Another Nail in the Coffin for Arbitral Dispute Resolution Agreements in the EU – the Judgment of the CJEU in Poland v. PL Holdings

  • 2021/11/24
  • kutatocsoport5

In the latest episode of the intra-European Union (EU) investment arbitration saga, the Court of Justice of the European Union (CJEU, Court) ruled on 26 October 2021 in Poland v. PL Holdings (Case C-109/20) that EU Member States are precluded from concluding with investors from another EU Member State an ad hoc arbitration agreement identical to an arbitration clause of an international treaty deemed invalid under the CJEU’s Achmea case law (Case C-284/16).

This is the second ruling concerning investment arbitration during this busy autumn, following the Komstroy Judgement (Case C-741/19) of 2 September 2021 – in a period which is, without doubt, exceptional due to the COVID-19 global pandemic, whose impact on the phenomenon in question was initially considered doubtful (Acevedo A. & Rueda Á. M., 2020.). Yet, international arbitration has demonstrated itself to be both adaptable and resilient throughout the crisis and emerged more strongly positioned as a method of dispute resolution (Scherer, M. & Bassiri, N. et al., 2020., Garrigues, 2021.).

Factual Background

Four years after a Swedish court ordered the Polish government to pay a company millions, the CJEU has tossed out the fine because an arbitration clause in an international investment agreement is illegal...

The case concerns Poland’s application to the Swedish courts to set aside two awards (a partial award and a final award) rendered in 2017 in arbitration with PL Holdings, a company incorporated under Luxembourg law, under a 1987 investment treaty (bilateral investment treaty – BIT) concluded between Poland on the one hand, and BLEU (the Belgium/Luxembourg Economic Union) on the other. Under the treaty – which predated the EU’s single market and is administered by the Stockholm Chamber of Commerce (SCC) – disputes between investors would be referred to an arbitration tribunal (Quell, M., 2021.).

Based on that BIT, when the Polish government forced PL Holdings in 2013 to sell shares it held in two Polish banks, the company disagreed with the decision requiring it to do so. This decision had been taken by the Komisja Nadzoru Finansowego (Polish Financial Supervision Authority), which then initiated arbitration proceedings against Poland (Insight EU Monitoring, 2021a.). Poland claimed that PL Holdings forced a merger of two banks so it could control 99% of the bank’s stock, which was illegal under Polish law.

The arbitration was initially based on Article 9 of the BIT and was seated in Sweden and conducted under the SCC rules (Garcia, A., 2021.). In 2015, Poland initially challenged the jurisdiction of the arbitral tribunal on the basis that PL Holdings was not an “investor” within the meaning of the BIT. In a second stage, in 2016, it also raised the fact that the arbitration clause of the BIT – involving an intra-EU dispute – would be incompatible with EU law. The latter challenge was made a few days after the request for a preliminary ruling was lodged in Achmea, in which the CJEU ultimately held that arbitration agreements in bilateral investments treaties between the EU Member States are contrary to EU law (Croisant, G., 2021.).

Neither challenge succeeded before the arbitral tribunal, which declared itself competent, what is more, issued a partial award concluding that Poland had breached its obligations under the BIT when it first suspended voting rights attached to shares owned by PL Holdings in Polish banks and ultimately forced those shares to be sold, and then issued a final award specifying damages of approximately €150 million including costs (awarded PL Holdings 653 million Polish złoty in total) (JD Supra, 2021.).

Poland brought annulment proceedings against both awards before the Swedish courts to set them aside on the basis that the tribunal lacked jurisdiction to decide the case, because, under EU law, an arbitration clause in a BIT between two EU Member States (i.e. an intra-EU BIT, such as the BIT in question) was invalid (the so-called “intra-EU objection”). In response, PL Holdings argued that, notwithstanding any potential invalidity of the arbitration clause in the BIT, a separate ad hoc arbitration agreement had been concluded between the parties. Referring to Swedish arbitration law and principles of commercial arbitration, PL Holdings submitted that it had made an offer to arbitrate on the same terms as contained in the BIT arbitration clause when it filed its request for arbitration. It argued that Poland had tacitly accepted that offer in failing to challenge the tribunal’s jurisdiction based on the BIT arbitration clause in a timely fashion (Poland had raised the intra-EU objection in the arbitration, but only when it submitted its rejoinder).

