In an advisory opinion to the Court of Justice of the European Union (CJEU), Advocate General Wathelet has rejected the argument that investor-State dispute settlement mechanisms in intra-EU bilateral investment treaties are inherently incompatible with EU law. While an Advocate General’s recommendations to the CJEU are non-binding, they are highly influential and are frequently adopted by the Court. The case could therefore have far-reaching consequences for investment arbitration within Europe.

Background

Prior to acceding to the European Union (EU), many Central and Eastern European countries entered into bilateral investment treaties (BITs) with existing EU Member States, in order to encourage in-bound investment. At the time, the European Commission actively supported these investor-friendly policies and even included mention of them in the various association agreements that preceded formal accession. As with most other BITs, these treaties contained mechanisms under which an investor could commence international arbitration proceedings directly against the host State, where a breach of the treaty was alleged (also known as ISDS).

However, in the years since these countries became EU Member States, the European Commission has changed its position. In June 2015, it initiated proceedings against five such States, requesting them to terminate their BITs with other EU Member States (intra-EU BITs), on the basis that they were incompatible with EU law.[1] It has subsequently intervened in several proceedings before arbitral tribunals and national courts to affirm this position but, as Advocate General Wathelet notes in his advisory opinion, such arguments have been “systematically rejected” by tribunals, including in the case of Achmea (formerly Eureko) v Slovakia,[2] to which the Advocate General’s advisory opinion relates, and which concerned a dispute between a Dutch insurer and Slovakia under the Netherlands-Czechoslovakia BIT of 1991.

Preliminary Reference

The current proceedings before the CJEU[3] arose as a result of an application by Slovakia to have the award set aside in Germany (which is where the underlying arbitration proceedings were seated), on the basis that it was “null and void and contrary to public policy” due to incompatibility with EU law. Slovakia’s application was rejected by the Higher Regional Court of Frankfurt/Main and then appealed to the German Federal Supreme Court, which submitted a reference to the CJEU for a preliminary ruling, given that the case required interpretation of EU law.[4] The questions submitted to the CJEU concerned whether the application of an ISDS mechanism in an intra-EU BIT is precluded by Articles 18, 267 or 344 of the Treaty on the Functioning of the European Union (TFEU). The Advocate General dealt with each of these provisions in turn, finding in each case that EU law did not preclude the application of such a mechanism.

However, prior to dealing with the specific provisions of the TFEU, the Advocate General made some striking preliminary observations that err on political rather than legal issues and will no doubt give rise to debate. First, he highlighted the stark divide between those EU Member States who had intervened in support of Achmea and Slovakia respectively, noting that the former were primarily “home” States for investors, while the latter were primarily “host” States for investments (and therefore more likely to be respondents in such claims). He then went on to criticize the latter’s apparent hypocrisy in maintaining the vast majority of their intra-EU BITs, notwithstanding their belief that they were incompatible with EU law.

He also held no punches in his criticism of the European Commission’s evolving position towards intra-EU BITs, citing the failure to provide for potential termination of such BITs in the various association agreements and the resulting “uncertainty which has lasted more than 30 years for some Member States”. He made reference to the EU’s (and its constituent Member States’) ratification of the Energy Charter Treaty (ECT) in 1994, which also includes an ISDS mechanism that applies to intra-EU investment disputes, to demonstrate that neither the European Commission nor the EU Member States “had the slightest suspicion” that such a mechanism might be incompatible with EU law at the time. Finally, he described the European Commission’s suggestion that intra-EU BITs represent a systemic risk to the uniformity and effectiveness of EU law as “greatly exaggerated”, with reference to the fact that only one example was cited in support of this proposition.[5]

Article 18: Non-Discrimination

Article 18 of the TFEU prohibits discrimination on grounds of nationality under EU law. Slovakia (along with the European Commission and eight other Member States) had argued that the provisions of the relevant BIT, including the ISDS mechanism, are discriminatory in that they afford preferential treatment to Dutch investors in Slovakia, whereas investors from other EU Member States do not benefit from that treatment.

The Advocate General roundly rejected these arguments, noting that Slovakia had in fact entered into BITs with most other EU Member States, which included similar ISDS provisions. Even for those few States that did not have an existing BIT with Slovakia, there was no prohibited discrimination because EU law only prohibits discrimination to the extent that a Member State affords its own citizens preferable treatment. This was clearly not relevant in the context of BITs. The Advocate General also drew an analogy with double-tax treaties, which similarly apply on a bilateral basis and yet have been found to be compatible with EU law.

Article 267: Referral to the CJEU

Article 267 of the TFEU provides for the CJEU to give preliminary rulings on questions concerning the interpretation of the EU treaties and the validity of acts of the institutions, bodies, offices or agencies of the EU. It also mandates that any “court or tribunal of a Member State against whose decision there is no judicial remedy under national law” must request a preliminary ruling from the CJEU where such questions are raised in a case before it.

Slovakia had argued that arbitral tribunals are not “courts or tribunals of a Member State” and are therefore not entitled to make a reference to the CJEU. However, the CJEU has an “interpretative monopoly” with regard to EU law under Article 267 and so, if an arbitral tribunal were to resolve questions of EU law in the absence of a referral to the CJEU, this would seriously jeopardise the uniform application of EU law.

