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Friday, April 24, 2015

Emanuela Matei on ”Micula” Case

With this post, State of Competition Blog inaugurates a new section, dedicated to Guest Contributions, as I wish to make this blog a larger arena for ideas and debates of current interest in the vast and agitated world of the competition. 
There is competition within the competition world? We think there is, so any comments and further contributions are welcomed.
I confine myself to only two comments for now:
First, there is no clear rule of thumb regarding the interplay between international billateral investments treaties and the EU law and the legal nature of the European Union itself, a ”half baked” federation of sovereign states does not help too much. Hence, the final outcome of this case might not be the one the European Commission strives for. 
Second, the debates and arguments around the Micula Case are useful also in the context of the much more debated Transatlantic Trade and Investment Partnership (TTIP) and, more particulary, its Investors State Dispute Settlements (ISDS), based on the model of the International Center for Settlement of Investment Disputes (ICSID), which also decided in the Micula Case. 
We wish you an useful reading!

Friday, 24 April 2015
Do obligations assumed by a Member State under international investment law take primacy over EU law? MICULA v ROMANIA

Emanuela Matei, 
Of Counsel at Mircea & Partners
  1. Introduction
The idea of presenting arguments for the meaning of rejecting the authority of the CJEU and the competence of the Commission inside the scope of state aid control appears to be brave, but it is certainly unproductive to follow such a path. 
It has the quality of being at least as ineffective as the attempts done by Convention States before the ICSID-tribunals to convince the arbitrators that Union law must be considered, since Union law makes integral part of the law of the defendant. Any ruler wants to remain king in his own castle. The investor has to treat the two masters, the EU and the international legal order, with equal respect. 
It must be well understood that both the supranational and the international legal order presuppose a transfer of sovereign power. They represent reflections of the national state power, expressions of will in a certain sense, so it is reasonable to assume that these expressions can be interpreted harmoniously. 
This particular conflict appears to constitute an anomaly that must be remediated. If legal means in place failed to provide an operable solution to this conflict, it would be up to the political actors to return to the negotiation table and solve the problem. It is well recognised that any legal organisation has certain systemic flaws, so if possible, they should be corrected in order to avoid conflicts of this type in the future. 
  1. EU law does neither require the invalidation of a decision reached by an Arbitral Tribunal, nor the amendment of Romanian legislation or the BIT itself
It should be basic knowledge that the arguments brought with the occasion of an annulment action must be grounded in the applicable law. So the winning arguments used before the Tribunal have nothing to say within the legal framework of EU state aid control. 
The function of the mechanism for state aid control is not to invalidate the Arbitral Award of 11 December 2013. In fact a negative state aid decision as the one of 30 March 2015 does not impose any obligation on the Member State to amend its legislation or create any new remedies. The magic word is effet utile and effectiveness. 
EU law does not impose on member states anything more than eliminate the distortion of competition and in the specific case of state aid law, the only effective remedy is the recovery of illegal state aid. At the practical level it might nevertheless be complicated to quantify the distortion created by an illegal state measure in order to calculate the amount to be recovered.
A recovery made in excess may imply a new distortion of competition. Due to these practical difficulties, the law of state aid requires the Member States to notify in advance any state aid measure. The provisions of Article 108(3) TFEU are denominated as standstill clause, since they contain not only a duty to notify, but also an obligation to suspend any action. The state aid can only be implemented after the evaluation decision is made by the Commission and the decision is positive. 
It is essential to understand that the EU law does not require a specific piece of legislation to be squashed, but it only deals with the effects of the legislation on the competition between Member States. The same thing is valid in relation to the BIT agreement in question. My personal opinion is that the BIT can be interpreted harmoniously with the obligation arisen from the Treaties, but even if this weren’t true, the EU law wouldn’t require the annulment of the BIT. However EU law and especially the principle of sincere cooperation in Article 4(3) TEU impose a duty on both parties, Romania and Sweden to assist each other in carrying out tasks flowing from the Treaties.
Moreover the Award decision itself does not impose on Romania any duty to amend its tax legislation or any other legislation, but it only require it to have observed a vague standard of protection, so called FET (fair and equitable treatment). If fair and equitable had meant only non-discriminatory, it would not have implied any concern in terms of EU law, since the very foundation of EU law is the non-discrimination principle. The problem is that in the interpretation of the Arbitral Tribunals, FET means better treatment and this standard goes so far as any change of legislation may potentially be interpreted as a breach of the FET.  

