The possible enforcement implications of intra-EU ICSID awards in conflict with EU law

Tahmina Sahibli

The relationship of EU law and bilateral investment treaties

Autumn 2015 Master Thesis, 30 HE Credits Master of Laws, 270 HE Credits Supervisor: Professor Pär Hallström

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Table of contents List of Abbreviations ..................................................................................................................... 4  

1   Introduction ............................................................................................................................. 5  1.1   Purpose ........................................................................................................................... 6  1.2   Materials and Methodology ............................................................................................ 6  1.3   Delimitations ................................................................................................................... 8  1.4   Structure .......................................................................................................................... 9  

2   Introduction to investment law ............................................................................................ 10  2.1   Introduction to Investment Treaties .............................................................................. 10  2.2   Investment Arbitral Institutions .................................................................................... 10  2.3   Introduction to ICSID Convention ............................................................................... 11  2.4   Binding force, Recognition and Enforcement of ICSID awards .................................. 12  

3   Investment Treaty Conflicts and European Union Law .................................................... 14  3.1   The Common Commercial Policy of the EU ................................................................ 14  

3.1.1   The New Investment Powers of the EU under the Lisbon Treaty .................... 14  3.2   EU’s Internal Relationship to intra-EU BITs ............................................................... 16  

3.2.1   The MOX Plant Case ........................................................................................ 18  3.3   The Arbitral Tribunals on intra-EU BITs ..................................................................... 21  

3.3.1   Eastern Sugar v. Czech Republic ...................................................................... 22  

3.3.1.1   Conclusions  on  Eastern  Sugar  .........................................................................................  25  3.3.2   Eureko v. Slovakia ............................................................................................ 26  

3.3.2.1   Conclusions  on  Eureko  v.  Slovakia  ................................................................................  29  3.3.3   Electrabel .......................................................................................................... 30  

3.3.3.1   Conclusions  on  Electrabel  ..................................................................................................  31  

4   Possible Implications of intra-EU BITs ............................................................................... 33  4.1   Micula et. al. v. Romania .............................................................................................. 33  

4.1.1   Background ....................................................................................................... 33  4.1.2   Amicus Curiae of the European Commission .................................................. 34  4.1.3   The Award ........................................................................................................ 36  4.1.4   Developments after the issuing of the Award ................................................... 38  4.1.5   The complexity of the Award ........................................................................... 40  

5   Analysis .................................................................................................................................. 42  5.1   EU Law perspective ...................................................................................................... 42  

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5.1.1   Primacy and Supremacy of EU Law ................................................................ 42  5.1.2   The Exclusive Competence of the CJEU .......................................................... 43  

5.2   Public International Law perspective ........................................................................... 44  5.2.1   Article 59 VCLT ............................................................................................... 44  5.2.2   Article 30 VCLT ............................................................................................... 47  

5.3   Micula – Enforcement of the Award ............................................................................ 48  5.4   Concluding remarks ...................................................................................................... 49  

Bibliography ................................................................................................................................ 51  Official documents of the EU ................................................................................................ 51  Official documents of Sweden ............................................................................................... 52  Bilateral Investment Treaties ................................................................................................. 52  Table of case-law ................................................................................................................... 52  Literature ................................................................................................................................ 53  Other sources .......................................................................................................................... 55  

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List of Abbreviations BIT Bilateral Investment Treaty

CCP Common Commercial Policy

CJEU Court of Justice of the European Union

ECT Energy Charter Treaty

EU European Union

FDI Foreign Direct Investment

FET Fair and Equitable Treatment

ICSID International Centre for Settlement of Investment

Disputes

ICSID Convention Convention on the Settlement of Investment disputes

between States and Nationals of Other States 1965

ISDS Investor-state dispute settlement

PCA Permanent Court of Arbitration

SCC Stockholm Chamber of Commerce

TFEU Treaty on the Functioning of the European Union

UN United Nations

UNCITRAL United Nations Commission on International Trade

Law

UNCITRAL Arbitration Rules United Nations Commission on International Law

Arbitration Rules

VCLT Vienna Convention on the Law of treaties 1996

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1 Introduction  Investment arbitrations have become more complicated lately where internal bilateral

investment treaties (BITs) between Member States of the European Union (EU) have created

questions about the relationship of investment treaties and EU treaties. The topic is hotly

debated in academic literature as well within the EU. The European Commission

(Commission or EU Commission) has questioned the BITs concluded between EU Member

States (intra-EU BITs) and their compatibility with EU law. In particular the provision on

investor-state arbitration, enabling investors from Member States party to such BITs to bring

the host state, also party to the BIT, before an arbitral tribunal, is a subject of discussion.

With the newly acquired competence of the EU in the field of Foreign Direct Investment

(FDI), new problems have arisen with regard to intra-EU BITs, some of which I will discuss

in this thesis. The fundamental principles of EU law, such as the principles of primacy and

supremacy are in conflict with the requirement of unconditional enforcement of International

Centre for Settlement of Investment Disputes (ICSID) arbitral awards.1 EU Member States,

who are bound by their obligations under EU treaties, are also bound by their international

obligations they have acquired by the concluding BITs amongst themselves. The Commission

sees this development as undesirable and has started to require its Member States to terminate

their intra-EU BITs, one of them is Sweden.2

The actions of the EU is triggered by the Micula3 award according to which Romania has to

pay compensation to Swedish investors for breach of the Sweden-Romania BIT, a

compensation, if paid, would constitute illegal state aid under EU law. The Commission has

prevented Romania from executing the award, even though the Convention on the Settlement

of Investment Disputes between States and Nationals of other States (ICSID Convention) that

the award is based on and the parties are bound by requires immediate and unconditional

enforcement of the award. Romania is bound by both legal orders, why regardless of which

actions Romania would take, it would either breach its EU law obligations or its international

ones. Thus, the question of the relationship of intra-EU BITs and EU law still remains

unanswered.

                                                                                                               1 See infra section 2. 2 See infra section 4.1.4. 3 See infra section 4.1.

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1.1 Purpose The subject of this thesis is to analyse the possible incompatibilities of intra-EU BITs with EU

law, both out of an EU perspective, based on EU law and the Commission’s view in the issue,

and from an international investment law perspective based on public international law. After

an examination of the relationship between intra-EU BITs and EU law, I will discuss the

circumstances in the Micula case and the possible implications of enforcement of awards that

are in conflict with EU law. Thus I will:

- Present and discuss the relationship between EU law and intra-EU BITs and the

possible incompatibilities of the treaties, out of an EU and public international law

perspective;

- Analyse with basis on the Micula award, the possible implications of enforcement of

intra-EU ICSID awards that are to be unconditionally and immediately enforced, but

are in conflict with EU law, and how the conflict between the treaties could be solved;

and

- Discuss the possible future of intra-EU BITs.

1.2 Materials and Methodology With regard to the aim of this thesis I have applied a de lege lata method, i.e. legal dogmatics

which is the “systematization, description, interpretation and analysis of existing law with the

aim of solving concrete legal problems”.4 I have therefore executed my legal research by

examining the actual wording or text of a legal text, paragraph of a code or statue. Thereafter,

I have tried to find support primarily in decisions by courts and tribunals in order to clarify

what the relevant provisions stand for and the intent behind them.5 Furthermore, I have used

legal literature to clarify existing law and more importantly, bring different points-of view and

arguments of how to interpret and analyse other law-sources.6 I have been careful with

choosing legal literature by authors who are acknowledged and known for their expertise

within international investment law and EU law.

With regard to the EU part of the thesis, focus will be on the Treaty on the Functioning of the

European Union (TFEU), since the EU treaties constitute primary law within the EU, which

                                                                                                               4 Lomio, Wilson and Spang-Hanssen, 2011, p. 230. 5 Lomio, Wilson and Spang-Hanssen, 2011, p. 235-236. 6 Lomio, Wilson and Spang-Hanssen, 2011, p. 243.

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has the highest place in the hierarchy of norms, meaning that they are binding upon the EU

and its Member States, who must comply with them. Primary law, because of its character,

cannot be questioned.7

In principle, the same can be said with regard to the case law of the Court of Justice of the

European Union (CJEU), since contrary to Scandinavian legal system, the EU legal order has

a more Common-law approach. A big part of the EU law is “unwritten” and created by the

CJEU case law. The factual role of the CJEU is therefore not only to interpret and apply EU

law but also to develop EU law. Many times the EU regulations can be vague why the

CJEU’s case law is important in applying the provisions.8 In other words, CJEU’s case law is

of utmost importance for deciding the hierarchy and contents of norms within the EU legal

order, why I will to a large extent refer to and apply CJEU case law in this thesis. The major

example of the importance of the Court is the fact that the Court has through its case law

created the principle of direct effect, i.e. an obligation to Member States to apply EU law to

its fullest within their national authorities and respect the rights given by EU law to their

nationals, and the principle of the primacy of EU law, meaning that Member States must set

aside their conflicting national provisions and apply EU law.9 These principles established

will also be applied in the thesis, as they have become some of the defining characteristics of

EU law and are binding upon the Member States of the EU.

As the reader will notice, the thesis will present the Commission’s standpoint and arguments

quite broadly throughout the thesis. The Commission is an independent institution from

national governments, which represents the European perspective and has exclusive

competence to initiate legislation. It has also a shared competence with the courts of the EU to

enforce EU law.10 With basis on this, and the Commission’s competence within the FDI, I

have given space for the Commission’s view with the aim of presenting the EU view of point.

Furthermore, also Opinions have been used even though they do not confer rights or

obligations, as their purpose it to give guidance on the interpretation of EU law.11

                                                                                                               7 Hettne and Eriksson, 2011, p. 40-42. 8 Hettne and Eriksson, 2011, p. 40 & 49. 9 Lomio, Wilson and Spang-Hanssen, 2011, p. 293. 10 Lomio, Wilson and Spang-Hanssen, 2011, p. 285. 11 Fact Sheets on the European Union, 2015, http://www.europarl.europa.eu/ftu/pdf/en/FTU_1.2.1.pdf. Accessed 2015-12-18.

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As to the public international law part of the thesis, I will primarily focus on the Vienna

Convention on the Law of Treaties (VCLT), which, according to its Article 1, is applicable to

treaties concluded between states and governs their interpretation. The relationship of the

intra-EU BIT and EU treaties is that of successive treaties in public international law.

Consequently, in case of conflicting treaties concluded between states, the Convention’s rules

of conflict between international treaties apply.12 There is differing opinion on this regard in

the literature whether EU law and its treaties are to be treated and considered as international

treaties. I have chosen not to discuss this in my thesis but in accordance with international

tribunals, considered EU treaties as international treaties in the meaning of the VCLT. Even

though Romania has not ratified the VCLT, both Romania and Sweden agreed upon in Micula

that the Convention gives expression to the customary law within the field of interpretation of

treaties.13 Therefore I will examine the VCLT, as the treaties and customary law are

considered to be the most important law sources in public international law.14

Similar to the case of EU law, I will use the case law of a variety of arbitral tribunals in order

to clarify the applicable provisions of the VCLT and find support in how the tribunals have

interpreted and applied them. This is in accordance with my legal method of legal dogmatics,

where case law is used to bring clarity to existing laws.

 1.3 Delimitations As written above, the reader will be introduced to investment law and treaties, but the focus

will remain on intra-EU BITs. The thesis will briefly touch upon extra-EU BITs in order to

clarify EU’s new competence within FDI and to compare in few points extra-EU BITs with

intra-EU BITs. Otherwise, the thesis will not be discussing extra-EU BITs. The reason to this

is because it is not within the purpose of this thesis and the frames of the highlighted problems

and questions. Naturally, only situations where there are conflicts between intra-EU BITs and

EU law, that puts conflicting obligations on the same state, will be discussed.

The thesis will focus on investment arbitrations commenced under the ICSID Convention, and

such awards’ relationship to the EU law. However, also awards from other institutions will be

referred to, mainly in order to examine how different tribunal’s have discussed and interpreted

EU law and their possible impact on intra-EU BITs. The enforcement and recognition of such                                                                                                                12 Hindelang, 2012, p. 183. 13 Dahlquist, 2014/15, p. 189, footnote 21. 14 Lomio, Wilson and Spang-Hanssen, 2011, p. 352.

