The termination of intra-EU BITs: How did ΕU Member States get here and what happens next?

Marily Paralika, international arbitration partner at Fieldfisher in Paris and Joost van Dam, associate at Fieldfisher in Amsterdam consider the implications of this recent change in the arbitral landscape.

 
The Termination Agreement does not affect EU Member States' participation in the Energy Charter Treaty (ECT) and its related arbitration clauses, but it is anticipated that the EU will take steps in due course to restrict the ambit of the ECT as between EU States. Nor does it affect specific intra-EU BITs by Member States that have not (yet) signed this agreement (i.e., the BITs concluded by Austria, Finland, Ireland, Sweden and the United Kingdom). This article discusses the background to the Termination Agreement, its provisions, its legal effects and the impact that it will have on investors going forward.

The main takeaway from the Termination Agreement is that investors from the 23 signing EU Member States will not be successful when initiating new arbitral proceedings (after 6 March 2018) against EU Member States. In addition, if investors have recently (before 6 March 2018) initiated arbitral proceedings, they will be required to withdraw their claims and (re)start negotiations with the Member State(s) or seek protection before national courts.

1. Background – the Achmea saga

A BIT is concluded between two states to reciprocally promote and protect private investments made by nationals (both natural and legal persons) of one state in the territory of the other state. BITs contain standards that protect the national against adverse state measures of the host state, and in order to address situations in which host states do not uphold these standards, they contain a dispute settlement clause which refers to international investment arbitration. Such arbitration clauses have been the subject of much debate.

The recent termination of the intra- EU BITs has its origin in the decision rendered in a dispute opposing the Dutch company Achmea and the Slovak Republic. Achmea claimed that the Slovak Republic breached the standards of the Slovakia-Netherlands BIT and brought its claim before an international arbitral tribunal.

Achmea succeeded in its claims, and was awarded €22.1 million, plus interest and costs. However, Slovakia sought to set aside this award before the courts of Frankfurt (the seat of arbitration), arguing inter alia that the BIT was not compatible with EU law, based on provisions of the Treaty of the Functioning of the European Union. In the appeal, after the first instance court denied Slovakia's application, the German Federal Court of Justice referred the question of incompatibility to the Court of Justice of the European Union (CJEU).

The CJEU ruled that the arbitration clause in the Slovakia-Netherlands BIT has an adverse effect on the autonomy of EU law and is therefore incompatible with EU law. The judgment found that arbitration provisions in BITs between Member States deprive EU courts of their jurisdiction and are therefore inconsistent with EU law.

2. The termination process – the post-Achmea effect

Following the Achmea judgment, the European Commission has been urging the Member States to terminate voluntarily their intra-EU BITs as soon as possible. However, this had little to no effect since only a handful of Eastern European Member States would initially comply with the Commission's request. Therefore, in January 2020, the EU Member States issued three joint political statements announcing their intention to terminate their intra-EU BITs. The Member States followed up on this promise and negotiated, together with the European Commission, a plurilateral agreement for the termination of the BITs, which resulted in the Termination Agreement.

Twenty-three Member States have signed the Termination Agreement, terminating their intra-EU BITs. Austria, Finland, Ireland and Sweden have not signed the Termination Agreement, and thus their BITs are still in effect. Lastly, the UK left the EU on 31 January 2020 and has therefore not signed the Termination Agreement, to the effect that its BITs with EU Members remain in force.

3. Legal effects of the Termination Agreement

The Termination Agreement provides a 46-page annex listing the intra-EU BITs that are terminated (annex A), and recently terminated BITs that may contain a sunset clause (annex B).[i] The Termination Agreement also terminates sunset clauses and provides that they shall not produce legal effects for BITs listed in both annex A and B (article 2). All intra-EU BITs and associated sunset clauses are terminated as soon as the Termination Agreement enters into force, which is 30 calendar days after the date on which the depositary receives the second instrument of ratification by Member States (articles 15, 16).

