The fate of 132 intra-EU bilateral investment treaties: More or less (legal) certainty?
Updated: Jun 17, 2020
On 5 May 2020, 23 Member States of the European Union signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union purporting to terminate 132 bilateral investment treaties and the legal effects of sunset clauses contained in eleven bilateral investment treaties that were terminated previously. Are things clearer now?
The Termination Agreement was not a surprise. It had been announced by the European Commission in a short press release on 24 October 2019. The finalisation of the text, and probably its translation into the 21 equally authentic languages, seems to have taken several months. It can also not be excluded that during this period, Member States and the Commission worked hard to convince the “small minority of Member States” that did not endorse the text back in October to change their mind. Brexit has certainly played a role too, excluding the United Kingdom from the Union and from the draft termination treaty keeping alive its ten bilateral treaties with EU Member States (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Romania, and Slovenia).
In addition to the United Kingdom, Austria, Ireland, Finland and Sweden did not sign the Termination Treaty. Ireland has already terminated the only intra-EU treaty it had concluded with the Czech Republic by mutual agreement in 2011. But the fate of the bilateral investment treaties concluded by Austria (11 intra-EU BITs), Sweden (11 intra-EU BITs), and Finland (10 intra-EU BITs) remains uncertain and open to speculation. In October 2019, the Commission recalled that it would “will consider resuming or initiating infringement procedures against EU Member States that do not terminate their intra-EU bilateral investment treaties”. Such infringement proceedings are already pending in respect of Austria and Sweden and the European Commission issued reasoned opinions in 2016. On 14 May 2020, the Commission sent letters of formal notice to Finland, but also to the United Kingdom noting that “EU law continues to apply to the United Kingdom during the transition period”.
A problem created by the EU itself
Bilateral investment treaties between EU Member States and arbitration proceedings between investors of one Member State against another Member State are a relatively recent phenomenon. No bilateral investment treaty was ever concluded between the original Member States of the European Communities, despite the dense network of treaties that each of these States had entered into with other States. This suggests that Member States did never consider necessary to add or even to “complete” the Common Market Rules by additional obligations concerning the promotion or protection of investments.
All intra-EU bilateral investment treaties that existed and exist were concluded when at least one of the parties was not yet a Member State. The EU actively encouraged candidates to EU Membership to build a network of bilateral investment instruments. The Europe agreements concluded between the EU and its Member States with candidates to the accession included provisions for conclusion of bilateral agreements for the promotion and protection of investments aimed “at maintaining and, if necessary, improving a legal framework and a favourable climate for private investment and its protection”.
Like in Goethe’s Sorcerer’s Apprentice, these bilateral investment treaties started to attract a life of their own, in particular through the many intra-EU investment disputes started by investors of a Member State against other Member States.
Oh, here comes my master! Help me Lord, I plead! Spirits I have conjured, no longer pay me heed.
The Court of Justice’s judgment in the Achmea case (C-284/16, EU:C:2018:158) brought some certainty concerning the conformity of (part of) these treaties with EU law: the Court made clear that EU law must be interpreted as precluding investor-State dispute resolution provisions bilateral investment treaties concluded between Member States under which an investor from one of those Member States may bring proceedings against the latter Member State before an arbitral tribunal. The intervention of the “master” solved the issue, at least the question of dispute resolution provisions, in terms of EU law. But Member States still faced difficulties to implement the Court’s direction in proceedings before arbitral tribunals through general international law, like the customary rules embodied in Articles 59 or 30 of the Vienna Convention on the Law of Treaties.
The Termination Agreement: reaching beyond Achmea
The scope of the Termination Treaty
The Termination Treaty is aimed at implementing what advocacy was unable to achieve: drawing all the consequences of the Achmea judgment and the primacy of EU law, and therefore terminating the bilateral investment treaties and the effect of sunset clauses contained therein. The preamble of the Termination Treaty recalls:
[I]n compliance with the obligation of Member States to bring their legal orders in conformity with Union law, they must draw the necessary consequences from Union law as interpreted in the judgment of the CJEU in Case C-284/16 Achmea.
Of course, the Achmea judgment concerned only the compatibility of investor-State arbitration provisions contained in bilateral investment treaties, and more specifically of provisions similar to Article 8 of the bilateral investment treaty between the Netherlands and the then Czech and Slovak Federative Republic. Not all arbitration provisions in existing intra-EU bilateral investment treaties are comparable to this Article 8. Some are more limited in scope, like Article 9 of the treaty between the Netherlands and Croatia, applying only to “disputes between one Contracting Party and a national of the other Contracting Party concerning an obligation of the former under this agreement in relation to an investment of the latter”. In light of the Court’s Opinion 1/17 on CETA, under such provisions the power of interpretation and application of the arbitral tribunal is confined to the provisions of the international agreement and could therefore be distinguished from the provisions in the Achmea case establishing a tribunal that would be called upon to give rulings on disputes that might concern the interpretation or application of EU law (Opinion 1/17, EU:C:2019:341, points 122 and 126).
