Court of Justice of the European Union says ad hoc submission to arbitration of dispute between EU Member State and EU investor under BIT is against EU law
01 November 2021
On 26 October 2021, the Court of Justice of the European Union (the Court) delivered its judgment in Case C‑109/20, Republic of Poland v PL Holdings S.á r.l. (PL Holdings).
It held that an ad hoc arbitration agreement concluded between PL Holdings and Poland on the same terms as the arbitration clause in the 1987 Belgium/Luxembourg-Poland BIT (the BIT) was invalid, following the interpretation of Articles 267 and 344 TFEU adopted in its 2018 ruling in Case C-284/16, Slovak Republic v Achmea B.V. (Achmea), reported on here.
The case concerns Poland’s application to the Swedish courts to set aside two awards (a partial award and a final award) rendered in 2017 in an arbitration with a Luxembourg company, PL Holdings, under the BIT, administered by the Stockholm Chamber of Commerce (SCC). The tribunal had held that Poland had breached the BIT when it first suspended voting rights attached to shares owned by PL Holdings in Polish banks and ultimately forced those shares to be sold.
Poland applied to the Swedish courts to set aside both awards on the basis that the tribunal lacked jurisdiction to decide the case, because, pursuant to EU law, an arbitration clause in a BIT between two EU Member States (i.e. an intra-EU BIT, such as the BIT) was invalid (the so-called “intra-EU objection”). In response, PL Holdings argued that, notwithstanding any potential invalidity of the arbitration clause in the BIT, a separate ad hoc arbitration agreement had been concluded between the parties. Referring to Swedish arbitration law and principles of commercial arbitration, PL Holdings submitted that it had made an offer to arbitrate on the same terms as contained in the BIT arbitration clause when it filed its request for arbitration. It argued that Poland had tacitly accepted that offer in failing to challenge the tribunal's jurisdiction on the basis of the BIT arbitration clause in a timely fashion (Poland had raised the intra-EU objection in the arbitration, but only when it submitted its rejoinder).
The Swedish Court of Appeal dismissed Poland’s application, finding that even though the arbitration clause in the BIT was invalid under EU law (pursuant to Achmea), that did not prevent a Member State from concluding an ad hoc arbitration agreement with an investor to settle a dispute under the BIT at a later stage. Such an ad hoc agreement was based on the common intent of the parties to that dispute and was concluded according to the same principles as in commercial arbitration proceedings. It also found that Poland’s challenge to the validity of the arbitration clause was in any event out of time and therefore time-barred under Swedish law.
Poland appealed to the Swedish Supreme Court. In February 2020, the Swedish Supreme Court suspended the proceedings and made a request to the Court for a preliminary ruling on the matter.
Question considered by the Court
The question considered by the Court was as follows: “Do Articles 267 and 344 of the Treaty on the Functioning of the European Union (the TFEU) preclude a Member State from adopting legislation which would allow Member States to conclude ad hoc arbitration agreements with investors from another Member State, where that agreement would make it possible to continue arbitration proceedings initiated on the basis of an invalid intra-EU arbitration clause of identical content?”
The Court first noted that it was for the Swedish courts to determine, on the facts, whether there was an ad hoc agreement between the parties concluded on the same terms as the arbitration clause in the BIT.
On the assumption that such an ad hoc agreement did exist, the Court answered the question in the affirmative. It observed that, in Achmea, it had held that Articles 267 and 344 TFEU precluded investor-State arbitration clauses in intra-EU BITs on the basis that such clauses allowed disputes, which may concern the application or interpretation of EU law, to be removed from the jurisdiction of EU Member State courts. For the same reasons, an ad hoc agreement having the same content as such an investor-State arbitration clause must also be precluded, as must any national legislation which allowed a Member State to conclude such an agreement.
The Court added that, applying Achmea, not only can Member States not undertake the removal from the EU judicial system of disputes which concern the application and interpretation of EU law, but also, where such disputes are brought before an arbitral body on the basis of an undertaking that is contrary to EU law, they are required to challenge the validity of that undertaking.
It also stressed that any attempt by a Member State to remedy the invalidity of an arbitration clause by means of a contract with an investor from another Member State would run counter to the first Member State’s obligation to challenge the validity of the arbitration clause, and would thus be liable to render the actual legal basis of that contract unlawful.
The Court refused to limit the temporal scope of the judgment to prospective application on the basis that the interpretation of Articles 267 and 344 TFEU in Achmea was not so limited. It also concluded that no serious difficulties would arise as a result of this decision. In particular, it confirmed that the scope of the judgment was limited to ad hoc agreements concluded in circumstances such as those at issue in the main proceedings. The judgment did not extend to arbitration agreements concluded with Member States in various other types of contracts, about which PL Holdings had raised concerns.
The Court’s judgment in PL Holdings extends the application of Achmea (reported on here) to the ad hoc submission to arbitration of disputes under intra-EU BITs, thus closing down a loophole that might have allowed, as a matter of EU law, such disputes to be resolved by arbitration despite the Court’s findings in Achmea.
At the same time, PL Holdings provides some comfort to parties (whether from inside or outside the EU) who have entered into arbitration agreements with EU Member States in commercial contracts. Although difficult to reconcile with its reasoning, the Court was clear that such contracts were unaffected by its judgment, which is limited to arbitration agreements that purport to circumvent the invalidity of an arbitration clause in an intra-EU BIT. The judgment thus maintains the distinction drawn between investment treaty arbitration based on an intra-EU BIT and commercial arbitration in Achmea and Komstroy (reported on here).
Nevertheless, EU investors entering into a contract (such as a host state agreement) with an EU Member State concerning an investment are advised to provide for ICSID arbitration in order to limit the risk of a review of any resulting award by an EU Member State court in accordance with EU law (and a potential reference to the Court). Where this is not possible, commercial arbitration rules, coupled with a seat outside the EU and, ideally, non-EU governing law, can also be chosen. However, it may also mean that enforcement has to be sought outside of the EU where non-immune assets may be more difficult to locate. Sovereign immunity waivers from execution are thus also vital to include in contracts with EU Member States.