Claims against EU Member States by disappointed energy sector investors have been a major growth industry in recent years. As regular readers will know, Spain alone has faced more than 30 claims under the Energy Charter Treaty (ECT) by investors in its renewables sector who lost out following the government’s abrupt about-turn on generous rewards for solar generation. All these claims – some running to billions of Euros — have been taken to international arbitration under ECT Article 26. But increasingly the European Commission has challenged the jurisdiction of arbitral tribunals in intra-EU investment disputes – that is, where an EU investor claims against an EU Member State – on the basis that these claims are incompatible with EU law.
So far, arbitral tribunals – including those in the Charanne and Eiser cases which featured in previous articles in these pages – have consistently rejected these jurisdictional challenges. But on 6 March 2018, the Court of Justice of the European Union’s (CJEU) shook the world of investment arbitration to the core with its judgment in Slovak Republic v Achmea (Case C-284/16).
The Achmea judgment
Achmea, a Dutch company, took a claim to arbitration under the Slovakia-Netherlands bilateral investment treaty (BIT), complaining about a 2006 Slovakian law preventing private health insurers from distributing profits to shareholders. The arbitration had its seat (its legal location) in Frankfurt. The tribunal awarded Achmea compensation of €22.1 million. Slovakia applied to the German courts to set that award aside, arguing that Article 8 of the BIT – which provides for arbitration along similar lines to ECT Article 26 – is incompatible with the Treaty on the Functioning of the European Union (TFEU). The German Federal Court of Justice referred the question of compatibility to the CJEU.
In September 2017, Advocate General (AG) Wathelet delivered an opinion advising that the arbitration clause did not violate EU law. In its judgment the CJEU framed the issue in the following way: “do Articles 267 and 344 TFEU preclude a provision in an international agreement between EU Member States under which an investor from one Member State may bring proceedings against another Member State before an arbitral tribunal, whose jurisdiction that Member State has undertaken to accept?” The Court took the unusual step of departing from the AG’s opinion. It held that the arbitration clause was incompatible with EU Law because:
- The arbitration clause in the BIT required the arbitral tribunal to take account of the law of the contracting State (Slovakia) and international law principles. These included EU law. So the tribunal would probably have to interpret and apply EU law, particularly the rules on freedom of establishment and free movement of capital.
- The preliminary ruling procedure in Article 267 TFEU enables courts and tribunals of Member States to refer to the CJEU questions of interpretation and application of EU law, so as to ensure uniformity and consistency of that law throughout the Union. But an arbitral tribunal constituted under the BIT is not a “court or tribunal” of a Member State within Article 267. And since arbitral awards are invariably subject to only very limited review by national courts, there is inadequate scope for the CJEU to supervise the arbitral tribunal’s handling of EU law.
- Art 344 TFEU provides that Member States may not submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for in the Treaties. That protects the autonomy of the EU legal system. Member States cannot enter into agreements that undermine the Treaties’ allocation of powers and so detract from that autonomy. The arbitration provision in the BIT was such an agreement.
- Commercial arbitration agreements are compatible with EU Law. But those originate in the “freely expressed wishes of the parties”, whereas BIT arbitrations derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts a dispute which may concern the application or interpretation of EU law.
The judgment has attracted much criticism in arbitral circles. But if we accept — as we must — that it is now the law, then the key questions become: does it prevent arbitration of energy investors’ claims under the ECT? And if not arbitration, then what?
Does Achmea prevent arbitration of ECT claims?
Some commentators have suggested the arbitration clause in Article 26 ECT is unaffected by Achmea because, unlike the Netherlands-Slovakia BIT, the EU itself is a party to the ECT. So, the argument runs, the EU must have agreed to Article 26 as a derogation from the allocation of jurisdiction under the EU Treaties. The CJEU pointed out in its judgment that it had previously ruled that it is “not in principle incompatible with EU law” for the Union to become party to an international agreement establishing a decision-making body whose judgments are binding on EU institutions including the CJEU.
But this seems doubtful. In referring to other international agreements the CJEU appears to have envisaged an agreement establishing a “court” in the usually understood sense, not an autonomous arbitral tribunal. In his opinion AG Wathelet pointed out that an arbitration provision under a treaty to which the EU is party is more, not less, likely to offend Article 344 TFEU. Its provisions would become part of EU law, so a dispute would inevitably require the interpretation and application of EU law. And the whole point of the judgment is that disputes involving interpretation and application of EU law must be determined in a court system which enables a reference to the CJEU under Article 267 TFEU, an attribute which arbitral tribunals lack.
