Switzerland stops the EU's «crusade against investment arbitration»

Achmea and Komstroy are not binding for the Federal Supreme Court

I. Introduction

In a landmark decision dated April 3, 2024 (4A_244/2023[1]), the Swiss Federal Supreme Court has decided the question of whether Swiss-seated arbitral tribunals have jurisdiction over intra-EU investment disputes – an issue which has been controversial in recent years, in particular in light of the case law of the Court of Justice of the European Union (CJEU), according to which arbitral tribunals seated in the European Union (EU) lack jurisdiction over such disputes.

The arbitration underlying the Federal Supreme Court’s decision had been introduced in 2016 by a French electricity company against the Kingdom of Spain (Spain) before an hoc arbitral tribunal on the basis of the Energy Charter Treaty (ECT) against certain tariff changes introduced by Spain in the renewable energy sector. In its award dated April 11, 2023 (Award), the arbitral tribunal held in favor of the French investor and condemned Spain to pay damages for breach of its fair and equitable treatment obligation under the ECT.

Spain raised several grounds of annulment in its request to set aside the Award, none of which withstood the scrutiny of the Federal Supreme Court. Of most interest is the argument raised by Spain concerning the jurisdiction of the arbitral tribunal, and in particular the allegation that the arbitration clause contained in Article 26 of the ECT,[2] a multilateral treaty signed inter alia by Spain, France and the EU, was not applicable to so-called intra-EU disputes, i.e., disputes between an EU member state and an investor from another EU member state. On the basis of the case law of the CJEU, Spain argued that the arbitral tribunal lacked jurisdiction to hear such disputes.

In its decision, the Federal Supreme Court rejected Spain’s arguments and confirmed the jurisdiction of the arbitral tribunal. Applying the rules of interpretation of the Vienna Convention on the Law of Treaties of 1969 (Vienna Convention), the Federal Supreme Court held that the ECT did not exclude intra-EU disputes from the scope of the arbitration clause in Article 26 of the ECT and that the arbitral tribunal had thus correctly declared itself competent. It also held – in no unclear terms – that the CJEU’s rulings on the incompatibility of arbitration clauses in intra-EU disputes were not binding on the Federal Supreme Court and that no particular weight should be attached to them.

Amongst the recent spate of anti-investment arbitration decisions taken by the EU institutions, the Federal Supreme Court’s decision must be hailed as a bold pro-arbitration stance confirming its unwavering support for arbitration and Switzerland’s position as a pro-arbitration jurisdiction.

II. Background of the decision: (No) investor-state dispute settlement in Europe

Before delving into the details of the decision of the Federal Supreme Court, it is worth summarizing two recent decisions of the CJEU, which significantly limit the jurisdiction of arbitral tribunals seated in the EU in connection with intra-EU investment disputes, on which Spain relied in its request to set aside the Award:

  • The Achmea decision is a landmark case decided by the CJEU on March 6, 2018 (Slovak Republic v. Achmea BV (Case C-284/16). This decision has had profound implications for investment arbitration within the EU, particularly concerning the compatibility of investor-state dispute settlement mechanisms with EU law. The case arose from a dispute between Achmea, a Dutch insurer, and the Slovak Republic. Achmea had made investments in the Slovak health insurance market. However, after the Slovak Republic reversed its liberalization of the health insurance market, Achmea initiated arbitration proceedings under the Netherlands-Slovakia Bilateral Investment Treaty (BIT), claiming that the reversal had harmed its investments. An arbitral tribunal, seated in Germany found in favor of Achmea and awarded it damages. The Slovak Republic challenged the award before the German courts, arguing that the arbitration clause in the BIT was incompatible with EU law. The matter was referred to the CJEU for a preliminary ruling. The CJEU held that the arbitration clause in the Netherlands-Slovakia BIT, i.e., an intra-EU BIT, was indeed incompatible with EU law. The court reasoned that such clauses could prevent disputes involving EU law from being resolved by the courts of the member states and could also affect the autonomy and effectiveness of EU law. The decision effectively meant that arbitration clauses in intra-EU BITs are not enforceable within the legal order of the EU.
  • On September 2, 2023, the CJEU handed down the Komstroy decision (Republic of Moldova v. Komstroy LLC (Case C-741/19), which is another significant ruling concerning the compatibility of investment arbitration agreements with EU law. This decision built upon the principles established in the Achmea ruling and further clarified the impact of EU law on investment arbitration clauses. Komstroy, a Ukrainian company, sought to enforce an arbitral award against the Republic of Moldova (en passant, a non-EU member state) under the ECT. The dispute related to an alleged breach of the fair and equitable treatment standard under the ECT. The Paris Court of Appeal referred several questions to the CJEU, including whether the ECT’s arbitration clause at Article 26 was compatible with EU law when applied to intra-EU disputes. The CJEU concluded that the arbitration clause in the ECT could not be applied to intra-EU disputes. The court emphasized that the arbitration clause, if applied within the EU, could prevent the full effectiveness of EU law by depriving the national courts of the EU member states of their jurisdiction to adjudicate such disputes.

