REUTERS | Gene Blevins

The end of intra-EU BITs is nearing

On 2 May 2016, it was reported that Denmark has proposed to the other EU member states to mutually terminate the existing bilateral investment treaties (intra-EU BITs) between them.

Denmark currently has nine intra-EU BITs in force, namely with Poland, Hungary, Latvia, Lithuania, Estonia, Hungary, Croatia, Slovenia and Slovakia.

Denmark has indicated two reasons for this move. Firstly, it wants to avoid an infringement procedure by the European Commission, similar to those which are pending currently against five other member states (The Netherlands, Sweden, Romania, Austria and Slovakia). Secondly, the Danish Government is of the view that these BITs are not used by Danish investors very often, and have therefore become obsolete.

According to the report, Denmark received broadly “favourable” responses from the majority of its treaty counter-parties. More specifically, Slovenia and Estonia have signalled to Denmark that there is agreement in principle for mutual termination, which is currently effectuated.

However, termination as such does not end the protection of existing investments, since the so-called “sunset clause” contained in the BITs provides for continued protection for 10 years or even longer.

In 2011, Denmark and the Czech Republic worked around this problem by first removing the sunset clause and then terminating the modified BIT. In this way, the termination immediately removed any protection, even for existing investments.

Indeed, this has been the preferred solution, which the European Commission has been pushing all member states to adopt.

Besides Denmark, Poland also surprised the investment arbitration world last February, when it announced that it intends to terminate all 60 of its BITs. Subsequently, it was clarified that it actually intends to terminate only its intra-EU BITs. Whether Poland will do that remains to be seen.

Nonetheless, it can be concluded that the push by the European Commission to eliminate intra-EU BITs is finally showing some results. Indeed the end of intra-EU BITs is nearing quickly if the Court of Justice of the EU were to decide against the member states in relation to the infringement procedures.

The broader question, though, is: what does this mean for European investors being expropriated or who are otherwise confronted with measures that result in compensable damages?

If the intra-EU BITs are gone, these investors can turn only to domestic courts. However, as is well-known, the judicial systems in many EU member states are slow, malfunctioning and often riddled with corruption and political pressure. Accordingly, domestic courts simply do not offer the equivalent to international arbitration. Moreover, the protection standards in domestic and EU law are much lower than those contained in the BITs.

In short, European investors will be left with very little protection. Consequently, they are well advised to look for alternatives, such as restructuring their investments outside the EU. For example, they could restructure via Switzerland, and thereby enjoy the benefits of Swiss BITs.

However, in the long run, the EU must consider ways of how to improve the rule of law and the functioning of the judiciaries in the EU member states. Only a predictable legal framework will lead to further investments and thus create more jobs in Europe.

EFILA Nikos Lavranos

One thought on “The end of intra-EU BITs is nearing

  1. In support of the above information, I would like to add that according to a document issued by the Trade Policy Committee (Services and Investment), the Council of the European Union, enclosed hereto, the Delegations from Austria, Finland, France, Germany and the Netherlands (the “Delegations”) have considered intra-EU BITs as incompatible with EU law (the single market, competition law, etc.) and suggested an immediate and entire termination of all intra-EU BITs (without application of the BITs’ sunset clauses of 10-20 years) upon the entry into force of a proposed multilateral agreement among the Member States (the “Agreement”) to be concluded to replace and supersede pre-existing intra-EU BITs. The termination would be legally admitted owing to Art. 59 of the Vienna Convention on the Law of Treaties.
    Pending ISDS proceedings shall not be affected.
    The proposed Agreement also guarantees an appropriate level of substantive and procedural protection for EU-Investors, including investor-to-state mediation (a binding and enforceable settlement mechanism for investment disputes to be provided) as well as a judicial mechanism based on one of the three options: the European Court of Justice, or a permanent investment court to be set up, or the Permanent Court of Arbitration (PCA) under The Hague Convention for the Pacific Settlement of International Disputes, 1907.
    As mentioned, potential financial liability of the Member States vis-à-vis their own investors shall not be admitted.
    The above Delegations’ observations, dated April 7, 2016, are available at: http://www.s2bnetwork.org/wp-content/uploads/2016/05/Intra-EU-Bits2-18-05.pdf

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