Determining international responsibility under the new extra-EU investment agreements: what foreign investors in the EU should know.

• Author: Baetens, Freya
• Position: Abstract through III. Problematic Issues Arising from the Regulation A. Respondent Status: Whom to Sue?, p. 1203-1233

ABSTRACT

The EU's newly acquired competence over foreign investment poses largely unprecedented legal challenges: the Union's unique structure and functioning are bound to raise questions about the traditional format of international investor-State arbitration. Anticipating these challenges, the European Commission has proposed a Regulation on managing the financial responsibility that arises out of such arbitrations, a revised version of this proposal was adopted by the European Parliament and the Council of the European Union. After outlining the contemporary international investment regime, as well as the relevant aspects of the EU legal system, this Article scrutinizes three problematic issues under international law that arise from the Regulation: respondent status in international arbitral proceedings, attribution of treatment, and compliance with the final award. This Article also discusses the means of recourse open to EU Member States dissatisfied with the EU's performance as respondent or its apportionment of financial responsibility.

TABLE OF CONTENTS I. INTRODUCTION II. THE EU AND THE IIA SYSTEM: SQUARE PEG, ROUND HOLE? A. The International System of Investment Protection B. The European Union System C. EU Meets Investment Law III. PROBLEMATIC ISSUES ARISING FROM THE REGULATION A. Respondent Status: Whom to Sue? 1. Investment Agreements: Mixed or EU-only? 2. The Commission's Proposal 3. Problematic Issues 4. Preliminary Conclusion on Respondent Status B. Determining Who is Responsible: Attribution of Conduct 1. Legal Value of the Explanatory Memorandum 2. Applying General Rules to a Specific Context 3. Preliminary Conclusion on Attribution C. Compliance with the Arbitral Award 1. Settlement by the Parties 2. Implementation of Remedies 3. Recognition, Enforcement, and Execution IV. RECOURSE FOR MEMBER STATES DISSATISFIED WITH THE EU AS RESPONDENT V. CONCLUSION I. INTRODUCTION

In 2012, foreign direct investment (FDI) flow into the European Union (EU) amounted to nearly 260 billion U.S. dollars, representing close to a fifth of total investment flows globally. (1) In the same year, investment stock in the EU was 7.8 trillion U.S. dollars, accounting for over 34 percent of global investment. (2) In light of these numbers, it is of crucial--indeed even global--importance that the EU acquired exclusive competence over FDI--which previously rested with its Member States--through the entry into force of the Lisbon Treaty in 2009.3

As a result, international investment agreements (IIAs) protecting the rights of foreign investors in the EU--and EU investors abroad--will now be negotiated and concluded by the EU, on behalf of itself, as well as on behalf of its Member States. One such example is provided by the ongoing negotiations for a Transnational Trade and Investment Partnership (TTIP) between the EU and the U.S.--described as "the biggest bilateral trade deal ever negotiated." (4) Considering the profound impact of this transfer of competences, however, there is an alarming degree of uncertainty regarding its practical implications. Any given foreign investment in the EU will necessarily be situated in the territory of an EU Member State (or in that of several,5) subject to the authority of not only the EU, but also of that Member State. Therefore, if an investor's rights are breached, it may be difficult to determine who is responsible: the EU or the individual Member State. This is particularly so considering that in many--if not most--of the fields where regulatory conduct may affect the rights of investors, both the EU and its Member States have certain competences. In addition, even when a specific measure is adopted at the European level, Member States may have a considerable margin of discretion in the way they implement them. (6) Thus the interaction between the international rules on responsibility--attribution, in particular--and the EU system of executive federalism," where almost all EU measures are carried out by Member States, may prove to be problematic. This interaction might lead to a situation where the Union may rarely be held responsible for any action on the international plane, since its rules are mostly carried out by Member State organs, which would imply that the Member States are held solely responsible, even though they may not have enacted the offensive rules. A solution would be to link responsibility to rule-making competence rather than to actual conduct--an approach currently put forward by the European Commission.

