19 November 2018

Intra-EU investment arbitration in 2028: will there be any BITs at all?

By Alfredo Guerrero (Madrid), Fernando Badenes (Madrid) and Alexis Namdar (London)

There is considerable uncertainty regarding the future of investment arbitration based on investment treaties concluded between Member States of the EU and, in particular, on-going and future investment arbitrations under the Energy Charter Treaty (“ECT”). 

This article examines the impact of the landmark decision of the Court of Justice of the European Union (“CJEU”) in Slovak Republic v. Achmea B.V.61 (“Achmea”) regarding intra-EU investment arbitration, focusing on the impact on arbitrations under the ECT and looking at the example of the Spanish renewable energy sector and recent disputes therein.

In 2028, we predict there will no investment arbitrations under intra-EU BITs but a post-Brexit UK will have carved a niche for itself as a jurisdiction in which to situate European investment vehicles, seeking protection under both BITs and under the ECT (in relation to which uncertainty will still reign).

The EC’s decision on Spain’s member state aid

On 10 November 2017, the European Commission (“EC”) issued a decision (“EC Decision”) confirming that any compensation granted by an arbitral tribunal to an investor in relation to Spain’s modification of its renewable energy scheme would constitute member state aid, and that arbitral tribunals are not competent to authorize the grant of such aid as this is within the exclusive competence of the EC.62 If tribunals award compensation, that compensation would be EU member state aid notifiable to the EC pursuant to Article 108(3) of 61 Case C-284/16, Slowakische Republik v Achmea, ECLI:EU:C:2018:158. 62 Decision of the European Commission of 10 November 2017 on Spain’s state aid SA.40348 (2015/NN) - Support for electricity generation from renewable energy sources, cogeneration and waste (Decision C (2017) 7384). the Treaty on the Functioning of the European Union (“TFEU”) and, therefore, subject to the standstill obligation provided therein.

The EC also considered that any arbitration clause providing for investor-state arbitration between two Member States is contrary to EU Law because EU law provides for a complete set of rules on investment protection and Member States are not competent to conclude bilateral or multilateral agreements between themselves. By doing so, they may affect common rules or alter their scope. According to the case law of the CJEU an arbitral tribunal is not entitled to make references to the CJEU as it is not a court or a tribunal of an EU member state under Article 267 of the TFEU.

Does this mean that no arbitral tribunal is competent to rule on arbitration proceedings commenced under any intra-EU bilateral or multilateral investment treaty? The view from Europe appears to be yes. Views from the arbitration community and some Tribunals appear to differ.

The Achmea judgment

The latest judgment of the CJEU on the issue was delivered in March 2018. The CJEU, in a judgment which departed significantly from that of the CJEU Attorney General’s (“AG”) decision in September 2017 (which found no incompatibility with EU law) ruled in Achmea that the arbitration clause in the BIT between the Kingdom of the Netherlands and the Czech and Slovak Federative  Republic was incompatible with EU law and, in particular, contrary to Article 344 of the TFEU. It reasoned that an arbitral tribunal constituted under an intra-EU BIT necessarily rules on the basis of law in force in EU contracting states, and therefore an arbitral tribunal may be required to interpret or apply EU law. However, as in the EC Decision, it held that an arbitral tribunal under an intra-EU BIT is not a court or a tribunal of a member state under Article 267 TFEU. As EU member states undertake not to submit disputes concerning the interpretation or application of the EU law to any method of settlement other than those provided for in the governing EU treaties (Article 344 TFEU) the BIT had established a mechanism for settling an investment dispute which was contrary to both Article 344 TFEU and EU case law.

Impact of the EC Decision and Achmea on ongoing ECT-based investment arbitrations

The Achmea decision related to an intra-EU bilateral investment treaty. The CJEU did not make any findings on the compatibility of arbitration clauses in multilateral agreements where the EU itself is a member, as with the ECT. The impact of the EC Decision and the Achmea judgment on multilateral investment treaties, including the ECT, therefore remains uncertain.

In May 2017, an ICSID tribunal ruled in favour of the investor for the first time in an ECT-based claim against Spain, rejecting Spain’s argument (made even before the EC Decision) that the tribunal was not the competent authority to rule on investment disputes between two Member States of the EU.[1] The tribunal decided that there is no limitation in the ECT relating to intra-EU Member State disputes and therefore that the arbitration clause contained in Article 26 of the ECT was applicable. The successful investor is yet to enforce the award in Spain, as Spain has filed an annulment action before ICSID (echoing the EC Decision’s reasoning), which is still pending.

In February 2018, and despite the enactment of the EC Decision, a Stockholm Chamber of Commerce tribunal declared its own competence to rule on a new case against Spain under the ECT (Novenergía v. Spain)[2] (“Novenergía”) and decided, again, in favour of the investor against Spain. The tribunal considered the EC Decision “entirely irrelevant”[3] as the tribunal was not applying EU law to resolve the dispute and, thus, was of the opinion that the EC Decision was not binding. The Swedish Svea Court of Appeal subsequently stayed the enforcement of the award pending Spain’s argument that the arbitration clause in Article 26 of the ECT is incompatible with EU law and, therefore, that the tribunal lacked jurisdiction based on the same reasoning in Achmea. In parallel, Spain has asked that the Swedish court to refer the question of compatibility of the ECT with EU law to the CJEU.

