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TTIP: Is the end near for classic investment protection?

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In the light of increasing critique against classic investment arbitration, the European Commission recently published a proposal for the establishment of an international “Investment Court System” (ICS), which it proposed to the US within the context of the Transatlantic Trade and Investment Partnership (TTIP) agreement. If concluded, TTIP would create a comprehensive bilateral trade and investment agreement between the two biggest economies in the world. The huge benefits for investors and the creation of jobs on both sides of the Atlantic are obvious.

However, the issue of investment arbitration has become so contentious that it has already slowed down the negotiations significantly. The perception has been created – and fuelled by anti-trade/investment/globalization NGOs and the media – that investment arbitration is a system that only benefits investors and is detrimental to public interests of the state and its citizens. But statistics show that states win more cases than investors. More generally, the critics fail to appreciate that legal certainty and access to independent judicial bodies is essential for every foreign investor. That is the very reason why investment arbitration has been included in more than 3,000 Bilateral Investment Treaties (BITs) worldwide.

 The classic system of investment arbitration

The classic system of investment arbitration is very much driven by party autonomy. This means that the investor is free to choose an arbitrator, the respondent State selects one arbitrator and both arbitrators agree on the chairing arbitrator. Moreover, the investor can usually choose from several arbitration rules such as ICSID, UNCITRAL, SCC or ICC which are to be applied to the dispute. Also, after the award has been issued, the investor can chose in which country he wants to enforce that award. Another advantage is the fact that there are only limited grounds for annulment or setting aside of an award, which means that in principle an award is final and binding.

All this has been working pretty well in the past 50 years.

Nonetheless, within the context of the TTIP negotiations, the European Commission proposes the ICS, which would radically break with the classic system of investment arbitration.

The proposed International Court System (ICS): room for state intervention

The proposal envisages a two-tier court system, consisting of a Tribunal of First Instance (TFI) and an Appeal Tribunal (AT).

The TFI would consist of 15 judges (5 EU, 5 US and 5 third country judges) commonly appointed by the States. These judges should have the qualifications required for appointment to judicial offices or be jurists of “recognized competence” and would be appointed for 6 years, renewable once. The cases would be heard by chambers of 3 judges. A judgment should in principle be rendered within 18 months, although the TFI can decide to go beyond it without an explicit maximum, which means proceedings can easily take much longer. The proposal also mentions the possibility that if both parties agree, a case may be dealt with by a sole arbitrator, which could be particularly useful for SMEs because of the lower costs involved.

The AT is envisaged as a permanent body composed of 6 judges (2 EU, 2 US and 2 third country judges). Also those judges would be appointed for 6 years, renewable once, and should have the qualifications for appointment to the highest judicial offices or be jurists of “recognised competence”.  The appeal must be brought before the AT within 90 days after the issuances of the TFI award and will be heard by chambers of 3 judges. The proposal mentions a number of grounds for appeal, such as for example (a) that the TFI erred in the interpretation or application of the applicable law; (b) that the TFI has manifestly erred in the appreciation of the facts, including the appreciation of relevant domestic law; or (c) the grounds mentioned in Art. 52 ICSID Convention.

Interestingly, the proposal sets a limit for the duration of the appeal procedure, which should last 6 months with a maximum of 9 months in exceptional cases. Accordingly, theoretically the whole two-tier procedure should last no more than 27 months or 2 years and 3 months. Another interesting element concerns the distribution of the costs of the procedures. The general principle proposed is that the losing party shall pay all legal costs, including the costs of the other party (loser pays principle).

The proposal also introduces a number of new ways for the States to intervene directly in the proceedings. Firstly, all States (including the State that is Respondent in a dispute) which are party to the treaty can adopt interpretations, that are binding on the TFI and AT and which can even be issued with retroactive effect. Secondly, all States can intervene as non-disputing third parties in the proceedings by making oral and written statements. Thirdly, also NGOs not involved in the dispute can submit so called amicus curiae briefs to the TFI and AT, which must in principle be admitted. Obviously, the first two options allow the States to directly intervene in ongoing disputes in order to make sure that the TFI and AT render the “right” decisions, i.e., decisions which are consistent with the views of the States.

Besides, these institutional aspects, the proposal contain several interesting innovations.

For example, in direct reaction to the Micula case on which we have reported in our previous newsletters, the Commission proposes to exclude all state aid issues from any arbitration. Also, as we discussed in our last newsletter, the Commission has included a provision requiring the claimant to disclose the name and address of any third-party funder, thereby creating the impression that third-party funding is somehow dodgy.

