SCC adopts policy on Intra-EU investment arbitration seats to address EU legal framework

 Executive summary: In October 2024, the SCC Arbitration Institute adopted a policy mandating that the seat of intra-EU investment arbitrations be outside the EU or any EU candidate state if parties cannot agree, aiming to avoid conflicts arising from CJEU rulings in Achmea and Komstroy, which affect arbitration enforceability within the EU.

On 16 October 2024, the Board of the SCC Arbitration Institute adopted its Policy on deciding the seat in intra-EU investment arbitrations administered under the SCC Rules. 

In this respect, the Board decided that, in the case of investment treaty arbitrations involving parties based in the EU or in a state that is a candidate or potential candidate for EU membership, where the parties have not reached an agreement on the seat of arbitration, the Board will not select any seat located within the EU or any state that is an EU candidate or potential candidate. 

The seat of arbitration plays a crucial role, as it determines both the legal framework governing the arbitration proceedings and the court(s) with jurisdiction over actions such as challenging or appointing an arbitrator, setting aside an arbitral award, or addressing the Arbitral Tribunal’s jurisdiction.

 The SCC Board explains that “the seat of arbitration is a legal fiction. It does not refer to the physical location or venue of the arbitration, but rather the legal place of arbitration.” This clarification stems from Article 25 of the SCC Arbitration Rules, which allows the Arbitral Tribunal, after consulting the parties, to hold hearings, meet, and deliberate at any location it deems appropriate.

Considering the so-called “intra-EU objection,” this SCC policy attempts to ensure that the arbitration seat is outside jurisdictions where EU laws or regulations might interfere with the arbitration process. The objective is to preempt potential issues stemming from the complex interplay between EU law and intra-EU investment disputes, a concern heightened by the Court of Justice of the European Union (CJEU) rulings in the Achmea and Komstroy cases. The CJEU has made clear that EU law precludes arbitration between EU Member States for resolving investment disputes, thereby invalidating the dispute settlement mechanisms contained in various international investment treaties that predate the EU membership of one or both parties.

As previously reported by iarbnews [see here], in 2018, the CJEU issued a landmark judgment in Slovak Republic v. Achmea BV, confirming that “Articles 267 and 344 of the TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States” that permits “an investor from one of those Member States [… ] in the event of a dispute concerning investments in the other Member States, [to] bring proceedings against the latter Member State before an arbitral tribunal.”

Later, in 2021,  in Republic of Moldova v. Komstroy, the CJEU held that Article 26(2)(c) of the Energy Charter Treaty (ECT) must be interpreted as not applying to disputes between an EU Member State and an investor of another EU Member State.

In the CJEU’s view, EU law does not allow arbitration between EU Member States for resolving investment disputes and invalidates the dispute resolution mechanisms contained in various international investment treaties between Member States of the EU, most of which predate one or both parties joining the EU.

Therefore, EU investors and EU countries must channel their disputes through the EU judicial system.

In May 2020, most EU Member States concluded Agreement for the termination of Bilateral Investment Treaties (BITs) between the Member States of the European Union. This move underscores the EU’s commitment to upholding EU legal principles and ensuring that investment disputes between Member States are settled within the EU legal framework, rather than through international arbitration mechanisms. As a result, the BITs, along with their seat-of-arbitration provisions were rendered ineffective. Where there is no agreement or the agreement is ambiguous, the SCC will give the parties an opportunity to agree on the seat of arbitration if they have not addressed the issue in the request for arbitration or the response. If no agreement is reached, the Board will decide, ensuring that the seat is outside the EU or any candidate or potential candidate State.

 The SCC Arbitration Institute’s policy raises, however, significant questions. While it appears to be a strategic effort to enhance the enforceability of arbitral awards by placing the seat outside EU jurisdiction, it does not fully shield awards from enforcement complications. Despite the policy's intention, European states like Spain have persistently raised “intra-EU objections” even against ICSID awards with non-EU seats. This persistent risk calls into question the policy’s effectiveness in ensuring enforceable outcomes.

 Furthermore, the policy could be interpreted as a means to circumvent judicial scrutiny by EU courts rather than a genuine effort to strengthen the enforceability of SCC awards. By aiming to shield SCC awards from being set aside by EU courts, the SCC may be sidestepping the obligation of these courts to adhere to CJEU jurisprudence. The Novenergia II v. Kingdom of Spain case, in which the Svea Hovrätt annulled an SCC award based on the Achmea and Komstroy rulings, underscores this concern. It appears, therefore, that a key objective of this policy is to limit EU courts’ ability to vacate SCC awards. Nevertheless, while this policy may temporarily protect awards from legal challenges within the EU, its long-term effectiveness in ensuring legally robust and enforceable outcomes remains open to question.