International Centre for the Settlement of Investment Disputes).
The European Commission participated as amicus curiae in the ICSID-proceedings,
though the arguments brought by it were not admitted. A different conceptual
understanding of the principle of legitimate expectations is the main source of
conflict. In EU law, a state aid measure must be notified and approved and only
afterwards the beneficiary may enjoy the protection derived from the principle
of legitimate expectations.
In the interpretation of the arbitral
tribunal, on the other hand, no matter that a state measure is implemented in
breach of EU law, the investor is entitled to protection. In March 2015 a
Commission Decision ordered the recovery of state aid.
Romania had already paid a part of the damages awarded by the arbitral
tribunal. The payment constitutes illegal state aid and it must be recovered. By
complying with the ICSID-award, Romania would fail to defer to the Commission
Decision.
In Eastern Sugar Netherlands v CzechRepublic, SCC Case No. 088/2004, the relevant law was
the Agreement on encouragement and reciprocal protection of investments between
Kingdom of the Netherlands and the Czech and Slovak Federal Republic, which was
ratified in 1992. This case presents a typical example of incompatibility: the
clash between quotas imposed by EU on agriculture products and the requirement
to maintain a preferential regime for the foreign investor.
The arbitral tribunal interpreted the Vienna
Convention on the Law of Treaties (VCLT) finding that the subject matters
treated by the BIT and the EU law were dissimilar, the parties did not mean to
terminate the BIT and the BIT and the EU Treaties were compatible. It awarded
damages of EUR 25.4 million for loss of sugar quota attributable to the Czech
Third Sugar Decree of March 19, 2003.
The defendant argued inter alia that post-accession damages should not be made subject
to arbitration, since they fell within the exclusive jurisdiction of the CJEU
according to Article 344 TFEU. The tribunal noticed that the European
Commission did not start infringement proceedings against the Netherlands and
the Czech Republic for failing to terminate their BITs as it would have been
expected, if the BIT had been incompatible with Article 344 TFEU. The argument
of the defendant that the BIT had been implicitly superseded by the acquis
communautaire when the Czech Republic acceded to the European Union was
rejected. It must be retained that the inaction of the Commission and the
parties has been interpreted by the arbitral tribunals as a tacit endorsement
of compatibility.
In Eureko Netherlands v Slovak Republic, UNCITRAL, PCA Case No. 2008-13, the
applicable law is the same as in Eastern
Sugar. Achmea, previously Eureko, is a Dutch insurer and the facts
of the case refer to the liberalisation of the Health Insurance Sector in 2004.
In late 2006, the newly elected Slovak
government sought to reverse the liberalisation of 2004. Slovakia claimed that
the arbitration clause was incompatible with EU law, while the arbitral
tribunal reasoned that no provision of EU law actually prohibited
investor-state arbitration. The arbitral tribunal awarded EUR 22.1 million
damages.
The arbitral tribunal found
in its decision of 7 December 2012 that the BIT was valid and compatible with
EU law and the dispute was arbitrable despite the relevance of EU law.
Investors were granted more extensive rights under the BIT compared with EU law
and the arbitral tribunal found that this inequality stayed in line with law. Hence,
the unequal treatment of EU investors seems to be contingent to the special
character of protection, which a foreign investor is habitually entitled to
claim in conformity with the BIT definitions.
As to the interpretative
monopoly of the CJEU, the Frankfurt Court of Appeals (Oberlandesgericht) ruling
on the matter of validity of the ISDS-clause in the Netherlands-Slovakia BIT found
that the exclusivity enshrined by Article 344 TFEU did not cover investor-to-state
disputes (see also my comments here). The German court did not refer the
question for a preliminary ruling, even if the interpretation of Article 344
TFEU should reasonably have been submitted to an examination under Article 267
TFEU.
