Author: Marc Morros Bo *
| Jurisdiction: | Topics: |
INTRODUCTION
In Infrastructure Services Luxembourg S.À.R.L. and Energia Termosolar B.V. v. Kingdom of Spain, Justice Fraser of the English Commercial Court refers to the argument that asserts European Union (the “EU”) law precludes intra-EU arbitration under pre-accession investment treaties as “the EU law question.”[1] When it still lacked a name, this issue had already gained significance, as many of the treaty signatories joined the EU two decades ago and, consequently, started reducing tax and tariff advantages—allegedly guaranteed by these agreements—to facilitate the Community’s single market.
Today, this scenario has developed into one of the most notorious ones in investor-state arbitration because the investment treaties incorporated the dispute-resolution mechanisms provided, among others, by the International Centre for Settlement of Investment Disputes Convention of 1965 (the “ICSID Convention”). That was the case of Article 26(2)(c) in connection to 26(4)(a) of the Energy Charter Treaty of 1994 (the “ECT”), which has become a nightmare for Spain after accumulating the largest number of arbitration lawsuits (51) in the last ten years, with 21 of the 27 already resolved in favor of the investor and totaling € 1.23 billion in awards.[2] However, the indirect effect of this phenomenon has been a flourishing pool of mature case law on how Justice Fraser’s EU law question should be answered. Nevertheless, the author of this blog post respectfully believes that the determinant factor in resolving it has yet to receive the proper attention, as it concerns the formulation of the question itself.
UNSATISFYING RESOLUTIONS
CJEU jurisdiction
Premise
There are at least two cases in which the Court of Justice of the EU (the “CJEU”) has specifically tried to address the issue on the basis of Articles 267 and 344 of the Treaty of Functioning of the EU (the “TFEU”). The prior concerns the jurisdiction of the CJEU to give preliminary rulings on the interpretation of primary and secondary EU law. At the same time, the latter regards the prohibition of submitting a dispute on that interpretation to any other method of settlement.
Slovak Republic v. Achmea BV (C-284/16), 2018
The first case dates from 2018. Motivated by the closing of the insurance market to private investors in 2006 after a reverse in the Slovak liberalization trend started in 2004, Achmea, a Netherlands-based insurance company, brought arbitration actions against Slovakia under a provision referring to the UNCITRAL Arbitration Rules in Article 8 of the Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 1991 (the “Netherlands-Slovakia BIT”). The final award ordering Slovakia to pay € 22.1 million for damages ended up in the Federal Court of Justice of Germany, which requested a preliminary ruling from the CJEU on whether the aforementioned provision was consistent with Articles 267 and 344 of the TFEU.
Considering that the dispute was thought to relate to both the interpretation and application of EU law, especially freedom of establishment and free movement of capital provisions, the Grand Chamber found that “the possibility of submitting those disputes to a body which is not part of the judicial system of the EU”[3] meant that the arbitral tribunal was “not [. . .] entitled to make a reference to the Court for a preliminary ruling,”[4] therefore precluding jurisdiction of the method of settlement alluded in Article 8 of the Netherlands-Slovakia BIT. The premise behind putting in such a determining position preliminary ruling was that it has “the object of securing uniform interpretation of EU law, thereby serving to ensure its consistency, its full effect and its autonomy as well as, ultimately, the particular nature of the law established by the [EU] Treaties.”[5]
By contrast, the CJEU assigned little importance to the possibility of the award being reviewed by national courts following national law reflected in Eco Swiss China Time Ltd v. Benetton International NV (C-126/97) and Elisa María Mostaza Claro v. Centro Móvil Milenium SL (C-168/05), since that would only allow a limited review of awards on fields covered by EU law, at the same time unnecessary when being before a per se respectful of the EU law commercial arbitration.
Republic of Moldova v. Komstroy LLC (C-741/19), 2021
The second case would reflect the same conclusion regarding a multilateral treaty, as is the ECT, as opposed to those signed bilaterally. The irrelevance of Republic of Moldova v. Komstroy LLC came to an end when the European Commission itself raised a separate question regarding the jurisdiction clause in Article 26 of the ECT from the initial one referred to the CJEU by the Paris Court of Appeal seeking to review another UNCITRAL award against Moldova for treaty breaches. In addition to addressing the lack of power to refer to the CJEU for a preliminary ruling by the arbitral tribunal with the same reasoning, the Grand Chamber also held that the ECT was, in fact, an “act of EU law”[6] since the Council of the EU was one of its signatories. That would not just create the risk of the EU being interpreted and applied by a court other than the CJEU, but the objective reality that the interpretation and application were already taking place.
