On 22 April 2021, Advocate General Kokott issued her opinion on the preliminary reference referred by the Swedish Supreme Court in Poland v PL Holdings SARL (Case C‑109/20).
The case concerns the compatibility of intra-EU investment arbitration, but with a twist. The Swedish Supreme Court (SSC) did not ask whether the investor-state dispute resolution (ISDS) provision in the 1987 BLEU – Luxembourg (intra-EU) 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.
Essentially, the CJEU is asked to clarify its reasoning in para. 55 of the Achmea judgment on the (criticised and confounding) distinction between investment arbitration and commercial arbitration and on the consequence of a Member States’ lack of objection to jurisdiction under treaty arbitration. The importance of this question is obvious as regards the many contract-based investment arbitrations, but it is equally important and arguably more controversial as regard Member States’ ability to engage in (either commercial or investment) arbitration.
It has often been said that Achmea is not really about investment arbitration. Following AG Kokott’s opinion, it seems that neither is Poland v. PL Holdings. Her opinion adopts a constitutionally expansive reasoning and proposes a standard of review that is hardly in line with international arbitral practice. However, the reasoning does appear consistent with the CJEU’s construction of the constitutional EU judicial system. If the CJEU follows the AG’s opinion, Poland v. PL Holdings might well become even more (in)famous than Achmea and define the co-existence of the EU legal order with arbitration.
After a brief summary of the factual background, this post addresses the key points of the Advocate-General’s reasoning against the backdrop of the Achmea judgment, followed by a brief appraisal of the potential importance and consequences if the CJEU were to follow the reasoning of AG Kokott.
1. Procedural background: An untimely jurisdictional challenge as ‘freely expressed’ agreement?
The relevant procedural facts are easily summarized.
PL Holdings, a Luxembourgish investor acquired, i.a. through a merger, a 99% ownership of a Polish bank. The Polish financial supervisory authority considered this undesirable, and required PL Holdings to divest its shares from the bank while suspending its voting rights. The investor claimed a breach of the 1987 BLEU-Luxembourg BIT investment protection standards and commenced arbitration in Stockholm under the SCC arbitration rules. In those proceedings, Poland failed to timely raise an objection to the tribunal’s jurisdiction for lack of a valid arbitration agreement, as would have been required following Achmea. Consequently, under Swedish arbitration law (as in many others) that objection is deemed waived. In an annulment procedure, the Swedish Court of Appeal upheld the SCC award (p. 37) and held that it was neither required to consider that objection ex officio on the basis of the imbalance between the parties (referring to Mostaza claro), nor to send a preliminary reference to the CJEU. On appeal, the Swedish Supreme Court, as a court of last instance, sent the following question to the CJEU.
‘Do Articles 267 and 344 TFEU, […] mean that – where an investment agreement contains an arbitration clause that is invalid as a result of the fact that the contract was concluded between two Member States – an arbitration agreement is invalid if it has been concluded between a Member State and an investor by virtue of the fact that the Member State, after arbitration proceedings were commenced by the investor, refrains, by the free will of the State, from raising objections as to jurisdiction?’
2. Advocate General Kokott’s opinion
AG Kokott’s opinion is relatively brief despite the complexity and profound consequences of the questions raised. In only 85 paragraphs she comes to the conclusion that EU law does not necessarily preclude Member States from entering into individual arbitration agreements, provided that the sovereign application of EU law is subject to comprehensive review by national courts on the compatibility with EU law (paras 65 and 85).
The opinion builds on the three part reasoning set out in Achmea. In Achmea, the CJEU held that EU law precluded the application of ISDS provisions in international agreements between two Member States on the basis of a three pronged analysis. First, the CJEU considered whether the tribunal at issue ‘was liable to relate to the application or interpretation of EU law’. Second, whether that tribunal was situated ’within the EU judicial system’ so that it could make preliminary references to the CJEU and third, whether there was a sufficient measure of review over its award to ensure the proper interpretation and application of EU law. The CJEU ultimately held that because that tribunal was liable to relate to EU law, although it could not make a preliminary reference to the CJEU nor be reviewed by EU courts, such ISDS provisions are incompatible with the principle of mutual trust and the autonomy of EU law.
The AG here analyses the Swedish Supreme Court’s question by reference to those same three key factors of the Achmea reasoning in sections A and B of the opinion. Additionally she considers the principle of equality (C), whether the form of the agreement is relevant to the analysis (D) and whether the CJEU should adopt a limitation on the temporal effect of its judgment in the interest of legal certainty (E). I will consider these in turn. Nevertheless, the gravitas of the opinion clearly lies in sections A and B.
Firstly, in section A (paras 23-42), she considers the relevance of the test set out in Achmea. This starts with a reminder of the role and scope of Article 344 TFEU according to which Member States ‘undertake not to submit a dispute to any method of dispute settlement, other than those provided for in the EU Treaties’. This, according to the AG, applies both in general treaty-based and individual contract-based arbitration agreements (para. 27-29) since EU law makes no such distinction and has already considered an individual arbitration agreement between two Member States incompatible with Article 344 TFEU in the MOX plant case. This links to the general framework of the EU judicial system, in which ‘it is for the national courts and tribunals and the Court of Justice to ensure the full application of EU law in all Member States’ (para. 26). The preliminary reference procedure under Article 267 TFEU is a key component of this system. In conjunction with Article 344 TFEU, it aims to prevent Member States removing disputes from the jurisdiction of EU Courts to ensure the consistent and coherent interpretation of EU law.
