European Court of Justice Decides that EU Law Precludes the Operation of Intra-EU BIT Arbitration Provisions

Firm Thought Leadership
In a ground-breaking decision of the Slovak Republic v Achmea BV, the Court of Justice of the European Union (“CJEU”) has today decided that a provision in a bilateral investment treaty (“BIT”) concluded between EU Member States is contrary to EU law if it allows an EU investor to bring arbitral proceedings against a Member State.
Although the decision was made in relation to the Netherlands–Slovakia BIT, it potentially has far-reaching implications for other intra-EU investor-state arbitral proceedings. 
In 2004, Slovakia embarked on the reform of its health system, which included the opening of market access to health insurance providers from other EU states. Achmea BV (“Achmea”), a company incorporated in the Netherlands, established a subsidiary in Slovakia in order to take advantage of this investment opportunity.
Slovakia implemented a law in 2007 prohibiting the distribution of profits related to health insurance ventures. Achmea claimed that it had been adversely affected by this law and, pursuant to Article 8 of the Netherlands–Slovakia BIT, commenced arbitral proceedings against Slovakia. Article 8(2) of the BIT provided that “Each Contracting Party hereby consents to submit a dispute [under the BIT] to an arbitral tribunal”. The seat of the tribunal was Frankfurt, Germany.
The tribunal delivered an award in Achmea’s favour and ordered Slovakia to pay damages in the amount of €22.1 million. Slovakia brought an action to set aside the award before the German courts, which had jurisdiction given the tribunal’s seat. The Federal Court of Justice of Germany decided to stay the German proceedings and referred three questions to the CJEU for its preliminary ruling.
The core of the three questions was whether the Treaty on the Functioning of the European Union (“TFEU”) precluded the operation of the dispute resolution regime in Article 8 of the BIT, which allowed investors of a Contracting State to commence an arbitration against a Contracting State for breaches of the BIT.
The Decision of the CJEU
The CJEU decided that the TFEU precluded the operation of Article 8 of the BIT because it was contrary to the operation of EU law. Its decision was based on the effect of Articles 267 and 344 of the TFEU.  
Article 267 of the TFEU gives the CJEU jurisdiction to make preliminary rulings concerning the interpretation of the EU Treaties. It also empowers courts or tribunals of Member States to refer such questions to the Court for a ruling. Article 344 of the TFEU provides that “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.”
The CJEU arrived at its decision by a three-stage process. First, it considered whether the dispute before the arbitral tribunal related to the interpretation or application of EU law. Under Article 8(6) of the BIT, the tribunal was obliged to take in account the law in force in Slovakia. Because EU law forms part of the law in force in Slovakia, the tribunal may have been required to apply EU law, particularly the provisions concerning the fundamental freedoms, including freedom of establishment and free movement of capital.
Second, the CJEU considered whether the arbitral tribunal was a court or tribunal of a Member State for the purposes of Article 267 of the TFEU. It concluded that it was plainly not part of the judicial systems of either the Netherlands or Slovakia, nor a court common to a number of Member States, comparable to the Benelux Court of Justice. The arbitral tribunal thus did not have the required links with the judicial systems of the Member States and did not, therefore, fall within Article 267. Consequently, the arbitral tribunal had no power itself to make a reference to the CJEU for a preliminary ruling.
Third, it was necessary to determine whether, even though the arbitral tribunal could not make a reference to the CJEU for a preliminary ruling, its award was subject to review by a court of a Member State which itself had the power of referral. Given that the arbitration was seated in Germany, it was necessary to consider the extent to which that country’s law permitted review of the award. The CJEU emphasised that the grounds for review under German law were limited to the validity of the arbitration agreement and the consistency with public policy of recognising or enforcing the award. In those circumstances, it concluded that a reference to the CJEU concerning matters of EU law raised by the award would not have been possible.  
While the CJEU considered this limited scope of the review of arbitral awards by the courts of a Member State to be justified in relation to commercial arbitration, in light of the requirements of efficient arbitration proceedings, it decided that the position was different in the case of arbitral proceedings initiated on the basis of bilateral investment treaties.  While commercial arbitration awards “originate in the freely expressed wishes of the parties”, investment arbitration awards 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, disputes which may concern the application or interpretation of EU law.”
Consequently, the CJEU decided that the BIT established a regime for dispute settlement contrary to maintenance of the full effectiveness of EU law. The CJEU concluded that “Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States, such as Article 8 of the BIT, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.” 
This case will likely have an immediate effect on existing investor-state disputes under other intra-EU BITs.  Arguments will no doubt be made to limit the decision’s significance to disputes under the BIT under consideration, which expressly required the tribunal to consider the effect of Slovakian law (and thus EU law). Not all intra-EU BITs contain such an express instruction and the CJEU’s decision might be dependent on this fact. The terms of Article 8 are, however, not unique to the Netherlands–Slovakia BIT and can be found in a similar form in other intra-EU BITs.  Moreover, the CJEU conclusions at the end of the judgment appear unqualified and seem to apply broadly to any dispute between an investor from one Member State concerning investments made in the other Member State. There is little doubt, therefore, that arguments will be made in pending arbitrations under existing intra-EU BITs using the rationale of the CJEU’s decision. 
This case is also likely to be invoked in arbitrations under the Energy Charter Treaty (“ECT”) even though a number of ECT Contracting Parties are not EU members. As stated above, the CJEU’s decision purports to apply to “international agreements[s] between Member States”. The European Union and most of the Member States are parties to the ECT. This decision will no doubt fuel jurisdictional debates under ECT arbitrations. It may potentially have a chilling effect on the initiation of arbitration proceedings under both intra-EU BITs and the ECT, in relation to the latter at least insofar as proceedings by EU investors against Member States are concerned.
Questions are also likely to arise in non-EU courts concerning the enforcement of arbitral awards that are made under intra-EU BITs or the ECT in cases between EU investors and Member States. Although non-EU courts are not formally bound by the CJEU’s decision, they can expect to be faced with vigorous arguments that the underlying arbitration agreement is incompatible with EU law.  To what extent the enforcement of ICSID awards may be immune from the ramifications of the decision, remains to be seen.  
Looking to the future, the decision also may have significant implications for the structuring of investments made in EU Member States. If investors wish to avail themselves of the kinds of protections normally found in BITs or the ECT, they may consider structuring their investments through non-EU entities. Post-Brexit, the United Kingdom may be a particularly attractive jurisdiction for such arrangements.
There can be no doubt that the CJEU’s decision will generate substantial discussion and could give rise to a multitude of collateral disputes. Its full impact will, however, only become apparent in the years to come as national courts and arbitral tribunals attempt to grapple with its implications.


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