The 2020 European financial services outlook
For all financial services practitioners, 2020 will be a year of dynamic developments.
In this article, we review breaking news in investor-State arbitration: the decision of the Court of Justice of the European Union that investor-State dispute settlement provisions in intra-EU bilateral investment treaties are incompatible with EU law. We consider the ramifications of that decision, including Spain’s copy-cat challenge to the ISDS provisions in the Energy Charter Treaty.
Continuing the shake up within the EU of investor‑State dispute settlement (ISDS), the Court of Justice of the EU (CJEU) in Opinion C284‑16 (Slovak Republic v Achmea BV) has held that ISDS provisions in bilateral investment treaties (BITs) between EU Member States (intra‑EU BITs) are incompatible with EU law. This decision will have come as a blow to many in the investment arbitration sphere, given that as recently as September 2017, Advocate‑General Wathalet came to the opposite conclusion in support of ISDS. Opinions of the CJEU’s Advocate‑ Generals are not binding on the Court, but are often followed, which is why the CJEU’s contrary conclusion was somewhat unexpected.
The CJEU concluded that the Treaty on the Functioning of the European Union (TFEU) “must be interpreted as precluding” provisions in international agreements between EU Member States that allow investors to bring proceedings against an EU Member State before arbitral tribunals. The CJEU’s primary objection was to arbitral tribunals ruling on matters of the interpretation or application of EU law or treaties – the CJEU is granted primacy in that regard by the TFEU and it acts as ultimate guardian of the uniformity of EU law across the EU. Advocate‑ General Wathalet had avoided this issue by opining that tribunals could (indeed, must) refer any question of the interpretation or application of EU law to the CJEU, like any domestic EU court. The CJEU disagreed, finding that tribunals established on the basis of intra‑EU BITs are different from domestic courts and are not able to refer questions to the CJEU for a preliminary ruling. As awards are generally not subject to review by EU domestic courts, a referral on a point of EU law could not be obtained that way either. The CJEU reasoned that such tribunals therefore undermine the principle of autonomy of EU law and threaten the uniform application of EU law across the EU, concluding that ISDS provisions in intra‑ EU BITs are incompatible with EU law.
The CJEU’s conclusion will have a wide ranging impact. There are over 190 intra‑ EU BITs — EU investors will no longer be able to exercise rights granted to them under those treaties to bring proceedings against infringing EU Member States. Less clear is the impact on ongoing, or indeed concluded, arbitrations under intra‑EU BITs. Ongoing arbitrations will certainly face jurisdictional challenges from the respondent EU Member States, but awards already rendered might also face challenges, particularly if still at the enforcement stage. Adding to the confusion, such challenges — within the arbitration process or before the courts — may result in different outcomes depending on the location of the seat of the arbitration and the tribunal/courts’ view of whether they are bound to follow decisions of the CJEU.
It is also not clear what State parties to intra‑EU BITs must now do in response to the CJEU decision — will they renegotiate those provisions or terminate their intra‑EU BITs entirely? The latter certainly seems a possibility. The European Commission (EC) has long been hostile to intra‑EU BITs and views them as incompatible with EU law. The EC has on a number of occasions gone as far as to intervene in investor‑ State arbitrations to object (albeit, unsuccessfully) to the applicability of intra‑EU BITs. It has also demanded that EU Member States terminate their intra‑EU BITs (with mixed responses) and brought infringement proceedings against a number of EU Member States on grounds that their intra‑EU BITs are in violation of EU law. It is likely that the Achmea decision will invigorate the EC’s campaign and undermine continuing EU Member State resistance.
The EC’s campaign has faced criticism because, particularly in respect to investor‑State dispute resolution, there is no adequate alternative in place. The EU’s controversial proposal for an investment court system (ICS) is a long way off from being agreed let alone implemented. Indeed a challenge to the ICS, also on grounds of incompatibility with EU law, is before the CJEU. That leaves EU investors with no option but to seek recourse for illegal EU Member State conduct before the State’s own courts. For obvious reasons, for most, that is a less than desirable option.
This is not a theoretical issue. Despite a common misconception that investor‑ State disputes happen only in emerging markets and rarely involve Western European States, disputes involving EU investors and/or EU Member States are not uncommon and have been on the rise. ICSID’s Caseload Report with a special focus on investor‑State arbitration in the EU (as of April 30, 2017) recorded that 17 percent of cases registered with ICSID (i.e. some 105 cases) involved an EU Member State respondent party – an increase from 12 percent as reported in ICSID’s 2014 EU Caseload Report. Spain had the highest number of cases (28 percent), followed by Romania and Hungary (both 12 percent). The ICSID EU Caseload Statistics do not specify how many were brought under intra‑EU BITs, but according to UNCTAD’s ISDS Navigator, intra‑EU disputes accounted for one‑fifth of all investment arbitrations initiated in 2017. UNCTAD also reported that by the end of 2017, the total number of known intra‑EU investment arbitrations was 168 — again, representing almost 20 percent of all known investment arbitrations. That is a significant proportion.
According to ICSID’s 2017 EU Caseload Report, the most common grounds for establishing jurisdiction were BITs (56 percent) and the Energy Charter Treaty (ECT) (43 percent). This is a notable rise in ECT disputes involving the EU over the last three years — ICSID’s 2014 EU Caseload Report reported that 25 percent of cases were brought under the ECT. The increase is largely due to claims brought following EU Member States’ withdrawal of renewable energy subsidies in the wake of the financial crisis. A more detailed analysis of the ICSID’s EU Caseload Report can be found in our article in this issue Investor‑state disputes in the EU — some statistical observations.
The CJEU’s decision did not expressly comment on the ECT, but there is a risk that by analogy ISDS provisions in the ECT also will be deemed incompatible with EU law.
Indeed, hot on the heels of the Achmea decision, Spain has applied to reopen two ICSID arbitrations (in which proceedings had concluded but the awards had not yet been handed down) in order to bring challenges on precisely that basis. Irrespective of the tribunal’s decision in Spain’s arbitrations, it is likely that more challenges on similar grounds will follow, again before tribunals and the courts of the seat and/or enforcement. It is worth noting that, reportedly, the EC intervened or sought leave to intervene in a number of ECT cases involving EU investors and EU Member States — its view is the ISDS provisions in the ECT should be read as applying only to extra‑EU claims; in circumstances where EU investors are bringing proceedings against other EU Member States, the ECT’s ISDS provisions would be incompatible with EU law. No doubt the question ultimately will be referred to the CJEU.
As a final aside, it is not bad news for everyone. The CJEU’s decision does not impact investment treaties between non‑EU States and EU Member States, nor does the uncertainty in respect of the ECT extend to extra‑EU proceedings. As a result, there is likely to be a benefit for non‑EU jurisdictions. ISDS provisions in BITs were introduced as a mechanism for investors to mitigate political risk of investing in foreign States. EU investors investing within the EU are now facing a lack of such investment protections and/or effective dispute resolution mechanisms. This might increase the attractiveness of foreign direct investment by EU investors into non‑EU States and/or the attractiveness of non‑ EU States for structuring investments into Europe. Likewise, should courts of non‑EU States decide that they are not bound to follow the CJEU’s decision in Achmea, it might increase the attractiveness to investors of those States as seats of arbitration.
For all financial services practitioners, 2020 will be a year of dynamic developments.
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