The EU’s increased hostility towards private arbitration

By
Pieter Cleppe
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Making sure there are effective judicial mechanisms to resolve disputes whenever they arise is essential to promoting trade and foreign investment.

Such disputes are being resolved through an arbitration agreement in the UK’s new relationship with the EU. Also with the recently agreed “Windsor agreement” between the EU and the UK, to deal with the Northern Irish aspects of Brexit, the European Court of Justice (ECJ) will continue to maintain direct jurisdiction over EU law adopted for Northern Ireland.

At the moment, in Switzerland’s relationship with the EU, no arbiter whatsoever has been foreseen. This is something the EU has tried to change, but so far, no deal on an update on the EU-Swiss relationship has been reached.

“Investor-state dispute settlement” (ISDS) and the new “Investment Court System”

An arbitration model known as “investor-state dispute settlement” (ISDS) has been inserted in many trade agreements agreed by the EU, particularly those signed 15 to 20 years ago. Over the years, due to foreign investors being able to sue governments through international arbitration, opposition has increased on this, particularly from leftwingers. This was a key factor in the failure of the Transatlantic Trade and Investment Partnership (TTIP), a proposed trade agreement between the United States and the European Union.

ISDS was also one of the reasons why the Belgian region of Wallonia refused to ratify the Canada-EU Comprehensive Economic and Trade Agreement (CETA). Ultimately, a compromise entailed that a new “Investment Court System” would be created to serve as the judicial forum to resolve disputes.

The whole idea of such a “Investment Court System”, which the EU is currently implementing, is that unlike ISDS, the judges would not be selected by the parties or arbitral institutions on an ad hoc basis for each dispute. Instead, the judges there are permanent civil servants. This is an effort to address the argument that using private arbitrators would make them more susceptible to conflicts of interest and that they would favor private investors over governments.

That’s despite statistics showing that only about 29% of all concluded cases have been decided in favour of the investor and that approximately 37% of all concluded cases were decided in favour of the State. About 20 per cent of the cases were settled by agreement.

Arbitration in the Energy Charter Treaty

The Energy Charter Treaty (ECT), a multi-nation trade agreement, aimed to support energy security by establishing a framework for energy cooperation and encouraging open and competitive energy markets. It foresees arbitration as a means to resolve differences. Typically, arbitration lawsuits on the basis of the ECT tend to be between governments and private investors, but recently, there was also Azerbaijan launching its first interstate arbitration under Energy Charter Treaty against Armenia over what it maintains constitutes illegal exploitation of the Garabagh region’s rich hydropower resources.

Opponents maintain that the ECT enables foreign investors to attack climate change policies precisely because of its reliance on private arbitration. Particularly in the EU, this has set in motion a drive to abandon the ECT, with the EU now officially supporting this.

This is completely misguided.

First of all, the arbitration procedures provided by this Treaty guarantee that investors do not need to rely on the courts in the countries where they invest. Given how these countries often do not exactly have an independent court system, this reassures investors, but it also benefits the emerging economies enjoying the investment, given how it makes them a more attractive place to operate.

Secondly, the ECT does also protect energy investment that tend to be cherished by the movement calling for more stringent action against climate change: renewable energy investment. Spain for example suffered multiple arbitration defeats over the drastic changes its government made to financial support schemes for renewable energy installations. Those had been created in 2007, but as a result of the dire financial situation Spain found itself back in 2012 and 2013, the government’s unilateral actions damaged renewable energy investors badly, who subsequent took Spain to court, suing Spain for up to 9 billion euro.

On 15 March, a Dutch court stated that it could not prevent enforcement of the awards outside of the EU, while at the occasion of another recent win for the investors, the District Court of Columbia urged European judicial authorities to no longer go along with Spanish attempts to annul the many arbitration decisions.

Spain has been strongly resisting to comply with arbitration court orders. As a result, in an international comparison of this, it is doing almost as bad as the likes of Venezuela, and it is currently facing a backlog of up to 700 million euro of unpaid arbitration awards. Spanish newspapers are now speculating that investors may manage to seize Spanish government property, similar to the kind of experience Argentina went through.

The EU’s increased hostility towards private arbitration

Apart from a refusal to pay, which is where the leftwing Spanish government is being supported by the European Commission on shady grounds – claiming that arbitration awards would amount to “state aid” –  it has also successfully lobbied the EU to oppose the ECT Treaty altogether.

Spanish ecological transition minister Teresa Ribera thereby claimed that the Treaty would endanger the fight against climate change – never mind that she knows well that it also protects the renewable energy investment ecologists tend to strongly support. She thinks that a negotiation to reform the ECT has yielded “no improvements” and has now managed to obtain support from the EU and a number of member states, even if the timeline to withdraw remains unclear. Already in 2018, the European Court of Justice ruled that investor-to-state arbitration in an intra-EU context was illegal and should be limited to disputes with non-EU member states.

It is very telling about how friendly the current mood in the European Union is towards international investment in general and tools like arbitration to support a friendly investment environment in particular.

At least the UK appears to be fine with the changes agreed to the Energy Charter Treaty, and also Switzerland will not abandon it. This all further undermines competitiveness of industry in the EU, when it is already suffering badly from international uncertainty and energy prices that remain at an excessive level.  

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