State Aid and Arbitration of Disputes

State Aid and Arbitration of Disputes - State Aid Uncovered photos

Introduction

On 22 February 2024, the Court of Justice [CJEU] delivered its judgment in joined Cases C-701/21 P and C-739/21 P, Mytilinaios v DEI & European Commission. Mytilinaios, a Greek company, and the Commission appealed against the judgment of the General Court in case T-639/14 RENV, DEI v Commission, concerning arbitration of a dispute between Mytilinaios and DEI, the main Greek electricity producer which is majority owned by the state. This is a case with a long history.

In the early 1960s, the DEI, which was then fully state-owned and the only electricity producer in Greece, entered into a long-term contract with Alouminion, a producer of aluminium, to provide electricity at preferential tariffs. The contract expired some 15 years ago. At that time, DEI held a dominant market position but it was required to negotiate the price of electricity with each large, high-voltage, customer. Alouminion was the largest consumer of electricity in Greece and at a steady rate throughout the year. DEI and Alouminion could not agree on the price for a new contract, given Alouminion’s unique position in the market and, as a result of the impasse, Alouminion resorted to legal action before domestic courts. In a related decision, the Commission had found that a new contract with preferential tariffs would constitute incompatible State aid. That decision was challenged before both the General Court and the CJEU. In the meantime Alouminion was acquired by Mytilinaios.

In order to resolve their dispute, DEI and Mytilinaios agreed to enter into arbitration by the permanent arbitration body of the Greek Energy Regulator [RAE]. However, DEI was not satisfied with the outcome of the arbitration and complained to the Commission that the decision of the arbitral court forced it to grant State aid. The Commission rejected the complaint in decision SA.38101. The Commission concluded that DEI entered into the arbitration procedure voluntarily and because it was in its interest to do so. It could not unilaterally cut off Alouminion from the electricity grid, legal action in Greek courts would have taken much longer than the six months of the RAE tribunal and it could recover millions of amounts owed to it by Alouminion much faster. More importantly, the Commission found that the parameters set for the arbitration tribunal could reasonably ensure that the price would be set on the basis of objective criteria that would not be biased against DEI. Therefore, the Commission considered that DEI acted as a rational private operator would do. DEI had a strong incentive to enter into speedy arbitration and the arbitration process ensured a fair outcome.

DEI appealed against the rejection of its complaint by the Commission and a long judicial process involving three cases before the General Court and a case before the CJEU eventually culminated in a second judgment of the CJEU on 22 February.

The most interesting issue addressed by the CJEU was whether the arbitration process could result in the granting of State aid. The Commission, in decision SA.38101, concluded that by agreeing to arbitration, DEI acted as a private investor and, therefore, the outcome of the arbitration process could not result in State aid.

The status of the arbitration tribunal

First, the CJEU had to determine the status of the arbitration tribunal. In this respect, it recalled the main finding of the General Court.

“(96) It should be noted that, […], the General Court found, first, that ‘by the arbitration award, the arbitration tribunal took a legally binding decision on the fixing of the tariff in question which was capable of procuring an advantage for [Mytilinaios] in the event that it did not correspond to normal market conditions and, therefore, of constituting State aid which has not been notified by the Hellenic Republic under Article 108(3) TFEU’ and, second, that ‘the arbitration tribunal, as established by the RAE […], the arbitration proceedings conducted before it, and its decisions, have characteristics similar to those of ordinary Greek courts, the disputes brought before them and their decisions’.

“(97) To support that conclusion, the General Court, […], analysed five criteria for the purpose of concluding, […] that ‘the arbitration tribunals established and operating in accordance with Article 37 of [Law 4001/2011] form an integral part of the judicial system of the Greek State’, and, […], that the arbitration tribunal in question ‘must be classified, in the same way as an ordinary Greek court, as a body exercising a power coming within the scope of public authority rights and powers’.”

“(98) It is therefore in the light of [this] assessment […] that the General Court was able to make the finding, […], that the tariff in question, as fixed by the arbitration award, constituted a State measure which had not been notified.”

“(99) It follows that the General Court held that the arbitration tribunal of the RAE ought to be classified as a body exercising a power coming within the scope of public authority rights and powers and that, accordingly, its decisions could be attributed to the Hellenic Republic, within the meaning of Article 107 TFEU on the sole ground that that tribunal formed an integral part of the Greek State legal system in so far as it could be treated as similar to an ordinary Greek court. Such reasoning is vitiated by errors of law.”

