BITs between member states breach EU law

The Court of Justice has rejected the advocate general’s opinion and ruled in the Achmea case that investment arbitration, the option provided for in treaties between member states for foreign investors to commence arbitration against a state where it has invested, violates the autonomy of EU law.

Last September we wrote an article on the opinion issued by the advocate general in a case pending before the Court of Justice of the European Union, C-284/16 Achmea. The case concerns compliance with EU law of bilateral investment treaties between EU member states. Advocate General Wathelet suggested to the Court of Justice that it should find that BITs are in line with EU law. But the judgment issued on 6 March 2018 held that arbitration clauses in intra-Community BITs are non-compliant—a rare case where the judges disagree with the advocate general. As we discussed the facts of the case and the reasoning of the advocate general extensively in the article referred to above, below we focus on the arguments behind the judgment.

Demand to reopen oral argument

The Czech, Hungarian, and Polish governments contested the opinion issued by the advocate general, and demanded that the oral phase be reopened. The court denied the request, citing its earlier ruling in C-106/16 Polbud, which we also wrote an article about.

Under Art. 83 of the Rules of Procedure of the Court of Justice, the oral part of the procedure is reopened in particular if there is insufficient information in the case before the court or the case must be decided on the basis of an argument that has not been debated between the interested parties. The court considered the demands by the Czech, Hungarian and Polish governments to be limited to contesting the opinion given by the advocate general, and not to contain any new arguments that were factors in adjudication of the case.

The court held that the fact that one of the parties did not concur with the opinion of the advocate general could not by itself be grounds for reopening the oral procedure, regardless of the kind of issues addressed in the opinion. Upon hearing the advocate general’s case, the court concluded that it had all of the information needed to issue a ruling, and that the information had been debated between the interested parties.

Compliance with Art. 344 and 267 TFEU

Firstly, the court repeated that according to an established principle of CJEU case law, an international treaty cannot breach the hierarchy specified in the EU treaties and thus by the same token the autonomy of the EU legal system. This is a principle provided for in particular in Art. 344 of the Treaty on the Functioning of the European Union, under which member states cannot submit disputes concerning the interpretation or application of the EU treaties to any method of settlement other than that provided for in the EU treaties. To ensure that the particular characteristics and autonomy of the EU legal system are preserved, a judicial system is created in the treaties to ensure that EU law is interpreted in a coherent and harmonised manner. A key element of this system is the preliminary ruling procedure provided for in Art. 267 TFEU. This procedure establishes a dialogue between the courts, in particular between the Court of Justice and national courts of the member states, and is intended to ensure consistent interpretation of EU law, thereby enabling the coherence, full effectiveness, autonomy, and special nature of EU law to be maintained.

Are BIT disputes connected to interpretation or applicability of EU law?

Contrary to the arguments presented in the advocate general’s opinion, the Court of Justice held that even if it was acknowledged that an arbitral tribunal is set up solely to rule on any breach of a BIT that might occur, under the BIT it should, to this end, take into consideration among other things the law currently applicable to a party and any other material agreements between the parties. Meanwhile, it is clear from the nature of EU law that this right should also be considered to be part of the national legal system and derived from an international treaty between member states.

As a result, in the view of the Court of Justice, an arbitral tribunal issuing an award on the basis of a BIT is set up for the purpose of interpretation or application of EU law, and in particular provisions on fundamental freedoms, including the freedom of establishment and the free movement of capital.

Can an arbitral tribunal ruling on the basis of a BIT be considered a court of a member state?

Contrary to the arguments made by the advocate general, who pointed to requests for preliminary rulings from arbitral tribunals which the CJEU allowed as queries from national courts, in Achmea the CJEU held that an arbitral tribunal did not have the characteristics of a national court.

On this issue, the court stated that in the case cited by the advocate general, C-377/13 Ascendi, the arbitral tribunal was a court of a member state because it was part of the judicial system for resolution of disputes concerning taxes, provided for in the Portuguese constitution. But in Achmea, the arbitral tribunal was not an element of the national judicial system, and it is precisely the special nature of the jurisdiction of the arbitral tribunal in relation to the jurisdiction of the national courts of the two member states that is one of the main reasons for the existence of an arbitration clause in a BIT.

