Investor Protection Clauses In Bilateral Trade Agreements Take A Hit In EU

Investor protection clauses in bilateral trade agreements between European Union member states were declared incompatible with EU law in a judgment by the European Court of Justice in Luxembourg today.

Today’s judgment is available here: (C-284/16).

The case, which dates back to a bilateral trade agreement between former Czechoslovakia and the Netherlands in 1991, also illustrated the risk resulting from the re-nationalization of public sector services once investor-state settlement procedures are in place.

In the case, Achmea, a company belonging to a Dutch insurance group, set up a subsidiary in Slovakia with a view to offering private health insurance services. After a partial reversal of the privatization, Achmea brought an arbitration proceeding against Slovakia under their bilateral investment treaty (BIT), claiming financial losses through the re-nationalization steps.

Four years later, an arbitration panel in Frankfurt, Germany ordered the Slovak government to pay Achmea damages in the amount of approximately €22.1 million. Slovakia‘s complaint before the German courts went up to the German Federal Court of Justice, which finally asked the EU Court of Justice whether the arbitration clause contested by Slovakia was compatible with the Treaty on the Functioning of the European  Union in the first place.

In the case at the EU Court of Justice, which drew broad attention, the Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the European Commission supported Slovakia’s arguments.

Germany, France, the Netherlands, Austria and Finland contended, according to the EU Court of Justice‘s press release that “the clause at issue and, more generally, clauses of a similar kind commonly used in the 196 BITs currently in force between the Member States of the EU are valid.”

But the judges of the Grand Chamber in Luxembourg found today that the arbitration clause in the Slovak-Dutch BIT removed arbitration to private dispute settlement bodies and thereby away from the judicial system of the EU. Therefore, the Court concluded that “the BIT has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.”

While it is now up to the German Court to decide what happens with the damages awarded to Achema, legal experts are convinced that dispute settlement mechanisms in other, also plurilateral, agreements might come under additional scrutiny after the decision.