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Intra-EU Investment Treaty Arbitrations are Incompatible with EU Law

On March 6, 2018, the Court of Justice of the European Union (CJEU) rendered its judgment in case Achmea v. Slovakia (C-284/16), deciding that arbitration clauses in bilateral investment treaties concluded between EU Member States (intra-EU BITs) are incompatible with EU law.

The Background of the Controversies over Intra-EU BITs

Intra-EU BITs began to draw close attention after the EU enlargement of 2004, when eight post-communist countries of the Central and Eastern Europe became the new Member States of the EU (the 2004 newcomers were followed by Bulgaria and Romania in 2007). As these countries were experiencing the process of political and economic transformation back in 1990s, they entered into a number of bilateral investment treaties with developed countries, in particular with that time members of the EU, hoping to attract much needed foreign capital. Subsequently, they also concluded number of BITs with each other. After these countries joined the EU, such BITs gained the intra-EU status as international agreements concluded between EU Member States. Soon after the 2004 enlargement, the debates on intra-EU BITs gained momentum. It was at that time when the questions such as whether these agreements were still valid and applicable, whether they could be regarded compatible with EU law, and whether their continued existence was desirable, have arisen for the first time.     

Besides the complicated legal questions surrounding these agreements, the issue of intra-EU BITs has significant political subtext, since these agreements have formed the basis for many investment arbitrations against the new Member States, many of them resulting in significant amounts of compensation awarded to investors. Experiencing painful investment disputes, some of these states began to reconsider advantages and disadvantage of the generous treaty protection afforded EU investors. Czech Republic and Slovakia have appeared among the most visible opponents of intra-EU BITs, as both countries have tried to challenge the validity and applicability of these agreements in investment disputes. In last few years, voices of backlash could have been heard also from Romania, Poland or Hungary. The most radical solution was adopted by Italy, which unilaterally terminated all its existing intra-EU BITs in 2013. On the other hand, number of the original Member States, whose investors benefit from the protection offered by intra-EU BITs, wish to keep these agreements in force. A specific role has been assumed by the European Commission, which has opposed the idea of continued existence of these agreements. On various occasions, the Commission has argued that intra-EU investment treaty arbitration was incompatible with EU law and the arbitrations clauses in intra-EU BITs were therefore inapplicable.

The Arbitral Awards on Intra-EU BITs and the Road to the CJEU

The relationship between intra-EU BITs and EU law has been addressed by couple of tribunals deciding on intra-EU investment disputes. The awards issued in cases Eastern Sugar v. Czech Republic and Achmea (formerly Eureko) v. Slovakia can be considered the most important.  Interestingly, both disputes were based on the same treaty, the BIT concluded between former Czechoslovakia and the Netherlands, which applies to both the Czech Republic and Slovakia as the successor states. The Czech Republic and Slovakia as the defendants pleaded that the BIT was automatically terminated upon accession of the Czech Republic and Slovakia respectively to the EU, as both the BIT and EU law related to the same subject matter and the two legal systems were not capable of being applied at the same time. They also argued that the arbitration clause in Article 8 BIT was inapplicable due to its incompatibility with EU law. However, the arguments of the Czech Republic and Slovakia were rejected in the arbitration proceedings and both tribunals accepted their jurisdiction, concluding, inter alia, that the BIT and EU rules on cross-border investment were not mutually exclusive but complementary.

Slovakia has been challenging the awards issued in the dispute with Achmea before the German courts, which are competent to deal with the application for setting aside of the awards since the seat of the arbitration was in Frankfurt. After the Slovakia's claims were rejected by the first-instance court, the Bundesgerichtshof (German Federal Court of Justice), hearing the case on appeal, decided to make a referral for preliminary ruling to the CJEU, asking whether the arbitration clause in Article 8 of the BIT between Czechoslovakia and the Netherlands was compatible with EU law.

The CJEU's Judgment

The course of the proceedings before the CJEU clearly demonstrated how controversial the issue of intra-EU investment arbitration was. While the Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the Commission submitted observations in support of Slovakia’s arguments, Germany, France, the Netherlands, Austria and Finland contended that the arbitration clause at issue and, more generally, clauses of a similar kind commonly used in the BITs currently in force between the EU Member States were valid and applicable. Advocate General Wathelet issued his opinion on 19 September 2017, finding that the investor-to-state dispute settlement mechanism under intra-EU BITs was not incompatible with EU law. Nevertheless, while the Court usually follows the opinions of the Advocates General, in this case, the Grand Chamber came to a different conclusion.

