Intra-EU Investment Protections – Where to Look for Protection

investment protection

In the last sixty years numerous states have entered into investment agreements containing investor state dispute settlement provisions and investor state dispute settlements became a common means by which investors sought to protect their investments.

At the same time as investor state dispute settlements became more common, the EU continued to grow, bringing within its territory an increasing number of member states who already had such treaties either with each other or with existing members.   

But those “intra-EU” treaties present a problem.  By acceding to membership of the EU, members had undertaken an obligation to ensure the uniform interpretation of EU law, which forms part of the law of each member of the EU.  In Achmea v Slovak Republic (C-284/16), in 2018, the Court of Justice of the European Union (“CJEU”) ruled that ISDS under the intra-EU bilateral investment treaty at issue in that case was incompatible with that obligation.  In the subsequent Komstroy v Moldova (C-741/19) decision the CJEU ruled that intra-EU ISDS proceedings under the multi-lateral Energy Charter Treaty are also incompatible with EU law.   In PL Holdings v Poland (C-109/20) the CJEU ruled that member states were required to challenge the jurisdiction of any arbitral tribunal based on a treaty that is contrary to EU law.  Finally, in Micula v Romania the CJEU upheld a ruling of the European Commission that payment of an ICSID award based on an intra-EU treaty amounted to impermissible state aid.

In response to the Achmea decision, the Commission and Member States began a process to terminate the intra-EU investment treaties, culminating in a termination agreement that entered into force on 29 August 2020 (the “Termination Agreement”).  This Termination Agreement does not apply to the Energy Charter Treaty.  More recently, the failure of the Commission’s efforts to obtain member state assent to a modernization of the Energy Charter Treaty has resulted in the Commission calling, in February of this year, for the member states to withdraw from the Energy Charter Treaty.

The overall effect is to largely dismantle the ability of EU investors to have recourse to ISDS in respect of their investments within the EU.  That presents issues for two classes of EU investors.  First, those who already have pending claims or awards under the pre-existing treaty regime and second those who either plan to make new investments or already have committed to investments within the EU.

Pending Claims/Awards

In the Termination Agreement, the EU member states agreed that 

  1. awards that had been “executed” (i.e., paid) before 6 March 2018 (when Achmea was decided) would not be affected, 
  2. “pending” proceedings, those commenced before that date but where no award had been executed, would be subject to a transition regime under which investors would have the option of terminating their claims and going to national courts or seeking to negotiate a settlement of their claim, and 
  3. Finally, all “new” proceedings commenced after 6 March 2018 would have no legal effect.  

The Termination Agreement attempted to have retrospective effect – it sought to invalidate not just new claims brought after it came into force but also claims brought prior to it coming into force.  The Termination Agreement also required EU member states to contest the jurisdiction of claims brought on the back of intra-EU treaties.

In practice, the attitude of most Tribunals seized with proceedings commenced before the Termination Agreement came into force has been to treat such jurisdictional challenges with skepticism.  Most such challenges are rejected on the basis that the Tribunal’s jurisdiction is governed by the terms of the relevant treaty, not by EU law.  As a result, the incompatibility of ISDS with EU law is not relevant to the Tribunal’s jurisdiction.  

Kingdom of Spain v ECT 

series of over 50 investment claims against the Kingdom of Spain from renewable energy producers who lost subsidies off the back of certain Spanish regulatory changes, including the rollback of the feed-in tariff scheme, showcase the complexities that arise from the enforcement of the treaty both within and outside of the EU.  

Where cases have been brought within the European Union, the general pattern has been a refusal by Tribunals to entertain arguments based on EU law, on the basis that the jurisdiction of the Tribunal is determined by the relevant treaty, rather than EU law.  The recent decision of the Tribunal in Green Power v Spain in June 2022 is an exception to the trend.  In this case, the arbitration was seated in Sweden so was subject to the Swedish Arbitration Act and, ultimately, to EU law.  In contrast, most claims are not affected by this analysis as they either are (i) seated outside the EU or (ii) take the form of ICSID arbitration which does not have a seat or an applicable curial law.

Further complications arise in the context of enforcement of awards based on intra-EU treaties or the ECT seated outside of the EU, where EU law is not considered to take precedence.  In 2020, the United Kingdom Supreme Court refused to grant a stay of enforcement of the award in Micula v Romania, holding that the UK’s obligation under the ICSID convention to enforce that award was not subject to its (then applicable) duty of sincere cooperation with the European Commission.  

More recently, the UK courts have been willing to order interim attachment of monies owed to Spain pending enforcement of the award in favor of Antin against Spain. A final decision on the enforcement of that award is expected soon. 

Likewise, on 12 April 2023 High Court of Australia ruled that the award in Infrastructure Services (formerly Antin) v Spain was enforceable, rejecting arguments that Spain enjoyed state immunity from enforcement. Spain’s main focus in its arguments was whether, by entering into the ICSID Convention, it had waived its immunity from enforcement.  Spain failed in this argument.  In a secondary argument, which it does not appear to have advanced with much conviction, Spain argued that the effect of the Komstroy decision was that it had not agreed to submit to the jurisdiction of the Court for the purposes of the state immunity act. 

