Slippery slope for intra-EU investment arbitration

In its press release of 6 March 2018 concerning the Achmea case, the Court of Justice of the European Union (CJEU) indicated that the “arbitration clause in the Agreement concluded between the Netherlands and Slovakia on the protection of investments is not compatible with EU law”.

A few days later, in a press release dated 20 March 2018, the Council of the European Union announced that it had adopted negotiation directives authorising the Commission to negotiate “a convention establishing a multilateral court for the settlement of investment disputes”.

If doubt still existed following the CJEU’s decision on the scope of incompatibility (only the treaty in question or all intra-EU treaties?), the Council itself has a more general position… Intra-EU investment arbitrations seem to be on a slippery slope…

The position of the Court of Justice in the Achmea case: the premises of a general incompatibility of EU BIT arbitration clauses with EU law  

The Achmea ruling was particularly awaited… and it was finally rendered on 6 March 2018.

The question that was raised in this case was indeed to know if the initiation of an arbitration procedure, of which the seat was Frankfort (Germany), between a Dutch investor, Achmea, and Slovakia, was not contrary to articles 344 and 267 of the Treaty of the Functioning of the European Union (“TFEU”).

This case was initiated in 2008 in application of article 8 of the BIT between the Netherlands and Slovakia by Achmea against Slovakia for legislative measures that would have caused a prejudice to the company.

The arbitral tribunal condemned Slovakia, which then brought an annulment action against this ruling to the high regional court of Frankfort am Main. Following the rejection of this claim, Slovakia then appealed this decision to the Bundesgerichtshof (federal court of justice, Germany) claiming that the arbitration clause contained in the BIT was contrary to articles 18, 267 and 344 of the TFEU.

It is under these circumstances that the German federal court submitted a prejudicial question to the CJEU bearing notably on the interpretation of (i) article 344 of the TFEU that provides that “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein” and (ii) article 267 of the TFEU that provides that “The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning: (a) the interpretation of the Treaties; (b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union […]” (Request for a preliminary ruling presented by the Bundesgerichtshof (Germany) 23 May 2016 – Slovak Republic/Achmea BV (Case C-284/16)).

To affirm the incompatibility of recourse to arbitration with European Union law, the CJEU used the following reasoning:

  • It first verified if arbitral tribunals were led to apply the law of the European Union. In this particular case, it concluded that “the arbitral tribunal referred to in Article 8 of the BIT may be called on to interpret or indeed to apply EU law, particularly the provisions concerning the fundamental freedoms, including freedom of establishment and free movement of capital” (point 42 of the decision) ;
  • Then, it equally raised that the arbitral tribunal did not constitute a court common to a number of Member States, and therefore was independent of the European legal sphere, such that its decisions could not be subject to the mechanisms of European Union law allowing a uniformity of Union law (such as preliminary recourse foreseen in TFEU article 267) (point 48);
  • Finally, it questioned the possibility of involving the Member State jurisdictions in order to guarantee that“the questions of EU law which the tribunal may have to address can be submitted to the Court by means of a reference for a preliminary ruling” (point 50). Yet, it concluded that the Member State cannot interfere in an arbitration, except if national law allows it to. In the context of this case, the Court of Justice considers that German law only provides a “limited control” of the award, notably on the validity of the arbitration convention pursuant to the applicable law, or on the respect of public order by the recognition or execution of the arbitral award (point 53). If in commercial arbitration the Court considers that efficiency requirements justify a limited control of national jurisdictions, it considers that in matters of investment arbitration, this reasoning is not transposable. Indeed, the limited control of national jurisdictions does not allow a guarantee of the necessary courses of action to ensure an effective jurisdictional protection in the domains covered by EU law, such as provided by Article 19, paragraph 1, subparagraph 2 of the Treaty on the EU.

Thus, the CJEU, to protect its legal order and keep a jurisdictional monopoly, denounced the arbitration procedure provided in this intra-EU BIT, recalling the fundamental principles of EU law that it would have violated, such as the principle of mutual confidence, the principle of loyal cooperation and “the preservation of the particular nature of the law established by the Treaties, ensured by the preliminary ruling procedure provided for in Article 267 TFEU”.

The bearing of this decision has been commented upon by numerous authors, some believing that this decision spells the end of 200 intra-EU 200 BITs (see for example,  Black Tuesday: the end of intra-EU BITs), others considering the “response of the Court is limited to the concerned treaty and takes into account the specificity of its dispositions regarding the applicable law” (free translation) (Philippe Pinsolle et Isabelle Michou, L’arrêt Achmea, la fin des traités d’investissements intra-UE?).

It is highly probable that a future case answers this question as to whether this incompatibility is limited to the single intra-EU BIT in question in the Achmea case or extends to all intra-EU BITs. Indeed, as a reminder, in a case between a Luxembourgian group and the State of Poland, an English judge upheld, on 2 March 2018, an annulment action of an arbitral award on jurisdiction, in the context of an investment arbitration founded on the basis of the Luxemburg-Poland BIT (Group v. Poland). Here, the English Commercial Court pronounced in favour of the arbitral tribunal’s jurisdiction in the context of an investment arbitration founded on an intra-EU BIT, such that it decided to set aside an arbitral award on jurisdiction… to return jurisdiction to the arbitral tribunal!

While the decision of the English judge confirms the jurisdiction of an arbitral tribunal in the context of an intra-EU investment litigation, Poland itself expressly reserved the right to raise the question of the compatibility of the Luxembourg-Poland BIT with European Union law, while awaiting the decision, still pending at the time, of the Achmea case.

While it will remain interesting to await the decision that could be rendered in the case that Poland decides to raise the incompatibility of the Luxembourg/Poland intra-EU BIT, the Council of the European Union already struck a new blow to intra-EU BITs on 20 March 2018, leaving little doubt as to the future of the compatibility of intra-EU BIT arbitration clauses with EU law…

The position of the Council of the European Union: is doubt still allowed?

On 20 March 2018, the Council of the European Union adopted directives allowing the European Commission to open negotiations to establish a multilateral court “for the settlement of investment disputes”.

In its press release, the Council specifies that this court   “would eventually replace the bilateral investment court systems included in EU trade and investment agreements”, in order, notably, to respond to  “some of the legitimate public concerns raised in the context of the traditional investor-to-state dispute settlement, by bringing  key features of domestic and international courts to investment arbitration”.

One gathers from this statement that intra-EU BIT arbitration clause hunting season is now open…

However, even though the specifics of this multinational court are not yet determined, one of the Council’s proposed suggestions attracts particular attention:  the possibility to appeal a decision of the court. Yet, if arbitration has seen such success, it is largely because of the absence of appeal … Something the future court will not offer.

Caroline Duclercq & Talel Aronowicz

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