**Case C-205/06**

**Commission of the European Communities**

**v**

**Republic of Austria**

(Failure of a Member State to fulfil obligations – Infringement of the second paragraph of Article 307 EC – Failure to adopt appropriate measures to eliminate the incompatibilities with the EC Treaty of the bilateral agreements entered
into with third countries prior to accession of the Member State to the European Union – Investment agreements entered into by the Republic of Austria with the Republic of Korea, the Republic of Cape Verde, the
People’s Republic of China, Malaysia, the Russian Federation and the Republic of Turkey)

Summary of the Judgment

1.        *Procedure – Oral procedure – Reopening*

*(Art. 222, second para., EC; Rules of Procedure of the Court of Justice, Art. 61)*

2.        *International agreements – Agreements concluded by the Member States – Agreements predating the EC Treaty*

*(Arts 57(2) EC, 59 EC, 60(1) EC and 307, second para., EC)*

1.        Under the second paragraph of Article 222 EC, it is the Advocate General’s duty, acting with complete impartiality and independence,
to make, in open court, reasoned submissions on cases which, in accordance with the Statute of the Court of Justice, require
his involvement. Since the Court is not bound either by the Advocate General’s Opinion or by the reasoning on which it is
based, it is not absolutely necessary to reopen the oral procedure, under Article 61 of the Rules of Procedure, each time
the Advocate General raises a point of law which was not the subject of debate between the parties as long as the judgment
is not based on arguments which were not the subject of debate between them.

(see paras 14-15)

2.        A Member State which does not take appropriate steps to eliminate incompatibilities concerning the provisions on transfer
of capital contained in an investment agreement it has entered into with a third country fails to fulfil its obligations under
the second paragraph of Article 307 EC.

The provisions of Articles 57(2) EC, 59 EC and 60(1) EC confer on the Council the power to restrict, in certain specific circumstances,
movements of capital and payments between Member States and third countries. In order to ensure the effectiveness of those
provisions, measures restricting the free movement of capital must be capable, where adopted by the Council, of being applied
immediately with regard to the States to which they relate, which may include the third countries which have signed an investment
agreement. Accordingly, those powers of the Council, which consist in the unilateral adoption of restrictive measures with
regard to third countries on a matter which is identical to or connected with that covered by an earlier agreement concluded
between a Member State and a third country, reveal an incompatibility with that agreement where, first, the agreement does
not contain a provision allowing the Member State concerned to exercise its rights and to fulfil its obligations as a member
of the Community and, second, there is also no international-law mechanism which makes that possible.

The periods of time necessarily involved in any international negotiations which would be required in order to reopen discussion
of the agreement at issue are inherently incompatible with the practical effectiveness of those measures. The possibility
of relying on other mechanisms offered by international law, such as suspension of the agreement, or even denunciation of
the agreement at issue or of some of its provisions, is too uncertain in its effects to guarantee that the measures adopted
by the Council could be applied effectively.

(see paras 35-37, 39-40, 45)


JUDGMENT OF THE COURT (Grand Chamber)

3 March 2009 ([\*](#Footnote*))

(Failure of a Member State to fulfil obligations – Infringement of the second paragraph of Article 307 EC – Failure to adopt appropriate measures to eliminate the incompatibilities with the EC Treaty of the bilateral agreements entered
into with third countries prior to accession of the Member State to the European Union – Investment agreements entered into by the Republic of Austria with the Republic of Korea, the Republic of Cape Verde, the
People’s Republic of China, Malaysia, the Russian Federation and the Republic of Turkey)

In Case C‐205/06,

ACTION under Article 226 EC for failure to fulfil obligations, brought on 5 May 2006,

**Commission of the European Communities,** represented by H. Støvlbæk, B. Martenczuk and C. Tufvesson, acting as Agents, with an address for service in Luxembourg,

applicant,

v

**Republic of Austria,** represented by C. Pesendorfer and G. Thallinger, acting as Agents,

defendant,

supported by:

