Energy Charter Treaty arbitration clause cannot be relied on in intra-EU investment disputes, says EC

Background

In its Achmea judgement (Case C 284/16), which we analyzed in a previous blogpost, the CJEU ruled that investor–State arbitration clauses in bilateral investment treaties (BITs) between Member States are not compatible with EU law.

Notably, the CJEU ruled that the EU Treaties have established a judicial system that is intended to ensure consistency and uniformity in the interpretation of EU law through, for example, the preliminary ruling procedure of Art. 267 TFEU, in order to ensure that the specific characteristics and the autonomy of the EU legal order are preserved.

The CJEU considered this autonomy of the EU legal order to be jeopardized by the arbitration clause in this case for three reasons: (i) firstly, the disputes that the arbitral tribunal was called on to resolve were liable to relate to the interpretation or application of EU law, in particular the freedom of establishment and the free movement of capital; (ii) secondly, the arbitral tribunal was not part of the judicial system of the Member States concerned, so they could not request for a preliminary ruling by the CJEU; and (iii) finally, the decision of the arbitral tribunal would be final, with limited judicial review (only regarding the validity of the arbitration agreement under the applicable law and the consistency with public policy on the recognition or enforcement of the arbitral award).

Contents of the EU Commission Communication

The European Commission concurs with the judgement rendered by the CJEU confirming in its newly adopted Communication that intra-EU BITs lead to a parallel treaty system that overlaps with single market rules and prevents the full application of EU law. Moreover, such BITs confer rights only in respect of investors from one of the two Member States concerned, and therefore , they conflict with the principle of non-discrimination among EU investors within the single market under EU law.

Indeed, investors have the right to transfer capital to other Member States (art. 63 TFEU), including both financial and physical capital (such as machinery, factories, or other production plants), and the right to establish their business in other Member States, set up agencies, branches, or subsidiaries (art. 49 TFEU). They generally also have access to public procurement procedures, with certain types of tenders being subject to harmonised rules on public procurement.

Restrictions to cross-border investments are possible, but they must be justified. This implies that:

• Discrimination on the basis of nationality is in principle prohibited. This also covers indirect discrimination and thus extends to measures that use criteria that are apparently neutral but in practice lead to a result that could be seen as equivalent to discrimination;
• National restrictions have to be justified by legitimate public objectives, such as grounds based on public policy, public security, and public health;
• All restrictions need to comply with the general principles of EU law (proportionality, legal certainty, and legitimate expectations);
• All national restrictions have to comply with the fundamental rights, such as the freedom to conduct a business, the right to property, and the right to effective judicial protection when acting within the scope of EU law; and
• Investors may invoke EU competition rules against national measures.

Finally, the European Commission explains how EU law enables the protection of cross-border investors in the EU using multiple ways and at different levels and stresses its role when it comes to the effective application, implementation, and enforcement of EU law.

The Commission’s Communication also explicitly refers to the Investment Plan for Europe, which aims to create a more predictable, stable, and clear regulatory environment to promote investments, and to the Capital Markets Union (CMU) Action Plan and its Mid-term review as part of this plan.

The EU Commission Communication focuses on intra-EU investment only and therefore does not concern investments made by EU investors in third countries, or vice versa.

Lowered standard of protection against expropriation?

Considering that the Commission’s Communication explicitly states that the ECT arbitration mechanism cannot be applied in a dispute between an EU investor and an EU Member State, one could wonder whether investors still enjoy the same level of protection against expropriation as under the ECT.

Indeed, the ECT provides not only for the fair and equitable treatment of investors but also for the protection against expropriation (art. 13). Notably, the ECT clearly states that “compensation shall amount to the fair market value of the investment expropriated”. As such, it has adopted the full compensation standard.

By contrast, article 1 of the First Protocol to the ECHR does uphold a broad definition of the concept of property, but it contains no explicit reference to a right to compensation in the event of expropriation or other interference. In case-law, the right to compensation has been generally accepted as an implicit requirement, but such compensation needs only to be fair (reasonable). In other words, a Member State could, under its domestic law, grant compensation that might not be at market value if there is an overriding public interest that justifies this.

Within a Belgian context, this risk is, however, low. The Belgian Constitution provides for a fair compensation, to be paid prior to the act of expropriation. This requirement has been interpreted by the Belgian Constitutional Court as implying a full compensation, at market value.

Furthermore and finally, it should be reiterated that even if intra-EU ECT arbitration becomes an unappealing avenue – despite some arbitral tribunals’ continued acceptance of jurisdiction (e.g., Masdar v. Spain, paras. 678-683; see also our previous blogpost), the ECT also provides for dispute resolution before the national courts of ECT States on the basis of Art. 26(2)(a) ECT. This would mean that investors from EU Member States can continue to (try to) rely on the substantive provisions of the ECT in intra-EU cases – of course, taking into account the hierarchy of norms in that particular EU Member State.