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Intra-EU Investment Treaties - Do They Still Provide Protection?

By Vijay Bange and Matthew Friedlander
November 2020
Construction Law

Intra-EU Investment Treaties - Do They Still Provide Protection?

By Vijay Bange and Matthew Friedlander
November 2020
Construction Law

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The Purpose of a Bilateral Investment Treaty (BIT)

In general terms a BIT is an agreement made between two countries that establishes the terms and conditions under which nationals (including companies) of one country may invest in the other, including their rights and protections.

As BITs are negotiated agreements between two countries their terms may vary; however, generally speaking, the overall purpose is to inspire confidence for nationals of one country to carry out business in the second country and vice versa.

One of the ways that a BIT may achieve that purpose is to afford certain protections to the investor operating in the respective state. A BIT may protect against illegal nationalisation and expropriation of foreign assets by a state (i.e. one signatory to a BIT) that may undermine the ownership or economic interest of a national operating in that state (i.e. a national of the other signatory to the BIT). The protections afforded by a BIT are usually reciprocal in nature. Other protections may typically include fair and equitable treatment, compensation in the event of expropriation, free transfer of means and security.

So, for a contractor (i.e. investor), operating in foreign state where there is a BIT in place, it can be an important added protection in addition to the relevant contractual arrangement. By way of example, if the contractor is involved with an infrastructure project and the other contracting party is the state or a state owned entity, if the state makes a ‘political’ or ‘fiscal’ decision that impacts upon the contractor, there is a risk that a local court perhaps may not be sympathetic to any legal action brought by the contractor. If that ‘political’ or ‘fiscal’ decision is a breach of the relevant BIT it provides the contractor with the option of pursuing a legal action by way of arbitration proceedings against the

Investment Treaty Arbitration

One of the distinctive features of a BIT is that it allows foreign investors to sue states directly in circumstances where a state may have breached the BIT, usually by referring a dispute to arbitration.

The right for an investor to sue a state is an important part of a BIT. Under public international law, normally only a state may sue another state. As such the investor can take comfort from the fact that it has own legal recourse where a state breaches the terms of the BIT.

The important factor is that the venue of the arbitration is typically in a neutral jurisdiction, such as those offered by the International Centre for Settlement of Investment Disputes.

Another important element of BITs are “Sunset Clauses”. The provisions of a BIT shall remain operative for a given time period after a possible termination. The relevant period can be as long as twenty years. The provisions of a BIT could possibly provide a cause of action for an investor for as long as 20 years following the termination of the BIT.

Intra-European Bilateral Investment Treaties

Up until now, the vast majority of EU member states had intra-EU bilateral investment treaties in place i.e. between one member state and another member state (Intra-EU BITs).

However, on 5 May 2020, 23 of the 27 Member States signed an agreement for the termination of intra-EU bilateral investment treaties (the Termination Agreement).

Signatories of the termination agreement include Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.

Austria, Finland, Ireland, and Sweden did not sign up to the Termination Agreement.

The Termination Agreement stems from the 6 March 2018 European Court of Justice judgment in the Slovak Republic v Achmea case (see further below), in which the ECJ found that investor-State arbitration clauses in Intra-EU BITs were incompatible with EU Treaties.

The Termination Agreement is currently subject to ratification, approval or acceptance under each member state’s domestic laws.

The Achmea Case

In respect of Intra-EU BITs the European Commission (EC) has for some time held the view that such agreements have been superseded by European Law and the principle of the single market. The upshot being that the European Commission believes that there is no need for Intra-EU BITs.

Before the Achmea case, the EC had previously relied on European Union (EU) state – aid rules to prohibit the enforcement of investment treaty arbitration awards.

In March 2018 the Court of Justice of the European Union (ECJ) held in the Achmea case that Article 8 of the Netherlands – Slovakia BIT, which allowed for the resolution of disputes by way of arbitration, was incompatible with EU law. The rationale for the decision was that a tribunal may have to interpret or apply EU law and where a question of law arose, unlike a Member State court, that question of law could not be referred to the ECJ. In other words Intra-EU BIT arbitration provisions, as reasoned by the ECJ, deprived the EU courts of jurisdiction in respect of the interpretation of EU law.

Despite the ECJ’s decision in the Achmea case, until recently the reaction of arbitral tribunals involved with Intra-EU BIT arbitrations has been for the most part to reject objections to jurisdiction based upon Achmea case. Those rejections have centred on the tension between EU Law and BITs which are a matter of international law. In addition, with regards to arbitrations under the Convention on Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention) arbitral tribunals have rejected the Achmea case on the basis that the ISCID Convention prevents contracting parties from unilaterally withdrawing their consent to arbitrate.

