ECJ in PL Holdings: ad hoc arbitration agreement between EU investor and Member State not compatible with EU law

In its judgment in Achmea, the European Court of Justice (‘ECJ’) held that intra-EU investor-State arbitration (‘ISDS’) clauses in treaties between Member States are incompatible with EU law and are therefore invalid (see discussion here and here). However, commercial arbitration was found compatible with EU law. This is because it is a result of the freely expressed will of the parties, whereas investment arbitration is based on a treaty between the Member States. Still, Achmea left one question open, namely what the consequences are if a Member State does not contest the jurisdiction of the arbitral tribunal on the basis that the clause is invalid and consequently accepts the offer of the investor to arbitrate through its conduct. Faced with this issue, the Stockholm Court of Appeal considered that such an ad hoc arbitration agreement would be based on the common will of the parties and would fall within the exception in Achmea allowing commercial arbitration between private parties. However, the Swedish Supreme Court considered that the interpretation provided by the ECJ is incomplete for such a conclusion and referred the issue for a preliminary ruling. On 26 October 2021, the ECJ confirmed the end of intra-EU investor-State arbitration by ruling in the PL Holdings decision that such an individual agreement is not compatible with EU law. For the ECJ allowing ad hoc agreements identical to intra-EU ISDS clauses would mean allowing to bypass Achmea.

In light of the recent Komstroy decision, which found that the ISDS clause of the Energy Charter Treaty (‘ECT’) does not apply to intra-EU disputes, and Opinion 1/17, which upheld the compatibility of the CETA tribunal only because the tribunal can apply EU law as a matter of fact, this decision seems to end the intra-EU ISDS saga once and for all (see discussion of the judgements here and here). While this conclusion seems quite reasonable given the approach taken by the ECJ, this is unlikely to be the last decision on the implications of Achmea. What the ECJ did not answer in the present decision is how this ruling would affect arbitration clauses in contracts between Member States and EU investors.

Background

The preliminary question concerns the compatibility with EU law of the arbitral award in favor of the investor PL Holdings against Poland issued under the Belgium-Luxembourg Economic Union (‘BLEU’) - Poland BIT on 28 September 2017. That award was issued almost a year before the Achmea ruling. Nonetheless, the same arguments on which the ECJ based its decision in Achmea were advanced by Poland to challenge the tribunal’s jurisdiction, claiming invalidity of the ISDS clause under EU law. However, the objection was found to be belated. As a result, Poland was ordered to pay EUR 150 million in damages to the investor PL Holdings.

Subsequently, Poland brought an action at the seat of arbitration, Sweden, to set aside that award. Pursuant to Article V(1)(e) of the New York Convention (‘NYC’) an award annulled at the seat of arbitration could be a ground for refusal of enforcement of the award in the other Contracting States. The NYC is ratified by almost all States (as of November 2021 – 168 States) and because of this an annulment of the award would in most jurisdictions effectively preclude the investor from recovering the damages. Thus, Poland claimed that the arbitration clause of the BLEU-Poland BIT was invalid as it infringed EU law. By the time of the Stockholm Court of Appeal’s decision, the Achmea judgment had already been issued. Relying on Achmea, the Swedish court accepted that Poland’s consent to arbitration contained in the applicable BLEU-Poland BIT was invalid. However, since Poland’s objection to the tribunal’s jurisdiction was raised belatedly, the court found that an individual arbitration agreement was concluded with the investor. Such an agreement was found to not be precluded by Achmea and the court therefore refused to set aside the contested award.

On appeal, the Supreme Court of Sweden requested a preliminary ruling from the ECJ asking the Court whether Articles 267 and 344 TFEU require it to set aside an arbitral award rendered in a dispute between an EU Member State and an EU investor where the Member State was found to have consented to the arbitration proceeding through its conduct, due to its belated objection to jurisdiction.

ECJ’s reasoning

The ECJ first reiterated that Articles 267 TFEU and 344 TFEU as interpreted in the Achmea judgement render the arbitration clause in the applicable BLEU-Poland BIT invalid (para 44). The reason being that Member States by permitting an arbitration body to rule in disputes which may concern the application or interpretation of EU law are removing these disputes from the jurisdiction of their own courts and, hence, from the system of judicial remedies that Article 19(1) TEU requires them to provide in the areas covered by EU law (para 45). Furthermore, such a clause was found to be against the principle of sincere cooperation enshrined in Article 4(3) TEU and to undermine the unique constitutional framework of the EU law, as the arbitral tribunal is not entitled to request a preliminary ruling under Article 267 TFEU (para 46).

Having ruled that the arbitration clause in the applicable BLEU-Poland BIT is null and void, the ECJ held that to allow a Member State to submit a dispute to an arbitral body with the same characteristics as that provided for by the void arbitration clause by implicitly accepting the offer of the investor to arbitrate under that clause, would be a circumvention of the Member State’s obligations under EU law and the Achmea judgement (para 47). For the ECJ the purpose of such an agreement would be in fact to replace the invalid investor-State arbitration clause in the intra-EU BIT with an identical ad hoc arbitration agreement maintaining its effects despite its invalidity (para 48).