The proposal also adopted the principle of “indirect expropriation without compensation”, which can be found already in the NAFTA agreement. According to this principle, a State which expropriates an investor, for example, by withdrawing a permit or imposing a huge tax bill, does not have to pay any compensation, except in “rare circumstances”, which are not defined further. Considering the fact that most investment arbitration disputes concern indirect expropriation, this is a significant limitation for investors to receive any compensation.

Conclusions: severe disadvantages for investors

It is obvious that this proposal, if accepted by the US, will make investment arbitration proceedings prohibitive in several ways.

Firstly, the appeal possibility is a standing invitation for States to delay proceedings further and push up costs for the claimant. This is further exacerbated by the fact that the claimant faces the risk of having to pay all the legal costs of the State as well.

Secondly, the fact that the claimant can no longer select an arbitrator puts the claimant in a disadvantageous position compared to the Respondent States, which will naturally select only “pro-State” judges. Thus, there is a real danger that the proceedings will not be fair and impartial anymore.

Thirdly, by excluding state aid and indirect expropriation claims from arbitration, important grounds for arbitration proceedings are excluded upfront, which begs the question why should an investor use this arbitration system at all.

In sum, this proposal, if adopted, will mark the end of classic investment arbitration. The proposal clearly aims at discouraging in various ways investors from bringing arbitration claims against States. Consequently, investors are well-advised to seek expert legal advice regarding other ways on how to ensure optimal investment protection, including access to international arbitration.

GIP offers tailored-made solutions and is ready to advise any investor.

Iran offers investment opportunities, but with risk

Recently, GIP has successfully advised a Netherlands-based investor on the optimal protection for his new investments into Iran. Finding the most optimal BIT jurisdiction is one of the key aspects when planning investments, in particular in challenging countries such as Iran.

For many years Iran was closed to foreign investors. But with the historic deal on Iran’s nuclear program, sanctions are gradually lifted. Switzerland was first to remove the ban on precious metals transactions with Iranian state bodies and the requirement to report trade in petrochemical products. Also, the obligation to report the transport of Iranian crude oil and petroleum products and rules on insurance and reinsurance policies linked to such transactions has been eliminated.

Now the EU followed suit and the sanctions are expected to be dismantled around the end of this year or early next year, given Iran meets its commitments.

With the lifting of sanctions, which have locked up billions in Iranian assets overseas and starved the oil-dependent economy of crucially needed technology and investment, new investment opportunities for foreign companies are on the horizon. However, investors should tread carefully and obtain advice on the best available investment protection.

Iran has concluded about 60 Bilateral Investment Treaties (BITs) of which 50 BITs are actually in force. Those 50 BITs cover a variety of countries and vary in their precise language and thus in their level of investment protection they offer. Moreover, it should be noted that in order to benefit from the investment protection offered by these BITs, all investments must be approved by the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), following the Iranian Foreign Investment Promotion and Protection Act (FIPPA) 2002.

GIP is ready to provide any investor with a tailor-made advice for the most optimal BIT protection.

Investing in Iran? Know your most optimal BIT jurisdiction!

With sanctions against Iran now incrementally removed, new interesting investment opportunities are on the horizon. However, investors should tread carefully and obtain advice on the best available investment protection. Global Investment Protecion has just advised a Netherlands-based investor on which BIT (bilateral investment treaty) should be used for his investments in Iran. Finding the most optimal BIT jurisdiction is one of the most important aspects when planning new investments and GIP is ready to help.

Contact us for more information!

Increasing obligations regarding third-party funding

As is well-known, investment arbitration disputes are costly for claimants. The high costs are a serious obstacle for SMEs to initiate and pursue disputes until the end. Consequently, third-party funding has been increasingly made available and used by claimants in order to gain access to justice and receive compensation for damages suffered through illegal governmental measures.

But despite third-party funding becoming increasingly, respondents in investment arbitration disputes have recently successfully convinced arbitral tribunals that these third-party funders are somehow dodgy.

The perception created is that in return for funding the arbitration claim, the third-party funders not only receives a certain percentage of any compensation awarded to the claimant, but also that they have an unacceptable influence in the way the claimants argues his case. As a consequence thereof, two questions need to be addressed: (i) what kind of information should be disclosed about third party financing and (ii) what are the consequences of such disclosure?
Regarding the information that the claimant must provide, the recent trend points towards full disclosure. This was the case in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan (ICSID Case No. ARB/12/6) and in Eurogas Inc., Belmont Resources Inc. v Slovak Republic , when the arbitral tribunal decided that the claimant should disclose the identity of the third-party funder.

So, while there is growing consensus to impose full identification and disclosure of  third-party funders, there is less consensus concerning the conclusions to be drawn from disclosure or the existence of a third-party funder.

