The Grand Chamber of the European Court of Justice (ECJ) in its Judgment dated 6 March 2018 in case C-284/16 Achmea vs. the Slovak Republic addressed the issue of the compliance of the arbitration clauses contained in bilateral agreements on encouragement and reciprocal protection of investments between EU Member States (the bilateral treaty hereinafter referred to as “BIT”) with EU law (the European law). In the proceedings, the Slovak Republic challenged an arbitration award whereby the Slovak Republic in investment arbitration proceedings had been instructed to pay to Achmea, an investor in the field of health care insurance, more than EUR 22 million. The Court held as incompatible with EU law a clause contained in a 1991 BIT between the Slovak Republic and the Netherlands, pursuant to which all disputes between a Member State and an investor from another Member State in relation to the investor’s investment should be resolved in arbitration proceedings by three (3) arbitrators according to UNCITRAL Rules.

REASONING FOR THE DECISION

In the aforementioned case, the Court has held the arbitration clause invalid because a panel of three (3) arbitrators was supposed to interpret and to apply, in addition to national legislation, also EU law, although the panel could not have been considered “a court of a Member State”, and it could not address the Court of Justice with requests for preliminary rulings concerning the validity and interpretation of EU law pursuant to Article 267 of the Treaty on Functioning of the European Union (TFEU). For the same reason, the challenged arbitration clause between a Member State and an investor did not allow for full, effective application of EU regulations, which is otherwise guaranteed, inter alia, by proceedings on preliminary rulings.
The European Court of Justice noted that EU law overrides provisions of a BIT. An international treaty may not interfere with the definition (limits) of powers determined by Treaties on the EU, or, respectively, with the autonomy of the EU legal system, adherence to which is ensured by the Court of Justice. Consequently, if Member States in Article 344 of TFEU agreed not to resolve disputes concerning interpretation or implementation of Treaties on the EU in a manner other than as provided therein (including the key proceedings on a preliminary ruling), the Member States cannot be bound by a different international treaty which systematically addresses the issue of EU law interpretation by entrusting it to a body not belonging to the EU judicial system. In this respect, the Court of Justice has put a strong accent on the difference between an arbitration clause contained in an international agreement (treaty) and standard commercial arbitration; in the latter case, when the arbitration clause applicable to a specific relationship is agreed upon by parties to the dispute, said arbitration clause would not be part of international public law.

IMPACTS OF THE DECISION

The impacts of the above ruling of the Court of Justice will be extensive and cannot be described in full at the moment. More than 190 similar agreements (treaties) were concluded between the individual EU Member States. Many investment-related arbitration proceedings have been initiated or even already completed. It will be interesting to see how arbitrators will respond to the ruling issued by the ECJ. If the Member States abide by the ruling, we can expect suspension of arbitration proceedings due to a lack of powers. We can also expect the unsuccessful parties to any arbitration disputes to challenge the arbitration awards.
European countries have divided opinions on the ruling. While some countries have welcomed and supported it (in addition to the Slovak Republic and the Czech Republic also Poland, Romania, Hungary, Estonia, Lithuania, Italy, Spain and Greece), other countries have supported the Netherlands’ opinion (for example, Germany, Austria and France, among others). As regards the Czech Republic, the ruling will have impacts on investment-related arbitration proceedings involving the Netherlands, with which the Czech Republic concluded a BIT identical to the one to which this ruling relates (it was concluded by Czechoslovakia). The Czech Republic is currently involved in approximately ten (10) investment-related arbitration proceedings in which it acts as the defendant; on the other hand, Czech investors have initiated a number of investment-related arbitration proceedings against other EU Member States. At the same time, the ruling issued by the Court of Justice is not good news for them. It will be interesting to observe the impacts of the decision in particular on solar energy-related disputes, which are a big issue for the Czech Republic.
On a general level it should be noted that the Judgment is able to freeze investment (at least temporarily) or to result in an outflow of investments from the EU, as it causes legal uncertainty concerning enforceability of claims under international agreements (treaties). Claims under agreements on protection of investments continue to exist on the substantive law level, and in the absence of an arbitration clause, there is no independent body to decide on such claims; consequently, investors lack effective instruments for enforcement of their possible claims. On the other hand, in the situation of legal uncertainty caused by the ECJ ruling, investors are under the pressure of deadlines applicable to statute of limitation, or, as the case may be, preclusive deadlines applicable to the enforcement of their respective claims. If the key issue perceived by the ECJ in the arbitration proceedings in case of a breach of BIT is the fact that the arbitration tribunal applied European law to BIT disputes without having an opportunity to review such law and to seek unifying interpretation from European institutions, it is possible that disputes may be launched directly in connection with a breach of European law within the framework of rules set up by TFEU. It is of course questionable to what extent, if at all, a breach of obligations under the relevant BIT will (be able to) become an argument in such disputes.
For the sake of completeness, we would like to point out that the decision may have impacts also outside the sphere of investments. The construed limits of the applicability of arbitration clauses rest on the elementary principles of the Treaties on the EU, and they could possibly have effects on any bilateral agreements (treaties) between the individual Member States that would be obliged to respect the priority of EU law at all times and provide for autonomous interpretation of EU law within the framework of the EU judicial system.

TRENDS IN FURTHER DEVELOPMENT

On a general level, it seems extremely unfair that an investor – in some cases after several years of pending arbitration proceedings or even after a success in arbitration proceedings – should get into such a principally adverse situation due to a breach of TFEU on the part of an EU Member State. Such a legal situation is ultimately not favorable even for the Member States, as it may result in reduction of investments.
The Judgment issued by the Court of Justice will probably lead to an increase in the pressure that has been recently developed with the aim of absolutely revoking BITs within the EU and of creating an independent EU judicial body specializing in disputes on investments. Any such change, however, will not occur soon.

For more information, please do not hesitate to contact us:

Lucie Dolanská Bányaiová: lucie.banyaiova@bvlaw.cz

Zuzana Kulhánková: zuzana.kulhankova@bvlaw.cz