EU law in international arbitration—the example of Switzerland

Abstract

This article identifies current issues of EU law in Swiss international arbitration and suggests solutions as they may be apprehended. It first provides a brief overview of EU law which is likely to affect Swiss international arbitration. This comprises the treatment under EU law, and therefore under EU Member State law, of public international law contrary to fundamental EU law, as well as the EU law duties imposed on EU Member States, in particular their courts. Secondly, EU law issues are identified and examined, in the order of the events arising in arbitrations and their result: the arbitration agreement, jurisdiction, the substantive proceedings, then challenges to and the enforcement of arbitration awards. This article covers investment, commercial, and sports arbitration and addresses the extent to which any EU law requirements established in one of these types of arbitration may also apply in any of the others.

1. Introduction

The intersection of EU law and international arbitration is of remarkable complexity.

EU law operates as a relationship between the EU legal order and the legal orders of its 27 Member States. The rules governing this relationship are of notable and even unique sophistication. EU Member State courts are under special EU law obligations to apply and enforce the requirements of EU law. Notable here is their ‘duty of sincere cooperation’ in Article 4(3) TEU.¹

The EU duties on its Member State courts do not apply directly to arbitration.² EU law is a sort of hortus conclusus, appearing absorbed in its self-contemplation, unmindful of the tumult of the outside world.

Yet EU law affects international arbitration, and in truth international arbitration challenges what some may see as EU law’s cloistered virtue. Arbitral tribunals must grapple with EU law seeking its application by EU Member State courts at times in apparent defiance of their own jurisdiction. Also, the law of an EU Member State will frequently be the lex causae in international arbitration, and norms ultimately emanating from EU law will often claim to apply and have a sufficient connection to apply on an additional basis, notably as mandatory norms. Moreover, the validity of international arbitration awards is subject to what appear to be increasingly stringent requirements of compliance with fundamental EU law.

The mounting claims of EU law engender correlatively intensifying incursion into international arbitration. The Swiss Supreme Court recently remarked that for several years now the EU institutions have been in effect conducting a ‘crusade’ against investment arbitration.³

In its 1999 Eco Swiss decision⁴ the European Court of Justice⁵ was content to leave arbitration undisturbed and to recognize the arbitrability of fundamental EU law (on the facts there, competition law under what is now Article 101 TFEU), provided violations of these important EU principles were subject to the apparently usual review by EU Member State courts at the enforcement stage.⁶

There was no differentiation in this regard between commercial and investment arbitration. But at the time investment arbitration was much less developed and widespread than it would become decades later, so doubtless the special EU law concerns about it were not then prominently before the ECJ’s mind.

This attitude of deference to international arbitration was shattered in the ECJ’s Achmea decision⁷ of 6 March 2018. The ECJ held that bilateral investment agreements between two EU Member States were repugnant to EU law because they disturbed the EU internal system of the determination of the rights of Member States under EU law and were therefore invalid as a matter of EU law.

This ruling was then confirmed and expanded in two further cases, in the ECJ’s 2 September 2021 decision in Komstroy,⁸ and its 26 October 2021 decision in PL Holdings.⁹

Then in its 23 December 2023 decision in ISU¹⁰ the ECJ took issue with an arbitration clause in a sports arbitration. The ECJ found that the arbitration clause ‘reinforced’ an EU competition law violation.

Like investment arbitration, sports arbitration presents features of particular concern to EU law.

Like Caesar’s Gaul, all of arbitration is divided into three parts. This article surveys EU law issues arising in all types of international arbitration, investment, sports, and commercial. One of the important questions is the extent of the effect of EU law requirements originating in a particular context, such as investment or sports law, and in particular the degree to which the erosion of the Eco Swiss deference has or will engulf commercial arbitration too.

This article takes Swiss international arbitration as an example. EU law presents challenges to arbitration in general but to Swiss arbitration in particular. Switzerland is a leading arbitration law system in the world in the sense that there is a lot of international arbitration seated in Switzerland.¹¹ Switzerland is moreover geographically and economically¹² highly integrated into the EU and its Member States. Parties based in the EU will frequently favour Swiss international arbitration. The law of an EU Member State, such as Italian, French, or German law, will frequently be the lex causae in Swiss international arbitration.

But much of what Swiss international arbitration is experiencing of EU law will be felt by other arbitration systems outside the EU. The UK and its arbitration systems share with Switzerland geographic and economic proximity to the EU, with the result that UK arbitration will also be particularly concerned.

The same few elements of EU law recurrently impact international arbitration in its various aspects. It was therefore thought advisable at the outset of this article to present these elements on the principles of a German Allgemeiner Teil, a general part at the head of a variegated treatment instancing the general principles. After thus summarizing relevant parts of EU law, this article will identify issues of Swiss arbitration law engendered in its contact with and use of EU law, suggesting solutions where they may be apprehended.

It may assist comprehension of this article for it to be noted here that it is organized by arbitration issue chronologically as arbitration and subsequent challenges and enforcement proceedings advance. It is not organized by type of arbitration, investment, sports, or commercial.

2. Summary background on EU law relevant to Swiss international arbitration

2.1. Introduction

This section surveys the functioning of the EU legal order in particular vis-à-vis the legal orders of its Member States, and how this functioning dictates the treatment of public international law within the EU legal order and therefore within and by its Member States. It also provides a glancing overview of the duties upon EU Member States proceeding from EU law, which may impact upon the application of EU law by international arbitration tribunals in Switzerland. The assessment of the effect and extent of these duties in the arbitration context occurs in subsequent sections.

2.2. EU law determines what part it plays in EU Member State law and how EU Member States’ legal systems treat public international law

EU law is a part of the law of EU Member States. It has ‘primacy’¹³ (also referred to as ‘supremacy’) over the law of the EU Member States. EU law derogates from Member State law to the extent of the application of EU law.

Public international law allows states to determine the applicability of international law on their internal municipal law.¹⁴ Schematically, a state can adopt a monist approach to international law with the result that international law becomes automatically part of the state’s internal law or a state can adopt a dualist approach, with the result that international law must be transposed into the state’s internal law by operation of the state’s law-making procedures.¹⁵

In Van Gend en Loos¹⁶ the ECJ held that EU law had direct effect in Member State law. This not only meant that as far as EU law is concerned all Member States are monist, but that EU law-making procedures directly adopt EU law for Member States.

Because EU law decides what part it plays in Member State law and how international law affects EU law, EU law decides on the relation between EU law and international law in Member State legal systems.¹⁷ This is the combined effect of primacy on the one hand, and on the other the direct applicability of EU law in Member State law.

2.3. The treatment of public international law under EU law

EU law treats public international law compatible with EU law as directly applicable in EU law and therefore in Member State law. But EU law treats international law not compatible with EU law as not applicable in EU law and by consequence not applicable in Member State law.

This is consistent with the focus of the mission of the CJEU set down in Article 19(1) TEU: ‘[The CJEU] shall ensure that in the interpretation and application of the Treaties the law is observed’.

It is also consistent with Article 344 TFEU which provides that ‘Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein’.

Nonetheless, EU law seeks to respect international law.¹⁸ This flows from Article 3(5) TEU which provides¹⁹:

In its relations with the wider world, the Union shall uphold and promote its values and interests and contribute to the protection of its citizens. It shall contribute to peace, security, the sustainable development of the Earth, solidarity and mutual respect among peoples, free and fair trade, eradication of poverty and the protection of human rights, in particular the rights of the child, as well as to the strict observance and the development of international law, including respect for the principles of the United Nations Charter.

(emphasis supplied)

Article 216(2) TFEU moreover provides that international treaties entered into by the EU are binding on the EU and the Member States, but that relates only to their external effect, not their effect on EU law itself.

So if an EU Member State has entered into a treaty which in any way is inconsistent with fundamental aspects of EU law then EU requires Member State law to treat the non-conforming aspects as inapplicable. The one limitation on this treatment is found in Article 351 TFEU which excludes any treaty entered into by a Member State prior to 1 January 1958²⁰ or prior to its accession to the EU. However, Article 351 TFEU places Member States under an obligation to remove any incompatibility of such excluded treaties.²¹

It should be emphasized that EU law seeks primacy even where it supervenes to impose inconsistent existing international obligations on the Member States. So, for example, even if, as a matter of EU law, Achmea were treated as affecting EU law ex nunc, its result would still take precedence over contrary international law (viz. the arbitration clause contained in Article 8 of the 1991 Netherlands-Slovakia BIT), as far as the EU legal order is concerned.

