Client Alerts

European Commission proposes Regulation to manage financial responsibility flowing from investor-State disputes under international agreements to which the European Union is party

Volterra Fietta Client Alert
27 July 2012

On 21 June 2012, the European Commission (the “Commission”) issued a proposal for a Regulation establishing a framework for the allocation of financial responsibility arising from investor-State disputes under international agreements to which the European Union (“EU”) is party (“the Regulation”).

Background

With the entry into force of the Lisbon Treaty, the Commission claims to have acquired the exclusive power under EU competence to conclude international investment agreements with third countries. There has been no material response from Member States and it seems that the Commission won this battle even before it started. Subsequently, the Commission has entered into investment agreement negotiations with a number of countries, such as Canada, India and Singapore.

Investment agreements typically allow an investor from one contracting State to bring a claim against the other contracting State, usually through international arbitration. That can result in an award being made and the respondent State paying monetary compensation to the investor. The Regulation proposed by the Commission seeks to provide a clear framework for the allocation of financial responsibility between Member States and the EU itself when such compensation is to be paid. Not surprisingly, the framework involves the Commission taking on more power but without any democratic accountability.

Allocation of financial responsibility within the EU

The core principle underlying the Regulation is that financial responsibility resulting from investor-State
disputes under investment treaties should be attributed to the actor (as between the EU and Member States) which has caused the violation of the obligation under the investment treaty.

When the violation is caused by an act of the EU, or was required by EU law, the Regulation provides that financial responsibility should be borne by the EU (with the curious exception of situations where the violation was required in order to rectify a pre-existing violation of EU law). When the violation is caused by an act of a Member State, the Regulation provides that the Member State in question should bear the financial consequences arising from the violation, except where the act was required by EU law. The Regulation provides that, when a Member State bears the potential financial responsibility arising from a violation, that Member State is permitted to act as the respondent in the consequent arbitration under the investment treaty in order to defend the act that gave rise to the dispute.

Notwithstanding the general position regarding the allocation of financial responsibility outlined above, the Regulation also qualifies these rules in several ways, without prejudice to the allocation of financial responsibility. For example, a Member State may decline to act as a respondent when it is otherwise entitled to do so, allowing the EU to take its place. The EU may also act as a respondent when it is deemed essential “in order to ensure that the interests of the Union can be appropriately safeguarded”, even in disputes for which a Member State is otherwise financially responsible. Of course, it will be left to the Commission to decide when it is essential for it to do so, which itself raises any number of concerns for those interested in such issues as democratic accountability and transparency.

Where a Member State acts as a respondent, it is obliged to provide the Commission with all documents relating to the proceedings and to keep it informed of all “significant procedural steps” in the case. This will no doubt raise concerns about obligations of confidentiality required by a number of procedural regulations contained in in relevant arbitration rules.

A Member State may also be required by the Commission to adopt a particular position regarding “any point of law raised by the dispute or any other element having a Union interest”. The Commission may also require a Member State to lodge an application for annulment, appeal or review of an award or, indeed, make the decision to settle a dispute if the Commission considers that the “overriding interests of the Union so require”, even if the Member State concerned does not agree. Again, this will raise concerns for those interested in such issues as democratic accountability and transparency. As an aside, it will be interesting to see how the Commission deals with the issues of corruption that arise with increasing frequency in investment disputes, given the endemic and notorious nature of its own corruption.

Payment of Awards

Where a Member State has acted as a respondent in a dispute, it is responsible for the payment of that award. Where the EU has acted as a respondent, it is responsible, unless a Member State has accepted financial responsibility for the dispute.

In the absence of agreement between the EU and the Member State in question as to the division of financial responsibility, the Regulation provides that any award rendered against the EU will be paid by the EU. However, the Member State in question will then compensate the EU budget. By proceeding in this manner, the Regulation as drafted by the Commission ensures that the Commission wields the threat of budgetary sanction to enforce its will in relation to investment disputes between Member States and investors from outside the EU on an otherwise potentially recalcitrant Member State.

Comments

Moving forward, the Regulation will now be discussed by the Council of Ministers and European Parliament. If adopted, the Regulation will form a significant new step in the establishment of a comprehensive EU investment policy. As usual, the Commission is seeking ever-greater powers for itself whilst at the same time neatly side-stepping issues of democratic accountability, transparency and, indeed, its own corruption. It will be interesting to observe whether the Council of Ministers (particularly capital exporting countries) or the European Parliament will require any modification to the present draft.

A number of issues still remain unclear. The EU is, for example, already party to the Energy Charter Treaty. The Commission is also currently negotiating a number of international investment agreements. Now, it intends to control, directly or indirectly, the resolution of investment disputes with non-EU investors under existing bilateral investment treaties. However, the EU is not a signatory to the ICSID Convention (and cannot become one without modification of that Convention). It is not clear how the Commission would purport to step into the role of defending a claim brought to ICSID. In addition, it is possible to foresee that conflicts may arise between claimants or arbitral tribunals, on the one hand, and the Commission with regards to identifying the respondent in a given dispute. Just because the Commission wants to be a respondent does not mean that an investor is required to recognise it as such under a given investment treaty. Of course, it might be that a Member State is formally a respondent but the legal representation is conducted by the Commission in that Member State’s name.

In any event, no doubt this and other issues (except issues involving democratic accountability, transparency, and the Commission’s own corruption) might be taken up and given due consideration in the fullness of time. On the other hand, the Commission might just get away with pushing this significant development through the hoops without being spotted.