EU Top Court Rules EU Investment Arbitration Tribunals Are Incompatible with EU Law: Implications for Investors

Law and Justice, Legality concept, Scales of Justice, Justitia, Lady Justice in front of the European Union flag in the background.

In Slovak Republic v. Achmea B.V. (Achmea), the European Court of Justice (ECJ) ruled that the existence of an independent arbitral tribunal established under a bilateral investment treaty (BIT) between EU Member States is fundamentally incompatible with EU law. The decision may effectively invalidate the 196 BITs currently in force between EU Member States. For Canadian and other non-EU parties, it calls into question the compatibility of EU law with fundamental tenets of international investment treaties more widely, including the Comprehensive Economic and Trade Agreement (CETA) signed between Canada and the European Union.

BACKGROUND

In April 1991, the Netherlands signed a BIT with Czechoslovakia containing an investor-state dispute settlement mechanism (ISDS) under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules). The Slovak Republic succeeded the rights and obligations under the BIT when it split from the Czech Republic in 1993, and the BIT continued in force when the Slovak Republic became a member of the European Union in May 2004.

In 2004, the Slovak Republic liberalized its sickness insurance market, allowing national and international operators to offer private sickness insurance to Slovak citizens. The Slovak Republic then partially revoked its liberalization in 2006 following a change in government, prohibiting the distribution of profits from sickness insurance activities. Achmea B.V. (Achmea) was an undertaking belonging to a Netherlands insurance group that invested heavily in the Slovak Republic beginning in 2004 and was significantly affected by the reversal of the reforms. Achmea initiated the ISDS procedure under the Netherlands-Czechoslovakia BIT, alleging a breach of the fair and equitable treatment and free capital transfer provisions of the BIT. In 2012, the Permanent Court of Arbitration (Tribunal) awarded Achmea €22.1-million in damages (Final Award), plus interest and the reasonable legal costs of the arbitration.

DISPUTE UNDER EU LAW

The case came before the ECJ when the Slovak Republic brought an action to have the Final Award annulled before the German courts. The Slovak Republic, supported by the European Commission, argued that the ISDS provisions of the BIT were null and void and the jurisdiction of the Tribunal was in conflict with Articles 267 and 344 of the Treaty on the Functioning of the European Union (TFEU).

Under Article 344 TFEU, Member States are prohibited from submitting any matter covered by the Treaties to a mechanism outside the EU judicial system, and the ECJ has a “monopoly” on the interpretation and application of EU law. In the EU court system, this is ensured by what is known as the preliminary reference system.

Under Article 267 TFEU, courts and tribunals of EU Member States must submit preliminary references to the ECJ for a binding interpretation of EU law where the validity of EU law is challenged or where it is necessary to resolve a dispute. The ECJ’s interpretation will then be binding on the Member State courts, which must apply that law over their own law – even international or constitutional law. Arbitral tribunals under ISDSs pose something of a challenge to this system for the simple reason that they are outside it. The ECJ has held in its prior case law that arbitral tribunals are not courts or tribunals of a Member State for the purposes of EU law; that they cannot apply EU law; and that there can be no arbitral tribunal independent from the ECJ.

As required by Article 267 TFEU, Germany’s Federal Court of Justice, stayed the proceedings and submitted a preliminary reference to the ECJ asking whether the ISDS mechanism under the BIT was compatible with the EU Treaties.

ECJ DECISION

The ECJ held that the Netherlands-Czechoslovakia BIT was in violation of Articles 267 and 344 TFEU because the ISDS Tribunal could potentially be called upon to interpret and apply EU law, but its interpretation could not be effectively challenged before a Member State court (and thereby fall within the purview of the ECJ through the preliminary reference system). The ECJ’s monopoly on the interpretation of EU law was infringed, and the autonomy and effectiveness of EU law was threatened. The court gave three reasons for its decision.