This question is now moot. The Termination Agreement sets out the position of Member States in respect of all investor-State arbitration clauses irrespective of their specific formulation. Article 4(1) of the Agreement provides:
The Contracting Parties hereby confirm that Arbitration Clauses are contrary to the EU Treaties and thus inapplicable. As a result of this incompatibility between Arbitration Clauses and the EU Treaties, as of the date on which the last of the parties to a Bilateral Investment Treaty became a Member State of the European Union, the Arbitration Clause in such a Bilateral Investment Treaty cannot serve as legal basis for Arbitration Proceedings.
But the Termination Agreement does not only confirm the inapplicability of the arbitration provisions of bilateral investment treaties. It is aimed at terminating the treaties in full, including the substantive provisions and sunset clauses. This is not a necessary consequence of the Achmea judgment, or of EU law. Indeed, the Member States confirmed in the Termination Agreement that
[T]his Agreement is without prejudice to the question of compatibility with the EU Treaties of substantive provisions of intra-EU bilateral investment treaties.
The Termination Provisions
The Member States were mindful of the difference between incompatibility with EU law and their wish to terminate all of the bilateral investment treaties.
Article 4(2) determines the time of termination of the bilateral investment instruments. Termination takes effect for each of the treaties or for each of the sunset clauses when the Termination Agreement enters into force for the relevant Contracting Parties. In other words, in respect of the formal termination of the bilateral investment treaties, the Termination Agreement is nothing else than an instrument envisaged by Article 54(b) of the Vienna Convention: it is nothing else than termination by unanimous consent of all parties to the bilateral investment treaty.
What seems a rather simple point, bears important consequences. Through the Termination Agreement the Member States confirm that their respective bilateral investment treaties were not terminated automatically by virtue of accession to the European Union. Several respondent States have tried to rely on Article 59 of the Vienna Convention on implied termination of a treaty by conclusion of a later treaty (the EU treaties). No arbitral tribunal has accepted these arguments, for several, not always very convincing, reasons.
Be that as it may, the Termination Agreement now confirms that the bilateral investment treaties were not terminated automatically by the accession to the EU treaties. The European Commission made statements to a similar effect, requesting Member States to terminate their bilateral investment treaties. As explained above, some Member States (e.g. Ireland and the Czech Republic) also proceeded to formal termination agreements well before Achmea.
The problem is different in respect of investor-State arbitration provisions. In accordance with Article 4(1) of the Termination Agreement, these provisions are considered inapplicable “as of the date on which the last of the parties to a Bilateral Investment Treaty became a Member State of the European Union”. In other words, despite the facts that the treaties remained unaffected by the accession to the EU treaties, the specific provisions concerning investor-State arbitration became automatically inapplicable. Thus, any offer to arbitrate contained in these provisions did not exist anymore and investor could not accept any such offer after the bilateral treaty became an intra-EU treaty.
The legal basis on which the intended consequences can be justified remains unclear. Several rules and principles of the law of treaties could come into play: Article 30(3) of the Vienna Convention on the application of successive treaties, but arbitral tribunals were quite reluctant to rely on this provision so far; the rules on treaty interpretation and authentic interpretations accepted by all parties, but there remains some uncertainty whether the non-application of a treaty provision is still interpretation – quite certainly not; or the modification of a treaty by agreement between the parties (through EU accession and EU law) pursuant to Article 39 of the Vienna Convention. This might create some further difficulties in implementing the aim of the Termination Agreement before arbitral tribunals.
Interestingly, the Termination Agreement does not draw all the consequences of the non-application of the arbitration provisions as of the date of accession to the European Union, adding to the legal uncertainty. It does not distinguish between proceedings based on consent established before the arbitration provision became inapplicable and those where consent was purportedly established thereafter. Rather the Termination Agreement distinguishes between proceedings by reference to 6 March 2018, i.e., the date of the Achmea judgment:
“Concluded Arbitration Proceedings”, i.e., proceedings in which a final decision was issues and executed before 6 March 2018;
“Pending Arbitration Proceedings”, i.e., those that were introduced before 6 March 2018 but that do not qualify as Concluded Arbitration Proceedings;
“New Arbitration Proceedings”, i.e., proceedings initiated after 6 March 2018.
