The second edition of Washington Arbitration Week (WAW) ran from November 29 to December 3, 2021, hosting 16 panels. This article deals with the key questions raised in the panel entitled “Is the EU a recalcitrant entity? “The case of national and regional judicial decisions not conforming to investment attributions”.
Gene Burd (Fisher Broyles) moderated the panel, which included both practitioners and academics, along with Guido Carducci (Carducci Arbitration), Nikos Lavranos (NL-Investmentconsulting), Alvaro Galindo (Carmingniani Perez Abogados) and Jose Antonio Rivas, SJD (Xtrategy LLP/Georgetown Law).
The CJEU’s view on intra-EU ISDS
Carducci presented to the public the events leading up to the preliminary ruling of the Court of Justice of the EU (CJEU) in Komstroy. In particular, Carducci referred to (i) the Achmea judgment of March 2018 when the CJEU declared intra-EU ISDS clauses incompatible with EU law; (ii) the 2019 political declarations by which some EU member states announced their intention to end intra-EU BITs, and (iii) the adoption of the agreement to end sunset clauses intra-EU BITs from May 2020.
In this legal and political context, in 2019 the CJEU added its Opinion 1/17 in which it ruled that the ISDS clause of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) was compatible with the law of the EU because it was part of an extra-EU trade and investment agreement. In October 2021, in PL Holdings, the CJEU ruled that an arbitration agreement between an investor from one EU Member State and another EU Member State, based on an ISDS clause inserted in an intra-EU BIT, was incompatible with EU law. To date, the most recent decision expressing the EU Judiciary’s position on investment arbitration has been in the Komstroy preliminary ruling concerning an ECT dispute between a Ukrainian investor incorporated in the BVI and Moldova. The CJEU interpreted the provisions of the ECT without referring to the Vienna Convention on the Law of Treaties (VCLT) and concluded that the dispute settlement provisions of the ECT are contrary to EU law when the case in question is an intra-EU dispute. The CJEU has extended its Achmea reasoning about intra-EU ECT cases, ignoring (i) the ECT is a multilateral treaty (ii) to which almost all EU member states, including the EU (as a whole) are signatories. Carducci also pointed to the CJEU’s decision in Komstroy exclusively affects EU member states and their national courts, which must abide by the ruling as it forms part of EU law. Therefore, when an ECT dispute is also an intra-EU dispute, the CJEU treats the ECT dispute in the same way as an intra-EU BIT.
The Komstroy Judgment or the Achmea of the TCE
Lavranos argued that from a public international law (PIL) perspective, the CJEU acted ultra vires in Komstroy. He considered Komstroy as an example of extraterritorial application of EU law, and criticized the CJEU’s simplistic approach, which treated a multilateral treaty in the same way as an intra-EU BIT when, in fact, Komstroy really concerned an extra-EU dispute; neither Ukraine nor Moldova are EU member states. Although, de facto the ECT can look like a set of bilateral treaties, de jure it continues to be a multilateral investment treaty. The CJEU did not explain the dual nature of the ECT: a DIP treaty which, solely for EU purposes, could be considered a set of standards integrated into the EU legal system. In Komstroy the CJEU also failed to mention that the only link of the EU in the dispute was the seat of the ad hoc arbitration, that is to say Paris. Otherwise, it was an entirely extra-EU dispute. With its decision in Komstroy, the CJEU has created more uncertainty for non-EU investors who would now have to avoid a seat in the EU as they risk having their awards voided. Given the ongoing modernization process of the ECT, the Komstroy decision has only increased uncertainty about the ECT, its composition and the future role of the EU and its member states. Lavranos pointed out that from now on, an ECT arbitration proceeding under other rules than ICSID, and with a seat in the EU, would most likely risk being annulled and/or not being applied. Therefore, the safest option seems to be ICSID arbitration. However, Lavranos reminded the audience of the micula saga in which enforcement of an ICSID award was found to be contrary to EU law (CJEU details here). Ironically, after Komstroyfor the purpose of enforcing investment premiums within the EU, even non-EU ECT signatories would face the principles of autonomy and supremacy of EU law.
