In encouraging news for businesses looking to invest or trade in Europe, it now appears likely that intra-EU investor protection mechanisms will continue to be valid. The Advocate General of the Court of Justice of the European Union (CJEU) has issued an opinion that such mechanisms, which allow EU businesses that invest another Member State to bring arbitration proceedings against the State in which they have invested, are not incompatible with EU law.
The opinion, which supports the validity of bilateral investment treaties between EU Member States (known as Intra-EU BITs), is expected to be highly persuasive with the CJEU when that Court comes to its ruling on this thorny issue.
What are BITs and ISDS?
Bilateral investment treaties (BITs) are agreements between states which grant investment protection rights to foreign investors. These rights include the ability to refer a dispute with the host state to an independent arbitration tribunal whose decisions are binding upon the state (a type of mechanism known as investor-state dispute settlement (ISDS)).
The controversial history of Intra-EU BITs
Intra-EU BITs have come under sustained attack in recent years by the European Commission and by those countries who have found themselves facing claims by foreign investors. Many of the BITs in question date back to a time when one or both of the state parties were not yet within the EU, and they were intended to encourage foreign investment by offering protection against political or other risks faced by foreign investors. Ironically, it was the European Commission that encouraged the conclusion of such treaties at that time.
However, the Commission now takes a contrary stance, arguing that the rules applicable to all EU Member States offer sufficient protection to all investors in the single market, and that granting specific rights to investors from other Member States amounts to discrimination on the ground of nationality.
The Commission has previously taken infringement proceedings against certain Member States (including Slovakia), asking that they terminate their Intra-EU BITs. The Commission has also intervened in several investment disputes in order to assert its position that such BITs are incompatible with EU law. This is, however, the first occasion on which the CJEU has been asked to address this issue.
Achmea v The Slovak Republic: the background to the AG’s opinion
The immediate background to the AG’s opinion is as follows:
- The ‘investor’ in question is Achmea, a Dutch insurance company whose ‘investment’ consists broadly of its operations in Slovakia via local subsidiary companies.
- Achmea brought an investment treaty claim against Slovakia in October 2008, under the Netherlands-Slovakia BIT, on the basis that legislative changes introduced by the new Slovakian government in July 2006 had effectively destroyed the value of its investment.
- Achmea’s claim was successful, and it was awarded €22.1m in damages (not including interest and costs) by a tribunal made up of three independent, international arbitrators seated in Frankfurt, Germany.
- However, in an attempt to resist enforcement of the award, the Slovakian government argued before the German courts that the BIT was incompatible with various Articles of the TFEU. The German Federal Court of Justice therefore requested a preliminary ruling on this issue from the CJEU.
According to the European Commission, the ISDS provisions in these BITs conflict with the Treaty on the Functioning of the European Union on at least three grounds:
- they discriminate between investors on the ground of nationality;
- they violate the exclusive jurisdiction of EU Member States’ courts and tribunals to refer questions as to the interpretation of EU law to the ECJ; and
- they violate the prohibition on Member States referring disputes as to the interpretation or application of the EU Treaties to other forms of dispute settlement.
The AG’s opinion
Advocate General (AG) Melchior Wathelet disagreed with the European Commission’s objections to the Netherlands-Slovakia BIT. According to the AG, the rights granted to qualifying investors under the BIT, including the ISDS mechanism provided for within it:
- Do not amount to discrimination on the grounds of nationality (and so are not in breach of Article 18 of the Treaty on the Functioning of the European Union (TFEU)). Investors from other EU Member States are entitled to rely on any equivalent investment treaties and, in any event, the BIT does not provide for the host state’s own citizens to receive preferential treatment at the expense of foreign nationals (which would be discrimination).
- Do not violate the monopoly on courts and tribunals of Member States requesting preliminary rulings from the ECJ on questions of interpretation of EU law. On this issue, the AG found that a tribunal constituted to hear a claim under an Intra-EU BIT will qualify as a “court or tribunal of a Member State“, thus satisfying, rather than breaching, Article 267 of the TFEU.
- Do not breach the prohibition on Member States submitting any dispute concerning the interpretation or application of the EU treaties to any method of settlement other than as provided for in those treaties (Article 344 of the TFEU). This is because: i) the prohibition only applies to disputes between Member States (rather than between states and private parties); ii) the specific investment treaty dispute to which this opinion related did not concern questions of EU law interpretation; and iii) allowing investors to rely upon ISDS does not undermine the autonomy of the EU’s legal system.
What will this mean for the EU’s approach to investment treaty arbitration?
It is not just intra-EU BITs that have come under criticism. As we have previously discussed, ISDS provisions have come in for criticism in the context of new free trade agreements such as the EU-Canada (CETA) agreement and the current renegotiation of NAFTA, between Canada, Mexico and the US.
In keeping with its desire to seek alternatives to the ‘traditional’ ISDS mechanisms, on 13 September 2017 the European Commission sought approval from the European Council to start negotiations to establish a new, permanent Multilateral Investment Court. This would have a fixed roster of judges, drawn from across participating states, rights of appeal and greater transparency than traditional ISDS mechanisms.
There have also been calls by some EU Member States to establish a mechanism, separate from the Multilateral Investment Court, to apply to the resolution of disputes between EU investors and Member States. Despite the Commission’s opposition to intra-EU BITs, there is currently no mechanism under EU law for EU investors to bring actions against Member States. If the Commission and other opponents of intra-EU BITs are no longer able to argue that they are invalid, however, this may increase the support for establishing an intra-EU mechanism.
Dispute resolution mechanisms are also likely to be a hotly debated topic in the UK-EU Brexit negotiations. The UK and the EU will need to decide on a mechanism to enforce the withdrawal agreement, and also any future trade agreement as between the UK and the EU. It remains to be seen whether any such trade agreement would also contain protection for investors, and if so, whether that would be on the basis of a traditional investment treaty arbitration mechanism, the Multilateral Investment Court, or something else again.
Osborne Clarke comment
The AG’s opinion does not dispose of the issue and is not binding upon the CJEU. However, the Court will give it significant weight, and it will be surprising if the CJEU’s finding on the preliminary reference is markedly different.
The AG’s position, and the reasoned arguments which support it, will provide a significant shot of confidence for investors and other supporters of ISDS and investment protection more generally.
The debate around investment treaty arbitration is certain to rumble on beyond this case though – within the EU, between the EU and other states (including the UK), and between other countries. Against such uncertainty, businesses should consider what investment protection they might currently benefit from, or might require in order to mitigate the risks of any new investments in other jurisdictions.