Sunset Clause

Sunset clauses (sometimes also referred to as survival or grandfathering clauses) guarantee that all investments made prior to the termination of a treaty continue to be protected during a certain period of time, typically ranging from 5, 10, 15 and up to 20 years.¹ The function of the sunset clause is to protect the legal expectations of the investors who made their investments based on the protection offered by the existing investment treaty.² Indeed, many investment treaties also cover investments made prior to the entering into force of the treaty.³ 

The reason why States include sunset clauses in most BITs is to protect the legal expectations of investors when making their investments. Typically foreign investments – particularly those in the oil, gas, and infrastructure sectors – are made with a long-term view that often extends beyond the standard initial period of validity of a BIT by 10 or 15 years. In such circumstances, a termination of a BIT is always a possibility, and without a sunset clause, existing investments would be left completely unprotected.⁴

Hence, sunset clauses aim to ensure that investors of existing investments have a transitional period in which they can take the appropriate measures to accommodate to the situation after a BIT has been terminated. Sunset clauses also ensure that investors can continue to rely on the investment protection and dispute settlement provisions contained in a BIT in order to be able to obtain, for example, compensation in cases of (in)direct expropriation by the host State.

Accordingly, investment claims can be successfully initiated even after the termination of the BIT. For example, in the Marco Gavazzi and Stefano Gavazzi v. Romania⁵ case, investors initiated arbitration under the Italy-Romania BIT in 2012, after the treaty had already been terminated in 2010. Similarly, in April 2019 a Dutch investor filed an ICSID claim against Tanzania six months after the termination of the Tanzania-Netherlands BIT.⁶ 

As a result of a sunset clause, the termination of a BIT itself does not necessarily prevent the filing of claims, unless the Contracting Parties of the BIT have agreed to remove the sunset clause before terminating the BIT. For example, it was reported that when Indonesia reached a mutual agreement with Argentina to terminate their BIT, they neutralized the sunset clause by mutual agreement before withdrawing from the BIT.⁷ This implied that the sunset clause would not operate for existing investments following termination. The Czech Republic has earlier used the same approach and removed its sunset clauses prior to the agreed termination of several BITs with fellow EU Member States.⁸ However, there have been separate discussions as to the impact of the withdrawal of a State from the ICSID Convention on the filing of a claim.⁹

As explained above, the function of sunset clauses is to continue to protect existing investments for a certain period of time and enable them to rely on the BIT provisions. Seen from this perspective and in the EU context of the termination agreement, the envisaged removal of the legal effects of the sunset clauses contained in the intra-EU BITs¹⁰ could cause a particularly significant abrogation of the rights of investors as granted by the present intra-EU BITs.

Indeed, such a move raises questions as to the respect for the Rule of Law, as the EU termination agreement would also retroactively abrogate the right to access to justice via intra-EU BITs that have already been terminated and whose sunset clauses have already been triggered.

It thus remains to be seen how arbitral tribunals will react to the EU termination agreement regarding intra-EU BITs that was signed by 23 EU Member States on 5 May 2020, should they receive the opportunity to adjudicate on this issue.

See Termination of treaties; Intra-EU objections.