AG Szpunar’s opinion in case C-741/19: Preparing for the end of intra-EU investment arbitration under the Energy Charter Treaty?
The investor-state dispute settlement mechanism (ISDS) provided for in art. 26 (2) (c) of the Energy Charter Treaty (ECT) is very relevant for the protection of intra-EU investments.1) In his widely discussed monument Achmee judgment, the Court of Justice of the European Union (CJEU) ruled that the ISDS clause contained in the bilateral investment treaty (BIT) between the Netherlands and Slovakia was incompatible with European Union (EU) law . As recently confirmed by the Higher Regional Court of Frankfurt in Raiffeisen v. Croatia, the Achmee The decision is not specific to the treaty in question but applies to all intra-EU BITs.
This article addresses the almost important question that remains unanswered: whether the Achmee judgment is also applicable to ISDS proceedings under Art. 26 ECT. The legal consequences would be serious for current and future ECT investment claims, particularly with regard to the enforceability of arbitral awards.
On March 3, 2021, Advocate General Szpunar (AG) delivered a remarkable opinion in CJEU case C-741/19 which contributes to this controversy. The GA concludes that Achmee should be extended to intra-EU ECT arbitration. In the following, we will provide an analysis of the opinion (I.) and give an overview of what to expect from future developments in intra-EU investment arbitrage (II.).
I. Analysis of Szpunar’s conclusions in Case C-741/19
An opinion Obiter Dictum
Taking into account the circumstances of the preliminary ruling procedure, the conclusions of the AG on art. 26 ECTs were unexpected. The case concerns the annulment of an ECT investment arbitration award before the Paris Court of Appeal. The underlying dispute between a Ukrainian investor and the Republic of Moldova concerns the purchase of electricity. In 2013, the Parisian court of Komstroy (formerly known as Energy) v. Moldova returned a UNCITRAL award in favor of the investor. Subsequently, the respondent State brought an action for annulment of the award at the seat of the arbitration.
The Paris Court of Appeal asked the CJEU three questions to find out whether the applicant had a protected investment within the meaning of art. 26 (1) ECT. After recognizing that neither the home state of the investor nor the host state concerned are EU member states, the GA asked if the CJEU was competent to rule on the matter ( para. 30 et seq.).
According to the Hermès case (C 53/96, EU: C: 1998: 292, point 32), such competence would exist if the relevant provision were potentially applicable in an intra-EU context (point 37). That s. 26 ECT is potentially applicable in the Union would however depend on its compatibility with Union law (point 47). Consequently, the CJEU would only be competent to render a preliminary ruling if Art. 26 ECT was compatible with EU law. Otherwise, no legitimate interest in deciding on the concept of investment within the meaning of art. 26 (1) ECT in a dispute between two non-EU parties would exist. Thus, the CJEU should take the opportunity to clarify whether its Achmee decision was applicable to ISDS under Art. 26 TEC (para. 48).
The analysis provided by the GA is remarkable and clearly motivated by its result. In view of legal certainty, there is indeed a great interest in clarifying the question. Nevertheless, the reasoning of the GA is wrong. It suggests that any decision on the concept of investment within the meaning of art. 26 (1) ECT would be moot if intra-EU ECT arbitration under Art. 26 (2) (c) ECT was inconsistent with EU law. This is simply not the case, because s. 26 (2) (a) ECT provides for the jurisdiction of the national courts of the host State. Any dispute brought before a national court under art. 26 (2) (a) ECT requires an investment within the meaning of Art. 26 (1) ECT. The notion of investment is therefore independent of the ISDS mechanism. Therefore, with regard to the compatibility between art. 26 TEC and EU law are concerned (paras. 46 to 90), the conclusions of the opinion fall outside the scope of the preliminary ruling procedure and were obiter dictum. The CJEU is therefore not competent to rule in this regard.
Main conclusions of the opinion concerning the intra-EU ECT arbitration
By applying the reasoning developed by the CJEU in Achmee, AG Szpunar concluded that the intra-EU ECT arbitration was incompatible with EU law (paragraph 79). He considered that the ISDS mechanisms provided by the TBI at issue in Achmee and the TEC were undoubtedly comparable (para. 73). Corresponding observations to the Court have been presented by the EU Commission and the governments of Germany, France, Spain, Italy, the Netherlands and Poland (para. 72 ).
