The final nail hammered into the coffin of intra-EU BITs

A recently published “non-paper” by France, Germany, The Netherlands, Austria and Finland represents the final nail hammered into the coffin of intra-EU BITs.

In this non-paper these Member States explicitly announce that they wish to immediately (i.e. without the sunset clause) terminate all existing intra-EU BITs by way of a multilateral international agreement among all Member States.

These Member States argue that intra-EU BITs and access to international arbitration are incompatible with EU law – adopting the position of the European Commission, which it has espoused in many intra-EU investment disputes.

Consequently, European investors can only turn to the domestic courts of the Member States for investment protection and obtaining compensation for damages.

Fortunately, the non-paper notes that the judicial system of many Member States is dysfunctioning. As an alternative, the non-paper proposes the use of mediation to resolve investment disputes. Recognizing that mediation is non-binding and non-enforceable, the non-paper talks about establishing a “binding and enforceable settlement mechanism”. Various ideas are floated how such a “binding and enforceable settlement mechanism” could look like, ranging from giving jurisdiction to the Court of Justice of the EU to the Permanent Court of Arbitration (PCA). However, it is clear that this will entail complicated legal discussions, which will last for many years, if it ever will be implemented.

In addition, it was recently reported that Demark has proposed to the other EU Member States to mutually terminate the existing bilateral investment treaties (intra-EU BITs) between them.

Denmark currently has nine intra-EU BITs in force, namely, with Poland, Hungary, Latvia, Lithuania, Estonia, Hungary, Croatia, Slovenia and Slovakia.

Denmark has indicated two reasons for this move. Firstly, it wants to avoid an infringement procedure by the European Commission, which are currently pending against five other Member States (The Netherlands, Sweden, Romania, Austria and Slovakia). Secondly, the Danish Government is of the view that these BITs are not very often used by Danish investors and therefore have become obsolete.

According to the report, Denmark received broadly “favourable” responses from the majority of its treaty counter-parties. More specifically, Slovenia and Estonia, have signalled to Denmark that there is agreement in principle for mutual termination, which is currently effectuated.

However, termination as such – normally – does not end the protection of existing investments, since the so-called “sunset clause” contained in the BITs provides for continued protection for 10 years or even longer.

But in 2011 Denmark and the Czech Republic worked around this problem by first removing the sunset clause and then terminate the modified BIT. In this way, the termination of the revised BIT immediately removed any protection – even for existing investments.

Indeed, this has been the preferred solution, which the European Commission has been pushing all Member States to adopt.

Moreover, as we have reported in our last newsletter, also Poland surprised the world when it announced last February that it intends to terminate all its 60 BITs. Subsequently, it was clarified that it actually intends to terminate only its intra-EU BITs. Whether Poland is indeed going to do that remains to be seen.

In addition, last year the European Commission has brought infringement procedures against 5 Member States because of their intra-EU BITs. If the Court of Justice of the EU (CJEU) would decide against the Member States, the end of intra-EU BITs is nearing quickly.

Taking all these developments together, it must be concluded that the push by the European Commission to eliminate intra-EU BITs is finally showing some results. In particular, since it appears for the first time officially that the large capital exporting countries such as the Netherlands, Germany and France are ready to give up their intra-EU BITs.

Consequently, it is now certain that intra-EU BITs will be gone within the next 18-24 months.

The broader question, though, is: what does this mean for European investors being expropriated or otherwise are confronted with measures, which result in compensable damages?

If the intra-EU BITs are gone, these investors can only turn to domestic courts. However, as is well-known, in many EU Member States the judicial system is malfunctioning, slow and often riddled by corruption and political pressure. Accordingly, domestic courts are simply no equivalent to international arbitration. In addition, the protection standards in domestic law and EU law are much lower than those contained in the BITs.

In short, European investors will be left with very little protection. Consequently, European investors are well advised to act now and to look for alternatives, such as restructuring their investments outside the EU, for example via Switzerland, thereby enjoying the benefits of Swiss BITs.

GIP AG stands ready to offer its expertise to help investors obtain and maintain optimal BIT protection from Swiss BITs.