  1. The sandwich-effect in a pluricontextual legal world 
  1. Rights and obligations arising from international agreements before the 1st of January 2007
A state aid scheme is not addressed to a specific person and the authority of the state to implement such fiscal facilities is limited by the commitments undertaken by the acceding state first under the European Treaty (1993-2005), then under the Treaty of Accession (2005-2007) and later as a Member State under the EC/EU treaties (2007-present time). 

The act addressed to the investor in this case is the PIC (permanent investor certificate) and this document might interpreted in the context of ICSID litigation to establish a synallagmatic or reciprocal relation of exchange of legal considerations by imposing on the investor certain legal obligations if he invests and takes advantage of the incentives. The question is whether these commitments can have the character of imposing an acceding Member State a duty to maintain in force a fiscal regime at any cost, including hereby a serious failure to comply with Treaty and pre-Treaty obligations.

Following an in-depth investigation started in October 2014 under Article 108(2) TFEU, the European Commission concludes on 30 March 2015 that the payment of compensation for an abolished investment aid scheme under obligations related to the BIT agreement signed 2002 between Romania and Sweden, constitutes illegal state aid in breach of the notification duty stipulated by Article 108(3) TFEU. Furthermore, the measure is deemed incompatible with the internal market and the compensation has to be recovered as provided by articles 7(5) and 14(1) of the Regulation No. 659/1999. 
The payment of compensation awarded by the Arbitral Tribunal on 11 December 2013 implies granting of economic advantages equivalent to those fiscal facilities provided to the claimants under the abolished aid scheme. In the present case the payment is meant to compensate damages caused by the abolishment of an illegal state aid scheme, therefore the Asteris defence does not apply on this particular case. The reestablishment of an illegal state aid scheme constitutes a measure characterised as new state aid.
Under the Treaties, foreign investors do not enjoy any distinctive or supplemental privileges, but they are guaranteed equal rights i.e. the same level of protection as any domestic investor. The Union and the Member States shall, in full mutual respect assist each other in carrying out their tasks under the Treaties.  Sweden does not have a direct obligation towards Romania and neither does Romania against Sweden. Under the Treaties, they both have obligations to observe that an advantage offered by a Member State forms an integral part of the establishment of the Union, hence it cannot be severed and examined in isolation.
Article 344 TFEU requires Member States to submit any dispute concerning the interpretation of the Treaties following exclusively the methods of settlement provided for by the Treaties. Seen through the perspective of EU law, the present dispute refers to the interpretation of Article 107(1) TFEU and the action brought by the claimants on 2 September 2014 in case T-646/14 is based on the interpretation of the state aid prohibition seen through the light of Article 351 TFEU and Article 4(3) TEU. It is expected that this argumentation will be revived with the occasion of appeal against the Commission Decision from 30 March 2015, hence I will discuss these two articles shortly in this post.

  1. The sensitive issue of intra-EU BIT agreements
The academic world has pointed out already with the occasion of entering into force of the Treaty of Lisbon and in the aftermath of Kadi case that the matter of agreements under international law that are incompatible with the Treaties must be clarified in order to prevent the so-called sandwich effect. The Commission has openly asserted that the BIT agreements are not compliant with EU law.
The Treaties contain an explicit protection rule for the rights and obligations arising from agreements before the date of the EU accession. This rule concerns only an agreement between one or more Member States and one or more third countries. Sweden is obviously not a third country, but a Member State itself starting with 1st of January 1995. 
Therefore, Article 351 TFEU does not apply on the present situation. However for the sake of argument, let’s suppose that instead of Sweden, it would have been a third country, let’s say Argentina and several Member States had been concluded the agreement with Argentina, let’s say Romania, Spain and Portugal.
The main rule is that the rights and obligations would remain unaffected by the Treaty provisions, however the three Member States should assist each other and make common front in order to eliminate any incompatibilities with the Treaties. In this sense the sincere cooperation principle has something to say, since in the case of a conflict of substance, the Member States are required to find a solution and bring their obligations under an international agreement in line with their Treaty obligations. 
The exception in Article 351(1) TFEU is not applicable in the case of a BIT between two Member States, though even if it had been, it would have merely offered a temporary and insubstantial shelter in cases of interference with the objective of the establishment of the Union as an autonomous legal order and the creation of common institutions.   

