Introduction

On 14 October 2020 Slovakia ratified the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (Termination Treaty), which was signed by 23 member states on 5 May 2020 and entered into force on 29 August 2020. The Termination Treaty purports to implement the decision of the European Court of Justice (ECJ) in Slowakische Republic v Achmea BV (Case C-284/16), dated 6 March 2018, in which the ECJ held that a dispute resolution provision contained in the agreement on reciprocal investment protection and promotion between the Netherlands and Slovakia was incompatible with EU law. By ratifying the Termination Treaty, Slovakia has terminated all of its bilateral agreements on the encouragement and reciprocal protection of investments (referred to as 'bilateral investment treaties' or 'BITs') with the other signatories to the Termination Treaty, with effect from 13 November 2020.

The BITs protected qualifying investments of EU investors against, among other things, unfair or inequitable treatment, discrimination and expropriation by the member state hosting their investments and gave them direct access to arbitration. As such, EU investors in Slovakia as well as Slovak investors in other signatory member states are left with limited remedies against measures of the host member state that do not adequately replace the regime dismantled by the Termination Treaty. Therefore, investors are advised to structure their investments into Slovakia and other EU countries through vehicles incorporated outside the European Union or, where possible, enter into a direct agreement with the host member state and provide for any disputes to be resolved by arbitration outside the European Union.

Facts

The Termination Treaty is the fall out of the ECJ's judgment in Achmea. The arbitration underlying Achmea concerned the much politicised ban on profits imposed by the Slovak government on health insurers operating in Slovakia in 2006 and 2007. Union zdravotná poistovna, held by Eureko BV (renamed Achmea Holdings BV following a merger) (Achmea), was one of the affected health insurers. Achmea initiated United Nations Commission on International Trade Law arbitration proceedings against Slovakia under the Netherlands-Slovakia BIT on 1 October 2008, seeking €65 million in damages. Slovakia sought to set aside the tribunal's award on jurisdiction, issued on 26 October 2010, which rejected Slovakia's arguments that the tribunal did not have jurisdiction to hear the claims because, on Slovakia's accession to the European Union in May 2004, the Netherland-Slovakia BIT had terminated or had its arbitration clause rendered inapplicable. On 7 December 2012, while the challenge was pending before the courts at the seat of the arbitration in Frankfurt, the tribunal issued its final award, finding Slovakia in breach of the Netherlands-Slovakia BIT and ordering it to pay €22.1 million in damages and more than €3 million in costs to Achmea. The lower level of damages reflected the fact that Slovakia's Constitutional Court had later disapplied a provision that would have made the ban on profits operate indefinitely, and thus partially corrected the wrong committed by Slovakia.

German Federal Court of Justice decision

On 10 May 2016 the German Federal Court of Justice ultimately referred to the ECJ three questions concerning the compatibility of the arbitration provision in the Netherlands-Slovakia BIT, specifically in relation to Articles 344, 267 and 18 of the Treaty on the Functioning of the European Union (TFEU). The ECJ found that Articles 344 and 267 of the TFEU must be interpreted as precluding a provision in an international agreement concluded between member states, such as Article 8 of the Netherlands-Slovakia BIT, and did not find it necessary to consider Article 18. The crux of the ECJ's's analysis in Achmea was that investor-state arbitration is a mechanism that cannot ensure that disputes in which the interpretation or application of EU law is engaged will be decided, or will be able to be reviewed, by a competent court within the EU judicial system. The ECJ did not offer any guidance as to the consequences of that finding. On 31 October 2018 the German Federal Court of Justice set aside the final award issued in favour of Achmea.

Declarations by member states

On 17 January 2019 28 member states issued three sets of declarations on the effects of Achmea, agreeing to terminate BITs in place between them by way of a plurilateral treaty. Further, 22 member states declared that Achmea also applied to the Energy Charter Treaty (ECT), a sector-specific multilateral treaty to which the EU member states, the European Union itself and numerous non-EU member states are party.

Termination Agreement and Termination Treaty

Eventually, on 5 May 2020, 23 member states signed the Termination Agreement. Austria, Finland, Ireland (which has no intra-European Union BITs in force) and Sweden did not sign the Termination Agreement. As a non-EU member state, the United Kingdom is also not a party to the Termination Agreement. The European Commission promptly launched infringement proceedings against Finland and the United Kingdom for failing to terminate their BITs with other member states. Austria and Sweden have started terminating their BITs bilaterally.

In the Termination Agreement, the signatory member states agreed, among other things, to terminate all BITs listed in Annex A. They also agreed that the 'sunset clauses' – which extend the protection of investments made prior to the date of termination of the applicable treaty for a further period – will be of no effect. The Termination Treaty further provides that arbitration clauses contained in the affected BITs are contrary to EU law and inapplicable and, as of the date on which the last of the parties to a BIT became an EU member state, cannot serve as a legal basis for arbitration proceedings. While concluded arbitration proceedings (ie, those that ended with a settlement, where the award was executed prior to 6 March 2018 and no challenge was pending or where the award was set side or annulled before the Termination Agreement entered into force) are excluded from its application, the Termination Treaty is said to apply to pending or new arbitral proceedings (ie, those that do not qualify as concluded arbitration proceedings) and the signatories must take certain steps in such proceedings or subsequent court action purportedly to give effect to the Achmea judgment.

