The recently delivered decision of the CJEU in Achmea case has caused mild earthquake among law practitioners and academics from both inside and outside the EU. The decision of the Grand Chamber sparked a heated debate about the future of ISDS in the context of the European Union. Indeed, the reasons for inconsistency of the arbitration clause of the Netherlands – Slovakia BIT (‘N-S BIT’) call into question all other similar intra-EU BITs (currently around 200). This may have profound consequences on the future development of investment climate and may influence the prac-tice of all involved actors: Member States, investors, arbitral tribunals and national courts of MS.
This chapter is devoted to an analysis of the CJEU’s landmark decision in case C-284/16 Ach-mea delivered on 6 March 2018. First, the factual background and the procedural history which led to the preliminary question under Art. 267(3) TFEU to the CJEU are summarized (Chapter 2.1). Subsequently, the content of the decision with a particular emphasis on the specific reasons for in-compatibility of the N-S BIT with EU law is addressed (Chapter 2.2).
2.1 Background summary of the case
The initial dispute between Achmea B.V. and Slovak Republic arose out of the measures adopted in 2006-2007 by Slovak government by which it reversed previous liberalization of Slovak health in-surance market. These measures eventually prevented private health insurers from distributing prof-its to their shareholders. Achmea (an undertaking of a Dutch insurance group) operated in Slo-vakia under two insurance providers – Union poisťovňa and Union zdravotná poisťovňa thereby also being a subject to the governmental measures in question.
In 2008, Achmea initiated arbitration proceedings under the N-S BIT claiming that the measures of Slovak government amounted to an indirect expropriation and further violations of oth-er various substantive treaty standards. The arbitral tribunal constituted on the basis of Article 8 N-S BIT (‘BIT Tribunal’) chose Frankfurt as the place of arbitration, thereby rendering German law applicable as lex arbitri. It was already in the beginning of the proceedings when Slovakia for the first time objected the BIT Tribunal’s jurisdiction, arguing that Article 8 of the N-S BIT is incompat-ible with EU law, in particular with Articles 18, 267 and 344 TFEU (‘Intra-EU jurisdictional objec-tion‘). By an interlocutory award of 26 October 2010 , the BIT Tribunal rejected these argu-ments and later ruled in favour of Achmea. In its final award from 7 December 2012 the BIT Tribu-nal ordered Slovakia to pay Achmea 22.1 million EUR in damages.
In March 2013, Slovakia challenged the award and tried to set it aside before German courts by submitting an application to Oberlandesgericht Frankfurt (Higher Regional Court of Frankfurt), again relying on the Intra-EU jurisdictional objection. However, only after appeal against the dis-missive decision of the Higher Regional Court, the Bundesgerichtshof (Federal Supreme Court of Germany), despite obvious disagreement with such reasoning, referred issues concerning the Intra-EU jurisdictional objection to the CJEU with a request for a preliminary ruling under Article 267 TFEU. In September 2017, an opinion of AG Wathelet has been published with a conclusion re-fusing the alleged incompatibility of the arbitration clause in Article 8 N-S BIT with EU law.
Nonetheless, opposite to the usual approach of the CJEU towards AG’s Opinions, the Court decided not to follow AG’s reasoning. As suggested by B. Hess, the apparent pro-investment orien-tation of the AG’s opinion might have provoked a firm resistance from the Grand Chamber. Consequently, after it performed a three-step analysis of the functioning of the BIT Tribunal (Chap-ter 2.2) the Court found the arbitration clause of Article 8 N-S BIT incompatible with EU Treaties.
2.2 Reasons for incompatibility of the BIT arbitration clause with EU law
Initially, in its preliminary reference the Bundesgerichtshof asked the Court three questions concern-ing the arbitration clause contained in N-S BIT. In particular it had asked whether Articles 344, 267 and 18 TFEU preclude its compatible application under EU law. At the outset of its analysis, the Court decided to answer questions regarding Articles 344 and 267 TFEU together, as it considered both provisions as preserving the principle of the autonomy of the EU legal order. In the first eight paragraphs of its considerations the Court thus ‘sketched the standard of review’ for the rest of the decision, when it reiterated the ‘essential characteristics of the EU’ derived from its very na-ture which together constitute the sacrosanct autonomy principle. Indeed, as B. Hess correctly points out ‘Achmea is primarily about the autonomy of the EU legal order in international dispute settlement and only in the second place about investment arbitration’. Essentially, in the test of compatibility with EU Treaties, the Court asks the question whether the EU judicial system is able to ensure full effectiveness of EU law with respect to the functioning of the BIT Tribunal.. Since the Court held that Articles 267 and 344 TFEU preclude Article 8 N-S BIT to be compatible with EU law, it concluded that there was no need to answer the remaining question concerning the principle of non-discrimination under Article 18 TFEU.
