Hannes Lenk, PhD Candidate at the University of Gothenburg

The connection between arbitral tribunals and the Court of Justice of the European Union (CJEU) has been a source of legal debate for many years. While the present situation is straightforward and practical, it is not without controversy. Commercial arbitration tribunals are not seen as “courts or tribunals of a Member State” as defined by Article 267 of the Treaty on the Functioning of the European Union (TFEU). This means they can’t ask the CJEU to clarify EU law. However, it’s no secret that EU law issues surface in arbitration cases, and there’s a risk of tribunals misinterpreting it. In commercial arbitration, domestic courts and the CJEU can indirectly address these issues when recognizing and enforcing arbitral awards. This might not be possible in investment arbitration, and whether investment tribunals can request preliminary rulings from the CJEU has been debated for some time. This discussion is particularly relevant to the ongoing negotiations of trade and investment agreements with countries like Canada and the US. Advocate General Wathelet’s recent opinion might significantly impact this debate and set the stage for future judicial cooperation.

Commercial arbitration: from Nordsee to Eco Swiss

Article 267 TFEU plays a crucial role in ensuring consistency within the EU judicial system, which includes domestic courts as “ordinary courts of the EU legal order” (Opinion 1/09, para. 80). The preliminary reference mechanism fosters communication between courts, ensuring that individuals can enforce their EU law rights in domestic courts and promoting uniform interpretation and application of EU law across all Member States. Domestic courts typically decide whether to request a preliminary ruling and are only obligated to do so in specific circumstances, such as when the case is before a court of last resort.

Article 267

1. The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

(a) the interpretation of the Treaties;

(b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union;

2. Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.

3. Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court.

4. If such a question is raised in a case pending before a court or tribunal of a Member State with regard to a person in custody, the Court of Justice of the European Union shall act with the minimum of delay.'

However, Article 267 TFEU has a procedural limitation: only a “court or tribunal of a Member State” can request a ruling from the CJEU. The CJEU has consistently interpreted this concept narrowly. In Dorsch Consult, the CJEU outlined the characteristics of such a body: it should be (a) established by law, (b) a permanent institution, (c) with compulsory jurisdiction, (d) whose procedure is inter partes, (e) applying rules of law, and (f) acts independently of other government branches. Applying these criteria to a commercial arbitration tribunal in Nordsee, the CJEU determined that despite similarities with ordinary courts, the tribunal wasn’t a “court or tribunal” for preliminary rulings.

Arbitration tribunals, therefore, lack guidance on interpreting EU law when it’s relevant to their proceedings. From an EU law perspective, the negative impact of incorrect EU law interpretation and application in commercial arbitration is lessened by the indirect role of domestic courts, and thus the CJEU. Domestic courts play a significant role in supporting the arbitral tribunal when requested and in recognizing and enforcing arbitral awards. In Eco Swiss, the CJEU emphasized that domestic courts generally need to assess the compatibility of arbitral awards with EU public policy and may ask the CJEU for a preliminary ruling on this. The award in Eco Swiss was deemed a breach of EU competition rules (now Article 101 TFEU), which the CJEU considers “a fundamental provision which is essential for the accomplishment of tasks entrusted to the [Union]” (para. 36). The CJEU clarified that this is part of public policy under Article V(1)(c) and (e), and II(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, awards contradicting EU public policy aren’t enforceable in Member States under domestic or international law.

Investment arbitration: commercial arbitration in disguise or something else entirely?