By consequence, for the most part EU law will reflect international law. But EU law will not dissolve international law into itself where to do so would violate fundamental principles of EU law: the so-called ‘constitutional structure and values on which the law is founded’.²² The CJEU’s decisions on matters impinging upon international law at variance to foundational EU law may indeed at times seem ‘pro domo’.²³

The practical effect on EU Member State law of its containing an international obligation contrary to fundamental EU law as a matter of EU law is that the Member State is under an obligation to restore compliance with EU law. If it fails to do so, the ‘Guardian of the Treaties’, the European Commission, may initiate the infringement process against that Member State under Article 258 TFEU. This process is generally much more effective than anything another state may undertake against that EU Member State to enforce an international obligation.

2.4. Fundamental EU law which has primacy over contrary Member State law and international law

There is some uncertainty as to the precise extent of the category ‘constitutional structure’ and foundational values. But it is certain that it now embraces a significant portion of EU law.

In Opinion 2/13 the ECJ described it as ‘the specific characteristics of the EU and EU law’.²⁴ The ECJ went on to say that the division of powers between the EU and the Member States is within the category²⁵ as are primacy and direct effect of EU law over and in Member State law²⁶ which in turn give rise to ‘a structured network of principles, rules and mutually interdependent legal relations linking the EU and its Member States, and its Member States with each other, which are now engaged, as is recalled in the second paragraph of Article 1 TEU, in a “process of creating an ever closer union among the peoples of Europe”’.²⁷

Also included are the following, derived from this structured network of principles: mutual trust between Member States, respect for the fundamental principles in the Charter of Fundamental Rights of the European Union.²⁸

So too is:

Article 3 TEU, […] entrusted to a series of fundamental provisions, such as those providing for the free movement of goods, services, capital and persons, citizenship of the Union, the area of freedom, security and justice, and competition policy. Those provisions, which are part of the framework of a system that is specific to the EU, are structured in such a way as to contribute — each within its specific field and with its own particular characteristics — to the implementation of the process of integration that is the raison d’être of the EU itself.²⁹

Also within the category are the EU Member State duty of ‘sincere cooperation’ under Article 4(3) TEU to ensure the application of EU law within their territory, and the fulfilment there of EU law obligations in particular in the activities of EU Member State courts.³⁰

Lastly, but of first-order importance, the preliminary reference mechanism under Article 267 TFEU is part of it:

In particular, the judicial system as thus conceived has as its keystone the preliminary ruling procedure provided for in Article 267 TFEU, which, by setting up a dialogue between one court and another, specifically between the Court of Justice and the courts and tribunals of the Member States, has the object of securing uniform interpretation of EU law (see, to that effect, judgment in van Gend & Loos, EU:C:1963:1, p. 12), thereby serving to ensure its consistency, its full effect and its autonomy as well as, ultimately, the particular nature of the law established by the Treaties […]”³¹

2.5. Duty of sincere cooperation

As mentioned above, EU law is extremely definite that the duty of sincere cooperation in Article 4(3) TEU entails that Member State courts ensure judicial protection of an individual’s rights under EU law.³² EU law, however, does not interfere with the judicial processes existing in Member State courts,³³ except to require that EU law be treated equivalently with Member State law and be given ‘full effectiveness’ (‘effet utile’). It also requires that Member State law be interpreted sympathetically with EU law.³⁴

Additionally, although an EU directive may not be directly effective in Member State law, since without transposition via Member State law its means of achieving its objective may be imprecise or conditional, the duty of sincere cooperation results in obligations even prior to the transposition grace period notably a duty to ensure that Member State conduct does not compromise the directive’s objective.³⁵

Extending from Article 4(3) TEU, EU Member State courts are under a duty to abstain from taking decisions that are incompatible with various preparatory acts of the EU legal order, such as Commission proposals and Council mandates to negotiate.³⁶

Also extending from Article 4(3) TEU, Member State courts are also obligated to decide consistently with competition law decisions of the EU Commission which are not yet subject of a decision of the CJEU.³⁷ Article 16(1) of Regulation 1/2003³⁸ even builds on this, by requiring additionally that EU Member State courts stay proceedings raising EU competition law issues which are subject to proceedings before the European Commission.

3. The arbitration agreement

3.1. Introduction

In the beginning, there is the arbitration agreement, before any arbitration event twinkles in anyone’s eye. In this section, the enquiry is whether the EU legal order requires international arbitrations to be seated within EU territory, that is, within an EU Member State, and, if so, what the extent of such a requirement is; for example, is it only sports arbitrations, or only arbitrations displaying certain characteristics, usually but not exclusively found in certain sports arbitrations. The reason why any such requirement will be treated under the rubric of ‘the arbitration agreement’ is that its effects may manifest themselves in various arbitration contexts, such as jurisdictional (eg arbitrability) challenges to the award, and refusals to recognize and enforce it. The requirements arose in the context of European Commission proceedings Article 2(1) of Regulation No 773/2004³⁹ investigating a complaint of a violation of EU competition law (Article 101 TFEU). They did not arise in the context of arbitration proceedings or the review or enforcement of an award issuing from arbitration proceedings.

3.2. Does EU law require an EU seat of arbitration where necessary for the protection of EU fundamental rights?

International Skating Union v Commission,⁴⁰ a recent decision of the ECJ, might suggest that the fact alone of an arbitration agreement setting the place of arbitration outside the EU, such as in Switzerland, may be in violation of EU law. But at its highest, the decision should be understood rather as impugning arbitration agreements with such a place of arbitration as in violation of EU law only where they exacerbate a concrete failure of the protection of EU legal rights.

In ISU the ECJ found that a Court of Arbitration for Sport (‘CAS’) arbitration clause ‘reinforced’ a violation of EU competition law. The ECJ found that there was a principal violation of EU competition law in that ISU rules on the eligibility of skaters to participate in events did not include independent review of the ISU’s decisions within the proceedings of the ISU itself, ie before heading off to CAS arbitration.

The reinforcement of this principal violation was that there was no review of decisions by EU Member State courts and no possibility of Article 267 TFEU preliminary references for the interpretation of EU law.

The exacerbating failure of protection of legal rights in this case was that under R 37 of the CAS arbitration rules ‘the parties expressly waive their rights to request any such measures from state authorities or tribunals’. A decision on the substance of eligibility may take years. Skaters’ professional careers are comparatively short so interim decisions are crucial to their interests. Crucially skaters have no choice but to accept CAS arbitration and with it the Swiss seat if they wish to compete.

The gravamen of the ISU decision would therefore appear to be limited to concrete⁴¹ concerns relating to weak parties who have limited ability to refuse arbitration, to the exclusion of the ordinary jurisdiction of EU Member State courts.

In Eco Swiss⁴² the ECJ had in the abstract pronounced itself content with the possibility of public policy review by EU Member State courts at the stage of enforcement of arbitration awards from places of arbitration outside the EU.

This suggests that it may in fact not be the place of arbitration per se that posed a problem in ISU. Of specific concern to the ECJ in ISU is that the Eco Swiss review for compliance with fundamental EU law by EU Member State courts at the enforcement stage comes too late for the protection of the urgent individual interests of ineligible skaters who have limited ability to refuse arbitration.

This concern is largely peculiar to sports arbitrations and indeed may well not operate in any particular sports arbitration. But consumer arbitration, which may be subsumed under the category of commercial arbitration, does appear susceptible of similar concerns. ISU sits within a well-developed line of ECJ case law impugning arbitration where it may be seen to imperil the protection of individuals’ legal rights under EU law.⁴³

Those previous cases, however, operate as simple instances of inarbitrability. Unlike previous cases, the suggestion in ISU is that arbitration within the EU would not fall afoul of EU law.

3.3. EU law may unreservedly permit the choice of extra-EU seats of arbitration

So far therefore, one might consider that in these narrow circumstances, and only in them, is the EU requiring arbitration (or court proceedings) in the EU.

Yet it is recalled that in ISU the ECJ treated Swiss arbitration as ‘reinforcing’ a violation of EU competition law. The principal concern about the ISU eligibility rules is that they did not even feature an internal independent review of eligibility decisions. That was the principal violation of EU competition law at issue.⁴⁴ The failure of review by EU Member State courts and Article 267 TFEU preliminary references was the reinforcement. Without the principal violation there is nothing to be accessory to.

In ISU the ECJ did not refer to Member State obligations under the New York Convention (‘NYC’). This may be explained away in that it is the mandate of the ECJ to interpret EU law, and international law contrary to fundamental EU law, such as the protection of fundamental rights, is not recognized within the EU legal order.

But, as mentioned in Section 2.3 above, the EU legal order seeks to maintain compliance with international law. This is relevant in interpreting what the ECJ is actually requiring in ISU.

