Case note: AS PNP Banka and others v. Latvia, decision on jurisdiction

Background of the dispute

The dispute arose in 2017 between a group of UK nationals who own the majority of the shares of a Latvian bank called AS PNP Banka (previously called AS Norvik Banka) on the one side and the Latvian government on the other. Although the tribunal has not delved into the merits of the case yet, the case concerns a contestation of national measures imposed by the Latvian Government as a response to an alleged failure from the claimants’ end to comply with national anti-money laundering and terrorist financing regulations.^[1] The contestation is based on the provisions enshrined in the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) and the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Latvia for the Promotion and Protection of Investments (“BIT”).

Claimants submitted a request for arbitration (RFA) to the International Centre for Settlement of Investment Disputes (“ICSID“) in 2017. Though for the past 3-4 years the tribunal has mainly focused on procedural issues, the case, however, took an interesting turn on 14th of May 2021 where the tribunal finally issued a decision on its jurisdiction regarding claims arising from the UK-Latvia BIT.^[2] The decision concerns a contentious issue, namely the validity of the BIT and the ability of arbitral tribunals to apply and interpret EU law.

To give context on the matter, for the past years, the EU has strived towards the elimination of intra-EU BITs (BITs between the EU Member States). This comes as a result of the 2018 Achmea decision issued by the Court of Justice of the European Union (CJEU or the Court).^[3] In brief, in this decision, the CJEU declared BITs that allowed arbitral tribunals to interpret and apply EU law incompatible with EU law.^[4] Moreover, the Court ruled that such tribunals are prohibited from interpreting and applying EU law since they do not form part of the judicial systems of EU Member States (MS).^[5] The decision raised huge controversy amongst academia and the legal community. Subsequently, the decision led to the conclusion of the Termination Agreement, urging every Member State to terminate intra-EU BITs.^[6] In this article, I will highlight the decision of the tribunal on its jurisdiction over the case in light of the aforementioned developments in EU law.

Consent and jurisdiction

The main discussion in these proceedings was whether the Achmea decision automatically restricted the tribunal’s jurisdiction over the case. Specifically, according to Latvia’s claims, the tribunal’s jurisdiction would be restricted because Achmea invalidated the parties’ consent to be bound by the BIT and the arbitration clause (i). Secondly, EU principles such as autonomy of EU law and primacy of EU law would render EU law applicable instead of the BIT, and since Achmea prevents arbitral tribunals from interpreting and applying EU law, the tribunal would not have jurisdiction over the case by virtue of EU law being applicable (ii). 

As regards the first issue, it is common ground that one of the preconditions for the establishment of the jurisdiction of an arbitral tribunal is valid consent by both parties.^[7] In the investment regime, states give their consent to arbitration by including arbitration clauses in their BITs. Although the parties signed the BIT and inserted an arbitration clause, Latvia claimed that as EU Member States, the parties were bound by Achmea. Consequently, since Achmea had declared BITs incompatible, the consent to arbitration was invalid.^[8] This was a controversial claim because Achmea came after the ratification of the BIT, and thus, Latvia was proposing a retroactive application of the decision.

As regards the second issue, to determine applicable law to determine jurisdiction, the tribunal had to interpret the provisions of EU law, the BIT, the ICSID, and other investment regime instruments. Latvia claimed that the interpretation of EU treaties could only be done through reference to CJEU decisions, which constitute authoritative interpretations of EU law. Firstly, Latvia cited the principle of primacy of EU law,^[9] a principle developed by a CJEU decision according to which EU law takes precedence over international agreements.^[10] Applied to the case at hand, this principle would entail that, even though Latvia and the UK signed the BIT, the EU law would still prevail because the parties were EU Member States and thus, first and foremost bound by EU law. Notably, there was no actual conflict between the BIT and the EU treaties.^[11] In fact, the conflict arose from the Achmea decision, which was an interpretation of EU law. In that sense, Latvia intended to include this decision in the treaty analysis with the intention to lead the tribunal to conclude that EU law, as the applicable law to the case, would prevent the tribunal from having jurisdiction over the case.

Tribunal’s analysis – consent

The tribunal, while acknowledging the fact that both parties to the dispute were EU Member States^[12], decided to take a different approach. Firstly, it pointed out that Latvia had not taken any action to indicate that it intended to terminate the BIT (i); invalidate the arbitration clause(ii); or make any declaration to withdraw its ISCID membership (iii).^[13] Secondly, the tribunal pointed out that in contrast to the facts of Achmea, there was no express clause in the UK-Latvia BIT indicating whether the law of the State Parties or EU law applied.^[14] In that sense, the EU law could not be presumed to apply automatically. Thirdly, the tribunal claimed that to determine the parties’ consent, the tribunal, as an international institution deriving its power and jurisdiction from international law and not from EU law, was bound to apply international law.^[15] As far as the tribunal was concerned, parties had given valid consent in accordance with international law. Therefore, despite infringing EU law, nothing prevented the tribunal from having jurisdiction.^[16]

Tribunal’s analysis – applicable law

As a starting point, a few clarifications must be made on the issue of the applicable law in the context of disputes of an international nature. Usually, such disputes involve different sets of law. As a result, tribunals are regularly faced with the challenge of having to determine which set of laws applies to the case. This is an important issue because laws differ, and sometimes they can offer certain advantages or disadvantages. Concretely, if the tribunal was to find that Achmea was applicable, it would automatically be precluded from exercising jurisdiction. Normally, tribunals address the issue of applicable law by using conflict of law rules which are laid down in the Vienna Convention of the Law of the Treaties (VCLT).^[17]

With that being clarified, the tribunal was faced with the question of whether EU treaties applied to the case. To find the answer, the tribunal had to interpret EU Treaties. As Articles 5 and 31(c), VCLT stipulate, when interpreting treaties tribunals must also take into account the rules of international law applicable to the parties.^[18] Did Achmea then qualify as such a rule?

