Emanuela Matei*

* Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).

Introduction

In June 2015, the European Commission urged the termination of bilateral investment treaties (BITs) within the EU. These agreements were established between Austria, Romania, Slovakia, Netherlands, and Sweden. The Commission’s rationale was that EU membership necessitates Member States to resolve internal matters under EU law, superseding any other legal frameworks. This stance was supported by the Court of Justice of the European Union (CJEU) in Opinion 2/13 regarding the EU’s accession to the European Convention on Human Rights (ECHR).

Both European BITs and free trade agreements (FTAs) commonly incorporate investor-state dispute settlement (ISDS) clauses. This mechanism has raised concerns about potential legal imbalances due to limitations on individuals’ access to the EU judicial system. Additionally, the superior investment protection frequently emphasized in BITs, compared to EU law, raises issues of substantive discrimination.

Recognizing the potential conflict, the Commission, the U.S. government, and most Central and Eastern European acceding states (excluding Hungary and Slovenia) signed a memorandum of understanding in 2003. This agreement aimed to prevent American investors from utilizing BITs to contest regulatory or administrative measures implemented by Member States to comply with EU law. The Commission’s action demonstrated their awareness of the looming clash evident in cases like Micula, Eureko, or Eastern Sugar.

The Micula v Romania case (ICSID Case No. ARB/05/20) centered around the Romania-Sweden BIT, ratified in 2003, four years before Romania’s EU accession. The tribunal awarded damages of roughly EUR 83 million to Micula. The case highlighted the challenges of pre-accession agreements promoting investment in specific disadvantaged regions. Similar to cases like Electrabel, AES, and EDF, Micula exemplified a fundamental incompatibility: the clash between EU state aid prohibitions and maintaining preferential treatment mandated by international investment law under the BIT network.

The Romanian Competition Council, and subsequently the European Commission, determined that the fiscal benefits offered to investors violated EU law. The regime was abolished before Romania’s accession, prompting the ICSID dispute.

The European Commission participated in the ICSID proceedings as amicus curiae, but their arguments were disregarded due to differing interpretations of the legitimate expectations principle. In EU law, state aid measures require notification and approval before beneficiaries can claim legitimate expectation protection.

Conversely, the arbitral tribunal held that investor protection persists even if a state measure infringes on EU law. In 2015, a Commission Decision mandated the recovery of the state aid. Despite already partially fulfilling the awarded damages, Romania faced a dilemma as compliance with the ICSID award contradicted the Commission Decision.

Eastern Sugar Netherlands v Czech Republic (SCC Case No. 088/2004) involved the 1992 Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic. The case demonstrated a typical incompatibility issue: the conflict between EU agricultural quotas and upholding preferential treatment for foreign investors.

The arbitral tribunal interpreted the Vienna Convention on the Law of Treaties (VCLT) and concluded that the BIT and EU law addressed distinct subjects. Therefore, there was no intent to terminate the BIT, rendering it compatible with the EU Treaties. Damages of EUR 25.4 million were awarded for sugar quota losses attributed to the Czech Third Sugar Decree of March 19, 2003.

The Czech Republic argued that post-accession damages fell under the exclusive jurisdiction of the CJEU as per Article 344 TFEU. However, the tribunal noted the European Commission did not initiate infringement proceedings against the Netherlands and the Czech Republic for failing to terminate their BITs, which would be expected if the BIT contradicted Article 344 TFEU. The argument that EU accession implicitly superseded the BIT was rejected. The Commission and the parties’ inaction was interpreted as tacit approval of the BIT’s compatibility.

In Eureko Netherlands v Slovak Republic (UNCITRAL, PCA Case No. 2008-13), the applicable law mirrored that of Eastern Sugar. The case, concerning Dutch insurer Achmea (formerly Eureko), pertained to the 2004 liberalization of the Slovak Health Insurance Sector, which the newly elected government attempted to reverse in late 2006. Slovakia contested the arbitration clause’s compatibility with EU law, while the tribunal reasoned that no EU law provision explicitly prohibited investor-state arbitration, ultimately awarding €22.1 million in damages.

The arbitral tribunal’s 2012 decision affirmed the BIT’s validity and compatibility with EU law, deeming the dispute arbitrable despite the relevance of EU law. Although investors were granted broader rights under the BIT than EU law, the tribunal deemed this disparity lawful. Consequently, the unequal treatment of EU investors appears contingent upon the special protection foreign investors customarily receive under BIT definitions.

Addressing the interpretative monopoly of the CJEU, the Frankfurt Court of Appeals (Oberlandesgericht) ruled on the ISDS clause’s validity in the Netherlands-Slovakia BIT. They determined that Article 344 TFEU’s exclusivity did not encompass investor-to-state disputes. Notably, the German court refrained from requesting a preliminary ruling, even though Article 267 TFEU seemingly necessitates examining Article 344 TFEU’s interpretation.