“(100) As regards, in the first place, the criteria adopted by the General Court […] in order to treat the arbitration tribunal in question as similar to an ordinary State court, those criteria are, first, that the arbitration tribunals established under Article 37 of Law 4001/2011 perform a judicial function which is identical to that of the ordinary courts, or even replace those courts in so far as the opening of arbitration proceedings deprives them of their jurisdiction, second, that the arbitrators, selected from a list drawn up by decision of the President of the RAE, must demonstrate their independence and impartiality before their appointment, third, that proceedings before arbitration tribunals are governed, inter alia, by the provisions of the Greek Code of Civil Procedure and, in addition, by the RAE’s arbitration rules, fourth, that the decisions of the arbitration tribunals are legally binding, have the force of res judicata and are enforceable in accordance with the relevant provisions of that code and, fifth, that the decisions of the arbitration tribunals may be the subject of an appeal brought before an ordinary court.”

“(101) However, […], none of those criteria make it possible to distinguish the arbitration tribunals provided for in Article 37 of Law 4001/2011 from any other arbitration tribunal appointed by contract.”

“(102) First, any arbitration tribunal appointed by contract replaces the ordinary courts, second, the procedure before such a tribunal is usually governed by law, which, third, may make the decisions of those tribunals binding, have the force of res judicata and be enforceable and, fourth, those decisions may, in certain circumstances, be subject to appeal before an ordinary court.”

“(103) In that connection, it is true, […], that the fact that, in the present case, the arbitrators are selected from a list drawn up by decision of the President of the RAE and must demonstrate their independence and their impartiality before their appointment distinguishes the arbitration tribunal of the RAE from other arbitration tribunals appointed by contract, whose arbitrators are not necessarily selected from a list such as that drawn up by the President of the RAE. However, that fact cannot, in itself, make it possible to find that that arbitration tribunal is to be distinguished from any other arbitration tribunal appointed by contract, since it constitutes merely a purely procedural element which does not affect the function or the nature of that tribunal.”

“(104) In the second place, […], the General Court erred in law in failing to ascertain whether the arbitration tribunal of the RAE had, as is, the case, generally, for courts which form part of the State judicial system, mandatory jurisdiction which therefore did not depend solely on the will of the parties.”

“(105) Such a factor could in fact result in the General Court finding that the arbitration tribunal of the RAE differed from an arbitration tribunal appointed by contract whose jurisdiction is based on an arbitration agreement, namely a specific agreement reflecting the freely expressed wishes of the parties concerned”.

“(106) In view of the foregoing and irrespective of any other consideration, the General Court erred in law in finding that the arbitration tribunal of the RAE could be treated in the same way as an ordinary court and that the arbitration award was a State measure capable of constituting State aid.”

Then the CJEU rejected the argument of DEI that the RAE arbitration tribunal was similar to the international tribunal in case C-638/19 P, Commission v European Food, whose decision had been found by the CJEU not to be compatible with EU law.

“(109) First, the arbitration tribunal which made the arbitration award in question in the case which gave rise to that judgment was not an arbitration tribunal appointed by contract, but had been established on the basis of a bilateral investment treaty. As follows from the settled case-law referred to, in essence, in paragraphs 143 and 144 of that judgment, the consent of a Member State to the possibility of litigation being brought against it in the context of the arbitration procedure provided for by a bilateral investment treaty, unlike that which would have been given in contractual arbitration proceedings, does not have its origin in a specific agreement reflecting the freely expressed wishes of the parties concerned, but is derived from a treaty concluded between two Member States in which they have, generally and in advance, agreed to exclude from the jurisdiction of their own courts disputes which may concern the interpretation or application of EU law in favour of arbitration proceedings.”

