Grappling with jurisdictional issues under the UK-Czech Republic BIT

This post was first published on Lexis PSL Arbitration on 2 May 2017.

One of the great challenges faced by lawyers post-Brexit is the untangling of English law and EU law. But there is one area where untangling will be relatively straightforward: the interplay between UK’s obligations under its investment treaties and the treaties of the European Union.

The European Commission has taken a hard line position, arguing that investment treaties between two Member States of the European Union are incompatible with EU law and the EU legal order. To that end, it has submitted a number of amicus curiae interventions in investment treaty claims in support of this position. In spite of this, tribunals have been consistent in rejecting these arguments, whether advanced by the Respondent State or by the European Commission.

More recently, the European Commission commenced formal infringement proceedings against five Member States and informal procedures against another 21 Member States, seeking to compel them to terminate their existing intra-EU BITs.

the Czech Republic argued that the tribunals did not have jurisdiction due to a conflict between the BIT and the EU treaties

In the last two months, three decisions have been issued by arbitral tribunals considering claims being advanced under the same investment treaty: the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Czech and Slovak Federal Republic dated 10 July 1990 (the ‘BIT’).

Although each of these claims have a different factual basis, they have the following in common: the intra-EU objections made by the Respondent State—the Czech Republic—were all rejected. Not only that, all claimants failed to persuade the tribunals that the narrow arbitration clause under the BIT should be interpreted widely to include some of the most frequent investment treaty claims advanced, such as claims for breach of the fair and equitable treatment standard.

The arguments advanced and rejected, in both the intra-EU context and in relation to the restrictive arbitration clause, are explored below.

• WNC Factoring Ltd v The Czech Republic (PCA Case No 2014-34) 22 February 2017. WNC’s claim arose out of is acquisition of Škoda Export, a Czech state-owned supplier of turnkey capital equipment in the energy sector. The complaint was that the Czech Republic provided bidders for Škoda Export with misleading and inaccurate information, obstructed WNC’s attempts to make the company profitable, and eventually forced it into insolvency. WNC alleged breaches of the BIT’s umbrella clause, the fair and equitable treatment standard and the BIT’s expropriation clause.
• I.P. Busta & J.P. Busta v The Czech Republic (SCC V 2015/014) 10 March 2017. The Claimants were in the business of the wholesale supply of automobile parts and accessories in the Czech Republic, conducting their business through a joint venture with a Czech company called VDI Kyjovan (‘Kyjovan’).Their claim arose out of certain actions taken by the Czech police following the breakdown of the joint venture relationship. Kyjovan began to move valuable goods belonging to the Claimants out of a jointly controlled warehouse. The Claimants alleged that the police did not intervene when requested, and subsequently took the goods only to fail to return approximately two thirds of them. The Claimants alleged that the police’s actions contravened the BIT’s expropriation clause.
• Anglia Auto Accessories Limited v The Czech Republic (SCC V 2014/181) 10 March 2017. Anglia Auto’s claim arose out of its attempts to enforce an arbitral award against its business partner – Kyjovan. While Anglia Auto was granted several enforcement orders, it argued that the enforcement proceedings were unduly delayed; during this time Kyjovan became bankrupt. This, it said, amounted to a breach of the BIT’s expropriation clause, and breach of the fair and equitable and full protection and security standards.

The Bista and Anglia claims were essentially linked, being part of the same overall investment. While they were separate claims, they had the same tribunal.

The intra-EU objection

In all three cases, the Czech Republic argued that the tribunals did not have jurisdiction due to a conflict between the BIT and the EU treaties. While the arguments were put in slightly different ways in WNC Factoring versus Bista and Anglia, essentially the same analysis was adopted in all three.

First, a central plank of the Czech Republic’s argument was that the subject matter of the BIT was the same as that of the EU treaties. This grounded arguments that:

• the BIT was terminated upon the Czech Republic’s accession to the EU (Bista; Anglia), applying Article 59 of the Vienna Convention on the Law of Treaties; and
• the arbitration provision in the BIT had been superseded by operation of EU law (WNC Factoring).

The central proposition of the Czech Republic’s case was rejected in all three awards. Following previous arbitral awards on the subject, notwithstanding the strong stance taken by the EU, the tribunals held that the BIT and the EU treaties did not cover the same subject matter. Of particular importance was the fact that EU law does not provide a right to initiate arbitration against a host state or the same substantive protections as those which are found in the BIT (WNC Factoring; Bista; Anglia).

the tribunals held that the BIT and the EU treaties did not cover the same subject matter

Consequently, for the purposes of Article 59 of the Vienna Convention, the fact that the BIT and the EU treaties did not relate to the same subject matter was fatal. And even if it could be said that there was an overlap between the provisions, it was not sufficiently clear from the EU treaties that they were intended to replace the BIT. For example, important substantive protections appearing in the BIT were absent in the EU treaties (Bista and Anglia).