ICSID Convention as pre-accession to the EU
Premise
The Supreme Court of the United Kingdom (the “UKSC”) has led the opponent side to the one dominated by the CJEU, according to which EU law precludes intra-EU investment arbitration. In its view, the registration of awards against states is justified on the grounds of the non-affectation by EU law of pre-EU accession obligations under Article 351 of the TFEU.
Micula & Ors v. Romania, 2020
One of the tax advantages Romania would have to reduce after joining the UE in 2004 concerned the food and beverage industry. Nevertheless, having adopted the Emergency Government Ordinance No 24/1998 granting exemptions for investors, in 2013, Romania would lose an ICSID arbitration provided by the Agreement between the Government of the Kingdom of Sweden and the Government of Romania on the Promotion and Reciprocal Protection of Investments of 2002 (the “Sweden-Romania BIT”) after the Swedish Micula brothers brought proceedings for violation of legitimate expectations concerning their investments. The Claimants applied for registration of the award under the English courts. Still, the UKSC granted a stay of enforcement pending the outcome of a General Court of the EU (the “GCEU”) annulment proceeding on a European Commission Decision stating that “[t]he payment of the compensation awarded [. . .] constitutes State aid within the meaning of Article 107(1) of the [TFEU,] which is incompatible with the internal market.”[7] The GCEU would rule in the same direction as would the UKSC afterward.
The obligation assumed by Contracting States in Article 54 of the ICSID Convention, affirming that they “shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State,” followed by the passing of the United Kingdom’s (the “UK”) Arbitration (International Investment Disputes) Act 1966 to that end under its Article 69, was sufficient for the UKSC to lift the stay and allow the execution of the award. Precisely, the reason for having this provision protected by Article 351 of the TFEU is that the State in which enforcement is sought (the UK) signed and implemented the ICSID Convention before becoming an EU Member State (which in this case still was) and that “[t]he travaux préparatoires of the ICSID Convention […] support the view that obligations to comply with the Convention scheme are owed to all Contracting States”[8]—among which there are multiple third countries to the EU—and not just to the State of the party seeking enforcement of the award (Sweden).
Infrastructure Services Luxembourg S.À.R.L. and Energia Termosolar B.V. v. Kingdom of Spain, 2023
The Luxembourgian claimant of the most recent ICSID award regarding non-compliance with the ECT by Spain, already introduced in this blog post, emulated the Micula brothers in requesting the UKSC an order for registration, with Spain challenging it once successfully registered. Justice Fraser validated the pre-accession argument in that prior case and used its content to dismiss Spain’s reliance on State immunity. In Unión Fenosa Gas, S.A. v. Arab Republic of Egypt, the UKSC cited Micula & Ors v. Romania to put forward the idea that even if the defenses before an ICSID award in comparison with those provided for an award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 were narrower because of national courts being enabled to refuse only the latter ones in specified grounds, a court could as well annul an ICSID award “in certain exceptional or extraordinary circumstances which are not defined, if national law recognises them in respect of final judgments of national courts and they do not directly overlap with those grounds [. . .] specifically allocated to Convention organs under articles 50 to 52.”[9]
This is what allowed Spain to rely on Section 9(1) of the State Immunity Act of 1978 (the “SIA”), a UK piece of legislation, by refusing that it had ever agreed to submit a dispute arising from arbitration in the repeated Article 26 of the ECT, which constitute a means for being immune from the jurisdiction of the UK courts. It reasoned that by signing the ECT, it only made a partial offer of ICSID arbitration to investors from non-EU countries (being bound only before extra-Community States) since the CJEU would demonstrate in the future throughout Slovak Republic v. Achmea BV and Republic of Moldova v. Komstroy LLC that such dispute resolution mechanism could not take place with EU investors. The UKSC, however, would highlight that “Spain cannot rely upon any particular wording within the treaty itself that could accomplish such an extraordinary result. There is no such wording.”[10] Other state immunity arguments made are not of interest to this blog post.
AN ALTERNATIVE RESOLUTION
Opinion 1/17, 2019
Requested by Belgium before Slovak Republic v. Achmea BV but resolved after it, the CJEU gave an Opinion in 2019 on the legality of Section F in Chapter 8 of the Comprehensive Economic and Trade Agreement between Canada and the EU and its Member States of 2017 (the “CETA”) providing for arbitration. That would constitute the only resolution of the EU validating such an agreement, basing its stand on a rational distinction rather than alluding to law.
From the Full Court’s point of view, “an international agreement providing for the establishment of a court responsible for the interpretation of its provisions and whose decisions are binding on the [EU] institutions, including the Court of Justice, is not in principle incompatible with EU law.”[11] This reading is tantamount to a iuris tantum presumption of compatibility with EU law that would allow the CJEU to disregard overruling Slovak Republic v. Achmea BV by positioning the former as an example of evidence to the contrary. If the tribunal that may interpret and apply EU law were habilitated by “means of an agreement between the Union and a non-Member State,”[12] where the intra-Community principle of mutual trust does not apply, the presumption would stick, unlike if solely created by the EU Member States.