In the analysis of the Court’s reasoning, the author focuses on three features of the arbitration clause in Article 8 N-S BIT as raised by the Court, which rendered the provision incompatible with the principle of autonomy of EU law and Union’s judicial system. First, it was the mere possibility of interpreting EU law by the BIT Tribunal which was a starting point for further reasoning of the Court (Chapter 2.2.1). Second, the fact that the BIT Tribunal was not found as being part of the EU judicial system rendered the preliminary reference mechanism inapplicable (Chapter 2.2.2). Finally, the limited scope of review of awards of the BIT Tribunal by MS courts was considered by the Court as a threat to maintaining uniform interpretation of EU law (Chapter 2.2.3).
2.2.1 Disputes relating to interpretation of EU law
The first question the Court asked in its analysis was whether the disputes which the BIT Tribunal is called to resolve are liable to relate to the interpretation or application of EU law. First, the Court ascertained that despite the broad wording of Article 8 (1) N-S BIT the jurisdiction of the BIT Tri-bunal extends only to possible infringements of the BIT. Nevertheless, it stressed the importance of Article 8 (6) N-S BIT, which provides a list of sources of applicable law. Aforementioned Articles provide:
Article 8 (1) N-S BIT:
‘All disputes between one Contracting Party and an investor of the other Contracting Party con-cerning an investment of the latter shall if, possible, be settled amicably.‘
Article 8 (6) N-S BIT:
‘The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively:
the law in force of the Contracting Party concerned;
the provisions of this Agreement, and other relevant agreements between the Contracting Parties;
the provisions of special agreements relating to the investment;
the general principles of international law.’
Accordingly, the Court noted that (1) the law in force of the Contracting Parties concerned (i.e. Slo-vak and Dutch law) and (2) provisions of other relevant international agreements may be applied. The Court then turned to the nature and characteristics of EU law when it reminded that EU law (1) forms part of the national laws of Member States while, simultaneously, (2) it derives from interna-tional agreement between the Member States. Hence, the mere possibility that the BIT Tribunal ‘may be called on to interpret or … apply EU law‘ either through applying MS’ law or their inter-national agreements, was sufficient for the Court‘s finding that the disputes covered by the tribunal's jurisdiction were ‘liable to relate to the interpretation or application of EU law.‘
This conclusion formed a base for the second step in Court’s analysis because once a court or tribunal has been found to be able to apply and interpret EU law, it may potentially affect the auton-omy of the EU legal order if a uniform interpretation is not ensured by EU judicial system. Conse-quently, the Court turned to the question whether the BIT Tribunal is a part of EU judicial system and whether it can request a preliminary ruling under Article 267 TFEU.
2.2.2 Court or a tribunal of Member States
The second step of the analysis revolved around the question whether the BIT Tribunal ‘is situated within the judicial system of the EU, and … whether it can be regarded as a court or tribunal of a Member State within the meaning of Article 267 TFEU’? The relevance of this question is based on the wording of Article 267 TFEU providing for the preliminary ruling mechanism, which, as already mentioned earlier, constitutes ‘a keystone of the EU judicial system which guarantees the allocation of powers fixed by the EU and EU Treaties and the autonomy of the EU legal system.’ Accordingly, only ‘a court or a tribunal of a Member State’ may refer preliminary questions to the CJEU to enable the Court to preserve uniform interpretation of EU law.
