Approach of the European Union to Bilateral Investment Treaties Concluded Between the Member States: Initial Thoughts on Draft Plurilateral Agreement for the Termination of Intra-EU BITs

 

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By Krzysztof Wierzbowski[1] and Aleksander Szostak[2]

The compatibility of investment protection treaties entered into between EU member states (the ‘Intra-EU BITs) with the regulatory framework of European Union law has been a controversial issue for quite some time. It can be recalled that the decision of the Court of Justice of the European Union (the ‘CJEU’) in Achmea (formerly Eureko) v. Slovakia (the ‘Achmea Decision’) declared investor-state dispute settlement clauses in intra-EU BITs as contrary to EU law. In particular the CJEU stated that disputes before arbitral tribunals based on intra-EU BITs may relate to matters of interpretation and/or application of the EU law. While a preliminary ruling procedure under Art. 267 TFEU enables courts and tribunals of member states to file a request pertaining to the interpretation and application of the EU law, no arbitral tribunal constitutes a court or tribunal under the meaning of the provision and, therefore, such arbitral tribunal cannot request a preliminary ruling.

As decisions of arbitral tribunals are final and, therefore, in principle, cannot be appealed to the national courts, the CJEU has found here a threat to proper interpretation and application of the EU law, which in turn has an adverse effect on the autonomy of the EU law .

The direct implication of the Achmea Decision is that investor-state arbitrations based on intra-EU BITs are not compatible with the EU law and should not be initiated. This may have a severe impact on foreign investors engaging in the European market and the foreign direct investment protection system in the EU.

In line with commitments contained in political declarations issued by the representatives of the governments of the EU member states on 15 January 2019, EU member states have quite recently reached an agreement on the text of a plurilateral treaty for the termination of intra-EU BITs.[3] Although it appears that the official text of the plurilateral treaty is not publicly available, its draft text has been leaked (the “Termination Treaty”) and may provide much needed insight into the future shape of EU policy towards protection of EU investors in the EU and the fate of intra-EU BITs. [4]

The fate of intra-EU BITs

According to the text of the Termination Treaty, intra-EU BITs listed in an annex to the Termination Treaty are to be terminated and shall not produce legal effects. Intra-EU BITS will therefore be terminated by means of mutual consent of contracting parties through a plurilateral treaty, which may prove to be the most efficient method of terminating all of intra-EU treaties in a consistent manner.

As a matter of certain standard, investment protection treaties provide for a solution applicable in the case of termination of the treaty. Investors enjoy continued protection for a set period of time, thereby not being surprisingly deprived of certain rights that might have been taken into account when the investment decision was made and implemented.

Interestingly, the Termination Treaty provides that such sunset clauses contained in intra-EU BITs, gguaranteeing the continued protection of investments existing prior to the termination of the relevant BIT, shall be terminated together with respective intra-EU BIT and shall not produce legal effects. Whether such termination by the Termination Treaty, without modification of intra-EU BITs by removing the sunset clauses from the legal framework and, subsequently, terminating each of BITs entirely, will be effective may be debatable (in particular by affected investors).

The Termination Treaty adds a degree of uncertainty with respect to the application of the Energy Charter Treaty (the ‘ECT’) in intra-EU relations. The Termination Treaty provides that it does not cover intra-EU proceedings initiated on the basis of the ECT and that this matter will be dealt with at a later stage. This may put many EU member states and foreign investors currently engaged, or considering engaging in intra-EU proceedings based on the ECT, in a disadvantageous position. It is noteworthy that recent years have witnessed a number of intra-EU ECT claims directed by foreign investors against for instance Spain (concerning reform of renewable energy sector).

The Termination Treaty appears to endorse the view that the legal framework of the EU sufficiently protects investors engaging in the European market. After all, by exercising some of the fundamental freedoms, such as freedom of establishment and free movement of capital, investors from EU member state fall within the scope of application of the EU law and enjoy protection under inter alia primary and secondary EU law as well as general principles of EU law.[5] It may however be doubtful that EU law and the national law of member states will always be perceived to de facto guarantee effective procedural and substantive protection to foreign investors engaging in the European market. One may identify a number of concerns associated with the potential bias of national judges, political pressure exerted by governments, corruption and malfunctioning of the domestic judiciary in general, which indicates that the view expressed in the Termination Treaty may be debatable.

