COMMON MARKET LAW REVIEW
CONTENTS Vol. 51 No. 6 December 2014
Editorial comment: A new Commission takes office: On the relevance
of Union law and the emergence of constitutional conventions
1571-1578
Articles
G. Davies, Legislative control of the European Court of Justice
N. Moloney, European Banking Union: Assessing its risks and
resilience
A. Dimopoulos, The involvement of the EU in investor-state dispute
settlement: A question of responsibilities
O. Odudu and D. Bailey, The single economic entity doctrine in EU
competition law
1579-1608
1609-1670
1671-1720
1721-1758
Case law
A. Court of Justice
“Give me one good reason”: The unified standard of review for
sanctions after Kadi II, A. Cuyvers
The Data Retention Directive is incompatible with the rights to
privacy and data protection and is invalid in its entirety:
Digital Rights Ireland, O. Lynskey
It never rains but it pours? Liability for “umbrella effects” under EU
competition law in Kone, N. Dunne
National anti-money laundering legislation in a unified Europe:
Jyske, T. Incalza
1789-1812
Book reviews
1851-1880
Index
1759-1788
1813-1828
1829-1850
III-XX
Aims
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COMMON MARKET LAW REVIEW
COMMON MARKET LAW REVIEW
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Common Market Law Review 51: 1671–1720, 2014.
© 2014 Kluwer Law International. Printed in the United Kingdom.
THE INVOLVEMENT OF THE EU IN INVESTOR-STATE DISPUTE
SETTLEMENT: A QUESTION OF RESPONSIBILITIES
ANGELOS DIMOPOULOS*
Abstract
This article discusses the legal framework for the involvement of the EU
and its Member States in Investor-State Dispute Settlement (ISDS) under
EU and Member State international investment agreements (IIAs). It
assesses whether the Financial Responsibility Regulation is a sufficient
and appropriate instrument to address the issue. It examines if and when
EU involvement in ISDS under EU IIAs is compatible with international
law and argues that EU IIAs and the Regulation should take into
consideration that international responsibility rules pose constraints on
the EU and Member State participation in ISDS, and that ICSID
arbitration can be a truly available ISDS option only if Member States can
act as respondents in all disputes concerning violations of EU IIAs. The
article then assesses the EU law implications of EU involvement in ISDS.
It explores the threats to the autonomy of the EU legal order; it examines
whether the allocation of financial responsibility is compatible with EU
rules on EU and Member State liability; it discusses how the application
and interpretation of the Financial Responsibility Regulation by the ECJ
may interfere with ISDS proceedings. Finally, it identifies the limited
scope for EU involvement in ISDS under Member State BITs, arguing that
the price that Member States have to pay for retaining their own
investment treaties is to bear full responsibility for all violations of their
BITs, even if they result from EU conduct.
1.
Introduction
In 2009 the Lisbon Treaty entered into force and endowed the EU with
exclusive competence over Foreign Direct Investment (FDI).1 Since then, the
EU has emerged as a new international actor in the field of foreign investment.
Already in 2010 the Commission made explicit its intention to create a
comprehensive EU investment policy by gradually taking over this field from
* Lecturer in Law, Queen Mary University of London. Websites were last visited 29 Sept.
2014.
1. Art. 207 TFEU together with Art. 3(1)(e) TFEU confer exclusive competence on the EU
in the field of the Common Commercial Policy, including FDI.
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CML Rev. 2014
Member States.2 Member State Bilateral Investment Treaties (BITs) amount
to more than 1,400 – which is slightly less than half of all existing BITs
worldwide.3 It is thus apparent why the EU can affect international investment
law.
One of the most controversial but least clarified aspects of the debate
concerns the involvement of the EU in investor-state dispute settlement
(ISDS). ISDS presents a unique system for dispute settlement under
international law involving individuals, and it has been an indispensable
characteristic of international investment agreements (IIAs). The growing
number of investment disputes and the million dollar awards rendered
annually by arbitral tribunals4 illustrate how successfully ISDS has been used
by investors to protect their interests, and why ISDS has been the source of
significant criticism, concerning mainly its legitimacy.5 Yet, the different
settings and the multifaceted nature of EU involvement in investment
arbitration create uncertainties. Indeed, the involvement of the EU in ISDS can
be very different depending on whether i) ISDS occurs under an IIA
concluded by the EU, the EU and its Member States together or its Member
States alone; ii) the dispute concerns a measure adopted by the EU, a Member
State acting within the scope of EU law, or a Member State acting on its own;
and whether iii) it concerns a dispute where third countries or their nationals
are involved, or only EU Member States and their nationals are involved. In
that respect, the clarification of the exact involvement of the EU in ISDS is
crucial for foreign investors, who need to know if ISDS is available for all of
the above situations and, if so, who can act as the respondent party in ISDS.
The position of third-country investors in the EU affects also indirectly the
interests of EU investors abroad, as most IIAs offer reciprocal rights to the
other party’s investors. In addition, the financial implications of ISDS require
a proper identification of whether and when the EU and its Member States
bear the costs of investment arbitration. Last but not least, the clarification of
the implications of EU involvement in ISDS is crucial for all adjudicatory
2. COM(2010)343, “Communication from the Commission to the Council, the European
Parliament, the European Economic and Social Committee and the Committee of the Regions:
Towards a comprehensive European international investment policy”. <trade.ec.europa.eu/
doclib/docs/2010/july/tradoc_146307.pdf>.
3. UNCTAD, “World Investment Report 2012: Towards a new generation of investment
policies” (2012) <www.unctad-docs.org/files/UNCTAD-WIR2012-Full-en.pdf>
4. UNCTAD, “Recent developments in investor-state dispute settlement”, (4 Apr. 2014),
<unctad.org/en/PublicationsLibrary/webdiaepcb2014d3_en.pdf> .
5. On criticism of ISDS see indicatively Hachez and Wouters, “International investment
dispute settlement in the twenty-first century: Does the preservation of the public interest
require an alternative to the arbitral model?” in Baetens (Ed.), Investment Law within
International Law. Integrationist Perspectives (CUP, 2013), pp. 417–449.
Investor-state dispute settlement
1673
bodies, including EU courts and arbitral tribunals who will eventually be
called to decide on these matters.
The complexity of these questions has been in fact an important reason
preventing progress in the negotiations of IIAs by the EU (EU IIAs).6 Indeed,
the part on ISDS remains the main part of the investment chapter of the
EU-Canada CETA that is yet to be finalized,7 while the negotiations of the
ISDS provisions of the investment chapter of the Transatlantic Trade and
Investment Partnership (TTIP) agreement with the US have been postponed,
as the EU opened public consultations regarding investment protection under
the TTIP.8
Aiming to clarify most of these questions, the EU has taken significant
initiatives to establish a general framework regarding its involvement in ISDS.
In August 2014, after two years of negotiations, the Council and the
Parliament adopted Regulation 912/2014 (Financial Responsibility
Regulation/ FRR), which represents a milestone towards demarcating the
roles to be assigned to the EU and its Member States in ISDS under future EU
IIAs.9 More specifically, the Financial Responsibility Regulation establishes
rules concerning the apportionment of financial responsibility between the
EU and its Member States. It provides specific criteria for allocating financial
responsibility between the EU and its Member States, and it identifies in
which cases the EU and/ or its Member States can act as respondents in ISDS,
settle disputes, and be liable to pay damages to investors.
However, the Financial Responsibility Regulation is neither sufficient nor
always appropriate to guarantee legal certainty as to the involvement of the EU
in ISDS. First of all, the involvement of the EU and its Member States in ISDS
in accordance with the Financial Responsibility Regulation is not always in
line with international responsibility rules, while the inclusion of specific
provisions in EU IIAs is necessary in order to give effect to them. Moreover,
6. On the challenges regarding the content of EU IIAs beyond ISDS see European
Parliament Resolution of 6 April 2011 on the future European international investment policy
(2010/2203IINI); Reinisch, “The EU on the investment path – Quo Vadis Europe? The future of
EU BITs and other Investment Agreements”, 12 Santa Clara Journal of International Law
(2014), 111–157.
7. Commission Press Release, “EU and Canada strike trade deal” Brussels, 18 Oct. 2013,
available at <trade.ec.europa.eu/doclib/press/index.cfm?id=973> ; Commission Press Release,
“Investment Provisions in the EU-Canada Free Trade Agreement”, 3 Dec. 2013, available at
<trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf> .
8. Commission Press Release, “European Commission launches public online consultation
on investor protection in TTIP” 27 March 2014, available at <trade.ec.europa.
eu/doclib/press/index.cfm?id=1052>.
9. Regulation 912/2014 of the European Parliament and of the Council establishing a
framework for managing financial responsibility linked to investor-state dispute settlement
tribunals established by international agreements to which the European Union is party, O.J.
2014, L 257/121.
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CML Rev. 2014
it is unclear whether arbitration under the International Centre for Settlement
of Investment Disputes (ICSID) Convention10 may be included in EU IIAs as
an ISDS option. Secondly, the involvement of the EU in ISDS raises concerns
about compatibility with EU law rules. More specifically, the application of
the provisions of the Financial Responsibility Regulation can present a threat
to the autonomy of EU law, while the criteria under which financial
responsibility is allocated between the EU and its Members States differ from
internal EU law rules on EU and Member State liability. On top of that, the
application of the Regulation by the ECJ raises threats to the smooth
functioning of ISDS proceedings.
Thirdly, the Financial Responsibility Regulation does not deal with EU
involvement in ISDS under Member State BITs. Indeed, even if the EU is not
a party to a Member State BIT, disputes may arise when the EU is indirectly
involved, such as when the challenged measure relates to EU law. Such
situations may arise on the one hand under BITs that Member States have
concluded with third countries (extra-EU BITs). Although extra-EU BITs are
authorized according to Regulation 1219/2012,11 the FRR leaves important
questions concerning ISDS and the participation of the EU and its Member
States thereunder unanswered. On the other hand, such disputes may also arise
under BITs concluded between EU Member States (intra-EU BITs). The
involvement of the EU in ISDS under intra-EU BITs raises entirely different,
albeit related questions. Without entering into the details of the debate
regarding the compatibility of intra-EU BITs with EU law and whether they
should be terminated as a matter of principle,12 pragmatism requires
identification of how and in what circumstances the EU could and should be
involved in ISDS under intra-EU BITs.
Within this context, this article aims to provide a clear framework for the
participation of the EU and its Member States in ISDS. After explaining the
main characteristics of the Financial Responsibility Regulation, it examines if
and when EU involvement in ISDS under EU IIAs is compatible with
10. Convention on the Settlement of Investment Disputes between States and Nationals of
Other States (adopted 18 March 1965, entered into force 14 Oct. 1966), 575 UNTS, 159.
11. Regulation 1219/2012 of the European Parliament and of the Council of 12 December
2012 establishing transitional arrangements for bilateral investment agreements between
Member States and third countries, O.J. 2012, L 351/40.
12. Dimopoulos, “The validity and applicability of International Investment Agreements
between EU Member States under EU and international law”, 48 CML Rev. (2011), 63–93;
Hindelang, “Circumventing primacy of EU law and the CJEU’s judicial monopoly by resorting
to Dispute Resolution Mechanisms provided for in inter-se Treaties? The case of intra-EU
investment arbitration”, 39 LIEI (2012), 179–206; Von Papp, “Clash of ‘autonomous legal
orders’: Can EU Member State courts bridge the jurisdictional divide between investment
tribunals and the ECJ? A plea for direct referral from investment tribunals to the ECJ”, 50 CML
Rev. (2013), 1039–1081.
Investor-state dispute settlement
1675
international law. Afterwards, this contribution assesses the compatibility of
the Financial Responsibility Regulation with EU law and the constraints and
limitations that EU law imposes on EU involvement in ISDS under EU IIAs.
Finally, in order to provide a comprehensive analysis of EU involvement in
ISDS, this article offers a critical reflection of EU participation in ISDS under
Member State BITs.
2.
The Financial Responsibility Regulation
The Financial Responsibility Regulation aims to establish clear rules
concerning the apportionment of financial responsibility between the EU and
its Member States and explain how the EU and its Member States can be
involved in ISDS under EU IIAs. Limiting themselves to responsibility, EU
institutions avoided the temptation to resolve all matters pertaining to EU IIAs
in this Regulation. In that respect, it is noteworthy that the Regulation renders
clear that it is without prejudice to the delimitation of competences between
the EU and its Member States in the field of foreign investment. Despite the
Commission’s attempts to use this Regulation as a way to assert a broad FDI
competence under Article 207 TFEU,13 the Regulation makes clear that not
only is the Regulation without prejudice to the scope of the EU’s FDI
competence, but also that it does not constitute an exercise of the Union’s
shared competence regarding non-FDI aspects of foreign investment.14
Although competence questions are linked to international responsibility, as
explained below the Regulation cleverly avoids their determination.
In order to examine the implications of the Financial Responsibility
Regulation on how ISDS can function under EU IIAs, it is necessary to
understand first the objectives behind determining financial responsibility,
the scope of financial responsibility and its linkages to participation in ISDS,
the criteria under which responsibility is apportioned and the tools available
for ensuring compliance with it.
2.1.
The aims of the Regulation
The importance of creating a specific legal framework for EU and Member
State participation in ISDS under EU IIAs has been highlighted by EU
13. COM(2012)335 final, Proposal for a Regulation of the EP and of the Council
establishing a framework for managing financial responsibility linked to investor-state dispute
settlement tribunals established by international agreements to which the European Union is a
party, pp. 3–5.
14. Art. 1(1) FRR.
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CML Rev. 2014
institutions since the very first steps of EU investment policy. The
Commission indicated early on its aim to clarify the rules concerning
respondent status under ISDS and allocation of responsibility. In fact, the
Commission indirectly suggested that the EU will be internationally
responsible not only for EU acts, but also for any Member State acts affecting
foreign investments under future EU IIAs, thus covering violations of FDI and
non-FDI related provisions.15 Despite such initial proclamations, the fact that
participation in ISDS can have significant financial consequences for the EU
has made the Commission adopt a more nuanced approach towards
participation in ISDS and the apportionment of responsibility between the EU
and its Member States.
Indeed, unlike dispute settlement under the WTO, where the EU has been
willing to pay the costs for defending Member State measures and bear the
financial burden of any adverse rulings,16 the assumption of international
responsibility for all Member State acts violating investment obligations
raises very significant moral hazard concerns. Member States may act in
violation of their obligations under EU IIAs, knowing that compensation will
be paid by the EU and (indirectly) shared by all Member States. Of course, the
EU can bring infringement proceedings against Member States according to
Articles 258 and 260 TFEU and require that they comply with EU IIAs, which
are also binding on Member States as a matter of EU law.17 However,
infringement proceedings are unsuitable for apportioning responsibility
between the EU and its Member States. Infringement proceedings, where the
ECJ would in essence have to reassess whether a Member State complied with
the provisions of an EU IIA, would result in duplication of ISDS proceedings,
thus indirectly scrutinizing all arbitral awards and jeopardizing their
enforcement. More importantly, the remedies offered under Article 260 TFEU
are unsuitable for reimbursing the Union for any financial loss it may incur
under ISDS. Fines are neither appropriate nor sufficient to cover the damages
that the EU may have to pay in cases of severe violations of investors’ rights,
which may amount to billions of euros.