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awards will not be discussed, since all BIT arbitration awards go under the United Nations

Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New

York Convention), except for the those commenced under ICSID Convention and its

Arbitration Rules.15 Therefore the legal system for the recognition and enforcement of non-

ICSID awards is not within the interest of fulfilling the purpose of the award. Thus, the ICSID

Convention and its rules for recognition and enforcement will remain the focus of the thesis.

Lastly, EU state aid law will not be addressed, since it is not within the frames of this thesis to

examine if the Micula award is in accordance with EU state aid law and whether or not it

should be enforced for that reason. The subject of the thesis would be broader if I would

attempt to answer that question, why I have left out the details of EU state aid regulation.

1.4 Structure Firstly, I will introduce the reader to the subject in the first chapter and give the reader a

general overview of investment law. Moreover, I will present the ICSID Convention and

some its fundamental provisions that are relevant for the object of the thesis. I will move on to

present EU law and its widened competence in the area of FDI and introduce the reader to the

EU’s internal relationship to intra-EU BITs. Furthermore I will present three arbitral awards

commenced between two EU Member States, the Commission’s point of view and the

reasoning of the members of the tribunals. I will continue by presenting the Micula award, the

complexity of the questions arisen therein and the developments since the award was

rendered. I will discuss both the Commission’s and the tribunals’ arguments in the awards

presented and apply them to the Micula award in an attempt to clarify the relationship of

intra-EU BITs and EU law, and which implications a conflict between the two legal orders

can have on the enforcement stage of an arbitral award. Finally, I will conclude by discussing

the future of intra-EU BITs.

                                                                                                               15 Born, 2012, p. 415.

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2 Introduction to investment law  2.1 Introduction to Investment Treaties Traditionally, any disputes between a foreign investor and a host state has been regulated

through public international law, where the investor depended on their own governments

support 16 This has however changed the past 50-70 years. Through the existing of

approximately 3000 investment treaties, most of them bilateral, the investors can anticipate

what level of protection that is offered in the host states where they have interest of investing.

The BITs are concluded and binding between two Contracting States and most of the BITs

share common structure and substance. 17 Some of their elementary characteristics are

protection against discrimination, unfair and inequitable treatment, and expropriation without

compensation.18 Interestingly, the BITs regulate the obligations of the states and do not,

normally, impose any obligations on investors.

Most BITs contain dispute resolution provisions in case a state is suspected for breaching the

BIT. The provision contains the host states consent to an investor from the other Contracting

Party to resolve the dispute by means of investment arbitration without exhausting any local

remedies in beforehand.19 In other words, the BITs contain a binding consent to arbitration of

investment disputes from the two High Contracting Parties, even though there is no

contractual relation between the investor and the sovereign state, except for the eventual

investor contract. Through the possibility of investment arbitration, the BIT enables the

investors to avoid national courts of the host states and the sensitive question of their

objectivity. There are exceptions, however, in case of disputes about taxation and government

procurement, where the investor has limited chance of bringing the host state before an

arbitral tribunal.20

2.2 Investment Arbitral Institutions There are a number of different arbitration institutions to choose amongst. The institution that

is most commonly used is undoubtedly ICSID, which is a part of the World Bank Group

                                                                                                               16 Dalhquist, 2014/15, p. 184. 17 Born, 2012, p. 414. 18 Bilateral Investment Treaties- how they work, Kommerskollegium [National Board of Trade], p.2. Available at: http://www.kommers.se/Documents/dokumentarkiv/publikationer/2013/rapporter/report-bilateral-investment-treaties.pdf. Accessed 2015-10-20. (Kommerskollegium). 19 Strik, 2014, p. 241. 20 Born, 2012, p. 415.  

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based in Washington, and its rules of arbitration. Also United Nations Commission on

International Trade Law (UNCITRAL) and the Arbitration Institute of the Stockholm

Chamber of Commerce (SCC) are popular institutions.21 The investors are bound to choose

the institution that is agreed upon in the BIT. All BIT arbitral awards are subject to the New

York Convention and general national arbitration legislation, except for awards commenced

under the ICSID Arbitration Rules.22

2.3 Introduction to ICSID Convention The ICSID Convention is a multilateral treaty that regulates the procedural framework for the

settlement of investment disputes. The convention does not mention any substantive rules of

investment protection. Important to notice is that, Contracting States do no consent to

arbitration simply by becoming a member of the ICSID Convention.23 As mentioned above,

through their BITs, states can give their consent to arbitration under the ICSID Convention.

This consent is binding and any investor who is a national of another Contracting Party can,

by means of these provisions, commence arbitration towards the host state.  

The convention limits its jurisdiction to legal disputes emerging from an investment. The

dispute must arise between a Contracting State and an investor from another Contracting State

to the Convention. Neither “legal dispute” nor “investment” is defined by the Convention.

The tribunals have interpreted the term “investment” as a contribution of money or other

assets, during a longer period that sustains some element of risk and contributes to the

development of the host state.24 Some guidance can be found in most BITs that contain a

general phrase on the definition of the term and several groups of illustrative categories. For

example in the US-Argentina BIT, an investment includes both tangible and intangible

property, i.e. both a piece of land and intellectual property can be an investment.25 According

to Dolzer and Schreuer, the negotiating history of the ICSID Convention speaks for a party-

defined approach of the term, which means that an investment is interpreted as those laid

down by the parties in a BIT or an investor contract.26

Regarding “legal dispute”, the International Court of Justice has interpreted the term as “a

disagreement on a point of law or fact, a conflict of legal views or interests between parties”.

                                                                                                               21 Kommerskollegium, p. 5. 22 Born, 2012, p. 415. 23 Dolzer, and Schreuer, 2012, p. 13. 24 Born, 2012, p. 420. 25 Dolzer, and Schreuer, 2012, p. 63. 26 Dolzer and Schreuer, 2012, p. 74.

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This definition is also adopted by ICSID tribunals. According to Schreuer, the dispute must be

a clearly identified issue, which is not merely an academic one, and be within the immediate

interest of the parties.27

The tribunals are most commonly composed of three arbitrators. The parties appoint one

arbitrator each and the president of the tribunal jointly. If the parties do not agree after 90

days, they may request the Chairman of the Administrative Council to appoint the arbitrators,

who, after consulting the parties, selects the tribunal from ICSID’s list of arbitrators. The

members of the tribunal cannot be nationals of the state or co-nationals of the investor party to

the dispute.28

2.4 Binding force, Recognition and Enforcement of ICSID awards ICSID awards are not subject to annulment by national courts but they have their own system

for review of awards under Article 52 of the ICSID Convention. The Article provides a party

the right to challenge an award before an ad hoc annulment committee, which is appointed by

ICSID. The annulment committee may only remove the original decision without replacing it

in contrast to appeals, which can result in replacement of the award by a new one. After an

annulment the parties may resubmit the dispute to a new tribunal. The parties can request an

annulment of the awards and not single decisions.29

The five exhaustive grounds on which either party can request an annulment demonstrate the

exceptionality of an annulment under the ICSID Convention. According to Article 52 (1) of

the ICSID Convention, parties may request annulment on at least one of the following

grounds; (a) improper constitution of the Tribunal, (b) manifest excess of power, (c)

corruption of a member of the tribunal, (d) a serious departure from a fundamental rule of

procedure, or (e) failure to state reasons the award is based on.30

What significantly distinguishes ICSID awards from other investment awards is their binding

force and enforcement, which is regulated in Articles 53 and 54 of the ICSID Convention.

Article 53 excludes the possibility for a party that is dissatisfied with the award, to turn to any

other remedy to seek relief for the same claim because of the issue of res judicata. According

to Article 53(1) of the ICSID Convention:                                                                                                                27  Schreuer, et.al., 2009, p. 92-95.  28 Dolzer and  Schreuer, 2012, p. 279; ICSID Convention Article 37 (2).  29 Dolzer and  Schreuer, 2012, p. 301. 30 ICSID Convention, Article 52.

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The award shall be binding on the parties and shall not be subject to any appeal

or to any other remedy except those provided for in this Convention. Each party

shall abide by and comply with the terms of the award except to the extent that

enforcement shall have been stayed pursuant to the relevant provisions of this

Convention.

No national court of any Contacting State is permitted to review the tribunal’s jurisdiction,

procedural decisions or other action, examine if the award is substantively correct or consider

objections based on ordre public (public policy).31 In conclusion, once the award is rendered

and the possibility of annulment by ad hoc committee has been used, the same matter cannot

be brought before another judicial forum such as national or international courts or another

tribunal. The exception is in case where the ICSID tribunal renders an award where it finds

that it does not hold jurisdiction over the dispute in matter. In such case, the party may take

the dispute to another forum.32

The immediate and unconditional recognition and enforcement of ICSID awards is regulated

in Article 54 (1) of the ICSID Convention, which states the following:

Each Contracting State shall recognize an award rendered pursuant to this

Convention as binding and enforce the pecuniary obligations imposed by that

award within its territories as if it were a final judgment of a court in that State.

Recognition is the preliminary step before an enforcement or execution. By recognizing the

award the states are formally confirming its authority and its legal consequences. The task of

the national courts or any other authority is limited only to verifying the authenticity of the

ICSID award.33 In conclusion, recognition of an ICSID award may not be refused on grounds

of national law. The recognition and enforcement of ICSID awards may be sought in any

Contracting Party to the ICSID Convention, which gives the parties the opportunity to seek

enforcement at the forum State in which territory the assets are available.34 The Member

State’s obligation to enforce is restricted to the pecuniary obligations imposed in the award.35

                                                                                                                   31 Dolzer and  Schreuer, 2012, p. 310-1. 32 Schreuer et al., 2009, p. 1105 – 1106. 33 Schreuer et al., 2009, p. 1128-29. 34 Schreuer et al., 2009, p. 1124. 35 Scheuer, et.al., 2009, p. 1136.

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3 Investment Treaty Conflicts and European Union Law

The closely linked principles of direct effect and primacy of EU law are some of the defining

characteristics of EU law. According to the principle of primacy, EU law overrules any

national law that is inconsistent with Union law, which means that national authorities, such

as the legislators or national courts, are prohibited to apply domestic laws that are inconsistent

with EU law. National courts confronted with this issue must therefore set aside their

conflicting national norms and apply the EU law while the national legislators are required to

modify their laws in order to make them compatible with their obligations under EU law.36

3.1 The Common Commercial Policy of the EU

3.1.1 The New Investment Powers of the EU under the Lisbon Treaty By the entry-into-force of the Treaty of Lisbon 37 (Lisbon Treaty) on 1 December 2009, EU

was granted exclusive competence over foreign direct investment (FDI), as a component of its

Common Commercial Policy (CCP).38 The exclusivity meant that the power to negotiate and

conclude investment treaties with third countries (extra-EU BITs) shifted from the Member

states to the EU, more specifically, the European Commission.39 Thus, if a Member State

wishes to enter into a new BIT with a non-EU state, the Commission can give authorization to

such Member State to do so.40

The Union has also passed Regulation 1219/201241 (Regulation) establishing transitional

arrangements for bilateral investment agreements between Member States and third countries,

according to which Member states may keep their existing extra-EU BITs in force until they

are replaced by treaties concluded by the EU.42 The Council of the European Union has

emphasized that the new legal framework provided to the EU by the Lisbon Treaty should not

negatively affect the protection and guarantees investors enjoy under the existing agreements

                                                                                                               36 de Witte, 2011, p. 340-341. 37 Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, Dec. 13, 2007, 2007 O.J. (C 306) 1 of 17 December 2007. 38 Reinisch, 2014, p. 114. 39 Ghouri, 2015, p. 149. 40 Stanič, 2015, p. 33. 41 Regulation (EU) No1219/2012 (2012) OJ L 351, of the European Parliament and of the Council of December 12 2012, establishing arrangements for bilateral investment agreements between Member States and third countries, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:351:0040:0046:EN:PDF. 42 Wilske, and Markert et al., 2015, p. 499.

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since the existing BITs of the Member States with third parties are recognized as the primary

source of protection for European investors abroad.43

Articles 206 and 207 of the TFEU regulate EU’s new competence to conclude agreements

with third countries with respect to trade and FDI. After the Lisbon Treaty, Article 206 TFEU

is as follows:

By establishing a customs union in accordance with Articles 28 to 32, the Union

shall contribute, in the common interest, to the harmonious development of

world trade, the progressive abolition of restrictions on international trade and on

foreign direct investment, and the lowering of customs and other barriers.

