UNCITRAL tribunal rules Slovak-Dutch BIT not affected by Slovakia's EU membership

Practical Law UK Legal Update Case Report 7-503-9310 (Approx. 7 pages)

UNCITRAL tribunal rules Slovak-Dutch BIT not affected by Slovakia's EU membership

by PLC Arbitration

Background

Article 30(3) of the Vienna Convention on the Law of Treaties (VCLT) provides (emphasis added):

"Application of successive treaties relating to the same subject matter

3. When all the parties to the earlier treaty are parties also to the later treaty but the earlier treaty is not terminated or suspended in operation under article 59, the earlier treaty applies only to the extent that its provisions are compatible with those of the later treaty."

Article 59 of the VCLT provides (emphasis added):

"Termination or suspension of the operation of a treaty implied by conclusion of a later treaty

1. A treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and:

a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty; or

b) the provisions of the later treaty are so far incompatible with those of the earlier one that the two treaties are not capable of being applied at the same time."

Article 65(1) and 65(5) of the VCLT provides (emphasis added):

"Procedure to be followed with respect to invalidity, termination, withdrawal from or suspension of the operation of a treaty

1. A party which, under the provisions of the present Convention, invokes either a defect in its consent to be bound by a treaty or a ground for impeaching the validity of a treaty, terminating it, withdrawing from it or suspending its operation, must notify the other parties of its claim. The notification shall indicate the measure proposed to be taken with respect to the treaty and the reasons therefore ...

5. ... the fact that a State has not previously made the notification prescribed in paragraph 1 shall not prevent it from making such notification in answer to another party claiming performance of the treaty or alleging its violation."

Facts

The dispute arose under the bilateral investment treaty (BIT) between the Netherlands and the Czech and Slovak Federal Republic. The claimant was a Dutch financial services group. The underlying dispute was based on the claimant's allegations of indirect expropriation caused by Slovakia's reversal of the liberalisation of its health insurance market in 2006. Slovakia raised a jurisdictional objection, arguing that its accession to the EU in 2004 had terminated the BIT or rendered its arbitration clause inapplicable. Slovakia claimed that:

Under Article 59(1) of the VCLT, the BIT was automatically terminated on Slovakia's EU accession. In particular:
- the BIT and the EC Treaty related to the same subject matter, as they covered the same types of investors and investments, served the same purposes, offered the same standards of protection, and provided for equivalent remedies. There was a clear intention by the parties to Slovakia's EU Accession Treaty to automatically terminate the BIT on Slovakia's accession to the EU (Article 59(1)(a) of the VCLT); and
- alternatively, the provisions of the BIT and the EC Treaty were incompatible and the EC Treaty had to prevail (Article 59(1)(b), VCLT). The incompatibility concerned, among other things, the BIT provisions covering transfers of capital and arbitration.
Under Article 30 of the VCLT, the arbitration clause in the BIT no longer applied after Slovakia's EU accession, due to incompatibility of certain of its provisions with EU law.
As the subject matter of the dispute was governed by EU law, the ECJ had exclusive jurisdiction over the dispute due to its "interpretative monopoly" with regard to EU law. The tribunal had no jurisdiction to decide a dispute governed by EU law. The principles of EU law (supremacy and direct effect) made parallel application of EU law and the BIT impossible. EU law superseded not only legal systems of the EU member states, but also prevailed over BITs concluded between the member states (intra-EU BITs).
The dispute was not arbitrable under the law of the seat of the arbitration (German law) because it was governed by EU law.

The tribunal invited the European Commission and the Netherlands government to file written observations. The European Commission observed, among other things, that:

The requirements of Article 30(3) of the VCLT were met in the present case. Certain provisions of the BIT, in particular, the investor-state arbitration mechanism, raised "fundamental questions regarding compatibility with EU law".
Investor-state arbitration undermined the principle of mutual trust in the administration of justice in the EU. The exclusive jurisdiction to determine whether a member state had terminated its obligation under the EU law rested with the Luxembourg courts. Under the EU judicial system, investors from one member state must address their claims against another member state in national courts, or refer the issue to the European Commission.
Investor-state arbitration under intra-EU BITs could create discrimination between investors from different member states and, as a result, was in conflict with EU law. The Commission disagreed that such discrimination could be resolved positively, by granting all investors the same preferential rights.
EU law had supremacy over intra-EU BITs. This did not make the BITs invalid but meant that they could not be applied where they conflicted with the EU law. In the event of such a conflict, the BIT provision had to be interpreted in the light of the EU law, not the other way round.
The claimant had already lodged a complaint with the Commission against Slovakia in relation to the present dispute and the Commission proceedings were pending. Continuing the arbitration posed a risk of conflicting decisions or an award that was inconsistent with EU law. For these reasons, the Commission suggested suspension of the arbitral proceedings.

