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Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
An European approach
to BITs, MITs and ISDS
Why the Investor-State Dispute Settlement has become such a
controversial matter?
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Tangible reality: Micula Case and the
inclusion of ISDS in the TTIP
 Two current events have brought the questions of international investment
law, international arbitration and intra-EU bilateral trade agreements closer
to the public eye. The issue of inherent conflict between law and politics,
pacta sunt servanda and the right to regulate, public and commercial
interests, commitments undertaken under EU Treaties and obligations
imposed by BITs and MITs is no longer just an academic concern.
 1st Micula Dispute starting in 2005, closed with an award in favour of the
investor in 2013. An annulment request was brought by Romania in April 2014.
 2nd TTIP project, a trade agreement between US and EU, initiated in June
2013 at the G8 summit in Lough Erne.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
What can be said about the public
European-International divergent views?
There are many perspectives that can be used in order to scrutinise the interaction between the
national-supranational-international levels of public protection of invested interests:
 Political – Sovereignty and Democracy and the central role of the nation state.
 Historical – The system was created for a different purpose under different historical
conditions, before globalisation and constitutionalisation of international law. Is 1950-
thinking still relevant now-a-days in a global trade liberalised context?
 Practical – Enforceability & Necessity. Renegotiation of BITs bringing them in line with EU law.
 Legal – Inconsistency and Arbitrariness. Kompetenz-Kompetenz.
The solutions also can point towards distinct directions:
 Maintaining the system as it is  There is no conflict that must be addressed.
 Maintaining the system while amending it  Changes are necessary.
 Abolishing the system  The national courts shall be empowered to grant remedies for a
breach of BIT. Systemic flaws cannot be addressed by amendments, a radical change is
needed. A parallel system of justice is not justified. Why is an investor more than a EU-
citizen?
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
The European already classic ambiguity
A certain political indecision or confusion characterises the public discourse.
- At the EU level, there are Member States in favour and other Member States
against the inclusion of ISDS in the TTIP;
- Also a difference of opinions exists between DG Trade and DG Competition,
inside the European Commission;
- In Romania, the uncertainty and hesitation during the time of pre-accession
to the EU led to the signing of the BIT with Sweden and a series of legislative
measures in favour of investors, but against the EU law;
- In Romania the difference of opinions has been manifested between the
Government and the Competition Council, in a sense a replication of the
conflict between DG Trade and DG Competition at a smaller scale.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
A happy marriage between the market and
the multi-layered state?
Eastern Europeans are generally more favourable to the ISDS and TTIP than the citizens of the old
Member States: France, Germany, Luxembourg and Austria.
A less critical view as regards the ISDS inclusion makes sense acknowledging the aspiration to fully
depart from the communist past. The Micula case shows nevertheless that there is a lot of
tension between these three spheres: trade law, competition law and foreign investor right of
access to arbitral justice.
Arbitral justice is a parallel avenue, an alternative to the national system of courts. It meant to
offer a safer and effective protection and in the same time, the very existence of this parallel
system, it presupposes that the system of national courts, which is good enough for you and me,
is not good enough for the foreign investor. The issue of reverse discrimination is open to debate,
but also the observance of free movement provisions in Article 49 TFEU and protection of
competition in Article 107 TFEU.
The state intervention made possible the accession to the EU and the signing of so many BITs.
Moreover markets are nothing but a regulatory space (even in the absence of states, markets
would comply with rules). State made rules in the liberal society aim to deal with market
failures, thus they have a corrective function. Competition law including state aid control, means
to maintain competition on markets, where the market in itself cannot provide it.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Transfer of state power in the EU and in
the international context
 State intervention in general must be based on democratic principles and be necessary, proportionate and
efficient;
 In certain areas, e.g. internal market and foreign trade, the state cannot regulate efficiently and therefore
the nation state transfers power to a pool of supranational legislative authority, the EU;
 Any transfer of power is exposed to a test of necessity and proportionality according to the federal principle
of subsidiarity (Article 5(3) TEU);
 In other areas, the state engages in contractual obligations with other states, implying as well a transfer of
sovereignty, which is nevertheless temporary and limited as scope;
 State transfer of power to the supranational pool might overlap with the commitments previously assumed
via international treaties;
 Both supranational and international law are state-made laws, not laws beyond the nation state.
 In contrast the ancient lex mercatoria has its origins in non-state law, though it has made its way into
different national laws.
 The true lex mercatoria according to Ralf Michaels, marks the shift in global law from a segmentary
differentiation in different national laws to a functional differentiation. It is a law beyond, not without, the
state.
 According to Michaels, there is no such thing as anational law and consequently the matter of enforceability
of arbitral awards cannot be placed outside the national forum. The relation is one of interdependence and
legitimacy. Even the Article 54 ICSID follows this path and assigns the Convention state to enforce arbitral
decisions, as if it were a final judgment of a court in that State.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Public-Private global regulatory convergence
There are two golden rules of democracy:
 Prevalence of public over private interest, including the prevalence of competition
protection over the protection of competitors/investors;
 Transparency of the government.
The constitutional law contributes to a well functioning market by designing
institutions, procedures and substantive tools directed towards the limitation of the
prevalence of the public over the private interest, especially the proportionality test
and the non-discrimination principle. Conceptually it can be made a distinction
between:
• Individual justice – Putting victims in the driving seat as the BIT/ICSID system.
• Constitutional justice – Constitution of Romania/ Constitutional Court.
• Pluralist justice – European Convention of Human Rights/ ECtHR.
• Market justice – Vote with feet, move away from the bad government. The choice
must be free, which in reality it is not.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
The rise of constitutional law.
Three schools of constitutionalism:
1. Normative – national law perspective, international constitutionalism
supplements the national constitutionalism. In this sense, only if the
protection of rights, including investor rights were insufficient, then a
supplement would be required. The complexity of world made state-law to be
less effective.
2. Functional – supranational law perspective, a centralised authority controls
the production of international law. International law protection permeates
the supranational legal order only if it passes the control test exercised by a
central authority.
3. Pluralist – transnational law perspective, constitutionalism beyond the state.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Private Investor Protection versus Free
Movement & Competition Protection
 The international treaty entitles the foreign investor to a better treatment
than normally a citizen would enjoy under the national constitution, EU law,
WTO law or ECHR.
 A better treatment than the national standard may relate to:
a. non-state law, which may become national law as an implementation of
supranational law;
b. illegal discrimination or
c. illegal subsidies/state aid.
 A better treatment may imply an illegality.
 A better treatment may also be allowed to permeate the supranational legal
order if it passes the test developed by CJEU in Opinion 2/2013.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Better rights imply unequal treatment
Something conceptually desirable, such as an individual justice system that puts
the investor in the driving seat, remains at odds with the EU law.
Better rights for some enterprise imply discrimination against other enterprises
and potentially, it may induce market foreclosure, where new investors are not
enjoying the same level of protection compared with the prevailing investors or
first-movers. Discrimination must be justified.
Compatible state aid implies justified discrimination and therefore the
compatibility is defined narrowly and made subject to strict procedural
conditions.
