On 6 March 2018, the Court of Justice of the European Union (CJEU) rendered its much-awaited decision in Slovak Republic v Achmea BV, in which it held that the arbitration clause contained in Article 8 of the Netherlands-Slovakia bilateral investment treaty (BIT), and those contained in other intra-EU BITs in general, was incompatible with EU law because it would threaten the “full effectiveness of EU law.”
Implications of the CJEU decisions
At this stage, the precise scope of the Achmea decision is difficult to assess. First, one can legitimately wonder what will happen to the approximately 200 intra-EU BITs. In 2015, the European Commission started legal proceedings against several EU countries for not terminating their intra-EU BITs, as initially requested by the Commission. These proceedings have been on hold pending the Achmea decision.
The main problem with the termination option is that, at an international level, it leaves EU investors with no other protection than that offered by EU law, which admittedly, has no substantive standards equivalent to intra-EU BITs, which provide a broader (and better) scope of protections. Further, a number of intra-EU BITs contain sunset clauses, under which EU investors continue to enjoy substantive and procedural protections under the BIT. As such, a rapid decision to terminate those intra-EU BITs would not prevent investors from trying to rely on the substantive protections contained in those BITs.
However, there is no doubt that following the decision rendered by the CJEU, arbitration will no longer be an option for intra-EU investors in the future. Without the benefits of the procedural protection offered by intra-EU BITs, the sole option for investors would be to have recourse to national courts. Undoubtedly, a system where the only possibility for EU investors is to see their claims adjudicated by the national courts of the very country in which they made their investment is likely to damage the EU investors’ trust and confidence in the EU investment protection regime.
That is the reason why several commentators have already called for an EU (multilateral) regulation on investment protections. In 2016, several countries, including France and Germany, had already proposed the adoption of a multilateral agreement which would bind EU member states. Such an agreement would have the benefit of providing for common and wide substantive protections to all EU investors. On the procedural side, several commentators push for the establishment of a multilateral investment court (as it was proposed in the Comprehensive Economic Trade Agreement (CETA)). Nonetheless, how such a mechanism should be designed so that it will be compatible with EU law remains uncertain. On the basis of the Achmea decision as it stands now, the chances that the CJEU considers such a court to be EU law compliant are extremely slim.
Time for EU investors to consider restructuring their investments
Where does that leave EU investors? It follows from the discussion above that it remains to be seen what the implications of the CJEU decision will be, but a few preliminary conclusions can already be drawn. First, the CJEU left open the question as to whether its decision would apply to arbitrations conducted under the Energy Charter Treaty. Secondly, the CJEU made clear that its ruling would not apply to commercial arbitration. Thirdly, arbitral tribunals asked to decide on intra-EU disputes, but whose seat is outside of the EU, will undoubtedly feel much less pressure to terminate any ongoing arbitration, although any award they will render may be expected to be denied enforcement (at least if enforcement is sought in an EU country).
One thing is clear, though: the Achmea decision is limited to intra-EU BITs. Put differently, investors with investments in the EU will no doubt consider restructuring their investments to ensure that their corporate structure includes at least one entity outside the EU in a country that has a BIT with the relevant EU member state in order to take advantage of BITs concluded between the host EU (investment) state and third countries, such as Switzerland (which is increasingly perceived as an investment arbitration-friendly seat). For instance, at the time of writing this contribution, 11 BITs are in force between Switzerland and EU member states, predominantly from the former Eastern Bloc. All of these BITs contain strong protections and advantages for investors. They also provide investors with the right to bring their disputes with an EU (investment) state before an arbitral tribunal.
Such a restructuring should, of course, be done long before an (investment) dispute arises. That is because, although it is admitted that investors are in principle entitled to structure their investment in such a way as to maximise treaty protection, investors should be wary of the risks of treaty shopping, bad faith or abuse of process (see Phillip Morris Asia Limited v the Commonwealth of Australia).
Finally, it will be crucial for any investors that envisage restructuring their investment to ensure that the interposition of whatever corporate entity seated in Switzerland as a holding company can be justified by legitimate, bona fide business considerations (such as tax purposes).