For the second time in two months, the EU’s highest court has issued a judgment extending the effect of its landmark 2018 ruling in the Slovak Republic v Achmea BV case. The judgments made it clear that from the point of view of the CJEU, investor-state disputes between EU investors and EU member states (“intra-EU disputes”) cannot be settled by the EU. arbitration of investment treaties. However, most investment treaty tribunals have taken the opposite view. Consequently, in practice, the impact of these judgments is particularly relevant in two areas. First, awards rendered in intra-EU arbitrations sitting within the EU may be subject to attack, in particular in the context of an action for annulment. Secondly, the enforcement of such sentences in the courts of EU Member States can also encounter difficulties.

On October 26, 2021, the CJEU issued another ruling on intra-EU investment disputes. In Republic of Poland v PL Holdings Sarl (Case C-109/20), it addressed the question of whether an EU member state could be bound by an ad hoc arbitration agreement with an EU investor. The CJEU held that the state could not be bound by such an agreement, regardless of the laws of the country where the arbitration is taking place.

The dispute

The dispute concerned a Luxembourg company, PL Holdings Sarl (the Claimant), which had acquired shares in two Polish banks. In 2013, the banks merged and the Applicant found himself owner of 99% of the resulting entity. However, later in the year, the Polish Financial Supervisory Authority decided to suspend the applicant’s voting rights and forced him to sell his shares in the merged bank. The Applicant then initiated investment treaty arbitration against Poland.

The arbitration was initially based on Article 9 of the Bilateral Investment Treaty between Luxembourg and Poland (the BIT), and took place in Sweden and conducted under the rules of the Swedish Chamber of Commerce (SCC). Poland challenged the jurisdiction of the arbitral tribunal, first on the grounds that the claimant was not an “investor” within the meaning of the BIT, then on the grounds that the arbitration – involving an intra-EU dispute – violated the law of the EU.[1] This last challenge was lodged in 2016, at the time when the request for a preliminary ruling was lodged in Slovak Republic v Achmea BV (C-284/16), in which the CJEU ultimately ruled that arbitration agreements in bilateral investment treaties between EU member states are contrary to EU law.

Neither of the two disputes ended up before the arbitral tribunal appointed in PL Holdings v Poland. In addition, the arbitral tribunal issued a partial award finding that Poland had breached its obligations under the BIT, and then issued a final award specifying damages of around 150 million euros (with costs).

Poland then asked the Svea Court of Appeal in Stockholm to quash the two sentences. Although the Court of Appeal dismissed the request, it made two findings relevant to the CJEU’s subsequent analysis. First, the Court of Appeal admitted that Achmee applied in the present case and that Article 9 of the BIT was therefore invalid. Second, however, he found that under Swedish law the parties had indeed entered into an ad hoc arbitration agreement at a later stage to settle their dispute. Despite these findings, the Court of Appeal dismissed Poland’s challenge to the validity of Article 9 of the BIT, concluding that it was time-barred.

Poland then appealed the decision of the Court of Appeal to the Supreme Court of Sweden, which in turn referred the issue of the compatibility of the ad hoc arbitration agreement with EU law to the CJEU.

The CJEU’s decision

On October 26, 2021, the CJEU ruled that the ad hoc arbitration agreements were not valid in these circumstances, and that it is indeed the duty of the EU Member State concerned to challenge them, and national courts to grant a request for cancellation of any rewards. This reflects Article 7 (b) of the Agreement for the Termination of Bilateral Investment Treaties, which most Member States signed in May 2020.

The CJEU took as its starting point the acceptance by the parties that Article 9 of the BIT could allow an arbitral tribunal to rule on disputes concerning the application or interpretation of EU law. Following Achmee, the CJEU concluded that Article 9 of the BIT was invalid because it undermined the principle of mutual trust between member states and prevented the relevant issues from being referred to the CJEU for decision (Article 267 TFEU), thus putting endangering the autonomy of EU law[2]. By extension, the CJEU ruled, an ad hoc arbitration agreement with the same content as Article 9 was also invalid. Allowing an EU Member State to conclude such an agreement “would in fact lead to a circumvention of the obligations arising for that Member State from the Treaties”, as interpreted in Achmee. Moreover, allowing this in one case would lead to adopting a similar approach in many others, which would further endanger the autonomy of EU law.

A secondary issue, but of considerable practical importance, was the temporal effect of the CJEU judgment. Should it apply to all such arbitration proceedings, or should it apply only to those which have not been initiated in good faith or which have not yet been completed? The CJEU confirmed that its rulings should apply at all levels, with limited exceptions, which were not relevant here. (Exceptions can be made in the interest of certainty, but only when the parties have acted in good faith and there is a risk of serious hardship.)

The larger image

The CJEU has taken care to circumscribe the effects of its judgment by specifying that “the interpretation of Union law provided for in this judgment relates only to ad hoc arbitration agreements concluded in circumstances such as those at issue in main”. Despite the qualification, the general direction of travel emerges from both this decision, which is based on Achmee, and of Republic of Moldova v Komstroy LCC (C-741/19), decided just a few weeks before PL Holdings.

In Komstroy, the CJEU ruled that the claims were invalid if brought by an EU investor against an EU member state under the Energy Charter Treaty (ECT).

In practice, the impact of Achmea, Komstroy and PL Holdings the trinity is particularly relevant in two areas. First, awards rendered in intra-EU arbitrations sitting within the EU may be subject to attack, in particular in the context of a request for annulment. Conversely, if the interpretation of most arbitral tribunals dealing with intra-EU disputes is followed, intra-EU arbitrations sitting outside the EU and ICSID arbitrations (operating under public international law) should not, in principle, not face such problems.

Second, arbitral awards resulting from intra-EU investment treaty arbitrations, even if made by courts outside the EU or under the ICSID Convention, may encounter difficulties if enforcement is requested in the courts of an EU Member State.