EU member states divided in face of Commission crackdown on intra-EU ISDS
Bordelex | 27 October 2016
EU member states divided in face of Commission crackdown on intra-EU ISDS
by Iana Dreyer
Horia Ciurtin walks us through the dynamics unleashed by an ongoing divisive Commission crackdown on intra-EU bilateral investment treaties. Horia Ciurtin is an investment law expert. Among others he is the managing editor of the EFILA Blog and works with the think tank New Strategy Centre in Bucharest, Romania. He also advises Scandic Distilleries on the Micula case mentioned in the text.
Once a desirable form of European international relations endorsed by the Commission, Bilateral Investment Treaties (BITs) became a problematic issue after the accession of former socialist countries in Central and Eastern Europe to the European Union, and with the emergence of the first intra-EU investment arbitration – ISDS – cases.
EU and international investment law: a clash in the making
In those cases, alleged breaches of investment treaties by CEE governments were the result of requirements made by the Commission. This put new member states into the peculiar situation of having to either breach the acquis communautaire or their international obligations under the BITs. Caught between a rock and a hard place, these states usually chose to try their luck in front of arbitral tribunals.
Numerous intra-EU ISDS cases touch upon intra-EU legal developments. As a result, the Commission decided to constantly intervene as an amicus curiae in the proceedings, both supporting the respondent member state and advancing its own position by arguing that some of the BIT provisions are in direct contradiction with EU law. However, its line of interpretation was almost unanimously rejected by international arbitrators as unfounded: in not one single case did a tribunal decline its jurisdiction based on reasons of conflict with EU law.
The situation became even more tense when two high-profile cases, Eureko v. Slovakia (December 2012 – later Achmea v. Slovakia) and Micula I v. Romania (December 2013) were won by the complaining investors. The Commission intervened in both proceedings, but its arguments were not deemed compelling enough for the tribunals to discontinue the proceedings or to admit the absolute primacy of EU law in light of all other international obligations of the respondent states.
Given these setbacks, the Commission decided to pursue a more consistent – and more powerful – course. First, Eureko went all the way up to the Germany’s Federal Court of Justice (its highest civil and criminal jurisdiction) in Karlsruhe. There Slovakia and the Commission managed to obtain the suspension of the proceedings. The matter is now with the Court of Justice of the EU ECJ, and will offer a preliminary reference pertaining to the compatibility of BIT provisions with the EU law.
While the Micula I case was still undergoing annulment proceedings at ICSID in Washington – where the Commission intervened again – the Commission declared the payment of the compensation granted by the arbitral tribunal to be illegal state aid, incompatible with EU law. The case too, landed at the General Court of the European Union.
Crackdown
As new ISDS cases emerged, the EU the Commission decided in June 2015 to commence infringement proceedings against five member states: Austria, the Netherlands, Romania, Slovakia, and Sweden. It demanded the immediate termination of all their intra-EU BITs, arguing that they are not compatible with EU law, outdated, and unnecessary within a single market ruled by the acquis
The Commission further said that the BIT regime was initially conceived as a political commitment and reassurance for EU investors that operated in non-EU countries. However, with EU accession these states became subject to the entire legal framework applicable in the single market, a framework that sufficiently protects cross-border investments and is more versatile in terms of enforcement. In addition, the Commission considered inacceptable the ‘side-effects’ of intra-EU BITs: in its view they allow for a specific bilateral undertaking between member states, circumventing the entire EU framework. The Commission suggests that the existence of intra-EU BITs eventually threatens the fabric of EU law, leading to contradictions and overlaps with mandatory provisions of the Treaties or secondary legislation.
These five ‘infringing’ member states were chosen because they were involved in intra EU ISDS cases. The Micula I case – the standard scarecrow example – was nominally mentioned in the Commission’s press release as a problem which led to ‘very practical consequences’ for the EU and its two member states involved (Romania and Sweden).
The Commission moved on to step up its clampdown. In September 2015 pilot proceedings were initiated against 21 member states (2 EU member states had terminated their BITs). No official details have emerged from this procedure, as it is still in a consultation phase.
