Worldwide: The Future Of Bilateral Investment Treaty Arbitrations In The European Union

The Contracting Parties to the Energy Charter Treaty (ECT) on June 24, 2022, announced their agreement in principle on the modernization of the ECT.¹ Part of the agreement "confirm[s] that an investor from a Contracting Party that is part of a regional economic integration organisation (REIO), like the EU, cannot bring an Investor-state dispute settlement (ISDS) claim against another Contracting Party member of the same REIO." The Parties addressed that aspect in order to "finally bring an end to the intra-EU applications under the ECT that are contrary to the EU law and recent judgments by the Court of Justice of the EU." The agreement in principle triggers procedures addressed to the adoption of the Modernised ECT at the Energy Charter Conference, and ultimately steps to secure the approval by the Council and the consent of the European Parliament. Here we address the background, recent decisions regarding enforcement of arbitral awards and the competence of panels considering the issue post-Achmea and Komstroy, and the resort to enforcement outside of the EU such as the actions pending in the United States. Here is where things stand—for now.

Countries throughout the world have bilateral investment treaties, many of which include provisions requiring arbitration in the event of a dispute. The Court of Justice of the EU (CJEU) has indicated that these arbitration provisions are incompatible with, and trumped by, EU law when they apply to intra-EU disputes between its nationals and member states. Although EU member states have mostly been unsuccessful in getting arbitral panels to revisit arbitration awards already issued pursuant to these treaties or to abstain from jurisdiction, litigants may find themselves unable to enforce those awards in EU courts and may have difficulty getting arbitral panels sitting in EU member states to accept jurisdiction going forward. This issue has also spawned litigation in the US as parties turn to US courts to enforce foreign arbitral awards there.

Background: from Achmea to Komstroy

Article 344 of the Treaty on the Functioning of the European Union (TFEU) provides that "Member States undertake not to submit a dispute concerning the interpretation of application of [EU law] to any method of settlement other than those provided for therein," i.e., EU and national courts.² For example, the CJEU issued an opinion that EU member states could not agree to be subject to the jurisdiction of the European Court of Human Rights because "the fact that Members States . . . are able to submit an application to the ECtHR . . . goes against the very nature of EU law, which . . . requires that relations between the Member States be governed by EU law to the exclusion . . . of any other law," such that "only the express exclusion of the ECtHR's jurisdiction . . . over disputes between Member States and the EU in relation to the application of the ECHR within the scope ratione materiae of EU law would be compatible with Article 344 TFEU."³

In 2018, the CJEU issued its decision in Slovak Republic v. Achmea B.V., which has become known simply as Achmea.⁴Achmea dealt with a 1991 bilateral investment treaty between the Netherlands and what was then the Czech and Slovak Federative Republic. The Slovak Republic succeeded to the rights and obligations under this treaty in 1993, but subsequently joined the EU in 2004. In 2008, a Dutch company, Achmea, initiated an arbitration in Germany against the Slovak Republic pursuant to the treaty. The arbitral panel took jurisdiction and awarded damages in favor of Achmea. The Slovak Republic then sought to set aside the award in a German court, at which point the German court sought guidance from the CJEU about whether the arbitration provision in the treaty was compatible with the TFEU.

The CJEU held that the TFEU "must be interpreted as precluding a provision in an international agreement concluded between Member States . . . under which an investor from one of those member states may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept."⁵ On remand, the German court held that the arbitration award was unenforceable in light of the CJEU's decision.⁶

The Achmea decision spurred the 23 EU member states to an agreement in 2020 to terminate bilateral investment treaties among themselves.⁷ The member states acknowledged that they were entering the agreement as part of "draw[ing] the necessary consequences from Union law as interpreted in the . . . Achmea judgment." The agreement specifically provided, however, that it would "not affect Concluded Arbitration Proceedings," which "shall not be reopened."