**Federal Republic of Germany,** represented by M. Lumma and. C. Blaschke, acting as Agents,

**Republic of Lithuania,** represented by D. Kriaučiūnas, acting as Agent,

**Republic of Hungary,** represented by J. Fazekas, K. Szíjjártó and M. Fehér, acting as Agents,

**Republic of Finland,** represented by A. Guimaraes-Purokoski and J. Heliskoski, acting as Agents,

interveners,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas, K. Lenaerts, M. Ilešič, A. Ó Caoimh and J.-C. Bonichot
(Rapporteur), Presidents of Chambers, G. Arestis, A. Borg Barthet, J. Malenovský, U. Lõhmus and E. Levits, Judges,

Advocate General: M. Poiares Maduro,

Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 6 May 2008,

after hearing the Opinion of the Advocate General at the sitting on 10 July 2008,

gives the following

**Judgment**

1        By its application, the Commission of the European Communities requests the Court to declare that, by not having taken appropriate
steps to eliminate incompatibilities concerning the provisions on transfer of capital contained in the investment agreements
entered into with the Republic of Korea, the Republic of Cape Verde, the People’s Republic of China, Malaysia, the Russian
Federation and the Republic of Turkey, the Republic of Austria has failed to fulfil its obligations under the second paragraph
of Article 307 EC.

**Legal framework**

2        Prior to its accession to the European Union, the Republic of Austria entered into bilateral investment agreements with the
People’s Republic of China (this agreement entered into force on 11 October 1986 (BGBl. 537/1986)), Malaysia (this agreement
entered into force on 1 January 1987 (BGBl. 601/1986)), the Russian Federation (this agreement entered into force on 1 September
1991 (BGBl. 387/1991), initially concluded with the former Union of Soviet Socialist Republics and made applicable between
the Republic of Austria and the Russian Federation pursuant to an exchange of letters (BGBl. 257/1994)), the Republic of Korea
(this agreement entered into force on 1 November 1991 (BGBl. 523/1991)), the Republic of Turkey (this agreement entered into
force on 1 January 1992 (BGBl. 612/1991)) and the Republic of Cape Verde (this agreement entered into force on 1 April 1993
(BGBl. 83/1993)).

3        Each of those agreements contains a clause under which each party guarantees to the investors of the other party, without
undue delay, the free transfer, in freely convertible currency, of payments connected with an investment.

**Pre-litigation procedure**

4        As it took the view that those bilateral agreements could impede the application of restrictions on movements of capital and
on payments which the Council of the European Union might adopt under Articles 57(2) EC, 59 EC and 60(1) EC, the Commission
sent a letter of formal notice to the Republic of Austria on 12 May 2004.

5        By letter of 14 July 2004, the Republic of Austria submitted its observations to the Commission on that letter of formal notice.
It maintained that the disputed provisions of the investment agreements at issue do not, first, impede the measures restricting
movements of capital or payments provided for by the EC Treaty or, second, prejudge a vote by that Member State in favour
of restrictive measures and would not, therefore, adversely affect the powers of the Council were the latter to consider the
adoption of such measures.

6        Taking the view that the arguments put forward by the Republic of Austria were insufficient and that it had failed, contrary
to the requirements of the second paragraph of Article 307 EC, to take appropriate steps to eliminate the incompatibilities
concerning the provisions on transfer contained in the various investment agreements at issue, the Commission sent a reasoned
opinion to that Member State on 21 March 2005.

7        By letter of 19 May 2005, the Republic of Austria submitted to the Commission its observations on that reasoned opinion. It
maintained the arguments put forward in its observations on the letter of formal notice and referred, in addition, to the
possibility, were the European Community minded to adopt measures, of arriving at a mutually satisfactory solution in accordance
with the dispute-resolution mechanism contained in the agreements at issue. It also stated that, in the course of the revision
being undertaken of the Austrian model bilateral investment agreement, the adoption of a ‘regional economic international
organisation’ (REIO) clause was envisaged, which would take into account the possible restrictions on the free movement of
capital which might be decided upon by the Union or the Community and on which, in future, all international treaty negotiations
would be based.

8        As it took the view that those arguments were not capable of rebutting the heads of complaint set out in the reasoned opinion,
the Commission decided to bring the present action.

**The action**

*The request to reopen the oral procedure*

9        By letter of 30 July 2008, the Republic of Austria requested the Court to reopen the oral procedure pursuant to Article 61
of the Rules of Procedure, on the ground that the Commission had unlawfully introduced a new head of complaint during the
oral procedure and that, as a consequence, the Advocate General’s Opinion was based on facts and arguments which it had not
been possible for the parties to debate properly.

