Back in 2018, the EU Supreme Court (CJoEU) shocked the investment world when it invalidated an arbitration clause ruling that the EU legislation can solely be interpreted by the EU state courts. Less than 4 years later, on January 25th, 2022, the Court confirmed the EU’s wary stance towards alternative investment dispute resolution rendering the EU internal market a rather unsafe space for the investors.
The significance of the international investment arbitration
It is a long practice of the states to attract investments by committing themselves to bilateral treaties (BIT). The latter aim at creating an investors-friendly stable environment for long term, major financial ventures. In this context, the inclusion of an alternative dispute resolution clause in the BITs has been a cornerstone for the investors’ interests.
The international investment arbitration became even more attractive in 1958 following the conclusion of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The Convention required from the 169 contracting states to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in other contracting states. It also set only few limited defences to render an arbitral award void.
Apart from the international commercial arbitration, in 1966 the World Bank established the International Center for Settlement of Investment Disputes (ICSID). The ICSID constitutes an independent, depoliticized institution devoted to international investment dispute settlement facilitating the enforcement of its awards. States have massively agreed on ICSID as a forum for investor-State dispute settlement in most international investment treaties and in numerous investment laws and contracts. After all, no reasonable investor would rather have its disputes settled by (state) judges appointed by its opposite party.
A jurisdictional bras de fer between the EU courts and the international investment arbitration
a) The Achmea precedent
In 2004, following the opening of the Slovak health insurance market to private investors, Achmea, a Dutch insurance company, set up a subsidiary in Slovakia to provide private health insurance services. However, in 2006 Slovakia partly reversed the liberalisation of the respective market and prohibited the distribution of its profits. In 2008, Achmea brought arbitration proceedings against Slovakia under a 1991 BIT. In 2012 an arbitral tribunal ruled in favor of Achmea and ordered Slovakia to pay damages of approximately €22.1 million.
Slovakia brought an action before the German Federal Court to annul the arbitral award claiming that the arbitration clause in the BIT was contrary to the Treaty on the Functioning of the European Union (FEU Treaty). The Federal Court referred the case to the CJoEU which in the Case C-284/16 "Slowakische Republik v Achmea BV" ruled in favor of Slovakia holding that:
"... the BIT … established a mechanism for settling disputes which is not capable of ensuring that those disputes will be decided by a court within the judicial system of the EU, only such a court being able to ensure the full effectiveness of EU law. In those circumstances, the Court concludes that the arbitration clause in the BIT has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law..."
Pursuant to the Achmea decision, most of the BIT arbitration clauses signed by the EU member states should be rendered void setting an “unprecedent” precedent for the investors’ interests in the EU market.
b) The European Food SA case: An investors’ saga in the EU
In 2005, in the context of the negotiations for Romania’s accession to the European Union, the Romanian government repealed a national tax incentives scheme for the benefit of certain investors in disadvantaged regions (‘the tax incentives scheme’). Considering that, by repealing the tax incentives scheme, Romania had breached its obligation to ensure fair and equitable treatment of the investments in accordance with a 2002 BIT, several Swedish investors brought the dispute before an ICSID arbitral tribunal which, in 2013, ruledagainst Romania ordering approximately €178 million in damages.
In 2015, the EU commission classified this arbitral award as … “state aid” and ordered Romania not to comply with it as well as to recover any sums already paid … plus interest! In 2019, the EU Court of First Instance (GCoEU) annulled the Commission's decision due to lack of jurisdiction ratione temporis. However, the EU Commission appealed the decision before the CJoEU. The latter issued its award in the European Food SAcase (C‑638/19) on January 25th, 2022, adopting once again a hostile stance towards the investors.
This time, the CJoEU holding that:
“…Romania’s consent to the arbitration system laid down in the BIT became inapplicable following the accession of that Member State to the European Union”
ruled that the arbitral award per se constituted a “state aid” regardless of its judicial status, and that pursuant to the Achmea precedent the ICSID arbitration clause included in the BIT should have been declared void.
Conclusion
While the EU supposedly leads the universal woke campaign for the judicial independence, the rule of law and the human rights, at the same time its Supreme Court arbitrarily intervenes in contractual agreements, overturns arbitration awards and denies compensations already adjudicated.
In both the Achmea and European Food SA cases, the investors had not only been deprived of their profits due to misconducts of the EU states involved, but they also saw these states getting away with the owed compensations because of the CJoEU’s interference. To add insult to injury, the CJoEU reached these decisions by having annulled lawful international arbitral awards in violation of international obligations provided in the New York and the ICSID Conventions, and following legal battles which lasted more than a decade.
The EU’s arrogant view on the supremacy of the EU overregulation, as well as its reluctance to give up on itsphobic stance towards established deregulated commercial practices shows that there is little hope for the prospects of the EU economy to attract foreign funds compared to rival flourishing economies. Unfortunately, the extremely centralized EU market leaves it vulnerable in case of a new financial crisis. What’s worse, the overpaid EU bureaucrats seem neither conscious of the crucial situation nor willing to shift the EU from a regulation freak cartel to a free market union.