In some cases procedural rules may give rise to substantive rights. This is the
case of Article 108(3) TFEU. It’s a procedural rule addressed to the Member
States, not to the beneficiaries of state aid, but functionally the rule ensures
substantive protection to the competitors of the beneficiary and to the
beneficiary herself, in terms of protection of legitimate expectations. This is the
outset of Micula state aid case.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Facts in Micula
The Europe Agreement came into force in 1995. In 1997, the European Commission did
not accept Romania’s application to join the EU. The 1998 Annual Report of the
European Commission highlighted that regional development would be key to
Romania’s satisfaction of the economic criteria for EU accession. In 1998 and 1999,
the European Commission issued Guidelines on Regional Aid and the Council issued a
regulation governing the application of Article 108 TFEU. In 1998 and 1999 Romania
established a framework to grant incentives for investment in disfavoured regions.
In 1999 the Miculas began their investment in food and drink production facilities in
the disfavoured region of Stei-Nucet-Draganesti. Throughout the term of the
investment, Romania repeatedly amended its regulations on regional State aid to
comply with EU law.
The Romanian courts struck down certain amendments, hence there was a series of
withdrawals and reinstatements of incentives. In 2005, all but one of the incentives
were withdrawn and the Commission issued its affirmative opinion on Romania’s
accession. Romania signed the accession treaty in 2005 and the Miculas brought a
claim under the Romania-Sweden BIT (signed in 2002/come into force in 2003)
requiring compensation for the abolished incentives.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Fiscal regulation and its limits
 The autonomy of the national state in the field of taxation is not absolute.
 There are limits to this autonomy that inter alia relate to:
o Constitutional law of the state itself and ECHR, right to property.
o Union law within which free movement rules constitute lex specialis in relation to non-discrimination
principle and the competition rules, especially state aid law.
o WTO law – non-discrimination based on origin.
o International law within which the Fair and Equitable Treatment standard constitutes a form of lex
specialis itself.
 What happens in Micula is that a new fiscal measure inferring a fiscal advantage granted to
investors in a certain geographical region constituted illegal state aid under Union law. (1998-
9) The scheme was abolished in 2005, four years earlier than it had been decided initially.
 Not granting that fiscal advantage constitutes according to the interpretation given by the
ICSID-Tribunal a breach of the FET-standard, which gives ground for compensation. (ICSID
Case No. ARB/05/20 11-12-2013)
 The payment of compensation constitutes in its turn a state measure covered by the
definition of state aid in Article 107(1) TFEU, it falls within the scope of the prohibition in
Article 108(3) TFEU and it is precluded by Union law in conformity with Article 108(2) TFEU.
(Commission Decision SA.38517 30-03-2015)
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
“Disorder of legal orders”: Global law.
 International law? Interstate law. BIT. VCLT. NYC. ICSID.
 Supranational law? Law above the state: EU law. WTO law.
 Transnational law? Law across the states: emerging law beyond the control of
state. For instance sports or internet laws.
 Jus cogens ≠ EU law. Higher-order law?
 Human rights. Charter of Fundamental Rights. General Principles of EU Law.
UN. ECHR. Social Rights Charter.
 New common law?
 Law of peoples as opposed to Law of nation states?
 Postnational law?
Where to place the investor protection law in this disorder of legal
orders?
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
The emerging standard of protection
TWO STANDARDS OF PROTECTION
 Customary Minimum Standard consistent with Rule of Law.
 Higher Treaty Standard  In conflict with EU law, since the advantages enjoyed by Member States are
inseparable from the obligations imposed by the EU Treaties.
 Absolute standards so called protection against regulatory expropriation (Frivolous? Ambiguous?):
 Fair and Equitable Treatment (Subjective, Arbitrary?)
 Full protection and security (Consistency?)
 Relative standards  – Non-discrimination, which is the DNA of EU law and the cornerstone of WTO law:
 National Treatment
 Most favoured nation treatment (MFN)
 Is there any place left for regulatory competence to legislate in the public interest with reference to
indirect expropriation, which in principle can be anything?
 Are these real problems that must be fixed?
 Who is foreign anyway in a global world?
 Who has the competence to perform the balance test?
 Is there a need for an appeal mechanism?
 Should all trade risks be secured and to which extent?
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
DG Competition monitoring activities and
analysis of intra-EU BITs
There are around 190 Bilateral Investment Treaties between EU Member States (intra-
EU BITs), concluded almost exclusively between 'old' (EU-15) and 'new' (EU-12)
Member States, or between two EU-12 countries, at a time when at least one
contracting party was not yet a Member of the European Union.
The regulatory overlap between intra-EU BITs and EU legislation gives rise to a number
of problems. In the Commission's view, intra-EU BITs are not compatible with the EU
internal market, because they only cover investment from the respective BIT partner
country and not from all EU Member States, and provide for parallel jurisprudence
through arbitration procedures. In this way these treaties conflict with the
jurisdiction monopoly of the CJEU on EU law questions.
There is an increasing number of arbitration procedures going on whereby investors
based in one Member State invoke a BIT in order to claim damages from another
Member State. The three CJEU judgments (Case C-205/06, Case C-249/06, Case C-
118/08) on the incompatibility of BITs provisions on the transfer clause also showed
clearly the regulatory overlap between investment agreements and the Treaty.
Regarding this issue, the Commission is in close contact with the Member States and
has repeatedly reiterated that the incompatibility of intra-EU BITs with EU law means
that they have to be brought to an end.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
VCLT - a body of consolidated international
law of treaties
 Under Article 3(b) VCLT the fact that the VCLT doesn’t apply to international agreements
concluded between States and other subjects of international law (such as the EU) is not to
affect the application of VCLT-rules, which are an expression of general international
customary law, to the EU and its member states in their entirety.
 Rules of general international customary law are binding upon the EU institutions and form
part of the Union legal order (see, to that effect, Racke, paragraphs 24, 45 and 46).
 Pursuant to Article 31 VCLT, a treaty is to be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in the light of its
object and purpose. In that respect, account is to be taken, together with the context, of any
relevant rules of international law applicable in the relations between the parties (see, to that
effect, inter alia, Opinion 1/91 [1991] ECR I-6079, paragraph 14; Case C-416/96 El-Yassini [1999] ECR I-1209, paragraph 47; Case C-268/99 Jany and
Others [2001] ECR I-8615, paragraph 35).
 Article 30(4)(b) VCLT agrees with Article 351(1) TFEU.
 Article 26 VCLT embodies the principle of “pacta sunt servanda”, which can not be
interpreted against EU law as means to evade state liability in the event of a breach of EU
law (see, by analogy, Case C-470/03 AGM.-COS.MET [2007] ECR I-02749, paragraph 72).
 ECO Swiss doctrine applies for the state aid prohibition, as it does in cartel cases, since there
is no differentiation between public and private arbitration in EU law that could have a
bearing on the scope of its application (See also Burgstaller, pp 472-3).
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
No actual conflict in the meaning of VCLT
 The Tribunal upheld that it retained jurisdiction to adjudicate cases related to intra-EU
BITs (Electrabel, Micula, Eastern Sugar) and that Romania’s accession to the EU did not
terminate the BIT signed with the member state, Sweden. Tribunal didn’t accept the
argument that the EU law may displace a pre-existent BIT (Eureko).
 However, the CJEU clarified that treaties concluded by MSs with acceding states
cannot, in relations between the MSs, be applied to the detriment of the objectives of
EU law (see, to this effect, Case 286/86 Deserbais [1988] ECR 4907, paragraph 18; Joined Cases C-241/91 P and C-242/91 P RTE and
ITP v Commission [1995] ECR I-743, paragraph 84; Case C-301/08 Bogiatzi [2009] ECR I-10185, paragraph 19; Case C-533/08 TNT Express
Nederland [2010] ECR I-04107, paragraph 52).