Some take for granted that third-party funders may not be ordered to pay the costs of the arbitration should the claim collapse. However, there is already case-law supporting the view that third party funders must bear the costs, if they hold a sufficient degree of economic interest and control in relation to the claim.

Regarding the consequences of the existence of a third-party funder, the question has arisen whether for the purposes of deciding security for costs, must a third-party funded claimant  be presumed penniless merely because the funding comes from a third-party?

In the Eurogas v Slovakia case cited above, the arbitral tribunal expressly denied such assumption. However, Gavan Griffith’s assenting reasons to the decision on St. Lucia’s Request for Security for Costs of 13 August 2014 was clearly of different view. He stated that “once it appears that there is third-party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made”.

Conclusions

Investors who decide to initiate investment arbitration proceedings should be aware of the additional obligations, which are connected with third-party funders.It seems that full disclosure of the identity and role of any third-party funder is now generally imposed. Also, third-party funders may be called upon to bear the costs if a claim collapses and may be required to pay security of costs in order to continue the proceedings. Such additional obligations make it more difficult for SMEs to obtain third-party funding and be able to pursue an investment arbitration claim. It also requires claimants to pay closer attention to the arrangements, which he makes with a third-party funder.

The GIP team is at your disposal to advice you on these issues and thus be able to make effective use of third-party funding.

Legitimate expectations and state aid: mind the gap!

For every investor, who invests in a foreign country, legal certainty is of utmost importance. One key element of legal certainty is trust in the assurances a state or any of its organs gives to a foreign investor in connection with an investment. So, if for example, a Ministry issues a building permission for a factory to a foreign investor, the foreign investor can legitimately expect that this permission is legally issued and thus valid. If it appears later that the permission was granted in an illegal manner and is therefore subsequently withdrawn when the investor has already started building the factory, the investor could start an investment arbitration claim arguing that his legitimate expectations, which are protected by the fair and equitable treatment (FET) principle contained in Bilateral Investment Treaties (BITs), have been violated. Indeed, the violation of legitimate expectations is one of the most often cited arguments by harmed investors in investment arbitration disputes.

The special case of state aid

However, in relation to state aid, in particular within the context of EU law, it appears that the investor cannot rely on legitimate expectations, which have been created by the state or any of its organs.

This problem has come to the forefront in the photovoltaic investment arbitration disputes, which have been initiated against several EU Member States.

As is well known, PV investors were motivated by state aid schemes established by the EU Member States to make substantial investments in building PV installations. After some years, the same EU Member States decided to retroactively eliminate or significantly reduce the promised state aid, which in turn caused a tsunami of investment arbitration disputes based on BITs and the Energy Charter Treaty (ECT).

Under normal circumstances and applying the legitimate expectation standard as described above, harmed investors should fairly easily win their cases. However, as will be explained below, when it comes to state aid, the jurisprudence of the Court of Justice of the EU (CJEU) illustrates that investors’ legitimate expectations are not protected.

The granting of state aid in EU law is based on a system of prior notification of the state aid by the Member State concerned to the European Commission. Subsequently, the European Commission must decide whether or not the notified state aid is in conformity with EU law. Only after the European Commission has approved the state aid, is the Member State allowed to proceed with paying out the state aid.

However, if the EU Member State concerned fails to notify the state aid scheme or notifies them only after they have already been paid out, such state aid is a priori considered to be illegal and thus has to be recuperated from the recipient. The same applies if the European Commission – for whatever reason – has not adopted a decision to approve the state aid scheme. Accordingly, the whole system depends on the actions or omissions of the EU Member State as far as the required prior notification of the state aid is concerned.

Hence, when an EU Member State attracts investors to invest in his country by offering a state aid scheme, the investor must assume that the state aid granted has been properly notified to the European Commission and thus is legal and validly in place.

But the practice shows that in many cases EU Member States have not notified their state aid schemes for renewable energy sources or they only notified them years later.

Based on the above, it would be fair to assume that since the EU Member State is fully responsible for its failure to properly notify the state aid, the same Member State would also be fully liable to make good any damages which investors have suffered due to the illegality of the state aid. In other words, by offering and putting into place a state aid scheme, the EU Member States concerned have created legitimate expectations towards PV investors, which should enjoy protection. However, that is not the case under EU state aid law.

The due diligence obligations of investors

The jurisprudence of the CJEU has developed specific obligations regarding legitimate expectations and state aid.

Regarding generally the right to rely on legitimate expectations, the CJEU identified three conditions that must be satisfied. Firstly, precise, unconditional and consistent assurances originating from the relevant authorities of the Member State and/or the EU must have been given. Secondly, those assurances must be such as to give rise to a legitimate expectation on the part of the recipient. Thirdly, the assurances given must be consistent with the applicable rules (see T-328/09 Producteurs de légumes de France v Commission).

