On May 30th, 2018, the European Court of Justice (ECJ) ruled that ad hoc clauses in international investment agreements are prohibited under European Union (EU) law. This decision has significant implications for the future of investment treaty arbitration in Europe and beyond.
Investment treaties typically include provisions for investor-state dispute settlement (ISDS), which allow investors to bring claims against states for alleged breaches of the treaty. Ad hoc ISDS clauses allow parties to an investment agreement to choose arbitrators and the applicable rules for arbitration in a way that is not predetermined by the treaty itself.
The ECJ`s decision was made in the context of a case between Slovak Republic and Achmea, a Dutch insurance company. The case concerned an arbitration clause in a bilateral investment treaty between Slovakia and the Netherlands, which allowed for ad hoc arbitration to be conducted under the UNCITRAL rules.
The ECJ held that this provision was incompatible with EU law, as it undermined the autonomy of the EU legal order. The court found that arbitration conducted under ad hoc clauses could not ensure the consistency and coherence of EU law, and was therefore incompatible with the EU Treaty.
The ECJ`s decision has been welcomed by many as a step towards greater accountability and transparency in investment treaty arbitration. Critics of ISDS have long argued that it allows corporations to sue governments in secret tribunals, bypassing domestic courts and democratic processes.
However, the decision has also been criticised for potentially reducing legal certainty and creating uncertainty for investors. Many argue that ad hoc arbitration allows for greater flexibility and can be more efficient than institutionalised arbitration.
It remains to be seen how the decision will be applied in practice, and whether it will lead to a shift away from ad hoc ISDS clauses in investment agreements. In any case, the decision emphasises the importance of ensuring that investment treaty arbitration is compatible with the principles of democratic governance and the rule of law.