 The Commission required the termination of intra-EU BITs. (See EC Letter of January 13, 2006, quoted in
Eastern Sugar, 27 March 2007, SCC Case No 088/2004, Partial Award, para. 119 and the three judgments in Case C-205/06, Case C-249/06,
Case C-118/08).
 According to EU law, the conflicting obligations aren’t displaced, but they become
inapplicable, this is what the primacy principle infers, that a MS shall disapply an
obligation found in breach of EU law.
 The ICSID decision only entitles an investor to receive compensation, it does not set
aside the Romanian legislation on state aid, but it penalises Romania for setting in
place this legislation.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
What is the nature of conflict?
 According to the conferral principle the MSs remain ‘the masters of the Treaties’, because
they possess Kompetenz-Kompetenz, within which they define their own competences and
those of the Union. CJEU has long asserted its Kompetenz-Kompetenz to determine the limits
of EU authority.
 After Opinion 2/2013 it is crystal clear that this question of interpreting whether a higher
level of protection concurs with EU law, will never be left at the discretion of a non-EU
forum. On the other side the ICSID system takes for granted that an award would be
enforceable under any circumstances and it makes this assumption in a context where a
substantively erroneous arbitral decision cannot be corrected, amended or annulled.
 As previously discussed a BIT is not law beyond state. It’s a synallagmatic contract concluded
between Sweden and Romania that cannot go any further than the intention of the parties.
 In this sense it is clear that Sweden, EU Member State since 1995 and Romania, an acceding
state with a fixed date of accession, couldn’t have aimed to conclude a BIT that obliged them
to depart from their EU law onuses. This is nevertheless the assumption made by the ICSID-
Tribunal in its imaginative interpretation of the BIT.
 The Tribunal interprets the BIT as a deviation from the accession course without giving any
solid argumentation why Sweden and Romania would have aimed to reach such an
agreement. The interpretation is unreasonable, since it infers an intent not to fulfil Treaty
obligations.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Arbitral Tribunal disregards the issue of
unenforceability
 The Arbitral Tribunal provides a disruptive interpretation of the BIT obligations and moreover it ignores the
question of enforceability.
 Article 54(1) ICSID: “Each Contracting State shall recognize an award rendered pursuant to this Convention
as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were
a final judgment of a court in that State”.
 In essence the questions at bar relate to what are usually called the negative (or preclusive) and the
positive (or conclusive) effects of res judicata of arbitral awards.
1. The first have to do with the effect of preventing further litigation on a matter that has formed the subject of a prior
arbitral award. FET standard and state aid compatibility with the internal market are two different matters.
2. The second have to do with the effects of the decisions contained in an award in other proceedings, whether or not
between the same parties.
 In Micula case the effect of the award (2nd type) is precluded by EU law. First the BIT is not binding on the
EU and its institutions and in addition, the principle of effet utile requires that the national court sets aside
the award and gives priority to the state aid prohibition. (Lucchini doctrine)
 A national court which is called upon, within the exercise of its jurisdiction, to apply provisions of EU law is
under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any
conflicting provision of national legislation (see, inter alia, Case 106/77 Simmenthal [1978] ECR 629,
paragraphs 21 to 24; Case 130/78 Salumificio di Cornuda [1979] ECR 867, paragraphs 23 to 27; and Case C-
213/89 Factortame and Others [1990] ECR I-2433, paragraphs 19 to 21).
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Res judicata in EU law
 The national legal systems of all the Member States include the principle
of res judicata. The lodging of a fresh appeal with the same subject-matter, the
same parties and the same arguments is ruled out.
 However, a lawsuit on the compatibility of a state aid may never take place
between the state and the state aid beneficiary, but it always involves the
Commission and the state or the Commission and a state aid beneficiary or other
interested party. Hence, it is clear that the preclusive effect is irrelevant. The
Commission does not decide on the same subject-matter, the same parties and the
same arguments.
 Despite the major importance to be attached to res judicata, its effect is not
absolute.(Case C-119/05, Lucchini, ECR 2007 I-06199)
 The application of res judicata that prevents the recovery of State aid granted in
breach of Union law which has been found to be incompatible with the internal
market in a decision of the Commission which has become final would be
precluded by EU law.
 “As if it were a final judgment of a court in that State” in Article 54(1) implies
that the conclusive effect of an arbitral decision does not enjoy absolute
protection, given that the res judicata effect of a national court decision in its
turn is not absolute.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Summary of previous observations
 BIT and state aid law do not treat the same subject-matter (as Article 30(3) VCLT
requires);
 BIT and EU Treaties are not incompatible from their inception (matter of
interpretation);
 EU Treaty doesn't supersede automatically the BIT (Article 59 VCLT).
 The compatibility of investor-state dispute settlement mechanism with the EU judicial
system is a major problem. Who has the competence to finally interpret the matter?
o CJEU as a matter of interpretation of the Treaties.
o ICSID as a matter of interpretation of the BIT.
 This set reminds of the issue of interpretation of human rights in EU law and the
division of competences between CJEU and ECtHR. The protection of investor rights
by EU law could be considered to be equivalent to that of the BIT-ICSID system.
 Consequently, a presumption would arise that a MS did not depart from the
requirements of the BIT, when it implemented legal obligations flowing from its EU
membership.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Status-quo: Values in tension
 Currently, the Arbitral Tribunals adopt an interpretation according to which a
Member State departs from the requirements of the BIT, when it implements
legal obligations flowing from its EU membership.
 Arbitral Tribunals do not agree with the constitutional theory of high-order
overlap (Eureko).
 So, none of the usual tools of determining a conflict of norms in international
law was found to be useful by the Tribunals, it seems that there is no point of
concurrence between the two legal orders.
 A point of convergence, somewhere in the domain of principles of
international law that as shown before are binding on the EU and all its
member states must be identified.
 This point may be the protection of legitimate and reasonable expectations of
the investor in the context given by the accession to the EU of the host state.
 The FET is interpreted as a reflection of the principle of legal certainty.
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Legitimate and Reasonable
 The legitimacy of the expectations is deeply rooted in the BIT context and the
principle of legal certainty.
 The reasonableness follows from placing the legitimate expectations in the
context of the Accession Treaty and the principle of regulatory flexibility.
 One can rely in good faith on the premise that the future conduct of the
government will follow a certain trajectory, unless there are compelling
reasons not doing so.
 It is not reasonable to assume that a government will never amend its
legislation, however in the interpretation of the ICSID tribunals the FET
standard includes also a commitment of general nature, called general
stability of the regulatory framework.
 Is it reasonable to affirm that the conduct of the government related to
alignment of its legislation to the acquis led to the destabilisation of the
regulatory framework to such extent that it implied a breach of the FET?
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Intention of the state to commit itself is
seen as irrelevant!
 Where the state has acted in such a way so as to generate a legitimate expectation and the
investor has relied on that expectation to make its investment, action by the state that
reverses or destroys those legitimate expectations will be in breach of the FET standard and
thus give rise to compensation. (Micula award, paragraph 667)
 There must be a promise, assurance or representation attributable to a competent organ or
representative of the state, which may be explicit or implicit. (Micula award, paragraph 669)
 It is irrelevant whether the state in fact wished to commit itself; it is sufficient that it acted
in a manner that would reasonably be understood to create such an appearance. (Micula award,
paragraph 669)
 A factual assessment must be undertaken in consideration of all the surrounding
circumstances. (Micula award, paragraph 669)
 The question is whether a promisee (the investor) could reasonably understand that a
promisor (the acceding state) would breach its previous commitments to a different promisee
(the EU and all its member states) in order to satisfy the expectations of the first named
promisee.
