Investor-State Dispute Settlement: Is it Really Losing Its Popularity?

During the past years, there has been a considerable amount of talks emphasizing issues of concern regarding investor-State dispute settlement (ISDS). Perhaps unsurprisingly, States have started to take an active stance with regard to the investment treaties in force that allow for recourse to ISDS. This article addresses the European Union (EU) policy regarding treaties that contain investment and dispute settlement provisions, the future of such treaties when the EU is involved, and recent developments on the global scene.

The EU Dimension

The EU has led a long-lasting battle against the application of BITs signed between Member States (MS). Although arbitral tribunals have constantly held that there is no conflict between EU law and BITs,[1] the Court of Justice of the European Union (CJEU) has taken a different approach.

In the case against Austria and Sweden,[2] the Commission contended that the pre-accession investment agreements were incompatible with Articles 64, 66 and 75 TFEU that allow for restrictions on the free movement of capital to and from third countries and that MS did not rectify this incompatibility pursuant to their obligation under Article 351 TFEU. The Commission was concerned that adoption of such measures may amount to an infringement of BIT obligations, which did not allow MS to comply with their EU obligations in the event of an immediate application of the said restrictions.

The Court also relied on the MS’ obligation under Article 351 TFEU, focusing on the immediate applicability of the measures.  It considered that the BITs are incompatible because they do not contain a provision allowing the MS to exercise their duties, therefore accepting that such a provision would render the agreements compatible.  Moreover, it considered that international law does not provide for mechanisms to cope with the urgent nature of the measures. Here, the Court referred to negotiation, suspension or denunciation as too uncertain and time consuming.

Questions have been raised regarding the hypothetical nature of the incompatibility, as the Community did not exercise its competencies in the field. An obligation to denounce agreements with third states in the situation of possible future conflicts could be disproportionate.

Further, the Commission brought a case against Finland[3] regarding similar pre-accession treaties, with the sole difference that a number of the BITs signed by Finland contained a clause for compliance with the State’s legislation and its international obligations. In the Court’s view, it was the part of the clause that referred to international obligations that led to the agreement being incompatible with EU law.  In doing so, the Court reasoned that Article 31 of the Vienna Convention would actually impede the application of EU law, which in the light of the BITs might not be considered part of national law.     

Lastly, CJEU was confronted with an unusual case against Slovakia,[4] where it analysed the relationship between Directive 2003/54/EC on non-discriminatory access to electricity networks, and a pre-accession BIT with Switzerland. The issue relates to an investment contract protected by a BIT, alleged to contravene the treatment set out in the Directive. In this case, the BIT is regarded as complying with EU law, but the contract is not. The Commission implicitly required Slovakia to annul the contract at issue, annulment that could lead to a breach of the BIT.  If by applying the Directive, Slovakia would breach its BIT obligations owed to the parties to the contract, then those obligations would be protected under Article 351(1) TFEU.

After stating that the Court is not competent to interpret the BIT, it proceeded to an “interpretative reconstruction”, treating the BIT as facts.  Since the contract did not allow for termination before the agreed period, the only possibility for Slovakia to denounce it would have been through enactment of legislation, which, in the Court’s view, would amount to indirect expropriation, prohibited by the BIT.  Therefore, the contract was protected by Article 351 TFEU.             The Commission did not pursue any claim under Article 351(2) TFEU, even though the Slovakia – Sweden BIT does not contain any clause that allows Slovakia to comply with its EU obligations.

Most recently, on 6 March 2018, the CJEU ruled that intra-EU BITs are incompatible with EU law.[5] The famous Achmea decision came out following the preliminary reference submitted by the German Federal Court of Justice in Docket No. I ZB 2/15, regarding Slovakia’s application for setting aside the arbitral award in favour of Achmea (formerly Eureko BV).[6]  The Federal Court has expressed its views in favour of investment arbitration clauses. It reasoned that although intra-EU BITs are discriminatory, this should not lead to the invalidation of the arbitral clause, but to the extension of the option to arbitrate to all Member States. The Federal Court enquired whether the BIT’s arbitration clause is incompatible with Articles 344, 267 and 18 of TFEU. Although Advocate General Wathelet in his Opinion of 19 September 2017 agreed with the German court, the CJEU decided against intra-EU BITs.

