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Are bilateral investment treaties between member states compatible with EU law?

CJEU Advocate General Melchior Wathelet issued his opinion in C-284/16 Achmea on 19 September 2017. He takes the view that the existence of bilateral investment treaties between member states is compatible with EU law.

What’s the Achmea case about?

Before presenting the legal analysis supporting the advocate general’s opinion, we should examine the background of the Achmea dispute.

In 1991 the Czech and Slovak Federal Republic and the Kingdom of the Netherlands entered into an agreement on encouragement and reciprocal protection of investments (also known as a bilateral investment treaty or BIT). The treaty provides that disputes between an investor from one of the contracting states and the other contracting state will be resolved amicably, and if an amicable settlement cannot be reached, the dispute will be resolved by an arbitral tribunal (under UNCITRAL rules). With the breakup of Czechoslovakia, the Slovak Republic became a party to the BIT by succession.

In 2004 Achmea BV, a member of a Dutch insurance group, opened a subsidiary in Slovakia offering private health insurance. But in 2006 Slovakia withdrew from the liberalisation of its health insurance market and prohibited distribution of profits from health insurance operations and the sale of insurance portfolios. Consequently, in 2008 Achmea commenced arbitration against Slovakia, alleging that the changes violated the country’s obligations under the BIT.

The arbitral tribunal upheld Achmea’s claim and awarded it over EUR 22 million in damages against Slovakia. As the arbitration took place in Frankfurt, Slovakia applied to the German court to set aside the award, alleging that the award violated public policy because it violated Art. 18, 267 and 344 of the Treaty on the Functioning of the European Union.

In line with the view raised by the European Commission as an intervenor in arbitration proceedings under these agreements, Slovakia takes the position that BITs between member states are incompatible with EU law.

In the proceedings to set aside the award, the German Federal Court of Justice sought a preliminary ruling from the Court of Justice of the European Union, stating that while it was inclined to share the position of Slovakia, in light of the Commission’s intervention and the lack of CJEU case law on the compatibility with EU law of BITs between member states, this issue warranted an interpretation by the Court of Justice.

Before the Court of Justice, the Commission, Cyprus, Czechia, Estonia, Greece, Hungary, Italy, Latvia, Poland, Romania and Spain have appeared in support of Slovakia’s position, while Austria, Finland, France, Germany and the Netherlands take the opposing view.

The advocate general’s opinion concludes that EU law is compatible with the existence of BITs between member states. While advocate generals’ opinions are not binding on the court, their proposal for legal resolution of the case is given great weight by the Court of Justice and in most instances the court rules in line with the advocate general’s analysis.

Preliminary remarks

The advocate general pointed out that the group of states intervening on the side of Slovakia (a respondent in 9 BIT arbitrations) are countries against whom investors also tend to pursue claims in BIT arbitration (Czechia 26 cases, Cyprus 3, Estonia 3, Greece 3, Hungary 11, Italy 9, Latvia 2, Poland 11, Romania 4, Spain 33). Conversely, the countries claiming that BITs between member states are compatible with EU law are countries of origin for capital and rarely respondents in BIT arbitration cases (Austria 1 case, France 1, Germany 3). Of all the intervenors rejecting the lawfulness of BIT treaties between EU member states, only Italy has renounced all of its treaties of this type (except for the BIT between Italy and Malta).

The advocate general also pointed out that EU institutions, including the Commission, had long taken the view that BITs were a necessary element in the process of preparing for EU expansion in Central & Eastern Europe. The association treaties between member states and candidate states even required them to conclude BITs. The advocate general also wondered why the accession treaties did not provide for dissolution of the BITs, if they were indeed incompatible with EU law.

The advocate general also disputed the Commission’s argument that BITs were primarily concluded between countries with free-market economies and countries formerly with centrally planned economies, or between member states and candidate countries, as Belgium and Luxembourg have BITs with Cyprus; Belgium and Luxembourg with Malta; Malta with Cyprus; Estonia with Latvia, Lithuania and Poland; Poland with Slovakia; Hungary with Poland, Slovakia and Slovenia; Czechia with Bulgaria and Latvia.

Moreover, EU member states concluded among themselves the Energy Charter Treaty in 1994, providing for investment arbitration, and the compatibility of this treaty with EU law had never been questioned by EU institutions or member states.

In the advocate general’s opinion, the Commission’s argument that BITs between member states undermine the uniformity and effectiveness of EU law is unpersuasive, as according to UNCTAD statistics, out of 62 intra-EU arbitral proceedings completed over several decades, the investors prevailed in 10 cases, a 16.1% success rate, as compared to a 26.9% success rate for investors at the global level. Only one arbitration was pointed out in the submissions as allegedly being incompatible with EU law (Micula v Romania).

The advocate general also argued that accession to the EU does not (under TFEU Art. 351) automatically render BITs between existing member states and acceding member states ineffective and contrary to EU law.

