Late last year, members of IMI’s Investor-State Mediation Taskforce responded to an EU Commission public consultation on “the protection and facilitation of investment within the EU”. The aim of the consultation was to “assess the current framework of investment protection, including both substantive rules and dispute settlement mechanisms”. Below you will find both the a copy of the published background to the public consultation, and IMI’s response.
Thank you to Wolf von Kumberg, Hannah Tuempel, Rana Kassas, Catherine Kessedjian, Michael Cover, and Shanti Abraham for preparing and submitting a response on behalf of IMI.
IMI’s response
Note that while IMI was responding to specific questions, several of these were yes/no. To enhance readability, responses have instead been gathered under related headings.
13. Improving enforcement mechanisms at EU level
Foreign Direct Investment (FDI) is important to the economic development of many EU States. A crucial factor when considering FDI is the provision of an efficient and transparent dispute resolution mechanism that meets the needs of the foreign investor as well as those of the Host State and all stakeholders who have an interest in the dispute (notably civil society when issues such as climate change are at stake). As cited under Article 47 of the Charter everyone has the right to an effective remedy. In the preamble to this Section it cites that some Investors question the impartiality of national courts that may be influenced by national interests and suggest that there would be an added value in additional Europeans solutions to settle disputes between Member States and investors coming from other Member States. Given that there may be legitimate concerns anytime a State Court is being requested to determine a dispute between the State and a foreign investor, another option, in addition to National Courts, could be created. The Commission has already provided a possible solution in the form of Article 9 in the Agreement for the termination of Bilateral Investment Treaties between Member States. Through this mechanism the framework for “facilitated settlements” is introduced. A settlement procedure can be entered into between an Investor and the State, overseen by an impartial facilitator to find an amicable, lawful and fair out-of-court settlement of the dispute. The independent facilitator must be someone who is independent and impartial and has in-depth knowledge of Union law. This mechanism, which one might also label “mediation” is one that has been advocated for some time by the International Mediation Institute of the Hague (IMI), which has been instrumental, together with ICSID, CEDR and the Energy Charter Treaty Secretariat (ECT) in helping to develop criteria and standards for the use of mediation in investment disputes. This development is also being contemplated by UNCITRAL through its working Group III. It is too early to know what will come out of the discussions within that forum since negotiations have been de facto suspended because of the Covid-19 pandemic. However, mediation and amicable dispute settlement mechanisms are certainly on the agenda of WGIII. The Academic Forum has published a paper to help focus attention on some issues and a webinar was conducted on 18 June 2020 (both are available on the UNCITRAL WG III website).
This is a progressive mechanism and takes into consideration rulings by the CJEU, national courts and European Commission, as well as the position of the Investor. It is a voluntary process, with no decision being imposed, the decision to settle remaining with the parties themselves. While this is currently only a temporary measure under the Agreement, it should be considered transforming it into a permanent measure. Consideration should be given to adding the IMI mediator criteria to those to be considered for appointment of the Facilitator. The criteria can be found at https://imimediation.org/2016/10/12/new-competency-criteria-for-investor-state-mediators/
There are often structural obstacles within State institutions, which make entering into settlements with Investors difficult. These inhibitors, which make it difficult for State officials to settle, in particular politically contentious matters, can be dealt with by putting an appropriate framework in place within the State apparatus. The Energy Charter Treaty Secretariat (ECT), has spent significant effort in formulating a Model Instrument recommended to its Member States (of which the EU is one), in order to permit them to engage in amongst others, mediation leading to a settlement agreement. It is highly recommended that the ECT Model Instrument on Managing Investment Disputes found at:
(with which the EU as a Member of the ECT is familiar) be adopted for use by EU Member States in the context of Article 9 and any successor mechanism thereto. This will remove many of the internal structural obstacles to settlement by Member States and make the facilitation process more effective and transparent.
14. Improving cross-border investment dispute resolution
As stated in the introduction, “Given the incompatibility of intra-EU BITs (including investor-to-state arbitration) from the date of entry into force of EU law, where necessary all investors within the EU need to seek legal remedies for disputes related to their investments in national courts.”:
The current investment dispute resolution system is non-harmonized within the EU. The lack of coherence lies primarily in the discrepancies between the different forms of legal remedies available to investors in the EU seeking relief in accordance with the national legislation of any of the member states. While it may be impossible to harmonize fully dispute settlement provisions of all Member States (not the least because of the limited competence of the EU in the field), it is conceivable to concurrently open the window of mediation to these disputes that are no longer covered by intra-EU BITs. Such are the efforts of the ECT’s Model Instrument on Managing Investment Disputes: the Instrument is a systematic framework that delineates ADR mechanisms and the potentially responsible bodies within a state that would be involved in the negotiation or mediation practices with investors.