Within this framework, the EU is not eager to assume responsibility for all
violations of EU IIAs, since “[i]t would as a consequence be inequitable if
awards and the costs of arbitration were to be paid from the budget of the
15. Investment Policy Communication, cited supra note 2, p.10.
16. Cf. EC-LAN (WTO Panel Report of 22 June 1998, WT/DS62/R, WT/DS67/R,
WT/DS68/R); EC-Asbestos (WTO Appellate Body Report of 12 March 2001,
WT/DS135/AB/R); EC-Biotech (WTO Panel Report of 29 Sept. 2006, WT/DS291, 292,
293/R). See also infra section 3.3.1.
17. Case 104/81, Hauptzollamt Mainz v. Kupferberg [1982] ECR 3641, paras. 12–13; Case
C-13/00, Commission v. Ireland, [2002] ECR I-2943, para 15.
Investor-state dispute settlement
1677
European Union where the treatment was afforded by a Member State …”.18
The conclusion of EU IIAs should be budget neutral for the Union in
circumstances where Member States violate investors’ rights thereunder, so
the Regulation intends to guarantee “that the budget of the Union and Union
non-financial resources would not be burdened”.19 In that respect, this
Regulation deals with financial responsibility, namely with the question of
who bears the “obligation to pay a sum of money awarded by an arbitration
tribunal or agreed as part of a settlement and including the costs arising from
the arbitration”.20
2.2.
The scope of the Regulation: Linkages between financial and
international responsibility
The determination of financial responsibility is a question of EU law rather
than international law. The Financial Responsibility Regulation renders clear
that questions of financial responsibility are to be determined under this
Regulation in a manner that is independent from the determination of
international responsibility under ISDS.21 Despite proposals to link financial
responsibility with ISDS and render this Regulation part of EU IIAs22 – which
would be problematic as it would render Union law part of an international
agreement and thus threaten the autonomy of EU law23 – the Regulation aims
to determine financial responsibility as an internal EU law matter, decided
irrespective of international responsibility.
Nevertheless, the Regulation links financial responsibility with respondent
status in ISDS. More specifically, in cases where financial responsibility lies
with the Member States, the latter not only bear a Union law financial
obligation to pay costs, but more importantly, they become respondents in
ISDS and should bear an international law obligation to pay damages awarded
under ISDS. Article 9 FRR provides that, but for some limited exceptions,
when a Member States bears financial responsibility it is also respondent in
ISDS, while Article 18 FRR indirectly limits investors’ rights to pursue
18. Recital 5 FRR.
19. Recital 9 FRR.
20. Art. 2(g) FRR.
21. Recitals 3 and 5 FRR.
22. INTA, Draft Report on the proposal for a Regulation of the European Parliament and of
the Council establishing a framework for managing financial responsibility linked to
investor-state dispute settlement tribunals established by international agreements to which the
European Union is party, PE504.106v01-00, 28.2.2013, Proposed amendment 50.
23. See infra section 4.1.1.
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CML Rev. 2014
payments for all awards rendered under EU IIAs from the EU.24 Moreover,
Member States have the right to settle disputes with investors, even when the
Union is respondent.25 As a result, financial responsibility is directly linked to
international responsibility, in that Member States participate in arbitration
proceedings, settle a dispute and are required to pay damages in cases where
they hold financial responsibility.
Article 9 FRR establishes three exceptions to the linkages between
financial and international responsibility.26 On the one hand, Article 9(2)(a)
FRR provides an exception in cases where financial responsibility is shared by
the Union and its Member States. In cases where the Union may, even partly,
bear financial responsibility, it is entitled to act as respondent, although
Member States would also bear financial responsibility. Article 9(3) FRR
offers a second exception in cases where similar claims are also raised in
WTO Dispute Settlement. Last but not least, Article 9(1)(b) FRR enables
Member States to decline to act as respondents, even though financial
responsibility lies with them. This provision establishes the main exception to
the linkage between financial responsibility and international responsibility,
as participation in ISDS is entirely independent from financial responsibility.
Yet, the Regulation provides, albeit only in hortatory language, that
international responsibility under EU IIAs should follow the division of
competences, so that only the EU could be held internationally responsible for
violations of provisions falling under exclusive competence.27 This statement
does not match with the implications that apportionment of financial
responsibility has on international responsibility and participation in ISDS. As
explained below,28 this statement contravenes one of the main objectives of the
Regulation, which is to guarantee that third country investors are not
disadvantaged by the fact that the EU and its Member States may both be
responsible under EU IIAs.29
24. The Commission will not pay for any awards where Member States have accepted
financial responsibility under Art.12 FRR or where a Member State has settled a case under
Art. 15 FRR.
25. Arts. 14(3) and 15 FRR.
26. The original Proposal submitted by the Commission provided two additional
exceptions. These would enable the Union to act as a respondent where the challenge concerned
treatment afforded by Member States, when similar claims were raised against a number of
Member States or if unsettled issues of law arose, (Commission Communication, cited supra
note 13, Art. 8(2)(c)-(d)). However, considering that in such cases only Member States would
incur financial responsibility, these provisions met strong resistance in the Council and were
later dropped, thus enhancing the principle that international responsibility reflects, to a large
extent, financial responsibility.
27. Recital 3 FRR.
28. See infra section 3.3.1.
29. Commission Communication, cited supra note 13, p.2.
Investor-state dispute settlement
2.3.
1679
The content of the Regulation: Allocation of financial responsibility
So far it has become evident that the determination of financial responsibility
is crucial for identifying in most cases whether the EU or its Member States
participate in ISDS under EU IIAs. In this respect, it is important to examine
the criteria according to which financial responsibility is apportioned between
the EU and its Member States. The key criterion for apportioning financial
responsibility is that such responsibility should be allocated to the entity that
afforded the treatment challenged as inconsistent with the relevant provisions
of an EU IIA.30 This principle is embodied in Article 3(1)(a) and 3(1)(b) FRR,
which provide that the EU and its Member States shall each bear the financial
responsibility arising from treatment afforded by them.
The determination of financial responsibility on the basis of the actor who
authored the challenged conduct is based on the principles of equity and
budget neutrality.31 Considering the high amounts of compensation that can
be awarded by investment tribunals, as well as the costs of investment
arbitration, the EU is willing to undertake only the costs related to its own
action. The nature of the remedies under ISDS, which involve significantly
high financial burdens, as well as the fact that the EU cannot always control
the conduct of Member States that results in violations of EU IIAs, would
render inequitable the allocation of financial responsibility to the EU for
Member State conduct.
Equity however requires a more nuanced approach in cases where Member
State conduct has been adopted within the framework of Union law. A strict
approach to allocation of financial responsibility on the basis of the author of
the challenged conduct would result in Member States bearing financial
responsibility for measures that they adopted in order to comply with EU law.
In that respect, Article 3(1)(c) FRR provides an exception concerning Member
State conduct that is “required by EU law”, while Article 2(l) defines such
conduct as “treatment where the Member State concerned could only have
avoided the alleged violation of the agreement by disregarding an obligation
under the law of the Union such as where it has no discretion or margin of
appreciation as to the result to be achieved”. Despite its complicated
wording,32 Article 3(1)(c) FRR provides in essence that in cases where the
challenged Member State measure is “required” by EU law, the EU bears
financial responsibility as long as prior Member State law was compatible
30. Recital 7 FRR.
31. Recitals 5 and 9 FRR.
32. Art. 3(1)(c) FRR is worded as an exception to 3(1)(b) FRR, while the second
subparagraph of 3(1)(c) FRR presents an exception to the exception, unless a specific condition
is met.
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with EU law, while the Member State bears financial responsibility if its prior
law was incompatible with EU law. However, the standards of apportionment
under this provision can be particularly problematic, especially if compared to
EU law rules on allocation of liability.
The allocation of financial responsibility is to be decided by the
Commission, after consulting with the Member States. Article 9(2) and (3)
FRR provide that in all cases where the Union acts as a respondent in ISDS
defending Member State conduct, a decision must be taken after following the
advisory or examination comitology procedures established in Articles 4 and
5 of Regulation (EU)182/2011.33 In cases where there is disagreement as to
the allocation of responsibility, Article 19 FRR provides a procedure for an ex
post facto determination of financial responsibility, after an award has been
rendered by an arbitral tribunal. The Commission has an obligation to offer a
detailed explanation of its position regarding the allocation of responsibility
and the Member States must respect tight timeframes in raising objections to
the Commission’s decision.
Compliance with the provisions determining financial responsibility may
be challenged before the ECJ. Such involvement of the ECJ in the application
and interpretation of the provisions of the Financial Responsibility Regulation
might, as explained below, pose threats to the smooth functioning of ISDS
proceedings.34
2.4.
Balancing the interests of the EU and its Member States: The role of
the duty to cooperate
In order to safeguard the allocation of financial responsibility between the EU
and its Member States and the determination of respondent status in ISDS and
settlement, the Financial Responsibility Regulation includes a system of
check and balances. It requires that the Commission and its Member States
consult each other and cooperate tightly, not only in cases where they share
responsibility,35 but even in cases where responsibility clearly lies with one of
them.36 In that respect, the Financial Responsibility Regulation is a
remarkable piece of legislation employing skilfully a vast array of obligations
enshrined in the duty of cooperation. Yet, its application can have undesirable
side-effects.
33. Regulation 182/2011 of the European Parliament and of the Council laying down the
rules and general principles concerning mechanisms for control by Member States of the
Commission’s exercise of implementing powers, O.J. 2011, L 55/13. See infra section 2.4.
34. See infra section 4.3.
35. Arts. 6, 9(3)-(5), 11, 13, 14 FRR.
36. Arts. 7, 8, 10, 15 FRR.
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More specifically, the most significant tool used in the Regulation which
guarantees cooperation between the Commission and the Member States is
the comitology procedure. In order to adopt decisions under Articles 9(3),
13(1), 14(8) and 16(3) FRR, where the examination procedure applies, the
Commission must in essence always have the consent of Member States,37
while decisions under Articles 9(2) and 15(3) FRR are to be taken only after
the Commission takes “utmost account” of the position of the Member
States.38 Besides, the Commission has a duty to render its decisions well
reasoned, “based on a full, balanced, factual analysis and legal reasoning
provided to the Member States”.39
In addition to comitology, the Financial Responsibility Regulation provides
a number of procedural safeguards, which guarantee that the Commission and
the Member States are duly informed and cooperate closely on any relevant
matters arising under ISDS. The Member States and the Commission are
obliged to duly notify each other of initiation of ISDS proceedings and any
steps they take thereunder,40 to share all relevant documentation and
information,41 and more importantly to consult with each other.42 Last but not
least, the Regulation also imposes substantive obligations on Member States
and the Commission in order to guarantee cooperation between them. Article
6(1) FRR provides that “… the Commission and the Member State concerned
will take all necessary steps to defend and protect the interests of the Union
and of the Member State concerned”. A number of other provisions emphasize
the obligation of the Commission to take into appropriate consideration the
Member States’ interests,43 focusing in particular on financial interests.44
The identification of specific procedural and substantive obligations born
by the Commission and the Member States is undoubtedly welcome. It renders
concrete which obligations arise out of Article 4(3) TEU in the context of
ISDS under EU IIAs. However, the enumeration of specific duties and
obligations potentially poses obstacles to the smooth operation of ISDS. This
is particularly so, since the Regulation does not identify the consequences of
the violation of these obligations and their impact on ISDS.
37. On the characteristics of these comitology procedures see Craig, EU Administrative
Law, 2nd ed. (OUP, 2012), pp.131–132.
38. Ibid.
39. Art. 9(2) FRR.
40. Arts. 6(2), 7(1), 8(1), 10(1)(b), 11(1)(d), 11(2), 15(3) FRR.
41. Arts. 6(2), 7(3), 10(2), 11(1)(c) FRR.
42. Arts. 6(2), 9(1) &(5), 10(1)(b), 11(1)(c), 14(1)-(4), 15(2), 16(1), 19(2) FRR.
43. Arts. 9(6), 10(1)(b), 11(1)(a), 13(1) FRR.
44. Arts. 9(4), 14(1),(4),(6), 16(1) FRR.
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Of course, any violation of the procedural conditions set for the adoption of
a Commission decision, such as the comitology rules, would be a ground for
challenging their validity under Article 263 TFEU.45 However, it is unclear
what are the ramifications in case of violations of general obligations to
cooperate, such as the obligation to cooperate under Article 6(1) FRR. Unlike
other areas of EU external relations, where a violation of the duty of
cooperation restricts the exercise of Member States’ external competences,46
any violation of the duty of cooperation under the Regulation should not affect
the external determination of respondent status, as this could seriously affect
the conduct of ISDS.47 Moreover, compliance with the duty to cooperate is not
a factor taken into consideration in the determination of financial
responsibility. Article 19(1) FRR provides that the allocation of financial
responsibility depends only on the basis of the criteria identified in Article 3
FRR, thus excluding the possibility of any other factor influencing how
financial responsibility is allocated in cases where one party does not
cooperate. This limitation on the ex post facto allocation of financial
responsibility may severely undermine the value of the duty to cooperate, as
its violation by Member States and the Commission would not bear any
financial consequences.
3.
EU involvement in ISDS under EU IIAs: International law
constraints
The Financial Responsibility Regulation, as a creature of EU law, is not
sufficient on its own to guarantee legal certainty regarding the involvement of
the EU in ISDS. On the contrary, the involvement of the EU in ISDS according
to the Financial Responsibility Regulation raises international law concerns.
This is particularly so, since not all international law rules are designed in a
way that can fully accommodate Regional Economic Integration
Organizations (REIOs), such as the EU.
More specifically, constraints arise firstly from international responsibility
rules. The determination of whether the EU and/or its Member States can be
respondent in ISDS under EU IIAs depends on whether they bear international
responsibility. However, the nature of the EU as a REIO, and the likely
conclusion of EU IIAs together by the EU and its Member States as mixed
agreements renders the determination of international responsibility difficult:
45. See infra section 4.3.1.
46. Case C-25/94, Commission v. Council (FAO Fisheries), [1996] ECR I-1469; Case
C-246/07, Commission v. Sweden (PFOS), [2010] ECR I-3317.
47. See infra section 4.3.2.
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on the one hand, international law has not yet developed crystallized rules
demarcating the international responsibility of the EU for acts of its Member
States and vice versa; and on the other hand, the EU treaty-making practice of
concluding treaties as mixed agreements renders the application of
international responsibility rules complex.
Secondly, constraints arise from the fact that the EU is an international
organization and not all types of ISDS are available to international
organizations. In that respect, it is unclear whether ICSID arbitration presents
a possible and fully functional ISDS option under EU IIAs, and if the
provisions of the Financial Responsibility Regulation facilitate the adoption
of ICSID arbitration.