Moreover, the signing Member States explicitly confirm that arbitration clauses in intra-EU BITs are contrary to EU law and thus inapplicable as of the date on which the last of the parties to an intra-EU BIT became a Member State to the EU (article 4). This means the Termination Agreement has a retroactive effect, dating back to the date that the last contracting party of a BIT joined the EU. In the context of the Termination Agreement, this means that as of a Member State's accession date, the arbitration clause under the relevant BIT cannot serve as the basis for initiating arbitration proceedings (article 4).

In turn, this has the effect that tribunals constituted on the basis of such arbitration clauses lack jurisdiction, since the consent to arbitration has been withdrawn. The Termination Agreement sets out its legal effects on three separate categories of arbitration proceedings:

(a) Concluded Arbitration Proceedings

The Termination Agreement gives finality to arbitration proceedings that have been concluded before 6 March 2018 (Concluded Arbitration Proceedings) and provides that they shall not be reopened, and that the Termination Agreement shall not affect any settlement agreements that have been concluded prior to 6 March 2018 (article 6).

(b) Pending Arbitration Proceedings

With regards to Pending Arbitration Proceedings that have been initiated prior to 6 March 2018 but do not qualify as Concluded Arbitration Proceedings, the Termination Agreement imposes two duties on the contracting parties (i.e., the EU Member States): first, they have to inform the arbitral tribunal of the legal consequences of the Achmea judgment (or, in other words, the lack of consent to arbitration)(article 7(a)). Second, if an award has already been rendered, the Member State has to request the competent national court to set aside, annul or to refrain from recognising and enforcing the arbitral award (article 7(b)).

The Termination Agreement provides two transitional measures for Pending Arbitration Proceedings. First, it imposes a structured dialogue (article 9). This entails that the investor may ask the EU Member State to negotiate a settlement agreement, which will be supervised by an impartial facilitator (article 9(7)). This settlement agreement must include an obligation for the investor to withdraw its arbitration claim, or in case an award has been rendered, the assurance that it will not initiate proceedings for recognition, execution, enforcement or payment (article 9(1)(a)/(b) and 14). It seems that this is a limited time offer, because an investor has six months from the termination date to utilise this option (article 9(2)). Additionally, the Termination Agreement  prescribes a mandatory settlement procedure  in case the CJEU or a national court has found in a final decision that the contested state measure violated EU law (article 9(3)), and likewise that a settlement procedure will not be entered into if these courts find that there is no violation (article 9(4)). This also means that settlement procedures shall be suspended until a court judgment has become final (article 9(5)).

There is a time limitation of six months (or agreed longer period) to the settlement procedure, commencing from the appointment of the facilitator (article 9(10)). If no settlement is reached within this time period, the parties are directed to communicate to each other the settlement that is acceptable to them, and the facilitator shall organise further negotiations on that basis with the aim of finding a mutually acceptable solution (article 9(11 -12)). If no settlement is reached, the investor would have to pursue its claims before national courts.

Second, investors are granted access to judicial remedies under national law against a measure contested in pending arbitration cases, even if the time bar of a statute of limitation has lapsed (article 10(1)). In order to be entitled to this remedy, the investor must (again) withdraw its arbitration claim and wave all rights under the relevant arbitration clause (article 10(a – c). The investor must bring its claim to the national courts six months after:

(i) the termination of the BIT, if it does not wish to use the option of the structured dialogue (article 10(1)(a)(i));
(ii) the investor rejects the structured dialogue (article 10(1)(a)(ii)); or
(iii) the last communication, in case no settlement agreement was concluded following the structured dialogue (article 10(1)(a)(iii)).

When the investor brings this claim to a national court, it must make a claim based on national or European law, which means that the standards found in the BIT are no longer applicable law (article 10(b) and 10(3)). However, proceedings before national courts are not possible, if a settlement agreement has been reached (article 10(c)).

