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Emmanuel E Kaufman
Knoetzl, Vienna
emmanuel.kaufman@knoetzl.com

Julia Hildebrandt
Knoetzl, Vienna
julia.hildebrandt@knoetzl.com

 

On 10 October 2019, the European Union Member States circulated a draft Agreement for the Termination of Bilateral Investment Treaties between Member States of the EU (draft agreement). This agreement aims at ending all bilateral investment treaties (BITs) concluded between EU Member States, as well as regulating finalised and ongoing arbitrations based on such treaties.

This article seeks to point out potential legal issues arising out of the draft agreement in connection with the non-enforcement of awards. Therefore, it will focus on Article 7 of the draft agreement, which foresees an obligation of all EU Member States to inform competent national courts to set aside, annul or refrain from recognisingor enforcing, pending awards issued under intra-EU BITs.

This provision may lead to three potential scenarios that could become a greenfield for new investment disputes:

• denial of enforcement of an award by national courts of a Member State;

• denial of enforcement by the domestic courts of a third State; and

• denial of enforcement with regard to pre-Achmea awards.^[1]

Article 7 of the draft agreement

Article 7 of the draft agreement provides that EU Member States are obliged to notify domestic courts of the consequences of the Achmea decision of the Court of Justice of the European Union (CJEU) dated 6 March 2018, in connection with so-called ‘pending’^[2] and ‘new’arbitral proceedings’:^[3] arbitration proceedings initiated before or after the CJEU issued that decision.

Article 4 of the draft agreement reflects the finding of the CJEU that the arbitration clauses in intra-EU BITs should be considered invalid.^[4] The obligation to inform national courts therefore applies to virtually all cases except those with a pending decision on costs.^[5] Therefore, awards that were rendered before and after the Achmea decision face enormous difficulties concerning their enforcement under the new draft agreement.

In cases where a national court denies enforcement based on the request of one of the Member States in accordance with Article 7 of the draft agreement, the investor would be forced to resort to the Settlement Procedure addressed in Article 9 or to access national courts in accordance with Article 10 of the draft agreement. However, these provisions only apply to pending arbitration proceedings (not new arbitration proceedings) and, most importantly, they do not allow for a claim under the standards of protection in the original intra-EU BIT.^[6] Thus, the underlying obligations foreseen in the draft agreement may provide the basis for the investor to resort – once again – to international investment law to protect itself from the non-enforcement of the arbitral awards.

Scenario 1: the denial of enforcement by national courts of an EU Member State

The draft agreement is a proposed multilateral treaty among the Member States. It takes into account the Treaty on the European Union as well as the Treaty on the Functioning of the European Union, general principles of EU law and the jurisprudence of the CJEU.^[7] It can therefore be assumed to form part of the legal framework of the EU and, as such, it would be binding upon the Member States. Their organs, including domestic judiciaries, will be required to directly apply the terms of the draft agreement.^[8] As a result, the courts of the EU Member States will be legally bound to stop the recognition and enforcement of awards in connection with intra-EU BITs upon the request of a Member State. Furthermore, the courts of Member States will most likely even deny recognition and enforcement in the absence of such request.

In the scenario of non-enforcement of an award by a court of an EU Member State, two questions arise:

• whether an investor can claim again in front of a tribunal based on the decision of the domestic court not to enforce the award; and

• whether the denial of enforcement would constitute a violation of international investment law.

The first question is linked to the issue of jurisdiction and to the basis on which the investor could claim against the EU Member State. The problem at hand is that the original intra EU-BIT has ceased to exist because of Article 2 of the draft agreement.^[9] A possible solution lies within the corporate structure of the company that first obtained a favourable award. Shareholders or holding companies with the nationality of a third State would have the possibility to raise claims under BITs between their respective home country and the non-enforcing Member State. A favorable corporate structure could even be achieved through anticipatory planning, since nationality planning is not per se prohibited under international investment law.^[10]

In cases of anticipatory planning, allegations of abuse of process or abuse of rights might be raised, as seen in Philip Morris v. Australia. Tribunals defined that an abuse of process or abuse of rights^[11] existed when ‘an investor who is not protected by an investment treaty restructures its investment in such a fashion as to fall within the scope of protection of a treaty in view of a specific foreseeable dispute’.^[12]

In the opinion of the majority of tribunals, an abuse of process or abuse of rights should fulfill the objective as well as the subjective criteria.^[13] This conclusion was reached in a case where an investor had restructured for the sole purpose of acquiring the right to claim under a BIT. However, restructuring for the protection of an existing or future award is not an acquisition of a right but a measure to secure the existing right. With such a measure, an investor would be pursuing a normal business interest, which could be justified in the wake of the Achmeadecision and the draft agreement. Therefore, it would be difficult to qualify such action as a ‘malicious, unreasonable and arbitrary conduct’.^[14]

For these reasons, an abuse of rights or abuse of process will very difficult to prove in most cases where an investor is seeking for protection of its intra-EU award. Corporate restructuring offers a chance for an investor affected by the consequences of the Achmea decision to protect existing as well as future enforcement of awards.

It is also possible that issues relating to the jurisdiction ratione materiae of a tribunal may arise: specifically, a dispute as to whether an award can be considered an investment under the BIT. The answer to this question depends on two issues: the definition of the term ‘investment’ in the applicable BIT and the identity of the respondent State.

