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Investor-State arbitration under intra-EU investment treaties not contrary to EU law, says Court of Justice's Advocate General

 

On 19 September 2017, Advocate General Melchior Wathelet of the European Court of Justice delivered his Opinion finding that that the investor-State arbitration clause in the bilateral investment treaty (BIT) between the Netherlands and Slovakia is compatible with EU law.  The Opinion was given in response to a Request for a preliminary ruling from the German Federal Court of Justice (Bundesgerichtshof, BGH).  If the Opinion is followed by the Court of Justice, this would be a very significant development in both EU and investor-State arbitration law.

Background

On 10 May 2016, the German Federal Court of Justice (Bundesgerichtshof, BGH) referred three questions to the Court of Justice of the European Union (the CJEU), concerning the validity under EU law of investor-State arbitration under so-called ‘intra-EU’ BITs.  The issue arose in an application by Slovakia to set aside a EUR22 million investment arbitration Award rendered against it in a claim by Dutch investor, Achmea B.V. (Eureko B.V.), in the insurance sector.  Intra-EU BITs are those treaties in force between two EU Member States.  Slovakia argued that such arbitration provisions in intra-EU BITs are contrary to EU law and, therefore, that the Netherlands-Slovakia BIT is invalid and/or that the tribunal constituted under it had no jurisdiction over the dispute and its award is unenforceable.

The BGH sought a preliminary ruling from the CJEU position on the compatibility of the investor-State arbitration provision in the Netherlands-Slovakia BIT, specifically in relation to Arts. 344, 267 and 18 of the Treaty on the Functioning of the European Union (the TFEU):

  • Art. 344 provides that “Member States undertake not to submit a dispute concerning the interpretation or application of the [EU] Treaties to any method of settlement other than those provided for therein”;
  • Art. 267 regulates referrals by “any court or tribunal of a Member State” to the CJEU to give a ruling on questions regarding “the interpretation of the Treaties; or the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union”; and
  • Art. 18 prohibits “any discrimination on grounds of nationality”.

Preliminary remarks from the Advocate General

The Advocate General noted in his Opinion that a number of Member States made observations in the case.  One group of Member States (including Spain, Italy, the Czech Republic and Hungary), all of whom had been respondents to multiple investor-State arbitrations under intra-EU BITs, intervened in support of Slovakia’s arguments.  The other group – which included the Netherlands, Germany and France and which the Advocate General described as “essentially the countries of origin of investors” – intervened arguing for the validity of intra-EU BITs.  

The Advocate General found it surprising that – with the exception of Italy – none of the Member States arguing for the invalidity of the BIT had moved to terminate the various intra-EU BITs they maintained, thus allowing their own investors to benefit from the treaties.  He also remarked on the position of the European Commission, which intervened in support of Slovakia as well.  Although now arguing for the invalidity of intra-EU BITs, the Advocate General noted that the Commission had previously been of the view such BITs were essential instruments to prepare for the accession to the EU by countries in Central and Eastern Europe.  Similarly, he noted that all EU Member States, as well as the EU itself, had ratified to the Energy Charter Treaty, and no EU institution, nor any EU Member State, had sought an opinion from the CJEU on the compatibility of that Treaty with EU law.

Finally, the Advocate General remarked that a statistical analysis of arbitral decisions made under intra-EU BIT decisions suggested that the systemic risk posed to EU law was exaggerated by the Commission.  In such cases, of which there are 62 known concluded instances, investors have prevailed in only 10, ie 16.1% of cases, “a rate significantly below the 26.9% of ‘victories’ for investors at the global level”.

Advocate General finds arbitration under BIT compatible with EU law

The Advocate General considered all three questions referred by the BGH to be admissible but recommended that the CJEU find no basis of incompatibility between the BIT and EU law.  In his view, the BIT (a) does not discriminate on the basis of nationality (b) is not contrary to Art. 267, since investor-State tribunals may refer questions of EU law to the CJEU for a preliminary ruling and (c) does not undermine the allocation of powers under Art. 344, since that does not apply to investment disputes.