The High Court rejected that very briefly because, it said: “the relevant agreement arose from Spain’s entry into the ICSID Convention”.  This has put several of the Kingdom of Spain’s assets in Australia, including the headquarters of the Cervantes Institute and various Navantia assets, at risk of seizure to meet a debt of over €120 million owed.  

The United States has also generally been a sympathetic jurisdiction for parties looking to enforce awards.  Perhaps the clearest examples are the decisions in the Next Era and 9Ren cases in February, 2023.  In both cases, the respondent state, Spain, had sought an anti-suit order from the European court in whose jurisdiction the claimants were incorporated (the Netherlands for Next Era, Belgium for 9Ren).  That order instructed the claimants not to pursue enforcement in the United States or elsewhere on pain of daily fines.  In response, Judge Chutkan of the DC District Court (i) ruled that the awards were enforceable in the US and the arbitration exception to state immunity applied and (ii) granted an anti-anti suit injunction requiring Spain to withdraw its anti-suit injunction in respect of US proceedings.

The position in the US has been complicated by the recent decision of Judge Leon, also of the DC District Court, in Blasket v Spain in March 2023.  In contrast to the Court’s earlier decisions, he held that Spain did not have capacity to enter into the ECT contrary to EU law and that therefore there was no valid agreement to arbitrate and so Spain continued to enjoy state immunity.  He therefore refused to enforce the award.  That decision is under appeal.

The Future for Investment Protections

As the summary above shows, in spite of the decision in Blasket, those who have already brought claims under intra-EU treaties may still be able to reach awards and monetise them.  In contrast, investors hoping to bring claims after the Termination Agreement came into effect in August 2020 will face struggle due to the termination of the relevant investment treaties.  Normally, when an investment treaty is terminated, a “sunset” clause allows investments made before the termination to continue to be protected for a period of time.  The Termination Agreement seeks to avoid such reliance by the state parties agreeing that the sunset clauses do not have legal effect.  

The Commission’s intention for future investors is that they should have recourse to national courts, relying on the protections contained in national and EU law.  The Commission’s view is hardly surprising.  A central pillar of EU law is mutual trust and independence between members.  Yet, realistic investors will know that both substantive legal protections and the efficiency of the courts varies widely across the EU.  In the latest survey conducted for the EU’s own Justice Scorecard, in 13 member states 50% or more of the public surveyed ranked the independence of the judicial system as being “very” or “fairly” bad.

One attractive option for investors seeking additional protection is to structure their investments through a non-EU member state that continues to have an investment treaty with the relevant target EU state for the investment.  This, for the time being, continues to provide a pathway for investors to enjoy investment protections.  One obvious venue for such investment is the United Kingdom.  Prior to leaving the EU, the UK did not enter into the EU’s agreement for termination of BITs.  As a result, the treaties between certain individual EU member states and the UK remain in effect.  However, there remains a risk that the EU member states may themselves unilaterally terminate or seek to renegotiate those agreements.  Examples of such moves include the Netherland’s proposed renegotiation of its investment treaties to reduce the scope of potential claims, including provisions designed to reduce investors’ ability to rely on structuring to obtain ISDS protections.  In the background the EU continues to explore the possibility of creating a multilateral investment court, a permanent state-appointed body mandated to rule on investment disputes.  Progress on this goal though has been haltingly slow and unenthusiastic.  

If they chose not to structure their investments for continued ISDS protection, investors may be able to instead invoke the protections of the European Convention on Human Rights in claims before the European Court of Human Rights (“ECtHR”) a non-EU body in Strasbourg.  In particular, Article 6 of the Convention provides for a right to a fair trial, Article 14 prohibits discrimination on the ground of national origin, and Article 1 to the Convention’s Protocol provides that no one shall be deprived of their possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. 

The ECtHR has long accepted that claims under the Convention which significantly overlap with the subject matter of conventional investor-state claims.  For example, as far back as 1986, in Agosi v United Kingdom, the ECtHR accepted that a claim could be made in principle against the United Kingdom in a case brought by a company over forfeiture of smuggled gold coins, though it rejected the claim on the merits.  

More recently, alongside the much-discussed investor-state claims by the shareholders in OAO Neftyanaya Kompaniya Yukos v. Russia (no. 14902/04), Yukos’ management also brought a successful claim against the Russian Federation before the ECtHR.  In its 2011 judgment, the ECtHR held that Russia’s treatment of Yukos had violated the protections of Article 6 of the Convention and Article 1 of the Protocol.  A subsequent decision on just satisfaction in 2014 awarded Yukos EUR 1.8 billion in compensation.    

However, the Yukos decision reveals the limitations of such a claim.  In contrast to the ECtHR’s award of EUR 1.8 billion (itself by far the largest award ever granted by the ECtHR), the majority shareholders in Yukos were awarded over USD 50 billion in their investor-state claim.  This reflects the reality that claims under the ECtHR tend to result in far lower levels of compensation.  In applying the Convention, the ECtHR will generally have regard to a principle of proportionality in assessing compensation for expropriations and interferences in property.  In contrast, investor-state tribunals will look to give “full compensation” usually based on an assessment of the market value of the affected investment.  

In short, the EU position now leaves investors with the option either of structuring for investment protection or of accepting the potentially thinner protections of EU law and the ECtHR.