The Dichotomy Between European Union Law and International Law: Responses to the Achmea Judgment of the European Court of Justice

Cees Verburg | c.g.verburg@rug.nl

In March 2018 the Court of Justice of the European Union (CJEU) ruled in a preliminary procedure that the investor-State arbitration clause contained in the Netherlands-Slovakia Bilateral Investment Treaty (BIT) was incompatible with primary European Union (EU) law. Due to the language employed by the CJEU, this ruling casts doubt over investor-State arbitration clauses in nearly 200 existing BITs concluded between EU Member States as well as the intra-EU applicability of the arbitration clause of the multilateral Energy Charter Treaty (ECT) to which the EU itself is a Contracting Party.

In a blog post written a week after the judgment I argued that one should not expect that international arbitration tribunals constituted under the existing intra-EU investment treaties will suddenly decline jurisdiction because of the CJEU judgment. This blogpost aims at providing an overview of the subsequent developments in relation to the above–mentioned Achmea judgment and the consequences that this judgment entails for intra-EU investor-State arbitration on the basis of investment treaties.

Response by European Commission (EC)

In a Communication issued during the summer, the EC gave its unequivocal view on the consequences of the Achmea ruling for intra-EU investor-State arbitration: since the arbitration clauses are inapplicable, investment tribunals lack jurisdiction because of the absence of a valid arbitration agreement. Consequently, any resulting awards should be annulled and recognition and enforcement should be refused. Furthermore, intra-EU BITs should be terminated. Concerning the investor-State arbitration clause of the ECT, the EC held that it is inapplicable in intra-EU relations because of the incompatibility with primary EU law.

Response by the German Federal Court of Justice

In late October, the German Federal Court of Justice, that had requested the preliminary ruling in the Achmea v. Slovakia case, ruled that the Achmea tribunal lacked jurisdiction and subsequently set aside the award. In essence, the Court held that Slovakia’s offer to arbitrate was inapplicable – due to incompatibility with EU law – and could, therefore, not give rise to an arbitration agreement.

Responses by ECT Arbitral Tribunals

The first ‘post-Achmea’ intra-EU award based on the ECT was rendered in May 2018 by a tribunal in the Masdar v. Spain case, which operated on the basis of the ICSID Convention (International Centre for Settlement of Investment Disputes). This tribunal primarily emphasized that the Achmea case concerned a BIT case, whereas the Masdar case was based on the multilateral ECT to which the EU itself is a party. By making reference to AG Wathelet’s opinion in the Achmea case, which had been ignored by the CJEU, the tribunal dismissed the relevance of the judgment for intra-EU ECT arbitration.

Another ECT award was rendered in June by an ICSID tribunal in Antin v. Spain. Although the tribunal did not explicitly refer to the CJEU judgment, it rejected the argument of Spain that the arbitration clause of the ECT did not apply in intra-EU relations. Amongst other considerations, the tribunal held that developments in EU law, including in the interpretation and application thereof by the CJEU, cannot undermine prior consent to arbitration offered through investment treaties.

In August an ECT tribunal, again operating on the basis of the ICSID Convention, devoted an entire decision to the ‘Achmea issue’ in the Vattenfall v. Germany case. The tribunal provided an elaborate analysis of the alleged conflict between the ECT and EU law and the consequences thereof. After a well-reasoned account of the relevant applicable laws and an interpretation of the investor-State dispute settlement clause of Art. 26 ECT, in light of the rules of treaty interpretation as laid down in the Vienna Convention on the Law of Treaties (VCLT), the tribunal concluded that the arbitration clause ‘includes EU Member States and non-EU Member States without distinction’ as there is no provision in the ECT that carves out intra-EU application of the treaty.

The tribunal partially based this conclusion on the finding that during the ECT negotiations the inclusion of an intra-EU disconnection clause, which would have precluded intra-EU applicability of the treaty, was rejected after the Commission tried to include it into the treaty. This might be the first ECT tribunal that shows awareness of this historical fact.

