The State Aid Risks of Arbitrating With State-Owned Enterprises

Practitioners arbitrating with State-owned enterprises encounter in an EU context, on the one hand, the institutional confidence of arbitration in its own autonomy and, on the other hand, a public-order regime that increasingly insists on the State’s answerability for the commercial choices it makes through, and in, arbitration. This post is written for the practitioner who must reconcile both. It proceeds from a simple premise: State aid risk may span the lifecycle of arbitrating with EU public-sector counterparties in three distinct ways: first, at the stage of agreeing to arbitrate; second, during the conduct and settlement of the dispute; and third, at the point of recognition, enforcement or payment of an arbitral award.

The Legal Framework

Article 107(1) TFEU prohibits, save as otherwise provided, aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it is liable to affect trade between EU Member States. These principles apply to international arbitration where the relevant conduct is imputable to the State, involves State resources, and confers a selective economic advantage that would not have been granted by a market economy operator. This is not to say that every arbitration clause, procedural concession, settlement or award involving a public undertaking creates State aid. The point arises only where the Article 107(1) criteria are satisfied, including the existence of a selective economic advantage.

Stage One: Agreeing to Arbitrate With the State

As mentioned earlier, the first stage of risk is the dispute-resolution clause itself.

The existence of selective economic advantage mentioned in Article 107(1) TFEU is identified by applying the Market Economy Operator (“MEO”) test. It asks whether a hypothetical private operator, acting in normal market conditions and pursuing profit on a comparable horizon, would have entered into the same transaction on the same terms.

When a State-owned enterprise (“SOE”) accepts a clause that no diligent private counterparty would accept, the State may already have conferred a selective advantage contrary to Article 107(1).

The DEI/Mytilineos line of authority illustrates this exposure, while also underlining its limits. In that litigation, DEI, a Greek State-controlled electricity producer and supplier, challenged the European Commission’s conclusion that its agreement to refer the tariff dispute with Mytilineos to arbitration did not involve State aid. In its most recent iteration, the General Court focused on the decision to refer the dispute to arbitration, rather than treating the adverse outcome of the arbitration as sufficient in itself, to establish the existence of State aid. The General Court applied the MEO test – in particular, the private investor test – and considered whether a prudent market operator, in DEI’s position and in the same circumstances, could have chosen arbitration as a commercially rational means of resolving a long-running tariff dispute. The judgment confirms that the MEO test may apply when assessing whether an SOE’s choice of arbitration confers a selective economic advantage for the purposes of Article 107(1) TFEU. It also confirms that, by concluding an arbitration agreement, each party accepts a certain risk as to the outcome ultimately decided by the tribunal. The General Court noted that the MEO test did not require the precise tariff ultimately fixed by the tribunal to have been foreseeable when the arbitration agreement was concluded.

Stage Two: Conduct and Settlement of the Dispute

The second stage of risk is the conduct of the proceedings and settlement of the dispute.

In this regard, three principal risk factors arise:

• First, procedural concessions: for example, waivers of limitation defences or of jurisdictional objections may transfer value from the public to the private party without commercial consideration.
• Second, evidentiary concessions, such as accepting a counterparty’s cost model without independent challenge, may inflate quantum beyond what a private operator would tolerate.
• Third, settlement on terms more generous than the likely litigation risk, evidential record or commercial alternatives may amount to a discretionary subsidy.

The MEO test in this stage asks: would a prudent private party, faced with the same litigation risk, evidential record, costs exposure and enforcement prospects, have agreed the same concession on the same terms? The answer will often depend less on the tribunal record than on the contemporaneous decision-making record of the SOE: merits advice, quantum analysis, settlement ranges, board approvals and the commercial reasons for compromise.

The intra-EU dimension complicates matters further. Following Achmea and Komstroy, investor-State arbitration clauses in intra-EU BITs, and Article 26 ECT as applied between an investor of one Member State and another Member State, are incompatible with EU law. Settlements that purport to give effect to such clauses may, in addition to State aid risk, expose the paying Member State to challenges based on the autonomy of the EU legal order.

