23 EU MEMBER STATES SIGN AN AGREEMENT FOR THE TERMINATION OF INTRA-EU BITS; EUROPEAN COMMISSION INITIATES INFRINGEMENT ACTION AGAINST NON-SIGNATORIES UK AND FINLAND

On 5 May 2020, 23 Member States of the European Union (the “EU”) signed an Agreement to terminate the Bilateral Investment Treaties (“BITs”) between them (the “Termination Agreement”).

Termination Agreement

In its preamble, the Termination Agreement refers to certain EU law principles and jurisprudence, including the well-known case of Slovak Republic v. Achmea B.V issued on 6 March 2018 (Case C-284/16) (“Achmea”).

The signatories of the Termination Agreement confirm their commitment to the “protection of cross-border investments within the [EU]” and “within the scope of application of [EU law]”, stating that intra-EU BITs are “contrary to the EU Treaties and, as a result of this incompatibility, cannot be applied after the date on which the last of the parties to an intra-EU bilateral investment treaty became a Member State of the [EU]”.

The Termination Agreement states that it covers any dispute between an investor of one signatory Member State and another signatory Member State (“Arbitration Proceedings”) commenced:

• in accordance with one of the BITs concluded between the signatory Member States and listed in the Termination Agreement (the “Affected BITs”), which include (i) those that are in force and (ii) those that have already been terminated bilaterally but contain a “Sunset Clause” (i.e. a provision which extends the protection of investments made prior to the date of termination of that BIT for a further period of time);
• under any arbitration rules and ad hoc arbitrations;
• either (i) prior to 6 March 2018, the date of the Achmea judgment, and which are still on-going (“Pending Arbitration Proceedings”); or (ii) on or after 6 March 2018 (“New Arbitration Proceedings”).

The Termination Agreement states that it does not cover:

• intra-EU proceedings on the basis of Article 26 of the Energy Charter Treaty (which, according to the Termination Agreement, will be dealt with “at a later stage”);
• Arbitration Proceedings ended with (i) a settlement agreement or (ii) a final award issued prior to 6 March 2018, where the award was (a) executed prior to 6 March 2018 or (b) set aside or annulled before the date of entry into force of the Termination Agreement; and
• any agreement to settle amicably a dispute that was the subject of Arbitration Proceedings initiated prior to 6 March 2018.

Key provisions

The Affected BITs and the Sunset Clauses

The Termination Agreement states that, as soon as it enters into force for the relevant signatories, both the Affected BITs of those signatories and the Sunset Clauses within them shall be terminated, and the Sunset Clauses “shall not produce legal effects”.

Arbitration clauses and New Arbitration Proceedings

According to the Termination Agreement, investor-state arbitration clauses in the Affected BITs (i) "are contrary to the EU Treaties” and (ii) cannot serve as a legal basis for Arbitration Proceedings “as of the date on which the last of the parties to [the relevant Affected] BIT became an EU Member State".

Duties concerning New and Pending Arbitration Proceedings

The Termination Agreement seeks to impose additional duties upon the signatories in respect of New or Pending Arbitration Proceedings under the Affected BITs:

• In particular, the relevant Member States shall inform the arbitral tribunal about the legal consequences of Achmea agreed in the Termination Agreement.
• Where the signatory Member State is a party to judicial proceedings concerning an arbitral award issued on the basis of an Affected BIT, it shall ask the competent national court to set the arbitral award aside, annul it or to refrain from recognising and enforcing it.

Measures relating to Pending Arbitration Proceedings

The Termination Agreement allows parties to Pending Arbitration Proceedings to commence a “structured dialogue” aimed at entering into a settlement agreement. The Termination Agreement sets out the required terms of that settlement, including an obligation on the investor to withdraw its arbitration claim and a commitment to refrain from initiating New Arbitration Proceedings.

The Termination Agreement also provides that an investor involved in Pending Arbitration Proceedings shall be entitled to access judicial remedies under national law even if national limitation periods for commencing actions have expired. This, however, is subject to certain conditions, in particular that the investor withdraws the Pending Arbitration Proceedings and waives all rights and claims pursuant to the relevant Affected BIT or renounces execution of an award already issued.

Entry into force

The Termination Agreement is subject to ratification, approval or acceptance by its signatories. It will enter into force 30 calendar days after the date on which the Secretary-General of the Council of the EU receives the second instrument of ratification, approval or acceptance. In respect of a particular signatory, the Termination Agreement shall enter into force 30 calendar days after the date of deposit by such signatory of its instrument of ratification, approval or acceptance.

Signatories and non-signatories; follow-up action by the Commission

All EU Member States have signed the Termination Agreement, except for Austria, Finland, Sweden and Ireland. The UK, which exited the EU on 31 January 2020, has also not signed the Termination Agreement. Under the UK-EU Withdrawal Agreement, EU law continues to apply to the UK during the transition period (i.e. until the end of 2020).

It was reported on 14 May 2020 that the European Commission (the “Commission”) sent letters of formal notice to Finland and the UK urging them “to take all necessary actions to urgently remove the intra-EU BITs from their legal order”. Without a “satisfactory response” from Finland or the UK within four months, the Commission may decide to launch a formal infringement procedure against them. As at the date of this blog post, it appears that the Commission has not sent similar notices to Austria, Sweden or Ireland (that has no BITs in force).

Comment

The Termination Agreement is a potentially significant development in the intra-EU investor-state dispute resolution landscape. However, it remains to be seen how quickly it will enter into force, and how it will be interpreted and applied, particularly regarding its impact on existing and future investor-state arbitration proceedings. Parties to existing intra-EU investor-state arbitration proceedings involving signatory states to the Termination Agreement, as well as those that are considering commencing such proceedings, are advised to seek guidance on the implications of the Termination Agreement.

For further information, please contact Andrew Cannon, Partner, Christian Leathley, Partner, Eric White, Consultant, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.