Regarding the applicability of that principle in the field of state aid, the CJEU emphasized that companies to which state aid has been granted, may not entertain a legitimate expectation that the aid is lawful, unless it has been granted in compliance with the procedure provided for in Article 108 TFEU, and that a diligent business operator must normally be in a position to confirm that that procedure has been followed (T-177/10 Alcoa v Commission). In particular, where state aid is implemented without prior notification to the European Commission, with the result that it is unlawful under Article 108(3) TFEU, the recipient of the state aid cannot have at that time a legitimate expectation that its grant is lawful, except where there are exceptional circumstances (joined cases T-427/04 and T-17/05 France and France Télécom v Commission).

Accordingly, an investor who is making an investment within the context of a state aid scheme is required to make a due diligence analysis in order to assure himself that the state aid has actually been properly notified to and approved by the European Commission. Obviously, it is extremely difficult, in particular for SMEs, to obtain all the necessary information from the various state organs that are involved in the whole process of state aid notification. In addition, the investor must satisfy himself that the European Commission actually approved the state aid scheme before the Member State concerned started to pay out the state aid.

If the investor fails to make this due diligence analysis and thus is unable to prove that the EU Member State concerned satisfied all the conditions for the proper notification and that the European Commission approved the state aid, he cannot rely on any legitimate expectations as regards that state aid.

Conclusion

Whereas legitimate expectations of investors normally are protected by BITs and the ECT, this is not the case regarding state aid. Consequently, investors should be aware of this gap and take appropriate steps. More specifically, investors are advised to perform an extensive due diligence analysis as to whether the state aid has been properly notified to and approved by the European Commission. In addition, explicit assurances by the Member State concerned to that effect should be obtained before the investor commences his investments. Above all, it is important that the investor is aware of the fact that the burden of proof is on him.

The GIP team is available to perform the necessary due diligence analysis before investors commence their investments.

 

 

GIP in documentary on investment protection

GIP’s head of legal Nikos Lavranos spoke on Dutch TV in a documentary on trade protection and international arbitration.

The documentary is in Dutch, English and French.

We prepared an English translation of Nikos’ interview within the documentary here.

TIMESTAMP 16:56

Q: how many BITs did you negotiate for the Netherlands?

Nikos Lavranos: I concluded BITs with Iraq, Azerbaijan, Morocco and the United Arab Emirates.

Q: How many BITs have the Netherlands concluded?

NL: the Netherlands has almost 100 BITs worldwide, thus large parts of the whole world is covered, Netherlands belongs to the top 5 worldwide regarding the amount of BITs. It has always been a policy of the Netherlands to attract investors to the Netherlands and have a “headquarter policy” to attract foreign investors to establish their headquarters in the Netherlands.

18:40

Q: how does a BIT work?

NL: in the first place, both countries express trust to each other, and agree that each other’s investors are decently treated.

30:08
NL: South Africa is a special case, because they decided to introduce the black empower policy, meaning white investors would be replaced by black South Africans.

30:51
NL: This leads to expropriation, which has resulted into claims and disputes. But all discrimination is prohibited.

36:14

Voiceover: Nikos Lavranos left the Ministry and is now working for GIP as head of legal affairs. He is convinced that without BITs countries would attract fewer investors.

36:34
Q: Do you understand why Indonesia terminated the BIT with the Netherlands?

NL: I think it is not a clever decision in the long term, because investors become insecure and will reduce their investments and will invest elsewhere. So I think in the long term Indonesia created a problem rather than found a solution.

38:58

Q: Take Brazil as an example, they don’t have ISDS in their BITs, but still they attract foreign investments.

NL: That is not correct: Brazil has not ratified the BITs but did sign them, also with the Netherlands, but those BITs include ISDS. So, in principle Brazil chose in favour of ISDS, but later on decided they don’t want them. Brazil wants to keep the policy space for steps such as nationalisations against foreign investors and want to avoid claims.

41:06
Q: Canada belongs to the countries which has faced many claims, why is that so in your opinion?

NL: This indicates that Canada, in particular the provinces, adopt measures which are often against NAFTA, so apparently there is no rule of law in the provinces.

43: 27
Q: ISDS is creating a happy hunting ground for lawyers – is that true?

NL: No, of course not. No investor wakes up in the morning and says OK let’s start a claim against country X or Z today, that is ridiculous.

44:15
Q: It seems that in recent years investments are made in claims, do you know about that?

NL: No, that is new to me.  However, another thing is third party funders, which are funding claims of investors, which just do not have sufficient money to pay for a whole expensive arbitration proceedings.

46:39
Q: Oit seems that governments are afraid of regulatory chill and therefore do not adopt measures because there are scared of claims, is this true?

