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THE KOMSTROY JUDGMENT AND THE LIMITS OF INVESTMENT ARBITRATION IN EU LAW SEPTEMBER-OCTOBER 2021

Table of Contents 1. e Komstroy case: common market philosophy, the ECT and intra-EU ISDS Edoardo Stoppioni 2. Republic of Moldova v Komstroy: what next for the Energy Charter Treaty? Michael De Boeck 3. Completing the un nished Achmea business in the Komstroy case: farewell to intra-EU ECT-based investment arbitration? Alessandro Monti and Ma eo Fermeglia 4. e Komstroy judgment, the Union interest, and the autonomy of the EU legal order Andrés Delgado Casteleiro 5. Komstroy: constitutional, procedural and substantive implications Paschalis Paschalidis 6. Komstroy: What is in the seat? Gillian Cahill

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The Komstroy judgment and the limits of investment arbitration in EU law

e Komstroy case: common market philosophy, the ECT and intra-EU ISDS Edoardo Stoppioni

e solution of the Court of Justice’s Grand Chamber in the Komstroy case does not come as a surprise for the readers of the evolution of the relations between EU law and international investment arbitration, as the evolution of the European jurisprudence points towards the prohibition of any intra-EU investment arbitration. e question remained whether intra-EU arbitration based not on a bilateral investment treaty (BIT) but on the Energy Charter Treaty (ECT) were spared from the Achmea reasoning (C-284/16), according to which the fundamental principles of EU procedural law could not allow the existence of investment arbitration within the common market. It is a preliminary reference of the Paris Cour d’Appel that gave the opportunity to dispel these doubts. Indeed, in the doctrinal debate, some authors had defended the particularism of the ECT, as a multilateral treaty applying between all parties. Similarly, the Council, Hungary, Finland and Sweden argued that the Court of Justice had no jurisdiction to answer such a preliminary reference and maintained that the Achmea solution could not be transposed to arbitration carried out on the basis of Article 26 ECT. e Court of Justice has rejected all these arguments and con rmed the non-applicability of the ECT arbitration clause in an intra-EU se ing.

Asserting jurisdiction: the Court’s power awareness Investment tribunals had already been faced with the issue of the applicability of the investor-state dispute se lement (ISDS) provision in the ECT. e European Commission had intervened as an amicus curiae to defend the negative answer, notably invoking the idea of an implicit ‘disconnection clause’ by virtue of which EU Treaties instead of the ECT would apply between EU Member States. No investment tribunal had taken the EU law arguments seriously, and had not since the famous Electrabel case that had nevertheless tried to propose a harmonious interpretation approach. Much to the contrary, the Court of Justice has con rmed its Achmea position, reading in the EU law – ECT articulation in relation to ISDS with a ‘strategically created treaty con ict’, to borrow S. Ranganathan’s expression. In this context, the Court of Justice was called upon to decide a very timely and delicate issue, knowing that we are in the middle of a saga where mostly Spain as well as Italy and the Czech Republic (but to a lesser extent) have been faced with many ECT arbitrations of an intra-EU nature. While all investment tribunals have rejected the Achmea jurisdictional exception, reinstating their power to decide intra-EU disputes based on a treaty located in the international legal order, the question was even more delicate for tribunals operating under the ECT. i. Professor of public law at the University of Strasbourg.

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The Komstroy judgment and the limits of investment arbitration in EU law

e external dimension of the ECT is naturally begs the question whether this judgment should be read as an endorsement of the extra-EU application of ISDS under the ECT. It is obvious that the ECT lacks several of the traits that were considered essential to safeguard the autonomy of EU law in Opinion 1/17 and Achmea. For instance, although the ECT’s applicable law clause does not designate domestic law of the host State as applicable law, it does not – unlike CETA (the EU-Canada Comprehensive Economic and Trade Agreement) – speci cally exclude any application of EU law, nor does it contain a disconnection clause. Unlike the CETA, it does not speci cally exclude direct eﬀect, or provide for a binding determination of the appropriate respondent, or contain more quali ed provisions safeguarding the Contracting Parties’ right to regulate for public and societal interests. e Court of Justice limited its analytical detour to the intra-EU application of the ECT, while apparently not concerning itself too much with the compatibility of the extra-EU application. Its concluding language in paragraph 65 – ‘may require’ – does not sound very determined, compared to its conclusion on the intra-EU se ing. at question on the external application of the ECT ISDS might well still come up in the pending prior Opinion 1/20 requested by Belgium in the context of the ECT modernisation process (discussed here), although any substantive changes due to the modernisation process should then be discounted from any analysis on the present applicable provisions. It is also worth paying a ention to the fact that the Court’s sweeping preclusion of intra-EU ISDS under the ECT conspicuously omits any reference to the temporal distinction between pre- and post-accession conclusion of the ECT, or the in uence of the transfer of competences a er the conclusion of an international agreement under Article 351 TFEU. Whether those arguments would indeed have changed the analysis is doubtful, since the Court of Justice had the opportunity to consider in Kadi (C-402/05 P and C-415/05 P, paragraphs 282 and 304) that even Article 351 TFEU cannot justify a derogation from the foundations of EU law, including its autonomy. Nevertheless, that the Court has not even raised them detracts from the credibility of its analysis.

