German court confirms the protection of investors under intra-EU BITs

On 10 May 2012, the Higher Regional Court (Oberlandesgericht) in Frankfurt issued a long-awaited decision in annulment proceedings brought against a jurisdictional award that had been rendered by a tribunal in an UNCITRAL arbitration between Dutch insurer Eureko B.V. and the Slovak Republic. 

The decision is important in that it confirms the possibility of European investors to initiate arbitral proceedings under the dispute resolution clauses contained in Bilateral Investment Treaties that have been concluded between EU Member States.  These are typically referred to as intra-EU BITs.  While the European Commission has taken the view that these treaties are in conflict with EU law, the Court's decision will nonetheless come as comfort to the claimants in a number of proceedings that are presently pending under intra-EU BITs before international arbitral tribunals.

Background

Eureko had initiated the arbitration in 2008 based on the investor-state dispute resolution mechanism in the 1991 Bilateral Investment Treaty (BIT) between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic.  It alleged breaches of various protection standards under that treaty.  In the proceedings, which are understood to now have moved onto the merits stage, Eureko claims that legislative measures introduced in 2006 in relation to Slovakia's health insurance sector have destroyed the value of its investments and caused it damages in excess of EUR 100 million.

After receiving detailed submissions from the parties as well as written observations by the Dutch government and the European Commission, the tribunal held in October 2010 that it had jurisdiction over the dispute.  In so doing, it dismissed the arguments of the Slovak Republic, according to which the arbitration mechanism under the BIT had become inapplicable with Slovakia's accession to the EU in 2004 and no valid arbitration agreement had therefore been formed between the parties.  As the proceedings were seated in Frankfurt, the Slovak Republic applied to the Oberlandesgericht Frankfurt as the supervisory court for annulment of the jurisdictional award.  The Court essentially confirmed the findings of the arbitral tribunal and refuted Slovakia's application.

The decision

The Court dismissed Slovakia's arguments as follows:

• Allowing investors to institute arbitral proceedings under intra-EU BITs was not (as Slovakia argued) incompatible with Article 344 of the Treaty on the Functioning of the European Union (TFEU).  According to this provision, Member States must not "submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein."  The Court pointed out that this provision only applied to disputes between EU Member States themselves and that there was no basis for extending it to investor-state disputes.  In particular:
  • Article 344 of the TFEU should not be applied so as to prevent tribunals sitting in intra-EU arbitrations from rendering awards that might be in conflict with EU law.  Rather, awards rendered in such proceedings were subject to the control by the national courts of the Member States, which in turn could submit questions of EU law to the European Court of Justice (ECJ).  As a consequence, these arbitrations did not take place entirely outside the EU's institutional framework.
  • The simple danger of erroneous awards and the limited control of the national courts over international arbitrations was not specific to proceedings based on intra-EU BITs, but equally existed in relation to ordinary "commercial" disputes.  Since international arbitration in general was not seen as being incompatible with EU law and the EU itself had expressed its agreement with ICSID and other forms of investor-state arbitration by becoming a signatory to the Energy Charter Treaty (ECT), making such an argument solely with regard to intra-EU proceedings was not convincing in the Court's opinion. 
  • With regard to Article 18 of the TFEU, which prohibits any discrimination on grounds of nationality, this could not affect the validity of the treaty's dispute resolution clause.  While the limitation of the protection available under the BIT to certain investors might well be discriminatory, the impact of this would rather be that protection would have to be extended to other EU investors as well.
  • The BIT's dispute resolution clause had not become inapplicable under Article 30 of the 1969 Vienna Convention on the Law of Treaties (VCLT).  This Article provides that where the provisions in two treaties concluded between the same parties are incompatible, the provisions in the later treaty usually prevail.  However, since the Court did not find that applying the dispute resolution clause in the BIT was incompatible with EU law, this argument was equally dismissed.
  • Finally, the Court refused to make use of its power to seek a preliminary ruling by the ECJ on the above issues of European law (under Article 267 of the TFEU), saying that it had no serious doubts in this regard.

Implications of the decision for intra-EU investors

The decision of the Court essentially confirms not only the decision of the tribunal in the original Eureko v. the Slovak Republic arbitration, but also the line that has been taken by arbitral tribunals in a number of other cases relating to intra-EU BITs, such as Eastern Sugar v. the Czech Republic and R.J. Binder v. the Czech Republic.  Given the position of the European Commission that intra-EU BITs are in conflict with EU law and its ambivalent stance regarding the applicability of the dispute resolution clauses contained therein, the decision will be of great interest to the many investors with current or prospective claims under intra-EU BITs.

In any event, the Higher Regional Court is set not to have the last word on the issue, as Slovakia is reported to have lodged an appeal against the decision to the German Federal Supreme Court (Bundesgerichtshof).  Contrary to the Frankfurt Court, the Bundesgerichtshof, whose decisions cannot be appealed within the German legal system, will have to seek a preliminary ruling from the ECJ if it has any reasonable doubts regarding the impact of EU law on the issues before it.  Investors with potential claims against EU Member States under one of the 190 or so intra-EU BITs will therefore be well advised to closely follow these further developments.