NL: I have never seen that. These are anecdotal stories but it has never been proven that this has actually happened.

47:59
NL: The whole regulatory chill argument is an artificially constructed argument, let me be clear again, if you look at how a arbitration proceeding works and if you look at the Netherlands, how it operates, I see no problem at all.

Italy and Spain hit by more solar energy cases

Investors have brought the first ICSID case against Italy arising from post-2008 cuts to renewable energy subsidies, as Spain faces its 19th claim over similar reforms.

Dutch entity Silver Ridge is bringing the new claim against Italy, while Switzerland’s Schwab Holdings AG and Malta-based OperaFund Eco-Invest Sicav have lodged the latest case against Spain.

Both claims are brought under the Energy Charter Treaty (ECT) and were registered at ICSID on 11 August.

The latest claim against Italy follows the news last week that two investors, Denmark’s Greentech Energy Systems and Luxembourg’s Novenergia, had jointly filed an ECT claim against Italy at the Stockholm Chamber of Commerce (SCC). These are thought to be the first of many claims threatened by investors affected by the Italian government’s decision to cut tariff incentives for some solar power projects, in the wake of the Eurozone crisis.

The new claimant is an affiliate of US-based Silver Ridge Power, the former solar power division of US energy group AES. SunEdison acquired AES’s 50% stake in the US venture for US$178 million last year, but assigned its rights to any proceeds from the ECT claim against Italy to AES as part of that transaction. Silver Ridge Power has 25 solar power plants in Italy – with a combined capacity of over 130 megawatts

Meanwhile Spain continues to face a wave of ECT claims over its own cuts to subsidies for alternative energy. OperaFund is a Maltese investment fund that appears to have energy holdings in the Extremadura region of western Spain. Schwab Holding is based Adliswil, Switzerland, and is better known for its investments in the railway vehicle supply industry.

 

Micula vs. (Brussels) Dracula

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1. Background

As we have reported in our previous article, the Micula case is developing into a major legal conflict between investment law and EU law.

After Micula obtained a USD 250 million ICSID award against Rumania, based on the Sweden-Romania BIT, the European Commission has significantly stepped up its intervening efforts. First, the Commission had issued an injunctive decision against Romania prohibiting it from executing the ICSID award, claiming that the payment of the compensation would constitute new, unlawful state aid. Second, the Commission finalized its formal state aid investigation against Romania concluding that indeed the payment of the award would constitute state aid that is incompatible with EU law. Subsequently, Micula also took legal steps by bringing the case before the first instance General Court of the Court of Justice of the EU (CJEU). Micula is requesting the General Court to annul the decision of the Commission.

In short, the Micula dispute, which originally was a normal ICSID arbitration case decided by an ICSID arbitral tribunal, suddenly has been transformed into an EU state aid case. This transformation has significant consequences regarding the enforcement of the award and the potential repayment of the award within the EU.

From the outset it should be emphasized that the important difference between ICSID awards and awards issued under other arbitration rules such as UNCITRAL, Stockholm Chamber of Commerce (SCC) or International Chamber of Commerce (ICC), is that according to Article 53 ICSID Convention:

Article 53
(1) The award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention. Each party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention.

Accordingly, an ICSID award cannot be reviewed by or appealed before domestic courts. Moreover, Article 54 ICSID Convention prescribes that:

Article 54
(1) 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 other words, ICSID awards must be recognized and enforced by all ICSID parties, without that there is a possibility by domestic courts or the European Commission to prevent their enforcement.

Moreover, it is important to recall that the EU is neither party to the ICSID Convention nor to the Sweden-Romania BIT. Accordingly, the European Commission has – prima facie – nothing to do with this dispute. Nonetheless, the Commission has intervened as amicus curiae in the Micula ICSID proceedings by warning that any award that would be paid to Micula by Romania would constitute unlawful state aid. Due to the supremacy of EU law, the Commission claims that any such award would not be enforceable within the EU.

Hence, the question arises: what happens if Romania pays out the award? If the payment of the award is indeed qualified as unlawful, who will be obliged to recollect the money and how would this be done in practice? But the question is: what happens if Romania pays out the award to Micula? What can the European Commission do against that?

2. EU state aid law

For a proper understanding of the case, it is first of all important to highlight which measure is at issue in the Micula state aid procedure. As the Commission states in its letter to Romania:

(25) The measure here under assessment is the implementation of the Award, i.e. payment of the compensation awarded to the claimants by the Arbitration Tribunal plus interest that has accrued since the Award was issued.