Stage Three: Enforcement of the Award

The third stage is enforcement. Payment of an arbitral award by a Member State, or by an emanation of the State, may itself amount to the implementation of State aid where the Article 107(1) criteria are satisfied. The Micula saga is the locus classicus: in that case, the Court of Justice held that the Commission had competence to assess the State aid implications of implementation of the award, and the relevant Commission decision treated implementation of the award as incompatible State aid.

Two consequences follow. First, where payment of an award would amount to new or notifiable aid, the standstill obligation in Article 108(3) TFEU may apply at the moment of intended payment, not only at the moment of the underlying dispute.

Second, intra-EU energy-sector awards rendered under the ECT cannot be treated as ordinary enforcement matters within the EU, because the autonomy doctrine and the State aid regime may operate simultaneously. For award creditors, this means that an otherwise enforceable award may still encounter EU law objections at the payment stage. For award debtors, State aid law may be central to enforcement: if payment of an award would amount to notifiable aid, Article 108(3) TFEU may require enforcement to be resisted, suspended or conditioned until the State aid issue is resolved.

National Courts, the Standstill and Recovery

National courts are co-guardians of the standstill obligation. Where an award debtor is a Member State, or an emanation of the State, and payment would constitute new aid, the national court seised of recognition or enforcement must take the measures necessary to give effect to Article 108(3) TFEU, which may include refusing, suspending or conditioning enforcement. In CELF v SIDE, the Court of Justice confirmed that national courts must draw the appropriate consequences from breach of the standstill obligation. The duty extends to ordering interim measures and, where necessary, recovery of sums already paid, as reflected in the Commission Notice on the enforcement of State aid law by national courts.

The  recent judgment of the Court of Justice in Commission v United Kingdom confirms that EU law obligations could still constrain national proceedings during the Brexit transition period, including where enforcement of the Micula award was authorised before the end of that period.

The practical corollary is that counsel for award creditors should anticipate, and counsel for award debtors should plead, the standstill defence at the earliest procedural opportunity.

Sectoral Illustrations: Energy and Infrastructure

Two sectors illustrate the framework.

In the energy sector, long-term power purchase agreements between SOEs and private generators frequently contain price-revision arbitration clauses. Where the revision is governed by a sectoral tribunal or regulatory arbitration process, the central question is not whether arbitration is permissible, but whether the SOE's choice of that mechanism and the parameters submitted to the tribunal reflect what a market operator would have accepted. DEI/Mytilineos is therefore best understood as an illustration of how energy pricing disputes may attract MEO scrutiny. It does not make an unfavourable tariff award State aid simply because the supplier is State-owned; rather, it asks whether the choice of arbitration was voluntary, commercially rational and consistent with normal market conditions.

In infrastructure, concession redress mechanisms – particularly tariff-rebalancing, force majeure compensation, change-in-law protections and termination payments – are similarly exposed. Such mechanisms may be "market" and may be necessary to finance major public infrastructure. The State must, however, be able to show that any amendment, settlement or award reflects what a private grantor would have accepted, on contemporaneous evidence, without strategic concessions to avoid political or reputational cost. The Micula and Commission v United Kingdom litigation illustrates the point by analogy: enforcement and payment may remain vulnerable where the economic effect is to confer or restore a selective advantage incompatible with the State aid rules.

Conclusion

The State aid regime ought not to displace arbitration as a dispute-resolution method for public-sector counterparties. However, it has a number of implications.

First, State aid analysis may arise at all three stages: agreement, conduct and enforcement. The MEO standard is central to the agreement and conduct stages, while Article 108(3) TFEU may become critical at the point of recognition, enforcement or payment.

Second, the relevant inquiry is fact-sensitive and commercial: would a market economy operator, acting on the evidence then available, have made the same decision?

Third, the Commission’s exclusive competence over compatibility assessment, coupled with the Article 108(3) TFEU standstill obligation, conditions the conduct of national courts and award debtors alike.

Finally, intra-EU investment arbitration, and some public-sector disputes at the enforcement or payment stage, are now governed by a regime in which State aid law and the autonomy doctrine may reinforce one another, particularly in the energy and infrastructure sectors where the ECT and BIT case law may intersect with MEO scrutiny.