Termination of Investment Treaties

Termination of treaties is governed by Articles 42 to 45 and 54 to 64 of the Vienna Convention on the Law of Treaties, which sets out the circumstances in which a treaty can be denounced (i.e. terminated unilaterally) or terminated and in which a party can withdraw from a multilateral agreement.¹

Typically, bilateral (and multilateral) investment treaties (BITs) contain provisions that provide formal details regarding the termination of the respective treaty, and any consequences for existing and future investments concerning both temporal and territorial scope.

While the specific wording of such provisions varies per BIT, they usually contain the following elements:

1. indication of the period of notification prior to the expiry of the validity of the treaty, typically ranging from 6 to 12 months;
2. indication of the period of time of the continued application of the treaty for existing investments after the termination of the treaty becomes effective, typically ranging from 5 to 20 years;² (see Sunset clause) and
3. sometimes, specific provisions regarding the territorial scope of the termination of the treaty in the case of States, which consist of several parts.³

Practitioners should be aware that the prior notification period for the termination of a BIT can serve as warning sign allowing the other Contracting Party to take the necessary steps to inform its investors about the upcoming termination of the BIT, who in turn can prepare for the consequences of the termination for their investments in the other Contracting Party.

In addition to the termination procedure contained in a BIT, a treaty could also be terminated by way of being replaced by a new similar treaty regarding the “same subject-matter” between the Contracting Parties according to Article 59 VCLT. This argument has been advanced by the European Commission and EU Member States in the context of the claimed incompatibility between intra-EU BITs and EU law. However, the Achmea tribunal ruled that the conditions of Article 59 VCLT were not met.⁴ In particular, the Achmea tribunal noted that the subject-matter of EU law and the BIT are substantially different and that accession to the EU cannot lead to the cancellation of the rights of investors granted by the BITs.⁵ See Intra-EU objections.

In the same vein, the tribunal in Marfin rejected the claim that Article 65 VCLT could be relied upon by the EU Member States in the sense that they could escape from their obligations entered into those intra-EU BITs.⁶

Regarding the issue of territorial scope, it is possible that the effect of the termination of a BIT can be specified for a particular geographic area. If the territory of a Contracting Party consists of several parts, the BIT could be terminated only for a certain part but remain effective for the other parts. Accordingly, some BITs contain specific provisions to that effect.⁷ Thus, the effect of the termination of the BIT may not necessarily cover the whole territory of a Contracting Party. 

Investment treaties are usually unilaterally terminated, i.e. denounced due to dissatisfaction by one of the Contracting Parties, often as a result of being hit by an increasing number of claims. Well-known examples have occurred in relation to several countries such as Venezuela, Bolivia, and more recently, South Africa, Indonesia and India.⁸ Another noteworthy example saw Italy withdraw from the Energy Charter Treaty (ECT) as of 1 January 2016, after it was hit by the first renewable energy claims.⁹ In 2017, the number of effective terminations of BITs exceeded for the first time the number of new treaties.¹⁰ See Backlash in investment arbitration.

Following the Court of Justice of the European Union (CJEU) Achmea judgment in 2018, in which it declared the arbitration provision contained in the BIT to be incompatible with European Union (EU) law, tribunals ruled that the 2019 Achmea Declarations issued by the EU's Member States containing their understanding of the legal consequences of the Achmea judgment were not a proper procedure to terminate or amend the applicable BITs.¹¹

The EU Member States began contemplating termination of all their circa 190 intra-EU BITs by a single termination agreement. The resulting termination agreement was signed on 5 May 2020 by 23 EU Member States and entered into force on 29 August 2020.¹² It aims to not only terminate all intra-EU BITs between those 23 EU Member States,¹³ but also removes the legal effects of the sunset clauses contained in those intra-EU BITs that would normally be triggered, meaning that the protection of the intra-EU BITs would be extended for 5, 10 or even 20 years (see discussion in sunset clauses).

Moreover, the intra-EU termination agreement foresees the removal of the legal effect of the sunset clauses of intra-EU BITs that have been terminated in previous years, despite the fact that the respective sunset clauses are already operational.¹⁴ In other words, the EU termination agreement could in some circumstances¹⁵ retroactively abrogate the right of investors to rely on the protection offered by those BITs, which are still applicable due to the sunset clauses.