Sidley Austin LLP | 12 May 2020
Termination of intra-EU bilateral investment treaties – What’s next for investor claims?
On May 5, 2020, the majority of EU Member States signed an agreement (Termination Agreement) to terminate all bilateral investment treaties (BITs) that have been concluded between two Member States of the EU (intra-EU BITs).1
The Termination Agreement is the latest consequence of the judgment issued by the Court of Justice of the European Union (CJEU) in Slovak Republic v Achmea, dated March 6, 2018, which held that the investor-state arbitration provision contained in the Slovakia-Netherlands BIT was incompatible with EU law.2 According to this judgment, arbitration provisions in intra-EU BITs deprive EU courts of jurisdiction and, therefore, are inconsistent with EU law.
Consistent with the Achmea judgment, the objective of the Termination Agreement is to secure that arbitration provisions contained in intra-EU BITs “cannot be applied after the date on which the last of the parties to an intra-EU bilateral investment treaty became a Member State of the European Union.”3 To that end, the Termination Agreement has the effect of terminating intra-EU BITs upon its entry into force in the relevant EU Member States and extinguishing any sunset clauses contained in those BITS so that they do not extend treaty protections beyond the date of termination.
For investors considering potential investment treaty claims against EU Member States, there are several important exceptions to the Termination Agreement.
First, the Termination Agreement expressly clarifies that it does not apply to the Energy Charter Treaty.
Second, at present, the Termination Agreement does not apply to four EU Member States – Austria, Finland, Ireland and Sweden – which have yet to sign it. Ireland is not party to any intra-EU BIT currently in force, but the other three Member States collectively are parties to 32 different intra-EU BITs that remain in force.
Third, given the United Kingdom’s recent exit from the EU, the Termination Agreement does not have any impact on BITs between the United Kingdom and any EU Member State. Likewise, the Termination Agreement has no impact on BITs between EU Member States and other countries outside the EU.
The Termination Agreement is subject to ratification requirements under each Member State’s domestic laws. The agreement will come into force when the second ratification is deposited with the Secretary General of the Council of the EU. For each Member State, the agreement shall become binding 30 days after the deposit of its ratification by that Member State. In practical terms, this means that the Termination Agreement will become effective with respect to any given intra-EU BIT 30 days after the last of the State parties to that BIT deposits its instrument of ratification.
What does the Termination Agreement say about investment arbitration?
The Termination Agreement purports to direct outcomes for arbitrations initiated under the intra-EU BITs that are subject to it. For these purposes, the agreement divides arbitration proceedings into three categories based on the status of the proceedings on March 6, 2018, that is, the date of the Achmea judgment.
“Concluded Arbitration Proceedings” are defined as those that ended with a settlement agreement or with a final award issued prior to March 6, 2018 where (a) the award was executed prior to that date, and no review, set-aside, annulment, revision or enforcement proceedings were pending on that date, or (b) the award was annulled or set aside before the entry into force of the Termination Agreement. These proceedings are not affected by the Termination Agreement and are not to be reopened.
“New Arbitration Proceedings” are defined as those initiated on or after March 6, 2018. With respect to such proceedings, the Termination Agreement stipulates that “Arbitration Clauses shall not serve as the basis for New Arbitration Proceedings.”
Finally, “Pending Arbitration Proceedings” are those initiated prior to and pending as of March 6, 2018. For such proceedings, the Termination Agreement offers a “transition mechanism” in the form of a facilitated settlement negotiation or “structured dialogue.” To access this mechanism, the investor must file a request within six months from the entry into force of the Termination Agreement for the parties to the BIT, and the arbitration proceedings or related enforcement proceedings must be suspended at the request of the investor. The transition mechanism is merely a settlement negotiation between the investor and the host State overseen by a “facilitator.” The Termination Agreement neither guarantees a resolution of the dispute through that process nor offers the investor any recourse upon the failure of the negotiations. As an alternative to the transition mechanism, the Termination Agreement also allows investors to submit pending disputes to domestic courts in the EU, even if the time limit for doing so has expired.