 Pacta sunt servanda beyond the intent of the state to commit itself would exercise a meta-
function very similar with the principle of effectiveness in EU law, the aim would be to
acquire an effective protection of the values placed at the core of ICSID law.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
A point of major doctrinal split!
EU law is uncompromising in relation to the breach of the standstill clause, leaving no
room for legitimate expectations of a beneficiary of incompatible state aid, since as
explained before the public interest of protecting competition is seen as superior to
the private interest of the beneficiary to retain an illegal advantage granted by a MS
in breach of its Treaty obligations.
ICSID on the other hand it interprets legitimate expectation as a belief that any
granted aid is compatible with the internal market, otherwise it wouldn’t be granted
by a member state. This is the point of major doctrinal split, since the ICSID approach
reverses by 180 degrees the rationale of state aid control and it denies the exclusive
competence of the Union institutions in this field of law.
There is no way in which the CJEU would allow that international legal obligations
derived from an intra-EU BIT overtrump the autonomy of EU law and this finding is so
elementary as almost anybody could figure it out in a couple of minutes.
Later on, the ICCJ (Supreme Court of Romania) dealing with the matter of
enforceability would have to refer for preliminary ruling under Article 267(3) TFEU
and the CJEU’s answer in the light of doctrine of effet utile will be undoubtedly
unfavourable for Micula. (See Burgstaller, p. 474)
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
One million questions_ _ _ One answer
 Why did the Commission allow Romania to accede in 2007, despite the fact
that it had not terminated the intra-EU BITs?
 Why did the Commission allow the counterparties (whoever they were inter
alia Sweden) to maintain the intra-EU BITS signed with an acceding state,
such as Romania?
 Why did Romania negotiate and concluded intra-EU BITs during the period of
pre-accession? (The objective of attracting more investments is kind of a fairy tale, there is no
evidence on the correlation between an increase of investments calculated in dollars and euros and
the signed BITs.)
 Why didn’t Sweden terminate all its intra-EU BIT or at least eliminate the
incompatibilities following the judgment in Case C-249/06?
 How can the EU start to negotiate the TTIP before solving internally the
question of compatibility between the autonomy of the EU legal order and
the ISDS?
 One answer: The Member States didn’t question the compatibility of the
intra-EU BITs and expected that the ICSID Tribunal would interpret the BIT in
line with their membership obligations.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Pacta sunt servanda beyond the state?
 Every agreement of a legal nature, domestic or international, whether it is a
contract between individuals or a treaty between states, presupposes that in
concluding the agreement the parties acted with the intention to abide by its
provisions.
 Micula award case states that “It is irrelevant whether the state in fact
wished to commit itself; it is sufficient that it acted in a manner that would
reasonably be understood to create such an appearance.” (Micula award paragraph 669)
 “No doubt it is true to say that international law is made for States, and not
States for international law, but it is true only in the sense that the State is
made for human beings, and not human beings for the State”. (Lauterpacht pp. 438-9)
1. International law creates basic rights and duties of the individual, besides rights
and duties of states.
2. In addition to treaties and customs, the sources of international law include
general principles of law, which are independent of state will.
3. 1+2  The primary normative unit is the individual rather than the State. The rule
of law represents a method to empower individuals.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
An attempt to re-create order
 The use of principle of conferral and subsidiarity can open a new perspective.
 Exactly as the borders between EU competences and MS are governed by the
principle of conferral, so should the relation between the international
investment order and the EU be clarified in the sense that competences not
conferred upon an external organisation remain with the EU.
 The conferral must be clear, unconditional and explicit.
 For issues where the competences may overlap, such as the commercial
policy, the principle of subsidiarity should apply, in the sense that only when
the objectives of a proposed action cannot be sufficiently achieved at the
supranational level, an external actor can be competent to act and provide
the necessary protection and the content and form of the action of that
external actor shall not exceed what it is necessary in order to achieve the
pursued objectives.
 FET standard should either be compliant with the intention of the state, as a
rule of interstate law should be, or follow the postnational legal thinking,
respect the subsidiarity principle and adopt a functional philosophy.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
How to regulate in the global world?
 No market failures  No public intervention is necessary
 Intervention necessary + overlapping competences
o State then,
o EU if the matter cannot be solved satisfactorily at the state-level then,
o An external actor, if the matter cannot be adequately solved at the EU-level.
 If each overlapping area had been governed by the principles of subsidiarity
and proportionality, a contradictory approach as the one present in Micula
would have been avoided.
 The question of necessity and proportionality should be cardinal, even during
the negotiation of ISDS inclusion into the TTIP.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Let’s keep in touch, share and discuss
information!
To request membership to European Internal Market Law, click Join the group.
To follow updates from Mircea & Partners, click Join the company group.
To follow updates from Centre for European Legal Studies, click Join the group.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
References
1. ECtHR Case law: Bosphorus Hava Yollari Turizm v. Ireland, App. No. 45036/98 (Eur. Ct. H. R. 30 June
2005).
2. Eastern Sugar B.V.(Netherlands) v. The Czech Republic, SCC Case No. 088/2004. Micula and Others v.
Romania, ICSID Case No. ARB/05/20. Electrabel S.A. v. Republic of Hungary, ICSID Case No.
ARB/07/19. Achmea B.V. (Eureko) v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13.
3. CJEU Case law: Case C-205/06, Case C-249/06, Case C-118/08. Opinion 1/91, Opinion 2/2013. AGM.-
COS.MET, Bogiatzi, Deserbais, Eco Swiss, El-Yassini, Factortame and Others, Jany and Others,
Lucchini, RTE and ITP v Commission, Racke, Salumificio di Cornuda, Simmenthal, TNT Express
Nederland.
4. SA 38517 Micula/Romania (ICSID arbitration award), Micula/Commission, Case T-646/14, 26-03-2014
to 30-03-2015.
5. Ministry of Finance, Romania/Micula, Court of Appeal Bucharest Case 15755/3/2014, 14-01-2015
pending.
6. European Commission/Banking and Finance/Free Movement of Capital/Enforcement and
Monitoring/Monitoring activities and analysis, 11-11-2014.
7. Transatlantic Trade and Investment Partnership (T-TIP), 9th Round of Negotiations, NY 20-24 April
2015.
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Books & Articles
1. Sadie Blanchard, What can a foreign investor in a future member state legitimately expect?:
Negotiating legal certainty and regulatory flexibility during the accession (2014).
2. Dr. Taida Begić Šarkinović, Towards Shaping the New EU Investment Policy, (2014).
3. Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration. The Interplay Between National
and International Law. OUP (2013).
4. Karl-Heinz Böckstiegel, An Arbitrator’s Perspective of BITs and their Relation to Other International
Law Obligations (2011)
5. Hersch Lauterpacht, The Function of Law in the International Community. OUP (2011).
6. Luca G. Radicati di Brozolo, Res Judicata in International Arbitral Awards, 15-04-2011.
7. Markus Burgstaller in Michael Waibel, The Backlash Against Investment Arbitration: Perceptions and
Reality. KLI (2010).