In addition, the ECJ considered the consequences of circumvention to be severe, as they are not limited to the specifics of this case. Instead, the ECJ noted that each request for arbitration by an investor based on a null arbitration clause contained in an intra-EU BIT constitutes an offer to arbitrate to the responding Member State, which could then be considered accepted in the absence of jurisdictional objections raised by that State (para 50). This was held to lead to an effective extension of a commitment by Member States in breach of EU law and to the undermining of the autonomy of EU law.

Furthermore, the ECJ underlined that the concerns raised in Achmea not only prohibit Member States from concluding investor-State arbitration clauses in intra-EU BITs but also oblige them to challenge the validity of the arbitration clause or ad hoc arbitration agreement when a dispute is brought before an arbitral tribunal (para 52).

Finally, the ECJ rejected PL Holdings request that the interpretation of EU rules made in Achmea should not apply to arbitration proceedings initiated in good faith and concluded prior to the delivery of the judgment. Rather, the effects of the Achmea judgment were considered not to be limited in time (para 64).

For these reasons, the ECJ concluded that the national courts must set aside awards rendered on the basis of an arbitration agreement as the one concluded between Poland and the PL Holdings investor. Importantly, however, the ECJ refused to address the implications of this ruling for arbitration clauses in contracts between Member States and EU investors (para 67). Instead, the ECJ limited its interpretation to ad hoc arbitration agreements entered into in circumstances such as those at issue (para 67).

Analysis

This decision does not come as a surprise, especially considering that barely two months earlier, in Republic of Moldova v. Komstroy LLC, the ECJ held that the investor-State arbitration provided for in the ECT does not apply to intra-EU disputes. Interesting to note is that the ECJ’s approach diverges substantially from the one adopted by Advocate General (‘AG’) Kokott in her Opinion on the case. The AG gave a ”glimmer of hope” that individual arbitration agreements between an EU investor and a Member State may be compatible with EU law provided that the principle of equality is respected and the arbitral award can be comprehensively reviewed for its compliance with EU law. The ECJ, by contrast, rejected the individual agreement outright as contrary to EU law, without examining whether the arbitral award made on the basis of that agreement can in fact be subjected to a review that ensures full compliance with EU law. Nevertheless, this is consistent with the ECJ’s jurisprudence on guaranteeing the autonomy of the EU legal order by not focusing on the narrow facts of the case (p. 225), but on the general possibility that autonomy could be undermined.

Since the disputed award was rendered before the Achmea judgement, the application of the findings in Achmea leading to its annulment arguably frustrates the legitimate expectations of the investor PL Holdings. However, the principle may be invoked only if the investor could not have foreseen this occurring (C-310/04 ECLI:EU:C:2006:521, para. 81). In the case of preliminary rulings, such as Achmea, the ECJ does not create new obligations, but instead provides the correct interpretation and application of existing EU law. Through preliminary rulings the Court merely ‘clarifies and defines […] the meaning and scope of that rule as it must be or ought to have been understood and applied from the time of its coming into force’ (C 61/79 ECLI: ECLI:EU:C:1980:100 para 16). Consequently, the investor PL Holdings and other EU investors that may have entered into arbitration agreements with Member States prior to Achmea could have anticipated in light of the principles of EU law that arbitral awards may not be enforceable under EU law. The Commission has been raising this issue since at least 2006 (see the EC’s note in this case here). Viewed in this light, the incompatibility of the intra-EU investor-State arbitration is derived not from Achmea but from the EU legal rules themselves.

While this decision does now seem to finally shut the door to intra-EU ISDS, investors from Member States do have remedies available in the EU that go beyond those typically available to foreign investors in third states. As noted by Prof. Mercelo G. Kohen in his Dissenting opinion to the Theodoros Adamakopoulos award, in which the tribunal upheld jurisdiction in favor of an EU investor against Cyprus, EU law provides extensive substantive protections to investors and a ‘sophisticated “supra-national” system’ (para 79). It may not be ISDS, as some investors might have hoped for, but the ECJ won’t have it any other way.

It will be interesting to see, however, how the ECJ will address the question of the compatibility of arbitration clauses in contracts between Member States and EU investors. AG Kokott made a very insightful argument in her Opinion in this case. The AG noted that the arbitration agreement must be in accordance with the principle of equal treatment. However, for the AG Member States by giving the right to only some investors to have recourse to arbitration, whereas others could only have recourse to national courts, violates the principle of equal treatment. A justification for such an unequal treatment, according to the AG, is ’difficult to conceive’ (see discussion of the opinion here). It therefore appears that arbitration agreements in contracts between Member States and EU investors would also be incompatible with EU law.