One year ago, the Higher Regional Court Frankfurt decided that the Achmea-decision[1] by the Court of Justice of the EU (“CJEU“) is transferable to arbitration clauses in other BITs (see Global Arbitration News on 22 April 2021).
Factual Background
Two banks who provide financial services in the Croatian market (= the investors) had initiated arbitration proceedings against Croatia based on the BIT between Croatia and Austria. Croatia sought a declaration that the arbitration proceedings were inadmissible and was successful: the Higher Regional Court held that the arbitration clause in the BIT was invalid based on the CJEU’s rulings in Achmea.[2] This decision was now confirmed by the German Supreme Court.[3]
The investors’ complaint on points of law against the Higher Regional Court’s decision was considered inadmissible because the prerequisites for a decision by the Supreme Court were not met. The German Supreme Court only hears complaints on points of law (i) if the legal matter is of fundamental significance or (ii) if the further development of the law or the interests in ensuring uniform adjudication require a decision to be taken by the Supreme Court.
In the case at hand, the Supreme Court found that the Higher Regional Court had proceeded on the basis of correct legal standards. The Frankfurt court had concluded that the disputes which an arbitral tribunal called upon to rule on under the BIT may relate to the interpretation or application of EU law. This was legally correct, said the Supreme Court. The investors’ arguments to the contrary were dismissed. In particular, the Supreme Court held that there was no material difference to the Achmea case so that the findings in that decision can be transferred also to the arbitration clause in the BIT in question.
In detail:
Higher Regional Court correctly considered whether the dispute that would be submitted to arbitration may involve EU law
The investors argued that the Higher Regional Court erred in holding that a violation of EU law would already be given when the arbitral tribunal applies EU law only as a matter of fact. They submit that, in the Higher Regional Court’s view, it would not be relevant for the decision on the compatibility of the arbitration clause with EU law whether the arbitral tribunal has to apply or interpret EU law. Yet, the Supreme Court’ says that this is not what the Higher Regional Court decided. The Supreme Court points out that the inferior court had specifically considered whether the arbitral tribunal would also have to apply or interpret EU law. Also, the court had expressly referred to the CJEU’s Opinion on CETA[4]. In this opinion, the CJEU considered it admissible, in relation to non-EU states, that an arbitral tribunal applies the law of a Member State and thus also EU law as a matter of fact. The Supreme Court concludes that the Higher Regional Court’s decision is in line with accepted jurisprudence so that there is no need for ensuring uniform adjudication.
No material difference to the Achmea case
The investors’ key argument was an alleged material difference to the Achmea case: According to the BIT in the Achmea case, the arbitral tribunal would have had to apply the applicable law of the Contracting Party concerned (= Slovakia) and any significant agreements between the Contracting Parties (Slovakia and the Netherlands). In the present case, according to the investors, the arbitral tribunal would only have to apply the provisions of the BIT and general principles of international law. The law of a EU Member State would at best have to be applied as a matter of fact. In their argument, the investors pointed to the opinion of the Advocate General to the CJEU’s Opinion on CETA.[5] Also this argument was dismissed by the Supreme Court.
Even if the investors’ view was correct, it would be required to apply the law of a EU Member State (Croatia) and the EU law, which is part of Croatia’s law, for deciding on a preceding question, namely to what extent the BIT is applicable and binding for the dispute. Also, according to the Supreme Court, the investors are wrong in arguing that the arbitral tribunal would only have to apply Croatian law and EU law as a matter of fact in this context.
Different standards for intra-EU BITs and BITs with non-Member States
According to the investors, an arbitration clause in a BIT between EU Member States is invalid only if it jeopardizes the CJEU’s monopoly on interpreting EU law in a binding manner.
The Supreme Court rejected this view. In relations between Member States – in contrast to relations with third states – such a clause is already invalid if the Member States deprive their own courts, by means of a BIT, of disputes which may concern the application and interpretation of EU law in a manner that does not guarantee the full effectiveness of EU law.
In the BIT at hand, this is already the case, says the Supreme Court, because it does not contain a provision corresponding to Art. 8.31 paragraph 2 CETA according to which the arbitral tribunal only has to apply the national law of the Parties, including the EU law, as a matter of fact. Also, the CJEU’s elaborations[6] on the consideration of EU law as a matter of fact refer to a treaty with a third state (CETA) and not a treaty between Member States. Therefore, there is no room for a corresponding interpretation of the BIT according to which the arbitration clause could be brought in line with EU law. The Supreme Court, however, expressly left open whether such a provision in a BIT between Member States (application of the EU law only as a matter of fact) could render an arbitration clause valid.
