Regime interaction in investment arbitration: EU law; From peaceful coexistence to permanent conflict.

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Once upon a time, not so long ago, the two legal orders on the one hand, international investment law (i.e. international investment agreements (IIAs) and the provisions Investor-State Arbitration (ISDS)), and on the other hand, law, coexisted peacefully alongside each other with only occasional contact.

Indeed, that was when EU Member States were responsible for concluding around half of the more than 3,000 IIAs worldwide. This was also the time when the EU and its Member States signed unconditionally to the Energy Charter Treaty (ECT) and its ISDS provisions. This was also the time when the EU actively encouraged its candidate members to sign IIAs to provide additional legal stability and thus attract the foreign investment they desperately needed before joining the EU.

So, while the number of IIAs concluded has continued steadily and, as a result, the number of ISDS disputes to over 1,100 according to UNCTAD’s Investment Policy Centre, significant changes have taken place within of the EU legal order, which brought the harmonious period to a rather abrupt end by ushering in the current state of permanent conflict between these two legal orders.

The journey of creating and escalating a conflict that did not exist before

The first signs of a potential conflict between these two legal orders appeared in oriental sugar case decided in 2007. In this case, the Czech Republic had raised several objections of EU law against the jurisdiction of the arbitral tribunal, which were however all rejected.

It was the 2018 Achmea judgment of the Court of Justice of the EU (CJEU), which justified the signing by EU member states of the termination agreement in 2020 aimed at terminating almost all intra-EU BITs. It should be noted that not all 27 EU member states have signed the Termination Agreement.

At the same time, the European Commission continued to escalate the conflict by intervening in virtually all intra-EU disputes (both based on intra-EU BITs and ECT) amicus curiae before arbitral tribunals as well as before national courts. However, so far the European Commission has failed to convince arbitral tribunals of its position that EU law prevents them from exercising their jurisdiction.

In contrast, the national courts of the EU Member States apply the Achmea judgment, as the Frankfurt court and the German Federal Supreme Court did in Austrian Raiffeisen Bank v. Croatia Case.

Moreover, in an unprecedented act, the European Commission prohibited Romania from fulfilling its international obligations by paying micula as this would supposedly constitute further illegal state aid. The Micula brothers successfully brought an action against the European Commission in the General Court of Justice of the EU. However, the European Commission has appealed, meaning a final decision is still pending. In the meantime, Advocate General Szpunar considered that the judgment of the General Court should be set aside.

More recently, the European Commission launched infringement proceedings against several EU member states (Austria, Sweden, Belgium, Luxembourg, Portugal, Romania and Italy) for failing to terminate their intra-EU BITs.

The spillover effect on ECT

While until the decision of the CJEU Komstroy judgement, one could confidently say that the impact and fallout from the Achmea judgment and post Achmea measures taken by EU member states have remained limited to intra-EU BIT situations, this has now been confirmed by the Komstroy stop that the fallout from Achmea also applies to ECT disputes with an EU connection.

I deliberately refer to cases “have a connection in the EU” because Komstroy did not involve an EU investor or an EU Member State. Furthermore, no question of EU law was involved. The only connecting factor was the fact that Paris was the seat of the arbitration. As a result, Komstroy is not an intra-EU ECT dispute and therefore cannot be equated with Achmea, despite the fact that the CJEU did. Instead of, Komstroy was an extra-EU ECT dispute, and the Komstroy The CJEU judgment does have an extraterritorial impact on the rights and obligations of non-EU ECT contracting parties and, by extension, on their investors.

Clearly, the CJEU has no jurisdiction to diminish the rights and obligations of non-EU ECT Contracting Parties and/or their investors. Therefore, the Komstroy The judgment is an example of the extraterritorial overstepping of the powers of the CJEU.

In any event, the message from the CJEU is clear: ECT-based ISDS arbitration is prohibited within the EU – whether or not it concerns intra-EU disputes.

This radical approach is unsurprisingly in line with the political declaration signed by the majority of EU Member States in 2019, which also extended the Achmea judgment of TCE disputes (see points 1 and 9). However, the political declaration was a legally non-binding declaration, whereas the legally binding termination agreement signed in 2020 explicitly states in the preamble that it does not not apply to ECT. 1) Indeed, the ECT is currently being renegotiated, so EU member states have decided not to deal with the ECT in the termination agreement itself.