On September 2, 2021, the Grand Chamber of the CJEU addressed the arbitration provisions of the multilateral ECT in Moldova v. Komstroy LLC.⁸ The CJEU found that the arbitration provision in the ECT "must be interpreted as not being applicable to disputes between a Member State and an investor of another Member State."⁹ The CJEU's decision was based on Achmea, as the court found that the arbitration provision in the Energy Charter Treaty was inapplicable "[i]n precisely the same way as the arbitral tribunal at issue . . . in Achmea" because an arbitral panel constituted under that provision "does not constitute a component of the judicial system of a Member State."¹⁰ The agreement in principal on the Modernised ECT, among other things, addressed this point as it determined such provisions are "contrary to the EU law and recent judgments by the Court of Justice of the EU."¹¹

Current decisions regarding intra-EU arbitration

Despite the Achmea decision and subsequent developments, EU member states have faced challenges in convincing arbitral panels to set aside earlier arbitration awards or dismiss arbitrations due to a lack of jurisdiction. As one commentator has noted, "arbitral tribunals in intra-EU arbitrations generally reject [such] jurisdictional objections."¹² A recent example demonstrates this trend. On June 10, 2022, an arbitral panel of the International Centre for Settlement of Investment Disputes (ICSID) rejected an attempt by Spain to annul a 2019 arbitration award issued by the panel under the ECT, based on Achmea and subsequent decisions.¹³ The panel rejected Spain's argument in part because Spain had not raised it during the original proceeding as to one of the claimants.¹⁴

As to the other claimant, the panel effectively opted to ignore Achmea and Komstroy, holding that the ECT is clear and that precluding intra-EU arbitrations could "only be achieved by a subsequent amendment to the ECT provisions, adding a disconnection clause or by permitting other customarily acceptable declarations and acceptances by other parties to the ECT."¹⁵ The panel went on to state that changes to the ECT "should not, with respect, be made by a unilateral judicial assertion by the CJEU that it alone has the monopoly to finally interpret the ECT provisions which has a direct impact on third-party investors who have relied on the plain and clear provisions of the ECT and unconditional consent to arbitration given by the Contracting States."¹⁶

Importantly, the panel also based its decision in part on the fact that arbitration "under the ICSID Convention . . . has no national juridical seat and thus [is] not subject to national court supervision. ICSID awards are therefore not subject to setting aside or vacatur provisions of national laws. Contracting Parties to the Convention have each undertaken to uphold and enforce awards made thereunder unconditionally."¹⁷

But at least one recent arbitral tribunal has sustained jurisdictional objections and dismissed an arbitration where no award had yet been issued, pursuant to Achmea and its progeny. On June 16, 2022, the Arbitration Institute of the Stockholm Chamber of Commerce considered the question in an arbitration against Spain pursuant to the ECT.¹⁸ The panel considered Achmea and the subsequent treatment of Achmea's case by German courts. Among other things, the panel concluded that, under Achmea, the TFEU is "in conflict with a provision in an international agreement whereby an EU Member State gives a unilateral offer to arbitrate disputes with investors from another EU Member State which is a party to that agreement."¹⁹ The panel stated that Achmea's reasoning "is fully applicable to investor-State disputes under the ECT" and that any doubts about this conclusion "have now been dispelled by the CJEU Grand Chamber Komstroy Judgment."²⁰

Based on the Komstroy decision, the panel found that Achmea is "decisive[] for the analysis of investor-State arbitration clauses in general, whether these are included in intra-EU [bilateral investment treaties] or in a multilateral treaty such as the ECT."²¹ The panel rejected the conclusions of other arbitral panels to the contrary, including by finding ICSID decisions "inapposite" because, unlike in ICSID arbitrations that do not have a jurisdictional seat, the arbitration here had its "seat in an EU Member State," Sweden.²² The panel ultimately concluded that "Spain is precluded under [the] TFEU to offer to submit to arbitration a dispute with investors from another EU Member State, such as the Claimants."²³ Thus, "the Tribunal does not have jurisdiction to hear the claims brought by the Claimants."²⁴

Impact on US litigation

The issues raised by Achmea and its progeny have spilled into the United States, as claimants seek to enforce arbitral awards against EU member states in US federal courts. Spain in particular has sought to stay or dismiss several US suits based on Achmea-related arguments. A number of US federal courts have stayed proceedings pending the outcome of Spain's attempts to annul the awards before the overseas arbitral panels, holding that the courts are "loath to wade into this territory unnecessarily."²⁵ Where Spain has been unsuccessful in those efforts to annul, however, US courts have lifted the stays, permitting Spain to press arguments that the US courts lack jurisdiction to enforce the awards.²⁶

