July 17, 2015

EC's Infringement Proceedings for Intra-EU BITs Cause Uncertainty for Investors

On 18 June 2015, the European Commission initiated infringement proceedings against five member states of the European Union for intra-EU bilateral investment treaties' (BITs) incompatibility with Article 351 of the Treaty on the Functioning of the European Union (TFEU). The infringement proceedings further pressure these states (Austria, the Netherlands, Romania, Slovakia and Sweden) to terminate their intra-EU BITs.

The Argument Over Intra-EU BITs

The Commission has long argued that intra-EU BITs are outdated and no longer necessary because the same protection is now afforded to investors pursuant to various EU rules in the single market, including those on cross-border investments (in particular the freedom of establishment and the free movement of capital). The Commission has also been arguing that intra-EU BITs are often incompatible with EU law. Perhaps the clearest example of the Commission’s “dislike” for intra-EU BITs was when it issued the suspension injunction against Romania in Ioan Micula, Viorel Micula and others v Romania (ICSID Case No ARB/05/20). In the May 2014 case, Romania lost an investment treaty arbitration and was required to pay a substantial sum to the claimants. The Commission’s formal conclusion in its action against Romania was that any payment by Romania in accordance with the terms of the award in that case would infringe EU rules on state aid. Accordingly, the Commission directed Romania not to satisfy the award and to recover any sums already paid. The claimants in Micula brought an action against the Commission later that year and the outcome is currently pending.

Uncertainty for EU Investors

The Commission’s action in the Micula case and its recent proceedings against the five member states raise various issues. One in particular is that of legal certainty afforded to existing and potential investors. For example, what mechanism, if any, can and should an existing investor use to bring a claim against one of the member states in question? Potential investors 20 years ago knew of the option to bring a claim in a national court (that is if the local legislation provides for a relief sought), but this is probably not what those investors hoped for. Even a fairly unsophisticated investor understands the advantages of arbitration when a sovereign state is concerned. Further, can a potential investor rely on the “promises” given by a member state in an intra-EU BIT when it already knows or at least suspects that the Commission is likely to challenge any such award rendered under an intra-EU BIT, considering it incompatible with EU laws?

It is unclear how the infringement proceedings may affect intra-EU BIT claims currently being pursued by investors — but it is clear that they add further uncertainty for both investors and member states. It has been suggested that the investors presently relying on intra-EU BITs as a form of protection for their investment in the EU might want to consider restructuring such investments. This can be done by changing the seat of the holding company from an EU country to a non-EU country which still has an appropriate BIT with the EU country the investor hopes to bring proceedings against. Although restructuring one’s holdings to take advantage of another BIT is not novel in the world of investment treaty arbitration, it is often not straightforward and may not always work, especially as different BITs may have different types of protections afforded. Finally, it is also unclear whether any alternative to arbitration under intra-EU BITs will follow. Although the EU Commissioner for Financial Services has recently suggested that some form of “investment mediation” will be established, this is unlikely to be accomplished any time soon.

(Written with research assistance from Christina Mouktari, summer intern at Faegre Baker Daniels.)

This legal update also appeared in Law360 on July 29, 2015.

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