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.