Spain's motions in certain of these cases remain pending, but a recent example shows the thrust of its arguments in the US courts. In Cube Infrastructure, Spain has raised four arguments supporting its motion to dismiss. One argument focuses squarely on the validity of an agreement to arbitrate among intra-EU parties post Achmea and Komstroy. The Foreign Sovereign Immunities Act (FSIA) provides the bases for a US court's subject matter jurisdiction over a foreign sovereign. Under the FSI courts do not have subject matter jurisdiction unless certain exceptions apply, including the sovereign's agreement to arbitrate or its waiver of sovereign immunity.²⁷ Spain argued that these exceptions could not apply because, among other things, in light of Achmea and Komstroy, Spain never made a valid agreement to arbitrate.²⁸ Going further, Spain posited that the claimants' attempt to enforce the award in the US was being driven by the fact that EU courts "would have rejected their efforts under well-settled law."²⁹

Spain invoked Achmea in partial support of two other arguments. Spain contended that enforcing the arbitration award at issue would violate the foreign sovereign compulsion doctrine, which prohibits US courts from compelling sovereigns to do something that would cause a violation of another nation's laws. Spain argued, among other reasons, that forcing it to comply with the arbitration award would require Spain to violate EU law as set forth in Achmea.³⁰ Spain further argued that the arbitration award is not entitled to full faith and credit as if it were a final judgment of a US state court because, among other reasons, the arbitral panel lacked jurisdiction to hear the dispute because there was no valid agreement to arbitrate presumably based in part upon Achmea and Komstroy. Just as a state court judgment would not be enforceable in federal court if the state court lacked jurisdiction to issue the judgment, Spain asserted that the arbitration award here is similarly unenforceable.³¹

As of this writing, the claimants in that proceeding have not yet filed their response to Spain's arguments, but claimants in other proceedings have countered with a variety of arguments. In one example, the claimants argued that Spain's entering into the ICSID Convention and the Energy Charter Treaty satisfied the requirements of FSIA.³² Because FSIA's jurisdictional requirements were, according to the claimants, satisfied by those facts alone, the claimants argued that the court should not even consider Spain's Achmea-Komstroy arguments. The claimants contended, however, that the ICSID panel had rejected those arguments in declining to annul the arbitration award and thus Spain was precluded from re-litigating the issue in US court.³³ The claimants also argued that Achmea and Komstroy are inconsistent with the plain language of the ECT and that, in any event, the ICSID award is governed by the ICSID Convention and US law, so EU law (and, by extension, Achmea-Komstroy) do not apply.³⁴ In that same proceeding, the European Commission has submitted a brief to the US court, arguing that Spain's motion should be granted and that the US court lacks jurisdiction under the FSIA in light of Achmea.³⁵

Although Spain's motions remain pending, at least one US court has weighed in on this issue, but in a very different factual context. In Micula v. Romania,³⁶ a federal court in Washington, DC rejected Romania's Achmea-based arguments largely because the events underlying the arbitration occurred before Romania joined the EU, and thus the arbitration did not implicate issues of EU law.³⁷ The court concluded, as a result, that the Achmea decision did not prevent the US court from exercising jurisdiction under FSIA's arbitration exception. Romania has recently moved to set aside or alter judgments entered against it by the US federal court, which remains pending as of this writing. As in one of the cases involving Spain, the European Commission has filed a brief asking the US court to grant Romania's motion and set aside the judgments based on a lack of jurisdiction.³⁸

It remains to be seen how the US courts will rule on these issues, although the outcome in Romania's case may have little bearing on Spain's cases in light of the different factual contexts. The decisions on these motions may have a significant impact on how successful intra EU arbitration parties will be when seeking to enforce arbitral awards and agreements to arbitrate in the US going forward.