For New Arbitration Proceedings and Pending Arbitration Proceedings, the Termination Agreement requires EU Member States to inform the arbitral tribunals of the legal consequences of the Achmea judgment. The Termination Agreement also directs EU Member States to ask domestic courts, including those in third countries, to set aside, annul, or refrain from enforcing awards under intra-EU BITs. The Termination Agreement includes a draft text in Annex C, which Member States are to use for informing arbitral tribunals and domestic courts of the legal consequences of Achmea.
What are the implications of the Termination Agreement for investors?
While the Termination Agreement aims to put an end to intra-EU investment arbitration, its success is not a foregone conclusion.
First, if Austria, Finland and Sweden remain outside of the Termination Agreement, investment arbitration will continue unaffected under 32 intra-EU BITs. This number may increase if some of the other Members States fail to meet ratification requirements under domestic law for the Termination Agreement.
Second, for intra-EU BITs involving signatories to the Termination Agreement, the agreement need not spell an immediate end to investment arbitration. Even if EU Member States abide by the requirement under the Termination Agreement that they explain the legal consequences of the Achmea judgment to an arbitral tribunal, the tribunal may not agree with the Member State that the judgment or the Termination Agreement has deprived it of jurisdiction.
At least in Pending Arbitration Proceedings, investors can argue that the host State consented to arbitration in the BIT, and that consent cannot be unilaterally withdrawn after the investor has initiated arbitration proceedings. Where the dispute is pending before an ICSID tribunal, the stipulation in Article 25 of the International Centre for Settlement of Investment (ICSID) Convention that “[w]hen the parties [to a dispute] have given their consent, no party may withdraw its consent unilaterally” would come to the aid of the investor.
Similarly, where an award results from an arbitration under an intra-EU BIT and enforcement is sought in a non-EU country, the competent domestic courts are not bound by EU law. Once again, even if the EU Member State explains the consequences of the Achmea judgment as a matter of EU law, a third-country court need not accept that those consequences render the award liable to be set aside or incapable of recognition and enforcement.
In fact, since the Achmea judgment was handed down, investment arbitral tribunals have generally rejected objections to jurisdiction based on EU law as laid down in that judgment. In UP and C.D Holding Internationale v. Hungary,4 the tribunal ruled that EU law cannot excuse violations of public international law as set out in the applicable BIT. The tribunal in Vattenfall v. Germany5 rejected a jurisdictional objection based on Achmea, holding that EU law was not part of its applicable law. Moreover, in Micula v. Romania, the U.S. District Court for the District of Columbia enforced an award resulting from intra-EU BIT arbitration, rejecting an Achmea-based argument against enforcement.6 A number of other applications for the enforcement of awards issued under intra-EU BITs are pending before U.S. courts.
If these reactions of investment tribunals and foreign courts to the Achmea judgment are prologue, the Termination Agreement will not guarantee an immediate end to intra-EU investment arbitration, at least in Pending Arbitration Proceedings. In those disputes, investors may be better off continuing with arbitration proceedings rather than submitting to the facilitated settlement negotiation offered under the transition mechanism. This is particularly so given that the transition mechanism offers no binding adjudication and provides investors no recourse if the negotiations fail. Of course, the prospects of securing recovery through continued arbitration proceedings as opposed to the transition mechanism will need to be assessed on a case-by-case basis.
While there continues to be scope for intra-EU investment arbitration after the Termination Agreement, investors nonetheless may be well advised to consider restructuring intra-EU investments through third countries to ensure treaty protection for the future.
1 Agreement for the Termination of Bilateral Investment Treaties Between the Member States of the European Union, EU Doc. A/T/BIT/en 1
2 Slovak Republic v. Achmea B.V., CJEU Case C-284/16, paras. 58-60
3 Termination Agreement, Preamble, fifth recital
4 ICSID Case No. ARB/13/35
5 ICSID Case No. ARB/12/12
6 Case No. 17-cv-02332 (D.D.C. Sept. 11, 2019)