A recent decision1 of the Court of Justice of the European Union (CJEU) ruled that the arbitration clause contained in Bilateral Investments Treaties (BITs) concluded between Member States (MS) is not compatible with European Union (EU) law. BITs are agreements between two countries affording protection to investments made by investors from one contracting state in the territory of the other. One of the main features of such a regime of protection is to be found in the recourse to international arbitration given to the investors against state expropriation.

The first BIT dates back to 1959. After two decades there were already hundreds of BITs, and the current number of BITs in force is estimated to be around 3,000. BITs have proven to be effective instruments in fostering foreign investments. Just two years before the first BIT appeared, several European Countries (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany) signed the Treaty of Rome creating the European Economic Community (ECC). It was indeed the first step toward an ongoing complex process of integration that today includes 28 Member States (27 at the end of Brexit) under the name of the EU.

BITs and the EU are diverse phenomena. The former are two-party treaties aiming at fostering international investments in the territories of contracting states. The latter is something far more ambitious, which cannot be adequately defined in just a few sentences. However, the institution of a single market within the EU borders, where investors can operate under a common framework of rules, certainly shares something with the BIT phenomenon. In other words, both the BIT and the EU are aimed at fostering international investments. But, while the EU has a much broader scope, the aforementioned aspect is indeed the sole purpose of the BIT.

Even the way in which that aim is pursued differs significantly. BITs are rather simple instruments, which contain just a few provisions. In contrast, the EU is based on two primary treaties: The Treaty on the European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). The relevant principles of the internal market are contained in the latter treaty, but they are enriched by a whole bunch of different sources such as EU regulations, directives transposed into national laws by member states and decisions. The internal market is based on the principles of free movement of goods (Part. 3, Title II, TFEU) persons, services, and capital (Part. 3, Title IV, TFEU). It also includes, amongst many other things, the principle of non-discrimination (article 18, TFEU) and a common set of rules provided on competition (Part. 3, Title VII, TFEU).

When compared to the structure of BITs, the architecture set up by the EU appears to be extremely sophisticated. Regardless, and despite all of the aforementioned differences, is it possible for BITs to coexist with the EU? More precisely, are BITs concluded between member states (intra-EU BITs) compatible with EU law?

Although there is no shared view about it, the preponderance of evidence indicate that they are not. Supporting this view is the fact that the EU Commission took a stand against their compatibility. Further, the opinion of the Advocate General who argued for their compatibility was recently overturned by the CJEU.2 But what are the grounds for the inconsistency of BITs with EU law?

The position of the EU Commission dates back to 2015.3 Over the years it raised various grounds that support incompatibility. These are summarized as follows:

 

• The principle of lex posterior derogate priori contained in article 59 of the 1969 Vienna Convention on the Law of Treaties;4 

• Article 351 of TFEU requiring member states to undertake actions against any inconsistencies arising concerning EU law and previous treaties;5 

• EU law primacy over national laws.6 Since international treaties enter into force through ratification of national laws, EU law shall also prevail over international treaties;

• The principle of non-discrimination pursuant to article 18 of TFEU;7

• The fact that BITs may be interpreted as being a violation of state aid rules under EU law;8 and

• BITs conflict with the exclusive jurisdiction the CJEU has in interpreting EU law. In fact, no preliminary ruling from the CJEU can be sought by arbitral tribunals.9 

It has also been argued that EU law provides investors with protection that ought to be considered equivalent to the one afforded by BITs.10 Consequently, there would be no need for intra-EU BITs. However, such grounds conflict with the assumption that intra-EU BITs violate the principle of non-discrimination contained in article 18 TFEU. Only one of these assumptions can be true. In other words, if it is true that the recourse to arbitration provided under BITs represents an advantage susceptible to violate the EU principle of non-discrimination, then the degree of protection EU law affords investors has to be lower than the one provided by BITs.

Some of these arguments were recently brought before the CJEU in the case Achmea v. Slovakia.11 The case relates to a BIT concluded between the Kingdom of the Netherlands and former Czechoslovakia. The Republic of Slovakia succeeded after the dissolution of Czechoslovakia in 1993.

The liberalization of Slovakia’s sickness insurance market of 2004 induced the Dutch company Achmea B.V. (Achmea) to set up a subsidiary there. In 2006 the aforementioned liberalization was partly reversed through the introduction of certain limitations.

For such reasons, Achmea started an arbitration proceeding against the Republic of Slovakia under the BIT in order to obtain compensation for the damage suffered due to Slovakia’s reform of 2006. With its award, the Arbitral Tribunal ordered Slovakia to pay damages of approximately 22.1 million Euro.

The Republic of Slovakia brought an action before the German Federal Court12 for setting off an intra-EU BIT related arbitral award. According to the arguments raised by Slovakia, the arbitration clause contained in intra-EU BITs is against EU law since it conflicts with articles 18, 267 and 344 of the TFEU and, thus with the principles of non-discrimination and supremacy of EU law.

Although the CJEU ruled in favor of the incompatibility, it is interesting to notice that both the German Court’s request13 for the CJEU’s interpretative intervention and the opinion14 of the Advocate General seem to conclude that intra-EU BITs arbitration clause is compatible with EU law.

Quite interestingly, the CJEU ruling left out any reasoning about the alleged violation of article 18 TFEU. Indeed, the decision seems built around the CJEU’s own role. EU Treaties confer on the CJEU the role of gatekeeper of the EU legal system’s autonomy and EU law interpretation. In other words, it is through the work of the court that the aim of uniform application of EU law within the European Union is reached. The CJEU decision is largely based on the fact that arbitral tribunals are not jurisdictional authorities within the meaning of article 267 TFEU. As a consequence, no arbitral panel can make a reference to the CJEU for a preliminary ruling. There- fore, intra-EU BITs arbitration clauses risk undermining the uniform application of EU law and for such reason conflict with EU law.

The CJEU conclusion appears reasonable but may be built on defective grounds. It is true that arbitral tribunals cannot be considered to be judicial authorities under article 267. Thereby they are precluded from making references to the CJEU. The reasoning as to why they should apply EU law in a dispute arisen under a BIT is therefore obscure.

In fact, BITs generally provide independent and autonomous frameworks where the scope of any concept involved is properly defined. Due to this kind of structure arbitral tribunals called to apply BITs shall not apply any other substantive law provisions than those contained therein. Moreover, it is true that member states’ laws may become applicable in case the seat of arbitration is located within their territories, but these are laws of procedural nature.

The CJEU surprisingly affirms15 that arbitral panels under BITs may be called to apply member states’ substantive laws which are now largely based on EU law. This reasoning is not convincing. In fact, substantive national laws of member states may perhaps become relevant only in proceedings where enforcement or setting aside are sought. Indeed, in such scenarios, member states laws are susceptible to becoming essential. However, it cannot be forgotten that the aforementioned proceedings’ jurisdiction always belongs to jurisdictional authorities within the meaning of article 267 TFEU. In other words, if the EU law’s supremacy really is at stake, either the enforcement or the setting aside authority can refer to the CJEU for a preliminary ruling.

Some may argue that the CJEU decision only refers to the particular arbitration clause contained in the BIT between the Kingdom of the Netherlands and the Republic of Slovakia and it is of no use with regards to arbitration clauses contained in other intra-EU BITs. However, BITs structures are generally the same, and the reference to arbitration as a dispute settling measure is contained in every BIT. Further, the reasoning of the CJEU is not based on the particularities of the specific case and seems to be wide enough to be applied to all intra-EU BITs.