3.1.
The involvement of the EU and its Member State in ISDS under
international law: The role of international responsibility
The involvement of the EU in ISDS is primarily a question of international
law. Arbitral tribunals must be satisfied that the respondent party to arbitration
meets certain conditions in order to have jurisdiction over a dispute and be able
to award damages. More specifically, the jurisdiction of arbitral tribunals
depends on whether the respondent party has given its consent to arbitrate a
case; the inclusion of an ISDS clause in an IIA is the most common way for
expressing a State party’s consent to ISDS.48 Moreover, arbitral tribunals must
be satisfied that the respondent party bears international responsibility, in
order to consider a claim admissible and award damages.49 Unless the
respondent can be held internationally responsible for a violation of an IIA
provision, an investor cannot claim damages for the loss suffered.
However it is questionable whether the determination of the respondent
party under EU IIAs in accordance with the provisions of the Financial
Responsibility Regulation satisfies these conditions. First, the identification
of the EU’s and its Member States’ international responsibility under EU IIAs
depends primarily on the apportionment of obligations between the EU and its
Member States under EU IIAs. For international responsibility to arise, a State
or an international organization has to be bound by a specific international law
obligation.50 Hence, only the party bound by an EU IIA provision can be held
responsible for its violation. Secondly the determination of whether the EU
and/or a Member State bear international responsibility depends on the
48. Of course, consent to arbitrate may be expressed ad hoc or through national law. See
Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka (ICSID Case
No. ARB/00/2) 2002 at para 55.
49. See Paparinskis, “Investment treaty arbitration and the (new) law of State
responsibility”, 24 EJIL (2013), 617–647, at 627–629.
50. Art. 2.b of the ILC DARS and Art. 4b DARIO.
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attribution of the conduct violating the provisions of an EU IIA. International
law does not offer clear rules determining attribution of conduct to
international organizations and/or its members.51 Although the International
Law Commission (ILC) has worked towards clarifying this area of
international law, especially by endorsing the Draft Articles on the
International Responsibility of International Organizations (hereinafter
DARIO),52 it is uncertain how these rules apply for determining the
international responsibility of REIOs, such as the EU, and its Member States.
Given that the EU differs substantially from other international organizations
in that the implementation of EU obligations rests on both the EU and its
Member States,53 there are different approaches as to when conduct should be
attributable to the EU and/or its Member States.54
3.2.
ISDS under “pure” EU IIAs
First of all, participation in ISDS is problematic if EU IIAs are concluded only
by the EU, as “pure” EU agreements. In such cases, the framework established
under the Financial Responsibility Regulation cannot function properly,
creating uncertainty under international law as to who can act as respondent.
3.2.1. The constraints under international responsibility rules
If the EU is the only contracting party to an EU IIA, Member States cannot,
according to existing international responsibility rules, bear responsibility for
the violation of treaty obligations that they have not undertaken.55 In such
cases where the EU is the only subject assuming international obligations, it
appears at first glance that only the EU would bear international responsibility
51. On the different sources of international law concerning attribution of international
responsibility to international organizations see Tomuschat, “Attribution of international
responsibility: Direction and control” in Evans and Koutrakos (Eds.), The International
Responsibility of the European Union (Hart, 2013), pp.7–34.
52. Text adopted by the International Law Commission at its sixty-third session, in 2011,
and submitted to the General Assembly as a part of the Commission’s report covering the work
of that session (A/66/10). DARIO has been based on the ILC Draft Articles on State
Responsibility (DARS) (Text adopted by the International Law Commission at its fifty-third
session, in 2001, and submitted to the General Assembly as a part of the Commission’s report
covering the work of that session (A/56/10).
53. Member States are bound to comply with international treaties concluded by the EU.
Case C-13/00, Commission v. Ireland [2002] ECR I-2943, paras. 15, 21; Case C-459/03,
Commission v. Ireland (Sellafield), [2006] ECR I-4635, paras. 80–85.
54. See Kuijper and Paasivirta, “EU international responsibility and its attribution: From
the inside looking out” in Evans and Koutrakos (Eds.), op. cit. supra note 51, pp. 35–71, at
48–67.
55. Rosas, “International responsibility of the EU and the European Court of Justice” in
Evans and Koutrakos op. cit. supra note 51, pp.139–159, at 151.
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for any violation of the provisions of an EU IIA, and of course only the EU
could be party to ISDS.
However, excluding Member States from ISDS and international
responsibility would appear problematic, especially in cases where the
conduct resulting in the violation of the EU IIA is the act of an organ of a
Member State. This is evident in cases of expropriations resulting from
Member State measures. Even if EU law dictates the conditions under which
nationalization occurs,56 a measure amounting to expropriation can be
adopted by a Member State without having any link to EU law whatsoever. In
such cases, it is questionable whether the EU bears responsibility for acts of
Member States which it cannot prevent. On the one hand, it is debatable
whether international responsibility rules allow holding the EU responsible
for violations of EU IIAs resulting from Member States’ measures. The rules
contained in DARIO concerning attribution of conduct to international
organizations, such as Articles 7, 9 and 17 are not sufficient to attribute
Member State conduct to the EU, especially in circumstances where a Member
State measure is not directly related to EU law, such as an act of
expropriation.57 It has been advocated that Article 64 DARIO, which provides
that special rules relating to international responsibility may supplement more
general rules or even replace them, may be able to capture the nature of the
“normative” control that the EU exercises over its Member States in areas of
EU competence.58 Yet, as Article 64 DARIO does not clarify the extent to
which this rule applies to the EU, whether it covers all types of Member States’
acts and if it supplements or replaces the general rules on attribution, it is
contentious whether the EU could be held responsible for all Member State
measures that amount to violations of EU IIAs.
At the same time, it is questionable whether Member States can be held
responsible for their conduct. The assumption of an international obligation is
a conditio sine qua non for State responsibility to arise. Although it may be
possible to attribute the conduct of EU organs to Member States under
exceptional circumstances, such as under Article 61 DARIO,59 there is no
provision enabling Member State international responsibility where only the
56. Dimopoulos, EU Foreign Investment Law (OUP, 2011), pp.108–116.
57. Ibid., pp. 260–264.
58. Commentary on the ILC Draft Articles, Official Records of the General Assembly, 61st
Session, Supplement No.10 (A/64/10) (2009); Hoffmeister, “Litigating against the European
Union and Its Member States – Who responds under the ILC’s Draft Articles on International
Responsibility of International Organizations?”, 21 EJIL (2010), 723–747, at 726–727,
740-741. On the concept of normative control as a criterion for determining EU international
responsibility see Delgado, The International Responsibility of the European Union: From
Competence to Normative Control, (PhD thesis, EUI 2011).
59. Kuijper, “International responsibility for EU mixed agreements” in Hillion and
Koutrakos (Eds.), Mixed Agreements Revisited (Hart, 2010), pp. 219–221.
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EU has assumed a specific treaty obligation. As there is not yet any
international practice regarding Member State international responsibility for
their conduct violating the provisions of a “pure” EU agreement, it is still
unclear if Member States bear any responsibility at all.60
The uncertainty pertaining to the determination of international
responsibility for Member State conduct under “pure” EU IIAs has to be
avoided at all costs. ISDS is one of the most successful systems of
international dispute settlement, and there is no doubt that investors will use it
under EU IIAs. Any uncertainty regarding international responsibility would
undermine the level of protection offered, which presents the rationale behind
the inclusion of ISDS in EU IIAs in the first place. The lack of clarity not only
as to who bears responsibility, but if any party at all is internationally
responsible, could devastate the guarantees that ISDS aims to provide to
foreign investors. Moreover, the existence of uncertainties would create
internal, financial concerns in the EU as to who, the EU or a Member State,
should bear the costs of an infringement. Last but not least, it is questionable
whether arbitral tribunals are best situated to determine how the rules of
international responsibility apply to the EU and its Member States, a question
that neither the ECJ nor the ILC have managed to address yet in a conclusive
manner.
3.2.2. The deficiencies of the Financial Responsibility Regulation
Besides international responsibility concerns, the participation of Member
States in ISDS under “pure” EU IIAs would cast doubt on the jurisdiction of
arbitral tribunals. Given that Member States did not sign “pure” EU IIAs, they
have not expressed therein their consent to be parties to arbitration, so arbitral
tribunals may lack jurisdiction to hear claims brought against Member States.
Of course, this obstacle could be overcome if Member States offer their
consent ad hoc in cases where they bear financial responsibility. However, this
would not be satisfactory, as Member States are not under any obligation
under international or Union law to consent to ISDS. Since the Financial
Responsibility Regulation does not impose such an EU law obligation on
Member States to consent to arbitration either, there is no legal obligation or
incentive for Member States to consent to ISDS under “pure” EU IIAs.
In that respect, participation in ISDS under “pure” EU IIAs should be based
on an entirely different framework. On the one hand, the inclusion of ISDS in
“pure” EU IIAs has to be accompanied by specific rules on the allocation of
international responsibility between the EU and its Member States. Legal
certainty requires ISDS clauses to be accompanied by an explicit assumption
of EU international responsibility for all violations of its provisions, including
60. Rosas, op. cit. supra note 55.
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those resulting from Member State conduct. Such specific recognition of
single EU international responsibility would safeguard the autonomy of EU
law, guarantee the rights of investors under ISDS and comply with
international responsibility rules.
On the other hand, the provisions of the FRR on Member State participation
in ISDS, such as Articles 9, 10, 14(3), 15 and 18 FRR would be incompatible
with the provisions of the EU IIA. Given the priority that EU law offers to EU
international agreements over secondary law,61 these provisions would be
inapplicable. In such cases, the rules pertaining to the EU acting as respondent
in cases where the Member State is financially responsible would be of utmost
importance. Similar to Article 9(1)(b) FRR, the obligations of the Union to act
in the best interest of the Member State and to cooperate fully with the
Member State involved62 will be particularly important for all cases where
Member State conduct is challenged. At the same time, the rules concerning
financial allocation of responsibility and Member State obligations to pay into
the Union budget, in particular Articles 19 and 20 FRR, would be pertinent. In
order to guarantee the principles of equity and budget neutrality that the
Financial Responsibility Regulation adheres to, allocation of financial
responsibility would become very pertinent if the EU bore international
responsibility for all violations of EU IIAs provisions.
3.3.
ISDS in EU IIAs concluded as mixed agreements
Despite the possibility of concluding EU IIAs as “pure” EU agreements, EU
negotiating practice indicates that ISDS will be included in most cases in
comprehensive trade, investment and cooperation agreements that will be
concluded by the EU and its Member States jointly as mixed agreements.
Indeed, Member States are expected to conclude CETA and TTIP agreements
together with the EU.63 Yet, the conclusion of EU IIAs as mixed agreements
does not render the determination of the role of the EU under ISDS much
easier. On the contrary, unless ISDS provisions are carefully drafted, the
determination of respondent status in accordance with the provisions of the
Financial Responsibility Regulation can significantly affect legal certainty.
61. Case C-366/10, Air Transport Association of America v. Secretary of State for Energy
and Climate Change, [2011] ECR I-1133, paras. 49–51; Case C-311/04, Algemene Scheeps
Agentuur Dordrecht, [2006] ECR I-609, para 25.
62. Arts. 9(6) and 11 FRR. See supra section 2.4.
63. See supra note 7. Commission Press Release, “Speech: The Transatlantic Trade and
Investment Partnership: The Real Debate”, 22/5/2014, available at <europa.eu/rapid/
press-release_SPEECH-14-406_en.htm>.
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3.3.1. The role of EU exclusive competence
The determination of respondent status in ISDS under EU IIAs concluded as
mixed agreements is mainly problematic due to the exclusive nature of EU
competence in the field of FDI. This is so, because in areas of a priori
exclusive competence, such as FDI, only the EU assumes international
obligations towards third countries. Hence, as with the above-discussed
“pure” EU IIAs, questions arise regarding international responsibility for
Member State conduct violating obligations that fall under EU exclusive
competence.
More specifically, international law requires that both the EU and its
Member States assume full rights and obligations over the whole breadth of a
mixed agreement that they conclude jointly.64 The only exception to this rule
is the existence of a manifest violation of the internal EU rules demarcating
competence. Articles 27 and 46 of the Vienna Convention on the Law of
Treaties between States and International Organizations and between
International Organizations of 198665 recognize that the division of
competence is primarily an internal question that does not affect the validity of
the obligations entered into by the EU and its Member States. However, if
there is a clear lack of competence to assume an obligation, and this is
objectively evident in accordance with normal State practice and good faith,
such as in cases of a priori exclusive competence, then limited responsibility
exists along the lines of the division of competences.66 Without entering into
details, suffice it to note that the EU in its treaty-making practice, as well as the
ECJ, have long relied on the division of competences between the EU and its
Member States as a criterion for demarcating the EU’s and Member States’
obligations under mixed agreements.67 In that respect, the existence of EU
exclusive competence over FDI indicates that only the EU has assumed
obligations related to FDI. Hence, similar to “pure” EU IIAs, it is unclear
when and who bears responsibility for violations of FDI-related provisions
resulting from Member State measures, especially when the latter are not
related to EU law.
64. Bleckmann, “The mixed agreements of the EEC in public international law” in
O’Keeffe and Schermers (Eds.) Mixed Agreements (Kluwer, 1983), p.159.
65. 1155 UNTS 331. Even though the Vienna Convention has never come into force, it is
generally recognized as codifying principles of customary international law. Steinberger, “The
WTO treaty as a mixed agreement: Problems with the EC’s and the EC Member States’
membership of the WTO”, 17 EJIL (2006), 837–862, 843.
66. Ibid, 844–845.
67. Opinion of A.G. Mischo in Case C-13/00, Commission v. Ireland, [2002] ECR I-2943,
paras. 29, 30; Kuijper and Paasivirta, “Further exploring international responsibility: The
European Community and the ILC’s project on responsibility of international organizations”,
1 International Organizations Law Review (2004), 111–138, at 119; Hoffmeister, op. cit supra
note 58, at 743.
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Current developments regarding EU and Member State responsibility
under the WTO are illustrative of the lack of clear rules regarding international
responsibility for Member State acts violating a provision falling in an area of
EU exclusive competence. In the field of trade in goods, where the EU has
exclusive competence, the EU has always been eager to assume responsibility
for all violations of GATT provisions. Besides, WTO panels and the Appellate
Body have always been eager to accept the EU’s assumption of responsibility
for Member State measures.68 Yet, in all these cases, the EU was held
internationally responsible when Member States were acting within the
framework of EU law. On the contrary, in the Airbus case, which concerned
the compatibility of both EU and Member State measures with WTO law, the
Panel departed from prior case law and ruled that the Member States, being
members of the WTO, were responsible for the actions of their organs.69
Without explaining why it did not accept the EU’s readiness to assume
responsibility for Member State actions, the Panel seems to have accepted
Member State responsibility for their actions, since the latter were adopted
and implemented outside the EU legal framework, and thus, Member States
were better suited to remedy this violation.70 Yet, the Panel did not contest the
EU acting as the only respondent in dispute settlement proceedings, nor the
EU’s readiness to bear the full costs.