The answer was clear: an interpretation of a rule could not qualify as a rule itself.^[19] In fact, these interpretations were considered as too constrained by the constitutional dimension of EU law, and thus not relevant in interpreting treaties from an international law perspective.^[20] Consequently, Achmea fell out of the category of international law for the purpose of Article 31(c) VCLT and thus, could not be included in the treaty interpretation analysis. As such, the tribunal proceeded to conduct the interpretation of the EU treaties in accordance with the VCLT conflict of law rules. To be more specific, the tribunal saw the conflict that Achmea brought amidst the EU treaties and BIT and decided to avoid this conflict by choosing to interpret EU treaties through VCLT rules, instead of CJEU decisions. It was a bold stance from the tribunal’s end as it blatantly disregarded the CJEU’s monopoly on interpreting EU law, something that the CJEU holds so dearly.

After clarifying this contentious issue, the tribunal applied the same reasoning to the application of the primacy of EU law principle, finding that the principle could also not be considered international law nor a conflict of law rule.^[21]

Once this was settled, the tribunal went on to resolve the conflict of law issue in accordance with the VCLT principles such as lex superior, lex specialis, and lex posterior.^[22] In summary, the tribunal found that Latvia had not followed any of the relevant procedures for terminating, invalidating, or suspending any of the provisions of the BIT. Moreover, the tribunal held that Latvia could not invoke EU treaties as a justification to perform the obligations under the VCLT.^[23] In this way, the tribunal ruled that it had jurisdiction over the case by stating that: parties had given proper consent to arbitration (i); and no action from the parties’ end or from the EU rendered the BIT void from an international law perspective (ii).

Conclusion

Very interesting points were made in this decision; and by interesting, I mean controversial and daring. Nevertheless, this is not the first investment dispute where a tribunal refuses to treat Achmea as an absolutely authoritative standard for determining consent or jurisdiction.^[24] The issue is that this does not change the EU’s stance on intra-EU BITs and arbitral tribunals applying EU law. As Latvia claimed, other acts such as the Termination Agreement could have been used to demonstrate a withdrawal of consent from the BIT. However, the tribunal refused this argument by applying the same logic as with Achmea. Namely, the tribunal did not consider the Termination Agreement to qualify as a treaty interpretation rule.^[25] For now, it is uncertain how the EU will act towards this decision, but it seems that for the moment, the tribunals in the investment regime will continue to apply intra-EU BITs and exercise jurisdiction. Perhaps this might change if the prohibition of intra-EU bits is codified on a treaty level or if the EU follows procedures for termination stipulated on the VCLT.

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[1] Investment Policy Hub, ‘ Norvik Banka and others v. Latvia’ (2020) <https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/860/norvik-banka-and-others-v-latvia> accessed 07 November 2021.

[2] AS PNB Banka and others v. Latvia, ICSID Case No. ARB/17/47, Decision on the Intra-EU Objection – 14 July 2021.

[3] C-284/16, Request for a preliminary ruling under Article 267 TFEU from the Bundesgerichtshof (Federal Court of Justice, Germany), made by decision of 3 March 2016, received at the Court on 23 May 2016, in the proceedings Slowakische Republik (Slovak Republic) v Achmea BV[2018] Digital reports (Court Reports – general).

[4] ibid. para. 60.

[5] ibid. paras. 46 and 49.

[6] Financial Stability, Financial Services, and Capital Markets Union, ‘EU Member States sign an agreement for the termination of intra-EU bilateral investment treaties’ (European Commission, 05 May 2020) < https://ec.europa.eu/info/publications/200505-bilateral-investment-treaties-agreement_en> accessed 04 November 2021.

[7] Convention on the Settlement of Investment Disputes between States and Nationals of Other States (opened for signature 18 March 1965, entered into force 14 October 1966) (‘ICSID Convention’) art 36.

[8] ibid. (n 2) para. 199.

[9] ibid. para. 204.

[10] Case 6-64, Flamino Costa v E.N.E.L. [1964] ESE 1964 00585.

[11] ibid. (n. 2) para. 526.

[12] ibid. para. 484.

[13] ibid. paras. 532 – 537.

[14] ibid. para. 487.

[15] ibid. para. 478.

[16] ibid. para. 507.

[17] Vienna Convention on the Law of the Treaties (adopted on 23 May 1969, entered into force on 27 January 1980) 1155 UNTS 331 (VCLT).

[18] ibid. art 5 and 31(c).

[19] ibid. (n 2) para. 544.

[20] ibid. para. 505.

[21] ibid. para. 614 – 616.

[22] ibid. paras. 606 – 656.

[23] ibid. para 669 see also Vienna Convention on the Law of the Treaties (adopted on 23 May 1969, entered into force on 27 January 1980) 1155 UNTS 331 (VCLT) articles 27 and 46.

[24] See Magyar Farming and others v. Hungary Inicia Zrt, Kintyre Kft and Magyar Farming Company Ltd v. Hungary, ICSID Case No. ARB/17/27, Award 13 November 2019.

[25] ibid. (n 2) para. 579.