Remedies for foreign investors in Slovakia and Slovak investors in other member states

In terms of which remedies are available for foreign investors in Slovakia, the answer depends not only on whether the investment was made before or after the Termination Treaty entered into force, but also on the sector in which the investment was made.

If the investment was made before the Termination Treaty entered into force, the investor may still have an argument that, despite the Termination Treaty's attempt to nullify the effect of the sunset clauses in the affected BITs, international law does not permit their retrospective abolishment in respect of investments that were made prior to termination. While this point has not yet been tested before international tribunals, at least one tribunal hinted that this is the conclusion that a tribunal proceeding under an affected BIT might reach (Magyar Farming Company Ltd v Hungary, ICSID Case ARB/17/27, 13 November 2019, Paragraph 223).

Investors from non-signatory member states may still be able to proceed under the applicable BIT and should therefore check the status of the BIT in question.

In either case, the resulting award is likely to meet with significant challenges on enforcement within the European Union and, to a lesser extent, outside the European Union. Therefore, it is recommended that, to the extent that investors choose to commence an arbitration pursuant to an intra-European Union BIT, they proceed under the Arbitration Rules of the International Centre for Settlement of Investment Disputes (ICSID) rather than commercial arbitration rules. This is because ICSID awards can be enforced under the Convention on the Settlement of Investment Disputes and Nationals of Other States (ICSID Convention) as if they were final judgments of the courts in the contracting parties to the ICSID Convention, whereas commercial awards are subject to a limited review (including on the grounds of public policy) under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

However, the better route would be for the investor to restructure its investment through a vehicle incorporated outside the European Union in order to secure protection under the umbrella of a BIT between a member state (or the European Union) and a non-member State. However, to avoid an investment being disqualified from BIT protection, there can be no dispute in existence or reasonably in contemplation at the time of the restructuring.

Of course, investors are also free to consider domestic law and other remedies (discussed below).

If an investment is made after the Termination Treaty entered into force, it will not be protected by the terminated BITs. Apart from (re)structuring its investment from a non-EU country (as noted above), the investor could also seek to enter into an ad hoc agreement with the host state in respect of its investment, providing for ICSID arbitration or a commercial arbitration seated outside the European Union. However, this may be possible only with respect to strategic investments. The investor is otherwise left with remedies available under:

  • domestic law;
  • EU law; and
  • the European Convention on Human Rights.

Insofar as domestic law remedies are concerned, in Slovakia it is possible for an investor to claim damages directly from the state before the domestic courts pursuant to Law 514/2003 Coll on Responsibility for Damage Caused by Exercise of Powers of a Public Authority. If the cause of the complaint is a piece of legislation, it may be possible to challenge its constitutionality pursuant to the Slovak Constitution and Law 314/2018 Coll on the Constitutional Court of the Slovak Republic. However, private parties do not have direct standing before the Constitutional Court; only specifically authorised persons have such standing, including:

  • one-fifth of the members of Parliament;
  • the Slovak courts;
  • the president;
  • public prosecutors; and
  • the Human Rights Ombudsman.

Insofar as EU law remedies are concerned, three key indirect routes exist:

  • a Frankovich action before the local courts, to the extent that the investor can identify a sufficiently serious breach of EU law that has been implemented by Slovakia (in general, this is difficult to establish);
  • requesting a court in a domestic action to seek a preliminary ruling on a question of EU law from the ECJ under Article 267 of the TFEU (in order to obtain damages, a favourable ruling by the ECJ would have to be followed up with a separate Francovich action in the domestic courts); and
  • filing a complaint with the European Commission, which may bring infringement proceedings and, absent compliance, proceedings before the ECJ under Article 258 of the TFEU (the vast majority of complaints are not taken up by the European Commission).

Investors can also file a claim with the European Court of Human Rights, most notably for breach of the right to property (Article 1, Protocol 1) under the European Convention on Human Rights. However, the investor must normally exhaust any available domestic remedies first, and the damages that tend to be awarded by the European Court of Human Rights are not on par with those awarded under BITs.

If the investment is in the energy sector and falls within the remit of the ECT, regardless of when the investment was made, the Termination Treaty explicitly states that it does not apply to the ECT (Article X of the Preamble to the Termination Treaty). However, the question of whether Achmea also extends to the ECT is likely to come before the ECJ soon. Therefore, structuring investments through non-EU vehicles remains the best option for investors in Slovakia. The same applies to Slovak investors seeking to invest in another member state.