The Advocate General found, somewhat surprisingly, that arbitral tribunals constituted under BITs were “courts or tribunals of a Member State” and were therefore permitted to request the CJEU to give a preliminary ruling. He distinguished the numerous occasions where the CJEU has refused to accept references from arbitral tribunals, by drawing a distinction between commercial arbitration and investor-State arbitration. He opined that, unlike commercial arbitrations, investor-State arbitrations fulfil the requirements of Article 267 because:

  • (i) they are “established by law” – unlike commercial arbitrations, their jurisdiction is based on an international treaty and its implementing legislation, rather than a simple contract;
  • (ii) they are “permanent” – while the individual tribunals constituted under the treaty may be ephemeral, the requirement for permanency relates to the institutionalisation of arbitration as a dispute resolution method. Accordingly, a reference to institutional rules (such as ICSID or the SCC, for example) or even administration by an arbitral institution (such as the PCA, in the present case) was sufficient;
  • (iii) their jurisdiction is “compulsory” – the fact that the investor has a choice of bringing proceedings before the domestic courts or an arbitral tribunal does not affect the compulsory nature of the arbitral tribunal if the investor chooses that forum;
  • (iv) their procedure is “inter partes” – this is clearly satisfied for most arbitral proceedings, where the parties are provided with an opportunity to present their respective cases;
  • (v) they “apply rules of law” – this is satisfied provided that the relevant treaty or arbitral rules mandate that the tribunal reaches its decision based on legal rules or principles, rather than ex aequo et bono; and
  • (vi) they are “independent and impartial” – there was no suggestion of partiality in the current case and most institutional arbitral rules provide appropriate safeguards.

In the light of the above findings, the Advocate General found arbitral tribunals established under the relevant BIT to be “courts or tribunals” within the meaning of Article 267. Furthermore, he found that they were tribunals “of a Member State” by virtue of the fact that they were established pursuant to the terms of a dispute settlement mechanism established by the State signatories to the relevant BIT i.e. the Netherlands and Slovakia (as one of the successor States to Czechoslovakia).

Article 344: Exclusive Jurisdiction of the CJEU

Article 344 of the TFEU prohibits Member States from submitting a dispute concerning the interpretation or application of the EU treaties to any method of settlement other than provided for in the EU treaties. The Advocate General divided his analysis of this issue into three distinct questions:

  • Does a dispute between an investor and a State come within the scope of Article 344?
  • Does the subject matter of such a dispute concern the interpretation or application of the EU treaties?
  • Does the BIT have the effect of undermining the allocation of powers determined by the EU treaties?

On the first question, the Advocate General did not consider a claim by an investor to come under Article 344 because it is not submitted by a Member State. He drew an analogy with the EU’s ongoing attempts to accede to the European Convention on Human Rights (ECHR), under which individuals are permitted to bring claims against a State before the European Court of Human Rights. Despite having issued an opinion on the EU’s proposed accession to the ECHR (and finding various aspects of the proposed accession protocol to be incompatible with EU law), the CJEU did not make any ruling that the right of individuals to bring claims against States was incompatible with Article 344.[6]

On the second question, the Advocate General determined that the issue of whether there had been a breach of the relevant BIT would not “concern the interpretation or application of the EU treaties”. EU law may be part of the applicable law taken into account by the tribunal in its determination, but the jurisdiction of the tribunal is confined to rulings on breaches of the relevant BIT, while the scope of the BIT (and the legal rules which it introduces) are not the same as the EU treaties. Notwithstanding the European Commission’s submission that EU law offers investors “full protection in the field of investments”, the Advocate General opined that intra-EU BITs generally “establish rights and obligations which neither reproduce nor contradict the guarantees of the protection of cross-border investments afforded by EU law”. He also found that the investment protections in the Netherlands-Czechoslovakia BIT were both wider in scope than the EU treaties and in some instances had no equivalent in EU law. Furthermore, to the extent that there was overlap, this did not result in any incompatibility with EU law.

On the final question, the Advocate General opined that recourse to international arbitration did not undermine either the allocation of powers under the EU treaties or the autonomy of the EU legal system, even if the CJEU were to disagree that such tribunals fall within the scope of Article 267 of the TFEU. In support of this proposition, he noted that no arbitral award can be enforced without the assistance of the State and concluded that the mechanisms for recognition, enforcement and setting aside all provided an opportunity for the courts to intervene where incompatibility with EU law might be a concern. He also highlighted the fact that the CJEU has previously demonstrated its ability to ensure uniform interpretation in relation to commercial arbitral awards, for example where antitrust issues were raised.[7]

While he did acknowledge that the same scrutiny might not be available in circumstances where the parties choose an arbitral seat outside the EU or where the relevant BIT provides for ICSID arbitration (which mandates automatic recognition and enforcement, without reference to the domestic courts), recourse is nonetheless available against the relevant Member State for enforcing an award that was incompatible with EU law, by way of European Commission infringement proceedings. He also pointed out that the same concerns might feasibly arise in relation to commercial arbitration, but neither the European Commission nor the CJEU have previously suggested that arbitration is generally incompatible with EU law.