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Arbitrations hit by agreement on intra-EU bilateral investment treaties

Out-Law Analysis | 13 May 2020 | 1:54 pm | 5 min. read

Ongoing arbitrations brought on the basis of an intra-EU bilateral investment treaty (BIT) could now be void following the signature of a new agreement by most EU member states.

In the latest step in a long-running legal saga, 23 of the 27 EU member states signed an agreement to terminate all intra-EU BITs.

The termination agreement implements a March 2018 judgment of the Court of Justice of the EU (CJEU) in the so-called Achmea case, in which the court found that investor-state arbitration clauses in intra-EU BITs are incompatible with the treaties underpinning the EU.

While the termination agreement draws a definitive line in the sand for the fate of intra-EU BITs and the arbitrations brought under them, it has also raised many issues which will take some time to play out in practice. 

When does it come into force?

The termination agreement will take effect 30 calendar days after the date on which the Secretary-General of the Council of the EU receives an instrument of ratification, approval or acceptance from two member states. It will then take effect for each subsequent signatory state 30 calendar days after the date of deposit of its individual instrument of ratification, approval or acceptance. Consequently, the entry into force of the agreement will not be the same in each signatory state.

Given the number of arbitrations presently pending against certain EU states which will be affected by the termination agreement, it is perhaps likely that some EU countries will move swiftly to ratify the agreement and bring it into force, while investors with arbitral awards rendered but not yet executed will be moving as quickly as possible to do so.

Which arbitrations are affected?

While the termination agreement covers arbitration proceedings brought under intra-EU BITs and "under any arbitration convention or set of rules", the agreement contains a notable exception for intra-EU proceedings brought on the basis of the dispute resolution provision of the Energy Charter Treaty (ECT). The preamble to the termination agreement mentions that the EU and its member states will deal with this matter "at a later stage". The EU has been negotiating the modernisation of the ECT since last year, a process that will continue to be watched keenly by those investors whose intra-EU arbitration proceedings under the ECT are as yet unaffected.

Are sunset clauses also terminated?

Yes. Sunset clauses provide for the continued application of a treaty and its protections for a specified period of time – often 10-20 years – following that treaty's termination. Under the termination agreement, intra-EU BITs and their sunset clauses are terminated. This means investors that made investments prior to termination cannot rely on those sunset clauses to bring their disputes.

Will the termination agreement affect UK-EU BITs?

The UK is not a signatory to the termination agreement. As a result of the departure of the UK from the EU on 31 January 2020, BITs concluded between UK and EU member states are not considered to be intra-EU BITs and so arguably do not fall foul of the Achmea decision. Nevertheless, prior to its departure from the EU, the UK signed declarations in January 2019, along with all other EU member states, [A1] in which the UK undertook to terminate all BITs concluded between them.

So while UK-EU BITs are not automatically terminated as a result of last week's agreement, it remains unclear whether the UK will take steps to support the termination agreement or even agree separate agreements with each member state to bring its EU BITs to an end. 

Does the termination agreement apply to concluded arbitration proceedings?

The termination agreement will not affect settlements or final awards issued and executed before 6 March 2018, which is the date of the CJEU's decision in the Achmea case. In addition, the agreement does not impact arbitral awards annulled or set aside before the termination agreement enters into force. Any agreement to settle a dispute of an arbitration initiated before 6 March 2018 is also unaffected.

What is the effect on pending and new arbitration proceedings?

The agreement acknowledges that intra-EU BITs cannot serve as a legal basis for any arbitration proceedings. This means that investors are precluded from bringing any new arbitrations on the basis of an intra-EU BIT. 

Bigelow-Nuttall Clea_November 2019

Clea Bigelow-Nuttall

Senior Associate

The door appears now firmly shut for the enforcement of intra-EU BIT awards by national courts of EU signatory states

Crucially, the effect of the termination agreement on ongoing arbitration proceedings will depend both on the stage of proceedings as well as on the date arbitration proceedings commenced. For this purpose, the date of the CJEU's Achmea decision of 6 March 2018 is used as a watermark: ongoing arbitrations started prior to this date are classified as "pending" while ongoing arbitrations started after this date are considered "new"

Contracting parties to the termination agreement which are parties to any intra-EU BIT forming the basis of an ongoing arbitration, whether pending or new, now have a duty to inform the arbitral tribunal about the incompatibility between the arbitration clause in the treaty and EU law, and therefore the inapplicably of the arbitration clause in the BIT. Likewise, if the signatory states are a party to judicial proceedings concerning an arbitral award, they are now bound to ask the national court, including in any third country, to set aside, annul or refrain from recognising and enforcing the award.

These potentially controversial requirements raise several questions in relation, amongst other things, to the unilateral and retroactive abolition of investors' rights. There are also questions about how these requirements will operate in practice in respect of certain types of award. For example, with respect to arbitration awards rendered under the Washington Convention (ICSID), such awards are recognised as being binding and treated as final judgments of a court. Arguably, therefore, they may not be open to challenges on enforcement in national courts. 

What is the settlement procedure and how does it work?

Article 9 of the termination agreement sets out what it calls a "structured dialogue" for pending arbitration proceedings – -those initiated before 6 March 2018.

Under this provision, an investor or a signatory state can ask the other party to the dispute to enter into a settlement procedure provided that the investor has either requested the suspension of the proceedings or, if an award has already been issued but not yet enforced or executed, the investor undertakes not to start proceedings for its recognition, execution, enforcement or payment in a member state or in a third country, or, if such proceedings have already started, to request that they are suspended.

In addition, the envisaged settlement procedure can only be used if and once the CJEU or a national court has found that the state measure being contested in the underlying arbitration violates EU law. 

Where these conditions are met, the investor and state can agree to designate an impartial facilitator to help the parties to reach an amicable settlement within six months of its appointment.

Conclusion

The aim of last week's termination agreement was to crystallise the position of intra-EU BITs which have been shrouded in uncertainly since the Achmea decision of 2018. 

However, the agreement has raised numerous further questions – both theoretical and practical – and it will be necessary to wait some time to see how arbitral tribunals in ongoing intra-EU BIT arbitrations will react to the termination agreement and whether they will respect the ostensible revocation of their jurisdiction to hear these disputes. Clarification and discussion will be needed to demystify the different regimes provided for arbitrations initiated before and after 6 March 2018, to make clear the effect of the termination agreement on intra-EU ICSID awards, and to clarify the practicalities of the envisaged settlement procedure, as well as to how investors may chose to bring their claims before the national courts.

The only thing that is crystal clear as a result of last week's agreement is that intra-EU BITs no longer provide a legal basis for bringing new claims through arbitration, and the door appears now firmly shut for the enforcement of intra-EU BIT awards by national courts of EU signatory states.

Co-written by Begoña Charro De Mendieta of Pinsent Masons, the law firm behind Out-Law.