In its judgment in Poland v PL Holdings of 26 October 2021 (C-109/20), the European Court of Justice (ECJ) dealt another blow to the resolution of disputes between an investor of one Member State and another Member State via arbitral tribunals. Having already invalidated treaty-based arbitration clauses in its Achmea (2018) and Komstroy (2021) judgments, the ECJ also now takes aim at the practice of ad hoc arbitration agreements. The judgment is particularly important for investors of Belgium and Luxembourg in Poland as it directly concerns the 1987 bilateral investment treaty between Belgium and Luxembourg, on the one hand, and Poland, on the other hand (BIT).
Facts
A Luxembourg company, PL Holdings, acquired shares in two Polish banks, which merged in 2013. PL Holdings acquired more than 99% of the shares in the new bank. In July 2013, the Polish Financial Supervision Authority decided to suspend the voting rights attached to the shares and forced PL Holdings to sell those shares.
PL Holdings instituted arbitration proceedings against Poland before the Arbitration Institute of the Swedish Chamber of Commerce (SCC) under the 1987 BIT. Poland challenged the jurisdiction of the tribunal on the ground that PL Holdings was not an investor. Half a year later, Poland expanded on its defence and challenged the jurisdiction of the arbitral tribunal, also on the grounds that the arbitration clause in the BIT was contrary to EU law.
By a partial arbitral award of 28 June 2017, the arbitration tribunal declared it had jurisdiction on the basis of the BIT and found that Poland had infringed the BIT. And in an arbitral award of 28 September 2017, Poland was ordered to pay damages to PL Holdings as well as the costs of the proceedings.
The action of Poland to set both awards aside was dismissed by a Swedish Court of Appeal. While that court, referring to the Achmea judgment, agreed that the arbitration clause in the BIT was invalid because it was contrary to EU law, it held that the invalidity of the arbitration clause did not prevent a Member State and an investor from another Member State from concluding an ad hoc arbitration agreement at a later stage in order to settle that dispute. It then concluded that Poland had tacitly agreed to an ad hoc arbitration agreement since it had challenged the jurisdiction of the arbitral tribunal out of time. Poland appealed to the Swedish Supreme Court, which referred the issue to the ECJ.
Decision
The ECJ decided that such an ad hoc agreement is contrary to EU law. It pointed out that Member States cannot conclude such agreements as this would amount to circumventing the Achmea case law, which runs counter to their duty of sincere cooperation.
The ECJ also rejected the argument that reliance by an investor on an invalid arbitration clause in a bilateral investment treaty constituted an offer of arbitration to the defendant Member State. Such an approach would equally circumvent the Achmea case law, as the effects of the invalid arbitration clause would be maintained unless the Member State would raise specific arguments against the existence of an ad hoc arbitration agreement.
Finally, since Member States cannot undertake to remove disputes which may concern the application of EU law from the judicial system of the European Union, they are required to challenge the validity of arbitration clauses or ad hoc arbitration clauses. It is thus not possible for them to remedy the invalidity of an arbitration clause by means of a contract. Such contracts are illegal under EU law.
Consequences
While the ECJ is at pains to limit its decision to the specific situation in which the invalidity of an arbitration clause in a bilateral investment treaty has been remedied by an ad hoc arbitration agreement, the judgment is another step in the direction of excluding arbitration for intra-EU investment disputes.
Further to this, the judgment has important consequences for investors from Belgium and Luxembourg in Poland. They will from now on need to seek redress in the Polish courts to vindicate their rights under the BIT and can thus no longer count on an independent body to adjudicate their claims.
Author: Janek Nowak, Attorney at &DE BANDT
