European Union: Member States Bid Adieu To Intra-EU Bilateral Investment Treaties (BITs)

The European Commission (EC) has, for some time, been urging EU Member States to end their intra-EU Bilateral Investment Treaties (BITs). In response, in January 2019, a number of EU Member States issued relevant Declarations announcing their intention to comply and terminate their intra-EU BITs. Following up on their promise, a majority of EU Member States (Signatories)¹ has now penned an Agreement that - once ratified and effective - will terminate 130 intra-EU BITs, albeit Austria, Finland and Sweden have decided not to participate.² Perhaps less surprising was the absence of Ireland (as it has no BITs in force) and the United Kingdom, following its departure from the EU on 31 January 2020.

The Agreement does not apply to investor-state arbitrations under the Energy Charter Treaty (ECT), to which the majority of EU Member States (and the EU itself) are party, or to BITs between EU Member States and third countries.

In this note we explain the Agreement's key provisions and highlight some of the challenges that it may pose going forward.

Implications of the Agreement on Intra-EU investor-state arbitrations

The Agreement identifies three categories of intra-EU arbitrations by reference to the date of Achmea (6 March 2018) - "New Arbitration Proceedings", "Concluded Arbitration Proceedings" and "Pending Arbitration Proceedings" - and affects each category in different ways.

New Arbitration Proceedings (initiated on/after 6 March 2018)

• The Agreement provides that arbitration clauses within the relevant BITs shall not serve as legal basis for arbitrations commenced on or after 6 March 2018 (Article 1(6); Article 5)
• Signatories must notify the arbitral tribunal of the consequences of Achmea, i.e. the lack of a legal basis to arbitrate (Article 7 (a))
• Where the Signatory is party to judicial proceedings concerning an arbitral award issued on the basis of a BIT, it shall ask the competent national court (including in any third country) to set the arbitral award aside, annul it or refrain from recognising and enforcing it (Article 7 (b))

Concluded Arbitration Proceedings (concluded before 6 March 2018)

• Concluded Arbitration Proceedings are defined as any arbitration proceedings which ended with a settlement agreement or with a final award issued prior to 6 March 2018 where:
  • the award was executed prior to 6 March 2018 and no challenge, review, set-aside, annulment, enforcement, revision or other similar proceedings in relation to that award were pending on 6 March 2018 (Article 1 (4) (a)) or
  • the award was set aside or annulled before the entry into force of the Agreement (Article 1 (4) (b))
• The Agreement does not affect Concluded Arbitration Proceedings - those proceedings will not be re-opened (Article 6).

Pending Arbitration Proceedings (initiated prior to 6 March 2018 but not qualifying as Concluded Arbitration Proceedings)

• Pending Arbitration Proceedings are arbitrations initiated prior to 6 March 2018 but which do not qualify as Concluded Arbitration Proceedings, regardless of their stage at the entry into force of the Agreement (Article 1 (5))
• As with New Arbitration Proceedings, Signatories are required to notify the arbitral tribunal of the consequences of Achmea, i.e. the lack of a legal basis to arbitrate (Article 7 (a)).
• Where the Signatory is party to judicial proceedings concerning an arbitral award issued on the basis of a BIT, it shall ask the competent national court (including in any third country) to set the arbitral award aside, annul it or refrain from recognising and enforcing it (Article 7 (b)).

"Structured dialogue" for Pending Arbitration Proceedings

It is open to either party to Pending Arbitration Proceedings within six months of the applicable BIT's termination (Article 9 (2)) to request that the parties enter into a settlement procedure with a view to resolving the dispute provided that (i) the Pending Arbitration Proceedings are suspended at the request of the investor (Article 9 (1) (a)); and (ii) the investor does not seek to enforce the award (if one has been issued) (Article 9 (1) (b)).

A settlement procedure shall be entered into if the CJEU (or a national court) has made a final ruling that there was a violation of EU law. Conversely, where the CJEU, a national court or the EC has made a final ruling / issued a decision that there has not been a violation of EU law, a settlement procedure shall not be entered into (Article 9 (3); Article 9 (4)).

The settlement procedure will be overseen by a "facilitator", to be appointed by agreement of the parties, failing which the Director-General of the Legal Service of the European Commission shall designate a former member of the CJEU who shall, after consultation with the parties, make the appointment (Article 9 (7); Article 9 (8)). If an agreement on the terms of the settlement is reached, the parties shall accept those terms in a legally binding manner without undue delay. The terms of the settlement must include:

• an obligation for the investor to withdraw their arbitration claim(s) (or renounce execution of an award if already issued, but not enforced / executed) or take into account any compensation previously paid in the Pending Arbitration Proceedings to avoid double-compensation (Article 9 (14) (a)); and
• a commitment to refrain from initiating New Arbitration Proceedings (Article 9 (14) (a))

The settlement may also include a waiver of all other rights and claims related to the proceedings (Article 9 (14) (b)).

