Frankfurt Higher Regional Court rules Achmea’s decision transferable to arbitration clauses in other BITs

In his Achmee-decision,[1] the ECJ ruled that EU member states should not settle their disputes in arbitration procedures agreed in bilateral intra-EU investment treaties (here: the BIT between the Netherlands and Slovakia) ( see https://globalarbitrationnews.com/ecj-stops-investment -arbitrage-intra-eu /). The Higher Regional Court in Frankfurt was recently faced with the question of whether the decision of Achmee is transferable to other intra-EU BITs, namely the BIT between Croatia and Austria.[2] In this case, investors argued that the Achmee-the decision was based on specific considerations which would not apply in the present case. This argument was unsuccessful. On the contrary, the Superior Regional Court considered that there was no room for a reasonable doubt as to the invalidity of the arbitration clause of the BIT on the basis of the decisions of Achmee.

Facts

A Croatian bank and an Austrian bank both provide financial services in the Croatian market. The banks have filed claims for damages against Croatia in connection with the amendment of Croatia’s insolvency law and an alleged systematic denial of legal protection by Croatian courts. Croatia and Austria have concluded a BIT. According to art. 9 par. 2 of the BIT, arbitration proceedings are conducted in the event of disputes arising from an investment. The banks thus initiated an arbitration procedure in accordance with art. 9 par. 2 at the agreed place of arbitration, Frankfurt am Main. Croatia then asked the Higher Regional Court to declare the arbitration proceedings inadmissible under Art. 9 par. 2 BIT was not compatible with EU law. Investors have defended the validity of the clause.

Arguments invoked to defend the validity of the arbitration clause

Investors argued that the Achmee-the decision was based on a detailed analysis of the choice of law clause in the specific BIT, according to which the arbitral tribunal should have interpreted or even applied EU law in the specific case. In contrast, an arbitral tribunal seized under the Croatia / Austria BIT would only have to apply the BIT and general principles of international law. Therefore, in the investors’ opinion, there is no risk that the arbitral tribunal will also have to interpret or even apply EU law in the present case.

Art. 11 of the BIT would not change that. According to this provision, the arbitral tribunal should consider whether a provision of the BIT is incompatible with EU law. Investors argue that in this case, the court would only establish EU law as fact. They point to the opinion of CETA[3] that it would not be contrary to EU law for a court outside the EU judicial system to assess the compatibility of an EU or Member State measure with the CETA agreement , for in doing so it was determining the scope of this measure only as a fact. Investors believe that s. 11 of the BIT only contains a provision on the interpretation and application of the BIT, i.e. a provision that is not part of EU law. the Achmee-the decision would not declare that arbitration clauses conflict with EU law, whatever law the arbitral tribunal must apply.

In addition, investors argued that arbitral tribunals would have the ability to submit questions to the ECJ, including through MLA requests to state courts.

Finally, investors believed that the principles of Achmee– the decision would not apply in the present case because the principles of loyal cooperation and mutual trust do not apply in the specific case due to exceptional circumstances, i.e. due to serious shortcomings in the Croatian legal system and the refusal of Croatian courts to use art. 267 TFEU.

Court decision

The higher regional court considered that art. 9 par. 2 of the BIT violates EU law in accordance with the legal principles established in the Achmee-decision. Consequently, the arbitration clause was invalid. In the opinion of the court, the Achmee-the decision must be understood as a decision of principle and acquires significance beyond the individual case for all BIT agreements between EU member states.

According to Achmee-decision, Articles 267 and 344 TFEU must be interpreted as opposing a provision of an international agreement concluded between Member States, under which an investor from one of these Member States may, in in the event of a dispute concerning investments in the other Member State, bring an action against the latter Member State before an arbitral tribunal of which that Member State has undertaken to accept jurisdiction. According to the ECJ, it is for national courts and the ECJ to ensure the full application of EU law, for example by means of the preliminary ruling procedure in accordance with Art. 267 TFEU. However, arbitral tribunals do not have the right to seize the CJEC for a preliminary ruling. Therefore, in the opinion of the ECJ, arbitration clauses in BITs have a negative effect on the autonomy of EU law.

In the case before the higher regional court, the court held that it is possible that an arbitral tribunal called under Art. 9 par. 2 of the Croatia / Austria BIT should also apply EU law, even if EU law is not the arbitral tribunal’s standard of review. Indeed, the legality of an investment is governed by EU law in addition to Croatian and Austrian law.

In addition, the application of the BIT is excluded in accordance with its Art. 11 par. 2 if it is contrary to EU law. Therefore, the arbitral tribunal must in any case refer to EU law in this context as well and take into account EU law as a standard of comparison. The higher regional court rejected the argument based on the opinion of CETA. The autonomy of EU law would already be compromised if there was a possibility that EU law would become relevant, even if it is not the standard for review by the arbitral tribunal.

Thus, in the opinion of the Superior Regional Court, the arbitral tribunal may be required to apply EU law. However, the arbitral tribunal would be prevented from submitting questions to the ECJ. The mere possibility that national law may provide for judicial review of arbitral awards does not lead to the compatibility of Art. 9 par. 2 with EU law.

The higher regional court thus concluded that art. 9 par. 2 of the Croatia / Austria BIT is incompatible with EU law and therefore there is no valid arbitration agreement. Finally, the tribunal ruled that a valid arbitration agreement cannot be inferred from the principles of good faith. Investors should be prepared that the provisions of the BIT are no longer applicable if inconsistent with EU law, as the investments were made after Croatia joined the EU. Moreover, it should not be concluded from the fact that the European Commission did not challenge existing BITs and that Croatia, at the time, had not terminated the BIT that investors could continue to rely on the validity of all clauses of the BIT. Possible flaws in the Croatian legal system, as alleged by investors, do not change the fact that the arbitration clause of the BIT is incompatible with EU law. According to the higher regional court, this is so clear in light of the Achmee-decision that the court does not have to submit the question to the ECJ in accordance with art. 267 TFEU (“clear act“), as requested by investors.

Conclusion

Although there are certain tendencies to possibly limit the consequences of Achmee-decision,[4] parties invoking the arbitration clause in an intra-EU BIT will have to fight an uphill battle.

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Elna M. Lemons