The future of international business arbitration in Europe

On October 26, 2021, in Republic of Poland v PL Holdings Sarl, the Court of Justice of the European Union (CJEU) issued a decision that, on its face, appeared to be quite narrow. Previously, in its 2018 decision in Achmea BV v Slovak Republic, the CJEU had ruled that an EU member state cannot agree in a treaty to arbitrate its investment disputes with an investor from another EU country. Now, the CJEU has ruled that an EU member state cannot seek to side-step the Achmea judgment by agreeing to the same arbitration after the event through a contract or other conduct.

The risk for companies engaged in business in the EU is if this reasoning becomes applied more broadly. Indeed, the judgment’s reasoning should cause companies to carefully consider the viability of agreeing to arbitrate any dispute within the EU.

What did the court say?

In its 2018 Achmea judgment, the CJEU held that tribunals hearing investment disputes in those circumstances would necessarily interpret EU law, but that no European courts would thereafter have the power to ensure the tribunal had properly interpreted EU law. Thus, the CJEU reasoned, such “intra-EU investment arbitration”, if based on a treaty, was barred by EU law.

In Poland v PL Holdings, the company argued that Achmea did not apply because Poland had agreed to arbitrate an investor–state dispute by contract and conduct — i.e. outside the terms of an investment treaty. The CJEU disagreed, ruling that a post hoc arbitration agreement cannot side-step the Achmea ruling. The court held that a contractual agreement by an EU member state to arbitrate an investment dispute with an EU investor is just as susceptible to Achmea as a similar agreement found in a treaty.

The broader implications

Companies now have cause to doubt their ability to arbitrate significant categories of disputes altogether within the EU, and should carefully consider the risk raised by the potential broader repercussions of Poland v PL Holdings.

The CJEU has now ruled that contractual intra-EU investment arbitration is contrary to EU law just like treaty-based investment arbitration. Effectively, this means that no company based in the EU can agree to arbitrate an investment dispute with an EU member state.

It is unclear whether the CJEU’s ruling would apply, for example, to an agreement to arbitrate a purely commercial dispute with an organ or subsidiary of an EU member state. Can contractors be assured that their arbitration agreements with procurement departments of EU member states will be respected in EU jurisdictions? And what about arbitration clauses with state-owned companies? Such arbitrations arguably raise EU law issues. Under the CJEU’s reasoning, these arbitration clauses also may not be deemed valid.

To take the CJEU position to its fullest extent, even commercial arbitration agreements between purely private parties within the EU are no longer safe, as commercial arbitration tribunals arguably interpret EU law outside the supervision of an EU court.

Companies would be well-advised to pay attention to the double-effect of these CJEU rulings combined with the European Commission’s attempts to establish a permanent global investment court that would hear all disputes between foreign investors and states. While this initiative has received no support from the like of the US, UK, Japan, China, India or Russia, it still might come into existence. Such a court represents a significant risk for investors. This is in addition to all the other challenges of a permanent international judicial institution. If the CJEU’s rulings end investment arbitration in Europe, many states or businesses may not consider a multilateral investment court to be a desirable alternative.

Of course, many of these problems may be largely avoided by companies agreeing to arbitrate a dispute outside of the EU, in global arbitration centres such as London.

Robert Volterra is partner and Gunjan Sharma is counsel at public international law firm Volterra Fietta.