Intra-EU BITs
Firstly, the intra-EU BITs came into
existence mostly as the result of the EU accessions of 2004, 2007 and 2013,
only two intra-EU BITs being concluded between old (pre-2004) Member States. Even if the incompatibility manifests itself later – at
the level of litigation – thus the conflict becomes more dramatic after the
accession, in substance, the incompatibility between the EU conceptual
framework and the BIT philosophy precedes these accessions. Hence, it
would be reasonable to ask the question why the legal status of the intra-EU
BITs has not been discussed during the pre-accession period in a more
transparent and well-founded manner.
Moreover, most BITs contain sunset clauses that
instruct an undisrupted protection in relation to investments already in
effect. The termination would only have force for the future investments, since
the investors may rely on the provisions of a BIT for periods of usually 15-20
years from the date of termination (see further my comments on Romania's termination of its BITs). The accession of the
post-2004 Member States was not an unprepared sudden decision, but a process
with a duration of 9-12 years. The incompatibility with EU law has been hanging
over the heads of the new Member States as a veritable Sword of Damocles. Thus,
the intra-EU BIT disputes should not be depicted as anomalies. They could have
been prevented by a more pre-emptive approach.
External BITs
The Acts of Accession – for
all thirteen newer Member States – provide that “with effect from the date of accession, [the state] shall withdraw from
any free trade agreements with third countries”. According to Article 6(9)
and Article 6(10) of the corresponding protocols, if an agreement signed
previously cannot be brought in line with EU law, the Member State in question
shall withdraw from it (see the Protocol on Romanian and Bulgarian accession). The Acts concerning the conditions and arrangements
for admission from 2003,
2005, and 2012 speak a clear language. The acceding states had to denounce any trade agreement they might have concluded
and become part of the free trade agreements concluded by the EU. Would
it not have been more appropriate to provide a similar obligation with regard
to the extra-EU BITs?
Having in mind the sunset clause, mentioned
above, the effect of termination cannot be direct and immediate, so an earlier
handling of the incompatibility issue would have reduced the time horizon for
potential disputes. It must be
reminded that the previous wave of accession, when Sweden, Finland and Austria
joined the EU, also generated an obligation to align the BITs signed by these
countries with the obligations imposed by Article 351 TFEU and Article 4(3) TEU[11] (see the judgments in Commissionv Austria, Commission v Sweden and Commission v Finland). The potential
conflict is no novelty.
The general incompatibility of the BITs with
Union law – discussed below – poses moreover the question whether Regulation 1219/2012, which concerns the investment treaties between EU Member States
and non-Member States, actually did clarify their legal status. My criticism
refers to the fact that instead of giving highest priority to the problem of
general incompatibility, the Commission dealt first with specific examples of
incompatibility. Such concrete examples relate for instance to the exclusive
prerogatives of the Council to regulate capital movements under Article 64(2)
TFEU or Article 75 TFEU. The Commission’s diplomatic strategy has placed the cart
before the horse i.e. the specific prerogatives of EU institutions before the
protection of the foundation of the EU law.
Moreover, the incompatibility can damage the
effort of establishing a level playing field for the outbound investments. The
investors from the Member States having no BITs with countries like Chile,
Japan, Korea, Canada or most recently, the U.S.A. will not enjoy the same level
of protection not being able to escape certain restrictions imposed by the
relevant FTA. The general incompatibility entails a high level of complexity,
therefore it cannot be surprising that such intricate consequences have
occurred.
The reversed
logic of the relation between intra- and extra EU BITs
Investment protection was the main tool for economic reconstruction during the post-WWII era, which constituted the
dominant function of the Friendship, Commerce and Navigation treaties (see the Vandevelde paper in the notes). The next big event was the signing of the GATT in
1947, which marked the shift from bilateral to multilateral negotiations and an
expanded scope of talks beyond tariffs. The GATT and the EEC
(now-a-days, the EU) – founded in 1957 – contributed to deeper economic
integration among Western countries, thus substituting and surpassing the Friendship,
Commerce and Navigation treaties subsequently seen as less than ideal vehicles
for trade promotion. The network of BITs
emerged as means to ensure investment protection outside the ambit of the GATT
and the EU. The overlapping between BIT protection and EU law has not been intentional.
