Killing all birds with one stone: Is this the end of Intra-EU BITs (as we know them)

On 5 May 2020, 23 EU Member States, except for Austria, Ireland, Finland, and Sweden, signed the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union (the Agreement). Its adoption is the latest development in the debate on the incompatibility of bilateral investment treaties between Member States (Intra-EU BITs) with EU law. The fierce debate finds its roots in the landmark CJEU judgment in Slovak Republic v Achmea BV (C-284/16), where the Grand Chamber declared Intra-EU BITs as contrary to EU law, and over time has prompted opinions from the EU Attorney General, the CJEU itself, and several ISDS tribunals convened on the basis of Intra-EU BITs. But what, exactly, will be the Agreement’s effects on Intra-EU BITs? And how will it impact pending and future ISDS disputes?

Closing the door to future Intra-EU ISDS

The Agreement’s objective is straightforward. Pursuant to Articles 2 and 3, following entry into force, all Intra-EU BITs will be terminated and any sunset clauses they might incorporate will be deprived of legal effects. The reason grounding termination lies in the express acknowledgement by signatory Member States of the incompatibility of arbitration clauses in Intra-EU BITs with the EU Treaties (Article 4). As termination wipes out the parties’ consent to ISDS, arbitration clauses in Intra-EU BITs can no longer serve as a legal basis to commence new arbitration proceedings against Member States (Article 5).

The Agreement deals a decisive blow to Intra-EU BITs and related ISDS. The blunt termination of sunset clauses is exemplary in this sense. Such clauses allow substantive protections in a BIT to survive even following its termination. Thus, despite termination, foreign investors will remain entitled to commence ISDS for investments made when the BIT was in force. In practice, sunset clauses end up frustrating the effects of termination. Hence, Article 3 is indicative of the Member States’ explicit will that Intra-EU ISDS no longer be allowed and all investment disputes entailing the application or interpretation of EU law be dealt with by EU and Member States’ domestic courts.

Yet, at a closer look, the Agreement’s termination effects appear quite spotty. Firstly, four Member States are not signatories to the Agreement. This is not an issue for Member States like Ireland, which has no Intra-EU BIT in place. However, this is not the case for Austria, Finland, and Sweden. Will these countries negotiate termination of Intra-EU BITs on a bilateral basis, considering that the European Commission has already sent a formal notice of infringement procedure against Finland (and the United Kingdom) for failing to engage in such bilateral negotiations? Secondly, the Agreement strikingly does not cover Intra-EU ISDS grounded in the Energy Charter Treaty (ECT), which will be dealt with by Member States at a later stage. Lastly, the Agreement must still be ratified before entering into force. Notably, entry into force will not take place for all Member States simultaneously, thus leaving the door open to Intra-EU ISDS against those lagging behind in the ratification process.

The Agreement and pending Intra- EU ISDS

The second leg of the Agreement sets up a transitional regime to deal with pending Intra-EU ISDS disputes. As of July 2018, 83 cases were pending before Intra-EU ISDS tribunals. The Agreement’s clear stance is to either get them quashed, discontinued, or settled altogether.

First, Article 7 mandates all 23 Member States signatories to duly inform ISDS tribunals about the asserted incompatibility with EU law of the arbitration clauses included in the terminated BITs. Likewise, Member States shall request any domestic courts in charge of the enforcement of Intra-EU awards, both in EU States and third countries, to set the awards aside, or “refrain from recognizing and enforcing it”. However, any previous attempt by Member States to emphasize the reach of the Achmea judgment before ISDS tribunals has proven unsuccessful. ISDS tribunals have consistently rejected Achmea-based objections while maintaining that they are not tasked with interpretation of EU law. Domestic courts challenged with the enforcement or recognition of the award might be more inclined to give deference to Achmea-based arguments. Yet where this might indeed be the case with EU domestic courts, a question mark remains as to courts in third countries courts, which are not part of the EU legal order and are certainly less familiar with its main tenets.

