On March 6, 2018, the CJEU rendered its judgment in the long-awaited Slovak Republic v. Achmea case (Case C-284/16). This case involved a preliminary reference from the German Bundesgerichtshof in the context of setting aside proceedings initiated by Slovakia against a 2012 award, which was rendered by an investment tribunal in accordance with the UNCITRAL Rules under the BIT between the Kingdom of Netherlands and Czech and Slovak Federative Republic, in force since 1992. Based on its analysis of certain provisions of the EU Treaties (TEU and TFEU), the CJEU ruled that an Investor-State Dispute Settlement (“ISDS”) provision in an intra-EU is not valid under EU law.
Thus far, the academic discussion surrounding the case has focused on the fate and future of Intra-EU BITs (see here and here) but has not ventured into the consequences of the decision for the arbitral awards rendered under these BITs. Since the Achmea decision forms part of EU law and is binding on the national courts of all EU Member States, it reasonably follows that national courts within the EU must now refuse to recognize and enforce non-ICSID awards based on ISDS provisions in intra-EU BITs. However, under Article III of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“New York Convention”), national courts within the EU also have an obligation to recognize and enforce arbitral awards except where one or more of the seven grounds under Article V apply. This piece utilizes this legal conflict that courts within the EU now face as its starting point and explores the practical implications of the Achmea decision through the lens of Article V of the Convention, focusing on two grounds in particular: violation of public policy and invalidity of the arbitration agreement.
Article V(2)(b): Violation of Public Policy
Post the Achmea decision, invoking the public policy (or ordre public) exception arguably represents the best strategy under the New York Convention in order to resist the recognition and enforcement of an award rendered under an intra-EU BIT. Article V(2)(b) provides that the recognition and enforcement of an award ‘may’ be refused where such action would be “contrary to the public policy of that country” i.e. the State where recognition and enforcement is sought. The New York Convention itself does not define public policy; instead, it allows national courts to derive the applicable standard for public policy from the lex fori, the law of the enforcement forum. It is emphasized that the concept of lex fori is slightly more nuanced within the EU by virtue of the application and interaction of EU law vis-à-vis national laws of Member States.
i. The Notion of EU Public Policy
Post the judgment of the CJEU in Eco-Swiss v. Benetton (Case C-126/97), the national courts of EU Member States found themselves in an unusual position vis-à-vis public policy. In that judgment, the CJEU relied on the principle of equivalence in EU law, according to which if a national court of a member state allows the annulment or refusal of enforcement of an award for violations of national public policy, it must also do so for violations of European public policy. The Court advanced a broad notion of EU public policy; it found that EU competition law “may be regarded as a matter of public policy within the New York Convention.” The permissive attitude of the Court shifted in Manfredi v. Lloyd Adriatico Assicurazioni SpA (Joined Cases C-295-98/04), where it ruled that EU competition law is a “matter of public policy which must be automatically applied by national courts.” The firm position taken by the CJEU indicated that national courts cannot overlook violations of European public policy even though they are at least permitted to do so (though they rarely do so) in the context of domestic public policy under the New York Convention. By extension, this imposes an obligation on the national courts of all EU Member States to flag the violation of EU public policy sua sponte during enforcement proceedings and deny enforcement to awards under intra-EU BITs. Incidentally, the latter fits within the scheme of the New York Convention: the two grounds under Article V (2), non-arbitrability and violation of public policy may be raised by a court sua sponte.
ii. What Constitutes EU Public Policy?
Although no consensus has emerged thus far with respect to the content and the contours of national public policy under the New York Convention, the prevailing position in case law across different jurisdictions is that this exception should be invoked only in those limited circumstances where ‘most basic notions of morality and justice’ of the legal order of a State are violated. Therefore, the public policy exception must be narrowly construed in order to prevent courts from undermining the effectiveness and viability of international arbitration.
The judicial standard adopted by the CJEU in relation to EU public policy represents the prevailing position in form but not in substance. The Court observed in Eco Swiss that Article 101 of the TFEU was a “fundamental provision” which it regarded as “essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market.” Article 101 of the TFEU prohibits agreements between commercial undertakings that have as their object or effect the restriction, prevention or distortion of competition within the EU and concomitantly, have a detrimental effect on trade between EU member states.
