By Krzysztof Wierzbowski[1] and Aleksander Szostak[2]

On 31 August 2018, the Arbitral Tribunal in Vattenfall AB and others v. Federal Republic of Germany issued a decision on jurisdictional objection made by the Federal Republic of Germany (decision).[3] The Tribunal asserted its jurisdiction, despite Germany’s argument based on the groundbreaking Slovak Republic v. Achmea decision issued earlier that year by the Court of Justice of the European Union (CJEU).

Background on the decision

The dispute between Vattenfall and Germany concerns the decision by Germany following the 2011 Fukushima disaster to phase out nuclear power by 2022.[4]

Vattenfall initiated proceedings pursuant to the Energy Charter Treaty (ECT) and ICSID Convention, claiming that the decision to phase out nuclear power and, thereby, shut down nuclear plants breached Germany’s obligations under the ECT.

Germany based its jurisdictional objection on the reasoning of the CJEU in the Achmea preliminary ruling, in which it was decided that the investor-State Dispute Settlement (ISDS) mechanism in the relevant intra-EU BIT is incompatible with EU law because the mechanism prevents investment treaty disputes from being decided within the judicial system of the EU. [5]

Germany essentially claimed that Art. 26 ECT, providing for the ISDS mechanism, must be interpreted restrictively in such a manner that the ISDS is not applicable in intra-EU investor-State disputes.[6] It further noted that the reasoning of the CJEU in Achmea extends to intra-EU investor-State disputes initiated under multilateral treaties, such as the ECT, as the risk to the consistent interpretation and application of EU law exists irrespective of the bilateral, or multilateral character of a treaty.[7]

Decision of the Tribunal on the Achmea issue

The ICSID Tribunal rejected the argument that Art. 26 ECT should be interpreted to exclude intra-EU investor-State arbitration.[8] In this sense, it dismissed Germany’s claim and asserted its jurisdiction.

The ICSID Tribunal stated that while the CJEU in Achmea interpreted the ISDS clause in the underlying intra-EU BIT as conflicting with the provisions of the European Union (EU) law, it limited its considerations to ISDS clauses in intra-EU treaties of bilateral character. Thus, the CJEU did not extend its reasoning to multilateral treaties concluded between EU members and third States.[9] The ICSID Tribunal further contended that the ECT is not an agreement concluded between EU Member States within the meaning of Achmea, but rather constitutes a mixed agreement between EU Member States, third States and the EU itself.[10]

The ICSID Tribunal pointed out that in line with the view expressed in Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, the CJEU in Achmea did not address the argument in the Opinion of the Advocate General Wathelet (AG), in which the AG distinguished between ISDS clauses in BITs and ECT, further supporting the position of the ICSID Tribunal.[11]

Having carried out an interpretation of Art. 26 ECT in accordance with Art. 31 of the Vienna Convention on the Law of Treaties, the ICSID Tribunal concluded that in light of the context, object and purpose of the ECT, Art. 26 ECT does not exclude the possibility of intra-EU ECT arbitration.^[12]

The ICSID Tribunal further noted that the lack of the “disconnection clause” in the ECT, which aims to ensure that the provisions of a multilateral treaty apply only between particular States, confirms that the ECT creates obligations between EU Member States and does not exclude intra-EU ECT arbitration.^[13]

Implications of the decision

The decision on the Achmea issue has a number of implications for investment protection system in the EU.

In particular, the decision confirms the full effectiveness of the ECT in relations between parties that are EU Member States. This is clearly beneficial for investors engaging in the European market as the restructuring of investment will not be necessary to benefit from protection granted by the ECT. This may contribute to further development of the European energy market. Undoubtedly, the Decision, by asserting the full effectiveness and binding force of the ECT, could positively affect the cross-border cooperation in the energy industry between its Parties.

