Euroscepticism: A Driver of the EU’s Clash with ISDS and Public International Law?

By Emma A. Iannini[1]

It was not so long ago that many attorneys, academics, and European intellectuals might have described the EU and the Court of Justice of the European Union (“CJEU”) as one of the crowning achievements of public international law. Despite its self-described sui generis nature, there is no doubt that the EU, including its supreme judicial organ, finds its origins in the public international law system painstakingly constructed by lawyers, diplomats, and other international political leaders in the 17th through the early 20th centuries and cemented after the World War II with the establishment of the UN.

Indeed, the founding fathers of the EU—Jean Monnet, Robert Schuman, Konrad Adenauer and Alcide de Gasperi among others—created the Union as a regional proponent and enforcer of the goals and principles enshrined in the UN Charter. Article 21(1) of the Treaty on European Union (“TEU”) mandates the EU to promote democracy, human rights, the principles of solidarity and equality as well as “the principles of the United Nations and international law.” This provision has existed in the EU Treaties since the establishment of the EU with the Treaty of Maastricht in 1992. The predecessor organization of the EU, the European Economic Community (EEC) also charged the Commission with “assuring all useful relationships with the organs of the United Nations [and] its special institutions,” according to Article 229 of the 1958 Treaty of Rome.[2]

Likewise, in its early days, the CJEU drew hermeneutical inspiration from other public international law judicial bodies such as the International Military Tribunals at Nuremberg and of the Far East in Tokyo and the International Court of Justice (“ICJ”). The CJEU deployed a “teleological methodology” to fill gaps in the EC Treaties and clarify the aims of early European integration, especially through its development of the EU law doctrines of primacy and direct effect. Moreover, the early CJEU engaged in frequent and mostly harmonious legal dialogue with the ICJ, the European Court of Human Rights, and other public international law tribunals.[3] In fact, observers lauded the CJEU as an encouraging example of how public international law could be used as a tool to advance the rule of law, democracy, and respect for human rights, despite the overall political and economic stagnation that afflicted the EU and much of the world economy during the 1970s and 80s (for more, see “stagflation” or “Eurosclerosis”; see also further discussion here and here).

Fast forward nearly half a century to the early 2020s, however, and the CJEU and the EU itself seem to have little interest in constructive dialogue with other public international law institutions. Through decisions such as Slovak Republic v. Achmea (2018), Republic of Moldova v. Komstroy (2021), Poland v. PL Holdings (2021) and others, the CJEU has all-but dismantled the system of investor-State dispute settlement (“ISDS”) within the EU.

Despite its considerable and well-noted faults,[4] ISDS is arguably one of the best-functioning procedural mechanisms produced by the post-World War II public international law system. In contrast to many international human rights and international environmental treaties that have many State signatories but weak mechanisms for enforcement, dispute resolution, and monitoring, most States respect and eventually comply with awards rendered under the International Centre for the Settlement of Investor Disputes (“ICSID”) Convention and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (for analysis see here). For the past 50 years, ISDS has perhaps been the best example of the “rule of law” actually functioning and being respected by States on the international plane. Why then, have the CJEU and the EU, sought to destroy it, at least within the EU and if not globally?

Besides the obvious argument that many EU Member States—particularly Spain, Italy, Romania, Bulgaria and others—face hundreds of millions of Euros in liability resulting from adverse awards rendered in favor of renewable energy investors under the Energy Charter Treaty (“ECT”), the psychology propelling the EU and the CJEU’s quest to dismantle ISDS may be less well understood than we think. What is ironic and perhaps revealing is that, as late as 2005 and beginning in the early 1990s, the EU encouraged then non-EU Member States such as the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and others to sign bilateral investment treaties (“BITs”) and multilateral investment agreements (“MIAs”) such as the ECT to foster respect for the rule of law, liberal democracy, and human rights, including and especially the property rights of EU investors.[5] In fact, the EU viewed former Soviet Republic States’ adherence to BITs and MIAs with EU Member States as a key and necessary step for their eventual accession to the EU.[6] What has changed now in the EU, most fundamentally, from the heady times of 1990s and the “End of History” is not so much the ballooning liabilities of Spain and other EU Member States to intra-EU investors but rather the attitudes of many voters, political parties, and EU national courts and judges about the future of the “European project” itself.