Hence, in the EU state aid proceedings the European Commission is not considering the state aid paid to Micula since 1999, but rather the potential payment of the ICSID award, which is equated by the Commission to state aid. Prima facie, it may seem strange to qualify the payment of an ICSID award as state aid. After all, Romania is not voluntarily paying the award of USD 250 million, but is ordered by the arbitral tribunal to pay for the breaches of the BIT. However, the European Commission explains that:

(34) By implementing the Award, Romania has (for the part of the Award that has already been executed) and would (for the remainder) in reality grant to the claimants an amount corresponding to the advantages foreseen under the abolished EGO 24 scheme from the moment it was repealed (22 February 2005) until the scheduled expiry (1 April 2009). In addition, to ensure that the claimants would fully benefit from an amount corresponding to that of the abolished scheme, interest and compensation for the allegedly lost opportunity and lost profit would be granted. In effect, the implementation of the Award would re-establish the situation the claimants would have, in all likelihood, found themselves in if the EGO 24 scheme had never been repealed (which is the idea behind the compensation award by the Arbitration Tribunal).

Unsurprisingly, the European Commission concluded that the execution, in part or in full, of the ICSID Micula award would amount to granting of state aid.

In a next step, the unlawfulness of the “award-turned stated aid” must be determined.

According to Article 107(1) TFEU state aid is, in principle, incompatible with the internal market. Unless an aid measure is declared to be compatible with the internal market by the European Commission, the Member States are prohibited from putting state aid measures into effect.

Under Article 108(3) TFEU, a Member State must notify any plans to alter or grant aid to the European Commission and shall not put its proposed measure into effect until the Commission has taken a final decision on that measure’s compatibility with the internal market.

In other words, the European Commission must approve any state aid measure before it is implemented. This means a Member State must notify the Commission and await its final decision before granting any new state aid.

Regarding the Micula award, the Commission stressed that executing the award would constitute “new state aid” and that the Romanian authorities could only execute the award after the Commission has authorized it under EU state aid rules. According to the European Commission, the unlawfulness of the “award-turned into state aid” is based on the fact that Romania has already taken steps towards the execution of the award by partially offsetting the awarded damages against tax debts of Micula. However, this was not notified to the Commission and therefore – according to the Commission – was unlawfully put into effect, which in turn violates Article 108(3) TFEU.

Pursuant to Article 14 of Council Regulation No 659/1999 all unlawful state aid may be recovered from the recipient. Since the European Commission has formally decided that the partial payment of the award constitutes illegal state aid, the Commission is requesting Romania from recovering it from Micula.

Thus, in the next step the procedure for recovering illegal state aid must be examined.

3. Procedures for recovering unlawful state aid

The European Commission stated that Rumania has partially paid the award by offsetting it with outstanding tax duties of Micula. For the sake of argument, it is assumed that Romania has fully executed the award. Assuming further that the payment of the award is indeed qualified as unlawful state aid, the question arises how and who will the award be recovered?

The decision of the Commission to recover the unlawful state aid is addressed to Romania as a whole, which imposes the obligation to recover the state aid upon all public entities of Romania – including its national courts, which in principle are obliged to give full effect to the Commission decision. In essence, the obligation to comply with the Commission decision means that Romania must take all necessary measures to make recovery of the unlawful state aid possible.

Due to the autonomy of procedural law of the Member States, EU law does not contain the rules for the recovery of unlawful state aid. Accordingly, the procedural rules for the recovery of unlawful state aid are determined by the national procedural law of each Member State.

Pursuant to the general obligation of the Member States to ensure that EU law is at all times fully and properly implemented, Romania is required to recover the payments from Micula. Since the decision to offset Micula’s tax duties is based on an administrative decision, Romanian administrative procedural law determines the subsequent steps. Accordingly, Romanian authorities would have to adopt an administrative decision requiring Micula to repay the award. Micula could of course appeal against that decision before Romanian courts, which in turn could also ask preliminary questions to the CJEU as to the compatibility of that decision with EU law. One of the main issues in these proceedings would be the question of legitimate expectations of Micula regarding the legality of the enforcement of the “award-turned state aid”. According to the jurisprudence of the CJEU, beneficiaries of state aid cannot rely on legitimate expectations that the granted state aid is compatible with EU law. This is in sharp contrast with investment law, in particular the FET-standard and the umbrella clause, which protect the legitimate expectations of investors as regards acts and commitments of the host state to a much greater extent.

More specifically, since the Micula award concerns the enforcement of an ICSID award based on the ICSID Convention and the BIT between Sweden and Romania, which are binding international treaties for Romania, it must be assumed that Micula can reasonably rely on a high level of legitimate expectations that Romania would indeed fulfill its ICSID obligations and enforce the award.

