Modern investment treaty between Hungary and Kosovo enters into force

Earlier this year, an agreement between Hungary and Kosovo on the promotion and reciprocal protection of investments has entered into force (the “BIT”).

While the BIT contains many of the standard investment protections, it also balances investors’ rights with states’ right to regulate in good faith. Moreover, the BIT contains safeguards to ensure compliance with EU law, including the latest rulings of the Court of Justice of the European Union in the field of investment protection.

Notable features of the BIT include:

• An objective to protect and promote through investment “human rights, labour rights, and internationally recognised standards of corporate social responsibility”.
• A broad definition of protected investments, including “any rights conferred by law” as well as “licenses”.
• A modern fair and equitable treatment clause that enumerates the specific scenarios in which the clause may be triggered, such as the “denial of justice in criminal, civil or administrative proceedings” or “harassment, coercion, abuse of power or similar bad faith conduct” by the state.
• A carve out for regulatory measures that pursue legitimate public health, environmental or other policy objectives.
• A precise definition of what constitute direct and indirect expropriatory measures and the calculation of the compensation due to the investor in case such measures are taken.
• A specific exclusion of domestic law, including in the case of Hungary, EU law, from the law that may be interpreted or applied to a dispute under the BIT by an international arbitral tribunal.
• An obligation for any arbitral tribunal considering the domestic law of either party as a matter of fact in any dispute, to follow the interpretation of the law given by the domestic court of such party. In effect, this means that any arbitral tribunal would have to follow the interpretation of EU law given by the CJEU, from time to time.

Our take on the Hungary-Kosovo BIT

The Hungary-Kosovo BIT is a modern and balanced agreement in many respects. It not only puts obligations on host states, but also on investors. The respect of labour rights and the promotion of corporate social responsibility are cases in point.

In addition, the BIT contains updated definitions of the typical investment protections, including, importantly, the FET standard. The BIT’s definition of the standard is in line with the wording of the latest international agreements concluded by the EU in the field of investment protection, including the one with Canada (CETA).

The BIT’s provisions concerning compliance with EU law comprise important safeguards against any arbitral overreach in the event of a dispute and may ensure the enforceability of any award rendered under the BIT across the EU. As such, the BIT’s modern language, which we understand has been approved by the European Commission, may be mirrored in other BITs to be entered by Hungary and, potentially, other EU member states.