Eurosceptism has manifested in two ways that may be crucial towards understanding the psychological motivations behind the EU and the CJEU’s opposition to ISDS. First, and most evidently, since the Constitution for Europe’s defeat in the Dutch and French referenda of 2005, Eurosceptic parties have swept to power in Austria, Hungary, Germany, Greece, Slovenia, Spain Denmark, Poland, Italy, Sweden, and many other EU Member States. This is not even to mention the success of UKIP and its co-optation of the far wings of both the Conservative and the Labour parties in the United Kingdom, with Brexit as the obvious result in 2016. Not even the European Parliament has been immune to the wave of Euroscepticism that has swept the EU in the early 21st century. Though they have not triggered Article 50 TFEU and sought to leave the EU, Poland and Hungary’s Eurosceptic executives have encouraged or even obliged their national courts to disapply the principle of primacy of EU law. So-called rule of law “backsliding” in Poland and Hungary has become so severe that EU institutions worry that “effective judicial protection” under Article 19 TEU is no longer guaranteed in either Polish or Hungarian courts.

Second, since at least the mid-1990s, EU domestic courts have sua sponte challenged the CJEU’s doctrine of primacy of EU law with increasing frequency. Perhaps channeling popular sentiment with their decisions, national judges have lifted the courant of Euroscepticism racing across the Continent to the attention of the CJEU. For instance, in a 2009 decision challenging the legality of Germany’s ratification of the Treaty of Lisbon, Germany’s Federal Constitutional Court warned the CJEU that further EU integration must not be undertaken in such a way that there was not sufficient space for Member States to construct their own unique, economic, cultural and social living conditions. In 2015, the Italian Constitutional Court similarly clashed with the CJEU over questions of fundamental rights, the principle of legality and the primacy doctrine in a series of decisions known as Taricco I and Taricco II. Likewise, in a 2016 decision, the Danish Supreme Court held that “judge made” (i.e., CJEU-made) general principles of EU law on non-discrimination would not be binding in Denmark notwithstanding the EU law principle of primacy. Taken together, the decisions of Danish, Germany, Italian, Polish and Hungarian courts in the last decade and a half have led commentators to observe that the EU and the CJEU face in the beginning of the 21st century the greatest “rule of law” crisis (or backsliding) since the modern project of European integration was initiated with the 1958 Treaty of Rome.

There is evidence in the CJEU’s own jurisprudence that “anti-ISDS” decisions such as Achmea, Komstroy, Poland v. PL Holdings and others may intend, at least in the minds of the Court’s judges, to reinforce the principle of primacy of EU law and forestall further “rule of law” backsliding. Viewed generously, these judgments are part of a well-intentioned CJEU campaign to combat rising Eurosceptism by enlarging the jurisdiction and responsibility of EU national courts and forcing especially Central and Eastern European Member State judges to “come up to standards.” The CJEU has characterized both ISDS and anti-democratic legislation in Poland and Hungary alike as assaults on the “full application of EU law,” “judicial protection,” and “uniformity” of EU law under Article 19 TEU. The common psychology motivating the Court’s decisions in “anti-ISDS” judgments such as Achmea (para. 36) and Komstroy (para. 59) and “anti-backsliding” decisions such as Commission v. Poland (paras 43-57) and Criminal proceedings against IS (para. 83) is evident in the CJEU’s many references to Portuguese Judges (paras 35-52)—the CJEU’s landmark ruling on Article 19 TEU holding that the CJEU could closely monitor Member States’ judiciaries to ensure that they are providing “effective legal protection” and fully enforcing EU law—in all of these decisions.

