The Termination Agreement of 5 May 2020: what it entails for investors and how (existing) intra-EU investments can be protected in the future

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The saying “you never know what you’ve got till it’s gone” is bound to hold true for many European investors whose investments in other Member States may become threatened by measures of the host state that are incompatible with rule of law standards. Maybe this sentiment will eventually also find its way into the departments of the German Federal Government responsible for foreign trade and investment. The economic success of countless German companies – and thus many jobs in Germany – depends on business ventures in other Member States. If foreign investments in these countries are taken or damaged without adequate compensation, this can have severe economic repercussions in Germany.
Until recently, foreign investments within the European Union (“EU”) were protected by almost 200 intra-EU bilateral investment treaties (“BITs”). Germany was a party to 13 of these intra-EU BITs. These treaties ensured certain minimum standards of treatment for foreign investments that we consider essential in a rule of law state.
For example, this include the obligation to pay compensation if the host state expropriates investments for the public good, the obligation to treat foreign investors and their investments fairly and equitably and to grant them full protection and security. BITs also prohibit discriminatory treatment against foreign investors. To ensure that the rights guaranteed in these BITs could be enforced in a neutral forum with an independent and impartial decision maker, the majority of these treaties provided for dispute resolution clauses, offering investors the possibility to settle their disputes with the host state through international arbitration.
This legal framework has now changed dramatically. By signing the Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union of 5 May 2020 (“Termination Agreement”), 23 Member States1 terminated their intra-EU BITs under the leadership of the European Commission (“Commission”).2 In total, this concerns 132 BITs. Only the United Kingdom, Finland, Ireland,3 Austria and Sweden withstood pressure from the Commission and refused to sign the Termination Agreement.

From the Achmea Judgement to the Termination Agreement
The Termination Agreement was signed approximately two years after the Court of Justice of the European Union (“CJEU”) rendered its judgement in the case Slovak Republic v. Achmea BV (C-284/16) of 6 March 2018 (“Achmea Judgement”). In this judgement, the CJEU ruled that a provision “such as Article 8” of the Dutch-Slovak BIT is incompatible with certain provisions of the Treaty on the Functioning of the European Union (“TFEU”). In its very brief reasoning, the CJEU heavily relied on the fact that under Article 8 of the Dutch-Slovak BIT, the arbitral tribunal must not only apply the relevant provisions of the BIT but also a Member State’s domestic law. The CJEU found that this could potentially include provisions of EU law. It also found that arbitral tribunals lack the power to request preliminary rulings from the ECJ and therefore concluded that the full effectiveness of EU law was not guaranteed. The CJEU also argued that the offer to settle disputes with a foreign investor through arbitration constitutes a violation of the principle of mutual trust between the Member States.
The Achmea Judgement followed a long-running campaign by the Commission against intra-EU BITs. For years, this campaign was unsuccessful since the Commission’s arguments had repeatedly been rejected in arbitrations in which the Commission had intervened as amicus curiae. However, backed by the Achmea Judgement, the Commission gained the upper hand. It swiftly proclaimed that the CJEU had allegedly confirmed the Commission’s view and that all intra-EU BITs – even the ones which do not contain a provision “such as Article 8 of the BIT” on the application of domestic law (which is the majority of the relevant BITs) – violate EU law. According to the Commission, all offers to arbitrate contained in intra-EU BITs are therefore invalid and the respective treaties to be terminated by the Member States. The Commission repeatedly threatened Member States that non-compliance with its demands would lead to infringement proceedings under Article 258 TFEU.
A number of Member States (which found themselves in the role of Respondents in investment arbitrations) had already adopted the Commission’s views voluntarily in order to seek the dismissal of the claims pending against them for lack of jurisdiction. One year after the Achmea Judgement was rendered, the Commission was able to persuade the majority of the other Member States to issue a declaration on the legal consequences of the Achmea Judgment undertaking to terminate intra-EU BITs. The Termination Agreement is the last step in this process, implementing the declaration of the Member States.

Notable: Termination of so-called Sunset Clauses
It is already astonishing that the Member States – under the leadership of the Commission – would turn against public international law treaties which aim to guarantee the most fundamental rule of law principles and promote the peaceful, depoliticized resolution of international disputes. It is even more surprising that in doing so, they would not even safeguard provisions which were specifically designed to ensure a minimum level of legal certainty in case of the termination of these treaties.
In principle, BITs can be terminated with effect for the future after a certain minimum term of validity as prescribed in the individual treaty has expired. However, because foreign investments often involve high up-front investment costs that can only be recovered over a long amortization period, most BITs contain so-called ‘sunset clauses’. These provisions guarantee that investments made prior to the termination of a treaty are still protected for a specified period of time after the termination, usually 10-20 years.
The Termination Agreement not only terminates the intra-EU BITs in question, it also specifically targets and terminates their respective sunset clauses.7 That is, the Termination Agreement not only changes the framework for new investments, it also changes the rules of the game for investors who have already committed (substantial) funds in reliance on the minimum standards of treatment guaranteed by the BITs. This can hardly be reconciled with rule of law principles such as non-retroactivity, legal security and the protection of legitimate expectations.