No discrimination contrary to Art. 18 TFEU

In Advocate General Wathelet’s opinion, the arbitration clause in the Netherlands-Slovakia BIT does not give rise to discrimination against investors not covered by the BIT, ie that are nationals of Member States that do not have a BIT with Slovakia.  First, many Member States other than the Netherlands have investment treaties with Slovakia, offering similar or equivalent protection. Secondly, and more fundamentally in the Advocate General’s opinion, the fact that the Netherlands-Slovakia BIT applies only to protect investments made by investors of those two States is inherent in the bilateral nature of BITs.  The right to arbitrate disputes arising from those investments is an integral part of the BIT.  It follows that a non-Dutch investor “is not in the same situation as a Netherlands investor so far as an investment made in Slovakia is concerned”.  This does not amount to discrimination on the ground of nationality.

A tribunal constituted under the BIT could make a preliminary reference

The Advocate General concluded that an arbitral tribunal constituted under Art. 8 of the Netherlands-Slovakia BIT is a court or tribunal within the meaning of Art. 267 TFEU.  As such, a tribunal is permitted to request that the CJEU give a preliminary ruling on matters of EU law.  It was his view that such tribunals are, among other things, established by law, with a sufficient degree of permanence, and that they apply rules of law in an independent, impartial manner to satisfy the definition of ‘court or tribunal’ for the purposes of Art. 267, as laid down by CJEU case law.

Allocation of powers for determining disputes not undermined

If the Court agrees with the Advocate General in relation to Art. 267, and a tribunal can refer questions to the CJEU, then no issue arises under Art. 344.  This is because such tribunals would then be required to apply EU law and, as such, cannot undermine the autonomy of the EU legal system.

In any event, a dispute between an investor and a Member State falls outside Art. 344 because that provision applies only to disputes between Member States or between Member States and EU institutions.  Art. 344 does not apply, in the Advocate General’s opinion, to disputes with individuals. Furthermore, since the EU is not a party to the BIT, that treaty is not a part of EU law and, as such, the exclusive jurisdiction of the CJEU over the interpretation and application of the EU Treaties is not affected.

Advocate General Wathelet also expressed the view that intra-EU BITs offer wider protection for investors than is generally available under EU law.  While EU law prohibits discriminatory treatment, BITs typically provide for additional substantive protections, which includes the option for investor-State arbitration itself.  Indeed, the arbitral tribunals “are the most appropriate fora” for the settlement of disputes between investors and States on the basis of the BIT, “since the national courts often impose conditions on investors that subject reliance on international law to conditions which in reality are impossible to meet, and time limits which are difficult to reconcile with the timely treatment of cases and the amounts at stake”.  As a consequence, if BITs did not provide for recourse to the investor-state dispute settlement mechanism, “the entire BIT would be devoid of all practical effect”.

The Advocate General’s Opinion, however, also acknowledges that intra-EU BIT tribunals are required to respect the primacy of EU law over the laws of Member States, as well as international commitments between them; any arbitral awards that fail to do so would be null and void.  Likewise, if an arbitral tribunal were to take a decision that was patently incompatible with EU law, EU courts can still set aside or refuse the enforce the award.

ICSID arbitration not at issue

The Advocate General’s Opinion does not deal with the compatibility of arbitration at the International Centre for Settlement of Investment Disputes (ICSID), since that is not an option available under the terms of the Netherlands-Slovakia BIT.  ICSID arbitration is, however, a common forum under many BITs and the Advocate General referred, in passing, to some concerns raised by the Commission about ICSID arbitration but expressly did not decide the issue.

Comment

The Advocate General’s Opinion is consistent with many rulings by numerous arbitral tribunals on the compatibility of intra-EU BITs with EU law, as well as with the decision of the lower courts in Germany in this particular case.  It is also worth noting that the BGH, which referred the questions to the CJEU, did not appear to share the concerns of Slovakia as to the compatibility of the BIT with EU law.  It referred the questions because the CJEU had never ruled on the issue and in light of the intervention of the European Commission both in the arbitration itself and in the German court proceedings. 

It now remains to be seen whether the CJEU will follow the Opinion of the Advocate General.  While Opinions rendered by Advocates General are influential and often followed by the Court, they are not binding.  In 2015, Advocate General Wathelet gave the opinion in another case before the CJEU relating to arbitration (the Gazprom case) and the Court there declined to follow his reasoning in several respects.

The Court of Justice is expected to give judgment in late 2017 or early 2018. 

 

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