Disagreement on intra-EU BITs continues: Infringement actions over intra-EU BITs

May 2020 was an interesting month for ISDS and EU law. On 5 May 2020, a majority of  EU Member States signed a multilateral treaty to terminate intra-EU Bilateral Investment Treaties (BITs). Despite longstanding reluctance, Member States were forced to act by the Achmea judgment, where the CJEU held that investment arbitration clauses in BITs between Member States have “an adverse effect on the autonomy of EU law” and are incompatible with EU law. It subsequently took Member States two years to negotiate a Termination Agreement (“TA”).  Being originally planned for December 2019, its conclusion is somewhat overdue and news of its signing was eclipsed by the controversial PSPP judgment. Nevertheless it marks an important transition, although it is not free of its own controversies. On the 14th May, the Commission already sent infringement notifications to two Member States who refused to sign it. This begs the question whether Member States have an obligation under EU law to conclude the TA. It is argued that, depending on the effectiveness of the TA under international law, they might indeed have such an EU law obligation. However, it can be questioned whether the TA really marks the (immediate) end of intra-EU ISDS as tribunals’ Kompetenz-kompetenz competes with the CJEU’s interpretative authority. 1. Intra-EU BIT Termination treaty and what next?

The signing of this agreement is in itself noteworthy. By removing approximately 200 intra-EU BITs, it heralds the end of an era for international investment arbitration and will have a serious impact on practitioners’ in the ISDS market. Despite disregarding the Energy Charter Treaty, it would still foreclose roughly half of the EU ISDS market (10% globally). In that light, and aside from arguments on the loss of investment protections, some resentment from practitioners seems inevitable.

Nevertheless, it must also be recognized that there are diverging levels of regulatory and judicial efficiency within the EU. The TA’s preamble therefore commits, like the non-paper and three declarations of January 2019 (EU22 declaration, EU5 declaration, Hungary’s declaration), to “intensify discussions on effective protection of investments within the European Union” including “mechanisms of dispute resolution” and potentially, “to create new or improve relevant existing tools and mechanisms under Union law.” Indeed, the Commission just launched a public consultation on intra-EU investment protection.

The terms of the TA are not substantially different from the draft that leaked earlier. Broadly,  the TA first terminates all sunset clauses in the BITs which are in force (Article 2) and those of BITs already terminated (Article 3). It then affirms (Article 4) that due to the conflict between the EU treaties and BITs, the latter are inapplicable and cannot serve as legal basis for Arbitration Proceedings. Article 4 (awkwardly) expresses that those ISDS provisions do not confer consent to arbitrate under Article 30(3) VCLT as of both contracting parties’ accession to the EU.

The TA then contains transitional measures differentiating between arbitrations that (i) were “concluded” before 6 March 2018; (ii) those initiated before that date, but are still pending because they are not “concluded”; and (iii) those commenced after that date.

Interestingly, “concluded” under Article 1(4) TA means “fully executed”. In other words, it is not sufficient that a final award was rendered, it must also have been paid, or set aside. Concluded investment arbitrations remain unaffected, despite deviating from the rule in Article 4 TA that that conflict deprives BITs of consent to arbitrate. Pending procedures have six months from the entry into force to seek settlement in a “structured dialogue” (Article 9 TA) and/or revert the claim to national courts (Article 10 TA). Claims brought after 6 March 2018 will be refused recognition and enforcement because, per Article 4 TA, the arbitration provisions are “inapplicable”.

2. Infringement claims

But despite this (uncertain) move towards EU mechanisms, the fate of the intra-EU BITs continues to divide Member States. The TA was signed by a (large) majority, but not all.  Austria, Finland, Sweden, Ireland and (former Member State) the UK did not sign it. It is not entirely clear whether that refusal relates to the form and content of the TA or to the very objective of terminating intra-EU BITs. Briefly after, the Commission sent two new infringement notices to the U.K. and Finland whom, by refusing to sign the TA, are not effectively terminating intra-EU BITs.  The content of infringement notices are not made public (Joined Cases C‑514/11 P and C‑605/11, LPN  v Finland), so it is not clear what the Commission specifically avers to be the infringement. Is it the failure to terminate intra-EU BITs, by whatever means? Or, the failure specifically to sign the TA? At first sight, the chronology may suggest the latter, but that is implausible. Nor has the Commission ignored the others, since there are already pending infringement procedures against Austria and Sweden. (Ireland, by contrast, had already terminated all its intra-EU BITs).

The question is thus whether the Member States have an obligation to cooperate in the conclusion of the TA specifically, and is this sanctionable by an infringement declaration? Inextricably related is the question whether the terms of the TA are themselves compatible with EU and international law.