One size does not fit all: concluded, pending and new arbitration proceedings

Although the Termination Treaty stipulates that all intra-EU BITs listed in an annex shall be terminated and shall not produce legal effects, it additionally addresses the status of arbitration proceedings under intra-EU BITs. In particular, the Termination Treaty distinguishes between three categories of arbitration proceedings under intra-EU BITs:

  • New arbitration proceedings

The Termination Treaty defines these as arbitration proceedings initiated on or after 6 March 2018 (i.e., on or after the date of Achmea Decision).

The Termination Treaty stipulates that arbitration clauses in intra-EU BITs shall not serve as legal basis for new arbitration proceedings as defined above.[6] This indicates that any intra-EU investment treaty arbitration initiated after the Achmea Decision will be declared as ineffective.

  • Concluded arbitration proceedings

The Termination Treaty defines these as:

Arbitration Proceedings which ended with a settlement agreement or with a final award issued prior to 6 March 2018 [the date of Achmea Decision] where:

  1. the award was duly executed prior to 6 March 2018, even where a related claim for legal costs has not been executed or enforced, and no challenge, review, set-aside, annulment, enforcement, revision or other similar proceedings in relation to such final award was pending on 6 March 2018, or
  2. the award was set aside or annulled before the date of entry into force of this Agreement;[7]

These intra-EU investment treaty arbitration proceedings will not be affected by the Termination Treaty. Accordingly, any award, final decision, or settlement issued before 6 March 2018 will not be considered as invalid, or not effective.

  • Pending arbitration proceedings

The Termination Treaty defines pending arbitration proceedings as arbitration proceedings initiated prior to Achmea Decision (i.e. 6 March 2018), which do not qualify as concluded.[8]

For this category of arbitration proceedings, the Termination Treaty provides a mechanism which aims at assisting the parties to the pending proceedings in finding an amicable settlement of a dispute – the so-called Structured Dialogue.[9] At the outset, it is interesting to note that the Structured Dialogue mechanism to a large extent resembles procedure for investor-state mediation.

The mechanism enables foreign investors to initiate settlement procedure with a state party to the pending arbitration proceedings within six months from the termination of intra-EU BITs, thereby providing the legal basis for respective pending arbitration proceedings to become converted to or substituted by, the specific  kind of mediation.[10] The settlement procedure is overseen by an impartial facilitator whose task is to find an amicable, lawful and out of court and out of arbitration settlement of the dispute. Settlement of the dispute shall be reached within 6 months.

While the facilitator shall be designated by an agreement of parties (i.e. foreign investor and state), and shall possess in-depth knowledge of EU law, the Termination Treaty does not seem to require an in-depth knowledge of public international law, or, more importantly, international investment law.[11] Although it is doubtful that parties would appoint a facilitator that is not an expert in public international and international investment law, the lack of express requirement in this respect may lead to undesirable situations that may undermine of the Structured Dialogue mechanism.

Interestingly, the Termination Treaty provides an additional option to foreign investors that enables them to seek the judicial remedies under national law against a measure adopted by the state, such measure being subject to such initiated arbitration proceedings. In such case, national time limits for bringing legal action do not apply provided that investor satisfies several conditions.[12] It is noteworthy that the provisions of intra-EU BITs that initially provided legal basis for the parties to settle their dispute, will not be considered as part of applicable law in proceedings before a national court. Clearly, this implies that investors will not be able to base their claims on substantive provisions of intra-EU BITs, which may severely limit the possibility to lodge a successful claim against a state.

Pending and New Arbitration Proceedings: what about recognition and/or enforcement?

The Termination Treaty provides that state parties to intra-EU BITs on the basis of which pending and/or new arbitration proceedings were initiated, shall inter alia request the national court of EU state and any 3rd state, to set aside an award issued in such proceedings, or to annul it or to refrain from recognizing and/or enforcing it, as applicable.[13]

Therefore, many arbitration awards issued after Achmea decision will, at least in EU member states, be ineffective.

