Extinguishing Intra-EU Bilateral Investment Treaties: Recent Developments

By Krzysztof Wierzbowski and Aleksander Szostak

In line with the decision of the Court of Justice of the European Union (referred to here as the “CJEU”) in Achmea (formerly Eureko) v. Slovakia (the Achmea Decision) and the political declaration issued by the governments of the European Union member states on Jan. 15, 2019, most of the EU member states, with the exception of Austria, Finland, Sweden and Ireland, have entered into a plurilateral treaty for the termination of bilateral investment treaties between the EU Member States (referred to in this article as “intra-EU BITs” and the Termination Treaty).

The Termination Treaty was signed on May 5, 2020, and entered into force on Aug. 29, 2020. See Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT] (available at http://bit.ly/3iqsTn3).

Portugal, the Netherlands, and Luxembourg have made the following formal declarations concerning the Termination Treaty:

  • “Luxembourg calls upon the European Commission and all member states to start, without any delay, a process with the aim to ensure complete, strong and effective protection of investments within the EU and adequate instruments in this regard.” It requests the  European Commission to create a plan for such a process. Declaration of Luxembourg to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].
  • Portugal appears to endorse a view similar to that of Luxembourg and emphasizes its “support to the intensifying of the discussions between the European Commission and Member States with the aim of better ensuring a sound and effective protection of investments within the European Union. To this end, calls to assess the establishment of new or better tools under European Union law and to carry out an assessment of the current dispute settlement mechanisms which are essential to ensure legal certainty and the protection of interests of investors.” Declaration of Portugal to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].
  • The Dutch government confirms that although the Achmea Decision does not affect the Caribbean parts of the Netherlands (as Overseas Countries and Territories), BITs concluded with those territories shall also be terminated pursuant to the Termination Treaty. In this sense and irrespective of the Achmea Decision, the effects of the Termination Treaty will extend to all parts of the Kingdom of the Netherlands. Declaration of the Netherlands to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

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So what will be the fate of intra-EU BITs and intra-EU investment arbitration?

The conclusion of the Termination Treaty is a direct consequence of the Achmea Decision, in which the CJEU declared that Investor-State Dispute Settlement (the “ISDS”) clauses in intra-EU BITs are not compatible with the EU law. (The decision is available at http://bit.ly/2Kf8OmM.)

In general, the Termination Treaty is based on the premise that all intra-EU BITs shall be terminated and their sunset clauses, providing for the temporarily continued protection of investments existing prior to the termination of the relevant BIT, shall be terminated together with the respective intra-EU BIT and thereby shall not produce legal effects.

Furthermore, it stipulates that new intra-EU investor-state arbitrations may not be initiated and that pending proceedings shall be subject to the management procedure described below.

Interestingly, the Termination Treaty does not resolve the issue of application and compatibility with the EU law of the Energy Charter Treaty (the “ECT”) in the intra-EU investment protection context. In particular, the Termination Treaty stipulates that it does not cover intra-EU arbitrations initiated based on ECT Article 26 and that this issue will be dealt with at a later stage. Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT] at 2. The ECT is available at http://bit.ly/3nUL2u7.

Considering that in recent years we have witnessed rise of the number of intra-EU ECT arbitrations, the uncertainty introduced by the Termination Treaty may put the parties engaged in pending arbitrations, or anticipating initiation of new proceedings pursuant to ECT Article 26, in an adverse position. See,. e.g., Landesbank Baden-Württemberg and others v. Kingdom of Spain, ICSID Case No. ARB/15/45, Decision on the Intra-EU Jurisdictional Objection [25 February 2019]; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018]; Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1, Award [16 May 2018]; Statistics of ECT Cases (as of Oct. 23, 2019) (available at https://bit.ly/3oGCeJz).

Notably, as argued by the Advocate General Henrik Saugmandsgaard Øe in his recently issued opinion in joined cases C‑798/18 and C‑799/18, the ECT ISDS clause does not apply in the intra-EU context,  and the ECT may be entirely inapplicable to intra-EU proceedings. This indicates that if the CJEU follows the Advocate General’s reasoning, EU investors may be deprived of procedural and substantive protection under the ECT in the intra-EU relations. Joined Cases C 798/18 and C 799/18, Opinion of Advocate General Saugmandsgaard Øe [29 October 2020] (available at http://bit.ly/3bEYEHk).

