Austria, Finland, France, Germany and the Netherlands propose an intra-EU investment agreement with traditional investment-treaty arbitration for all 28 EU Member States

In a document dated 7 April 2016 that entered the public domain last week, the governments of Austria, Finland, France, Germany and the Netherlands (the “Proposing States”) have proposed replacing the existing web of intra-EU bilateral investment treaties (“intra-EU BITs”) with a single, multilateral investment agreement between all 28 EU Member States. Of critical note, the Proposing States expressed their commitment to investment treaty arbitration (“ITA”) as their preferred method of investor-State dispute settlement.

The coordinated replacement of all intra-EU BITs by a single EU multilateral investment agreement (the “EUMI”) would be based on Article 59 of the Vienna Convention on the Law of Treaties. Article 59 provides that a treaty shall be considered terminated when the parties to it conclude a later treaty on the same subject that is meant to replace the initial treaty.

The proposal is for all intra-EU BITs to be terminated immediately upon the conclusion of the EUMI, i.e., without any sunset clauses for the existing intra-EU BITs. The EUMI would also put an end to any sunset clauses contained in any intra-EU BITs that have already been terminated. Despite this approach to sunset clauses, the proposal is that the entry into force of the EUMI would not affect pending arbitration proceedings. This is because the Proposing States envisage putting transitional procedures in place to forestall potentially unnecessary arbitrations being started during the run-up to the entry into force of the EUMI by investors worried that their entitlement to seek ITA would be taken away.

Despite the termination of the existing intra-EU BITs, the Proposing States are adamant about the need to preserve substantive and procedural investment protections for European investors operating within the EU’s internal market.

The Proposing States presented six arguments for safeguarding public international law investment protections and the benefit of binding third-party arbitration in the EUMI:

1. Any termination of intra-EU BITs would need to address the procedural constraints and limitations (presumably, including the obvious violations of international human rights norms) that would result from trying to eliminate the effect of existing sunset clauses contained in intra-EU BITs;

2. An outright termination of intra-EU BITs would affect EU trade policy: it would make it next to impossible for the EU to take strong positions on the protection of EU investors operating overseas (including in relation to investor-State dispute settlement mechanisms such as ITA);

3. An outright termination of intra-EU BITs may negatively affect investment treaties between EU Member States and third States;

4. Replacing the existing system of intra-EU BITs with the EUMI would clarify and reinforce the status of investment protection within the EU;

5. The existence of the EUMI would level the playing field between EU investors investing within the EU, on the one hand, and non-EU investors investing within the EU and covered by investment protection treaties between their State of nationality and EU Member States, on the other;

6. The EUMI would contribute to the EU Commission’s plan to create an investment-friendly environment.

In terms of substantive protection of investments by EU investors within the EU internal market, the Proposing States note that protections such as fair and equitable treatment, full protection and security and compensation in case of expropriation are already recognised in the EU legal order. However, they are scattered within various EU and Member State legal instruments. The EUMI would restate and codify these standards of protection to improve their consistent and predictable application.

In relation to procedural protections, the Proposing States noted that investor-State disputes would “usually” be subject to EU Member States’ domestic courts, in relation to issues subject to investor-State dispute settlement. However, since alternative mechanisms may be more suitable, the Proposing States supported third-party dispute resolution. One idea was to have a voluntary investor-State mediation scheme. More importantly, however, the Proposing States expressed the view that a binding and enforceable mechanism for investor-State dispute settlement remained necessary.

By way of selecting such a binding and enforceable investor-State dispute settlement mechanism, the Proposing States remain committed to ITA. Nonetheless, they identified three possible procedural options for dispute resolution under the EUMI: (i) conferring jurisdiction on the Court of Justice of the European Union (the “CJEU”); (ii) a system based on the Unified Patent Court; and (iii) dispute settlement via ITA at the Permanent Court of Arbitration (the “PCA”).

The Proposing States expressed a clear preference for the third option, that is, ITA at the PCA. Such ITA would be based upon a to-be-agreed “Compromis” on investment disputes. This “Compromis” may be modelled on the recent EU investment court proposal (see Volterra Fietta’s prior Client Alert of 24 March 2016, available here) and would rely on Member State-nominated arbitrators on the existing roster of the PCA. In any event, any new investor-State dispute settlement scheme would have to comply with the EU legal system and in particular with the competence of the CJEU to finally interpret EU law.

The Proposing States apparently hope to discuss the proposal at future technical meetings with the objective of drafting a legal text.

Comment

The EUMI proposal is a timely development in the discussion about the future shape of investor-State dispute settlement. It reflects the continued general (albeit not unanimous) commitment of States to ITA, as opposed to other forms of investor-State dispute settlement. That same general commitment to ITA was demonstrated in the investor-State dispute settlement provisions of the recent Trans-Pacific Partnership treaty (an agreement covering some 40% of the world’s trade and investment flows that provides for investment treaty arbitration as the method of investor-State dispute settlement).

Although diplomatically expressed, the EUMI proposal – particularly the preference for the continued availability of ITA – represents a fundamentally different view of the future of investor-State dispute settlement from the European Commission’s recent attempts to promote its vision of investor-State dispute settlement (via bodies over whose performance the European Commission would retain close control). The European Commission’s efforts to generate interest in a shift away from ITA to its preferred vision of investor-State dispute settlement have met with little success to date. Apart from Canada’s and Vietnam’s agreement to accept the European Commission vision in the Canada-EU Comprehensive Economic and Trade Agreement and in the Vietnam-EU Free Trade Agreement, respectively, the European Commission has notably failed to generate significant enthusiasm for its vision.

The Proposing States’ list of six reasons to continue with strong substantive protections for investors and neutral third-party dispute resolution mechanisms, notably preferring ITA, show a focus on the benefits of stable, transparent and enforceable investment protections even within the EU single market. The EUMI proposal also appears to be informed by a conception of the EU as outward-looking and part of a larger legal and economic world order. It will be interesting to see whether the Proposing States’ initiative will be supported by other EU Member States (and how the European Commission will respond).

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