The Preliminary Ruling in the Achmea (formerly Eureko) v. Slovakia Case: the Uncertain Future of Intra-EU BITs

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Welcome to the inaugural post of a new CPR Speaks feature, “The European View,” offering valuable insights and perspectives from CPR’s European Advisory Board (EAB).

By Krzysztof Wierzbowski[1] and Aleksander Szostak[2]

The compatibility of investment protection treaties with the regulatory framework of European Union law has been a controversial issue for quite some time. A recent decision of the Court of Justice of the European Union in Achmea (formerly Eureko) v. Slovakia clarifies the matter and raises several concerns with respect to the future of intra-EU investment protection treaties. This article aims to shed a light on the potential implications of the decision on foreign investors engaging in the European market and the foreign direct investment protection system in the European Union.

Wierzbowski

Krzysztof Wierzbowski

Szostak_oferta

Aleksander Szostak

On March 6, 2018, the Court of Justice of the European Union (CJEU) ruled that the investor-State dispute settlement (ISDS) clause in the Slovakia-Netherlands bilateral investment treaty (BIT) had an adverse effect on the autonomy of European Union (EU) law. Accordingly, the CJEU declared that the clause was incompatible with EU law.[3]

Background to the decision

Slovakia challenged the Arbitration Tribunal’s award in Achmea (formerly Eureko) v. Slovakia and applied to the Higher Regional Court in Frankfurt to set the award aside. After the Court rejected its application, Slovakia turned to the Federal Court of Justice in Germany with a motion to set aside the award.

Slovakia claimed that the Tribunal lacked necessary jurisdiction in the dispute because the Slovakia-Netherlands BIT, providing for the ISDS mechanism, violated several provisions of the Treaty on the Functioning of the European Union (TFEU).[4]

Germany’s Federal Court of Justice (Federal Court) in Achmea v Slovak Republic turned to the CJEU with a request for a preliminary ruling to resolve as a matter of principle the issue of compatibility of investment protection treaties between Member States and the law of the European Union. In particular, the Federal Court asked whether Art. 267 and 344 TFEU precludes ISDS clauses in intra-EU BITs.[5]

The approach of the Advocate General

On Sept. 19, 2017, Melchior Wathelet, the Advocate General (AG) to the CJEU, issued its opinion with regard to issues raised in the request for a preliminary ruling. The AG demonstrated interesting reasoning, which, however, was not followed by the CJEU. The AG concluded that the ISDS clauses in intra-EU BITs are compatible with EU law.

As stipulated in the AG’s opinion, arbitral tribunals constitute courts or tribunals within the meaning of Art. 267 TFEU, which implies that arbitral tribunals can, and in fact have the obligation to, accept the supremacy of the EU law and, thereby use the preliminary ruling procedure in appropriate situations.[6]

The AG failed to observe that arbitral tribunals, both in commercial and investment treaty disputes, lack basic features of courts, or tribunals within the meaning of Art. 267 TFEU and, therefore, cannot use the procedure contained therein. As established by the CJEU in its case law, entities submitting a request for a preliminary ruling should, among other things:

  • be established by law;
  • be permanent;
  • have compulsory jurisdiction;
  • apply the rules of law;
  • be independent[7]

in order to be considered courts or tribunals under Art. 267 TFEU.

While the list is not absolute and the jurisprudence of the CJEU is not consistent, it is clear that parties to a dispute are under no legal obligation to settle it through arbitration. In principle, arbitral tribunals do not have a compulsory jurisdiction.[8] Although, it may be argued that investment treaty tribunals, contrary to tribunals in commercial arbitration disputes, can be considered as having compulsory jurisdiction conferred by a treaty, or domestic legislation implementing a treaty. Nonetheless, arbitral tribunals are established by parties for the purpose of settling a particular dispute and therefore do not have a permanent character, which prevents them from using the procedure envisaged under Art. 267 TFEU.[9]

Decision of the CJEU

The CJEU stated that disputes before arbitral tribunals based on intra-EU BITs may relate to matters of interpretation and/or application of the EU law. Nonetheless, while a preliminary ruling procedure under Art. 267 TFEU enables courts and tribunals of Member States to file a request pertaining to the interpretation and application of the EU law, arbitral tribunals do not constitute a court or tribunal within the meaning of the provision and, therefore, cannot request a preliminary ruling.

