Last week the Court of Justice of the European Union (CJEU) ruled in the Slovakia v Achmea case that an arbitration clause in the Slovakia-Netherlands Bilateral Investment Treaty (BIT) was incompatible with EU law, as it had an “adverse effect” on the autonomy and effectiveness of the Union’s legal order. The ruling is ground-breaking for the arbitration world, as it may spell the end of investor-state dispute settlement (ISDS) among EU Member States.

But it also raises many questions and has implications for the wider EU community. Let us see why.

What happened

In short, the Dutch health insurer Achmea BV sued Slovakia for damages under a BIT with the Netherlands before an arbitral tribunal established in Frankfurt (i.e. applying German law). The tribunal rejected Slovakia’s opposition to its jurisdiction as incompatible with EU law, and awarded EUR 22.1 million in compensation. Slovakia tried to annul the award in German courts, lost, and appealed to the German Federal Court of Justice, which referred a preliminary question to the CJEU.
The CJEU found that while the arbitral tribunal might deal with the interpretation or application of EU law – notably fundamental freedoms – it is not itself part of the judicial system of the EU or its Member States. The CJEU therefore considered that German law allowed insufficient judicial review of the arbitral award to ensure the effectiveness and autonomy of EU law, and ruled that Articles 267 and 344 of the Treaty on the Functioning of the European Union should be interpreted as precluding arbitration clauses in intra-EU BITs. Clear, right?

What it means: investment questions…

With this decision the CJEU essentially ruled that arbitration clauses in intra-EU BITs are incompatible with EU law – which has serious potential implications for the 196 BITs in force between EU Member States. The immediate consequence of this judgment should be that the German Federal Court will set aside the arbitral award. This may affect investors and their investments, as the same might apply to other clauses in other BITs, so other arbitration proceedings might be challenged on similar grounds, perhaps even under the Energy Charter Treaty. This could be a headache for some EU businesses, especially those active in cross-border projects on energy, infrastructure, utilities or public procurement. Similarly, it may prompt investors to avoid this risk and seek protection through BITs with non-EU states by arranging their investments via entities outside the EU.
However, one may also argue that the impact should not be exaggerated yet. First, the ruling has no implications for commercial arbitration, which derive from the will of private parties, not Member States. Secondly, it is based on the fact that the arbitral proceedings endangered the functioning of EU law because of the law applicable to the case (i.e. German law). This is, the same might not be valid for arbitration in other fora that allow more judicial review of awards. Thirdly, in terms of giving effect to the CJEU ruling, the ball is now back in the German Federal Court’s court – so let us wait and see how it plays out in practice.

…and some trade policy answer

Some may notice this CJEU ruling for going against the opinion of the Advocate General (as well as Germany’s in a request from a German court), which is rather uncommon. Judicial comity aside, the case is however unsurprising in that it strongly protects and fosters the autonomy of EU law, and notably the exclusive competence of the CJEU to interpret it. Interestingly, the CJEU reasoning stresses EU law’s guarantee of fundamental rights against the possibility of relying only on the arbitral tribunal for judicial review. It thus somewhat weighs against ISDS in the everlasting public debate about whether arbitration encroaches on public interest as “private justice”, disregarding human rights and the environment in favour of investors’ interests.
This ruling may thus not only kick-start the end of ISDS among EU Member States. It may also be seen to deal another blow to the nowadays “infamous” ISDS that politically killed TTIP, almost killed CETA, and granted a say to the Council and the European Parliament in trade matters through the Singapore opinion. On ISDS, deemed so undemocratic by many and so crucial to protect investors from foreign governments by as many others, the Court indeed points to the importance of solidarity and mutual trust among fellow EU Member States. Of course this does not mean that ISDS may soon disappear worldwide. But with EU Member States participating in many of the roughly 2,500 investment agreements in force globally, what the EU says and does matters greatly.
Perhaps more importantly, the ruling serves as a kind reminder that the CJEU is usually not “happy to discuss” on matters relating to its exclusive competence on the EU legal order and the autonomy of EU law. This may reinforce the Commission’s call to terminate intra-EU BITs, but also inform its latest trade policy endeavours, notably the current quest to establish a multilateral investment court. It may also remind those Member States which play with nostalgic alliances (read V4 or returning Hanseatic Leagues) or bilateralism (think of the Franco-German pact) that the EU is chiefly one legal order, and not only an intergovernmental organisation for their use. Finally, this may make for another interesting read in London, when the UK government will – hopefully – put forward a proposal for an EU-UK dispute settlement mechanism with jurisdiction over the withdrawal agreement and transition period.
In other words, stay tuned, as the laws of international trade and investment, just like the politics of the EU and Brexit, they are a-changing.