Hence the Komstroy judgment even exceeded the intentions of the EU Member States, if one agrees with this author, that Komstroy was actually an extra-EU ECT dispute.

Autonomy, uniformity and supremacy of EU law are principles foreign to public international law

Having described at a very high level the journey of the creation and escalation of the conflict between international investment law and EU law, it is equally important to step back and identify the root cause of this dilemma.

Essentially, it all boils down to protecting the principles of autonomy, consistency, uniformity, full application and supremacy of EU law and, by extension, the ultimate interpretative authority of the CJEU as the highest court on the continent – anytime, anywhere. in all cases. The CJEU referred to these principles in Achmea, Komstroy and PL Holdings as the main reasons for banning ISDS.

This is not the first time that the CJEU has found it necessary to rely on the most fundamental principles of EU law in order to protect its final authority against the influences of public international law. Indeed, a decade earlier in the seminal Kadi case concerning the alleged supremacy of UN Security Council resolutions on the basis of Article 103 of the UN Charter, the CJEU made it clear that the autonomy and supremacy of the EU legal order cannot be affected by any international treaty. In fact, the CJEU has displayed a similar attitude towards the European Court of Human Rights (ECHR) and the Appellate Body of the WTO.

Coming back to investment law, the question that must be asked is: can an international arbitral tribunal ruling on a specific case endanger the autonomy, coherence, uniformity, full application or supremacy of the EU legal order at a discernible level? ? A legal order developed over the past 50 years with a constitutional foundation as strong and a supreme court more powerful than any other court (international or constitutional) in the world. Is the Achmea Where Komstroy have arbitral tribunals ever been able to pose any threat to these fundamental principles of EU law?

Even if, for the sake of argument, we assume that this would have been theoretically possible, Advocate General Wathelet proposed in his Opinion in Achmea the simple solution to avoid this permanent conflict: namely to allow or even oblige arbitral tribunals to seek preliminary rulings from the CJEU in the event that questions of EU law are at stake.

In fact, this is precisely the solution that the Court of Justice of the Andean Community, the equivalent of the CJEU, has adopted. Therefore, this conflict between EU law and international investment law could easily have been avoided.

The simple point is that all of these principles of EU law work very well internally but are alien at the level of public international law where all international treaties are treated equally (except for Article 103 of the Charter of the United Nations). In other words, the horizontal nature of public international law simply clashes with the vertical, supremacy and autonomous legal order of the EU.

The frantic search for alternatives

Clearly, the CJEU, European Commission and Member States will not change their quest to significantly alter or even abolish ISDS arbitration altogether. This quest is already underway in UNCITRAL Working Group III on ISDS reforms with the proposal to replace ISDS with a permanent multilateral investment court (MIC).

As Gary Born warned years ago, winter has arrived for investors and the arbitration community. At the same time, the level of the rule of law is declining – not only in Europe. Thus, investors still need investment protection and effective dispute resolution tools.

So what are the alternatives?

First, the main advice is to stay out of the EU – for both – by structuring investments and using European IIAs. Instead, commercial arbitration could theoretically be an alternative for some investors and for some investments based on contracts with state entities. However, the PL Holdings judgment may have already dashed such hopes in this regard.

Second, the seat of arbitration should preferably be outside the EU to avoid interference from the CJEU and the European Commission.

Third, and for the same reasons, the enforcement and recognition of awards should be sought outside the EU.

Thus, while the EU is rapidly becoming an arbitration-unfriendly jurisdiction, other more arbitration-friendly jurisdictions such as the United Kingdom, Switzerland, Singapore and the United States are increasingly benefiting from these developments.

Nevertheless, despite these potential alternatives, the fact remains that these may only be available to a select group of large investors, whereas for the vast majority of investors, investment protection and access to arbitration have been effectively and definitively restricted by the same EU, which – ironically – in accordance with Article 21(1) TEU:

[…]seeks to advance throughout the world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity , and respect for the principles of the Charter of the United Nations and international principles of law.

To read our coverage of the interaction of regimes in investment arbitration, click here.

This article was first published on the Kluwer Arbitrage Blog here. Written by Nikos Lavranos of the consulting firm NL-Investment

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