Achmea: The principle of autonomy and its implications for intra and extra-EU BITs

On 6 March 2018, the CJEU issued its judgment in Case C-284/16 Achmea, where it opined that intra-EU BITs and in particular their ISDS provisions are incompatible with the principle of autonomy of EU law. In a rather brief judgment, the Court found the ISDS provision under the Netherlands-Slovakia BIT has an adverse effect on the autonomy of EU law, as the latter in enshrined in Articles 344 and 267 TFEU. With this judgment the Court gave a definitive answer to a long-awaited controversial issue as to whether international investment treaties between EU Member States are compatible with EU law. Yet, Achmea does not provide conclusive answers as to the interaction between EU law and international investment law, neither with regard to intra-EU BITs, nor for extra-EU BITs. Considering that the compatibility of ISDS under CETA with EU law is challenged by Belgium and is the subject matter of a pending Opinion, Achmea adds a, admittedly important, piece to the puzzle.

In finding an incompatibility between an intra-EU BIT with EU law, the Court focused exclusively on the ISDS mechanism and its effects on the autonomy of EU law. Although the parties to the dispute and in particular the Commission argued about the existence of incompatibilities on other grounds as well, the most important being non-discrimination, the Court chose to address only the autonomy concerns. Referring to its landmark judgment on autonomy, Opinion 2/13, the Court confirmed the key role that autonomy plays for identifying the compatibility of international dispute settlement with EU law. The argument used is easy follow: the principle of autonomy protects the full effectiveness and consistency of EU law, which entails the uniform interpretation of EU law. Article 19 TEU guarantees autonomy by providing exclusive jurisdiction to the CJEU to offer authoritative interpretations of EU law and enabling a judicial dialogue with national courts via Article 267 TFEU. Investment arbitration under intra-EU BITs can have an adverse effect on autonomy, as investment tribunals a) can decide matters of EU law and b) are not subject to the CJEU’s control.

EU law under ISDS

The first condition that has to be met for autonomy to be violated, is that investment tribunals can decide matters of EU law. The Court makes a hasty finding that this condition is met. It opines that since EU law is part of the law of Member States and the provision of the specific BIT explicitly allows for such domestic law to be considered as applicable law, ISDS is bound to apply and interpret EU law. The very short analysis of the Court raises however 2 important questions. Is EU law applicable law under all intra-EU BITs, or only under those such as the Netherlands-Slovakia BIT that explicitly provide that the law in force at the host state, ie “domestic law” is part of the applicable law? Secondly, is EU law applicable law only in ISDS under intra-EU BITs, or also under extra-EU IIAs, that is under investment agreements between the EU and its Member States with third countries?

To answer these questions, we need to understand when the CJEU considers that a matter of EU law is determined by non-EU courts or tribunals. This is not a new question. The CJEU clearly stated in Opinion 2/13 that “any action by the bodies given decision-making powers by the ECHR, as provided for in the agreement envisaged, must not have the effect of binding [emphasis added] the EU and its institutions, in the exercise of their internal powers, to a particular interpretation of the rules of EU law” (para. 184). A threat to the autonomy of the EU legal order arises only if ISDS can result in a binding interpretation of EU law. The mere possibility of providing a binding interpretation of EU law suffices for autonomy to be breached.

In that respect, it can be argued that ISDS is always incompatible with the principle of autonomy, whether under intra-EU BITs or extra-EU investment treaties, because it would deprive the CJEU of providing a definitive interpretation of relevant EU law rules. The mere fact that an investment tribunal would assess an EU measure or a national measure falling within the scope of EU law would suffice for the CJEU to consider that investment tribunals can rule on matters of EU law.

Is that true? Would the consideration of EU law by investment tribunals result in a binding, definitive interpretation of EU law? The answer depends on whether a tribunal is established under an intra-EU or an extra-EU investment treaty.

In an intra-EU context, any arbitral award would always result in a binding interpretation of EU law and is thus violating the principle of autonomy. This is because, in an inter se context autonomy functions as a mechanism for establishing a kind of “external” primacy of EU law, limiting the ability of Member States to cooperate internationally outside the EU legal order. This function of autonomy has been manifested by the Court in Opinion 2/13, when the Court opined that the principle of mutual trust requires that when implementing EU law, Member States have an EU law obligation “to presume that fundamental rights have been observed by the other Member States.” (para. 192). The Court used autonomy in order to limit the ability of Member States to enter into an inter se agreement that violates a fundamental principle of EU law. Without entering into the controversial debate concerning the scope and content of the principle of mutual trust and its relationship to human rights protection (see in particular the contribution by D. Halberstam) from an autonomy perspective the Court is clear that autonomy is breached when Member States assume obligations in inter se relations that may conflict with a rule of EU law. Inter se agreements may result in a violation of applicable EU law rules. Yet, the existence of such incompatibility is a matter of EU law and could only be determined by the CJEU. Hence, autonomy requires that the conclusion of inter se agreements in areas of non-exclusive competence must guarantee that no conflict can arise, as otherwise non-EU courts could offer a binding interpretation.

