Arbitration and intra-EU BITs – German Bundesgerichtshof weighs in on the discussion

In its decision of 3 March 2016 (I ZB 2/15), published on 11 May 2016, the German Federal Court of Justice ("BGH") announced that it would request the Court of Justice of the European Union ("CJEU") to make a preliminary ruling on the validity of arbitration agreements concluded under intra-EU bilateral investment treaties pursuant to Art. 267 TFEU. While this decision takes the underlying investor state dispute to yet another level, the BGH's request for preliminary ruling by the CJEU bears the potential of becoming a turning point in the history of investor state dispute settlement in that it forces the CJEU to rule on the relationship between EU law and international investment law.

Background

On 1 October 1992, Czechoslovakia entered into a bilateral investment treaty with the Netherlands (the "BIT"). When Czechoslovakia dissolved on 1 January 1993, its legal successor, the Slovak Republic, assumed all legal obligations towards Dutch investors arising from the BIT. On 1 May 2004, the Slovak Republic acceded to the EU.

In 2004, the Slovak Republic also liberalized its national insurance market. The defendant in this litigation and claimant in the underlying investor state arbitration, Eureko, a Dutch insurance company now called Achmea (the "Investor"), invested in the Slovak medical insurance market. When the Slovak government changed in 2006, the liberalisation of the insurance market was halted and new regulations of the market were introduced. In the Investor's view, these measures amounted to a breach of the Slovak Republic's international obligations stemming from the BIT. The Investor initiated treaty arbitration against the Slovak Republic under the UNCITRAL rules. These proceedings were seated in Frankfurt, Germany.

Notwithstanding the Commission's attempt to halt this intra-EU investor state arbitration through an amicus curiae brief, the arbitral tribunal found that it had jurisdiction over the merits of this case. On the merits it ruled that the Slovak Republic was liable for breaching the Investor's treaty rights under the BIT. The arbitral tribunal granted the Investor compensation in the amount of EUR 22.1 million plus interest.

The Challenge Proceedings

During the arbitration, the Slovak Republic had already unsuccessfully attempted to challenge the arbitral tribunal's jurisdiction before the competent court in Frankfurt, Germany. Once the award was rendered, the Slovak Republic again filed a motion for setting aside the award.

In summary, the Slovak Republic contended that the BIT had become inapplicable after its accession to the EU. As a consequence, the Slovak Republic's standing offer to arbitrate investor state disputes under the BIT became ineffective and the arbitral tribunal lacked jurisdiction over the Investor's treaty claim. The Higher Regional Court of Frankfurt dismissed the Slovak Republic's challenges to the award and held that the Slovak Republic continued to be bound by its consent to arbitration expressed through the BIT. The Slovak Republic therefore appealed to the BGH on points of law.

The BGH's Request For a Preliminary Ruling

While the BGH's request for a preliminary ruling under Art. 267 TFEU it yet to be published, the main thrust of its legal reasoning is known.

To begin with, the BGH sets some ground rules: the BGH reiterated the CJEU's standing position that in case of conflicting provisions EU law takes precedence over previous international obligations of an EU member state. The BGH further noted that the CJEU has not pronounced itself on the compatibility of arbitration agreements arising from an intra-EU bilateral investment treaty with EU law, especially with respect to Art. 344, 267, and 18 TFEU. The BGH therefore suspended the court proceedings and requested the CJEU to rule whether or not investor state arbitration under an intra-EU bilateral investment treaty is incompatible with Art. 344, 267 or 18 TFEU.

At the same time, however, the BGH provided its preliminary view on the compatibility of intra-EU investor state arbitration with the provisions of the TFEU at stake:

• In the BGH's view, the member state's obligation under Art. 344 TFEU to submit disputes concerning the interpretation and application of EU law to the CJEU does not rule out the possibility that a foreign enterprise may raise claims against a member state on the basis of an intra-EU bilateral investment treaty. According to the BGH, this must hold true all the more as EU law does not foresee any direct investor state dispute settlement mechanism in case an investor's rights arising from an intra-EU bilateral investment treaty are infringed. 
• In addition, the BGH is not persuaded by the argument that Art. 267 TFEU is a bar to intra-EU investor state arbitration. The BGH held that the coherent application of EU law may be achieved through the member states' domestic court system. Where the lawfulness of an award can be questioned under EU law, the member state courts seized with the enforcement of the arbitral award may refer the decision to the CJEU pursuant to 267 TFEU. The BGH therefore proposes applying the CJEU's Eco Swiss-jurisprudence to intra-EU awards, although it conceded that the CJEU's scope of review would be limited to assessing if the award complies with the 'EU law's ordre public'.
• Despite the foregoing, the BGH is concerned that the possibility to arbitrate investor state disputes may potentially discriminate against investors from member states which cannot have recourse to investor state arbitration, contrary to Art 18 TFEU which prohibits any discrimination on the grounds of nationality within the scope of application of the EU Treaties. However, according to the BGH it does not follow automatically that investor state arbitration under intra-EU bilateral investment treaties is impermissible per se. Rather, the BGH refers to the CJEU's standing practice to eliminate discrimination by extending the benefits to the non-privileged party. In essence, this means that the Slovak Republic would be deemed to consent to investor state arbitration brought by investors from third member states that could not previously avail themselves of investor state arbitration under the BIT.

In the broader context of the Commission's efforts to put an end to intra-EU investor state arbitration the legal reasoning of the BGH's decision to request a preliminary ruling from the CJEU is quite remarkable in two respects.

First, the BGH appears to find most of the legal arguments advanced by the Commission through various amicus briefs during recent years unpersuasive. The BGH holds that neither Art. 344 TFEU nor Art. 267 TFEU pose a bar to intra-EU investor state arbitration. It is however doubtful that this will cause the Commission to reconsider the legal arguments it advances as amicus curiae.

Further, even if the BGH agrees in principle that intra-EU investor state arbitration may breach EU law, it reaches a fundamentally different conclusion as to what that means. The Commission proposes to remedy possible discrimination by eliminating intra-EU BITs, so far as the provisions therein conflict with provisions of EU treaties or secondary legislation, or coincide with areas under the EU's competence. However, the BGH seems to propose to significantly broaden the scope of a member state's consent to arbitration, to include investors from all member states.

For further information, please contact Dr. Patricia Nacimiento, Dr. Mathias Wittinghofer, Tilmann Hertel, Dr. Alessandro Covi or your usual Herbert Smith Freehills contact.