In two recent investment treaty decisions - AES v Hungary and Eureko v Slovakia – the tribunals had to consider the relationship between EU law and international investment law and came to slightly different conclusions.

In AES v Hungary, the tribunal found that EU law should be considered as a fact. In Eureko v Slovakia, the tribunal indicated that EU law may be treated as part of the applicable law. On a closer analysis, however, the differences in the two tribunal’s findings may not be as significant as it initially appears: although the tribunal in AES v Hungary found that the Energy Charter Treaty ("ECT") should be interpreted independently of EU law, EU law was given considerable weight in the tribunal's analysis of Hungary's compliance with its investment treaty obligations. Parties investing in EU member states should therefore be alert to the fact that host states may be successful in relying on EU law as a defence to an investment treaty claim.

AES v Hungary

The first dispute, AES v Hungary, arose out of the privatisation of the energy sector, including certain state-owned power stations, by Hungary in 1995. AES, an English company, had invested in the acquisition and improvement of three power stations in Hungary. In 2004, Hungary acceded to the EU. In the same year, it terminated the administrative pricing regime for power generators, moving from fixed to flexible tariffs. However, in 2005, political debate arose in Hungary regarding the high profits of certain power generators. In addition, the European Commission had commenced an investigation based on concerns that certain power generators were profiting from state aid which prevented new players from entering the market. Against the background of these concerns, in 2006, the Hungarian Parliament reintroduced the administrative price regime for power generation.

In AES' view, this new price regime violated the terms of its long-term power purchase agreements with the Hungarian state-owned entity MVM, had a detrimental impact on its investment and was in breach of Hungary's obligations under the ECT. Accordingly, on 6 July 2007, it filed a Request for Arbitration, alleging that Hungary's reintroduction of administrative pricing resulted in multiple violations of the ECT, including breach of the obligation to accord it fair and equitable treatment, impairment of its investment by unreasonable and discriminatory measures and expropriation.

Hungary's position was that the reintroduction of administrative pricing was necessary under EU law and that AES could not have expected it to "ignore EC demands to minimize or eliminate prohibited State aid".

The tribunal held that the ECT was the applicable law, together with the applicable rules and principles of international law. As regards the EU competition law regime, which Hungary relied on as a defence to AES' claims, the tribunal held that it:

"has a dual nature: on the one hand, it is an international law regime, on the other hand, once introduced in the national legal orders, it is part of these legal orders … It will be considered by this Tribunal as a fact, always taking into account that a state may not invoke its domestic law as an excuse for alleged breaches of its international obligations".

However, the tribunal ultimately decided the case on the ground that Hungary's conduct did not give rise to any legitimate expectation since Hungary had not made any representations or given assurances to the effect that, following the termination of price administration at the end of 2003, regulated pricing would not again be introduced. Furthermore, the tribunal held that there was nothing "irrational or otherwise unreasonable" in Hungary's policy decision to reintroduce administrative prices in 2006 so as to constitute a breach of its ECT obligation to ensure that investors were treated fairly and equitably and that their investments were not impaired by unreasonable or discriminatory measures.

Eureko v Slovakia

The AES v Hungary decision has been followed by the jurisdiction decision in Eureko v Slovakia. Eureko, a Dutch company, complained that various legislative measures introduced by Slovakia after a change in government in July 2006 constituted a systematic reversal of the 2004 liberalisation of the Slovak health insurance market that had prompted Eureko to invest in that sector. According to Eureko, these actions destroyed the value of Eureko’s investment and were in breach of Slovakia's obligations under the BIT between the Netherlands and the Czech and Slovak Federal Republics.

Slovakia denied these allegations and furthermore argued that, as a matter of international law, EU law, Slovak law and German law, the accession of Slovakia to the EU in May 2004 terminated the BIT or rendered its arbitration clause inapplicable (as the two treaties relate to the same subject matter and the EC Treaty prevails), and accordingly the tribunal lacked jurisdiction to hear the dispute.

