Top EU court bans investors from suing member states in arbitration
Recent decisions by the Court of Justice of the European Union (CJEU), the EU's top court, have abolished the rights that EU investors previously had to bring claims against EU member states in international arbitration.
In a trilogy of cases, the CJEU has held that investor-state arbitration mechanisms - whether found in bilateral investment treaties (BITs), multilateral investment treaties such as the Energy Charter Treaty (ECT) or in investment contracts - are incompatible with EU law to the extent that they apply to disputes between an EU member state and an investor from another EU member state (intra-EU arbitration) and are therefore invalid. The CJEU has also instructed EU member states to actively challenge intra-EU arbitration proceedings and to refuse to recognise and enforce any resulting awards.
This is an important development. Investor-state arbitration offered foreign investors important protections against arbitrary, capricious or other unfair treatment by host states. It gave teeth to the agreements in which states made commitments to investors about how they and their investments would be treated, and allowed investors a neutral, independent mechanism through which to seek redress in the event of breach.
This is not a purely philosophical discussion - according to the UN Conference on Trade and Development's database of investment treaty arbitrations, 180 cases - over 16pc of all known investment arbitrations - involved intra-EU disputes. Of those, 80 cases (45pc) were brought under the ECT. The vast majority of all intra-EU arbitrations (some 134 cases) were brought in the last ten years, and 62 cases are still pending.
The loss of the right to claim against EU member states in investment arbitration, and its associated deterrent effect on state conduct, is an issue that may have a practical impact on the risk profile of many investments within the EU.
Intra-EU arbitrations are incompatible with EU law
In September 2021, the CJEU published its decision in Republic of Moldova v Komstroy (Case C‑741/19) (Komstroy) which concerned the application of the ECT within the EU. It followed in the wake of a controversial 2018 decision, Slovak Republic v Achmea BV (Case C‑284/16) (Achmea), in which the CJEU held that arbitration provisions found in BITs between two EU member states are incompatible with EU law. In Achmea, however, the court did not express an opinion as to whether the ruling also applied to multilateral treaties such as the ECT.
The CJEU's decision in Komstroy has addressed that question. The CJEU determined that the treaties that form the constitutional basis of the EU preclude EU member states from concluding international agreements containing intra-EU arbitration provisions even if they are found in multilateral treaties involving EU member states and non-EU states.
The CJEU said that the ECT may require EU member states to comply with the ECT's arbitral mechanisms in their relations with investors from non-EU states which are also ECT contracting parties but preservation of the autonomy and of the particular nature of EU law precludes the same obligations under the ECT from being imposed on EU member states as between themselves.
The CJEU said the fact that the ECT was a multilateral treaty was irrelevant because, in reality, the ECT and its dispute resolution provisions governed bilateral relations between two contracting parties and, therefore, the dispute resolution provisions in the ECT were analogous to those found in an intra-EU BIT.
A mere two months later, the CJEU published its decision in Poland v. PL Holdings Sarl (Case C 109/20) (PL Holdings). In that case, the CJEU determined that even ad hoc arbitration agreements between EU investors and EU members states are invalid under EU law.
The CJEU then went further and stated that all EU member states are required to challenge the validity of intra-EU arbitration agreements before the arbitral tribunal and before any competent national court, and to ask any competent national court to set any resulting intra-EU arbitral award aside, annul it or refrain from enforcing it. Moreover, the court said that EU national courts must uphold an application which seeks the setting aside of an arbitration award made on the basis of such invalid arbitration agreements.
The CJEU also warned that any attempt by an EU member state to remedy the invalidity of an intra-EU investment arbitration clause (such as by means of a contract with an EU investor) would run counter to the EU member state's obligation to challenge the validity of the arbitration clause, and "would be liable to render the actual legal basis of that contract unlawful, since it would be contrary to the provisions and fundamental principles governing the EU legal order".
What is the effect on investors?
In practice, the CJEU's decisions could affect protections available to EU investors under the ECT and other investment agreements. Those arbitration provisions, after all, are what give real teeth to the substantive treaty commitments.
The number of claims against EU member states is proof enough that investors in the EU need these protections as much as they do when investing in ostensibly challenging jurisdictions such as emerging markets. The CJEU's insistence that investors seek recourse in national courts overlooks the history of investor-state disputes and the reasons why investor-state arbitration evolved - namely that recourse to domestic courts was often not effective, and state-to-state intervention politicised what would otherwise be commercial disputes. Investment arbitration offered foreign investors certainty that disputes with host states could be resolved in a neutral forum, and this was the backbone in many ways for the proliferation of foreign direct investment around the globe.
Investors with pre-action intra-EU disputes or involved in ongoing intra-EU arbitration should be taking advice on their positions in those proceedings. If investors choose to continue their proceedings, EU member states will no doubt challenge or seek to reopen challenges to the jurisdiction of the tribunal and any subsequent award - indeed the CJEU has said they are obliged to do so. The European Commission will also likely seek permission to intervene in support of such challenges.
To date, such challenges have had only spotted success, and even post-Achmea, claims by EU investors against EU member states have continued to be brought, and in some instances significant awards were rendered and subsequently successfully enforced in favour of investors. Post-Komstroy and post-PL Holdings, we will certainly see more jurisdictional challenges and a much more aggressive approach taken by EU member states and the European Commission. Similarly, awards and efforts to enforce awards will face aggressive challenges.
But there will still be some uncertainty as to outcome due to the risk of conflicting decisions - as we saw post-Achmea, tribunals and national courts may take different views as to both jurisdictional challenges and the enforceability of intra-EU awards. In particular, there could be a divergence of approach between courts within the EU and those outside the EU.
Investors with existing intra-EU investments should also take advice on their position and risk profile, including what other mechanisms (if any) might be available to them in the event of objectionable host state conduct.
Investors considering new intra-EU investments should likewise consider the availability of alternative protections, as well as considering whether to structure their investment via non-EU member states, such as the UK, the US or Switzerland, so as to avoid falling foul of these decisions and being still able to avail themselves of investment arbitration. In light of the PL Holdings case, attempts to contract around the issue are likely to be challenged and should therefore be approached with caution.
It is unclear what impact, if any, the CJEU's decisions will have on the current renegotiation or 'modernisation' of the ECT process which, as of March 2021, has entered a fourth negotiation round. No doubt the issue will come up, but exactly how it will be navigated by contracting parties and stakeholders is currently unclear - particularly given the EU's hostility to investment arbitration.