The EU itself is not a signatory to the NYC but all of its 27 Member States are. Article II of the NYC requires signatories to recognize qualifying arbitration agreements (such as the CAS arbitration agreement) unless they are ‘null and void, inoperative, and incapable of being performed’. The EU legal order would permit an arbitration agreement with a place of arbitration within the EU. So clearly the Swiss place of arbitration cannot be a ground to decline to recognize the agreement.

Understanding ISU to invalidate the CAS arbitration agreement would therefore bring the EU Member States into non-compliance with the NYC. Such a crass preference for one’s home jurisdictions would also be inconsistent with international comity.

The better view of the ECJ’s requirements in ISU therefore is that they are limited to ensuring independent review within the ISU eligibility rules determination, of which internal independent review is sufficient, and do not specifically require arbitration (or court proceedings) within the EU.

The difficulty for sports federations using CAS arbitration is that if the EU Commission nonetheless takes the view that arbitration outside the EU violates EU competition law it may impose fines and periodic penalties, which they will then have to challenge to obtain relief.⁴⁵

Doubtless because of such concerns, the UEFA rules concerning the authorization of its international club competitions have taken a cautious view, and now provide that, at the claimant’s option, Dublin, Ireland may be a place of arbitration.⁴⁶

There is no reason for an arbitrator in a Swiss international arbitration to pay any heed to the EU law requirements in ISU, even on their broader interpretation, and even if EU Member State law is the lex causae or the law to which the arbitration agreement is subjected. Within the meaning of Article 178(2)⁴⁷ of the Swiss Federal Act on Private International Law (‘PILA’), CAS arbitration agreements are obviously valid under Swiss law and nothing in the ISU context alters this situation. In particular, even if, which is denied, the ISU situation discloses inarbitrability under EU law, by Article 177⁴⁸ of the PILA this is a matter of indifference to Swiss arbitration law. See Section 4.3 below.

4. Jurisdiction

4.1. Introduction

In this section, the various objections to arbitral jurisdiction set up by EU law are examined. There is an important, indeed notorious obstacle to certain investment arbitration. A question arises as to the breadth of application of this obstacle and indeed whether it may apply beyond investment arbitration. There is separately the possibility that in certain circumstances EU law may require a narrowed interpretation of the substantive scope of arbitration agreements. It will be concluded that whatever such requirements EU law may seek to impose, Swiss arbitration will not give effect to them. A fairly extensive examination of a recent decision of the Swiss Supreme Court permits arriving at such a conclusion on the principal matter. How Swiss international arbitration will treat EU law's interpretation of the substantive scope of arbitration agreements is a much more straightforward matter.

4.2. Consent to arbitrate

Intra-EU investment treaties are contrary to EU law which in consequence treats the consent to arbitrate under them as void. In Achmea⁴⁹ the ECJ held this to be the case for arbitration under a bilateral investment treaty between two EU Member States. In Komstroy⁵⁰ the ECJ held it to be the case for arbitrations between an EU Member State and a claimant acting under its EU Member State nationality pursuant to a multilateral investment treaty not all of the parties to which are EU Member States. In PL Holdings⁵¹ the ECJ held this to be the case for ad hoc arbitrations deriving from the same multilateral investment treaty where the respondent was an EU Member State and the claimant was acting under its nationality of an EU Member State.

So under EU law there is no arbitral jurisdiction engendered under such treaties in relation to intra-EU arbitration, and any resulting award is void for lack of valid jurisdiction.⁵²

The EU law position is that intra-EU investment treaties offend against the autonomy of EU law from outside demands. The investment treaty may lead to the interpretation of EU law outside of EU law mechanisms, including Article 267 TFEU, of which arbitral tribunals cannot avail themselves.⁵³ Moreover such extra-EU interpretation of EU law is in violation of Article 344 TFEU.

It is important to note that from the EU point of view this lack of consent to arbitration does not arise from the time of the ECJ’s judgment in Achmea but from the time the Member State entered into the EU treaties.⁵⁴ This is because Achmea simply recognizes the existing legal position under the EU treaties, and in principle judgments of the ECJ, as with judgments of courts in most legal systems, are retroactive in their effect.⁵⁵ This explains the statement in the 26 June 2024 Declaration of the EU Member States and the EU itself⁵⁶ that ‘a clause such as Article 26 of the Energy Charter Treaty could not in the past, and cannot now or in the future serve as legal basis for arbitration proceedings initiated by an investor from one Member State concerning investments in another Member State […]’. (emphasis supplied)

Because under investment treaties the investor’s consent only comes later, with the request for arbitration, the investment state’s consent must be operative at the time of the investor’s consent for a valid arbitration to arise. The Swiss Supreme Court, for example, has recognized this to be the position.⁵⁷

In a decision of 3 April 2024⁵⁸ the Swiss Supreme Court held that, as a matter of Swiss law, the EU law restrictions on intra-EU investment treaty arbitration do not vitiate an EU Member State’s consent to arbitration with an EU investor. It stated that it was not bound by the ECJ’s determination that, where the seat of the arbitration is within the EU, EU Member State courts are bound to ensure the application of EU law.

On the facts there, the investment state was Spain, and the investor state France. The Supreme Court proceeded upon a pure international law interpretation of treaties analysis, treating the Vienna Convention as declarative of customary public international law. In brief, the Swiss Supreme Court gave expression to the clear wording in Article 26 of the Energy Charter Treaty (‘ECT’) that consent was ‘unconditional’ and in regard to all disputes, with exhaustive express exceptions that did not contemplate intra-EU arbitrations.⁵⁹ A 1997 declaration of the EU and the declaration of 22 of the EU Member States did not alter this. Under this analysis, the EU treaties as applied in the CJEU case law in Achmea and other cases do not affect an EU Member State’s consent to arbitration under Article 26 of the ECT. There was no subsequent modification of the ECT.

More broadly, in this decision the Swiss Supreme Court declared that Swiss courts are under no obligation to apply EU law as it comprises ‘matters conducted by others’ (res inter alios acta).⁶⁰

This statement is certainly correct as regards duties under Article 4(3) TEU. But as will be explored below, there are numerous situations where EU law may validly claim to apply in Swiss arbitration and in which Swiss courts and arbitral tribunals may properly give effect to it.

By consequence of this decision, it would appear that in Swiss international arbitration EU law restrictions on the validity of intra-EU arbitration agreements do not interfere with consent to arbitration.

4.3. Capacity to arbitrate

The Swiss Supreme Court did not address Spain’s capacity to arbitrate intra-EU arbitrations in its above-mentioned 3 April 2024 decision. It does not appear to have been argued as there is no mention of capacity in the judgment. But capacity is an element of valid consent. Consent is the focus of the extensive discussion in consideration 7 of the judgment. Some of the reasoning looks relevant to lack of capacity. So it is difficult to tell if a lack of capacity was argued.

Municipal Spanish law does not apply international law contrary to fundamental aspects of EU law. Autonomy is a fundamental aspect of EU law.

This is so most unproblematically when the lack of capacity pre-dates the ECT. The Swiss Supreme Court recognized that the autonomy objection under EU law pre-dates the 2009 Lisbon Treaty. So any EU Member State that was so when it signed the ECT would fall into this category. Spain, for example, was an EU Member State when in 1994 it signed the ECT.

Under Spanish law, Spain’s capacity to enter into the ECT was therefore restricted.⁶¹

On the other hand, other EU Member States entered into the EU after they signed the ECT. Their incapacity under EU law to be bound by the ECT in regard to intra-EU relations therefore only arose subsequently, with their entry into the EU. So the argument for such EU Member States is a supervening lack of capacity, which tends to behave like other withdrawal of consent arguments, and which therefore would appear to be covered by the reasoning in the Swiss Supreme Court judgment and its result.

There is a question as to whether the capacity of a state to enter into an agreement to arbitrate under a treaty is determined by the ordinary Swiss approach to applicable law or rather under public international law. The answer to this question may well determine whether as a matter of Swiss law Spain had capacity to enter into the ECT.

Under Swiss law, a party’s capacity to arbitrate is a requirement of arbitral jurisdiction.⁶² The general approach under Swiss law to applicable law in relation to capacity is that it is by the law of a party’s legal capacity. If an analogy from Article 154 of the PILA is applied, a state’s legal capacity would be determined by its own law.⁶³ For Spain this is Spanish law.