Management of the pending intra-EU proceedings

Pending proceedings, defined as intra-EU investment arbitration proceedings initiated prior to March 6, 2018—the Achmea Decision linked above–and which have not ended with a settlement agreement or with a final award issued prior to March 6, 2018, where the award was duly executed prior to March 6, 2018, or the award was set aside or annulled before August 29, 2020, shall in principle be subject to the so-called Structured Dialogue, which is a mechanism that aims to assist disputing parties in finding an amicable settlement of a dispute. Art. 1(4) and (5) and Art. 9 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

The settlement procedure is overseen by an impartial facilitator who shall find an amicable, lawful, and fair out-of-court and out-of-arbitration settlement of the dispute. Settlement of the dispute shall in principle be reached within six months. Art. 9 (1) – (14) Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT]. It can be observed that the mechanism resembles investor-state mediation.

Going a step further, the Termination Treaty implements an option for investors engaged in pending arbitrations to seek judicial remedies under national law before domestic courts against the host state measure contested in such arbitration proceedings. This option is available to investors under the condition that they withdraw pending arbitration proceedings and waive rights and claims under the relevant intra-EU BIT, or renounce execution of the issued award and commit to refrain from instituting any new arbitration proceedings. Art. 10 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT]. In such case,  limitation periods would not apply to bringing legal action before domestic courts.

This may have a severe impact on the prospect of lodging a successful claim against a state by the investor, since the legal framework of intra-EU BITs that provided a substantive and procedural legal basis in a pending arbitration will not be applicable in domestic court proceedings.

Doubtful recognition and enforcement of awards

Decisions and/or awards issued in pending, or, as the case may be, new arbitration proceedings may not be effective, because the Termination Treaty stipulates that contracting states shall, in case of domestic court proceedings, request the domestic court, including in any third country, to set the arbitral award aside, annul it, or to refrain from recognizing and enforcing it. Art. 7 (b) Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

This raises a threat to the effectiveness of guarantees provided under, among others, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).

It can be recalled that ICSID Convention Article 54 stipulates 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. This unique recognition mechanism does not leave room for any ground on which the recognition could be refused.

Considering a rather likely scenario in which a domestic court of an EU member state is faced with a request for recognition of award or decision issued by a tribunal in an intra-EU investment arbitration case, it can be noted that such domestic court will need to resolve uncertain and complex situation concerning the conflict of treaty norms. The domestic court will need to decide whether to recognize the award, or issue a decision in accordance with the ICSID Convention, or to comply with the EU law and refuse recognition and thereby, to undermine the ICSID Convention.

Although not addressed in the Termination Treaty, it appears that the CJEU argument in the Achmea Decision regarding incompatibility of the ISDS clauses in intra-EU BITs with the EU law may potentially extend to extra-EU BITs and arbitrations between EU members states and investors from third states.

Clearly, arbitrations initiated on a basis of ISDS clauses contained in such BITs may concern treatment of investors from third states investing in the EU, and therefore the subject matter of such arbitrations may relate to interpretation and application of the EU law.

Such arbitrations may also pose a risk to the proper interpretation and application of the EU law and have an adverse effect on the autonomy of the EU law. See Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018]. Such reasoning, if followed, which is rather unlikely, would further deepen the crisis concerning European Union investment treaty arbitration.

It might be further noted that the competence of the court where the arbitration is seated to set aside the arbitration award may lead to the situation where such court would be a non-EU court and would not be bound by the Termination Treaty.

Furthermore, the winning investor may seek to have the arbitration award recognized and enforced in a non-EU jurisdiction where the defendant’s assets are located.