Importantly, she considers that whether a ‘dispute is removed from the jurisdiction of EU courts’ depends on the subject matter of the dispute being adjudicated and not on the type of dispute resolution agreements (para. 31). Then, crucially, she submits that, although EU law was relevant, the arbitral tribunal did not as such apply EU law (para. 33). ‘Nevertheless, it proceeds on the basis of standards which, in the view taken by the arbitration tribunal, Poland should have observed when exercising the banking supervision provided for under EU law, for example with regard to proportionality or effective legal protection. While the arbitration tribunal assumes that those standards are in line with EU law, it does not comprehensively examine this question.’ In other words, the tribunal applies international investment law although EU law is also relevant to the dispute. Since the CJEU had already held in Achmea that intra-EU BIT arbitral tribunals are not ‘Courts or Tribunals of a Member State’ within the meaning of Article 267 TFEU (para. 36), they are by definition outside of the EU judicial dialogue and cannot send preliminary questions to the CJEU. Therefore, this removes a dispute relating to the interpretation or application of EU law, from EU courts (para. 34).
The AG thus concludes that there is a risk that arbitral decisions in this constellation would lead to violations of EU law (para. 39). Even if EU law is not part of the applicable law as such, and the risk to the uniformity of EU law appears low, she seems to argue in para 39, in line with the above-mentioned holding in MOX plant, that if the dispute at issue is also covered by EU law, it does not matter if a tribunal outside the EU judicial system applies EU law or not. The fact that that dispute is removed from its jurisdictional system is in itself incompatible with the EU treaties, since the allocation of powers enshrined in Article 344 TFEU is intended to ensure that disputes relating to EU law are resolved within the judicial dialogue established by the EU judicial system.
Secondly, in section B (para. 43-65), the opinion turns to examine the distinction between commercial and investment arbitration. Having established above that there is (i) a dispute covered by EU law, which is (ii) adjudicated outside and thus removed from the EU judicial system, the question is why that removal is incompatible with the EU Treaties when this has long been accepted for commercial arbitration. That was the infamously unclear para. 55 of the Achmea judgment, which many construed as meaning that commercial arbitration remained unaffected by the ruling. The CJEU hinged that distinction on the conclusion of the arbitration agreement by the ‘free will of the parties’ or ‘l’autonomie de la volonté des parties’.
The AG however connects that distinction to the nature of the parties involved, instead of on the nature or form of the agreement. She also flags that the relationship between a sovereign state as regards sovereign measures and an investor on its territory cannot as such be the subject of the latter’s free will. Consequently, this reasoning cannot apply to ISDS. But even more importantly, as opposed to private parties, EU Member States are bound by EU primary law and are to ensure the proper application and full effectiveness of EU law (Article 1, 2 and 4(3) TFEU). To that end, they are to provide for judicial remedies in respect of the areas covered by EU law (Article 19(1) TEU). The AG additionally revisits the irrelevance of that form in a separate section D (para. 72-79) to reinforce that point (infra). This distinction is convincing, since the fluidity and the lack of clear conceptual distinction between the type (investment or commercial purpose) and form (treaty or contract clause basis) of arbitrations all indeed support a construction on the nature of the subjects of the EU Treaty obligations, notably those in Articles 19(1) TEU, 267 and 344 TFEU.
Nevertheless, in Achmea (para. 50), the CJEU still considered that it could be compatible for Member States to arbitrate disputes covered by EU law in a forum outside of judicial system, provided that there is an effective remedy within the judicial system in line with the Member States’ obligation under Articles 19(1) TEU and 47 of the Charter.
AG Kokott takes up this point of redemption to consider that even when a Member State has referred a dispute to an arbitral tribunal outside of the EU judicial system, that practice may still be compatible ‘if the courts of the Member States not only review the arbitration award with regard to whether it complies with fundamental provisions of EU law, but comprehensively verify compliance with EU law and refer the matter to the Court if necessary’ (para. 62). Regrettably, she does not clarify what conditions such review should meet.
Thirdly, in section C (para. 66-71), she considers the principle of equality. She concludes that it is ultimately up the national courts to determine whether or not a differential treatment exists in any given case, and whether that differential treatment is justified under Article 20 of the Charter. What is conceptually important is that the principle of equality also applies to individual arbitration agreements of Member States. Moreover, the comparison made to international (investment or tax) agreements suggests that it is much harder to find an objective criterion for such differentiation, since it cannot be based on the balance between the legitimate interests in the negotiation of both contracting parties to an international treaty, which will necessarily find general application (para. 60). Instead, individual arbitrations, investment or commercial, involve a case by case decision that might therefore treat similar placed individuals differently and vice versa.