Swiss arbitration law would indeed appear, as a general proposition, to accept that the law applicable to a state party’s capacity to enter into arbitration is or at least may be governed by the law of that state since Article 177(2) of the PILA assumes so.⁶⁴

Article 177(2) of the PILA provides a rule applicable in addition to the law of the state to determine its capacity to arbitrate, namely that the state may not invoke its incapacity thereunder.

There is no provision in chapter 12 of the Swiss PILA more in want of interpretation than Article 177(2). There are questions whether it applies to entire lack of capacity of the state to enter into arbitration, or also to lack of delegated authority⁶⁵ and to the excess of powers.

In relation to excess of powers, which is of present concern, Voser and Nessi, relying on Lalive, Poudret, and Raymond,⁶⁶ suggest that Article 177(2) of the PILA does apply.

There is also a question whether not just supervening incapacity is contemplated or also incapacity pre-existing the agreement to arbitrate. Thirdly, is it only legislative restrictions, or also those extending from judicial decisions?

In a 1992 decision, the Swiss Supreme Court identified the principle operating behind this provision as the protection of good faith and described its functioning as follows:

This rule is based on the principle of good faith, to which the state participating in international commercial transactions is just as much subject as a private person (Bucher, Die neue internationale Schiedsgerichtsbarkeit in der Schweiz, p. 44 f. N 101; Lalive/Poudret/Reymond, loc. cit., N 7 to Art. 177; Walter/Bosch/Brönnimann, Internationale Schiedsgerichtsbarkeit in der Schweiz, p. 63; Marc Blessing, Das neue Internationale Schiedsgerichtsrecht der Schweiz, Die Internationale Schiedsgerichtsbarkeit in der Schweiz (II), p. 37). This is intended to prevent the state from using its legislative power to its advantage in agreements between states and private parties and thus thwarting the arbitration proceedings (Walter/Bosch/Brönnimann, op. cit., p. 63).⁶⁷

Clearly some restrictions under state law will validly excuse it from arbitration and therefore fall outside the provision. Otherwise, states would be treated by Swiss arbitration law disadvantageously to everyone else, since there are many occasions when Swiss arbitration law recognizes parties’ incapacity to arbitrate. There is no justified basis for discriminating against states in this way. In fact, it may be that Article 177(2) of the PILA should be understood as seeking to remove the advantages that states have over everyone else concerning the entering into and the effectiveness of arbitration agreements. That advantage is that unlike private individuals states have power unilaterally to alter their own laws to escape arbitration. To exercise such powers to the detriment of a counterparty to arbitration may be considered bad faith in the same way as a party’s failure to exercise a condition it alone has power to exercise to defeat the arising of an obligation is in bad faith under Article 156 of the Swiss Code of Obligations.⁶⁸

It is pertinent to enquire whether the Achmea decision was not foreseeable to Spain and other EU Member States when entering into Article 26 of the ECT. The Swiss Supreme Court would seem to agree with this view inasmuch as it declared that the ECJ erred in coming to it.⁶⁹ The Swiss Supreme Court took the view that on its face Article 267 TFEU does not require that no other court than the CJEU may interpret EU law. As regards Article 344 TFEU, it relates to the interpretation and application of EU law in dispute resolution between EU Member States, whilst ECT arbitrations are between an EU Member State and a national of an EU Member State, who will be the one initiating (ie submitting) the claim, and not the EU Member State. Moreover, the wording of Article 344 TFEU contemplates the interpretation and application of the EU Treaties and not investment treaties.

The EU concept of the autonomy of EU law has been evolving. It is indeed not at all clear why an arbitral tribunal constituted under the ECT falls within the mischief of Article 344 TFEU and the autonomy principle inasmuch as its decisions have no formal and only limited material effect on the interpretation of EU law beyond the parties themselves. No EU Member State court would feel bound by such interpretation, or even much influenced by it. Other arbitral tribunals constituted under the ECT may advert to the interpretation of EU law of another arbitral tribunal, but any such influence would be entirely eclipsed by the interpretation of the CJEU and any fellow Member State court.

It is submitted that the result in Achmea and its progeny at the CEJU was not reasonably foreseeable as far as Article 177(2) of the PILA is concerned.

If this restriction on capacity could not objectively have been foreseen, it may be contended that the EU and Spain with it is in not in bad faith in relying on it to escape the arbitration. The same follows inasmuch as the EU Member State had no control or influence over this judicial development.

If this is the case, Article 177(2) of the PILA would not stand against a finding of Spain’s lack of capacity to enter into the ECT in relation to intra-EU arbitration. On the other hand, if, as was the view of the Swiss Supreme Court, this ‘discovery’ of the incapacity was unreasonable, it might be contended that it is in bad faith to rely on it.

But the better view may be that the law of the state does not determine the state’s capacity to arbitrate where the arbitration agreement in question proceeds from a treaty, but rather it is public international law that applies, exhaustively or in supplement to Article 177(2) of the PILA.⁷⁰

The source of treaty obligations to arbitrate is public international law. Public international law supplies a regime relating to states’ capacity to enter into public international law obligations. So this regime would appear to claim to apply in relation to public international law obligations.

The Swiss vision for Switzerland itself is that, in accordance with Article 5(4) of the Swiss Federal Constitution,⁷¹ public international law binding upon the state takes precedence over its municipal law. This is some indication that, more generally, the Swiss legal order would treat the public international law regime on state capacity to enter into treaties as derogating from the ordinary approach to the law applicable to the capacity to arbitrate under Swiss law, including derogation from or as a supplement to Article 177(2) of the PILA.

Indeed, that article would appear to assume the application of state law, so where this does not obtain (eg where public international applies) that article arguably does not apply either.⁷²

But even if there is no displacement, Article 177(2) of the PILA, an indeterminate provision, may be understood not to occupy the entire field in relation to the circumstances when a state may plead its incapacity to agree to arbitration but rather may be supplemented by applicable public international law.

The Vienna Convention contains two provisions of relevance in relation to capacity. Switzerland is a signatory to the Vienna Convention. Its courts will therefore apply its provisions on this matter, independently of whether or not they declare it customary international law. In any event, the supremacy of international law over internal law is considered to be part of customary international law according to general doctrinal analysis.⁷³

Under public international law, every state has ‘capacity to enter into treaties’.⁷⁴ Legal capacity is an incidence of statehood, which is determined by public international law. Under Article 6 of the Vienna Convention legal capacity entails the capacity to enter into treaties.

This relatively vague provision mostly refers to the definitional nature of the state, as being able to enter into a treaty. It concerns itself more with the general enunciation that all states have equal capacity to enter into a treaty and defines this capacity as foundational to the nature of the state.⁷⁵

Article 46 of the Vienna Convention governs the extent of that capacity, which is there referred to as ‘competence’, to enter into treaties.

Article 46 provides that in principle a state may not rely on its internal law to deny its ‘competence’ to enter treaties, except in the limited circumstance where the basis of the incompetence was ‘fundamental’ and this was ‘manifest’:

Article 46

Provisions of internal law regarding competence to conclude treaties

1. A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent unless that violation was manifest and concerned a rule of its internal law of fundamental importance.

2. A violation is manifest if it would be objectively evident to any State conducting itself in the matter in accordance with normal practice and in good faith.

The term manifest is to be understood ‘according to its ordinary meaning, ie clear or obvious and objectively (ie to any other State) evident’.⁷⁶ Other signatories to the treaty are protected in their good faith reliance on the treaty, but not so where they knew or objectively should have known about the lack of consent.⁷⁷

Lastly, the provision relied upon as denying capacity must be of fundamental importance to the state invoking it. It must ‘directly relate[…] to, and provide[…] an essential condition for, the competence to conclude a treaty.’⁷⁸

As argued above in the context of Article 177 of the PILA, it is doubtful that the violation was manifest.

Moreover, although the EU is certainly of the view that the restriction on EU Member States entering into agreements for intra-EU arbitration is of fundamental importance, there is doubt whether objectively (see Article 46(2) of the Vienna Convention) such a conclusion may be arrived at. The Swiss Supreme Court would appear to deny any such fundamental importance a fortiori in that it is of the view that there is no rule of internal EU law denying EU Member States capacity to enter into intra-EU investment treaties.⁷⁹

At any rate, where there is a lack of capacity sufficient under Article 46 of the Vienna Convention to impugn a treaty, the effect is that, at the instance of the mistaken state, the treaty is voidable, not void ab initio.⁸⁰ The termination of a treaty because of voidable mistake is governed in the first instance by the provisions of that treaty on termination, if it contains any. Otherwise it is the regime under Articles 65 et seq. of the Vienna Convention which governs, including a waiting period of at least three months following notification of termination to the other signatories.

