The Achmea Quake: Fallout and the Restructuring of Investment Protection in Europe

⚖️ The Achmea Quake: Fallout and the Restructuring of Investment Protection in Europe

The European Court of Justice (CJEU)'s landmark ruling in Slowakische Republik v Achmea BV (C-284/16) in March 2018 sent an unprecedented tremor through the world of international investment law. By finding that the investor-State arbitration clause in the Bilateral Investment Treaty (BIT) between the Netherlands and Slovakia was incompatible with EU law, the CJEU set the stage for a fundamental overhaul of investment protection within the Union.

Five years on, the "Achmea fallout" is not merely a historical case study; it remains a powerful, evolving force that continues to reshape the legal landscape for investment and commercial contracts across Europe.

1. The Core of the Decision: Autonomy and Judicial Supremacy

At its heart, the Achmea decision is about the autonomy and supremacy of the EU legal order. The CJEU argued that investor-State arbitration (ISDS) clauses in intra-EU BITs undermine key principles of EU law, primarily:

· Preliminary Ruling System (Art. 267 TFEU): Arbitral tribunals, not being courts or tribunals of a Member State, are unable to refer questions on the interpretation or validity of EU law to the CJEU. This inability prevents the uniform application of EU law, a cornerstone of the Union.

· Principle of Sincere Cooperation (Art. 4(3) TEU) and Autonomy: By agreeing to a dispute settlement mechanism that operates outside the EU judicial framework and whose decisions cannot be adequately reviewed by EU courts on matters of EU law, Member States breached their obligations to secure the full effectiveness of the EU legal order.

The ruling was, therefore, a decisive assertion that, within the single market, a parallel justice system for investors and Member States is unacceptable if it risks undermining the uniform application of EU law.

2. Continuing Implications for Investment Protection: The Domino Effect

The immediate and subsequent implications for investment protection have been profound, initiating a process to dismantle the intra-EU BIT regime.

A. The Demise of Intra-EU BITs

Following the ruling, the European Commission intensified its campaign to terminate all approximately 200 intra-EU BITs.

· The Termination Agreement (2020): 23 EU Member States signed an agreement to terminate these treaties, formalising the end of the intra-EU BIT system. This agreement provides that the arbitration clauses in these BITs shall not serve as a legal basis for new arbitrations.

· Sunset Clauses: A key remaining complexity is the status of "sunset clauses," which typically allow investors to bring claims for a fixed period (often 10-20 years) after a treaty's termination. While the Termination Agreement attempts to nullify the effect of these clauses for intra-EU disputes, investors continue to argue for their protection under international law, especially in non-EU seated arbitrations.

· The Energy Charter Treaty (ECT): The Achmea reasoning was explicitly extended to intra-EU disputes under the multilateral ECT in the subsequent CJEU case Republic of Moldova v Komstroy LLC (C-741/19). This marks a significant broadening of the scope and places the future of the ECT in Europe in serious doubt.

B. Enforcement and Jurisdictional Challenges

The ruling has turned award enforcement into a legal minefield for intra-EU BIT claims:

· Refusal of Enforcement in EU Courts: Courts in EU Member States are generally required to refuse the recognition and enforcement of arbitral awards based on intra-EU BITs, often on the grounds that the underlying arbitration agreement is invalid or contrary to EU public policy.

· Non-EU Seats: Awards seated outside the EU (e.g., in London or Switzerland) have presented a challenge. While some non-EU seated tribunals have dismissed the Achmea argument as irrelevant under international law, the resulting awards still face significant hurdles if the investor attempts to enforce them against an EU Member State's assets within the EU.

3. The Achmea Principle and Commercial Contracts: A Narrow Escape (for Now)

The crucial question for the commercial world was whether the Achmea ruling would extend beyond State-to-State treaties and invalidate arbitration clauses in contracts between an EU Member State and a private commercial party (commercial arbitration).

A. The Distinction Drawn by the CJEU

The CJEU, both in Achmea and subsequent rulings, has consistently maintained a distinction:

Feature	Investment Arbitration (BITs)	Commercial Arbitration (Contracts)
Origin of Consent	Unilateral state offer (in the BIT) accepted by the investor. Consent is rooted in a public international law treaty.	Mutual and voluntary consent of both commercial parties in a contract.
EU Law Risk	High, as the tribunal derives its jurisdiction from a public international law instrument and may be forced to interpret EU law when reviewing sovereign acts.	Lower, as it is a private contractual dispute, and national courts retain a more robust review power over awards.

B. Impact on Commercial Contracts

For now, classic commercial arbitration clauses in contracts between two private parties remain largely unaffected by the Achmea ruling. The CJEU considers commercial arbitration to stem from the "freely expressed wishes of the parties" and subject to adequate review by national courts, which can refer preliminary questions to the CJEU.

However, the line becomes blurred in "investment contracts"—contracts directly between a private investor and a State or State entity that include an arbitration clause. Legal debate persists on whether an arbitration clause in an investment contract concerning a purely internal EU matter might be challenged if it is deemed to circumvent the principles set out in Achmea. This area requires careful drafting and jurisdictional planning by commercial parties.

4. The Future: A New EU Investment Architecture

The vacuum left by the collapse of intra-EU BITs must be filled. The European Union has a clear preference for a new system that fully respects EU law:

· Member State Courts: The primary avenue for dispute resolution for intra-EU investors is now the domestic courts of the host Member State, subject to the preliminary ruling mechanism of the CJEU.

· Multilateral Investment Court (MIC) Concept: The EU is actively promoting the creation of an international Investment Court System (ICS) and eventually a Multilateral Investment Court for extra-EU relations (e.g., in agreements with Canada and Vietnam). The ICS is designed to address the concerns raised in Achmea by having an appeal mechanism and permanently appointed judges, though its acceptance by other global partners remains uncertain.

Key Takeaway for Businesses and Legal Counsel

The Achmea ruling is a paradigm shift. Investors in Europe can no longer rely on pre-existing intra-EU BITs for protection.

For any cross-border investment within the EU, businesses must:

1. Conduct Rigorous Due Diligence: Explicitly consider the domestic legal frameworks of the host Member State, as national courts are now the primary remedy.

2. Rethink Dispute Resolution: For commercial contracts with State entities, ensure arbitration clauses are carefully structured to maximise their characterisation as commercial rather than treaty-based arbitration, and consider a seat of arbitration that offers predictability.

3. Explore Alternative Protection: Look to non-BIT treaty mechanisms (like the ICS provisions in modern EU treaties) or political risk insurance to mitigate against regulatory risk.

The fallout from Achmea confirms a singular truth: within the European Union, the fundamental principles of the EU legal order—uniformity and autonomy—will prevail over pre-existing arrangements for investment protection.