Second, Articles 9 and 10 provide for a “structured dialogue”, whereby a facilitator nominated by the disputing parties shall drive the procedure to an amicable settlement while “tak[ing] into due account” CJEU and national courts case law, as well as European Commission’s decisions and ad hoc advisory opinions. This procedure may be triggered under the following conditions:

1. The pending ISDS arbitration is formally suspended (upon request by the investor);
2. If an award has been issued, the investor foregoes any enforcement proceeding, or refrains to commence one;
3. The settlement procedure is initiated within 6 months after the termination of the relevant BIT;
4. The CJEU or EU national courts have not previously found for the consistency of the measure(s) subject to the disputes with EU law.

As a consequence of the settlement agreement, the investor must withdraw the pending ISDS or enforcement proceeding, as well as refrain from pursuing further proceedings and waive all rights and claims related to the measure(s) subject to the agreement.

Thus, investors are now placed in a dicey fork-in-a-road-situation. They may choose to continue the ISDS arbitration and bear the (enhanced) risk of not getting any enforcement down the road. Or, they may opt for the settlement procedure, which yet arguably provides for a very narrow leeway for successful claims. To give but one example, the Italian Constitutional Court has upheld the legitimacy of all the measures taken to scale down, and eventually repeal, the Feed-in-Tariffs schemes for RES sources subject to ISDS litigation. Facilitators are bound to acknowledge this development when settling the dispute. Thus, should investors opt for the settlement procedure, their claims are likely to be quashed even before reaching the merits of the dispute.

Third, investors are granted the right to bring pending ISDS claims before EU domestic courts (Article 10). This may be done in derogation of all time limits set in domestic law, which hence run from the investor’s decision to either withdraw the arbitral proceeding or enforce an award already issued. Moreover, investors must commit not to undertake any further ISDS dispute and waive all rights related to the claim. Compensation for investors would thus not be prevented in theory. Yet investors should now endure a whole new proceeding before domestic courts, which is precisely what ISDS aims to prevent. Moreover, if investors opt for the settlement procedure or bring the case to national courts, all costs for pending ISDS proceedings already incurred will be fully borne by the same investors (as well as respondent Member States).

Conclusion: The (winding) road forward

Termination of Intra-EU BITs is indeed the silver bullet to overcome fragmentation, parallelism and clashes between the EU and international legal order while reconciling investment protection and sound application of EU law. The Agreement boldly asserts the primacy of EU law as a superior legal order vis-a-vis ISDS tribunals. Therefore, arguably drawing from the Simmenthal doctrine, privilege should be given to the only judicial body in charge of sound and harmonized interpretation of EU law, as opposed to investment tribunals.

The Agreement’s greatest shortcoming lies, however, in leaving the ECT out of the picture. The ECT is the largest multilateral investment agreement covering a wide range of investments in the energy sector. About 45% of the pending Intra-EU ISDS claims are grounded in the ECT, notably including the renowned RES litigation brought against Italy, Spain, Czech Republic and Bulgaria, as well as the cases brought against Germany by Vattenfall and other utilities in reaction to the shutdown of nuclear power plants. More recently, German energy company Uniper has threatened to file an ECT claim against The Netherlands to seek compensation for the phase-out of its coal power plans enacted by the Dutch Parliament in December 2019. Hence, from the perspective of removing potential obstacles “chilling” the swift implementation of the European Green Deal, the big leap appears yet to be taken.

Notwithstanding the gaps that it potentially leaves open, the Agreement’s importance on the EU international investment law regime cannot be understated. In fact, the consequences of its adoption may be soon perceived in the aftermath of several ISDS cases, starting from Republic of Poland v PL Holdings S.à r.l. In February 2020, after Swedish courts granted PL Holdings the enforcement of an Intra-EU award issued post-Achmea, the Supreme Court of Sweden requested a preliminary ruling from the ECJ on the validity of Belgium-Luxembourg Economic Union-Poland BIT. In this scenario, it would not be a stretch to envisage the ECJ reaffirming the incompatibility of the arbitration agreement with EU law, thus definitively forcing Swedish courts to reject the enforcement of the award due to its contrariety with EU law’s main tenets.