The Court of Justice of the European Union has issued a historic judgment that tames the provisions of BIT contracts, which are an inflammatory point in many disputes between investors and state governments. The provisions of the Treaty on the Functioning of the European Union should be interpreted as precluding the provision of an international agreement concluded between Member States according to which an investor from one of those Member States may, in the event of an investment dispute, In the second Member State, initiate proceedings against this second to a Member State before an arbitration court whose competence that State has undertaken to recognise, ruled by the Court of Justice of the European Union (TEU) in its judgment dated 6 March 2018 on C-284/16.
Slovakia undermines the investor mechanism against the State
The judgment was given in response to the question referred for a preliminary ruling by the German Federal Court of Justice (Bundesgerichtshof) on the basis of the following facts.
In 1991 The Czech and Slovak Federation Republic have concluded an international agreement with the Kingdom of the Netherlands on the promotion and mutual protection of investments between these countries.
Such agreements are based on an investor-to-state mechanism – Investor-State Dispute Settlement – and are concluded in the form of commercial contracts, which are briefly referred to as BIT, from the English name: Bilateral investment treaty.
On 1 January 1993 The Slovak Republic, as the legal successor to the Czech and Slovak Federal Republic, has entered into the rights and obligations of the latter and on the day 1 May 2004 joined the European Union.
In 2004 The Slovak Republic has opened the market to foreign insurance companies offering private health insurance services. Achmea, a company belonging to the Dutch insurance group, formed a subsidiary in Slovakia through which it offered private health insurance services on the Slovak market.
However, In 2006 there has been a gradual withdrawal from the liberalisation of the health insurance market. As a result of this trend, a law was passed prohibiting the distribution of profits generated by private health insurance activities.
Next, The Slovak Constitutional Court ruled its non-constitutionality, as a result of which the payment of profits was again possible.
In October 2008 Achmea initiated arbitration proceedings against the Slovak Republic on the basis of Article 8 BIT, claiming compensation for damage suffered by state legislative measures. As a place of arbitration, Frankfurt am Main was designated, resulting in German law being applied. The arbitration court has ruled to Achmea compensation of 22,000,000 EUR, He dismissed the plea of lack of jurisdiction of the court of arbitration brought by Slovakia.
Slovakia further tried to repel the decision of the arbitration court, bringing an action for its repeal to the higher national court in Frankfurt am Main (Oberlandesgericht Frankfurt am Main).
When the complaint was dismissed, Slovakia brought another complaint, this time to the German Federal Court of Justice (Bundesgerichtshof), alleging non-compliance Article 8 BIT with regulations Article 18(267)(344) Treaty on the Functioning of the European Union (TFEU).
The Court did not, in principle, share the applicant’s allegations, but, given the large number of international investment protection agreements providing for a similar provision to the arbitration court, recognised the appropriateness of a reference to the TEU.
Bundesgerichtshof versus TSUE
Worth it. First, Take a look at the position put forward by the German court, whose conclusions are in principle opposed to the interpretation of the TEU.
The German Federal Court of Justice held in principle that the BIT provision does not conflict with the provisions of the TFEU cited by Slovakia
After first The German Federal Court of Justice essentially stated that the BIT provision does not conflict with the provisions of the TFEU cited by Slovakia. Concerning compliance with Article 344 The TFEU stated that it does not apply to disputes between an individual and a Member State.
Furthermore, that provision concerns disputes as to the interpretation and application of the Treaties only, and the case in question concerns a court judgment based solely on an international agreement of the BIT.
In the Court’s assessment, this provision only protects the competence of the EU Court in so far as Member States should apply the procedures provided for in the Treaties to it.
However, there is a dispute in the case which cannot be governed by a procedure pending before EU courts, as the Treaties do not provide for a suitable procedure for such cases.
The Court also held that the provision to the arbitration court provided for under Article 8 BIT does not conflict with Article 267 TFEU
After second, The Court also held that the arbitration clause provided for under Article 8 BIT does not conflict with Article 267 TFEU.
It was considered that the content of the arbitration ruling had to comply with Union law (based on Article 8(6) BIT) and may be subject to review in this respect in the course of a judicial procedure in which a court may refer a question to the TEU for a preliminary ruling. Therefore, uniform interpretation of Union law will be ensured.
Furthermore, the existence of a special court established under an international agreement and ruling on it in cases between Member States is compatible with Union law.
It was considered that the application of certain powers between the parties to an international agreement granting nationals of Contracting Parties could not be regarded as discrimination against nationals of other non-contracting Member States.
After third The tribunal did not see any contradiction either Article 8 BIT from Article 18 TFEU. It was considered that the application of certain powers between the parties to an international agreement granting nationals of the Contracting Parties could not be treated as discrimination against nationals of other non-contracting Member States. In the judgment of the Court, the latter are not in an objectively comparable situation as their countries did not accede to the relevant international agreement.
The Court of Justice of the European Union, in its answer to the question referred for a preliminary ruling, made a completely different interpretation of the rules of the TFEU than the German tribunal.
He stated that Article 267(344) it must be interpreted as precluding the provision of an international agreement concluded between Member States.
Contracts such as those resulting from Article 8 Agreements for the promotion and mutual protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, according to which the investor from one of those Member States may, in the event of an investment dispute, In the second Member State, initiate proceedings against this second a Member State before a arbitration court whose competence it has undertaken to recognise.
