European Union: Ground-Breaking Referral: Are Arbitration Clauses In Bits Between EU Member States Void?

In recent years, the number and economic relevance of bilateral investment treaties ("BITs") has significantly increased. BITs are international treaties which provide for assurances in favour of investors from the contracting states, such as freedom from expropriation and for fair and equitable treatment. Another important feature of BITs is that they usually provide for disputes to be resolved by way of arbitration. Investment disputes can come more into the public spotlight if and when a contracting state or investor asks a state court to quash a final award.

One such case recently caused a stir, because the respondent, Slovakia (the Slovak Republic), resorted to an innovative line of reasoning under EU law. Slovakia sought to avoid liability for damages to the tune of € 22 million by arguing that the arbitration clause in the BIT at issue is incompatible with EU law and thus void. In an as yet unpublished decision of 3 March 2015, which is summarised in an official press release of 10 May 2016, the German Federal Supreme Court highlights that there is no established case-law and so the European Court of Justice ("CJEU") in Luxemburg will have to provide guidance.

The underlying investment dispute Czechoslovakia and the Netherlands concluded a BIT in 1992. Only a few months later the two constituent parts of Czechoslovakia went their separate ways. Slovakia, one of the legal successors and the respondent in the arbitration proceedings at issue, became an EU Member State in 2004.

In that same year, Slovakia decided to de-regulate the insurance sector. This motivated a Dutch insurance company to set up a subsidiary in Slovakia and start doing business in the country. However, following a change of government Slovakia made a U-turn in 2006 and introduced several pieces of legislation that provided for strict regulation of the insurance sector. Under the new legal regime, it was not permissible to retain the services of policy brokers, to distribute profits or to sell insurance policy portfolios. Eventually the constitutional court held that the ban on distributing profits was illegal. Slovakia accordingly amended its laws in 2011.

The applicant Dutch company brought arbitration proceedings against Slovakia. It argued that Slovakia was in breach of the guarantee of fair and equitable treatment. Further, under the BIT, it argued that Slovakia was obliged to allow a distribution of profits. As a result of the regulations imposed on the insurance sector the applicant contended that it had suffered significant losses. In its reply, Slovakia argued that the arbitral tribunal lacked jurisdiction. The arbitration clause in the BIT at hand was allegedly incompatible with EU law and therefore void. The tribunal, however, took the view that it had jurisdiction, and it awarded the applicant damages of more than € 22 million.

Implications of EU law Slovakia did not accept that decision and initiated proceedings before the Higher Regional Court of Frankfurt asking it to quash the arbitral award. When the Frankfurt judges refused to do this, the respondent filed an appeal. So the German case is currently pending before the Federal Supreme Court in Karlsruhe (I ZB 2/15).

In its press release of 10 May 2016, the Federal Supreme Court highlighted that this is the first known case relating to a BIT between two EU Member States. According to the doctrine of dominance of EU law, if there is a collision between provisions in an international treaty between Member States and EU law the latter will prevail. However, there is no established case-law regarding the specific arguments raised by the respondent Slovakia. Accordingly, the Federal Supreme Court referred the case to the CJEU asking for guidance on whether the arbitration clause in the BIT is void.

The line of reasoning of Slovakia is three-fold. First, it argues that the arbitration clause is not compatible with Art. 344 of the Treaty on the Functioning of the EU ("TFEU"). That article reads as follows: "Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein". The Federal Supreme Court takes the view that Art. 344 is not relevant in the current circumstances. That is because the EU Treaties do not provide for proceedings in which an investor from a Member State may bring damages claims against another Member State. Hence Art. 344 TFEU does not bar contracting Member States from providing for alternative dispute resolution in a BIT.

Slovakia's second argument is under Art. 267 TFEU according to which the CJEU is entrusted with the task of safeguarding the uniform interpretation of EU law by issuing preliminary rulings. According to Slovakia, the CJEU cannot fulfil its task if an investment dispute is decided by an arbitral tribunal which cannot refer the case to the CJEU. Slovakia did, however, concede that it was possible to ask a state court to quash a final award and that the state court could then refer the case to Luxembourg. The obvious counter argument is that the review of the final award by a state court will be limited to violations of the ordre public, i.e. particularly important principles of law. In its press release, the Federal Supreme Court indicates that the possible review of final awards by state courts (and, in effect, the CJEU) may nonetheless be sufficient to safeguard the uniform interpretation of EU law.

The third argument raised by Slovakia relates to Art. 18 TFEU, which prohibits any discrimination on the ground of nationality. If a BIT between two Member States provides that only investors from the contracting Member States may bring arbitration proceedings against the other contracting state, this arguably has a discriminatory effect. That is because the BIT only confers advantages on investors from the contracting states, none of the other Member States. The wording of the press release of the Federal Supreme Court is cautious. The Karlsruhe judges tentatively indicated that there may be a way to avoid discrimination in terms of Art. 18 TFEU. It might be possible to bring the arbitration clause in line with EU law by giving it an extremely broad interpretation. According to that broad interpretation, the arbitration clause does not only allow investors from the Netherlands but investors from any Member State to bring investment disputes against Slovakia. From a German perspective, it is conceivable to "interpret" clauses against their literal meaning so as to safeguard compliance with EU law. Judges from other Member States, such as the UK, are much less inclined to do this. It remains to be seen whether the CJEU is prepared to accept this solution.

Outlook and implications The referral of the Federal Supreme Court has potentially significant implications for parties to BITs. For the first time the CJEU will have an opportunity to decide whether, and under which circumstances, EU Member States can conclude BITs that include a standard arbitration clause. The line of reasoning of Slovakia in the underlying investment dispute is innovative and it throws up several important issues under EU law. In particular, the risk of discriminating investors from non-contracting EU Member States cannot be ignored. Whether the CJEU will concur with the views of the German judges is far from clear. It may take up to two years to receive answers from the Luxembourg court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.