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Swiss supreme court upholds an arbitration agreement and unequivocally rejects Achmea and Komstroy Doctrine

Briefing
21 October 2024
3 MIN READ
1 AUTHOR

In a carefully reasoned judgment1 (Judgment) handed down in April this year, the Swiss Supreme Court upheld an arbitration clause entered into between a company and a member state of the European Union by resoundingly rejecting the application of the 2018 Achmea2 and 2023 Komstroy3 decisions to a Swiss-seated arbitration.

In those two cases, the Court of Justice of the European Union (CJEU) held that arbitration clauses found in Bilateral Investment Treaties, respectively in the Energy Charter Treaty (ECT), were not compatible with EU law and that arbitral tribunals lack the substantive jurisdiction to hear such disputes when one of the parties was an EU entity and the other was a EU member state.

The reasoning which led to these decisions was effectively that the CJEU considers that, under the Treaty of the European Union (TEU), the member states have a duty to ensure that any issue which may potentially involve an interpretation of EU law must be decided by EU courts (and if necessary, by the CJEU) to ensure that EU law is interpreted and applied uniformly throughout the union. As arbitral tribunals are not part of the court systems of the EU member states, the risk exists that they might interpret and apply EU law differently. This, combined with the limited recourse which usually exists against arbitral awards, lead the CJEU to conclude that the concept of an arbitral tribunal being able to hand down such decisions was incompatible with the TEU, such that they were illegal.

These two judgments have had dramatic repercussions on legal certainty around arbitration clauses provided for in BITs or to other treaties to which EU member states are a party.

When member states are pursued in arbitration by entities based in the EU, they now often rely on the Achmea and Komstroy decisions to argue that the tribunal does not have the jurisdiction to hear the matter.

The practical effect of these decisions is that an EU investor may no longer rely on an arbitration clause against a member state of the EU found in a BIT or another treaty if that clause provides for an arbitration seated within the EU. Furthermore, an award which has been obtained by an EU-based investor against a member state under such a treaty will be unenforceable in the EU.

An EU-based investor may now have to seek redress for its claims in the State Courts of the member state where the investment was made, which is an inherently uncomfortable position for investors in large projects. EU investors now have to carefully structure their investments in order to be able to arbitrate against EU member states.

The EU has since renounced the ECT and its member states are currently renouncing a number of other treaties as a result of this doctrine.

The situation may however be very different if the arbitration clause provides for arbitrations to be seated outside the EU: a number of courts in non-EU countries, such as the United States, have declined to apply the Achmea and Komstroy judgments when arbitral tribunals or awards were challenged in front of them.

The Swiss Supreme Court has now joined that number.

The case referred to the Swiss Supreme Court concerned a French company (Claimant) who had made substantial investments in photovoltaic energy installations in the Kingdom of Spain (Spain) under a legal framework which provided that tariffs levied by Spain would be maintained at advantageous levels for 25 years.

The tariffs were changed to the claimant’s disadvantage before that and the claimant started arbitration against Spain under the ECT, which is a multilateral treaty that was signed by Spain and the EU, among others. The arbitration was seated in Switzerland and the arbitral tribunal found in favour of the Claimant.

Spain tried to have the award overturned on several grounds. One of them was a purported lack of jurisdiction of the tribunal to hear the dispute because, according to Spain, as a result of the Komstroy decision and the primacy of European law over the law of the member states, only the CJEU had the jurisdiction to interpret the ECT with respect to disputes between EU entities and member states.

In a carefully-reasoned decision, the Swiss Supreme Court, which directly hears appeals against Swiss awards, firmly rejected the proposition.

First, the court noted that the European Union had undertaken what it termed a “crusade against international investment arbitration” for several years.

Next, it considered that non-EU courts (such as Swiss courts) have no obligation to apply EU law as decided by the CJEU. Consequently, it was not bound by the Achmea and Komstroy decisions.

The court did note that while it would usually follow the decisions of a foreign apex court when interpreting the law of the jurisdiction of that court, it did not think that it was appropriate to do so where that court was deciding whether its law took precedence over an international treaty, because of the risk that the court could be tempted to unduly find in its own favour.

The Swiss Supreme Court then interpreted the ECT as it would any other treaty and came to the conclusion that Spain had unreservedly agreed to arbitration for disputes which arose out of that treaty.

It further noted that it was not convinced by the reasoning in the Komstroy judgment because the reason for the decision was mainly the preservation of the EU law, and it did not take into account international law, or generally-applied rules on the interpretation of international treaties.

Spain’s challenge to the award was therefore dismissed.

This is a welcome decision in that it provides abundant clarity on the Swiss position on the topic.

Arbitration clauses and arbitral awards between an EU member state and a European entity will therefore continue to be upheld for Swiss-seated arbitrations. This will presumably also hold true for the enforcement of awards.

In many respects, the Judgment is not especially surprising. Switzerland’s legal order is very arbitration-friendly and has been for a long time. The Swiss Supreme Court will almost invariably uphold agreements, whether they are agreements to arbitrate or international treaties. The Judgment further cements Switzerland’s long-established position as one of the premier jurisdictions for international arbitration.

Footnotes

  1. Decision 4A_244/2023, handed down on 3 April 2024.
  2. EUR-Lex – 62016CJ0284 – EN – EUR-Lex (europa.eu).
  3. EUR-Lex – 62019CJ0741 – EN – EUR-Lex (europa.eu).
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