Iana Dreyer in Brussels -

The European Commission is stepping up efforts to put a stop to costly legal disputes between Western European investors and Central and Eastern European member states that are arbitrated in ad hoc international tribunals. Experts say the move by Brussels will help clarify the status of investor-state arbitration tribunals in the EU, though some fear the Commission is actually undermining investor rights by the way it is going about this.

In late June, the Commission launched so-called ‘infringement proceedings’ against Austria, the Netherlands, Sweden, Romania and Slovakia for non-compliance with EU law. If these countries continue to maintain their mutual bilateral investment treaties (BITs), they might have to pay fines to the EU.

The Netherlands-Slovakia and Austria-Slovakia BITs of 1991 and a 2002 Sweden-Romania BIT offer the legal basis for recent high-profile investor-state dispute sagas involving the Dutch insurer Achmea (formerly Eureko), European American Investment Bank (EURAM Bank), and two Swedish food industry magnates, the Micula brothers.

BITs aim to protect foreign investors from discriminatory host government measures and illegal expropriation. These deals have traditionally been signed between capital-exporting advanced economies and emerging markets with weak legal systems that want to give extra protection to foreign investors they are looking to attract.

Most BITs envisage arbitration courts to resolve disputes. The international tribunals generally operate under UNCITRAL (United Nations Commission on International Trade Law) and ICSID (International Centre for Settlement of Investment Disputes rules) rules.

Amsterdam, Stockholm and Vienna are expected to contest the Commision’s order to cancel the BITs. The matter is most likely to be referred to the Court of Justice of the European Union (CJEU) – the EU’s supreme court – in Luxembourg.

Settlement sagas

In December 2012, Achmea, owner of a local health insurance company in Slovakia, was awarded €22mn in compensation by an arbitral tribunal in Frankfurt, Germany, on the basis of the Netherlands-Slovakia BIT. Achmea had contested the 2006 decision by the government of the time – headed by the populist Robert Fico – to ban private insurance companies from distributing profits to their shareholders. Bratislava refused to comply with the 2012 award. It asked a local German court in Frankfurt to invalidate the arbitration tribunal’s decision, but was rebuffed. Now the case is with the German constitutional court in Karlsruhe. Meanwhile, Achmea has had Slovakian state assets seized in Luxembourg.

A comparably complex dispute pitched Austria-based EURAM Bank, which had also invested in Slovakia’s health insurance sector and was also affected by the 2006 profit ban.

By 2012, the irrepressible Fico was back in power and his government decided to establish one single public health insurance system – de facto nationalising private insurers. In an unprecedented move, Achmea tried to have the measure cancelled before it even came into force. But the arbitrators rejected the claim.

In December 2013, the Micula brothers were awarded €178mn in compensation by an arbitration tribunal for not having been given "fair and equitable treatment" by the Romanian government. In 2005, Bucharest had cancelled subsidies two years after it had agreed to offer them to the agri-food companies European Food, Starmill and Multipack owned by the Micula brothers. Bucharest partly paid the award by cancelling €76mn of tax payments owed by European Food.

Last year Romania asked the Commission for permission to pay the outstanding amount: the Commission said no. Brussels’ executive body argued that the subsidies that Bucharest cancelled violated the bloc’s sacrosanct state-aid rules and paying the award would amount to illegal state aid. The Micula brothers went to the CJEU to have the Commission’s decision cancelled. The case is pending.

Freya Baetens, associate professor of law at Leiden University tells bne IntelliNews that that EU competition rules were in place in Romania as early as 1995. “EU companies have been ordered to repay unlawfully received aid, even if it caused their bankruptcy. Micula cannot argue that it could not see this coming,” she says.

Taking sides?

The Commission’s June proceedings reflect a mounting conflict between EU law and international investment law. In 2009 when the EU's Lisbon Treaty came into force, competence over investment policy shifted from the member states to Brussels. Since then, both sides have been arguing over what to do with the BITs signed by old members with former Soviet bloc countries that have subsequently joined the EU. 

Brussels says these BITs are illegal under EU law; they create an uneven playing field between member states and investors, and that the arbitration tribunals are outside the purview of EU law. But despite Brussels’ calls for governments to cancel their intra-EU BITs, all of them, except Italy, have refused.

Davide Rovetta of Grayston & Company, a law firm in Brussels, identifies something “strange” going on. “The Commission is not launching an infringement case against all the member states [as it is entitled to], but is just proceeding against some of them which by chance correspond to the ones that have an investment problem. That is not good,” he tells bne IntelliNews, adding that this amounts to taking sides in the current disputes.

Professor Baetens for her part thinks “the Commission wants to get a few precedents established as fast as possible, rather than asking for a more general ruling which may subsequently be more open to interpretation and further disputes”.

But Rovetta says the Commission is starting from the wrong assumption that, “because they need to apply EU law, all the legal systems of the member states are the same. This is not true”. To him, the Commission is only removing international investment protection to force investors to go to national court – without ensuring in return that solid investment protection rules are applied uniformly by all member states.

Slovakia scores 0.4 (on a scale from – 2.5 to + 2.5) and Romania 0.1 in the World Bank’s Rule of Law index. In comparison, scores for the Netherlands are 1.8, and for Germany 1.6. Slovakia has BITs in force with 20 other EU member states, and Romania with 22.