On 6 March 2018 the European Court of Justice (“ECJ”) delivered a preliminary ruling in the case Slovak Republic v. Achmea B.V. (Case C‑284/16). The remarkable ruling of the ECJ effects arbitration in the European Union in so called Investor-State Dispute Settlement, however the ruling has no implications for commercial arbitration. The preliminary ruling might not completely render the arbitration clauses in investment treaties useless, but can nevertheless be considered as a landmark decision.

Background

Since the early nineties, an agreement on the encouragement and protection of investments exists between Slovakia and the Netherlands. Pursuant to this Bilateral Investment Treaty (BIT), disputes between either Contracting State and an investor from the other Contracting State are settled amicably or before an arbitral tribunal. Considering that Slovakia became a member of the European Union in 2004, the BIT is an agreement between two Member States of the European Union.

As part of a reform of its health system, the Slovak Republic opened the Slovak market in 2004 to national operators and those of other Member States offering private health insurance services. The Dutch insurance company Achmea set up a subsidiary in Slovakia, through which it offered private health insurance services on the Slovak market.

The Slovak Republic partly reversed the liberalisation in 2006 by prohibiting the distribution of profits made by private health insurance activities. In its judgment dated 26 January 2011, the Constitutional Court of the Slovak Republic held that the prohibition was contrary to the Slovak constitution. Subsequently, by law which entered into force on 1 August 2011,  the Slovak Republic once more allowed the distribution of the profits in question.

Achmea was of the opinion that it had suffered financial damage which could be attributed to the legislative actions of the Slovak Republic and believed the actions of the Slovak Republic to be a breach of the BIT. In 2008, Achmea brought arbitral proceedings under the BIT with Frankfurt am Main (Germany) being the place of arbitration and German law being applicable to the arbitral proceedings.

The Slovak Republic raised an objection of lack of jurisdiction of the arbitral tribunal, pleading that recourse to an arbitral tribunal provided for in Article 8(2) of the BIT was incompatible with EU law. By an interlocutory arbitral award of 26 October 2010, the tribunal dismissed the objection. The Slovak Republic unsuccessfully tried to have that interlocutory award be set aside by the German courts.

By arbitral award of 7 December 2012, the tribunal ordered the Slovak Republic to pay Achmea damages in the principal amount of EUR 22.1 million. The Slovak Republic brought an action to set aside that arbitral award before the Oberlandesgericht Frankfurt am Main, which action was dismissed. Subsequently,  the Slovak Republic appealed to the highest German Federal Court of Justice (the Bundesgerichtshof).

In 2016, the Bundesgerichtshof decided to request a preliminary ruling from the ECJ on the following questions:

“(1) 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:

(2) Does Article 267 TFEU preclude the application of such a provision?

If Questions 1 and 2 are to be answered in the negative:

(3) Does the first paragraph of Article 18 TFEU preclude the application of such a provision under the circumstances described in Question 1?”

                          

Ruling by the ECJ

The ECJ answers the first and second question together. The ECJ first establishes that even if the tribunal is called on to rule only on possible infringements of the BIT, in order to do so the tribunal must, in accordance with Article 8(6) of the BIT, take account in particular of the law in force of the contracting party concerned and other relevant agreements between the contracting parties. EU law must be regarded both as forming part of the law in force in every Member State and as deriving from an international agreement between the Member States.

The arbitral tribunal therefore may be called on to interpret or apply European law, particularly the provisions concerning the fundamental freedoms, including freedom of establishment and free movement of capital.

 

Secondly, the ECJ finds that it must be ascertained whether an arbitral tribunal such as that referred to in Article 8 of the BIT is situated within the judicial system of the EU, and in particular whether it can be regarded as a court or tribunal of a Member State within the meaning of Article 267 TFEU. The ECJ answers this question negatively and holds that such an arbitral tribunal cannot request the ECJ for a preliminary ruling, which is problematic since the arbitral tribunal may be called on to interpret or apply European law. The arbitral tribunal is not part of the judicial system of the Netherlands or Slovakia. Furthermore, the arbitral tribunal at issue is not a court common to a number of Member States, comparable to for example the Benelux Court of Justice. Whereas the Benelux Court has the task of ensuring that the legal rules common to the three Benelux States are applied uniformly, and the procedure before it is a step in the proceedings before the national courts leading to definitive interpretations of common Benelux legal rules, the arbitral tribunal at issue does not have any such links with the judicial systems of the Member States

 

The ECJ finds that thirdly, it must be ascertained, whether an arbitral award made by such a tribunal is subject to review by a court of a Member State, ensuring that the questions of EU law which the tribunal may have to address can be submitted to the Court by means of a reference for a preliminary ruling.

Under Article 8(7) of the BIT the decision of the arbitral tribunal is final. Moreover, pursuant to Article 8(5) of the BIT, the arbitral tribunal is to determine its own procedure applying the UNCITRAL arbitration rules and, in particular, is itself to choose its seat and consequently the law applicable to the procedure governing judicial review of the validity of the award by which it puts an end to the dispute before it.

Arbitration proceedings such as those referred to in Article 8 of the BIT are different from commercial arbitration proceedings. While the latter originate in the freely expressed wishes of the parties, the former derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts, and hence from the system of judicial remedies which the second subparagraph of Article 19(1) TEU requires them to establish in the fields covered by EU law. Having regard to all the characteristics of the arbitral tribunal mentioned in Article 8 of the BIT, it must be considered that the Member States parties to the BIT established a mechanism for settling disputes between an investor and a Member State which could prevent those disputes from being resolved in a manner that ensures the full effectiveness of EU law, even though they might concern the interpretation or application of that law.

 

The ECJ finds that the BIT is not compatible with Article 19 TEU, that the arbitration clause in the BIT has an adverse effect on European law and that it is therefore in contravention with EU law.

 

Comments

In his opinion to this case, Advocate General Wathelet concluded that intra-EU BITs and international arbitration based on such BITs, is entirely compatible with EU law. Wathelet fully rejected the arguments raised by the European Commission and several EU member states. While an Advocate General’s recommendations to the ECJ are non-binding, they are highly influential and are frequently adopted by the Court. However, in this particular case the ECJ decided not to follow Wathelet’s opinion.

 

Between EU Member States, 196 agreements similar to the BIT between the Netherlands and Slovakia exist. Disputes rising from these agreements are to be settled by arbitral tribunals, the so called Investor-State Dispute Settlement (ISDS). ISDS is considered a necessary tool to protect investors from possibly erratic foreign governments and to assure quick and competent proceedings. Opponents point out that it is undemocratic to have a select group of arbitrators decide on matters that can potentially have great consequences for states. The European Commission is considering the formation of a special court for disputes between Member States and companies.

 

In practice, however, the ruling of the ECJ may not cut out ISDS entirely. The decisive factor for the ruling is that the set-up of the arbitral proceedings between Slovakia and Achmea prevented the proper functioning of European law. This was caused in particular due to the specifics of German law, which was applicable because the arbitral proceedings took place in Germany. It could be argued that this would be different if the arbitral proceedings had taken place in another Member State with law providing more possibilities for judicial review of the arbitral award.