[emphasis added]

Article 207(1) TFEU regulates EU’s competence in the field of CCP and adds FDIs, since the

entering into force of the Lisbon Treaty, to the list of EU’s treaty-making powers:

The common commercial policy shall be based on uniform principles,

particularly with regard to changes in tariff rates, the conclusion of tariff and

trade agreements relating to trade in goods and services, and the commercial

aspects of intellectual property, foreign direct investment, the achievement of

uniformity in measures of liberalisation, export policy and measures to protect

trade such as those to be taken in the event of dumping or subsidies. The

common commercial policy shall be conducted in the context of the principles

and objectives of the Union’s external action.

As follows from the Articles there is no definition of the scope and application of EU’s new

competence, i.e. the term of FDI. The Commission defines FDI as to “include any foreign

investment which serves to establish lasting and direct links with the undertaking to which

capital is made available in order to carry out an economic activity”.44 The Commission

interprets EU’s competence as not being limited to access and admission questions as some                                                                                                                43 Weiss and Steiner, 2013, p. 366; Council of the European Union, ‘Conclusions on a Comprehensive European International Investment Policy’, 2041st Foreign Affairs Council Meeting, Luxembourg, 25 October 2010, para. 9.  44 Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, ’Towards a Comprehensive European International Investment Policy’, COM (2010) 343 final, p 2.

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argue, but argues that it comprises both pre-establishment questions and post-establishment

investment protection, allowing it to conclude treaties that include the traditional substantive

obligations of International investment agreements and state-to-state or investor-to-state

dispute settlement mechanism (ISDS). In such a system, EU would replace its Member States

as the respondent in the potential dispute.45

The scope of FDI is not the only question that remains to be solved, but also the future of

intra-EU BITs. In doctrine, the latter has been the focus of discussions. Stanič interprets the

new EU competence as that the already existing BITs of the Member States with third

countries will progressively be replaced by new agreements of the EU “relating to the same

subject matter”.46 As opposed to Stanič, Ghouri argues that even though the purpose of EU’s

competence within FDI is to create a uniform and wide foreign investment regime, the

competence of the European Commission seems to concern new agreements only and appears

not to empower the Commission to renegotiate or, more importantly, terminate the already

existing BITs of Member States.47 In other words, Ghouri does not consider that EU’s new

competence allows it to terminate the Member States BITs, inclusively their intra-EU BITs.

There seems to be uncertainties amongst the Member States as well. In a report by the

Economic and Financial Committee of 2008, it is emphasized that the majority of Member

States are in favour of maintaining their intra-EU BITs in force, especially with regard to the

investor-state arbitration provision. However, the Commission is also supported by some

Member States who have declared an intention of terminating their BITs.48

3.2 EU’s Internal Relationship to intra-EU BITs Since the new EU competence, the issue of intra-EU BITs and their compatibility with Union

law has arisen. The focus of the debate has been the intra-EU BITs relationship to the

fundamental freedoms of EU law and the exclusive jurisdiction of the CJEU to interpret EU

law under Article 344 TFEU.49 In the Commission’s view, the existing intra-EU BITs are

incompatible with EU-law and may have to be terminated, which the Commission and some

Member States have argued before various investment tribunals. However, the tribunals have

                                                                                                               45 Reinisch, 2014, p. 118. 46 Stanič, 2015, p. 33; See also recital 5 to the Regulation (EU) NO 1219/2012 (2012) OJ L 351. 47 Ghouri, 2015, p. 151. 48 Weiss and Steiner, 2013, p. 372. 49 Weiss and Steiner, 2013, p. 367.

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not shared the Commission’s view and in stead declared the on-going validity of intra-EU

BITs.50

As stated above, Member States of the EU cannot act in a way that might be a breach of their

obligations under the EU law and policy.51 According to Article 351 TFEU, Member States

have an obligation to remove incompatibilities between agreements concluded before their

accession to the EU and the TFEU.52 Some of the provisions of the Member States BITs have

been considered to be incompatible with the Member States obligations under the TFEU. This

issue has been addressed by the CJEU in cases against Austria, Sweden and Finland53 where

the Court found that the Member States had violated Article 351 TFEU by not removing

provisions of their extra-EU BITs that were inapplicable with EU law.54

According to Weiss and Steiner, although these cases concern extra-EU BITs, the conclusions

of the Court could be mutatis mutandis applicable to intra-EU BITs since the only difference

is the legal consequences that arise out of the incompatibility of the treaties. Weiss and

Steiner argue thereby that in case of extra-EU BITs, the legal consequence would be the

removal of the provisions pursuant to Article 351 TFEU while in case of intra-EU BITs it

would be the automatic inapplicability of the contested provisions.55

Regarding intra-EU BITs, the Commission has expressed concerns about the application of

some of its provisions, which might lead to a more favourable treatment of investors who are

nationals of Member States party to the BIT by excluding the same protection to investors

from other Member States. In other words, the rights granted exclusively to investors of

Member States party to the BIT would not be given to investors from other Member States

who are not party to the BIT. This would consequently discriminate against investors from

other Member States, which would not be in accordance with the relevant Treaty provisions.

This concern is articulated particularly regarding the right of investors to international

investment arbitration.56

                                                                                                               50 Reinisch, 2014, p. 149. 51 Bermann, 2012, p. 440. 52 Importantly, the Article applies only to pre-accession treaties and does not extend to post-accession ones. 53 Case C-205/06, Commission v. Austria; Case C-249/06 Commission v. Sweden; Case C 118/07, Commission v. Finland. 54 Weiss and Steiner, 2013, p. 358-359. 55 Weiss and Steiner, 2013, p. 367-368. 56 von Krause, Christopher, ’The European Commission’s Opposition to Intra-EU BITs and its Impact on Investment Arbitration’, Kluwer Law International Arbitration Blog, 28 September 2010, available at:

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Not only does the Commission consider application of intra-EU BITs as a potential risk to

create inequality between EU citizens, it has also voiced concerns about intra-EU BITs to

hinder a harmonized development of EU law. The Commission has expressed these concerns

in some cases, which I will give more detail about below, where the source of this concern

seems to be the potential risk of an arbitration taking place without the relevant questions of

EU law being submitted to the CJEU.57

3.2.1 The MOX Plant Case According to Article 344 TFEU, “Member States undertake not to submit a dispute

concerning the interpretation or application of the Treaties to any method of settlement other

than those provided for therein”. Concerns have been expressed from the CJEU regarding the

implications of other dispute settlement institutions and their possible threat to the autonomy

of EU law and the Court’s exclusive power to interpret EU law. The claim is not only based

on the exclusive competence of the Court but also the explicit prohibition for Member States

to choose other fora to settle their EU-related disputes.58

These concerns were voiced in the MOX Plant59 case, amongst others, where the Commission

brought infringement proceedings against Ireland that had initiated arbitral proceedings

against UK under the UN Law of the Sea Convention. The Court found that the issues raised

in the arbitration was within the EU competence, why it was a question of interpreting and

applying EU law, which the Court had exclusive jurisdiction to do.60

Thus, the Court affirmed its own exclusive jurisdiction to interpret EU law by asserting that:

an international agreement cannot affect the allocation of responsibilities defined

in the Treaties and, consequently, the autonomy of the Community legal system,

compliance with which the Court ensures /…/ That exclusive jurisdiction of the

Court is confirmed by Article [344 TFEU], by which Member States undertake

not to submit a dispute concerning the interpretation or application of the EC

                                                                                                                                                                                                                                                                                                                                                         http://kluwerarbitrationblog.com/2010/09/28/the-european-commissions-opposition-to-intra-eu-bits-and-its-impact-on-investment-arbitration/. Accessed 2015-12-03. 57 Weiss and Steiner, 2013, p. 371. 58 Reinisch, 2014, p. 152. 59 Case C-459/03, Commission v. Ireland (MOX Plant). 60 Reinisch, 2014, p. 152-153.

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Treaty to any method of settlement other than those provided for therein /…/”.61

The act of submitting a dispute of this nature to a judicial forum such as the

Arbitral Tribunal involves the risk that a judicial forum other than the Court will

rule on the scope of obligation imposed on the Member States pursuant to

Community law.62

The decision implies that in cases where there are questions about application and

interpretation of EU law, the arbitration tribunal is not entitled to decide if or to what extent

EU law is to be applied.63

There is a difference of opinion regarding the applicability of the MOX Plant case to the

situation of investment arbitrations commenced under intra-EU BITs. Reinisch argues that

MOX Plant and the Article 344 TFEU that it is based on, refers to inter-state disputes why

they should not affect investor-state arbitration since such arbitration would not be regarded

as incompatible with the Court’s exclusive jurisdiction.64 Weiss agrees that in contrast to

investment arbitration, the dispute in MOX Plant is between two Member States and not

between an investor and a Member State, but admits that the Court would not have a different

approach to arbitrations commenced under BITs.65

Clodfelter finds Reinisch statement regarding the inapplicability of the provision on investor-

state arbitration under intra-EU BITs, as incorrect. Even though MOX Plant concerns a

dispute between two Member States, Clodfelter argues that there is no support for claiming

that the Article 344 TFEU itself would be limited to inter-state disputes. In stead, Clodfelter

suggests that the absence of limitation in the Article could mean that any submission by a

Member State, regardless of who its counterpart is, to a dispute settlement other than the

CJEU would constitute a breach of the Article. The mere fact that the Article does not apply

to disputes between private parties does not mean that it is also inapplicable to disputes

between a Member State and a private party.66 Clodfelter does not mention, however, that

only a Member State is entitled to submit a dispute to the Court according to Article 344

TFEU, not investors.                                                                                                                61 MOX Plant, para. 123. 62 MOX Plant, para. 177. 63 Weiss and Steiner, 2013, p. 368. 64 Reinisch, 2014, p. 153. 65 Weiss and Steiner, 2013, p. 368. 66 Clodfelter, 2014, p. 179.

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Reinisch does not exclude, that the CJEU might find ISDS proceedings as incompatible if

they deal with questions of EU law. In order to avoid such incompatibilities with EU law,

Reinisch refers to the European and Community Patents Courts Opinion67 where the CJEU

was asked to rule on the compatibility of the draft agreement, establishing European and

Community patents courts, with the EU treaties. In its opinion, the CJEU seems to suggest

that the cause of incompatibility is the patent courts’ lack of access to preliminary reference

proceedings.68

Even if investment tribunals would allow preliminary rulings, such a system would cause new

problems with regard to Article 267 TFEU, which governs the right and obligation of any

court of tribunal of a Member State to request the Court to give a preliminary ruling in a

dispute. In the Nordsee69 case, the Court stated that commercial arbitral tribunals could not

qualify as tribunals entitled to request preliminary rulings in the meaning of Article 267

TFEU, since they were a form of private and not state dispute settlement. Reinisch argues that

the same could be applied to investor-state arbitral tribunals since it might be hard to prove

the link of such a tribunal to a Member State, despite the argument that one could regard

treaty-based arbitration as arbitration based on national law.70 Consequently, since investment

tribunals do not exercise public authority on behalf of Member States, it seems highly

unlikely that they could be entitled to request a preliminary ruling under EU law.

Clodfelter agrees that the investor-state tribunals are not courts or tribunals of Member States

as required by Article 267 TFEU. Contrary to Reinisch, however, Clodfelter argues that the

cause of CJEU’s concerns was the mere fact that such patent courts, by interpreting and

applying EU law, would deprive national courts of Member States of their jurisdiction over

the same disputes and thereby their ability to refer questions of EU law to the CJEU.

Clodfelter argues that the same is applicable to investor-state arbitral tribunals commenced

under intra-EU BITs, since they deprive Member States’ domestic Courts of their named

rights to request CJEU for preliminary rulings and concludes that the jurisdiction given to

tribunals under intra-EU BITs are incompatible with the exclusive jurisdiction of the CJEU.

                                                                                                               67 Opinion 1/09, European and Community Patents Courts, CJEU, 2011 ECR I-01137, para 83. 68 Reinisch, 2014, p. 155. 69 Case 102/81, Nordsee Deutsche Hochseefisherei. 70 See Reinisch, 2014, p. 156.

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Clodfelter concludes, thus, with basis on Opinion 1/09, that it is doubtful that the CJEU would

consider such tribunals as compatible with Article 267 TFEU.71

Regardless of which of these views one supports, the CJEU seems to be concerned about

being the only interpreter of EU law, through both direct interpretation and preliminary

rulings. This system would therefore be threatened by any other dispute settlement that would

interpret EU law without referring the questions to the CJEU.