One type of procedure permitted by Article 26 ECT is arbitration under the rules of the International Centre for Settlement of Investment Disputes (ICSID), a body established by the Washington Convention which requires contracting States to recognise its tribunals’ awards automatically and without any review. It has been suggested this bypasses the problem of EU law, resulting in this form of ECT arbitration remaining available. But that seems optimistic. AG Wathelet signalled that the lack of review of ICSID awards by a national court might itself generate incompatibility with EU law. The Court’s reasoning tends to confirm that. An ICSID tribunal is no more a “court or tribunal of a Member State” than is any other kind of arbitral tribunal constituted under Article 26.
Investors now face the prospect that EU law prohibits any intra-EU investment dispute, including an ECT claim, from reference to any form of arbitration. So: where can such a claim be made? Indeed, is there any claim left to make? AG Wathelet thought that a BIT shorn of a right to arbitrate would be “devoid of all practical effect”.
It seems improbable that the Achmea judgment, by barring investors from enforcing rights through arbitration, has gone as far as extinguishing the rights themselves. It is precisely the existence of the treaty rights, alongside parallel EU rights and obligations, that produces the compatibility problem. EU law has a rich tradition of insistence on effective remedies. Where existing rules provide no obvious route for enforcing EU rights against a Member State, the Court’s usual approach is to recognise – or even create — the necessary jurisdiction in the national courts. In the Factortame case, the CJEU held that the principle of effectiveness gave UK courts the previously unknown power to disapply an Act of Parliament incompatible with EU the Treaties, and to award damages against the Government for the loss caused (R v. Secretary of State for Transport, ex p. Factortame, case C-213/89, and Brasserie du Pêcheur/Factortame (No. 3), Cases C-46/93 and C-48/93).
It is consistent with these principles that an investor deprived by Achmea of arbitral protection of rights against a Member State should be entitled instead to seek judicial protection by claiming damages in a national court. It is unlikely that the courts of the investor’s home State have jurisdiction over such a claim, because that would involve the courts of one State claiming power over the authorities of another State – a quantum leap even by EU standards.
That leaves the question whether the national courts of the host State could entertain an intra-EU investment claim, bearing in mind that the investor’s rights are created not by the EU regime but by a separate agreement between States. This is a particular headache for the UK, Ireland and the EU’s other common law States, where international agreements confer no rights enforceable in national courts unless and until implemented by national legislation.
The ECT may well sidestep this problem. Article 26(2) gives an investor the express option of referring a dispute to the national courts of the host State. Because the EU itself is party to the ECT, the treaty is binding on the Union and the Member States under Article 216(2) TFEU. So it forms part of domestic law in the same way as other EU rules. In the UK that is reinforced by the ECT’s designation as an “EU Treaty” under section 1(3) of the European Communities Act 1972.
There are also good reasons why, apart from the ECT, the EU principle of effectiveness may in principle give a national court jurisdiction over intra-EU investment treaty claims. The point of Achmea is that EU law demands that rights under the treaty, because of their interaction with rights under the EU regime, be ventilated in a court forming part of the EU judicial framework. The need for that court to have jurisdiction is inherent in the removal of jurisdiction from the arbitral mechanism in the first place.
In the event of a claim against the UK, English law may also supply a pragmatic answer to the problem. There are useful examples of the High Court asserting jurisdiction to deal with a dispute where the original non-judicial machinery is unavailable: for example where an agreed expert determination mechanism could no longer operate (Sudbrook Trading Estate Ltd. v. Eggleton  3 All ER 1, HL) or where a body of commissioners for assessing compensation under an old Canal Act was long defunct (Swanhill Developments plc v. BWB  JPL 153, CA). The court would not be importing the treaty into domestic law, but simply offering a platform for a dispute where the State has agreed to accept binding determination but the original mechanism has failed as a result of another system (EU law) whose binding decisions the State has also agreed to accept. The court could still make a preliminary reference to the CJEU, satisfying Achmea. An early reference may well be necessary on the very question whether the national court has jurisdiction of this kind.
Suing Member State authorities in their own courts might strike some investors as an unwelcome prospect. Does the EU’s status as a party to the ECT give investors the option of suing the EU itself in its own courts? That might be possible in certain circumstances. For example, in the Eiser case the Commission has blocked payment of the arbitral award on the ground that it constitutes unlawful State aid. If that decision is overturned by the General Court or CJEU, the investors might have a claim against the Commission under Article 340 TFEU. But beyond that rather special situation, all eyes must remain on the courts of the host State.
Where does it leave us?
Whatever criticism might be levelled at Achmea, it cannot be ignored. The judgment gives impetus for establishing the standing multilateral investment court first proposed by the EU in response to political controversy surrounding the TTIP (EU-USA trade agreement) negotiations. But that is some years away. Meanwhile investors whose BIT or ECT claims Achmea bars from arbitration will wonder where to go now – not least as regards the UK pending expiry of the expected Brexit transition period in 2020. There are good grounds for believing that the national courts of the host State can and should now step into the breach created by the CJEU.