EU Terminates all Intra-EU Bilateral Investment Treaties

| 6 minutes

On May 5, 2020, 23 of the Member States of the European Union signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (the “Agreement”). This move invalidates all Bilateral Investment Treaties (“BITs”) between these EU Member States and disallows any future claims from being made thereunder.

What are BITs?

It has long been recognized that a significant impediment to foreign investment is the danger of politically motivated decision making by the government and judiciary of host countries. BITs are agreements between countries that allow foreign investors to make claims against a host government in private arbitration; a process known as “Investor-State Dispute Settlement” or ISDS. These treaties encourage foreign investment by granting investors a range of protections including protection against expropriation, discriminatory treatment, or violations of reasonable investment backed expectations. The investors are also protected from having to rely on domestic courts as disputes arising under such treaties are adjudicated by neutral arbitral tribunals appointed jointly by the investor and the host government.

Enter Achmea – the CJEU Crashes the Party

In 2018 the Court of Justice of the European Union (“CJEU”) issued a landmark ruling in Slovak Republic v Achmea BV (C-284/16). Achmea BV, a Dutch insurer, had brought a claim against Slovakia under the Netherlands-Slovakia BIT. The dispute arose out of the decision by Slovakia to reverse part of the liberalization of its health insurance market that prevented the distribution of profits generated by Achmea in its operations in Slovakia. Achmea was successful at arbitration and Slovakia began proceedings to set aside that award in European courts.

Achmea was initially successful at several lower courts, which all found that the BIT was not incompatible with EU law. It also obtained a favourable opinion from the Advocate General. However, the CJEU took a completely different view than either the lower courts or the Advocate General, and found that the intra-EU BIT was incompatible with EU law.

The crux of the decision was that the arbitral tribunal system used to settle BIT claims existed outside the scope of EU procedural law (for example, a tribunal could not refer matters of EU law to the CJEU on a preliminary basis) and the oversight of the CJEU. Where two EU Member States agreed to such a system through a BIT, this was effectively the two states agreeing to remove disputes from the oversight of the CJEU and its ability to ensure the application of EU law.

The impact of the decision was to find that a BIT was in violation of EU law where each of the following conditions are met:

  • an investor was from an EU Member State;
  • the investment was made in another EU Member State; and
  • the arbitration clause pursuant to which the claim was brought was within a BIT between two Member States.

Following Achmea, the EU decided to implement the decision by an agreement to terminate all BITs concluded between them.

The Agreement Formalizes BIT Termination

While some Member States have begun to wind up the BITs between them bilaterally, 23 Member States agreed to use the Agreement to implement Achmea and terminate their respective BITs. Once the Agreement fully enters into force, it will terminate, completely, the intra-EU BITs of the parties (which are listed in the appendix to the Agreement). This includes providing a settlement provision for any proceedings ongoing as of the date the Agreement enters into force. Outside of this limited provision, the Agreement forms a blanket prohibition on the recognition or enforcement of any claims brought under an intra-EU BIT.

However, ISDS arbitrations can be procedurally lengthy. Many ISDS claims also could have been brought as traditional legal claims in either the country of the investor or of its investment. Because of the length of the arbitration, those claims could be rendered time-barred from being brought. This would create a potentially unfair system that would prejudice litigants for pursuing claims in what appeared to be a legitimate venue. As such, the Agreement provides a waiver on limitations periods in domestic courts for ISDS claims that are abandoned by the investor (subject to the investor fulfilling certain other procedural requirements). In such cases, the investor can use the date of termination of its ISDS claim to gauge whether it is time barred for bringing a claim over the subject matter of the ISDS dispute in a domestic court.

Finally, in the usual course, a BIT will contain a clause to protect investments made during its lifetime for some period after its termination. This tailing off process is the “sunset clause” within the agreement and is meant to provide investor certainty even as a BIT approaches the end of its natural life. Importantly, the Agreement also terminates all such “sunset clauses”. 

Does this Impact External BITs

At present, this Agreement only impacts intra-EU BITs. While some may consider expanding Achmea to include external BITs between EU Member States and Third Party States, this is complicated by the earlier CJEU ruling regarding the Free Trade Agreement between the EU and Singapore. In that case, the question before the Court was whether the Free Trade Agreement could be ratified without the individual ratification of the Member States.

The CJEU determined that the EU-Singapore Free Trade Agreement was a “mixed agreement”. The vast majority of the agreement could be concluded by the EU alone. However, two provisions required Member State ratification – certain portfolio investment commitments, and the BIT/ISDS chapter.

As such, it is difficult for the CJEU to backtrack and determine that all BITs are incompatible with EU law, though it may limit them in the future. Canadian firms are already seeing the effect of this in the curtailed provisions within the Comprehensive Economic and Trade Agreement (“CETA”) between Canada and the EU. While the bulk of CETA is in force, the ISDS provisions are suspended pending Member State ratification. Such ratification is not likely in the near future.

What’s Next?

Perhaps the most interesting aspect of this is whether an anti-BIT animus is beginning to infect our public policy more broadly. We have already seen the elimination of any ISDS between Canada and the other NAFTA parties in the new CUSMA/USMCA. As noted above, the ISDS mechanism in CETA has been suspended. As the world continues to pull back from the use of ISDS, it is increasingly likely that major economic powers pull back from requiring such provisions between each other.

This introduces its own fairness issues. If the United States, Canada, and the EU begin waiving requirements for ISDS mechanisms between each other (or with other G7 countries), what does it say to a negotiating partner that you insist on one in any free trade agreement with them? Does it not automatically imply that the government, as a matter of policy, assumes that the other country lacks an independent and well-functioning judiciary? Or that the other country is prone to political intervention (such as property seizures)?

Previously, a country like Canada (or a trading bloc such as the EU) could point to its agreements with other developed economies, and claim it was simply applying its principles evenly across the board. That is increasingly impossible. It will be interesting to note which countries the EU, Canada, and the United States insist on maintaining BITs with in the future.

arbitration international arbitration commercial arbitration Bilateral Investment Treaties

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