Navigating the Complexities of Investment Protection in the EU Single Market

This draft discusses the current debate over intra-EU bilateral investment treaties (intra-EU BITs). This is an esoteric issue for all who do not have some interest in EU and investment law. But the controversy over these agreements is likely to affect current conceptions of investment protection in trade agreements like the CETA as well as the future of the envisaged Multilateral Investment Court (MIC).

Are bilateral investment treaties between EU member states (intra-EU BITs) compatible with EU law and the rules of the Single Market? The case Slovak Republic v Achmea BV (C-284/16) represents the first opportunity for the Court of Justice of the European Union (CJEU) to examine this question and decide on the compatibility of intra-EU BITs with EU law. Even more important, its outcome will determine not only the uncertain future of the 196 intra-EU BITs that remain currently in force as well as ongoing disputes, but also address some of the controversies over the EU’s vision for a multilateral investment court.

Intra-EU BITs have only recently become popular with investors. Most of these treaties date back to the 1990s when one or both countries were not yet a member of the EU. However, the number of investor-state arbitrations based on these agreements has only risen significantly over the last few years: while we rarely saw more than two or three intra-EU arbitrations initiated in a single year before 2011, the number of new cases started to increase rapidly in 2012. In 2015 alone, out of a total of 74 new investment disputes worldwide, 28 were initiated between EU-based investors and EU member states. These figures are based on data in UNCTAD’s Investment Policy Hub. The darker section of each bar indicates the number of arbitrations in which the claimant is an investor based in the EU and the respondent is an EU member state; this includes cases under the multilateral Energy Charter Treaty.

Figure 1 – Number of Investor-State Arbitrations Initiated per Year

Arbitrations

EU member states are divided on the issue of intra-EU BITs, with some maintaining that intra-EU BITs are incompatible with the EU treaties and others arguing the opposite. According to the recent opinion in Slovak Republic v Achmea BV, delivered by Advocate General Wathelet on 19 September 2017, Germany, France, the Netherlands, Austria and Finland have all intervened on the side of the investor (Achmea BV). These are mostly home states of investors and have therefore never or rarely been respondents in arbitral proceedings launched by investors. In contrast, the Slovakian position has been supported by a larger group including the Czech Republic, Italy, Spain, Greece, Hungary and Poland, which have all repeatedly been respondents in arbitral proceedings relating to intra-EU investment.

In addition, the European Commission has intervened in support of Slovakia’s position during the arbitration proceedings. The Commission has long expressed concerns about the risks that intra-EU BITs pose to the uniformity and effectiveness of EU law. In 2015, it initiated infringement proceedings against five EU member states – including Slovakia – requesting them to terminate their intra-EU bilateral investment treaties. In early 2017, Poland and Romania have actually started this process.

The Achmea case

The complex case now revolves around the fundamental question of whether the arbitration clause in the 1991 Netherlands-Czechoslovakia BIT violates EU law and, therefore, cannot be relied upon any longer by European investors. Legal proceedings began in October 2008, when Achmea, an undertaking belonging to a Netherlands insurance group, initiated an arbitral procedure against the Slovak Republic, under Article 8 of the Netherlands-Czechoslovakia BIT. Achmea’s complaint was directed against the re-nationalisation of the Slovak health insurance system, which caused the indirect expropriation of Achmea’s business in Slovakia.

Before the arbitral tribunal accepted jurisdiction and proceeded to the merits of the case in 2010, Slovakia already argued that the BIT had been superseded by Slovakia’s accession to the EU in 2004. The Slovakian government and the European Commission both claimed that the Treaty on the Functioning of the European Union (TFEU) would govern the same matter as the Netherlands-Czechoslovakia BIT and, consequently, that the BIT should be considered inapplicable or to have terminated in accordance with the specific lex posterior rules contained in Articles 30 and 59 of the 1969 Vienna Convention on the Law of Treaties (VCLT).

However, the arbitral tribunal rejected these arguments on jurisdiction and, in 2012, delivered its final award. It concluded that the Slovak Republic violated its obligations under the BIT and ordered it to pay damages of €22.1 million plus interest and the costs of the arbitration – Achmea originally claimed damages of €65 million. But Slovakia challenged this award before the Oberlandesgericht (Higher Regional Court), Frankfurt am Main; this was the place of arbitration. Because this court rejected to annul the arbitration award, the Slovak Republic then lodged an appeal before the Bundesgerichtshof (Federal Court of Justice, Germany).

Finally, the Bundesgerichtshof in 2016 requested a preliminary ruling from the CJEU on the compatibility of Article 8 of the Netherlands-Czechoslovakia BIT with Articles 18, 267 and 344 TFEU because it felt unable to infer the answer with sufficient certainty from the existing case-law.