The CJEU considered that, by concluding the BIT, Slovakia and the Netherlands 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. The Court noted that an arbitral tribunal settling an investment dispute may be called on to interpret or indeed to apply EU law, since the latter forms an integral part of Member States' domestic laws and at the same time is a source of international law applicable between the contracting parties to the BIT, and as such, the EU law thus forms part of the law applicable to investment disputes. On the other hand, the arbitral tribunal is not part of the judicial system of the EU and its Member States, and unlike the courts of the Member States, it is therefore not able to submit questions to the CJEU for a preliminary ruling concerning interpretation of EU law rules. The Court furthermore pointed out that possibilities to review arbitral awards by courts of the Member States (e.g. as regards their compatibility with EU law) and to eventually set them aside were very limited. Given the characteristics of the investor to state dispute mechanism established by the BIT, which removes from the jurisdiction of the Member States' courts disputes which may concern the application or interpretation of EU law, this mechanism calls into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature EU law as an autonomous legal system, and is not therefore compatible with the principle of sincere cooperation between the Member States and EU institutions.

It is important to note in this regard that the CJEU expressly distinguished investment treaty arbitration, which derives from a treaty between Member States, and commercial arbitration, which originates in freely expressed wishes of the parties to a dispute. The Court has delivered its statements on the need to ensure effective application of EU law in commercial arbitration and on the ways to achieve that end in several earlier decisions, however without ever questioning compatibility of commercial arbitration with EU law as such.

The Future of Investment Treaty Arbitration in the EU

The judgment in Achmea v. Slovakia is certainly set to provoke criticism and to cause deep controversies. However, the Court's conclusions and its reasoning can hardly be found too surprising, since they seem be quite in line with the strand of previous case-law, showing the Court keeping a wary eye on preservation of the autonomy and integrity of EU law (as interpreted by the Court), and protecting it against any real or perceived threats posed by any other judicial or quasi-judicial mechanisms standing wholly or partly outside the EU judicial system. The decision drawing particularly fierce criticism came with Opinion 2/13, in which the Court turned down the planned accession of the EU to the European Convention on Human Rights, which would entail submission of the EU to the jurisdiction of the European Court of Human Rights in matters concerning alleged violations of the Convention. One might say that with such an approach, the Court seems to be asserting a wide autonomy of EU law not only in relation to domestic laws of Member States, but also in relation to international law. 

The Court's decision will certainly massively impact the possibility of investors to pursue their claims against Member States in investment treaty arbitrations based on intra-EU BITs. While these agreements undoubtedly remain valid as a matter of international law, and while the arbitral tribunals are not formally bound by the CJEU's decision, they can hardly afford to ignore it in long term. Also in previous awards the tribunals usually tended to admit that they were under a duty to take EU law into account, while it is the CJEU to give the final and binding interpretation of such law. Another question is how the CJEU's decision may affect the awards rendered in intra-EU investment disputes and their enforceability (in this particular case whether it will be a ground for setting aside awards rendered by the tribunal in Achmea v. Slovakia). According to most national laws governing enforcement of arbitral awards, awards cannot be set aside and their enforcement cannot be refused due to any inconsistency with law, but only in case of inconsistency reaching the intensity of violation of public order of the forum. Case Achmea v. Slovakia exemplifies the alarming imbalance of the solution resting in setting aside of the existing award or in refusal of its enforcement, sgiven that the host state, which violated the investor's rights, is in principle taking advantage of the unlawful situation it itself created (incompatibility of its own international commitments with EU law) to the detriment of a private party acting in good faith. Other complications as regards the practical impacts of the CJEU's judgment stem from the fact that most BITs allow investors to initiate arbitration under the ISCID Convention, which in principle excludes any review of awards by courts or other bodies of the contracting parties, as well as from the fact that the arbitration and enforcement of the awards may be entirely located in third countries, outside the reach of Member States' courts. It can be expected that the Court's judgment will bring about a need for a coordinated reaction by the Member States and the EU, which will likely lead to formal phasing out of the existing intra-EU BITs.

Another question which remains open is whether and how the recent CJEU's judgment may affect the BITs concluded between the Member States and third countries. The decision itself hardly provides any clues suggesting that its conclusions should be limited only to intra-EU situations. However, the situation of the extra-EU BITs is different at least in that one of their contracting parties is a third country, which is not bound by EU law and the CJEU's doctrines. The tribunals established under extra-EU BITs thus cannot be expected to be much concerned with issues of compatibility of the investor-to-state dispute settlement mechanism with EU law. For the time being, the same should apply also for the disputes under new investment agreements concluded by the EU based on the competence conferred on it by the Treaty of Lisbon.

Further Reading

The full text of the CJEU's judgment is available here.

For a detailed analysis of the relationship between international investment agreements and EU law, see:

FECÁK, Tomáš. International Investment Agreements and EU Law. Alphen aan den Rijn: Kluwer Law International, 600 p., 2016


Tomáš Fecák

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