This distinction might find some support in the principle of legal certainty. It makes sense not to reopen final, executed decisions or settlement agreements (Article 6 of the Termination Agreement). Indeed, some of these proceedings might have been brought well before the arbitration provision became inapplicable, creating no incompatibility with EU law.
However, as a matter of international law and in regard of the position adopted by the Member States, the articulation between Pending Arbitration Proceedings and New Arbitration Proceedings is surprising. Article 5 of the Termination Agreement addresses only the situation of New Arbitration Proceedings:
Arbitration Clauses shall not serve as legal basis for New Arbitration Proceedings.
No similar provision exists concerning Pending Arbitration Proceedings. On the contrary, the Termination Agreement organises some transitional measures in respect to these proceedings (Article 8). In other words, the EU incompatibility seems to create its full effect only on 6 March 2018, and not by virtue of EU accession.
States are of course free to establish and to adjust the legal effects attached to their modification or termination of a treaty, in particular in light of legal certainty or similar considerations. But it is surprising that the Termination Agreement does not aim at protection consent established between an investor and a State before the arbitration provision became inapplicable. To take just one example, under the provisions of the Termination Agreement, the arbitration proceedings in the Micula v. Romania case (ICSID Case No. ARB/05/20) would fall under the definition of Pending Arbitration Proceedings, irrespective of the fact that this case was initiated in 2005, two years before the dispute resolution provision in the Sweden-Romania BIT became inapplicable by virtue of Romania’s accession to the European Union. Even if Sweden were a party to the Termination Agreement – which it is not – this solution seems absurd and legally incorrect.
The Termination Agreement also includes some transitional measures and obligations for Member States and investors. These are certainly aimed at ensuring a smooth transition and at handling pending proceedings in an appropriate manner. Nevertheless, some of the agreed measures and procedures add more uncertainty and a heavy burden for Member States.
In respect of New and Pending Arbitration Proceedings, Member States accept an obligation to inform arbitral tribunals of their “common understanding” in respect of arbitration provisions in their bilateral investment treaties (Article 7(a)), and eventually to request national courts to annul, set aside or refuse the enforcement of arbitral awards based on such arbitration provisions (Article 7(b)). The Termination Agreement remains unclear on whether Member States will have actively to introduce possible annulment proceedings even before courts and tribunals of third States. This would indeed add a heavy burden on Member States and, indeed, investors. Article 7 of the Termination Agreement seems to accept the principle of endless proceedings to oppose enforcement or recognition of arbitral awards rendered since the Achmea judgment and those that will still be rendered in the near future.
Article 8 of the Termination Agreement envisages, under some circumstances and conditions – like the suspension of pending arbitration proceedings –, further transitional measures in respect of Pending Arbitration Proceedings. New Arbitration Proceedings seems to be excluded from this specific régime. Interestingly, recourse to the transitional measures is also excluded in case a Member State has prevailed in arbitration proceedings conducted on the basis of an intra-EU bilateral investment treaty (Article 8(2)).
Article 9 of the Termination Agreement provides for a framework for a Structured dialogue in order to find an agreed solution to the dispute through a facilitation procedure. This dialogue is based on consent between the investor and the respondent State in the Pending Arbitration Proceedings. Neither the investor, nor the Member State concerned are obliged to accept such a procedure. The procedure is overseen and organised by an independent facilitator to be appointed by common agreement or, failing such an agreement, by a former Member of the Court of Justice of the European Union designated by the Director General of the Legal Service of the European Commission. On the basis of Annex D of the Termination Agreement setting out an indicative fee schedule for the facilitator, it appears that this facilitation procedure is supposed to be rather inexpensive compared to arbitration practice: a full facilitation procedure should cost approximately 5,000 Euro in terms of fees for the facilitator.
Article 10 of the Termination Agreement sets out another possibility to find an out-of-arbitration settlement to the dispute. Under certain conditions, it envisages access to national judicial remedies for the investor, even if the relevant national time limits have expired.
Both possibilities – structured dialogue and access to national judicial remedies – are not an alternative (or succédané) to dispute resolution under the relevant bilateral investment treaty. Both possibilities are limited to assess the legality of the contested measures and its consequences under EU law and, eventually, municipal law to the express exclusion of the bilateral investment treaty as such. Article 9(6) limits the facilitation procedure to potential violations of Union law caused by the State measure being contested in the arbitration proceedings. Under Article 10(1)(b), an investor must commit to use access to national courts to make claims based on national or Union law; and Article 10(3) adds that “the provisions of Bilateral Investment Treaties terminated pursuant to this Agreement shall not be considered as part of the applicable law in proceedings brought before a national court pursuant to this Agreement”.