This approach has been criticized, partly because the concept of EU public policy remains unclear. “Given the continuous assignment of additional tasks to the European Union over the past twenty years, it’s become progressively harder to pinpoint the provisions considered fundamental to these tasks.” (Basedow, p. 373). However, from an EU law perspective, it seems to offer a practical solution that reserves the CJEU’s involvement and guarantees the application of EU law in domestic courts. It’s been argued that using EU public policy during enforcement might prevent some of the most disputed awards from having legal force within the EU, especially in investment arbitration. However, investment arbitration differs from commercial arbitration in several ways. Most proceedings adhere to the rules of the International Centre for Settlement of Investment Disputes (ICSID). Article 54 ICSID mandates the automatic recognition and enforcement of awards, preventing domestic courts from reviewing ICSID awards for public policy compliance. To complicate matters, non-ICSID awards are frequently enforced outside the respondent state’s territory. For example, the controversial Micula award is currently seeking enforcement in the US.

Gaffney and Basedow have proposed that investment tribunals should be able to request rulings under Article 267 TFEU. The CJEU acknowledged in Nordsee that an arbitral tribunal could fall under Article 267 TFEU if its jurisdiction isn’t solely based on the parties’ autonomy but involves the exercise of state authority, making it a state institution. This view was reaffirmed in Ascendi, a request from Portugal’s Tribunal Arbitral Tributário. The CJEU noted that Portuguese law allows for resolving tax disputes through arbitration and regulates the tribunal’s function and composition. “[The Tribunal’s] jurisdiction derives directly from the provisions of Decree-Law No 10/2011 and is therefore not contingent upon the parties’ prior agreement to arbitrate,” the CJEU concluded (para. 29). Like the Tribunal Arbitral Tributário, investment tribunals are an alternative dispute resolution mechanism established by law, such as the investment agreement, constituting a “permanent fixture of the [domestic] judicial system” (Basedow, p. 379-380).

The proposal to classify investment tribunals as “courts or tribunals” under Article 267 TFEU is more than just an academic exercise. There are hints within the CJEU that this could be a viable solution to integrate investment tribunals into the EU legal framework. In his recent Opinion in Genentech, a preliminary ruling request from the Cour d’appel de Paris regarding EU public policy in enforcing arbitral awards, Advocate General Wathelet presented his carefully considered perspective on the relationship between arbitral tribunals and the CJEU. Initially, the AG reaffirms established case law in line with Nordsee and Eco Swiss.

‘Regarding the review of international arbitral awards’ compatibility with EU law through the public policy reservation […], the Court has determined that tribunals ‘formed under an agreement’ are not Member State courts under Article 267 TFEU. Therefore, they cannot request preliminary rulings. It’s the responsibility of Member State courts, as defined by Article 267 TFEU, to assess the compatibility of (international or domestic) arbitral awards with EU law if a case is brought before them for annulment or enforcement, or for any other legal action or review under the relevant national legislation.’

More compelling arguments are found in the footnotes. The AG specifically addresses investment tribunals, arguing that they should be treated differently.

Footnote 34

‘Based on this case-law, arbitral tribunals handling cases under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) could be considered capable of requesting preliminary rulings from the Court. See, in this regard, [Basedow], p. 376 to 381. Given the increasing number and scale of investment arbitrations involving EU law issues, especially in State aid, allowing tribunals to request preliminary rulings could help ensure the proper and effective application of EU law.’

These are just obiter dicta, and the CJEU is unlikely to address them directly in its final judgment, though it might agree with the AG’s stance. However, the opinion sends a strong message to investment tribunals: an invitation to request preliminary rulings from the CJEU on interpreting EU law.

Helping hand or last straw

Ideally, AG Wathelet’s opinion would be interpreted as an attempt by Luxembourg to find a mutually agreeable solution to the current conflict based on judicial dialogue and respect. However, so far, investment tribunals have been hesitant to engage with the CJEU on EU law matters. In other words, it seems that investment tribunals don’t see EU law as directly relevant to arbitration. For example, in Oostergetel and Laurentius, the tribunal acknowledged the “lack of any definitive position from the [CJEU]” on the relevant EU law issues but ultimately rejected the respondent’s request to refer a question to the CJEU with a domestic court’s assistance (para. 109). The tribunal in Micula dismissed concerns from the Commission that the potential award might be unenforceable under EU state aid law, essentially ignoring the conflict.