3.3 The Arbitral Tribunals on intra-EU BITs There have been several investment arbitrations under intra-EU BITs, against EU Member

States that have implemented obligations under EU law into their domestic regulations, which

has arguably violated their obligations under the BIT, causing the investor to commend

arbitral proceedings. This is especially the case for new EU Member States that amend their

national laws in order to accede to the EU. The respondent states as well as the Commission

have argued for the termination of EU Member States’ intra-EU BITs after the Member States

accession to the EU. Articles 59 and 30 VCLT are recurring in this debate. Article 59 VCLT

concerns the termination of an entire treaty:

A treaty shall be considered as terminated if all the parties to it conclude a later

treaty relating to the same subject-matter and:

(a) it appears from the later treaty or is otherwise established that the parties

intended that the matter should be governed by that treaty; or (b) the provisions

of the later treaty are so far incompatible with those of the earlier one that the

two treaties are not capable of being applied at the same time.

Article 30 VCLT, on the other hand concerns the priority between particular provisions of an

earlier and later treaty and states that:

1. Subject to Article 103 of the Charter of the United Nations, the rights and

obligations of States parties to successive treaties relating to the same subject-

matter shall be determined in accordance with the following paragraphs.

2. When a treaty specifies that it is subject to, or that it is not to be considered as

                                                                                                               71 Clodfelter, 2014, p. 180-181; See also Opinion 1/09 supra note 54, para 89.

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incompatible with, an earlier or later treaty, the provisions of that other treaty

prevail.

3. When all the parties to the earlier treaty are parties also to the later treaty but

the earlier treaty is not terminated or suspended in operation under article 59, the

earlier treaty applies only to the extent that its provisions are compatible with

those of the latter treaty.

4. When the parties to the later treaty do not include all the parties to the earlier

one:

(a) as between States parties to both treaties the same rule applies as in

paragraph 3; (b) as between a State party to both treaties and a State party to

only one of the treaties, the treaty to which both States are parties governs their

mutual rights and obligations.

As said above, investment tribunals have rejected that intra-EU BITs would have become

ineffective because of EU’s new competence within FDI, and maintained their BIT-based

jurisdiction. Some of the case law and the approach taken by tribunals will be examined

closely below.

3.3.1 Eastern Sugar v. Czech Republic The question of the validity and inapplicability of intra-EU BITs with TFEU was first raised

in Eastern Sugar B.V v. Czech Republic72 (Eastern Sugar). The arbitration proceedings were

initiated by a Dutch company against Czech Republic claiming that the Czech Republic had

violated the fair and equitable treatment (FET) standard under the Czech-Dutch BIT, by

enacting a series of three pricing decrees. Czech Republic argued however, that enacting the

decrees was a mandatory requirement under the EU law, more specifically the requirement of

non-discrimination under the current Article 18 TFEU, and that its obligations under EU law

had priority over its obligations under investment treaties.73

By referring to Article 59 VCLT, the Czech Republic argued that the treaties address the same

subject matter and that the concerned BIT was inapplicable since Czech Republic’s accession

                                                                                                               72 Eastern Sugar B.V. (Netherlands) v. The Czech Republic, Partial award, Stockholm Chamber of Commerce (SCC) no. 088/2004 (Mar. 27, 2007). The arbitration was conducted under the UNCITRAL Rules. 73 Bermann, 2012, p. 429.

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to the EU in 2004.74 The Czech Republic quoted a January 2006 letter from the Commission

stating that “where the EC Treaty or secondary legislation are in conflict with some of these

BITs’ provisions /…/ Community legislation will automatically prevail over the non-

conforming BIT provisions” and “intra-EU BITs should be terminated in so far as the matters

under the agreements fall under Community competence”.75 However, the Commission also

stated: “the effective prevalence of the EU acquis does not entail, at the same time, the

automatic termination of the concerned BITs or, necessarily, the non-application of all their

provisions” and meant that the Member States would have to strictly follow the relevant

procedures in order to terminate their BITs.76

Thus, the dispute settlement procedure under the BIT could not be applied by the Member

States, for facts occurring after their accession to the EU, if the matter at hand was within the

EU competence. The dispute should therefore be resolved under the EU law, based on the

principle of prevalence of EU law from the date of a Member States’ accession. However, the

arbitration clause of the BIT could be considered to be in force until the formal termination of

the treaty, if the facts of the dispute occurred before the Member States accession to the EU.

In such case, arbitral tribunals must consider and respect the primacy of EU law.77

In a note from the Commission to the Economic and Financial Committee, cited in the award,

Commission argues that the dispute settlement mechanism provided by a BIT “could lead to

arbitration taking place without relevant questions of EC law being submitted to the ECJ, with

unequal treatment of investors among Member States as a possible outcome” and encourages

the Member States to “formally rescind such agreements.78

By referring to Commission’s note, the Czech Republic argued that their obligations under the

BIT would be superseded by obligations under EU law as of the date of the Czech Republic’s

accession to the EU.79 Czech Republic argued, with basis on Commission v Italy, “a member

state may not exercise rights granted under an earlier agreement to the extent that such

exercise conflicts with obligations under EEC treaty80”. Thus, for facts occurring after a

                                                                                                               74 Eastern Sugar, paras. 100-101. 75 Eastern Sugar, para. 119. 76 Eastern Sugar, para. 119. 77 Burgstaller, 2009, p. 185; Eastern Sugar, para 119. 78 Eastern Sugar, para. 126. 79 Eastern Sugar, para. 126. 80 The EEC treaty, which after the coming into force of the Lisbon Treaty became the TFEU.

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Member States accession to the EU, the BIT would not be applicable for matters that are in

conflict with obligations under the TFEU.

For these reasons, the Czech Republic asked that the tribunal would consider the BIT as

terminated why claimant’s investments in Czech Republic would be governed by EU law.

Since the respondent considered the BIT inapplicable, they argued that the tribunal lacked

jurisdiction to hear the case if it related to the time after the respondent’s accession to the

EU.81 Finally, the Czech Republic argued that the CJEU holds interpretive monopoly82 why

the tribunal should refer the matter to the Court.83

The tribunal found the third out of three decrees to be a breach of the FET standard and

argued that the principle of non-discrimination under Article 18 TFEU could not justify the

breach of the BIT, especially since the principle did not require the enactment of such

decrees.84 The tribunal asserted that in order for Article 59 VCLT to be applicable, the

successive treaties must deal with the same subject matter and be incompatible. Even though

the tribunal recognized some commonality between the treaties, some of the most

fundamental provisions provided by a BIT, such as the FET standard, guarantee against

expropriation and dispute settlement mechanism were not considered to be reflected under the

protection of EU law.85 The fact that BIT could give rights to the Dutch investors that it does

not give to other EU investors, did not make these rights incompatible, according to the

tribunal who meant that it is up to other countries and investors to claim their equal rights.86

Furthermore, the tribunal argued that the BIT was not superseded by EU law since neither the

treaties marking the Czech Republic’s accession to the EU, nor the BIT expressly say so, why

the requisites in Article 59 VCLT weren’t fulfilled.87 Consequently, the tribunal found that the

mere accession of Czech Republic to the EU had not automatically superseded the BIT why

the BIT was still in force, giving the tribunal its jurisdiction.88 Finally, the tribunal rejected

the argument about the CJEU’s interpretive monopoly with regard to EU law89 and Czech

                                                                                                               81 Burgstaller, 2009, p. 184. 82 Eastern Sugar, para. 186. 83 Eastern sugar, para. 109; See also paras. 130-139. 84 Bermann, 2012, p. 429. 85 Bermann, 2012, p. 433; Eastern Sugar, paras. 159-160; 164-165 & 167-168. 86 Eastern Sugar, para. 170. 87 See Eastern Sugar, paras. 143-175; More closely paras. 143- 146 and 153-154. 88 Eastern Sugar, paras. 172 and 181. 89 Eastern Sugar, para. 134.

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Republic’s request of referring the question to the CJEU since an arbitral tribunal was not

considered as a court or a tribunal of a Member State in meaning of Article 267 TFEU.90, The

tribunal did not touch upon Article 30 VCLT that governs the application of treaties relating

to the same subject matter and the priority of inconsistent obligations, after establishing that

the BIT was still in force and not terminated according to Article 59 VCLT.91

3.3.1.1 Conclusions on Eastern Sugar The Commission’s arguments referred to in Eastern Sugar brings clarity on its view on the

relationship between the EU law and intra-EU BITs. The Commission seems to have a view

that if the provisions of a BIT would be in conflict with the TFEU or any EU secondary

legislation, the latter would automatically prevail over such provisions. Intra-EU BITs should

therefore be terminated in so far as the matters under the BIT are within EU competence.

However, BITs are not automatically terminated by the prevalence of EU law, but Member

States must still follow the relevant procedures to terminate them, i.e. Article 65 VLCT. The

Commission seems to accept that BITs would be applicable to disputes whose facts occurred

before the concerned Member States accession to the EU, but requires the tribunal to respect

the primacy of EU law in such case. If the facts of the dispute had occurred after the

accession, however, the BIT would have no effect on the dispute, under the circumstance that

the matter at hand was within the EU competence.

There are many conclusions to draw from the tribunals reasoning in Eastern Sugar. Firstly, a

party’s breach of its BITs cannot be justified by its other obligations occurring out of its

membership in the EU. Secondly, in order for a BIT to be terminated, the treaties must relate

to the same subject matter and be incompatible with each other. Since most of the

fundamental provisions of the concerned BIT in Eastern Sugar were considered to be missing

in the protection provided to investors under EU law, the BIT and EU law could not be

considered to relate to the same subject matter. As stated above, most BITs follow the same

structure and share similar provisions. Therefore, it is likely that the tribunal’s argument based

on the Dutch-Czech BIT could be applied to other BITs.

Thirdly, the mere circumstance that the BIT offers protection to investors who are nationals of

those Member States party to the BIT and not all EU Member State cannot make the treaties

                                                                                                               90 Burgstaller, 2009, p. 186; Eastern Sugar paras. 130-138. 91 Burgstaller, 2009, p. 187-188.

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to be incompatible with each other. In stead, the problem could be solved by offering the

same protection to all Member States of the EU. Finally, a BIT cannot be considered to be

superseded by the EU treaties simply by the accession of a state to the EU. If such intention

exists, it must be expressed either in the BIT or the accession treaty of the concerned state. If

these criterions are not fulfilled, then the BIT should be considered to be in force.

3.3.2 Eureko v. Slovakia In Eureko v. Slovakia92 (or Eureko), a Dutch company commenced arbitral proceedings

towards Slovakia under the Netherlands-Czechoslovakia BIT. The company, Eureko, had

invested in the insurance sector in Slovakia and claimed that Slovakia had indirectly

expropriated its investments and denied it FET under the BIT.93 Both the EU Commission,

through its amicus curiae94, and Slovakia expressed objections to the jurisdiction of the

tribunal, and argued that since the TFEU and the BIT governed the same subject matter, the

accession of Slovakia to the EU in 2004 should have terminated or made its intra-EU BIT

inapplicable, pursuant to Articles 30 and 59 VCLT. Furthermore, the respondent claimed that

the arbitration clause of the BIT could not be applied since Slovak Republic’s accession to the

EU treaties, which give CJEU exclusive jurisdiction over Eureko’s claims. Finally, the

respondent claimed that the tribunal lacked jurisdiction because of the principle of autonomy

and the principle of supremacy of EU law.95

The respondent argued furthermore that a parallel application of the BIT and EU law was not

possible because of the supremacy and direct effect of EU law, which “enables EU law to

supersede the legal systems of its Member States, including bilateral treaties concluded

between Member States.”96 The Commission agreed and meant that the principles of the

primacy and supremacy of EU law, meaning that any national law that is inconsistent with EU

law must be set apart, applied also to pre-accession BITs between Member States. In

Commission’s view “as a result of the supremacy of EU law vis-á-vis pre-accession treaties

between Member States, conflicts between BIT provisions and EU law cannot be resolved by

interpreting and applying the relevant EU law provisions in the light of the BIT.” Conversely,

the Commission argued that the BITs should be interpreted in the light of the EU law. The                                                                                                                92 Eureko B.V. v. The Slovak Republic, Award on Jurisdiction, Arbitrability and Suspension, PCA Case No. 2008-13, Oct. 26, 2010. The case was conducted under UNCITRAL Rules. 93 Ghouri, 2015, p. 161. 94 European Commission Observations, dated July 7, 2010, cited in Eureko v. Slovakia, para. 180. 95 Eureko v. Slovakia, para. 19 and 59. 96 Eureko v. Slovakia, para. 135.