The lack of clarity regarding Member State international responsibility for
their conduct resulting in violation of FDI provisions has significant
repercussions for ISDS. In addition to the problems identified above with
regard to “pure” EU IIAs, if EU IIAs are concluded as mixed agreements, the
degree of uncertainty becomes greater, given that it is not yet clear which
aspects of EU IIAs fall under the EU’s exclusive FDI competence. More
importantly, the possibility of investment tribunals deciding on the existence
of international responsibility based on the existence of exclusive competence
would present a major threat to the autonomy of EU law. As explained below,
preserving the autonomy of EU law means that investment tribunals should
not be entitled under EU IIAs to decide, even indirectly, on the allocation of
competences between the EU and its Member States.71
3.3.2. Shared competence and the problem of attribution of conduct
Even in areas of shared competence, which cover all non-FDI provisions of
EU IIAs, the determination of respondent status is complicated. On the one
hand, the apportionment of obligations is not self-evident. The ECJ seems to
68.
69.
70.
71.
Supra note 16.
EC-Airbus, WTO Panel Report 30 June 2010, WT/DS316/R.
Kuijper and Paasivirta, op. cit. supra note 54, p. 63.
See infra section 4.1.3.
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favour a competence-based allocation of international obligations, according
to which the assumption of obligations depends primarily on the
determination of the actor who exercised its (shared) competence at the time
of the conclusion of the EU IIA. Yet the Court offers little guidance as to how
this can be done. The Court has accepted that the EU may exercise its shared
competence,72 and it linked the actual exercise of shared competence with the
legal basis used for the adoption of the mixed agreement.73 Yet, it is difficult
to extract definitive answers, since legal basis is only one indication of the
exercise of shared competence, which rests on other factors as well. Moreover,
it is highly unlikely that the EU will use in its EU IIAs a declaration of
competences, a tool that has proven rather useless in the past,74 to demarcate
the exercise of its investment powers. In that respect, apportioning non-FDI
obligations of EU IIAs to both the EU and the Member States would seem
more probable under international responsibility rules.75
On the other hand, even if obligations under EU IIAs in areas of shared
competence are equally apportioned to the EU and its Member States, the
identification of international responsibility remains complicated, as it would
depend on the attribution of the conduct violating an EU IIA provision. As
discussed above, there have been many attribution criteria that have been
proposed as suitable to reflect the realities of EU and Member State action
under the framework of EU law, which can be based upon different DARIO
provisions.76 Depending on the criterion chosen, it is possible to hold the EU
responsible for any violation of EU IIA provisions, such as under the WTO
framework,77 all the way to holding Member States responsible for acts of EU
organs.78 Considering the divergent rules and current practice concerning
attribution of responsibility under mixed agreements, it becomes apparent
why the inclusion of ISDS provisions in EU IIAs should be accompanied by
the explicit identification of attribution criteria, in a way that safeguards legal
certainty and promotes the policy choices on internal allocation of
responsibility which the EU favours.
72. Case C-239/03, Commission v. France (Etang de Berre), [2004] ECR I-9325, para 30.
73. Commission v. Ireland (Sellafield), cited supra note 53, paras. 96–97.
74. For a critical analysis of the impact of declarations of competence on international
responsibility see Heliskoski, “EU declarations of competence and international
responsibility” in Evans and Koutrakos (Eds.), op. cit. supra note 51, pp.189–212.
75. Case C-316/91 European Parliament v. EDF [1994] ECR I-625, para 29; Eeckhout,
“The EU and its Member States in the WTO: Issues of Responsibility” in Bartels and Ortino
(Eds.), Regional Trade Agreements and the WTO System (OUP, 2006), p. 464; ILC
Commentary-2009, op. cit. supra note 58, p.144.
76. Kuijper and Paasivirta, op. cit. supra note 54; Delgado, op. cit. supra note 58.
77. Kuijper and Paasivirta, op. cit. supra note 54, pp. 60–63.
78. Ibid., pp. 65–67.
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Rendering financial responsibility possible: The need for joint and
several responsibility under EU IIAs
Unlike “pure” EU agreements, allocation of responsibility under the Financial
Responsibility Regulation can function appropriately if EU IIAs are
concluded as mixed agreements. The conclusion of EU IIAs as mixed
agreements could not only guarantee adherence to the principles of
apportionment of financial responsibility elaborated in the Regulation, but
also, as explained below, render possible the inclusion in EU IIAs of ICSID
arbitration as an available and fully functioning ISDS option. However, this
depends on how international responsibility under EU IIAs will be divided
between the EU and its Member States.
More specifically, the determination of respondent status under the
Financial Responsibility Regulation cannot be properly applied, if
international responsibility under EU IIAs is determined only on the basis of
competence. In such cases, only the EU would be able to act as respondent and
be responsible for all violations relating to FDI, irrespective of whether
financial responsibility for such violations would be apportioned to Member
States. Similar to “pure” EU IIAs, the provisions of the Financial
Responsibility Regulation concerning respondent status, conduct of
arbitration, settlement and payment would be inapplicable.79 The fact that
competence should not be used as the sole criterion for establishing
international responsibility under EU IIAs does not necessarily undermine its
value within EU law. The determination of international responsibility under
EU IIAs should be based on additional – to competence – criteria, which can
enhance legal certainty under international law and enable the system
established under the Financial Responsibility Regulation to work
successfully. Besides, since the exact determination of EU exclusive
competence remains a highly contentious matter, which more than 5 years
after the entry into force of the Lisbon Treaty has not yet been clarified, any
competence-based allocation of responsibility should be avoided.
In that respect, EU IIAs should explicitly establish joint and several
responsibility for all violations of EU IIAs provisions. EU IIAs could
explicitly provide that the EU and its Member States jointly assume all
obligations provided thereunder and have joint and several responsibility for
any violation occurred. Adding to legal certainty, such an approach would
allow third-country investors to bring claims against both the EU and its
Member States, while arbitral tribunals would in all cases have jurisdiction
and be able to award damages, irrespective of whether the EU or a Member
State acts as respondent.
3.3.3.
79. Supra note 61.
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The joint assumption of all obligations would be particularly crucial for
enabling Member State international responsibility in areas of EU exclusive
competence. Only if Member States explicitly assume international
obligations that may fall under EU exclusive competence, can they be held
internationally responsible for their conduct and act as respondents in ISDS
according to the provisions of the Financial Responsibility Regulation. At the
same time, the explicit acknowledgment and adoption of Member States
conduct by the EU and vice versa, according to the principles provided in
Articles 9 and 61(1)(a) DARIO, would enable the EU to act as respondent and
assume responsibility for the conduct of Member States in all circumstances.
This would be particularly relevant for situations covered under Article
9(1)(b) FRR, where the Union acts as respondent in cases where the violation
results from Member State conduct that is not linked to EU law.
The explicit adoption of joint and several responsibility under EU IIAs is
nothing new under EU international agreements. The ECJ favours the
existence of joint and several responsibility under mixed agreements, as they
enable third countries to choose either to seek remedies from the EU and its
Member States together or the party of their choice for the whole of the
damages suffered.80 Moreover, international law favours the existence of joint
and several responsibility in cases where an obligation is violated that both the
EU and Member States bear equally, since responsibility cannot be
apportioned between them and each of them is fully liable to the injured
party.81 As regards the language that can be used in EU IIAs, various options
are available: EU IIAs could of course directly acknowledge joint and several
responsibility for any violations of their provisions. However, they may adopt
more indirect language, such as requiring arbitral tribunals to accept that
whether the EU or a Member State acts as respondent does not affect the
admissibility of a claim or the jurisdiction of a tribunal.
3.4.
ICSID arbitration as an ISDS option under EU IIAs
Despite the great diversity of fora provided in IIAs for settlement of
investment disputes, ICSID arbitration has been the main mechanism used
broadly since the emergence of ISDS. Unlike other ISDS options, which are
primarily used for private commercial arbitration, such as UNCITRAL
arbitration rules, ICSID offers a unique arbitration system that combines
elements of both commercial and inter-state arbitration. While it adheres to
the basic rule of arbitration that consent of the parties is a condition sine qua
non, it requires double consent of the defendant State party, one of them being
80. European Parliament v. EDF, cited supra note 75.
81. Art. 47 DARIO; ILC Commentary-2009, op. cit. supra note 58, p. 77,144.
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the ratification of the ICSID Convention, the other relating to the specific
dispute, which is usually expressed by conclusion of an IIA. More
importantly, it provides for annulment and legal review of awards as well as for
a strong and efficient enforcement mechanism of ICSID awards. ICSID
obliges States to treat them as if they were a final judgment of a national court,
thus avoiding the restrictions posed by the New York Convention on the
Recognition and Enforcement of Foreign Arbitration Awards.82
Considering the benefits that ICSID arbitration offers to investors in
comparison to other ISDS options, the EU is willing to include ICSID as an
available ISDS option under EU IIAs.83 The inclusion of ICSID arbitration as
an ISDS option could be particularly beneficial for EU investors, maximizing
the benefits that they can draw from the conclusion of EU IIAs.84 Yet, it is
questionable whether ICSID is a truly available ISDS option under EU IIAs,
especially given the determination of respondent status under the FRR.
3.4.1. Constraints under international law
International law places constraints on the inclusion of ICSID arbitration in
EU IIAs. As the ICSID Convention is open only to States,85 it is doubtful
whether ICSID arbitration could be included in EU IIAs as an ISDS option,
and if so, whether it is politically feasible. In order to rectify this problem, the
EU is willing to accede to the ICSID Convention after it is amended so as to
allow REIOs to be parties.86 However, such renegotiation of the Convention
may not be politically feasible, at least in the imminent future. Considering
that there are 150 signatory parties to ICSID,87 and that the Convention has
been the subject of fierce criticism by some developing countries, as
evidenced by the recent withdrawal of Bolivia, Ecuador and Venezuela, it may
take very long to negotiate such an amendment. Bearing in mind that the
negotiation and ratification of Protocol 14 of the ECHR, which introduced a
similar amendment allowing the EU to accede to the ECHR, took more than 8
82. Arts. 53 and 54 ICSID Convention; See also Schreuer et al., The ICSID Convention: A
Commentary. 2nd ed. (CUP, 2009), section 6.
83. Investment Policy Communication, p.10; Parliament Investment Resolution, cited
supra note 6, para.33.
84. For a discussion on the significant legal, political and economic ramifications
concerning ICSID arbitration under EU IIAs see Burgstaller, “Investor-State arbitration in EU
International Investment Agreements with third States”, 39 LIEI (2012), 207–221.
85. Art. 67 ICSID Convention.
86. Investment Policy Communication, p. 10; Parliament Investment Resolution, cited
supra note 6, para 33.
87. ICSID, List of Contracting Parties and other Signatories of the Convention, 11 April
2014, available at <icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH
&actionVal=ShowDocument&language=English> .
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years to negotiate and enter into force,88 it is questionable whether a similar
amendment to the ICSID Convention could be done within the foreseeable
future.
Of course, the fact that the EU cannot be a respondent party to ICSID
arbitration does not necessarily mean that ICSID cannot be included in EU
IIAs. ICSID could present an ISDS option when third countries or EU
Member States are respondent under ISDS. However, this possibility also
meets legal and political constraints. On the one hand, it is questionable
whether ICSID arbitration against Member States would be legally feasible
under EU IIAs. Considering that ICSID arbitration requires double consent of
the defendant State party, the second being found in an IIA, it is clear that this
requirement is not met if EU IIAs are concluded as “pure” EU agreements.
Member States are not formally bound under “pure” EU IIAs, thus not
offering their consent to ICSID arbitration.
Moreover, even if EU IIAs are concluded as mixed agreements, it is
doubtful whether ICSID arbitration could be initiated against EU Member
States. If arbitral tribunals are not allowed to determine the allocation of
competences and responsibility between the EU and its Member States in
order to safeguard the autonomy of EU law,89 ICSID arbitration does not
present a viable ISDS option. This is because third country investors who
choose to bring claims against Member States before ICSID would be stripped
of their right if the EU were to be respondent in such dispute. Considering that
under the Financial Responsibility Regulation the EU would act as respondent
also when Member States refuse to act as respondents,90 it becomes obvious
that Member States can easily manipulate their way out of ICSID arbitration
under EU IIAs. Within this framework, it is questionable whether third
countries would accept ICSID as an ISDS option concerning only disputes
brought against them by EU investors. Notwithstanding any political leverage
the EU may have it is doubtful whether any third country would accept such an
onerous departure from reciprocity.
The missed opportunity? A framework for ICSID arbitration under
the Financial Responsibility Regulation
It would be very difficult for third countries to accept that their investors
would not have access to ICSID arbitration, while EU investors could use the
full range of available ISDS options. In that respect, ICSID arbitration would
have to be an available ISDS option to third-country investors for all violations
of EU IIAs provisions resulting from both EU and Member State conduct.
3.4.2.
88. Protocol 14 was signed in 2004 and ratified by all Council of Europe members in 2010.
89. See infra section 4.1.3.
90. Art. 9(1)(b) FRR.
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This would require first that all EU Member States are parties to the ICSID
Convention. Given that Poland is the only EU Member State that is not a
signatory party to ICSID, Poland would have to accede to the Convention, in
order to ensure that third country investors would have this ISDS option
available throughout the territory of the Union.
Secondly, it would be necessary for Member States and the EU to bear joint
and several responsibility. By assuming all international obligations under EU
IIAs, Member States can bear international responsibility for their conduct in
all cases, irrespective of whether the alleged violation concerns a provision
falling under EU exclusive competence. In addition, joint and several
responsibility allows Member States to be respondents and be held
internationally responsible even for violations of EU IIAs resulting from EU
conduct. If Member States acknowledge and adopt Union conduct in
accordance with Article 61(1)(a) DARIO, the acts of Union institutions could
be attributed to them,91 so that investors could raise claims against Member
States before ICSID tribunals.
Thirdly, EU IIAs would have to carve out an exception from the rule that the
determination of the respondent party is to be decided by the EU and its
Member States.92 The initiation of ICSID proceedings by an investor should
ensure that the Member State would act as respondent. As the EU cannot be
party to ICSID arbitration, only if Member States are bound to arbitrate a case
under ICSID, even if it concerns a violation of an EU IIA resulting from EU
action, could ICSID arbitration be a fully functioning ISDS option under EU
IIAs.
The inclusion of such provisions in EU IIAs is a necessary, yet not sufficient
condition for enabling ICSID arbitration against Member States. Although
they can render ICSID arbitration possible under international law, this is not
feasible under EU law. Article 4 FRR, which establishes that only the EU can
be respondent in cases where the violation results from a Union measure, as
well as Article 9(1)(b) FRR, which enables Member States to decline
respondent status in cases concerning their conduct, do not permit Member
States to act as respondents in ICSID arbitrations for all violations of EU IIAs
provisions. For ICSID arbitration to be a viable alternative under EU IIAs, the
Financial Responsibility Regulation should carve out an exception from
Articles 4, 9 and 13 FRR for cases where the third country investor initiated
ICSID proceedings against a Member State.