This is true in the context of intra-EU BITs. As AG Wathelet admitted in his Opinion in Achmea substantive BIT provisions, such as FET and expropriation overlap with EU Treaty standards, at least partially. Moreover, although, as the AG rightly notes, intra-EU BITs have a wider scope of application that the EU Treaties they do cover situations falling within the scope of EU law. This very existence of different standards applying in relations between Member States in areas covered by EU law is per se problematic.

On the contrary, in an extra-EU context, arbitral awards would not result in a binding interpretation of EU law. Unlike Achmea and intra-EU BITs, ISDS under EU investment agreements is problematic only when it results in binding interpretations of EU law. As the Court emphasised what was problematic in Achmea was “the possibility of submitting those disputes to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States [emphasis added]” (para. 58).

When an agreement in concluded by the EU, a binding interpretation of EU law that would result in a violation of autonomy exists only when an international agreement concluded by the EU exhibits a special link to EU law.

Unlike decisions of the ECtHR, extra-EU ISDS awards do not result in binding, definitive interpretations of EU law rules. The reason why prior involvement was necessary in the context of the ECHR is because the ECHR has a special link to the EU legal order. As the Court clearly stressed in Opinion 2/13 (paras. 37-38) and Opinion 2/94 (paras. 34-35), has special significance for the EU legal order, due to its linkages with the sources of EU law, be it general principles of EU law or the Charter of Fundamental Rights (e.g. Article 52(3) CFR). There are direct references to the ECHR in the primary law of the EU which in essence enable the ECtHR through the interpretation of the ECHR to shape the interpretation of relevant EU law rules.

Besides, the existence of a binding, definitive interpretation of EU law by a non-EU court is what rendered the original EEA agreement incompatible with EU law. In Opinions 1/91 and 1/92 concerning the conclusion of the EEA Agreement, the Court ruled that the autonomy of EU law was violated, because “the proposed EEA Court could apply and interpret the EEA provisions without paying attention to future developments of the case-law of the CJEU”. As the EEA Agreement intended to ensure “homogeneity of EEA and EU law”, this meant that an interpretation of the provisions of the EEA agreement by the proposed EEA court would be binding on the EU. A similar threat to the autonomy of the EU legal order was also discussed in Opinion 1/00. That agreement essentially expanded the territorial scope of application of the EU acquis and required that identical provisions had to be interpreted identically. The Court found that autonomy was preserved, as the treaty contained assurances that its interpretation in non-EU states will follow the interpretation given by the CJEU.  Yet, homogeneity is not required under EU investment treaties. There is no provision in investment treaties that require their interpretation to follow that of specific rules of EU law.

Finally, any limitation on extra-EU ISDS would contradict EU’s past practices, which allow for dispute settlement fora to decide on the compatibility of EU or national measures in a non-binding manner. For example, measures taken by the EU and its Member States under relevant EU law rules have been the subject matter of international disputes in the context of the WTO on numerous occasions. Therefore, it should also be irrelevant whether investment tribunals offer their views on relevant EU law, and if so whether it is considered as part of domestic or international law.

The CJEU’s control over ISDS: can intra-EU BITs be saved?

The application of EU law by investment tribunals in intra-EU BITs is problematic, as long as it falls outside the oversight of the CJEU. Such a problem would not exist, were arbitral tribunals, including the ICS to be considered a court or tribunal of a Member State, as then it would be able to ask for a preliminary reference ruling under Article 267 TFEU, thus engaging the jurisdiction of the CJEU. In fact, AG Wathelet in his Opinion attempted to explain how arbitral tribunals satisfy the conditions set by the CJEU to  be considered “a court or tribunal of a Member State” (paras. 90-131). Without entering into the points as to whether investment tribunals are established by law, are permanent, have compulsory jurisdiction and are impartial, applying rules of law, it seems that the AG neglects in his analysis an essential characteristic of the test established in Article 267 TFEU, namely that it must be a Court or Tribunal “of a Member State”. The CJEU clearly explains in its judgment that investment tribunals are not part of the “judicial system” of Member States, similar to the Benelux Court, or commercial arbitration tribunals that are embedded in a national constitutional legal order (paras.43-45). A court or tribunal set up by an inter se agreement concluded by EU Member States is not automatically a court of EU Member States.  The Court could have also referred to Opinion 1/09, where it stated that a court established by an international agreement concluded by EU Member States “is outside the institutional and judicial framework of the European Union. It is not part of the judicial system provided for in Article 19(1) TEU. [it] is an organisation with a distinct legal personality under international law”. This was in fact the reason why the Patent Court had to be explicitly designed and acknowledged as a national court of EU Member States in order to qualify as a court of a Member State and in order to be compatible with EU law.

