The decision in Oostergal and Laurentius v. Slovak Republic (April 23, 2012) (previous post) was rendered under the bilateral investment treaty, or BIT, between the Netherlands and the Slovak Republic and under the Arbitration Rules of UNCITRAL, the UN Commission on International Trade Law.
Slovakia argued that its accession to the European Union in 2004 terminated the BIT. To decide the issue, the investment tribunal looked to Article 59 of the Vienna Convention on the Law of Treaties, which provides that a treaty shall be terminated if the parties conclude a later treaty “relating to the same subject matter” and either:
'(a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty; orThe tribunal found that none of the elements of Article 59 were satisfied:
'(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.'
► The Treaty Establishing the European Economic Community (the EC Treaty) did not cover the same subject matter as the BIT.
The tribunal observed that the “dominant view expressed in scholarly writings” is that it “two treaties can be considered to relate to the ‘same subject matter’ only if the overall objective of these treaties is identical and they share a degree of general comparability.” It determined that that the EC Treaty and the BIT had different objectives: the former aims to create a common market among European Union member states, while the latter grants specific protections to foreign investments. The tribunal emphasized that the EC Treaty provides no protection that is equivalent to the BIT’s recourse to investor-state arbitration, “one of, if not the most important feature of the BIT regime.”
► The parties had shown no intention to supersede the BIT.
No provision in either treaty indicated such intent. The tribunal pointed to a provision in the BIT stating that it shall not be construed to require either contracting state to accord advantages to nationals of the other contracting state similar to those granted to nationals of a third state as a result of any future customs or economic unions. It read that provision as demonstrating an intent that the BIT would remain force regardless of future economic unions.
► The provisions of the two treaties were compatible.
The tribunal was not persuaded by Slovakia’s argument that the protections for Dutch investors in the BIT were incompatible with the free movement of capital and violated the principle of nondiscrimination in the EC Treaty.
The decision raises a number of intriguing issues, of which I will point out two:
► First, the tribunal relied on the following finding to determine that the EC Treaty did not supersede the BIT:
'[A]s EU law stands today, the EC Treaty does not exhaust the field of investment protection. That is especially so considering that the EU’s role in the area of foreign investment has so far been very limited.'That analysis leaves open the possibility that, as European Union law on foreign investment develops further, future investment tribunals relying on the same principles might reach the opposite conclusion.
► Second, the tribunal asserted that it was not bound by views expressed by the European Commission on the issue. That assertion underscores a conflict between two international decisionmaking bodies with authority to render decisions on the same issues applicable to the same states. Article 307 of the EC Treaty requires member states to take measures to remove incompatibilities in their pre-accession treaties. In 2009, the Commission won declaratory judgments under that article against Austria and Sweden from the European Court of Justice. That court found that the states had violated the EC Treaty by maintaining BITs that guaranteed the “free flow of capital” with non-EU states, because such a guarantee could conflict with future capital flow regulation at the Community level.
The 2012 Oostergal tribunal asserted the supremacy of BITs in the event of such a conflict, stating that
'there is no doubt that a state cannot unilaterally withdraw its offer to submit an investment dispute to arbitration after the investor has made its investment in reliance on this promise, as this would result in a complete violation of the investor’s legitimate expectations.'According to the tribunal, a state can exit a BIT only through the denunciation mechanism provided in the BIT. This mechanism invariably involves a waiting period—in Oostergal, 15 years—during which the rights of investors at the time of denunciation remain in force. However, the 2009 European Court of Justice ruling against Austria and Sweden stated that denunciation cannot eliminate conflicts between a BIT and EU law because it is “too uncertain in its effects.”
The incompatibility of a BIT with EU law could conceivably form the basis of a challenge to the enforcement of an arbitral award in some circumstances. While such a challenge would fail in most jurisdictions, the conflicting legal rules leave EU states between a rock and a hard place, where no course of action can prevent a breach of their international obligations.