No jurisdiction over BIT claims if investor fails to state a prima facie case

Background

The Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Czech and Slovak Republic (BIT) was signed on 29 April 1991 and entered into force on 1 October 1992. It contains the following relevant provisions:

• Fair and equitable treatment (FET). This requires, among other things, that each contracting party shall ensure FET to the investments of investors of the other contracting party (Article 3).
• Expropriation. This provides that neither contracting party shall take any measures depriving, directly or indirectly, investors of the other contracting party of their investments unless:
  • the measures are taken in the public interest and under due process of law;
  • the measures are not discriminatory; and
  • the measures are accompanied by provision for the payment of just compensation (Article 5).

Facts

Achmea BV is a financial services company headquartered in the Netherlands. The disputes in this case relate to Achmea's investment in the Slovak health insurance sector.

In February 2006, Achmea (then known as Eureko BV) obtained a licence to establish a health insurance business in the Slovak Republic. In March 2006, Achmea incorporated a local subsidiary called Union zdravotná poisťovňa, a.s (Union).

Achmea continues to own 100% of Union. As of 1 January 2013, Union's share of the Slovak health insurance market was slightly more than 8%.

The Slovak Republic liberalised its health insurance sector in 2004 when it joined the European Union. In mid-2006 a new government led by Prime Minister Robert Fico introduced a range of measures affecting the health insurance sector, including legislation preventing private companies operating in the sector from distributing profits to their shareholders.

In Eureko BV v The Slovak Republic (PCA Case No 2008-13), Achmea (then Eureko) challenged a number of these measures under the BIT. On 7 December 2012, Achmea was awarded compensation of approximately EUR 22 million. In January 2013, the Slovak Republic commenced proceedings in Germany to have the award set aside. At the time of writing, those proceedings have not been resolved.

In the meantime a new government was elected in the Slovak Republic and, on 26 January 2011, the Constitutional Court of the Slovak Republic ruled that the restriction on distribution of profits was unconstitutional and in breach of Article 1 of Protocol 1 to the European Convention of Human Rights. The restriction on distribution of profits and certain other measures were reversed with effect from 1 August 2011.

On 1 April 2012, Mr Fico returned to power. Both before and after resuming the post of Prime Minister, Mr Fico made clear his intention to reintroduce the ban on distribution of profits and also indicated his preference for returning to a unitary public health insurance system.

In July 2012, the Ministry of Health published a proposal suggesting that a unitary system could be established in three ways:

• Agreeing with the private insurers that the state would take over the management of their client portfolios, with the private insurers to receive payments from the state (subsequently discounted).
• Private insurers voluntarily selling their shares or operations to the state.
• Expropriation.

The proposal envisaged that expropriation would be a last resort, to be pursued if a negotiated solution was not agreed with the private insurance companies.

Union wrote to the government expressing concern about the proposed measures, but on 25 July 2012 the government adopted a resolution approving the proposal to create a unitary system. Shortly afterwards, Mr Fico said to the press that the practical effect of the proposal would be that Union (and one other private health insurance company) would be forced to leave the Slovak market.

On 25 September 2012 the government published a detailed plan on how the unitary system would be established and further explaining its reasons for pursuing the plan. The plan also indicated that in the event of expropriation, compensation would be paid in accordance with the Slovak constitution and the international legal obligations of the Slovak Republic. Deadlines were fixed with a view to achieving introduction of the unitary system by 1 July 2014.

A period of consultation followed the introduction of the plan in which Achmea and Union made clear their objections. On 31 October 2012, the government approved the plan and authorised the Minister of Health to proceed with implementation. On 29 January 2013, a so-called "unitisation company" was incorporated, apparently with the intention that it would ultimately assume ownership of the shares or assets of the private health insurance companies.

On 6 February 2013 Achmea submitted a notice of arbitration requesting, among other things, that the tribunal:

• Order the Slovak Republic to "refrain from expropriating Achmea's investment in the Slovak Republic" (that is, Union).
• Declare that the Slovak Republic had breached the FET provision of the BIT "through conduct related to the impending expropriation of Achmea's investment" and "by continuously destabilizing the regulatory and investment environment in the Slovak health care sector".
• Order the Slovak Republic to pay Achmea compensation for damages suffered as a consequence of the alleged breaches of the BIT.

In response, the Slovak Republic requested that the tribunal declare that the tribunal did not have jurisdiction over Achmea's claims.

The tribunal was composed of Mr John Beechey (appointed by Achmea), Professor Pierre-Marie Dupuy (appointed by the Slovak Republic) and Dr Laurent Lévy (as presiding arbitrator).

In its first procedural order, the tribunal ordered the proceedings to be split, with issues of admissibility and jurisdiction to be determined in the first phase. Submissions were exchanged and a one day hearing on jurisdiction and admissibility took place in Amsterdam on 15 September 2013.

Decision

The tribunal held that it lacked jurisdiction over the expropriation and FET claims.

In the introduction to its decision, the tribunal noted that Article 8 of the BIT establishes four jurisdictional requirements namely that:

"There must be (i) a dispute, (ii) between one Contracting Party and an investor of the other Contracting Party, (iii) concerning an investment, and (iv) which has not been settled amicably within a period of six months from the date either party to the dispute requested amicable settlement."

It was not in dispute that the second and third of these requirements were essentially satisfied. As the tribunal ultimately determined that the first requirement was not satisfied, it did not address the fourth requirement.

The Slovak Republic argued that the requirement that there must be a dispute was not satisfied and, furthermore, Achmea had failed to state a prima facie case on the merits.