As decisions of arbitral tribunals are final and, therefore, in principle, cannot be appealed to the national courts, a threat now exists to the proper interpretation and application of the EU law, which in turn has an adverse effect on the autonomy of the EU law.[10]

The CJEU concluded that the ISDS mechanism in the Slovakia-Netherlands BIT is incompatible with the EU law since the mechanism prevents investment treaty disputes from being decided within the judicial system of the EU.[11]

Infringement proceedings against Member States

On June 18, 2015, the European Commission (EC) initiated infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden. The EC asked Member States to terminate their intra-EU BITs with the aim of resolving the conflict between the intra-EU BITs and European treaties.[12]

It is yet to be seen whether the EC will decide to bring the matter before the CJEU. Nonetheless, considering the approach of Poland, which is likely to terminate its intra-EU BITs, as well as that of Romania, Italy and Ireland, which already terminated their intra-EU BITs, it is probable that Member States, especially given the position of the CJEU, will cooperate with the EC.

Resolving the conflict

In light of Art. 351 TFEU, Member States are required to resolve any incompatibilities between their international agreements and EU treaties. Failure to fulfil this obligation may lead to the initiation of infringement proceedings by the EC under Art. 258 TFEU.

While it would be favourable to foreign investors to maintain the extra-level of protection by merely removing ISDS mechanism but preserving the substantive protection of investors under the BIT, it is apparent that the EC would prefer Member States to terminate intra-EU BITs entirely.

Art. 54(a) and 54(b) of the Vienna Convention on the Law of Treaties (VCLT) provide that an international treaty can be terminated unilaterally or by mutual consent of the contracting parties. While termination by mutual consent, unless otherwise specified in a treaty, leads to the immediate cessation of any effects of the agreement, unilateral termination often requires a notice period. Treaties provide for different notice periods; and some agreements provide for a waiting period upon expiry of which notice may be given. Because unilateral termination of intra-EU BITs may not have immediate effect, it likely will not be a desirable termination method because it does not mitigate the risk of infringement proceedings during the notice period.

Even termination of intra-EU BITs by mutual consent may not lead to the immediate cessation of protection of already existing investments. The existence of the so-called sunset clauses guarantees the continued protection of investments existing prior to the termination of the relevant BIT. In this sense, for a period of time specified in a relevant sunset clause the effectiveness of intra-EU BITs in general and ISDS clauses in particular will not be affected by termination. Accordingly, the termination as such will not resolve the issue and might not prevent the EC from initiating infringement proceedings against relevant Member States.

However, it seems possible to either terminate intra-EU BITs together with sunset clauses by mutual consent of contracting parties, or to modify the agreements with the aim of removing the sunset clauses from the legal framework and, subsequently, terminating the agreement. This method would enable the immediate termination of intra-EU BITs without the waiting period established by sunset clauses. While the effectiveness of such a termination or modification may be debatable (in particular by affected investors), the reading of Art. 70 (1) VCLT indicates that the parties’ (EU Member States) consent may prevail over the guarantees contained in sunset clauses.[13]

Paradox in the reasoning of the CJEU

The CJEU based its reasoning on the argument that arbitral tribunals cannot refer a question on the interpretation and application of the EU law to the CJEU under Art. 267 TFEU. Nonetheless, the CJEU had the opportunity to decide on the request for a preliminary ruling in the Achmea case.

While it was the Federal Court that relied on Art. 267 TFEU, the argument that ISDS clauses have an adverse effect on the autonomy of the EU law and prevent investment treaty disputes from being decided within the judicial system of the EU is misguided. The CJEU may issue a preliminary ruling in the context of arbitration if it is approached by a court exercising supervision over arbitral proceedings, or a court enforcing or annulling the arbitral award (as in Achmea), which demonstrates that ISDS clauses do not entirely prevent investment treaty disputes from being decided within the judicial system of the EU.

Implications of the decision

The Achmea decision has important implications for investors engaging on the European market. The incompatibility of the ISDS clauses with the EU law deny investors the recourse of investment treaty arbitration.