The Termination Agreement

The Termination Agreement seeks to deal with Intra-EU BIT arbitrations principally in three ways.

Firstly, “Concluded Arbitration Proceedings” are unaffected by the Termination Agreement. These are proceedings that ended with a final award issued prior to 6 March 2018 provided that (a) the award was executed before that date and no review, set aside, annulment, enforcement proceedings were pending as of 6 March 2018 or (b) the award was set aside or annulled before the Termination Agreement comes into force.

Perhaps more controversial, though, is how the Termination Agreement deals with “New Arbitration Proceedings” and “Pending Arbitration Proceedings”.

“New Arbitration Proceedings” are defined as those arbitration proceedings commenced on or after 6 March 2018. If so, the Termination Agreement provides that Intra-EU BITs shall not serve as a legal basis for those arbitrations.

“Pending Arbitration Proceedings” are defined as arbitration proceedings commenced prior to 6 March 2018 but which do not qualify as Concluded Arbitration proceedings.

For both New Arbitration Proceedings and Pending Arbitration Proceedings the Termination Agreement directs the signatories (i.e. the relevant Member State) to notify the arbitral tribunal of the consequences of the Achmea case (as described above) and through the signatories’ domestic courts, to set aside, annul, or resist enforcement of arbitral awards originating from an Intra-EU BIT.

Separately, for Pending Arbitration Proceedings, the Termination Agreement offers a structured settlement procedure overseen by a facilitator. The procedure is open for 6 months following the termination of the applicable Intra-EU BIT.

Immediate Consequences of the Termination Agreement

Following the Termination Agreement, to the extent that an investor wishes to rely upon an Intra-EU BIT the position is no longer certain as providing an avenue of recourse.

However, some commentators argue that tribunals may continue to reject the Achmea case, and in turn the Termination Agreement, for depriving those tribunals of their jurisdiction.

That argument appears to carry little weight though because, even if an investor is successful in obtaining an award in New or Pending Arbitration Proceedings (despite the Termination Agreement), the enforcement of that award in member states’ domestic courts (that have signed up to the Termination Agreement) should be set aside, annulled or resisted.

Furthermore, it is probable that for those investors currently engaged with Pending Arbitration Proceedings, the structured settlement procedure will probably come as little solace given that it is no guarantee to a remedy.

It is of course open to a domestic court outside of the EU to ignore the Termination Agreement. As such were an investor to obtain an arbitral award under an 0Intra-EU BIT it remains conceivable that the investor could seek enforcement outside of the EU. However, the outcome of such enforcement proceedings is by no means certain.

It is important to remember that the Termination Agreement applies only to signatory EU member states. It does not, for example, effect a BIT in place between an EU member state and a country outside of the EU.

Fortunately, therefore, for UK contractors operating in Europe the Termination Agreement has no impact at all and, in theory, those contractors can continue to rely upon any relevant BIT in place between the UK and any EU member state.

For UK contractors that may have European subsidiaries or for any European contractors operating in another EU state, there is a significant risk that any relevant Intra-EU BIT will no longer be of assistance.

Broader Consequence of the Termination Agreement

There are perhaps wider concerns, however.

BITs have traditionally had long sunset clauses to ensure that investors are not vulnerable to the capriciousness of international politics; even if a state 0decides to withdraw a BIT, the investor will have usually 20 years of protection in which to prepare for life without the BIT. Arguably the most alarming aspect of the Termination Agreement is that each member state intends to refuse to honour the sunset clauses set out in each BIT. This means that an international contractor or investor must now contemplate the possibility that any BIT on which he might look to rely could be withdrawn at short notice and, potentially, without the honouring of a sunset clause. Is this going to encourage rouge states to seek to unilaterally withdraw to avoid responsible fair behaviour?

Moreover, the Achmea case raises the somewhat confusing spectre of an order of precedence to public international treaties, whereby each member state’s treaty commitments to the EU trump their treaty commitments to each other. As public international law becomes ever more global, complex and sophisticated, it is increasingly likely that a state’s various treaty commitments may inadvertently be conflicted. It remains to be seen whether the Achmea case creates an unpleasant precedent where BIT obligations are regarded as the less prioritised of
each state’s treaty commitments.

On the other hand, it must be said that the Termination Agreement has arisen in unusual circumstances that are unlikely to be encountered 0outside of the EU. It may well be that this situation is an isolated incident that does not affect how BITs are maintained and enforced going forward; it still remains fundamentally in the interests of nation states to ensure that they attract international investment, and BITs are a useful tool in that regard. Given that we are in the grips of a global recession this could not be more relevant.

Nevertheless, international companies must be mindful of the risk that BITs may not be as valuable a source of protection for their investments in the 00future.

Republished by permission.