The fact that the subject matter of the BIT and EU treaties was not the same was also fatal for the argument that Article 8(1) – the arbitration clause – was incompatible with the Treaty on the Functioning of the European Union (WNC Factoring, Bista and Anglia).

Second, in WNC Factoring, the Czech Republic argued that the BIT established discrimination on grounds of nationality against investments from other EU Member States who did not benefit from the BIT. This was similarly rejected. The WNC Factoring tribunal held that the BIT does not discriminate on the grounds of nationality: there is nothing in the BIT that prevents investors of other states claiming equal rights under the BIT and it does not bar investors of non-party states from accessing commensurate protections under EU law.

So, despite the efforts of the Czech Republic to have these three tribunals depart from the decisions of previous tribunals on the compatibility of intra-EU investment treaties with EU law, the tribunals were unmoved.

The problem of the restrictive arbitration clause

Another jurisdictional objection common to all three claims was whether the fact that the arbitration clause in the BIT provided that disputes arising under only a limited number of the provisions of the BIT could be referred to arbitration operated as a jurisdictional bar.

This was a particular problem because the standards of fair and equitable treatment and full protection and security were not included in the list of provisions that could be referred to arbitration. Nor was the most-favoured nation clause, through which WNC Factoring sought to introduce a more favourable Umbrella Clause.

The claimants sought to avoid this problem in two ways:

• in WNC Factoring, Bista and Anglia, the claimants argued that wording in the Umbrella Clause—that the state would ‘observe the provisions of these specific agreements, as well as the provisions of this Agreement’—was a commitment to honour all the provisions of the BIT, and thus extend the arbitration clause to the same; and
• in Bista and Anglia, the claimants sought to introduce a more favourable arbitration clause, by relying on the most-favoured-nation clause, which was itself not referenced in the arbitration clause.

Again the Tribunals took the same approach; they found that there was no reason to depart from the language of the arbitration clause itself. The only objections that may be the subject of arbitration are those referred to in the clause.

The WNC Factoring Tribunal rejected the interpretation contended for by the claimant. If it was right that the Umbrella Clause had the effect of extending the provision for arbitration to all the provisions of the BIT, the restrictions set out in the arbitration clause would be superfluous. Further, the better interpretation of the Umbrella Clause is that the State is obliged to adhere to both the terms of the specific agreement and the BIT protections in so far as those protections are contained in the specific agreement. The Tribunals in Bista and Anglia adopted the same approach in respect of this argument.

The Bista and Anglia tribunals also rejected the claimants’ arguments based on the most-favoured-nation clause. It is not possible here to recount the detailed and wide-ranging arguments made by the parties on this topic. It is perhaps somewhat ironic that the claimants sought to invoke EU law to its aid on this point, arguing that a duty was imposed on the Czech Republic not to discriminate between UK and Cypriot parties by incorporating the dispute resolution clause from the Czech-Cypriot BIT, which was more favourable. The Tribunal paid little mind:

Although it was impressed by the extensive and sophisticated character of the Parties’ arguments relating to the scope of [the arbitration clause] the Tribunal has found the answer to be straight forward, given the language used in the BIT.

Conclusion: the writing on the wall

The above analysis is not surprising, but also looks backwards to a world of investment treaty law that is fast changing.

EU law may shift as the Commission and the European Court of Justice develop their views

As these cases involved an investment agreement to which United Kingdom is a party, the intra-EU arguments have an air of academic interest going forwards in light of Brexit. But even more broadly, the writing is on the wall. The European Commission seems intent on getting rid of intra-EU BITs. In the context of this analysis, it is noteworthy that the Czech Republic is one of the EU Member States against which the European Commission has started informal procedures seeking to compel them to terminate their existing intra-EU BITs.

The WNC Factoring tribunal specifically recognised this, concluding their analysis on the EU law arguments by recognising that EU law may shift as the Commission and the European Court of Justice develop their views. The Tribunal acknowledged that ‘a different view may eventually prevail.’

As for the restrictive arbitration clause in the UK-Czech Republic BIT, it does not appear in the UK Model BIT. As the UK explores its future outside the EU, one could expect that many more investment treaties will be concluded on the terms of the UK Model BIT.

Slowly, slowly, these jurisdictional points may begin to assume less significance.