Global Arbitration News | 22 April 2021
Higher Regional Court Frankfurt holds that Achmea-decision is transferable to arbitration clauses in other BITs
by Annette Keilmann
In its Achmea-decision, the ECJ decided that EU member states must not settle their disputes in arbitration proceedings agreed upon in bilateral intra-EU investment treaties (here: the BIT between the Netherlands and Slovakia) (see https://globalarbitrationnews.com/ecj-stops-investment-arbitration-intra-eu/). The Higher Regional Court Frankfurt recently had to deal with the question whether the ruling in Achmea is transferable to other intra-EU-BITs, namely the BIT between Croatia and Austria. In this case, the investors argued that the Achmea-decision was based on specific considerations which would not apply in the case at hand. This argument was not successful. Rather, the Higher Regional Court held that there was no room for reasonable doubt that the arbitration clause in the BIT was invalid based on the rulings in Achmea.
A Croatian and an Austrian bank both provide financial services in the Croatian market. The banks raised damage claims against Croatia in connection with the amendment of Croatian insolvency law and an alleged systematic denial of legal protection by the Croatian courts. Croatia and Austria have concluded a BIT. According to Art. 9 para. 2 of the BIT, arbitration proceedings are conducted in case of disputes arising from an investment. The banks thus initiated arbitration proceedings pursuant to Art. 9 para. 2 at the agreed place of arbitration, Frankfurt am Main. Croatia then requested the Higher Regional Court to declare that the arbitration proceedings are inadmissible as Art. 9 para. 2 BIT was not compatible with EU law. The investors defended the validity of the clause.
Arguments raised to defend validity of the arbitration clause
The investors argued that the Achmea-decision was based on a detailed analysis of the choice of law clause in the specific BIT, according to which the arbitral tribunal would have had to interpret or even apply EU law in the specific case. In contrast, an arbitral tribunal seized under the Croatia/Austria BIT would have to apply only the BIT and general principles of international law. Therefore, in the investors’ view, there is no risk that the arbitral tribunal would also have to interpret or even apply EU law in the case at hand.
Art. 11 of the BIT would not change this. According to this provision, the arbitral tribunal would have to examine whether a provision of the BIT is incompatible with EU law. The investors argue that in this case the tribunal would only establish the EU law as a fact. They point to the CETA opinion according to which it would not be contrary to EU law for a court outside the EU judicial system to assess the compatibility of an EU or Member State measure with the CETA Agreement, because in doing so it was determining the scope of that measure only as a matter of fact. The investors take the view that Art. 11 of the BIT only contains a provision on the interpretation and application of the BIT, i.e. a provision which is not part of EU law. The Achmea-decision would not state that arbitration clauses are in conflict with EU law irrespective of the law which the arbitral tribunal has to apply.
In addition, the investors argued that arbitral tribunals would have a possibility to submit questions to the ECJ, namely by way of requests for legal assistance to state courts.
Finally, the investors took the view that the principles of the Achmea-decision would not apply in the case at hand because the principles of loyal cooperation and mutual trust do not apply in the specific case due to exceptional circumstances, i.e. because of severe deficits in the Croatian legal system and the Croatian courts’ denial to make use of Art. 267 TFEU.
Decision of the court
The Higher Regional Court found that Art. 9 para. 2 of the BIT violates EU law in accordance with the legal principles established in the Achmea-decision. Therefore, the arbitration clause was invalid. In the view of the court, the Achmea-decision is to be understood as a decision of principle and acquires significance beyond the individual case for all BIT agreements between EU Member States.
According to the Achmea-decision, Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept. According to the ECJ, it is up to the national courts and the ECJ to ensure the full application of EU law, e.g. by way of the preliminary ruling procedure pursuant to Art. 267 TFEU. Yet, arbitral tribunals are not entitled to make a reference to the ECJ for a preliminary ruling. Therefore, in the ECJ’s view, arbitration clauses in BITs have an adverse effect on the autonomy of EU law.
In the case before the Higher Regional Court, the court found that it is possible that an arbitral tribunal called upon pursuant to Art. 9 para. 2 of the Croatia/Austria-BIT would also have to apply EU law, even if EU law does not form the standard of review of the arbitral tribunal. This is because the legality of an investment is governed by EU law in addition to Croatian and Austrian law.
Furthermore, the application of the BIT is excluded according to its Art. 11 para. 2 if it is contrary to EU law. Therefore, the arbitral tribunal must in any case refer to EU law in this context as well and take EU law into account as a standard of comparison. The Higher Regional Court rejected the argument based on the CETA-opinion. The autonomy of EU law would already be impaired if there was a possibility that EU law will become relevant, even if it does not form the standard for the arbitral tribunal’s review.
Thus, in the view of the Higher Regional Court, the arbitral tribunal may have to apply EU law. Nevertheless, the arbitral tribunal would be precluded from submitting questions to the ECJ. The mere possibility that national law may provide for judicial review of arbitral awards does not lead to the compatibility of Art. 9 para. 2 with EU law.
The Higher Regional Court thus concluded that Art. 9 para. 2 of the Croatia/Austria BIT is incompatible with EU law and that therefore there is no valid arbitration agreement. Finally, the court decided that a valid arbitration agreement cannot be inferred from the principles of good faith. The investors had to be prepared for the fact that provisions of the BIT are no longer applicable if they are incompatible with EU law as the investments were made after Croatia had become a member of the EU. Also, it must not be concluded from the fact that the EU commission has not challenged the existing BITs and that Croatia, at the time, had not terminated the BIT that the investors could continue to rely on the validity of all clauses in the BIT. Possible defects in Croatia’s legal system, as alleged by the investors, do not change the fact that the arbitration clause in the BIT is incompatible with EU law. According to the Higher Regional Court, this is so clear in light of the Achmea-decision that the court does not have to submit the issue to the ECJ pursuant to Art. 267 TFEU (“acte clair“), as had been requested by the investors.
While there are some tendencies to possibly limit the consequences of the Achmea-decision, parties relying on the arbitration clause in an intra-EU-BIT will have to fight an uphill battle.
 C-284/16, https://curia.europa.eu/juris/documents.jsf?num=C-284/16.
 OLG Frankfurt, 26 SchH2/20, available at https://www.rv.hessenrecht.hessen.de/bshe/document/LARE210000373; in German).
 Opinion 1/17 of the ECJ, https://curia.europa.eu/juris/document/document.jsf?docid=213502&doclang=EN.
 https://globalarbitrationnews.com/vattenfall-tribunal-mitigates-the-achmea-effect-20180913/; https://globalarbitrationnews.com/the-swedish-supreme-court-requests-a-preliminary-ruling-from-the-cjeu-on-the-validity-of-an-arbitration-agreement-in-light-of-the-achmea-ruling/