In a case concluded in May 2018 (“Masdar”),[4] Spain argued (after the case had officially closed) that the Achmea decision confirmed a previously submitted jurisdictional objection. In that case, the tribunal dismissed the submission because the claim was brought under the ECT.[5] The tribunal reasoned the Achmea judgment “cannot be applied to multilateral treaties, such as the ECT, to which the EU itself is a party”.[6] In a very recent ICSID decision, issued on 31 August 2018[7] (“Vattenfall”), the tribunal agreed with the Masdar tribunal and found no rule relevant to the interpretation of the ECT in the Achmea ruling. The Vattenfall tribunal stressed, however, the ambiguity both in the Achmea judgment itself and of Achmea’s application to the ECT, stating: “[i]t remains unclear what alleged rule of international law arising from the [Achmea] Judgment exists and is of application to the present case … it is an open question whether the same considerations [in Achmea] necessarily apply to the ECT”.[8] Masdar and Vattenfall therefore still leave uncertainty as regards multilateral treaties concluded with or without the EU as a party.

Concluding remarks

The Achmea decision will doubtless have wide reaching implications for the existing 196 intra-EU BITs currently in force. The EC has already stepped up its efforts to require EU member states to amend or terminate incompatible intra-EU BITs. Some member states have already announced such measures; for instance, in May 2018 the Netherlands declared that it intends to terminate its bilateral intra-EU investment treaties.

Going forward, the decision creates an increased degree of uncertainty for parties looking to rely on the existing intra-EU BITs to protect their investments or to enforce awards in the EU. Most importantly, respondent EU States will inevitably seek to rely on the CJEU to challenge the jurisdiction of tribunals hearing disputes and to resist the enforcement, or to challenge the validity, of awards. In addition to Spain, since Achmea, Hungary has also applied to set aside awards in part on this basis.

Clients investing in the EU are advised to structure or restructure their investments through a vehicle incorporated outside of the EU, if possible. In this way, a client can be sure to be protected by a BIT between a Member State (or the EU) and a third State not affected by the CJEU’s judgment. Perhaps there is a silver lining for post- Brexit English investment arbitration practitioners after all as the UK may soon become a jurisdiction outside the EU keen to attract and structure investments. The UK retains a number of BITs with countries now in the EU and is a signatory to the ECT. 

As for investment arbitrations under the ECT, for the time being, it appears that arbitral tribunals are not applying the EC Decision or the Achmea judgment and do not accept that EU law is of application to arbitration disputes where it is not strictly necessary to apply EU law to resolve the dispute. The next word will come from the Courts of the Member States and the Swedish Svea Court of Appeal in Novenergía, and from the enforcement actions in Masdar and Antin v. Spain.[9] Only time (and the CJEU) will tell whether the EC Decision and Achmea will bring the end to investment arbitration under the ECT between Member States. 

Achmea is a signpost along the road to a clear destination for intra- EU dispute settlement. That destination is the replacement of all preexisting intra-EU BITs with a single multilateral agreement among EU member states. The solution, already proposed by both Germany and France, would terminate all intra-EU BITs and provide for wide substantive protections for EU investors. Post-Brexit, it is inevitable that Europe will have a renewed incentive to solve the EU dispute resolution puzzle. There will be a new desire to underscore political cohesion between the remaining member states, to streamline perceived inefficiencies in the EU and to face down the threat of an “offshore solution” from the UK. We think this fresh impetus will finally prompt a resolution to the long-standing debates surrounding the procedural mechanism to hear the disputes arising from a new multilateral treaty (be that at the CJEU itself, under the auspices of the Permanent Court of Arbitration or in an entirely new permanent investment court). The disappearance of intra-EU BITs from the legal landscape is by far the most likely outcome by 2028. 

Slovak Republic v. Achmea B.V.

The underlying dispute

Achmea concerned an investment in Slovakia by a Dutch insurer, Achmea B.V., at a time of deregulation of Slovakia’s health insurance market. Following the initial investment, in 2006, Slovakia increased regulation in the health insurance sector. On the basis of this regulatory change, in 2008, Achmea commenced adhoc proceedings under the Dutch-Czech and Slovak BIT for breach of the BIT. In 2012, the arbitral tribunal found that Slovakia had breached the BIT and ordered the payment of EUR 22.1 million damages to Achmea. Slovakia subsequently brought set aside proceedings before the German courts. Slovakia argued the arbitral tribunal lacked jurisdiction to hear the claims because the arbitration clause (in Article 8 of the BIT) was incompatible with EU law. The first instance court in Frankfurt rejected Slovakia’s arguments. On appeal, the German Federal Court of Justice referred the question to the CJEU.

What was the CJEU asked to decide?

The TFEU (Article 267) gives the CJEU jurisdiction to deliver preliminary rulings on the validity and interpretation of EU law. The primary purpose of that jurisdiction is to ensure consistency and uniformity of EU law in all member states. The referring court questioned  whether the arbitration clause in the BIT was incompatible with the TFEU.

 


 

[1] Eiser Infrastructure Limited and Energia Solar Luxembourg Sarl v. Kingdom of Spain, ICSID Case No ARB/13/36, Award, 4 May 2017.

[2] Novenergia II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. The Kingdom of Spain, SCC Case No. 2015/063, Award, 15 February
2018, para. 465.

[3] Id., paragraph 465

[4] Masdar Solar & Wind Cooperatief U.A v. Kingdom of Spain, ICSID Case No Arb/14/1, Award, 16 May 2018.

[5] Id., paragraph 678.

[6] Id., paragraph 679.

[7] Vattenfall AB et ors v. Federal Republic of Germany, ICSID Case No Arb/12/12, Decision on the Achmea Issue, 31 August 2018.

[8] Id., paragraph 161.

[9] Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdom of Spain, ICSID Case No. ARB/13/31.

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