10      The Commission, it argued, had, for the first time and in succinct terms, claimed that the maintenance in force, in their
present terms, of the bilateral investment agreements at issue was incompatible with Article 10 EC.

11      The Advocate General, it contends, proposes, in points 33 to 43 and 71 of his Opinion, that the Court base the alleged failure
to fulfil obligations on Article 10 EC as well as on Articles 57(2) EC, 59 EC and 60(1) EC.

12      In addition, as several Member States have pointed out, the Commission set out this line of argument – which was subsequently
developed – very belatedly and in rather unclear terms.

13      In that regard, it must be pointed out, first, that the Court may, of its own motion, on a proposal from the Advocate General
or at the request of the parties, order the reopening of the oral procedure under Article 61 of its Rules of Procedure if
it considers that it lacks sufficient information or that the case must be dealt with on the basis of an argument which has
not been debated between the parties (see Case C‐210/03 *Swedish Match* [2004] ECR I-11893, paragraph 25; Case C‐138/05 *Stichting Zuid-Hollandse Milieufederatie* [2006] ECR I‐8339, paragraph 23; and order in Case C-17/98 *Emesa Sugar* [2000] ECR I‐665, paragraph 18).

14      Second, under the second paragraph of Article 222 EC, it is the Advocate General’s duty, acting with complete impartiality
and independence, to make, in open court, reasoned submissions on cases which, in accordance with the Statute of the Court
of Justice, require his involvement. Since the Court is not bound either by the Advocate General’s Opinion or by the reasoning
on which it is based, it is not absolutely necessary to reopen the oral procedure, under Article 61 of the Rules of Procedure,
each time the Advocate General raises a point of law which was not the subject of debate between the parties.

15      In the present case, since the Court considers that it has sufficient information to make a ruling and since the case does
not have to be resolved on the basis of arguments which were not the subject of debate between the parties, in particular
in the course of the hearing, it is not appropriate to grant the request that the oral procedure be reopened.

*The incompatibility of the investment agreements with the Treaty*

 Arguments of the parties

16      The Commission takes the view that the absence, in the agreements at issue, of any provision expressly reserving for the Republic
of Austria the possibility of applying measures which may, where appropriate, be decided upon by the Council on the basis
of Articles 57 EC, 59 EC and 60 EC is liable to make it more difficult, or even impossible, for that Member State to comply
with its Community obligations and that, by not taking appropriate steps to remove such an incompatibility, that Member State
has failed to fulfil its obligations under the second paragraph of Article 307 EC.

17      The Commission claims that, were the Council to adopt restrictions on movements of capital and on payments, the period of
time required for the denunciation or renegotiation of the agreements at issue would have the consequence that the Republic
of Austria would be obliged, in the intervening period, under international law, to continue to apply the agreements in question,
including their respective transfer clauses, in accordance, moreover, with the first paragraph of Article 307 EC. As a result,
the measures adopted by the Council would not be uniformly applied within the Community.

18      The Republic of Austria considers that, in the absence of restrictions on movements of capital and on payments decided upon
by the Council, it is free to regulate the movement of capital with third countries on the basis of Article 56 EC. It contends
that, so long as no restriction has been decided upon by the Council, the question of the compatibility of the agreements
at issue with a provision of the Treaty which has not been the subject of any application does not arise.

19      The Federal Republic of Germany, the Republic of Lithuania, the Republic of Hungary and the Republic of Finland concur with
the arguments put forward by the Republic of Austria and take the view that the investment agreements in question are not
incompatible with existing Community measures on free movement of capital, as those measures do not affect such agreements.
According to those Member States, the failure to fulfil obligations relied on by the Commission is purely hypothetical in
nature.

20      Those Member States contend that the objective of an action for failure to fulfil obligations under Article 226 EC is not
to review situations in which the alleged failure is hypothetical, but to remedy actual failures by Member States to fulfil
their obligations.

21      The Federal Republic of Germany and the Republic of Hungary point out that a potential future incompatibility with secondary
Community legislation on the part of an agreement entered into with a third country does not fall within the scope of application
of Article 307 EC and can, if at all, be confirmed only if the Council actually exercises its competence within the area covered
by that article.

22      The Republic of Finland points out that the Commission has failed to prove the existence of the alleged failure to fulfil
obligations and cannot, according to the case-law of the Court, act on the basis of assumptions.