There was some argument whether the Slovak Republic's second argument should be characterised as an objection going to jurisdiction or admissibility. The tribunal acknowledged that admissibility and jurisdiction are distinct legal concepts but said that the distinction had not been strictly enforced at the international level. Having considered various authorities, the tribunal concluded that "any and all objections grounded on the BIT provision that contains the State's consent to international arbitration … address the Tribunal's jurisdiction".

The tribunal proceeded to deal with both of the Slovak Republic's arguments as objections to jurisdiction.

Requirement that there must be a dispute

The tribunal rejected the Slovak Republic's arguments that there was not a dispute. In particular, the tribunal was not persuaded that a dispute could only exist after a breach of the BIT had occurred. The tribunal observed that the parties "hold radically opposing views on the proper interpretation of Article 5 of the BIT". Accordingly, the tribunal was satisfied that there was a dispute for the purposes of Article 8. On this issue, the tribunal stated that:

"The question of whether the Claimant alleged a breach of Article 5 of the BIT is of little relevance for the determination of whether a dispute on the interpretation and application of Article 5 exists. Indeed, the Respondent conflates the question of the existence of a legal dispute and the law of international responsibility. It does not follow from the fact that international responsibility can arise only after an internationally wrongful act has occurred, that an internationally wrongful act is required for a legal dispute to exist. In other words, the allegation of a breach is not a constitutive element of the notion of legal dispute but rather a requirement for liability to arise.

The Slovak Republic had also argued in favour of a concreteness requirement, relying on AES Corporation v Argentine Republic (ICSID Case No. ARB/02/17), where the tribunal had stated that:

"The true test of jurisdiction consists in determining

(a) whether, in its claim, AES raises some legal issues in relation with a concrete situation, and

(b) if the Tribunal's determination of the answer to be given to these issues would have some practical and concrete consequences."

Elaborating on its argument that a dispute would only exist after a breach had occurred, the Slovak Republic further argued that the relief sought by Achmea (an order that the Slovak Republic should refrain from carrying out any expropriation) was impermissible.

The tribunal stated that the requirement of concreteness was specific to the ICSID context. In the tribunal's view, the introduction of such a requirement into the definition of a legal dispute conflated the question of the existence of a dispute with the question of whether the claimant had demonstrated a prima facie case on the merits. The tribunal also agreed with Achmea that the question of available remedies could not be considered at the jurisdictional stage and was not an element of the definition of a dispute.

Requirement that claimant must state prima facie case

The Slovak Republic argued that it was a jurisdictional requirement that Achmea had to state a prima facie case. According to the Slovak Republic, even if Achmea's factual allegations were true (which was denied), those facts were not capable of constituting a violation of the BIT. Achmea denied the existence of any jurisdictional requirement of this type and argued that, in any event, it had established a prima facie case.

Noting that the so-called prima facie test had been applied by numerous international courts and tribunals, the tribunal ruled that "at the jurisdictional phase, the Claimant must not only establish that the jurisdictional requirements of the Treaty are met … but also that it has a prima facie cause of action under the Treaty."

According to the tribunal, the prima facie test has two consequences:

• The facts alleged by the claimant will be assumed to be true, without prejudice to the further examination of those facts during the merits phase.
• The onus is on the claimant is to show that the relevant provisions of the BIT apply to the facts as alleged.

Regarding the expropriation claim, the tribunal noted that Achmea had argued that Article 5 of the BIT contained a general prohibition on expropriation, whereas the Slovak Republic contended that Article 5 confirmed the Slovak Republic's right to expropriate, subject to certain requirements. The tribunal therefore considered that it should assess these arguments, notwithstanding that this would usually be an issue for the merits phase of the arbitration.

The tribunal was not persuaded by Achmea's arguments regarding the interpretation of Article 5. The tribunal considered that the right of states to expropriate foreign owned assess was strongly established in customary international law. Further, to the knowledge of the tribunal, it had never before been argued that the negative formulation of the right to expropriate contained in most BITs reversed that right, as opposed to specifying certain conditions circumscribing the right. The tribunal decided that Achmea had failed to state a prima facie case under Article 5 of the BIT, saying that it was impossible, and impermissible, for the tribunal to attempt to assess in advance of the Slovak Republic actually carrying out an expropriation whether those conditions were or were not satisfied. In the tribunal's view, Achmea's claim was premature.

Regarding the FET claim, the tribunal accepted that in 'in certain circumstances, conduct of a State in anticipation of an expropriation might amount to a breach of [the FET standard]'. However, the tribunal was not satisfied that the facts alleged by Achmea amounted to prima facie evidence of such a breach. In particular, the tribunal noted that in announcing its intentions in relation to the healthcare sector, the Slovak Republic had indicated that it would respect its legal obligations, including the obligation to pay compensation in the event of expropriation. The tribunal was also not satisfied that Achmea had demonstrated that actions of the Slovak government had destabilised the regulatory environment.

Having found that it lacked jurisdiction in relation to the expropriation claim and FET claim, the tribunal stated that it was not necessary to consider the Slovak Republic's further objections to jurisdiction.

Achmea was ordered to pay the costs of the arbitration and 75% of the Slovak Republic's costs. 

Comment

This is the second BIT claim brought by Achmea in relation to its investment in the Slovak private health insurance sector. Achmea was victorious in the first round and now the Slovak Republic has levelled the score. The most interesting aspect of the case was Achmea's novel argument that the expropriation provision of the BIT permitted the tribunal to review the expropriation process which the Slovak Republic had threatened to pursue, before any actual taking. While this argument was emphatically rejected, the tribunal did pause to note the possibility that a state's conduct in anticipation of expropriation might amount to a violation of the FET standard. It remains to be seen whether there will be a third round.

For further information, please contact Antony Crockett, Senior Associate, or your usual Herbert Smith Freehills contact.

A version of this article has previously been published by Antony Crockett, Herbert Smith Freehills LLP on PLC Arbitration.