As mentioned above, the Commission took the
initiative of signing a MoU with the U.S. government being aware of the
existence of incompatibilities between the European BITs and EU law. Areas of
law, which have been specifically named in the MoU are: the economic freedoms,
state aid rules and the obligations imposed by
the EU treaties in relation to third countries.
Article 351 TFEU, which
governs the relationship between EU law and the pre-existing treaties between
Member States and non-EU States, gives expression to the obligation of the
Member States to eliminate all incompatibilities with EU law resulting from
extra-EU BITs. Then again, the Treaty of Lisbon does not overtly consider the
status of the intra-EU BITs. Article 4(3) TEU may be nonetheless useful for this
purpose. Some arbitral tribunals interpreted Article 351 TFEU as inferring paradoxically
a more lenient regime for the intra-EU BITs.
By not opening earlier infringement proceedings or not explicitly placing the intra-EU network
of BITs outside the law, the EU institutions did – according to the arbitral tribunals
– tacitly endorse the intact validity of these BITs and the jurisdiction of the
arbitral tribunals for that matter. The contrast between alter- and outer
legality is of the essence, since the ISDS exists as an alternative to, not a
substitute for, the domestic judicial system.
General
incompatibility with EU law
From a purely legal perspective the situation of
double standards covering areas of law defining the very foundation of the
Union – the economic freedoms and the transjudicial dialogue based on sincere
cooperation and mutual trust – are direct threats to its political integrity
and the autonomy of the EU legal order. The risk of jeopardising the autonomy
of the Union legal order is the consequence of an extant parallel international
order that does not have to bring its rulings in line with the interpretation
of EU law adopted by the CJEU.
It must be mentioned as well that usually the
conceptual conflict between international law and EU law relates to the
contradiction between reciprocity and the EU federal principles of autonomy,
conferral and subsidiarity. However, the legal regime represented by the European
BITs has been characterised by asymmetry being designed to protect the interests
of investors from the capital exporting countries against the whims of the unstable
governments in the capital importing countries. This is why, there are not many
BITs signed between pre-2004 member states and the focus of the Commission has
been initially set on the BITs signed by an acceding state with third
countries.
The transition from the pure intergovernmental
set of rules to a more federal agenda engendered legal discrepancies, negative
interlegality and significant costs for the parties directly involved in these
disputes. However, on the state-to-state level, it is obvious that the EU accession
of the capital importing countries to the CEE provided a more substantial and
comprehensive safeguard for the capital exporting countries in the
North-western Europe than a BIT would ever be prone to afford. It is difficult
to support the argument of practical significance of BITs in the constitutional
framework of the European Union by using legal terms.
The only persuasive argument is the protection of
legal certainty of the investment regime within the EU, though the strength of
it has only been tested by the arbitral tribunals against the VCLT (Articles 59
and 30 of that Convention). The conflict of laws assessment has constantly
reached the conclusion that each BIT has not been displaced by the EU treaties.
The Vienna Convention does neither bind the Union nor all its Member States. It
has relevance only as a reflection of the rules of customary international law,
which are binding upon the Union institutions and form part of the Union legal
order (see CJEU judgments in Racke,
El-Yassini and Jany). From this point forward
the matter becomes one of harmonious interpretation, a method which requires a
deferential attitude towards the legal identity of the challenger. The ECtHR
for instance follows the jurisprudence of the CJEU and the opposite is true,
even if no binding agreement has been signed and no hierarchic structure has
been crystallised between them.
In its Opinion
2/13, the CJEU did not agree to assign the power to interpret EU law
provisions to the final adjudicator in matters of human rights – the ECtHR –
affirming once again that the interpretation of EU law must remain the
exclusive prerogative of the Union supranational judicial authority (see the discussions
on this blog by Peers and Barnard). So, how could someone expect
the CJEU to agree with a transfer of powers to a non-judicial and temporarily
constituted entity, which is ineligible to refer to the CJEU for a preliminary
ruling under EU law? (see the judgments in Pretore di Salo, Pardini and Corbiau) How could
it be possible to do that without contradicting itself in the assessment of a
fundamental matter?