The result is that as a matter of public international law Spain cannot plead incapacity to agree to intra-EU arbitration on the basis of EU law as enunciated in Achmea and its progeny.

For the sake of completeness, it may be mentioned that a state may also escape a treaty for an error in entering into it, within the meaning of Article 48 of the Vienna Convention, which provides as follows:

Article 48

Error

1. A State may invoke an error in a treaty as invalidating its consent to be bound by the treaty if the error relates to a fact or situation which was assumed by that State to exist at the time when the treaty was concluded and formed an essential basis of its consent to be bound by the treaty.

2. Paragraph 1 shall not apply if the State in question contributed by its own conduct to the error or if the circumstances were such as to put that State on notice of a possible error.

3. An error relating only to the wording of the text of a treaty does not affect its validity; article 79 then applies.

But this basis cannot avail the EU in its attempts to escape intra-EU investment treaties, inter alia, since it does not apply to errors of law.⁸¹

4.4. Arbitrability

In that same decision,⁸² the Swiss Supreme Court rejected a challenge based on the inarbitrability of intra-EU disputes.

Swiss legal commentators had come to the view that foreign inarbitrability would generally not be relevant to the determination of arbitrability under Swiss international law since Article 177(1) of the PILA laid down a material rule on the matter, for the very purposes of avoiding the complicated applicable law analysis that otherwise would need to be conducted. The narrow acknowledged exception was where the foreign arbitrability amounted to a violation of public policy. Voser and Nessi summarize the position as follows:

It emerges from the above that the majority of Swiss commentators take the view that the only limitation to arbitrability is public policy within the meaning of Article 190(2)(e) of the PILA. Put differently, it is only when the disregard of a foreign mandatory law would lead to an outcome that is contrary to public policy within the meaning of Article 190(2)(e) of the PILA that an arbitral tribunal should declare a dispute not arbitrable.⁸³

In its recent judgment, the Swiss Supreme Court appears to have closed the door to arbitrability challenges based on foreign law inarbitrability even for this narrow exception.

The Swiss Supreme Court held that arbitrability is a matter of the validity of the arbitration agreement, which is a matter of jurisdiction, not public policy. The Supreme Court therefore held that an award allegedly contrary to foreign arbitrability can only be challenged on the basis of lack of jurisdiction, that is, under Article 190(2)(b) of the PILA, and not Article 190(2)(e) of the PILA.⁸⁴

4.5. Material scope of arbitration agreements

In Swiss international arbitration, not only is the substantive validity of an arbitration agreement governed by Article 178(2) of the PILA but also its scope, in particular its material scope. If the lex causae or (much more rarely) the law to which the arbitration agreement has been subjected is the law of an EU Member State, the application of relevant EU law will arise.

There is one area where EU law may disclose a reluctance to extend the material scope of arbitration clauses. It is in regard to certain actions for damages for violations of Article 101 TFEU, which is for concerted violations of EU competition law. The concern of EU law here is that since, as a rule, the action will not lie in contract but in tort or on a near-tort basis, it may not have been in the contemplation of the parties when they were agreeing to their arbitration clause. It is more consistent with the protection of the right to damages for EU competition law violations not to interpret a generally formulated arbitration agreement to extend to actions seeking such damages.

There is some indirect support for this position in the EU case law and in the literature. Case C‑352/13, Cartel Damage Claims (CDC) Hydrogen Peroxide SA v Evonik Degussa GmbH et al.⁸⁵ concerned interpretation of the breadth of a choice of forum clause under Article 23 of the original Brussels Regulation,⁸⁶ and not directly an arbitration agreement. In his opinion, Advocate General Jääskinen treated arbitration agreements as equivalent to choice of court agreements for this purpose as both being ‘clauses conferring jurisdiction’. He was of the opinion that the effective protection of EU law rights to damages for cartel injury was compromised by allowing their submission to arbitration in the absence of the right-bearer’s clear agreement to do so. He affirmed that actions in damages for concerted action are generally so remote from the contract containing the arbitration clause that the presumption arises that they were not in contemplation of the parties in agreeing to arbitration:

In the case of a horizontal restriction of competition, such as that on which the main proceedings are based [involving numerous participants and persons allegedly adversely affected, whose implementation has generated a multitude of individual supply contracts], I find it difficult to accept an exclusion of the normal forms of judicial protection, unless the parties allegedly adversely affected have expressly entered into an agreement to that effect and the national or arbitration courts to which jurisdiction has been assigned in this way are required to apply the provisions of EU competition law as rules of public policy.⁸⁷

What in AG Jääskinen’s estimation was a particular challenge to arbitral jurisdiction was that cartel agreements are not only separate from the contractual arrangements between a cartelist and its victim, but they are generally achieved without the knowledge of their victims.⁸⁸ Those two factors led AG Jääskinen to conclude that arbitration would not be contemplated, and therefore agreed to by the parties, in relation to damages actions for injury due to cartel agreements.

The judgment of the ECJ in CDC⁸⁹ did not, however, pick up on AG Jääskinen’s comments. It did, however, decide that the scope of prorogation of court jurisdiction clauses under the former Brussels Regulation must be interpreted to exclude claims in tort. The basis of this decision would appear to relate to the express requirement in Article 23 of the former Brussels Regulation that prorogation must be ‘in connection with a particular legal relationship’, ie the contractual relationship.⁹⁰ The ECJ’s reasoning (at paras. 68–70) was as follows:

68 A jurisdiction clause can concern only disputes which have arisen or which may arise in connection with a particular legal relationship, which limits the scope of an agreement conferring jurisdiction solely to disputes which arise from the legal relationship in connection with which the agreement was entered into. The purpose of that requirement is to avoid a party being taken by surprise by the assignment of jurisdiction to a given forum as regards all disputes which may arise out of its relationship with the other party to the contract and stem from a relationship other than that in connection with which the agreement conferring jurisdiction was made (see, to that effect, judgment in Powell Duffryn, C‑214/89, EU:C:1992:115, paragraph 31).

69 In the light of that purpose, the referring court must, in particular, regard a clause which abstractly refers to all disputes arising from contractual relationships as not extending to a dispute relating to the tortious liability that one party allegedly incurred as a result of its participation in an unlawful cartel.

70 Given that the undertaking which suffered the loss could not reasonably foresee such litigation at the time that it agreed to the jurisdiction clause and that that undertaking had no knowledge of the unlawful cartel at that time, such litigation cannot be regarded as stemming from a contractual relationship. Such a clause would not therefore have validly derogated from the referring court’s jurisdiction.

So the ECJ was not concerned with the full effectiveness of court protection of EU law rights, and it did not advert to the position under arbitration agreements. Nonetheless, it may be argued that arbitration agreements will generally express their material scope as in relation to a contract and the argument can equally arise that actions for cartel damages were not in contemplation of the parties in settling the material scope of their arbitration agreement. One can see the analogical force of CDC to arbitration.

Although the authority for such a limitation in the material scope of arbitration clauses is far from compelling, the concern is that in a climate of EU hostility to international arbitration, especially arbitration outside the EU, such limits may prove enticing to EU Member State courts. So, it was thought worth mentioning it here.

After CDC, in Apple Sales International, et al. v MJA⁹¹ the ECJ found, however, that these concerns in relation to the scope of choice of court agreements in respect of Article 101 TFEU do not apply to actions under Article 102 TFEU, ie for damages for abuse of dominant position. The ECJ came to this conclusion on the basis that with Article 102 TFEU the damages action will generally be sufficiently proximate to the contract to be in the contemplation of the parties in selecting a jurisdiction. The ECJ distinguished CDC as follows (at paras. 28–30):

28 However, while the anti‑competitive conduct covered by Article 101 TFEU, namely an unlawful cartel, is in principle not directly linked to the contractual relationship between a member of that cartel and a third party which is affected by the cartel, the anti‑competitive conduct covered by Article 102 TFEU, namely the abuse of a dominant position, can materialise in contractual relations that an undertaking in a dominant position establishes and by means of contractual terms.

29 It must therefore be stated that, in the context of an action based on Article 102 TFEU, taking account of a jurisdiction clause that refers to a contract and ‘the corresponding relationship’ cannot be regarded as surprising one of the parties within the meaning of the case-law mentioned at paragraph 22 of the present judgment.

30 In the light of all the foregoing, the answer to the first and second questions is that Article 23 of Regulation No 44/2001 must be interpreted as meaning that the application, in the context of an action for damages brought by a distributor against its supplier on the basis of Article 102 TFEU, of a jurisdiction clause within the contract binding the parties is not excluded on the sole ground that that clause does not expressly refer to disputes relating to liability incurred as a result of an infringement of competition law.

