TaylorWessing | 7 May 2020
The termination of bilateral investment treaties in the EU – one agreement to end them all?
On 5 May 2020, 23 Member States of the EU entered into an Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (the Agreement).
The Agreement will terminate any bilateral investment treaties (BITs) in force between any of Bulgaria, Croatia, Cyprus, Czechia, Denmark, Estonia, France, Germany, Greece, Hungary, Latvia, Lithuania, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, and Spain, as well as Belgium and Luxembourg, who had entered into BITs together as the Belgo-Luxembourg Economic Union.
Italy also signed the Agreement, having already started the process of unwinding its intra-EU BITs.
There are, however, some notable omissions. Austria, Finland, Ireland, or Sweden did not sign the Agreement. Intra-EU BITs concluded by them remain untouched.
While the signing of the Agreement represents a major development, it will still need ratification before coming into force. The Agreement will take effect 30 calendar days after the date on which the Secretary-General of the Council of the European Union receives an instrument of ratification, approval, or acceptance from two Member States.
It will then take effect for any third and subsequent Member State 30 calendar days after they deposit an instrument of ratification, approval, or acceptance.
Background to the Agreement
With its judgment of 6 March 2018 in the case of the Slovak Republic v Achmea BV (C-284/16), the Court of Justice of the European Union delivered a decision which unsettled the investor-state dispute settlement dynamics in Europe. The Court’s conclusion was that a regime in which a variety of different investor-state protections existed across the EU was incompatible with EU law.
It held that the ability to arbitrate issues which might concern the application of EU law undermined the supremacy of EU law and the role the Court played in its interpretation. The Court found that the law of the EU precluded individual Member States from agreeing investor-state protections between themselves.
It followed that an investor-state arbitration clause violated EU law in all cases where:
- the investor came from an EU Member State, and
- the state where the investment had been made was another EU Member State, and
- the arbitration clause was contained in an international agreement in force between the home Member State of the investor and the Member State where the investment had been made.
Following the Achmea judgment, all EU Member States – including the United Kingdom – signed declarations on 15 January 2019 and on 16 January 2019 (Finland, Luxembourg, Malta, Slovenia, Sweden and Hungary) in which they undertook to terminate all BITs concluded between them by means of a plurilateral treaty or, where mutually more expedient, bilaterally. The Agreement is one major step in implementing these declarations.
On 24 October 2019, the majority of EU Member States agreed the draft text for terminating intra-EU BITs. The signed Agreement represents several months of further engagement, though four Member States have still not been able to reach agreement.
Which BITs are affected?
The Agreement covers investor-state arbitration proceedings based on the intra-EU BITs explicitly listed in the Agreement and under any set of arbitration rules, including ICSID, PCA, SCC, ICC, UNCITRAL, and ad hoc arbitration.
It does not cover intra-EU arbitration proceedings based on Article 26 of the Energy Charter Treaty, with which, the Agreement announced, the EU and the Member States will deal "at a later stage". For the energy investor, this may be a welcome indication that, for the time being at least, they will continue to enjoy the protections provided by the ECT.
The Agreement also covers those BITs which have already been terminated but – due to so-called "sunset clauses" – still have effect. A sunset clause is a provision which extends the protection of investments made before the date of termination of the BIT for a further period of time. Notably, Poland had already started to terminate its intra-EU BITs in 2017.
The Agreement provides that all sunset clauses in the BITs terminated by the Agreement and before are terminated and will not produce any legal effects. This means that there will be no transitional period once the Agreement comes into force.
What is the impact on Concluded, Pending, and New Arbitration Proceedings?
The Agreement provides that the arbitration clauses in the terminated BITs may no longer serve as a legal basis for fresh proceedings. Accordingly, investors who are yet to initiate proceedings will no longer be able to do so.
However, that leaves open the issue of what happens to current proceedings.
The Agreement categorises current proceedings into "Pending Arbitration Proceedings" and "New Arbitration Proceedings". "Pending Arbitration Proceedings" are those initiated before 6 March 2018, being the date of the Achmea judgment, and not yet concluded, and "New Arbitration Proceedings" are those initiated on or after 6 March 2018.