The Svea hovrätt (Svea Court of Appeal, Sweden) dismissed Poland’s application, finding that even though the arbitration clause in the BIT was invalid under EU law (according to Achmea), that did not prevent a Member State from concluding an ad hoc arbitration agreement with an investor to settle a dispute under the BIT at a later stage. Such an ad hoc agreement was based on the common intent of the parties to that dispute and was concluded according to the same principles as in commercial arbitration proceedings. It also found that Poland’s challenge to the validity of the arbitration clause was in any event out of time and therefore time-barred under Swedish law.

However, after an appeal was brought against the decision of the Court of Appeal, the Högsta domstolen (Supreme Court, Sweden) had doubts as to whether the aforementioned approach is compatible with the Achmea judgment (Insight EU Monitoring, 2021b.) and therefore suspended the proceedings and made a request to the CJEU for a preliminary ruling on the compatibility of such an ad hoc agreement with Articles 267 and 344 TFEU (principle of autonomy of EU law, as interpreted by the CJEU in Achmea and its subsequent case law) (Lowther, J., 2020.).

The Judgment of the CJEU

Thus the case concerns the compatibility of intra-EU investment arbitration, but with a twist. The Supreme Court did not ask whether the investor-state dispute resolution provision in the BIT, as such, is compatible with EU law. Instead, the question is whether, despite the assumed incompatibility of that treaty provision, a Member State can (still) enter into an ‘individual’ arbitration agreement with an investor, for instance by concluding a contract, or by omitting to challenge the jurisdiction of the arbitral tribunal in time (De Boeck, M., 2021.). In essence, the question was based on two premises: whether an ad hoc agreement was concluded and whether the BIT arbitration clause was incompatible with EU law for the reasons stated in Achmea and confirmed in Komstroy (Lawn, N. & Van Damme, I. et al., 2021).

In its judgment, the CJEU repeated its conclusions in Achmea and underlined that an arbitration clause in an international agreement between two Member States, which is capable of leading to a situation in which an arbitration body rules in disputes which may concern the application or interpretation of EU law, is contrary to Articles 267 and 344 TFEU as well as Article 4(3) TEU. To allow a Member State, which is a party to a dispute which may concern the application and interpretation of EU law, to conclude an ad hoc arbitration agreement with the same content as that clause would, according to the Court, entail a circumvention of the obligations under the Treaties as interpreted in Achmea. Moreover, the CJEU underlined that the consequences of that circumvention were no less serious because it concerned an isolated case, since, such an approach could be adopted in a multitude of disputes which may concern the application and interpretation of EU law, thus allowing the autonomy of that law to be undermined repeatedly (Johansson, M. & Lagerlöf, E. et al., 2021.). Further, given the requirements of Articles 267 and 344 TFEU, the CJEU stated that the validity of the legal basis of an arbitration body’s jurisdiction cannot depend on the conduct of the parties to the dispute.

The CJEU thus concluded that Articles 267 and 344 TFEU preclude national legislation which allows an ad hoc arbitration agreement to be used to continue arbitration proceedings initiated according to an invalid arbitration clause in an intra-EU BIT that has the same content. (Business Review, 2021.).

In addition, the CJEU’s reasoning was not limited to the question of compatibility. The CJEU found that the Member States have a positive obligation to challenge, before either the arbitral tribunal or the court with jurisdiction, the validity of an arbitration clause or ad hoc arbitration agreement. That positive obligation is based on EU law, especially the principles of the primacy of EU law and sincere cooperation. According to the CJEU, the positive obligation was also followed from its judgment in Achmea. The CJEU added that, in those circumstances, national courts must uphold an action to set aside an arbitration award made based on an arbitration agreement that is contrary to Articles 267 and 344 TFEU and the principles of mutual trust, sincere cooperation, and the autonomy of EU law (Lawn, N. & Van Damme, I. et al., 2021.).

The Implications of the Judgment

Although the result was not unexpected, considering the Court’s position in Achmea, the CJEU’s judgment in PL Holdings represents a further restriction of the possibility for a Member State to enter into an arbitration agreement with a private party, thus closing down a loophole that might have allowed, as a matter of EU law, such disputes to be resolved by arbitration despite the Court’s findings in Achmea (JD Supra, 2021.).

