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Article: August 2020: EU Countries Sign Intra-EU BIT Termination Agreement, Ushering in Brave New World of Investor-State Dispute Settlement on the European Continent

August 27, 2020

EU Countries Sign Intra-EU BIT Termination Agreement, Ushering in Brave New World of Investor-State Dispute Settlement on the European Continent

On 5 May 2020, all EU Member States (except Ireland, Sweden, Finland and Austria) concluded the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (the “Termination Agreement”).  As its name suggests, this agreement purports to put an end to all bilateral investment treaties (“BITs”) between its signatories.  

The impact of this agreement cannot be understated. Most of the BITs affected by this agreement were signed between Eastern and Western European States before the former became members of the EU. The termination of intra-EU BITs will mean the end of an era for investor-State dispute settlement (“ISDS”) and could foreclose a significant number of future claims against sovereigns. Yet, there is much more than meets the eye.


The Culmination of a Political Process

The Termination Agreement flows from the 6 March 2018 decision of the Court of Justice of the European Union (the “CJEU”) in Slovak Republic v. Achmea B.V. (The “Achmea Decision”). In that decision, the CJEU concluded that the dispute resolution provision of the Netherlands-Slovakia BIT was contrary to EU law. This, according to the CJEU, was because such a provision would grant an arbitral tribunal the authority to make decisions on the interpretation or application of EU law without the ability to refer such questions to the CJEU.

There has been some debate about whether the Achmea Decision is a sui generis decision or has general scope. Some have argued that the Achmea Decision only applies to the dispute resolution provision of the Netherlands-Slovakia BIT (or, at most, those like it that provide for the direct or indirect application of EU law to the merits of a dispute). Others maintain that the Achmea Decision means that all intra-EU BITs (regardless of whether they call for application of EU law) are contrary to EU law.  

The latter is the position taken by EU Member States. On 15 January 2019, EU Member States signed a series of “declarations” in which they informed investors and investor-State tribunals that, based on their understanding of the Achmea Decision and its implications, “all investor-State arbitration clauses contained in bilateral investment treaties concluded between Member States are contrary to Union law and thus inapplicable.” In that same document, they resolved to terminate all intra-EU BITs by the end of 2019. The Termination Agreement – although a little late – flows from those declarations.

However, the movement to terminate intra-EU BITs began at least a decade before the Achmea Decision. Its origins can be traced to the 2007 Lisbon Treaty, which gave the EU absolute authority over both the external and internal trade policies of the Member States. Since then, the Commission (the EU’s executive branch) has lobbied for the termination of intra-BITs – mostly, against the will of the majority of EU Members States, who refused to terminate their intra-EU BITs.  

The Termination Agreement nonetheless strikes a conciliatory position in comparison to the Commission’s longstanding approach and the 15 January 2019 declarations. It provides differing solutions for three classes of arbitration proceedings (as defined in the Termination Agreement).


Concluded Arbitration Proceedings: A Full Exemption from Termination

According to the Article 6 of the Termination Agreement, awards rendered in Concluded Arbitration Proceedings – i.e. arbitration proceedings commenced on the basis of an intra-EU BIT in which a final award was rendered prior to 6 March 2018 (the date of the Achmea Decision) and where the award was duly executed with no pending challenge – are unaffected by the Termination Agreement.  

While this will only touch a small number of cases, it is a striking retreat from the position put forward in the 15 January 2019 declarations, which called for Member States to take an active role in preventing intra-EU BIT awards from being rendered or enforced.  


Pending Arbitration Proceeding: The Europeanization of Intra-EU Bit Disputes

Pending Arbitration Proceedings – i.e. those initiated prior to 6 March 2018, but not concluded before that date – are subject to a special dispute resolution process anchored in EU law and institutions. The special settlement procedure provided in the Termination Agreement’s Article 9 may only be opened where the measure alleged to be a violation of the BIT also violates EU law. The process is led by a “facilitator” who is chosen by a former Member of the CJEU (not the parties) and must have “in-depth knowledge of Union law” (not international law).  

In effect, this settlement procedure takes the dispute out of the international sphere and puts it squarely in an EU law context (of course, with, at most, the prospect of a non-binding proposal by the facilitator).


New Arbitration Proceedings: The End of Intra-EU Bit Investor-State Arbitration?

Article 5 of the Termination Agreement purports to sound the death knell for arbitration proceedings under intra-EU BITS. It provides that arbitration clauses in intra-EU BITs “shall not serve as legal basis for New Arbitration Proceedings” (which are defined as arbitration proceedings initiated on or after 6 March 2018). However, despite this categorical language, intra-EU ISDS is not dead.

First, the hold-outs to the Termination Agreement ensure that there will be some life for intra-EU BITs post-Achmea. While Ireland’s absence was to be expected (as it had already terminated all of its intra-EU BITs), the fact that the other hold-outs did not sign the Termination Agreement came as a surprise – and clearly did not please the Commission, which has brought infringement proceedings against Finland and the UK. In particular, the UK, which although not technically a member of the EU, remains a party to the relevant treaties for the time being. If its intra-EU BITs survive its divorce from the EU, the UK could be a safe harbour for intra-EU BITs.

Second, the Termination Agreement appears to make a notable exception for proceedings commenced under the Energy Charter Treaty (the “ECT”). At the time of the declarations, Hungary split from other Member States, arguing that proceedings commenced under the ECT were not subject to the Achmea Decision. It now appears that its position has won the day as the ECT is not included in the Termination Agreement. Therefore, EU investors would still be able to bring claims against EU Member States provided that they may invoke this treaty instrument.

Third, investors may ultimately seek to challenge whether, as a matter of international law, the Termination Agreement may have retroactive effect on ongoing arbitrations and even on future arbitrations brought under so-alled sunset clauses (i.e., clauses of BITs that extends that treaty’s protections post-termination) – which the Termination Agreement also purports to terminate.  

In short, while the Termination Agreement is in many ways the culmination of a process seeking to put an end to intra-EU investor-State dispute resolution, the story is far from over.