Decision

The tribunal found that it had jurisdiction.

In relation to Slovakia's arguments, the tribunal found that:

The BIT was not terminated, or otherwise displaced, by EU law (under Article 59 of the VCLT). In particular:
- as a rule, the VCLT did not allow for automatic termination of treaties. To terminate the BIT, the parties should have followed the procedure set out in Article 65(1) of the VCLT, which required, among other things, a formal notification, which Slovakia had failed to give. Notification under Article 65(5) of the VCLT (in response to the claim of the breach of the BIT) was not available to Slovakia because the claimant was not a party to the BIT;
- there was no evidence of any intention that the provisions of EU law should entirely displace the provisions of the BIT;
- Article 59 of the VCLT concerned termination of the entire treaty, and its application could be triggered only in the case of a broad incompatibility between the BIT and EU law. There was no such incompatibility here;
- the claims raised by the claimant under the BIT were not covered by EU law. The protections granted by the BIT, concerning fair and equitable treatment, full protection and security and protection against expropriation, extend beyond protections granted under EU law;
- the investor-state arbitration under the BIT was an essential characteristic of an investor's rights which could not be replicated under the court procedures of the member states; and
- "extra-EU BITs" (that is, BITs between member states and non-member states) should be clearly distinguished from intra-EU BITs. Under intra-EU BITs, the investor and the host state were subject to the same provisions of EU law.
The fact that a BIT granted wider rights to investors than those granted by EU law could amount to discrimination. However, this could not justify eliminating an investor's rights under the BIT. The host member state was not prohibited from granting equivalent rights to investors from other member states.
Only those obligations under the BIT which could not be fulfilled by Slovakia without violating EU law could give rise to inapplicability of a BIT under Article 30(3) of the VCLT. Substantive BIT obligations, however, were not relevant at the jurisdictional phase. Only the BIT arbitration clause could be considered at this stage of the proceedings. The arbitration clause was not incompatible with EU law, which does not prohibit investor-state arbitration.
The ECJ had no general interpretative monopoly over EU law but rather "a monopoly on the final and authoritative interpretation of EU law". The tribunal could interpret and apply EU law in the merits phase and this did not deprive it of its jurisdiction. The potential application of EU law did not make the dispute non-arbitrable.

The tribunal refused to suspend the proceedings pending the proceedings before the European Commission. It did not consider the proceedings to be so close as to be "a cause of procedural unfairness or serious inefficiency."

The dispute will now proceed to the merits phase.

Comment

The award addresses the important issue of the enforceability and validity of intra-EU BITs concluded by the recent 12 EU entrants before their EU accession. The legal status of these BITs is controversial and so far unresolved. The tribunal followed the approach of earlier tribunals, which, applying Article 59 of the VCLT, found other intra-EU BITs to be in force after EU accession (see Eastern Sugar BV v Czech Republic (SCC No 088/2004, UNCITRAL Arbitration Rules), discussed in Legal update, Effect of EU accession on BIT, and Binder v Czech Republic (UNCITRAL) Partial Award on Jurisdiction (not public)).

More generally, the award (and the arguments of the European Commission and the tribunal in particular), illustrate the competition between two regimes of international economic law: the EU law and the intra-EU BITs. They represent competing principles and interests and there are currently no special rules for resolving the conflicts between them. However, the European Commission has published an EU investment policy and a draft Regulation that would provide transitional arrangements for existing or pending extra-EU BITs. For further discussion, see Legal updates, Commission publishes EU investment policy and sets its approach to bilateral investment agreements member states and third countries and Council adopts conclusions on a European foreign direct investment policy.

Case

Eureko BV v the Slovak Republic (PCA Case No 2008-13, UNCTIRAL Arbitration Rules) Award on Jurisdiction, Arbitrability and Suspension (26 October 2010).

UNCITRAL tribunal rules Slovak-Dutch BIT not affected by Slovakia's EU membership | Practical Law