23      The Republic of Lithuania adds that the objective of the second paragraph of Article 307 EC is not to ensure formal compliance
with Community law on the part of the provisions of international agreements entered into by the Member States, but to ensure
effective application of the provisions of Community law, in particular where the Member States have, prior to the respective
dates of their accession, concluded international agreements with third countries on the same matters.

 Findings of the Court

24      The various investment agreements at issue concluded by the Republic of Austria contain equivalent provisions which guarantee
the free transfer, without undue delay and in freely convertible currency, of payments connected with an investment.

25      In particular, the following matters are thus guaranteed: the free transfer of funds in order to create, manage or extend
an investment; the freedom to repatriate the income from that investment; and the freedom to transfer the funds necessary
to repay loans and the funds arising from the liquidation or assignment of that investment.

26      Those agreements are to that extent consistent with the wording of Article 56(1) EC, according to which ‘... all restrictions
on the movement of capital between Member States and between Member States and third countries shall be prohibited’, and of
Article 56(2) EC, under which ‘all restrictions on payments between Member States and between Member States and third countries
shall be prohibited’, and are in line with the objective pursued by that article.

27      It is true that the Treaty provisions to which the present action by the Commission refers grant the Council the power to
restrict, in certain circumstances, the movement of capital and payments between Member States and third countries, including
the movements covered by the transfer clauses here at issue.

28      The provisions in question, contained in Articles 57(2) EC, 59 EC and 60(1) EC, introduce, with a view to protecting the general
Community interest and enabling the Community to comply, as appropriate, with its international obligations and with those
of the Member States, exceptions to the principle of free movement of capital and payments between Member States and between
Member States and third countries.

29      Article 57(2) EC allows the Council, acting by qualified majority on a proposal from the Commission, to adopt certain measures
restricting the movement of capital to or from third countries involving, inter alia, direct investment. Where those measures
constitute a ‘step back’ in Community law as regards the liberalisation of the movement of capital to or from third countries,
unanimity is required.

30      Article 59 EC authorises the Council, on a proposal from the Commission and after consulting the European Central Bank, to
take safeguard measures where movements of capital to or from third countries ‘cause, or threaten to cause, serious difficulties
for the operation of economic and monetary union’, provided that they are strictly necessary and that they relate to a period
‘not exceeding six months’.

31      Article 60(1) EC allows the Council, on a proposal from the Commission, in order to implement a common position or a joint
action in the area of the common foreign and security policy, to take ‘necessary urgent measures’ on the movement of capital
and on payments. Such action could, for example, be required in order to give effect to a resolution of the Security Council
of the United Nations Organisation.

32      It is common ground that the agreements at issue do not contain any provision reserving such possibilities for the Community
to restrict movements of funds connected with investments. It is therefore necessary to examine whether the Republic of Austria
was, for that reason, under an obligation to take the appropriate steps to which the second paragraph of Article 307 EC refers.

33      Under the first paragraph of Article 307 EC, the rights and obligations arising from an agreement concluded before the date
of accession of a Member State between it and a third country are not affected by the provisions of the Treaty. The purpose
of that provision is to make it clear, in accordance with the principles of international law, that application of the Treaty
is not to affect the duty of the Member State concerned to respect the rights of third countries under a prior agreement and
to perform its obligations thereunder (see Case 812/79 *Burgoa* [1980] ECR 2787, paragraph 8; Case C-84/98 *Commission* v *Portugal* [2000] ECR I‐5215, paragraph 53; and Case C-216/01 *Budĕjovický Budvar* [2003] ECR I‐13617, paragraphs 144 and 145).

34      The second paragraph of Article 307 EC obliges the Member States to take all appropriate steps to eliminate incompatibilities
with Community law which have been established in agreements concluded prior to their accession. Under that provision, the
Member States are required, where necessary, to assist each other to that end and, where appropriate, to adopt a common attitude.

35      The provisions of Articles 57(2) EC, 59 EC and 60(1) EC confer on the Council the power to restrict, in certain specific circumstances,
movements of capital and payments between Member States and third countries.

36      In order to ensure the effectiveness of those provisions, measures restricting the free movement of capital must be capable,
where adopted by the Council, of being applied immediately with regard to the States to which they relate, which may include
some of the States which have signed one of the agreements at issue with the Republic of Austria.

