On 6 May 2020, the European Commission announced that a majority of EU member states had signed the Agreement for the Termination of Bilateral Investment Treaties (BITs) between the Member States of the EU. The agreement will have a significant impact on the protective measures bestowed upon EU investors who have businesses in other EU countries, as well as foreign investors who rely on passport rights through one EU member state to gain access to the wider common market.
Notably, however, a number of EU member states have not signed the agreement. These include Austria, Finland, the Republic of Ireland, Sweden, and the UK (which left the EU on 31 January 2020).
The agreement is not yet in force, and there may still be a narrow window of opportunity to file a claim under a current intra-EU BIT before that door is shut. Investors contemplating such proceedings will still need to tread with caution, given the now infamous Achmea decision and the contradictory positions that have been taken by some arbitral tribunals following that decision (see, for example, UP v Hungary in the case of intra-EU ICSID arbitration and Vattenfall v Germany in the case of intra-EU Energy Charter Treaty arbitration).
The COVID-19 pandemic has now also put a further spin on matters. The restrictions and measures implemented by many European governments in the last few months have undoubtedly had a very serious impact on business and investments, and this in turn creates the potential for investment treaty claims to be triggered.
Here are the key takeaways for those investing in EU member states:
- A number of government actions in light of the COVID-19 pandemic are likely to have a detrimental impact on EU investments by foreign investors, especially in member states heavily affected by the virus, such as Italy and Spain. In theory at least, this creates the possibility of potential investor-state disputes.
- EU investors and foreign investors benefiting from passport rights, who have been considering filing for investor-state arbitration against another EU member state, may want to consider the possibility of doing so as soon as possible.
- EU investors and foreign investors benefiting from passport rights may also want to consider restructuring their businesses through a jurisdiction that will continue to have BITs in force with the EU jurisdictions where they have ongoing investments and business activities.
- The UK could be one of those jurisdictions, as it will no longer be obliged to follow EU law as of 1 January 2021. This will, however, largely depend on what agreement is reached between the UK and the EU in this respect, and what protective measures it will provide.
Background to the agreement
On 6 March 2018, the Court of Justice of the European Union (CJEU) issued its judgment in Achmea v Slovak Republic. The CJEU found that the investor-state dispute settlement provisions in the Netherlands-Slovakia BIT were not compatible with EU law. On 19 July 2018, the Commission issued guidance setting out its position with respect to the ways in which investors making intra-EU investments could enforce their rights using EU law through the national courts of EU member states, and how EU member states could protect the public interest in compliance with EU law. The goal of the 19 July 2018 Commission guidance was very clear: to ensure recourse to EU law as well as EU courts and tribunals as opposed to international arbitral tribunals.
Following the Achmea judgment and the 19 July 2018 Commission guidance, EU member states (including the UK at the time) made political declarations on 15 and 16 January 2019, manifesting their intention to terminate their intra-EU BITs either plurilaterally, or, where more expedient, bilaterally. On 28 October 2019, the Commission announced that the majority of EU member states (again, including the UK) had agreed on the text of a multilateral treaty terminating intra-EU BITs, a draft of which was also leaked online in October 2019. The text of the agreement is very similar to the leaked draft.
The agreement
On 5 May 2020, 23 EU member states signed the agreement. Austria, Finland, the Republic of Ireland, Sweden and the UK have not signed it. The agreement terminates approximately 130 intra-EU BITs which are currently in force. It also nullifies any sunset clauses. The agreement also sets out transitional measures to facilitate the settlement of pending intra-EU arbitration proceedings or to transfer the dispute to national courts. Article 16 clarifies that the agreement is subject to ratification and will only enter into force 30 calendar days after receipt by the depositary (that is, the Secretary-General of the Council of the European Union, Mr Jeppe Tranholm-Mikkelsen) of the second instrument of ratification, approval, or acceptance. It should also be noted that Article 17 allows EU member states to apply the agreement provisionally before it comes into force.
The agreement, however, does not affect arbitration proceedings that have already been concluded, that is, proceedings that have produced a final award and where that final award has already been executed. Similarly, the agreement does not cover intra-EU investment disputes under the Energy Charter Treaty, which will be dealt with at a later stage.
Termination of sunset clauses
Sunset clauses are provisions designed to protect investments made prior to the termination of a BIT for a certain period, usually for an additional ten, 15, or 20 years following its termination. The purpose of sunset clauses is to protect the legal expectations of investors who made their investments in light of protective measures embodied in a certain BIT prior to its termination. However, articles 2(2) and 3 of the agreement provide for both the termination of any sunset clauses, as well as the immediate cessation of their legal effects. These provisions underscore the goal of EU member states to move as soon as possible from a system that allows the scrutiny of their regulatory actions by international arbitral tribunals, to a system of EU law and EU courts as envisaged by the 19 July 2018 Commission guidance.
Sunset clauses typically remain applicable and have the effect of extending the legal application of the BIT in the event of its unilateral termination (that is, termination by only one of the states party to the BIT). However, a different question arises where termination is by mutual consent (as under the agreement) and where the sunset clause is also deemed null with immediate effect. Arguments in favour of the termination of the sunset clause could focus on the autonomy of the parties that entered the treaty (that is, the states) and the fact that the superseding treaty (the agreement) does not leave foreign investors unprotected. Investors, on the contrary, may argue that they have direct rights under the BIT, and such rights cannot be terminated at whim. It will be necessary to examine the provisions of each individual BIT, relating to its modification and termination, to have a better understanding of whether the termination of the sunset clause is at all possible by a superseding treaty, that is, the agreement. No doubt this will be the subject of debate in due course.
Action points
EU investors doing business in any EU member state, who have been unlawfully treated by such state or fear that an unreasonable measure could be taken against them in the future, will have a number of options. Many investors will have already structured investments in anticipation of the agreement. For others, a key question will be whether a dispute has already crystallised, what additional pre-arbitration steps may need to be taken before a formal claim can be brought, and whether all of these steps can be completed before the relevant BIT is terminated by the agreement. No doubt this will require some expedited but substantive legal analysis.
Investors may also want to consider whether their investments could be restructured to secure protection via an extra-EU BIT. The UK may find itself in a prime position in this respect. This will, however, largely depend on whether any future UK-EU relationship agreement will supersede the current BITs that the UK has with EU member states and, if so, whether it will provide adequate protective measures for British nationals and companies investing in the EU.