We mention in our response to Question 13 that mediation offers a flexible, cost effective and transparent means to the settlement of investment disputes. Mediation is a valuable tool for both investors, host states and civil society. Unlike in other dispute settlement mechanisms, parties in mediation are directly involved in the process of settlement. It is also a flexible mechanism whereby third parties can be heard (see below question 15) in a much more inclusive way than can do arbitration or court proceedings. The will of the parties, including their interests, play a major role in shaping the outcome of the mediation procedure. The control these parties exercise over the procedures represents a hands-on approach that can bridge the present-day gap between investor and state in the absence of applicable investment treaties with the EU. As a result, political backlash and strain between EU governments could also be averted.
This importance is also stressed in light of the ongoing pandemic that has triggered high-stake litigation threats by international companies whose investments abroad were impacted by the public health measures implemented by host governments (it is also worth noting here that these measures have been at times inconsistent from one member state to another). Mediation can offer an unique environment for a personalized and much needed dialog between investor and state. The framework for the creation of such an environment that incorporates the use of mediation in investment disputes has been explored vigorously by ICSID, CEDR and the Energy Charter Treaty Secretariat.
15. Ensuring third parties’ interests are better taken into account in cross-border investment disputes
We have already set out that mediation is a mechanism that could be suitable to settle cross-border investment disputes. Mediation is a form of facilitated negotiation, where the facilitator is a professional neutral. It is very flexible and its stability and effectiveness is about to be increased by the coming into force of the UN Convention on International Settlement Agreements Resulting from Mediation, generally known as the Singapore Convention. This will facilitate the enforcement of settlement agreements arising out of cross border mediation, including mediation involving sovereign states (unless excluded from the Convention by reservation by a particular state). The Convention will provide greater credibility to mediation as a whole to be utalised as a tool to ensure that legitimate interests of third parties (eg public interest considerations on climate change, environmental or consumers’ protection) are better taken into account in cross-border investment disputes. Both States and stakeholders representing these various interests can be brought into the mediation process as interested parties, in addition to the investor, so that all views are considered and form part of the final settlement agreement. Our suggestion would therefore be that investor-state mediation is used much more widely, to take into account the position of all legitimate interests. In fact, mediation is the only credible mechanism with the flexibility and credability to do so.
At a time when many speak of a new equilibrium of investors’ rights with obligations, specifically concerning business, CSR, human rights, the environment and other similar issues, and until this new equilibrium is fully incorporated in the law, processes such as mediation are fully equipped to provide parties with access to an effective dispute resolution mechanism.
There has been increased interest in mediation of investor-state matters and a number of successful cases, not least because of increased interest in the process from States. The mediation initiative under the auspices of the Energy Charter Treaty is an example of this. There are also a cadre of trained investor-state mediators beginning to emerge, thanks to the program put on around the world by IMI, ICSID/the World Bank and CEDR. This training emphasizes the flexibility of the process and the ability in the context of this Question 15 to bring to the mediation climate change and environmental campaigners and experts and consumers and local communities and businesses and business sectors, such as those in agriculture. This could be achieved with relatively little cost to these interests, who could participate directly in the mediation process, rather than needing to be represented by Counsel.
Investor-state mediation is thus an excellent way of ensuring that these legitimate interests are heard and buy in to the outcomes. Mediation is generally conducted in a confidential manner but there is no reason why, with the agreement of all participants, sessions with these interests could not be held in public, thus increasing the transparency and legitimacy of the process. And even when a fully public process is not possible or desirable, mediation specialists have developed tools to allow the public to be regularly informed so that the evolution of the negotiation is not coming as a surprise. The same is true with the constitutionally required consultations and approval of democratic institutions in any given State.
The mediation process opens channels for the discussion of various subject-areas of interest. For example, in investor-state disputes, the state typically pushes for compliance of investors with its public health regulations and policies that protect consumers, general health, and the environment. Public health measures and regulations in particular are subject to heavy alteration over a short period of time. The fact that mediation discussions are shaped by the interest of the involved parties rather than only the rights of these parties (as is the case in litigation or investment arbitration) invites a wider array of general interests to be introduced and considered in these negotiations.