The practical significance of this concern for narrow interpretation of arbitration agreements under EU Member State law is, however, modest in Swiss international arbitration. By virtue of Article 178(2) of the PILA, Swiss law will always apply as an alternative to EU Member State law to interpret the material scope of an arbitration clause. So if it is more favourable to arbitration than EU law, its result will carry.⁹²

When applying Swiss law under Article 178(2) of the PILA, there is an initial restrictive interpretation of the intent to arbitrate in case of doubt. However, once intention to arbitrate has been sufficiently established, there is a presumption that the parties in question intended to entrust the arbitrators the entirety of their dispute.⁹³ In particular, non-contractual claims fall under the material scope the arbitration agreement under Swiss law unless there is express limitation to contractual claims or at least wording actively suggesting such a limitation.⁹⁴ By consequence, this potential restriction under EU law will not generally affect Swiss arbitration.

5. Reaction of EU Member States contrary to arbitral jurisdiction under Swiss arbitration law

5.1. Introduction

This section concerns the reaction of EU Member States where Swiss arbitration law asserts Swiss arbitration jurisdiction contrary to EU law before that arbitration has produced its final award. In keeping with the approach in this article to address issues in the order in which they arrive in the career of an arbitration and its resulting award, the enforcement of Swiss international arbitration awards before EU Member State courts in face of a violation of EU law will be considered later, in Section 8. below.

5.2. Jurisdiction

Even where Swiss arbitration law affirms the jurisdiction of an arbitral tribunal sitting in Switzerland, there is an issue as to whether EU law will permit or even require jurisdiction of an EU Member State court.

Such a situation may arise, for example, in relation to EU law’s potentially restrictive treatment of the material scope of arbitration agreements. Will EU law permit or even require EU Member State courts’ taking jurisdiction over matters that EU law treats as beyond the arbitration agreement, in parallel to the Swiss arbitration of them?

The availability of damages actions for breaches of EU competition law is of importance to the EU legal order.⁹⁵ The full effect requirements of EU law may well therefore entail that EU Member States courts must take jurisdiction in accordance with a narrow EU law interpretation of arbitration clauses.

In such a case, it may be expected that an EU Member State court will do so, even in face of the acceptance by an arbitral tribunal in Switzerland of its own jurisdiction over the matter.

If, however, there is no such requirement of EU law on EU Member State courts, the extent of this risk depends principally on how the individual EU Member State court which, absent the arbitration agreement would have jurisdiction, treats its review of arbitral jurisdiction, that is, its approach to the so-called ‘negative Kompetenz-Kompetenz’ principle. It also depends in some degree on that court’s treatment of the obligation to recognize arbitration agreements under Article 2 of the NYC. The question of the material scope of an arbitration agreement is nonetheless a different one than that of whether it is ‘null and void, inoperable or incapable of being performed’ within the meaning of Article 2(3) of the NYC.

As has been seen, in ISU fundamental rights of a person under EU law, in that case the right to an effective remedy for breach of EU competition law, were at issue. In ISU the protection of those EU rights was urgent because skaters’ careers are short in duration, and any exclusion from competition is a serious penalty against them. If, as with CAS, arbitration interim measures may not be sought of an EU Member State court, they need to wait for an arbitration to run its course and seek review only at the enforcement stage (if this is before an EU Member State court at all). They will therefore suffer substantial prejudice if the exclusion is then found to be in violation of EU law.

Moreover, the ECJ is of the view that such skaters do not freely choose CAS arbitration, since they must accept it as a condition of competing.

As mentioned above, it is possible to understand ISU as requiring, in such circumstances, original jurisdiction of EU Member State courts, or at the least a right to make an application to them for interim relief.

If, however, EU Member States take jurisdiction in face of the Swiss arbitration clause they will be doing so in flagrant violation of Article II of the NYC. It cannot be that the same arbitration seated in an EU Member State court is ‘null and void, inoperable or incapable of being performed’ within the meaning of Article 2(3) of the NYC, and not so if seated in Switzerland.

5.3. Injunctions against arbitration in Switzerland

In Romatsa,⁹⁶ the ECJ stated in regard to an ICSID award that, ‘[s]uch an award cannot therefore produce any effect and cannot therefore be enforced with a view to proceeding with the payment of the compensation awarded by it'.⁹⁷

There is, however, a question as to what limits there may be to the requirements upon EU Member States under EU law to give effect to the EU’s prohibition on intra-EU investment treaty arbitration.

An obvious way of ensuring this is for EU Member State courts to issue injunctions against arbitration seated outside of the EU, in particular in Switzerland. Where in particular the claimant is based in the EU Member State in question, any such injunction could be enforced against it by the EU Member State court.

There is no express EU law requirement for EU Member States actively to interfere with Swiss international arbitration in violation of EU law. In particular, there is no judgment of the CJEU so requiring.

But the EU law doctrines of equivalence and full effectiveness may entail such a requirement.

According to Article 4(3) TEU, EU Member States are under a duty loyally to cooperate in ensuring the full effect of EU law such as the requirements of Achmae and Komstroy.

These cases may, however, be understood as requiring only that the system of EU judicial competences not be disturbed and in particular the jurisdiction of the CJEU not be restricted. The enforcement actions of extra-EU courts do not affect these competencies. By consequence, it is no requirement of EU law (under Achmae and Komstroy) to interfere with such activity of non-EU instances.

Additionally, it is a much lesser incursion into the procedural autonomy of EU Member State courts to require that they take no action to assist in the violation of EU law than to issue anti-arbitration injunctions which require action.

The requirements of Romatsa may in fact be circumscribed. EU Member State courts are required to refuse enforcement of arbitration awards rendered outside the EU the content of which offends against the autonomy of EU law since enforcing them is an indirect violation of the principle of autonomy. Moreover, there is no discretion with courts as to whether or not they will take jurisdiction to decide enforcement actions.

But these requirements of EU law must be understood to be limited to EU territory. EU Member States are therefore not required to police what occurs outside of the EU as part of their duty of loyal cooperation.

EU law is itself self-limiting according to the sovereignty principle. The reason for the effectiveness principle of EU law is the protection of EU values. As pointed out in a recent decision of the Landgericht Essen,⁹⁸ one of these values is respect for other States’ sovereignty, seen for example in Articles 2, 3(5), 8, and 21 TEU. A court’s power to determine its own jurisdiction (Kompetenz-Kompetenz) is a fundamental component of State sovereignty, with which anti-suit injunctions, however directed at individual litigants, seek to interfere.

It may also be contended that orders seeking to interfere with the enforcement of arbitration agreements in other countries are in violation of the NYC. This argument found favour before the Amsterdam District Court.⁹⁹ It held, without reference either to any particular provision of the NYC or to any authority, that that Convention creates an exclusive jurisdiction for review of arbitral awards with the courts of the place of arbitration and an exclusive jurisdiction for enforcement at the place of enforcement. It held further that anti-suit injunctions seeking to interfere with the enforcement of arbitration awards violate these supposed jurisdictional requirements of the NYC in that they create an additional forum in which to challenge the award and to determine its enforcement.

Yet there is no express reservation of jurisdiction in either case in the NYC. Article V(1)(e) of the NYC does permit a refusal to enforce where the award is not in conformity with the law of the place it was made. This is perhaps some suggestion that its non-conformity with the law of other places, subject to the arbitrability (Article V(2)(a)) and public policy (Article V(2)(b)) bases of refusal, is not relevant.

As for the arbitrability and public policy exceptions, they are expressly limited to the law of the place of enforcement, which logically will never be the law of the place of such anti-suit injunctions.

The most that can be affirmed in favour of such operation of the NYC is that it is certainly aimed at encouraging the enforcement of arbitration awards and expressly stipulates and limits the bases upon which such enforcement may be refused. As anti-suit injunctions may interfere with that scheme and expand these bases for refusal to enforce, they are contrary to the spirit of the NYC.

As for the principle of equivalence, where EU Member State law treats a claim under its municipal law a certain way, it is required to treat an equivalent EU law claim the same way. Where therefore under the law of an EU Member State it would grant the anti-suit injunction it must do so for the requirements of EU law such as those under the Achmae and Komstroy.

As a general comment, and as observed by the Swiss Supreme Court¹⁰⁰, common law countries are much more open to anti-suit injunctions than civilian law countries are. Civilian legal systems, such as Swiss law, tend to deny such requests over concerns about interfering with another state’s court’s Kompetenz-Kompetenz.¹⁰¹ The vast majority of EU Member States have civilian systems and approaches to law. They would therefore tend to refuse, and as a result no equivalence argument could be built under EU law. The major exception is Ireland,¹⁰² which is indeed host to many large corporations operating internationally, and, as such, to potential claimants under intra-EU investment treaties. Ireland, however, was not party to any BITs at the time of Achmea, although it was party to the ECT.