Irrespective of the issue whether the protection granted under a bilateral investment treaty is more favourable than the protection under EU law or national law, the exclusion of the application of the relevant bilateral investment treaty might be surprising. Indeed, under Article 4(2) of the Termination Agreement, the relevant bilateral investment treaties will be terminated only as soon as the Termination Agreement enters into force for the relevant Contracting Parties. Despite this choice of the Member States, the settlement procedures proposed operate as if the obligations under the bilateral investment treaty did not exist at the time the contested measures was adopted, even in circumstances where the relevant treaty is considered part of the relevant municipal law.
This solution seems even more concerning because it applies only to Pending Arbitration Proceedings and not New Arbitration Proceedings. In other words, an investor that initiated arbitration proceedings on the basis of an intra-EU bilateral investment treaty after the Achmea judgment was handed down, or any investor that has not done so yet, could use national judicial remedies (if they are still open to the investor) and rely on the bilateral investment treaty as part of municipal law on the time of the internationally wrongful act (subject to national rules of incorporation and reliance on treaty provisions before courts and tribunals). It can hardly be justified to treat an investor that has introduced arbitration proceedings based on a bilateral investment treaty before Achmea differently from investors that have done so despite Achmea.
The end of an era?
In light of the uncertainties contained or created by the Termination Agreement, the Achmea saga is not over yet. The Agreement is certainly a significant step. But its effects and efficiency will still need to be tested before arbitral tribunals, national courts or the Court of Justice of the European Union.
Entry into force
For the time being, the Agreement still needs to enter into force. In accordance with Article 16, it will enter into force 30 days after the second ratification. The relevant bilateral investment agreements will be considered terminated 30 days after both contracting parties to the treaty have ratified the Termination Agreement.
Article 17 also allows for provisional application of the Termination Agreement. Using this procedure might accelerate the application of the Agreement and the termination of the bilateral investment treaties where internal ratification or approval procedures are burdensome and lengthy.
The fate of intra-EU investment disputes
European investors that envisage to bring claims under an intra-EU bilateral investment treaty against an EU Member State and have not done so yet need to consider viable alternatives, including recourse to national courts. This will indeed become the rule rather than the exception in intra-EU relations. The preamble of the Termination Agreement recalls in this regard:
Member States are obliged under the second subparagraph of Article 19(1) TEU to provide remedies sufficient to ensure effective legal protection of investors’ rights under Union law. In particular, every Member State must ensure that its courts or tribunals, within the meaning of Union law, meet the requirements of effective judicial protection.
Bringing an investment dispute directly to Luxembourg is difficult; but the preliminary ruling procedure and the possibility to draw the attention of the European Commission to violations of EU law are viable options for bringing claims to another level. Member States also expressed their desire to ensure a higher level of protection of cross-border investments within the European Union and to create a more predictable, stable and clear regulatory environment to incentivise investments within the internal market, including through the assessment and improvement of dispute resolution mechanisms.
Investors should also keep in mind other truly international remedies, and in particular the European Court of Human Rights. It has already dealt with investment disputes in the past, and it can be a new alternative in cases of expropriation or refusal to a fair trial.
European investors in the energy sector are better placed, at least for the time being. The Preamble of the Termination Agreement specifies that the Agreement “does not cover intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty”. This might come as a relief to investors in the renewable energy sector. Finding a solution for the problem of intra-EU disputes under the Energy Charter Treaty is more complicated, will take more time and necessitates some involvement of other, non-EU Contracting Parties. But it will come at some point. The French government has already warned French investors that no new investor-State proceedings should be initiated under the ECT against another EU Member State.
Bilateral investment treaties and future enlargement
Future accession processes will also have to focus closely on existing bilateral treaty relations between the future Member and existing Members in order to avoid similar issues. For instance, Montenegro, a candidate for EU Membership since 2010, has currently 15 bilateral investment treaties with EU Member States in force. Investors should be aware of the development in respect of intra-EU relations and take appropriate steps to ensure full protection and the possibility to have recourse to arbitration if necessary. One possibility consists in accepting in advance (and before a dispute has actually arisen) the offer to arbitrate contained in a relevant bilateral investment agreement. Such consent might then well be protected by virtue of Article 25(1) of the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States.
The text of the Termination Agreement can be found here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:22020A0529(01)