On March 6, 2018, the Court of Justice of the European Union (CJEU) published its preliminary ruling in Slovak Republic v. Achmea BV (the Ruling), which held that the application of the investor-state dispute settlement (ISDS) provisions under Article 8 of the Netherlands-Slovakia bilateral investment treaty (BIT) was incompatible with EU law.
This alert is the third in our series of updates on the Ruling. Our previous two alerts can be found here:
The European Commission speaks out about the Ruling
In a rare move the European Commission issued a communication to the European Parliament and Council on the “protection of intra-EU investments” on July 19, 2018 (the Communication).1
With reference to the Ruling, the Communication notes that the CJEU has “confirmed that investor-State arbitration clauses in intra-EU BITs are unlawful.” This finding is stated to be consistent with the CJEU’s view that “intra-EU BITs are incompatible with Union law” for the following reasons:
(i) The application of BITs between EU member states has created a parallel treaty system overlapping with single market rules and thereby preventing the full application of EU law (i.e., contrary to article 344 of the Treaty on the Functioning of the European Union (TFEU), which provides for the exclusivity of the jurisdiction of the CJEU in disputes concerning the interpretation or application of EU treaties).
(ii) Intra-EU BITs confer rights only in respect of investors from one of the two member states concerned, in conflict with the principle of non-discrimination among EU investors within the single market under EU law (i.e., contrary to the anti-discriminatory provisions under article 18.1. TFEU).
(iii) Intra-EU BITs “take away from the national judiciary” litigation concerning national measures and involving EU law, and entrust this litigation to private arbitrators who cannot properly apply EU law and, importantly, cannot refer questions of EU law to the CJEU for a preliminary ruling pursuant to article 267 TFEU, which is said to be the “keystone” of the EU judicial system.
In many respects, the Communication goes much further than the Ruling and provides answers to at least some of the questions previously left open by the Ruling:
Arbitrations under the Energy Charter Treaty (the ECT): The Ruling had failed to address the question of whether intra-EU arbitrations under the ECT were permissible as a matter of EU law – many commentators considered such arbitrations did not fall foul of the Ruling, on the basis that the EU was itself a party to the ECT. In stark (and surprising) contrast, the Communication confirms that article 26 of the ECT “if interpreted correctly,” does not provide for an investor-State arbitration clause applicable between investors from one EU member state and another, and further that “[t]he fact that the EU is also a party to the Energy Charter Treaty does not affect this conclusion: the participation of the EU in that Treaty has only created rights and obligations between the EU and third countries and has not affected the relations between the EU Member States.”
Ad hoc arbitrations under intra-EU BITs seated within and outside of the EU: In the Ruling, the CJEU reasoned that the specific wording of article 8 of the Netherlands-Slovakia BIT, which provides that the arbitration tribunal must take into account the law in force of the contracting party (here, Slovak law) and other relevant agreements between the contracting parties (to include EU treaties), means that the tribunal may be called on to interpret or apply EU law. It was accordingly thought that the Ruling might be specific to the Netherlands-Slovakia BIT or to other intra-EU BITs that contain similar references to EU treaties. However, the Communication states that, absent recourse to the preliminary ruling procedure under article 267 TFEU, “all investor-State arbitration clauses in intra-EU BITs are inapplicable and that any arbitration tribunal established on the basis of such clauses lacks jurisdiction due to the absence of a valid arbitration agreement.”
It follows that it is likely that tribunals in ad hoc arbitrations seated within the EU will no longer have jurisdiction to hear disputes arising under intra-EU BITs. This also leaves the door open for challenges to jurisdiction of tribunals appointed to hear such disputes and seated outside of the EU, but the CJEU has no jurisdiction over proceedings conducted outside of its borders.
Enforcement of arbitral awards under intra-EU BITs: The Ruling raised questions as to the validity and therefore enforceability of previous awards rendered under intra-EU BITs. In this regard, the Communication states that “national courts are under the obligation to annul any arbitral award rendered on that basis and to refuse to enforce it.” Of course, the European Commission does not have the power to enforce this “obligation” on national courts outside of EU member states.