Impact on (pending) arbitrations
In principle, the Termination Agreement stipulates that the host state’s consent to arbitration expressed in the relevant BIT is invalid and cannot serve as legal basis for arbitrations. As explained, it is generally possible to create such legal effect for the future (subject to the sunset clauses). However, the Termination Agreement (once again) goes beyond this “normal” ex nunc regulation.
The Termination Agreement distinguishes between three categories of arbitrations: “new”8, “pending”9, and “concluded”10. This classification is not undertaken in relation to the effective date of the Termination Agreement. Instead, it uses a date that is more than two years in the past: 6 March 2018, i.e. the date of the Achmea Judgement.
Only arbitration proceedings “concluded” prior to 6 March 2018 are not affected by the Termination Agreement. Moreover, for an arbitration to qualify as “concluded” within the meaning of the Termination Agreement, it is not sufficient that a final award had been rendered by this date. Rather, any attempt by the respondent state to challenge the award must also have failed and enforcement measures must have been “duly executed”.11
Since setting aside and annulment proceedings often extend over years, the desired legal effect of the Termination Agreement is shifted back in time even further. Moreover, states that have not complied with an arbitral award and resisted enforcement in violation of their public international law (and contractual obligations) are rewarded and put in a privileged position in comparison to states that have diligently complied with the awards.

“Pending” proceedings are defined as all arbitrations that were initiated before 6 March 2018 but have not yet been concluded in the (very narrow) sense of the Termination Agreement. For such proceedings, the Termination Agreement provides for so-called “transitional measures”12 according to which investors can chose to either conduct a non-binding “structured dialogue” with the host state in an attempt to reach a voluntary settlement or to pursue their claims before the national courts of the host state.

Both options are less than satisfactory for the foreign investors.
First, the Termination Agreement does not clarify how the dialog should be “structured” and what happens if a settlement cannot be reached during this process. It seems that the investor would then be left empty-handed. Second, in order to be “allowed” to pursue its claim before the national courts, an investor must irrevocably waive all rights and claims under the BIT and renounce the execution of any arbitral awards already issued but not yet executed or enforced. The investor must then start from square one before the national court.
It seems obvious that this is neither a fair nor an economically viable alternative for an investor who has already invested a lot of time, money, and resources in the arbitration. Moreover, it bears recalling that the Commission itself has already taken action against both Poland and Hungary because it deemed the independence of the judiciary and the rule of law in these countries to be at risk.13 Indeed, the Commission yet again initiated infringement proceedings against Poland to safeguard the independence of Polish judges on 29 April 2020 – a few days before the signing of the Termination Agreement.14 The Global Competitiveness Report 2019 rated Croatia’s judicial independence at 2.4, Poland at 2.7 and Hungary at 3 out of 7 points.15
Finally, all arbitrations initiated on or after 6 March 2018 are qualified as “new” proceedings.16 For these arbitrations, not even the transitional measures are available. This means that investors who may have initiated an arbitration two years before the Termination Agreement with regard to investments made long before that are left without any recourse under the new legal framework.
With concerns over non-compliance with rule of law principles, the few states that decided not to sign the Termination Agreement did so to protect their investors engaged in pending arbitrations against other Members States from this unfortunate fate. For instance, several Austrian banks are currently pursuing ICSID arbitrations against Croatia under the Croatian-Austrian BIT. Unfortunately, the German Federal Government has not prioritized the interests of its nationals investing in other Member States. This may be due to the fact that the Federal Republic of Germany is currently being sued by the Swedish state-owned company Vattenfall AB for damages allegedly incurred in connection with the state’s decision to accelerate the phase-out of nuclear energy for the commercial generation of electricity in the aftermath of the Fukushima nuclear accident.17