An interesting side-question is why the Commission targets the UK, which prima facie need no longer observe EU law after the end of the transition period on 31 December 2020. The Withdrawal Agreement (“WA”) does not affect its BITs, nor does the draft EU-UK FTA feature ISDS. Terminating UK (intra-)EU BITs now, removes “old style” ISDS and clears the road for EU-UK investment provisions on EU terms. The UK, however, obviously has incentives not to terminate its intra-EU BITs, which will soon become extra-EU BITs. It would arguably be more advantageous to keep those BITs in force, than to (re-)negotiate new investment standards with the EU. So, the UK might try to “run out the clock”. Under Articles 92 to 95 and 87 to 89 WA, the Commission and CJEU retain competence over administrative and judicial infringement procedures commenced before 31 December 2020. Hence, the Commission could refer the case to the CJEU even after the end of the transition term but the CJEU would then only be competent to rule on the UK’s past conduct while it was subject to EU law. Nor could it order a specific performance to terminate them for the future. Perhaps the UK accepts that risk to keep its investors internationally protected under the old BITs?

3. Do the Member States have an obligation to conclude the Termination Treaty?

It might seem like a stretch for the EU to compel the Member States to conclude an international agreement outside the EU institutional framework. The CJEU has no power to order specific performance, but can do so de facto by framing the margin of manoeuvre to remedy an established incompatibility. The case law regarding Article 351 TFEU, applied by analogy, suggests that the Member States might indeed have an EU law obligation to cooperate in the conclusion of the TA. Such analogy between jurisprudence on Article 351 TFEU, which applies only in relation to third states, and intra-EU international agreements is not inappropriate because Article 351 TFEU is a specific expression of the duty of loyalty in Article 4(3) TEU. In other words, insofar as Article 351(2) TFEU imposes obligations on the Member States with regard to their obligations vis-a-vis third states, those obligations a fortiori exist in their internal relations under Article 4(3) TEU. Moreover, they would apply more strongly, since there is no need to consider legitimate expectations and rights of third states as mandated by Articles 2 and 3(5) TEU. Between EU Member States the principle of EU law primacy means that provisions of international agreements contrary to EU law are simply not applied by the EU (national) courts. However, in the case of ISDS under BITs, investors do not (need to) rely on enforcement by national courts. Under international law moreover, conflicts between successive treaties under Article 30 VCLT do not affect the validity of either treaty, but the relative priority a state accords to it. This means that a state facing a conflicting pair of international obligations chooses which to honour, but remains liable for the other until that obligation is effectively terminated. It remains disputed whether Member States’ choice of relative priority in favour of the EU Treaties means that consent is vitiated under intra-EU BITs. On the one hand, it would be odd to prioritize the application of the EU Treaties, but still to ‘consent’ to the ISDS provisions. On the other hand, international obligations continue to exist validly until they are terminated. Therefore, consent may still exist under those provisions until they are terminated.

Whichever is true, the practical reality is that without the involvement of EU courts ensuring the primacy of EU law, intra-EU ISDS remains available. It is thus up to the Member States under the second paragraph of Article 4(3) TEU to take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union. This resembles what occurs under Article 351(2) TFEU. Under the first paragraph of Article 351 TFEU, Member States may honour certain conflicting international obligations. However, under the second paragraph, they also incur an EU law obligation to remedy that incompatibility. The extent of that obligation remains somewhat uncertain, but it is arguable that it may require Member States to conclude an international agreement if that is necessary to effectively remedy an incompatibility.

The CJEU held in C-84/98,  Commission v. Portugal (paragraph 58) that “Member States have a choice as to the appropriate steps to be taken, they are nevertheless under an obligation to eliminate any incompatibilities existing between a pre-Community convention and the EC Treaty. If a Member State encounters difficulties which make adjustment of an agreement impossible, an obligation to denounce that agreement cannot therefore be excluded.” From that statement, some confusion ensued since EU law does not require Member States to wantonly disregard their international obligations by unilaterally terminating conflicting treaties with third states. The CJEU must take into account the obligation of strict observance of international law under Article 3(5) TEU. Hence, an obligation of denunciation only follows where a treaty foresees that possibility, which had been the case.

