CJEU signals the end of intra-EU investment arbitration

Out-Law Analysis | 08 Mar 2018 | 5:35 pm | 3 min. read

ANALYSIS: Dispute resolution clauses in bilateral investment treaties (BITs) entered into between member states which require the parties to arbitrate their disputes are incompatible with EU law, according to a recent judgment by the EU's highest court.

The European Commission has recently signalled its desire for all EU countries to ultimately terminate any BITs in favour of the exclusive application of EU law. While its full impact is yet to be assessed, the recent ruling by the Court of Justice of the European Union (CJEU) appears to confirm this approach.

The CJEU was asked to rule on a question which had been referred to it by the German Federal Court of Justice, the Bundesgerichtshof, arising out of an award which had been issued in an arbitration between Achmea, a Dutch investor, and the Slovak Republic.

In the original award, dated 7 December 2012, the arbitral tribunal ordered the Slovak Republic to pay €22.1 million for breaching the provisions of the Netherlands-Slovakia BIT relating to fair and equitable treatment, and the provisions safeguarding the free transfer of payments. The Slovak Republic brought an action to set aside the award in the German courts, as Frankfurt had been chosen as the seat of the arbitration, on the grounds that the arbitration provisions in the BIT were null and void as they run contrary to EU law.

The CJEU was asked to consider in particular whether arbitration provisions in intra-EU BITs were precluded by operation of various provisions of the Treaty on the Functioning of the EU (TFEU, the 'Lisbon Treaty') including:

  • Article 344, which prevents member states from submitting disputes concerning the interpretation or application of EU treaties to any method of settlement other than those prescribed in EU law;
  • Article 267, which allocates jurisdiction to the CJEU to rule on the interpretation and validity of EU treaties and law, and requires courts and tribunals of the member states to refer such questions to the CJEU; and
  • Article 18, which prohibits discrimination on the grounds of nationality.

What are bilateral investment treaties?

BITs are international agreements signed between two states which establish the terms and conditions for private investment by nationals and companies of one state in the other state. Typically, they set out standards of conduct that apply to governments in their treatment of foreign investors, such as fair and equitable treatment, protection from expropriation, free transfer of investment proceeds and full protection and security for the investment.

The protections offered by BITs are particularly relevant in the context of large international construction projects in which contractors often negotiate and contract with various emanations of the state in which their project is located. As long as a contractor qualifies as a 'foreign investor', then the BIT with the host state is likely to apply and afford protection to the contractor and its investment; whether this is capital investment, equipment, machinery or the project itself.

A common and distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism. An investor whose rights under the BIT have been violated could have recourse to international arbitration under the auspices of various arbitration institutions, such as the International Centre for the Settlement of Investment Disputes (ICSID), rather than suing the state in its own courts.

While BITs potentially provide for protection to international contractors on a worldwide scale, the European world of investment treaty arbitration is currently going through fundamental changes which are likely to have an impact on the resolution of disputes relating to infrastructure projects located across Europe. The European Commission has made clear its position on the continuing availability of the BIT network for disputes within EU territory, which would ultimately result in claimants of EU origin no longer being able to rely on these treaties for disputes with EU member states.

What did the CJEU decide?

In its ruling of 6 March 2018, the CJEU appears to have sided with the European Commission. It found that, by concluding the BIT, Slovakia and the Netherlands had established a mechanism for settling disputes which was not capable of ensuring that those disputes will be decided by a court within the judicial system of the EU, which is able to ensure the full effectiveness of EU law. On that basis, the court concluded that the arbitration clause in the Slovakia-Netherlands BIT had an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.

The CJEU's ruling is important as its judgments are binding on all member states. However, the full impact of the decision is not yet clear, as the CJEU focused only on the specific BIT at issue and did not hand down a ruling of general application.

Nevertheless, it remains the case that the CJEU's ruling could have an adverse impact on the enforcement of future awards. In addition, if member states decide to terminate intra-EU BITs as a result of the ruling, this could affect current investors in those countries.

Frédéric Gillion is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.