Even if investment tribunals are not courts or tribunals of Member States, they could still be subject to the CJEU’s oversight. In Achmea, arbitration was under UNCITRAL rules and was seated in Germany, thus allowing German courts to assess the consistency of the award with EU law and, if in doubt ask for a reference to the CJEU. Although the Court was happy in earlier cases to clear commercial arbitration that was subject to national court oversight, in Achmea the Court distinguished commercial from investment arbitration. It argued that while commercial arbitration “originates in the freely expressed wishes of the parties”, investment arbitration  derives from an international treaty by which Member States agree to remove from the jurisdiction of their own courts disputes which may concern the application or interpretation of EU law” (para.55). This argument is hardly convincing. Investment arbitration also originates in a “freely expressed wish” of the Member States to submit these disputes to arbitration. The opposite would be equivalent to arguing that when Member States signed a BIT were not expressing freely their wish to limit their sovereignty. Besides, the fact that such wish is expressed via an international agreement, rather than via national law as in the case of commercial arbitration, does not in any way influence the role of national courts in exercising oversight over arbitral awards, especially UNCITRAL ones, where the same rules for national court oversight apply!

The CJEU could have found a much stronger argument in its favour in Opinion 2/13. As the Commission pointed out and the AG acknowledged, in almost all intra-EU BITs, there is “the risk that the seat of an arbitration may potentially be fixed in a third country or that recognition and enforcement of an arbitral award that was incompatible with EU law may be sought in a third country, in which cases the courts and tribunals of the European Union would not be involved and the Court of Justice would therefore never be requested to give a preliminary ruling” (paras.252-253). The is particularly true for intra-EU BITS which designate the ICSID as an option for ISDS, as, ICSID awards are binding on the parties and could not be subject to any appeal or any other remedy except those provided for in the ICSID Convention. The AG dismissed the threat posed to the jurisdiction of the CJEU as purely hypothetical, as such avenues were not chosen in the present case. Yet, as has been already pointed out, the CJEU in Opinions 1/92 and 2/13 has clearly stated that even the very possibility of sidelining the jurisdiction of the CJEU is sufficient to render an international agreement incompatible with the principle of autonomy of EU law.

In that respect, the Court seems to indicate that the only way to provide for a distinctive mechanism to resolve intra-EU investment disputes, is by embedding it in the judicial order of the Member States. Following the UPCt paradigm, the conclusion of an inter se agreement that would establish a European investment court as a shared national court, which could apply EU law rules as well as additional standards of protection, would be the only way to retain a distinct dispute settlement mechanism for intra-EU investment. However, such system would always be subject the CJEU’s oversight.

The implications of Achmea

Achmea has far reaching implications for pending and future arbitrations under intra-EU BITs. These depend on identifying the legal effects of an incompatibility of a Member State international agreement with EU law, which creates different obligations on different actors under different legal orders. Firstly, EU Member States have an obligation to amend or terminate their BITs under EU law. The principle of primacy of EU law requires that Member States take all appropriate and available measures in order to eradicate the incompatibility. Disregarding the relationship between the EU treaties and inter se treaties under international law, the CJEU safeguards the international law validity of inter se treaties, but imposes an EU law obligation on Member States to cure incompatibilities. This means that Member States either have to terminate their intra-EU BITs, or amend them, for example by turning ISDS into a UPCt as mentioned above, to render them compatible with EU law.

Secondly, the incompatibility of intra-EU BITs with EU law creates EU law obligations on national courts to disapply the provisions that are incompatible with EU law. As the Court explained in Exportur, national courts in Member States are EU courts and thus required to consider provisions of inter se agreements that are in conflict with EU law as inapplicable, without again affecting the international law validity of the incompatible rule. This means that the provisions of intra-EU BITs that provide for ISDS and form the basis of the consent of Member States to arbitration are inapplicable; hence, arbitral tribunals lack jurisdiction under intra-EU BITs. As EU law is according to Eco-Swiss a public policy ground which requires national courts to review arbitral awards for their compatibility with EU law, this means that any arbitral awards where the arbitration seat is in an EU Member State, or the recognition and enforcement of the award in an EU Member State is sought, can be successfully challenged in front of national EU courts.

Thirdly, the incompatibility of ISDS provisions with EU law raises an obligation on arbitral tribunals to reconsider their jurisdiction under intra-EU BITs. As I have argued in the past, an incompatibility with EU law results in the international law inapplicability of the relevant ISDS provision, thus affecting the jurisdiction of arbitral tribunals. Besides, arbitral tribunals have an obligation to render enforceable awards. This means that intra-EU investment arbitration can survive only to the extent that (i) arbitrators are willing to disregard the implications of EU law incompatibility on their jurisdiction, (ii) arbitration is seated and awards enforced outside the EU, and (iii) national courts in non-EU jurisdictions are willing to defy the CJEU’s ruling.