Intra-EU BITs generally contain “sunset clauses” coupling unilateral termination to a (long) transitional period. Hence, denunciation solidifies rather than remedies the incompatibility. The only available option - in accordance with international law- is to mutually agree on the termination of BITs. The first paragraph of Article 4(3) TEU imposes an obligation on Member States to assist each other to that end. Thus, when all the Member States propose an international agreement to mutually terminate intra-EU BITs in a manner that effectively terminates the sunset clauses, there can be a strong assumption that Member States ought to use it.  Although Member States are free to choose the means by which they remove the incompatibility, they may not frustrate that objective by refusing to cooperate, unless there is a compelling reason. One should bear in mind that, by not agreeing on the TA, those non-contracting Member States are also preventing other EU Member States from meeting their own EU law obligations since those cannot unilaterally remove those BITs. It seems then that to refuse on the conclusion of a multilateral termination treaty is hardly in accordance with the principle of sincere cooperation.

4. Defences to the Commission infringement claim?

Withholding states might, of course, resist infringement claims when it comes to that. Two defences appear evident.

• First, it can be argued that the TA goes beyond what is necessary for remedying the incompatibility. In Achmea, the CJEU was only concerned with the compatibility of the arbitration provisions of intra-EU BITs and said nothing about the substantive protection standards. Hence, an international agreement requiring that Member States terminate the entire BITs might encroach on international obligations of which a conflict with EU law has not -at least not yet- been established.

• Secondly, it could also be argued that the TA itself is not in accordance with EU or international law or simply not effective under international law to remove the incompatibility. In both cases, those Member States may have a point in withholding from the agreement as it would not remedy the incompatibility.

On the first argument, it is hard to see the relevance of substantive protections without ISDS provisions. One could argue that substantive protections alone do not violate EU law or fall within the scope of Article 351(1) TFEU (if the BIT pre-dates accession). It is true that the CJEU has not decided as such on that point. However, it is arguable that they do. In C-264/09, Commission v. Slovakia, the CJEU already held that termination of a contractual preferential access right might violate the FET standard for which Slovakia would be liable, even though it was prohibited by EU law. Thus, substantive protections at least potentially maintain incompatible obligations. The CJEU nevertheless ruled that the international obligation was covered by Article 351(1) TFEU implying equally that they conflict with EU law, triggering Article 351(2) TFEU’s obligation to remedy it.

This brings us to the second question, which concerns the content of the TA in light of EU and international law. Member States cannot invoke invalidity of a measure in light of international or EU law as a defence for non-transposing directives (C-177/06, Commission v. Spain). In the present case however, that influences the effectiveness of the international action, which is the centrepiece on which an EU law duty to conclude the TA should be based.

Therefore, invalidity or ineffectiveness may well be a relevant defence to the Commission’s infringement action. This hinges on whether the termination of sunset clauses is effective as a matter of international law, and whether the retroactivity of the TA is in conformity with the Rule of Law and general principles of international law.  Firstly, the TA terminates the remaining BITs and sunset clauses (Articles 1 and 2) in lieu of two-step treaty modification and termination. Nothing, however, indicates that this impedes effective termination cf. Articles 26 and 54(b) VCLT. Secondly, the TA affirms the “non-applicability” of intra-EU BITs retroactively, negating the jurisdiction of investment tribunals. Retroactivity is not as such prohibited under international or EU law, but is limited by Rule of Law considerations. Article 70(1)(b) VCLT protects the acquired/vested rights of “third parties” which once again calls into question the direct/derivative nature of investment claims. Nevertheless, despite retroactive inapplicability, the TA foresees transitional measures which predominantly target pending and new procedures post-Achmea. One could therefore argue that the TA sufficiently protects investors’ legitimate expectations under BITs by limiting effects from the date of the Achmea judgment rather than ab initio.

5. Is intra-EU Investment arbitration really over?

In practice, the CJEU and investment tribunals have competing interpretative authorities. Disputes concerning the interpretation of the TA must be resolved by the CJEU because it contains a special agreement under Article 273 TFEU (Article 14). Under Article 273, the CJEU can be charged with interpreting a treaty under international law, provided it has an objectively identifiable link to the EU Treaties (C-648/15, Austria v. Germany).

However, the effect of the TA on the jurisdictional competence of investment tribunals will de facto also remain subject to the Kompetenz-kompetenz of investment tribunals. Seized of a claim, tribunals will decide based on their interpretation of whether the TA properly terminates the BITs and sunset clauses and as of when. It seems incontestable that the TA does so from its entry into force, but whether it deprives jurisdiction of tribunals over pending claims seems questionable under Article 70(2) VCLT. On this (albeit limited) issue, the interpretation of investment tribunals and the CJEU of Article 4 TA might still conflict, so that investment tribunals might continue to assert jurisdiction over pending investment claims despite the TA’s assertion that such consent is lacking.