Nonetheless, it must be emphasized that while the Decision presents the perspective of an arbitral tribunal, the European Commission (EC) and the CJEU may advocate that the Achmea argument extends to MITs, which raises a threat to the ECT as well to the recognition and enforcement mechanism of ICSID arbitral awards in the EU Member States. Art. 54 of the ICSID Convention provides that each contracting state shall recognize an award rendered by an ICSID Tribunal as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court where recognition is sought. This unique recognition mechanism does not leave room for any ground on which the recognition could be refused.

Therefore, considering the possibility that the EC and, depending on whether there will be a preliminary ruling on the compatibility of Art. 26 ECT with the EU law and the role of the ICSID Convention, CJEU will not accept the reasoning of the ICSID Tribunal in Vattenfall AB and others, the national court where the recognition is sought will be faced with a rather complex and uncertain situation of conflicting treaty obligations. It must decide whether to recognize the award pursuant to Art. 54 of the ICSID Convention, or to comply with the EU law and, thereby, refuse to recognize the award.

The possibility that a national court may decide not to recognize the award rendered pursuant to the ICSID Convention may undermine the effectiveness of the Convention and deprive investors of the benefit of its recognition mechanism.

Additionally, it must be noted that payment of compensation awarded by the arbitral tribunal may, as it was the case in the Ioan Micula, Viorel Micula and others v Romania and Decision adopted by the EC, constitute illegal state aid under Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).[14] This leads to the consideration that even if the Achmea argument would not cover MITs, the enforcing court would still face a dilemma of whether to enforce the award.

In light of the above, it is interesting to note that the ICSID Tribunal explicitly stated that while it is mindful of the duty to render an enforceable award, it must perform its mandate given under the ECT and, thereby, is not as such concerned with the question of whether the award will be recognized or enforced.[15]

Conclusion

The Decision of the ICSID Tribunal in Vattenfall AB and others on the jurisdictional objection made by the Federal Republic of Germany demonstrates the approach of investment treaty tribunal to the “Achmea issue” and adds to the ongoing discussion on the relationship between EU law and investment protection treaties.

While the ICSID Tribunal confirmed that the reasoning of the CJEU in Slovak Republic v. Achmea preliminary ruling does not extend to intra-EU arbitrations initiated on the basis of multilateral treaties, there is uncertainty as to the approach of the EC and, possibly, CJEU to the matter. Ultimately, it is the domestic court of a Member State before which the recognition and/or enforcement of the award will be sought that will have final say on the matter.

It is worth noting that because of the fragmentation of international investment law and lack of stare decisis principle in investment treaty arbitration, there is much uncertainty as to whether arbitral tribunals will follow the reasoning of the ICSID Tribunal in Vattenfall AB and others.

After the decision of the EC with respect to Ioan Micula, Viorel Micula and others v. Romania, even if the EC and CJEU would share the reasoning of the ICSID Tribunal in Vattenfall AB and others regarding jurisdiction, investors may be unable to obtain compensation awarded by tribunals, as it would amount to illegal State aid.

Finally, the Achmea argument has the potential to become a popular strategy of defendants in investment arbitration proceedings to challenge the jurisdiction of arbitral tribunal, or admissibility of a claim.

Endnotes

[1] Krzysztof Wierzbowski is the senior partner at Wierzbowski Eversheds Sutherland.

[2] Aleksander Szostak LL.M., LL.B. is a trainee lawyer at Wierzbowski Eversheds Sutherland.

[3] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018].

[4] 13. AtGÄndG v. 31.07.2011, BGBl I S. 1704 (No. 43); Nathalie Bernasconi-Osterwalder and Rhea Tamara Hoffmann, The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the new dispute Vattenfall v Germany (II) (The International Institute for Sustainable Development 2012).

[5] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 59-60.

[6] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.50.

[7] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.51-52.

[8] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par. 211.

[9] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.213.

[10] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.162.

[11] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.163-164; Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018], Opinion of AG Wathelet [2017] par.43; see. Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1, Award [16 May 2018].

[12] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.207.

[13] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par. 201-206.

[14] See. Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20; Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v Romania of 11 December 2013.

[15] Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018] par.230-231.