In a groundbreaking decision of 6 March 2018, the European Court of Justice (CJEU) shook up the arbitration community. The first reaction is that the CJEU has virtually stopped investment arbitration proceedings if the underlying Bilateral Investment Treaty (BIT) had been concluded between member states of the European Union. But is that true?
To recall: BITs typically stipulate that each contracting country promises to treat investors from the other contracting country in a fair and equitable manner and will not expropriate them without compensation. In case of a dispute, the BITs allow a private investor to invoke those rights as a third party beneficiary and to start arbitration proceedings against the host state accused of violating the BIT. This mechanism ensures that the investor can approach a neutral forum to seek justice instead of addressing the (possibly biased) courts of the host state accused of violating the BIT.
So far, so good. But no longer, as the judgment of the CJEU in the case, Slovakia vs Achmea BV suggests (Case C-284/16). The underlying story is quickly told: In 2004, Slovakia opened its sickness insurance market to private investors. The Dutch company Achmea invested heavily – and was massively disappointed when Slovakia reversed its earlier decision and closed the market. Achmea relied on a BIT of force between the Netherlands and Slovakia and initiated arbitration with the place of arbitration in Germany. The arbitral tribunal found in favour of Achmea and awarded Achmea an amount of EUR 22.1 million. Slovakia approached the competent German courts to set aside the award arguing a violation of several provisions of EU law, in particular with the Treaty on the Functioning of the European Union (TFEU). The German Federal Court of Justice submitted the question to the CJEU whether the arbitration agreement in the BIT was compatible with the TFEU (see our previous GAN-article on the decision of the German Federal Court of Justice here: https://globalarbitrationnews.com/compatibility-intra-eu-bits-eu-law/).
“No, such arbitration is not compatible with EU law”, was the surprising decision of the CJEU yesterday. Surprising, because the Advocate General at the CJEU had recommended an opposite ruling. However, the CJEU held that the arbitral tribunal might have to rule on EU law, in particular on fundamental rights such as the freedom of establishment and the freedom to move capital. Respectively, a private arbitral tribunal cannot submit a respective legal question to the CJEU for ensuring a consistent EU-wide interpretation of the law under Article 267 TFEU. In the enforcement stage, national courts are involved. But their review of the challenged arbitral award is severely restricted under the applicable national law which typically copies the restrictive standards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The argued violation of EU law is not part of the permitted level of scrutiny. Alas, the CJEU concludes, full effectiveness of EU law is not guaranteed if an arbitral tribunal decides a dispute. For that reason, the arbitration clause in the BIT has an adverse effect on the autonomy of the EU and is therefore incompatible with EU law. The German Federal Court of Justice must now decide what this ruling means precisely for the validity of the arbitration agreement. It is easy to imagine that the arbitration agreement, including the award ultimately based on that arbitration agreement, will not survive that ruling of the CJEU. The German Federal Court of Justice, however, expected an opposite ruling when it submitted the case to the CJEU in 2016. The ball is back in the court of the German Federal Court of Justice, and it is too soon to predict if its decision firmly.
The decision of the CJEU is a major earthquake for investment arbitration proceedings based on a BIT between two member states of the EU. The decision produces chaos, with many open questions: What happens to other pending proceedings? Does the CJEU-decision only mean that Intra-EU BITs must be renegotiated and respective arbitration clauses be deleted? Or are pending arbitrations immediately affected and come to an end by operation of law? Can an investor argue “legitimate expectations” and “justified reliance on existing laws” to save the pending arbitration in which the investor invested time and money? Must a disappointed investor now approach the courts of the state accused of violating the BIT? Is that true also for EU member states like Poland where the EU itself has recently expressed serious doubts about the independence of the judiciary from the government? Or can the investor argue that the damage was caused in his home country so that its home courts are now competent to rule on acts of the host state, e.g. whether a legislative act of Country X violated the BIT? Is the CJEU’s ruling also applicable to the countless disputes currently pending under the Energy Charter Treaty if only two member states of the EU are involved? Or does the fact that the EU itself is a member of the Energy Charter Treaty makes a difference?
Many questions, no immediate answers. What the CJEU has done is to attack a well-functioning mechanism for dispute resolution between an investor and a member state of the EU. What the CJEU has failed to provide is safe and just alternative for investment protection. Fiat Justitia et pereat mundus.