In particular, the decision indicates that the domestic judicial system of Member States is the only appropriate forum for the settlement of their disputes. This raises several concerns associated with the potential bias of national judges, political pressure exerted by governments, corruption and malfunctioning of domestic courts in general. Depriving investors of the benefits of the ISDS mechanism will also likely affect their decision to invest in the European market and limit the FDI capital flow, which may be disadvantageous for the European economy. Accordingly, it is apparent that the domestic judiciary for various reasons attributable to a given Member State may not provide a desirable alternative to the ISDS mechanism contained in intra-EU BITs.

As the CJEU in the Achmea decision referred to the incompatibility of ISDS clauses in intra-EU BITs only, one may consider that such clauses contained in BITs with non-EU States will be deemed as compatible with EU law. For that reason, investors may decide to engage in “treaty shopping” through, for instance, corporate restructuring with the aim of changing corporate nationality in order to benefit from BITs concluded between non-EU and EU States. Depending on the wording of a relevant BIT, treaty shopping may relate to a transfer of the seat or place of incorporation of investor to a non-EU State. While investment protection treaties provide for prevention mechanisms against treaty shopping through denial of benefits clauses or determination of corporate nationality on the basis of the nationality of the entity exercising direct or indirect control, treaty shopping is, in principle, permissible for legitimate purposes.

While treaty shopping could potentially mitigate the negative consequences of the Achmea decision, two issues may impair the effectiveness of such practice.

In certain situations, treaty shopping may constitute abuse of process which may deprive an investment tribunal of jurisdiction ratione temporis and, thereby, prevent an investor from resolving a dispute through investment arbitration. In light of the Pac Rim and Philip Morris cases, abuse of process will arise if an investor engaged in treaty shopping in order to obtain access for a dispute that is foreseeable, even if it has not yet materialised. A dispute must be foreseeable before the restructuring and there must be a reasonable prospect that it will in fact arise.[14] Tribunals, therefore, take into consideration matters such as the degree of foreseeability of a dispute, the timing of investment and restructuring.

The restructuring of investment must be legitimate and justified independent of the possibility of occurrence of a BIT dispute in order for a tribunal to accept its jurisdiction. This leads to a conclusion that depending on a number of factors, restructuring of investments by European investors with the aim of obtaining access to protection granted under investment protection treaties concluded with non-EU States may pose a risk of denial of jurisdiction by an investment tribunal.

In addition, the Achmea decision raises a concern with respect to enforcement of arbitral awards in the EU Member States. While the CJEU focused on the incompatibility of ISDS clauses in intra-EU BITs, the approach of the CJEU may be adopted in relation to clauses in BITs concluded by Member States with non-EU States. The issue may be particularly relevant in case of enforcement of awards issued in arbitrations concerning disputes between foreign investors engaging on the European market, and the EU Member States in the matters relating to the EU law. The argument of the CJEU and the approach of the EU Commission may apply to such situations as well, thereby preventing enforcement of such awards within the EU.

The above raises a risk that the EU Commission or the CJEU, faced with a request for a preliminary ruling, may intervene in the enforcement proceedings of such awards and claim that the arbitration between a foreign investor and EU Member State adversely affects the autonomy of the EU law and, therefore, domestic courts of EU Member States should refuse the enforcement of such awards. This would have a devastating impact on the effectiveness of guarantees contained in investment protection treaties.

In particular, if a dispute relates to a benefit obtained by an investor and such benefit constitutes state aid, based on the Ioan Micula, Viorel Micula and others v Romania case and position adopted by the EC, it is most likely that exclusive jurisdiction of the EC in such matters will constitute an argument against ISDS clauses, no matter which States would be parties to a given BIT.[15]

The same issue arises with respect to arbitrations initiated under the Energy Charter Treaty (ECT) by investors engaging on the EU market against a host Member State. It is possible that the reasoning demonstrated in the Achmea decision would apply due to the fact that such disputes will, essentially, constitute intra-EU arbitrations, which in turn raises a concern as to the enforcement of arbitral awards on the territory of the EU as well as to the effectiveness of the ECT.

