On the 6th of March 2018, the Court of Justice of the European Union (CJEU) held in a case between the Slovak Republic and Achmea (Case C-284/16, ECLI:EU:C:2018:158) that investment arbitration on the basis of the Netherlands-Slovakia Bilateral Investment Treaty (BIT) is incompatible with EU law, in particular Arts. 267 and 344 of the Treaty on the Functioning of the European Union (TFEU).
This article has been co-written by Cees Verburg, PhD researcher at Groningen Centre of Energy Law and Faculty of Law, University of Groningen
This puts a question mark over the almost 200 existing intra-EU BITs, including the 12 BITs of the Netherlands and the 13 BITs of Belgium and Luxembourg, which are concluded with primarily Eastern-European EU Member States.
The judgment also casts some doubt over the investor-State arbitration clause of the Energy Charter Treaty (ECT). The ECT is nowadays often invoked in intra-EU relations, in particular in relation to renewable energy projects. The (non) applicability of the ECT is thus of great relevance for European investors in the renewable energy sector. For that reason, this blogpost will devote a few words on the consequences of the CJEU ruling in the Achmea case for the ECT.
The case between Slovakia and Achmea arose out of an investment made by the Dutch insurer over a decade ago. In 2004, Slovakia liberalized its health insurance sector after which Achmea made an investment. From 2006 onwards, Slovakia partially reversed the liberalization and in 2007 a measure was adopted which prohibited the distribution of profits made by private insurance activities. Subsequently, in 2008 Achmea invoked the arbitration clause of the Netherlands-Slovakia BIT. An UNCITRAL arbitration tribunal seated in Frankfurt, Germany would render an award on jurisdiction in 2010 and a final award in 2012. The tribunal concluded that Slovakia violated its obligations under the BIT and awarded Achmea EUR 22.1 mln in damages.
In the subsequent set-aside proceedings brought by Slovakia before German courts, Slovakia argued that the tribunal lacked jurisdiction, primarily because the arbitration clause in Art. 8 of the BIT is incompatible with EU law, more specifically with Arts. 18, 267 and 344 TFEU. This argument, which has often been put forward by the European Commission acting as amicus curiae in arbitration proceedings, has been returning in intra-EU investment cases for more than a decade. However, so far it has always been rejected by arbitral tribunals as well as domestic courts, including the German courts in the Achmea v. Slovakia case. However, because the CJEU has never ruled on this issue, the German Federal Court of Justice decided to make a reference to the CJEU. Advocate-General Wathelet concluded in his opinion of 19 September 2017 that the arbitration clause in the BIT did not violate EU law.
Analysis of the Court
The Court started its analysis by recalling the unique characteristics of the EU legal order. According to the Court, international agreements, such as the BIT, cannot affect ‘the autonomy of the EU legal system, observance of which is ensured by the Court.’ Also, ‘the autonomy of EU law with respect both to the law of the Member States and to international law is justified by the essential characteristics of the EU and its law, relating in particular to the constitutional structure of the EU and the very nature of that law.’ One of the essential characteristics of EU law is, according to the Court, ‘that it stems from an independent source of law, the Treaties, by its primacy over the laws of the Member States, and by the direct effect of a whole series of provisions which are applicable to their nationals and to the Member States themselves.’ The Court also refers to the principle of mutual trust between Member States. To preserve these specific characteristics of the EU legal order, the EU treaties have established a judicial system which is intended to ensure the consistency and uniformity in the interpretation of EU law, for example through the preliminary ruling procedure of Art. 267 TFEU.
The Court subsequently turns to the BIT. It recalls that the arbitration clause of the BIT states that tribunals shall decide a dispute on the basis of the law, including the domestic law of the Contracting Parties, the BIT and other relevant agreements between Slovakia and the Netherlands, general principles of international law, and agreements relating to the investment.
According to the Court, on the basis of this clause, in particular the reference to the domestic law of the host State and agreements between Slovakia and the Netherlands, a tribunal may be called upon to interpret and/or apply EU law. However, and contrary to the opinion of A-G Wathelet, a tribunal which derives its jurisdiction from the BIT is not a court or tribunal of a Member State within the meaning of Art. 267 TFEU. Consequently, the BIT tribunal is not entitled to make a reference to the Court for a preliminary ruling.
Next, the Court examines whether an arbitral award by a tribunal may be subject to review by the court of a Member State, which may ensure that the questions of EU law that the tribunal had to address can be submitted to the CJEU. The Court notes, however, that the grounds for such review are usually rather limited. Furthermore, if the seat of arbitration in an intra-EU investment dispute is outside the EU, a reference to the Court is again impossible.
A careful reader may think that this line of reasoning also holds true for commercial arbitration, where EU law may also be involved. However, the Court distinguishes between investment and commercial arbitration. ‘While the latter originate in the freely expressed wishes of the parties, the former 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 [EU law] requires them to establish in the fields covered by EU law, disputes which may concern the application or interpretation of EU law.’ Therefore, these disputes may be settled in a manner which does not guarantee the effectiveness of EU law: which violates Arts. 267 and 344 TFEU.
This ruling casts a shadow of doubt over the almost 200 existing intra-EU BITs. The final decision of the German Federal Court of Justice in this case is going to be of great interest: all we now know is that there is a treaty conflict between the EU treaties and the BIT. This does not mean, however, that these treaties are no longer in force: they have to be terminated first, which may be a difficult task given the presence of sunset clauses. No doubt, this ruling will carry a lot of weight in European courts where the primacy of EU law is a well-known principle. However, it remains to be seen whether the same holds true for ICSID tribunals or investment tribunals seated outside the EU and domestic courts in those jurisdictions. Hence, the ball is now in the court of policy makers in EU capitals: will intra-EU BITs be terminated after quickly amending them and removing sunset clauses? In the meantime, the recognition and enforcement of intra-EU investment awards within the EU may have become more complicated.
