Parallel Proceedings at the Intersection of FDI Screening and Investment Arbitration
Authors: Sally Pei (Arnold & Porter) and Joel Dahlquist (Arnold & Porter)
Introduction
States in Europe and beyond are increasingly screening incoming foreign direct investment (“FDI”). When a host State blocks or restricts an investment on security grounds, the affected investor may seek judicial review domestically, initiate investor-state dispute settlement (“ISDS”) proceedings under an applicable investment treaty, or pursue both in sequence or in parallel. The prospect of overlapping domestic and international proceedings raises a host of complex legal questions. How effective are domestic review mechanisms, and how do they compare across jurisdictions? What ISDS issues does this scenario trigger? And, to what extent does the quality of domestic proceedings shape and constrain any related international arbitration? This post addresses each of these questions in turn.
I. Challenging Adverse Screening Decisions in Domestic Courts: A Brief Comparative Survey
A. The EU
FDI screening sits at the intersection of regulation of FDI (an area of exclusive European Union (“EU”) competence) and national security (which is reserved for Member States). Art. 3(5) of the EU FDI Screening Regulation (Regulation (EU) 2019/452) thus sets only a minimum floor regarding the mechanisms for foreign investors to challenge adverse screening decisions: Member States’ must provide foreign investors ‘the possibility to seek recourse against screening decisions,’ leaving considerable discretion as to the forum, procedural rules, and standard of review. The result is a patchwork of national systems, some purpose-built for FDI review challenges and others relying entirely on general administrative law. We discuss a few salient examples below.
1. Germany
In Germany, FDI screening decisions are taken by the Federal Ministry for Economic Affairs and Climate Action (“BMWK”) under the Foreign Trade and Payments Act (“AWG”) and the associated Ordinance (“AWV”). Adverse decisions are administrative acts (Verwaltungsakte) and may be challenged before the administrative courts. Jurisdiction in the first instance falls exclusively to the Berlin Administrative Court (Verwaltungsgericht Berlin), reflecting the central role of the BMWK (see for example ICLG Foreign Direct Investment Regimes Laws and Regulations Report 2026 — Germany).
However, the scope of review is narrow: Courts may review a screening decision for procedural compliance and formal legality, but the substantive security assessment falls within the executive’s margin of appreciation and is largely insulated from judicial scrutiny (see Bormann, noting the BMWK’s broad discretion to make security assessments, and that ‘the extent of judicial review has been significantly reduced’ accordingly).
Until November 2023, no screening decision had ever been successfully challenged. That month, however, the Berlin Administrative Court annulled two BMWK decisions — the PCK Raffinerie case (concerning the acquisition of an ownership interest in a major crude oil refinery) and the Heyer Medical case (concerning an attempt to acquire a German manufacturer of anesthesia equipment and ventilators) — both on procedural grounds. It remains to be seen whether these rulings signal a genuine willingness to scrutinize the Ministry’s conduct in FDI screening (even on procedural grounds) or are simply outliers.
2. Spain
Spain’s FDI screening regime is established under Article 7 bis of Law 19/2003, as supplemented by Royal Decree 571/2023 and Royal Decree-Law 34/2020. Adverse decisions by the Council of Ministers are subject to challenge before the Sala de lo Contencioso-Administrativo of the Tribunal Supremo.
The ongoing litigation arising from Spain’s 2024 decision to block a Hungarian consortium’s takeover bid for Talgo, the Spanish high-speed train manufacturer, offers a real-time illustration of how the regime operates in practice.
In blocking Ganz-Mávag’s €619 million bid, the Council cited concerns relating to Talgo’s track-gauge conversion technology — considered strategically important to Ukraine’s railway integration with the EU — and alleged links between the consortium’s ultimate owners and Russian interests. The Council of Ministers also declared that the administrative file was classified (p. 2; stating that the Council of Ministers declared the information on record as classified and that authorization ‘would entail insurmountable risks to national security and public order’).