The Court of Justice also addressed the argument concerning its treatment as a “national court” of a court created for a number of member states, such as the Benelux Court of Justice. The CJEU pointed out that that court is charged with ensuring consistent application of legal norms shared by the three Benelux countries. Proceedings before that court are incidental, part of the proceedings pending before national courts, and are used to reach a definitive interpretation of legal norms common to the Benelux countries. Unlike that court, the arbitral tribunal in Achmea did not demonstrate a link to the legal systems of the member states, and therefore could not be considered a “court or tribunal of a Member State” in the meaning of Art. 267 TFEU. As a result, an arbitral tribunal acting according to a BIT cannot request a preliminary ruling from the Court of Justice.

Is an award issued according to a BIT subject to review by the CJEU via a court of a member state (when a preliminary ruling can be requested)?

On this matter as well, the CJEU differed with the advocate general. The court reasoned that an award by an arbitral tribunal provided for in a BIT is final, and the arbitral tribunal also determines its own procedure in line with the relevant arbitration rules, and in particular it can choose its seat and the governing law in proceedings for judicial review of the award. This means that judicial review can be conducted by that court solely to the extent permitted by national law. Thus, fundamentally, the scope of review by a national court covers the validity of the arbitration clause under applicable law or observance of the need for public order when recognising or enforcing the award.

The CJEU acknowledged that with respect to commercial arbitration, it has accepted limited review of arbitration awards by courts of member states, so long as the national courts review interpretation of EU law made by the arbitral tribunals (e.g. C-126/97 Eco Swiss). In the view of the CJEU, however, BIT arbitration differs in this regard from commercial arbitration. While commercial arbitration follows from the principle of the autonomous will of the parties to an agreement, investment arbitration follows from a BIT under which member states agree that disputes—including disputes that may relate to applicability or interpretation of EU law—are not subject to the jurisdiction of their own courts, and this precludes as well the possibility of requests for preliminary rulings from the Court of Justice.

In short, the CJEU found that when entering into a BIT, the member states established a mechanism for resolution of disputes between an investor and a member state, which could mean that questions concerning interpretation or applicability of EU law are not adjudicated in a manner guaranteeing complete effectiveness of EU law.

Eventual findings of the CJEU

In the view of the CJEU, disputes heard by an arbitral tribunal under a BIT can relate to interpretation of both the BIT and EU law. Even if, by way of an international treaty, a court can be appointed whose rulings are binding for EU institutions, the EU must be a party to that treaty. In the case of a BIT, however, the potential for disputes to be referred to an institution that is not part of the EU judicial system is provided for in an agreement concluded not by the EU, but by member states. As a result, investment arbitration could undermine the principle of mutual trust between member states as well as preservation of the special nature of EU law, which is guaranteed by the preliminary ruling procedure provided for in Art. 267 TFEU. By the same token, investment arbitration breaches the autonomy of EU law and the principle of loyal cooperation.

Consequences of the judgment

The CJEU issued a judgment concurring with the standpoint adopted by the European Commission and a group of member states including Poland. At the same time, the judgment is disappointing for investors who, in line with the resolution suggested by the advocate general, could have expected a ruling in their favour.

The practical consequences of the judgment make it controversial. Do arbitration clauses in BITs found to violate EU law remain valid and effective under international law? How should member states approach disputes currently being heard on the basis of BITs, and any new disputes that arise? Should member states serve each other with notices of termination of the BITs between them? What should the approach be to arbitration clauses when BITs are terminated unilaterally in the context of sunset clauses?

Incidentally, in the Achmea judgment, the court repeatedly cited its Opinion 2/13 on the EU’s accession to the European Convention on Human Rights, which shows how fundamental the issue of exclusive jurisdiction in matters of interpretation of EU law is for the Court of Justice.

Agnieszka Kraińska, legal adviser, EU Law practice, Wardyński & Partners