12.05.2020

The clock is ticking: States to cancel international legal protections, endangering existing claims of international investors

Background

On 5 May 2020, 23 of the 27 EU Member States signed a treaty to terminate existing bilateral agreements for the protection of foreign investments (BITs) between themselves. At the same time, the EU is pushing ahead with plans to significantly reduce protection under the Energy Charter Treaty (ECT), which protects investments in the energy sector. A genuine European investment protection mechanism is yet to be developed. Cancelling these investment protections guarantees will create a gaping hole in the international legal protection of investments. What can investors do now?

Investment protection treaties provide legal protection against state measures

Investment protection treaties protect investments (e.g. subsidiaries, shares, real estate, shareholders and loans, concessions, licenses/permits, contractual rights – the exact scope depends on the respective investment protection agreement) made in another country against certain government measures, in particular expropriation (and measures that effectively deprive the investor of any economic value), unfair/unequitable treatment (especially the violation of legitimate expectations) and discrimination. If these guarantees are violated, investors can enforce their rights before neutral international arbitration tribunals.

Termination of intra-EU BITs creates gap in international legal protection

By virtue of the termination agreement of 5 May 2020, 23 EU Member States (all except Austria, Finland, Ireland, and Sweden) now want to terminate the BITs that exist among themselves (moreover, the BITs with Austria, Finland, Sweden may soon face unilateral termination by the other 23 Member States; Ireland does not have any intra-EU BITs). By doing so, they go far beyond the Achmea ruling of the European Court of Justice (ECJ), which they allegedly seek to implement by way of the termination agreement. In March 2018, the ECJ only found that an arbitration clause "such as" in the Netherlands-Slovak Republic BIT violates EU law: https://www.luther-lawfirm.com/en/newsroom/blog/detail/schlaegt-der-eugh-intra-eu-investitionsschiedsgerichten-die-tuer-vor-der-nase-zu. It did not find that all arbitration clauses in intra-EU BITs are contrary to EU law, nor did it say anything about the substantive protection standards being contrary to EU law. Nevertheless, all BITs are to be terminated in their entirety. Yet, the EU member states even take it one step further and also terminate the "sunset clauses", which in case of a termination are supposed to ensure the continued validity of BITs for existing investments for a certain number of years.

At the same time, the Member States acknowledge in the preamble of the termination treaty that there are still no equivalent legal protections at European level – despite a decision by the ECOFIN Committee in July 2017 to “intensify discussions without undue delay with the aim of better ensuring complete, strong and effective protection”. Instead, investors are referred primarily to the freedom of establishment and movement of capital as well as to the EU Charter of Fundamental Rights. Moreover, any claims based on these rights are to be filed in the national courts of the Member State that harmed the foreign investor – despite the fact that the EU Justice Score Board shows serious concerns about the independence of courts in several Member States. Moreover, against Poland and Hungary, even proceedings under Article 7 TEU for serious breaches of the rule of law are pending. 

The EU also plans to significantly limit protections under the ECT

The protection under the ECT is likely to be severely restricted as well. The ECT is a multilateral investment protection treaty with 52 Contracting Parties (from the EU, Eastern Europe, Central Asia, the Balkans and the Caucasus as well as Jordan and Japan) and is currently the most frequently invoked investment protection treaty worldwide. It specifically protects the typically highly capital-intensive investments in the (particularly regulated) energy sector and obliges the contracting parties to ensure stable conditions for such investments.

As part of the ECT reform process, which was initiated at the end of 2018, the EU recently presented proposals for substantial restrictions of the protection standards under the ECT. In particular, the protection of legitimate expectations – the most important protection in practice – is to be practically eliminated. Moreover, regulatory measures shall become more difficult to challenge. The ECT Contracting Parties will discuss these and other changes in December 2020. While an agreement already then seems rather unlikely, it cannot be ruled out.

What can investors do now?

Arbitration tribunals, which usually are to decide disputes on the basis of international law (while the ECJ applies EU law), have so far not followed the far-reaching conclusion of the EU Commission and the Member States that, as a result of the Achmea ruling, all arbitration clauses in intra-EU BITs are invalid, and have continued to exercise their jurisdiction.

Investors who have been harmed in the past by state measures taken by an EU Member State or an ECT Contracting Party (e.g. due to retroactive tariff cuts for renewable energies or measures relating to the fight against the COVID-19 pandemic) are well advised to have their claims examined at short notice and to seek advice on how to secure the possibility to enforce their claims through international arbitration. The termination agreement has not yet entered into force, but this can change quickly. For each of the intra-EU BITs concerned, termination takes place 30 days after the two EU member states concerned have ratified the termination agreement, i.e. in particular after the respective national parliaments have approved the treaty. This has not yet happened. After ratification, enforcement of claims might still be possible but would face additional hurdles. As regards the ECT, an amendment will only be adopted in December 2020 at the earliest. However, in light of the negotiations envisaged by investment protection treaties prior to the initiation of proceedings, and the time that may be required for internal processes (in particular, board decisions), the potentially remaining time period is not long either.

Looking ahead, investors should assess whether investments within the EU or in an ECT Contracting Party can be structured in such a way that they continue to be (adequately) protected by investment protection treaties even after a termination of intra-EU BITs and an amendment of the ECT.

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