8. José Enrique Alvarez, A BIT on Custom, 42 New York University Journal of International Law &
Policy 17 (2009).
9. Ralf Michaels, The True Lex Mercatoria: Law Beyond the State, 14 IND. J.GLOBAL LEGAL. STUD. 447,
452–60 (2007).
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
Thank you for your time
and attention!
Emanuela Matei
CELS researcher
Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666

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An European approach to BITs, MITs and ISDS

  • 1. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 2. An European approach to BITs, MITs and ISDS Why the Investor-State Dispute Settlement has become such a controversial matter? Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 3. Tangible reality: Micula Case and the inclusion of ISDS in the TTIP  Two current events have brought the questions of international investment law, international arbitration and intra-EU bilateral trade agreements closer to the public eye. The issue of inherent conflict between law and politics, pacta sunt servanda and the right to regulate, public and commercial interests, commitments undertaken under EU Treaties and obligations imposed by BITs and MITs is no longer just an academic concern.  1st Micula Dispute starting in 2005, closed with an award in favour of the investor in 2013. An annulment request was brought by Romania in April 2014.  2nd TTIP project, a trade agreement between US and EU, initiated in June 2013 at the G8 summit in Lough Erne. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 4. What can be said about the public European-International divergent views? There are many perspectives that can be used in order to scrutinise the interaction between the national-supranational-international levels of public protection of invested interests:  Political – Sovereignty and Democracy and the central role of the nation state.  Historical – The system was created for a different purpose under different historical conditions, before globalisation and constitutionalisation of international law. Is 1950- thinking still relevant now-a-days in a global trade liberalised context?  Practical – Enforceability & Necessity. Renegotiation of BITs bringing them in line with EU law.  Legal – Inconsistency and Arbitrariness. Kompetenz-Kompetenz. The solutions also can point towards distinct directions:  Maintaining the system as it is  There is no conflict that must be addressed.  Maintaining the system while amending it  Changes are necessary.  Abolishing the system  The national courts shall be empowered to grant remedies for a breach of BIT. Systemic flaws cannot be addressed by amendments, a radical change is needed. A parallel system of justice is not justified. Why is an investor more than a EU- citizen? Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 5. The European already classic ambiguity A certain political indecision or confusion characterises the public discourse. - At the EU level, there are Member States in favour and other Member States against the inclusion of ISDS in the TTIP; - Also a difference of opinions exists between DG Trade and DG Competition, inside the European Commission; - In Romania, the uncertainty and hesitation during the time of pre-accession to the EU led to the signing of the BIT with Sweden and a series of legislative measures in favour of investors, but against the EU law; - In Romania the difference of opinions has been manifested between the Government and the Competition Council, in a sense a replication of the conflict between DG Trade and DG Competition at a smaller scale. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 6. A happy marriage between the market and the multi-layered state? Eastern Europeans are generally more favourable to the ISDS and TTIP than the citizens of the old Member States: France, Germany, Luxembourg and Austria. A less critical view as regards the ISDS inclusion makes sense acknowledging the aspiration to fully depart from the communist past. The Micula case shows nevertheless that there is a lot of tension between these three spheres: trade law, competition law and foreign investor right of access to arbitral justice. Arbitral justice is a parallel avenue, an alternative to the national system of courts. It meant to offer a safer and effective protection and in the same time, the very existence of this parallel system, it presupposes that the system of national courts, which is good enough for you and me, is not good enough for the foreign investor. The issue of reverse discrimination is open to debate, but also the observance of free movement provisions in Article 49 TFEU and protection of competition in Article 107 TFEU. The state intervention made possible the accession to the EU and the signing of so many BITs. Moreover markets are nothing but a regulatory space (even in the absence of states, markets would comply with rules). State made rules in the liberal society aim to deal with market failures, thus they have a corrective function. Competition law including state aid control, means to maintain competition on markets, where the market in itself cannot provide it. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 7. Transfer of state power in the EU and in the international context  State intervention in general must be based on democratic principles and be necessary, proportionate and efficient;  In certain areas, e.g. internal market and foreign trade, the state cannot regulate efficiently and therefore the nation state transfers power to a pool of supranational legislative authority, the EU;  Any transfer of power is exposed to a test of necessity and proportionality according to the federal principle of subsidiarity (Article 5(3) TEU);  In other areas, the state engages in contractual obligations with other states, implying as well a transfer of sovereignty, which is nevertheless temporary and limited as scope;  State transfer of power to the supranational pool might overlap with the commitments previously assumed via international treaties;  Both supranational and international law are state-made laws, not laws beyond the nation state.  In contrast the ancient lex mercatoria has its origins in non-state law, though it has made its way into different national laws.  The true lex mercatoria according to Ralf Michaels, marks the shift in global law from a segmentary differentiation in different national laws to a functional differentiation. It is a law beyond, not without, the state.  According to Michaels, there is no such thing as anational law and consequently the matter of enforceability of arbitral awards cannot be placed outside the national forum. The relation is one of interdependence and legitimacy. Even the Article 54 ICSID follows this path and assigns the Convention state to enforce arbitral decisions, as if it were a final judgment of a court in that State. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 8. Public-Private global regulatory convergence There are two golden rules of democracy:  Prevalence of public over private interest, including the prevalence of competition protection over the protection of competitors/investors;  Transparency of the government. The constitutional law contributes to a well functioning market by designing institutions, procedures and substantive tools directed towards the limitation of the prevalence of the public over the private interest, especially the proportionality test and the non-discrimination principle. Conceptually it can be made a distinction between: • Individual justice – Putting victims in the driving seat as the BIT/ICSID system. • Constitutional justice – Constitution of Romania/ Constitutional Court. • Pluralist justice – European Convention of Human Rights/ ECtHR. • Market justice – Vote with feet, move away from the bad government. The choice must be free, which in reality it is not. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 9. The rise of constitutional law. Three schools of constitutionalism: 1. Normative – national law perspective, international constitutionalism supplements the national constitutionalism. In this sense, only if the protection of rights, including investor rights were insufficient, then a supplement would be required. The complexity of world made state-law to be less effective. 2. Functional – supranational law perspective, a centralised authority controls the production of international law. International law protection permeates the supranational legal order only if it passes the control test exercised by a central authority. 3. Pluralist – transnational law perspective, constitutionalism beyond the state. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 10. Private Investor Protection versus Free Movement & Competition Protection  The international treaty entitles the foreign investor to a better treatment than normally a citizen would enjoy under the national constitution, EU law, WTO law or ECHR.  A better treatment than the national standard may relate to: a. non-state law, which may become national law as an implementation of supranational law; b. illegal discrimination or c. illegal subsidies/state aid.  A better treatment may imply an illegality.  A better treatment may also be allowed to permeate the supranational legal order if it passes the test developed by CJEU in Opinion 2/2013. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 11. Better rights imply unequal treatment Something conceptually desirable, such as an individual justice system that puts the investor in the driving seat, remains at odds with the EU law. Better rights for some enterprise imply discrimination against other enterprises and potentially, it may induce market foreclosure, where new investors are not enjoying the same level of protection compared with the prevailing investors or first-movers. Discrimination must be justified. Compatible state aid implies justified discrimination and therefore the compatibility is defined narrowly and made subject to strict procedural conditions. In some cases procedural rules may give rise to substantive rights. This is the case of Article 108(3) TFEU. It’s a procedural rule addressed to the Member States, not to the beneficiaries of state aid, but functionally the rule ensures substantive protection to the competitors of the beneficiary and to the beneficiary herself, in terms of protection of legitimate expectations. This is the outset of Micula state aid case. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 12. Facts in Micula The Europe Agreement came into force in 1995. In 1997, the European Commission did not accept Romania’s application to join the EU. The 1998 Annual Report of the European Commission highlighted that regional development would be key to Romania’s satisfaction of the economic criteria for EU accession. In 1998 and 1999, the European Commission issued Guidelines on Regional Aid and the Council issued a regulation governing the application of Article 108 TFEU. In 1998 and 1999 Romania established a framework to grant incentives for investment in disfavoured regions. In 1999 the Miculas began their investment in food and drink production facilities in the disfavoured region of Stei-Nucet-Draganesti. Throughout the term of the investment, Romania repeatedly amended its regulations on regional State aid to comply with EU law. The Romanian courts struck down certain amendments, hence there was a series of withdrawals and reinstatements of incentives. In 2005, all but one of the incentives were withdrawn and the Commission issued its affirmative opinion on Romania’s accession. Romania signed the accession treaty in 2005 and the Miculas brought a claim under the Romania-Sweden BIT (signed in 2002/come into force in 2003) requiring compensation for the abolished incentives. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 13. Fiscal regulation and its limits  The autonomy of the national state in the field of taxation is not absolute.  There are limits to this autonomy that inter alia relate to: o Constitutional law of the state itself and ECHR, right to property. o Union law within which free movement rules constitute lex specialis in relation to non-discrimination principle and the competition rules, especially state aid law. o WTO law – non-discrimination based on origin. o International law within which the Fair and Equitable Treatment standard constitutes a form of lex specialis itself.  What happens in Micula is that a new fiscal measure inferring a fiscal advantage granted to investors in a certain geographical region constituted illegal state aid under Union law. (1998- 9) The scheme was abolished in 2005, four years earlier than it had been decided initially.  Not granting that fiscal advantage constitutes according to the interpretation given by the ICSID-Tribunal a breach of the FET-standard, which gives ground for compensation. (ICSID Case No. ARB/05/20 11-12-2013)  The payment of compensation constitutes in its turn a state measure covered by the definition of state aid in Article 107(1) TFEU, it falls within the scope of the prohibition in Article 108(3) TFEU and it is precluded by Union law in conformity with Article 108(2) TFEU. (Commission Decision SA.38517 30-03-2015) Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 14. “Disorder of legal orders”: Global law.  International law? Interstate law. BIT. VCLT. NYC. ICSID.  Supranational law? Law above the state: EU law. WTO law.  Transnational law? Law across the states: emerging law beyond the control of state. For instance sports or internet laws.  Jus cogens ≠ EU law. Higher-order law?  Human rights. Charter of Fundamental Rights. General Principles of EU Law. UN. ECHR. Social Rights Charter.  New common law?  Law of peoples as opposed to Law of nation states?  Postnational law? Where to place the investor protection law in this disorder of legal orders? Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 15. The emerging standard of protection TWO STANDARDS OF PROTECTION  Customary Minimum Standard consistent with Rule of Law.  Higher Treaty Standard  In conflict with EU law, since the advantages enjoyed by Member States are inseparable from the obligations imposed by the EU Treaties.  Absolute standards so called protection against regulatory expropriation (Frivolous? Ambiguous?):  Fair and Equitable Treatment (Subjective, Arbitrary?)  Full protection and security (Consistency?)  Relative standards  – Non-discrimination, which is the DNA of EU law and the cornerstone of WTO law:  National Treatment  Most favoured nation treatment (MFN)  Is there any place left for regulatory competence to legislate in the public interest with reference to indirect expropriation, which in principle can be anything?  Are these real problems that must be fixed?  Who is foreign anyway in a global world?  Who has the competence to perform the balance test?  Is there a need for an appeal mechanism?  Should all trade risks be secured and to which extent? Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 16. DG Competition monitoring activities and analysis of intra-EU BITs There are around 190 Bilateral Investment Treaties between EU Member States (intra- EU BITs), concluded almost exclusively between 'old' (EU-15) and 'new' (EU-12) Member States, or between two EU-12 countries, at a time when at least one contracting party was not yet a Member of the European Union. The regulatory overlap between intra-EU BITs and EU legislation gives rise to a number of problems. In the Commission's view, intra-EU BITs are not compatible with the EU internal market, because they only cover investment from the respective BIT partner country and not from all EU Member States, and provide for parallel jurisprudence through arbitration procedures. In this way these treaties conflict with the jurisdiction monopoly of the CJEU on EU law questions. There is an increasing number of arbitration procedures going on whereby investors based in one Member State invoke a BIT in order to claim damages from another Member State. The three CJEU judgments (Case C-205/06, Case C-249/06, Case C- 118/08) on the incompatibility of BITs provisions on the transfer clause also showed clearly the regulatory overlap between investment agreements and the Treaty. Regarding this issue, the Commission is in close contact with the Member States and has repeatedly reiterated that the incompatibility of intra-EU BITs with EU law means that they have to be brought to an end. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 17. VCLT - a body of consolidated international law of treaties  Under Article 3(b) VCLT the fact that the VCLT doesn’t apply to international agreements concluded between States and other subjects of international law (such as the EU) is not to affect the application of VCLT-rules, which are an expression of general international customary law, to the EU and its member states in their entirety.  Rules of general international customary law are binding upon the EU institutions and form part of the Union legal order (see, to that effect, Racke, paragraphs 24, 45 and 46).  Pursuant to Article 31 VCLT, a treaty is to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. In that respect, account is to be taken, together with the context, of any relevant rules of international law applicable in the relations between the parties (see, to that effect, inter alia, Opinion 1/91 [1991] ECR I-6079, paragraph 14; Case C-416/96 El-Yassini [1999] ECR I-1209, paragraph 47; Case C-268/99 Jany and Others [2001] ECR I-8615, paragraph 35).  Article 30(4)(b) VCLT agrees with Article 351(1) TFEU.  Article 26 VCLT embodies the principle of “pacta sunt servanda”, which can not be interpreted against EU law as means to evade state liability in the event of a breach of EU law (see, by analogy, Case C-470/03 AGM.-COS.MET [2007] ECR I-02749, paragraph 72).  ECO Swiss doctrine applies for the state aid prohibition, as it does in cartel cases, since there is no differentiation between public and private arbitration in EU law that could have a bearing on the scope of its application (See also Burgstaller, pp 472-3). Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 18. No actual conflict in the meaning of VCLT  The Tribunal upheld that it retained jurisdiction to adjudicate cases related to intra-EU BITs (Electrabel, Micula, Eastern Sugar) and that Romania’s accession to the EU did not terminate the BIT signed with the member state, Sweden. Tribunal didn’t accept the argument that the EU law may displace a pre-existent BIT (Eureko).  