Thus, the fundamental premise of the Court’s reasoning in the present case is that an arbitration agreement that is invalid under Achmea remains invalid regardless of the form in which it manifests itself, and regardless of whether such invalidity benefits a Member State who had breached EU law not only by maintaining in force intra-EU BITs but also by failing to raise EU law as a defence when it had the opportunity of doing so in the arbitration proceedings (PL Holdings, paragraphs 51-52.). In this regard, Dániel Dózsa concludes that the thousand-year principle nemo auditur propriam turpitudinem allegans (no one may benefit from her wrong) must heed to the constitutional principles referred to above, even when they are invoked by a Member State in breach of EU law against a private party whose fundamental rights are in jeopardy (PL Holdings, paragraph 46., Dózsa, D., 2021.).

The CJEU was careful to circumscribe the effects of its judgment by stating that „the interpretation of EU law provided in the present judgment refers only to ad hoc arbitration agreements concluded in circumstances such as those at issue in the main proceedings” (PL Holdings, paragraph 67., Garcia, A., 2021.). The Court thereby confirmed that it did not extend Achmea to arbitration agreements between the EU Member States and investors made outside the context of intra-EU BITs, in other words, neither did it hold that all arbitration agreements between the EU Member States and investors are invalid. This also implies that the CJEU maintains the distinction drawn between investment treaty arbitration based on an intra-EU BIT and commercial arbitration in Achmea and Komstroy. It should be noted that in the latter case – the latest concerning the relationship between EU law and international investment law where the Court demarked the limits under which international investment tribunals can legally operate under EU law –, the CJEU concluded explicitly (and rather predictably) that there is no place for intra-EU arbitration proceedings under the Energy Charter Treaty (Suătean, I., 2021.), a multilateral agreement to which the EU, its Member States (apart from Italy which withdrew in 2016) and third states are parties. Within the EU such disputes must be resolved by the independent judiciary consisting of the EU and Member State courts and not by external quasi-judicial bodies (Eckes, C. & Ankersmit, L., 2021., Fouchard, C. & Thieffry, V., 2021.).

It should also be highlighted that neither did the Court follow the Advocate General’s Opinion (Opinion in Case C-109/20), in which Advocate General Kokott suggested that individual arbitration agreements between the Member States concerning the „sovereign application of EU law” might be able to escape the rule in Achmea and be compatible with the duty of sincere cooperation and autonomy of EU law, subject to the condition that national courts can „comprehensively review the arbitration award for its compatibility with EU law” by way of the preliminary reference procedure (Cahill, G., 2021.). According to several opinions on this subject, the Advocate General’s Opinion might come as a disappointment for those advocating for the necessity of greater clarity and certainty following Achmea (Korom, V., 2021., Dózsa, D., 2021.).

A Room for Hope?

It is noteworthy that in the aftermath of Achmea, the Commission attempted to reassure EU investors that, in the absence of intra-EU BITs, their cross-border investments will be protected by EU law which will be enforced via such infringement proceedings [COM (2018) 547 final, Korom, V., 2021.]. Conscious of the paradox created by the fact that extra-EU investment may be more effectively protected than intra-EU investment [since the CJEU confirmed – in Opinion 1/17, in the context of CETA – the validity of the investment court system provided for under some of the investment and trade agreement concluded by the EU with third states (see more: Croisant, G., 2019., Kanyuk, P. Á., 2019.)] and the fact that currently, most countries in the world are affected by these agreements in question, as of the 2837 valid BITs, 2269 are in force (UNCTAD, 2021, Szalai I., 2021.), the Commission is indeed working towards a comprehensive policy on intra-EU investments with the aim of better protecting and facilitating EU cross-border investment.

Following a 2020 public consultation (European Commission, 2021.), the Commission is considering the creation of a new legislative proposal concerning the intra-EU investment system, to be launched on 22 December 2021 (European Parliament, 2021.). The Commission contemplates, among others, setting out the substantive rights of specific investors in a new EU instrument, setting up an intra-EU investment court (similar to the EU’s proposal for a Multilateral Investment Court currently discussed at UNCITRAL), as well as extending and improving the “Solvit” mediation mechanism (Croisant, G., 2021.).

 

For a list of references, click HERE.

 

Author: dr. Petra Ágnes Kanyuk

MTA–DE Public Service Research Group

Ph.D. Student, Géza Marton Doctoral School of Legal Studies of the University of Debrecen

 

Source of the picture:

https://www.iisd.org/articles/covid-19-support-litigation [accessed November 5, 2021]

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