(c) New Arbitration Proceedings

Lastly, the Termination Agreement addresses arbitration proceedings that have been initiated on or after 6 March 2018 (New Arbitration Proceedings). The Termination Agreement describes that in the context of New Arbitration Proceedings, the arbitration clause in the intra-EU BIT shall not serve as a legal basis for new proceedings (article 5). Consequently, the New Arbitration Proceedings will likely be dismissed for lack of jurisdiction. Further, the Termination Agreement imposes the same two above-mentioned duties on Member States as in Pending Arbitration Proceedings, i.e., a duty to inform the tribunal about the legal consequences of the Achmea judgment, or make a request before the national court (article 7). Even in case a tribunal accepts jurisdiction and renders an award against an EU Member State, issues will arise at the state of enforcement of the award before national courts. National courts will assess whether there was consent to arbitrate before they grant permission to enforce the award.

4. Conclusion – what to expect?

The Termination Agreement has rendered BITs agreed between EU Member States that signed the Termination Agreement futile. Not only have the BITs been terminated, the sunset clauses have also been retroactively terminated from the moment the last intra-EU BIT signing party became a member of the EU.

States are free to consensually terminate their treaties, but declaring a sunset clause terminated might be an issue under the Vienna Convention on the Law of Treaties (VCLT)(Article 28), which provides that international treaties do not produce retroactive effects. In addition, Article 70(1)(b) VCLT provides that termination of an international treaty does not affect parties' rights and obligations created through the execution of such treaty prior to its termination. It is not to be excluded that investors may seek to rely on such provisions to argue that they have rights under the relevant BIT, which cannot be terminated unilaterally.

Going forward, investors that wish to commence arbitration proceedings based on an intra-EU BIT contracted by an EU Member State that has signed the Termination Agreement will see their case dismissed in the jurisdictional phase of the proceedings, since these EU Member States have not consented to arbitration.

An investor that had initiated Pending Arbitration Proceedings must now enter negotiations with the relevant EU Member State and attempt to find an acceptable solution for both parties. This is likely to place the investor in an awkward position – having Pending Arbitration Proceedings may mean that other attempts at mediation, conciliation and amicable solutions have failed before, as it is required by most BITs before initiating arbitration proceedings, known as a "cooling off" period. In order to settle a pending dispute, the investor must now rely on the national courts for protection. This could work adversely for the investor, since national courts may have different standards than the investor anticipated when structuring its investment according to case law of investment tribunals.

More importantly, the Termination Agreement removes rights that were previously afforded to investors through the BITs, without, at the same time, proposing a replacement protection mechanism that can provide a similar or equivalent protection. This may render European investors disadvantaged compared to non-EU investors (who will continue enjoying the protection afforded by BITs), and may, in turn, lead them to (re)structure their investments in a way that will allow them to benefit from such protection through other BITs with non-EU states (by, for example, incorporating entities outside the EU).

As described above, the UK preserves its BITs with different EU Member States. Due to its independence of EU law, and geographical location on the doorsteps of the EU, the UK becomes an attractive location for investment protection in EU Member States. Fieldfisher's leading International Arbitration Group can advise on such issues that may allow investors to (re)gain investment protection under relevant EU Member States. 

Finally, the Termination Agreement has no effect on the ECT, and it is therefore unclear how concluded, pending and new ECT proceedings will be handled. The European Commission has communicated to the European Parliament and Council that it considers the ECT incompatible with EU law.[ii] The preamble of the Termination Agreement expressly states that EU Member States "will deal with this matter [the ECT] at a later stage." Fieldfisher will provide an update once there is more clarity on the future of intra-EU ECT proceedings.

Fieldfisher regularly advises clients on international arbitration and international investment treaty disputes, as well as arbitration proceedings under the LCIA, ICC, ICSID, SCC and UNCITRAL Arbitration Rules. For more information on our expertise in this area, please contact Marily Paralika (partner, international arbitration in Paris); Simon Sloane (partner, international arbitration in London); Joshua Fellenbaum (director, international arbitration in London); or Joost van Dam (associate, international arbitration in Amsterdam).