6. Substantive law

6.1. Introduction

This section reviews the EU legal order’s claims to the application of its substantive law and how Swiss international arbitrators should treat such claims. First, the application of EU law as the lex causae is considered. Here the principal issue is what EU law is contained in the lex causae, whether chosen subjectively by the parties, or whether it is applied objectively, upon the Swiss ‘closest connection’ test in Article 187(2) of the PILA. Secondly, the application of EU substantive law on a special basis, for example as mandatory norms, will be considered. The principal issue here is whether EU law even seeks its application in international arbitration.

6.2. Lex causae

6.2.1. General

Under Article 187 of the PILA, Swiss international arbitrators will either apply the substantive legal rules that the parties chose, or those with the closest connection to the case.

It is conceptually possible for parties expressly to choose the application of EU law, but such a choice must be extremely rare in practice. EU law is not a complete legal system but rather an adjunct to EU Member State legal systems,¹⁰³ themselves complete legal systems, with or without EU law. Parties generally designate an entire legal system as their applicable law, in the interests of avoiding normative voids or uncertainty.¹⁰⁴

For the same reason, EU law will not usually qualify in and of itself as legal rules with ‘the closest connection’. A blanket legal system will generally supply such legal rules.

Where this is the law of an EU Member State, there is a question whether, for the purposes of either branch of Article 187 PILA, this law includes the EU law entwined within it. How is EU law part of EU Member State law and therefore entitled to be given effect where EU Member State law is chosen?

As seen above, as a requirement of EU law, ie the doctrines of direct effect and primacy, Member State law must give EU law effect in accordance with the requirements of EU law. Under EU law, EU Member States have delegated the determination of what EU applies within their legal system to the EU. Therefore, the material scope of the applicable legal system is determined by EU law, and it treats the rules it engenders as being part of EU Member State law.¹⁰⁵

Other things being equal, Swiss international arbitrators will apply the EU law components of Member State law in accordance with the will of the EU Member State, itself accounting for the constitutional requirements on it that emanate from EU Law.

Any difference in the content of Member State law as lex causae as a function of whether it is a court of that Member State that is applying it, or a court outside that Member State (even the court of a fellow EU Member State), or an arbitral tribunal is applying it, would require an explanation, and, it would seem, none avails here.

By consequence, the application of EU Member State law by virtue of either basis in Article 187 PILA attracts the application in principle¹⁰⁶ of all EU law within it.

In the result, for example, international arbitrators will properly accept the decisions of an EU Member State court on EU law as a component of that EU Member State’s law.

On the other hand, the decisions of courts of EU Member States whose law is not the lex causae will not generally be an authoritative source of that EU Member State’s law. But an international arbitration tribunal may treat these as persuasive. All EU Member State courts have particular institutional capability and experience of interpreting and applying EU law as they must routinely do so.

6.2.2. EU law reposing exclusively upon the duty of loyalty under Article 4(3) TEU

There is a question whether elements of EU law reposing exclusively upon the duty of loyalty to which EU Member States are subjected by virtue of Article 4(3) TEU should be applied by arbitrators when the law of an EU Member State, and EU law with it, is the lex causae. At issue here are therefore (i) the interpretation of Member State law sympathetically with EU law, (ii) the indirect effect of directives that have not yet been transposed into Member State law, (iii) Commission proposals and Council mandates to negotiate, and (iv) Commission decisions on EU competition law. This duty of loyalty does not extend to adjudicators outside of the scheme of EU law, to Swiss international arbitrators in particular.¹⁰⁷

Advocate General Maciej Szpunar, writing ‘extra-judicially’,¹⁰⁸ has assessed that arbitral tribunals should in fact act consistently with decisions of the European Commission on EU competition law since ‘they are binding and constitute part of the EU legal order’.¹⁰⁹ This reasoning may apply generally in regard to these elements of EU law reposing exclusively upon the duty of loyalty under Article 4(3) TEU.

Subject, however, to the considerations in Section 6.2.3 below, ultimately, whether international arbitrators nonetheless give effect to these elements of EU law depends on their determination of the will of the EU Member State legal order, which in turn depends upon the will of EU law.

It would be extraordinary if EU law disclosed one set of principles for its interpretation by EU Member State courts and another for any other adjudicatory instance.

EU law may, additionally, be understood to be requiring the limited actualization of its as yet untransposed norms through EU Member State courts. International arbitrators may feel it inappropriate themselves to supply that actualization on the basis that this may contravene the constitutional rules of the EU Member State, whose law is at issue in relation to the transposition of international law.

As for Commission proposals and Council mandates to negotiate, and Commission decisions on EU competition law, Swiss international arbitrators may find rather that their limited force is already a matter of the domestic law of the EU Member State concerned and give them this limited effect. Certainly, however, one cannot envisage a Swiss international arbitrator considering him or herself under an EU law duty to suspend an arbitration whilst the European Commission decides on a relevant question of EU competition law. If a suspension is ordered it will typically be for practical reasons of accuracy in the application of the law, and efficiency of the arbitral process.

Where arbitrators are sitting in EU territory, they may be concerned about the enforceability of the award in the EU if they fail to give expression to untransposed EU law, Commission proposals and Council mandates to negotiate, and Commission decisions on EU competition law. The matter will ultimately come before an EU Member State court which is subject to the duty under Article 4(3) TEU and may require the award to reflect the position under that duty. Where they are sitting in Switzerland the much more limited concern is the potential unenforceability of their award within the EU.

6.2.3. Public interest elements of EU law

Much of EU law serves a public purpose, which is often the interests of the EU itself, described above.

Does a choice of a legal system entail a choice of elements which the parties themselves have no particular interest in, such as public interest norms?

An arbitrator sitting in Switzerland and applying the lex causae under Article 187(1) of the PILA will in principle apply all of the law the parties chose, or all of the law most closely connected that may be imputed to party choice. In both cases, this will generally be all of the contract law of the relevant legal system. This is the majority opinion in Swiss arbitration law.¹¹⁰

Parties generally choose whole legal systems and can be inferred to have done so, to preserve the coherence of the system they choose, and to avoid normative gaps.

In turn that whole, coherent legal system, when it is the law of an EU Member State, will encompass both purely domestic rules and those emanating from EU law.

It may, however, be doubted whether the parties choose even the public interest elements of a lex causae where these elements’ purpose is of no interest to the parties but only to the legal system itself. The same is true of the objective application of a lex causae inasmuch as it will generally apply as the supposed expression of the parties’ interests, and in no way of any public interest. Coherence and completeness of the law are in the interests of the parties, but, for example, sanctions are not really, or only accidentally. The further integration of the EU is also unlikely to stimulate much concern with a party to a contract.

6.2.4. Are elements of EU law in EU Member State law contrary to international law also applicable as part of the lex causae?

As has been seen, EU law is prophylactic to any public international law that is not consistent with fundamental EU law principles. EU Member State law accepts this for its own law, in accordance with its delegation to EU law of the power to determine what international law is part of EU Member State law. A Swiss international arbitrator may therefore enquire whether in applying EU Member State law he or she too should equally reject the application of public international law inconsistent with fundamental EU law. The Swiss Supreme Court’s decision 4A_244/2023 of 3 April 2024 does not assist here since in that case the Supreme Court was applying Swiss law (to the question of consent to arbitration, by virtue of Article 178(2) of the PILA) to a state, ie a subject of public international law. Both these elements attract the application of public international law by reference from Swiss law.¹¹¹

The better view may be that when applying EU Member State law as the lex causae only those elements which that Member State law treats as valid are part of the lex causae, and not international obligations contrary to EU law. This better reflects the will of the EU Member State constitution as dictated by EU law.

The matter is different in regard to the operation of potential subsidiary bases (whether or not outside the lex causae¹¹²) of the application of legal norms in Swiss international arbitration (see Section 6.2 below).

6.3. The application of EU law on a special basis

If one, with the majority of commentators, accepts that there is at least a power with Swiss international arbitrators, if not a duty, on appropriate occasion to apply substantive norms outside the lex causae and those of the state of the place of arbitration (in our example, Switzerland),¹¹³ then the question arises, does this duty or obligation extend to giving effect to public interest norms originating with EU law.

When the occasion arises to apply or give effect to EU law outside of the EU there is a particular difficulty. Public policy and mandatory norms as special bases for the application of substantive third-state norms¹¹⁴ both presuppose a will of that third state that they be applied, or at least that effect be given to them.

