Determining International Responsibility Under the New Extra-EU Investment Agreements: What Foreign

The following blog post summarizes Determining International Responsibility Under the New Extra-EU Investment Agreements: What Foreign Investors in the EU Should Know (47 Vand. J. Transnat’l L. 1203 (2014)) by Freya Baetens, Gerard Kreijen & Andrea Varga. Read the full article here.

The amount of foreign investment flowing into the European Union (EU) continues to grow at an increasing rate, amounting to nearly $260 billion in 2012—a fifth of worldwide investment flow. Further, investment stock in the EU totaled $7.8 trillion in the same year—accounting for over 34 percent of total global investment. In light of the EU’s role as a major market for global investments, the ability of the EU to regulate the flow of foreign investment—a power that previously rested with its Member States—has become increasingly important. Recognizing this need, the EU Member States have permitted the European Commission to act on their behalf in the negotiations of international investment agreements (IIAs), specifically IIAs granting investors the right to make use of one or more sets of arbitral procedural rules. The existing system of IIAs has in fact achieved high levels of efficiency and in turn has become increasingly popular with global business and investment.

However, a potential concern with the creation of IIAs is that it may be difficult, in the case that an investor’s rights are breached, to determine whether the EU or an individual Member State is responsible. Such a problem naturally arises given that any foreign investment in the EU will be within the territory of an EU Member State, subject not only to the EU’s authority but also that of the Member State. Additionally, because both the EU and its Member States govern many of the fields in which regulatory conduct may affect the rights of investors, problems may arise when a Member State uses its inherently broad margin of discretion in implementing or enforcing certain measures promulgated by the EU.

Thus, the interaction between various international rules on responsibility and the EU system of “executive federalism,” where almost all EU measures are enforced by Member States, may prove to be quite problematic. For example, such an interaction may produce a condition in which the EU will rarely be held responsible for any action on the international level, since the rules it creates are generally carried out by Member State authorities—leaving the Member States to be held solely responsible for violations of investors’ rights despite not having enacted the offending rules.

Anticipating difficulties in determining the responsibility of (and apportioning damages to be paid by) the EU and its Member States pertaining to such a breach of investors’ rights, the European Commission proposed a Regulation on managing financial responsibility arising out of investment arbitrations in 2012. After much discussion, the European Parliament and the Council of the European Union adopted an amended form of the Regulation in 2014. Although this Regulation seeks to clarify the structure of this determination of responsibility exercise, this article explores some of the potential gaps it left unresolved.

After outlining the contemporary international investment regime, as well as the relevant aspects of the EU legal system, the authors scrutinize 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. The authors also discuss the means of recourse open to EU Member States dissatisfied with the EU’s performance as respondent or its apportionment of financial responsibility.