In order to understand the effect of the ECJ’s landmark Achmea1 decision, it is important to understand the relationship between the European Union and its Member States and its historical relationship to international arbitration. According to the principle of conferral, the EU only has the competences that the Treaties – the Treaty on the Functioning of the European Union (TFEU) and the Treaty on European Union (TEU) – confer upon it. Of these competences, only very few are exclusive competences, barring the Member States from taking action, such as monetary policy and building a customs union. Other competences are shared between the Union and the Member States, meaning that the EU can make binding legislation, but where it does not, the Member States can set forth their own legislation or refrain from doing so. This applies to the internal market, consumer protection and what is known as the “area of freedom, security and justice”, among others. As such, the legal systems of the Member States are still largely independent from EU influence. Only in the select areas in which the EU is competent do the Member States have no choice but to implement or accept the direct application of EU law.
While the EU has brought forth legislation regulating matters of jurisdiction in international cases and the recognition and enforcement of foreign judgements, it has no competence to set forth laws regarding procedure in the Member States’ courts or the structure of the Member States’ court system. Given this background, international arbitration long escaped the attention of the EU, which had its hands full regulating the few areas of law it was competent to. Due to the existence of the successful New York Convention governing the recognition and enforcement of foreign arbitral awards, the UNCITRAL Model Law and its implementations, a wealth of BITs and corresponding judicature, and the International Centre for Settlement of Investment Disputes (ICSID), the area of international arbitration was deemed sufficiently regulated on an international level.
This indifference, however, did not last. While there is still no EU legislation regarding arbitration, the European Court of Justice (ECJ) has started limiting the freedom of international commercial arbitration. In its Achmea decision, the ECJ dealt a blow to investment arbitration much more severe than it ever had to international commercial arbitration. It found that an arbitration clause in a BIT between two EU Member States violates EU law.
I Achmea
The facts of the Achmea decision are the following: After becoming a Member State of the EU, Slovakia first liberalized its health insurance market and later, in 2006, partly reversed this liberalization. The Dutch insurer Achmea B.V. got caught in this back and forth and suffered losses. It brought arbitration proceedings against Slovakia in 2008 under the BIT that Slovakia and the Netherlands had concluded before former became part of the EU. Achmea claimed a violation of substantive treaty standards. The ad-hoc arbitration tribunal selected Frankfurt, Germany as its arbitral seat and awarded EUR 22.1 million in damages to Achmea in 2012. Slovakia sought to have the award set asidebefore the Higher Regional Court of Frankfurt, alleging that the arbitral tribunal lacked jurisdiction because the arbitration clause was incompatible with EU law. After the Frankfurt court had rejected Achmea’s claim and Achmea appealed this decision, the German Federal Court of Justice (BGH) referred the question of the validity of the BIT arbitration clause to the ECJ.
Contrary to the stance of both the BGH and the Advocate General Wathelet, the ECJ decided that the Investor-State Dispute Settlement (ISDS) mechanism contained in the BIT – and thus, in all intra-EU BITs – violates EU law. The core of the argument set forth by the ECJ is that such ISDS mechanisms infringe upon the autonomy of EU law. In order to ensure the viability of the European Union, EU law has to be effective and consistent. As such, it must be interpreted uniformly by all decision-making bodies. To this end, the TFEU enables courts of Member States to request a preliminary ruling from the ECJ on the interpretation of the EU treaties (Art. 267 TFEU), and it prohibits Member States from submitting disputes concerning the application or interpretation of EU law to other methods of dispute settlement than those provided for in the EU treaties, such as the Member States’ courts (Art. 344 TFEU).
