Sunset Clause: a strategic instrument to protect investments abroad

Source: Giada Gubert intern at the Treviso-Belluno|Dolomiti Chamber of Commerce

In international law, the use of the so-called Sunset Clause is widespread in many international agreements, so much so that the clause itself is a key element in foreign investment treaties.
This often-overlooked clause plays an important role in supporting the principle of legal certainty by protecting the legitimate expectations of investors.

But what exactly is a sunset clause, what is its specific function, and what guarantees does it offer the foreign investors?

Definition of Sunset Clause

The Sunset Clause ensures that all investments made before the termination of the treaty governing them continue to be protected for a specified period of time, typically ranging from 5 to 10 years. In other words, the provisions contained in the treaty will remain binding for a period of time even after the bilateral treaty is terminated.

It is important to note that the period of additional protection offered by the Sunset Clause extends only to investments made before than the termination of the treaty. Investments already concluded or not yet strated at the time of termination do not enjoy this protection. Defining when an investment is to be considered terminated or started are the provisions contained in the treaty and negotiated by the parties. Should a dispute arise, the interpretation of these provisions is up to the competent court.

A typical example of a Sunset Clause in one of its possible formulations is contained within the Italian Model BIT (2022) Art. 36(3), namely:

In the event that the present Agreement is terminated pursuant to paragraph 2 of this Article, its provisions shall continue to be effective for a further period of five (5) years from the date of termination, with respect to covered investments made before the date of termination.

Function

The main function of the Sunset Clause is to protect the legitimate expectations of investors, who have invested in the host State on the basis of the protection offered to them by the existing bilateral treaty.

In this regard, it should be kept in mind that foreign investments – especially in sectors related to oil, gas, and large infrastructure – are long-term projects, which may develop well beyond the initial term of the BIT. In such cases, therefore, the termination of the treaty in the absence of a sunset clause would leave all existing investments at the time of termination completely unprotected.

Specifically, depending on the wording of the sunset clause within the treaty, this ensures that investors of ongoing investments:

• Enjoy a transition period, in which to take appropriate measures adapting to the situation after the termination of the BIT
• Continue to enjoy, during this “transition period,” the protection provided by the treaty with respect to provisions related to dispute resolution. This condition is particularly important as it allows investors to enforce these provisions against the host State and thus protect themselves, especially in the event of unlawful expropriation.

Effect

Regardless of the specifics of Sunset Clauses contained in each specific treaty, they generally provide that investors of ongoing investments at the time of treaty termination will continue to enjoy substantive rights under the treaty, may terminate ongoing proceedings, and possibly retain the right to initiate proceedings after the treaty is terminated, for the period defined by the clause.

At the end of this further period, the treaty will finally cease to produce legal effects.

Case Histories

• Italy-Turkey BIT: for investments made before the date of termination of the treaty, if the treaty itself is not renewed, the provisions contained therein remain applicable for the following 5 years.
• EU-Singapore and EU-Vietnam Free Trade Agreements: also include provisions on foreign investment and both contain a sunset clause that extends the duration of protection to ongoing investments by 20 years if the relevant BITs are terminated.
• Article 30.8 of the Comprehensive Economic and Trade Agreement (CETA): replaces the sunset clauses of BITs concluded between Canada and individual EU member states and provides a 3-year sunset clause, which applies specifically to dispute settlement, for investments still in progress related to bilateral treaties that have now ceased.
• Marco Gavazzi and Stefano Gavazzi v. Romania case: in 2012 the investors initiated ICSID arbitration proceedings as provided for in the Italy-Romania BIT. The BIT in question had already been terminated consensually by the parties in 2010, in order to comply with a request from the European Commission to terminate intra-EU investment agreements. This was possible because of the sunset clause in the agreement, which allowed investors with ongoing investments prior to the termination of the BIT to initiate arbitration proceedings for an additional period of five years.

Sources:

Mundi, J. (2023). Wiki Note: Sunset Clause. [online] jusmundi.com. Available at: https://jusmundi.com/en/document/publication/en-sunset-clause#:~:text=Sunset%20clauses%20. 

Kouroutakis, A. (2022). Sunset Clauses in International Law and their Consequences for EU Law Policy Department for Citizens’ Rights and Constitutional Affairs Directorate-General for Internal Policies PE. [online] EU Policy Department for Citizens’ Rights and Constitutional Affairs. Available at: https://www.europarl.europa.eu/RegData/etudes/STUD/2022/703592/IPOL_STU(2022)703592_EN.pdf 

August Reinisch, Sara Mansour Fallah, Post-Termination Responsibility of States?—The Impact of Amendment/Modification, Suspension and Termination of Investment Treaties on (Vested) Rights of Investors, ICSID Review – Foreign Investment Law Journal, Volume 37, Issue 1-2, Winter/Spring 2022, Pages 101–120, https://doi.org/10.1093/icsidreview/siab023 

Mundi, J. (2023a). Wiki Note: Denunciation of Bilateral Investment Treaties. [online] jusmundi.com. Available at: https://jusmundi.com/en/document/publication/en-denunciation-of-bilateral-investment-treaties 

Oliva, R. (2022). Il trattato bilaterale di investimento (BIT) tra Italia e Turchia. [online] Arbitrato in Italia. Available at: https://www.arbitratoinitalia.it/2022/09/13/il-trattato-bilaterale-di-investimento-bit-tra-italia-e-turchia/

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