European Union Member States Sign Treaty to Terminate Intra-EU Bilateral Investment Treaties

On May 5, 2020, the European Commission (Commission) announced that 23 of the 27 member states of the European Union (EU) signed the Agreement for the Termination of Bilateral Investment Treaties [("BITs")] between the Member States of the European Union (the Treaty).[1] If the Treaty enters into force for all 23 member states, it will terminate 123 "intra-EU BITs,"[2] or BITs where both treaty parties are EU member states. The BITs authorize investors in one EU member state to bring an international arbitration proceeding against another EU member state hosting the investment to resolve alleged BIT violations by the host member state, instead of having to litigate that dispute in the domestic courts of the host member state. The policy rationale underlying BITs is that allowing investment disputes that arise between a foreign investor and a host state to be settled before an international arbitral tribunal instead of a domestic court will increase a foreign investor's confidence that such disputes will be resolved fairly, and thus will increase the amount of foreign investment flowing between the two BIT Parties. The Treaty is the result of the March 6, 2018 decision by the Court of Justice of the European Union (Court) in the Achmea case, where the Court ruled that intra-EU BIT arbitration clauses are contrary to the EU Treaties.[3] Further, the Commission considers intra-EU BITs to be discriminatory, and thus inconsistent with EU law,[4] because they create an uneven playing field for EU investors. If a member state has BITs with, for example, six other member states, investors from those six member states will have more protections in the host member state than investors from the twenty member states without such BITs.

This Insight examines the implications of the Treaty for ongoing investor-state arbitration proceedings and ongoing investments protected by intra-EU BITs, and for possible future recourses by investors.

The Treaty is particularly significant for investors of the 23 member states that have ongoing arbitrations under one of the 123 BITs, or ongoing court proceeding to challenge an arbitral tribunal's decision issued pursuant to one of the BITs, as the Treaty calls for the relevant member states to take steps to inform arbitral tribunals and national courts that the BITs "cannot serve as a legal basis" for arbitrations because they are contrary to EU Treaties. This could cause a tribunal or court to find that there is or was no jurisdiction for the arbitration, leading to dismissal of current arbitrations, or to annulment of prior awards in an investor's favor.

The Treaty will also terminate the "sunset clauses" that exist in these BITs as well as in BITs that have already been terminated, but still have operative sunset clauses.[5] "Sunset clauses" are common feature in BITs. They extend a BIT's protection of investments for a period of years after the BIT's termination.[6] The Treaty is therefore also significant for investors in the 23 member states that have no arbitrations, but who have ongoing investments protected by one of the 123 BITs, as those investments will purportedly lose the protection of the sunset clauses. Thus, these investors are to lose the substantive protections the BITs provide, as well as the right to initiate arbitrations, after the BITs are terminated. These issues are explored below.

Arbitration Proceedings

The Treaty defines three different types of "arbitration proceedings" that could arise under the 123 BITs: "concluded," "pending," and "new," each of which is treated differently.[7]

"Concluded arbitration proceedings" are those in which a final award was rendered prior to March 6, 2018, if the award (i) was executed prior to that date, as long as no post-award proceedings to challenge the award (such as annulment or set-aside proceedings) or enforce it were pending on that date, or (ii) was annulled or set-aside before the Treaty enters into force. Challenges to an award frequently take place in the form of a set-aside proceeding in a domestic court of the legal seat of the arbitration, although for arbitrations taking place at the International Centre for the Settlement of Investment Disputes pursuant to a treaty known as the Washington Convention, they are heard by an ad-hoc international body known as an Annulment Committee.[8] On the other hand, efforts to enforce an award can take place in the domestic court of any jurisdiction where an investor locates assets, and is typically governed by a treaty known as the New York Convention.[9] Arbitrations falling into this category are not to be reopened. Further, any agreement settling an arbitration proceeding that was initiated under one of the 123 BITs prior to March 6, 2018, will not be affected by the Treaty.[10] Investors falling within this category receive legal certainty that they will not have to disgorge any payment they have already received.

"Pending arbitration proceedings" are all arbitrations initiated prior to March 6, 2018, which do not qualify as "concluded," regardless of the stage of the proceeding. For any such proceedings, the Treaty imposes duties on the two EU members states which are Parties to the relevant BIT.

For cases still before an arbitral tribunal, the member states must cooperate to inform the tribunal of the Court of Justice of the European Union's ruling in Achmea that intra-EU BIT arbitration clauses are contrary to the EU Treaties. The exact language that the two member states are to use is set forth in Annex C to the Treaty, and it includes the statement that the BIT "cannot serve as a legal basis for Arbitration Proceedings."[11] A tribunal accepting that conclusion would undoubtedly dismiss the proceeding for lack of jurisdiction, and a statement by both parties most likely increases the likelihood of that result. However, there are certainly examples of arbitral tribunals disagreeing with the interpretations of the state parties to a BIT (or comparable agreement), and there is no guarantee a tribunal will dismiss a case based on the views of the two BIT Parties.