Nonetheless, if the CJEU were requested to rule on this issue, it can be expected that the CJEU will argue against any legitimate expectations of Micula, so the state aid must be repaid. In that case, Romania will adopt an administrative decision requesting Micula to pay back the state aid. If Micula fails to pay back, Romania could confiscate any assets of Micula within or even outside Romania. For example, Romania could request Swedish authorities to assist in the confiscation of assets o Micula in Sweden. By virtue of EU law, Swedish authorities would be obliged to do their utmost to help Romania fulfill its EU law obligations.

Moreover, in case Micula ends up in financial difficulties due to the repayment of the award, the CJEU has repeatedly confirmed that the mere fact that the beneficiary of unlawful state aid is in financial difficulty does not impact on his repayment obligation. However, there can be situations where the assets of the beneficiary are not sufficient to meet all outstanding claims. In such cases, the CJEU has stated that the liquidation of the beneficiary can be regarded as an acceptable alternative to recovery. The reason for this approach is that, from an economic perspective, the competitive advantage of the beneficiary no longer exists in the event of formal liquidation. In any case, a Member State is obliged to register its recovery claim immediately if the beneficiary is subject to an insolvency proceeding.

If Romania fails to comply with the recovery decision of the Commission, the Commission may refer the matter to the CJEU. From the case law of the CJEU, it can be ascertained that the only acceptable argument is that recovery will be “absolutely impossible”. The case law of the CJEU also shows that a provision of domestic law and domestic practices or circumstances cannot impede the reimbursement of state aid. As long as the Member State has not taken any attempt to recover the unlawful aid, it will not be accepted that recovery is absolutely impossible.

In short, Romania is obliged to recover any payments made to Micula in the context of implementing the ICSID award – irrespective of the clear ICSID provisions, which require Romania to enforce the award automatically. Hence from the perspective of EU law, Micula will have to repay – in any case – the ICSID award.

However, assuming that Romania has fully paid the award to Micula, thereby fulfilling its ICSID obligations, the European Commission could start a so-called infringement procedure against Romania for violating its EU law obligations by disregarding its negative state aid decision. The CJEU would decide this dispute most likely in favour of the European Commission because it would place EU law above the ICSID Convention and the BIT. In this case, the CJEU would order Romania to recollect the payment of the award from Micula. Consequently, Romanian authorities would be required to do everything they can to collect the money back from Micula. This would essentially mean confiscating any assets of Micula in Romania or elsewhere in the world.

In short, in both scenarios Micula will not be in a position to enjoy the USD 250 million award.

4. Conclusions

The Micula case illustrates the increasing inability of foreign investors to enforce an award – even an ICSID award – within the EU. This problem is not new, but so far was limited to non-ICSID awards, such as the UNCITRAL award in the Eureko/Achmea v. Slovakia case. In contrast to ICSID awards, in UNCITRAL disputes national courts can be called upon by the Respondent host state for setting aside the award – as has been attempted – so far unsuccessful – by Slovakia in the Eureko/Achmea case. Moreover, if the seat of the arbitration is within the EU, this enables national courts which are asked to rule on setting aside an UNCITRAL award to request preliminary rulings from the CJEU. In this way an arbitral award is brought before the CJEU, which will decide on the basis of EU law alone. Hence, neither the ICSID Convention nor the BIT nor investment law principles will be taken into account. In essence, this is a comparable transformation of the dispute as is now the case with the Micula award.

In addition, by transforming the Micula award into a state aid issue, Micula will be unlikely to rely on the argument of legitimate expectations – in particular since in EU state aid law legitimate expectations are not accepted. Moreover, in cases such as Micula in which the payment of an award is qualified as unlawful state aid, the investor will be confronted with new legal proceedings requesting the repayment of the award. Thus, the investor is not only unable to enforce his award, but will in addition be confronted with extra legal proceedings and legal costs. As mentioned above, this recovery obligation extends up to the bankruptcy of the beneficiary.

5. Available solutions

However, investors can reduce such risks by taking appropriate steps.

Firstly, investors should always select the ICISD rules as the preferred arbitration rules, since compared to all other arbitration rules, ICSID rules provide the highest chance of recognition and enforcement of the award on a worldwide basis in more than 150 states.

Secondly, investors should always select a seat of the tribunal outside the EU, so as to reduce interferences by EU law and the CJEU. Unfortunately, this will not prevent interferences from the European Commission in the proceedings as amicus curiae, since it is up to each arbitral tribunal to decide whether or not to accept amicus briefs from the Commission.

Thirdly, investors who have obtained an ICSID award should preferably enforce the award outside the EU in order to avoid the transformation of the payment of the award into a state aid issue. This may entail additional costs and may be more complicated, but it is worth the money considering the danger of being unable to enforce the award at all and thus lose the whole award.

