Slovakia v. Eureko: German Federal Supreme Court Refers Question of Validity of BIT Arbitration Amongst Member States to the ECJ

433px-Slovakia_coat_of_arms_1939-1945_svgWhether BIT arbitration between EU member states is permitted, as a matter of EU law, is heavily debated. The EU Commission strongly takes the view that there is no room for investment treaty arbitration amongst member states. As previously discussed here, the Commission has intervened in arbitrations in support of the position that the arbitral tribunal lacked jurisdiction to hear the dispute. Eureko v. Slovakia apparently is the first case where this issue has reached state courts, namely the courts in Germany. Earlier this week, in its second decision on the matter, the German Federal Supreme Court (Bundesgerichtshof), published its decision to refer the matter to the European Court of Justice (as I had expected it would). The Court clearly felt obliged to refer the matter to the European Court of Justice, but at the same time was very clear that in its opinion, investment treaty arbitration amongst member states is compatible with EU law.Here are the key facts and the procedural history in a nutshell: Eureko, a Dutch insurer, provided private health insurance in Slovakia. It alleged that changes in Slovakia’s regulatory regime for the private health insurance sector violated the BIT between the Netherlands and Slovakia. On that basis, Eureko commenced arbitration proceedings in October 2008. The arbitral tribunal was seated in Frankfurt am Main, Germany. In October 2010, the tribunal issued an interim award on jurisdiction (available on italaw.com). It found that Slovakia’s objections to the applicability of the arbitration clause were unfounded. Slovakia challenged the award on jurisdiction of the tribunal in the Frankfurt Court of Appeals (Oberlandesgericht). The Frankfurt court in May 2012 upheld the award (see here for comments). While the challenge to the award on jurisdiction was pending in the German courts, the arbitral proceedings progressed. In December 2012, an award on the merits was issued. It granting Eureko, inter alia, damages in the amount of EUR 22,100,000. Therefore, by the time the challenge to the award on jurisdiction had reached the German Federal Supreme Court, the Court found that for procedural reasons, it was unable to rule on the issue any longer (see my earlier post on the Court’s procedural order dated September 19, 2013).

But now, the challenge to the award on the merits has found its way through the Court of Appeals to the Federal Supreme Court. It is in this matter, that the request for an advance ruling is made to the European Court of Justice.

In its decision dated May 3, 2016, the Federal Supreme Court is seeking a ruling of the ECJ on the issue whether Articles 344, 267 or 18 para. 1 TFEU render an arbitration agreement contained in a bilateral investment treaty invalid and hence prevent the commencement of arbitration proceedings by a claimant who is this citizen of one member state against another member state. The Court refers to the opinion held by the European Commission that private arbitral tribunals have no power to decide disputes between private parties and member states. At the same time, however, the Court clearly states that in its opinion, Articles 344 and 267 do not prevent BIT arbitration. This having been said, the court concedes that there might be an element of discrimination if only investors from some member states are able to pursue claims under BIT arbitration agreements, whereas investors from other member states cannot. In its opinion, even if one were to find that this constitutes discrimination, it would not necessarily imply that the arbitration agreement is invalid, but rather that the BIT mechanism ought to be opened to all investors from member states.

In my option, the German courts have got it right: Article 344 TFEU provides that member states shall not “submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.” Both the Frankfurt Court of Appeals and the Federal Supreme Court read Article 344 to apply only to disputes amongst member states, but not to disputes between a member state and a private party such as Eureko. While there always is the possibility that the decision of an arbitral tribunal violates EU law, this also does not warrant the immediate jurisdiction of the ECJ. Any such violations would need to be addressed by seeking judicial review of the arbitral award in the courts of the member states. These, in turn, have the authority – or even the duty, as the case may be – to submit questions of EU law to the ECJ for its authoritative interpretation, if they deem the issue at hand to be sufficiently material to meet the public policy (ordre public) threshold. Therefore, the effectiveness of Article 267 is not undermined by BIT arbitration either.

Finally, I am not convinced that it constitutes discrimination in the first place if an investor from one member state has to commence arbitration under a BIT, whereas an investor from another member state has to seek relief in the state courts, as long as all parties irrespective of their nationality have access to a fair and impartial dispute resolution process in which their complaints will be heard and adjudicated. But even if one finds this to be discriminatory, the Court’s reference to the ECJ’s case law that the situation would be redressed by granting all parties equal access to the BIT arbitration mechanism is convincing.

The picture shows the Slovakian code of arms.

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