The principle of non-discrimination (TFEU Art. 18)

According to the advocate general, the privileges awarded by BITs, particularly the right to “fair and equitable treatment,” are broader than the EU’s freedom of establishment and free flow of capital (TFEU Art. 49 and 63).

After this preliminary observation, the advocate general pointed out that the Court of Justice had already addressed the question whether discrimination may exist vis-à-vis a national of a member state engaged in cross-border investment where the host member state does not afford the investor a benefit which it affords to nationals of another member state under a bilateral agreement between those states.

The Court of Justice addressed this issue in C-376/03 D. in the context of a tax treaty between the Netherlands and Belgium. Considering that discrimination can occur only with respect to persons in a comparable situation, the court held that “the fact that rights and obligations apply only to persons resident in one of the two Contracting Member States is an inherent consequence of bilateral double taxation conventions. It follows that a taxable person resident in Belgium is not in the same situation as a taxable person resident outside Belgium” with respect to real property in the Netherlands, and a rule such as the one in the Belgium-Netherlands convention “cannot be regarded as a benefit separable from the remainder of the Convention, but is an integral part thereof and contributes to its overall balance.” Consequently, if an agreement between two member states awards mutual benefits to their citizens, citizens of other member states are not in a comparable situation and cannot suffer discrimination as a result of the agreement.

The advocate general also stated that the arbitration clauses in BITs are an essential benefit for investors, without which the BIT would not guarantee adequate protection of investments (as confirmed by the Court of Justice in Opinion 2/15 regarding the free trade agreement between the EU and Singapore).

Moreover, TFEU Art. 18, banning discrimination, requires that persons in a situation governed by EU law be placed on a completely equal footing with nationals of the member state, not with nationals of another member state, and the Treaty on the Functioning of the European Union does not contain a most-favoured nation clause.

Wathelet drew an analogy between BITs and treaties on avoidance of double taxation, as they have a similar purpose of attracting foreign capital by ensuring a favourable climate for investment.

For these reasons, the advocate general concluded that the ban on discrimination in TFEU Art. 18 is not a barrier to the existence of BITs between EU member states.

TFEU Art. 267 and 344—the authority of the Court of Justice to interpret EU law and the autonomy of the EU legal system

The advocate general devoted much of his opinion to this vitally important issue. We highlight some of these points below.

Is an arbitral tribunal ruling under a BIT a national court for purposes of EU law?

The advocate general first pointed out that arbitral tribunals are not automatically excluded from the concept of a court or tribunal of a member state which may seek a preliminary ruling from the Court of Justice. The court has admitted requests for a preliminary ruling from arbitral tribunals on a case-by-case basis, including in arbitration with the state or in international arbitration (109/88 Handels- og Kontorfunktionærernes Forbund I Danmark, C-377/13 Ascendi Beiras Litoral e Alta, C-555/13 Merck Canada).

To determine whether a given institution meets the criteria of a national court for purposes of EU law, it must be examined “whether the body is established by law, whether it is permanent, whether its jurisdiction is compulsory, whether its procedure is inter partes, whether it applies rules of law and whether it is independent” (C-394/11 Belov). The advocate general found that all of these conditions were met in the case of the arbitral tribunal ruling under the Dutch/Slovak BIT.

The arbitral tribunal is established by law because the BIT is part of the legal order of the member states. While the panel is ephemeral, the arbitral tribunal is institutionally permanent as a dispute resolution method, acting under the rules of a permanent arbitration court. Its jurisdiction is compulsory because it arises under an international agreement making up part of the national legal order and the tribunal’s award is final and binding. Its proceedings are conducted inter partes by an independent institution applying rules of law, as guaranteed by the procedures of a permanent arbitration institution.

Is the autonomy of the EU legal system and the authority of the Court of Justice to interpret EU law ensured?

In the advocate general’s opinion, an arbitral tribunal established by the BIT as a national court within the meaning of EU law, applying EU law, is required to observe the rules established by EU law; otherwise, its rulings would be void as contrary to public policy.

The advocate general also pointed out that BITs are not part of EU law, and thus an arbitral tribunal whose role is to resolve a dispute over whether the provisions of the BIT were violated is not interpreting EU law. In any event, in the Achmea case EU law had no impact on the resolution of the dispute. He also indicated that the scope of the BIT and the scope of EU law are not the same, and the protection afforded under the BIT is much broader than the protection afforded by EU law.

He also pointed out that proceedings to set aside an arbitration award provide an opportunity to seek a preliminary ruling from the Court of Justice, ensuring uniform interpretation of EU law, as occurred in this case and in cases such as C-536/13 Gasport, C-567/14 Genentech and C-126/97 Eco Swiss.

Consequences of the judgment in Achmea

The resolution proposed by the advocate general in Achmea clearly supports the compatibility with EU law of bilateral investment treaties between member states. If the Court of Justice adopts that view, the judgment will undoubtedly be advantageous for foreign investors. The advocate general’s proposal is particularly interesting as it thoroughly rejects the position of the European Commission.

Agnieszka Kraińska, legal adviser, EU Law practice, Wardyński & Partners