91. D’Aspremont, “The abuse of the legal personality of international organizations and the
responsibility of Member States’, 4 International Organizations Law Review (2007), 91–119,
at 98.
92. See infra section 4.1.3.
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Moreover, it would be necessary to establish under Union law safeguards
that would guarantee the effective protection of the Union’s interests, and
protect Member States’ financial interests. In that respect, the guarantees
provided under the Financial Responsibility Regulation for protecting the
Member States’ interests when the EU acts as respondent in cases where
Member States bear financial responsibility could be mirrored. Provisions
similar to Articles 11 and 20 FRR on the conduct of arbitration and advance
payment of costs would ensure that the Union interest is protected and
Member States do not have to bear the financial costs when they act as
respondents, but the EU bears financial responsibility.
Last but not least, it is worth pointing out that allowing Member States to
bear international responsibility for EU actions under ICSID, thus enabling
ICSID to be an available ISDS option under EU IIAs, would be in line with the
EU’s current practice in other fields of EU external action. It is not uncommon
for Member States to participate in international fora and conclude
international agreements, acting as “trustees” of the common Union interest
in fields where the Union is not entitled to participate in international
agreements.93 However, such participation would not necessarily mean that
the ICSID Convention would become a Union agreement. Unlike the GATT,94
there has not been a full transfer of competences from the Member States to
the Union in the field covered by ICSID.95
4.
EU involvement in ISDS under EU IIAs: EU law constraints
In addition to international law constraints, the involvement of the EU in ISDS
meets constraints also under EU law. On the one hand, the determination of
respondent status under the Financial Responsibility Regulation can present a
threat to the autonomy of EU law and the exclusive jurisdiction of the ECJ to
apply and interpret EU law. Avoiding such incompatibilities, EU IIAs must
safeguard the prerogatives of the ECJ under EU law. On the other hand, the
criteria for the allocation of financial (and international) responsibility raise
concerns. As they differ from internal EU law rules on EU and Member State
liability, their compatibility with EU law is questioned, while their application
and interpretation by the ECJ raises threats to the smooth functioning of ISDS
proceedings.
93. See Cremona, “Member States as trustees of the Union Interest: Participating in
international agreements on behalf of the European Union” in Arnull et al. (Eds.), A
Constitutional Order of States? Essays in EU Law in Honour of Alan Dashwood (Hart, 2011),
pp. 435–457. See also the recent judgment in Case C-399/12 Germany v. Council (IOV),
judgment of 7 October 2014, nyr.
94. Cases 22-24/72, International Fruit Company, [1972] ECR 1219.
95. See also Case C-308/06, Intertanko, [2008] ECR I-4057.
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ISDS and the need to protect the autonomy of EU law
The inclusion of ISDS in EU IIAs can only occur if it complies with the
requirements set by the EU Treaties. As a general rule, the EU can conclude
treaties containing provisions for the settlement of disputes.96 Nevertheless
the ECJ has been very cautious, striking down as incompatible with EU law
treaty provisions on dispute settlement when it considered that the latter
affected the autonomy of EU law. This is particularly so when dispute
settlement threatens the exclusive jurisdiction of the ECJ to have the final say
in the application and interpretation of EU law.97 However, any finding of
violation of the autonomy of EU law produces only EU law effects and does
not affect the international law validity of EU IIA provisions. Irrespective of
its compatibility with EU law, an EU IIA would present valid international law
and continue to bind the EU and its treaty partners, until its modification.98
In order to identify whether and in what circumstances ISDS would affect
the autonomy of EU law, it is important to clarify first that the inclusion of
ISDS in EU IIAs raises different autonomy concerns from ISDS under
intra-EU IIAs. In intra-EU BITs, ISDS is part of an agreement between two
EU Member States, and as such poses threats to the autonomy of the EU legal
order, since Member States may not conclude an inter se agreement which
affects the application of EU law in their territory.99 On the other hand, ISDS
in EU IIAs, which are treaties between the EU and third countries, would be
problematic only if an arbitral tribunal were to strip the ECJ of its exclusive
jurisdiction to decide authoritatively upon the validity and interpretation of
EU law. As the Court firmly established in Opinions 1/91, 1/09, 2/94 and 1/00,
dispute settlement mechanisms under treaties concluded between the EU and
third countries can affect the autonomy of EU law only if the dispute
settlement system can i) provide a binding interpretation of EU rules, ii)
decide on the validity of EU rules or iii) decide on the delimitation of
competences between Member States and the EU.100 In that respect, it is
96. Opinion 1/91 (EEA Agreement) [1991] ECR I-6079, para 3.
97. Opinion 1/91, ibid.; Opinion 1/00 (Common Aviation Area) [2002] ECR I-3493;
Opinion 1/09 (Community Patents Court), [2011] ECR I-1137.
98. Case C-327/91, France v. Commission [1994] ECR I-3641, paras. 13–17.
99. On the threats that intra-EU IIAs present to the autonomy of EU law see Hindelang, op.
cit. supra note 12.
100. Schill, “Luxembourg limits: Conditions for investor-state dispute settlement under
future EU investment agreements” in Bungeberg, Reinisch and Tietje (Eds.), EU and
Investment Agreements (Nomos, 2012), pp. 37–54; Govaere, “Beware the Trojan Horse:
Dispute settlement in (mixed) agreements and the autonomy of the EU legal order” in Hillion
and Koutrakos, op. cit. supra note 59, pp. 187–207, at192.
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necessary to examine whether ISDS under EU IIAs poses any of these
threats.101
4.1.1. The application and interpretation of EU law in ISDS
First of all, ISDS does not seem to affect the jurisdiction of the ECJ to interpret
EU law. A common misconception that could arise is that arbitral tribunals
may deal with matters of EU law when applying or interpreting the provisions
of an EU IIA. However, for the purposes of EU law, it is irrelevant whether
arbitral tribunals deal with EU law, and if so whether it should be considered
as part of domestic or international law. Unlike intra-EU BITs, where the
application and interpretation of EU law by investment tribunals affects the
validity of the agreements,102 any awards rendered under EU IIAs may apply
EU law, as long as they cannot offer an authoritative interpretation of EU law
rules. Arbitral tribunals may rely on EU law to identify whether there has been
a violation of EU IIA provisions, as long as their ruling does not offer a
binding interpretation of EU law.
As the ECJ explained in Opinions 1/91, 2/94 and 1/09 respectively,
autonomy concerns arise only if homogenous interpretation is required, as
under the EEA agreement, or if the international treaty rules are important for
interpreting EU rules, as in the case of the ECHR, or if the dispute settlement
body has the explicit jurisdiction to apply EU law, as in the European Patent
Court case.103 However, none of the above is plausible under EU IIAs. Even if
the substantive law provisions under EU IIAs have wording similar or
identical to EU law, the application and interpretation of an EU IIA by an
investment tribunal would not affect the autonomy of EU law: it is well
established in the ECJ’s case law that provisions of EU international
101. At the time of the writing of this article, the Court had not issued its Opinion 2/13,
where the compatibility of the Draft Accession Agreement of the EU to the ECHR with EU law
and the dangers it poses to the autonomy of EU law are examined. Yet the arguments raised in
the proceedings follow broadly the three categories of concerns mentioned here.
102. Supra note 12.
103. In Opinion 1/91 the ECJ ruled that the autonomy of EU law was undermined, as the
EEA Court could apply and interpret the EEA provisions without paying attention to future
developments of ECJ case law. In this way, it deprived the ECJ of its power to determine
questions of EU law, as the EEA Agreement intended to ensure homogeneity of EEA and EU
law and as a result bound the ECJ to follow future case law of the EEA Court. In contrast with
the clarity of its analysis in Opinion 1/91, the Court rejected in Opinion 2/94 EU competence on
these grounds only indirectly. It considered that accession to the ECHR would bring a
modification of the system for protection of human rights in the EU, with fundamental
institutional implications for the EU and the Member States. Hence, it is argued that the ECJ
recognized that the potential scope of jurisdiction of the ECtHR could include competence
questions and that its decisions would affect the interpretation of the EU law guarantees of
fundamental rights. For analysis, see Schill, op. cit. supra note 100, pp. 44–48.
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agreements that are identically or similarly worded to corresponding EU law
provisions do not necessarily have be interpreted identically.104
4.1.2. Available remedies under ISDS
Secondly, ISDS would pose a threat to the autonomy of EU law, if it affected
the jurisdiction of the ECJ to review the legality of acts of Union institutions.
As the ECJ ruled in Opinion 1/00, if a dispute settlement body finds that a
Union measure violates the provisions of an EU international agreement, the
measure is not automatically invalidated, but it is up to the EU to take the
appropriate measures so as to conform with the EU’s international
obligations.105 In that respect, EU IIAs should not offer, directly or indirectly,
remedies that can result in the invalidity of an EU measure without the ECJ’s
involvement. Given that monetary compensation is the most common remedy
provided in ISDS,106 the obligation to pay damages does not affect directly the
validity of challenged EU measures. On the other hand, if an arbitral tribunal
awards restitution, non-pecuniary injunctive relief or specific performance,107
ISDS may present a threat to the autonomy of EU law. This threat would arise
only if third country investors could enforce such awards in the EU, as only
then would they circumvent the ECJ’s exclusive jurisdiction to declare EU
measures inapplicable or invalid.
As a result, in order to preserve the autonomy of the EU legal order, EU IIAs
would have to preclude specific performance, injunctions of non-pecuniary
nature, and non-pecuniary compensation from the array of available remedies
under ISDS. EU IIAs could specifically determine that arbitral tribunals may
only award monetary damages. However, EU IIAs can include specific
performance as a remedy, while still safeguarding the autonomy of EU law.
EU IIAs can provide that investment tribunals can award specific
performance, such as restitution of property, as long as they enable the
respondent to pay monetary damages instead, if they so prefer.108
Alternatively, the autonomy of EU law could be safeguarded if investment
awards do not have direct effect in the EU. Without entering into a detailed
104. E.g.Case 270/80, Polydor, [1982] ECR 329 and Case 104/81, Hauptzollamt Mainz v.
Kupferberg, [1982] ECR 3641. See also Govaere, op. cit. supra note 100, pp.197–198.
105. Opinion 1/00, paras. 18–21; Govaere, op. cit. supra note 100, p. 195.
106. Dolzer and Schreuer, Principles of International Investment law (OUP, 2012),
pp. 296–297.
107. Although specific performance is not directly provided for under the ICSID
Convention, it is widely accepted that ICSID as well as ad hoc tribunals can require restitution
or specific performance, which may take the form of reversing or invalidating secondary EU
rules. On the use of non-pecuniary remedies under investment arbitration see Schreuer,
“Non-pecuniary remedies in ICSID arbitration”, 20 Arbitration International (2004), 325–332.
108. Schill, op. cit. supra note 100, p. 50.
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analysis of whether the provisions of EU IIAs should have direct effect,109 it is
worth pointing out that if the ECJ found that EU IIAs do not have direct effect,
then investment awards would also lack direct effect. Following the case law
on the direct effect of dispute settlement rulings under the WTO,110 it is clear
that the lack of direct effect of the substantive provisions of an EU agreement
in essence precludes the direct effect of dispute settlement rulings.111
Moreover, even if IIAs were found to differ from WTO agreements and
resemble EU association agreements (which in principle have direct effect)112
this does not mean that investment awards would necessarily have direct
effect. If dispute settlement under an international agreement leaves scope for
manoeuvre regarding the implementation of a ruling, direct effect is excluded,
since the granting of direct effect limits the flexibility enjoyed by EU
institutions to comply with such international ruling.113 Whether ISDS offers
scope for manoeuvre regarding the enforcement and implementation of
arbitral awards depends greatly on the type of ISDS, as the enforceability of
ICSID awards is subject to the specific rules determined in the ICSID
Convention, while other arbitral awards can be enforced under the conditions
set out in the New York Convention on the Recognition and Enforcement of
Arbitral Awards.
Within this framework, the direct effect of ISDS provisions found in EU
IIAs is entirely uncertain. It depends on whether EU IIAs resemble more the
WTO agreement or EU association agreements and on the types of ISDS
available and how the ECJ will evaluate these. In order to avoid such
uncertainties, which can undermine the role of ISDS, the EU could insist on
explicitly limiting the direct effect of awards that require restitution, injunctive
relief or specific performance. As international law allows treaty partners to
identify the domestic legal effects of treaty provisions,114 the use of express
treaty language regarding the direct effect of investment awards could ensure
compliance with EU law.
4.1.3. ISDS and the delimitation of competences
The inclusion of ISDS in EU IIAs raises more concerns for the autonomy of
EU law, to the extent that arbitral tribunals may decide on the delimitation of
competences between the EU and its Member States. The ECJ has emphasized
109. On the author’s opinion see Dimopoulos, op. cit. supra note 56, pp. 296–305.
110. Case C-93/02, Biret, [2003] ECR I-10947; Case T-19/01, Chiquita v, Commission,
[2005] ECR II-315; Case C-377/02, Van Parys, [2005] ECR I-1465.
111. Eeckhout, EU External Relations Law, (OUP, 2011), p. 372.
112. On the approach of the ECJ towards the direct effect of bilateral EU trade agreements
see Mendez, The Legal Effects of EU Agreements (OUP, 2013), pp. 151–155.
113. Ibid., pp. 224–226.
114. PCIJ, Jurisdiction of the Courts of Danzig Advisory Opinion, [1928] PCIJ, ser B, no15.
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the importance of excluding questions of determination of competence from
the ambit of non-EU dispute settlement bodies,115 while the EU has in practice
used various mechanisms, such as declarations of competence,116 which aim
to ensure that proceedings initiated by non-Member States and their nationals
are correctly addressed to Member States and/or the EU as appropriate and
that the compulsory jurisdiction of the Court is not affected.
Such questions may arise especially if EU IIAs are concluded together by
the EU and its Member States as mixed agreements and an arbitral tribunal can
decide on whether the EU or a Member State should be respondent in a dispute
and bear international responsibility. This would be particularly true if EU
IIAs were to endorse a competence approach to determining international
responsibility: arbitral tribunals could engage with the question of whether the
respondent party bears international responsibility in order to determine their
jurisdiction and award damages,117 and thus decide on the allocation of
competences between the EU and its Member States. Considering that the
Financial Responsibility Regulation envisages a system where both the EU
and its Member States could act as respondents in arbitration proceedings,118
and that international responsibility of the EU and its Member States is
(partly) based on the scope of their respective competences,119 the possibility
of arbitral tribunals determining how competence over investment is shared
between the EU and its Member States is not trivial.
Within this framework, it is important that EU IIAs exclude from the scope
of ISDS questions that concern the delimitation of EU from Member State
competence. Given the complex framework of EU and Member State
international responsibility, it is important that EU IIAs explicitly provide for
competence issues to be decided by the EU and its Member States rather than
by arbitral tribunals.120 The lack of specific rules would not only create legal
uncertainty for investors and pose threats to the autonomy of EU law, but
would ultimately result in entrusting arbitral tribunals with determining how
international responsibility rules apply to the EU and its Member States.