The tribunal rejected Slovakia's claim that it lacked jurisdiction over the dispute. Agreeing with the findings made by the tribunal in the Eastern Sugar case (decided under the same BIT), the tribunal found that Slovakia's accession to the EU did not terminate the BIT as EU law did not provide substantive rights for investors that extended as far as those provided by the BIT, nor could it be said that the provisions of the BIT were incompatible with EU law.

The tribunal only had to address the question of jurisdiction and therefore left the question of the extent to which either the BIT or EU law covered the claim for the merits stage. However, it suggested that EU law could have a bearing upon the scope of the parties’ rights and obligations under the BIT, by virtue of its role as part of the applicable law and that it might therefore have to apply EU legal doctrines to the dispute. At the same time, the tribunal stressed that its jurisdiction was confined to ruling upon alleged breaches of the BIT and that it did not have jurisdiction to rule on alleged breaches of EU law as such.

What is the significance of these decisions for parties investing in EU member states?

The decisions are not directly comparable in that the AES v Hungary case concerned a claim under the ECT, a multilateral treaty to which the EU is a party, whereas the Eureko v Slovakia case concerned a claim under a BIT. Furthermore, the context in which EU law was invoked in each case was different - as a defence against the alleged treaty breaches in AES v Hungary and as an objection to jurisdiction in Eureko v Slovakia. However, in both cases the tribunals considered the relationship between EU law and international investment law, reaching slightly different conclusions. In AES v Hungary, the tribunal found that EU law should be considered as a fact whereas, in Eureko v Slovakia, the tribunal indicated that, when it came to decide the merits of the dispute, EU law may be treated as part of the applicable law.

However, whilst the tribunal in AES v Hungary found that the ECT should be interpreted independently of EU law, it also held that EU law should be considered when determining whether the state's measures are rational, reasonable, arbitrary or transparent. EU law was therefore given considerable weight in the tribunal's analysis of Hungary's compliance with its investment treaty obligations.

Extra-EU BITs versus intra-EU BITs

The award in Eureko v Slovakia is also interesting for investors investing in the EU in that it provides a good insight into the European Commission’s current thinking on extra-EU BITs and intra-EU BITs.

As regards extra-EU BITs, the European Commission’s concern stems from the potential incompatibility between the member states’ treaty making competence and mandatory EU law relating to investment. With the entry into force of the Lisbon Treaty (as to which please see our earlier bulletin here), the EU has exclusive competence in respect of foreign direct investment as part of the common commercial policy. The Commission has therefore made a proposal for an EU Regulation establishing the terms and procedures under which member states are authorised to maintain in force, amend or conclude extra BITs. However, this proposal expressly does not encompass intra-EU BITs such as the one at stake in Eureko v Slovakia.

As regards intra-EU BITs, the Commission’s concern relates to the compatibility of such BITs with mandatory provisions of EU law. According to the Commission, intra-EU BITs are an “anomaly within the EU internal market” and, because there is a partial overlap between intra-EU BITs and the internal market provisions of the EU, the permissibility of the continued existence of intra-EU BITs is called into question. The Commission claimed that intra-EU BITs create "serious potential" for discrimination between different member states as only some are covered by a BIT and granted the opportunity to resort to investor-state arbitration, which is incompatible with EU law.

The Commission concluded in its written submissions to the Eureko v Slovakia tribunal that “[e]ventually, all intra-EU BITs will have to be terminated” and indicated that Commission services would contact member states again “urging them to take concrete steps soon”. Therefore, while the Commission does not seem to object in principle to the resolution of extra-EU BIT disputes by arbitration, it clearly objects to such dispute resolution in the context of intra-EU BITs and is likely to increase pressure on EU member states to terminate such BITs.

AES Summit Generation Ltd and AES-Tisza Erömü Kft v Republic of Hungary (ICSID Case No ARB/07/22)

Eureko B.V. v The Slovak Republic (PCA Case No. 2008-13, UNCITRAL)