The European Court of Justice, International Arbitrations and the exercise of (an unsatisfactory) St

Author: Elisabetta Righini, Counsel with Latham & Watkins LLP and Visiting Professor at the Centre of European Law, King’s College London.

The opinions expressed are strictly personal.

The recent judgement of the EU Court of Justice (“EUCJ”) in Case C-284/16, Slovakia vs Achmea BV, has reheated the legal debate between international arbitration lawyers and State aid lawyers. Albeit ultimately a case about the possibility of a private company to invoke an intra-EU bilateral investment treaty (“BIT”) to protect itself against the reversal by Slovakia of the liberalisation of its sickness insurance market, the most imminent impact of this ruling is likely to be in a completely different field of law, i.e. that of State aid, and in particular in a few cases currently pending at the General Court in Luxembourg (e.g. Case T-217/17). Over the last ten years, in fact, because of accession negotiations or – more prosaically – the public budgets crunch due to the economic and financial crisis, a number of Member States have cut down on public support to existing investments. This has been notably the case with regard to the financing of renewable energy sources (“RES”) in countries like Spain, the Czech Republic, Italy. Wherever possible, foreign investors have reacted to this cut in revenues by resorting to the investment protection rules of BITs or the Energy Charter Treaty (“ECT”).

The key finding in Achmea is in its paragraph 58:

“In the present case, … the possibility of submitting … disputes [relating to the interpretation also of EU law] to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States. Article 8 of the BIT is such as to call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the [EU] Treaties, ensured by the preliminary ruling procedure provided for in Article 267 TFEU, and is not therefore compatible with the principle of sincere cooperation referred to in paragraph 34 above.”

Achmea comes six day after another landmark judgement in Case C‑64/16, Associação Sindical dos Juízes Portugueses, in which the EUCJ stated that:

“The very existence of effective judicial review designed to ensure compliance with EU law is of the essence of the rule of law (see, to that effect, judgment of 28 March 2017, Rosneft, C‑72/15, EU:C:2017:236, paragraph 73 and the case-law cited). It follows that every Member State must ensure that the bodies which, as ‘courts or tribunals’ within the meaning of EU law, come within its judicial system in the fields covered by that law, meet the requirements of effective judicial protection. … In order for that protection to be ensured, maintaining such a court or tribunal’s independence is essential, as confirmed by the second subparagraph of Article 47 of the Charter, which refers to the access to an ‘independent’ tribunal as one of the requirements linked to the fundamental right to an effective remedy. … The independence of national courts and tribunals is, in particular, essential to the proper working of the judicial cooperation system embodied by the preliminary ruling mechanism under Article 267 TFEU, in that, in accordance with the settled case-law referred to in paragraph 38 above, that mechanism may be activated only by a body responsible for applying EU law which satisfies, inter alia, that criterion of independence.” (para. 36-37, 41 and 43)

Achmea applies this jurisdictional principle and thus frames the relationship in law on a given subject matter between, on the one hand, the decisions of the EU regulator - possibly subject to EUCJ judgments confirming their validity under EU law - and, on the other hand, the Arbitrators’ awards adopted pursuant to a BITs regulated under International Law.

Before Achmea, conflicting remedies had been adopted under the two legal systems in the Micula case (case SA.38517), in which the EU State aid watchdog declared that the enforcement of an award by Romania as a compensation for a State aid measure that was terminated at the request of the Commission would constitute illegal and incompatible State aid.

Given these precedents, it is not surprising that emotions are high and the debate polarised.

However, it would be a mistake to characterise this debate only from the macro-perspective of the relationship between legal and judicial orders. In other cases, such as the 2016 Decision on the Czech RES Scheme (case SA.40171) or the 2017 Decision on the Spanish 2013 RES Law (case SA.40348), the EU State aid watchdog failed to exercise its ex officio powers of control to assess whether the overall remuneration of existing energy installations financed under a past scheme was in line with the case-practice and the benchmarking of similar situations in other Member States at the time at which aid had been granted, issue that a number of investors had successfully brought in front of Arbitrators under BITs or the ECT when such remuneration had been cut down retroactively by the Member States.

This situation significantly differs from situations such as in Micula. Whereas in Micula, the claimants sought compensation for the withdrawal of a scheme previously found to be incompatible aid by the Commission, the RES investors sought before the Arbitrators compensation for damages resulting from the unprecedented reversal of schemes which have never been assessed as State aid by the EU watchdog. The arbitration procedures were perfectly lawful under International Law and should have thus been considered with the appropriate care and restraint. This because another EUCJ jurisprudence mandates that the European Union “must respect international law in the exercise of its powers” (Judgment of 24 November 1992, Anklagemyndigheden v Peter Michael Poulsen and Diva Navigation, C-286/90, EU:C:1992:453, para. 9; and judgment of 16 June 1998, Racke v Hauptzollamt Mainz, C-162/96, EU:C:1998:293, para. 45), and that “a measure adopted by virtue of those powers must be interpreted, and its scope limited, in the light of the relevant rules of international law” (Judgment of 3 September 2008, Kadi and Al Barakaat v Council, C-402/05 P, EU:C:2008:461, (“Kadi I”), para. 291).

In the context of the Czech and Spanish Decisions, the EU State aid watchdog could have avoided escalating the issue at the level of a clash between legal and judicial systems by simply exercising its ex officio powers of State aid control, checking whether the compensation did indeed constitute State aid, which the investors consider far from evident, and – if at all necessary – taking the BITs and ECT into account in the proper hierarchical order of EU norms. The Commission, in fact, cannot qualify any compensation without conducting a proper assessment, first, as to the existence of aid and, then, of its compatibility against the criteria set out in the guidelines in force when the aid was originally granted, as required under the grand-fathering logic of point 249 of the 2014 Energy and Environmental Aid Guidelines. This would allow the Commission to exercise its State aid control powers when necessary, in line with the TFEU, and under the EUCJ oversight, while respecting the binding nature of international agreements concluded by the EU. As assessing the validity of the actions of the EU regulator is the task of the system of EU courts, the hope is that the State aid cases pending in Luxembourg on the Czech and Spanish Decisions will bring this debate into its right proportions.

#Stateaid #InternationalArbitration #intraEUbilateralinvestmenttreaties #BIT #EnergyCharterTreaty #ECT

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