“(110) Second, in the judgment of 25 January 2022, Commission v European Food and Others (C-638/19 P, EU:C:2022:50), the Court confined itself to ascertaining whether the Commission, in the case in point, was competent ratione temporis to exercise its powers under Article 108 TFEU. To that end, in paragraph 123 of that judgment, it found that the decisive factor for establishing the date on which the right to receive State aid was conferred on its beneficiaries by a particular measure is the acquisition by those beneficiaries of a definitive right to receive that aid and to the corresponding commitment, by the Member State, to grant that aid. Although, in paragraph 124 of that judgment, the Court, in essence, noted that such a right had been granted only by the arbitration award in question, it in no way concluded that that arbitration award, in itself, constituted State aid. By contrast, the Court, as follows from paragraphs 80 and 131 of that judgment, explained that it was not competent, in the case which gave rise to that judgment, to rule on whether the measure in question in that case, namely, the arbitration award, constituted, in substance, ‘State aid’ within the meaning of Article 107(1) TFEU.”

It must be said that paragraph 110 above contains two statements that appear to be contradictory. On the one hand, the CJEU repeated its findings in European Food that the date an undertaking is deemed to receive State aid is the date of the arbitration award. On the other hand, it also contended that it had not determined whether the award constituted State aid. Probably it meant that, had the award constituted State aid, it was granted on the date of the decision of the arbitration tribunal. This means that European Food acquired a right to a payment which might not have conferred an advantage in the meaning of Article 107(1) TFEU. In this context, only two kinds of payment do not constitute State aid: compensation for damage and a transfer that satisfies the market economy investor principle.

The CJEU went on to further explain that “(111) the fact that in the present case an action for annulment of the arbitration award has been dismissed by a Greek court such as the Efeteio Athinon (Court of Appeal, Athens) cannot mean that that award may, on that ground alone, be attributable to the Greek State. The judicial review carried out by that court does not relate to the lawfulness of the arbitration award, which remains a measure attributable only to the arbitration body which adopted it. In addition, it follows from the case-law of the Court that the establishment as such of State aid cannot result from a judicial decision, since such an establishment of State aid entails a decision as to the appropriate course of action which falls outside the scope of a court’s powers and obligations […] Consequently, the existence of such a judicial decision cannot, in any event, suffice to classify the arbitration award, as confirmed by that decision, as a measure capable of constituting State aid.”

Excluding any involvement of the state

Lastly, the CJEU stressed the significance of the voluntary acceptance of resolution of the dispute through an arbitration procedure.

“(113) It follows, in the present case, that in view, inter alia, of the particularities of the dispute between DEI and Mytilinaios and the specific features of the task voluntarily entrusted by those parties to the arbitration tribunal of the RAE, the Commission was fully entitled to consider, first, that the only State measure capable of constituting State aid was DEI’s decision to conclude the arbitration agreement with Mytilinaios, given that DEI is controlled by the Greek State, and, second, that, in order to know whether that decision had conferred an advantage on Mytilinaios, it had been necessary to ascertain whether a private operator, under normal market conditions would have taken that decision under the same conditions.”

“(114) In that respect, it should be noted that it could have been otherwise if the arbitration procedure in its entirety, from the conclusion of the arbitration agreement until the arbitration award, had been the product of a scheme imposed by the Greek State on the undertakings concerned in order to use that procedure to circumvent the rules in the field of State aid. A private operator would not have agreed, under normal market conditions, to be part of such scheme. However, DEI has not claimed that the conclusion of the arbitration agreement with Mytilinaios had been imposed on it, against its will, by the Greek State in order to grant Mytilinaios State aid.”

On the basis of the above reasoning, the CJEU concluded that “(116) the judgment under appeal must be set aside”.

The actions before the General Court

Although the CJEU retuned the case back to the General Court, it also gave final judgment to certain aspects of the case.

DEI claimed that the Commission had infringed Article 107 TFEU by failing to examine the existence of an advantage and by confining itself to ascertaining whether, under normal market conditions, a private operator would have entered into the arbitration agreement under the same conditions.

The CJEU responded that “(119) it is sufficient to note that, […], the General Court held, in essence, that DEI and Mytilinaios had voluntarily referred the dispute to an arbitration tribunal of the RAE, such a finding not having been disputed in the present appeal. Accordingly, for the reasons set out in paragraphs 96 to 105 of the present judgment, the Commission was, in any event, not required, in the circumstances of the case, to analyse the content of the arbitration award for the purpose of ascertaining whether DEI’s decision to conclude an arbitration agreement had procured an advantage for Mytilinaios within the meaning of Article 107 TFEU.”

It is difficult to understand the meaning of the CJEU’s statement in paragraph 119. Does it mean that by voluntarily agreeing to arbitration, DEI could not have granted State aid?

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Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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