The Court relied on the principle of autonomy (Article 344 TFEU), according to which MS are under duty to ensure uniform application of EU law, on which arbitral tribunal might be called to rule on. Furthermore, since arbitral tribunals cannot be considered courts or tribunals of MS, the preliminary ruling procedure is not available to them in order to ensure compatibility with EU law (Article 267 TFEU).

The impact of the decision remains to be determined. For instance, its influence over the claims brought between EU States relying on the Energy Charter Treaty (ECT) provisions has been disputed, as the arbitral tribunal denied to follow it in Masdar Solar & Wind Cooperatief v. Spain.[7] Moreover, an ICSID tribunal has ruled in Vattenfall v. Germany[8] that the Achmea decision does not apply to ICSID claims in general and even denied the European Commission the chance to intervene in the proceedings – another claim based on the ECT.

Intra-EU BITs

In the meantime, the European Commission commenced infringement proceedings against five Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) requesting that they terminate the intra-EU BITs between them.  A letter of formal notice was sent on 18 June 2015.[9] The arguments relied on by the EC refer to: (i) the overlap between the BIT and the TFEU internal market provisions; (ii) discrimination against EU investors on grounds of nationality; (iii) incompatibility of BIT dispute settlement provisions with Article 344 TFEU; and (iv) the existence of a survival clause in the BIT, which further aggravates the current situation. On 29 September 2016, the EC sent a formal request to the five states to terminate their intra-EU BITs.

The press release issued by the EC contains a direct reference to the Micula v Romania ICSID arbitration, a case where Romania was found in breach of the Romania – Sweden BIT due to revocation of economic incentives following Romania’s accession to the EU. The Commission found that by complying with the Award, Romania would be in breach of EU law. On 26 May 2014, the EC issued a suspension injunction against Romania, considering that compliance with the ICSID award would constitute state aid and would be in breach of EU law. On 30 May 2015, the EC issued a decision ordering Romania to recover the compensation paid to the Investors following the ICSID Award. On 4 February 2016, the EC filed an amicus brief before the US Court of Appeals for the Second Circuit, opposing the enforcement of the Award, a matter that is waiting to be heard.

The saga continues before the English courts. On 20 January 2017, an English High Court judge declined to set aside an order for registration of the award. However, the judge stayed the enforcement until the CJEU rules on the annulment application. This decision was upheld by the Court of Appeal, which also allowed an appeal against the High Court’s refusal to request Romania to provide security for damages.[10]

In this context, on 8 September 2016, the President of Romania issued Decree no. 799/2016 for termination of the 22 intra-EU BITs in force. On 27 February 2017, the Parliament enacted Law no. 18/2017, approving the decree. Thus, Romania is in the process of negotiating the termination of the said BITs. Also, 5 January 2017, Poland published a resolution establishing a governmental working group with the mission to review and analyse existing BITs. Poland has roughly 60 BITs in force, out of which 23 are intra-EU. According to the working group, Poland is seeking to terminate intra-EU BITs by joint declarations, whereas a new model BIT will be proposed in order to negotiate agreements with a list of States.

CJEU landmark decision

Regarding the future of ISDS provisions within the EU, the CJEU decision on the EU-Singapore free trade agreement issued on 16 May 2017 is telling. The Court decided that the two areas falling within mixed competence of the EU and MS are in the field of non-direct foreign trade investment and ISDS. There are several implications that this decision leads to.

First, the EU exclusive competence is broader than previously thought and even includes some areas (sustainable development and transport/maritime services) that were regarded as shared competences in the opinion handed down by Advocate General Sharpston on 21 December 2016. Second, any deal struck by the EU with a third state can enter into force under the provisional application regime without ratification by all MS. Third, the ratification will be required only with respect to the two areas of mixed competence. This may lead to the disappearance of the ISDS system as we know it, or, in any case, will lead to a more complicated process of negotiation of these clauses. However, these concerns are not related to the EU trade policy as a whole. The CJEU decision merely clarifies the extent of the powers of the European Commission deriving from the Lisbon Treaty, which appear to split the Singapore agreement into the exclusive and shared competency parts. Finally, this clarification may have implications in the negotiations of the exit deal between United Kingdom and EU, relieving some of the pressure that some governments are planning to exercise on the deal. This may lead to the creation of a broad trade agreement model, which could be used as a starting point in future negotiations of mega-agreements.