  27  

Commission argued that no provision of international law could possibly justify a breach of

EU law. Consequently, as in the case of national law incompatible with EU law, the

provisions of intra-EU BITs that are incompatible with EU law do not become invalid, but

simply cannot be applied. 97 The Commission argued, moreover that there was an

incompatibility in accordance with Article 30 VCLT, based on the arbitration clause and its

conflict with the exclusive competence of CJEU to rule on claims involving EU law.98

The tribunal rejected the objections of the respondent as well as those of the Commission and

meant that the provisions of the BIT had neither been displaced by EU law, in accordance

with Article 59 VCLT, nor disapplied by EU law, as follows of Article 30 VCLT.99 The

tribunal argued that invalidity or termination of a treaty must be invoked under Article 65

VCLT and stated furthermore, that “the VCLT does not provide for the automatic termination

of treaties by operation of law”.100 Regarding Article 30 VCLT, the tribunal found no

incompatibilities between the treaties or any norm in EU law prohibiting investor-state

arbitration and concluded that “it cannot be asserted that all arbitration that involve any

question of EU law are conducted in violation of EU law.” No incompatibility could exist if a

BIT obligation could be fulfilled without breaching EU law. Regarding the discriminatory

aspects of the dispute settlement provision, discrimination could be avoided by extending the

same rights to all EU Member States, and not cancelling them.101

The legal rights and duties under the BIT were not considered as duplicated or incompatible

with EU law since there was no evidence of intention of the parties that the BIT should be

displaced and the matter governed by the latter treaty, i.e. the TFEU. The tribunal did not

consider the BIT and the TFEU to cover the same subject matter, since the protection granted

to investors under the BIT was considered to be “at least potentially, broader than those

available under EU law (or, indeed, under the laws of any EU Member State)”, why the

termination under Article 59 VCLT could not apply.102 The tribunal based this argument on

the fact that no FET standard was yet established in EU law and that protection against

expropriation provided by the BIT was not covered by the freedom of establishment under EU

                                                                                                               97 European Commission Observations, dated 7 July 2010, cited in Eureko v. Slovakia, para. 180. 98 European Commission Observations, dated 7 July 2010, cited in Eureko v. Slovakia, para. 193. 99 Reinisch, 2012, p. 160. 100 Eureko v. Slovakia, para. 235. 101 Eureko v. Slovakia, para. 274. 102 Ghouri, 2015, p. 165-166; Eureko v. Slovakia para. 245.

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law.103 The tribunal meant that there might be overlaps between protection granted by EU law

and the BIT but since it did not consider them as contradictory, the tribunal saw no reason to

why the rights under the BIT should not be fulfilled and upheld parallel to those rights

provided under the EU law.104 Consequently, the tribunal found that the TFEU and the BIT

dealt with different subject matters why the argument of incompatibility was not sustainable.

Thus, the tribunal upheld its jurisdiction based on the continued validity of the BIT.

Furthermore, the tribunal stated that the BIT might grant wider protection than those under

EU treaties, which would cause a more favourable treatment of investors from some Member

States but not from all, which could violate the prohibition on discrimination under EU law.105

However, this could not lead to the cancellation of the claimant’s rights under the BIT since

the parties have given their consent to arbitral proceedings, particularly since the consent was

given prior to their accession to the EU and the Lisbon Treaty. The tribunal concluded that it

could not cancel these rights and safeguard that a State can apply the treaty in a way that

violates its obligations in order to comply with its obligations under other treaties.106

Interestingly, the tribunal recognized that EU law may affect the ability of a State to consent

to an international treaty, its performance of obligations under such treaty, or may be part of

the applicable law to determine the scope of obligations under the treaty, or affect how the

disputes arising under the treaty must be settled and lastly may affect the jurisdiction of

tribunals established outside the EU legal order.107 The tribunal took the view that “in

principle the EU legal doctrines, including those of supremacy, precedence, direct effect,

direct applicability, are part of the body of EU law that might fall to be applied by the

Tribunal in this case under Article 8 (6) of the BIT”. The tribunal accepted thus that EU law

might have a bearing on the scope of rights and obligations under the BIT as applicable law

under the BIT. However, the tribunal noted that its jurisdiction was restricted only to rule on

the alleged breaches of the BIT and not on alleged breaches of EU law as such.108

The tribunal did not accept that the CJEU had exclusive right to interpret EU law since this

was also done by courts and arbitration tribunals throughout the EU. Instead, the tribunal                                                                                                                103 Stanič, 2015, p. 37; Eureko v Slovakia, para. 259-260. 104 Reinisch, 2012, p. 174; Eureko v. Slovakia, para. 263. 105 Ghouri, 2015, p. 165. 106 Eureko v. Slovakia, para. 266-267. 107 Strik, 2014, p. 246; Eureko v. Slovakia, para. 229. 108 Eureko v. Slovakia, paras. 287 – 290.

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stated that the CJEU had “monopoly on the final and authoritative interpretation of EU law”

and concluded that not even final courts have the obligation to refer questions of

interpretation of EU law to the CJEU in all cases.109 Furthermore, the tribunal recognized that

the MOX Plant case could be applied on disputes arising between two BIT Contracting Parties

but not on disputes between one Contracting Party and an investor. The tribunal found thereby

no support for bringing any dispute between an individual and a Member State before the

CJEU and rejected CJEU’s jurisdiction over all such disputes.110

3.3.2.1 Conclusions on Eureko v. Slovakia The body of the Commission’s arguments in the award seems to be the following. Firstly, the

Commission takes the view that the TFEU and BIT govern the same subject matter, why

Slovakia’s accession to the EU, should have made the intra-EU BIT inapplicable in

accordance with Article 59 VCLT. Secondly, the arbitration clause is not compatible with EU

law, why it cannot be applied in accordance with Article 30 VCLT. Thirdly, since Slovakia’s

EU accession, the CJEU holds exclusive competence to rule on Eureko’s claims. Finally, that

EU law takes supremacy over intra-EU BITS, why any provision of an intra-EU BIT that is

incompatible with EU law cannot be applied.

 

The tribunal’s conclusions were that the BIT was not terminated, since the treaties were not

considered to cover the same subject matter and there was no evidence of intention of the

parties to terminate the BIT. One can draw the conclusion that even though there might be

some overlaps between the protections provided by a BIT and those provided by the TFEU,

there is no reason not to apply them parallel. Finally, EU law did not prohibit investment

arbitration why the treaties were not incompatible under Article 30 VCLT. The provision in

the BIT could therefore be applied without breaching EU law. Even though some provisions

of the BIT, such as investor-state arbitration, can constitute a possible breach of the non-

discrimination prohibition under EU law, it is not an alternative to cancel these rights and give

a State the right to breach the BIT by justifying it with its EU obligations. In stead the same

right could be extended to all EU Member States.

                                                                                                               109 Strik, 2014, p. 246; Eureko v. Slovakia, paras. 282-283. 110 Eureko v. Slovakia, para. 276.

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3.3.3 Electrabel In   Electrabel   S.A.   v.   Republic   of   Hungary 111  (Electrabel),   a   Belgian   energy   firm  

commenced  arbitration  against  Hungary  based  on  Hungary’s  privatization  process  of  its  

energy  power  sector.  The  proceedings  were   initiated   for  breach  of   the  Energy  Charter  

Treaty   (ECT),   more   specifically   for   violating   Electrabel’s   rights   under   the   FET   and  

against   expropriation   by   the   termination   of   the   power   purchase   agreement   (PPA)  

concluded  between  the  parties.112  The  termination  of  the  PPA  was  due  to  a  decision  by  

the  EU  Commission  in  2008  stating  that  Hungary  was  violating  EU  state  aid  regulation,  

more   specifically   Article   107   TFEU,   by   providing   illegal   state   aid   to   its   power  

generators.113  In   other  words,   the   payments  made  under   the   PPA  were   considered  by  

the   Commission   as   a   breach   of   its   obligations   under   EU   law,   why   Hungary   had   to  

terminate  its  PPA  in  order  to  conform  with  EU  law.    

 

As in Eastern Sugar and Eureko, the jurisdiction of the tribunal came into question. The

Commission intervened as amicus curiae and denied the tribunal’s jurisdiction with basis on

the exclusive jurisdiction of the CJEU to determine issues of EU law by referring to the MOX

Plant case.114 These arguments were rejected by the tribunal and, as in the previous cases the

tribunal determined its jurisdiction.115

A more interesting question was if EU law could be considered as applicable law and whether

EU law could be invoked as a defence for a breach of an ECT or a BIT. In its amicus curiae,

the Commission requested a harmonious interpretation of the ECT and EU law and meant that

such interpretation is required in intra-EU situations. In case of incompatibility, the

Commission argued that the EU law would prevail over the ECT.116 In Conclusion, the

Commission meant that Hungary’s obligations under EU law triumphs its obligations towards

other EU Member States under other treaties.117

                                                                                                               111 Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, Nov 30 2012. 112 Stanič, 2015, p. 41. 113 Blanchard, 2014, p. 10; See also Electrabel paras 6.4 – 6.7. 114 Electrabel, para. 5.20, the Commission’s submission paras. 65-68. 115 Electrabel, para. 5.60. 116 Strik, 2014, p. 238; Electrabel paras. 4.89 – 4.110. 117 Dahlquist, 2014/15, p. 193.

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The tribunal found no incompatibilities between the treaties and gave instead an analysis on

how it would have reasoned if such incompatibility had arisen. The tribunal stated that there

was no fundamental difference between international law and EU law that could justify

treating EU law any different than international rules in an arbitration that requires the

application of relevant rules and principles of international law. However, the tribunal took

the view that EU law is introduced in the national legal order of the Member States, why it is

to be considered as “facts” before the tribunal.118 Moreover, the tribunal recognized the

special relationship between the ECT and EU law and asserted that “the ECT should be

interpreted, if possible, in harmony with EU law”.119 Due to the relationship of the ECT and

the TFEU, the tribunal concluded that “foreign investors in EU Member States, including

Hungary, cannot have acquired any legitimate expectations that the ECT would necessarily

shield their investments from the effects of EU law as regards anti-competitive conduct”.120

In conclusion the tribunal found that “from whatever perspective the relationship between the

ECT and EU law is examined, /…/ EU law would prevail over the ECT in case of any

material inconsistency.“ 121, at least between two EU Member States.122 The tribunal based

this on a negative interpretation of Article 351 TFEU and meant that EU law must prevail

over earlier agreements concluded between two Member States. According to Strik, the role

of EU law in investor-state arbitration commenced under an ECT is analogous to that within

intra-EU BITs, so that “EU law may be applied for the identification of rights in rem and as a

tool for the interpretation of the investment agreement”. In other words, the tribunal’s

reasoning regarding the relationship of ECT and EU law could be applied to the relationship

of intra-EU BITs and the EU law.123

3.3.3.1 Conclusions on Electrabel Based on the Commission’s arguments in Electrabel, the Commission supports a harmonious

interpretation of the ECT and EU law in intra-EU situations. In case of incompatibilities

between the treaties, the Commission takes the view that EU law should prevail over the ECT.

Commission seems to believe that a Member States obligations towards EU Member States

under EU treaties triumphs its obligations under other treaties.                                                                                                                118 Strik, 2014, p. 246; Electrabel paras. 4.195 and 4.127. 119 Electrabel para. 4.130. 120 Stanič, 2015, p. 44; Electrabel para. 4.141. 121 Electrabel paras. 4.191. 122 Dahlquist, 2014/15, p. 190. 123 Strik, 2014, p. 247.

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What is interesting with the Electrabel award is the tribunal’s discussion regarding the

relationship of the ECT and EU law in case of a possible breach of the ECT, even though it

did not find any incompatibilities between the treaties in the dispute concerned. The tribunal

supported a view where EU law considered as “facts” before the tribunal since it is introduced

into the national legal orders of the Member States and promoted a harmonious interpretation

of the ECT and EU law where investors could not legitimately expect that ECT would protect

their investments from the effects of EU law. Thus, in case of potential incompatibilities

between the treaties, EU law would prevail, at least between two EU Member States. As said

above, the same could be applied to similar situations arisen under an intra-EU BIT.