The Communication concludes with the explicit statement that:
“EU investors cannot invoke intra-EU BITs, which are incompatible with Union law and no longer necessary in the single market. They cannot have recourse to arbitration tribunals established by such intra-EU BITs or, for intra-EU litigation, to arbitration tribunals established under the Energy Charter Treaty.”
The Communication advances the argument that EU law is itself sufficient to “protect … all EU cross-border investments throughout their lifecycle.” However, both the substantive protections and the remedies available to EU investors are confined to those that are available under EU law. It follows that many of the protections typically provided for in investment treaties are not covered. For example, the most commonly invoked protection under investment treaties, fair and equitable treatment, is not replicated in EU law.
At the same time, there is no uniform standard approach by domestic courts toward investment protection, as is recognized by the EU in the proposal to introduce an EU investment court.
ICSID arbitrations under intra-EU BITs
As previously noted, the International Centre for Settlement of Investment Dispute (ICSID) is an independent dispute settlement institution governed by the Washington Convention of 1965 (the ICSID Convention). ICSID tribunals derive jurisdiction under the ICSID Convention and ICSID arbitrations are seated in Washington, D.C. Contracting states are obliged to disapply their domestic arbitration legislation and it follows that the Ruling (and any subsequent EU directives) will not by default bind an ICSID tribunal.
It will be open to investors to challenge the jurisdiction of an ICSID tribunal to hear disputes arising under intra-EU BITs in reliance on the Ruling; however, any decision in this regard will be decided by the tribunal. The CJEU technically has no authority over ICSID arbitrations, even if they are intra-EU, because the seat will always be Washington, D.C. and the tribunal takes its jurisdiction from the relevant BIT and the ICSID Convention, not from the EU or any domestic law. If an intra-EU BIT has not been terminated by the EU member state parties, there is an argument that it remains a valid instrument on which investors can rely and from which a tribunal derives jurisdiction to determine disputes under it. An EU member state respondent would be forced to argue that there was no valid submission to arbitration on the basis that, as a matter of EU law, the BIT is invalid and therefore the standing offer to arbitrate contained within it is ineffective.
In our last client alert, we reported that the position in respect of ICSID arbitrations remained unclear, but clarification may come from pending ICSID cases under intra-EU BITs, including Addiko Bank AG and Addiko Bank d.d. v. Republic of Croatia (ICSID Case No. ARB/17/37) and the annulment proceedings underway in Dan Cake (Portugal) S.A. v. Hungary (ICSID Case No. ARB/12/9).
In this regard, and since our last client alert, the award in Marfin Investment Group v. The Republic of Cyprus (ICSID Case No. ARB/13/27) under the Cyprus-Greece BIT was rendered on July 26, 2018. The award was not made public, but the authors understand that the tribunal dismissed Cyprus’ jurisdictional objections made in reliance on the Ruling. The award may be the first ICSID award to consider intra-EU BIT objections since the Ruling, and may provide an indication of how ICSID tribunals will view the Ruling and its applicability to ICSID arbitration.
Since our last client alert, it has been reported that Airbus has withdrawn its claim against Poland over a canceled US$3.5 billion helicopter deal under an intra-EU BIT, allegedly pointing to the Ruling as the basis for the withdrawal.2
In other news, the Svea Court of Appeal has granted both Spain’s application for a stay of enforcement of an award rendered under the ECT in Novenergia v. Spain (SCC Case No. 063/2015) as well as Poland’s application for a stay of enforcement of an award under the BLEU-Poland BIT in PL Holdings S.a.r.l. v. Poland (SCC Case No. 2014/163). The Ruling was cited by both Spain and Poland in their applications for a stay of enforcement.
Spain will no doubt welcome the Communication’s clarification of the position as regards the ECT, not least because the overwhelming majority of the solar energy cases brought against Spain are pursued under the ECT.
Meanwhile, the enforcement proceedings arising out of the award in Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania (ICSID Case No. ARB/05/20) are ongoing in a number of jurisdictions, including Washington, D.C., England and Wales, Romania and Sweden.