Hannes Lenk, Assistant Professor in Law, Aarhus University
On 24 September 2019 the French Cour d’appel de Paris requested a preliminary reference from the Court of Justice of the European Union (CJEU) on the interpretation of the concept of ‘investment’ in Article 1.6 of the Energy Charter Treaty (ECT). The relationship of the ECT with the EU legal order has long been in question, but came under criticism particularly following the Achmea judgment that sent shockwaves around the arbitration community as it declared investor-state dispute settlement (ISDS) provisions in bilateral investment treaties (BITs) concluded between EU Member States inter se as incompatible with the EU Treaties (discussed here). Scholars and practitioners have since tried to ascertain the broader effects of the Achmea judgment for investment arbitration, including its impact on the intra-EU application of the ECT, i.e. in disputes brought by an investor from an EU Member State against another Member State.
In light of yesterday’s Opinion of Advocate General Szpunar in the case referred from the French court (Case C-741/19), this post focuses on the jurisdictional issues, ie the jurisdiction of the CJEU over the ECT, and the intra-EU application of the ECT.
Jurisdiction of the CJEU over the ECT
Case C-741/19 is peculiar because the underlying dispute involves two non-EU parties. It is only for the seat of arbitration in Paris, that the dispute ultimately developed an EU law dimension. In April of 2016, the French Cour d’appel set aside the award, ruling that the tribunal had no jurisdiction having erred in considering the payment of a debt linked to a contract for the sale of electricity as an ’investment’ under Art 1.6 ECT. Upon appeal the Cour de cassation disagreed with this narrow interpretation and reverted the case back to the Cour d’appel.
Article 267 TFEU furnishes national courts with an option—and in some cases an obligation — to refer to the CJEU questions over the interpretation of a legal act that falls within the Court’s jurisdiction. This includes so-called ‘mixed’ agreements, that is international agreements concluded by the Member States alongside the EU with third countries. Indeed, the EU as well as its Member States (with the exception of Italy that withdrew from the ECT in 2016) are all signatories to the ECT. As ‘an integral part’ of the EU legal order (Case 181/73 Haegeman) the ECT is binding on the Union and its Member States by virtue of Article 216(2) TFEU. Strictly speaking, the ECT is only to be viewed as a Union agreement in as far as its provisions fall under exclusive competence of the Union (Case C-239/03 Commission v France).
Following Opinion 2/15 on the EU-Singapore FTA, this exclusive competence extends in the field of investment to all matters concerning foreign direct investment (with the exclusion of investor-state dispute settlement provisions). Non-direct forms of investment, as well as provisions on liberalization and protection of these investments, fall outside of the EU’s exclusive competence. ISDS provisions are likewise excluded (discussed here). This delimitation of competence carries certain ramifications for the CJEU’s jurisdiction over mixed agreements.
The CJEU has nonetheless interpreted its own jurisdiction broadly, covering provisions of a mixed agreement that are liable to find application in both national law and EU law (Case C-53/96 Hermès). In these cases, the argument for CJEU jurisdiction lies with the Union’s interest in the uniform interpretation of an international agreement. This is certainly the case for an interpretation of ‘investment’ within the context of the ECT, considering that certain forms of investments fall within, while others fall outside, of the exclusive competence of the EU. The classification of an economic transaction as one or the other type of investment, or falling outside of the scope of the ECT altogether is furthermore liable to have ramifications for the application of national as well as EU law. It would not be unreasonable, therefore, for the CJEU to assume general jurisdiction over the ECT.
The Advocate General confirms the broad jurisdiction of the CJEU over the ECT as an agreement concluded by the EU (paras. 28-29). However, the AG is quick to acknowledge that Case C-741/19 concerns a dispute between a Ukrainian investor and the Republic of Moldavia, and that this factor might have implications on the Court’s jurisdiction (para. 30).
Indeed, there may be legitimate reasons for the uniform interpretation of the ECT in disputes with an EU dimension. It is not immediately clear, however, why this reasoning should be extended to the application of the ECT in disputes that have no substantive link with the Union legal order. Indeed, in the context of the EEA agreement the CJEU recognized that it had no jurisdiction to interpret the provisions of a mixed agreement in as far as its application in third countries is concerned (Case C‑321/97 Wåkerås-Andersson); Case C‑300/01 Salzmann). Although the concept of ‘investment’ under the ECT is liable to be applied in situations that fall under both Member State as well as EU law, in the present case it is being applied to neither.