To determine whether the BIT Tribunal corresponds to such definition, the Court first referred to Case C-377/13 Ascendi Beiras Litoral e Alta. In this case, the Tribunal Arbitral Tributário (arbitration tribunal dealing with taxation) has been found to be a ‘court or a tribunal of a MS’ be-cause of the ‘fact that the tribunal as a whole was part of the system of judicial resolution of tax disputes’ in Portugal. In the present case, however, the Court not only found that the BIT Tribunal is not a part of neither Slovak or Dutch judicial systems, it further emphasized, that ‘it is precisely the exceptional nature of the [BIT Tribunal’s] jurisdiction (as being situated outside of MS judicial systems) compared with that of the courts of those two Member States that is one of the principal reasons for the existence of Article 8 of the BIT.’ Hence the Court concluded, that the BIT Tribu-nal ‘cannot in any event be classified as a court or tribunal ‘of a Member State’ within the meaning of Article 267 TFEU, and is not therefore entitled to make a reference to the Court for a preliminary ruling.’
Interestingly enough, Advocate General Wathelet relied on the same judgement of the Court in Ascendi Beiras Litoral e Alta but reached opposite conclusion. Accordingly, he proposed the Court to answer that the BIT Tribunal is ‘a court or tribunal’ within the meaning of Article 267 TFEU and is therefore permitted to request the Court to give a preliminary ruling. AG Wathelet mentioned number of factors which he considered relevant, namely: (1) whether the body is established by law, (2) whether it is permanent, (3) whether its jurisdiction is compulsory, (4) whether its procedure is inter partes, (5) whether it applies rules of law and (6) whether it is independent and impartial. After detailed assessment of those factors applied to the present case, the AG concluded that the BIT Tribunal is a ‘court common to number of Member States’ referring to the Benelux Court of Justice (Benelux Court) from Parfums Christian Dior case. In the case the CJEU held that ‘there is no good reason why such a court, common to a number of Member States, should not be able to sub-mit questions to [CJEU], in the same way as courts or tribunals of any of those Member States.’ The Court also considered this argument, but refused to accept any similarities between the Benelux Court and the BIT Tribunal. In the Court’s opinion, there is no comparable connection between the BIT Tribunal and Dutch/Slovak judicial system as was found between the Benelux Court and Bene-lux countries.
After the second step of its analysis, the Court ascertained that the arbitral tribunal established according to Article 8 N-S BIT (1) may potentially interpret EU law and (2) is not part of EU judi-cial system and consequently not a ‘court or a tribunal of a Member State’. The Court thus proceed-ed to the last step of its analysis, in which it considered to what extent are the awards of the BIT Tri-bunal subject to review by a court of a Member State, which could refer questions concerning EU law to the CJEU.
2.2.3 Possibility of reviewing the awards
In the end of its analysis, the Court inquired whether the BIT Tribunal may still be reconciled with EU law through the review of its awards by a court of Member State in accordance with Article 19 TEU. Full review by MS courts would ensure ‘that the questions of EU law which the [BIT Tribu-nal] may have to address can be submitted to the Court by means of a reference for a preliminary ruling.’ This was a logical step to take as the Court tried once more to ensure that it will remain in full control over the final interpretation and application of EU law.
In this part, the Court based its analysis on Articles 8 (5) and 8 (7) N-S BIT which provide:
Article 8 (5) N-S BIT
‘The arbitration tribunal shall determine its own procedure applying the United Nations Commis-sion on International Trade Law (UNCITRAL) arbitration rules.’
Article 8 (7) N-S BIT
‘The tribunal takes its decision by majority of votes; such decision shall be final and binding upon the parties to the dispute.’
It follows, that the awards of the BIT Tribunal are final, and that it determines its own procedure by applying the UNCITRAL Arbitration Rules (UAR). Under Article 18 UAR, in the absence of agreement of the parties on the place of arbitration, the place of arbitration shall be determined by the arbitral tribunal. Accordingly, in the present case the BIT Tribunal chose Frankfurt as a place of arbitration and consequently German law as lex arbitri in relation to possible setting aside proce-dure of the award.
The Court stressed two important issues with respect to the wording of the N-S BIT arbitration clause. First, despite the fact that it was precisely the placement of the seat of the BIT Tribunal in Germany which enabled Slovakia to seek judicial review of the award before German court (as a EU MS court) which eventually led to involvement of the CJEU, the Court found that the mere possibil-ity of the BIT Tribunal to choose its own seat is problematic. Hypothetically, the BIT Tribunal could have chosen to be seated outside of the EU, which would place its awards outside the jurisdic-tion of MS courts or CJEU. Hence, the absence of any procedural safeguard which would guarantee that the BIT Tribunal will be seated in an EU Member State renders the arbitration clause incon-sistent with EU law.
