“BITing the bullet”: Arbitration Clauses in Internal EU Bilateral Investment Treaties are struck down by the European Court of Justice.
In their landmark decision of 6 March 2018 in Case C-284/16 Slovak Republic v Achmea BV (EU: C: 2018: 158), the Court of Justice of the European Union (“CJEU”) has declared that arbitration clauses in bilateral investment treaties between EU Member States are incompatible with EU law. In a world where there are approximately 200 bilateral investment treaties in force between EU Member States, the consequences of the Court’s decision could prove to be far reaching,
On 1 January 1992, a bilateral investment treaty (‘the BIT’) was entered into by the Netherlands and (what was then) the Czech and Slovak Federative Republic. As is common, this BIT contained an arbitration clause at Article 8 which provided:
- All disputes between one Contracting Party and an investor of the other Contracting Party concerning an investment of the latter shall if, possible, be settled amicably.
- Each Contracting Party hereby consents to submit a dispute referred to in paragraph 1 of this Article to an arbitral tribunal, if the dispute has not been settled amicably within a period of six months from the date on which either party to the dispute requested amicable settlement.
- The arbitral tribunal referred to in paragraph 2 of this Article will be constituted for each individual case in the following way: each party to the dispute appoints one member of the tribunal and the two members thus appointed shall select a national of a third State as Chairman of the tribunal. Each party to the dispute shall appoint its member of the tribunal within two months, and the Chairman shall be appointed within three months from the date on which the investor has notified the other Contracting Party of his decision to submit the dispute to the arbitral tribunal.
- If the appointments have not been made in the abovementioned periods, either party to the dispute may invite the President of the Arbitration Institute of the Chamber of Commerce of Stockholm to make the necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the most senior member of the Arbitration Institute who is not a national of either Contracting Party shall be invited to make the necessary appointments.
- The arbitration tribunal shall determine its own procedure applying the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules.
- The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively:
- the law in force of the Contracting Party concerned;
- the provisions of this Agreement, and other relevant agreements between the Contracting Parties;
- the provisions of special agreements relating to the investment;
- the general principles of international law.
- The tribunal takes its decision by majority of votes; such decision shall be final and binding upon the parties to the dispute.’
In 1993, the Slovak Republic succeeded to the rights and obligations of the former Czech and Slovak Federative Republic under the BIT. On 1 May 2004, it also acceded to the EU.
In 2004, as part of a reform of its health system, the Slovak Republic opened its internal market to national operators and those of other Member States offering private sickness insurance services. Achmea, an undertaking belonging to a Netherlands insurance group, obtained authorisation as a sickness insurance institution and set up a subsidiary in Slovakia through which it offered sickness insurance on the Slovak Market.
In 2006, the Slovak Republic had a change of heart and partially reversed the liberalisation of their private sickness insurance market. In particular, a 2007 law prohibited the distribution of profits generated by private sickness insurance activities. Achmea considered that the Slovak laws had caused it damage and had brought arbitration proceedings against the Slovak Republic in October 2008 in Frankfurt, Germany, pursuant to Article 8 of the BIT. German law was applied to the arbitration proceedings.
In response, the Slovak Republic challenged the jurisdiction of the arbitral tribunal. The State argued that, as a result of its accession to the EU, recourse to an arbitral tribunal provided for in Article 8(2) of the BIT was incompatible with EU law. The Slovak Republic’s challenge failed before the tribunal and subsequently before the German courts at first instance and on appeal.
A substantive award was therefore sought and obtained, and by an arbitral award of 7 December 2012, the arbitral tribunal ordered Slovak Republic to pay Achmea damages in the sum of €22.1 million.
