The principle of effectiveness during the EU Financial Crisis: effective judicial protection of bank
The aim of this research was to identify whether courts within the EU effectively protect bank depositors and whether arbitration would offer additional protection, especially in the light of the current global financial crisis. This was achieved by examining selective case law of national, EU and supranational courts and awards given by international tribunals in this area. In order to consider and compare the approach of courts and arbitral tribunals towards the protection of bank depositors during the financial crisis, this paper’s measure of assessment is based the right of effective judicial protection, as it is preserved in the Charter, the ECHR and the EU Treaties and the relevant case law.
Bank deposits as investments
The examination of the nature and characteristics of bank deposits in relation to the general features of investments under EU law and international law, might lead to some assumptions regarding whether bank deposits could qualify as investments.
At first, an investment involves a commitment of economic value, the purchase of an asset or the transposition of capital into a lucrative economic activity. The action of depositing money in a bank does not convert cash (or either cash-equivalents) into other assets. Furthermore, there is the argument that the operation of a bank deposit entails a commitment of economic value but from a reverse side. In particular, the bank invests the client’s money when it on-lends it to third parties. In such argument, the client becomes the lender to the bank, instead of being an investor in it.
Moreover, the duration of an activity plays a key role in identifying the activity as an investment. Since there is no a fixed time threshold, on the basis of which someone could assess whether a contribution may qualify as an investment, it is difficult to draw a general conclusion regarding bank deposits and their duration. It is clear that short-term bank deposits could not satisfy the duration requirement and long-term deposits might illustrate the establishment of long-lasting link with a country, while medium-term deposits are more controversial.
The third feature of investment relates to the profit expectation and the assumption of risk. Bank deposits are income-producing, since the depositors have at least a minimum return, in the form of the interest returned to them. As every profitable activity, bank deposits involve some risk. Since most Deposit Guarantee Schemes provide for the protection of a maximum amount of money deposited, the rest of the deposit remains uninsured. Therefore, the deposits in excess of the deposit guarantee threshold constitute unsecured claims of the depositor on the bank, and they can be bailed-in, contrary to the initial supposition that money deposited are available to be returned to their owners on demand.
Furthermore, an investment is generally considered to contribute to the development of the country. Strictly speaking, an individual bank deposit cannot be advantageous for the development of a country in a direct way. However, the long-term importance of bank deposits in a country’s economy is priceless. If banks do not provide finance, the economy of a country will suffer and finally fail. The ability of banks to provide finance depends on their ability to mobilise sufficient amount of deposits in the economy. Some clients deposit their money in a bank and some other clients borrow money from those resources, therefore the banking industry transform deposits into real productive capital, which contributes to the development of a country. Consequently, bank deposits are the foundations of an economy, since banks cannot function without deposits.
Moreover, the fact that some BITs expressly cover bank deposits also strengthens the argument that bank deposits are investments for the purposes of investment arbitration.
In summary, this section supports that although bank deposits cannot be regarded as investments up to the amount protected by the deposit guarantee schemes, they can be regarded as investments for the unsecured amount, i.e. the amount that is not secured under the relevant DGS. The importance of deciding whether bank deposits qualify as investments lies in the further allowance or prevention of the protection of depositors by the provisions of investment law and the availability of international investment arbitration for the resolution of their disputes and their effective protection during the financial crisis.
The approach of courts towards the protection of bank depositors and effectiveness
In the context of economic integration, the CJEU has been used to create new legal norms, establish new rights and interests and promote new policies. The whole process in this area has a normative character, since the changes introduced by the Court regarding economic governance and the role of various, national and supranational, actors involved, give rise to further litigation which results in deeper integration.
At the national level, courts remained highly deferential when dealing with reforms of the EMU and slightly less deferential when dealing with national measures in the same area. This extent of deference can be explained based in the concerns of domestic judges of possible adverse consequences of a negative decision and of intervening in areas of political process and sensitive emergency circumstances.
Similarly, the CJEU preferred to detach itself from scrutinising the legality of the ESM Treaty and declared inadmissible all applications made to review the compliance of national measures and the MoUs with the general principle of law and the Charter. Furthermore, it declared that the EU institutions were not involved in the conclusion of the MoUs and the financial assistance programmes, since they were not acting as organs of EU law at that time. Importantly, the EFTA Court refused to impose any responsibility on the State to compensate affected depositors, and prefer to shift all the burden on the DGS itself.
Finally, the ECtHR’s case law on the Eurozone crisis is mainly based on the argument that the economic crisis at stake constituted a major threat for the Eurozone, but also for the Union as a whole, so most measures adopted were declared proportionate and States were given a wide margin of appreciation.
The first conclusion reached is that the nature of the subject matter of the disputes, which requires particular expertise and democratic legitimacy, and the emergent character of the measures at stake, constitute the basic obstacle to judicial review, though such review seems more necessary for individuals than ever before. Besides, by refusing any link of EU law and the EU institutions with the MoUs means that, de facto, no legal organ within the EU legal order remains eligible to examine the protection of citizens’ fundamental, economic and social rights considering this field.
