The end of Intra-EU BITs. Now what?

In this second of a series of four articles, we analyse the key aspects of the decision of the majority of EU Member States to terminate the bilateral investment treaties between them.

In our previous article, we provided an overview of the plurilateral treaty for the termination of intra-EU bilateral investment treaties that was signed by the majority of EU Member States on 5 May 2020.

In this second article, we will explore in more detail the fate of pending intra-EU arbitrations affected by the termination treaty and how States and claimants should deal with these arbitrations.

Transitional measures for “pending” arbitrations

While the termination treaty has no bearing on “concluded arbitration proceedings” where the award has been either executed before 6 March 2018 - i.e. the date of the Achmea decision by the Court of Justice of the European Union (CJEU)¹ - or set aside before the termination treaty enters into force, it certainly affects “pending arbitration proceedings”. The termination treaty defines pending arbitrations as proceedings that were initiated before 6 March 2018 before an arbitral tribunal acting pursuant to a terminated intra-EU BIT and that do not qualify as concluded arbitrations. Although it may seem counter intuitive, “pending arbitration proceedings” can thus include proceedings that are no longer pending before an arbitral tribunal, but - amongst others - annulment or set aside proceedings pending before State courts.

With respect to such “pending arbitrations”, the termination treaty imposes at least two main obligations on the State parties. First, they have to inform the arbitral tribunal of the legal consequences of the Achmea decision (i.e. arbitration clauses of the concerned intra-EU BITs cannot serve as a legal basis for arbitration proceedings). Second, if the arbitral tribunal has already issued an award, the State party has to seek the annulment of such award or, as the case may be, request those courts to refuse their recognition and enforcement. With these obligations, the termination treaty’s objective is obviously to defeat the purpose of intra-EU BIT arbitrations.

Member States are nonetheless mindful of their obligations to provide investors with effective legal protection under EU law. Accordingly, for pending arbitrations where the investor did not challenge the disputed measure of the defendant State before state courts, the termination treaty offers investors two pathways, defined as “transitional measures”. On the one hand, the termination treaty provides the parties to the arbitration with the opportunity to enter into a settlement procedure overseen by an impartial “facilitator” to find an amicable out-of-court resolution of their dispute. On the other hand, the termination treaty provides investors with the right to seek judicial remedies under national law against the measure contested in the pending arbitration, even in cases where the relevant statute of limitation has lapsed under the domestic legal regime concerned. Both “transitional measures” provided under the termination treaty are heavily focused on EU law and/or domestic law, as discussed below.

Besides, these transitional measures are not available to investors who have referred their dispute to an arbitral tribunal that found the disputed measure was not in breach of the concerned intra-EU BIT.

Avenue 1: Structured dialogue for out-of-court settlement

In terms of procedure, either the investor or the State party to the arbitration has the possibility to request the other party to enter into a so-called “structured dialogue” for an out-of-court settlement of the dispute. This option is available to the parties on the condition that the arbitral tribunal grants the investor’s request to stay the arbitration, or that the investor undertakes not to seek the enforcement of the award already rendered (if any). Importantly, if the structured dialogue is unsuccessful, the parties to the arbitration may resume the arbitration or enforcement actions, as the case may be.

The opportunity to initiate a settlement procedure is limited in time: the parties have six months from the termination of the respective BIT to utilise this option. The party receiving the request for negotiations has two months to respond.

The settlement procedure is contingent on a potential violation of EU law. Practically, the investor initiating a “structured dialogue” must allege that the State measure that is being contested in the pending arbitration violates EU law. As such, unlike in investment arbitration, the investor may not invoke the violation of the (by then terminated) BIT or international law in the broader sense in the course of the settlement procedure. (In our next article, we will explore the relevance of this difference between investment arbitration and the transitional measures provided under the termination treaty. Specifically, we will compare what substantive standards of protection and rules on reparation apply under international investment law and EU law, respectively).

Where the CJEU or a national court has already found that the measure being contested in the pending arbitration violates EU law, it is mandatory for the parties to the arbitration to enter into a settlement procedure. Conversely, there is no room for initiating a settlement procedure where the CJEU or a national court has determined that the measure does not violate EU law, or the European Commission has reached a final decision to the same effect. If EU courts or the European Commission are reviewing the concerned measure’s compatibility with EU law, the State party must inform the investor within two months and the initiation of the settlement procedure (or the settlement procedure itself if it has already started) is suspended until they issue a final ruling. The State party must inform the investor of such a final ruling within two weeks.

A so-called impartial “facilitator” designated by the parties to find an amicable out-of-court settlement of their dispute oversees the settlement procedure. Where the parties cannot agree on a facilitator, either party may ask the Director General of the Legal Service of the European Commission to designate a former Member of the CJEU, who shall appoint the appropriate person after consultation with each party.

The settlement procedure is heavily focused on EU law: the negotiations have to be conducted with due consideration of the relevant rulings of the CJEU and domestic courts, and of the case-law of the CJEU on the extent of reparations for damages under EU law.

The settlement procedure does not automatically lead to a final and binding decision. Any agreement on the terms of the settlement must be mutually accepted by the parties to produce a binding effect. Any such agreement must also include an obligation for the investor to withdraw its pending arbitration claim or renounce execution of an award already issued, and to refrain from bringing new arbitration claims.

It bears mention that the parties may also agree on any other appropriate resolution of the dispute, provided that the solution complies with EU law.

Avenue 2: Channelling of pending arbitrations to national courts

Alternatively (or should the settlement procedure fail), the termination treaty grants a six-month window to the investor to access judicial remedies under national law regarding the measure contested in pending arbitrations. This right is subject to a number of conditions, including that the investor withdraws its pending arbitration claim, waives its right to bring any future arbitration claims, and renounces the award already rendered (if any). Accordingly, as opposed to the structured dialogue, here the investors relinquish the mere possibility to bring an arbitration or enforce any awards for good.

For this transitional measure to be effective, the termination treaty purports to overrule applicable national limitation periods by providing that recourse to national courts is available even if the domestic time limits for bringing such actions have expired.

Recourse to the competent national court can be used by the investor to make a claim based on national or EU law. Hence, much like in the case of the structure dialogue, the investor may not invoke the violation of the (by then terminated) BIT or international law in the broader sense before the State party’s national court.

No room for “new” arbitrations after 6 March 2018

The termination treaty provides that the relevant BITs may not serve as a legal basis for new arbitrations, defined as proceedings initiated on or after 6 March 2018.

Given that the transitional measures applicable to pending arbitrations do not extend to such new arbitrations, it remains somewhat unclear as to how parties should proceed where the investor has initiated arbitral proceedings on or after 6 March 2018 despite the Achmea Decision and the text of the termination treaty. What is clear under the termination treaty is that such arbitrations cannot be pursued, nor can any award rendered therein be enforced within the EU. Nevertheless, it seems possible that the parties may agree on any appropriate resolution of the dispute, including amicable settlement, provided that the solution complies with EU law.

In any event, if an EU investor considers that a contested State measure violates EU law, it may initiate infringement proceedings against the State party under EU law, even without any additional basis granted under the termination treaty to this effect (provided it is not time-barred). It is also a well-established principle of EU law that Member States are obliged to make good any loss and damage caused to individuals by breaches of EU law for which they can be held responsible. Hence investors will not remain without remedy even if they did not commence arbitration proceedings before 6 March 2018.²

In our next article, we will discuss how substantive protections of intra-EU investments available under EU law compare to those commonly found in BITs and what the future holds for substantive protections of intra-EU investments.

Please contact us if you would like further information.

¹Case C-284/16 Slowakische Republik v. Achmea BV, dated 6 March 2018.