In Short

The Ruling: On March 6, 2018, the Court of Justice of the European Union ("CJEU") issued a judgment in the Achmea v. Slovakia case on whether the investor–state arbitration provision in the Netherlands–Slovakia Bilateral Investment Treaty ("BIT") is compatible with EU law.

The Result: With little analysis and against the opinion of its own Advocate General, the CJEU ruled that the investor–state arbitration provision in the BIT is incompatible with EU law.

Looking Ahead: The ruling raises concerns for investors in the European Union that route their investments through another EU Member State. Savvy investors will no doubt consider restructuring to include jurisdictions outside of the European Union in their corporate holding chain if they wish to preserve the potential to resort to investor–state arbitration.

The Decision

In December 2012, an UNCITRAL tribunal awarded Achmea €22.1 million in a dispute brought against Slovakia under the Netherlands–Slovakia BIT. The Slovak Republic then sought to set aside the award in Germany, the seat of the arbitration, arguing that granting an investment tribunal jurisdiction under an intra-EU BIT is incompatible with the Treaty of the Functioning of the European Union ("TFEU"). The German courts referred the question to the CJEU for a preliminary ruling on the compatibility of the BIT in question with EU law.

Eventually, in September 2017, the CJEU's Advocate General issued an opinion that the BIT was in fact compatible with EU law. Before that, several investment tribunals, including the Achmea tribunal, had similarly found that intra-EU BITs were indeed compatible with EU law.

However, the CJEU ignored these various prior decisions and opinions and instead ruled that the investor–state arbitration provision in the BIT violates EU law. The CJEU's opinion primarily focused on the fact that investment tribunals are not part of the EU legal system and may be called on to interpret or apply EU law without being able to refer EU law issues to the CJEU or without necessarily being bound by EU law or CJEU decisions. Thus, the CJEU could not directly ensure consistency and uniformity in the interpretation of EU law.

Interestingly, the CJEU did not address the fact that non-EU courts might also have to interpret EU law in the context of foreign court proceedings, again without referrals to the CJEU. The CJEU also took the view that domestic court review of an arbitral award at the enforcement stage was not in and of itself sufficient insurance that EU law would be uniformly interpreted and applied. Thus, in the CJEU's opinion, because there was insufficient control over an investment tribunal's interpretation of EU law, agreements granting jurisdiction to investment tribunals are incompatible with EU law.

In our view, the CJEU drew a flawed distinction between investment arbitration tribunals and commercial arbitration tribunals, as the CJEU admitted that the latter can decide issues of EU law despite the limited review of their awards by domestic courts. The CJEU posited that intra-EU BITs are agreements by Member States to resolve disputes outside of the EU legal system in violation of their duties under the TFEU, whereas commercial arbitration agreements are somehow different because they are between private parties. However, this attempted distinction fails to acknowledge that a private party's ability to resolve a dispute through commercial arbitration stems from the various Member States' own national arbitration laws, which also remove certain disputes from the jurisdiction of the EU courts.

The Implications

It remains to be seen what the implications of the CJEU decision will be, but a few preliminary conclusions can already be drawn. First, the CJEU did not directly opine on an investment tribunal's jurisdiction to hear a dispute brought under an intra-EU BIT. The CJEU also left open the question as to whether its decision would apply to arbitrations conducted under the Energy Charter Treaty ("ECT"), to which the EU is a party. Nor did the CJEU opine on what duties Member States may have with regard to existing intra-EU BITs, although the European Commission has previously put significant pressure on them to withdraw from those agreements.

Investment tribunals are entitled to determine their own jurisdiction, applying the applicable treaty and international law, and they may decide that the CJEU decision is not binding on them. However, this decision may nevertheless have consequences for tribunals constituted under intra-EU BITs with similar arbitration clauses to that Netherlands–Slovakia BIT, which required the tribunal to take into account the host State's domestic law and other relevant agreements between the contracting parties, both of which obviously include EU law in this case.

Second, pending and future arbitrations involving EU investors and countries may (and should) consider the impact of the CJEU's decision on the enforceability of future awards. Any EU national court that is asked to rule on an intra-EU BIT award, either as it constitutes the seat of the arbitration or as the situs of recognition and enforcement, would need to consider this decision.

Of course, it is far from certain whether courts outside of the EU will take this judgment into account in the recognition and enforcement of intra-EU BIT awards under the New York Convention, which permits a court to refuse enforcement if an arbitration agreement is invalid under its applicable law, which might in turn include the law of the country where the award was made. Consequently, investors and investment tribunals should exercise caution in selecting an EU Member State as the seat of an intra-EU BIT arbitration.

Third, ICSID awards would appear to be on a safer ground for purposes of enforcement, as they are insulated from any national court review in any of the contracting parties to the ICSID Convention, which include many EU Member States. The General Court of the European Union is currently deciding, in Micula v. European Commission, on the conflict between preexisting conditions under the ICSID Convention and EU Member States' obligations under EU rules as to State aid. However, in a decision discussing the enforceability of the underlying ICSID award in the Micula arbitration, the English High Court has suggested that EU law can be considered at the enforcement stage of an ICSID award. In the English Court decision, Mr. Justice Blair stated that once registered by the High Court, an ICSID award was to be treated like any other domestic judgment, which includes subjecting the award to EU rules regarding State aids.

Finally, savvy investors with investments in the European Union will no doubt consider restructuring their investments and holding structures in order to take advantage of BITs concluded between the host (investment) State and countries outside of the European Union. Obviously, the concept would be to make the investment in the EU host country via a non-EU jurisdiction with an equivalent BIT and other equivalent protections and advantages. This should, of course, be done long before an investment dispute arises so as to avoid any allegations of abuse of process or bad faith. And, of course, other issues will have to be taken into account, with legitimate tax planning being primary among them.

However, given the increasing role and importance given to "substance" when claiming tax advantages and tax treaty relief, it will be important to ensure that whatever corporate entity is used as a holding company will be able to justify its interposition in the structure and present a legitimate, bona fide business purpose. Non-EU countries that will no doubt gain prominence in this regard are likely to include Switzerland, Singapore, the United Kingdom post-Brexit, and perhaps even the United States (following its recent tax reform and new lower tax rates). Of course, a comparison must be made not only on tax grounds, but also with regard to the specific provisions of whatever BIT that may be in place.

Two Key Takeaways

  1. The CJEU decision has implications for pending and future investment arbitrations based upon intra-EU BITs and potentially the ECT.
  2. Thus, investors in EU countries should consider restructuring their investments to incorporate treaty planning that does not depend upon an intra-EU BIT.