Although the Termination Treaty covers intra-EU BITs only (as listed in the Annex to the Treaty), it deserves to be noted that one may extend the reasoning of the CJEU in Achmea Decision regarding incompatibility of investor-state dispute settlement clauses in intra-EU BITs with EU law to BITs concluded between EU member states and 3rd states.

In particular, disputes covered by such BITs and settled through investor-state arbitration may relate to matters concerning treatment of foreign investors engaging in the European market and, thereby, interpretation and application of EU law. While it is rather doubtful that tribunals constituted on the basis of such BITs will reject jurisdiction over a dispute, there is a threat to effective recognition and enforcement in the European Union of awards issued in such arbitrations.

The national court faced with a request for recognition or enforcement of such arbitral award, or the CJEU faced with a request for a preliminary ruling, may declare that the arbitration between a non-EU foreign investor and EU member state adversely affects the autonomy of the EU law and, therefore, recognition and enforcement of such awards should be refused. It can be expected that a request for a preliminary ruling from the CJEU on this matter will be made.

This would have a devastating impact on the effectiveness of guarantees contained in such BITs. In addition, this approach, if adopted, would severely impact recognition and enforcement mechanism contained in the ICSID Convention. Namely, Art. 54 of the ICSID Convention provides that each contracting state shall recognize an award rendered by an ICSID Tribunal as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court where recognition is sought. As the mechanism does not leave room for any ground on which the recognition could be refused, potential refusal by national courts to recognize awards issued in arbitrations under ICSID rules would adversely affect the effectiveness of the ICSID Convention and possibly pose a threat to its existence.

Concluding remarks

Although the official text of the Termination Treaty is not publicly available, its leaked draft may serve as a valuable source indicating the fate of intra-EU BITs.

Some of the solutions provided under the Termination Treaty, such as the mode of termination of legal effects of sunset clauses, or retroactive effect of the Termination Treaty with respect to the claims that arose and could constitute the basis of New Arbitration Proceedings, may be controversial and will most probably be contested by affected investors. It remains a matter of separate discussion what avenue the investors may have in order to effectively contest the ex post deprivation of their rights.

Some investors may decide to engage in the treaty shopping practice and seek protection under BITs other than intra-EU ones. It remains an open question whether BITs concluded between EU member states and 3rd states will be affected by the reasoning of the CJEU in Achmea Decision.

ENDNOTES

[1] Krzysztof Wierzbowski is Senior Partner at Eversheds Sutherland Wierzbowski in Warsaw, Poland.

[2] Aleksander Szostak LL.M. is a lawyer at Eversheds Sutherland Wierzbowski.

[3] See. Statement: EU Member States agree on a plurilateral treaty to terminate bilateral investment treaties [24 October 2019] available at: https://ec.europa.eu/info/publications/191024-bilateral-investment-treaties_en.

[4] Draft text of the treaty is available at: https://www.iareporter.com/articles/revealed-previously-unseen-draft-text-of-eu-termination-treaty-reveals-how-intra-eu-bits-and-sunset-clauses-are-to-be-terminated-treaty-also-creates-eu-law-focused-facilitation-p/.

[5] See. Point XI of the preamble to Termination Treaty.

[6] Art. 5 Termination Treaty.

[7] Art.1(4) Termination Treaty.

[8] Art.1(5) Termination Treaty.

[9] Art.9 Termination Treaty.

[10] Art.9(1) Termination Treaty.

[11] Art.9(8) Termination Treaty.

[12] Art.10 Termination Treaty.

[13] Art.7 Termination Treaty.

The views expressed in this article are those of the authors and do not necessarily reflect the views of The CPR Institute.

Notes from AM19: The “Risky Business” of NAFTA, BITs, ITAs and Global Trade

By Evan Drake

The CPR Institute’s 2019 Annual Meeting was held at the Fairmont Hotel in Washington, D.C., Feb. 28-March 2.  The event featured more than 50 speakers on 16 panels addressing the most pressing issues in commercial conflict resolution.