Both the Achmea and Komstroy decisions underscore the CJEU’s stance on the primacy of EU law over international agreements with regard to intra-EU investment disputes. These decisions have led to significant debate and have had a considerable impact on the practice of international investment arbitration within the EU, particularly affecting the enforcement of investment awards and the structuring of investment protection.

III. The Federal Supreme Court rejects the Achmea and Komstroy decisions and upholds the jurisdiction of an arbitral tribunal seated in Switzerland to hear intra-EU investment disputes

In its recent decision, the Federal Supreme Court had to decide whether Article 26 ECT was incompatible with EU law, thus depriving Swiss-seated arbitral tribunals of their jurisdiction over intra-EU investment claims.

As a starting point, the Federal Supreme Court recalls in its decision that the present dispute is part of a broader context concerning the very legality of recourse to investment arbitration within the EU for the settlement of intra-EU investment disputes. According to the Federal Supreme Court, for several years now, EU bodies have been crusading against international investment arbitration, in particular through the Achmea and Komstroy decisions. According to the Federal Supreme Court, the decisions handed down by the CJEU, and in particular the Komstroy ruling, are not binding on a state court called upon to rule on an annulment request against an award made by an arbitral tribunal seated in Switzerland. Without mincing its words, the Federal Supreme Court found that it accords no value to these decisions, dismissing them as pro domo positions taken by the supreme European jurisdiction (cons. 6.5).

Accordingly, the Federal Supreme Court held that it would proceed with its own interpretation of Article 26 of the ECT, which, like any other treaty, must be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context, its object and purpose, and, although not expressly mentioned in Article 31 of the Vienna Convention, the principle of good faith (cons. 7.7.1). The Federal Supreme held that – interpreted in good faith – the term «unconditional» as contained in Article 26(3) of the ECT means that consent to arbitration is expressed without the slightest reservation and is therefore unrestricted. According to the Federal Supreme Court, there is nothing in the text of Article 26 of the ECT to suggest that the scope of the «unconditional consent» to arbitration is subject to other limits and does not cover disputes of an intra-European nature (cons. 7.7.1). The Federal Supreme Court also recalls that the ECT aims to promote international cooperation and investments in the energy sector – and this, without making any geographical distinction as to the origin of investors – in order to serve the ultimate cause of energy security. According to the Federal Supreme Court, granting investors based in an EU member state the right to initiate arbitration proceedings against another member state undoubtedly helps to achieve this goal (cons. 7.3).

The Federal Supreme Court also dismissed Spain’s argument relating to the relevance of the declaration of 22 EU member states of January 15, 2019 on the legal consequences of the Achmea judgment and on investment protection (Declaration) because it was not formulated by all contracting parties to the ECT, but only by certain (and not even all) EU member states. Thus, according to the Federal Supreme Court, the Declaration could not be regarded as a subsequent agreement between the parties concerning the interpretation of the ECT within the meaning of Article 31 of the Vienna Convention. The Federal Supreme Court also held that a closer look at the Declaration confirms that, in reality, it was not intended to interpret the provisions of the ECT, but only to clarify the legal consequences of the Achmea ruling, which had nothing to do with the ECT (cons. 7.5).

Finally, the Federal Supreme Court was not persuaded by Spain’s argument that the provisions of EU treaties should take precedence over Article 26 of the ECT in intra-European disputes, based on Article 31(3)(c) of the Vienna Convention. According to Spain, EU treaties, as interpreted by the CJEU, conflict with the ECT and thus invalidate consent to arbitration under the ECT. However, since Spain introduced new legal considerations regarding Articles 30 and 41 of the Vienna Convention only in its rebuttal submission in the set-aside proceedings, these were considered belated and thus inadmissible. Notwithstanding this, the Federal Supreme Court considered that even if they had been admissible, Spain’s allegations in this regard would not have prospered (cons. 8.1).

Therefore, the Federal Supreme Court rejected the objection of lack of jurisdiction raised by Spain and confirmed the jurisdiction of the arbitral tribunal to adjudicate an intra-EU investment dispute on the basis of Article 26 of the ECT.

IV. Conclusion

The decision of the Federal Supreme Court is ground-breaking in so far as it confirms that the anti-investment arbitration position taken by the EU and its various institutions will be confined within the boundaries of the EU and will not spill over, at least not in Switzerland, where arbitration agreements validly concluded, whether in a bilateral or multilateral investment agreement will continue to apply in full force. Thus, for investors contemplating intra-EU investments, dispute resolution by Swiss seated arbitral tribunals remains a safe option.

[1]         Link: 4A_244/2023 03.04.2024 – Schweizerisches Bundesgericht (bger.ch) .
[2]         Art. 26 ECT: «(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible, be settled amicably. (2) If such disputes cannot be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution: (a) to the courts or administrative tribunals of the Contracting Party party to the dispute; (b) in accordance with any applicable, previously agreed dispute settlement procedure; or (c) in accordance with the following paragraphs of this Article

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