However, the CJEU clarified that treaties concluded by MSs with acceding states cannot, in relations between the MSs, be applied to the detriment of the objectives of EU law (see, to this effect, Case 286/86 Deserbais [1988] ECR 4907, paragraph 18; Joined Cases C-241/91 P and C-242/91 P RTE and ITP v Commission [1995] ECR I-743, paragraph 84; Case C-301/08 Bogiatzi [2009] ECR I-10185, paragraph 19; Case C-533/08 TNT Express Nederland [2010] ECR I-04107, paragraph 52).  The Commission required the termination of intra-EU BITs. (See EC Letter of January 13, 2006, quoted in Eastern Sugar, 27 March 2007, SCC Case No 088/2004, Partial Award, para. 119 and the three judgments in Case C-205/06, Case C-249/06, Case C-118/08).  According to EU law, the conflicting obligations aren’t displaced, but they become inapplicable, this is what the primacy principle infers, that a MS shall disapply an obligation found in breach of EU law.  The ICSID decision only entitles an investor to receive compensation, it does not set aside the Romanian legislation on state aid, but it penalises Romania for setting in place this legislation. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 19. What is the nature of conflict?  According to the conferral principle the MSs remain ‘the masters of the Treaties’, because they possess Kompetenz-Kompetenz, within which they define their own competences and those of the Union. CJEU has long asserted its Kompetenz-Kompetenz to determine the limits of EU authority.  After Opinion 2/2013 it is crystal clear that this question of interpreting whether a higher level of protection concurs with EU law, will never be left at the discretion of a non-EU forum. On the other side the ICSID system takes for granted that an award would be enforceable under any circumstances and it makes this assumption in a context where a substantively erroneous arbitral decision cannot be corrected, amended or annulled.  As previously discussed a BIT is not law beyond state. It’s a synallagmatic contract concluded between Sweden and Romania that cannot go any further than the intention of the parties.  In this sense it is clear that Sweden, EU Member State since 1995 and Romania, an acceding state with a fixed date of accession, couldn’t have aimed to conclude a BIT that obliged them to depart from their EU law onuses. This is nevertheless the assumption made by the ICSID- Tribunal in its imaginative interpretation of the BIT.  The Tribunal interprets the BIT as a deviation from the accession course without giving any solid argumentation why Sweden and Romania would have aimed to reach such an agreement. The interpretation is unreasonable, since it infers an intent not to fulfil Treaty obligations. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 20. Arbitral Tribunal disregards the issue of unenforceability  The Arbitral Tribunal provides a disruptive interpretation of the BIT obligations and moreover it ignores the question of enforceability.  Article 54(1) ICSID: “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State”.  In essence the questions at bar relate to what are usually called the negative (or preclusive) and the positive (or conclusive) effects of res judicata of arbitral awards. 1. The first have to do with the effect of preventing further litigation on a matter that has formed the subject of a prior arbitral award. FET standard and state aid compatibility with the internal market are two different matters. 2. The second have to do with the effects of the decisions contained in an award in other proceedings, whether or not between the same parties.  In Micula case the effect of the award (2nd type) is precluded by EU law. First the BIT is not binding on the EU and its institutions and in addition, the principle of effet utile requires that the national court sets aside the award and gives priority to the state aid prohibition. (Lucchini doctrine)  A national court which is called upon, within the exercise of its jurisdiction, to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation (see, inter alia, Case 106/77 Simmenthal [1978] ECR 629, paragraphs 21 to 24; Case 130/78 Salumificio di Cornuda [1979] ECR 867, paragraphs 23 to 27; and Case C- 213/89 Factortame and Others [1990] ECR I-2433, paragraphs 19 to 21). Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 21. Res judicata in EU law  The national legal systems of all the Member States include the principle of res judicata. The lodging of a fresh appeal with the same subject-matter, the same parties and the same arguments is ruled out.  However, a lawsuit on the compatibility of a state aid may never take place between the state and the state aid beneficiary, but it always involves the Commission and the state or the Commission and a state aid beneficiary or other interested party. Hence, it is clear that the preclusive effect is irrelevant. The Commission does not decide on the same subject-matter, the same parties and the same arguments.  Despite the major importance to be attached to res judicata, its effect is not absolute.(Case C-119/05, Lucchini, ECR 2007 I-06199)  The application of res judicata that prevents the recovery of State aid granted in breach of Union law which has been found to be incompatible with the internal market in a decision of the Commission which has become final would be precluded by EU law.  “As if it were a final judgment of a court in that State” in Article 54(1) implies that the conclusive effect of an arbitral decision does not enjoy absolute protection, given that the res judicata effect of a national court decision in its turn is not absolute. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 22. Summary of previous observations  BIT and state aid law do not treat the same subject-matter (as Article 30(3) VCLT requires);  BIT and EU Treaties are not incompatible from their inception (matter of interpretation);  EU Treaty doesn't supersede automatically the BIT (Article 59 VCLT).  The compatibility of investor-state dispute settlement mechanism with the EU judicial system is a major problem. Who has the competence to finally interpret the matter? o CJEU as a matter of interpretation of the Treaties. o ICSID as a matter of interpretation of the BIT.  This set reminds of the issue of interpretation of human rights in EU law and the division of competences between CJEU and ECtHR. The protection of investor rights by EU law could be considered to be equivalent to that of the BIT-ICSID system.  Consequently, a presumption would arise that a MS did not depart from the requirements of the BIT, when it implemented legal obligations flowing from its EU membership. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 23. Status-quo: Values in tension  Currently, the Arbitral Tribunals adopt an interpretation according to which a Member State departs from the requirements of the BIT, when it implements legal obligations flowing from its EU membership.  Arbitral Tribunals do not agree with the constitutional theory of high-order overlap (Eureko).  So, none of the usual tools of determining a conflict of norms in international law was found to be useful by the Tribunals, it seems that there is no point of concurrence between the two legal orders.  A point of convergence, somewhere in the domain of principles of international law that as shown before are binding on the EU and all its member states must be identified.  This point may be the protection of legitimate and reasonable expectations of the investor in the context given by the accession to the EU of the host state.  The FET is interpreted as a reflection of the principle of legal certainty. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 24. Legitimate and Reasonable  The legitimacy of the expectations is deeply rooted in the BIT context and the principle of legal certainty.  The reasonableness follows from placing the legitimate expectations in the context of the Accession Treaty and the principle of regulatory flexibility.  One can rely in good faith on the premise that the future conduct of the government will follow a certain trajectory, unless there are compelling reasons not doing so.  It is not reasonable to assume that a government will never amend its legislation, however in the interpretation of the ICSID tribunals the FET standard includes also a commitment of general nature, called general stability of the regulatory framework.  Is it reasonable to affirm that the conduct of the government related to alignment of its legislation to the acquis led to the destabilisation of the regulatory framework to such extent that it implied a breach of the FET? Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 25. Intention of the state to commit itself is seen as irrelevant!  Where the state has acted in such a way so as to generate a legitimate expectation and the investor has relied on that expectation to make its investment, action by the state that reverses or destroys those legitimate expectations will be in breach of the FET standard and thus give rise to compensation. (Micula award, paragraph 667)  There must be a promise, assurance or representation attributable to a competent organ or representative of the state, which may be explicit or implicit. (Micula award, paragraph 669)  It is irrelevant whether the state in fact wished to commit itself; it is sufficient that it acted in a manner that would reasonably be understood to create such an appearance. (Micula award, paragraph 669)  A factual assessment must be undertaken in consideration of all the surrounding circumstances. (Micula award, paragraph 669)  The question is whether a promisee (the investor) could reasonably understand that a promisor (the acceding state) would breach its previous commitments to a different promisee (the EU and all its member states) in order to satisfy the expectations of the first named promisee.  