Key takeaways

Despite the seemingly straightforward rulings in Achmea and Komstroy, the viability of intra-EU arbitrations under bilateral investment treaties carries some uncertainty. Although an arbitral panel has reached a different result, ICSID panels in particular may remain poised to continue to exercise jurisdiction over these disputes notwithstanding Achmea and Komstroy. That said, claimants should give careful consideration to the ability to enforce ICSID awards and other awards in the courts of EU member states and, for now, the US. Pending motions in several cases involving Spain and Romania may end up either opening the door for future enforcement of these types of awards, or shutting down such efforts based on Achmea and its progeny.

Footnotes

1. The announcement is available at https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en.

2. The TFEU is available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12016ME%2FTXT.

3. See CJEU Op. 2/13 ¶¶ 212-13.

4. CJEU Case No. C-284/16, available athttps://curia.europa.eu/juris/document/document.jsf?text=&docid=199968&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=10955575.

5. Id. ¶ 62.

6. German-language version available at https://dejure.org/dienste/vernetzung/rechtsprechung?Text=I%20ZB%202/15.

7. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:22020A0529(01).

8. CJEU Case No. C-741/19, available at https://curia.europa.eu/juris/document/document.jsf?text=&docid=245528&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=10961628.

9. Id. ¶ 66.

10. Id. ¶ 52.

11. The announcement is available at https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en.

12. The CPR Speaks post is available at https://blog.cpradr.org/2021/01/19/exinguishing-intra-eu-bilateral-investment-treaties-recent-developments/ (listing a number of examples).

13. RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.A.R.L. v. Kingdom of Spain, ICSID Case No. ARB/13/30, available at https://jusmundi.com/en/document/decision/en-rreef-infrastructure-g-p-limited-and-rreef-pan-european-infrastructure-two-lux-s-a-r-l-v-kingdom-of-spain-decision-on-annulment-friday-10th-june-2022#decision_24420.

14. Id. ¶ 46.

15. Id. ¶ 97.

16. Id.

17. Id. ¶ 98.

18. Green Solar Partners K/S SCE Solar Don Denito APS v. Kingdom of Spain, SCC Arbitration V (2016/135), available at https: https://jusmundi.com/en/document/decision/en-green-power-k-s-and-sce-solar-don-benito-aps-v-kingdom-of-spain-award-thursday-16th-june-2022?su=%2Fen%2Fsearch%3Fquery%3Dgreen%2520solar%2520partners%26page%3D1%26lang%3Den&contents[0]=en.

19. Id. ¶ 423.

20. Id. ¶¶ 427, 431.

21. Id. ¶ 436.

22. Id. ¶ 439.

23. Id. ¶ 456.

24. Id. ¶ 479.

25. Infrared Envt'l Infrastructure GP Ltd. v. Kingdom of Spain, 2021 U.S. Dist. LEXIS 120489, at *15 (D.D.C. June 29, 2021) (internal quotation marks omitted) (quoting 9REN Holdings, S.A.R.L. v. Kingdom of Spain, 2020 U.S. Dist. LEXIS 180117 (D.D.C. Sept. 30, 2020) and Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, 397 F. Supp. 3d 34, 40 (D.D.C. 2019)).

26. See, e.g., Cube Infastructure Fund SICAV v. Spain, 20-cv-1708 (D.D.C.); Nexterra Energy Global Holdings B.V. v. Spain, 19-cv-1618 (D.D.C.).

27. See id. at 16 (citing 28 U.S.C. § 1605(a)(1), (6)).

28. Id. at 17-24. Spain also argued that agreeing to arbitrate under the ICSID Convention was not an express or implied waiver of its sovereign immunity. Id. at 20-24.

29. Id.

30. Id. at 24-25. Spain added a second prong to this argument, positing that forcing it to pay the award "would require Spain to make unlawful payments in violation of EU [state] aid law" as the payment was not authorized by the European Commission.

31. Id. at 25-26.

32. Nexterra, 19-cv-1618, Dkt. No. 68 at 5-6.

33. Id. at 6-7.

34. Id. at 7-8.

35. Nexterra, 19-cv-1618, Dkt. No. 67.

36. 404 F. Supp. 3d 265 (D.D.C. 2019).

37. Id. at 279-80.

38. Micula, 17-cv-2332, Dkt. No. 191.

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