It is also worth noting that state to state tensions may occur in conventional investment arbitration resulting in the withdrawal of states from some treaties. ‘Treaty shopping’ by companies seeking investor protection is one phenomenon that has exacerbated these tensions. Mediation offers a leeway in the settlement of cross-border investment disputes that involve third party interests (generally, the public) without being detrimental to government relationships. Treaties and other model instruments that comprise mediation provisions are ultimately protecting third party interests by granting signatory parties a framework that allows for the negotiation of these interests.
The ECT Model Instrument on Managing Investment Disputes substantiates this analysis through its Article 24 (Dispute Resolution Clauses Included in International Investment Agreements and Contracts) which affirms that: “The Model Instrument underlines the need to provide in BITs and contracts the possibility for an investor to request amicable dispute settlement before the dispute is submitted to arbitration or before another tribunal. The purpose is to discuss in good faith the dispute and to exchange views over its causes and the interests involved, identifying possible solutions based on mutual advantages.
Background to the consultation (per the EU Commission)
Note: This background text was included in the submission form, and informed IMI’s response. This text was authored by the EU Commission, and not by IMI.
Background for this public consultation
Private investments are of key importance to create business and work opportunities and generate sustainable economic growth. They provide financing for companies, enabling them to develop and to scale up (European start-up & scale up initiative: Only 3% of start-ups go on to scale up, but they are Europe’s job creation champions) to compete at EU or global level. They also help building new infrastructures, connecting remote communities and providing them with the facilities they need. Stable flows of investments ultimately allow people to have infrastructures, better choice of jobs, diversified products and services.
To meet the commitments related to climate change and digitalization in light of the strategic priorities set by the Commission (European Green Deal, Digital Single Market and an Economy that works for the people), Europe will need to mobilise vast financial resources, mainly long-term, in the years to come. In the climate and energy sector alone a yearly investment gap of €260 bn will need to be covered by private investments (European Commission factsheet, Financing Sustainable Growth). Investment in innovation, especially through digitalisation, is recognised as the main driver of productivity, long-term prosperity and economic growth for advanced economies. Innovation requires inter alia systematic investment in research and development (R&D), for which the annual investment gap in the European Union is estimated at EUR 145 billion (European Investment Bank (2019) “Accelerating Europe transformation”).
The COVID-19 outbreak will severely affect investment plans and capital flows (Communication from the Commission: Coordinated economic response to the COVID-19 Outbreak, COM(2020)112 final). The very large detrimental economic impact of this crisis will require, amongst other measures, effective policies to offset the negative repercussions on investors’ confidence and to encourage the investments needed to recover from the economic impact of the outbreak.
Cross-border investments within the EU play an important role to mobilise additional funding and make full use of the economic opportunities in the Single Market. The flow of investments towards the EU has however recently decreased, while cross-border capital flows intra-EU have not grown (Analysis of developments in EU capital flows in the global context, Bruegel report, November 2019). Evidence suggests that, among other factors (For example, market fragmentation, taxation and legal or operational barriers), investors’ low confidence in the rules protecting their cross-border investments, as well as in their effective enforcement, can play an important role in holding back citizens and businesses from investing in another Member State1. A stable and predictable regulatory framework, effectively enforced in all Member States, is considered essential for an attractive investment climate. When investors are fully aware of investment opportunities in other Member States and can easily identify the rules or the competent public authorities in those Member States they are more likely to invest in another Member State.
As better explained in the following paragraphs, feedback gathered from some stakeholders and Member States suggest that the investment environment within the EU has been deteriorating. The level of cross-border investments may further decrease if no action is taken, especially following the economic impact of the COVID-19 outbreak. This risk exists in particular for investments related to the transformation of industry and energy sectors, as they usually involve investments in physical infrastructures that need to be financed over long periods of time and cannot be easily withdrawn or replaced. Small and Medium-sized Enterprises (SMEs), which represent 99% of European enterprises (in the non-financial sector) and account for two thirds of total employment in the EU Eurostat Statistics on small and medium-sized enterprises – data extracted in May 2018), may also be more vulnerable to State measures affecting their investments and may have more difficulties in knowing and asserting their rights in administrations or courts since they have less economic resources than bigger companies.
Considering the importance for the EU economy and society of ensuring increasing flows of capital in the internal market, in line with the Commission Work Programme of 2020, which foresees that “an initiative to strengthen intra-EU investment protection” will be presented in the Capital Markets Union Action Plan, and the Executive Vice President Dombrovskis’ mandate to explore ways to make cross-border investments easier (Mission letter, 10 September 2019), the Commission – as announced in the Communication A New Industrial Strategy for Europe – is working towards a comprehensive policy on intra-EU investments with the view of better protecting and facilitating cross-border investments.