The EU and the CJEU in Komstroy: Deja vu of the recalcitrant policy against international awards
The extra-EU effects of the Komstroy and Achmea decisions have yet to be seen in other parts of the world facing investment arbitration proceedings. Galindo examined the potential effects of these two rulings on the Andean Community Court of Justice (CJAC). The CJAC allowed arbitral tribunals to file requests for interpretation if such a tribunal were to apply Andean community law. However, the current adversity towards investment arbitration in the EU is not new to Latin America. The CJEU’s decision recalls Ecuador’s recalcitrant policy fifteen years ago, when Ecuador eventually withdrew from the ICSID Convention. Interestingly, Ecuador joined the ICSID Convention in 2021. The current Ecuadorian administration has not only supported re-joining the ICSID Convention, but has also approved a new law on arbitration in Ecuador and the negotiation of new BITs and trade agreements with the United States, Mexico and various Caribbean countries. The shift against investment arbitration from the EU judicial body and the EU itself could impact how regional courts in Latin America and other parts of the world are considering investment arbitration in the future.
The EU as a Disruptor of the International Rule of Law?
The panel ended with remarks from Rivas. Rivas argued that the EU and CJEU should uphold the international rule of law, instead of stubbornly resisting investment arbitration awards. Rivas relied on Simon Chesterman’s definition of the international rule of law in LIP’s Max Planck Encyclopedia:[A]n the international rule of law would include the consistent application of international law to states and other entities, including respect for the judgment of international tribunals. He argued the Komstroy must be analyzed not only from the point of view of the CJEU, but also from the point of view of the courts of the seat of arbitration, that is to say French courts. The French Court of Cassation, in its judgment of March 28, 2018, quashed the judgment of the Paris Court of Appeal (CA) annulling the Komstroy Award. Moreover, unlike the CJEU, the French Court of Cassation considered that the CdA of Paris had made an error of reasoning by adding non-existent criteria to determine the existence of an “investment” under the ECT. The Court of Cassation referred the case to the CdA of Paris, stating that it had acted ultra vires by adding elements that were not included by the drafters of the ECT in the definition of “investment”. In the second procedure, the CoA sent three preliminary questions to the ECJ. Rivas held that the CJEU had erred in its reasoning by including certain elements, such as the characteristics of an investment provided in the Salini test, which stemmed from ICSID case law, while Komstroy was an ad hoc arbitration under the UNCITRAL Rules. Moreover, he pointed out, the Komstroy The award has not yet been overturned by the French courts and therefore is currently in effect.
Additionally, in the United States, in its notice dated November 16, 2021, the District Court for the District of Columbia denied Moldova’s motion that the proceeding in the United States be stayed until the courts French decide on the annulment of the award. The US court ruled that the CJEU’s preliminary ruling would not result, with absolute certainty, in the annulment of the arbitral award. Previously, the District Court and the Court of Appeals for the District of Columbia authorized the enforcement of arbitral awards that were vacated at the seat of arbitration, as in Commiss against Pemex (2008), The Micula brothers in the Micula saga also successfully entered their ICSID award in the District of Columbia Circuit Court of Appeals. However, the same District of Columbia courts denied enforcement of the arbitral award overturned by the Malaysian courts in Thai-Lao Lignite Co., Ltd v Government of the Lao People’s Democratic Republic (2009). The United States District Court did not mention Commissa or Thai-Lao. Instead, he relied on Europcar Italia, SpA vs. Maiellano Tours, Inc.. and refused a reprieve concluding that the lengthy proceedings in France had no obvious conclusion in sight.
The EU’s active policy against ISDS and CJEU rulings on investment treaties have immense ramifications both inside and outside the territory of the EU. Countries from other continents are currently monitoring the CJEU judgments and how the EU and its Member States approach the Komstroy implementation of the decision. This could easily lead to dangerous behavior by states in the rest of the world. After all, if the EU refuses to comply with its international obligations, non-EU countries might be tempted to disobey the DIPs in the same way.
This article was first published on the Kluwer Arbitrage Blog here. Written by Daniela-Olivia Ghicajanu, Fredrik Lindmark and Jose Antonio Rivas of Xtrategy LLP