Moreover, the tribunal resolved the conflict between the conflict clauses in the EU treaties and the ECT in favor of Art. 16 of the ECT by reference to the lex specialis rule. As held by the tribunal:

“In the Tribunal’s view, the clearer conflict rule in Article 16 ECT must prevail over a rule derived from an a contrario interpretation of Article 351 TFEU which cannot be found in the text of the TFEU itself. As a matter of public international law, the Tribunal cannot be asked to leave aside a clear rule in favour of a countertextual one. This is the case irrespective of whether or not EU law is considered to prevail over international treaties within the EU internal legal order.” Throughout its decision, the Vattenfall tribunal emphasized that it analyzed the relevant matters from the perspective of public international law.

Responses by intra-EU BIT Arbitral Tribunals

Thus far, only one investment tribunal that derived its jurisdiction from an intra-EU BIT has commented on the Achmea judgment. In the ICSID case UP and CD v. Hungary, the tribunal also dismissed the relevance of the Achmea judgment for purposes of its jurisdiction. The tribunal primarily emphasized the special nature of the ICSID Convention as a multilateral treaty that provides for an international arbitration forum, which is completely delocalized from national arbitration law. This stands in contrast to the Achmea arbitration, which was governed by German arbitration law due to the fact that the tribunal was seated in Frankfurt. The UP and CD tribunal went on to say that the Achmea judgment was silent as to the effect that it has on consent to arbitration given under BITs and the ICSID Convention. Moreover, the tribunal held that the nature of investment treaties – as evidenced by the presence of sunset clauses – and the ICSID Convention itself oppose the retroactive withdrawal of consent to arbitration. Hence, the consent to arbitration given through the investor-State arbitration clause of the applicable BIT was not affected by the Achmea judgment.

Conclusion

The cases referred to above underline that the existing dichotomy between EU law and international law is one to be solved permanently by policy makers and politicians and not by adjudicators. On the basis of the above–mentioned investment cases, one could argue that all offers of consent to arbitrate investment disputes arising under investment treaties remain valid until they are formally withdrawn.

Until this time, EU Member States are in the awkward position of being bound to conflicting treaty obligations arising under investment treaties and the EU treaties. From the EU law–perspective, the primacy principle dictates that rules of international law in intra-EU relations that are incompatible with EU law become inapplicable. From the perspective of public international law, which is the perspective that investment tribunals will most likely adopt, this is not necessarily the case. The outcome here may depend on the exact wording of the applicable treaty, its time of conclusion, applicable procedural rules and lex arbitri, as well as the conflict of norms rule that the tribunal deems most appropriate in the specific dispute: lex posterior, lex priori or lex specialis. The Achmea judgment has thus not put an immediate end to intra-EU investment arbitration.

Although all the named investment cases were decided under the ICSID Convention and different conclusions may be reached in EU-seated arbitrations where tribunals may be more prone to considerations based on EU law, the multilateral nature of both the ICSID Convention and the ECT may complicate a quick resolution of the existing conflict between EU and international law. While it is a perfectly legitimate policy objective of the EU and its Member States to put an end to intra-EU investment arbitration, it may not be in their interest to achieve this goal by simply refusing to recognize and enforce ECT and/or ICSID awards as the EC suggests – an avenue that might not even be available in enforcement proceedings outside the EU. The challenge that lies ahead is therefore to address the concerns of the CJEU in a manner that does not undermine the multilateral rules on foreign investment as these may benefit the EU – as a major source of foreign direct investment – and its investors.

Cees Verburg is a PhD Researcher at the Groningen Centre of Energy Law of the University of Groningen. His research focuses on international investment and trade law with a specific emphasis on the renewable energy sector. He also teaches the LLM course ‘Investment and International Law’ at the Faculty of Law. His wider research interests include (renewable) energy law, international trade and investment law, and international dispute settlement law.