REUTERS | Stephen Hird

The EU flexes its muscles: update on EU foreign investment disputes

On 4 February 2016, the European Commission filed an amicus brief with the US Court of Appeals for the Second Circuit, opposing the enforcement of the controversial International Centre for Settlement of Investment Disputes (ICSID) award against Romania in the Micula case. In its amicus brief, the Commission argued that the award was rendered under an “illegal” treaty and urged the Court of Appeals to overturn a lower court judgment that confirmed the award.

The Micula case

The Micula case relates to an ICSID claim brought under the Sweden-Romania bilateral investment treaty (BIT) whereby it was claimed that Romania breached the BIT by withdrawing certain business incentives when it joined the EU. Shortly after the majority of an ICSID tribunal held that Romania had breached the Sweden-Romania BIT and ordered Romania to pay damages, the Commission issued a suspension injunction against Romania, to prevent it from complying with the damages award. The Commission subsequently issued a decision confirming the injunction and requiring Romania to recover any payment that had already been made by Romania pursuant to the award. The Miculas also brought an action against the Commission seeking an annulment of its decision.

EU’s role in intra-EU investment disputes

The Commission’s intervention in the US proceedings (first in August 2015 before the New York district court, and now before the Court of Appeals) is the latest twist in the Micula saga, which has evolved from a bilateral investment dispute between the Miculas and Romania, into a battle about the future of so-called intra-EU BITs (that is, BITs between EU members states), and the EU’s role in European investment disputes.

In addition to the Micula case, the Commission has also intervened in numerous arbitral proceedings brought under intra-EU BITs, and the Court of Justice of the European Union (CJEU) has held, in several cases, that BITs entered into by member states prior to their accession to the European Union (EU) are incompatible with EU law. In this respect, the Commission has commenced infringement proceedings against a number of EU member states (including Romania), requiring them to terminate their intra-EU BITs. However, the EU’s attempts to eradicate intra-EU BITs have been met with some resistance, with several arbitral tribunals and one member state court upholding the BITs in spite of the EU’s protestations.

Of course, the EU’s strategy in respect of intra-EU BITs is only half of the story. The Treaty on the Functioning of the European Union (TFEU) made foreign direct investment an exclusive competence of the EU. This has placed the EU centre stage in all matters relating to BITs between members states and third countries (in other words, extra-EU BITs).

Extra-EU BITs

The EU has implemented a transitional framework aimed at the more than 1,000 BITs concluded by EU member states with other countries. In broad terms, the framework allows member states to maintain existing extra-EU BITs signed prior to December 2009, at least until a new investment agreement between the EU and the relevant country enters into force. However, BITs signed after December 2009 will need to be reviewed by the Commission to ensure their compliance with EU law.

Likewise, the framework gives the EU a key role with respect to any renegotiation or amendment of existing BITs, and provides for the EU to approve and supervise any future negotiations of new BITs. Furthermore, the EU has passed regulations entrenching its right to participate in proceedings involving EU states, and recently tried to intervene in an on-going ICSID proceeding under the Spain-Guatemala BIT, citing its responsibility for negotiating on behalf of EU member states with external parties and professing to have a “systemic interest” in the interpretation given to investment treaties concluded by EU member states.

However, the most publicised and high profile fight by the EU for greater influence in the ISDS sphere is being conducted in the context of the on-going Transatlantic Trade and Investment Partnership (TTIP) negotiations between the EU and the US, in which the EU seeks to fundamentally reshape the current system of investor-state dispute settlement. Amongst other things, the EU seeks to judicialise investor-state dispute settlement by replacing arbitral tribunals with a new two-instance investment court, staffed by judges appointed by the EU and US. Specifically, the EU’s proposal to the US, published late last year, provides for a Tribunal of First Instance and an Appeal Tribunal for investment disputes falling under the scope of the TTIP, with both tribunals composed of a fixed number of judges appointed for a fixed term.

Reaction

The EU’s proposals have been met with mixed reviews, with some high profile members of the arbitral community voicing their concerns about the proposed reforms. For example, in a recent lecture, Yves Fortier QC argued that the fascination with creating courts fails to acknowledge:

“the contemporary success of international arbitration and the ability it has had to influence and bend states to a system of international general principles”.

Similarly, VV Veeder QC portrayed the idea as unworkable and noted that:

“If users want arbitration, arbitration will continue as it has always. [It] does not depend for its existence upon princes or princesses in the European Commission and parliament, or EU budgets”.

Yet, despite such criticisms, the recently concluded free trade agreement between the EU and Vietnam incorporates many elements from the EU’s investor-state dispute settlement (ISDS) wish list, including a two-tier “investment tribunal system” comprised of a first instance and appeal tribunal. Similar to the EU’s TTIP proposal, the tribunal members are to be selected from an existing list of arbitrators nominated by the EU, Vietnam and neutral states.

As the EU’s free trade agreement with Vietnam and its recent intervention in the Micula case demonstrate, the EU is determined to make its mark and cement its position in the world of ISDS, both within the EU and externally. It will not back down easily. With the latest round of TTIP negotiations having ended on 26 February, and more negotiation rounds planned before the summer, this is certainly a space to watch.

Kirkland & Ellis Chiraag Shah Philipp Kurek

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