The future of ISDS in the EU: leaked non-paper reveals proposal for EU-wide investment agreement

In a recently leaked non-paper presented to the EU Council's Trade Policy Committee (available here), Austria, Finland, France, Germany and the Netherlands (the "Delegations") have proposed the introduction of an EU-wide investor-state dispute settlement ("ISDS") mechanism.  The proposal is an interesting development in the continuing debate surrounding the future of ISDS in the EU and the wider disputes over the relative merits of investor protection, most prominently in the context of negotiation of the EU-Canada Comprehensive Economic and Trade Agreement ("CETA") and the Transatlantic Trade and Investment Partnership ("TTIP").  Although the proposal has no legal effect and will not impact any current arbitral proceedings under intra-EU bilateral investment treaties ("BITs"), the non-paper nonetheless offers a valuable insight into the views of the Delegations on ISDS and adds another voice to the debate on the future of investor protection in the EU.

Background

For some time the Commission has sought the termination of the over 200 BITs in force between EU Member States.  These BITs are seen as problematic by the Commission as they provide for bilateral investment protection regimes between certain EU Member States and are therefore viewed by the Commission as incompatible with the principles of equal treatment and non-discrimination.  The Commission also considers them to be unnecessary in the single market and contrary to EU law, not least because they allow the relevant EU investors to use an alternative dispute resolution system to that offered by national courts and the Court of Justice of the European Union ("CJEU").

Despite the Commission's efforts to encourage Member States to terminate their intra-EU BITs, there has been little action.  Only Italy, Ireland and the Czech Republic initially responded to the Commission's request.  As a consequence, in June 2015, the Commission commenced the first stage of infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden, requesting that they bring their intra-EU BITs to an end.  In its press release of June 2015, the Commission expressed its intention to engage in a discussion with the Member States and all interested parties on how to improve further investment protection inside the single market.

The proposal

The proposal put forward in the non-paper is presented by the Delegations as a "compromise solution" on the question of intra-EU BITs.  It proposes the replacement of intra-EU BITs by a single investment agreement between all 28 Member States, affording protection to investors across the EU, the nature of which would be similar to that usually found in BITs.  Rather than suggesting that such an agreement would create wholly new investor protections, the Delegations view this as the codification and consolidation of existing EU investor rights such as those afforded under the EU Treaties and the Charter of Fundamental Rights, amongst other sources. 

The approach of the Delegations in the non-paper comes across as measured and pragmatic, seeking to balance the concerns of Member States and investors.  This is demonstrated perhaps most clearly by the Delegations' treatment of the issue of existing intra-EU BITs.  The proposal provides for the immediate termination of all intra-EU BITs upon entry into force of the single agreement, and importantly, for the disapplication at the point of termination of any sunset clauses contained in the BITs.  The disapplication of sunset clauses would not only serve to accelerate the process of phasing out intra-EU BITs, but would also eliminate the risk to Member States of investors relying on the terms of those BITs to bring claims after the implementation of the new single agreement.  The single agreement would in turn ensure the continuation of investor protection, whilst shielding Member States from liability towards investors for the loss of such protection.  Furthermore, the Delegations consider that the interests of investors in ongoing disputes under the BITs would be protected, with the single agreement providing for the continuation of such claims and the enforceability of any subsequent awards. 

To fill the gap left by the termination of intra-EU BITs for investors to pursue and enforce their rights to protection, the proposal sets out a three-tier dispute resolution structure, commencing with litigation in Member States' domestic courts, followed by an ad hoc mediation scheme and, as a last resort, a binding ISDS mechanism.  The Delegations put forward three options as to the form of practical implementation of an ISDS mechanism under the single agreement: (i) the settlement of investor-state disputes by the CJEU; (ii) the creation of a "permanent investment court" in the image of the EU Unified Patent Court; and (iii) reliance on the Permanent Court of Arbitration (the "PCA") in The Hague.  The Delegations settle on option (iii) as their preferred short term solution, with a view to achieving the phasing out of intra-EU BITs within a reasonable timeframe and in the most cost-effective way.  According to the proposal, this option would function through reliance on the list of State-nominated arbitrators which is already maintained by the PCA.  Reliance on permanent arbitrators in this way would, the proposal suggests, have the benefit of increased consistency compared to the appointment of ad hoc arbitrators.  However, the Delegations recognise that in the long term a "permanent court system" would be more in line with the EU's new trade policy on ISDS and propose that provisional reliance on the PCA should be replaced with a permanent solution of the kind outlined under options (i) and (ii) in the future.

How does the non-paper relate to the Commission's stance on intra-EU investment protection and ISDS?

The non-paper offers an interesting source of both reinforcement and divergence vis-à-vis the Commission's stance on the future of investment protection and ISDS in the EU.  On the one hand, the proposal recognises and supports the Commission's position on the termination of existing intra-EU BITs, including the Commission's preference for the disapplication of sunset clauses.  In this regard, it will be interesting to track the German Federal Court of Justice's recent request to the CJEU to make a preliminary ruling on the compatibility of arbitration agreements concluded under intra-EU BITs with EU law (for more information on this, see our recent blog post).  Although the Delegations advocate the termination of all intra-EU BITs in the non-paper, it is expressly stated that this position is without prejudice to their views on the compatibility of those BITs with EU law.  The Delegations' reasoning focuses instead on the dual advantage to investors and Member States of implementing an over-arching, EU-wide investment protection scheme.

The key point of divergence between the stance of the Commission and that of the Delegations centres on the question of what role, if any, ISDS should play in any subsequent arrangement.  In its negotiations with states outside the EU, the Commission has expressed its desire to move away from traditional investment arbitration towards an investment court system, particularly in the context of CETA and the investment chapter of TTIP (see our earlier blog post on this).  The Commission's position on disputes between EU investors and EU Member States is that these should be resolved in national courts and, if necessary, with reference to the CJEU.  In this regard, the Delegations position themselves in opposition to the Commission by suggesting that ISDS in some form should, at least in the short term, survive the termination of intra-EU BITs, through a consolidated system relying on the PCA. 

Finally, it is worth noting that the non-paper signals a somewhat brave endorsement of the merits of ISDS on the part of the Delegations.  Austria, France and Germany have all seen strong national opposition to ISDS, particularly at an NGO level.  It is therefore noteworthy that the governments of these countries are willing to advocate a proposal which relies on a binding ISDS mechanism, even if its use might be temporary.

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