In Mostaza Claro v. Centro M6vil Milenium (Case C-168/05), the CJEU reiterated the formulation it adopted in Eco Swiss and applied it by analogy to the domain of EU consumer protection law. It found that that Directive 93/13, which was aimed at strengthening consumer protection, constituted a measure that it considered “essential to the accomplishment of the tasks entrusted to the Community and, in particular, to raising the standard of living and the quality of life in its territory.” These judgments demonstrate the willingness of the CJEU to determine the nature of EU norms vis-à-vis public policy on a field-by-field basis (for a detailed discussion, see the article by Prof. George Bermann). However, the breadth of EU law, combined with the potential for any branch to acquire public policy status before the CJEU, suggests that the judicial standard, despite its emphasis on fundamental norms, is potentially capable of wide application across EU law, which is difficult to reconcile with the narrow vision of public policy under the New York Convention.
iii. Qualification of the Principle of Autonomy of the EU as Public Policy
The Achmea decision of the CJEU has one central theme and focus: the autonomy of the EU and its legal order. The final finding of the Court clearly states that ISDS provision in the Netherlands-Slovakia BIT was invalid because it had an adverse effect on the autonomy of EU law. The argumentative route that the Court adopts to reach its conclusion is rather straightforward: the principle of autonomy of the EU vis-à-vis domestic law of Member States and international law is justified by the “essential characteristics of the EU and its law”, which must be preserved by ensuring a uniform interpretation and application of EU law. To achieve this, the EU Treaties have established a judicial system that allows dialogue between the national courts and the CJEU by virtue of preliminary reference under Article 267, allowing the CJEU to offer an authoritative and decisive interpretation of EU law. However, investment tribunals established by Member States inter se do not fit within this judicial system. Thus, they are not subject to the interpretative control exercised by the CJEU, which the Court considered to be a threat to the particular nature of the law established by the EU Treaties and by extension, to the autonomy of EU law.
The Court placed great emphasis on the overriding nature of the principle of autonomy of EU law, which it considered to be equally binding on the Member States as well as the EU. It observed that even when the EU exercises its competence in relation to international agreements, it can submit to the decisions of a court created by such agreements provided that the autonomy of the EU and its legal order is preserved. The Court treated the principle of autonomy as a fundamental and mandatory norm of EU law, which satisfies the judicial standard that the Court followed in Eco Swiss and Mostaza Claro. Therefore, it is highly likely that national courts will now be expected to mandatorily apply public policy sua sponte, which will render the awards rendered under intra-EU BITs rather vulnerable before EU courts.
Article V (1) (a): Invalidity of the Arbitration Agreement
Although violation of public policy is arguably the strongest argument to resist enforcement, the Achmea decision also leaves room to argue that the arbitration agreement is not valid under Article V(1)(a). To follow this argument, one must first note that unlike commercial arbitration wherein the consent to arbitration is expressed by both parties in the form of a contractual clause or agreement, in the case of investment arbitration, the State normally provides its consent to arbitration by incorporating a unilateral offer in the ISDS provision of the BIT (see here). The consent is only perfected once it is accepted by the investor, whether by communication or by conduct. The perfection of consent, and by extension the arbitration agreement, is thus predicated on a valid offer made by the State, which is later accepted by the foreign investor.
In Achmea, the Court found ISDS provisions in intra-EU BITs to be incompatible with EU law, thereby rendering them invalid under the legal system of the EU. This necessarily implies that the unilateral offer made by the State under such provisions is also invalid. However, there is one impediment: under Article V(1)(a), the applicable law is the lex loci arbitri, not the lex fori, which means that the success of this argument will be predominantly determined by whether the arbitral seat is located within the territory of an EU Member State.
Where the seat is indeed in an EU Member State, the lex loci arbitri includes the operation of EU law through the national law of that EU Member State. In such a case, it is almost certain that the enforcing courts within the EU would refuse to enforce an award under an intra-EU BIT in light of the Achmea decision and their obligations under Article 19 of the TEU. However, the situation is far less predictable where enforcement is sought before national courts outside the EU. In such a scenario, given that their discretion is not circumscribed in any way by the Achmea decision or by the general operation of EU law, the enforcing courts can still exercise their discretion under Article V in favour of enforcement even where they find that the arbitration agreement is not valid under the lex loci arbitri.
Alternatively, where the arbitral seat is located in a non-member State, applying Article V (1) (a) raises certain complications for national courts of the EU Member States. In this case, the application of EU law through the lex loci arbitri is no longer a possibility. The national courts cannot rely on the lex fori, which means that any defect in the arbitration agreement must be found within the lex arbitri of the non-EU member State itself. In the absence of such a defect, the national court would be bound by Article III to recognize the arbitral award as binding unless it triggers the ‘safety valve’ and flags the violation of EU public policy sua sponte.
The above discussion demonstrates that the Achmea decision has far-reaching implications; awards rendered under intra-EU BITs are now exceedingly vulnerable not only in enforcement proceedings but also in annulment proceedings. The defence of public policy may offer limited leeway to national courts in the EU, which are unfortunately caught between their obligations under Convention and the demands of the EU legal order. But with the fault lines between these two realms becoming increasingly visible, the courts must tread carefully and hopefully, they will find the order in the chaos.