REUTERS | Darrin Zammit Lupi

EU member states agree to terminate their intra-EU BITs: is this the end of intra-EU BIT arbitrations and what about Brexit?

In mid-January this year, all 28 EU member states signed declarations committing to terminate their intra-EU bilateral investment treaties (BITs). 21 EU member states (including the United Kingdom), went further and stated that the Achmea decision (described further below) also applies to intra-EU disputes pursuant to the Energy Charter Treaty (ECT).

The Achmea decision

The decision of the Court of Justice of the European Union (CJEU) on 6 March 2018 in the case of Achmea v Slovak Republic came as a shock to the investment arbitration community. In Achmea, the CJEU held that the investor-state dispute settlement (ISDS) provisions in the Netherlands-Slovak BIT were not compatible with EU law. In particular, the CJEU held that Articles 267 and 344 of the Treaty on the Functioning of the European Union must be interpreted as precluding a provision in an agreement concluded between EU member states, such as Article 8 of Netherlands- Slovak BIT, under which an investor from one EU member state may bring proceedings against another EU member state before an arbitral tribunal whose jurisdiction that member state has undertaken to accept under the terms of the BIT. The decision in Achmea did not refer to the ECT or whether intra-EU disputes under the ECT were compatible with EU law.

19 July 2018 European Commission guidance

On 19 July 2018, the European Commission (EC) issued “guidance to help EU investors to invoke their rights before national administrations and courts and to help Member States to protect the public interest in compliance with EU law” (19 July 2018 EC note).

In the 19 July 2018 EC note, the EC set out, amongst other things, 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. In summary, the EC stated that:

  • The four fundamental freedoms (free movement of capital, services, goods and workers) in the EU single market give companies and citizens the right to establish a business, invest in a company and provide services and goods across European borders.
  • General principles of non-discrimination, proportionality, legal certainty and protection of legitimate expectations offer protection to intra-EU investors.
  • EU law recognises fundamental rights, such as the right to conduct a business, the right to property and the right to effective judicial protection.
  • EU rules protecting investors are found in various sources of EU law, including in the Treaty on the European Union, the Charter of Fundamental Rights of the European Union, general principles of  EU law, and sector-specific legislation.
  • Whilst EU law allows for markets to be regulated to pursue legitimate public interests which may have negative consequences for investors, the EU and EU member states have a duty and a responsibility to both protect investments and to regulate markets. In this regard, the EU and member states can only take legitimate measures to protect those interests in certain circumstances and under certain conditions, and in compliance with EU law.

The EC also stated that the Achmea decision applied to the ECT and that in the EC’s view, the ECT cannot be used as a basis for dispute settlement between EU investors and EU member states.

The January 2019 declarations

Surprisingly, three separate declarations were released by EU member states in January 2019, each stating a differing viewpoint on the application of the Achmea decision to the ECT.

On 15 January 2019, 21 member states (including the UK) issued a declaration that they would commit to terminating their intra-EU BITs either plurilaterally, or where more expedient, bilaterally, with a view to achieving this by 6 December 2019. The declaration also stated that the sunset clauses in intra-EU BITs have no effect as there was no valid offer to arbitrate by the EU member state parties. The declaration signed by the majority also accepted that the Achmea decision applied to the ISDS provision in the ECT with regard to the intra-EU application of such ISDS provision.

On 16 January 2019, Finland, Luxembourg, Malta, Slovenia and Sweden adopted a declaration broadly similar to that of the majority, except in respect of the ECT. The declaration noted that the question of whether the ECT contains an ISDS clause applicable between member states is currently being contested before a national court of a member state and that against this background they consider that it would be inappropriate to express views on the compatibility of EU law with any intra-EU application of the ECT.

Hungary released a declaration on 16 January 2019 in which it stated that, in its view, the Achmea decision concerns only intra-EU BITs and does not concern any pending or prospective arbitration under the ECT. All 28 member states have further committed to informing tribunals in pending arbitrations commenced under an intra-EU BITs of the Achmea decision and challenging the validity or enforcement of arbitration awards issued against them pursuant to intra-EU BITs, as well as “informing the investor community that no new intra-EU investment arbitration” should be commenced.

Whilst these are bold words and no doubt will have an impact on intra-EU BIT and ECT arbitrations commenced prior to the termination of the intra-EU BITs (at the very least we can expect they will be used by respondent EU member states to dispute jurisdiction), it is likely that the fallout from the Achmea decision and the declarations will lead to diverging outcomes, both in investment arbitrations as well as in any related national court litigation.

Tribunals may, nonetheless, still determine that they have jurisdiction on the basis that neither the Achmea decision, the 19 July 2018 EC note nor the declarations are legally binding on them. If any litigation relating to the enforceability or validity of an arbitration award issued pursuant to an arbitration commenced under an intra-EU BIT takes place in courts outside of the EU member states, where the courts are not bound to follow Achmea, there may not be a common approach.

The scene is set then for some interesting developments in the context of the recently commenced (post Achmea) ECT arbitration claims against Italy and Spain: see for example, Veolia v Italy (claim registered June 2018); Itochu v Spain (claim registered July 2018); EBL v Spain (claim registered November 2018) and European Solar Farms v Spain (claim registered December 2018).

Furthermore, despite the best efforts of the EU member states to be definitive, this is a complex area of law and there are still important matters to be clarified; including:

  • The application of Achmea to the ECT (which is a point that even the member states disagree on amongst themselves).
  • The interplay between the ICSID Convention (and the obligations which it places on signatory states), the ISDS provisions in intra-EU BITs and the Achmea decision both in respect of the jurisdiction of the tribunal and in respect of the enforcement of any ICSID award.
  • Whether the sunset provisions really are of no effect, as suggested in the declarations.

The UK’s position

Perhaps what is most surprising is the UK’s decision to agree to terminate all of its intra-EU BITs when it is on the cusp of “Brexiting” the EU. Whilst no amount of crystal ball-gazing will assist us in determining what will be the final terms on which the UK exits the EU, the fact is that the UK is set to leave the EU on 29 March 2019, as it currently stands.

It seems quite incongruous with that position for the UK to agree to terminate its intra-EU BITs (particularly since the only reason they are considered to be invalid is due to their incompatibility with EU law; a law to which the UK will no longer be subject post-Brexit).

Such a move, if it were to be effected prior to Brexit, would leave investors from the UK into the EU and EU investors in the UK without any basic investor protections on the basis that:

  • The protections that the EC stated existed under EU law in the 19 July 2018 EC note would no longer bind the UK as the UK would no longer be subject to EU law.
  • The protections that were provided pursuant to the intra-EU BITs would no longer exist post-termination of such BITs.

Conclusion

This all clearly indicates a continued and committed approach by the EU and its member states to alter the way in which intra-EU investor disputes are settled. For now, however, it is still a case of watch this space as events unfold and the new promised land of reformed intra-EU ISDS develops.

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