Unlawful Consent is Still Consent: International Law Perspectives on Komstroy vs Moldova

The CJEU held that intra-EU arbitrations (viz., arbitrations initiated by an EU investor against an EU Member State) based on the investor-state dispute mechanism provided for in Article 26 of the Energy Charter Treaty (ECT) are not compatible with the EU legal order. The CJEU’s judgement gives rise to a long list of questions. This includes whether it is apposite for a court to resolve legal issues which are not relevant for the resolution of the dispute before it. The preliminary reference in Komstroy arose from a dispute between an Ukrainian entity and the Republic of Moldova. It concerned the interpretation of the term “investment”, as laid down in Article 1(6) ECT. Nevertheless, the CJEU allots more than 50 per cent of its substantive reasoning to the question of whether intra-EU arbitration under the ECT is compatible with the EU legal order.

At present, there are close to 50 pending International Centre for Settlement of Investment Disputes (ICSID) arbitrations initiated by EU investors against the EU Member States on the basis of the investor-state arbitration mechanism set out in the ECT. EU investors primarily seek full reparation for the losses resulting from an EU Member State’s breach of the fair and equitable treatment standard set forth in Article 10(1) ECT. Accordingly, in practice, the central question will be whether ICSID tribunals can still hear ECT claims raised by EU investors against the EU Member States after the CJEU’s judgement in Komstroy. The unequivocal answer to this question will be: ‘Yes, they can‘. Komstroy is an expression of EU constitutional law. The decision may imply that EU institutions and the Member States breached their EU law duties by concluding the ECT without a disconnection clause. However, from the perspective of public international law, such breach of EU law cannot supersede or vitiate an EU Member State’s consent to arbitration embodied in Article 26 ECT.

This article aims to discuss whether the CJEU’s judgement Komstroy bars ICSID tribunals from hearing ECT claims brought by EU investors against the EU Member States. It argues that once a State has given consent to arbitrate disputes with investors in a binding international treaty, it cannot rely on its internal law to escape from its treaty duties. In this sense, a breach of EU constitutional law cannot supersede or vitiate an EU Member State’s unconditional consent to arbitration embodied in international treaties.

Komstroy is an Expression of EU Constitutional Law

A remarkable feature of Komstroy is the CJEU’s silence on public international law (PIL) rules. The CJEU interprets provisions of the ECT, an international treaty to which the EU, its Member States, and non-Member States are parties. Yet, the CJEU does not consider the treaty interpretation principles embodied in Article 31 of the Vienna Convention of the Law of Treaties (VCLT). Instead, the CJEU exclusively draws on EU constitutional law principles (such as the “autonomy” of the EU legal order, as developed in Opinion 2/13, paragraphs 179 et seqq).

The EU commits itself to a “strict observance and development of international law” under Article 3(5) of the Treaty on European Union (TEU). Article 216 of the Treaty on the Functioning of the European Union (TFEU) expressly provides that international treaties concluded by the EU are binding upon the institutions of the EU and on its Member States. Indeed, the CJEU considered PIL and readily applied the VCLT on various occasions, including in cases requiring the interpretation of mixed agreements (such as the ECT) (cf. Walz vs Clickair). However, the CJEU has been particularly loath to give PIL any credit in cases possibly touching upon its authority under the EU legal order.

Achmea is famous for discounting PIL. In Komstroy, too, the CJEU considers intra-EU arbitration exclusively from the perspective of EU law. PIL? Given short shrift. The upshot is that Komstroy can hardly have any weight from a PIL perspective. Most importantly, it will not be determinative of a tribunal’s jurisdiction. ICSID tribunals have Kompetenz-Kompetenz (viz., the principle that a tribunal has the competence to decide upon challenges to its jurisdiction, cf. Hochtief vs Argentina, paragraph 11). Their jurisdiction is anchored in international treaties, not EU law. ICSID tribunals derive jurisdiction from the ICSID Convention and the PIL instrument encapsulating a State’s offer to arbitrate (such as the ECT). ICSID tribunals are mandated to apply PIL and construe the ECT in accordance with Article 31 VCLT. They may accord priority to EU law. However, they cannot do so based on EU constitutional law principles (as expressed in Komstroy). Instead, they can only give priority to EU law on the basis that PIL (viz., Articles 31-32 VCLT) requires them to accord priority to EU law (cf. Landesbank Baden-Württemberg et al vs Spain, paragraph 179). Thus far, more than 50 ICSID tribunals have concluded that PIL does not require them to do so (Infrastructure Services et al vs Spain, paragraph 154).