Other Treaties Containing Investment Provisions

At a larger scale, States have been taking measures to terminate BITs. Ecuador has been on a streak of measures against ISDS. Starting with its formal withdrawal from the ICSID Convention, Ecuador terminated 10 BITs, following the adoption of the new Constitution in 2008. In 2010, Ecuador announced the termination of BITs with four European States, but no further measures have been pursued. More recently, on 3 May 2017, a proposal to terminate 12 more BITs has been adopted. The official reason invoked is the large number of claims brought against the State. At the same time, Ecuador announced an intention to renegotiate more favourable investment treaties.

India, another State that has faced one of the highest number of claims against it, has abruptly announced its intention to terminate BITs, sending notices to 58 States on 6July 2016, according to a declaration made by the Dutch Government. In certain cases, the protection of the BITs has already ended, or only the protection of new investments is precluded. India is making efforts to align all the BITs with the 2015 Model BIT, which still contains an ISDS clause, and made known its intention to continue negotiating agreements. Also, starting from 2014, Indonesia has been terminating or refrained from renewing all of its BITs.

Furthermore, BITs are not the only instruments targeted. Italy has withdrawn from the Energy Charter Treaty (ECT) as of 1 January 2016, with remaining protection of existing investments until 2036. Since then, the British energy company Rockhopper Exploration was the first to file a claim against Italy, as announced on 23 March 2017. Italy’s withdrawal has raised concerns regarding the future of the ECT, considering that Russia has previously withdrawn, and the EU has been battling the application of the treaty provisions between its MS. Recently, Spain has been resisting numerous claims following the reforms in the renewable energy. After several successful defences, a breach of the ECT was found in Eiser Infrastructure et al v Spain.[11] Considering that the most frequent Respondents are the States that have been terminating treaties recently, perhaps looking at the States currently in the spotlight could be a reliable way to predict their future policies.

Although the future of the announced actions is uncertain, President Trump has given NAFTA an ultimatum. Renegotiations are scheduled for August 2017, after Trump gave Congress the 90 days’ notice.

Conclusion

Although the high number of termination notices appears to announce a grim future for ISDS, a closer look reveals that States are simply reviewing their treaties and seek to preserve the clause in an improved form. Considering that much has been written on the development of the investment protection regime, which has often been portrayed as an arbitrary and non-transparent system of a hybrid or undetermined nature, it is only natural that States, now with a mature understanding of the agreements they are entering into, are developing a new system.

In any case, the attitude towards ISDS is changing, as the UNCITRAL investment report for 2018 finds that the number of investment treaties concluded in 2017-18 was at its lowest and there were more treaties terminated than concluded.[12] It seems that States are generally more preoccupied with ensuring coherence with national policies and regulations, particularly in the field on national security, ownership of land and natural resources.[13]

 

[1] E.g. Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Award of 11 December 2013; Eastern Sugar B.V. v. Czech Republic, Partial Award (SCC No. 088/2004), 27 March 2007; Eureko B.V. v. The Slovak Republic, Award on Jurisdiction, Arbitrability and Suspension (PCA Case No. 2008-13), 26 October 2010.

[2] Joined cases C-205/06 and C-249/06 Commission v Austria and Commission v Sweden [2009] ECR I-1301.

[3] Case C-118/07 Commission v Finland [2009] ECR I-10889.

[4] Case C-264/09 Commission v Slovakia [2011] ECR I-8065.

[5]  Slovak Republic v. Achmea B.V., Case C-284/16.

[6] PCA Case No. 2008-13, UNCITRAL.

[7] Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1, Award of 16 May 2018.

[8] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue of 31 August 2018.

[9] Letters of formal notice are the first stage of infringement procedures under Article 258 of the Treaty on the Functioning of the European Union.

[10] Micula & Ors v. Romania [2018] EWCA Civ 1801.

[11] Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award of 4 May 2017.

[12] UNCTAD, World Investment Report 2018, p. xiii.

[13] Ibid.