The Slovak Republic in response brought an action before the German Courts seeking to set aside the award, failed and appealed on a point of law to the Bundesgerichtshof (Federal Court of Justice, Germany). In their challenge, the Slovak Republic expressed doubts as to the compatibility of the arbitration clause in the BIT with Articles 18, 267 and 344 of the Treaty on the Functioning of the European Union (“TFEU”). The German court did not share those doubts but considered that a reference to the Court was necessary, as the CJEU had not yet ruled on those questions, which were of considerable importance because of the numerous investment treaties still in force between Member States which contain similar arbitration clauses, then
Accordingly, the Bundesgerichtshof referred the following questions to the Court:
- Does Article 344 TFEU preclude the application of a provision in a bilateral investment protection agreement between Member States of the European Union (a so-called intra-EU BIT) under which an investor of a Contracting State, in the event of a dispute concerning investments in the other Contracting State, may bring proceedings against the latter State before an arbitral tribunal where the investment protection agreement was concluded before one of the Contracting States acceded to the European Union but the arbitral proceedings are not to be brought until after that date? If Question 1 is to be answered in the negative:
- Does Article 267 TFEU preclude the application of such a provision? If Questions 1 and 2 are to be answered in the negative:
- Does the first paragraph of Article 18 TFEU preclude the application of such a provision under the circumstances described in Question 1?’
The Court’s answer
The Court of Justice decided to deal only with questions 1 and 2 together, treating them as essentially asking whether Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States, such as Article 8 of the BIT, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.
Contrary to the earlier answers suggested by Advocate-General Wathelet, the Court of Justice decided such arbitration clauses in such BIT treaties were in fact incompatible with EU law.
The Court held that the provisions of both Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States, such as Article 8, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.
The Court held the disputes which the arbitral tribunal constituted in Article 8 of the BIT was called on to resolve may to relate to the interpretation or application of EU law: in particular, the provisions concerning the fundamental freedoms, including freedom of establishment and free movement of capital. Yet, any tribunal established under Article 8 of the BIT was not part of the judicial system of either the Netherlands or Slovakia. Indeed, it was precisely the exceptional nature of the tribunal’s jurisdiction compared with that of the courts of those two Member States that was one of the principal reasons for the existence of Article 8.
In such circumstances, such a tribunal could not be regarded as ‘a court of tribunal of a Member State’ within the meaning of Article 267 TFEU and was not therefore entitled to make a reference to the Court of Justice for a preliminary ruling.
Was the effective operation of EU law sufficiently protected in such circumstances?
The Court decided that it was not. The BIT arbitral tribunal was different from commercial arbitration proceedings which derive from the freely expressed wishes of the parties (for the Court’s earlier cases on them and the indirect supervisory role of the CJEU discussed in Michael McParland, The Rome I Regulation (OUP, 2015), paras [2.30]-[2.43]). In contrast, the BIT system is derived from a treaty by which Member States agreed to remove from the jurisdiction of their own courts, and thus from the system of judicial remedies that Article 19(1) TEU requires them to establish in the field covered by EU law, disputes which may concern the application or interpretation of EU law.
In such circumstances, the Court considered that the limited review available by the German courts of any German seated BIT tribunal was insufficient to ensure the full effectiveness of EU law. The Court concluded that, apart from the fact that the disputes falling within the jurisdiction of the arbitral tribunal referred to in Article 8 of the BIT may relate to the interpretation both of that agreement and of EU law, the possibility of submitting those disputes to a body which is not part of the judicial system of the EU was provided for by an agreement which was concluded not by the EU but by Member States. Article 8 of the BIT therefore also called into question not only the principle of mutual trust between the Member States but also 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, and was therefore not therefore compatible with the principle of sincere cooperation. In those circumstances, Article 8 of the BIT was considered to have “an adverse effect on the autonomy of EU law”.
The matter will now be returned to the German courts, but the only answer that can logically be given by them is that the original arbitral award is null and void. Where does that leave the investor, and indeed any other investor operating under such a BIT?
The Court’s decision therefore opens up a whole series of questions that may need to be answered in the future regarding both the role of arbitration in existing BIT treaties (including possibly also matters arising under the Energy Charter Treaty), as well as the status of existing arbitrations.
In an age of increasing uncertainty, the Court of Justice as added another factor to challenge existing thinking.