  1. Stand-still obligation under Article 108(3) TFEU
As soon as the state aid scheme was abolished in 2005, Romania couldn’t allow any exceptional treatment for foreign investors from certain Member States, with whom Romania concluded a BIT, since such an action would be prone to jeopardise the attainment of the Union’s objectives. 
The reciprocity principle within the Union law has an institutional core and a functionalistic philosophy, therefore the principle is relevant for the case of an implicit obligation to act or abstain from acting in a certain sense that can be elucidated through contextual interpretation. 
However, the obligation enshrined in Article 108(3) TFEU is an explicit obligation not to put into effect a proposed measure until a final decision under Article 108(2) TFEU has been released. Before 2007 this authority was retained by the Romanian Competition Council and in this quality, the decision recommending the abolishment of the state aid schemes was issued in May 2000 i.e. before signing the 2002 BIT with Sweden. The conflict would have been avoided, if the Romanian courts upheld the Decision No 244/2000 of the Competition Council instead of squashing it. 
The only way to ensure respect for the legitimate expectations of an investor, beneficiary of a state aid scheme is by making sure that no state aid is paid or otherwise made available until a final decision is reached by the authority in charge with the examination of compatibility with the internal market.

  1. Complexity and pluricontextuality  
The competition law regime protects indirectly the rights of the investors in the EU. For a small country, still struggling to cope with the EU multifaceted requirements, it would be definitely better if the EU had a special investment agency ensuring a fair and equitable level of protection for all non-European investors in the EU taking into account the obligations derived from the relevant international treaties. Concerning the European investors who spend resources in a different Member State, it is absolutely obvious that they cannot be treated as “foreign” in the legal context being framed in the EU after the adoption and entering into force of the Treaty of Lisbon.
Now, what about the claimants and their rights? In this sense, it must be said that any investment implies risks and country risk is one of these risks. It is supposed that any rational investor would not assume a risk without the expectation of a proportionate profit. Theoretically, zero risk implies zero profit. Therefore, it would be unreasonable to assume that the role of the FET standard is to ensure a zero risk zone for the foreign investors.  
The element of risk in this case refers to the situation where a Member State grants a state aid in breach of the standstill clause. The theory of non-contractual liability applies and it relies on three conditions:
- The rule of Union law infringed must be one intended to confer rights on individuals, which Article 108(3) TFEU is designed to provide;
- A sufficiently serious breach of law and it might be argued that a breach of the standstill obligation implies a serious infringement of EU law;
- Existence and Causation of damages, which is difficult to claim.
It is nearly impossible to claim existence of damages based on the abolishment of an illegal advantage, since that advantage should not have been granted in the first place. The BIT/ICSID tandem do not recognise the illegal character of the advantage, not even as a matter of fact, but the illegal advantage is interpreted as a synallagmatic contractual obligation.
Even if the BIT/ICSID laws don’t require anything more than the payment of a compensation for the allegedly unexpected change of legislation caused by the accession to the EU, it would be reasonable to assume that the implementation of an obligation to pay does not take place in a jurisdictional vacuum. 
This is the fatal contradiction and lethal flaw of the BIT/ICSID system that it attempts, at least by implication, to oblige a Convention State to make use of its own legal system in order to implement an obligation that causes refraction, when it passes from the international legal medium into the national enforcement medium and induces further dissonance in the sphere of supranational rights and obligations. In this sphere the transfer of sovereign power has created a pool of public law authority that does not belong to the synallagmatic philosophy describing relations of bi- or multipolarity. 
The EU membership means to function as a prolongation of public law authority that cannot be distinguished from the state, hence it cannot be made subject to one-to-one or one-to-many type of conflict settlements. The contradiction induced by the BIT/ICSID in this context generates an inner conflict and such conflicts must be solved inside the system by making appeal to constitutional law toolbox. 
So, do obligations assumed by a Member State under international investment law take primacy over EU law? The answer is that they might enjoy primacy in some cases, though these obligations won’t be able to pass from the international into the national legal medium in a direct manner. The reason why is given by AG Maduro in his Opinion of 16 January 2008 to Kadi case C‑402/05 P:
The relationship between international law and the Community legal order is governed by the Community legal order itself, and international law can permeate that legal order only under the conditions set by the constitutional principles of the Community.”