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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

All intra-EU bilateral investment treaties have now been terminated, which, combined with EU withdrawal from the Energy Charter Treaty (ECT), could have significant implications for arbitration in 2024.

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.

Against this backdrop, it is unsurprising that EU companies are considering restructuring their investments in the EU by channeling them through their subsidiaries outside the EU, especially those incorporated in Switzerland and the UK. EU investors should keep in mind that corporate restructuring to secure investment treaty protection is generally allowed, if done early enough.

Nathalie Colin
Freshfields Partner

Enforcement strategies and alternative legal avenues

Since the ECJ’s decision in Achmea, it has been clear that intra-EU awards stand very little chance of being enforced within EU borders. The ECJ recently confirmed that this option is indeed off the table in its decision Romatsa and others.

Nevertheless, some investors appear to be successfully enforcing their awards outside EU borders. In England, Spain’s creditors have managed to attach real estate assets and bank accounts held by State-owned entities. Australian courts have also allowed the enforcement of intra-EU investment treaty awards.

But the most popular jurisdiction for these purposes, which presents one of the highest concentrations of Member States’ assets outside the EU, is the US. Following a consistent, positive trend of judicial decisions confirming the enforceability of intra-EU awards, investors experienced a setback in the US. In March 2023 – for the first time – a US judge refused to enforce an ECT award in favor of EU investors against Spain. The issue is now before the US Court of Appeals for the District of Columbia Circuit. A decision is expected this year.

Market participants thus remain rather optimistic. Notably, investment funds continue to acquire intra-EU awards on the secondary market (albeit at a discount), reflecting a belief that they will be able to enforce them.

Further legal avenues may be explored when it comes to enforcement of legal rights. For example, we expect a gradual increase in the number of investors resorting to the protection offered by human rights instruments, both in relation to investment disputes with host States and with respect to the enforcement of awards.

Gregorio Pettazzi
Freshfields Principal Associate

It is also worth remembering that an unreasonable refusal to enforce a valid arbitral award may in fact constitute a violation of the right to property, as recently confirmed by the European Court of Human Rights in BTS v Slovakia. An EU court’s refusal to enforce intra-EU awards in violation of that State’s obligations under the New York Convention and the ICSID Convention could potentially trigger the State’s responsibility under the European Convention of Human Rights. The viability of this legal avenue will undoubtedly be tested soon.