An investment protection vacuum arguably looms large within the EU following recent commitments by EU Member States, in the wake of the Achmea decision, to terminate the bilateral investment treaties (BITs) between them. This is notwithstanding that there is currently no viable alternative regime for protecting foreign investors or resolving disputes they might have with the host EU Member States in which they are investing. This represents a genuine threat to intra-EU foreign direct investment in the region, at a time when focus on the stability of bilateral trade relations should be a priority.
There are good reasons for foreign investors to be concerned: intra-EU investment treaty-based arbitrations comprise around 20 per cent of known global disputes between foreign investors and the host states in which the investments were made. That number is, however, expected to plunge dramatically as intra-EU investors lose the protections currently offered by intra-EU BITs, in particular the right to bring suit directly against host states.
The Achmea decision
On March 6, 2018, the Court of Justice of the European Union (CJEU) ruled that the investor-state arbitration clause in the Netherlands-Slovakia BIT was incompatible with EU law. The German Federal Court had referred the issue to the CJEU during its review (in its capacity as the supervisory court of the seat of arbitration) of the validity of an arbitral award against Slovakia in the Achmea case. The CJEU held that the arbitration agreement in the Netherlands-Slovakia BIT impaired the CJEU’s exclusive jurisdiction to interpret EU law and thereby undermined the principle of autonomy of the EU, and as such was incompatible with EU law. Following the decision, the German courts set aside the award. This decision has had a knock-on effect for other intra-EU BITs.
The CJEU’s decision, however, left something to be desired in terms of clarity as to its intended scope and application. A key area of uncertainty concerns whether the decision applies only to intra-EU BITs, or extends to multilateral investment treaties (MITs) where EU Member States are also a party, for example the Energy Charter Treaty (ECT). A number of tribunals have since had to grapple with the question of their own jurisdiction, with varying results. Shortly after Achmea, the European Commission weighed in, issuing a non-binding communication setting out its opinion that all intra-EU BITs and intra-EU investor-state arbitrations under the ECT were incompatible with EU law. The Commission has sought to intervene in a number of subsequent intra-EU investment arbitrations arguing that positive findings of jurisdiction are undermined by Achmea. However a binding decision is some way off, as we wait for the outcome of the CJEU’s review of the compatibility of intra-EU arbitration under the ECT following a preliminary ruling on the issue referred by the Svea Court of Appeal in Stockholm.
Termination of intra-EU BITs
In January 2019, all EU Member States declared their agreement to terminate the BITs concluded between them by December 6, 2019. Whilst many if not all of these BITs contain sunset provisions, which provide that treaty protections will continue to apply to investments made before termination for a number of years post-termination, there is some question as to whether such provisions will have any effect following mutual as opposed to unilateral termination. Whether existing investments will benefit from continued protection in the years following termination will depend on the precise terms of the particular BITs.
Twenty-one Member States also declared that the Achmea judgment applies to intra-EU investor-state arbitrations under the ECT and agreed to discuss with the Commission whether additional steps are required to ensure this position is recognized. Five states declared that they considered Achmea was silent on the ECT, noting that such impact is presently under review by the CJEU, whilst Hungary suggested that such silence was demonstrative that Achmea had no effect on arbitrations initiated under the ECT. Hungary is of course notable as its national oil and gas company (MOL) is currently pursuing an ECT claim against Croatia. It will therefore be keen to avoid a finding that intra-EU ECT arbitrations are contrary to EU law; at least insofar as such a finding will impact pending proceedings.
How will this impact intra‑EU ISDS?
In their declaration, twenty-one Member States agreed to inform tribunals in pending intra-EU investment arbitrations about the consequences of the Achmea judgment and to dissuade investors from bringing new claims. It is yet to be seen how tribunals will respond to this development. Although, it has not deterred an ICSID tribunal (ICSID Case No. ARB/14/20) deciding a case under the France-Hungary BIT, which has since handed down an award on jurisdiction and merits in favour of Sodexo Pass International against Hungary. The Tribunal permitted the Commission to make a submission during the proceedings, but in its award it dismissed the Commission’s arguments regarding the effect of Achmea, finding that it had jurisdiction.
Until the relevant BITs are terminated and a definitive decision or action is taken in relation to the ECT by EU Member States, tribunals may continue to make positive findings of jurisdiction. Indeed, they may continue to do so even after such actions. Interventions by the Commission thus far as to the consequences of Achmea have in many instances not been successful in preventing a tribunal from making such positive findings of jurisdiction. In other instances, tribunals have simply refused to permit the Commission’s requested intervention. As such, direct interventions by Member States may not have the desired effect. Further, tribunals seated outside EU Member States may not consider themselves bound by EU law in this respect.