The Energy Charter Treaty
The fact that the Energy Charter Treaty (ECT) is by far the most often invoked investment treaty in intra-EU relations warrants a brief examination of the consequences of the CJEU ruling for the ECT. Arguably, the reasoning of the CJEU in the Achmea case can by analogy also be applied to ECT tribunals since these tribunals, by and large, operate in the same manner. Nevertheless, the ECT differs in two respects from the Netherlands-Slovakia BIT.
Firstly, the applicable law clause of Art. 26(6) ECT states that ECT tribunals ‘shall decide the issues in dispute in accordance with this Treaty [the ECT] and applicable rules and principles of international law.’ Thus, while the Achmea tribunal also had to apply domestic law, which may include applicable rules of EU law, ECT tribunals merely apply international law. In ECT cases, tribunals tend to apply national law, which may include the implementation of EU law, as a fact without really interpreting it. This is for example what happened in AES v. Hungary. Nevertheless, one can also make the argument that in intra-EU cases, EU law is part of the applicable rules of international law.
Secondly, the fact that the EU itself is a Contracting Party to the ECT is a notable difference. As the CJEU held in the Achmea judgment: ‘In the present case, however, apart from the fact that the disputes falling within the jurisdiction of the arbitral tribunal referred to in Article 8 of the BIT may relate to the interpretation both of that agreement and of EU law, the possibility of submitting those disputes to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States (emphasis added).’ In its judgment, the CJEU did not question to possibility of the EU entering into international agreements which establish a court responsible for the interpretation of that agreement in a way that is binding upon the institutions of the EU.
Even if ECT arbitration would be equally incompatible with EU law, this again, does not mean that the ECT no longer applies or its arbitration clause becomes inoperable. As the RREEF v. Spain tribunal held two years ago in reaction to an intra-EU objection to jurisdiction:
“The Tribunal observes, however, that should it ever be determined that there existed an inconsistency between the ECT and EU law – quod non in the present case – and absent any possibility to reconcile both rules through interpretation, the unqualified obligation in public international law of any arbitration tribunal constituted under the ECT would be to apply the former. This would be the case even were this to be the source of possible detriment to EU law. EU law does not and cannot “trump” public international law.”
This statement is probably the most forceful reminder from ECT practice which confirms that bodies that apply international law – and not EU law – as their primary applicable law may resolve conflicts between international and EU law in rather different manner than the CJEU. Indeed, the primacy of EU law in the context of a treaty to which the EU itself is a Contracting Party – and therefore bound by that treaty - would be an interesting phenomenon.
An opportunity for the CJEU to rule on the compatibility of ECT arbitration with EU law may already arise in the very near future. Less than a month ago, a Luxembourgish company prevailed in an ECT arbitration against Spain. Contrary to the wishes of the investor, the seat of arbitration was Stockholm. Given the fact that the investor was awarded more than EUR 53 mln in damages, one would expect that Spain will turn to the Swedish courts and attempt to set aside the award, probably by arguing that there was no jurisdiction. With regards to comparable ongoing Spanish ECT cases, it is worth mentioning that Spain has immediately requested two ICSID tribunals to re-open their proceedings pursuant to ICSID Arbitration Rule 38(2) in order to submit the CJEU judgment as evidence that these tribunals lack jurisdiction over intra-EU claims.
An interesting historical side-note in any discussion regarding the intra-EU applicability of the ECT is that during the negotiations of the ECT, in the early 1990’s, the European Commission tried to include a disconnection-clause into the current Art. 24 of the ECT, which would have precluded the intra-EU applicability of the treaty. Given the fact that this proposal never made it beyond the negotiating table, one could argue that the ECT Parties therefore wanted the ECT to apply within the EU. If the CJEU would, in the future, rule that ECT arbitration violates EU law, arbitrators may find themselves in an awkward position. On the one hand, following such a CJEU ruling might be considered as giving effect to a non-existing disconnection clause that was explicitly rejected during the negotiations, which may amount to a de facto amendment of the ECT and which in ICSID arbitration might expose the award to annulment if it constitutes a manifest excess of powers. On the other hand, rejecting to follow a CJEU judgment might result in an award that, in the worst-case scenario, is unenforceable in the EU.
Nonetheless, one should bear in mind that even if intra-EU ECT arbitration becomes an unappealing avenue, the ECT also provides for dispute resolution before the national courts of ECT States on the basis of Art. 26(2)(a) ECT. This would mean that investors from EU Member States can continue to rely on the ECT in intra-EU cases, but this time under the supervision of the CJEU.
 Intra-EU BITs of the Netherlands are currently in force with: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. In addition to these States, Belgium and Luxembourg have also concluded a BIT with Cyprus.
 Decision on Jurisdiction, RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/30, 6 June 2016. Para. 87.
 Luke Eric Peterson, Analysis: Spain Immediately Seeks to test whether ECJ Judgment Reaches to Energy Charter Treaty Cases; However Request to Reopen two Closed Proceedings also Raises Specter of Arbitration Challenge (IA Reporter, 2018). <http://tinyurl.com/y9ybrono> Accessed on 13/3/2018.
 The proposal provided for the following: ‘In their mutual relations, Contracting Parties which are members of the EC shall apply Community rules and shall not therefore apply the rules arising from this Agreement except insofar as there is no Community rule governing the particular subject concerned.’