In what seems to be an alternative argument, the CJEU would focus on the competencies given to the tribunal under Article 8.31.2 of the CETA, which stated that “in determining the consistency of a measure with this Agreement, the Tribunal may consider […] the domestic law of a Party as a matter of fact […] follow[ing] the prevailing interpretation given to the domestic law by the courts or authorities of that Party,” saying that the actions of interpreting and of considering a rule are different. The CETA tribunal would not be allowed to interpret EU law, differently from the Netherlands-Slovakia BIT (not prohibiting it) tribunal tackled in Slovak Republic v. Achmea BV, but take that law into account following the interpretations of the CJEU “for greater certainty”[13] of properly recognizing when the CETA has been breached.
Adaptation to the unsatisfying resolutions
At this point, only descriptions of multiple judicial resolutions have been addressed. After its consideration, none of them can answer the EU law question no matter in which context it is asked, but the second argument of the CJEU in Opinion 1/17.
On the one hand, the approach in both Slovak Republic v. Achmea BV and Republic of Moldova v. Komstroy LLC continued in more recent cases, such as Republiken Polen v. PL Holdings S.À.R.L. (C-109/20), is useful to answer the EU law question when an investment law claim is submitted under the UNCITRAL Arbitration Rules. Instead of being a treaty, this legal text is a work adopted by the United Nations Commission on International Trade Law,[14] as was recommended in 1976 by the United Nations General Assembly (the “UNGA”) A/RES/31/98. Therefore, even though an agreement that refers to the UNCITRAL Arbitration Rules has a signature date that provides for its entrance into force, the prior ones have not since the resolutions of the UNGA are generally not binding on Member States, according to Paragraph 105 of the International Court of Justice Advisory Opinion on the Legal Consequences for States of the Continued Presence of South Africa in Namibia of 1971. With that, the CJEU was able to rule on the basis of Articles 267 and 344 of the TFEU without falling into the scope of the aforementioned Article 351.
On the other hand, the logic of Micula & Ors v. Romania and Infrastructure Services Luxembourg S.À.R.L. and Energia Termosolar B.V. v. Kingdom of Spain is useful to answer the EU law question when an investment law claim is submitted under the ICSID Convention. These rules form a treaty signed over the decades by more than 160 countries.[15] As a result, the UKSC could look at the year in which the states in those cases entered the ICSID Convention, compare it to the moment they joined the EU, and rule on Article 351 of the TFEU accordingly, before examining Articles 267 and 344, as mentioned above, when needed.
The remaining two of the four faces of the EU law question are still unresolved. What would the CJEU have done if, in Slovak Republic v. Achmea BV and Republic of Moldova v. Komstroy LLC, the governing rules had been the ICSID Convention? What would the UKSC have done if, in Micula & Ors v. Romania and Infrastructure Services Luxembourg S.À.R.L. and Energia Termosolar B.V. v. Kingdom of Spain, the governing rules had been the UNCITRAL Arbitration Rules? Far from being incompatible, the UKSC consideration could satisfactorily answer the first question, as could the CJEU thinking do with the second one. However, the debate that this blog post wants to put forward is not whether that could happen, which has been made clear that it could. Instead, the cornerstone should be found in the undesirability of that event. Firstly, it is far from reasonable to share with the CJEU in Paragraph 55 of Slovak Republic v. Achmea BV that, unquestionably, arbitrators in commercial arbitration neither interpret nor apply EU law in such a way by which it could displace Articles 267 and 344 of the TFEU. If arbitration clauses providing for UNCITRAL proceedings in investment treaties preclude the jurisdiction of the CJEU, those in commercial arbitration agreements should produce the same effect, as they may need to examine EU law. Seldom could there be a more antiarbitration result from any other possible answer to the EU law question. Secondly, the UKSC point suggests that non-ad hoc investment arbitration within the EU can only occur as long as the ICSID Convention continues to be the primary choice of the parties to subject their dispute. This continuity is unlikely to happen when states know that by submitting the dispute to another method distinct from the ICSID Convention and the UNCITRAL Arbitration Rules, the resulting award—probably making them liable—would be of no effect. Countries may be inclined to push the envelope and remove from their bilateral or multilateral investment treaties the possibility of submitting the dispute to the ICSID Convention, leaving Article 351 of the TFEU with anything but importance. Thirdly, a contradiction between Republic of Moldova v. Komstroy LLC and the first argument of Opinion 1/17 would be irreconcilable, thus making this CJEU-UKSC four-faced system legally uncertain. The EU and non-Member States agreed upon the ECT and the CETA. Suppose that meant that both treaties should be considered as acts of EU law by having the arbitral tribunal interpret and apply it, illegally displacing the CJEU. In that case, one cannot say that this displacement is legal because when the party agreeing is the EU itself, the principle of mutual trust does not apply.
