Czech Republic: bilateral investment treaties

The Czech Republic and Italy have agreed to end their bilateral investment treaty from 1 May 2009.

Bilateral investment treaties (BITs) provide reciprocal protection for cross-border investments between the two treating countries.

Before their accession to the European Union in 2004 and 2007, countries in Central and Eastern Europe tended to rely on BITs to maintain their popularity as investment destinations. BITs are also used by West European member states, but much less widely.

The European Commission has expressed concern that BITs are unnecessary for member states as most of their content is superseded by EU law.

However, the argument that all the Czech Republic’s BITs with other member states were automatically terminated on its accession to the EU was rejected in a BIT international arbitration dispute.

As well as guaranteeing equal treatment with domestic investors and full protection and security for their investments, BITs also provide foreign investors with an extra-contractual dispute resolution mechanism, generally involving international arbitration at a neutral forum with enforcement under the New York Convention.

This has led the European Commission to warn against possible inequality among investors, as BITs allow some disputes to be resolved via arbitration without key questions of EU law being determined by the ECJ.

Although there is some uncertainty surrounding their interaction with EU law, BITs provide comfort for investors because of the high stakes involved and so aid the flow of investment capital between countries. This is perhaps reflected in the CEE region being ranked the fourth most preferred destination for foreign direct investment by the United Nations Conference on Trade and Development in its 2008-2010 World Investment Prospects Survey.

While most member states believe that existing BITs should be maintained, the Czech Republic reportedly plans to terminate all of its intra-EU BITs. This position is surprising given the current economic climate and perhaps one which should be reconsidered.