Kluwer Arbitration Blog » Patricia Nacimiento

Who’s A Respondent In Light of Art. 207 of the Lisbon Treaty?

Patricia Nacimiento — Fri, 30 Apr 2010 12:19:43 +0000

Art. 207 of the Lisbon Treaty defines the new common commercial policy of the European Union, and states that it shall furthermore relate also to “foreign direct investments”. This provision has the appeal of an outright earthquake, given that the field of foreign investment, and in particular investment treaties, has always been the exclusive realm of the member states (at least in theory, the legal reality was different, though: the EU has concluded mixed free trade agreements with third states not only comprising matters of commercial policy, but also of investments). It has accordingly drawn the comments and critique of numerous scholars. Yet, to my mind it seems that this provision conceals more than it reveals: All we know so far is that the European Union will somehow take part in the foreign investment business in the future. The extent and the manner of its new role is widely unclear: The trouble starts with the term “direct foreign investment” itself, which is not defined. There are a number of other questions which are left unanswered by Article 207: What happens to existing BITs now that the competence to such treaties has – at least in part – been elevated to the EU level? Concededly, until the EU signs treaties of its own, there is little point in arguing that the member states have to cancel their existing BITs, but what happens if the EU does? Will there be parallel treaty structures in respect of direct and indirect investments? Or will there be joined treaties, negotiated and concluded by both the EU and the member states, originating from separate competences (I think, with regard to feasibility, this is the more likely option, especially with a view to the lack of competence of the EU to regulate matters of expropriation, cf. Art. 345 of the Lisbon Treaty)? When negotiating new investment treaties, will the EU take the position of an export- or an import-oriented state, given that the Union comprises both types of states?
Most of these questions require decisions to be made by the Commission and the ECJ, not so much because of legal considerations, but because the competence conferred by Art. 207 is too general and broad as to allow for a definite answer in either direction. It is this very indetermination of the competence, however, which is intriguing in that it allows for learned guesses on how the future of investment treaties in Europe could look. As an arbitration lawyer, I am personally most interested in the question of who would be liable and who would be eligible as a respondent in arbitration in the event a future EU investment treaty is breached.
If the investment treaty is signed by both the EU and the member states, i.e., a multilateral treaty (this is the scenario I would like to discuss, since it is, in my view the most probable one), there is, to my mind, a multitude of possible outcomes. The respondent and/or liable parties could possibly be:
1. only the entity which caused the breach, i.e., either the EU (in the case of a breach of EU officials, for example the competition authorities) or one or more infringing member states. This option would be inspired by a notion of the member states and the EU being coequal partners to the treaty and only severally liable.
2. The EU and the member state who breached the treaty. Such an option would, in legal terms, amount to several liability and attribution of a violation committed by a member state to the EU.
3. The EU and all of the member states, following a concept of joint and several liability.
4. The EU or the infringing member state, at the choice of the EU/member states. Such a mechanism would mirror the existing rule in s. 26 of the Energy Charter Treaty (“The communities and the member states concerned will determine who is a respondent party to arbitration proceedings (…)”.

Which will it be? I think that this depends first and foremost on the terms of the respective treaty, but which option would be desirable in terms of policy? Furthermore, in the absence of specific terms, the determination of liability and the status as respondent to investment arbitration proceedings might also require some deliberation as to the nature of the relationship between the EU and the member states in the context of multilateral investment treaties.

Recognition and enforcement of annulled arbitral awards – the Yukos Capital decision

Patricia Nacimiento — Wed, 14 Oct 2009 16:57:39 +0000

The 9.10.2009 session of the New York Convention subcommittee of the IBA in Madrid saw a lively discussion on the topic of enforcement of annulled arbitral awards.

The discussion related to the “Yukos Capital” decision issued by the Amsterdam Court of Appeals in April 2009. The Amsterdam Court of First Instance had previously upheld the decision of the Russian courts setting aside four awards related to a dispute between Yukos Capital and Rosneft (initially Yuganskneftegaz which later merged with Rosneft). The dispute related to the shares in Yuganskneftegaz which were held by Yukos Capital and subsequently seized by the Russian Ministry of Finance. In an auction, such shares were sold first to the newly established company Baikal Finance Group and a few days later to Rosneft, the shares of which were held in the majority by the Russian State.

Yukos was awarded 7 billion Euros in arbitrations under the Rules of the International Court of Commercial Arbitration (ICAC) with the place of arbitration in Moscow. Rosneft’s request that the four awards be set aside was upheld on three occasions by the Russian courts: the Arbitrazh Court of the Russian Federation, the Federal Arbitrazh Court of the Moscow Region and the Supreme Arbitrazh Court of the Russian Federation.

The courts set aside the awards for three main reasons:

• Rosneft was not granted a postponement of the hearing, leading the Russian courts to conclude that Rosneft had been denied its right to present its case.

• Yukos Capital had submitted new claims, which is not allowed under the applicable ICAC Rules.

• The Arbitral Tribunal had not been properly constituted since the arbitrators failed to disclose that they had spoken at conferences co-sponsored by the firm representing Yukos.