An enhanced intra-EU investment environment, where clear rules are implemented in a coherent way, information is effortlessly available and services by public administrations are easily accessible is important to encourage people to invest across EU Member States.
The initiative aims at contributing to the achievement of the Capital Markets Union’s objective of fostering cross-border investments. Protection and facilitation measures that may be envisaged by the initiative will go beyond investments in financial instruments and may cover all cross-border investments, including, for example, the purchase of real estate properties.
This public consultation is the first step to prepare possible initiatives which the Commission is considering in this context. The consultation is addressed in particular to companies, associations or representative organisations, civil society representatives and private individuals. Member States authorities are also welcome to respond to the public consultation and they may be consulted separately on more targeted questions. For investments in sustainable activities, specific questions on investment protection and facilitation related to that field are provided in questions n. 74 and 75 of the public consultation on the Renewed sustainable finance Strategy, to which concerned stakeholders and citizens are invited to respond.
The momentum created by the termination of intra-EU Bilateral Investment Treaties
The debate triggered by the termination of the intra-EU Bilateral Investment Treaties (intra-EU BITs) represents a good opportunity to assess the current system of investment protection and facilitation within the European Union. It also offers the possibility to assess whether certain aspects could be further improved or modernised to make the system more suitable for the changing investment environment.
In particular in the 1990’s, Member States have encouraged cross-border investments by concluding Bilateral Investment Treaties with other European countries that have since joined the EU. In 2018 the Court of Justice (Case C-284/16, Achmea), stated that investor-State arbitration clauses included in those Treaties are incompatible with EU law.
After the judgement, Member States committed to terminate all intra-EU BITs by means of a plurilateral agreement or bilaterally in their Declarations of 15 and 16 January 2019. On 5 May 2020, 23 Member States2 signed an agreement for the termination of intra-EU bilateral investment treaties. At the same time Member States called on the Commission to explore further actions aimed at better ensuring complete, strong and effective protection of investments within the European Union (The texts of the Declarations are available here).
Some EU investors have repeatedly raised concerns. They claim that the investment climate has been deteriorating over the last years, notably because of sudden and unforeseeable changes in the regulatory framework or due to a loss of trust in the effective enforcement of their rights. Some investors also claim that due to the termination of intra-EU BITs there will no longer be a level playing field between third country investors in the EU (that can still rely on Member States extra-EU BITs and on EU international investment agreements with third countries) and EU investors within the EU3.
Investors’ concerns have persisted also after the Commission issued in July 2018 a Communication on the Protection of intra-EU investment, in order to clarify EU law protecting investments throughout their life-cycle. In that Communication the Commission aimed to increase investors’ confidence by recalling the most relevant substantive and procedural EU rules with reference to the Court’s case law; especially that EU law offers a complete system of judicial remedies. The Communication thus helps to ensure that investors’ rights are known and respected in all Member States. However, the Commission remains open to make the protection of investors in the EU even more effective, strong and adequate.
EU protection of investments
As recalled in the Communication on protection of intra-EU investment of 2018, EU rules on the protection of intra-EU investment can be found in the EU treaties, in the Charter of Fundamental Rights of the European Union, in the general principles of Union law, and in sector-specific legislation.
These rules allow EU citizens and companies inter alia to establish a business, to invest in companies, to import and export goods and to provide services across borders benefiting from objective, proportionate and non-discriminatory treatment across borders. Any investment falls into at least one of the fundamental freedoms (in particular the freedom of establishment and the free movement of capital) laid down in the Treaty on the Functioning of the European Union (TFEU), which prohibits measures which are liable to unduly prevent, hinder or discourage cross-border capital movements and payments. EU rules provide, for example, that investors from a Member State shall not be expropriated unless it is justified and proportionate. Moreover, even where expropriation is justified and proportionate, the Member State must adequately compensate the expropriated individual.
Single Market freedoms and fundamental rights granted to citizens and companies are not absolute, and public authorities may, under certain conditions, restrict these rights (of individuals) with a view to pursuing other public interest objectives, such as public health, the protection of the environment or the fight against tax evasion. Investment protection rules thus leave Member States sufficient policy space to protect legitimate public interests (“right to regulate”), and to take the measures necessary to achieve their commitments related, for example, to climate change and the transition to a more sustainable economy. However, the restriction must comply with the conditions laid down in EU law (including secondary legislation) and with the general principles of EU law such as legal certainty, legitimate expectations and principle of proportionality.
