Top EU court finds arbitration deals between member states illegal

LUXEMBOURG (CN) — Four years after a Swedish court ordered the Polish government to pay a company millions, the European Court of Justice has tossed out the fine on the grounds that an arbitration clause in an international investment agreement is illegal. 

The European Union’s highest court reinforced its earlier decision in another case in which it held that EU countries cannot agree to arbitration that circumvents the court’s jurisdiction, rendering the judgment in favor of PL Holdings invalid. 

At issue was a clause in a 1987 investment treaty between Poland and BLEU, the Belgium/Luxembourg Economic Union. The treaty predated the EU’s single market, which wasn’t created until 1993. Under the agreement, disputes between investors would be referred to an arbitration tribunal. 

On the basis of that treaty, when the Polish government forced PL Holdings in 2013 to sell shares it held in two Polish banks, the company brought a complaint before the Arbitration Institute of the Stockholm Chamber of Commerce in Sweden. Poland claimed PL Holdings forced a merger of two banks so it could control 99% of the bank’s stock, which was illegal under Polish law. 

In 2017, the arbitration tribunal awarded PL Holdings 653 million Polish zloty ($174 million), but Warsaw appealed to a Swedish court, which ultimately referred the case to the Luxembourg-based European Court of Justice. 

In an earlier case, Dutch insurer Achmea had its own dispute resolution issue with the Slovakian government following a partial nationalization of the country’s health insurance market. Achmea brought a complaint before The Hague-based Permanent Court of Arbitration under a similar arbitration provision in a treaty between Slovakia and the Netherlands.

In its 2018 ruling known as the Achmea decision, the Court of Justice concluded these arbitration clauses circumvented the court itself, which was designed to be the final arbiter of EU law. 

In the PL Holdings case, the Swedish court wanted to know if there was any possibility for member states to enter into arbitration deals and the Court of Justice firmly concluded such agreements are contrary to EU law.

“Member states cannot undertake to remove from the judicial system of the European Union disputes which may concern the application and interpretation of EU law,” the 13-judge panel wrote. An opinion from a court magistrate earlier this year came to a similar conclusion. 

Tuesday’s decision is seen as the final nail in the coffin for arbitral dispute resolution agreements in the EU. It’s unclear how many of the 27-member states have signed treaties with such obligations. 

The ruling also ordered the Swedish court to overturn the award given to PL Holdings by Poland. 

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