The AG, however, differentiates the EEA context from the specific characteristics of the ECT in two respects. On the one hand, the ECT lacks a judicial institution that is capable of ensuring its uniform interpretation of the agreement. It is therefore liable to create differences in interpretation of core concepts such as ‘investment’ (para. 40). Second, considering the design of the ECT, which can be broken down in a number of bilateral commitments between the contracting parties, it cannot be excluded that the ECT finds application in relations between the Member States inter se (paras. 41 and 42). It is in the Union’s interest, so the AG concludes, to ensure the uniform interpretation of provisions of the ECT that find application within the Union legal order (para. 45). It is true, of course, that the Cour d’appel might be compelled to uphold its interpretation in future cases, including disputes involving measures adopted by the EU or an EU Member State. The argument in favour of uniform interpretation might therefore have merit in all circumstances where the ECT is interpreted by a Member State court ‘in order to forestall future differences in interpretation’ (Joined Cases C-300/98 and C-392/98 Perfums Dior, para. 35).
In the eyes of the AG the ECT would be applied within the EU legal order if an EU investor initiates a dispute against a Member State, be that before an ISDS tribunal established on the basis of Article 26 ECT, or the domestic courts of that Member State. Having indulged in some detail on the issue on intra-EU application of the ECT (discussed below), the AG returns towards the end of his opinion to the application of the ECT against an EU Member State before the domestic courts. Acknowledging that an exhaustive analysis as to the overlap of the ECT and EU law is nearly impossible to carry out in the abstract, the AG departs from the general proposition that the substantive provisions of the ECT were intended to be applied also within the EU legal order (para. 97). This finding alone would have justified CJEU jurisdiction over the ECT. And yet, the AG analyses in some detail the controversial issue of intra-EU application of the ECT.
The intra-EU application of the ECT
This has long been a contentious issue. However, with the Achmea judgment it has gained gravity, both politically as well as in EU and domestic courts. Politically, the Achmea judgment created a rift between EU Member States over the effect of the Court’s ruling. Whereas the majority of Member States declared in February 2019 that the Achmea judgement applies mutatis mutandis to the intra-EU application of the ECT, a group of five Member States rejected this proposition (see here and here). For this group of Member States, which included Sweden, the dissenting position was primarily based on the outcome of the set-aside proceedings in Novenergia II, which is currently pending before the Svea Court of Appeal. At the time these declarations were made there were strong reasons to believe that the Swedish court would follow Spain’s request to refer the question over the validity of intra-EU ECT arbitration to the CJEU. In May 2019, however, this request was denied, and the uncertainty over the relationship between the EU legal order and the ECT remained.
In the meantime, the Belgian government requested an Opinion from the Court of Justice on the compatibility of the modernization of the ECT with the EU Treaties. Opinion 1/20 thus directly concerns the institutional set-up under the ECT, and cannot ignore the issue of the intra-EU application of Article 26 of the ECT. Furthermore, the issue has already—somewhat unexpectedly—sprung up in other cases before the CJEU. Only recently, Advocate General Saugmandsgaard Øe commented on the issue, noting that ‘inasmuch as Article 26 of the Energy Charter, …, provides that such disputes may be resolved by arbitral tribunals, that provision is not applicable to intra-Community disputes’. The case, which concerned the application of the ECT by an Italian investor against Italy, turned on the central question as to whether investors can initiate ISDS proceedings against their home state under the ECT. On the contrary, the issue of intra-EU application of the ECT was entirely irrelevant to the dispute. Indeed the AG acknowledges as much (para. 93). The CJEU has yet to decide in this case but is unlikely to engage with the AG on this point.
More importantly, although the present case does no immediately concern the intra-EU application of the ECT, it has the potential to shed some light on the issue. During the written procedure, some Member States raised the incompatibility of intra-EU application of Article 26 of the ECT with the Treaties. In preparation for the hearing in November 2020, all intervening Member States were asked by the CJEU specifically to provide their views on this issue.
AG Szpunar elegantly connects this question logically with the Court’s jurisdiction, arguing that the CJEU only has jurisdiction over provisions of an international agreement that may also find application within the EU legal order (para. 46). Consequently, if in light of the Achmea judgment Article 26 of the ECT cannot be applied as between Member States, the Court cannot have jurisdiction (para. 47). Noting, the differences between the ECT and intra-EU BITs, which were at issue in Achmea, the AG then explicitly invites the Court to take this opportunity to address this controversial question in its judgment (para. 48). Going even further, the AG asks the CJEU to address the compatibility of substantive provisions in intra-EU investment agreements with the Treaties, an issue not addressed in Achmea.