One may only speculate on the future of settlement of investor-State disputes and investment protection treaties in general. But recent developments in the mega-regional treaties indicate the direction in which the issue is developing. The Investment Court System (ICS), initially proposed in the context of the negotiations on the Transatlantic Trade and Investment Partnership (TTIP), adopted in Comprehensive Economic and Trade Agreement (CETA), may provide a foundation for the creation of a European or Multilateral Investment Court. Such a system would need to be specifically designed to ensure the final and ultimate authority of the CJEU over the EU law as well as to enable the Investment Court to request binding preliminary rulings within the meaning of Art. 267 TFEU. However, the very structure and design of the ICS in CETA, which is a transparent two-tier body with quasi-permanent adjudicators chosen by a joint committee consisting of representatives of contracting States, could operate as a model for the establishment of European investment court, which could offer an effective and desirable alternative to the existing ISDS mechanism.

Concluding remarks

The CJEU’s decision in the Achmea case has important repercussions for the intra-EU BITs and functioning of the ISDS mechanism. ISDS clauses in intra-EU BITs are now considered incompatible with the EU law, which necessitates that Member States take appropriate actions with the aim of ensuring compatibility. Member States may choose to terminate their intra-EU BITs, rather than modify them in order to delete the ISDS clauses.

The decision rendered will likely reduce the level of the investor protection in intra-EU relations, which in turn could weaken investor’s perception of legal certainty and the rule of law in the EU and affect the FDI capital flows.

Looking forward, some investors may seek protection under existing BITs other than intra-EU ones. Paradoxically, perception of a broader (or at least recognized) protection enjoyed by non-EU investors can weaken the competitive position of EU investors. Such imbalance in protection of EU-based and non-EU based investors may adversely affect the functioning of one of the cornerstones of the EU: the free and non-discriminatory flow of capital.

It would be difficult to expect investors to sue any of the EU Member States under an applicable intra-EU BIT. While they could reasonably predict the time necessary to obtain an award and assume the cost of arbitration, which could amount to tens of millions of euros, at the end, the award would not be enforceable. Similarly, it is difficult to assume that there would be any developments with respect to third-party funding of such matters.

Some investors may engage in treaty shopping by changing the nationality of an entity that once was protected by an intra-EU BIT to a non-EU State so as to benefit from protection granted under a BIT concluded between that State and EU Member State.

Finally, while developments contained in mega-regional treaties, such as CETA, may provide a model for the creation of the European investment court, the institutional design of the body must comply with the EU law in order to provide an effective alternative to domestic courts and ISDS mechanism currently in place.

ENDNOTES:

[1] Krzysztof Wierzbowski is the senior partner at Wierzbowski Eversheds Sutherland. He is also a member of CPR’s European Advisory Board (EAB).

[2] Aleksander Szostak LL.M., LL.B. is a trainee lawyer at Wierzbowski Eversheds Sutherland.

[3] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 59-60.

[4] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 6-23.

[5] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par.23 and 31.

[6] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018], Opinion of AG Wathelet [2017] par. 84-89, 134.

[7]  E.g. Case C-54/96 Dorsch Consult Ingenieurgesellschaft v Bundesbaugesellschaft Berlin [1997] par. 23; Case C-125/04 Guy Denuit and Betty Cordenier v. Transorient-Mosaique Voyages et Culture SA [2005] par.12-17; Case C-416/96 Nour Eddline El-Yassini v Secretary of State for the Home Department [1999] par.17-22.

[8] E.g. Case C-377/13 Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta SA v Autoridade Tributária e Aduaneira [2014] par.27.

[9] See. E.g.  Case C-125/04 Guy Denuit and Betty Cordenier v. Transorient-Mosaique Voyages et Culture SA [2005] par.14-17; Case C-126/97 Eco Swiss China Time Ltd v Benetton International NV [1999] par.28,34.

[10] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 55-59.

[11] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 59-60.

[12] European Commission – Press release: Commission asks Member States to terminate their intra-EU bilateral investment treaties Brussels, 18 June 2015.

[13] See. E.g. Tania Voon, Andrew Mitchell and James Munro, ‘Parting Ways: The Impact of Mutual Termination of Investment Treaties on Investor Rights’ [2014] 29(2) ICSID Review, 461-463 and 465-467.

[14] Pac Rim Cayman v. The Republic of El Salvador, ICSID Case No. ARB/09/12 [2012] Decision on the Respondent’s Jurisdictional Objections par. 2.96-2.100; Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12 [2015] Award on Jurisdiction and Admissibility par.566, 570, 584, 585-588.

[15] See. Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20;

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