One of the many CPR AM19 highlights was a lively panel discussion of international investment arbitration, Navigating Risky Business: NAFTA, BITs, ITAs and Global Trade.  The panel included international investment arbitration experts Arif H. Ali, a partner who co-chairs Dechert LLP’s international arbitration practice in Washington and London; Mélida Hodgson, a partner in the New York office of Foley Hoag; Mark Luz, senior counsel and deputy director of the Trade Law Bureau of Global Affairs Canada in Ottawa, a Canada government agency; and moderator Ank Santens, a partner in the New York office of White & Case and a CPR Institute board member.

The panel discussed the potential impact of the recent United States–Mexico–Canada free trade agreement, best known as the USMCA.  The agreement, which is awaiting ratification by each of the nations, regulates both trade and investment. Once ratified, it will replace the NAFTA.

The panel focused on international investment arbitration.

Moderator Santens began by introducing the panel members and providing an outline of modern investor-state dispute settlement, or ISDS.  Santens, who has served as both counsel and arbitrator in investment disputes under all major international arbitration rules, highlighted that bilateral and multilateral investment treaties, or BITs, play an important role in the global economy by increasing investment-system stability.

The typical ISDS claim is brought by an investor against a state, typically for breach of a substantive standard of protection contained in a BIT.  These standards vary treaty by treaty, but usually include at minimum protections against expropriation and guarantees of fair and equitable treatment. NAFTA, a multilateral trade and investment treaty, grants similar protections to U.S., Canadian and Mexican investors.

The reciprocal protections created by these treaties, Santens continued, allow investors to bring claims against states that would otherwise lack privity, and the number of these claims has increased substantially over the past 10 years.  The bulk of these claims have been arbitrated through ICSID–the International Centre for Settlement of Investment Disputes, which is part of the World Bank and based in Washington, D.C.

But other forums, including the Permanent Court of Arbitration in The Hague, Netherlands, the International Chamber of Commerce and the Stockholm Chamber of Commerce may be available to claimants. The United Nations Commission for International Trade Law, or UNCITRAL, among others, provides frequently-used ISDS rules.  (Private and nonprofit providers, including the CPR Institute, which publishes this blog, also have adaptable rules.)

The panel then shifted its focus to ISDS history and development. Panelist Mark Luz, who works in the Canadian Department of Foreign Affairs and International Trade, began the discussion with the tongue-in-cheek goal of “explaining 120 years of investment law history in ten minutes.”

Luz, who has represented the Canadian government in NAFTA and other investment arbitration proceedings, described how the “gunboat diplomacy” of the early 20th century was gradually displaced by a system of treaties providing for protection of foreign investments, and how this system has developed rapidly in the past 20 years.

Prior to the advent of inter-state investment treaties, he explained, states defended the interests of their investors abroad in the same way they defended their nationals–through diplomatic protection. For capital-exporting European powers, this might even entail dispatching warships to pressure foreign governments into honoring their commitments to investors.

Evidence of this practice can be seen in the Hague Convention of 1907, on the law of war, in which states undertook not to use armed force for the recovery of debts owed to themselves or their nationals—provided, however, that the debtor states agreed to submit to arbitration.

Diplomatic protection, said Luz, was a poor system for resolving investment disputes.  Under this system, investors would generally need to exhaust local legal remedies before applying to their home states for diplomatic protection—a time-consuming and potentially expensive endeavor.

Furthermore, states were under no obligation to grant protection to their nationals, even in the event of a meritorious claim.  If political considerations weighed against damaging a sensitive relationship, a state might simply decline to exercise this protection, and an investor would have no way of seeking redress individually.

During the early-to-mid 20th century, certain customary protections began to gain expression through treaties; interstate bodies such as the U.S,-Mexico Claims Commission (1924) were created to adjudicate investment-related disputes.  But it was not until the NAFTA’s 1994 passage that investment arbitration “exploded” into the broad-reaching network of substantive protections for individual investors that characterizes modern ISDS.

Luz also noted that ISDS is not without its critics, and that many consider the system to be in the midst of a “legitimacy crisis.”  He recalled that during one NAFTA negotiation over an oil and gas project, protesters floated a blimp with the slogan “Frack Off NAFTA Chapter 11” outside the window of the conference room.  Chapter 11 is the NAFTA’s investment section.

