Are offers to arbitrate in BITs (Bilateral Investment Treaties) between EU member states compatible with the laws of the European Union? On 3 March 2016, the German Federal Supreme Court (Bundesgerichtshof or short: BGH) submitted this question to the Court of Justice of the European Union (CJEU) for preliminary ruling.1 The CJEU’s decision in this matter could have wide ranging implications for EU investors.
Background to the Case
The case originates from an investment arbitration between a Dutch insurer and the Slovak Republic, initiated under the 1991 Czechoslovakia-Netherlands-BIT (the “BIT”) in 2008. The Slovak Republic is a legal successor to Czechoslovakia and became a member state to the European Union on 1 May 2004.
Also in 2004, Slovakia opened up its market for domestic and foreign providers of private health insurances. Subsequently, the claimant in the arbitration (a Dutch insurer) entered the Slovak market. It applied for the relevant licenses to act as a private health insurer and the Slovak Republic granted these licenses. After a change of government in 2006, the new government partly reversed the liberalization of the health insurance market. With several legislative acts, Slovakia prohibited the use of insurance brokers, the distribution of profits for health insurers and the disposition of insurance portfolios.2
The Dutch insurer reacted on 1 October 2008 and claimed damages in an ad hoc arbitration against the Slovak Republic for breach of the Fair and Equitable Treatment (FET) clause in Article 3 (1) of the BIT and the Free Transfer of Funds clause in Article 4 of the BIT. The seat of the arbitration was Frankfurt/Main, Germany; the UNCITRAL Arbitration Rules were the applicable arbitration rules.3 In the Tribunal’s final award of 7 December 2012, it awarded the claimant damages in excess of € 22mn for Slovakia’s breach of the BIT.4
Slovakia moved to have the award set aside in the Higher Regional Court (Oberlandesgericht or short: OLG) of Frankfurt/Main. Slovakia argued that the offer to arbitrate in Article 8 (2) of the BIT was in conflict with EU laws, namely Article 344 TFEU5 (undertaking not to submit disputes concerning the interpretation of the European Treaties to methods of settlement other than those provided for therein), Article 267 TFEU (the CJEU’s jurisdiction to give preliminary rulings) and Article 18 TFEU (prohibition of any discrimination on grounds of nationality). Slovakia submitted that the conflict with these provisions made the offer to arbitrate in the BIT inapplicable. The OLG Frankfurt dismissed Slovakia’s application to have the award set aside on 18 December 2014. Slovakia appealed the OLG Frankfurt’s decision to the BGH.
The German Federal Supreme Court’s Position
On 3 March 2016, the BGH submitted the case for preliminary ruling under Article 267 TFEU to the CJEU because it considered the interpretation of Articles 344, 267 and 18 TFEU necessary to give judgment. As the final authority on the interpretation of the TFEU, it is the CJEU who has to decide, if Articles 344, 267 and 18 TFEU collide with offers to arbitrate in intra-EU BITs and if they do, how that conflict shall be remedied. If these provisions indeed made the offer to arbitrate in Article 8 (2) of the BIT inapplicable, the BGH reasoned, the parties would not have concluded a valid arbitration agreement. This would, in turn, trigger a ground for setting aside under section 1059 (2)(1a) German Code of Civil Procedure. Section 1059 (2)(1a) German Code of Civil Procedure is Germany’s verbatim adoption of Article 34 (2)(a)(i) UNCITRAL Model Law, according to which an award may be set aside if the arbitration agreement is not valid under the law to which the parties have subjected it.
In its submission to the CJEU, the BGH acknowledged that the 1991 Czechoslovakia-Netherlands-BIT became an intra-EU treaty when Slovakia became a member state to the European Union in 2004.6 The BGH also revisited the CJEU’s case law, that in cases of conflict, the laws of the EU prevail over treaties between EU member states.7 It also acknowledged the European Commission’s position on this issue that the laws of the EU render offers to arbitrate in intra-EU BITs inapplicable.8 The BGH also made clear, that from its perspective, Articles 344, 267 and 18 TFEU do not render offers to arbitrate, such as the one in Article 8 (2) of the BIT, inapplicable:
Article 344 TFEU
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.
First, the BGH stated that the offer to arbitrate disputes with investors in Article 8 (2) of the BIT does not violate Article 344 TFEU because Article 344 TFEU only covers disputes between EU members states themselves. Further, Article 344 TFEU only applies to disputes concerning the interpretation or application of the European Treaties, but not to disputes under a BIT.9 For the latter kind of dispute, EU laws do not even provide for a dispute resolution mechanism.10 The BGH, thus, concluded that Article 344 TFEU may not prevent member states from submitting disputes with a private individual or legal entity to arbitration.11
The BGH concluded that Article 8 (2) of the BIT does not conflict with Article 267 TFEU either. Article 267 TFEU reads:
Article 267 TFEU
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;
Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.
Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court. […]
The BGH acknowledged that arbitral tribunals may themselves not submit questions for preliminary rulings to the CJEU under Article 267 TFEU.12 However, the lacking competence of arbitral tribunals under Article 267 TFEU does not endanger a consistent interpretation of the European Treaties, which is the very purpose of Article 267 TFEU. A German court deciding on an application to set aside or enforce an arbitral award may still check the award for its compatibility with EU law and may eventually request the CJEU to make a preliminary ruling under Article 267 TFEU.13 The CJEU itself has regarded this procedure for arbitrations between private individuals or entities as sufficient and compatible with EU laws.14
However, the BGH found it to be possible that the offer to arbitrate in Article 8 (2) of the BIT violates Article 18 TFEU because only Slovakian and Dutch nationals/investors could benefit from it. Article 18 TFEU reads:
Article 18 TFEU
Within the scope of application of the Treaties, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited. […]
However, even if the offer to arbitrate in Article 8 (2) of the BIT discriminates other EU nationals, the BGH did not conclude that the offer to arbitrate would be inapplicable.15 Rather, under the CJEU’s case law, discriminations under Article 18 TFEU are remedied by offering the disadvantaged nationals the same benefits.16 Accordingly, the BGH held that a possible discrimination of other EU nationals through an offer to arbitrate in an intra-EU BIT should be remedied by letting other EU nationals benefit from the same offer to arbitrate.17
It will be interesting to see whether the CJEU will side with the Slovak Republic and the European Commission–that the offer to arbitrate in the BIT conflicts with EU laws and is thus inapplicable–or with the BGH, that even if the offer to arbitrate is a discrimination on grounds of nationality, it should be remedied by extending the offer to arbitrate to all other EU investors. Either way, the CJEU’s decision will have a big impact on the remaining offers to arbitrate in BITs between member states of the EU. Although the European Commission is putting pressure on the member states to terminate their intra-EU BITs,18 most of those BITs have a sunset clause, which will provide for their application.
Should the CJEU decide in favor of the Slovak Republic and the European Commission, possibly all offers to arbitrate in those intra-EU BITs would be rendered inapplicable with immediate effect. On the other hand, should the CJEU side with the BGH, intra-EU BITs would potentially apply to all other EU nationals/investors on the basis of Article 18 TFEU.
A ruling from the CJEU is expected in 2017. As soon as the CJEU makes its ruling, we will report here on Global Arbitration News.