Intra-EU BITs

The majority of intra-EU BITs emerged from the EU accessions of 2004, 2007, and 2013, with only two agreements between pre-2004 members. Although the incompatibility becomes more evident and problematic during litigation after accession, the conflict between EU law and the BIT philosophy predates these accessions. This begs the question: why wasn’t the legal status of intra-EU BITs addressed more transparently and thoroughly pre-accession?

Furthermore, most BITs include sunset clauses that guarantee continued protection for existing investments. Termination would only impact future investments, as investors can rely on BIT provisions for typically 15-20 years post-termination. Considering the 9-12 year accession process for post-2004 members wasn’t abrupt, the incompatibility with EU law has loomed over new Member States. Therefore, the intra-EU BIT disputes should not be perceived as anomalies; a more proactive approach could have prevented them.

External BITs

The Accession Acts for all thirteen newer Member States stipulate the withdrawal from free trade agreements with non-EU countries upon accession. According to Articles 6(9) and 6(10) of the relevant protocols, if a pre-existing agreement cannot be reconciled with EU law, the Member State must withdraw from it. The Acts outlining admission conditions and procedures from 2003, 2005, and 2012 are unambiguous: acceding states were obligated to renounce any existing trade agreements and adopt EU-negotiated free trade agreements. Shouldn’t a similar obligation have been imposed on extra-EU BITs?

Given the aforementioned sunset clause, termination’s impact is not immediate. Addressing the incompatibility issue earlier could have minimized the timeframe for potential disputes. It’s worth noting that the previous accessions of Sweden, Finland, and Austria also required aligning their BITs with Article 351 TFEU and Article 4(3) TEU obligations, as highlighted in the judgments of Commission v Austria, Commission v Sweden, and Commission v Finland. The potential for conflict is not a new discovery.

The fundamental incompatibility of BITs with EU law raises questions about Regulation 1219/2012’s efficacy in clarifying the legal standing of investment treaties between EU Member States and non-Member States. Instead of prioritizing the overarching incompatibility, the Commission focused on specific instances, such as the Council’s exclusive power to regulate capital movements under Article 64(2) TFEU or Article 75 TFEU. By prioritizing specific EU institutional prerogatives over safeguarding the foundation of EU law, the Commission’s approach appears misaligned.

Moreover, this incompatibility could hinder efforts to create a level playing field for outbound investments. Investors from Member States lacking BITs with countries like Chile, Japan, Korea, Canada, or the USA might face disadvantages and restrictions imposed by relevant FTAs. The complexities stemming from this general incompatibility make these consequences unsurprising.

The reversed logic of the relation between intra- and extra EU BITs

Post-WWII, investment protection, primarily through Friendship, Commerce, and Navigation treaties, served as the primary tool for economic reconstruction. The 1947 signing of the General Agreement on Tariffs and Trade (GATT) marked a shift toward multilateral trade negotiations and broadened the scope beyond tariffs. GATT and the European Economic Community (EEC, now the EU), established in 1957, fostered deeper economic integration among Western nations. These developments effectively replaced Friendship, Commerce, and Navigation treaties, which were perceived as inadequate for promoting trade. Consequently, the BIT network emerged to ensure investment protection outside the purview of GATT and the EU, with the overlap between BIT protection and EU law being unintentional.

As previously mentioned, the Commission, recognizing the potential conflicts between European BITs and EU law, took the initiative to sign a memorandum of understanding with the U.S. government. The MoU specifically addressed areas such as economic freedoms, state aid rules, and obligations imposed by EU treaties concerning third countries.

Article 351 TFEU, governing the relationship between EU law and pre-existing treaties between Member States and non-EU states, mandates Member States to rectify any inconsistencies arising from extra-EU BITs. However, the Treaty of Lisbon doesn’t explicitly address intra-EU BITs. Nevertheless, Article 4(3) TEU might offer some guidance. Interestingly, some arbitral tribunals interpreted Article 351 TFEU as implicitly suggesting a more lenient approach towards intra-EU BITs.

According to arbitral tribunals, by not initiating infringement proceedings or explicitly invalidating intra-EU BITs, EU institutions tacitly endorsed their validity and the jurisdiction of arbitral tribunals in these matters. This distinction between internal and external legal frameworks is crucial because ISDS serves as an alternative, not a replacement, for domestic judicial systems.

General incompatibility with EU law

Legally, the double standards applied to areas defining the core of the EU, such as economic freedoms and the transjudicial dialogue founded on sincere cooperation and mutual trust, directly threaten the EU’s political integrity and the autonomy of its legal system. The parallel international legal order, which isn’t obligated to align its rulings with the CJEU’s interpretation of EU law, risks compromising this autonomy.

