On 6 March 2018, the Court of Justice of the European Union (CJEU) ruled that Articles 267 and 344 of the Treaty on the Functioning of the European Union (TFEU) must be interpreted as precluding arbitration provisions in bilateral investment treaties between EU Member States, such as the arbitration agreement contained in Article 8 of the 1991 treaty between the Czech and Slovak Federative Republic and The Netherlands (BIT).
In 2008, Achmea BV, a company belonging to a Dutch insurance group, commenced arbitration proceedings against Slovakia pursuant to Article 8 of the BIT. The place of the arbitration was Frankfurt, Germany, and so German law applied to those proceedings. Under German law, an arbitral award can be set aside on limited grounds, including that the arbitration agreement is invalid under the law to which the parties have subjected it.
In the arbitration proceedings, Slovakia challenged the jurisdiction of the arbitral tribunal on grounds that recourse to a BIT tribunal is incompatible with EU law. The challenge was dismissed, and the tribunal went on to award damages of EUR 22.1 million to Achmea BV arising from Slovakia’s breach of the BIT.
Slovakia then sought to set aside the award in Germany on grounds that Article 8 of the BIT was incompatible with several provisions of the TFEU. That action was dismissed and the decision was appealed to Germany’s Federal Court of Justice. Noting that the CJEU had not yet ruled on questions concerning the incompatibility of arbitration agreements contained in intra-EU BITs with EU law, and recognising that such questions “are of considerable importance because of the numerous bilateral investment treaties still in force between Member States which contain similar arbitration clauses”, the Federal Court considered it necessary to request a preliminary ruling from the CJEU.
The CJEU’s judgment
In its decision of 6 March 2018, issued in response to that request, the CJEU found as follows:
- when deciding the case under the BIT the arbitral tribunal must take into account not only the BITs provisions, but also the law of the contracting state party to the dispute, and other relevant agreements between the two states. For this reason, the CJEU found that the arbitral tribunal may be called on to interpret and apply EU law;
- the arbitral tribunal formed under the BIT could not be classified as a court or tribunal 'of a Member State' within the meaning of Article 267 TFEU and thus was not entitled to request a preliminary ruling on interpretation of EU law from the CJEU;
- the decision of the arbitral tribunal was, according to the provisions of the BIT, final and binding upon the parties to the dispute;
- although the arbitral award issued under the BIT was reviewable by the competent general courts of Germany (which could request a preliminary ruling), this was only to the extent permitted by national laws. The CJEU stressed that the German law applicable to the case only provided for a limited judicial review of the award; and
- in relation to commercial arbitration, the CJEU has previously held that the requirements of efficient arbitration justify the review of arbitral awards by Member States being limited in scope. However, such proceedings may be distinguished from arbitration proceedings referred to in Article 8 of the BIT. According to the CJEU, while the former originate in the freely expressed wishes of the parties, the latter are derived from an agreement (treaty) in which EU Member States agree to remove from the jurisdiction of their own courts disputes that may concern the application or interpretation of EU law.
The CJEU concluded that the BIT established a dispute settlement mechanism that could prevent disputes concerning EU law from being resolved in a manner ensuring the full effectiveness of EU law. Thus, the arbitration clause contained in the BIT was found to have an adverse effect on the autonomy of EU law and therefore is precluded by the TFEU.
Besides Achmea BV, the CJEU’s ruling may negatively affect the rights of other EU-based investors who have relied on the substantive and procedural guarantees provided by up to 200 bilateral investment treaties between EU Member States that remain in force today.
Click here for the full text of the decision.