In the Aftermath of Achmea – Does Vattenfall Ensure the Future for Intra-EU Investment Arbitration?

On 6 March 2018, the EU Court of Justice (CJEU) held in its Achmea ruling that dispute settlement provisions providing for arbitration in intra-EU bilateral investment treaties (BITs) are incompatible with EU law. In the wake of the CJEU ruling, many have been wondering whether this decision also impacts intra-EU disputes arising under multilateral investment treaties, in particular disputes under the Energy Charter Treaty (ECT).

After the CJEU ruling, two arbitral tribunals held that the Achmea decision does not affect their jurisdiction under the ECT. In Masdar v. Spain, the tribunal addressed the question as part of its award. In Vattenfall v. Germany, the tribunal issued a comprehensive "Decision on the Achmea Issue", setting out in detail the basis on which investment treaty tribunals may still consider themselves competent to decide on intra-EU investment disputes under the ECT.

Other tribunals could take a similar position on their jurisdiction under the ECT, which may be some comfort to intra-EU investors relying on ECT protection, but does not yet settle the issue in the long term.

Background of the Vattenfall decision

The Vattenfall tribunal rendered its decision in the context of a pending dispute between various subsidiaries of the Swedish Vattenfall group and the German republic concerning Germany's decision to move away from nuclear energy after the 2011 Fukushima catastrophe (ICSID Case No. ARB/12/12).

Prior to the CJEU's Achmea ruling, Germany had not raised the "intra-EU objection", but the objection was put forward by the EU Commission, which had intervened as amicus curiae – as it has routinely done in intra-EU disputes in recent years. Following Achmea, Germany formally raised the intra-EU objection and argued together with the EU Commission that the CJEU's findings applied not only to intra-EU BITs, but also to multilateral agreements such as the ECT.

The claimants argued that Germany's objection – raised six years after arbitral proceedings were commenced in 2012, and 18 months after the hearing in October 2016 – came far too late. The tribunal disagreed. It held that the March 2018 Achmea judgment qualified as a "new fact" entitling Germany to raise its objection at this late stage. The tribunal also noted that its ex officio powers would allow it to consider jurisdictional matters at any stage of the proceedings.

EU law and the Achmea ruling vis-á-vis the ECT

The tribunal assessed the relevance of EU law and the Achmea ruling to determine its jurisdiction.

Firstly, it held that Article 26(6) ECT, by which the tribunal must decide "issues in dispute" in accordance with the ECT and the "applicable rules and principles of international law", applies only to the substantive standards of treatment and protections for investments. It does not apply to the ECT's dispute settlement provisions.

Secondly, the tribunal noted that the starting point of its interpretation was not EU law but Article 31(1) of the Vienna Convention on the Law of Treaties (VCLT). Pursuant to this provision, a treaty should be interpreted according to the ordinary meaning of its terms and their context, and in light of the treaty's object and purpose. While the EU treaties qualify as international law and EU law might come into play in the interpretation analysis, EU law cannot be used to rewrite the treaty being interpreted, contradicting the ordinary meaning of its terms.

The tribunal expressed "serious difficulty" in deriving a "relevant rule of international law" from the CJEU's Achmea ruling, and considered it an open question whether the CJEU's considerations would also apply to the ECT. It agreed with the Masdar tribunal that the CJEU ruling was silent on the compatibility of EU law and intra-EU investor-State dispute settlement under the ECT and therefore did not declare a relevant new rule of international law. On that basis, it concluded that EU law could not be taken into account in its interpretation of Article 26 ECT under the VCLT.

What the Vattenfall tribunal did decide

In determining the ordinary meaning of Article 26 ECT, the tribunal found nothing in its text, context, object or purpose that excludes intra-EU investment disputes. For the tribunal, it "would have been a simple matter" to draft Article 26 so that it did not apply to intra-EU disputes, but there was no indication that such a carve-out was intended.

The tribunal also addressed Article 16 ECT, which provides that prior or subsequent treaties may not derogate from rights in the ECT, where any such right is more favorable to the investor. If the EU treaties concerned the same subject matter as the ECT, Article 16 ECT would "confirm beyond doubt" that Article 26 cannot be interpreted to exclude intra-EU investors from arbitration. The tribunal also ruled that Article 16 served as lex specialis in terms of a conflict of laws rule and posed an "insurmountable obstacle" to the argument that EU law prevails over the ECT.

Finally, the tribunal considered it "telling" that the ECT did not contain a disconnection clause, which would ensure that provisions of mixed agreements apply only to third parties and not between EU member states. In particular, the EU's initial proposal to insert a disconnection clause, which was ultimately dropped, led the tribunal to conclude that the clause was "intentionally omitted from the ECT".

What the Vattenfall tribunal didn't decide

The Vattenfall tribunal's decision carefully avoided the substance of the Achmea ruling. It distinguished Achmea for addressing a bilateral investment treaty and focused on an interpretation of the ECT.

In reaching its conclusion, the tribunal emphasised that it was not denying the effectiveness of EU law; it rather drew a line between the task of a tribunal to apply the applicable treaty to a current dispute and policy considerations for future dispute settlement. The tribunal determined that should the EU Commission or member states consider Article 26 incompatible with EU law, it was up to them to "take the necessary action to remedy that situation" rather than for the tribunal to redraft the treaty.

What is to come: legal certainty for Intra-EU investors?

The Vattenfall tribunal's statement may be indicative of what is to come. In the short term, intra-EU investors relying on ECT investment protections may find comfort in the view that the Masdar and Vattenfall tribunals have taken on their jurisdiction.

However, this may not be the end of the story. Germany has argued that the tribunal's decision to uphold its jurisdiction might give rise to enforceability issues for the award. Unlike Achmea, Vattenfall and also Masdar are ICSID proceedings where awards are to be enforced according to special rules of the ICSID Convention. This means there is no remedy that would allow national courts to review the tribunal's determination of its own jurisdiction. Therefore, neither Masdar nor Vattenfall will result in another request for a CJEU preliminary ruling.

Yet the CJEU is expected to issue a preliminary ruling on this very issue. The award in the SCC case Novenergia v. Spain, currently under review by the Svea Court of Appeal in Stockholm, may be the impetus as Spain has already asked the Court to seek a preliminary ruling from the CJEU on the compatibility of Article 26 ECT with EU law.

The CJEU has yet to decide whether it shares the view of the EU Commission – as most recently confirmed in its communication to the European Parliament and the Council – that the Achmea ruling not only renders intra-EU BIT arbitration clauses unlawful, but that the underlying considerations are equally relevant to intra-EU disputes under the ECT. The EU Commission views intra-EU investments as being fully protected by EU law and that these protections can be enforced within the judicial systems of the EU and its member states.

Broadly speaking, this development may also be viewed against the background of criticism against investor-State dispute settlement in its current form which in recent years has arisen particularly in Europe.

The EU Commission aims to move away from investor-State arbitration and eventually create a multilateral investment court for resolving investment disputes. Shortly after the CJEU's Achmea ruling, the EU Council adopted negotiating directives for a convention establishing a multilateral court for the settlement of investment disputes.

Vattenfall provides reassurance for intra-EU investors relying on ECT investment protections. It may not, however, settle the question of intra-EU investment arbitration under the ECT in the long term. It remains to be seen what the future holds for the effective protection of intra-EU investments.

See CMS's article on the original Achmea ruling here, also available in English.

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