The European Commission has consistently advocated against intra-EU bilateral investment treaties (BITs). It views them as being contrary to the principles of the single market because they result in more favourable treatment for investors from certain EU member states.
Despite this, its submissions to investment tribunals, annulment committees and national courts arguing that intra-EU arbitration clauses are contrary to the Treaty on the Functioning of the European Union (TFEU) to date have routinely been rejected. However, this year the European Court of Justice made a landmark ruling in Slovak Republic v Achmea BV that an investor-state arbitration clause in a BIT between two European states is incompatible with EU law.
This is likely to have significant repercussions for investors that rely on existing intra-EU BITs to protect their investments in Europe, and also for European investors that have commenced arbitrations or are seeking to enforce awards.
The case concerned Dutch insurance group Achmea’s decision to invest in Slovakia during its liberalisation of the private health insurance market in 2004. In 2006, Slovakia reversed its position and Achmea commenced a UNCITRAL arbitration under the 1991 Netherlands-Czechoslovakia BIT.
In 2010, an arbitral tribunal found in Achmea’s favour and ordered that Slovakia pay €22.1 million plus interest for violating the BIT’s fair and equitable treatment standard.
Slovakia’s challenge to the award was rejected in 2014, prompting Slovakia to appeal to Germany’s highest civil court which referred the matter to the ECJ for a preliminary ruling.
In the interim, one of the ECJ’s advocates general, Melchior Wathelet, advised that the BIT’s arbitration clause was not incompatible with EU law and was not discriminatory.
On March 6, 2018, however, the ECJ went against this and concluded that the investor-state arbitration clause in the BIT had “an adverse effect on the autonomy of EU law” and was incompatible with it, calling into question “the principle of mutual trust between the member states”.
There have already been significant ramifications. A Dutch investor has withdrawn its intra-EU treaty claim against Poland, citing the Achmea decision, while a prominent arbitrator has publicly expressed the view that an award issued by a tribunal on which he sat may be annulled.
Arbitral tribunals, which in all publicly available awards to date have ruled arbitration clauses to be compatible with EU law, may now find it more difficult to reach this conclusion. The Netherlands has committed to terminating its 12 remaining BITs with other EU member states.
Perhaps the greatest impact will be on how European investors investing in other EU countries will structure their investments in the future. The potential lack of BIT protection may prompt some investors to consider restructuring them so that they are made through a holding company outside of the EU, such as in Switzerland or, following Brexit, the UK. As a consequence, when the UK leaves the EU, we may see an increase in investments made through UK holding companies.
The UK not only has over 80 extra-EU BITs, but also 12 BITs with Central and Eastern European countries.
Liz Tout, partner, and Lionel Nichols, associate, at Dentons
©2018 funds europe