From a procedural scope of view all courts have offered sufficiently effective judicial protections, since applicants enjoyed access to justice and a fair trial. However, most of the rulings given only gave priority on economic and political considerations and the survival of the Eurozone, thus they have not focused on the protection of individuals’ rights.
The tendency identified that holds some of the most important actions taken in response to the crisis, with the European Commission and the ECB playing a crucial role in their adoption, to fall outside the scope of EU law and the jurisdiction of the European courts, limits the judicial protection of individuals on their national courts. National courts, from their side, seem reluctant to shift their focus towards the effects of the measures under challenges on the citizens.
The approach of Arbitration towards the protection of bank depositors and effectiveness
After examining the approach of national, supranational and international courts towards the protection of bank depositors during the financial crisis, this paper proceeded to the position that international arbitration has adopted when arbitrators were asked to review the conformity of the post-crisis measures adopted at the EU and national level with the standards afforded to the protection of foreign investors. For this purpose, the Abaclat v Argentina case has operated as a benchmark and an indication of how other arbitral tribunals in the pending cases could approach the matters of financial instruments as investments and the financial crisis.
The fact that most arbitral cases regarding the Eurozone are still pending renders any conclusion drawn, at least for the time being, somehow premature. As a matter of procedure, at this point the paper reiterates the conclusion made in the previous chapter, namely that all arbitral tribunals have offered sufficiently effective protection, in the sense that the applicants’ rights of access to justice and a fair trial have been respected. Consequently, comparatively, both litigation and arbitration satisfy the principle of effective (judicial) protection.
As an initial implication, the decision in Abaclat is considered landmark as it signals the availability of ICSID arbitration to holders of security entitlements that have been negatively affected by a sovereign debt restructuring. Such a possibility could be characterised both as salutary for foreign investors and as a menace to States in financial difficulties, such as the Eurozone countries. The immense significance of Abaclat does not depend on whether compensation was finally payable or not, but on the fact that it recognised that financial investment should enjoy the protection afforded by BITs. Indeed, since, probably, most BITs define ‘investment’ as ‘any kind of asset’, they give the opportunity to Tribunals to encompass on the notion of financial investments.
The introduction of international arbitration as a new forum for disputes arising out of sovereign debt restructurings demonstrates ‘a neglected field in the European Union countries’ reaction to the sovereign debt crisis. The reason for this is that, within the Eurozone, various legal and political measures were taken in order to achieve and secure financial stability, but the matter of the resolution of disputes arising out of those measures was never touched upon. If ‘the crisis showed that it was possible to have a sovereign debt crisis in a European Member State’, the Abaclat case revealed the availability of an international fora.
The regime of international arbitration lacks the feature of precedent, which means that arbitrators are not bound to follow previous awards, even in cases with very similar facts, and this is the reason why court decisions and arbitral awards do not have the same legal value though they are both enforceable and binding on the parties involved. Thus, it is only expected that the ongoing arbitration cases on the financial cases will use the reasoning of Abaclat, but no one can ensure that this will happen.
In any case, even if the approach of Abaclat Decision is not followed by other ICSID tribunals, and they find similar claims inadmissible due to the lack of an investment within the meaning of Article 25 of the ICSID Convention, this does not exclude the availability of other international arbitral tribunals. For example, most BITs signed by the aforementioned EU countries provide for the option to resort to other forms of arbitration, for instance ad hoc tribunals governed by UNCITRAL Arbitration Rules.
Such provisions that allow for other forms of arbitration avoid the obstacle of interpreting the notion of investment based on the ICSID Convention and would no longer constitute a threshold for holders of financial instruments ‘seeking redress under these BITs’.
By comparing the approach of courts and arbitral tribunals towards the protection of bank depositors, this paper reaches the conclusion that one basic difference between them lies on the ground of jurisdiction. In particular, while courts denied jurisdiction to hear the cases that concern the financial crisis, by declaring that they are not involved in the scope of EU law, arbitral tribunals are more likely to assume jurisdiction and proceed to the merits of the disputes, as happened in the case of Abaclat and as it is expected to happen in cases that were brought by shareholders that clearly fall under the scope of the relevant BIT.
Based on this, it is suggested that arbitration offer more effective protection than litigation, in the sense that applicants are given the possibility to present their arguments on the merits of their cases instead of being rejected at the initial stage of jurisdiction. It should be repeated here that the limited information on the arbitration cases, due to the confidentiality principle and the fact that most cases are still pending, constitutes a reservation of the paper.
While no legal organ within the EU legal order remained available for them, the only available forum for individuals; judicial protection is their national courts, and particularly on their national district courts, which prefer to remain detached from any political consideration and whose rulings are given with considerable delay. This is the reason why arbitration can operate as the only available forum where individuals can have their disputes being heard, at least those individuals who fall within the scope of a BIT or any other agreement that provides for arbitration.
Dr. Despina Christofi, LLB, LLM, PhD | Lecturer in International Commercial Arbitration and Investment Law, School of Law, UCLan Cyprus – Dchristofi1@uclan.ac.uk