CJEU judgment in Slovak Republic v. Achmea BV: intra-EU BITs incompatible with EU law

In the much anticipated judgment of 6 March 2018 (Case C-284/16), the Court of Justice of the European Union (“CJEU”) found the arbitration provision of the bilateral investment treaty (“BIT”) between the Netherlands and Slovakia to be incompatible with EU law. As the decision potentially affects not less than 196 BITs between EU Member States (“intra-EU BITs”), it is likely to have significant consequences for the world of intra-EU BIT arbitration. Yet its overall implications are far from clear, so that the judgment will loom large for some time to come.

Background

The CJEU’s ruling is the latest chapter in the saga between Dutch insurer Achmea B.V. and the Slovak Republic. An arbitral tribunal seated in Frankfurt, Germany had found Slovakia in breach of treaty obligations under the 1991 Netherlands-Slovakia BIT for partially reversing the liberalisation of its health insurance market, and awarded Achmea damages in the amount of 22.1 million Euro. Subsequently, Slovakia unsuccessfully requested the Higher Regional Court of Frankfurt to set aside the award, arguing that the BIT’s arbitration mechanism was contrary to EU law, due to its inconsistency with the methods set out for resolving disputes on the interpretation of EU law under Articles 267 and 344 TFEU (Oberlandesgericht Frankfurt, decision of 18 December 2014 – Case 26 Sch 3/13). On appeal, the German Federal Court of Justice referred the question of the BIT’s compatibility with EU law to the CJEU for a preliminary ruling (decision of 3 March 2016 – Case I ZB 2/15). In his widely noted opinion, Advocate General Wathelet at the CJEU (“AG”) affirmed such compatibility (opinion of 19 September 2017, Case C-284/16, on which see our previous blog post for the AG’s reasoning and greater detail on the dispute’s progress).

The CJEU’s ruling

Contrary to AG Wathelet, the CJEU found the BIT’s arbitration provision to have an adverse effect on the autonomy of EU law enshrined in particular in Article 344 TFEU. It took the Grand Chamber of the CJEU only 31 paragraphs to reach its conclusion.

According to the court, an arbitral tribunal “such as that referred to in Article 8 of the BIT” may be called upon to interpret or apply EU law, particularly the provisions on freedom of establishment and free movement of capital. At the same time, it could, however, not make preliminary references to the CJEU pursuant to Article 267 TFEU as it cannot be qualified as a “court or tribunal” of a Member State. On the contrary, the CJEU considers such an arbitral tribunal to be an exception to the jurisdiction of the Slovak and Netherlands courts, so that it does not form part of their respective judicial systems.

Furthermore, any arbitral award rendered under a BIT is not subject to review by a court of a Member State capable of ensuring compatibility with EU law. Arbitral awards are final, subject only to limited judicial review by the competent national courts. According to the CJEU, this limited review is legitimate in the context of commercial arbitration proceedings, provided that the fundamental provisions of EU law can be examined during that review and, if necessary, referred to the CJEU for a preliminary ruling. However, that rule cannot be applied to the arbitration proceedings at issue as they do not originate from the freely expressed wishes of the parties, but from a treaty by which Member States agree to reduce the jurisdiction of their own courts. Yet, according to the CJEU, it is this system, including the “keystone” preliminary ruling procedure, that is essential to ensure consistency and uniformity in the interpretation of EU law and gives effect to the fundamental principles of mutual trust and sincere co-operation enshrined in the EU Treaties.

In any event, investors will feel deprived of their rights that effectively addressed and mitigated political risk. Especially where arbitration proceedings are already pending or where they have already obtained favourable awards that are not yet enforced, investors will be frustrated by the legal uncertainty caused by the judgment. In the future, it will be difficult for investors to effectively solve their disputes outside of the national courts of the host state when seeking protection under intra-EU BITs. However, the fear of not being treated fairly in a state court system financed and overlooked by the defendant was the reason why BITs were agreed upon in the first place. As a result, investors may attempt to avoid an intra-EU situation by structuring their investments differently (the decision does not affect BITs between EU Member States and non-EU states, which, within the EU, are subject to Regulation 1219/2012).

The Member States, on the other hand, which have taken a divided view on intra-EU BITs, will need to decide whether to comply with awards already rendered, and whether to terminate or renegotiate their intra-EU BITs (in any case, such treaties’ sunset clauses will prolong the period of uncertainty).

Finally, it remains to be seen whether the European Commission, which has mounted a strong opposition to intra-EU BITs in recent years, will initiate infringement proceedings against Member States that comply with awards contradictory to Achmea, and increase the pressure on Member States to terminate their intra-EU BITs.

As for the tale of Achmea B.V. and the Slovak Republic, it is now for the German Federal Court of Justice to pen the concluding chapter and to give life to the CJEU’s ruling.

Rupert Bellinghausen and Julia Grothaus would like to thank Hannes Ingwersen for his assistance in preparing this article.