First, the ECJ observed that although the law at issue in Achmea was Slovak — not EU — law, arbitral tribunals under the UNCITRAL Rules must decide disputes “on the basis of the law” including the “law in force of the Contracting Party concerned”. As EU law is part of the domestic law of the Member States, the ECJ held that the Tribunal could nonetheless potentially be “called on to interpret or indeed to apply EU law”.

Second, arbitral tribunals are not “courts or tribunals of a member state” for the purposes of Article 267 TFEU, and therefore not within the preliminary reference system that ensures the ECJ’s monopoly on the interpretation and application of EU law. The ECJ referred to Article 267 TFEU as the “keystone” of a judicial system that guarantees the autonomy, uniformity, full effectiveness and “particular nature” of EU law.

Third, the ECJ held that arbitral awards such as the one in Achmea posed a threat to this system because they are final and not generally subject to review by EU courts. Like the domestic law of most countries that implement the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) or the International Centre for Settlement of Investment Disputes Convention (ICSID Convention), the German Code of Civil Procedure provides for only a limited review of arbitral awards (on grounds such as public policy or lack of jurisdiction). The ECJ held that such limited grounds of review would not be sufficient to ensure the autonomy and supremacy of EU law, because they do not allow the EU Member State court to submit preliminary references and enforce the binding interpretations of the ECJ. By consenting to remove from the jurisdiction of Member State courts certain disputes that might involve the interpretation or application of EU law, the BIT breached the obligation on Member States to ensure the full application of EU law.

IMPLICATIONS

Intra-EU Investment Arbitration

Achmea has immediate implications for the 196 intra-EU BITs currently in force in the European Union. The European Commission has long been of the view that any intra-EU ISDSs are incompatible with EU law, and Ireland, Italy, the Czech Republic and Romania have already terminated their intra-EU BITs. Following Achmea, all Member States are now under an obligation to dis-apply their intra-EU BITs, and remove all intra-EU ISDS mechanisms. Furthermore, since such arbitral tribunals are incompatible with EU law, the enforcement of intra-EU arbitral awards by courts of the Member States is now prohibited. This means that these Member States are required by EU law to breach their obligations under the ICSID Convention and the New York Convention regarding the recognition and enforceability of arbitral awards.

Commercial Arbitration

In Achmea, the ECJ was careful to distinguish ISDS from commercial arbitration, stating that commercial arbitration does not violate Article 344 TFEU because it does not involve Member States removing certain disputes from their jurisdiction. However it is unclear how the problem of Article 267 TFEU may be resolved given that commercial arbitration remains outside the preliminary reference system. The ECJ has already ruled in its prior case law that Member State courts must review commercial arbitral awards for conformity with EU competition and consumer law. In Achmea, the fact that an arbitral tribunal might potentially rule on a matter “covered by EU law” rendered it incompatible with Article 267 TFEU, opening the door to the wider claim that no arbitral award is enforceable unless it is reviewable by courts for compliance with EU law. This would go against one of the central tenets of international arbitration — that arbitral awards are only subject to review under the limited grounds set out in the New York Convention.

Foreign Investors in the EU

Finally, the decision has implications for foreign investors under agreements such as CETA. In Achmea, the ECJ distinguished the Netherlands-Czechoslovakia BIT from agreements signed by the EU itself. It stated that BITs signed by the EU itself could be permissible in principle, “provided that the autonomy of the EU and its legal order is respected.”

Yet in light of Achmea, it is unclear whether an independent international tribunal can ever ensure the autonomy of the EU and its legal order. The existence of the independent arbitration mechanism was not upheld in either of the three cases cited for that proposition by the ECJ, Opinion 1/91 EEA Agreement I, Opinion 1/09 Agreement creating a unified patent litigation system, and Opinion 2/13 Accession of the EU to the ECHR. In each case, the ECJ ruled that the existence of an independent litigation system, outside the preliminary reference system, was incompatible with EU law.

This raises serious doubts about the investment provisions of CETA, and one Member State (Belgium) has already requested an opinion from the ECJ as to whether the investment provisions of that treaty are compatible with EU law.

For further information, please contact:

Joe McArthur                            604-631-3383

or any other member of our Arbitration group.

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