As van Harten says: “The powers shifted to
arbitrators are among the highest that any adjudicator can exercise. They
involve the final determination of the legal boundaries of sovereign authority,
as exercised by any legislative, executive, or judicial body, based on broad
standards of foreign investor protection. They can lead to the assignment of
potentially vast amounts of public funds to private actors, usually large
companies. They are backed by an international enforcement system that is more
powerful than that of domestic or international courts. They are subject to
very limited judicial review or no judicial review at all, depending on the
arbitration rules under which the foreign investor chooses to bring its claim”.
The possibility to obtain damages for state
or supra-state non-contractual liability within the EU is narrowly defined,
thus in a similar situation of (for example) expropriation without
compensation, an investor under a BIT agreement would enjoy a higher degree of
protection being able to obtain substantial damages as underlined by van Harten above. So should the same
enhanced level of protection be granted to all investors no matter if their
situation is covered by a BIT or not? In Eureko
the claimant declared explicitly that it preferred to use the arbitration
solution offered by the BIT instead of the judicial path offered by the EU
system and the arbitral tribunal recognised that a higher level of protection
is guaranteed under BIT-regime.
T-TIP: Will the
cart be placed on the spot?
While the Council believes that the new legal framework should contain the pre-existing investor guarantees in BITs, and the Commission also supports ISDS, the EP has moved towards opposing it in its present form, asserting in 2013 that future EU investment agreements should include an
ISDS-clause, only if it were justifiable in the light of a case-by-case
assessment.
At the most recent EP
consultations, Bernd Lange – rapporteur on TTIP for the EP’s international
trade committee (INTA) – affirmed exultantly: “We have placed the extrajudicial arbitration in the dustbin of history.
It is clear that private tribunals have no future in trade agreements. And we
will work on a new system, which corresponds to a public court”.
Kleinheisterkamp and Poulsen proposed in
their turn three distinct patterns for investor protection in the T-TIP.
The first choice – no greater rights
– corresponds to the American trade policy adopted by the 2012 US Model BIT.
The second
pattern – the Australian ISDS model – matches the proposal of most
Committees of the European Parliament being characterised by default reliance
on domestic courts supplemented by state-to-state dispute settlement and
institutionalised consultations concerning the domestic regimes of investor
protection.
The third
pattern would be in tune with the European Union constitutional structure as to
the choice to allow primarily the domestic courts to decide on the legality of
public acts, then it reflects the American philosophy with regard to binding
state interpretations and filter of frivolous and obviously unmeritorious
claims (see Tietje and Baetens, in the notes; compare to the Bipartisan Congressional Trade Priorities and Accountability Act 2015, p 14). The possibility to review the legality of state measures at the level of
domestic courts would enable them to refer for preliminary ruling, which is key
for the constitutional autonomy of the EU.
In this sphere, flexibility
and consistency must go hand in hand and perhaps the Europeans could extract
some relevant knowledge from the developments accumulated by the United States
during the past three centuries. A comparative historical study could be a
beneficial groundwork for achieving an improved insight into the matter of
trade agreements authority. As the EU-BITs array of contradictions perfectly shows, despite its apparent
political cleverness, the strategic move of putting the cart before the horse
would be an unfortunate decision as regards the T-TIP negotiations.
Barnard & Peers: chapter 24
Art credit: www.euractiv.com
Notes
Kenneth J. Vandevelde, ‘A
Brief History of International Investment Agreements’ UC Davis Journal of
International Law & Policy 12, no. 1 (2005): 157, 165-166.
Christian Tietje and Freya
Baetens, ‘The Impact of Investor-State-Dispute Settlement (ISDS) in the
Transatlantic Trade and Investment Partnership’, 26 June 2014, p. 127.
Compare with the Bipartisan Congressional Trade Priorities and Accountability
Act of 2015 (TPA-2015), p. 14.