Gaffney suggested that the lack of guidance on EU law issues should prompt domestic courts to fulfill their responsibility under Article 267 TFEU. However, even domestic courts may hesitate to involve preliminary rulings in investment arbitration cases. When the jurisdiction award in Achmea was challenged in May 2012, the Higher Regional Court of Frankfurt determined that although EU law was raised during arbitration, the core issue was interpreting the investment agreement’s arbitration clause and thus outside EU law interpretation. The final award was challenged before the same court in December 2014. While acknowledging the debate about the compatibility of arbitration clauses in intra-EU investment agreements with the Treaties, the Frankfurt court declined to refer the question to the CJEU. These instances suggest a reluctance to involve the CJEU in arbitration. Instead of welcoming the CJEU’s invitation to refer questions, AG Wathelet’s opinion might be perceived as pressure on investment tribunals to accept EU law’s dominance and the CJEU’s jurisdiction.

Remaining challenges

Even if investment tribunals start referring questions to the CJEU, some issues remain. First, courts or tribunals with no higher appeal aren’t just allowed but obligated to refer questions on the interpretation and legality of EU law according to Article 267(3) TFEU. While domestic arbitration laws might allow for setting aside investment awards, this doesn’t prevent their enforcement under Article (1)(e) of the New York Convention in another state. Article 52 ICSID outlines an internal procedure for annulling ICSID awards on limited grounds, effectively excluding domestic courts. Since an investment award cannot be appealed or permanently set aside based on incorrect EU law interpretation, investment tribunals might fit the description in Article 267(3) TFEU.

The investment court system, recently included in the Comprehensive Economic and Trade Agreement with Canada (CETA) and the EU-Vietnam FTA, and proposed for the Transatlantic Trade and Investment Partnership with the US (TTIP), raises similar concerns. Tribunal decisions can be appealed to the Appeals Tribunal on grounds such as the incorrect interpretation of domestic law (as a matter of fact). While the first-instance Tribunal is exempt from the obligation under Article 267(3) TFEU, this burden ultimately falls upon the Appeals Tribunal. The more fundamental issue is that the EU Treaties can’t actually compel investment tribunals to refer questions to the CJEU.

Second, CJEU decisions under the preliminary reference procedure are binding on the referring court. Without specific provisions in the investment agreement, investment tribunals aren’t obligated to follow the CJEU’s interpretation (Gaffney, p. 13). There’s no apparent reason for tribunals to refer a question to the CJEU only to disregard the answer. Nevertheless, these two issues might affect the essence of Article 267 TFEU and the powers it grants the CJEU. According to established CJEU case law, this would undermine the autonomy of the EU legal order, violating the Treaty (Opinion 1/09, para. 77-79). Therefore, interpreting Article 267 TFEU in a way that encourages tribunals to refer questions but neither compels them to do so under Article 267(3) TFEU nor makes the CJEU’s answers binding would contradict the Treaties.

Third, and potentially most problematic, are denial of justice cases where the interpretation of domestic law itself is the basis for the investment dispute. It would be unusual for investment tribunals to request a preliminary ruling from the CJEU on a domestic court’s interpretation of EU law, especially if the CJEU was involved in the domestic proceedings. Under the EU-Vietnam FTA and CETA, such a scenario might fall under manifest arbitrariness (e.g. Article 8.10(2)(c) CETA). Gaffney highlights other challenges, such as the increasing backlog of preliminary references, which could prolong the arbitration process by several months or even years (p. 14).

Conclusions

While the CJEU’s approach to commercial arbitration is unlikely to change soon, AG Wathelet’s opinion strongly suggests that investment tribunals are a different matter. Whether the preliminary reference procedure can foster much-needed judicial cooperation between Luxembourg and investor-state tribunals remains uncertain.

Barnard & Peers: chapter 10

Photo: ICSID headquarters, Washington DC

Photo credit: icsid.worldbank.org