By Prof. Dr. Dr. h.c. Carl Baudenbacher, Baudenbacher Kvernberg, lawyers and advisors, President of the EFTA Court 2003-2017
On 3 April 2024, in the landmark ruling of Spain v. EDF Energie Nouvelles (4A_244/2023), the Swiss Federal Supreme Court confirmed the jurisdiction of arbitration tribunals seated in Switzerland for investment disputes within the EU. Arbitration tribunals are non-state courts that are used on the basis of an agreement between the parties involved. The Federal Supreme Court has thus clearly distanced itself from the case law of the Court of Justice of the European Union (CJEU). It stated that the ‘unconditional consent’ to submit a dispute to arbitration in accordance with Art. 26(3)(a) of the Energy Charter Treaty (ECT) of 1994 is applicable to internal EU disputes. The ECT is a framework for multilateral co-operation in the field of energy. According to the Federal Supreme Court, the conclusion of an arbitration agreement is not incompatible with EU law because the dispute resolution mechanisms of the Treaty on the Functioning of the European Union (TFEU) do not take precedence over those of the ECT.
A French investor had developed twelve photovoltaic plants in Spain. Two royal decrees from 2007 and 2008 provided for attractive feed-in tariffs for qualified photovoltaic systems. Between 2010 and 2013, Spain changed the financial support measures provided for in these decrees on the grounds that it wanted to combat its energy price deficit. The two decrees were replaced in 2013 and 2014 by a new law, according to which the fixed feed-in tariff for photovoltaic systems was replaced by a remuneration that offers investors a reasonable return (‘rendement raisonnable’).
https://x.com/SwissAmbRiga/status/1770365101767290941
In 2016, the French investor initiated arbitration proceedings against Spain, invoking Art. 26 ECT. The dispute was submitted to a three-member ad hoc arbitration tribunal based in Geneva. Spain raised the defence that the arbitration clause in Art. 26 ECT was incompatible with EU law due to the intra-EU nature of the dispute. The CJEU had exclusive jurisdiction to interpret the ECT. Spain essentially relied on the judgments of the Grand Chamber of the CJEU in the cases Achmea (Case C-284/16, judgment of 6 March 2018) and Komstroy (Case C-741/19, judgment of 2 September 2021).
The Achmea judgment was based on a dispute between Achmea, a Dutch insurer, and the Slovak Republic. Achmea had made investments in the Slovakian health insurance market. After the Slovak Republic reversed the liberalisation of that market, Achmea initiated arbitration proceedings under the bilateral investment treaty (BIT) between the Netherlands and Slovakia, claiming that the reversal had harmed its investments. An arbitration tribunal based in Germany ruled in Achmea’s favour and awarded it damages. The Slovak Republic challenged the arbitration award before the German courts, arguing that the arbitration clause in the BIT was incompatible with EU law. The matter was referred to the CJEU for a preliminary ruling. The CJEU held that the arbitration clause in the Dutch-Slovak BIT, i.e. an intra-EU BIT, was indeed incompatible with EU law. Such clauses could prevent disputes concerning EU law from being decided by the courts of the Member States and could also jeopardise the autonomy and effectiveness of EU law. The Belgian Advocate General Melchior Wathelet had not been able to recognise any incompatibilities between international arbitration and European law.
In the Komstroy judgment, the Grand Chamber further developed the principles established in Achmea. The dispute related to an alleged breach of the ECT standard of fair and equitable treatment. The Paris Court of Appeal referred several questions to the CJEU, including whether the arbitration clause in Article 26 of the ECT was compatible with EU law when applied to intra-EU disputes. The CJEU concluded that the arbitration clause of the ECT could not be applied to intra-EU disputes. If this clause were applied within the EU, it could prevent the full effectiveness of EU law by depriving the national courts of the EU Member States of jurisdiction to hear such disputes.
The EDF Arbitration Tribunal rejected the plea of lack of jurisdiction and ordered Spain to pay damages for breach of its duty of fair and equitable behaviour under the ECT by 2 votes to 1. The Kingdom of Spain challenged this award before the Federal Supreme Court.
Crusade and lack of impartiality
In its grounds for judgement, the Swiss Federal Supreme Court pointed out that the legal dispute was embedded in the broader context of the admissibility of investment arbitration proceedings within the EU for the settlement of disputes of an intra-European nature. Lausanne explicitly complained that the EU has been waging a crusade (‘une croisade’) against the possibility of settling intra-EU disputes through arbitration for years and cited the harshest critics of this crusade.
Finally, as regards the Komstroy case, the Federal Supreme Court questioned the impartiality of the CJEU by implying that it may have adopted a ‘pro-domo’ interpretation when it confirmed the primacy of EU law over international law.
https://x.com/POLITICOEurope/status/1792437351492231390
Conclusions for the FA 2.0
The ‘Common Understanding’ on a Switzerland-EU Framework Agreement (“FA”) of 15 December 2023 provides for a monopoly on interpretation by the CJEU. The Swiss Federal Council (Government) no longer wishes to negotiate this. The violation of the iron principle of ‘nemo iudex in causa sua’ (no one can be judge in their own cause) is justified, among other things, by the assertion that the CJEU’s existing case law on the bilateral agreements proves that Switzerland and the Swiss have nothing to fear. However, the Achmea and Komstroy cases make it abundantly clear that this conclusion is wrong. Of course, a Swiss farmer who rents land in Baden-Württemberg need have no more fear of the CJEU than a hunter who wants to pursue his passion in Austria. In politically sensitive cases, however, the situation is quite different. This is where the CJEU’s claim to power manifests itself quite openly, something our ivory tower scholars (consciously or unconsciously) overlook. This claim to power is also criticised in the EU. The German European law expert Andrej Lang has written a well-founded review of the Komstroy judgment under the title ‘Autonomy “above all”’ (‘Autonomie “über alles”’).
Disputes arising from the bilateral agreements would be conflicts with the EU and Switzerland as parties. They would therefore be politically charged by definition. The Swiss Federal Council does not want to recognise this fact, but the Swiss Federal Supreme Court apparently does. It should be noted here that the Federal Supreme Court has been completely eliminated in the ‘Common Understanding’. According to FA 2.0, there would be no type of proceeding in which the Federal Supreme Court would have a single word to say. On the other hand, the Federal Supreme Court would have to fear that its case law would be brought by the European Commission to the CJEU, the court of the opposing party, via a pro forma ‘arbitration tribunal’. Former Federal Supreme Court judge and current judge at the Strasbourg Court of Human Rights Andreas Zünd pointed this out years ago. No supreme court in the EU or EEA is treated so shabbily. This also shows that the (newly proposed EU-Swiss framework agreement) FA 2.0 is an ill-conceived patchwork that cannot be the basis for future EU-Swiss relations.
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