First, The Court of Justice found that the arbitration court in question under Article 8 The BIT is set up to apply Union law, including in particular provisions on fundamental freedoms (mainly freedom of establishment, free movement of capital). It considers that part of the law in force in each Member State and international agreements between Member States should be considered to be Union law.
The CJEU then considered that the arbitration court appointed on the basis of the BIT did not constitute a court one from Member States and consequently cannot ask a preliminary question to the TEU.
In his view, the Court is considered to be a ‘court’ one Member States" need to be established that it forms part of a judicial dispute resolution system in BIT States. However, the jurisdiction of the arbitration court concerned is exceptional and does not form part of the judicial system established in the Netherlands and Slovakia.
The arbitration court is not common to several countries and is not designed to ensure uniform application of legal standards in those countries. In addition, the proceedings before him are not an accident, merely to establish a final interpretation of the legal standards common to several countries.
Therefore, it cannot be compared, for example, to the Court of Justice of Benelux (Cour de justice du Benelux), which, in another case recognised by the TEU, has been declared a common court for several Member States.
The CJEU further sought to determine whether the case law of the amicable court was subject to review by a court of a Member State, ensuring that the question referred for a preliminary ruling was submitted to the CJEU.
It was found that, in accordance with the provisions of the BIT, the decision of the arbitration court was final (Article 8(7)), and, in addition, the court of that kind sets its own rules of procedure, elects its seat and the law to be applied in the proceedings governing the judicial review of the validity of the judgment under which it settles the dispute before it (Article 8(5)).
Therefore, judicial review of the arbitration judgment is only possible if the national law of the State designated as the seat of the arbitration court so permits. In the view of the TEU, the selection of Frankfurt am Main and thus of German law allowed Slovakia to carry out judicial review of the arbitration court’s ruling.
Finally, the TEU identified the practical implications of the difference between commercial arbitration and BIT arbitration. first They are subject to limited review by the courts of the Member States in respect of compliance with basic Union legislation, which allows a preliminary question to be put to the TEU.
The limited scope of review of judgments in commercial arbitration is justified by the requirements for the effectiveness of such proceedings.
The Court held that commercial arbitration derives from the autonomy of the parties and that BIT arbitration derives from a Treaty by which States agree to exclude disputes which may relate to the application or interpretation of Union law from the jurisdiction of their own courts.
Consequently, in cases dealt with by arbitration under an international agreement, the judicial remedies which the Member States have undertaken to establish by virtue of the Article 19(1) paragraph second TEU (the Treaty on European Union) in the fields covered by that law.
Therefore, the limited scope of judicial review in commercial arbitration proceedings cannot apply to arbitration based on Article 8 BIT.
In conclusion, the Court concluded that, on the basis of the case at hand, it was possible to submit a dispute to an institution which does not belong to the judicial system of the Union and is provided for in an agreement not concluded by the Union but by Member States.
Therefore, Article 8 The BIT may undermine the principle of mutual trust between States and the preservation of the specific nature of the law laid down in the Treaties, as ensured by the procedure for reference for a preliminary ruling, provided for in under Article 267 TFEU.
As a result Article 8 BIT is not compatible with the principle of loyal cooperation expressed under Article 4(3) paragraph first TUE.
Legal effects of the ruling
The provisions of the BIT containing a record to the arbitration court, as contrary to Union law, should not constitute a positive condition for the conduct of arbitration proceedings
First, it must be stated that the provisions of the BIT containing a record to the arbitration court, as contrary to Union law, should not constitute a positive condition for the conduct of arbitration proceedings.
This means that investors from the BIT State cannot sue the BIT State second a party to such a contract before an ad hoc arbitration court. Therefore, the investor may complain to the Member State about compensation for the expected loss of benefits before the general court.
In the event of a dispute pending before the Polish court, the investor would then have to First, demonstrate the existence of injury, the state's fault and an adequate causal link between the introduction of certain legislation by the State and the occurrence of injury in its company.
Only in the course of such proceedings would it be possible to maintain the principles of Union law and ensure uniform application. Thus, from the European Union's values, the result of the ruling will be positive.
However, it is worth considering the effect of this judgment on the rulings of the arbitration courts issued on the basis of the BIT. The judgment of the CJEU does not provide any indication in this regard.
If we consider that the arbitration proceedings contained in the BIT are invalid ex tunc, then there is a question of appeal against the arbitration courts which have been brought on their basis. There is therefore another question: in what kind of judicial proceedings it will be possible to challenge the judgments of arbitration courts.
The answers to these questions may be of considerable importance in the near future for those countries that feel affected by the judgments of arbitration courts and for entrepreneurs who may face the need to repay their compensation. But it does not seem easy.
It is difficult to imagine that a general court would have annulled a judgment of an arbitration court many years before the present ruling of the TEU.
Although it can be imagined that the grounds for the annulment of an arbitration court ruling would call for a breach of the principles and values resulting from Union law and the argument would be raised by the recent ruling of the CEU.
The win in turn would open the way for possible further action, although this would not automatically mean that the State concerned would recover the funds paid on the basis of an arbitration court ruling.
Authors:
Aleksandra Księżyk – Legal advisor, Director of the Legal Department At Russell Bedford