Typically, conflicts between international and EU law involve the principles of reciprocity and EU federal principles like autonomy, conferral, and subsidiarity. However, the European BIT system, characterized by asymmetry, aims to shield investors from capital-exporting countries against unpredictable governments in capital-importing nations. This explains the limited number of BITs between pre-2004 EU members and the Commission’s initial focus on BITs signed by acceding states with third countries.

The transition from purely intergovernmental rules to a more federalized agenda has resulted in legal inconsistencies, negative interlegality, and significant costs for involved parties. Nevertheless, the CEE accession of capital-importing countries provided capital-exporting countries in Northwestern Europe with more robust and comprehensive safeguards than any BIT. Justifying the practical significance of BITs within the EU’s legal framework proves difficult.

The sole compelling argument is ensuring the legal certainty of the investment regime within the EU. However, the strength of this argument has only been tested by arbitral tribunals against the VCLT (Articles 59 and 30). The consistent conclusion of conflict of laws assessments is that EU treaties haven’t superseded any BIT. It’s crucial to remember that the Vienna Convention doesn’t bind the Union or all its members; its relevance stems from reflecting customary international law, binding upon EU institutions and comprising part of the EU legal order. This is evident in CJEU judgments like Racke, El-Yassini, and Jany. Consequently, the issue transforms into one of harmonious interpretation, demanding respect for the challenging party’s legal identity.

For instance, the ECtHR adheres to CJEU jurisprudence and vice-versa, even without a binding agreement or formalized hierarchy. The CJEU, in Opinion 2/13, rejected granting the ECtHR (the final adjudicator in human rights matters) the authority to interpret EU law provisions. This reaffirms that interpreting EU law falls solely under the Union’s supranational judicial authority. Therefore, expecting the CJEU to cede power to a non-judicial, temporary entity incapable of seeking preliminary rulings from the CJEU under EU law seems unreasonable and contradictory. This is further emphasized in judgments like Pretore di Salo, Pardini, and Corbiau.

As stated by van Harten, the powers transferred to arbitrators hold immense weight: they ultimately define the boundaries of sovereign authority exercised by any legislative, executive, or judicial body, based on broad standards of foreign investor protection. These decisions, backed by a powerful international enforcement system, can result in substantial public funds being awarded to private entities, typically large companies. Notably, these decisions are subject to limited or no judicial review depending on the chosen arbitration rules.

The possibility of obtaining damages for non-contractual state or supranational liability within the EU is limited. Consequently, in situations like expropriation without compensation, an investor operating under a BIT would receive a higher level of protection, potentially securing significant damages, as highlighted by van Harten. Should this enhanced protection be universally applied, regardless of whether a BIT is involved? The Eureko case sheds light on this issue. The claimant openly admitted to choosing the BIT’s arbitration route over the EU judicial system, with the arbitral tribunal acknowledging the higher level of protection provided under the BIT regime.

T-TIP: Will the cart be placed on the spot?

Regarding the Transatlantic Trade and Investment Partnership (TTIP), the Council believes the new legal framework should include existing investor protections from BITs, and the Commission supports ISDS. Conversely, the European Parliament (EP) opposes ISDS in its current form, advocating for its inclusion in future EU investment agreements only after a case-by-case assessment. Bernd Lange, the EP’s rapporteur on TTIP for the international trade committee (INTA), recently proclaimed the abolishment of extrajudicial arbitration in trade agreements, emphasizing a shift towards a public court system.

Kleinheisterkamp and Poulsen proposed three potential models for investor protection under TTIP. The first, mirroring the 2012 US Model BIT, advocates for no additional rights beyond existing frameworks.

The second model, favored by most European Parliament Committees, aligns with the Australian ISDS model. This approach prioritizes domestic courts, supplemented by state-to-state dispute resolution and structured consultations on investor protection regimes.

The third model reflects the EU’s constitutional structure by primarily entrusting domestic courts to adjudicate the legality of public acts, while incorporating the US approach of binding state interpretations and filtering frivolous claims. Allowing domestic courts to review the legality of state measures enables them to seek preliminary rulings, which is crucial for safeguarding the EU’s legal autonomy.

In this context, flexibility and consistency must coexist. Europe could benefit from studying the United States’ experience with trade agreement authority over the past three centuries. A comparative historical analysis could provide valuable insights. As demonstrated by the inconsistencies surrounding EU-BITs, prioritizing specific elements over addressing the fundamental conflict, while seemingly strategic, could negatively impact the T-TIP negotiations.

Barnard & Peers: chapter 24

Art credit: www.euractiv.com

Notes 

Kenneth J. Vandevelde, ‘A Brief History of International Investment Agreements’ UC Davis Journal of International Law & Policy 12, no. 1 (2005): 157, 165-166.

Christian Tietje and Freya Baetens, ‘The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership’, 26 June 2014, p. 127. Compare with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), p. 14.