Anticipating difficulties in determining responsibility of the EU and/or its Member States, the EU Commission put forward a Regulation on managing financial responsibility arising out of investment arbitrations in 2012 (the Proposed Regulation). (7) After much discussion and several amendments, the European Parliament and the Council of the EU adopted the Regulation in 2014 (the Regulation), in accordance with the EU's ordinary legislative procedure. (8) This article scrutinizes the Regulation through the following structure: Part II outlines the contemporary international investment regime as well as the relevant aspects of the EU legal system; Part III analyzes the three problematic issues, namely respondent status in arbitral proceedings, attribution of treatment, and compliance with the final award; Part IV discusses the means of recourse open to EU Member States dissatisfied with either the EU's performance as respondent or with the EU's apportionment of financial responsibility.

2. THE EU AND THE IIA SYSTEM: SQUARE PEG, ROUND HOLE?

   1. The International System of Investment Protection

      The European Union and the current system of investment protection both trace back to the years following World War II. After the war, many areas of international law underwent major multilateral efforts of regulation, such as the 1947 General Agreement on Tariffs and Trade (GATT), which later formed the basis of the World Trade Organization (WTO). (9) Unlike in the field of trade, however, no major multilateral agreement was concluded to regulate investment: the only attempt to establish such an agreement was the 1948 Havana Charter, which included a brief provision on investment protection but never entered into force. (10) This was largely due to the lack of support from the United States for the project. Given the isolationist tendencies prevailing at the time in the U.S. Senate, and in view of the political damage should it formally refuse to ratify, President Truman decided not to put the Havana Charter on the Senate agenda. (11)

      Despite--or perhaps precisely because of--this lack of consensus about the necessity and the terms of such an all-encompassing multilateral agreement, developed states became increasingly concerned about the protection of their investors abroad. This was, in large part, due to developing countries' reiterated assertions of permanent sovereignty over natural resources and a concomitant wave of expropriations and nationalizations. (12) Consequently, instead of a multilateral framework, a system of predominantly bilateral agreements started developing from the 1960s and onward, with IIAs that either took the form of free-standing bilateral investment treaties (BITs), or of investment chapters within broader agreements. The latter are most commonly Free Trade Agreements (FTAs)--such as the North American Free Trade Agreement (NAFTA)--but may also include other types of treaties, such as the Energy Charter Treaty, which is a broad agreement regulating the energy sector in its various aspects. (13) In the 1990s, there was another attempt at creating an overarching regulatory framework, in the form of the so-called Multilateral Agreement on Investment, drafted under the auspices of the Organization for Economic Co-operation and Development and initially strongly backed by the United States (14) However, non-governmental organizations expressed concerns that the proposed agreement would unduly constrain the ability of host states to regulate matters such as labor conditions, so in the face of mounting public pressure, governments ultimately abandoned the project. (15) Meanwhile, the number of IIAs continued to grow over the decades, particularly in the 1990s and 2000s, resulting in nearly 3,200 agreements that are currently in force, of which over 2,800 are BITs. (16)

      IIAs are based on the rationale that the protection of investments will stimulate the flow of capital and technology, as well as the economic development of the contracting parties. (17) To this end, these treaties stipulate a number of substantive standards, notably full protection and security, (18) fair and equitable treatment, (19) the prohibition of expropriation without compensation, (20) as well as national (21) and most-favored-nation treatment. (22) Just as importantly, although these agreements are concluded between states, they usually provide for a procedurally novel arrangement whereby investors no longer have to rely on their home state to espouse their claim through diplomatic protection; investors instead have the possibility to initiate arbitral proceedings directly against the host state for alleged breaches of the IIA. (23) Accordingly, IIAs grant investors the right to make use of one or more sets of arbitral procedural rules. (24) The vast majority of IIAs refer disputes to the International Centre for Settlement of Investment Disputes (ICSID), whose proceedings are governed by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States...