During the Russian annulment proceedings Yukos had applied to the Amsterdam courts for enforcement. The Court of First Instance denied leave of enforcement on the grounds that the Russian court decisions were to be respected as Russian courts in this case are the competent authority under Art. V(1)(e) of the New York Convention. The Court of First Instance did recognize the possibility of deviating from this principle in exceptional circumstances, namely in case of a violation of generally accepted principles of due process and a lack of independence of the courts. In this specific case, however, the court concluded that Yukos failed to submit sufficient evidence.

The Amsterdam Court of Appeals reached a different conclusion. It reviewed in depth the evidence submitted and held that the Russian courts in this case had lacked impartiality and independence and that its decisions were politically motivated. The court stated in particular that proving such a lack of impartiality and independence is difficult since there is usually no direct evidence. As a consequence, the court relied on external evidence indicating possible partiality and dependence, including reports of Transparency International, the EU-Russian Centre and Freedom House, as well as court decisions from the UK and Switzerland related to the criminal prosecutions in Russia of Yukos officers.

The IBA session on the New York Convention discussed the background and consequences of this decision and discussed its potential impact on the practice of recognition and enforcement. It was pointed out that the case is exceptional and that the decision must be viewed as taking into account the exceptional circumstances. It is in any event path breaking since it applies and enforces international standards of the New York Convention and will thus contribute to its harmonized interpretation and application.

By Patricia Nacimiento

Germany Enacts Amendment to Its Foreign Trade and Payments Act

Patricia Nacimiento — Wed, 13 May 2009 07:30:31 +0000

Germany has introduced an amendment to its Foreign Trade and Payments Act. It is a direct response to increased activities and acquisitions by sovereign wealth funds (SWFs), as they are often perceived to pursue economic as well as political aims. Despite this origin, the legislation does not only apply to SWFs. Instead, it allows the German government to effectively block any acquisitions of stakes in any German businesses if:

 the purchaser is a non-EU person, or 25 per cent or more of the voting rights in the purchaser are owned by a non-EU person,
 following the transaction, the purchaser directly or indirectly holds 25 per cent or more of the target company’s voting rights, and
 the transaction poses a threat to public order or public safety in Germany.

Some commentators have wondered whether the broad scope of the Act might not actually prove to be counterproductive. Extending its application to any industry is more likely to be subject to severe scrutiny, particularly in relation to existing laws and regulations for the protection of foreign investment, than a narrowly tailored approach might have been. It also remains unclear whether the amendment may affect obligations assumed by Germany under its Bilateral Investment Treaties.

Under the Act, if the purchaser is a non-EU person, or if one non-EU person controls 25 per cent or more of the voting rights in the purchaser individually, the government’s right of review is triggered. Conversely, no right to review is triggered if there are several non-EU shareholders with a combined shareholding of 25 per cent or above, as long as each of them individually remains below 25 per cent. However, any voting rights held indirectly through other entities in which the relevant non-EU person holds 25 per cent or more of the voting rights are attributed to that person (as well as voting trusts). An exception to this general rule applies to EU acquisition vehicles that have “sufficient substance”. This means a company that has not been set up exclusively for the purpose of circumventing the review process, in other words, a company with its own business activities, employees and/or assets will not trigger the review process, even if a third country person holds 25 per cent or more of the voting rights in that company.

For the purpose of the Act, persons and companies from the European Free Trade Association (EFTA), namely Iceland, Liechtenstein, Norway and Switzerland are treated like EU persons.

The Review Process
The only ministry that has authority to act under the amended legislation is the Ministry of Economics and Technology (MET). The MET may decide to enter into a formal review process within three months from the conclusion of a sale-and-purchase agreement or the announcement of a public takeover offer. For at least the duration of this review period any transaction remains subject to a condition subsequent of the MET prohibiting such transaction.

If the MET decides to institute a review, the purchaser has to provide the ministry with the relevant documents of the transaction. Upon receipt of all the required documents, the statutory review period of two months begins to run. The only ground upon which the MET can order annulment is a determination of a “threat to public order or safety”.

Alternatively, an investor may apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) from the MET before the conclusion of the acquisition. In this case, it is merely necessary to outline the basic elements of the planned acquisition, the investor and his field of business.

In the event the MET decides to prohibit the transaction, the legal consequence is the invalidity of the underlying sale-and-purchase agreement under German civil law. If shares have already been transferred to the purchaser, the MET can limit or restrain completely the voting rights in the German target or appoint a trustee to unwind the transaction.

Under the Act, an investment can only be denied if it poses a threat to public policy or public order. Any limitation exercised must be within the scope set by the European Court of Justice (ECJ). In very limited circumstances the ECJ has recognized this exception in the areas of Freedom of Establishment and Free Movement of Capital. However, any measure taken must not be a disguised form of protectionism, must be strictly necessary and no less restrictive measure must be available.

Further limitations on restricting investments result from the General Agreement on Trade in Services (GATS). It contains detailed rights that guarantee capital access of investors.

Considering the legal limits resulting from the EC Treaty and GATS, it will be interesting to see what happens if an investment is denied on this basis. A situation is conceivable where an investor successfully raises EC or GATS concerns. It further remains to be seen whether there is an impact with regard to rights under Germany’s Bilateral Investment Treaties.

Dr. Patricia Nacimiento
Partner
White & Case LLP