The EU’s campaign to end intra-EU investor-State arbitration: pushing investor creativity

International arbitration in 2024

The EU’s campaign to end intra-EU investor-State arbitration: pushing investor creativity

By: Nathalie Colin, Gregorio Pettazzi, Alexandre Alonso, Florence Frühling

Declaring arbitration clauses in intra-EU bilateral investment treaties (BITs) incompatible with EU law, the European Court of Justice’s (ECJ) landmark 2018 Achmea decision marked the beginning of a sweeping change.

In the following years – under increasing pressure from the European Commission (EC) – Member States have terminated all intra-EU BITs, through either a multilateral treaty between most of the Member States (Termination Agreement) or ordinary bilateral instruments.

Intra-EU BIT sunset clauses

Intra-EU BITs included so-called sunset clauses, which extend treaty protection for investments made prior to termination for, depending on the treaty, five, ten or 20 years. The Termination Agreement attempts to prevent the operation of sunset clauses by repealing them from the relevant BITs upon termination. The legal validity of this simultaneous termination of investment treaties and their sunset clauses is yet to be tested. In this respect, the arbitral tribunal in Adria Group v Croatia held that investment treaties confer rights directly upon investors at the time when they make their investments. Investors could thus not be retroactively deprived of such rights, including that to have recourse to international arbitration. Under this approach, any attempt to invalidate the operation of sunset clauses would not have any effects on investments already made.

Recently, the Amsterdam Court of Appeal refused to prevent a Dutch investor from pursuing an arbitration procedure brought under the Netherlands-Poland BIT and seated in London. This was despite the fact that the relevant treaty was terminated in 2019 and both the Netherlands and Poland sought to neutralize its sunset clause by means of the Termination Agreement. According to the Dutch court, the incompatibility of the arbitration clause of the BIT with EU law is not sufficient to conclude that the initiation of arbitration proceedings based on such a clause outside the EU was unlawful or abusive.

Similarly, in October 2023 a Bulgarian insurance group threatened to bring arbitration against Romania relying on the Bulgaria-Romania BIT’s sunset clause, whose operation has also purportedly been barred by the Termination Agreement. The outcome of these attempts remains to be seen. But success may revive investment treaty protection within EU borders. 

Coordinated withdrawal from the ECT

Given its multilateral nature, the EU could not deal with the ECT so easily.

While the ECT Secretariat was trying to find consensus to modernize the ECT (especially by carving out fossil fuels from treaty protection), in July 2023 the EC proposed a joint withdrawal of the EU and its Member States. One of the main purposes of a coordinated withdrawal strategy – like the one adopted with the Termination Agreement for intra-EU BITs – was, again, to attempt to invalidate the operation of the ECT’s 20-year sunset clause.

Yet Member States appear to be acting disjointedly. France, Germany, Luxembourg, and Poland have already denounced the ECT. As of June 2024, all these withdrawals will have taken legal effect. Denmark, Ireland, the Netherlands, Portugal, Slovenia, and Spain have already publicly announced their intention to denounce the ECT. They are expected to do so formally soon. Other Member States – like Cyprus, Greece, Hungary, and Slovakia – remain reluctant to exit the ECT. We will see whether their position will shift as the EC’s political pressure increases. Without the necessary support from the EU and its Member States, the future of the ECT’s modernization process (if any), which requires unanimity among Contracting Parties, is uncertain.

The legal effects of a coordinated withdrawal are equally unsettled under international law. It will be left for domestic courts and arbitral tribunals to determine whether the ECT’s sunset clause applies with respect to prior investments. Energy investments already made by EU investors in other Member States may, therefore, still be granted treaty protection under the ECT for long after the various withdrawals, whether coordinated or not.

Pending withdrawals, Member States involved in intra-EU ECT arbitration proceedings are increasingly seeking assistance from EU domestic courts. Germany and the Netherlands have recently done so, asking German courts to declare the ECT arbitration clause invalid in intra-EU relations. These cases went all the way up to the German Federal Court of Justice, which in July 2023 found in favor of the Germany and the Netherlands. While the legal relevance of these domestic judgments under international law is limited, it creates an additional hurdle that EU investors should be prepared to face.

Enforcement strategies and alternative legal avenues

Since the ECJ’s decision in Achmea, it has been clear that intra

SDGs, Targets, and Indicators Analysis

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 16: Peace, Justice, and Strong Institutions
• SDG 17: Partnerships for the Goals

The issues highlighted in the article are related to international arbitration, investment treaties, and legal frameworks. These topics align with SDG 16, which aims to promote peaceful and inclusive societies, provide access to justice for all, and build effective, accountable, and inclusive institutions at all levels. Additionally, SDG 17 focuses on strengthening global partnerships to achieve the goals, which is relevant as the article discusses the actions and coordination of EU Member States.

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.
• SDG 17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources.

The article highlights the termination of intra-EU bilateral investment treaties (BITs) and the implications for arbitration. This relates to SDG 16.3, which emphasizes equal access to justice at both national and international levels. The coordination and joint withdrawal strategy of EU Member States from the Energy Charter Treaty (ECT) also reflect the need for global partnerships, aligning with SDG 17.16.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Number of intra-EU bilateral investment treaties terminated
• Number of arbitration cases brought under terminated investment treaties
• Number of EU Member States withdrawing from the Energy Charter Treaty
• Number of domestic court cases challenging the validity of arbitration clauses
• Number of successful enforcement of intra-EU investment treaty awards outside the EU

The article mentions the termination of intra-EU BITs, the initiation of arbitration proceedings under terminated treaties, and the withdrawal of EU Member States from the ECT. These indicators can be used to measure progress towards SDG targets. Additionally, the article discusses domestic court cases challenging the validity of arbitration clauses and the enforcement of intra-EU investment treaty awards, which are relevant indicators for assessing access to justice and the effectiveness of legal frameworks.

Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: freshfields.com

Join us, as fellow seekers of change, on a transformative journey at https://sdgtalks.ai/welcome, where you can become a member and actively contribute to shaping a brighter future.