In July, the European Parliament voted to adopt its recommendations to the Transatlantic Trade and Investment Partnership (TTIP). Though not legally binding, the text represents an important political signal for trade diplomats because the European Parliament ratifies trade agreements once signed. And the text calls for investor-to-state arbitration (ISDS) to be phased out, although it does not fully rule out this method of dispute resolution altogether. Bernd Lange, a member of the European Parliament within the Progressive Alliance of Socialists and Democrats and rapporteur of the resolution declared: “ISDS is dead.”

ISDS, championed by European governments in the past, is aimed at giving investors confidence that they will be treated according to due process in a host country. It is a standard feature of international trade investment agreements, and is practised in the US. But ISDS is new to Brussels because investment was for so long outside EU responsibility.

In early 2015, France and Germany made proposals to reform ISDS in TTIP and the EU. ISDS has been criticised for its real or imagined interference with a government’s policies or the lack of transparency of its arbitration proceedings. The proposals from Paris and Berlin seek stringent conditions on investors’ right to sue a government (such as fines for ‘frivolous’ cases), and suggest new rules regarding the nomination of arbitrators. France has started fleshing out ideas for a potential future European investment court.

Fewer cases

The number of ISDS cases has increased significantly in recent years. The EU dealt with 69 cases as of April 2015, according to the International Centre for Settlement of Investment Disputes. Spain (with 13 known cases), Hungary (12 cases) and Romania (11 cases) are grappling with particularly long lists.

Four-fifths of EU cases involve EU-based firms. Investors invoke a bilateral investment treaty (BIT), or the Energy Charter Treaty (ECT). The latter protects energy investors against arbitrary and discriminatory expropriation on the Eurasian landmass. The EU is a full party to the ECT, alongside its member states.

Brussels wants to get rid of intra-EU arbitration cases. For several years it has been asking national governments to terminate their intra-EU BITs, which contain ISDS clauses. So far, only Italy has complied. It is also trying to induce member states to renounce the 10- to 20-year sunset clauses entailed by these BITs, which extend their validity beyond termination.

In June 2015, the European Commission launched infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden for retaining their mutual BITs. These cases could be referred to the European Court of Justice, and more could follow. At the same time, the European Commission is trying to eliminate the ability of EU-based firms to sue EU governments under the ECT.

Courtroom drama

Few governments have made statements on the European Commission’s move. The Slovakian government, which has contested an arbitral ruling in favour of the Dutch insurance company Achmea under an EU Netherlands BIT but failed to win its case at a tribunal in Frankfurt in 2014, does not consider it necessary to formally terminate intra-EU BITs. Yet Slovakia is relieved that the matter could be resolved by a Court of Justice of the EU ruling.

The European Commission is also involving itself in arbitration proceedings by filing amicus curiae briefs. In a highly controversial battle between a Swedish investor and the Romanian government (Micula vs Romania), the European Commission asked Bucharest not to honour an arbitral award in a dispute over cancelled subsidies that goes back to the time before Romania was an EU member. This would, in the eyes of the European Commission, constitute illegal state aid and violate EU competition law. In early 2015, the case was brought for resolution before the Court of Justice of the EU.

“Whatever the final outcome of the Micula case, it makes one thing very clear: even if the investor has won a case, they will eventually be unable to effectively enforce it against an EU member state,” says Nikos Lavranos, secretary-general of the European Federation for Investment Law and Arbitration.

This conflict is a result of the transfer of competency on FDI away from the member states to Brussels by the Lisbon Treaty, the set of fundamental laws regulating the functioning of the EU since late 2009. Several EU member states resisted the move, while the European Commission viewed the 1300 BITs signed at that time by European capitals as potentially contrary to EU law. While a compromise was found over BITs with third parties, which remain in place until a new treaty is signed by the EU, intra-EU BITs remained an unresolved matter.

Investor protection

The European Commission argues that all member states are subject to the same EU rules in the single market, including those on crossborder investments. “All EU investors benefit from the same protection thanks to EU rules (for example, non-discrimination on grounds of nationality). By contrast, intra-EU BITs confer rights on a bilateral basis to investors from some member states only... such discrimination based on nationality is incompatible with EU law,” it said in a statement in June.

Critics of the European Commission argue that eliminating these BITs undermines investor rights as no reliable EU mechanism exists to protect investors. Many EU countries still have weak justice systems that cannot guarantee sufficient protection for foreign investors. 

Proponents of an EU-level investment protection policy, which also responds to some of the public criticism about how investor-state arbitration cases work, have criticised both member states and the Court of Justice of the EU. The court has increasingly been assertive about its monopoly over EU law. In Opinion 2/13 of December 18, 2014, it held that the EU could not join the European Convention of Human Rights, a 48-member international body based in Strasbourg, or attend the Court of Human Rights, despite the fact that the Lisbon Treaty’s preamble explicitly mandates the EU does so. The Court of Justice of the EU argued that the Strasbourg court’s rulings could undermine “the autonomy of the EU legal system”. This opinion forms the backdrop of the refusal that same month by member states to let Brussels become a party to the new Uncitral Rules on Transparency in Treaty-based Investor-State Arbitration. In return, Brussels has been urging states to adopt these rules, but many have resisted.

Trouble brewing

Berlin’s stance has surprised many. In 2009, Germany argued that the transfer of competency over investment protection to the EU would undermine the high level of investor rights its own BITs provide. Since 2013 it has become highly critical of ISDS. Meanwhile the German capital remains silent about the BITs it continues to uphold with 14 EU member states in central and south-eastern Europe, the Baltics, and with Malta, Greece and Portugal.

Paris for its part is not pleased with the confrontational, judicial route taken by the EU Commission, according to government sources. France is planning to keep its intra-EU BITs until an overarching EU level solution is found.

With the ECT, the European Commission is treading a fine line. The agreement is important for energy security and relationships with former Soviet states. While Brussels has lauded Italy for dropping its BITs with other EU member states, it is trying to convince the country to reverse its decision in January 2015 to pull out of the ECT altogether. Contrary to intra-EU BITs, the ECT involves third parties: in order to abolish intra-EU arbitration cases, says Anna de Luca, research fellow in international law at Bocconi University in Milan, “the European Commission needs first of all an agreement between the member states and then there is the need to discuss this option with the other contracting parties”. 

As the EU’s investment regime enters a legal limbo, investors are less and less certain about what treatment awaits them in Europe.