REUTERS | Lucy Nicholson

Quo vadis investment protection within the EU?

Following the now infamous Achmea judgment of the Court of Justice of the European Union (CJEU) in March 2018, which declared the use of the investor-state arbitration clause in the Netherlands-Czechoslovakia bilateral investment treaty (BIT) (as it then was) incompatible with EU law, the EU member states quickly issued political declarations in which they announced their intention to terminate all their intra-EU BITs.

Indeed, on 5 May 2020, the so-called termination agreement was signed by 23 EU member states and on 29 August 2020, the agreement entered into force for four of those member states; Hungary and Denmark have ratified it, while Spain and Slovakia have declared it provisionally applicable.

Assuming that in the near future all 23 EU member states will ratify the termination agreement, most intra-EU BITs will indeed be gone. The question whether it is legally acceptable to also declare the sunset clauses contained in those intra-EU BITs moot and inapplicable for investments already made will unquestionably be addressed by arbitral tribunals in due course.

In any event, the working hypothesis of the EU and its member states is that from now on, investment arbitration disputes between European investors and EU member states is something of the past. Instead, European investors can only rely on domestic law and domestic courts of the EU member states, as well as EU law and potentially the CJEU in order to enforce their rights.

At the same time, the European Commission is cautiously recognising the fact that there might be deficiencies regarding investment protection within the EU. This should be addressed in order to attract more foreign direct investments (FDI), which have been decreasing over the past years.

Accordingly, the European Commission has recently initiated a public consultation online, an intra-EU investment protection and facilitation initiative, which closed on 8 September 2020. The questionnaire consisted of 26 questions, which were subdivided into the following main sections:

  • General questions.
  • Rules protecting investments within the EU.
  • Improving enforcement of investment rules within the EU.
  • General questions on the overall EU investment protection system.
  • Facilitating and promoting cross-border investments.

This blog post will focus on the most important aspects.

Rules protecting investments within the EU

The questions in this blog focus on the specific rights granted to cross-border investors within the EU. The aim is to understand the extent to which these rules are known and effectively enjoyed by investors. The questions specifically refer to the following rights and principles:

  • The right to reparation in case of expropriation.
  • Principles of legal certainty and legitimate expectations.
  • Principle of non-retroactivity.
  • Principle of good administration.

From the way the questions and possible answers have been formulated, it appears that the European Commission considers that all these rights and principles, which form the backbone of any BIT, are already guaranteed by various EU legal provisions and the EU Charter of Fundamental Rights. At the same time, the questionnaire acknowledges that those provisions are scattered in different legal instruments and are often applied differently within various EU member states.

Interestingly, the European Commission stresses the importance of the principle of good administration, which includes, among other things: that affairs are handled impartially and fairly; the right to be heard before any individual measure which would affect him or her directly is taken; the right to access documents; and the obligation of the administration to give reasons for decisions.

However, as is well known, many EU member states are far away from guaranteeing the principle of good administration as defined by the European Commission. Moreover, so far there is little jurisprudence, which gives this principle sufficient meaning in order to be turned into an effective right.

At the same time, the questionnaire also highlights that EU member states have the right to regulate, which consequently means that investment protection rights are not absolute and need to leave member states with sufficient policy space to protect public interests.

Improving enforcement of investment rules within the EU

This blog also emphasises the working hypothesis of the European Commission, namely, that where necessary, all investors within the EU need to seek legal remedies for disputes related to their investments exclusively before national courts.

Reference is made to article 19(1) of the Treaty on European Union (TEU), which obliges the EU member states to provide remedies that are sufficient to ensure effective legal protection in the fields covered by Union law. Moreover, under article 47 of the EU Charter of Fundamental Rights, which is directly applicable, everyone has the right to an effective remedy and to a fair trial. National justice systems in the Union are subject to standards of independence, quality and efficiency, spelled out in case law of the Court of Justice and of the European Court of Human Rights (ECHR).

As far as compensation for expropriation is concerned, the questionnaire states that under EU law, individuals once harmed by state measures breaching EU law have a right to reparation by the state. For instance, under certain conditions, damages caused by state measures breaching EU law may give the right to claim damages. The effective enforcement of this right may, however, be difficult when investing cross-border.

Again, this reveals the thinking of the European Commission that, on paper, the enforcement of investment protection rules within the EU is already adequately dealt with, but there may be some practical difficulties for investors. Also, it is noteworthy that the right to claim damages (monetary compensation) is considered an exception, whereas under BITs, this is the usual way of reparation.

However, as the annual EU Justice Scoreboard of the European Commission amply illustrates, the inadequacies of the judicial system in many EU member states are abundant. The recent infringement proceedings initiated by the EU against Poland and Hungary for alleged Rule of Law breaches and the subsequent judgments of the CJEU are further evidence of the existing shortcomings within the EU. In addition, the Rule of Law situation in Romania and Bulgaria is deteriorating and closely watched by the EU institutions.

Towards a new EU investment protection policy

While the outcome of the public consultation is still unknown, one can nevertheless identify some of the main pillars of the EU’s investment protection policy post-termination agreement.

Firstly, arbitration seems to be a no-go area for the European Commission. Instead, and as can be expected, domestic courts will be the only avenue for European investors to enforce their rights. In other words, the preliminary ruling system, in which the domestic courts operate under the supervision and ultimate control of the CJEU remains the only dispute resolution tool that the European Commission and the CJEU consider to be compatible with EU law.

Second, and as a direct consequence of the above, EU law as generally understood, that is, primary and secondary EU law, the EU Charter of Fundamental Rights and by reference, the European Convention of Human Rights (ECHR), is the only legal instrument on which European investors can rely upon when trying to enforce their rights.

Third, the European Commission does not seem to be convinced that EU law is suffering from significant lacunas that would need to be filled with new legal instruments. Instead, the European Commission appears to be confident that all the necessary elements for a high level of investment protection are more or less already in place.

At a maximum, the European Commission admits that there may be a need to present and to explain the already existing rights in a more coherent fashion. In addition, an increased used of digitalisation appears to be viewed as a panacea that will remove any existing obstacles.

In fact, following the recent presentation of the State of the Union address of the President of the European Commission, the action plan for the coming period mentions the proposal for an EU Investment and Facilitation Regulation. While it is unclear what the contents of such a regulation will be, it could provide the necessary investment protection for European investors. Indeed, if this is supplemented with the establishment of an European Investment Court, this is considered by many users to be necessary elements for replacing the intra-EU BITs.

However, if that is not going to materialise, this would be yet another proof that the European Commission is operating in a parallel universe, in which all EU member states perfectly adhere to the Rule of Law and all domestic courts are able and willing to apply EU law properly and thus protect the rights of European investors effectively. Sadly, however, abundant evidence shows that the reality in many EU member states is in fact rather depressing.

Thus, as long as the European Commission, the Council, the European Parliament and the CJEU refrain from accepting this reality, little progress will be made and this public consultation could turn out to be a wasted opportunity.

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