Arbitrexit: is PL Holdings the beginning of the end of commercial arbitration in the EU?

For over a decade, there has been an increasing rift between EU and international investment law and international arbitration. My article ‘Arbitration, Investment, and EU Legal Order’ discusses the leading EU cases, as well as the Swedish court’s approach in PL Holdings, and the Vattenfall arbitration case.

The divide is explained by a certain narrow-mindedness on both sides (EU law and international arbitration), which to some extent lies in the nature of specialised regimes of general international law. As to the EU, its self-understanding and overall integrative purpose sits uneasily with economic freedom and party autonomy as basis for arbitration when it comes to EU Member States as contracting parties. It is possible that the initial pro-arbitration approach by the Court of Justice regarding commercial arbitration between private parties may be absorbed by the downward spiral for investment arbitration within the EU. The efficiency of commercial arbitration has already had to give way to the overarching EU principle of mutual trust in West Tankers. Following PL Holdings, the privileged treatment of commercial as opposed to investment arbitration appears further undermined. This is because the Court of Justice held that the prohibition to arbitrate on the basis of a standing offer in a bilateral investment treaty between EU Member States (Achmea) extended to an ad hoc arbitration agreement, which arguably replaced consensus under the treaty. According to the Court, any arbitration agreement concluded in an individual contract between an investor and an EU Member State is unlawful under EU law, if it could be seen as a circumvention of Achmea. Although the Court of Justice limits this to the specific circumstances of the facts underlying the PL Holdings case, there remains a risk that whenever an individual agrees to arbitrate with an EU Member State which has also concluded an investment treaty with the other party’s home state, this could be construed as circumvention of an arbitration under the investment treaty.

Compliance with Achmea and Komstroy, prohibiting intra-EU arbitration under bilateral investment treaties and the Energy Charter Treaty, respectively, creates a dilemma for EU Member States: how can this be squared with their international law obligation to honour arbitration agreements under the New York Convention? A narrow construction of Achmea as attempted by the Svea Court of Appeal in PL Holdings is no longer an option. Most recently, the German Bundesgerichtshof (BGH) acknowledged that even in an arbitration under the International Convention on the Settlement of Investment Disputes (ICSID), arbitral jurisdiction had to take a back seat relative to the requirements of EU law. As a matter of (general) international law, the attempt to accommodate these EU law obligations is unconvincing, but the overall result seems inevitable from an EU perspective. Arbitral tribunals on the other hand may follow in the steps of the Vattenfall tribunal and focus on their jurisdiction under international law. Alternatively, they might try and accommodate EU law, following the more recent approach taken by the tribunal in the case of Green Power v Spain. For arbitration users, this leaves the option of arbitrating without any involvement of EU Member State courts, for example by choosing an arbitration seat outside the EU. Economically, this will not benefit the EU.

As to the EU general public, the distrust in global business resorting to a confidential form of dispute settlement is unlikely to end. In this respect, the much more benevolent approach by the Court of Justice in Opinion 1/17 regarding the arbitration mechanism negotiated in modern EU trade and investment agreements with third countries must be seen critically. Time will tell whether this more institutionalized approach to dispute settlement can serve as a bridge between EU and international law. With regard to gaining public trust, it is highly doubtful whether the focus on details of dispute resolution in economic treaties by the EU will do the trick.

Konstanze von Papp is Professor of Public and EU Law, Hamburg University of Applied Sciences.