Circumscribing the jurisdiction of independent ISDS tribunals and centralizing authority in EU national courts over intra-EU disputes may not have the dampening effects on Euroscepticism and rule of law backsliding that the CJEU seems to desire. Though the Court’s desire to “capacity build” national judiciaries in Central and Eastern European Member States is understandable and even praiseworthy, the preliminary signs are that the CJEU’s efforts are backfiring. At least initially, more fragmentation, incoherence, and bad behavior seem to be the result of the clash of Grundnormen between the CJEU and ISDS tribunals. For example, despite the Commission’s support of a modernized and “eco-friendly” version of the ECT and the great need for further investment in independent energy infrastructure in Europe in light of the Russia-Ukraine conflict, the EU Member States have failed to come to a unified position on whether or not to sign the new agreement. Some Member States have argued for a full and coordinated EU withdrawal from the ECT whilst (unsurprisingly) Member States such as Poland, Spain, Slovenia, and others have used the confusion as an excuse to unilaterally dash for the exit. If the CJEU’s goal in issuing Achmea, Komstroy, and other anti-ISDS decisions is to propel the EU Member States towards an “ever closer Union” according to the EU Treaties, its strategy does not appear to be working, at least in the short-term.

Before the courts of EU Member States, investors have also highlighted the “rule of law” hypocrisy created by the CJEU’s judgments in Achmea and Komstroy. In cases No. 48 and 49, the investors and award-creditors in Strabag v. Poland and Slot Group v. Poland pointed out to the Cour d’appel de Paris that the Commission had opened another infringement procedure against Poland under Article 258 TFEU on 22 December 2021 due to the Commission’s “serious concerns about the Polish Constitutional Court” (No. 48, para. 95) and its lack of independence and impartiality. The Cour d’appel de Paris, however, swatted away the investors’ concerns and applied Achmea as justification for declining confirmation and enforcement of the Strabag and Slot Group awards. Calling the Vienna Convention on the Law of Treaties (“VCLT”) “inoperable,” the Cour d’appel concluded that it could not “infer[]” from the Commission’s infringement action that “Investors would be deprived of their right of access to a[n] [impartial] judgment” in Poland (No. 48, para. 90; No. 49, para. 70). Far from aiding the CJEU and the Commission in their avowed goal of ensuring all EU national courts provide “full and effective judicial protection” before impartial fact-finders, the Cour d’appel and other EU courts have essentially told intra-EU investors that they had best try their luck before Polish and Hungarian judges. Left in the lurch, most intra-EU investors and award-creditors have wisely opted to seek enforcement of their awards in non-EU countries rather than becoming unfortunate victims of the CJEU’s attempts at judicial capacity-building in backsliding EU Member States.[7]

Meanwhile, behind the scenes, the Commission appears to be pressuring non-EU ECT Contracting Parties to sign an inter se agreement disapplying Article 26 ECT (the treaty’s dispute resolution provision offering ISDS) intra-EU and scrapping the ECT’s twenty-year sunset clause (Article 47(3)). The hope of the Commission and EU Member States is that non-EU courts will view this document as a valid “subsequent agreement between the parties regarding the interpretation of the [ECT]” under Article 31(3)(a) VCLT and decline to enforce intra-EU investment treaty awards. Should the EU be successful in this initiative, courts in the United States, the United Kingdom, Australia, Switzerland and other jurisdictions where investors are seeking relief from the EU’s intra-EU ISDS ban will be faced with the intervention of the Commission as an amicus curiae brandishing this document as a valid public international law basis for the annulment of intra-EU ISDS awards.[8] Of course, if not all non-EU ECT Contracting Parties sign this “subsequent agreement” (the more likely outcome), the basis for the EU’s argument under the VCLT will be significantly weakened. In that scenario, we will again be faced with EU efforts to discourage extra-EU countries from abiding with their public international law obligations under the ICSID Convention, the New York Convention, and customary international law. Once again, this “bad behavior” from the EU is likely not something its founders would have ever envisioned or condoned.