Further, for arbitrations where a tribunal has already issued an award that is currently subject to challenge or enforcement in a domestic judicial proceeding, the Treaty requires that the BIT party that is also a party to the judicial proceeding ask the court to annul or set-aside the award, or to refrain from recognizing or enforcing it.[12] If a court is persuaded by the logic of Achmea, it will most likely agree with such a request. Again, there is no guarantee that a domestic court will do so, but the BIT Party's request will help tip the scale in that direction.[13]

Investors taking part in pending arbitrations proceedings are left with considerable uncertainty as to what will happen in their cases. They may choose to argue that the retroactive application of Achmea's interpretation of EU law to pending arbitrations is contrary to international law, which might convince a tribunal or court that the Treaty should not be applied to such cases. From the investor's perspective, the best-case scenario is that the case continues to an award of monetary damages in its favor, albeit with another issue to litigate along the way. The worst-case scenario is that the tribunal or court concludes that the arbitration was invalid as a result of Achmea and dismisses the case. An investor is thus left to assess the likelihood of these scenarios.

As an alternative, the Treaty provides a relatively complex set of transitional procedures allowing the investor and host member state to enter into settlement procedures, although these require the investor to suspend pending proceedings, whether they are before an arbitral tribunal or a domestic court, and there is no guarantee a settlement procedure will end in a result to the investor's liking.[14] The Treaty also allows a settlement agreement outside the rubric of the transitional measures, as long as the agreement does not contravene EU law.[15]

"New arbitration proceedings" are defined to mean any arbitration proceedings initiated on or after March 6, 2018. For such proceedings, the Treaty concisely provides that any of the 123 BITs "shall not serve as [the] legal basis" for the proceedings, and requires the relevant EU member state(s) to file before the relevant tribunal or court the same statements required for pending arbitration proceedings that are discussed above.[16] However, the transitional measures authorizing settlement procedures do not apply to new arbitrations. Investors in this category are left with a similar type of uncertainty as those that fall into the pending arbitrations category, although arguably with considerably more risk. Having initiated arbitration after the Achmea decision, they will not be able to argue that that Achmea's interpretation of EU law is being retroactively applied to their arbitration. Although an investor might attempt to argue that the Achmea decision technically applied to a single BIT between two specific member states, Achmea's sweeping language may cause tribunals and domestic courts to cast a skeptical eye towards such an argument.

Sunset Clauses

Sunset clauses are included in BITs because they mitigate the risk that foreign investors take when investing in a host state. Many investments subject to a BIT's protections involve long term investment of significant amounts of capital that cannot quickly be removed from a country if a BIT is terminated. These types of projects can include large construction projects or mining ones. Without a sunset clause, a state could terminate a BIT after an investor had invested the infrastructure necessary for the project to succeed, but before any returns had been realized, and, for example, expropriate the investment without a meaningful remedy for the investor except what might be available under the host state's domestic law. Sunset clauses typically involve long timeframes (the 2012 U.S. Model BIT has a ten-year sunset clause),[17] which allows an investor time to realize a return on its investment, sell the assets to another investor (perhaps one from a different country still protected by a BIT) or repatriate assets to its home country.

The Treaty's purported immediate termination of the sunset clauses may raise questions in investors' minds as to whether a tribunal would uphold the validity of the immediate termination, or whether it might conclude that the right in the sunset clause was vested under international law. An investor experiencing post-termination difficulties may attempt to constitute a tribunal on the basis that a sunset clause helped induce its investment, and argue that the retroactive application of the Achmea decision to their investment resulting in the removal of a vested right such as the sunset clause is contrary to international law. Indeed, Article 70(1)(a) of the Vienna Convention on the Law of Treaties discusses the consequences of the termination of a treaty, and it provides that "[u]nless the treaty provides otherwise … the termination of the treaty … releases the parties from any obligation further to perform the treaty."[18] But the sunset clauses "do provide otherwise," raising the question of whether a tribunal might hold a BIT party to compliance with the BIT for the duration of the sunset clause notwithstanding its purported termination. Further Article 70(1)(b) provides that the termination of a treaty "does not affect any right or legal situation of the parties created through the execution of the treaty prior to its termination." A tribunal might consider a sunset clause to fall within the scope of this language, and thus conclude the termination of the sunset clause is invalid.

Looking Forward

The Treaty is subject to ratification, approval, or acceptance, and it will enter into force after the second state deposits an instrument of ratification, approval, or acceptance. States will now need to consider the Treaty in their capitals and receive any necessary domestic legal authority before depositing such instruments.

Intra-EU arbitrations have been the subject of political controversy in Europe, and the Commission has considered such arbitrations to be contrary to EU law.[19] If the Treaty does enter into force for all 23 member states, it will significantly reduce such arbitrations, although not completely eliminate them. In particular, the Energy Charter Treaty (ECT) has accounted for approximately 45 percent of the intra-EU arbitrations as of July, 2018.[20] The Commission is on record as considering that the ECT does not provide authority for intra-EU arbitrations,[21] and one wonders if the next step for the Commission is to facilitate the negotiation of a treaty to terminate obligations in the ECT as between EU member states. It seems unlikely that EU member states would cease being a party to the ECT altogether, as that treaty provides important rights to EU member states with respect to numerous states outside the EU.

In any event, one aspect of the Treaty seems certain. With intra-EU arbitrations accounting for nearly 20 percent of the over 900 known investment-state arbitrations as of July 31, 2018,[22] should the Treaty enter into force for all 23 member states, it will bring about a significant reduction in the number of international investment arbitrations.

About the Author: John I. Blanck is an Attorney Adviser at the U.S. Department of State. The views expressed here are his own, and do not necessarily reflect those of the U.S. government.