The German Federal Court of Justice rules in Achmea – entry into the EU renders Slovakia's offer for Intra-EU arbitration inapplicable

In its recent decision (I ZB 2/15), the German Federal Court of Justice (BGH) set aside the award obtained by the Dutch investor Achmea against the Slovakian Republic. The BGH's decision came down on 31 October 2018 and was not unexpected given that the German court had issued a reference for a preliminary ruling by the Court of Justice of the European Union (CJEU) that led to the CJEU's 6 March 2018 decision (C-284/16), which found that the arbitration clause referred to by Achmea was incompatible with EU law.

Although the BGH had indicated a different view in its preliminary-ruling reference, the Court in its final decision followed the CJEU, ruling that there was no arbitration agreement between Achmea and Slovakia. The BGH held that when Slovakia joined the EU on 1 May 2004 – and thus before Achmea initiated arbitration proceedings in 2008 – the state’s offer to investors to conduct arbitration proceedings became inapplicable. As a result, there was no valid offer for Achmea to accept when Achmea commenced arbitration against Slovakia.

Supremacy of EU law renders the arbitration agreement inapplicable

The BGH made his finding on the basis of the German Arbitration Law, which states that an invalid arbitration agreement between parties constitutes grounds for setting aside an arbitral award. The BGH found that a non-existing arbitration agreement is equivalent to an invalid agreement.

The BGH noted that, in principle, an arbitration agreement between the parties could have been concluded through the commencement of arbitration proceedings by Achmea. By initiating arbitration proceedings, the investor usually accepts the offer made by a state in a Bilateral Investment Treaty (BIT) to conduct arbitration proceedings with investors from another state.

In this specific case, however, there was no valid Slovakian offer at the time the arbitration proceedings were initiated. A respective offer was originally provided for in Article 8(2) of the Netherlands-Slovakia BIT. Once Slovakia joined the EU, however, the offer became inapplicable because – according to the CJEU ruling, rendered as a result of the BGH’s reference – Article 8 of the Netherlands-Slovakia BIT is not compatible with the principle of sincere cooperation among EU member states (Article 344 TFEU) and the autonomy of EU law ensured by the preliminary ruling procedure (Article 267 TFEU).

The BGH clarified that EU law became part of the applicable law to the dispute under Article 8(6) of the Netherlands-Slovakia BIT when Slovakia joined the EU on 1 May 2004. As of that moment, the treaty became an Intra-EU BIT and Article 8(2) was no longer applicable in the light of the CJEU declaring the arbitration offer incompatible with EU law.

The BGH recognised that Article 8 of the Netherlands-Slovakia BIT is contained in a treaty that is generally binding only on the Netherlands and Slovakia. The provision’s inapplicability, however, caused Slovakia’s offer to conduct arbitration proceedings with Dutch investors to lapse. In short, there was no longer a corresponding Slovakian offer that Achmea could have accepted by initiating arbitration proceedings. In this way, the BIT is inseparably linked to the arbitration agreement.

BGH rejects Achmea’s objections

As for the objections raised by Achmea after the CJEU’s ruling, the BGH considered that none of them was decisive. In particular, the BGH did not follow the argument that the CJEU’s ruling is based on a faulty understanding of German Arbitration Law.

When the BGH made its reference for a preliminary ruling in March 2016, it was still of the opinion that a uniform interpretation of EU law could be ensured by having national courts examine the arbitral award’s compatibility with EU law before enforcing it. In the case of any doubt about the interpretation of EU law, national courts could make a reference to the CJEU for a preliminary ruling. This view reflects the CJEU’s jurisprudence on commercial arbitration, which it explicitly upheld in the Achmea ruling.

In the present ruling, however, the BGH emphasised the CJEU’s view that an arbitral tribunal does not constitute a “court” within the meaning of Article 267 TFEU, and cannot make a reference to the CJEU for a preliminary ruling. As the CJEU did not consider the possibility of making such reference through a national court, the BGH found that the issue was irrelevant. The BGH noted that, according to the CJEU, the limited judicial review of arbitral awards under German Arbitration Law was insufficient – contrary to the CJEU'S jurisprudence on commercial arbitration.

The CJEU's distinction between commercial arbitration and investor-state arbitration has been the subject of numerous discussions. The CJEU did not provide further reasoning for the distinction, and its finding has often been described as unconvincing. Why should a limited judicial review of arbitral awards be appropriate for commercial arbitration, but not for investor-state arbitration?

The BGH did not comment on this issue either, but merely reflected the CJEU’s view.

Fate of other Intra-EU arbitral awards

The BGH’s ruling draws the perhaps inevitable conclusion from the CJEU’s ruling that Article 8(2) of the Netherlands-Slovakia BIT is incompatible with EU law. The Achmea award has been set aside, and Achmea may now only take recourse to Slovakian national courts.

How does this affect other intra-EU arbitral awards?

The ground to set aside an arbitral award due to the invalidity or the lack of an arbitration agreement under German Arbitration Law is based upon the UNCITRAL Model Law and therefore also part of numerous other arbitration regimes. The ground also corresponds to one of the grounds for non-recognition of an arbitral award under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Hence, other intra-EU awards that are subject to enforcement in Germany or other EU member states could also suffer the same fate as the Achmea award.

The crucial question will be whether the CJEU’s ruling on Article 8(2) of the Netherlands-Slovakia BIT also applies to the arbitration offers contained in other Intra-EU BITs. While the operative part of the CJEU's ruling is formulated in rather general terms and could thus be considered transferable to other BITs, the CJEU’s underlying reasoning deals with some specific aspects of Article 8 which cannot be found in the dispute settlement clauses of other BITs. This applies in particular to Article 8(6), which explicitly provides for the applicability of Slovakian law (and by extension EU law) to the dispute. This leaves room for a different interpretation of other BITs.

Furthermore, it must be taken into account that the grounds for setting aside an award under German Arbitration Law are not applicable to arbitral awards rendered under the ICSID Convention. ICSID arbitral awards are subject to a particular enforcement regime, which does not allow for a review of the arbitration agreement by national courts. This also applies to the Vattenfall v. Germany arbitration, in which the arbitral tribunal recently confirmed its jurisdiction despite the Achmea judgment. The Vattenfall decision concerned the arbitration offer contained in the Energy Charter Treaty (ECT).

For now, the BGH’s ruling may be the final curtain for the Achmea case, but discussions on Intra-EU arbitration will continue. This is because the procedural constellations may vary significantly and the relevant dispute settlement provisions leave room for diverse interpretation.

It remains to be seen how arbitral tribunals and national courts in the EU will decide in other proceedings which are not directly covered by the Achmea ruling.

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