Whether this task is suitable for arbitral tribunals and whether the EU wishes
to offer them this opportunity is, at the least, highly controversial.
In that respect, future EU IIAs would have to include a provision, which,
while safeguarding the right of investment tribunals to determine whether the
115. Opinion 2/91, ILO, [1993] ECR I-1061; Case C-459/03, Commission v. Ireland,
[2006] ECR I- 4635.
116. On the use of these instruments see Delgado, “EU declarations of competence to
multilateral agreements: A useful reference base?”, 17 EFA Rev. (2012), 491–509.
117. Supra note 49.
118. See supra section 2.2.
119. See supra section 3.3.1.
120. Schill, op. cit. supra note 100, p. 49.
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respondent party bears international responsibility, would create a procedural
framework enabling the EU and its Member States to determine themselves
the question of who is internationally responsible in a given case.121 In order
to guarantee the rights of foreign investors and promote legal certainty, EU
IIAs should provide for the “proceduralization” of responsibility questions. A
number of mixed agreements include provisions which allow third parties to
initiate proceedings against the EU or Member States or both, but create a
procedural framework that safeguards the autonomy of EU law, by enabling
the EU and its Member States to themselves determine the question of who is
internationally responsible in a given case.122 The Energy Charter Treaty
presents a successful example of such a procedural mechanism, which enables
the EU and its Member States, upon a request by a private investor, to
determine who is responsible in a given case and will have respondent status
in arbitration proceedings.123 Such determination shall be binding on arbitral
tribunals, third country investors, the EU and its Member States. Neither the
EU, its Member States, third country investors, nor arbitral tribunals should be
allowed to challenge the legality of ISDS proceedings on the grounds that the
determination of the respondent party was not appropriate.
4.2.
Financial responsibility and its compatibility with EU liability rules
As the Financial Responsibility Regulation is part of secondary EU law, the
question arises how the determination of financial responsibility for
violations of EU IIAs fits within the existing system of EU law rules
determining EU and Member State liability for their conduct. In that respect,
it is necessary to identify on the one hand whether the allocation of financial
responsibility between the EU and its Member States complies with EU rules
and standards. This question becomes particularly controversial as regards the
allocation of financial responsibility for treatment afforded by Member States
when the latter act within the scope of EU law. On the other hand, it is
important to assess whether the Financial Responsibility Regulation
establishes a higher or lower threshold for EU and Member State liability than
that required under EU law, and if so, whether this is allowed.
121. Hoffmeister, op. cit. supra note 58, at.744.
122. Ibid.; Burgstaller, “European law and investment treaties”, 26 Journal of International
Arbitration (2009), 181–216, at 207.
123. The text of the declaration provides: “…The Communities and the Member States
will, if necessary, determine among them who is respondent party to arbitration proceedings
initiated by an Investor of another Contracting Party. In such case, upon the request of the
Investor, the Communities and the Member States concerned will make such determination
with a period of 30 days. This is without prejudice to the right of the investor to initiate
proceedings against both the Communities and their Member States” [emphasis added].
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4.2.1. Allocation of financial responsibility
Firstly, as to the allocation of financial responsibility between the EU and its
Member States, it is important to identify whether Article 3(1)(c) FRR
follows existing EU rules on the allocation of responsibility between the EU
and its Member States. Article 3(1)(c) FRR, together with Article 2(l) FRR,
allocate financial responsibility to the EU only if Member State conduct is
required by Union law, namely where a Member State did not have any other
option under EU law but to adopt the challenged conduct, and Member State
prior laws were compatible with EU law. In all other cases where Member
State conduct is related to but not required by EU law, financial responsibility
remains with the Member State.
These provisions seem at a first glance to comply with EU law rules on the
allocation of liability between the EU and its Member States. The Court has
very clearly explained that Member States bear liability for wrongful or
negligent implementation or application of lawful EU rules,124 and that in case
of correct application of unlawful EU acts by Member States, the EU bears
liability only if national authorities had no discretion whatsoever.125 Yet, the
Regulation raises two basic concerns: first it is silent on the question if, and
under which conditions, joint responsibility arises. In EU law joint liability
may arise on a number of occasions, including inter alia situations where the
Union fails to prevent Member States from violating Union law or when
Member States and Union acts are part of a broader process resulting in
liability.126 Although it is easy to imagine how the violation of EU IIA
standards can be the result of a series of national and EU measures, the FRR
avoids specifying the criteria under which such allocation of responsibility
will occur. Although it indirectly acknowledges the existence of joint
responsibility,127 the Regulation does not indicate when it will occur and how
it can be divided. Since the existence of joint responsibility has been
somewhat confusing in internal Union law, leading in certain situations even
in inequitable results,128 this omission in the FRR can only add to the
uncertainty regarding the application of the rules on allocation of financial
responsibility.
Secondly and more importantly, the FRR seems to depart from Union law
rules in cases where responsibility arises from Member State acts to remedy
124. Case 101/78, Granaria, [1979] ECR 623.
125. Case 175/84, Krohn, [1986] ECR 753.
126. Cases 5,7 13-24/66, Kampffmeyer v. Commission, [1967] ECR 245. See de Visser,
“The concept of concurrent liability and its relationship with the principle of effectiveness: A
one-way ticket into oblivion”, 11 MJ (2004), 47–71, at 53–61.
127. Art. 9(1)(b) FRR refers to situations where the EU bears only part of the financial
responsibility.
128. Case C-55/90, Cato, [1992] ECR I-2533.
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an inconsistency with Union law. Unlike the exception to Article 3(1)(c) FRR,
EU law does not carve an exception from Union liability in cases where a
Member State adopts acts required by EU law in order to remedy a prior
inconsistency of national law with Union law. Although Member States may
bear liability for the prior rule that is inconsistent with EU law, as a matter of
principle Member States should not bear liability for bringing their legislation
in compliance with EU law. The TFEU guarantees that the Union should be
always called to account for EU unlawful measures. Indeed, when Member
States have to pay damages arising from unlawful Union acts, EU law requires
in most cases, such as in the field of trade or agriculture, that Member States
are reimbursed by the EU.129 Yet, the Court has recognized in exceptional
circumstances that Member States may bear liability for unlawful Union
actions, such as when a Member State’s prior act is unlawful.130 As a result, it
is questionable whether the Financial Responsibility Regulation establishes a
a permissible exception to the general rule that the Union should bear liability
for its actions, which should be construed narrowly.
4.2.2. The threshold for EU and Member State financial responsibility
Although the allocation of financial responsibility between the EU and its
Member States appears in principle equitable and compatible with EU law, the
threshold for Member State and Union responsibility is lower than that
required under EU law. As regards Member State responsibility, the FRR
allocates financial responsibility to Member States in cases where, if
responsibility arose as a result of a violation of EU law, Member States would
not bear State liability. Indeed, the Regulation apportions financial
responsibility to Member States in all cases where they apply or transpose EU
law incorrectly, irrespective of the seriousness of the breach. However, one of
the conditions of State liability under EU law is that there is a sufficiently
serious breach of EU law.131 Thus, in cases of a non-serious breach, Member
States would not bear State liability, as not all violations of EU law are
sufficiently serious.132
Moreover, the Regulation seems to accept that the EU may also incur
responsibility for the conduct of its organs, which, under EU law would not
necessarily give rise to liability. The most explicit acknowledgement of this
additional EU responsibility is found in the exception to Article 3(1)(c) FRR,
which provides that the EU will incur responsibility for Member State
conduct, if the latter was adopted to ensure compliance with EU law and
129. Ward, Judicial Review and the Rights of Private Parties in EU Law. 2nd ed. (OUP,
2007), pp. 390–391.
130. Case 41/84, Pinna, [1986] ECR 1.
131. Joined Cases C-46 & 48/93, Brasserie du Pêcheur v. Factortame, [1996] ECR I-1029.
132. See e.g. Case C-5/94, Hedley Lomas [1996] ECR I-2553; Case C-392/93, ex parte BT
[1996] ECR I-1631; Case C-224/01, Köbler [2003] ECR I-10239.
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amended prior Member State law which had also been adopted in order to
comply with EU law. This provision illustrates that the EU may bear financial
responsibility for Member State conduct that is legal under EU law but
violates the provisions of EU IIAs.
EU liability for conduct that is legal under EU law is possible under Article
340 TFEU. However, this provision has been interpreted rather narrowly by
the ECJ, which indicated that EU non-contractual liability arises only if EU
institutions have manifestly and gravely disregarded the limits on the exercise
of their powers.133 More importantly, the ECJ has not been very eager to
accept EU liability for acts that are legal under EU law, but have been found by
an international dispute settlement body to violate the provisions of an
international agreement to which the EU is party. In FIAMM,134 the ECJ
rejected EU responsibility arising from a breach of WTO rules that was
confirmed by the WTO Appellate Body. Although the rejection of EU
non-contractual liability for violation of WTO rules was basically due to the
nature of WTO rules,135 the Court clarified that not every breach of an EU
international agreement would automatically give rise to EU liability, but the
conditions required under 340 TFEU would always have to be satisfied.136 As
a result, it is possible that the EU bears responsibility under EU IIAs to pay
damages in cases where such responsibility would not arise under Article 340
TFEU.
However, the existence of EU and Member State responsibility under EU
IIAs beyond that provided under State liability rules and Article 340 TFEU,
which the Financial Responsibility Regulation indirectly acknowledges, does
not pose any threat to the validity of EU IIAs or the Regulation. Although EU
law rules on State and EU non-contractual liability provide when a Member
State or the EU bear liability towards individuals for violations of EU law, they
do not preclude Member States or the EU from incurring responsibility for
violations of international agreements concluded by them. Indeed, any finding
of legality under EU law does not prejudice the existence of responsibility
under an international agreement. Indeed, Article 3 FRR deals with the
allocation of financial responsibility between the EU and its Member States,
rather than the existence of responsibility as such. Given that responsibility
arises from the provisions of EU IIAs, compatibility issues would arise only if
EU law required that financial responsibility for Member State conduct under
EU IIAs cannot occur except for instances where State liability arises. As this
133. Brasserie du Pêcheur, supra note 131, para 45.
134. Joined Cases C-120 & 121/06 P, FIAMM and Fedon v. Council and Commission,
[2008] ECR I–6513.
135. Ibid., paras. 113–124, 130; See also Eeckhout, op. cit. supra note 111, pp. 370–371.
136. Ibid., paras.171–176.
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is not the case, it is the broader scope of responsibility under EU IIAs that
requires the allocation of this additional responsibility between the EU and its
Member States.
Of course, the existence of financial responsibility under EU IIAs beyond
the limits of liability under EU law is controversial. Indeed, it results in
offering third-country investors higher standards of protection than EU
investors enjoy, while establishing a parallel system of responsibility.137 In
that respect, a position that is increasingly gaining support is to limit the scope
of protection of foreign investors under EU IIAs, in line with the standards
offered under EU law, so as to ensure coherence and consistency.138 In fact,
following the insistence of the European Parliament, the Regulation includes
a recital providing that “Union agreements should afford foreign investors the
same high level of protection as Union law and the general principles common
to the laws of the Member States grant to investors from within the Union, but
not a higher level of protection. Union agreements should ensure that the
Union’s legislative powers and right to regulate are respected and
safeguarded”.139
Irrespective of the merits of this principle, it is questionable whether such a
recital deserves its place in the FRR. As was already discussed, this
Regulation is about the allocation of financial responsibility and participation
in ISDS, rather than a policy instrument or a negotiating guideline to the
Commission regarding the provisions that EU IIAs should include. The recital
is not only inopportune and entirely misplaced, as a provision in a secondary
law instrument cannot affect the validity or applicability of an EU
agreement,140 but may also potentially undermine the credibility of ISDS
under EU IIAs: were EU IIAs to offer higher standards of protection to third
country investors than EU law does, could this recital mean that the FRR
should not apply for apportioning such additional financial responsibility?
Since it is not reflected in the text of the Regulation, the negative ramifications
of including such a principle in the preamble of the Regulation can be
effectively avoided.
4.3.
The involvement of the ECJ under the FRR and implications for ISDS
The Financial Responsibility Regulation is part of EU secondary law and as
such its application and interpretation is subject to judicial review. This entails
that the legality of Commission and Member State actions applying the
137. Kleinheisterkamp, “Financial responsibility in European international investment
policy’, 63 ICLQ (2014), 449–476, at 463–467.
138. Ibid., 472–475.
139. Recital 4 FRR.
140. Supra note 61.
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Regulation can in principle be challenged before the ECJ and Member State
courts. Nevertheless, litigation concerning the application of the Financial
Responsibility Regulation can potentially pose threats to the smooth
functioning and operation of ISDS under EU IIAs.
4.3.1. The different types of proceedings available
In order to assess the impact of judicial review on the smooth functioning of
ISDS, it is important first to explain the different types of proceedings where
the application of the FRR could be challenged. More specifically, first, it
would be possible for the Commission to initiate infringement proceedings
against a Member State for violating its obligations under the FRR. Article
258 TFEU enables the Commission to initiate proceedings in all cases where
it considers that a Member State failed to comply with its obligations under the
Regulation, especially those arising under the duty of cooperation. However,
considering that the Commission ultimately decides on the apportionment of
financial responsibility, it would be highly unlikely for the Commission to
initiate infringement proceedings before it decides on the apportionment of
financial responsibility and respondent status.Yet, Article 258 TFEU could be
used in situations where the failure of a Member State to comply with its
obligations arises only after a dispute under an EU IIA has commenced. For
example, the failure of a Member State to notify a notice of arbitration,141 or
provide significant information regarding the nature of the challenged
measure142 may result in determination of respondent status or settlement in
violation of the provisions of the Regulation.
A second, and most probable, avenue for challenges to arise regarding the
application of the Financial Responsibility Regulation concerns the decisions
adopted by the Commission concerning the determination of respondent
status and settlement. Indeed, Article 263 TFEU offers the opportunity to
Member States, as well as other EU institutions, most importantly the
European Parliament, to initiate proceedings against the Commission,
challenging the legality of its acts.143 Such challenges may concern violations
of procedural obligations, such as those concerning the reasoning of the
decision,144 whether the relevant comitology procedures were followed
appropriately, etc. More importantly, Commission decisions may also be
challenged by Member States as regards the correct application of the
substantive rules on allocation of responsibility and respondent status,
while the obligations requiring the Commission to pay due consideration to
141.
142.
143.
144.
Art. 8 FRR.
Art. 9(5) FRR.
Art. 263(2) TFEU.
Art. 9(2) FRR.
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the interests of the Member States,145 may also offer the opportunity to the
ECJ to rule on the validity of Commission decisions.
