On 18 June 2015, the European Commission (the Commission) initiated infringement proceedings against five European Member States seeking termination of their bilateral investment treaties (BITs) with other European Union (EU) Member States (intra-EU BITs).  

Background

There are around 200 intra-EU BITs in force.  The majority of these were entered into following the end of the Communist era in Central and Eastern Europe.  Their aim was to put in place a framework that would encourage investment in countries whose EU membership was then still some way off.  The BITs offer reciprocal guarantees against political and other risks, which might negatively affect investments. 

In the Commission’s view, however, following the enlargement of the EU since the signing of many intra-EU BITs, the “extra reassurances” these treaties provide to investors are no longer necessary given that all Member States are subject to the same EU rules and protections.

The Commission position

The Commission is a long-standing critic of intra-EU BITs, yet the infringement proceedings commenced against Austria, the Netherlands, Romania, Slovakia and Sweden represent a new dimension in the Commission’s policies in this arena.

The Commission views intra-EU BITs as redundant, outdated and, most importantly, as in contravention of EU law.  In its view, intra-EU BITs lead to the fragmentation of  the internal market by conferring greater rights on a bilateral basis to investors from certain Member States only.  According to the case law of the Court of Justice of the European Union (the CJEU), discrimination based on nationality is incompatible with EU law.

The Commission’s decision to act now, appears to be a response to a recent trend of “renewed reliance by some investors” on intra-EU BITs, bringing arbitral proceedings against Member States.  In its Press Release announcing the infringement proceedings, for example, the Commission cited the recent ICSID award in Micula v Romania (ICSID Case no. ARB/05/20), rendered in December 2013.  In its award, the arbitral tribunal ordered Romania to pay damages to a Swedish investor in respect of its breach of the Romania-Sweden BIT.  The Commission, however, ordered Romania not to comply with the award, pending the outcome of an investigation of its compatibility with EU law.  In March 2015, the Commission concluded that payment by Romania of the award would infringe EU rules on State aid.  Accordingly, Commission has directed Romania not to satisfy the award and to recover any sums already paid.

The Commission appears to consider that the outcome of cases such as Micula, brought as a result of a Member States’ alleged breach of an intra-EU BIT, leaves cross-border investors in a situation of legal uncertainty.  This in turn conflicts with the EU’s top priority of promoting an environment that encourages investment.

What next?

The five Member States are required to reply to the letters of formal notice sent by the Commission within two months.  The Commission has also begun “pilots” with the remaining 21 Member States, which still have intra-EU BITs in place, involving information requests and the initiation of an administrative dialogue.  Notably, Italy and Ireland have already terminated their intra-EU BITs in 2012 and 2013 respectively.  

The Commission will hold a meeting with all 28 EU Member States in October 2015 to provide ‘assistance’ for the coordinated termination of all intra-EU BITs.  The Commission also intends to engage in a discussion with Members States and interested parties on how to improve further investment protection inside the single market.

Comment

The infringement proceedings themselves do not impact intra-EU BIT claims currently being pursued by investors.  Aside from the infringement proceedings, however, the Commission’s robust approach has also resulted in the filing (or seeking of leave to file) amicus curiae briefs in a number of recent, as well as ongoing, investment tribunal proceedings. The Commission argues that arbitral tribunals should decline jurisdiction in cases under intra-EU BITs.  Such claims necessarily, in the Commission’s view, involve EU law issues and the appropriate forum for their resolution, therefore, are EU Member State courts and the CJEU. 

The infringement proceedings have created a new frontier of uncertainty for investors and Member States alike.  It is unclear how the five EU Member States will respond to the infringement proceedings, and it may be that they will respond in different ways.  Moreover, it is unclear what, if any, alternative to arbitration under intra-EU BITs will follow, including whether, as suggested by the EU Commissioner for Financial Services, some form of ‘investment mediation’ may be established.

For investors presently relying on intra-EU BITs as a form of protection for their investments in the EU, consideration should be given to the restructuring of such investments, for example by interposing a holding company in the corporate structure, which is incorporated in a non-EU State that has an appropriate BIT with the relevant EU country.  Caution should be taken in this regard, however, and expert advice should be sought before any restructuring, in particular if a potential dispute is already on the horizon as it may result in the loss of investor protection.