ECJ Arbitration

Small Court Case, Big Implications

LUXEMBOURG - OCTOBER 23: The Grand Chamber at the European Court of Justice, from left: Judges Aindrias O'Caoimh, Jerzy Makarczyk, Christiaan Willem Anton Timmermanns, Vassilios Skouris, president of the European Court of Justice, Allan Rosas and Anthony Borg Barthet U.O.M. arrive at the courtroom for the decision of the Volkswagen trial in Luxembourg, Luxembourg, on Tuesday, Oct. 23, 2007. Germany's so-called Volkswagen law is illegal, the European Union's highest court said in a ruling that may remove the last hurdle for a takeover of Europe's largest carmaker by Porsche AG. (Photo by Wolfgang Von Brauchitsch/Bloomberg via Getty Images)
The Grand Chamber at the European Court of Justice.
  • Why it matters

    Why it matters

    The case raises the issue of jurisdiction of arbitration courts in Europe, which could have far-reaching effects for investors.

  • Facts

    Facts

    • The suit was brought by a Dutch insurance company against Slovakia, as the legal successor to a 1991 treaty with Czechoslovakia.
    • When the Dutch company appealed to an arbitration court in Frankfurt, Slovakia argued that the court had no jurisdiction over the case because the BIT became invalid when Slovakia joined the E.U.
    • The case is now before the European Court of Justice.
  • Audio

    Audio

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Opponents of the planned free trade agreement between the European Union and the United States are keeping a close eye on anything to do with arbitration courts.

After all, the model they sharply criticize as “parallel justice” beyond the reach of government jurisdiction is still on the table as part of the negotiations for the Trans-Atlantic Trade and Investment Partnership, known as TTIP.

They will therefore undoubtedly be aware of the fact that Germany’s Federal Court of Justice has submitted questions to the European Court of Justice on the effectiveness of arbitration agreements in bilateral investment protection treaties between European Union member states.

“The case is rather small, and the amount in controversy is relatively small, but the decision will be extremely exciting,” explained Markus Burianski, who heads the department that handles national and international arbitration proceedings at the law firm of White & Case in Frankfurt.

In the case in question, the Netherlands and the former Czechoslovakia had signed a bilateral investment protection treaty, or BIT, in 1991.

The Luxembourg-based court must now interpret three articles from the Treaty on the Functioning of the European Union.

It contained the standard clause that disputes between an investor and one of the participating countries are presented to an arbitration court.

In 1992, in the aftermath of the break-up of the Soviet Union, the country of Czechoslovakia dissolved and on January 1, the two nations of the Czech Republic and Slovakia were established.

In 2004 Slovakia, as the legal successor to the BIT treaty, opened its market to providers of private health insurance policies. A Dutch company was granted a license. However, the deregulation was partially reversed after a change in government. The Dutch insurer claimed that it had incurred a loss in the double-digit millions as a result of the regulation, and it appealed to an arbitration court in Frankfurt.

Slovakia, however, insisted that the arbitration court had no jurisdiction over the case. It argued that the clause on arbitration agreements in the BIT became invalid when Slovakia joined the European Union in 2004, because it was incompatible with E.U. law.

The case made its way through the lower courts and is now before the European Court of Justice. The Luxembourg-based court must now interpret three articles from the Treaty on the Functioning of the European Union. Among other things, the case involves questions of discrimination via such BIT treaties and the ECJ’s monopoly on the administration of justice.

The decision could have far-reaching effects for investors. There are three conceivable options. If the ECJ voices no concerns over the arbitration agreements in the internal E.U. treaty on the protection of investments, companies will likely make greater use of BITs. “The risks that currently exist for investment protection strategies will be eliminated, which could encourage clients,” said Mr. Burianski, the legal expert.

Meanwhile, the ECJ could also acknowledge discrimination by the bilateral treaties, although they would probably not be rendered invalid as a result.

Instead, companies from other E.U. countries could also claim the arbitration agreements for themselves. “The possibilities of legal protection for companies are multiplying,” said Mr. Burianski. This could lead to “forum shopping,” he said, that is the use of BITs beyond their original scope of application.

If the ECJ were to declare the arbitration court did not have jurisdiction and revoke the arbitration award, it would strike a blow against international investment protection. “Companies could then no longer take advantage of this legal protection,” said Mr. Burianski.

It comes as no surprise that Germany, Austria, Finland, France and the Netherlands have already argued in an unofficial E.U. position paper that the BITs, some of which have existed for a long time, should be allowed to expire and should be replaced with a multilateral investment protection treaty for all E.U. member states.

Since it normally takes the ECJ 15 months to decide on such cases, the ruling could also be of interest for those involved in the TTIP negotiations, should they drag on that long.

 

Heike Anger is a political reporter for Handelsblatt, based in Berlin. To contact her: anger@handelsblatt.com

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