Linklaters contributes to the European Commission’s consultation on intra-EU investment protection

In the wake of the Achmea ruling of the Court of Justice of the European Union (CJEU) and the termination of intra-EU bilateral investment treaties (BITs), the European Commission asked stakeholders for their views on the state of investment protection offered by EU law. Our global arbitration practice contributed to this important debate.

Background – termination of intra-EU BITs

Particularly in the 1990s, EU Member States entered into BITs with other European countries that have since joined the EU. Those treaties typically offered foreign investors protection for their investments from host states’ conduct violating the treaties’ standards. Such treaties became an important part of the intra-EU investment protection framework as they often provided a higher standard of protection than national laws and referred conflicts to international arbitration, a neutral forum.

Following the enlargement of the EU, the European Commission has been critical of intra-EU BITs. They were perceived as overlapping with the fundamental freedoms of the internal market and as  contrary to the principle of equality since some EU investors would benefit from the protections under a BIT while others would not.

In 2018, the CJEU found in Achmea (Case C-284/16) that the investor-state arbitration mechanism in the Slovakia/Netherlands BIT was incompatible with EU law. Two years after this judgment, 23 Member States signed an agreement for the termination of approximately 130 intra-EU BITs. As reported here, this treaty first entered into force on 29 August 2020.

Recent energy reforms across Europe, in particular concerning the solar, wind and nuclear industries, have led to a large number of disputes arising under BITs and the Energy Charter Treaty (ECT). The ECT remains in effect between EU Member States, but the European Commission also considers that intra-EU ECT arbitrations are contrary to EU law.

In this context, Member States and a number of stakeholders called on the Commission to explore further actions aimed at better ensuring complete, strong and effective protection of investments within the EU. This was timely as recent trends (e.g. certain changes in regulatory frameworks, concerns over independence of certain domestic courts, and responses to the Covid-19 crisis) have been said to have impacted negatively the EU investment climate.

Some investors also consider that, due to the termination of intra-EU BITs, the situation unduly favours the investments of third country investors into the EU who can continue to rely on Member States’ extra-EU BITs and on international investment agreements between the EU and third countries.

Against this background, on 26 May 2020, the Commission invited stakeholders to answer a public consultation on the protection and facilitation of cross-border investment within the EU. This closed on 8 September 2020. Linklaters’ global arbitration practice submitted an answer (available here, and summarised below), after discussing the topic with clients across the EU.

Key elements of our answer to the consultation

The EU is based on a system of common values (with the rule of law at its core) and an internal market ensuring the free circulation of people, capital, services and goods, without differences of treatment among the various Member States. Although  the EU has made great progress in facilitating intra-EU  investments,  the current system can  be improved.

In practice, EU investors frequently have to deal with a variety of administrative obstacles when investing in another EU Member State, often perceived to be driven by politics or nationality discrimination. Once the investment is made, investors may also face a variety of state measures detrimental to their investment. This may lead EU investors to lose confidence in making investments in other Member States.

EU law offers a number of protections and guarantees to EU investors (e.g. the four freedoms of the internal market, other rights and principles such as the right to property and the prohibition of state aid, and protections in certain sectorial or specific EU legislation). However, some of them would benefit from a clearer scope and content. Ultimately EU law should provide, and be seen to provide, protections for investors that are at least similar to those under investment treaties.

More importantly, the availability and effectiveness of enforcement mechanisms at domestic level may vary greatly between Member States, or from one situation to the other. Enforcement at an EU level also suffers shortcomings, including  that investors generally do not have legal standing before the CJEU. Similar points apply to remedies (in particular in relation to interim measures and compensation).

We believe that, similar to the European Commission’s efforts to set up a Multilateral Investment Court at international level, the creation of an EU Investment Court – which is currently envisaged by the European Commission – could offer adequate solutions to these shortcomings, even though access to investment arbitration remains preferable. To be effective, such a Court should (i) be directly accessible directly by investors (including appropriate access to legal aid), (ii) comprise impartial and independent judges, (iii) have the power to order preliminary measures and direct compensation, (iv) render directly enforceable decisions, and (v) have competence over investor claims against the Member States as well as the EU itself.

The deterrent effect of the existence of such mechanisms may substantially improve protection at the domestic level, thereby contributing to the avoidance of disputes between investors and Member States.

Next steps

The European Commission will review the answers received to its consultation, before recommending areas of possible reform. It aims to make a potential new legislative proposal during the second quarter of 2021. Linklaters will closely monitor and report on these developments.