End of the road for intra-EU BITs

On 24 October 2019, the EU announced that a majority of its Member States had agreed the terms of a multilateral treaty coordinating the termination of bilateral investment treaties (BITs) between EU Member States (so-called “intra-EU” BITs).  The treaty may come into force before the end of the year.

The agreement was reached after a year of "intense preparatory" work and fulfils an EU objective going back at least 15 years.  The Commission has threatened infringement proceedings against the "small minority" of Member States that have expressed reservations about the draft treaty.  These are understood to be Finland and Sweden.

Earlier this year, in January, EU Member States gave formal declarations committing to terminate their intra-EU BITs by means of a multilateral treaty to come into force no later than 6 December 2019 and to take steps to inform investment tribunals in existing proceedings of the legal consequences of the Achmea judgment.

These declarations came less than a year after the European Court of Justice’s landmark judgment of March 2018 in the case of the Slovak Republic v Achmea BV, in which the Court held that the arbitration clause in an intra-EU BIT had an adverse effect on the autonomy of EU law and was therefore incompatible with it.

Member States’ individual views have differed over whether the legal consequences of the Achmea judgment extend to the intra-EU effect of the multilateral Energy Charter Treaty (ECT).  It was this divergence that led to the need for two separate declarations in January and to the fact that the newly-announced treaty will apply only to BITs and not to multilateral investment treaties such as the ECT.  However, the Member State signatories have indicated a willingness to discuss whether the ECT should be subject to the same position as intra-EU BITs.

The dawn and sunset of intra-EU BITs

Investment treaties are international agreements between two or more states under which each state offers private investors of the other contracting state specific guarantees of protection for investments they make in the territory of the receiving state. The purpose of investment treaties is to stimulate foreign investments by reducing political risk.

The new treaty will terminate nearly 200 intra-EU BITs.  Many of these date back specifically to the period of enlargement of the EU in the 1990s when one or both of the states to the particular treaties were among the so-called “EU13”: that is, the 13 Member States that joined after 2004 but were not then members of the EU. In some cases, the treaties in question were specifically intended to reassure private investors intending to invest in the future EU 13 at a time when they might otherwise not have done so without the additional protection of a BIT.  Some of the BITs date back still further and include some of the very first BITs, the oldest being the German-Greek BIT of 1961.

The draft treaty contains provisions intended to eliminate the effect of so-called “sunset clauses” in the BITs to be terminated: that is, provisions that maintain the protections of the BIT in question for investments made prior to its termination for a “sunset” period of 10 to 20 years following termination.  It also provides for a new dedicated settlement mechanism for on-going investment treaty arbitrations, in a move intended to encourage those investors involved in such proceedings voluntarily to terminate them in exchange for a commitment by the Member State involved to participate in bilateral settlement negotiations.

A hostile Commission

The Commission’s hostility to intra-EU BITs goes back at least fifteen years, to 2004, when it commenced infringement proceedings against four Member States that alleged incompatibilities between intra-EU BITs and EU law and provisions concerning the free movement of capital. In 2009, the CJEU found infringements in three of these cases, on the basis of findings that had more general application to intra-EU BITs as a whole.

Over the last decade, the Commission has begun to intervene in intra-EU investment treaty arbitrations with increasing frequency by submitting amicus curiae briefs and other written communications, contending the more general objection that intra-EU investment treaties fragment the single market by conferring rights on some EU investors on a discriminatory basis, and that the protections offered by these agreements overlap and conflict with EU single market law on cross-border investment.  This position has been consistently rejected by investment treaty tribunals, even after the Achmea judgment, above all in arbitrations proceeding under the ECT.

In 2015, the Commission began a new round of infringement proceedings against five Member States with a view to compelling them to terminate their intra-EU BITs.  It has simultaneously pursued less formal procedures against all other Member States that have declined to terminate their intra-EU BITs.  The Czech Republic, Ireland and Italy have already terminated their intra-EU BITs.

What happens next?

The mass termination of intra-EU BITs by this treaty may encourage some future intra-EU investors, who may still lack confidence in the quality and reliability of the judicial systems of certain Member States to protect their investments, to explore alternative ways of structuring their investments in order to take advantage of extra-EU treaties.

One interesting and topical aspect in this respect is the future position of the United Kingdom in light of a likely Brexit.  The schedule of doomed intra-EU BITs appended to the draft treaty includes 10 BITs between the UK and other Member States, such as those with Bulgaria and Romania.  These BITs will all be terminated upon ratification of the termination treaty, quite possibly even before 6 December 2019.  It remains to be seen whether the UK will in fact ratify the treaty, just as it is in the final throes of leaving the EU and before it has agreed the terms of its continuing trade and investment relationship with the EU.