First, the GA pointed out that, like the ISDS clause in Achmee, Art. 26 ECT allows disputes to be submitted to arbitration that may be related to the interpretation of EU law. According to art. 26 (6) TEC, the court decides on the disputed issues in accordance with the TEC and the applicable rules and principles of international law. As the CJEU clarified in Achmee, Union law is part of these rules of international law because it must be considered on a double basis: “ as part of the law in force in each Member State and as arising from an international agreement between the Member States ” (Achmee judgment, s. 41). On this basis, the GA concluded that there was a risk that the ECT courts would interpret or apply EU law (paras. 74-75).
Second, the AG considered that a tribunal established in accordance with art. 26 ECT is not part of the EU judicial system (paragraphs 76-78). Consequently, such a tribunal is not empowered to seek the advice of the CJEU on questions of Union law and therefore constitutes a threat to the principle of autonomy of Union law (paragraph 79).
Next, the GA examined whether the Achmee the decision must be distinguished from intra-EU TEC arbitration because the EU itself is a party to the TEC (para. 81 et seq.). On this basis, the arbitral tribunals have so far rejected all jurisdictional objections relating to Achmee. The GA argued that in principle the EU could be subject to the decisions of a tribunal established by an international agreement, provided that the autonomy of EU law is preserved. But given that the ISDS in accordance with art. 26 TEC constitutes such a threat to the EU legal order, as the Union being party to the Treaty cannot remedy the incompatibility with EU law (point 83).
Finally, AG Szpunar considered the comments of the Hungarian, Finnish and Swedish governments. Instead of Achmee, Opinion 1/17 of the CJEU should apply to the assessment of art. 26 ECT (para. 84). The VG rejected these arguments, recalling that Opinion 1/17 concerns ISDS between the EU and third countries, and not intra-EU ISDS procedures (paragraph 88).
Evaluation of results
Basically, we agree with the conclusion of the GA. As we have explained elsewhere, the Achmee The decision is indeed transposable to intra-EU ECT arbitration. The Auditor General’s opinion remains vague, however, as to why Achmee cannot be distinguished by the multilateral nature of the TEC. As recalled by the European Commission and the German government (paragraph 41), the ISDS mechanism within the meaning of art. 26 ECT is bilateral in nature and therefore perfectly comparable to the ISDS clauses contained in intra-EU BITs.
In principle, any multilateral treaty can be divided into bundles of bilateral relations, provided that the breach of an obligation does not prejudice the common interest of all the States concerned. Imagine a situation where receiving State A refuses to arbitrate against investors from State B, but consents to legal action against investors from State C. State A violates s. 26 TCE, but this only affects bilateral relations between States A and B, while the interests of State C remain intact. Therefore, the multilateral nature of the ECT does not hinder the portability of Achmee to intra-EU ECT arbitration.
II. Consequences for intra-EU investment arbitrations
Given its lack of jurisdiction, the CJEU should not address the issue of intra-EU TEC arbitration in a preliminary ruling procedure limited to the notion of investment within the meaning of art. 26 (1) ECT. Since the question is far too important to be clarified by means of obiter dictum, instead, the Court should use the Belgian government’s request to rule on the matter.
We hope that the CJEU will transpose its Achmee decision at the TCE. The incompatibility of intra-EU investment treaty arbitration with EU law must therefore be recognized as a matter of principle. As we have analyzed elsewhere, the practical consequences will be manifold. On the one hand, ICSID tribunals and non-ICSID tribunals sitting outside the EU will remain competent to settle disputes relating to intra-EU investments. Their rewards, however, will be inapplicable, at least within the EU. In contrast, non-ICSID courts sitting within the EU will no longer have jurisdiction to settle such disputes. If they nevertheless render awards in violation of the law of the seat (lex arbitri), these awards will be inapplicable inside and outside the EU.
Is this the end of intra-EU investment arbitrage? Maybe not yet, as suggested by a recent advisory from AG Kokott (discussed here). There are indeed good reasons not to apply Achmee arbitration agreements directly concluded between a State and an investor. Thus, contract-based investment arbitration could continue to be part of the European legal landscape.
This article first appeared on the Kluwer Arbitration Blog here. Written by Julian Scheu, Petyo Nikolov of the International Investment Law Center in Cologne