Reviewing first the Achmea judgment, the AG provides some notable insight into the conceptual differentiation of commercial arbitration, which is generally accepted under EU law, and investment treaty arbitration. This aspect was at the heart of Achmea judgment but was insufficiently substantiated by the CJEU. The AG here confirms that it is precisely the systemic nature with which Member States have waived the jurisdiction of domestic courts over an abstractly defined class of cases, which undermines the principles of mutual trust and the specific character of the law established by the Treaties (including the judicial dialogue established under Article 267 TFEU) (para. 63), and thus the principle of autonomy.
Ultimately, the AG concludes that the inapplicability of intra-EU ISDS provisions has no temporal limitations and the jurisdiction of an arbitral tribunal on the basis of such a provision can simply not be recognized within the Union legal order (para. 69).
Applying this view to the ECT, the AG notes certain similarities. On the one hand, he observes that although the applicable law under the ECT does not include domestic law explicitly, an arbitral tribunal under the ECT might nonetheless face questions over the interpretation, if not application, of EU law (para. 75). On the other hand, the AG opines that the ECT investor-state tribunals are, like investment tribunals established under intra-EU BITs, outside of the EU legal order (para. 76). As a consequence, so the AG argues, Achmea can be directly transposed to the intra-EU application of Article 26 of the ECT (para. 79). This conclusion is not called into question by the multilateral nature of the ECT, nor the EU’s participation in the agreement (para. 83).
Challenge and opportunities for the CJEU in Case C-741/19
The case raises a number of novel questions in EU law that would undoubtedly benefit from greater clarity. This includes the Court’s jurisdiction over incomplete mixed agreements, ie mixed agreements to which not all Member States are signatories, as well as its jurisdiction over provisions of multilateral agreements in their application outside of the EU.
In as far as the Achmea judgment carries relevance, a more detailed explanation of the Court’s differentiation between commercial arbitration and investment arbitration would also be welcome. It should be remembered in this respect that Case C-109/20 PL Holding, which is currently pending before the CJEU, raises additional questions in light of AG Szpunar explanations in the present case. In 2019 the Svea Court in annulment proceedings concerning an investment award issued under the Poland-Belgium/Luxembourg Bilateral Investment Treaty, ruled that Poland’s failure to object to the jurisprudence of the investment tribunal led to a parallel arbitration agreement that existed between PL Holding and Poland independent of the underlying BIT. This, so the Svea Court concluded, results from the application of the Swedish Arbitration Act.
According to AG Szpunar, commercial arbitration presupposes the exercise of the disputing parties’ autonomy to submit to arbitration in respect of a particular dispute. Consequently, the commercial tribunal’s limited jurisdiction derives directly out of a specific arbitration agreement that defines the precise nature of the dispute (para. 60). This is juxtaposed by the systemic, permanent and unilateral nature with which an offer to arbitrate is extended under an international investment agreement (para. 61). If, however, domestic arbitration laws can have the effect of turning treaty arbitration into contractual arbitration, the differentiation underlying AG Szpunar’s reasoning would suddenly disappear.
Most controversial about Case C-741/19 is its instrumentalization by Member States as a venue for the settlement of political conflict. The issue of intra-EU application of the ECT was only raised in the written submissions of some of the intervening Member States. It’s now prominent role in the proceedings, shifted the focus of the substantive nature of the dispute, and deprived interested Member States’ from an opportunity to substantively engage with this issue in their written observations. Member States that have advocated the application of the Achmea judgment to the intra-EU dimension of the ECT already during the negotiation of the plurilateral agreement on the termination of intra-EU BITs, now effectively hijacked judicial proceedings where the material question over the intra-EU application is merely of latent relevance.
To be sure, there is nothing inherently wrong with the judicialization of political disputes. Indeed, the Treaties offer a plethora of procedural avenues to contest the validity of the ECT. It is doubtful, however, that the present case offers an appropriate venue to review this question. After all, Opinion 1/20 will allow the Court to thoroughly assess the institutional design of the ECT. Since potential incompatibilities of the ECT with the Treaties can only be resolved through political negotiation, Opinion 1/20, which addresses the ECT modernization process, offers an adequate forum to not only identify the shortcomings, but provide guidance for the Commission’s negotiations. More importantly, the Court can resolve the jurisdictional question without evaluating Article 26 of the ECT. AG Szpunar, in fact, provides for this possibility in his Opinion.
The Opinion of AG Szpunar is eloquently written and wittingly argued. And while its relevance for aficionados of EU law cannot be overstated, the Court should be wary to wander down this path and reserve its judgment to the essential elements that it needs to address in order to answer the question referred to it. This is not to diminish the importance of the substantive question at the heart of AG Szpunar’s reasoning, nor to challenge the correctness of his analysis. It rather goes to asserting the integrity of the judicial process and the jurisdiction of the Court of Justice.
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Photo credit: Erik Christensen, via Wikimedia commons