CJEU: The opinion of the Advocate General

In the much anticipated opinion, Advocate General (AG) Wathelet dismissed the arguments of Slovakia and concluded that the arbitration clause in the BIT does not undermine the FEU Treaty or the autonomy of the EU legal system. In particular, he proposed that the CJEU should answer the questions of the Bundesgerichtshof as follows: Articles 18, 267 and 344 FEU Treaty “must be interpreted as not precluding the application of an investor/State dispute settlement mechanism established by means of a bilateral investment agreement concluded before the accession of one of the Contracting States to the European Union”.

In framing his analysis, the AG argues that the legal position of the Commission and the member states opposing the validity of the intra-EU BITs is seriously flawed and their approach incoherent. I find this comparison between the legal position and current practice of certain member states (and the Commission) particularly interesting. For example, the opinion highlights that out of the member states that consider intra-EU BITs incompatible with EU law only Italy has terminated its intra-EU BITs – although, as stated above, some countries might actually have started this year. All other states in this group maintain most of their BITs in force, thus allowing their own investors to benefit from them. In fact, as the Opinion points out, Slovakian investors continue to benefit from the BITs concluded with member states of the same group, as shown, for example, by the arbitral proceedings Poštová banka, a.s. and Istrokapital SE v Hellenic Republic (ICSID Case No ARB/13/8).

Even more striking is that the AG attacks the Commission’s arguments on the inapplicability of intra-EU BITs. First, he asks why the Commission for a long time advocated BITs as an instrument necessary to prepare Eastern European countries for the accession to the EU but did not provide for the termination of those BITs in the accession treaties, thus creating considerable uncertainty over a significant time period. This argument might, however, take advantage of hindsight. Second, he cites the multilateral Energy Charter Treaty, which provides for a similar dispute settlement mechanism between EU member states, but has not attracted “the slightest suspicion that it might be incompatible” with EU law. The main difference is, of course, that the Energy Charter Treaty also includes states outside the EU, but the principal concern, intra-EU cases, is real. Third, he points to the outcomes of intra-EU arbitration proceedings, which only rarely (10 out of 62 cases) end successful for the investor and would so far not have been required to review the validity of acts of the Union or the compatibility of acts of the Member States with EU law. Although this finding supports the AG’s impression that “the systemic risk which, according to the Commission, intra-EU BITs represent to the uniformity and effectiveness of EU law is greatly exaggerated”, it does not answer whether intra-EU BITs are incompatible with the FEU Treaty. Because there already are many comments on the particular strengths and weaknesses of the AG’s reasoning with regard to Articles 18, 267 and 344 FEU Treaty, I will not go into this here.

The wider context

Following the CJEU’s answer to the Bundesgerichtshof, an end to the, by now, almost ten-year saga of the Achmea case might finally be in sight. However, the continued existence of BITs between some member states will likely remain a constant irritant in the EU’s Single Market framework. However, a recent comment on the AG’s opinion also finds some positive aspects about retaining these BITs: because the rule of law and independence of national courts has come under attack in some member states, “it now seems that the intra-EU investment treaty arbitration may still have a vital role to play also in the intra-EU dimension as the private enforcement mechanism of fundamental economic freedoms.” For critics of investor-state arbitration, this might, of course, seem like replacing one evil with another.

The forthcoming opinion of the Court will also be important insofar as any incoherence might undermine the EU’s negotiating position when it comes to reforming the system for investment protection more generally. In fact, the AG’s opinion was published shortly after the Commission issued a recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes (Multilateral Investment Court – MIC) on 13 September. In this document, the Commission explicitly states that it considers disputes arising from intra-EU BITs and the Energy Charter outside the scope of this initiative because “[t]he Commission considers this type of treaties contrary to Union law.” However, if the Court follows the recommendations of the AG, some member states might argue that intra-EU BITs should be included.

Finally, the AG’s recommendations were followed by an Article 218 (11) TFEU request submitted by the Belgian government on 30 October, which asks the CJEU to determine whether the ISDS section (Chapter 8 Section F) of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada is compatible with EU law. This review will constitute a major test for the new Investment Court System (ICS) in CETA and will likely preclude the entry into force of these provisions until the Court has published its Opinion. This will also affect the outlook for negotiations on investment protection in future trade agreements and the MIC.

Although one landmark case might thus slowly come to an end, chances are that the underlying problems will remain on the agenda for quite some time.

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Navigating the Complexities of Investment Protection in the EU Single Market