The long-term effects of the EU’s and the CJEU’s clash with ISDS and public international law will be interesting to observe. Although it is possible that the CJEU’s attempt to centralize jurisdiction over intra-EU disputes within EU national courts will in fact whip backsliding Member States into shape in the long-term, the initial prognosis does not appear good. At a time when the EU needs more and not less intra-EU and extra-EU FDI, especially in the energy sector, one must ask the question of whether judgments such as Achmea and Komstroy will sow doubt in the minds of investors as to the safety of the EU as a destination for investment. Moreover, if the EU and the Commission are able to successfully convince non-EU courts to also (retroactively) disregard their public international law obligations under the ICSID and New York Conventions, this may further compromise the legitimacy of public international law in a post-World War II system already destabilized by the reemergence of inter-State war, climate change, and other threats.

It is one thing for the CJEU to hold that pacta sunt servanda—literally the premise of “Agreements must be kept”— means nothing with regard to approximately one hundred and fifty intra-EU BITs and MIAs; but, stretching this principle just a bit further, is it not perhaps problematic that one of the world’s most admired champions of international law and human rights, the EU, is sending the message that it is OK, at times, for States to disregard or declare null and void their treaty commitments under international law? Does pacta sunt servanda still apply fully to Article 5 of the NATO Treaty? To Article 2(4) of the UN Charter?

The founders of the EU, whose foremost wish was to make war on the Continent physically and politically “impossible” through the tools of international law and diplomacy, would likely be very uncomfortable with these very questions. But in light of the Commission’s and the CJEU’s recent treatment of ISDS and public international law in the last decade and a half, such questions should be asked. Can the world and the international bar afford to let the EU and its institutions—in perhaps what is a well-meaning response to the rise of Euroscepticism and the EU’s own “rule of law” crisis—deal such potential damage to the legitimacy of public international law? The answer to that question goes far beyond ISDS itself and to the very cornerstones of our current international legal order.

  1. Emma Iannini is an Associate at King & Spalding LLP in New York City. She graduated from Georgetown University’s School of Foreign Service in 2016 and received her J.D. from NYU School of Law in 2020. The views represented herein do not represent the views of King & Spalding LLP or any organization that the author is or has been associated with. ↑

  2. Translated from the French original by the author. ↑

  3. See e.g. Opel Austria GmbH v Council of the European Union, 1997 para. 77 (noting that the Vienna Convention on the Law of Treaties of 1969 had been found to represent customary international law for the ICJ and “hence the Community [was] bound by the rules codified by the [Vienna] Convention” under the rules of public international law, which was part of binding EU law. ↑

  4. To name a few: (1) lack of transparency; (2) alleged bias in favour of investors or corporations; (3) conflicts of interest produced by arbitrators and counsel “double-hatting”; (4) poor mechanisms for involving other stakeholders besides investors and States in disputes; (5) and alleged frustration of States’ ability to meet their emissions reductions targets under the 2015 Paris Accord and other agreements under the UNFCCC framework. ↑

  5. See e.g. Micula v. Romania (I), paras 324-25 (noting that Article 74 of Romania’s Europe Agreement with the EU, which paved the way for its later accession to the Union, encouraged Romania and then-EU Member States to conclude “Agreements for the promotion and protection of investment […]”). Nikos Lavranos, Regime Interaction in Investment Arbitration: EU Law; From Peaceful Co-Existence to Permanent Conflict, 13 Jan. 2022. ↑

  6. See Lavranos; Micula Final Award; See further for example, Europe Agreement establishing an association between the European Economic Communities and their Member States, of one part, and Romania, of the other part, 1 Feb. 1993, art. 74; as well as Association Agreements with Latvia (art. 74(2)); with Croatia (art. 85(2)): with Estonia (art. 73(2)) etc. ↑

  7. For example, there are over a dozen pending intra-EU ECT enforcement proceedings before the District Court of Columbia in in the United States. Other investors have also sought enforcement in the United Kingdom (Micula) and Australia (Antin). ↑

  8. In all intra-EU enforcement actions in the United States, the UK, and Australia, the Commission has attempted to intervene to assert the intra-EU objection to jurisdiction on behalf of the defendant EU Member State. See e.g. Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l. [2021] FCAFC 3, 1 Feb. 2021, ¶¶ 112-16; Micula et al v. Romania, [2020] UKSC5, 19 Feb. 2020, ¶ 34. ↑

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