Generally, BITs will provide for a broad definition of investment including every asset or property tangible or intangible and in many cases also claims to money. BITs would therefore frequently cover an award as an investment. Specifically, there should be no difficulties if the claim is brought against the host State of the investment for which the award was rendered, as the Tribunal in Gavazzi v. Romania found: ‘[t]he Arbitral Tribunal (by a majority) accepts the Claimants’ case that an award which compensates for an investment made in the host State is a claim to money covered by the BIT as an investment.’^[15]

It would therefore be most practical to seek enforcement in the actual host State. After such a claim under the scope of the applicable extra-EU BIT has been raised and the tribunal has established jurisdiction, it will need to determine whether a standard in the extra-EU BIT was breached by the denial of enforcement on an award rendered under an intra-EU BIT. The provision to which investors will most likely resort is the standard of protection of fair and equitable treatment (FET).

Within the vast realm of FET, the most pertinent aspects of cases as the ones prescribed are non-arbitrariness, denial of justice and legitimate expectations. Tribunals consider denial of justice as part of FET.^[16] It can take many forms including arbitrary, idiosyncratic and unjust decisions, as well as a treatment that is clearly and manifestly contrary to law.^[17] These two points could be raised in cases of non-enforcement based on Article 7 of the draft agreement. The tribunal will have to decide whether the denial of enforcement of the award was the result of a gross misapplication of international law.

Two scenarios also have to be distinguished:

• an award rendered in an International Centre for Settlement of Investment Disputes(ICSID) arbitration and, therefore, under the scope of the ICSID Convention; and

• an award that will have to be enforced through the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

As all EU Member States are party to either or both the ICSID Convention and the New York Convention (Poland only to the latter), their domestic courts will be bound by one of those sets of rules when it comes to enforcement proceedings. Thus, a tribunal – deciding on a dispute arising out of an enforcement of intra-BIT award – will have to establish whether the adherence to the draft agreement, namely the denial of enforcement, was arbitrary and manifestly contrary to the applicable law. For this purpose, it must be ascertained how the ICSID Convention and the New York Convention relate to the draft agreement.

The ICSID Convention, the New York Convention and the draft agreement are all multilateral agreements. Even considering that the draft agreement is EU law, it could still be considered international law in accordance with the findings of several investment tribunals.^[18] Where two multilateral treaties seemingly are in conflict, Article 30 of the Vienna Convention on the Law of Treaties (VCLT) would apply.

Article 30 of the VCLT provides that, where two treaties of the same subject matter contradict each other, the later treaty prevails. Thus, it could be argued that since the draft agreement, the ICSID Convention and New York Convention address the same subject matter, the later treaty between the Member States would prevail over the ICSID Convention as well as the New York Convention.^[19]

In conclusion, as the agreement would form lex posterior, courts applying it over the ICSID Convention or New York Convention would not manifestly disregard the applicable law. However, a tribunal may still find that there is a breach of FET and their obligations under international law.

Scenario 2: denial of enforcement by national courts of third states

The case lies differently when it comes to courts of third states who are not the host EU Member State. In such cases, where the host state as a normal litigant in the enforcement proceedings requests the non-enforcement due to the draft agreement and eventually is successful, the relevant breach can lie within the denial of enforcement by the national court or within the actions of the host state.

A claim against the third state may be possible: the enforceable award is, after all, a claim to money and an asset with an economic value, which can be sold.^[20] Moreover, the third state, if it is not an EU Member State, would violate the ICSID Convention or the New York Convention if applying the draft agreement, thus breaching FET by blatantly disrespecting the applicable international laws.

Furthermore, in this case, the former host state could have incurred another violation of the investors’ rights. Where the host state takes recourse to unreasonable measures to give more significance to its request to non-enforcement, it will violate the investor’s right to fair and equitable treatment. On could think, for example, of undue political pressure or the threats of financial disadvantages made by a host state, in case the enforcement state would go through with the execution of the award. Such conduct, where evident, would not just violate the standards of arbitrariness, idiosyncrasy and unreasonableness, but also fulfill the standard of abuse of rights and bad faith. Even where a state acts ex iure gestionis in courts of another country, it can be made responsible for breaches of its international obligations.^[21]

Scenario 3: special legal issues arising for pre-Achmea awards

Besides from the protection as laid out in scenario one and two, investors who obtained a favorable intra-EU award before the Achmea decision may also rely on the protection of their legitimate expectations, the fundamental principles of legal certainty and the rule of law.

The denial of their right to the damages awarded by an arbitral decision could be regarded as improperly frustrating legitimate expectations to have the award enforced. Even considering that past awards defined the protection of legitimate expectations narrowly, tribunals will have to consider that investors would be deprived of their duly acquired right to reparation under a BIT.

The fact that investors would now be referred to the settlement procedure or to national court litigation pursuant to Articles 9 and 10 of the draft agreement is in stark contrast to the basic notions of legal security and the rule of law. After a competent tribunal found a breach of international law, this finding, which under most BITs as well as the ICSID Convention would be final and binding between the parties, would now have no effect. Any possibility to make use of it is taken away, leaving only breaches of domestic or EU law to form a basis for a new claim. This could be considered as breaching basic values at the expense of the international community. It could also be considered as arbitrary and would thus establish a breach of FET. This applies even if the decision not to enforce were taken in accordance with the applicable law to the enforcement proceedings.

Therefore, an investor, its holding company or shareholders would have the possibility to assert a claim for violation of FET where the award was rendered before the Achmea decision.

Conclusion

The questions arising out of the text of the draft agreement are numerous. Should the draft agreement become final and binding in its current form, Member States could face a new wave of investment claims by investors, which were denied enforcement of their awards. The Achmea decision may not have been the end of investment arbitration in Europe after all.

 

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