The award has received extensive criticism for its possible implications, especially with

regard to non-EU investors. One could argue that the special relationship established between

the ECT and the TFEU in the award, meaning that the ECT should be read in harmony with

EU law, denies protection to investors who normally would have protection under the ECT. In

practice this would mean that the EU and its Member States could merely refer to changes in

their law to avoid violating the ECT.124 This would mean that a Member State brought before

an investment arbitral tribunal for a possible breach of the ECT or a BIT could justify its

actions simply by referring to their obligations to change their domestic laws under EU law,

which would make the dispute settlement clause under the BIT and the ECT to become almost

unusable in practice.

                                                                                                               124 Stanič, 2015, p. 44.

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4 Possible Implications of intra-EU BITs  The relationship between EU law and investment law is not entirely clear and there are many

unanswered questions, one of which I will closely examine below. Some of fundamental and

unique provisions of ICSID Convention are its Articles 53 and 54 that require immediate and

unconditional recognition and enforcement of ICSID awards amongst all its Contracting

Parties. But what if recognition and enforcement of an ICSID award would constitute a breach

of a Member State’s obligation under EU law? According to EU law and its principles of

primacy and supremacy, such enforcement would not be possible, since it would violate EU

law. In such case there would be a situation with an international convention demanding

immediate enforcement of an award and EU law preventing such enforcement. Since Member

States have given most of their sovereign rights to the EU, and agreed upon implementing and

following EU legislation, a Member State would therefore either have to breach its

obligations under EU law or its international obligations.

This situation has arisen in the case below, between investors from Sweden who commenced

arbitration against Romania, based on the Sweden-Romania BIT.

 4.1 Micula et. al. v. Romania125  4.1.1 Background Since Romania’s accession to the EU in 2007, it has adapted its legislation to the EU

legislation, which has lead to abolishment of certain incentives and benefits provided to

foreign investors prior to its accession to the EU. These changes are based on EU regulation

on state aid, which qualifies the incentives as illegal state aid.126

The background to the dispute, which is brought against Romania by Swedish investors, is as

follows. The claimants, Ioan and Viorel Micula, two brothers of Swedish nationality, had

made substantial investments to produce food and beverages in the less developed region of

Stei-Nucet through three Romanian food production companies (European Food S.A, Starmill

S.R.L. and Multipack S.R.L.) that the brothers owned or had interest in. At the time of the

investment, Romania had implemented a series of regional aid in an attempt to make its

economically disfavoured regions more attractive for foreign investments, a process that                                                                                                                125 Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L.and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Final Award Dec 11 2013. 126 Wilske, and Markert, 2015, p. 497.

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began at the end of the 1990s. These measures included extensive exceptions from custom

duties on imports of certain goods, exception from profit tax and state grants from Romanian

development fund. The investors could profit from these measures through a certain official

license, which the brothers received in the beginning of 2000s that would be valid during the

upcoming 10-year period. 127 However, in 2005, Romania repealed these incentives in

connection with its accession to the EU, for the purpose of bringing its legislation in line with

EU-law, more specifically Article 107 of the TFEU.128

Subsequently, in 2005, the investors commenced arbitration proceedings against Romania for

breaching the Swedish-Romanian BIT by repealing the promised incentives. The claimants

argued that their major investments in the region of Stei-Nucet were made under the

presumption of receiving the benefits, guaranteed by their licences, for the upcoming ten

years.129 They further claimed that Romania’s cut of the incentives that were causing their

investment damages, breached Article 2(3) of the BIT and the state’s commitment to

guarantee investors FET, since the revocation violated their legitimate expectations created

under the Article. Moreover, the investors meant that since the investments lost most of their

value, and the investors were not compensated for the damages caused, Romania’s actions

constituted illegal expropriations in accordance with Article 4(1).130 Finally, the claimants

argued that Romania had breached the umbrella clause in Article 2(4) of the BIT by “failing

to observe obligations entered into with the Claimants with regard to their investments”.131

Romania did not dispute the facts presented by the claimants regarding introducing and

repealing the tax incentives but denied that the revocation of the incentives was a breach of

the BIT. Romania argued that it was necessary to revoke the incentives in order to comply

with its obligations under EU law and complete its accession to the EU, since such incentives

would constitute illegal state aid under Article 107 TFEU.132

4.1.2 Amicus Curiae of the European Commission During the process, the arbitral tribunal invited European Commission to provide an amicus

curiae brief, a written submission on factual and legal aspects of EU law in order to “assist                                                                                                                127 Dahlquist, 2014/15, p. 185. 128 Ortolani, 2015, p. 125. 129 Micula v. Romania, para. 131. 130 Dahlquist, 2014/15, p.186; Micula v. Romania, para. 262.  131 Micula v. Romania, para. 262. 132 Micula v. Romania, para. 132.

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the tribunal in the adjuration of the Parties’ rights”.133 An amicus curiae is a “friend of the

court”, in our case the tribunal, who acts as a non-disputing party.134

In its amicus curiae, the Commission argued that the tribunal should consider the BIT’s

European context and origin and by referring to CJEU’s reasoning in Van Gend en Loos135, it

asked the tribunal to interpret intra-EU BITs in the light of EU law. The Commission stated

that the parties of the Europe Agreement intended for any future BIT to subscribe the same

logic as EU state aid law and argued that the tribunal should consider these regulations when

interpreting the BIT. With basis on Article 30(3) VCLT, the Commission asked the tribunal to

apply EU state aid law instead of the provisions of the BIT in conflict with EU law.136

Furthermore, the Commission underlined the supremacy of EU law and stated that “any

award requiring Romania to re-establish investment schemes which have been found

incompatible with the internal market during accession negotiations, is subject to EU State aid

rules” and “[t]he execution of such award can thus not take place if it would contradict the

rules of EU State aid policy”.137 An award requiring any payment of compensation would

thereby constitute illegal state aid under EU law and become unenforceable within the EU,

because of the supremacy of EU law.138

Moreover, the Commission acknowledged Article 54(1) of the ICSID Convention, requiring

automatic recognition of all ICSID awards within the territory of all Contracting States as if it

was a judgement of a national court. The Commission added, however, that if a national court

of an EU Member State would be asked to enforce an ICSID award that is incompatible with

EU state aid law, the proceedings would have to stay under the conditions of Article 267

TFEU so that the CJEU may decide on the applicability of Article 54 of the ICSID

Convention. The Commission added that the ICSID Convention was not binding on the EU,

since EU is not and cannot be a party to the Convention why “the ICSID Convention does not

form part of the EC legal order.” The tribunal concluded that a conflict between the BIT, the

ICSID Convention and EU law could be avoided “through a contextual interpretation of the

                                                                                                               133 Micula v Romania, para. 27. 134 Dahlquist, 2014/15, p. 192. 135 Case C-26/62, Van Gen en Loos v Netherlands. 136 Micula v Romania, para. 317. 137 Micula v Romania, para. 335. And ¶ 121 of the Commission’s written submission. 138 Micula v Romania, para. 330 et seq.

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BIT or the application of Article 30(3) VCLT,139 according to which the earlier treaty, the

BIT, would apply “only to the extent that its provisions are compatible with those of the latter

treaty”.

4.1.3 The Award The tribunal did not find any real conflict to exist between the BIT and EU law. During the

time frame of the dispute, the relevant rules of international law applicable to Romania and

Sweden were the Europe Agreement, which entered into force 1 February 1995, and the BIT,

which entered to force on 1 April 2005. Romania completed its accession to the EU on 1

February 2007, which is when the EU treaties entered into force in Romania. The tribunal

held therefore, that EU law was not applicable to Romania during the period of the entering

into force of the Europe agreement in 1995 and the accession of Romania to the EU in

2007.140 In other words, Romania could not be subject to EU law until 1 February 2007.

The tribunal moved on to discussing the relevance of EU law in the interpretation of the BIT.

In its discussion, the tribunal stated that the BIT did not contain any reference to the EU or

EU accession. Neither did the Accession Treaty mention the BIT or any amendments of its

provisions. The tribunal came into the conclusion that it “cannot therefore assume that by

virtue of entering into the Accession Treaty or by virtue of Romania’s accession to the EU,

either Romania, or Sweden, or the EU sought to amend, modify or otherwise detract from the

application of the BIT.”141

The tribunal found no reason to believe that Sweden and Romania had intentions of defeating

their obligations when entering any of the treaties they are party to why it concluded that it

had to interpret each treaty according to the intent of the parties. Interestingly, the tribunal

also recognized EU law and its role in the interpretation of the BIT under Article 31 VCLT,

which states that when interpreting a treaty, one must take into account the terms of the treaty

in their context and in the light of their object and purpose. The tribunal found therefore that

“the general context of EU accession must be taken into account when interpreting the BIT”

and held that “the overall circumstance of EU accession may play a role in determining

whether the Respondent has breached some of its obligations under the BIT.” The tribunal

                                                                                                               139 Micula v Romania, para. 336. And ¶ 122-124 of the Commission’s written submission. 140 Micula v Romania, para. 319. 141 Micula v Romania, para. 321.

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concluded that the overall context of Romania’s EU accession and the relevant provisions of

EU law could be relevant when deciding if Romania’s actions were reasonable or if the

claimants’ expectations were legitimate.142 However, since Romania had not acceded to the

EU during the time period relevant for the dispute, EU law was not directly applicable and

there was no direct conflict of treaties.143

With all this in regard, the tribunal found that Romania’s repeal of the incentives was a

response to conditions imposed by the EU.144 Even though the arbitral tribunal could find

Romania’s actions somewhat reasonable and in pursuit of rational policy, more specifically

EU accession, the tribunal held that Romania had failed to ensure FET to investments by

removing the promised incentives. The tribunal stated moreover that “Romania undermined

the Claimants’ legitimate expectations with respect to the continued availability of the

incentives until 1 April 2009”, i.e. the end of the ten year period promised by the license that

the claimants held. The tribunal concluded therefore Romania’s actions to be “unfair or

inequitable vís-a-vís the Claimants”.145

Regarding Commission’s statement on the unenforceability of an award that is in conflict with

EU state aid rules, the tribunal did not find it desirable to discuss the predictions of possible

enforcement issues after the Award had been rendered and referred shortly to Article 53 and

54 of the ICSID Convention and requirement of immediate recognition and enforcement of

ICSID awards in national courts of Contracting States. The tribunal concluded that it would

be “inappropriate for the Tribunal to base its decisions in this case on matters of EU law that

may come to apply after the Award has been rendered”.146

In conclusion, the tribunal, by majority, found that Romania had breached the Swedish-

Romanian BIT by failing to ensure FET of the claimants’ investments and ordered Romania

to pay 116 million USD, plus interest, bringing Romania’s liability to a total sum of 250

million USD.147

                                                                                                               142 Micula v Romania, paras. 326-328. See also para. 322. 143 Wilske, and Markert, 2015, p. 501. See also Micula v Romania, para. 319. 144 Micula v Romania, para. 802. 145 Micula v Romania, paras. 825-827. 146 Tietje, and Wackernagel, 2015, p. 246; Micula v Romania, paras. 340-341. 147 Wilske, and Markert, 2015, p. 500; Micula v Romania, para. 1239.

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4.1.4 Developments after the issuing of the Award The European Commission issued an injunction on 26 March 2014148 and required Romania

to suspend the payment of the Micula award pursuant to Article 11(1) of the Council

Regulation (EC) No 659/1999149, which states that the Commission should examine all cases

of unlawful aid. Later the same year, on 1 October, the Commission decided to initiate formal

investigations in accordance with Article 4(4) of the regulation mentioned above.150 The

Commission prevented thereby Romania from implementing the award until the Commission

had investigated the award and its compatibility with the internal market, a decision that the

Commission issued in the beginning of 2015.