The involvement of the ECJ in possibly all cases concerning ISDS becomes
imminently apparent, if one considers that the third country investors who
initiate ISDS would also be entitled to initiate proceedings under Article 263
TFEU.146 Although investors usually do not have any incentives to start
litigation in front of the ECJ, otherwise they would not have initiated ISDS
proceedings, they may in certain instances benefit from the involvement of the
ECJ in the dispute. For example, third country investors may not be happy with
the choice of the respondent party or the allocation of responsibility to the EU
for Member State conduct, since it may be more difficult to challenge
successfully national measures that are required under EU law. Moreover,
investors may wish to create tensions between the EU and a Member State.
This could be either a litigation tactical move, especially when the delegation
team defending the case is jointly formed by the EU and a Member State, or a
diversion from the merits of the case, especially when a claim under ISDS has
raised negative criticism in EU public opinion.
Article 263(4) TFEU enables individuals to challenge the validity of EU
acts, such as the Commission decisions at issue, if the act is of direct and
individual concern to them. Although Commission decisions under the FRR
are not addressed to investors, nor are they regulatory acts, as they are not acts
of general application,147 they are arguably acts of direct and individual
concern to investors. More specifically, Commission decisions determining
respondent status or settlement are acts of direct concern to an investor, as they
affect the latter’s own legal position directly by determining their counterparty
in ISDS, in an automatic manner, without leaving any discretion to a third
party to mediate the effect of the act.148 In addition, such Commission
decisions are acts of individual concern to foreign investors as these decisions
“affect them by reason of certain attributes which are peculiar to them or by
reason of circumstances in which they are differentiated from all other
145. Supra notes 43 and 44.
146. While investors may challenge Commission decisions, it is highly unlikely that they
could challenge the legality of Member State conduct under the Regulation before national
courts. Although the Regulation is directly applicable, and is in principle capable of conferring
rights to individuals (Case 93/71, Leonesio, [1972] ECR 287), none of the provisions of the
FRR appears to create rights for individuals. The obligations imposed by the Regulation on
Member States do not aim to establish rights for individuals, as they concern Member State
cooperation with the Commission and Union institutions under ISDS.
147. Case T-262/10, Microban v. Commission, [2011] ECR II-7697, para 21; Case T-18/10,
Inuit I [2011] ECR II-5599, paras. 42–46, confirmed in Case C-583/11 P, Inuit Tapiriit
Kanatami v. Parliament and Council, judgment of 3 Oct. 2013, nyr.
148. Case 11/82, Piraiki-Patraiki, [1985] ECR I-207; Case C-486/01P, Front National v.
European Parliament, [2004] ECR I-6289.
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persons”.149 As the ECJ has recently confirmed, a measure is of individual
concern, if the applicant establishes that he belongs to an affected closed class,
that is to say, a group which cannot be extended after the adoption of the
contested measure.150 Considering that Commission decisions under the
Financial Responsibility Regulation address in each case a specific claim
brought under ISDS, it becomes apparent that the investor who initiated ISDS
is a member of a closed group, and thus she can challenge the legality of such
Commission decisions.
4.3.2. The impact of ECJ proceedings on ISDS
ECJ rulings regarding the application and interpretation of the Financial
Responsibility Regulation may affect directly or indirectly the proceedings
under ISDS. More specifically, significant problems may arise if the ECJ
finds that respondent status was not properly determined under the FRR. If
EU IIAs condition the determination of respondent status under EU IIAs in
accordance with EU law, or if they remain silent on the implications of internal
EU law rules on the determination of respondent status, any adverse rulings by
the ECJ may significantly obstruct ISDS: if an ECJ ruling is issued after a
final award or a settlement is reached, it could affect the validity of the award
or the settlement; if the ECJ reaches a decision while proceedings are pending
in front of an arbitral tribunal, it could affect the jurisdiction of the tribunal.
One possible solution to avoid such adverse effects would be to require
arbitral tribunals under EU IIAs to stay their proceedings, if the respondent
status is challenged under EU law. Nevertheless, such a provision could
potentially result in long delays, since proceedings in front of the ECJ may last
long. Requiring an arbitral tribunal to stay its proceedings until respondent
status is determined by EU courts would severely undermine the raison d’etre
of ISDS, since the EU and its Member States could engage on purpose with
internal proceedings in order to delay ISDS and eventually render it
meaningless.
In that respect, the best available solution would be to allow parallel
proceedings in front of arbitral tribunals and the ECJ, whilst determining in
EU IIAs that the initial determination of respondent status is binding on the
EU and its Member States and that neither an investor, nor the EU and its
Member States are allowed to challenge the jurisdiction of a tribunal, the
admissibility of a claim or the validity of an award on the grounds that the
respondent was not properly determined. Such a clause would enhance legal
certainty and guarantee that ISDS proceedings are not directly affected by
internal EU law considerations. Considering that EU international agreements
149. Case 25/62, Plaumann v. Commission, [1963] ECR 95.
150. Case T-221/10, Iberdrola, judgment of the GC of 8 March 2012.
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take precedence over secondary Union law,151 the jurisdiction of a tribunal or
the validity of an award could not be challenged in Union courts on the
grounds of being incompatible with EU rules.
By allowing and guaranteeing ISDS proceedings irrespective of internal
Union rules, the effectiveness of judicial review becomes questionable. By
excluding the option of reversing respondent status, it is contestable how a
finding of a violation of the provisions of the FRR can be remedied. On the
one hand, in cases where the Union acts as respondent in violation of the
provisions of the Financial Responsibility Regulation, Article 19 FRR enables
an ex post facto allocation of financial responsibility between the Union and
the Member State, bearing in mind the appropriate application of the
allocation criteria. However, as was discussed in section 2.4, Article 19 FRR
does not envisage for all violations of FRR obligations to be considered when
allocating financial responsibility. Moreover, where a Member State acts as
respondent in violation of the provisions of the Regulation, there is no
mechanism similar to Article 19 FRR enabling an ex post facto proper
allocation of financial responsibility and costs incurred. The only available
avenue for Member States would be to rely on the Treaty rules on EU liability
to claim back damages suffered due to the wrongful application of the FRR.
Considering the high threshold for Union liability to arise,152 Member States
may have to bear higher than the EU costs from the improper application of the
provisions of the Regulation.
Finally, the very existence of parallel proceedings raises concerns about the
indirect impact that ECJ rulings may have on ISDS. Considering that the
determination of financial responsibility requires the ECJ to examine
the conduct that gave rise to responsibility under EU IIAs, the danger exists
that the ECJ could engage, even in obiter, with an analysis of the legality of the
conduct challenged in ISDS. This could be particularly problematic if the ECJ
reaches a decision while the proceedings in front of an arbitral tribunal are
pending, as the ECJ’s decision could significantly influence and prejudice the
outcome of arbitration. Given the credibility and international reputation of
the ECJ, it would be, at least, challenging for an arbitral tribunal to depart from
any finding that the ECJ may have made on the compatibility of an EU or
Member State measure with an EU IIA. However, the jurisdiction of the ECJ
on the matters determined by the FRR cannot and should not be circumvented.
Rather, the preservation of the fine balance regarding the mandate of arbitral
tribunals and the ECJ rests with the ECJ, which should be very cautious in its
adjudication of all matters concerning the Financial Responsibility
Regulation.
151. Supra note 61.
152. See supra section 4.2.2.
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The role of the EU in ISDS under Member State BITs
The EU can play a role in ISDS not only under EU IIAs, but also under BITs
concluded by its Member States. Even if the EU is not a signatory party under
Member State BITs, it may still be indirectly involved in ISDS and influence
the conduct and outcome of arbitration. This is particularly true for claims
which, if initiated under an EU IIA, would result in the EU bearing financial
responsibility and being the respondent party in ISDS. In order to assess the
involvement of the EU in ISDS under Member State BITs, it is necessary to
distinguish extra-EU BITs that Member States have concluded with third
countries from intra-EU BITs concluded between Member States.
5.1.
The role of the EU in ISDS under Member State BITs with third
countries
Extra-EU Member State BITs still represent the vast majority of IIAs that can
give rise to ISDS where the EU and its Member States may be involved.
Safeguarding investors’ rights and strengthening legal certainty, one of the
first issues addressed under the emerging EU investment policy was the
development of a transitional framework determining the status of Member
State BITs with third countries. To that end, Regulation 1219/2012 was
adopted after a lengthy process, which explicitly authorized Member States to
retain their existing BITs with third countries, also providing a framework for
the negotiation and conclusion of Member State BITs in the future.153 Without
entering into a detailed analysis of the authorization system under Regulation
1219/2012, suffice it to indicate that Member States have made use of its
provisions, keeping in force most of their BITs.154
In this context, the EU may directly or indirectly affect ISDS under Member
State BITs. This would be particularly true for situations where, if ISDS
occurred under an EU IIA, the EU would be respondent. Violations of
extra-EU BITs provisions can be the result of the application and
implementation of EU legislation by a Member State. It is easy to imagine
numerous scenarios under which the fulfilment of Member State obligations
153. See supra note 11. On the scope and content of Regulation 1219/2012 see Lavranos,
“In defence of Member States’ BITs gold standard: The Regulation 1219/2012 establishing a
transitional regime for existing extra-EU BITs – A Member State’s perspective”, 10
Transnational Dispute Management (2013), 1–14.
154. List of the bilateral investment agreements referred to in Art. 4(1) of Regulation (EU)
1219/2012 of the European Parliament and of the Council establishing transitional
arrangements for bilateral investment agreements between Member States and third countries,
O.J. 2013, C 131/2.
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under the EU Treaties can lead in a specific case to a violation of Member
State BITs provisions.155 In such situations, it is questionable whether and
how the EU can be involved in ISDS.
5.1.1. International law considerations
From an international law point of view, it is straightforward that the EU
cannot be directly a party to ISDS. Unlike EU IIAs, the EU is not a signatory
party to these BITs and thus, it cannot be respondent in arbitration
proceedings, nor can it bear international responsibility for any violations of
Member State BIT provisions. Of course, the Commission may request an
arbitral tribunal to be allowed to submit its views as amicus curiae, and
participate in proceedings as an interested third party.156 Although the
Commission has made such requests successfully in the past only with regard
to intra-EU BITs,157 it is important to stress that arbitral tribunals are under no
obligation to allow standing to the Commission. Unless Member State BITs or
the investment tribunal’s mandate explicitly allow for third party submissions,
which is still rather uncommon,158 there is no obligation for arbitral tribunals
to allow the Commission to participate as a third party in ISDS.
As the EU cannot be party to ISDS, the question arises whether Member
States can be held internationally responsible for violations of BITs provisions
resulting from EU conduct or Member State conduct required by EU law. On
the one hand, the attribution of conduct of Member State organs to them, even
when they act in order to comply with EU law, would seem straightforward
under State responsibility rules. Considering the ambiguity concerning
attribution of Member State conduct under mixed agreements,159 it would be
odd for an arbitral tribunal to refuse Member State international responsibility
for the conduct of its organs violating its international obligations. On the
other hand, rendering Member States responsible for EU conduct is
155. For a detailed description of potential situations where the application of EU law may
lead to a violation of BITs see Eilmansberger, “Bilateral investment treaties and EU law”,
46 CML Rev. (2009), 383–429, at 413–420.
156. On third party participation in ISDS see Levine, “Amicus Curiae in International
Investment Arbitration: The implications of an increase in third-party participation”, 29
Berkeley Journal of Int. Law (2011), 200–224.
157. The EU has submitted amici in a number of arbitrations under intra-EU BITs such as
in Eureko (Eureko B.V. v. The Slovak Republic, Award on Jurisdiction, Arbitrability and
Suspension, PCA Case No. 2008-13 (26 Oct. 2010)), Eastern Sugar (Eastern Sugar BV v.
Czech Republic, ICC Partial Award and partial dissenting Opinion, 27 March 2007), and AES
(AES Summit Generation Limited & Another v. Republic of Hungary, ICSID Case
No. ARB/07/22, Award, 23 Sep. 2010, and Electrabel (Electrabel SA v. Republic of Hungary,
ICSID Case No. ARB/07/19).
158. Bastin, “Amici Curiae in investor-State arbitration: Eight recent trends”, 30
Arbitration International (2014), 125–143, at 137–140.
159. See supra part 3.3.2.
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controversial. Holding Member States responsible for the conduct of EU
organs, either on the basis of direct attribution or because Member States
direct and control EU organs, requires that Member States exercise effective
control over the conduct of EU organs. However this is doubtful, since “the
role that a member State may have within the organs of an international
organization would not justify attribution of responsibility to the State for the
conduct of the organization: this would be tantamount to denying the separate
legal personality of the organization”.160
Nevertheless, Article 61 DARIO devises a mechanism enabling Member
States to be held internationally responsible for the conduct of organs of
international organizations of which they are members. Aiming to prevent
States from circumventing their international obligations by conferring
competence to an international organization, which then adopts a wrongful
conduct, Article 61 DARIO prohibits States from evading their international
law obligations by availing themselves of the separate legal personality of an
international organization of which they are members.161 Member State
international responsibility for the conduct of EU organs has been affirmed in
practice, in particular in the field of human rights, where the ECtHR has held
Member States responsible for EU acts violating the human rights obligations
of Member States.162
Moreover, such broad reading of international responsibility rules is
conducive to legal certainty and contributes towards maintaining the high
levels of investor protection that were originally envisaged by Member State
BITs and agreed upon by Member States and third countries. Were third
country investors to be denied protection of their investments for the reason
that the BIT violation stemmed from EU conduct, it would severely
undermine the reciprocity of rights under the BIT. It would offer EU investors
higher levels of protection, while EU Member States could get away with their
obligations, by favouring the adoption of measures that may be at odds with
their BITs obligations at EU rather than national level. Consequently, Member
States should be internationally responsible for any violation of Member State
BITs, even if the violation results directly or indirectly from EU action.
160. Fourth Report of the Special Rapporteur on responsibility of international
organizations UN Doc. A/CN.4/564/Add.1, 12 April 2006, para. 67. See also Kuijper, supra
note 59, pp. 219, 223.
161. ILC Commentary-2009, supra note 58, pp.167–168.
162. ECtHR, Matthews v. the United Kingdom [GC], Appl. No. 24833/94, 1999-I, paras.
26–35; ECtHR, Bosphorus Hava Yollari Tuzirm ve Ticaret Anonim Sirketi v. Ireland [GC],
Appl. No. 45036/98, para 137. For an overview of the cases and relevant literature see 4th
Report, cited. supra note 160, paras. 68–73.
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CML Rev. 2014
5.1.2. EU law considerations
The broad scope of Member State international responsibility for EU-related
violations of extra-EU BITs raises questions as to whether the EU should be
involved or bound by ISDS as a matter of Union law, and if so, how.