37      Accordingly, those powers of the Council, which consist in the unilateral adoption of restrictive measures with regard to
third countries on a matter which is identical to or connected with that covered by an earlier agreement concluded between
a Member State and a third country, reveal an incompatibility with that agreement where, first, the agreement does not contain
a provision allowing the Member State concerned to exercise its rights and to fulfil its obligations as a member of the Community
and, second, there is also no international-law mechanism which makes that possible.

38      Contrary to what is contended by the Republic of Austria, the measures put forward by it and which, in its view, are such
as to enable it to fulfil its Community obligations do not appear to guarantee that this will be the case.

39      In the first place, the periods of time necessarily involved in any international negotiations which would be required in
order to reopen discussion of the agreements at issue are inherently incompatible with the practical effectiveness of those
measures.

40      In the second place, the possibility of relying on other mechanisms offered by international law, such as suspension of the
agreement, or even denunciation of the agreements at issue or of some of their provisions, is too uncertain in its effects
to guarantee that the measures adopted by the Council could be applied effectively.

41      Moreover, as it pointed out again at the hearing, the Republic of Austria intends to introduce, in the investment agreements
under negotiation or when the existing agreements are renewed, a clause which would reserve certain powers to regional organisations
and would, therefore, make it possible to apply any measures restricting movements of capital and payments which might be
adopted by the Council.

42      While acknowledging that such a clause should, in principle, as the Commission admitted at the hearing, be considered capable
of removing the established incompatibility, it is common ground that, in the cases referred to by the Commission, the Republic
of Austria has not taken any steps, within the period prescribed by the Commission in its reasoned opinion, with regard to
the third countries concerned, designed to eliminate the risk of conflict with measures liable to be adopted by the Council
under Articles 57(2) EC, 59 EC and 60(1) EC which may arise from the application of the investment agreements concluded with
those third countries.

43      It must be added that, as follows from the judgment delivered today in Case C‐249/06 *Commission* v *Sweden* [2009] ECR I-0000, the incompatibilities with the Treaty to which the investment agreements with third countries give rise
and which militate against the application of the restrictions on movement of capital and on payments which the Council may
adopt under Articles 57(2) EC, 59 EC and 60(1) EC are not limited to the Member State which is the defendant in the present
case.

44      It must therefore be stated that, in accordance with the second paragraph of Article 307 EC, where necessary, the Member States
must assist each other with a view to eliminating the incompatibilities established and must adopt, where appropriate, a common
attitude. In the context of its duty, under Article 211 EC, to ensure that the provisions of the Treaty are applied, it is
for the Commission to take any steps which may facilitate mutual assistance between the Member States concerned and their
adoption of a common attitude.

45      It follows from the foregoing that, by not having taken appropriate steps to eliminate incompatibilities concerning the provisions
on transfer of capital contained in the investment agreements entered into with the Republic of Korea, the Republic of Cape
Verde, the People’s Republic of China, Malaysia, the Russian Federation and the Republic of Turkey, the Republic of Austria
has failed to fulfil its obligations under the second paragraph of Article 307 EC.

**Costs**

46      Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been
applied for in the successful party’s pleadings. Since the Commission has applied for costs to be awarded against the Republic
of Austria, and the latter has been unsuccessful, the Republic of Austria must be ordered to pay the costs. In accordance
with the first subparagraph of Article 69(4) of those Rules, the Federal Republic of Germany, the Republic of Lithuania, the
Republic of Hungary and the Republic of Finland, which have intervened in the proceedings, are to bear their own costs.

On those grounds, the Court (Grand Chamber) hereby:

1.      **Declares that, by not having taken appropriate steps to eliminate incompatibilities concerning the provisions on transfer
of capital contained in the investment agreements entered into with the Republic of Korea, the Republic of Cape Verde, the
People’s Republic of China, Malaysia, the Russian Federation and the Republic of Turkey, the Republic of Austria has failed
to fulfil its obligations under the second paragraph of Article 307 EC;**

2.      **Orders the Republic of Austria to pay the costs;**

3.      **Orders the Federal Republic of Germany, the Republic of Lithuania, the Republic of Hungary and the Republic of Finland to
bear their own respective costs.**

[Signatures]

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[\*](#Footref*) Language of the case: German.