In November 2014, the Commission was invited to submit comments pursuant to Article 108

(2) TFEU, where the Commission argued that an execution of the award would constitute new

and incompatible state aid, irrespective of the fact that some operating expenses to be

reimbursed had incurred before Romania’s accession to the EU and thereof before the entry

into force of the TFEU since the crucial moment is when the State decides to relieve the

undertakings of the economic burden the expenses constitute.151

On 30 March 2015, the Commission issued a decision following the formal investigations

initiated on 1 October 2014, and stated that “payment of the compensation awarded by the

arbitral tribunal established under the auspice of [ICSID] /…/ to the single economic unit /…/

constitutes State aid within the meaning of Article 107 (1) of the Treaty which is incompatible

with the internal market.”152 Furthermore, the Commission decided that Romania shall not

pay out any incompatible state aid and shall recover any such aid that had already been paid

out. Finally, the Commission held that the claimants are jointly responsible for the repayment

of the state aid received by any of them.153

                                                                                                               148 Case NO SA38517, Micula v Romania (ICSID arbitration award). 149Council Regulation (EC) No 659/1999 of 22 March 1999 lying down detailed rules for the application of Article 93 of the EC Treaty [now Article 108 TFEU]. 150 Ortolani, 2015, p 125. 151 Official Journal of the European Union (OJ), C 393, 7 November 2014, 27-40. See p. 28 152 Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v Romania of 11 December 2013, p. 69, Article 1. Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015D1470&from=EN. 153 Ibid, p. 69, Articles 2 & 3.

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On 18 April 2014, Romania filed a request for the annulment of the award before an ad hoc

Committee, which is still pending.154 The claimants have not been passive either; on 2

September 2014 they challenged the Commission’s measures before the CJEU and asked the

Court to annul the Commission’s decision ordering Romania to refrain from executing the

award.155

In June 2015, the Commission initiated infringement proceedings against five Member States,

amongst them Sweden, to terminate their intra-EU BITs. The Commission held that

eventually all Member States would have to terminate their intra-EU BITs since they were

found to be incompatible with internal EU law.156 In its letter of formal notice to Sweden, the

Commission highlighted the regulatory overlap between intra-EU BITs and EU legislation

and argued that intra-EU BITs are not in conformity with the internal EU market.157 The

Commission based its arguments on the protection provided exclusively to investors from

Member States party to the BIT and argued that some of the provisions of the BIT amounted

direct discrimination.158 The Commission also held that the provision on arbitration conflicts

with the exclusive jurisdiction of the CJEU to interpret and apply EU law questions and

violates the principles of primacy and uniformity of EU law.159 Therefore, the Commission

required Sweden to terminate all the legal effects of its BITs and immediately prevent their

further application, including any on-going dispute settlement procedure.160

The Swedish government replied to the Commission’s letter in October 2015. Sweden stated

that the agreement between Sweden and Romania did not mention tax incentives or regional

aid to investors why the agreement itself cannot be regarded as inconsistent with EU law.161

Furthermore, Sweden argued that “a tribunal’s judgement in a particular case is irrelevant to

                                                                                                               154 https://icsid.worldbank.org/apps/ICSIDWEB/cases/pages/casedetail.aspx?CaseNo=ARB/05/20. 155 Case T-646/14, Action brought on 2 September 2014 – Micula a.o. v Commission, OJ C 439/29. Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62014TN0646&from=EN. 156 European Commission, press release, Brussels, 18 June 2015, available at: http://europa.eu/rapid/press-release_IP-15-5198_en.htm. Accessed 2015-12-14. 157 Formell underrättelse angående avtalet mellan Konungariket Sveriges regering och Rumäniens regering om främjande och ömsesidigt skydd av investeringar (KOM:s ref SG- Greffe 2015/D/6898, ärendenummer/case number 2013/2207) [Formal letter of notice concerning the agreement between the Kingdom of Sweden and the Government of Romania on promotion and mutual protection of investments], p.5. Not available in English. 158 Ibid, p. 5-6. See also p. 8-9: 11-12. 159 Ibid, p. 13-14. 160 Ibid, p. 15. 161 Svar på formell underrättelse angående avtalet mellan Konungariket Sveriges regering och Rumäniens regering om främjande och ömsesidigt skydd av investeringar, para. 8. Not available in English.

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the assessment whether the agreements as such is compatible with EU law”.162 Sweden did

not share the Commission’s view regarding the primacy of EU law, the exclusive competence

of the CJEU and the discriminatory aspects of the dispute settlement provision. Sweden

argued that the agreement between the parties is not a part of EU law and EU is not a party to

the agreement. A tribunal is thus interpreting the rights and obligations under the BIT and not

EU law. Sweden did not consider the CJEU to have competence to interpret the agreement

why it argued that the possibility of investment arbitration was not a breach of Article 344

TFEU.163

Moreover, Sweden did not consider Article 344 TFEU to be applicable on disputes between

others than EU Member States. By basing its argument on this fact and the lack of provisions

giving competence to national courts to judge investor-state disputes, Sweden concluded that

the principles of the primacy and uniformity of EU law were not violated by a tribunal’s

jurisdiction to interpret the BIT.164 Regarding the discrimination aspects of the arbitration

clause, Sweden held that the provision did not have equivalence in EU law why the argument

of discrimination indicates that “the provision itself is in accordance with the EU law but the

scope of it is limited”.165 Sweden also found the Commission’s requirement to terminate the

BITs with immediate effect to be a violation of the principle of legal certainty.166 Nonetheless,

Sweden concluded that it could accept to terminate its intra-EU BITs under the condition that

all EU Member States would do the same and that the termination would meet the

requirement of foreseeability and transparency in order to secure protection to investors.

Finally, Sweden required a uniform EU solution providing a continuing investor protection

after the termination of all Member States intra-EU BITs.167

4.1.5 The complexity of the Award It appears as though the last word has not been spoken on the Micula case. The opinions of

the claimants’ on one side and the respondent with the Commission on the other side are

differing as widely as in the doctrine. The problems are complex. According to Article 53 and

54 of the ICSID Convention, all Contracting Parties are obligated to immediately recognize

and enforce an award rendered by an ICSID tribunal. Romania, being a Contracting Party to                                                                                                                162 Ibid, para. 26. My personal translation. 163 Ibid, paras. 27-31. 164 Ibid, para. 32. 165 Ibid, para. 35. 166 Ibid, paras. 39. 167 Ibid, paras. 40-43.

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the ICSID Convention is also a Member State of the EU and is bound by its obligations under

the EU treaties. The execution of the tribunal’s award would, according to the Commission,

constitute illegal state aid, why the Commission has made it clear that Romania cannot

enforce the award. Romania’s obligations under its BIT and EU law are thereby contradictory

and regardless of what Romania takes it will breach either its international obligations or its

EU obligations and risk being imposed sanctions.

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5 Analysis  5.1 EU Law perspective  5.1.1 Primacy and Supremacy of EU Law The relationship between EU law and intra-EU BITs is a complex and an on-going debate that

has still not been solved. The conclusions are different based on the approach taken. Out of an

EU law perspective the focus is on the primacy and supremacy of EU law that is binding the

Member States and their national authorities. This means that in case where there are

conflicting obligations between national law and EU law, the latter prevails. If one would

apply the EU law approach, then the same would go for the Member States international

obligations, meaning that national courts confronted with the issue of enforcing intra-EU

ICSID awards that are not in conformity with EU law must respect the primacy of EU law and

thereby not enforce any decisions or awards that are in conflict with it.

The Member States are moreover obligated under Article 351 TFEU to remove any

inconsistent provisions in their agreements with third countries that are inconsistent with EU

law. This has also been confirmed by the case law of the CJEU with regard to Member States’

extra-EU BITs concluded prior to their accession to the EU.168 In doctrine, it has been argued

that the CJEU’s reasoning could be applied in case of intra-EU BITs as well, meaning that

Member States would have an obligation to remove the provisions in their intra-EU BITs

even though the Article clearly states otherwise.

The tribunal in Electrabel held that EU must prevail over earlier agreements concluded

between Member States on the basis of a negative interpretation of Article 351 TFEU. The

tribunal meant that in case of any material inconsistencies between the EU law and the ECT,

EU law would prevail, at least between two EU Member States. In doctrine there is support

that the same reasoning could be applied to intra-EU BITs as well. However, applying this on

the case of intra-EU BITs, is quite complicated. Firstly, the BITs are intra-EU even though

they are concluded before one of the Member States accession to the EU. The possible dispute

is therefore not between an EU Member State and a third country, as Article 351 requires, but

is inter se EU countries. Article 351 TFEU is with regard to treaties concluded between a

Member State and third country, why it cannot be applicable to treaties concluded between

                                                                                                               168 See supra section 3.2.

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two Member States. As the TFEU is the primary law of the EU, other interpretation from case

law or doctrine should not lead to any other conclusion. Secondly, according to the tribunal,

the ECT is a multilateral treaty that recognizes EU decisions as binding why it would be

absurd that a Member State of the EU would be liable under the ECT for implementing EU

orders.169 Such relationship does not exist between intra-EU BITs and EU law. There is

nothing in the BITs that establishes the same prevalence of EU law, why it is unlikely that the

same argument could be applied with regard to intra-EU BITs.

The tribunal’s reasoning is controversial and has received extensive criticism. If one would to

apply the principle of primacy and supremacy of EU law and Article 351 TFEU as wished by

the EU and as the tribunal in Electrabel, then any Member State of the EU breaching its

obligations under an international treaty could justify its actions and escape penalty by simply

referring to their EU obligations. Such reading would certainly weaken, if not make it

impossible for investors to claim their rights granted under the BIT, which cannot be

considered was the intent of the parties at the time the BIT was concluded. In conclusion,

Article 351 should not be applicable on intra-EU BITs.

5.1.2 The Exclusive Competence of the CJEU The incompatibilities that are to be removed in accordance with Article 351 TFEU are many

out of an EU perspective. Particularly, the provision on investor-state arbitration has raised

many issues. Not only is the provision considered as discriminatory under EU law Article 18

TFEU, it is also considered as depriving the CJEU of its exclusive competence to interpret

and apply EU law, which is regulated under Article 344 TFEU. In other words, the Article not

only creates an inequality amongst EU Member States investors and prevents a harmonized

development of EU law, it can also lead to an arbitration taking place without the relevant

questions of EU law being submitted to the CJEU for interpretation.

In MOX Plant, the CJEU has affirmed its interpretative monopoly and stated that the arbitral

tribunal is not entitled to decide whether EU law is applicable and if so to what extent. The

opinions in literature regarding the applicability of MOX Plant and Article 344 TFEU is

divided.170 I am ready to agree with Reinisch in his view that MOX Plant concerns a dispute

between two Member States of the EU, which is different from investor-state disputes based

                                                                                                               169 Electrabel, para. 6.72. 170 See supra section 3.2.1.

  44  

on intra-EU BITs. In other words, in intra-EU BITs the dispute is not between two states but

one private party and a state, why MOX Plant should not be applicable on intra-EU BITs.

Furthermore, Article 344 TFEU is an obligation on Member States not to submit a dispute

concerning interpretation and application of EU treaties to any other court than the CJEU, i.e.

it is an obligation on Member States only and not their nationals, which means that this

obligation does not concern investors. Even though Clodfelter is right in the fact that Article

344 TFEU does not limit itself to inter-state disputes or prevents Member States from

submitting a dispute towards an investor, the Article does not give the right or obligation to

private parties. In conclusion, private parties do not have any right or obligations under

Article 344 TFEU to submit disputes against Member States in CJEU, why the Article or

MOX Plant cannot be applied to intra-EU BITs.

Neither is the argument of preliminary rulings sustainable since Article 267 TFEU puts an

obligation to the courts and tribunals of a Member States to request the CJEU for a

preliminary ruling. Even the CJEU has in its case law established that arbitral tribunals do not

have the required link to a Member State why they cannot ask the Court for a preliminary

ruling. In conformity with Reinisch, I consider the investment arbitral tribunals under intra-

EU BITs not a court or tribunal of a Member State since such tribunals are treaty-based and

not under national law. The tribunals are independent with no link to any Member States and

its members cannot be nationals of the Member States. I find Clodfelter’s argument about

such tribunals to deprive the courts of Member States from their right to ask for preliminary

rulings as too far-going. The BIT is an agreement concluded between two Member States who

consent to the provisions of the BIT; it voices the will of Member States. Member States have

consented to such arbitration and given up the jurisdiction of their national courts, why the

argument is not sustainable.

5.2 Public International Law perspective  5.2.1 Article 59 VCLT The Commission has challenged the validity of intra-EU BITs in several investment

arbitration cases, some of which I have described above. The core of the debate on the

continued validity or inapplicability of intra-EU BITs has been around lex posterior rules in

  45  

Articles 59 and 30 VCLT, that I will analyse in detail below with the aim of shedding light on

the EU-intra-EU BITs relationship.

