European Reform of Investment Protection & Investor-State Dispute Settlement

Upon entry into force of the Lisbon Treaty on 1 December 2009, exclusive competence relating to Foreign Direct Investment (“FDI”) was transferred from the EU’s Member States to the EU.  This provided the EU with a unique opportunity to set a new agenda for investment protection and the settlement of investor-state disputes between the EU block and third states.
 
However, the entry into force of the Lisbon Treaty also created some uncertainty as to the status of the circa 190 bilateral investment treaties (“BITs”) concluded between EU Member States (“intra-EU BITs”), and the more than 1,200 BITs concluded between EU Member States and third states (“extra-EU BITs”).  Whilst considerable uncertainty remains as to the legal status of intra-EU BITs, the EU has since implemented transitional arrangements seeking to clarify the fate of extra-EU BITs.  These rules point towards a growing role of the EU in negotiating BITs on behalf of EU Member States, and the EU’s possible participation in investment arbitrations between Member States and third states.  However, the full extent of the EU’s envisaged reform of the European investment protection framework only becomes clear when considering the terms of the new investment agreements being negotiated at EU level. 
 
The EU’s proposed reforms, many of which have been built into the proposed EU-Canada free trade agreement, are aimed at both substantive investment protection standards as well as the dispute settlement process in general.
 
In this context, it is expected that future EU agreements will reaffirm the state’s right to regulate to pursue legitimate public policy objectives, and at the same time narrow the concept of indirect expropriation by reference to a detailed set of provisions delimiting its scope.  Similarly, future EU agreements are likely to include a precise “closed list” definition of the fair and equitable treatment (“FET”) standard.  Furthermore, it is expected that future EU agreements will seek to exclude shell companies from the treaty’s protection, requiring an investor to have substantial business operations in the territory of the relevant treaty party.
 
As regards the EU’s proposed reform of the dispute settlement system, future EU agreements are likely to include provisions preventing investors from bringing “frivolous” claims.  For example, new EU agreements envisage the creation of committees to examine claims relating to the financial services sector or tax measures, with the ability to prevent what they deem to be frivolous claims to go to arbitration.
 
Moreover, it is expected that the agreements will include limitation periods after which a claim cannot be brought.  Future EU agreements will most likely also put a strong emphasis on transparency, allowing public access to hearings, allowing interested parties (e.g. NGOs) to make submissions, and providing for the publication of a wide range of documents.  The EU is also seeking to introduce a code of conduct for arbitrators as well as an agreed list of individuals who can act as arbitrators in a particular dispute.  The EU is furthermore seeking to introduce a procedure allowing the contracting States to make submissions in on-going proceedings and to issue binding interpretations of the treaty.  Moreover, future EU agreements may provide for a possible appeals mechanism.
 
These proposed fundamental reforms have attracted substantial criticism, not only from investors but also from certain European governments.  Public concern has focussed in particular on the draft trade agreement being negotiated between the EU and the US, the Transatlantic Trade and Investment Partnership (“TTIP”). 
 
For example, the European Federation for Investment Law and Arbitration (“EFILA”), a recently formed think tank that aims to be the “main voice” of users of investment arbitration at EU level, warned that the EU’s approach to preventing the so-called “frivolous” claims, and in particular the proposed establishment of committees, composed of state officials equipped with the power to make determinations without giving any opportunity to the investor to present its case, will inevitably politicise disputes and may prevent access to justice for investors.
 
EFILA further cautions that the use of binding interpretations would be open to abuse by the contracting States, and could lead to a denial of justice for the investor where the binding interpretations amount to de facto amendments of the agreement, or to violations of the principle of non-retroactivity where such binding interpretations are given with retroactive effect.
 
Whilst the EU’s aim of making investment arbitration more transparent has been generally welcomed, critics of the proposed approach nevertheless point to the general idea of confidentiality of arbitration, and point to the risk of making virtually all documents related to an arbitration public, especially where particularly sensitive documents are involved. 
 
The EU’s proposed “closed list” definitions of the FET standard and the principle of indirect expropriation have also been subject to criticism.  EFILA points out that the FET standard serves as an important gap-filling device, and that the concept of indirect expropriation is inherently case-specific.  As such, the EU’s proposed restrictions of those concepts are said to increase uncertainty and create further disputes.  On the same basis, EFILA questions the need to include a right to regulate, which could instead be achieved by careful drafting of the protection standards and exceptions.
 
Concerns have also been raised about the EU’s proposed reforms regarding the appointment and regulation of arbitrators, and in particular the inherent issues in having a pre-set lists of arbitrators.  In this context, EFILA point to the obvious practical difficulties, as well as issues of party equality (at least as far as investors are concerned).
 
Other critics have also attacked the EU’s proposed reforms as nonsensical, including the proposal to automatically characterise the use of shell companies to bring claims as abusive. 
 
It appears that investment tribunals are similarly apprehensive to embrace the EU’s involvement in the European investment protection sphere.  For years, tribunals have resisted the EU’s view that intra-EU BITs are invalid, nevertheless finding jurisdiction over such disputes; and recently, an ICSID tribunal rejected the EU’s first attempt to intervene in an extra-BIT dispute.
 
However, the EU’s proposed reforms find support on the international plane.  Many of the proposed terms in the new generation of EU agreements have their counterparts in the North American model of investment protection.  For example, under NAFTA it is already possible for the contracting parties to issue binding interpretation notes on particular treaty provisions.  Similarly, US practice also supports the inclusion of restrictive definitions of substantive protections such as FET.  UNCTAD’s proposals for reform of the international investment agreement regime provide further support for some of the EU’s proposals.  For example, UNCTAD advocates expanding the contracting parties’ role in interpreting the treaty, including a mechanism for early discharge of frivolous claims, and denying protection to investors that engage in nationality planning.  Likewise, UNCTAD proposes setting time limits for bringing claims, introducing an appeals facility, and providing for more transparency.
 
It remains to be seen to what extent the EU will take on board the public criticism and comments levelled at its proposed reforms.  However, in light of the growing international pressure to rebalance and reform the system of investment protections and investment dispute settlement, there is a good chance that the EU – with the force of 28 Member States behind it – could become the driving force behind such reforms.