Although many states have become increasingly critical of investment arbitration, Mark Luz believes that ISDS is more likely to adapt than to perish.  Pointing out the varied approaches that different actors have taken toward reforming the system—including NAFTA’s renegotiation, and the development of an international investment court at the United Nations—he emphasized that most states will seek to preserve the stability created by ISDS, even as they act to transform it.

Panelist Mélida Hodgson, of Foley Hoag, who has been both arbitrator and counsel representing the United States in NAFTA and World Trade Organization disputes, cited the USMCA’s transformative potential, but cautioned that the system isn’t changing just yet.

Until the new rules are ratified, Ms. Hodgson said, NAFTA is still the law.  Although the so-called “legitimacy crisis” facing ISDS may result in significant future changes, the USMCA represents a discreet set of reforms in both trade and investment law, which should be considered in the context of specific political factors.

Canada and Mexico, for example, have fared far worse in NAFTA disputes than the United States, and yet current U.S. Trade Representative Robert E. Lighthizer and his office has sought to reduce the scope of protections for North American investors.  While Mexico may want to re-assert government prerogatives in the energy sector, Canada appears more concerned with the USMCA’s trade provisions than its investment protections.

The result of these negotiations seems to be a two-tiered system, where investments in certain “special sectors”—e.g., oil and gas—will receive greater protection than other investments.

In any event, as members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), both Canada and Mexico have already committed to a limited set of obligations toward foreign investors. The CPTPP, like much of the USMCA, includes a higher bar than NAFTA for demonstrating discriminatory treatment against an investor, as well as reduced protections against expropriations. President Trump withdrew the United States from the agreement 2017.

Shifting the discussion to Europe, Dechert’s Arif Ali agreed with Mélida Hodgson that any USMCA impact will come only after the agreement is ratified. Ali stressed that modern ISDS development represented a historical shift from a “power-based system to a rules-based system,” and that European and other states are unlikely to abandon this useful framework for depoliticizing investment disputes.

Ali first took issue with the oft-repeated criticism that arbitrators in investment cases are, in effect, deciding public policy.  Issues of public policy often arise in cases of expropriation, in which states seek to regulate foreign investments for the public good, creating situations where arbitrators may determine that a state’s regulations are impermissible under an investment treaty.  Far from rejecting the system, however, he highlighted that states are more likely to use public policy as a litigation tool within ISDS, developing new procedural and substantive rights in the process.

Drawing a parallel with the USMCA, Ali cited the controversial Achmea decision of the Court of Justice of the European Union as an exaggerated threat to investment arbitration.  In its landmark 2018 opinion in Achmea, the CJEU declared that a Netherlands-Slovakia BIT–and by extension all inter-EU BITs–were incompatible with EU law.  The EC has supported this position by submitting amicus briefs in EU investment disputes. (For information on the case, see CPR Speaks here.)

Nevertheless, European states continue to refer their investment disputes to arbitration, and it is unclear to what extent the Achmea decision will actually affect the practice of arbitral tribunals.  As Arif Ali pointed out at the CPR AM19 panel discussion, the applicability of the Achmea decision to intra-EU treaties such as the Energy Charter Treaty, to which the EU itself is a part, is unclear, and already has sparked conflicting interpretations.  In Vattenfall v. Germany, for example, an ICSID tribunal determined that the ECT was unaffected by Achmea, despite the issuance of a “guidance note” by the European Commission to the opposite effect.

Ali looked at the proposed EU multilateral investment court as another possible evolution of European ISDS, rather than a departure from the system.  Considering the greater focus in more recent BITs on public policy, he said he felt that the development of such an institution would be “in principle, not a bad thing.”

Collectively, the panelists seemed to agree that NAFTA’s renegotiation should be seen as part of a systemic evolution in international investment arbitration.  In Europe, North America, and around the world, the panel members indicated that they believed that states are acting to reform ISDS to suit their changing interests. The USMCA, like the Trans-Pacific Partnership and Achmea, represents one piece of a continuing process.

The author is a CPR Institute Spring 2019 intern from Brooklyn Law School.