Fourthly, in section D (para. 72-79), AG Kokott considers the (lack of) importance of the form of an arbitration agreement in a subsidiary analysis in case the CJEU does not follow her prior reasoning. In other words, she considers whether it matters if the arbitration agreement was concluded on the basis of an individual agreement, either written or by entering an appearance, or by virtue of a more general treaty provision. She gives two compelling reasons why it should not. First, by failing to raise a jurisdictional objection, Member States can elect to circumvent the full consequences of the Achmea judgment, and therefore their own measure of compliance with their EU law obligations. Additionally, EU law simply does not regulate the question of jurisdictional competence ‘by entering an appearance‘ (para. 78) and therefore, it is an irrelevant consideration for its compliance with EU law.
Lastly, in section E (para. 80-84), she considers the fate of the pending and past arbitral awards. Should the CJEU limit the temporal effect of this ruling to future cases and leave already rendered awards unaffected for the sake of legal certainty? According to AG Kokott, the Court should not. Firstly, because it would be contrary to the requirement of good faith for any individual relying on the arbitration provisions on the expectation that EU law would not be fully applied (para. 82). Secondly, due to the fluidity between the general treaty arbitration agreements and individual arbitration agreements, such a limitation of the temporal effects would be inconsistent with the non-limitation of the effects in the judgment in Achmea.
3. Importance and consequences?
If the AG opinion is any measure, there is no doubt that Poland v. PL Holdings will become a landmark judgment. Not only because, en passant, it is the final nail in the coffer of intra-EU BIT ISDS, but because it has the potential to bring about entirely novel obligations on the Member States’ judicial organization through the duty of sincere cooperation in the EU judicial system. It also profoundly affects the relationship between international investment law and arbitration on a completely novel distinction based on the nature of the parties.
It imposes, firstly, a new limitation, through the construction of the EU judicial system, on the Member States’ ability to freely engage in arbitral dispute resolution agreements, if not in whole than at least in part for what the AG terms ‘sovereign application of EU law’. The significance of this term throughout para. 43-65 is less clear. If intended to limit the scope of the incompatibility to acta de jure imperii, it invites many questions of delimitation. Moreover, it seems contradictory to her conclusion in para. 56, that Member States’ obligations to enforce EU law are ‘not limited to compliance with fundamental rules, but concerns all rules of EU law’. Perhaps it will be remembered exactly for this very novel distinction? In any case, the AG suggests in reply to the questions raised after Achmea, that it is irrelevant whether EU law is part of the applicable law as such or not. What is relevant is that the dispute at issue is ‘covered’ by EU law, and the Member State at issue fails to apply it under Article 19(1) TEU by arbitrating such issue outside of the EU legal system, or at least without comprehensive review of the outcome in EU courts.
Secondly, it expressly imposes a requirement of full review over the otherwise generally light-handed review on arbitral awards in Member States’ legal orders. This creates a fundamental paradigm shift in the relationship between what were otherwise two parallel worlds. This shift will require Member States to consider with great(er) care how to integrate ADR policies in their respective legal order and their own practice. The latter, moreover, by definition entirely excludes participation in ICSID treaty arbitrations on account of its self-enforcing nature through Article 54 ICSID. Nevertheless, question marks remain, since the scope of the Member States’ obligation to refrain from entering into arbitration still remains unclear in the AG opinion due to the above-mentioned use of the term ‘sovereign’ as an additional qualifier. In such cases, Member States will have in essence two options to engage in arbitration if the Court where to follow this opinion. Either they must provide for arbitration under the rules of an independent and permanent arbitral body set up by a source of public law with compulsory jurisdiction such as those at issue in Merck Canada (paras 15-25) and Ascendi Beiras (paras 22-35), or they must foresee a specific level of review over arbitral awards for the type of arbitrations covered by the CJEU’s reasoning. Finally, it is understood that this obligation of review extends to all EU courts, such that it possibly interferes with Member States’ obligations under the New York Convention. The grounds for a refusal to recognize international arbitration awards are exhaustively expressed in Article V of the New York Convention. Those do not include full review for EU law beyond a limited set of public policy considerations. Therefore, an EU Court may be called on to recognize or enforce an award between an EU Member State and an individual under its obligations in the New York Convention, even though the principle of sincere cooperation mandates that it reviews such award for full compliance with EU law…
The question is of course whether the CJEU will follow the AG’s opinion. No doubt AG Kokott’s reasoning seems constitutionally expansive, but it is nevertheless sound in light of the prior jurisprudence. Clearly, if the ‘structured network of principles, rules and mutually interdependent legal relations’ that makes up the EU, imposes limitations on international dispute resolution, then it is rather obvious that the involvement of Member States in such dispute resolution is an important relevant factor, since the treaties’ obligations are indeed largely addressed to the Member States as an either intergovernmental or supranational organization of their mutual relations. This, in the author’s view, indeed justifies a distinction between compatible and incompatible arbitration agreements along the nature of the parties involved. But where to draw the lines on that nature may well remain unclear…
Given all these novel questions, certainly, the CJEU’s judgment in Poland v PL Holdings is one to watch out for!