Structuring Investment Arbitration Agreements in Post-Achmea Europe

Paras Jain*

Introduction

The decision given by the CJEU in the case of Slowakische Republik (Slovak Republic) v. Achmea BV[1] (hereinafter Achmea ruling) is being called as a loud clap of thunder.[2] The decision will have a lasting effect on the Investor State Dispute Settlement (ISDS) system in Europe.

In this blog post, the author will discuss how the supremacy and autonomy of EU law have been guiding factors in the struggle to create a comprehensive dispute settlement mechanism. The author begins with the examination of the Achmea ruling and explains its effect on the Intra-EU BITs. The author then proceeds to examine the decision of US District Court given in the case of Ioan Micula v Government of Romania[3] in the light of CJEU ruling in Achmea. The author finally analyzes the compatibility of other investment arbitral tribunals such as EU-Canada Comprehensive Economic and Trade Agreement (CETA) with EU law.

Achmea Ruling: Supremacy of EU Law a primary motive

The ruling by the CJEU in this case was given in pursuance of request made by the Bundesgerichtshof (Federal Court of Justice, Germany) for a preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union (TFEU).[4] Article 267 of TFEU provides for a request by a court or tribunal of a member state, which is to be made to CJEU for obtaining a preliminary ruling in case a question relating to validity and interpretation of EU law arises.[5] The question in the present case pertains to the interpretation of Articles 18, 267 and 344 of the TFEU.

Article 8 of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic (‘the BIT’) provides for the constitution of arbitral tribunal for settlement of disputes concerning an investment.[6] A dispute arose concerning an investment made in the health insurance sector and it was subsequently referred to the arbitral tribunal constituted under article 8 of the BIT. During the arbitration proceedings, the Slovak Republic raised an objection that in light of its accession to the EU, article 8 is incompatible with EU law.

The primary factor behind the CJEU’s ruling in Achmea was the supremacy of EU law. The CJEU was of the view that with regard to the very nature of EU and its essential characteristics, the EU law is supreme and prevails over the law of the member states. The courts and tribunals of the member states are under an obligation to ensure full and effective implementation of EU law. According to CJEU, “the judicial system as thus conceived has as its keystone the preliminary ruling procedure,”[7] as this enables the courts or tribunals to settle disputes in consonance with EU law.

While deciding upon the compatibility of arbitral tribunal constituted under Article 8 of the BIT, the CJEU took into account the circumstances in which the arbitral tribunal has to deal with the interpretation of EU law. The CJEU approached the question of compatibility of the arbitral tribunal by delving into the question that whether the arbitral tribunal is entitled to refer a question to the CJEU for a preliminary ruling.

The CJEU was of the view that while deciding upon an investment dispute the arbitral tribunal has to consider the law in force of the Contracting Party as mandated by the article 8(6). This law in force is not limited to the law of the member states but also includes the EU law. The CJEU further stated that the arbitral tribunal does not fall under the ambit of “court or tribunal of a member state” since the judicial system of neither Netherlands nor Slovak Republic includes the arbitral tribunal.[8] This hinders the ability of arbitral tribunal to request the CJEU for a preliminary ruling in case a doubt persists as to the validity or interpretation of EU law.

The arbitral tribunal’s inability to request for a preliminary ruling is a primary reason behind its incompatibility with the EU law, as the upshot of the preliminary ruling procedure is the uniform interpretation and application of EU law.

Since, the arbitral tribunal is not part of the judicial system of the member states the decision given by it is final and not subject to review by court of member states. This in turn has a negative effect on supremacy of EU law because in case a tribunal’s decision is not in consonance with EU law, the lack of sufficient review mechanism hinders the proper application of the supreme law. Constructing upon this foundational premise that EU law is supreme; the CJEU held that article 267 of TFEU precludes the arbitration clauses such as article 8 of the BIT.

Ioan Micula et. al. v. Government of Romania: Relief to the investors

In order to overcome economic constraints, the Romanian government announced that it would provide financial assistance to investors[9]. In pursuance of the said notification, the Micula brothers from Sweden made an investment in Romania. Later on, the Romanian government withdrew the scheme in order to become a member of EU. The Micula brothers initiated arbitration proceedings against the Romanian government under the Sweden-Romania BIT before the ICSID tribunal. The ICSID tribunal gave the award in favour of the investors.[10]

In the proceedings before the enforcing court, the Romanian government argued that the court lacked subject matter jurisdiction in light of the Achmea Decision. The Romanian government contended that the arbitration clause in the BIT was incompatible with EU law and therefore the award given by ICSID tribunal is not enforceable. The US District Court rejected this argument by observing that the facts of both the case are materially distinct from each other. In the present case, the dispute arose before Romania’s accession to the EU and therefore the concern that the arbitral tribunal has to deal with the interpretation of the EU law, as was present in the Achmea case, does not apply to the facts of the instant case.[11]

The primary question that the CJEU considered in Achmea was whether the arbitral tribunal’s decision on interpretation and validity of EU law will in any way affect the effective implementation of EU law. The ICSID tribunal in the Micula case did not delved into the questions related to the interpretation and validity of EU law and therefore the supremacy of EU law is not under threat in this case.

