EU Investment Arbitration

Intra-EU BITs and the Achmea Judgment

The relationship between EU law and international investment arbitration was fundamentally transformed by the Court of Justice’s judgment in Slovak Republic v Achmea (Case C-284/16, 6 March 2018). The case arose from a dispute between a Dutch insurance company and the Slovak Republic under the Netherlands-Slovakia Bilateral Investment Treaty. The CJEU held that the arbitration clause in the BIT was incompatible with EU law because it established a mechanism for resolving disputes that could involve the interpretation or application of EU law, thereby undermining the autonomy of the EU legal order and the preliminary ruling procedure under Article 267 TFEU.

The Court reasoned that arbitration tribunals operating under intra-EU BITs could be called upon to interpret EU law without being able to refer preliminary questions to the CJEU, creating a parallel adjudicatory system that threatened the uniform interpretation and application of EU law. The judgment declared that Articles 267 and 344 TFEU preclude the application of arbitration clauses in intra-EU BITs, effectively invalidating the dispute resolution mechanism at the heart of over 190 bilateral investment treaties concluded between EU Member States.

The consequences of Achmea were immediate and far-reaching. EU Member States signed the Agreement for the Termination of Bilateral Investment Treaties between European Union Member States on 5 May 2020, a multilateral agreement that terminated all existing intra-EU BITs and provided for the progressive winding-down of pending disputes. The Termination Agreement addressed transitional arrangements, including the treatment of sunset clauses, pending arbitrations, and the status of awards already rendered. A significant number of arbitration tribunals and national courts have since applied the Achmea ruling, declining jurisdiction in intra-EU investment disputes.

The Investment Court System

The EU has pioneered a structural alternative to traditional investor-state arbitration through the Investment Court System (ICS), first proposed in the context of the Transatlantic Trade and Investment Partnership negotiations and subsequently incorporated into the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. The ICS replaces ad hoc arbitral tribunals with a permanent, institutionalised two-tier dispute resolution body consisting of a Tribunal of First Instance and an Appeal Tribunal.

Under CETA, the Tribunal of First Instance comprises fifteen members appointed jointly by the EU and Canada for a fixed term, with five members drawn from each side and five from third countries. Cases are heard by divisions of three members, with one member from each side and one from a third country serving as chair. The Appeal Tribunal may uphold, modify, or reverse tribunal decisions on grounds of error in the interpretation or application of applicable law, manifest errors in the appreciation of facts, or the grounds set out in the ICSID Convention annulment provisions. The ICS includes strict ethical requirements for tribunal members, rules on conflicts of interest, and provisions for the transparency of proceedings.

The Multilateral Investment Court Project

The EU has advocated for the establishment of a Multilateral Investment Court (MIC) to replace the fragmented system of investment dispute resolution under bilateral investment treaties. In 2017, the Council of the European Union authorised the Commission to negotiate a convention establishing a multilateral court for the resolution of investment disputes, and the proposal has been discussed within the framework of the United Nations Commission on International Trade Law (UNCITRAL) Working Group III on Investor-State Dispute Settlement Reform.

The proposed MIC would be a permanent international court with jurisdiction over investment disputes, composed of full-time, tenured judges with fixed remuneration and stringent ethical requirements. The court would have an appellate mechanism to ensure consistency and correctness of decisions, and its members would be subject to strict rules on independence, impartiality, and conflicts of interest. The MIC project reflects the EU’s broader objective of replacing ad hoc arbitration with a judicialised system that incorporates the procedural safeguards and legitimacy characteristics of domestic and international courts.

The EU has faced significant challenges in advancing the MIC project, including divergent positions among states on the desirability of retaining investment arbitration, the scope of the court’s jurisdiction, the relationship with existing treaty frameworks such as the Energy Charter Treaty, and the financial and institutional arrangements for the court’s operation. The Commission continues to pursue the MIC as a long-term objective, embedding ICS mechanisms in new-generation EU trade and investment agreements as transitional arrangements pending the establishment of the multilateral court.

The Energy Charter Treaty and EU Law

The Energy Charter Treaty (ECT), a multilateral investment and trade treaty to which both the EU and its Member States are parties, has generated significant tensions with EU law following the Achmea judgment. In Komstroy v Moldova (Case C-741/19, 2 September 2021), the CJEU extended the reasoning of Achmea to arbitration clauses in the ECT, holding that investor-state arbitration between an investor from one Member State and another Member State under Article 26 of the ECT is incompatible with EU law.

The Komstroy ruling raised questions about the validity of arbitration clauses in the ECT in the intra-EU context and has been applied by national courts to set aside ECT awards rendered in intra-EU disputes. The EU and its Member States have pursued coordinated action to modernise and ultimately withdraw from the ECT, with the Commission proposing a coordinated withdrawal from the treaty and the adoption of a common position on the application of sunset clauses.

Sunset Clauses and Transitional Arrangements

Sunset clauses in investment treaties typically provide that investments made before the termination of the treaty remain protected for a specified period, often ten to twenty years. The treatment of sunset clauses in the context of the termination of intra-EU BITs and the potential withdrawal from the ECT has been the subject of intensive legal debate. The 2020 Termination Agreement provides that sunset clauses in terminated intra-EU BITs do not apply, meaning that protection ceases immediately upon termination.

The EU’s position on sunset clauses reflects the constitutional imperative of ensuring the autonomy and effectiveness of EU law. The Commission has maintained that sunset clauses in intra-EU BITs are incompatible with EU law and that the Achmea and Komstroy rulings preclude any continued application of such provisions within the EU legal order. This position has been contested by some investors and by certain arbitration tribunals, generating ongoing litigation before national courts and the CJEU concerning the scope of the sunset clause exclusion.

Conclusion

The EU’s approach to investment arbitration reflects a fundamental reconceptualisation of the relationship between international investment law and the EU legal order. The Achmea judgment and its progeny have dismantled the system of intra-EU investment arbitration, while the ICS and MIC projects represent efforts to construct a new institutional architecture that reconciles investment protection with the constitutional requirements of EU law. The evolution of this area continues to generate significant legal controversy, particularly concerning the Energy Charter Treaty and the treatment of pending and future investment disputes.