On 6 March 2018, the Court of Justice of the European Union, the EU’s highest court, ruled that a clause removing from the EU’s judicial review investment disputes related to the application or interpretation of EU law is incompatible with EU law.

The CJEU’s ruling referred to a bilateral investment treaty (“BIT”) between the former Czechoslovakia and the Netherlands of 1991. Under the BIT, disputes between one contracting state and an investor from the other contracting party had to be settled amicably or before an arbitral tribunal. Challenging a measure of the Slovak government as an infringement against the BIT, Achmea brought arbitration proceedings against that state in 2008. In 2012, the arbitral tribunal, based in Frankfurt am Main (Germany), ruled that Slovakia’s new legislation was contrary to the BIT and ordered the Slovak state to pay Achmea damages in amount of around EUR 22.1 million. Since Frankfurt am Main was chosen as the place of arbitration, German law applied to the arbitration proceedings.

Slovakia brought an action before the Higher Regional Court of Frankfurt am Main to request the annulment of the tribunal’s award. Slovakia claimed that the arbitration clause in question was contrary to Article 18 TFEU (prohibition of any discrimination on grounds of nationality), Article 267 TFEU (exclusive competence of the CJEU to give preliminary rulings on the interpretation of the EU Treaties and acts of EU’s institutions), and Article 344 TFEU (obligation of Member States to submit any dispute concerning the interpretation or application of the EU treaties to the CJEU). As the action was dismissed by the Higher Regional Court, the Slovak state brought an appeal before Germany’s Federal Court of Justice which referred the matter to the CJEU. Germany’s highest court focused on the application of Article 344 TFEU in this case and asked whether the EU treaties preclude an arbitration clause. It also asked the CJEU whether the provisions of the arbitration clause are contrary to the principle of non-discrimination on grounds of nationality.

In its ruling, the CJEU pointed first that the arbitral tribunal concerned was called on to rule on the basis of the law in force of the contracting state concerned by the dispute, as well as on other agreements between Slovakia and the Netherlands. The CJEU added that since EU law forms part of every Member State’s legislation and derives from an international agreement between those states, the arbitral tribunal may be called on to interpret or apply EU law.

The CJEU further found that the arbitral tribunal is an exception to the jurisdiction system of both the Netherlands and Slovakia and that such arbitration tribunals cannot be considered as courts “of a Member State” within the meaning of EU law. Therefore, they have no power to refer a matter subject to their decision to the CJEU for a preliminary ruling.

The CJEU further noted that under the BIT, the arbitral tribunal’s decision is final and that the arbitral tribunal may determine its own procedure as well as its seat and, consequently, the national law applicable to judicial review of the validity of the award it makes. However, according to the CJEU, judicial review may be exercised by national courts only to the extent allowed by national law. The CJEU stressed that this requirement was not fulfilled in this case. The CJEU accepts that in the context of commercial arbitration it is accepted that the review of arbitral awards by national courts may be limited in scope. But this cannot be applied in the case of investment arbitration. As the CJEU reasoning goes, while commercial arbitration is the result of the freely expressed will of the parties, investment arbitration is derived from a treaty by which two EU Member States agreed to remove from the jurisdiction of their own tribunals disputes related to the application or the interpretation of EU law. Consequently, Slovakia and the Netherlands established a mechanism of investment disputes settlement that failed to ensure the full effectiveness of EU law.

Furthermore, the CJEU emphasized that the BIT, which was concluded not by the EU but by two Member States, provides for the possibility of submitting investment-related disputes to a body which is not a part of the judicial system of the Member States and, thus, the EU. As a result, the provisions of the BIT questioned not only the principle of mutual trust between the Member States but also the preservation of the specific nature of EU law. The CJEU found that the arbitration clause in question was incompatible with the principle of sincere cooperation, providing that the EU and its Member States should “assist each other in carrying out tasks which flow from the Treaties” (Article 4(3) TEU).

The CJEU ruling has binding effect on all Member States. However, its impact is still not clear as the judgment refers only to investment arbitration, rather than to arbitration proceedings in general. The impact of this ruling on other pending proceedings is not clear. It is also unclear whether this ruling suggests that BIT between Member States must be renegotiated and arbitration clauses have to be deleted.