Second, the limited extent of review of arbitral awards under German Code of Civil Procedure (applicable as lex arbitri) has been found insufficient for an efficient application of EU law. Accord-ingly, German courts can review only validity of an arbitration agreement under applicable law and the consistency of the award with public policy. The Court recalled its previous case-law concern-ing commercial arbitration , in which it held that the requirements for efficient arbitration proceed-ings justified limited judicial review if the fundamental provisions of EU law could be examined in the course of that review. Nonetheless, it considered that the same reasoning cannot be applied to arbitration proceedings under Article 8 N-S BIT. In the Court’s view, the main difference between commercial arbitration and arbitration under the N-S BIT is the fact that the former originates ‘in the freely expressed wishes of the parties’ whereas the latter ‘derive from a treaty by which Member States agree to remove (disputes which may concern the application or interpretation of EU law) from the jurisdiction of their own courts and hence from the system of judicial remedies which the second subparagraph of Article 19(1) TEU requires them to establish in the fields covered by EU law.’
To sum up, the Court reached the conclusion that an arbitration mechanism established under Article 8 N-S BIT could prevent disputes concerning the interpretation or application of EU law from being resolved in a manner that ensures its full effectiveness, and thus has an adverse effect on the autonomy of EU law.
2.3 Interim conclusion
The precise reach Achmea’s consequences for the future investment arbitrations in both intra-EU and extra-EU context is currently a subject to broad discussion of legal professionals and academics who consider various scenarios. What will happen to ongoing intra-EU arbitrations or what are the effects of the decision on similar intra/extra EU BITs are just few questions that arose immediately after the decision has been published. To illustrate the contrasting views from both sides – one group argues that the decision applies only to the specific arbitration clause in the N-S BIT, while the other argues that because of the general nature of the reasons for incompatibility raised by the Court, they are also applicable on investment arbitration beyond the context of intra-EU BITs. It is indeed a very inter-esting debate, however, for the purpose of this thesis, only the implications of Achmea on CETA’s Investment Court System are further addressed (Chapter 3).
Based on the decision, it is possible to derive a three-step test adopted by the Court when de-termining the compatibility of an ISDS tribunal with EU law. First, it is crucial to determine whether the examined tribunal may interpret and apply EU law. The Court made clear, that this occurs even if the wording of arbitration clause is limited to infringements of the IIA. According to the Court, it is sufficient that such tribunal may apply EU law as a part of Member States law or their international agreements. Second, it must be ascertained, whether such tribunal forms a part of the judicial system of Member States. According to the Court, however, investment tribunals cannot be considered to be ‘courts or tribunals of the MS’ under Article 267 TFEU, and consequently, cannot refer preliminary questions to CJEU. Third, the Court must inquire whether the awards of such tribunal located out-side MS judicial systems are subject to sufficient review by courts of the MS. It follows that an una-vailability of a full review regard to their consistency with EU law renders such arbitration mecha-nism unable to ensure the full effectiveness of EU law.
Indeed, the Court was not that much concerned with a conflict between EU law and internation-al investment law, rather than that a dispute that may potentially involve interpretation of EU law is removed from EU courts supervision. Thus, it is its adverse effect on the autonomy of EU law what renders the ISDS mechanism under Article 8 N-S BIT incompatible with EU Treaties.
In conclusion, the only immediate consequence of the decision will probably be the success of Slovakia in the set-aside proceedings before German courts. The Bundesgerichtshof is now bound by the interpretation provided by the Court, and although it has only limited competences in review-ing the award , it should set it aside on the basis of its inconformity with public policy. Howev-er, the practical effects of the decision are already apparent for instance with respect to arbitral award delivered by a tribunal based on Benelux – Poland BIT in PL Holdings Sarl v. Poland case. The Polish government, which was ordered to pay 208 million dollars, has already declared its plans to raise an ‘Achmea defence’ in the set aside proceedings. This case may thus serve as an example for any unsuccessful party in investment arbitration proceedings to object the validity of an award issued by a tribunal established under similar provision as Article 8 N-S BIT. Nevertheless, only actual practice of investment tribunals, national courts of MS and the CJEU will reveal the real out-come of Achmea decision. The CJEU may soon be the first to follow its own reasoning in its antici-pated Opinion 1/17 where it will address the compatibility of the ICS mechanism envisaged in CE-TA (Chapter 3).