The ECJ held that the BIT’s ISDS mechanism violated both of these provisions: a tribunal constituted under the BIT may possibly have to apply EU law as part of the substantive law of the signatory states, while being neither part of the legal system of the Member States – this being their main appeal – nor able to request preliminary rulings, according to the ECJ’s own jurisprudence. In the Achmea arbitration, the award could only have been annulled within the limits of German arbitration law. Following the UNCITRAL Model Law, German law prohibits a revision au fond and only lets violations of ordre public serve as grounds for annulment. According to the Court, this poses a threat to the autonomy of EU law, since it can lead to unchecked application and interpretation of EU law. Finally, the ECJ found that the arbitration clause infringes upon the principle of mutual trust, which is the case when Member States assume obligations in inter se relations that may conflict with a rule of EU law.
II Criticism
The decision has been heavily criticized. Next to some technical arguments concerning the text of the EU Treaties, one point that stands out is the different treatment of investment arbitration versus international commercial arbitration. Before it was ever asked to decide on investment arbitration clauses, the ECJ has long held that commercial arbitration tribunals cannot be considered courts in the sense of Art. 267 TFEU and are thus not able to request a preliminary ruling from the ECJ. International commercial arbitration awards are also subject to the limited review set forth in the respective arbitration laws, typically following the UNCITRAL Model Law. And yet, the Court generally accepts the existence of international commercial arbitration, only rarely claiming the invalidity of arbitration clauses under special circumstances, such as when they are contained consumer contracts.
In Achmea, the fact that investment arbitration tribunals cannot request preliminary judgements and are subject to the same limited review as commercial arbitral awards suddenly constitutes grounds to invalidate the arbitration clause. To justify this different treatment, the Court posits that commercial arbitration proceedings are based on party autonomy and thus on the free will of the parties, while investment arbitration proceedings are based on arbitration clauses contained in the respective treaties. The Court sees a problem in the Member States agreeing, by signing the BITs, to remove certain matters from their domestic jurisdiction. However, this is no different from what all Member States have done regarding international commercial arbitration: By signing the New York Convention, they have agreed to respect arbitration agreements and recognize and enforce foreign arbitration awards, and by implementing competitive arbitration laws they have promised to respect and enable parties’ wishes to arbitrate their commercial disputes. The only real difference between the one kind of arbitration and the other is the subject matter. If the ECJ wants to secure its jurisdiction over investment disputes, a more straightforward way would be to simply declare investment issues inarbitrable – an old-fashioned position that took many years to overcome in other areas of law.
III Consequences
It is unclear how the stance of the ECJ affects arbitration clauses in investment treaties with non-EU countries. After all, tribunals deciding disputes arising out of such treaties may also have to apply and interpret EU law. And there is another development that may have a far more devastating effect on arbitration clauses in investment treaties: such treaties have come to the attention of the European public in recent years, provoking outrage over the notion that companies can take countries to court in front of private tribunals, with no publicity and no real appeal. As a reaction, the trade agreement CETA between the EU, its Member States and Canada now contains plans for the creation of a tribunal and appellate tribunal for the resolution of disputes arising under it. In the long term, a multilateral investment tribunal is to be installed, and with it, a so-called Investment Court System. Following a request by Belgium in 2017, the ECJ issued an opinion in 2019 that such a mechanism for dispute settlement is compatible with EU law. In Europe, the future of investment arbitration as we know it is bleak.
1 Esta es una versión adaptada y actualizada del artículo “Manos limpias y arbitraje de inversión: a propósito del caso Odebrecht”, publicado por CIAR Global el 24 de febrero de 2020. En línea: https://ciarglobal.com/manos-limpias-y-arbitraje-de-inversion-a-proposito-del-caso-odebrecht/
2 Asociado de Bullard Falla Ezcurra +.
3 ECJ, judgement of 6 March 2018, C-248/16, ECLI:EU:C:2018:158.
4 ECJ, judgement of 23 March 1982, C-102/81, ECLI:EU:C:1982:107 (Nordsee).
5 Achmea (fn. 1), para. 55.
6 ECJ, judgement of 30 April 2019, C-1/17, ECLI:EU:C:2018:478.