Slovak Republic v Achmea – See You In Court

On 6 March 2018, the Court of Justice of the European Union's (CJEU) judgment in Slovak Republic v Achmea (Case C-284/16) shook the world of investment arbitration to the core. The CJEU held that an arbitration clause in the Slovakia-Netherlands bilateral investment treaty (BIT) - and, essentially, all intra-EU BIT arbitration - was incompatible with EU law.

Much has been written already about the rights and wrongs of Achmea. However, if we accept (as we must) that it is the law, then it poses a crucial question: if not arbitration, then what? Gordon Nardell QC of 20 Essex Street and Richard Power of Clyde & Co. consider the solution.

Background

Achmea, a Dutch insurance company, established a Slovakian subsidiary offering private sickness insurance. In 2006, Slovakia passed a law preventing private health insurers from distributing profits to shareholders.

Under Article 3(1) of the Netherlands-Slovakia BIT, each state undertakes to treat the other's investors fairly and equitably, and not to impair enjoyment of investments by unreasonable or discriminatory measures. Article 4 guarantees the free transfer of payments relating to an investment. Article 8 provides that, if a dispute under the BIT cannot be settled amicably, such dispute will be determined by arbitration.

Achmea commenced arbitration proceedings, seated in Frankfurt, against Slovakia. In December 2012 the tribunal rendered an award which ordered Slovakia to pay Achmea compensation of €22.1m million. Slovakia applied to the Higher Regional Court in Frankfurt to set aside the award. That court rejected the application and Slovakia appealed to the German Federal Court of Justice. Slovakia argued that the tribunal lacked jurisdiction because the Netherlands-Slovakia BIT was contrary to the Treaty on the Functioning of the European Union (TFEU), which should take precedence over the BIT. The Federal Court of Justice referred the question of compatibility of the BIT with the TFEU to the CJEU.

The CJEU's judgment

In September 2017, Advocate General Wathelet delivered an opinion in which he advised that the arbitration clause did not violate the autonomy of EU law and was not discriminatory. In its judgment the CJEU framed the issue in the following way: "do Articles 267 and 344 TFEU preclude a provision in an international agreement between EU Member States under which an investor from one member state may bring proceedings against the another Member State before an arbitral tribunal, whose jurisdiction that Member State has undertaken to accept?" Inevitably, the Court's answer would have wider significance than the Netherlands-Slovakia BIT.

However, The CJEU took the unusual step of departing from the Advocate General's opinion and held that the arbitration clause was incompatible with EU Law. Its reasoning was as follows:

Article 8(6) of the BIT (similar to most arbitration clauses in BITs) provides that the arbitral tribunal shall take account of the law in force of the contracting party concerned, and international law principles. That would include EU law. Therefore, the tribunal may be called on to interpret and/or apply EU law, particularly provisions concerning freedom of establishment and free movement of capital which are closely related to the substantive BIT provisions. Article 19 Treaty on European Union (TEU) provides that it is for the national courts/tribunals of Member States and the CJEU to ensure the application of EU law in Member States. Key to this is the preliminary ruling procedure in Article 267 TFEU, which enables the courts of a Member State to refer questions on the interpretation and application of EU law to the CJEU, so as to ensure uniformity and consistency. An arbitral tribunal constituted under Article 8 of the Netherlands-Slovakia BIT is not a court or tribunal of a Member State within the meaning of Article 267 TFEU.Moreover, the award rendered by such a tribunal is subject to very limited judicial review, the extent of which is determined by national law depending on the seat (i.e. legal place) of the arbitration. Member States cannot enter into treaties which affect the allocation of powers created by the EU's constitutional Treaties, including the TFEU, so as to detract from the autonomy of the EU legal system. Art 344 TFEU in particular provides that Member States may not submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for in the Treaties. It follows that the arbitration agreement in Article 8 of the Netherlands-Slovakia BIT has an adverse effect on the autonomy of the EU legal order and is incompatible with EU law. The CJEU recognised that it has previously held commercial arbitration agreements compatible with EU Law.1 However, those agreements were distinguishable because they originate in the "freely expressed wishes of the parties", whereas BIT arbitrations derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts a dispute which may concern the application or interpretation of EU law. That violates their obligations under Art 344 TFEU and Article 19(1) TEU.

How far does Achmea go?

The Achmea judgment now forms part of EU law. Consequently, any arbitral tribunal hearing a claim under an intra-EU BIT which has to take account of international law and/or the law of a contracting state - which most BIT arbitration clauses require - will have to take account of the judgment. This could result in a tribunal refusing jurisdiction. How likely is that?

Some have...