No need for a preliminary ruling by the CJEU
In the investors’ view, the complaint on law should be considered admissible because the legal matter was of fundamental significance so that the Supreme Court can submit the case to the CJEU for a preliminary ruling. However, the Supreme Court found that there is no relevant legal question on the interpretation of EU law which has not already been decided or cannot be decided based on the existing jurisprudence of the CJEU: In its Achmea decision, the CJEU set out the principles for deciding on the validity of an arbitration agreement in a BIT between Member States. These principles have been confirmed in the decisions Komstroy[7] and PL Holdings[8]. As the CJEU cited its Opinion on CETA[9] in its Komstroy decision, the Supreme Court concludes that the CJEU has uphold its principles under due consideration of the elaboration in its Opinion on CETA.
Possibility that arbitral tribunal may refer questions of EU law to CJEU through state courts not decisive
In a further attempt to “save” the arbitration clause, the investors sought to argue that the arbitral tribunal would be capable or even obliged to submit questions of EU law, if any, to the CJEU via state courts. The Supreme Court, however, states that an arbitral tribunal is not generally obliged to follow this path and that this depends on the place of arbitration and the applicable national arbitration law. It is thus a theoretical question whether an arbitration clause in a BIT would be valid had the arbitral tribunal such an obligation.
Existence of mutual trust is not a prerequisite to be examined in individual cases
The investors further argued that in the case at hand the principles of loyal cooperation and mutual trust cannot be used to deny the validity of the arbitration clause like in the Achmea case. This is because in the investors’view the principle does not apply in the specific case due to exceptional circumstances, i.e. because of severe deficits in the Croatian legal system. Also this argument was rejected. The Supreme Court found that the CJEU had referred to the principle of trust among the EU Member States as a justification for its rulings inter alia in Achmea. However, according to the Supreme Court, the CJEU had not considered the actual existence of mutual trust a prerequisite to be examined in the individual case. Moreover, even if extraordinary circumstances would overrule the principle of mutual trust, this would not render the arbitration clause valid. Otherwise, the courts of one Member State, which do not ensure the full effectiveness of EU law, would be deprived of a dispute by a court of another Member State and the dispute would be transferred to an arbitral tribunal, which would equally fail to ensure the full effectiveness of EU law according to the rules laid down in the CJEU’s case law.
Conclusion
It is very unlikely that arbitral proceedings based on intra-EU bits and seated in Germany will succeed in light of the Achmea and following CJEU decisions. The German Supreme Court rejected many arguments brought forward to limit the consequences of the Achmea decision. The Supreme Court left the backdoor just a little bit open. It expressly left open whether a provision in a BIT between Member States, according to which the EU law only applies as a matter of fact, could render an arbitration clause in an intra EU-BIT valid. However, the court points out that it would be required to apply EU law for deciding to what extent the BIT is applicable and binding for the dispute. Therefore, it is unlikely that a clause comparable to Art. 8.31 paragraph 2 CETA in an intra-EU BIT would render the arbitration clause valid.
[1] C-284/16, https://curia.europa.eu/juris/documents.jsf?num=C-284/16.
[2] OLG Frankfurt, 26 SchH2/20, available at https://www.rv.hessenrecht.hessen.de/bshe/document/LARE210000373; in German).
[3] BGH, I ZB 16/21, available at Beschluss des I. Zivilsenats vom 17.11.2021 – I ZB 16/21 – (bundesgerichtshof.de) (in German).
[4] Opinion of Advocate General Bot to Opinion 1/17, 29 January 2019, CURIA – Documents (europa.eu).
[5] Opinion of Advocate General Bot to Opinion 1/17, 29 January 2019, CURIA – Documents (europa.eu).
[6] Opinion 1/17 of 30 April 2019, CURIA – Documents (europa.eu).
[7] C-741/19, Republic of Moldova (europa.eu).
[8] C-109/20, 62020CJ0109 (europa.eu).
[9] Opinion 1/17 of 30 April 2019, CURIA – Documents (europa.eu).
