Eyes on Romania As It Enacts a Law Approving the Termination of All Intra-EU Bilateral Investment Treaties

By Dr Cosmin Vasile, Violeta Saranciuc (Zamfirescu Racoti & Partners, Bucharest)

On 24 March 2017, Law No. 18/2017 approving the termination of the bilateral investment treaties (BITs) between Romania and the European Union Member States came into force in Romania. The law targets 22 BITs entered with Austria, Bulgaria, Czech Republic, Cyprus, Croatia, Denmark, Greece, Finland, France, Germany, Lithuania, Latvia, Luxembourg, Poland, UK, Portugal, Netherlands, Slovakia, Slovenia, Spain, Sweden and Hungary.

The sole article of the law approves the termination of these BITs by consent or by denunciation.

Although Romania’s legislator has now transposed the intention to leave all the intra-EU BITs, the termination of each BIT will take effect when Romania will either notify unilaterally the denunciation or will conclude agreements with its counterparts to terminate the BITs. There is no clear agenda on the further steps in either direction yet.

Notably, the law does not address a withdrawal from the Energy Charter Treaty and neither does it target any BITs outside the EU.

The explanatory note underlying the bill outlines that the legislative measure follows after the European Commission has commenced infringement proceedings against Romania and four other Member States (i.e., Austria, Netherlands, Slovakia and Sweden) in June 2015, demanding that these states terminate intra-EU BITs between them on the basis that such BITs are outdated, no longer necessary in a single market and incompatible with the EU law. The explanatory note further states that, although the notice to Romania concerns the Romania-Sweden BIT (which was basis for the Micula v. Romania case), Romania anticipates further similar proceedings regarding other intra-EU BITs. The intention is, thus, to seek a termination by agreement of all these treaties, to which end Romania has commenced consultations since 2011, and, in case of no agreement, to terminate them unilaterally. The legal ground asserted for both scenarios is Article 54 of the Vienna Convention on the Law of Treaties (the Vienna Convention).

A previously suggested alternative of potentially relying on Article 59 of the Vienna Convention regarding the automatic termination of the intra-EU BITs upon accession to the EU has not been embraced by the Romanian legislator. The explanatory note to the bill expressed clearly the intention to terminate the intra-EU BITs with future effect. In fact, the European Commission has followed the same approach, as both the infringement procedure, but also its previous statements indicate that until termination by the signatories, the intra-EU BITs are still in force and have not automatically ceased to exist.

The confrontation between the EU law and the intra-EU BITs’ protection framework is a controversy that reached a peak with the ICSID Award rendered in the case Micula v Romania, which ordered Romania to pay substantial compensation in favour of the foreign investor. The European Commission decided that the enforcement of this award would amount to illegal state aid. Yet, the intra-EU BITs are an issue that got the Commission’s attention before the Micula case. As early as 2007, the European Commission was inviting the Member States to bring the EU BITs to an end. Afterwards, other investor-state disputes have dealt with the question of intra-EU BITs and their compatibility with EU law. For example, the arbitral tribunal in Eastern Sugar v Czech Republic rejected the thesis that EU law superseded the BIT; in AES v Hungary, the arbitral tribunal refused to give EU law prevalence; and in Electrabel v. Hungary, the arbitral tribunal recognised the prevalence of EU law, but upheld its jurisdiction based on the ECT provisions.  Moreover, the setting aside proceedings against the UNCITRAL arbitral award rendered in the Achmea BV v Slovakia brought the same question of compatibility with the EU law before the Court of Justice of the EU, and the referral is currently pending.

With the latest developments in Romania regarding the intra-EU BITs, attention has once again been focused on the effects of the sunset clause. A sunset clause extends the foreign investment protection after the termination of the BIT and over defined periods of time. All the intra-EU BITs concerned by the newly enacted Romanian law include sunset clauses. The majority provide for a 10-year survival of the BIT, four provide for a 15-year sunset (BITs with Bulgaria Finland, Netherlands and Luxembourg), and another four for a 20-year sunset (BITs concluded with France, Germany, UK and Sweden).
On the other hand, withdrawal may be delayed by the BITs’ provisions on renewal terms, which may prevent the termination until close to the end of the initial term or any of the successive renewal terms (e.g. Romania-Hungary BIT, which provides for 10-year initial and successive renewal periods). In addition, some of the BITs provide for 1-year periods of notice before effective termination (e.g. Romania-Finland, Romania-Sweden).
Thus, bringing the intra-EU BITs to an end immediately will be a challenge for Romania. In any case, if Romania decides to terminate the intra-EU BITs unilaterally, there will be a buffer-period of protection ensured by the sunset clauses and by other provisions of the treaties.
Noteworthy, in the process of pre-legislative scrutiny, the Parliamentary Commission on European Affairs recommended “finding … the most appropriate legal and contractual avenues to avoid the effects of the survival clauses”.

There is, therefore, an intention to terminate the intra-EU BITs with immediate effect. Romania could explore this direction by seeking to reach an agreement with its counterparts on termination of BITs by consent, if the counterparts are willing to drop the BIT and the sunset clause altogether (otherwise, the sunset clause itself may survive termination). However, the question is still if this would be the wisest pursuit for Romania. Italy and Ireland, which terminated their intra-EU BITs in 2012 and 2013, are a precedent. However, in the context of the recent pressure from the European Commission, Romania would break some paths by initiating the trend of “avoiding” sunset clauses by consent, and this might be a less positive message to foreign investors.

Apart from the technicalities of termination between the signatories, the challenge remains to deal with potential new claims brought by foreign investors regarding investments made prior to termination. The BITs may cease to exist with effect for the future. As for the past, they are a key source of legitimate expectations for the foreign investors. Whether, despite the BITs’ termination by consent, arbitral tribunals would further accept jurisdiction to hear subsequently brought BIT-based cases and whether arbitral tribunals would further uphold foreign investors’ rights based on the same BITs, are questions to be settled in future arbitrations.

Altogether, any concrete measures resulting in the effective termination of intra-EU BITs by Romania are still to be expected, and most probably such measures will follow only after careful analysis and consideration by Romania of each BIT on an individual basis. Nevertheless, for now, Romania’s move is a statement, and one that may remain in the memory of foreign investors as a not so overly sympathetic one towards the concept of foreign investment protection.

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