Finally, immediately after obtaining an ICSID award, foreign investors should be prepared to move their assets outside the EU in order to avoid confiscation and liquidation of the assets by a Member State.

Global Investment Protection (GIP) AG is ready to assist investors in restructuring their investments and in preparing arbitration proceedings on the basis of the ECT and BITs.

The European Commission has delivered the kiss of death for investors

Just like the kiss of death, by which Judas betrayed Jesus, the European Commission (EC) is betraying European investors, by removing the only real possibilities for EU companies to protect themselves from devastating retroactive state interventions. The only chance investors now have is to restructure their investments outside the EU.

After years of speculation, the EC finally officially began the dismantling process of Bilateral Investment Treaties (BITs) in June. In an announcement it requested five member states (The Netherlands, Sweden, Austria, Slovakia and Romania) to terminate all BITs which they have concluded with other EU Member States (so-called intra-EU BITs). The Commission also started similar procedures against 21 other member states.

This move follows upon the interventions by the European Commission in the Micula case. In this highly controversial and worrying case the European Commission prohibited Romania from executing a USD 250 million ICSID award because that would – in the Commission’s view – constitute new, unnotified and thus illegal state aid.

All of these developments fit into the ongoing process of complete demolition of investment protection initiated by the European Commission.

No sunset, no access

Assuming that eventually all intra-EU BITs will be either terminated by the Member States or declared incompatible with EU law, any substantive investment protection, such as fair and equitable treatment, legitimate expectations, non-discrimination, umbrella clause, etc. will no longer be available for new investments.

As far as existing investments are concerned, the EC is keen on removing all BITs with immediate effect and without the so-called “sunset clause”, which usually keeps investments protected under BITs for a certain period of time (mostly for a period of 10-15 years after termination).

In addition and even more importantly for investors, access to international arbitration, which is provided for in all intra-EU BITs will not be available anymore. Consequently, European investors whose investments have been negatively affected by a host state’s measures will only be able to turn to domestic courts of the Member States in order to annul those measures or obtain compensation for damages. This, effectively, means that investors, who have been robbed by corrupt or irresponsible governments, will have to rely on judicial institutions in the same corrupt countries and hope that there is absolutely no link between the judiciary and executive branch, that there is no political pressure on courts and that the courts themselves are not corrupted. And since this is real life and not some ideal democracy straight out of a political science textbook, good luck with that!

A foreign investor who challenges the state before its own courts will simply not get a fair trial. Accordingly, European investors are faced with a denial of justice. And even if an investor would get a fair trial, the amount of compensation for damages, which can be obtained on the basis of national laws is substantially lower than the amounts international arbitral tribunals usually award. Thus, also from this perspective, European investors will be deprived from one of the most crucial elements of investment protection.

Particularly bad news for energy investors

Moreover, there are already clear indications that the European Commission is working towards disconnecting the Energy Charter Treaty (ECT) for intra-ECT disputes. The result of this disconnection would be that the ECT could not be invoked anymore by European investors against EU Member States. Investors in the renewable energy sector – who have already been robbed using retroactive measures in several EU countries – will be particularly hard hit by this move.

Italy has recently announced that it has terminated its membership to the ECT as of 1 January 2016, a clear warning signal that the ECT will not be available anymore within the EU.

The European Commission has been warned repeatedly that these steps will have a catastrophic effect on the investment climate within the EU, but still the Commission continues to go down this destructive path. After all, the EC is in the end merely the child of the same unreliable, irresponsible or simply corrupt governments that rob investors in their own countries in the first place.

Pointless mediation

The only alternative which the European Commission has so far proposed is the use of mediation as an alternative dispute resolution mechanism. But the drawbacks of mediation compared to arbitration are significant. Mediation is voluntary and any outcome is not legally binding and thus cannot be enforced by the investor against the host state. More specifically, mediation has the inherent risk that representatives of the host state who participate in the mediation may in fact not have the authority to act on behalf of the host state. They may also face charges of being corrupt or otherwise collude with the foreign investor. Also, mediation can be abused in bad faith by the host state, thus delaying the whole process, thereby further increase the costs for the investor – after all, also the mediator must be paid.

So effectively the EU is taking the trained Rottweiler, that investors had been using to protect their assets, and replacing it with an old, narcoleptic Chihuahua who had all his teeth surgically removed.

Think outside of the EU-box

If the European Commission will go ahead with its plans, European investors will be left totally unprotected in the EU. The only solution for investors is to restructure their existing investments through a country outside the EU with a strong BIT with the Member State in question, such as for example Switzerland. New investments should be structured from the very beginning via a non-EU state.

Georg Hotar
Managing Director
M +41(0) 76 340 46 32
E gh@globalinvestmentprotection.com