Pacta sunt servanda beyond the intent of the state to commit itself would exercise a meta- function very similar with the principle of effectiveness in EU law, the aim would be to acquire an effective protection of the values placed at the core of ICSID law. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 26. A point of major doctrinal split! EU law is uncompromising in relation to the breach of the standstill clause, leaving no room for legitimate expectations of a beneficiary of incompatible state aid, since as explained before the public interest of protecting competition is seen as superior to the private interest of the beneficiary to retain an illegal advantage granted by a MS in breach of its Treaty obligations. ICSID on the other hand it interprets legitimate expectation as a belief that any granted aid is compatible with the internal market, otherwise it wouldn’t be granted by a member state. This is the point of major doctrinal split, since the ICSID approach reverses by 180 degrees the rationale of state aid control and it denies the exclusive competence of the Union institutions in this field of law. There is no way in which the CJEU would allow that international legal obligations derived from an intra-EU BIT overtrump the autonomy of EU law and this finding is so elementary as almost anybody could figure it out in a couple of minutes. Later on, the ICCJ (Supreme Court of Romania) dealing with the matter of enforceability would have to refer for preliminary ruling under Article 267(3) TFEU and the CJEU’s answer in the light of doctrine of effet utile will be undoubtedly unfavourable for Micula. (See Burgstaller, p. 474) Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 27. One million questions_ _ _ One answer  Why did the Commission allow Romania to accede in 2007, despite the fact that it had not terminated the intra-EU BITs?  Why did the Commission allow the counterparties (whoever they were inter alia Sweden) to maintain the intra-EU BITS signed with an acceding state, such as Romania?  Why did Romania negotiate and concluded intra-EU BITs during the period of pre-accession? (The objective of attracting more investments is kind of a fairy tale, there is no evidence on the correlation between an increase of investments calculated in dollars and euros and the signed BITs.)  Why didn’t Sweden terminate all its intra-EU BIT or at least eliminate the incompatibilities following the judgment in Case C-249/06?  How can the EU start to negotiate the TTIP before solving internally the question of compatibility between the autonomy of the EU legal order and the ISDS?  One answer: The Member States didn’t question the compatibility of the intra-EU BITs and expected that the ICSID Tribunal would interpret the BIT in line with their membership obligations. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 28. Pacta sunt servanda beyond the state?  Every agreement of a legal nature, domestic or international, whether it is a contract between individuals or a treaty between states, presupposes that in concluding the agreement the parties acted with the intention to abide by its provisions.  Micula award case states that “It is irrelevant whether the state in fact wished to commit itself; it is sufficient that it acted in a manner that would reasonably be understood to create such an appearance.” (Micula award paragraph 669)  “No doubt it is true to say that international law is made for States, and not States for international law, but it is true only in the sense that the State is made for human beings, and not human beings for the State”. (Lauterpacht pp. 438-9) 1. International law creates basic rights and duties of the individual, besides rights and duties of states. 2. In addition to treaties and customs, the sources of international law include general principles of law, which are independent of state will. 3. 1+2  The primary normative unit is the individual rather than the State. The rule of law represents a method to empower individuals. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 29. An attempt to re-create order  The use of principle of conferral and subsidiarity can open a new perspective.  Exactly as the borders between EU competences and MS are governed by the principle of conferral, so should the relation between the international investment order and the EU be clarified in the sense that competences not conferred upon an external organisation remain with the EU.  The conferral must be clear, unconditional and explicit.  For issues where the competences may overlap, such as the commercial policy, the principle of subsidiarity should apply, in the sense that only when the objectives of a proposed action cannot be sufficiently achieved at the supranational level, an external actor can be competent to act and provide the necessary protection and the content and form of the action of that external actor shall not exceed what it is necessary in order to achieve the pursued objectives.  FET standard should either be compliant with the intention of the state, as a rule of interstate law should be, or follow the postnational legal thinking, respect the subsidiarity principle and adopt a functional philosophy. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 30. How to regulate in the global world?  No market failures  No public intervention is necessary  Intervention necessary + overlapping competences o State then, o EU if the matter cannot be solved satisfactorily at the state-level then, o An external actor, if the matter cannot be adequately solved at the EU-level.  If each overlapping area had been governed by the principles of subsidiarity and proportionality, a contradictory approach as the one present in Micula would have been avoided.  The question of necessity and proportionality should be cardinal, even during the negotiation of ISDS inclusion into the TTIP. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 31. Let’s keep in touch, share and discuss information! To request membership to European Internal Market Law, click Join the group. To follow updates from Mircea & Partners, click Join the company group. To follow updates from Centre for European Legal Studies, click Join the group. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 32. References 1. ECtHR Case law: Bosphorus Hava Yollari Turizm v. Ireland, App. No. 45036/98 (Eur. Ct. H. R. 30 June 2005). 2. Eastern Sugar B.V.(Netherlands) v. The Czech Republic, SCC Case No. 088/2004. Micula and Others v. Romania, ICSID Case No. ARB/05/20. Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19. Achmea B.V. (Eureko) v. The Slovak Republic, UNCITRAL, PCA Case No. 2008-13. 3. CJEU Case law: Case C-205/06, Case C-249/06, Case C-118/08. Opinion 1/91, Opinion 2/2013. AGM.- COS.MET, Bogiatzi, Deserbais, Eco Swiss, El-Yassini, Factortame and Others, Jany and Others, Lucchini, RTE and ITP v Commission, Racke, Salumificio di Cornuda, Simmenthal, TNT Express Nederland. 4. SA 38517 Micula/Romania (ICSID arbitration award), Micula/Commission, Case T-646/14, 26-03-2014 to 30-03-2015. 5. Ministry of Finance, Romania/Micula, Court of Appeal Bucharest Case 15755/3/2014, 14-01-2015 pending. 6. European Commission/Banking and Finance/Free Movement of Capital/Enforcement and Monitoring/Monitoring activities and analysis, 11-11-2014. 7. Transatlantic Trade and Investment Partnership (T-TIP), 9th Round of Negotiations, NY 20-24 April 2015. Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 33. Books & Articles 1. Sadie Blanchard, What can a foreign investor in a future member state legitimately expect?: Negotiating legal certainty and regulatory flexibility during the accession (2014). 2. Dr. Taida Begić Šarkinović, Towards Shaping the New EU Investment Policy, (2014). 3. Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration. The Interplay Between National and International Law. OUP (2013). 4. Karl-Heinz Böckstiegel, An Arbitrator’s Perspective of BITs and their Relation to Other International Law Obligations (2011) 5. Hersch Lauterpacht, The Function of Law in the International Community. OUP (2011). 6. Luca G. Radicati di Brozolo, Res Judicata in International Arbitral Awards, 15-04-2011. 7. Markus Burgstaller in Michael Waibel, The Backlash Against Investment Arbitration: Perceptions and Reality. KLI (2010). 8. José Enrique Alvarez, A BIT on Custom, 42 New York University Journal of International Law & Policy 17 (2009). 9. Ralf Michaels, The True Lex Mercatoria: Law Beyond the State, 14 IND. J.GLOBAL LEGAL. STUD. 447, 452–60 (2007). Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666
  • 34. Thank you for your time and attention! Emanuela Matei CELS researcher Emanuela Matei Of Counsel Mircea & Partners https://se.linkedin.com/in/emanuelamatei 0046-735576666