A controversial ruling from the European Union’s highest court rejecting arbitration to settle disputes among EU countries may force foreign investors to make a wide circle around member nations in future ventures.
The European Court of Justice ruled last week that private arbitration does not guarantee that EU law will be respected and therefore is not permissible as a way to settle legal disputes. The removal of this investment protection exposes investors to litigation in countries where courts may not operate in a fair or unbiased manner.
If a company invests in a country like Bulgaria, Romania or Poland, legal experts said, it needs to determine how it can best protect itself from government intervention or expropriation. “It is hardly an option to go before the Bulgarian, Romanian or Polish courts,” said Jörg Risse at the law firm Baker McKenzie.
The ruling may benefit countries outside the EU, such as Switzerland or Britain once it exits the bloc, which will be in a position to host special purpose entities precisely to make these investments without being exposed to litigation in local courts. “That’s a realistic scenario,” said Mr. Risse.
“It is fatal for international competition.”
The new concerns come against a backdrop of growing tensions between the European Commission and some Eastern European nations precisely because of worries that their judicial systems are not independent. The commission has opened a proceeding against Poland to scrutinize recent judicial reforms that appear to go against the rule of law.
In any case, the court’s ruling caused consternation in legal circles because it went against the recommendation of the advocate general, a court official whose expert opinion the justices normally follow.
The case involved a Dutch insurer, Achmea, which entered the market for health insurance in Slovakia once that was opened up to foreign insurers and invested substantial sums to develop the business. The Slovakian government later partially rescinded this permission. Achmea claimed this resulted in substantial losses. The company went to arbitration in Germany and was awarded €22 million.
The arbitration clause used by Achmea is based on a bilateral investment treaty (BIT) between Slovakia and the Netherlands, one of 196 such treaties between EU members and former accession candidates that have since become full EU members. The treaties provide for arbitration as a form of investment protection in legal disputes. Slovakia challenged this use and the European Court ruled that in fact such arbitration clauses do not allow EU law to be fully effective and are therefore not compatible with EU law.
“It is fatal for international competition if the BIT isn’t valid,” said Rupert Bellinghausen from the Linklaters law firm. The US law firm Gibson Dunn is already advising clients to seriously consider a restructuring of their corporate holdings so that there is at least one entity in a country outside the EU that has BIT with the country hosting the investment. It is a “legitimate business goal” to get this in place before any disputes arise.
Switzerland is the ideal candidate for such entities, legal experts say. Britain, which already offers more investor protection than other EU members, could also play this role once it is no longer subject to European Court of Justice jurisdiction.
In the meantime, it seems certain Achmea’s arbitration award will not survive the court ruling. Likewise, some 150 other current arbitration proceedings based on BIT protections may have to bow to the court’s ruling. Moreover, the judgment is likely to have consequences for investor protection clauses already built into the Canadian-EU Comprehensive Economic and Trade Agreement (CETA) and the draft of the Transatlantic Trade and Investment Partnership (TTIP).
It is no longer certain that any arbitration award made in the EU, even if the BIT is with a non-EU member, will be enforceable. When the Achmea case first went to the European Court in 2016, Germany and several other EU countries argued in favor of letting the current bilateral treaties expire and creating a multilateral investment protection treaty for all EU members.
But there was no consensus for such a move at that time. The surprise ruling may lead to one. “One can expect that EU countries will now revoke their BITs,” said Nico Basener, arbitration expert at Clifford Chance. “A multilateral investment protection treaty for all EU member states could get new impetus from the decision.”
Heike Anger is a Handelsblatt reporter in Berlin. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: firstname.lastname@example.org.