Perhaps the greater issue in practice is not whether arbitral tribunals accept jurisdiction but whether resulting awards on merits can be enforced. The area of most risk (for non-ICSID awards) is likely the public policy exception to recognition and enforcement under the New York Convention, and we have already seen a number of enforcement challenges on the basis of Achmea. The Commission recently intervened in a review by the New York courts of an intra-EU investment arbitration award referencing the Achmea decision and the “foreign policy implications” of allowing enforcement of intra-EU awards. In a similar vein, the twenty-one EU Member States have agreed to request that the courts of any country reviewing an award made in an intra-EU investment arbitration either set aside or refuse to enforce such award.
It might be thought that ICSID awards would fare better, given they are subject exclusively to the annulment procedure contained within the ICSID Convention and therefore judicial review is technically not within the competence of national courts. However, a Swedish court ruled in 2019 that an investor could not enforce an ICSID award against Romania in light of the Commission’s decision that payment of the award would constitute state aid in breach of EU law. The court said that, as with a legally enforceable Swedish ruling, the award could not be executed if its enforcement was contrary to EU law. Whilst the court did not deal with Achmea specifically, the decision indicates how national courts may deal with ICSID awards if persuaded that enforcement would be in breach of EU law.
This question may soon be decided definitively as the Brussels Court of Appeal recently sought a preliminary ruling from the ECJ on the relationship between EU law and Member States’ enforcement obligations under the ICSID Convention in the context of an appeal against enforcement of an ICSID award. The court has also said it would seek a ruling from the ECJ on whether the 2015 decision (referred to above) by the European Commission on the state aid issue precludes the award’s enforcement in the courts of a member state other than Romania.
Investors (whether from or into) countries that are applicants for EU membership, should also think carefully about the potential impact on their investments. Upon accession to the EU, any investment dispute involving the acceding country and another EU Member State will fall foul of the Achmea decision. Presently, Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey are candidate countries and Bosnia and Herzegovina and Kosovo are considered potential candidates.
Conversely, when the UK leaves the EU, it will be removed from the remit of Achmea. Although, given the UK’s inclusion in the EU Member States’ recent declaration, it is presently unclear what the UK’s intention is with respect to the BITs between it and EU Member States. Prior to this declaration, the assumption was that these BITs would remain in place following Brexit. In which case, any investment protection dispute brought by a UK investor against an EU Member State or an EU investor against the UK would no longer be characterized as intra-EU and avoid Achmea-related challenges.
Alternative protection for EU investors
The Commission’s view seems to be that intra-EU investor-state arbitration is not necessary in the single market. It is true that some investor protections within the EU regime have a similar flavor to traditional BIT protections. These include the fundamental freedoms, such as the free movement of capital, and general principles of European Union law, such as non-discrimination, proportionality, legal certainty and protection of legitimate expectations.
However, the EU mechanisms in place to supposedly ensure the administration of these protections are not currently suitable for resolving complex investment disputes. Whilst some EU Member States boast high quality court systems, the standard across them is by no means consistent, and many lack the requisite expertise to provide effective remedies to investors in such disputes. That there is a gap that needs bridging is evidenced by the number of investor state arbitrations brought outside the national courts.
EU Member States in their declarations restated their obligations to provide remedies to ensure the effective legal protection of investors’ rights under EU law. They acknowledged the need to assess the EU’s existing processes and mechanisms for dispute resolution and, if required, create new tools. What these might look like is as yet unknown.
The topic is highly politicized even within the EU. It would seem unlikely that those states against which intra-EU BIT claims have repeatedly been made (to date, about half of all intra-EU BIT disputes were made against Spain, the Czech Republic or Poland) would volunteer for a replacement EU-wide regime. It is thus questionable whether replacement investment protection mechanisms (if any) would be as robust.
It is important that foreign investors within the EU are alive to these developments and the resulting risks to their investments. Adequate consideration should be given to quantifying and structuring these risks, such as negotiation of stabilization clauses which seek to freeze applicable law or provide a contractual mechanism to modify the contract in response to a change in law or economic circumstances, as well as seeking to take advantage of alternative, non-treaty based, protections that might be available to them.
Investors considering commencing intra-EU investment arbitration should do so carefully and upon having received appropriate advice given the inevitable challenges such claims will now face from both jurisdiction and enforcement perspectives. After all, as history shows,an investment is only valuable if there are adequate means by which to protect it.
2019 guide to Foreign Private Issuer status
A company organized outside the US subject to provisions of the US federal securities laws receives benefits if it qualifies as an FPI.