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Agreement to terminate intra EU Bilateral Investment Treaties entered into force

Posted on 14 September 2020

The abolition of intra-European Union bilateral investment treaties ("intra EU BITs") has been on the EU's agenda for some time as the EU considered them to be contrary to the EU Treaties. To that end, on 5 May 2020, 23 Member States of the EU signed an Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union. The Agreement is the result of the March 2018 judgment of the European Court of Justice, Slovak Republic v Achmea. The judgment states that the investor-state arbitration provision contained in the Slovakia-Netherlands BIT was incompatible with EU law as arbitration clauses in intra EU BITs deprive the EU courts of their jurisdiction.

The Agreement entered into force on 29 August 2020 and has the effect of terminating 264 intra EU-BITs and extinguishing any sunset clauses contained therein. We set out briefly below the scope of the Agreement and its impact on investment arbitration.

What does the Agreement cover?

It covers any dispute between a signatory state and an investor in another signatory state and another signatory state in accordance with one of the BITs listed in the Agreement. These include BITs that are in force and those that have been terminated but contain a sunset clause. The termination of the sunset clause means that there will be no transitional period once the Agreement has entered into force. The Agreement also covers any new and pending arbitration proceedings.

It does not cover concluded arbitration proceedings, which are defined as (i) those that ended with a final award or a settlement agreement prior to 6 March 2018 and (ii) where the award was executed prior to 6 March 2018, or set aside or annulled before 29 August 2020 (i.e. the date of entry into force of the Agreement). It also does not apply to agreements to settle a dispute amicably that was subject to arbitration proceedings initiated prior to 6 March 2018. It does not yet apply to Austria, Finland, Ireland and Sweden who are yet to sign the agreement. It also won't affect the UK's BIT's with any EU Member states because of Brexit. Finally, it expressly excludes disputes under Article 26 of the Energy Charter Treaty, meaning that intra EU investments and trades in the energy sector still receive the protection of that treaty.

What happens to new and pending arbitration proceedings?

New arbitration proceedings are proceedings initiated after 6 March 2018. Pending arbitration proceedings are those initiated prior to and pending as at 6 March 2018. The Agreement imposes a duty on signatory Member States to inform the arbitral tribunal about the legal consequences of the Achmea decision. In addition, where a signatory 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 aside the award, annul it or refrain from recognising and enforcing it.

The Agreement also allows parties in pending arbitrations to enter into a so-called "structured dialogue". This is a process whereby parties enter into facilitated settlement discussions (the procedural details are set out in Article 9) provided that (i) the pending arbitration proceedings have been suspended and (ii) where an award has already been issued that the successful party undertakes not to recognise, execute, enforce or otherwise seek payment under the award. If recognition and enforcement proceedings have been commenced, they will have to be suspended.

If settlement is not an option, parties are entitled to seek judicial remedies under national law even if the limitation period for commencing actions has expired. This requires that the investor withdraws the pending proceedings, waives all its rights and claims under the applicable BIT, renounces the execution of an award already issued and commits to refrain from executing new arbitration proceedings.

Comment

Investors in new and pending investment arbitration proceedings are left with the choice to settle or refer their disputes to national courts in accordance with the provisions of the Agreement as outlined above. Time will show how well equipped national courts are to deal with investment claims and whether individual (national) limitation periods will operate to defeat long-standing claims. There is no doubt that a number of investors will end up in lengthy court proceedings unless and until an adequate and efficient dispute resolution mechanism fills the investment arbitration gap.

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