Member state split
The Commission’s moves have led to divergent reactions among the member states.
Some simply complied. The Czech Republic (not a country undergoing an infringement proceeding) terminated all its intra-EU BITs in 2016. Denmark launched negotiations with its counterparts to terminate its intra EU BITs. In February 2016 Poland went even further: it announced it would terminate all its BITs – including those with non EU member states.
The infringing states of Romania and Sweden have kept on negotiating among themselves and with the Commission throughout 2015 and 2016. Romania appeared open to outright termination, but it did not proceed immediately, arguing that its position is not reciprocated by EU partner states. On the other hand, Sweden’s more evasive position – it is the home state in multiple ICSID proceedings against Romania and Germany – pointed to the fact that it does not see a direct violation of EU law by BIT provisions, but it is – in principle – willing to terminate the agreement if a similar system of investment protection is ensured within the EU.
The Nordic state argues that a potential overlap of EU law and international investment protection is – at this point – only a theoretical assertion, which the Commission must prove in a detailed and specific manner in regard to the Sweden-Romania BIT. Another point made by the Scandinavians was that the results of certain arbitral cases do not actually preclude the Commission from ensuring the integrity of EU law by using the mechanisms existing in the Treaties, including by the deployment of core instruments such as its state aid regime.
In September 2016, Romania launched domestic procedures to initiate a process of termination of its intra-EU BITs, to comply with the Commission’s requirements – while also facing new intra-EU litigation from Swedish, Austrian and Dutch investors. Late September, the Swedish Ministry of Foreign Affairs allegedly refused termination of its BIT following Romanian entreaties, and said it is awaiting a joint EU-level solution.
Counterproposals
Others made counterproposals. A mixed group of infringing and non-infringing states issued in April 2016 a ‘Non-Paper’ that comprised their counter-offer to the EU for the termination of intra-EU BITs. In this working document Austria, Finland, France, Germany and the Netherlands accepted the idea of entirely scrapping the present investment regime. They even went as far as suggesting to do away with BIT sunset clauses, which prolong the protection granted to investors for two decades after the termination of such a treaty. They reconfirmed their acceptance of the primacy of EU law, under the condition of developing a replacement multilateral system for intra-EU investment protection.
The document also proposed to build a new type of litigation mechanism to deal with investment cases which allowed for three alternative scenarios: (a) extending the CJEU’s mandate for this autonomous legal regime; (b) creating an autonomous and auto-sufficient body with a competence limited to this kind of disputes; (c) or using the Permanent Court of Arbitration the Hague under a limited and custom-made procedural framework.
This strong core of developed EU states emphasized the disposition towards the reconstruction – under EU guidance – of the investment protection regime, rather than allowing its complete disappearance.
Although the purpose of the ‘Non-Paper’ was to be a unifying vector throughout the wider EU membership – apart from its endorsement by small rich states after it was initiated by Paris and Berlin – was lukewarm. The Commission maintained its hardline approach of no tolerance for any parallel or new system of investment protection, arguing that EU law already offers sufficient guarantees in this respect. Other member states either announced their willingness to scrap the entire BIT architecture, while others remained reluctant, or took no position.
The reception of the proposal by civil society and non-institutional groups was mixed. In the militant NGO milieu, the ‘Non Paper’ was looked upon as a weak attempt to maintain the status quo and repackage ISDS. Per a contrario, the arbitration community and the academia perceived the proposal as legally unacceptable – and, in some interpretations, impossible – for neutralising the ‘sunset clause’ and going against established understandings of international norms and commitments.
Meanwhile, the fight goes on.
In September 2016 the European Commission issued its reasoned opinion to the five infringing states. If the mentioned states fail to comply with the trajectory recommended by the Commission, the case can be brought in front of the ECJ, forcing the non-abiding members into judicial submission.
Therefore, a grand finale is building up on the horizon. The tension between the two legal orders – international and EU – will be diffused either by the member states themselves or by the Court. In any event, the investment protection regime will appear as radically transformed due to the EC’s intransigent policy approach. And the situation may turn out to be politically understandable, but entail an incomprehensible legal outcome.
