Intra-EU BITs before the Court of Justice of the EU

 

As we have reported previously, the European Commission and several EU Member States have been consistently trying to escape their legal obligations of the bilateral investment treaties (BITs), which have been concluded between Member States (intra-EU BITs). The Achema (Eureko) v. Slovakia investment dispute is the most recent case, which has been referred by the German court to the Court of Justice of the EU (CJEU) for a decision.

The background of the case

In 2008 Dutch insurer Eureko (later renamed Achmea) brought an investment treaty claim against Slovakia based on the Netherlands-Slovakia BIT. Eureko complained against the re-nationalisation of the Slovak health system, which caused the indirect expropriation of Eureko’s health insurance business in Slovakia.

In 2010 the arbitral tribunal accepted its jurisdiction and proceeded with the decision in the merits. Already during the jurisdiction phase, Slovakia – actively supported by the European Commission – argued that the BIT between the Netherlands and Slovakia has been superseded by the accession of Slovakia to the EU in 2004. Indeed, Slovakia and the European Commission argued that the BITs is violating EU law and therefore cannot be relied upon any longer by European investors. The arbitral tribunal – following the arguments of the Netherlands which intervened as well – rejected the arguments of Slovakia and the European Commission.

In 2012, the arbitral tribunal concluded that Slovakia indeed violated its obligations under the BIT and ordered it to pay €22 million plus interest to Eureko.

However, that has not been the end of the story.

Slovakia – again actively supported by the European Commission – tried to challenge the jurisdiction of the arbitral tribunal before the ordinary courts in Frankfurt, Germany, which was selected as the seat for this arbitration. However, the Frankfurt Regional Court rejected the annulment claim by Slovakia, which in turn appealed against that judgment to the Federal Supreme Court (Bundesgerichtshof, BGH) in Karlsruhe.

In a recently published decision, the BGH decided to stay the proceedings and ask three preliminary questions regarding the compatibility of investment arbitration and intra-EU BITs with EU law to the CJEU.

The preliminary ruling questions

While the BGH expressly indicates in its request for preliminary questions that it is not very much convinced by Slovakia’s arguments and that it supports the judgment of the lower Frankfurt court, it nevertheless considers it necessary to ask these questions to the CJEU because the CJEU has so far not ruled precisely on the compatibility of investment arbitration and intra-EU BITs with EU law.

The questions of the BGH focus on three provisions of the Treaty on the Function of the EU (TFEU).

The first question – and main question – concerns Art. 344 TFEU, which provides that all disputes between Member States must be exclusively brought before the CJEU.

While the wording of this provision clearly only mentions disputes between Member States, Slovakia and the European Commission have been trying to expand the scope of Art. 344 TFEU by claiming that it also applies to disputes between investors and Member States. The Frankfurt court, following the largely accepted view in the legal literature, clearly rejected this interpretation. The BGH, while fully supporting the reasoning of the Frankfurt court, nevertheless considers it necessary to ask the CJEU whether Art. 344 TFEU prohibits the use of investment arbitration rules as contained in intra-EU BITs, which have been concluded before the Member State concerned acceded to the EU but where the dispute was initiated after its accession.

Only if the first question is to be answered negatively, the BGH asks the CJEU to answer the second question, which focuses on Art. 267 TFEU.

Art. 267 TFEU deals with the issue of ensuring uniformity and consistency of the interpretation and application of EU law through the co-operation between domestic courts of the Member States and the CJEU.

In short, the principle is that domestic courts are required to interpret and apply EU law as interpreted by the CJEU, but when domestic courts have doubts they should ask preliminary questions – as the BGH did in this case – to the CJEU for guidance. In this way, the uniformity and consistency of EU law can be ensured throughout the EU. The problem is that the CJEU does not consider arbitral tribunals as proper “courts” in the context of Art. 267 TFEU and therefore arbitral tribunals cannot ask the CJEU preliminary questions. This “lack of standing” of arbitral tribunal has been used as an argument by Slovakia and the European Commission for claiming that arbitral tribunals can interpret, apply or even negate EU law as they see fit – without any control by the CJEU. This in turn would cause fragmentation of EU law. However, this argument is not convincing since domestic courts are involved in the recognition and enforcement phase of arbitral awards. In this phase, domestic courts can – and indeed in the view of the BGH are obliged – to check whether an award violates the ordre public of a Member States, which also includes EU law. Accordingly, domestic courts of the Member States can ensure that arbitral awards are not in violation of EU law.

Indeed, the BGH views this mechanism as sufficient and therefore sees no reason that Art. 267 TFEU would stand in the way of using an arbitral tribunal for resolving a dispute between an investor and a Member State. Nonetheless, the BGH requests the CJEU to clarify this matter.

Only if the first and second questions are answered negatively, the BGH wishes to receive an answer on the third question, which concerns Art. 18 TFEU. Art. 18 TFEU is the general non-discrimination provision in EU law, which prohibits any discrimination based on nationality. Slovakia and the European Commission have been arguing that a BIT grants the right to use investment arbitration only to the nationals of the states, which have concluded the BIT – in our case Dutch and Slovak investors. This BIT grants them a privileged position compared to for example an Irish investor, who has no access to the Netherlands-Slovak BIT. This – so the argument goes – constitutes a discrimination among EU investors, which is prohibited by Art. 18 TFEU.

The BGH does not deny that this could be perceived as a discrimination. However, the BGH agrees with the solution which has been put forward by many investment law experts, namely, that the definition of “nationals” in intra-EU BITs simply should be interpreted broadly by covering all EU investors. In other words, all EU investors should be considered as falling within the scope of the Dutch-Slovak BIT (in fact, within the scope of all intra-EU BITs), so that all EU investors are treated equally. Consequently, all intra-EU BITs would be open to all EU investors. This broad interpretation can simply be employed by the arbitral tribunals ex officio, since Art. 18 TFEU applies also to all intra-EU BITs. Therefore, no treaty changes are necessary. The implicit question of the BGH is thus, whether or not the CJEU shares its view that this solution is sufficient to remove any doubts as to a potential violation of Art. 18 TFEU.

The wider context

This case must be seen in the wider context of the increasing efforts of the European Commission and some Member States to eradicate intra-EU BITs and investment arbitration within the EU.

In fact, this is the third case now pending before the CJEU. The first one is the Micula case, in which the European Commission has prohibited Romania to pay out a US $250 million ICSID award because that would be considered illegal new state aid. This case is currently pending before the General Court of the EU, which could be appealed to the CJEU.

The second case is the infringement procedures initiated by the European Commission against 5 Member States (the Netherlands, Romania, Austria, Sweden and Slovakia). In these proceedings the European Commission argues that intra-EU BITs are generally in violation of EU law and therefore should be terminated immediately.

All these cases should be decided within the next 18-24 months.

While the outcome of those cases cannot be predicted with certainty, it seems that the CJEU will side with the European Commission and thus declare intra-EU BITs to be in violation of EU law.

Finally, as we report in the other article of this newsletter, several EU Member States have indicated or even taken steps to terminate their intra-EU BITs.

Whether or not this will be the case, investors should use the current window of opportunity to secure their existing and future investments by structuring their investments outside the EU. With its 130 BITs, including with most Central and Eastern European Member States, Switzerland is an excellent option for maintaining maximum investment protection.

GIP AG stands ready to advise you on how to option optimal investment protection via Switzerland.