Taming the lion: The tendency of arbitral tribunals to reject intra-EU jurisdictional objections

Despite the Achmea Decision and clear commitment of EU member states on terminating the intra-EU BITs, arbitral tribunals in intra-EU arbitrations generally reject jurisdictional objections asserting incompatibility of intra-EU BITs.vSee, e.g., Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, ICSID Case No. ADHOC/15/1, Partial Award on Jurisdiction [4 March 2020]; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018]; Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1, Award [16 May 2018]; UP (formerly Le Chèque Déjeuner) and C.D Holding Internationale v. Hungary, ICSID Case No. ARB/13/35, Award [9 October 2018]; Addiko Bank AG and Addiko Bank d.d. v. Republic of Croatia, ICSID Case No. ARB/17/37, Decision on Croatia’s Jurisdictional Objection Related to the Alleged Incompatibility of the BIT with the EU Acquis [12 June 2020].

As emphasized by the tribunal in the partial award on jurisdiction in Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, EU law does not form part of the law applicable to questions of the tribunal’s jurisdiction, and no extrinsic elements of interpretation under Article 31(3) of the Vienna Convention on the Law of Treaties can trump the clear expression of the parties’ common intention to arbitrate. Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, at par. 8.143. It should be noted, however, that the intention of capital importing states to arbitrate disputes may be considered as no longer existent due to the signing and entry into force of the Termination Treaty.

Notably, the tribunal further considered the issue of the enforceability of an award issued in intra-EU arbitration and recognized its duty to render an enforceable award. It noted, however, that it is not able to predict the future validity, or enforceability of the award before enforcing courts. Id. at par. 8.140-8.142.

More recently, the tribunal in Addiko Bank v. Croatia raised several interesting points when rejecting Croatia’s jurisdictional objection related to the incompatibility of the Austria-Croatia BIT with the EU acquis.

The tribunal reasoned that in light of Article 2(1)(a) of the Vienna Convention on the Law of Treaties, the law applicable to the Austria-Croatia BIT consists of the terms of that BIT itself and general principles of international law, which are the sources of law not considered by the CJEU as  incompatible with the EU law.

Furthermore, the tribunal noted that contrary to the BIT concluded between the Netherlands and Slovakia, considered by the CJEU in the Achmea Decision as incompatible with the EU law, the Austria-Croatia BIT does not incorporate EU law as part of its applicable law. Addiko Bank AG and Addiko Bank d.d. v. Republic of Croatia, ICSID Case No. ARB/17/37, Decision on Croatia’s Jurisdictional Objection Related to the Alleged Incompatibility of the BIT with the EU Acquis [12 June 2020] par.267. The tribunal concluded that the Austria-Croatia BIT does not give rise to the same functional concerns, which the CJEU found to be present in the context of the Achmea Decision. Id. at par.269.

This indicates that intra-EU BITs whose applicable law is limited to the terms of the intra-EU BIT itself and general principles of international law are not incompatible with the EU law. Following this reasoning, it can be assumed that the tribunal would reach a different conclusion if the Austria-Croatia BIT included a provision expressly or impliedly incorporating EU law as the applicable law.

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Some of the solutions implemented under the Termination Treaty may indeed be considered controversial. This is particularly the case with respect to the mode of termination of legal effects of sunset clauses, or more broadly, the retroactive effect of the Termination Treaty.

Investors may decide to seek protection under existing BITs concluded with non-EU states and, thereby, engage in the treaty shopping practice. It remains an open question whether such BITs will be affected by the Achmea Decision.

While the Achmea Decision argument has become a popular strategy for defendants in investment arbitration proceedings to challenge jurisdiction of arbitral tribunals, jurisprudence indicates that such arguments are generally rejected.

Although developments contained in mega-regional treaties, such as the Comprehensive Economic and Trade Agreement (available at http://bit.ly/2LXjQh3), may provide a model for the creation of standing investment court, which could replace the ISDS mechanism so far in place, the institutional design of the body must comply with the EU law in order to provide an effective alternative to domestic courts. In this regard, it is important to monitor development of the EU’s initiative concerning the so-called Investment Court System, which could be further developed into a Multilateral Investment Court.

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Krzysztof Wierzbowski is a Senior Partner at Eversheds Sutherland Wierzbowski in Warsaw, Poland. He is a member of the CPR European Advisory Board, which provides EAB posts for CPR Speaks. Aleksander Szostak LL.M. is a lawyer at Eversheds Sutherland Wierzbowski.

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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.