Komstroy will not cause a sea change because the CJEU’s EU constitutional law analysis cannot possibly alter the PIL analysis of ICSID tribunals. The CJEU could have engaged with PIL and so influenced the unanimous ICSID case law. It chose not to. Accordingly, the primary relevance of Komstroy will be “internal“: mixed agreements (such as the ECT) frequently contain a disconnection clause. Such clause ensures that the agreement does not apply in intra-EU cases. The EU and the Member States could have carved out the application of the ECT in the intra-EU context (and initially contemplated this option), but consciously did not take this course of action. The EU and its Member States so accepted the possible application of the ECT in the intra-EU context. From the perspective of EU law, Komstroy implies that the EU and its Member States breached EU law by concluding the ECT without a disconnection clause.

From a PIL perspective, however, the relevant principles expressed in Komstroy are merely a manifestation of EU constitutional law and, as such, qualify as “internal law” within the meaning of Article 27 VCLT (cf. AS PNB Banka et al vs Latvia, paragraph 669). Consent to arbitration is an indispensable requirement for a tribunal’s jurisdiction under Article 25 ICSID Convention. Any ICSID tribunal must satisfy itself that it has jurisdiction ratione voluntatis (viz., that a State’s consent to jurisdiction is valid and effective, see Blue Bank - 3 - vs Venezuela, paragraph 101). However, once a State has given consent to arbitrate disputes with investors in a binding international treaty, and an investor has accepted the standing offer to arbitrate (e.g., by filing a Request for Arbitration with ICSID), a State cannot rely on its “internal law” to escape from its treaty duties. In this sense, a breach of EU constitutional law cannot supersede or vitiate an EU Member State’s unconditional consent to arbitration embodied in international treaties, such as Article 26(1) ECT. To put it in Lord Neuberger’s words: “Wrongful consent nonetheless constitutes consent, and in order to establish jurisdiction, consent (whether rightly or wrongly given) is all that is required” (AS PNB Banka et al vs Latvia, paragraph 507).

Article 26(6) ECT is Not Determinative of a Tribunal’s Jurisdiction

The starting point of the CJEU’s analysis if intra-EU arbitration under the ECT is compatible with EU law is set out in paragraphs 49 to 50: “[49] the ECT itself is an act of EU law. [50] It follows that an arbitral tribunal such as that referred to in Article 26(6) ECT is required to interpret, and even apply, EU law.” Based on this central proposition, the CJEU develops the argument that intra-EU arbitration under the ECT conflicts with the EU legal order.

Yet, even if the CJEU’s analysis in paragraphs 49 to 50 were an accurate statement of the law, it could not bear on the jurisdiction of ICSID tribunals. It is trite that the law applicable to the merits is distinguishable from the law applicable to the issue of jurisdiction. Article 26(6) ECT defines the law which a tribunal must apply to the merits of the dispute before it. It reads: “A tribunal established under paragraph (4) shall decide the issues in dispute […]“.

Simply put, Article 26(6) ECT assumes that the jurisdiction of a tribunal has been enlivened. Thus, it is not determinative of a tribunal’s jurisdiction. The power of ICSID tribunals to hear ECT claims is anchored in Article 25 ICSID Convention and Article 26(1) to (5) ECT (viz, provisions defining the purview of the jurisdiction of a tribunal constituted under the ECT; cf. Landesbank Baden-Württemberg et al vs Spain, paragraph 159). To blend the law applicable to the merits with the law applicable to the issue of jurisdiction (as the CJEU did) is to gloss over fundamental concepts of public international adjudication. Article 26(6) ECT may very well be relevant for the CJEU to reach the conclusion it desires (i.e., that Article 26 ECT may remove disputes from the judicial system of the EU). However, as a matter of PIL, ICSID tribunals cannot determine their jurisdiction by reference to the law applicable to the merits of the dispute.

Conclusion

The CJEU’s Komstroy judgement will not bar ICSID tribunals from hearing ECT claims. Komstroy is an expression of EU constitutional law. It documents a breach of EU law on the part of the EU and its Member States. As such, it is not imperative from a PIL perspective. ICSID tribunals do not operate in the same hierarchy as the CJEU. Their jurisdiction is rooted in the ICSID Convention and the ECT, not EU law. ICSID tribunals must apply PIL and construe the ECT in accordance with Article 31 VCLT. Anything else would put them in breach of their obligations under the ICSID Convention and the ECT. The consent of EU Member States to arbitrate disputes with investors embodied in the ECT may be unlawful from the perspective of EU constitutional law. Yet, from a PIL perspective, the unconditional consent of EU Member States is valid and effective, even if it conflicts with their internal law.

This article was first published in Cambridge International Law Journal | Edward Elgar Publishing, 15.09.2021.

author: Sebastian Lukic