Autonomy as a limit on the Court of Justice’s interpretative authority In the process of the ever-expanding scope of EU law, the Court of Justice’s domain of interpretative authority inevitably grows. However, in the external dimensions of EU and Member State action, it is not always evident that the autonomy of EU law can also constitute a limit for the interpretative power of the Court. In paragraphs 23-24 and 49-50 of the Komstroy judgment, the Court strikingly considers, on the basis of the Haegeman-rationale (C-181/73), that the ECT is in and of itself also an integral part of EU law ‘and that, in the context of that legal order the Court has jurisdiction’. It follows from this that any tribunal under Article 26(6) ECT that applies and interprets the ECT, interprets and applies EU law. e Court of Justice does not make the distinction here between an internal and external dimension, unless the reference to ‘in the context of that legal order’ in paragraph 24 is intended to signal that this reasoning only applies in the relationship between two EU Member States. By contrast, a similar reasoning was not followed in Opinion 1/17. In

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The Komstroy judgment and the limits of investment arbitration in EU law

Opinion 1/17, paragraph 133, the Court considered that ISDS in CETA was compatible with the autonomy of the EU, inter alia, because the applicable law did not include EU law ‘other than the provisions of the CETA’. It is here that the distinctions between international law and EU law blur somewhat. It seems that the Court of Justice considers that ‘in the context of the EU legal order’, it has the requisite jurisdictional authority to render a binding interpretation of the scope of the ECT ‘as between the Member States’ because it is also an EU legal act. It appears to also support that by considering that the international obligations contained in the ECT concern mere bundles of reciprocal rights (paragraph 64), which are inherently more likely to be susceptible to inter se modi cation (Article 41 of the Vienna Convention on the Law of Treaties). With that assumption, its interpretation apparently leads to a lack of jurisdiction of the arbitral tribunals in the intra-EU application of the ECT. However, that view is not consistent with the concept of interpretation under international law, the limits on inter se modi cation, and the very notion of the autonomy of EU law, exactly because that autonomy stands for the separation between the EU and international legal order. Hence, in the context of the EU legal order, the Court’s interpretation of the scope ISDS under the ECT is but an expression of successive treaty con ict between EU law and the ECT. It may impose speci c EU law obligations on the Member States, but does not bind international tribunals in their own international law interpretation of the very same ECT provisions in their intra-EU application. In his Opinion, AG Szpunar expressed this in the following way: ‘From this follows their inapplicability in the EU legal order, without temporal limitation, with the result that an arbitral tribunal cannot, on that basis, be recognised as having jurisdiction’ (emphasis added). is wording aptly recalls that the Court’s consideration of the compatibility of the ECT with the autonomy of EU law imposes EU law obligations on EU Courts not to apply or otherwise give effect to those provisions. But this, in light of the very autonomy of EU law, has no bearing on the validity of that international commitment under international law, as the Court itself recognised in Parliament v Council (C-317/04 and C-318/04, paragraph 73). Autonomy is in that sense a doubleedged sword. Moreover, if the Court of Justice endorses the extra-EU application of ISDS in the ECT while rejecting the intra-EU application, it is difficult to reconcile those different approaches with a conceptual understanding of autonomy. Again, in the understanding that the autonomy of EU law safeguards the separation of EU law from international law and national law for the purpose of maintaining its indivisible nature, its uniformity and to that end contains a centralised interpretative system, I fail to see what difference it makes whether EU law is interpreted or applied by an international tribunal in a dispute between an EU Member State and an investor from another EU Member State or between an EU Member State and a third-State investor. Both are just as clearly, and by the Court’s own reasoning, outside of the EU judicial system and risk the fragmentation of EU law. e only relevant criterion is whether the dispute is ‘covered by EU law’ and deprives an EU Court of its jurisdiction, and/or the international tribunal is liable to interpret or apply EU law. It is on the one hand the risk that such non-centralised interpretation of EU law becomes binding on the EU through its unionisation as an EU agreement, or the Member States’ disregard for the allocation of powers to EU Courts which deprives EU Courts of their jurisdiction, that presents a systemic risk to the autonomy of EU law as a structural and systemic principle of EU law. Whether that is the case here, is simply not considered by the Court of Justice.

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