A new European Regulation entered into force on the 17 September 2014. (EU No 912/2014) The Regulation, and I’m quoting from a variety of sources that all seem to say the same thing, is supposed to “allocate financial responsibility going forward, for claims brought by non-EU investors for harm done to their investment within the European Union. Depending on who was involved in the treatment in question – a Member State or a body, institution or agency of the EU itself, responsibility is allocated accordingly”. The key words are allocated accordingly. For those words are the tip of an iceberg that will not only make it harder for investors to bring claims against the actions of a host state but in so doing, deter investors from investing in Europe.

As I have previously written, according to the ICC a big dose of new FDI is required in order to recover from the global economies growth slump. Current FDI flows are about 1.6 trillion dollars annually, which is little more than 2% of global GDP per annum – greater FDI is clearly possible in the right environment. If that were doubled, it would provide a major stimulus to the world economy, helping create jobs, raise living standards and contribute to government tax revenues. FDI is the single biggest engine for growth on the planet.

According to the EU Trade Commissioner Karel De Gucht the Regulation is “another building block in our efforts to develop a transparent, accountable and balanced investor-to state dispute settlement mechanism as part of EU trade and investment policy.” Evidently the EU did not set about to deter investors but unfortunately, the road to economic hell is paved with good intentions. This piece of regulation is but one slab on that route. Let’s step back for a second and consider what we mean by hindering an investor’s ability to bring State claims. Investments are about assessing risks. Risks are about balancing impact and probability - the likelihood that something adverse will happen and the impact if it does so. Do investors enjoy suing states? Of course not, it is an inherently risky endeavour. But when an investor is considering an investment it must measure the risk of a dispute arising. In this context hindering an investor’s ability to mount a claim is measured in terms of negative impacts on time, cost and quality.

  • By time I mean how long it takes to bring claims and to conclude them;
  • By cost I mean how much it costs to bring a claim and enforce an award;
  • And by quality I mean, how certain and transparent is the process.

Unfortunately, this regulation appears set to negatively impact all three.

First of all, although the Regulation attempts to set out the roles that the EU or the Member State will play, to a large extent, the European Commission has discretion as to whether the EU or a given Member State should act as respondent(see Article 3.2 of the regulation.) It implies a form of subrogation, not unlike that which is found in many insurance contracts where effectively the EU steps into the shoes of the member State. However, the Regulations mean that the EU will not just step into the States shoes, they stand in its stead. An investor doing business with one party effectively ends up concluding that business under unfortunate circumstances, with not only another party, but an entirely different entity. And make no mistake, in a recent dispute regarding a nuclear power plant and an EU member state, the EU took it upon itself to write to ICSID to inform it that the EU had grave concerns about the case and the wider implications across the EU. These are bullyboy tactics that disregard details and facts in favour of a wider policy agenda. How does that send out a positive message to investors that in the event that something goes wrong that they will get a fair shake at dispute resolution?

Second, and as a result of the above, the Regulation establishes who, the EU or the Member State concerned, will be externally liable as a debtor on the arbitral award. If it’s the Member State enforcement is tried and tested. Assets may be traced and seized if necessary. Clear forums for enforcement procedures exist that recognise international treaty obligations to treat the awards as though it were a judgement in their own country. What if it’s the EU? The EU has all the trappings of Statehood without actually being a State. What are you enforcing against? What if the EU simply disagrees with the decision? Will it pay out comewhatmay? What if it feels there are reasons to hold back, what recourse does the investor have? What forum would be adopted for enforcement?

Finally, what happens if the State and the EU disagree. Under the Regulations it is the EU who will decide whether liability derives from compliance with EU legislation and thus the EU is liable, or if it is the actions of the Member State alone or if the liability is shared between the EU and the Member State. For the Member State there is a quasi review process where the decision of the EU can be challenged (see Article 17 onwards). If the EU is liable, it is supposed to pay. If the Member State is liable, the Member State is supposed to pay and if there is a conflict, who is supposed to pay? Who knows? And who will pay for this conflict between the EU and the Member State? The time and cost of what seems an inevitable dispute process between Member State and the EU will carry a hefty price tag. And what about certainty for the investor? Enforcement risk is a fundamental part of ensuring investment protection. Without it, a pyrrhic victory looms large and will weigh heavy on the minds of potential investors.

In conclusion, this regulation will make it harder for investors to bring claims as they are faced with a multi-headed opponent that acts not only as respondent but as a third party force to pressure the very institutes such as ICSID to adopt a bias in favour of EU policy over the rule of law and ultimately as a decider on the allocation of liability for the purposes of enforcement. For investors this means uncertainty in terms of time and costs at the very least. Uncertainty is the risk assessment killer. It is difficult to measure impact and probability under these circumstances. It will not happen over night, but slowly, as a result of the EU seizing more control over the investor/state relationship, not only will it hinder investors from bringing claims it may actually deter them from investing in the first place - a result that no State can afford.

Notes to Editors:

For more information on Vannin Capital, please contact: Meika Aysal, Marketing at Vannin Capital, T: +44 207 099 5180, E: ma@vannin.com