The prior paragraph reflects the problem of dividing the EU law question into four parts. It does not raise a multifaceted question. In the end, the second argument of Opinion 1/17 touched on the crux of the matter while escaping the debate on the moment of accession. In fact, the CJEU established that there is room for the signatories of an agreement to limit the scope of an arbitration proceeding by virtue of which the tribunal could enter into EU law to resolve the dispute to a preconceived extent. The outcome of Article 8.31.2 of the CETA, doing precisely that, resulted in having chosen as interpretable and applicable only “international law, constituted of the CETA itself and rules of international law, and not EU law.”[16] With that in mind, EU Member States should look at the EU law question by putting the scope of the arbitral tribunal in their sight and thus rethink whether they should maintain their bilateral and multilateral agreements without precising the extent to which the tribunal may enter the EU law, or put the agreement itself, the Vienna Convention on the Law of Treaties of 1969 and international trade law as the only law subject to interpretation and application.
CONCLUSION
The version of the EU law question introduced by Justice Fraser is already—problematically—resolved under Article 351 of the TFEU (where the UKSC stands), which, in its case, sets Articles 267 and 344 into play (where the CJEU stands). Nevertheless, the new, still-unanswered EU law question remains the conduct EU Member States will engage in under this context. The first option would maintain the CJEU-UKSC four-faced system and its supra-described practical problems operating. In contrast, the second one would always work within an international law framework isolated from EU law jurisdictional concerns. Notwithstanding the resolution of the latter, the prior seems to be the most plausible path that intra-EU investment arbitration will keep following. For the second option to occur, EU Member States should modify their agreements to limit the scope, and there is a lack of consensus on this matter. For example, the division could be observed in the interventions made by some EU Member States in Slovak Republic v. Achmea BV. Specifically, Germany, France, the Netherlands, Austria, and Finland supported intra-EU investment arbitration, the reason being that these are “essentially countries of origin of the investors and therefore never or rarely respondents in arbitral proceedings launched by investors,”[17] according to the Opinion of Advocate General in the case; Czechia, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania, and Slovakia would argue otherwise as “[t]hose States have all been respondents in a number of arbitral proceedings relating to intra-EU investments.”[18]
Even if the recommendation in this blog post cannot be implemented, there should be a significant depoliticization of the new EU law question to leave investor-state arbitration exempted from arbitrariness. The ultimate result of keeping it unsolved is not that some Community countries may benefit to the detriment of others, but that the EU will become a hostile zone for Community companies and individuals to invest, contradicting the basic foundations of the EU itself and harming all Member States.
*Marc Morros Bo is an ultimate-year LLB student at ESADE Law School in Barcelona pursuing the fall 2023 exchange program at Columbia Law School in New York. He currently holds on-campus employment as a Research Assistant to Profs. George A. Bermann and Kabir A. N. Duggal on the ICSID Rules, FET clauses, and diversity in international arbitration.
[1] [2023] EWHC 234 (Comm), para. 36.
[2] [2022] Lucía Bárcena and Fabian Flues, From solar dream to legal nightmare: How financial investors, law firms and arbitrators are profiting from the investment arbitration boom in Spain, Transnational Institute (TNI) and PowerShift. Accessed on 18 Sept. 2023.
[3] [2018] CJEU C-284/16 (Grand Chamber), para. 58.
[4] Id., para. 49.
[5] Id., para. 46 (referring to [2014] CJEU Opinion 2/13 (Full Court), para. 176 on the accession of the EU to the European Convention on Human Rights of 1950).
[6] [2021] CJEU C-741/19 (Grand Chamber), para. 49 (referring to id., para. 23).
[7] [2015] Commission Decision (EU) 2015/1470, para. 161, Art. 1.
[8] [2020] UKSC 5, para. 107.
[9] [2020] EWHC 1723 (Comm), para. 67 (referring to id. [8], para. 78).
[10] Supra 1, para. 101.
[11] [2019] CJEU Opinion 1/17 (Full Court), para. 106.
[12] Id., para. 127.
[13] [2017] CETA, OJ L 11, 14.1.2017, p. 23-1079, Art. 8.31.2.
[14] [1976] UNGA A/RES/31/98, point 1.
[15] [n.d.] https://icsid.worldbank.org/about/member-states/database-of-member-states, Database of ICSID Member States. Accessed on Oct. 1, 2023.
[16] Supra 11, para. 77.
[17] [2017] Opinion of Advocate General Wathelet, id. [3], para. 34.
[18] Id., para. 35.