Where one of the signatories of the Agreement is a party to Pending or New Arbitration Proceedings, the Agreement provides that they must inform the arbitral tribunal that the arbitration clause in the relevant BIT is inapplicable.
Furthermore, the signatory must ask the competent national court to set aside, annul, or refrain from recognising and enforcing any arbitral award already made in such arbitration proceedings.
These requirements are potentially controversial.
First, they purport to retrospectively (and unilaterally) remove rights which one party has chosen to exercise. It is yet to be seen if tribunals will view this as a termination of their jurisdiction. There may be justifiable doubts as to whether retroactive and unilateral avoidance is consistent with principles of national and international law.
Second, regarding arbitration proceedings under the ICSID Convention, there is no national court – as the Agreement requires – which has the power to set aside or annul an arbitral award. The annulment procedure under ICSID is internal to the process under Article 52 of the ICSID Convention.
In addition, ICSID arbitral awards must be recognised as binding and the pecuniary obligations imposed by such an award must be enforced "…as if it were a final judgment of a court in that State…" according to Article 54. The prevailing view is that ICSID awards cannot then also be challenged on enforcement in national courts.
This is in contrast to all other arbitration proceedings. The fact that an arbitration was conducted without a valid agreement to arbitrate ordinarily constitutes a ground for setting aside and refusing enforcement in most jurisdictions.
Accordingly, it remains to be seen how national courts will deal with arguments based on a unilateral termination of the arbitration agreement in the relevant BIT, whether in the context of Article 54 of the ICSID Convention, under Article V(1)(a) of the New York Convention, or any national law, in particular where recognition and enforcement is sought outside of the European Union.
In Pending Arbitration Proceedings, the Agreement provides that both parties – the investor and the state – may, under certain conditions, enter into a "structured dialogue" to initiate a settlement procedure.
Moreover, investors may initiate proceedings in the national courts against a measure contested in Pending Arbitration Proceedings, even if the national time limit for bringing an action has already expired, within the time limits set forth in the Agreement.
What is the impact for UK investors?
One notable omission from the list of signatories is the United Kingdom. While the UK formally left the EU on 31 January 2020, it was both a signatory to the January 2019 declarations and one of the parties involved in discussing the draft text in October 2019. Post-Brexit, the position which the UK will adopt is unclear.
For the UK investor, this might mean a period of uncertainty. While several BITs between the UK and EU Member States remain in force, the January 2019 declaration to terminate these BITs leaves investors in an unsatisfactory position. It was clearly then the political intention to unwind those BITs, however in this post-Brexit world, intentions may have changed.
It is yet to be seen how the UK will respond and whether it will take steps either to support the Agreement or reach separate bilateral agreements with Member States to terminate those investor-state arrangements. In the meantime, however, those BITs remain in force and that being so investors should take some comfort that they ought to be able to take advantage of the protections they provide.
The age of intra-EU BITs is coming to an end. Investment arbitration based on intra-EU BITs will soon be impossible, and aggrieved intra-EU investors will have to look elsewhere for legal protection. From the perspective of the European Commission, this means that there will no longer be a "parallel system overlapping with Single Market rules".
As a result, there could be cases where investors from third countries may be better placed to protect their investments in the EU than intra-EU investors. Those intra-EU investors and their lawyers might come up with creative solutions to compensate for the soon-to-be absence of intra-EU BITs; many will start thinking of ways to structure investments through entities in third countries – including, potentially, the United Kingdom – with the BIT-protection that such investments may bring.
Whether or not the Agreement presents a welcome development, aspects of its implementation are unsatisfactory. There is no "clear cut" end to all intra-EU BITs on the same day. Four Member States did not sign the Agreement, and it will come into force for different Member States at different times.
There is then also the uncertainty created by the regimes for dealing with pending and new proceedings. Set against a backdrop of staggered ratification, investors are left in some doubt as to whether the protections given by BITs within the EU still apply to them.
The one area where there is at least some clarity is the effect of the Agreement on proceedings under the Energy Charter Treaty. Proceedings under the ECT remain unaffected. While the EU has indicated that this is something which will be addressed in the future, for the time being, energy investors should take comfort that the ECT protections remain intact.