Addressing partly these concerns, Article 13(b) of Regulation 1219/2012
introduces an obligation on Member States to cooperate with the Commission
when ISDS proceedings are initiated under an extra-EU BIT. More
specifically, Member States have to “immediately inform the Commission of
any request for dispute settlement . . . The Member State and the Commission
shall fully cooperate and take all necessary measures to ensure an effective
defence which may include, where appropriate, the participation in the
procedure by the Commission” (emphasis added).163
Although Article 13(b) acknowledges that the EU should be involved in
ISDS under Member State BITs, it offers only a very general and broad
framework without identifying the conditions, scope and consequences of EU
involvement in ISDS. On the one hand, Article 13(b) seems to impose
procedural obligations on Member States similar to the ones identified under
the FRR: Member States have to notify the Commission of ISDS proceedings,
share relevant information with the Commission, and even, in certain
circumstances, allow the Commission to be part of the delegation team
defending a case in front of an arbitral tribunal.164 Yet, Article 13(b) does not
specifically indicate when the Commission should be involved in ISDS.
Unlike the framework set up under the FRR, the Member States have
procedural obligations even when the challenged measure is not required by
EU law.
Identifying the scope of the duty to cooperate under Article 13(b), the broad
reference to the adoption of “all necessary measures” may be particularly
useful. This provision indicates on the one hand that the Commission should
be involved in ISDS only when necessary. Hence, the Commission should not
be involved in ISDS, if the challenged conduct has nothing to do with EU law.
On the other hand, it is debatable what measures are necessary when the
challenged conduct is related to EU law in a way that would result in EU
financial responsibility if it were challenged under an EU IIA. Considering
the application of the duty to cooperate under the FRR,165 this rule seems to
require not only effective cooperation in terms of management of ISDS
proceedings, but also imposes a substantive obligation on Member States to
take due consideration of the Union interest and support it appropriately.
163. Art. 13(b) Regulation 1219/2012.
164. See supra section 2.4.
165. Ibid.
Investor-state dispute settlement
1715
Nevertheless, Article 13(b) stops short of imposing financial responsibility
on the EU. Despite the fact that Member States may bear international
responsibility for conduct required by EU law, Regulation 1219/2012 does not
set up a system of allocation of financial responsibility, thus requiring
Member States always to bear the costs of ISDS under extra-EU BITs. This
omission is, to use the language of the FRR, inequitable. If Member States
have to pay compensation for acts required by EU law, the EU should be
ultimately responsible for bearing such costs. This is particularly true, since
the EU explicitly authorized the maintenance of extra-EU BITs, thus
acknowledging their importance for protecting the interests of EU investors
abroad and enhancing the attractiveness of EU Member States as investment
destinations.
Of course, one may argue that undertaking full responsibility is the price
that Member States have to pay if they wish to retain their BITs. In fact,
bearing such responsibility may be an incentive for, at least some, Member
States to support the replacement of their extra-EU BITs by EU IIAs.
However, such incentives may not be equally relevant for all Member States.
Not all Member States equally attract foreign investors and have the financial
ability to bear the costs of ISDS for violations that are required by EU law.
More importantly, the violation of an extra-EU BIT may present an incentive
for Member States not to comply with EU law, especially when the cost of a
BIT violation would be significantly higher than the cost of non-compliance
with EU law.
At this point it is worth discussing whether non-compliance with EU law
would be a possible alternative option for Member States. If Member States
were allowed not to comply with EU law, where such compliance results in a
violation of an extra-EU BIT, they could in principle avoid international
responsibility for EU-related violations. Indeed, non-compliance with EU law
has been accepted by the ECJ as a possible way for Member States to avoid
conflicting obligations. In Commission v. Slovakia,166 the ECJ was asked
whether the termination of a contractual commitment that Slovakia had made
towards a third-country investor, which was required under EU secondary
legislation, would violate the FET and expropriation provisions of the BIT that
Slovakia had concluded with Switzerland. Although the Court found Slovakia
should not comply with EU secondary law, since by doing so it could violate
the provisions of the BIT,167 the Court ruled so on the basis of Article 351
TFEU, which grandfathers Member State international agreements concluded
prior to accession to the EU.168 However, Article 351 TFEU does not mean that
166. Case C-264/09, Commission v. Slovakia, [2011] ECR I-8065.
167. Ibid., para 49.
168. Ibid., para 51.
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CML Rev. 2014
incompatibilities found between pre-accession Member States’ treaties and
EU law can remain forever. Paragraph 2 of this Article provides explicitly that
if such agreements are incompatible with EU law, Member States have the
obligation to take all appropriate measures in order to eliminate the
incompatibilities.169
More importantly, the fact that extra-EU BITs are authorized under EU law
does not mean that Member States can get away with any incompatibilities
arising from their application. Article 3 of Regulation 1219/2012 explicitly
provides that the maintenance in force of Member State extra-EU BITs is
“without prejudice to other obligations of the Member States under Union
law”. As a result, the fact that a Member State may bear conflicting obligations
under an extra-EU BIT and Union law is never a good reason justifying
non-compliance with EU law.170
5.2.
The role of the EU in ISDS under intra-EU BITs
ISDS presents one of the most controversial aspects of intra-EU BITs, as the
very existence of ISDS can affect the legality of intra-EU BITs under EU
law.171 Yet, as the ECJ has not yet pronounced on the incompatibility of
intra-EU BITs with EU law, while arbitral tribunals have found them valid
under international law,172 intra-EU BITs can give rise to disputes between an
EU investor and another Member State. Similar to extra-EU BITs, disputes
arising under intra-EU BITs may concern measures that are directly or
indirectly related to EU law. However, unlike extra-EU BITs, the legal status
of intra-EU BITs under EU law requires a different involvement of the EU in
ISDS.
As to, firstly, the involvement of the EU in ISDS under international law,
intra-EU BITs do not differ significantly from extra-EU BITs. As long as
arbitral tribunals consider intra-EU BITs to be valid and applicable treaties
that are binding on Member States, the EU cannot be directly involved in
ISDS, nor bear any responsibility, but it may, subject to the permission of an
arbitral tribunal, submit its views regarding the dispute at hand.173 Indeed, the
Commission has used this opportunity in a number of disputes, which
concerned, inter alia, Member State conduct that was related to EU law.
However, its submissions aimed mainly at challenging the validity and
169. For an analysis of the mechanism of Art. 351 TFEU see Cremona, “Defending the
Community interest: the duties of cooperation and compliance” in Cremona and De Witte
(Eds.), EU Foreign Relations Law – Constitutional Fundamentals (Hart, 2008), pp.131–135.
170. Recital 11 of Regulation 1219/2012.
171. Supra note 12.
172. See the findings of the arbitral tribunal in Eureko, cited supra note 157.
173. See supra section 5.1.1.
Investor-state dispute settlement
1717
applicability of intra-EU BITs rather than arguing on the merits of the cases or
whether the challenged measure was compatible with EU law.174
The nature of EU involvement in ISDS under intra-EU BITs must be
qualitatively different from its involvement in ISDS under extra-EU BITs.
Issues of legality and validity of the BIT are of primary concern, since they
affect the jurisdiction of an arbitral tribunal and the very existence of ISDS.
On the contrary, in cases where the challenged measure is related to EU law
and which would justify EU involvement under extra-EU BITs, there is no
need for the EU to intervene in order to support the “legality” of a Member
State measure under EU law, or offer an authoritative statement as to the
application and interpretation of EU law in this case. The Commission is not
entitled to offer authoritative interpretations of EU law, or determine the
legality of Member State conduct.175 More importantly, the Commission
should not, even indirectly, legitimize via its submissions proceedings
concerning the legality of a Member State measure under EU law which are
held outside the EU legal order. Respecting the jurisdiction of the ECJ, any EU
involvement in ISDS under intra-EU BITs should limit itself to questions of
compatibility of the intra-EU BIT with EU law rather than arguing on the
merits.
More importantly, the reason why the EU should not be involved in ISDS
under intra-EU BITs regarding national measures related to EU law, is that
such disputes are incompatible with EU law. More specifically, intra-EU BITs
enable EU nationals to challenge the compatibility with an intra-EU BIT of
measures adopted by another EU Member State in order to comply with EU
law. However, unlike extra-EU BITs, where Article 351 TFEU provides some
tolerance towards Member States’ international agreements with third
countries,176 the EU Treaties do not authorize or even tolerate any
international agreement between EU Member States that result in obligations
conflicting with EU law.177 Even if one considers that intra-EU BITs and ISDS
are not per se incompatible with EU law, if their application results in a finding
of illegality of conduct authorized or required by EU law, this is inherently
problematic. The principle of effet utile requires Member States to set aside
any rules, including inter se agreements such as intra-EU BITs, which can
jeopardize the full effectiveness of EU law.178 As a result, not only does
compliance with an intra-EU BIT not justify non-compliance with EU law, but
174. Supra note 157.
175. As Art. 19 TEU provides, the interpretation of EU law is entrusted to EU courts rather
than EU institutions.
176. Supra note 169.
177. De Witte, “International law as a tool for the European Union”, 5 EuConst. (2009),
265–283, at 274–275.
178. Case 106/77, Simmenthal II, [1978] ECR 629.
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CML Rev. 2014
the very existence of a conflicting obligation under intra-EU BITs requires the
intra-EU BIT provisions to be set aside.
Within this framework, where the EU has neither authorized, nor
acknowledged the legality of intra-EU BITs, the duty of cooperation functions
differently. On the one hand, it is hard to explain why Member States have a
duty to notify or share information with the Commission, since a challenge
concerning an EU-related measure under an intra-EU BIT would signal to the
Commission that a Member State has infringed its EU law obligations. Unlike
extra-EU BITs, where the Commission explicitly authorized Member State
BITs with third countries, Member States are entirely responsible for entering
into conflicting obligations and must fully bear the costs of their actions.
Besides, the Commission has no legitimate interest in defending the legality of
an EU-related measure under an intra-EU BIT. By cooperating with a Member
State in defending the legality of EU action under an intra-EU BIT, the
Commission indirectly legitimizes the existence of incompatibilities with EU
law.
In that respect, Commission involvement in ISDS under intra-EU BITs
should be limited. The Commission should only intervene to address
questions of compatibility of the agreement as such with EU law, rather than
discuss the merits of the case, especially when the challenged treatment was
adopted in accordance with EU law. The latter situations should actually
present an opportunity for the Commission to bring infringement proceedings
against Member States that are signatories to intra-EU BITs for undermining
EU law via the creation of a parallel to the EU legal order, where measures
adopted under EU law can be found illegal.
6.
Conclusions
The clarification of the legal framework concerning the involvement of the
EU in ISDS presents a significant challenge that the emergence of the EU as
a new global investment actor creates. The complicated network of BITs and
IIAs where EU involvement is pertinent, and the different requirements set by
EU and international law, render the identification of an optimal legal
framework rather difficult. In that respect, it is completely understandable
why the negotiation and adoption of the Financial Responsibility Regulation
as well as the ISDS chapter in the EU-Canada CETA have taken more than two
years to finalize.
More specifically, the involvement of the EU in ISDS under EU IIAs
depends firstly on the internal EU law question regarding whether and to what
extent the EU is willing to be involved in ISDS. The Financial Responsibility
Investor-state dispute settlement
1719
Regulation provides the compromise reached by EU institutions and the
Member States on this question, whereby involvement in ISDS depends
primarily on the author of the conduct that is challenged, except for cases
where Member States acts are “required” by Union law. Although the
Regulation uses this allocation criterion for determining financial
responsibility and addressing the internal EU law question of who bears the
costs, financial responsibility is, with few but important exceptions, linked to
international responsibility and participation in ISDS. Unless a Member State
considers that the Commission will defend its interests better, the allocation of
financial responsibility determines the actor who can be respondent in ISDS,
settle cases, and pay awards.
This policy choice made by the EU and its Member States has significant
repercussions for the development of the ISDS chapters of future EU IIAs. On
the one hand, they have to preserve the autonomy of the EU legal order, mainly
by precluding arbitral tribunals from offering an authoritative interpretation of
EU law or deciding on the allocation of competences between the EU and its
Member States. Safeguarding the autonomy of EU law, EU IIAs should
include provisions according to which the EU and its Member States will be
able to decide exclusively as to who will be respondent to ISDS proceedings
and such decision shall be binding on investors, tribunals, the EU and its
Member States alike. Of course, for such mechanism to work, investment
tribunals must be satisfied that the choice of the respondent party complies
with the relevant international law rules affecting the admissibility of a claim,
such as international responsibility rules, and its jurisdiction. In that regard,
EU IIAs should explicitly provide that, irrespective of competence
determinations, both the EU and its Member States assume fully the
obligations arising under an EU IIA and have responsibility for any violation
of their provisions, regardless of the author of the conduct. Of course, the
limited involvement of the EU in ISDS in these situations means that EU IIAs
should be concluded as mixed agreements, while the EU should refrain from
linking responsibility with competence. As the question of responsibility
ultimately depends on the author of the measure that resulted in a violation,
any competence determination would only complicate, rather than resolve the
situation.
However, sharing financial responsibility between the EU and its Member
States does not mean that EU IIAs cannot be concluded as “pure” EU
agreements. Including ISDS in EU agreements is legally possible under both
EU and international law. However, in such situations the EU should be
willing to bear full international responsibility for Member States’ actions.
This would require the Union to clarify that only the EU can act as respondent.
At the same time, the provisions of the Financial Responsibility Regulation,
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CML Rev. 2014
and in particular those enabling Member States to act as respondents or settle
cases, would be inapplicable, thus rendering the provisions explaining the
duty of cooperation very important.
Moreover, EU involvement in ISDS should also not necessarily entail the
exclusion of ICSID as a fully functioning ISDS option. As long as Member
States explicitly adopt international responsibility for any violation resulting
from EU IIAs, they can be held responsible for EU conduct. In that regard, EU
IIAs should carve an exception from the rule that the EU and its Member
States decide exclusively on respondent status, and protect the choice made by
third country investors to initiate ICSID proceedings. Moreover, for ICSID to
be a fully functioning alternative, it would be necessary to adopt internal EU
law rules, mirroring the ones concerning situations where the Union acts as
respondent but the Member State bears financial responsibility.
In additon, the involvement of the EU in ISDS under EU IIAs requires not
only the protection of the jurisdiction of the ECJ from interferences from
arbitral tribunals but also the opposite. As the application and interpretation of
the Financial Responsibility Regulation is subject to judicial review by the
ECJ, EU IIAs should make sure that any adverse findings by the ECJ
regarding the determination of respondent status or settlement do not affect
the admissibility of claims and validity of awards under ISDS proceedings.
Yet, ECJ proceedings may still indirectly influence ISDS, especially where the
allocation of financial responsibility under the FRR requires an analysis of the
legality of the conduct in question.
Last but not least, EU involvement in ISDS under Member State BITs
should be minimal. As the EU is not a signatory party, Member States bear the
full responsibility for any violation of their BITs provisions, even when a
violation is required by EU law. This outcome can be argued to be the price
that Member States have to pay for retaining their own investment treaties.
While this may be true for intra-EU BITs, which are inherently incompatible
with EU law, it is questionable whether it is equitable under extra-EU BITs.
Given that the EU has offered its authorization of extra-EU BITs and that
non-compliance with EU law is not a proper alternative for Member States in
cases where the challenged measure is required by EU law, the Commission
should not only a have a duty to cooperate with the Member State to defend the
measure, but the EU should also bear financial responsibility under EU law.
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