International Arbitration in 2022
Investment protection within the European Union
2021 saw the European Court of Justice (ECJ) trying to put a nail in the coffin for intra-EU investment arbitration. What is next for investors?
After the extensively discussed 2018 decision by the ECJ in Slovakia v Achmea, which declared arbitration clauses in intra-EU bilateral investment treaties (BITs) incompatible with EU law, the same court issued two further landmark decisions in 2021. In Moldova v Komstroy, it held that the Energy Charter Treaty (ECT) arbitration clause, when applied intra-EU, is affected by the same incompatibility with EU law. A few weeks later, in Poland v PL Holdings, the ECJ extended the same finding to ad hoc arbitration agreements between EU investors and EU Member States.
In principle, these decisions should have no bearing on intra-EU arbitration proceedings (and resulting arbitral awards) conducted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), given that ICSID constitutes a self-contained regime under international law and is independent from the EU and national legal orders.
It is, however, expected that these two decisions will have a major impact on those ECT intra-EU arbitrations that are not brought under the ICSID Convention and are seated within the EU. These arbitrations, unlike ICSID ones, are grounded on the domestic jurisdiction of their seat and thus subject to EU law and the decisions of the ECJ. National courts at the seat of arbitration within the EU will most likely find themselves bound to apply EU law and the ECJ’s finding of incompatibility. In practice, investors will thus wherever possible avoid commencing proceedings seated in an EU Member State. In turn, this will mean that hardly any non-ICSID arbitration proceedings will be commenced in an intra-EU context.
What’s cooking in investment protection in the EU?
In early December 2021, the European Commission launched infringement proceedings against seven EU Member States, in addition to those initiated in 2020 against Finland and the UK, for their failure to remove intra-EU BITs from their respective legal orders. It will be interesting to see if they will be referred to the ECJ since, although some EU Member States have simply not yet completed the ratification process of the agreement for the termination of intra-EU BITs (Termination Agreement) (Belgium, Italy, Luxembourg, Portugal and Romania), Austria and Sweden did not sign the Termination Agreement at all.
Moreover, further to a public consultation conducted in 2020, the European Commission is expected to shortly adopt a legislative proposal for an intra-EU Investment Protection and Facilitation Framework aimed at “better protecting and facilitating cross-border investments” in light of the “momentum created by the termination of intra-EU [BITs]”. This will also give the EU the opportunity to ensure that this new investment protection legal framework is aligned with the EU’s commitments related to climate change and digitalisation. If ultimately passed as legislation, this proposal could prove to be a game-changer for EU investors.
In parallel, the European Commission is one of the driving forces behind the modernisation process of the ECT. In this context, the European Commission has been advocating both for the establishment of a multilateral investment court that would replace the current arbitration system – also in light of the ECJ judgments discussed above - as well as for the ECT’s alignment with the Paris Agreement with respect to sustainability goals.
Given the blatant necessity of green investment to secure a sustainable future, it is essential for States, and the EU in particular, to recognise that ISDS can help tackle the challenges arising from climate change, notably with respect to the clean energy transition.
What do investors need to consider when investing in the EU?
Against the backdrop of the new developments, intra-EU investors should carefully take into account a number of factors when making their investment decisions to protect against unlawful sovereign intervention:
- Considering possible future adverse measures and regulatory changes: governmental measures with detrimental impact on investments as well as changes to the regulatory and legal framework that were the basis of the investments may be implemented anywhere. EU Member States with high investment-protection standards and good track records in terms of compliance with the rule of law, such as Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands and Spain, have all in the past adopted measures that gave rise to investment disputes.
- Structuring the investment properly: investors should carefully evaluate how to structure their investments in the EU. It may be advisable to invest from an entity located in a jurisdiction outside the EU (eg Switzerland or the UK) with good investment protection treaties in force with the EU State in which the investment is to be made. This is particularly important in countries that are not parties to the ICSID Convention, for example Poland.
Similarly, when deciding to initiate an intra-EU investment treaty claim, investors must equally bear in mind the following:
- Choosing the appropriate forum: it is of utmost importance not to underestimate the relevance of the different forums available to resolve investment disputes. For the reasons discussed above, bringing arbitrations under the auspices of ICSID may be the preferable option.
What appears at first sight to be a conflict of legal norms may be better described as a clash of different perspectives. In pursuit of its objective of strengthening the EU legal order, the EU Commission will most certainly continue to interfere with intra-EU investment arbitrations. We have so far observed that this may span from initiating legal actions before domestic courts attempting to force claimant-investors to drop their investment claims or opening State aid investigations. Investors should therefore be prepared to pursue their legal rights in different forums.
- Tracing assets early on: given the hurdles to be overcome to enforce any intra-EU investor-State awards within the EU, intra-EU investors should consider enforcement outside the EU. Investors should therefore develop effective enforcement strategies from the outset of an investment dispute and identify extra-EU jurisdictions where respondent States hold sufficient enforceable assets. Australia, the UK and the US appear so far to be the preferred options for extra-EU enforcement.
- Keeping the settlement option open: both the effective enforcement mechanism of arbitration awards as well as the potential reputational damage of adverse awards (eg when issuing government bonds) make settlement negotiations still attractive for respondent States. Recently, Germany agreed to pay EUR 1.4 billion to Swedish Vattenfall to settle its nuclear energy dispute brought under the ECT. It has also been reported that the Republic of Croatia settled its disputes with four European banks over the forced conversion into euro of Swiss franc-indexed loans.