The consequences of the Termination Agreement and what investors must now consider
In light of the intended effects of the Termination Agreement, it is unclear how arbitral tribunals will deal with this treaty in the future. Under public international law, they can (and must) make an independent assessment of the relevant legal issues. They may therefore reach different conclusions than those intended by the Commission and the Member States.
However, two points can be made with certainty.
First, the Termination Agreement will be front and center of many coming procedural battles in arbitrations initiated under the relevant intra-EU BITs. This will inevitably create significant additional costs for the investors.
Second, the Termination Agreement and the manner in which the termination is executed therein, demonstrates that there is absolute political determination to prevent payment of damages by Member States in the context of intra-EU investment arbitrations. Therefore, even if an arbitral tribunal were to reject the line of argument of the Termination Agreement and an investor were to prevail in an intra-EU arbitration, the financial value and enforcement prospects of such an arbitral award is uncertain at best.
The unsuccessful host state will certainly not comply with the award voluntarily. Enforcement measures in other Member States that signed the Termination Agreement will also not have any prospect of success. This leaves enforcement efforts outside of the EU. Even if the investor manages to find (sufficient) assets that are not subject to state immunity, considerable political resistance is still to be expected.18
Importantly, this applies not only to the intra-EU BITs in question. The Commission and the Member States have already announced that they hold the same legal view with regard to the Energy Charter Treaty under which many arbitrations, including by German investors, are currently pending and pledged to address this matter next.
The fact that the Commission initiated infringement proceedings against the United Kingdom because it refused to sign the Termination Agreement also demonstrates that the Commission’s approach is driven more by ideology than by the application of law. The Termination Agreement was signed on 5 May 2020 – several months after Brexit on 31 January 2020.
Against this background, German investors who have already invested in other Member States or intend to make such investments in the future must be particularly careful. New investments should be structured through a subsidiary in a non-Member State to ensure that they can benefit from investment treaties to protect against political risks. Often, investors can also restructure existing investments as long as a dispute with the host state has not yet arisen. Following Brexit, the United Kingdom could become an attractive jurisdiction for such purposes. To determine the best possible options, investors should consult an experienced investment arbitration specialist who can usually provide guidance at minimal costs.
Although questionable for many reasons, the Termination Agreement marks a historic turning point for the protection of cross-border investments within the EU. This is particularly unfortunate in view of the current surge of nationalism and populism. Effective means to safeguard the rule of law and protect against political risks are now needed more than ever. With its prominent lack of enforcement mechanisms for individuals, the EU legal framework alone does not provide such means. It is therefore particularly regrettable that the Commission has not taken any effective steps to close the gaps for the protection of foreign investments that result from the Termination Agreement. Although the Commission’s fight against intra-EU BITs has been ongoing for many years, it has only launched public consultations on this issue in May 2020. So even if there were political will to actually protect intra-EU investments at the level of the EU law, experience shows that concrete measures would still be years away. For the time being, the only way for investors to protect their investments in the event of a crisis is to structure them via third countries with strong investment treaties in place.

1 These 23 Member States are the following: Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.
2 See Article 2(1) of the Termination Agreement as well as its Annex A. The Termination Agreement entered into force on 29 August 2020.
3 However, it needs to be noted that Ireland has already terminated its only intra-EU BIT with the Czech Republic in 2011. The protective mechanism of the so-called sunset clause ends in the year 2021.
4 Slovak Republic v. Achmea BV, C-284/16, Judgment of 6 March 2018, para. 62.
5 Slovak Republic v. Achmea BV, C-284/16, Judgment of 6 March 2018, paras. 56-58.
6 See
7 See Article 2(2) and 3 of the Termination Agreement. There is also a provision concerning BITs terminated before the Termination Agreement in
respect of which sunset clauses have not been challenged so far. See Article 3 of the Termination Agreement.
8 See Article 1(6) of the Termination Agreement.
9 See Article 1(5) of the Termination Agreement.
10 See Article 1(4) of the Termination Agreement.
11 See Article 6 of the Termination Agreement. ­ A ­“concluded arbitration proceeding” is defined in Article 1(4) of the Termination Agreement as “any Arbitration Proceeding which ended with a settlement agreement or with a final award issued prior to 6 March 2018 where: (a) the award was duly executed prior to 6 March 2018, even where a related claim for legal costs has not been executed or enforced, and no challenge, review, set-aside, annulment, enforcement, revision or other similar proceedings in relation to such final award was pending on 6 March 2018, or (b) the award was set aside or annulled before the date of entry into force of this Agreement”.
12 See Article 8-10 of the Termination Agreement.
13 European Commission v. Poland, C-619/18, Judgement of 24 June 2019; European Commission v. Hungary C-286/12, Judgement of 6 November 2012.
14 See
15 Klaus Schwab, World Economic Forum, The Global Competitiveness Report 2019 (, pp. 175, 271, 467.
16 See Article 1(6) of the Termination Agreement.
17 Even though this arbitration was brought under the Energy Charter Treaty (“ECT”), the political considerations likewise apply as the Commission – and a number of Member States – argue that the Achmea Judgment also applies to the ECT.
18 For example, the Commission actively tried to prevent the enforcement of the award in Micula v Romania I (ICSID Case No. ARB/05/20) and participated in the enforcement proceedings in US-courts as amicus curiae. This was long before the Termination Agreement.

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