A recent legal setback may embolden the European Commission to push harder for the phase out of the international treaties that protect FDI flows within the EU. 

The focus of the European Commission's ire is an ageing network of bilateral treaties, most of which were executed by western European governments with eastern counterparts before the latter joined the EU family. The treaties assured EU investors that their ventures in former Communist bloc countries would not be exposed to undue political risks, such as expropriation without compensation. 


However, now that countries such as Poland, Hungary and the Czech Republic are part of the EU, the European Commission views these treaties as a threat to the hegemony of EU law and EU courts. 

Exhibit A in the commission's case against such bilateral pacts is an international arbitration whose final chapter was written in February. The dispute pitted certain Swedish investors against the government of Romania, and centred on the latter's premature withdrawal of subsidies that had been earlier extended to the Swedes in return for their making investments in "disadvantaged" regions of Romania. 

Romania contended that the roll-back was needed in order to comply with EU state aid rules in the lead up to Romania's EU accession. The Swedish investors countered – and a trio of arbitrators ultimately agreed – that Romania had given the Swedes a "legitimate expectation" that the relevant subsidies would run for a full decade. By removing the subsidies early, arbitrators found that Romania should pay the Swedes $250m in compensation. 

The European Commission was apoplectic at the unwillingness of arbitrators to defer to the supremacy of EU state aid rules. For the commission, the arbitration ruling highlighted the legal chaos that can result when intra-EU investment disputes are outsourced to outside arbitrators, rather than the EU court system. 

However, a subsequent bid by Romania and the European Commission to have the arbitration decision overturned by a higher panel at the Washington, DC-based International Centre for Settlement of Investment Disputes has failed. 

The European Commission may have lost the battle, but it is determined to win the war. Romania has been ordered not to pay the arbitration ruling – as any payment would be construed by Brussels as state aid by another name. Moreover, when the Swedish investors have taken the arbitration judgment to various jurisdictions in an effort to seize Romanian state assets located outside of Romania, Brussels has stepped in and urged the courts to find that the arbitration ruling runs afoul of EU law.

The European Commission claims to have had some success already, convincing a first-instance court in Brussels that the arbitral award cannot be enforced. 

The fight is far from over, but the European Commission appears unwilling to compromise on the question of these bilateral treaties. EU investors doing business in other EU countries may need to get used to relying solely on the existing court system, rather than international treaties (and arbitration). Other options, such as political risk insurance and one-off contracts, may also provide greater legal comfort.  

Luke Eric Peterson is the editor of InvestmentArbitrationReporter.com, an online reporting service tracking FDI disputes between foreign investors and states.