Investors will be allowed to file claims under national law to national courts over measures contested in Pending Arbitration Proceedings, even if outside the prescribed national time limitation, on the condition that they withdraw the Pending Arbitration Proceedings and waive all rights and claims pursuant to the BIT or renounce the execution of an award already issued. Provisions that were part of the terminated BIT will have no force as part of the applicable law in such court proceedings (Article 10).

Future outlook

This Agreement is the last chapter in the Achmea saga and marks the end of intra-EU BITs. It brings (some) certainty in terms of transitioning as it contains specific provisions regarding past and present intra-EU BIT arbitrations.

The Agreement however also throws up some thorny issues, for instance:

• The termination of sunset clauses;
• The interplay with ICSID and ECT arbitrations; and
• The removal of important substantive and procedural rights previously afforded to investors under BITs, without introducing an equivalent protection mechanism.

Termination of sunset clauses

Sunset clauses (also known as survival clauses) extend the protection of a BIT for investments made prior to the date of termination of a BIT for a further period of time, usually ranging from 10 to 20 years. Articles 2 and 3 of the Agreement now provide that sunset clauses contained in BITs are terminated, while Articles 5 and 7 end all arbitrations commenced inter alia on the basis of these clauses. Both aspects are on the face of it problematic: Article 70 (1) (b) of the Vienna Convention on the Law of Treaties (the VCLT) provides that termination of an international treaty does not affect parties' rights and obligations created through the execution of such treaty prior to its termination and Article 28 of the VCLT states that international treaties do not ordinarily produce retroactive effects.

Investors are therefore likely to rely on these provisions and on international law concepts of legitimate expectations or acquired rights to argue that they have direct rights under the treaty, which cannot unilaterally be terminated. And tribunals may be sympathetic to their cause given that this Agreement contravenes these long-established international law rules.

ICSID and ECT arbitrations

Another problematic area is the Agreement's interplay with arbitrations under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Energy Charter Treaty (ECT).

The latter fall outside the scope of this Agreement and will be dealt with "at a later stage", so it is not yet clear if - and how - (past and future) ECT arbitrations will be affected.

Conversely, the Agreement's recitals expressly provide that the Agreement also covers arbitrations under the ICSID Convention. The ICSID Convention does not allow its contracting states to unilaterally withdraw their consent to arbitrate but that is precisely what the Agreement achieves, to the potential detriment of investors under the relevant BIT. In the last two years a large number of arbitral tribunals have rejected Achmea's purported effect on both ICSID and ECT arbitrations on the basis that contracting states had previously consented to these procedures and have therefore decided to retain their jurisdiction over such disputes. This Agreement has not yet resolved these thorny subjects in a satisfactory manner.

No replacement regime

Importantly, the Agreement strips investors of the protections offered by intra-EU BITs, without introducing a replacement regime. It creates a gap both in terms of substantive investment protections provided under BITs - such as fair and equitable treatment or compensation in the event of (in)direct expropriation - and dispute resolution mechanism that needs to be filled. And although national and EU law afford some security, it is not equivalent to the rights and protections enshrined in intra-EU BITs.

The Agreement promises that Member States and the European Commission will intensify discussions to ensure that effective protection of investments is provided to all investors within the EU. But it remains unclear how these discussions will unfold and what protective measures will be introduced to level the playing field for European investors that will now be disadvantaged compared to their non-EU counterparts that will still be able to enjoy BIT rights and bring investment arbitrations against EU member states investors.

In the short term, EU-based investors with investments in other EU Member States may seek to take advantage of rights afforded under other BITs that remain in force by restructuring their investments via entities incorporated outside of the EU. However, such restructuring should be handled with care: if a dispute is on foot (or is contemplated) at the time of restructuring, the investment may be excluded from treaty protection. Another alternative could be for investors to negotiate with the relevant Member State on an ad hoc basis and seek specific protection and/or assurances. In all circumstances, investors should weigh up their options and devise a strategy to safeguard their investments going forward.

From the EU's perspective, the Agreement has more pressingly raised the need for the EC and EU Member States to bolster the judicial protection offered by EU law and the European Convention on Human Rights. It has also thrown onto centre stage the possibility of introducing a Europe-wide dispute resolution mechanism for investment disputes, such as a dedicated European Investment Court. Either way the EU will have to carefully consider the way forward to ensure that it remains competitive and as investor-friendly as possible.

Footnotes

1 The 23 EU Member States comprise: Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.

2 However those remaining intra-EU BITs may be terminated unilaterally at a later stage.

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