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Bilateral investment protection agreements in the EU

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Bilateral investment protection agreements in the EU

Implementing a regulatory framework and supervising the compliance with it is one of the core competencies of any state. But the state‘s discretionary power in shaping and enforcing its regulatory systems is not unlimited, as the unclear legal situation in bilateral investment treaties between Austria and Croatia proves. 

For all EU member states there are two separate legal regulations that limit their own regulatory scope: On the one hand, current EU law prohibits discrimination against market participants from other EU member states. And on the other hand, there must not be any unfair treatment of investors from one state on the territory of the other state, even within the framework of investment agreements concluded bilaterally with other countries (BITs or intra-EU BITs). However, these two regulations often cause controversy and great legal uncertainty, as the following example shows. In September 2015, Croatia passed controversial legislation which converted Swiss franc loans and mortgages to Euros. This followed a sharp appreciation of the Swiss franc against the Euro, which caused high debts to Croatian Swiss franc borrowers that they were unable to repay. The Croatian legislation obliged the banks to bear the cost of the conversion, which is estimated at over US$ 1 billion. Six European banks have instigated investor-state arbitration against Croatia as a consequence of this legislation, based on BITs concluded between Croatia and other EU member states. Four of those banks base their claims on the BIT between Austria and Croatia. Those four arbitral proceedings have been initiated between 2016 and 2017. The cases are still pending. 

In the meantime, the Court of Justice of the European Union (CJEU) decided in the famous Achmea-judgment on 6 March 2018, that intra-EU BITs were contrary to EU law. The CJEU reasoned that those BITs provide investors from some member states with more rights against a member state than this state granted to investors from other member states. Hence, according to the CJEU, intra-EU BITs violate the EU law principles of non-discrimination and equal treatment. Based on the Achmea-judgment, Croatia objected to the jurisdiction of the arbitral tribunals in the cases brought against it under the intra-EU BITs. The European Commission, who joined the proceedings as amicus curiae, took the position that the Achmea-judgment was also binding on the arbitral tribunals. 

In January 2019, before any ruling in the arbitration cases was made, all EU member states signed a political declaration to terminate all BITs between member states. However, this declaration was of no legally binding effect, it still needed to be implemented. 23 member states went on to conclude a multilateral treaty to terminate all BITs between them, the so-called Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union. The Treaty came into force on 29 August 2020. 

Austria is not yet amongst the contracting parties of the treaty. Hence, the BIT be- tween Austria and Croatia remains in force for the time being, though the legal effect of the Achmea-judgment on it is unclear. While the Austrian government considered to also accede to the multilateral treaty, it ultimately favoured to terminate the intra-EU BITs by way of bilateral agreement. When and how Austria’s intra-EU BITs will be terminated and what effect this will have on pending arbitration cases is still unknown. 

Just recently (June and September 2020), two of the arbitral tribunals in the cases against Croatia based on the BIT with Austria made rulings on their jurisdiction: Both rejected Croatia’s objection and argued that at the time when Croatia consented to arbitration (which was done by concluding the intra-EU BIT) and when the request for arbitration was registered, the Achmea-judgment was not yet rendered. The tribunals reasoned that at that point in time, the so-called acquis of EU law – which includes not only legislation adopted and international agreements included by the EU institutions, but also the case law of the CJEU – did not prevent Croatia from agreeing to arbitration under a BIT. Therefore, the tribunals found Croatia’s consent to arbitrate to be valid. 

For Austria, this results in a rather difficult situation: Naturally, Austria has to comply with EU law, which includes the ruling of the Achmea-judgment. A failure to do so could lead to proceedings for treaty violations by the European Commission. However, Austria must not light-heartedly deprive its own investors of the protection on which they relied when making investments in other EU member states, such as Croatia. 

Due to the unclear legal situation created by the Achmea-judgment, resolving this legal entanglement without prejudicing the interests of one stakeholder or another seems hardly possible. Our arbitration experts at LGP will review this situation carefully. 


MARA OKMAŽIĆ, Senior Legal Counsel at LANSKY, GANZGER + partner
Dr. MICHAEL KOMUCZKY, Attorney-at-law at LANSKY, GANZGER + partner

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