Investment Treaties and EU law

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Piet Eeckhout is Professor of Law and Director of the Centre for European Law at King’s College London.

In two parallel decisions of March of this year (Case C-249/06 Commission v Sweden and Case C-205/06 Commission v Austria) the European Court of Justice ruled that Sweden and Austria are in breach of their EC Treaty obligations by maintaining bilateral investment treaties with third countries which may interfere with the EU’s powers to restrict capital movements.  This is the Court’s first venture into the booming international investment law field.  It should be seen in its broader setting. The Treaty of Lisbon purports to extend the scope of the EU’s common commercial policy to matters of “foreign direct investment”.  Perhaps in anticipation of this significant expansion of Community competence, the Commission is becoming active in this area.  It considers that bilateral investment treaties between Member States and third countries are incompatible with Community law, in so far as they contain a clause on the free transfer of payments connected with an investment.  Such a clause, whilst in principle compatible with the free movement of capital between the Community and third countries, could create problems were the Community to introduce restrictions pursuant to Articles 57(2), 59 and 60(1) of the EC Treaty.  There is as yet no relevant legislation under any of these Treaty provisions, but the Commission is concerned that the future exercise of Community competence could be hindered.

The Commission therefore brought proceedings against Sweden and Austria, referring to a series of investment treaties which they have concluded.  Those treaties come within the scope of Article 307 EC, pursuant to which (a) rights and obligations arising from agreements, concluded before accession, between Member States and third countries are not affected by the EC Treaty, and (b) Member States shall take all appropriate steps to eliminate any incompatibilities with the EC Treaty.  Sweden and Austria were alleged not to have removed the incompatibility between their investment treaties and EC law.  What the Commission would like to see is a so-called Regional Economic Integration Organisations clause in these agreements: a clause which allows and safeguards EC measures.

Advocate General Maduro was of the opinion that the investment treaties in issue were not incompatible with the relevant EC Treaty provisions as such. Those provisions do not establish an exclusive Community competence; competence to adopt measures on free movement of capital is shared with the Member States.  To hold that the investment treaties are incompatible with the shared or concurrent powers which the Community has in this field would amount to making those powers exclusive.

 The Advocate General nevertheless concluded that there was an incompatibility with EC law, namely with Article 10 EC, embodying the duty of loyal cooperation.  He drew an analogy with case law on directives whose period for transposition has not yet expired.  He proposed that the Court rule “that Member States are obliged to refrain from any measures liable seriously to compromise the exercise of Community competence”.  The Advocate General considered that this was the case, particularly since some of the relevant EC Treaty provisions allow the Community to adopt urgent measures.  To do so could be made more difficult because of the transfer clauses in bilateral investment treaties.

 The Court’s analysis is very brief.  It describes the powers of the Community to restrict, in certain specific circumstances, movements of capital and payments between the Member States and third countries.  It then establishes that such measures must be capable of being applied immediately – this is necessary to ensure their effectiveness.  Such immediate application may extend to States with which Sweden and Austria have concluded investment treaties.  The Court then concludes that there is an incompatibility between the Council’s powers to adopt unilateral restrictive measures and the investment treaties – at least in so far as those treaties do not allow the Member States to exercise their rights and to fulfil their obligations under Community law and in so far as there is no international-law mechanism to achieve the same result.  Arguments by Sweden and Austria concerning the scope for re-negotiation, suspension, or denunciation, are rejected as insufficient to remove the incompatibility.  The Court concludes by instructing the Commission and the Member States to adopt a common attitude – indeed the issue of transfer clauses is not limited to treaties concluded by Sweden and Austria – all Member States are bound by treaties containing such clauses.

 The judgments call for some comments.  First, I hope that the Court is not in these judgments establishing a broader principle that any international agreements concluded by the Member States which may make the exercise of shared Community competences more difficult are incompatible with Community law.  That would indeed turn shared competences into exclusive ones.  It cannot be right that the Member States are in breach of EC law whenever they conclude an international agreement in an area of shared competence, simply because at some later stage the Community may decide to adopt its own legislation, which may differ from the terms of the agreement.  The judgments in my opinion have to be read in the light of the particular legal context: the relevant EC Treaty provisions permit the Community to adopt urgent measures, and this may justify finding that any Member State agreements which would pose problems for the adoption and implementation of such measures are incompatible with the EC Treaty.

Second, the Court is very dismissive of the opportunities offered by treaty law to suspend or terminate the relevant treaties, if the need were to arise.  Those opportunities are “too uncertain in [their] effects”.  The Court’s position is that, if and when the Council decides to take restrictive measures, nothing should stand in its way.  International law obligations of the Member States should not form an obstacle of any kind.  It is questionable whether this is the right approach towards an area of international law in which all the EU Member States are active.  In another fairly recent decision, Intertanko (Case C-308/06, 3 June 2008), the Court suggested that, where all Member States are bound by an international agreement (in that case Marpol 73/78), Article 10 EC (loyalty principle) has consequences for EC acts: it is then incumbent upon the Court to interpret such acts taking account of the agreement.  Should not the EC Council equally take account of international investment treaties binding the Member States when considering to take measures restricting capital movement?

Third, it must be noted that the EC is itself bound by a treaty, together with its Member States – the Energy Charter Treaty (ECT) – which includes free transfer provisions.  Is that treaty then not equally incompatible with the EC Treaty?  Can it make any difference whether the investment treaty was concluded by a Member State, or by the Community itself?  It may in this respect be noted that, under the ECT, there are arbitral proceedings pending which further test the relationship between the ECT and EC law.  One of the cases is AES v Hungary (ICSID).  In an expert opinion for the Tribunal I took the position that the EC must respect the rights of an investor, even when the ECT is invoked in an intra-Community context (in the case, the UK and Hungary).  I also analysed how the first paragraph of Article 307 EC allows a Member State (in this case Hungary) to respect its treaty obligations towards a private party, established in another Member State.  The Tribunal is to decide in coming months.

 Fourth, the effect of these judgments may be similar to that of the so-called Open Skies judgments, in which the Court found that bilateral aviation agreements between the Member States and third countries were in violation of the freedom of establishment.  Those judgments forced the Community – the Council in particular – to craft a common external air transport policy, and to replace bilateral agreements with Community agreements.  A comparable development in the field of investment treaties is not inconceivable.  It may therefore be that the entry into force of the Lisbon Treaty is not required for the shaping of an EU external investment policy.

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Nikos Lavranos says

September 25, 2009

While I share Piet Eeckhout's analysis that the ECJ went too far by applying this 'hypothetical incompatibility' approach (see my case-note in the upcoming AJIL 2009 October issue) , I think, the ECJ's uncompromising position can be explained by another reason: namely, the ECJ's concern that its exclusive jurisdiction is increasingly undermined by investment arbitral tribunals that find themselves interpreting EC law, in particular the free movement of capital provisions as well as generally the non-discrimination principle. This applies in particular to intra-EC Member States BITs.
Since the MOX plant judgment, we know that the ECJ is not ready to accept any interference - how potential and remote that may be - from other international courts and tribunals.
The question is: can the ECJ continue to de-couple and insulate the Community legal order from the international legal order? We have seen in the context of the interaction between WTO law and EC law that this is not a sustainable approach, in particular when private party interests are directly affected as is usually the case with foreign investments.
So, at the end of the day, it all boils down to the Rule of Law, which is increasingly applied by the ECJ on a selective basis - and it seems that the list of exceptions is becoming longer rather than shorter.