EU law’s focus, however, is generally fixed on the requirements imposed on Member State institutions, such as courts, to apply EU law. EU law lays down a set of duties on Member State institutions to achieve this purpose.

EU law simply does not distinctly articulate what it may require of adjudicators outside the EU. Indeed, in Nordsee¹¹⁵ the ECJ determined that arbitral tribunals were not eligible to refer questions to the ECJ under the equivalent of Article 267 TEU. One might infer from that a more general lack of direct expectations about how arbitral tribunals treat EU law even its fundamental provisions.

One of the main reasons why in practice third-state mandatory norms are not frequently given effect is that their state sponsor has not been unequivocal that it seeks such effect.¹¹⁶

For that reason a Swiss international arbitrator may decide not to give effect to EU law norms on a special basis.

Nonetheless, an argument may be built in favour of the EU seeking effect for elements of its law on a special basis.

First, EU law increasingly is demanding that its fundamental norms be subject to application by EU Member States. The point of this is not just the autonomy of the EU legal order. It must also be to ensure that these norms are applied in their substance. Although not subject to the assistance of the EU legal order, adjudicators such as Swiss international arbitrators may see the latter as a sufficient basis for them too to apply such norms of EU law.

Secondly, the principle of equivalence entails that any special basis for giving effect to indigenous Member State norms be equally available for those extending from EU law. The law of most if not all EU Member States will contain norms to which they seek effect to be given without regard to what the lex causae is.

Thirdly, at least to some degree, EU law has enunciated a hierarchy of importance of its norms in designating some of them as fundamental. Generally speaking, legal orders have a three-stage order of importance of norms. First, there are norms purely in the interests of legal subjects who are free to derogate from them. Secondly, there are norms that may not be derogated from in a domestic context since they are important for the coherence of the legal system, such as Article 404 of the Swiss Code of Obligations (on the termination of the contract of mandate). Thirdly, there are norms which the legal order seeks to apply even where the domestic legal order as a whole has been the subject of a derogation, for example, by party choice of another legal system, because they seek public interest objectives which usually are engaged inasmuch as there is a sufficient connection to that state’s territory.

The EU legal order treats its fundamental norms as being of application (by EU Member State courts) in a manner most akin to the third basis. It treats them so because of their importance to the objects of the EU legal system of a public interest.

Fourthly, EU law enunciates criteria for mandatory norms building upon a definition first outlined in Joined Cases C-396/96 and C-376/96, Arblade and Leloup.¹¹⁷ Article 9(1) of the Rome I Regulation sets these criteria identifying mandatory norms as follows:

“[…] provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation”.

Certainly various norms of EU law will meet these criteria.

Fifthly, EU law itself enunciates a basis for EU Member State courts to apply any public interest norms outside of the lex fori, which comprise a category that is functionally similar to third-state norms in international arbitration. This is Article 9(3) of the Rome I Regulation,¹¹⁸ which provides:

3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

A norm’s seeking to render performance of the contract unlawful is not just a condition of its being given effect under Article 9(3) of Rome I, but it can be seen too as an indication of its qualifying as an ‘overriding mandatory provision’. Inasmuch as a norm of EU law deems contractual performance to be unlawful, such as Article 101 TFEU on concerted violations of EU competition law, it may be deduced that the EU treats it as a mandatory norm.

7. Refusal by Switzerland to enforce an international arbitration award contrary to EU law

There was a time when Swiss international arbitration law appeared to countenance the possibility that a violation of foreign arbitrability might constitute a public policy basis to refuse to enforce an arbitration award in Switzerland.¹¹⁹ But the matter appears recently to have been resolved in the negative.¹²⁰

In principle, a violation of values important to foreign legal systems may satisfy the requirements under Swiss law to nullify or decline to enforce an international arbitration award as contrary to public policy.

The requirement is that it be contrary to values which in the Swiss perspective are fundamental on a sufficiently generalized basis around the world.¹²¹ Competition law, in particular EU competition law, did not satisfy that standard in 2008.¹²² With increasing international consensus of the perniciousness of certain ‘hard core’ offences, such as horizontal price fixing, perhaps at least a core of competition law violations may today rise to the necessary level.

It remains doubtful, however, that the further integration of the EU is of that degree of concern to anyone but the EU itself and its Member States. But it is conceivable that other fundamental norms of EU law meet the standard.

8. Refusal of EU Member State courts to enforce Swiss international arbitration awards contrary to EU law

As for the enforcement of a Swiss international arbitration award in the EU, in Romatsa there is specific EU law authority that an award contrary to fundamental principles of EU law, on the facts there the autonomy of EU law, cannot be enforced by an EU Member State (Belgium in that case).¹²³ The precise wording of the ECJ concerning the effect of incompatibility with fundamental EU law was that, ‘such an award therefore cannot produce any effect and cannot be enforced in pursuance of the compensation granted by it’.¹²⁴

Incidentally, the Romatsa award was subject to a decision of the European Commission to the effect that any enforcement of it would amount to state aid in violation of Article 107 TFEU. But this aspect of the case was not relied upon by the ECJ in requiring the non-enforcement. Although the questions posed by the Belgian court in this preliminary reference specifically enquired about the effect of the Commission decision, the ECJ consciously preferred to rest its decision on the wider footing of a violation of the wider autonomy principle.

Romatsa concerned the enforcement of an ICSID award. So even ICSID awards in violation of fundamental EU law are unenforceable in EU Member States. The ECJ did not indicate under which basis of the NYC, where it applies, such enforcement was to be refused, but inarbitrability (Article V(2)(a)) and public policy (Article V(2)(b)) are the obvious candidates.

The Romatsa award was unambiguously in violation of EU law and subject to no gradation. No independent analysis of the arbitral tribunal could have added to or subtracted from this reality. But often whether an award constitutes a violation of EU law will be a much more vexed question. Violations of EU competition law under Articles 101 and 102 TFEU are good examples since such violations increasingly proceed upon sophisticated effects analysis.

In Achmea the ECJ distinguished ‘commercial arbitration’ for the purposes of EU law requirements on the rather inchoate basis that it resulted from the parties’ ‘freely expressed wishes’.¹²⁵ This Achmea reasoning found its way unaltered into Komstroy.¹²⁶  PL Holdings is silent on the issue. The Romatsa court clarified that EU law has no objection to ordinary commercial arbitration tribunals interpreting and applying EU law since their jurisdiction is specific whereas treaty jurisdiction is ‘general’.¹²⁷

In this there appears to be a shift away from concerns about the free choice of arbitration to the degree to which the choice of arbitration is institutionalized. The availability of investment arbitration created by an investment treaty does not ipso facto restrict investors from pursuing other existing options, such as relief before EU Member State courts. But although remaining short of court status for the purposes of preliminary references (Article 267 TFEU), treaty operation institutionalizes arbitration in a way that makes it a greater threat to EU autonomy than specific, individual choice of arbitration does.

Whatever the position, it is not a paragon of limpidity. It would at any rate appear that there remains scope in EU law permitting the continued coexistence between arbitration law review of awards and the requirements of EU law on the Eco Swiss basis.

The issue arises, however, whether EU law requires, within that scope, a particular degree of scrutiny from the EU Member State court examining the award in enforcement proceedings.¹²⁸ There will generally be a tension here with modern pro-arbitration legal systems favouring the finality of arbitration awards.

As alluded to in the introduction to this article, Eco Swiss initially suggested that EU law left undisturbed the intensity of Member State court review of arbitration awards.¹²⁹ In reference to Eco Swiss, Achmea frames the issue as a concern to protect the ‘efficiency’ of international arbitration as against the countervailing concern to ensure the expression of the fundamental provisions of EU law.¹³⁰

In Genentech, Avocat General Wathelet expressed the view that the then permissive approach of the French courts was in contravention of the EU law requirement of effectiveness.¹³¹ The ECJ, for its part, did not address the matter in its Genentech decision.¹³²

The suggestion is therefore that EU law has no requirements, in particular effectiveness requirements, concerning this review for compatibility with fundamental EU law beyond treating EU law as Member State law for the purposes of public policy review.¹³³

One must therefore look to Member State law for the standard of public policy review in relation to a violation of EU fundamental law.

Nonetheless, perhaps indirectly out of concern for the effectiveness of EU law, French arbitration law is tightening its public policy review of arbitration awards.¹³⁴ Although that tightening is not specific to EU law -- in fact the core case was corruption -- given the influence of French arbitration law in Europe (and around the world), this may portend a more general movement.

Footnotes

Author notes