The decision by US District Court comes as a relief to the investors who were of the view that the CJEU’s ruling in Achmea will affect their rights under the Intra-EU BITs. The material distinction between the facts of the both the case suggests that the arbitral tribunal are only incompatible with EU law in the circumstances where the interpretation of the EU law in any way affect the supremacy of EU law. If the decision given by a particular arbitral tribunal is in consonance of the principles of EU law, the Achmea decision does not affect the validity of such awards.[12] However, the decision by US district court does not categorically state that the ICSID tribunals are fully compatible with EU law and in circumstances in which the proper implementation of EU law is threatened, the European courts will not hesitate to render the ICSID tribunal as incompatible with EU Law.

Investment Court System: The way forward

While considering the compatibility of ad-hoc arbitral tribunal and ICSID tribunal with the EU law, the factors that the courts considered were that whether the tribunal in questions deals with the interpretation and validity of EU law and whether the decision given by the arbitral tribunal is subject to review by the judicial system of the EU. In order to tackle the fallacies of the ISDS mechanism, the European Union has been working towards establishment of Investment Court Systems (ICS).

Many of the recent Free Trade Agreements (FTAs) entered into by the EU provides for a dispute settlement mechanism known as Investment Court System. The ICS is an attempt towards achieving stability in the arena of investment arbitration by setting up a permanent dispute settlement tribunal as opposed to ad hoc tribunals constituted under the current Intra- EU BITs.[13]. The CJEU’s apprehension that lack of review mechanism of decision of arbitral tribunal affects the effective implementation law[14] is also addressed under the ICS as it provides for an appellate tribunal to hear and review the decisions of the tribunal. Other significant features of the ICS are appointment of professional and independent adjudicators and transparency of dispute settlement proceedings.[15]

In order to settle the debate around the compatibility of ICS as provided under CETA with EU law, the Belgium court requested CJEU for a preliminary ruling.[16] Building upon the substructure of autonomy of EU law, as upheld in Achmea ruling, the CJEU in the present case stated that the domain of a tribunal under CETA is limited to the application of law provided under CETA itself and the rules of international law and is not concerned with the interpretation of EU law.[17] Therefore, in CJEU’s opinion section F of Chapter eight of CETA dealing with resolution of investment disputes between investors and states is compatible with EU law.

Conclusion

The string of decisions in the above mentioned cases have laid down the fundamental principles upon which a suitable dispute settlement mechanism is to be constructed. The scope of these decisions is not restricted merely to the compatibility of EU law and investment arbitration tribunals, but is a step forward in creating a more comprehensive dispute settlement mechanism. The aim is to create a model, which is not only consistent with the structural principles of the EU legal order and but, at the same time, can also be applied in all commercial agreements between the European Union and third States.[18]


*4th Year, RGNUL
Member, Research Team, CADR.

[1] Case C‑284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, ECLI:EU:C:2018:158.

[2] Clément Fouchard, Marc Krestin, ‘The Judgment of the CJEU in Slovak Republic v. Achmea – A Loud Clap of Thunder on the Intra-EU BIT Sky!’, Kluwer Arbitration Blog,March 7 2018, http://arbitrationblog.kluwerarbitration.com/2018/03/07/the-judgment-of-the-cjeu-in-slovak-republic-vachmea/

[3] Ioan Micula et al., v. Government of Romania, Case No. 17-cv-02332 (APM).

[4] Case C‑284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, ECLI:EU:C:2018:158.

[5] Consolidated Version of the Treaty on the Functioning of European Union art. 267, May 9, 2008, 2008 O.J. (C 115) 47.

[6] Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic, Article 8, Jan 1, 1992.

[7] Case C‑284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, ECLI:EU:C:2018:158.

[8] Case C‑284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, ECLI:EU:C:2018:158.

[9] Emergency Government Ordinance No. 24/1998.

[10] Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20.

[11] Ioan Micula et al., v. Government of Romania, Case No. 17-cv-02332 (APM).

[12] Opinion 1/91 (EEA Agreement — I) of 14 December 1991, EU:C:1991:490.

[13] https://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/index_en.htm#read-more

[14] Case C‑284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, ECLI:EU:C:2018:158.

[15] https://europa.eu/rapid/press-release_IP-19-2334_en.htm

[16] OPINION 1/17 OF THE COURT, REQUEST for an Opinion pursuant to Article 218(11) TFEU, made on 7 September 2017 by the Kingdom of Belgium, ECLI:EU:C:2019:341.

[17] OPINION 1/17 OF THE COURT, REQUEST for an Opinion pursuant to Article 218(11) TFEU, made on 7 September 2017 by the Kingdom of Belgium, ECLI:EU:C:2019:341.

[18] Opinion 1/17, Request for an opinion by the Kingdom of Belgium, OPINION OF ADVOCATE GENERAL BOT, delivered on 29 January 2019, ECLI:EU:C:2019:72.


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