Out of an EU law approach, the BIT becomes terminated or inapplicable after the Member

States accession to the EU and EU treaties. The TFEU, the latter treaty that the parties became

part of, and the BIT, are relating to the same subject matter, which is intra-EU cross border

investment and providing protection to investors. In conformity with the Commission’s

argument, several provisions of the BIT can be considered to be incompatible with the TFEU

as they provide protection to the investors of Member States party to the BIT and not all EU

Member States. Therefore, from EU point of view, in accordance with Article 59 VCLT, the

earlier treaty, i.e. the BIT, should be terminated as the BIT and the TFEU relate to the same

subject matter. Moreover, out of an EU law perspective, the treaties are incompatible since

some provisions of the BIT are inconsistent with EU law. This is particularly with regard to

the provision on investor-state arbitration that offers protection only to investors from those

Member States party to the BIT and not to all investors from the EU, which is a violation of

the non-discrimination clause in Article 18 TFEU. With basis on this, one could argue that the

provisions are incompatible why they cannot be applied at the same time.

With regard to international law approach, however, the conclusions are different. In order for

Article 59 VCLT to be applicable, the BIT and the TFEU must relate to the same subject

matter and be incompatible. The tribunals in Eastern Sugar and Eureko have been consistent

in rejecting the arguments of automatic termination of the BIT and have established that the

treaties do not relate to the same subject matter, regardless of the similarities of the some of

the provisions of the treaties. The protection under EU law has not been considered as far-

reaching as provided under the BIT, since the TFEU does not include any FET standard,

expropriation clause or an investor-state arbitration provision. For these reasons, they could

not be considered as relating to the same subject matter. Furthermore, the mere fact that the

BIT provides more protection and rights than EU law does not make the treaties incompatible,

or impossible to apply at the same time.

Both the BIT and the TFEU share the same purpose, that is to provide protection to investors.

Many of the provisions of the treaties are similar, even though there are some differences or

absence of some provisions. However, the mere fact that the BIT provides FET, expropriation

and arbitration clause should not mean that the treaties do not relate to the same subject

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matter. According to Reinisch the similarity between the treaties must not be to it’s fullest. By

referring to the tribunal in Eureko, Reinisch argues that one cannot require a strict overlap of

treaties.171 Nevertheless, even though it is not required that the treaties must be coextensive,

“the later treaty must have more than a minor or incidental overlap with the earlier treaty”.172

Thus, only a substantive similarity is required. Therefore, the treaties can be considered as

relating to the same subject matter, since many of the BIT’s provisions such as the promotion

of investments, FET treatment and protection against expropriation correspond to the

protection provided by the TFEU, such as the non-discrimination clause in Article 18 TFEU

and general principles of EU law, such as prohibition against expropriation without

compensation. Thus, the overlap of treaties could be considered to be more than only minor.

However, there is a difference of the purpose of the treaties when looked at in detail. Reinisch

differentiates between what kind of protection that is offered by different treaties and argues

that the EU protection primarily is with regard to pre-establishment phase of the investment,

i.e. before an investment is made. The purpose of the EU law protection, Reinisch argues, is

to access other Member State markets. The intra-EU BITs, on the other hand offer protection

for the post investment phase, which is after an investment is made, for example by offering

investor-state arbitration.173 With basis on this, the overlap between the treaties cannot be

regarded as substantial since the main purpose of the protection provided is differing so

widely between the treaties.

Other requisites of the Article have not been considered as fulfilled either, such as the one of

intent. The tribunals has found no support for intention of the parties to terminate the BITs or

for EU law to supersede them, either in the BITs or their Accession Treaties and the mere

accession of a Member State into the EU cannot constitute intent in itself. If the parties to the

BIT wished to terminate the BIT or for EU law to supersede the BIT, such intent must be

given in either of the documents mentioned. Moreover, the fact that the BIT provides

protection to Contracting Parties of the BIT and not all Member States cannot make the

treaties incompatible, as also stated by various tribunals. The treaties can still be applied at the

same time and the problem of discrimination under EU law can easily be avoided by all

Member States offering the same protecting throughout the EU.

                                                                                                               171 Reinisch, 2012, p. 166. 172 Eureko, para. 242. 173 Reinisch, 2012, p. 167.

  47  

In conclusion, in order for Article 59 to become applicable the provisions of the TFEU must

be so far incompatible with those of the intra-EU BIT that the two are not capable of being

applied at the same time, why the provisions of the treaty need to be compared with each

other. According to Reinisch, such incompatibility can arise only if investor-state arbitration

under the BIT cannot take place at the same time as a dispute settlement under EU law.

However, since such dispute settlement for investors is not provided under EU law, neither by

investor arbitration, nor before the CJEU, there cannot be an overlap between the treaties.174

5.2.2 Article 30 VCLT If a treaty is not considered as terminated then the provisions of Article 30 VCLT could be

applicable, which the respondents in Eastern Sugar and Eureko invoked. Article 30 VCLT

states that if an earlier treaty is not terminated by Article 59 VCLT, then the provisions of an

earlier treaty are applicable so far as they are compatible with the provisions of the later

treaty. In other words, if the BIT is not terminated, then its provisions would apply to that

extent as they are in conformity with the TFEU. Thus, Article 30 VLCT means that single

treaty provisions become inapplicable if they are incompatible with the provisions of a

subsequent treaty.

Out of an EU law perspective, such an interpretation would mean that the BIT provision on

investor-state arbitration could not be applied, since the provision is incompatible with EU

law. The same would apply to some other BIT provisions. This goes hand in hand with the

principle of primacy of EU law, meaning that the provisions of a BIT that is inconsistent with

EU law cannot be applied.

This argument has been rejected by the tribunal in Eureko, arguing that no incompatibility

could exist if an obligation under the BIT could be fulfilled without violating EU law. This

conclusion was not effected by the principles of supremacy or direct effect of EU law. Since

the tribunal found no norm of EU law prohibiting investor-state arbitration, there was no

reason not to apply it. Moreover, as said above, since there is not dispute settlement provision

under EU law where investors can bring Member States in front of the CJEU or other arbitral

tribunal, then the investor-state arbitration provision of the BIT can be used by investors

without breaching EU law. Regardless of the possible overlaps between the treaties, the

                                                                                                               174 Reinisch, 2012, p. 176.

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protection provided by the BIT extends beyond that provided by the EU law, why there is no

reason not to apply the treaties parallel.

5.3 Micula – Enforcement of the Award In the Micula award, the conflict between EU and international investment law and the

different obligations of the parties under the treaties become clear with respect to the

enforcement stage. There are two conflicting legal orders that claim primacy over each other.

Interestingly, the issue was not only the general comments on discrimination aspects of the

investor-state arbitration and the exclusivity of the CJEU but the fact that enforcement of an

award would violate EU state aid law, where Romania would pay compensation to the

Swedish investors, by re-installing illegal state aid that they had removed before.

Article 59 VCLT was invoked by neither the respondents nor the Commission in Micula,

perhaps since the tribunals in Eastern Sugar and Eureko had rejected the arguments based on

this Article, especially with regard to the sameness of the treaties. Instead the Commission

invoked Article 30 VCLT, arguing that the tribunal should apply EU state aid law and not the

provisions of the BIT in conflict with EU law. In previous tribunals, the Article has been

interpreted as no incompatibility could exist if an obligation could be fulfilled without

violating EU law. In contrast to previous awards however, there is an EU regulation that

prohibits Member States to grant illegal state aid and thereby disrupt the competition.

Consequently, according to Tietje and Wackernagel, under Article 30 (2) and (4) VCLT,

Articles 53 and 54 ICSID Convention can be applied only to the extent that they are

compatible with the provisions of the TFEU. The ICSID Convention requires an immediate

and unconditional enforcement of the award that is in conflict with EU law, why it is

inapplicable.175 Therefore, national courts of the EU Member States confronted with the issue

of enforcing an ICSID award have to examine under Article 30 VCLT if the award conflicts

with EU law in order to decide if the award is applicable on the Member States.

Furthermore, similar to Electrabel approach, the Commission asked the tribunal to interpret

the intra-EU BIT in the light of EU law and asserted that it was the intention of the parties.

This is in accordance with Article 31(1) VCLT, which states that when interpreting a treaty,

the context of its terms and the light of their object and purpose must be taken into account.

                                                                                                               175 Tietje and Wackernagel, p.225.

  49  

Moreover, Article 31(3c) states that besides the context of the provisions, “any relevant rules

of international law applicable in the relations between the parties” must be taken into

account. The Article is thus applicable since EU law is an applicable law binding both parties.

The EU law was considered as part of the “factual matrix” of the case, which the parties

agreed upon, why the Tribunal considered EU law as relevant for the interpretation of the BIT

and held that EU law can have an influence in deciding whether a respondent has breached its

obligations under the BIT.176 Consequently, one can draw the conclusion that intra-EU BITs

must be interpreted in light of the parties’ EU obligations.

However, at the time period of the dispute Romania had not acceded to the EU why the TFEU

cannot be regarded as applicable during that time. Had the dispute occurred after EU

accession, Article 30 and 31 VCLT could be applied in a way that the tribunal would have to

consider the BIT under the light of EU law and consider EU law as “factual matrix” of the

BIT when interpreting the BIT. Moreover, in case of conflict between provisions of TFEU

and intra-EU BIT then the TFEU would prevail in accordance with Article 30 VCLT. As

Romania was not an EU Member States and its actions are not governed by EU law, then the

TFEU does not become relevant in this aspect, why Article 30 and 31 VCLT cannot be

applied in this way.

5.4 Concluding remarks The relationship between intra-EU BITs is complicated and opinions vary depending on

which view one takes, which is perhaps the reason why the Commission is asking its Member

States to terminate their intra-EU BITs. However, most BITs contain a survival clause,

meaning that even after the termination of a BIT, all of its provisions would remain in force

and provide protection for investors and investments made before the termination, for a longer

period of time, as in the case of Sweden-Romania BIT for twenty years after the

termination.177 This would mean that even if all Member States of the EU would terminate

their BITs, the provisions, including the one on investor-state dispute settlement would still

remain in force and could be invoked by European investors for twenty years to come.

Therefore the termination of the BITs would not solve the issues arisen in connection to the

Micula award, but they will probably reoccur and be discussed in the years to come.

                                                                                                               176 Wilske, and Markert, 2015, p. 501. 177 Agreement between the Government of the Kingdom of Sweden and the Government of Romania on the Promotion and Reciprocal Protection of Investments, Article 10(3).

  50  

Regardless of which point of view one takes, whether or not the protection provided by the

BIT is incompatible with EU law or not, whether provision on investor-state arbitration is

discriminatory or whether or not the intra-EU BITs should be terminated, the investors and

their legitimate expectations must be given full respect. In our case, the Micula brothers could

not legitimately expect that their licence valid during a ten-year-period would not grant them

the promised incentives, which was the reason they invested in the area in the first place.

Even though the Electrabel tribunal says otherwise and states that investors could not

legitimately expect that the ECT could protect their investments from EU law, I believe

otherwise. The investment is made under the premises of the intra-EU BIT, binding two

states. The investors of those Member States must be considered to legitimately expect to be

granted their rights under the BIT. Stating otherwise would be a violation of investors’

legitimate expectations under the BIT and would not be proportionate with regard to the

private investor and its position against a state.

It is possible that the treaties could co-exist and be applied parallel to each other. The

investors could thereby benefit from protection provided by both treaties that could

complement each other. The discriminatory aspects could be resolved by offering the same

protection to all EU Member States leading to a more uniform EU investment regime. The

argument on the CJEU exclusive competence could be dismissed simply because not all

disputes with connection to the EU or EU law must be submitted to the CJEU since they not

only lack the jurisdiction, but the Court also lacks capacity to do so because of the enormous

amount of disputes that the Court in such case would have to rule upon. In case of disputes

similar to Micula, the VCLT and its provisions would become applicable where the time

period of the dispute in connection to a Member States accession to the EU would become

relevant, as stated above.

However, this is most unlikely to happen. The Micula dispute is still on going and the future

of intra-EU BITs is unclear. The Commission has initiated the proceedings towards

terminating all intra-EU BITs but the process has just started. The EU Member States are

divided in the question and it will probably take many years until the issue is resolved and an

agreement between the EU and its Member States is reached. Until then however, as the intra-

EU BITs and the protection provided by them remain in force, the question on the relationship

between EU law and intra-EU BITs will remain disputed.

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