Ganz-Mavág and former Talgo shareholders have initiated multiple sets of proceedings in the Tribunal Supremo. A central issue in several of these proceedings concerns access to the administrative file, and the tension between the government’s interest in protecting sensitive national security-related material and the procedural rights of the parties seeking to challenge the Council’s screening decision. In a January 2026 ruling, the Tribunal Supremo ordered that the classified documents be included in the court record and made available to all parties on equality of arms grounds. The Tribunal Supremo did, however, uphold restrictions on documents created by Spain’s intelligence agency, Centro Nacional de Inteligencia (“CNI”).
Ganz-Mávag has also reportedly brought an investment arbitration against Spain, arguing that the adverse screening decision violates the bilateral investment treaty (“BIT”) between Spain and Hungary.
3. Other EU Member States
The picture across other EU Member States is fragmented, with significant variation in the scope and robustness of review.
In Belgium, for example, foreign investors may appeal adverse decisions from the Interfederal Screening Committee to the Brussels Market Court within 30 days. That court has jurisdiction over the case both in law and in fact, and has power to annul a challenged decision — a notably more searching standard than pure supervisory review for procedural and formal compliance (see DLA Piper, Belgium Section).
At the other end of the spectrum, in Sweden, an adverse FDI screening decision must be appealed directly to the government. The government’s decision may only be appealed to the Supreme Administrative Court if it potentially infringes Article 6 of the European Convention on Human Rights (right to a fair trial) (see Section 39 of the Swedish Act (2023:560).
Other countries fall somewhere in between. The Czech Republic subjects adverse decisions to revision under administrative procedural rules, though annulment actions do not generally have suspensory effect (see DLA Piper, Czech Republic section). Austria similarly channels challenges through an administrative process with an ultimate appeal to the Constitutional Court or Administrative Court.
Across the board, publicly reported case law on FDI screening challenges in EU Member States remains scarce, making it difficult to assess how these mechanisms operate in practice, beyond their formal design.
B. The UK
The United Kingdom operates its own distinct regime under the National Security and Investment Act 2021 (“NSIA”). Under sections 23 and 26 of the NSIA, the Secretary of State makes final orders, including divestment orders, which are subject to challenge before the Administrative Court of the High Court of Justice.
The FTDI Holding litigation offers the most detailed picture to date of how such challenges are likely to fare.
FTDI Holding Limited, a UK holding company ultimately owned by five Chinese state-backed funds, had in 2021 acquired an 80.2% stake in a Scottish semiconductor company. The acquisition pre-dated the NSIA’s entry into force and was accordingly not voluntarily notified to the Secretary. However, the NSIA authorizes the Secretary to ‘call in’ and review transactions that were not voluntarily reported. The Secretary exercised that authority in November 2023 and ordered full divestment in November 2024, citing potential disruption to critical national infrastructure.
FTDI Holding sought judicial review. The High Court rejected FTDI’s challenge at both the interim (Interim Relief Judgment, 2025) and merits stages (Substantive Judgment, 2025).
Several features of the litigation are worth noting.
First, the court found that the Final Order was insufficiently reasoned, characterizing its stated grounds as ‘largely formulaic, uninformative and by no means comprehensive’ (Substantive Judgment, 2025, para. 133). However, the court declined to invalidate it, because evidence demonstrated that the decision-maker had in fact possessed adequate reasons for the decision, even if they had not been set out in the Order (Substantive Judgment, 2025, paras. 133-136). This apparent tolerance for abbreviated reasoning sits in notable contrast to merger control cases, where decisions that are inadequately reasoned are typically invalidated.
Second, the proceedings employed a ‘special advocate’ procedure: classified material concerning the national security assessment was made available to the court in closed proceedings, but the investor and its legal counsel were excluded and had no opportunity to see or respond to that material. A special advocate — appointed by the Attorney General, but not instructed by or reporting to the claimant — was tasked with representing the claimant’s interests in the closed proceedings (Substantive Judgment, 2025, paras. 47-48).
Third, the court endorsed earlier case law holding that the assessment of national security risk is a matter for the executive and not the judiciary (Substantive Judgment, 2025, para. 106). The result is a standard of review that is substantially more deferential for national security issues than that which applies to ordinary agency decisions or, for instance, to competition authority decisions. This deferential stance is not peculiar to the UK; it reflects a broader judicial instinct, visible across all surveyed jurisdictions, to accord the executive a wide margin of appreciation when national security is invoked.
Taken together, these three features paint a picture of judicial review that is available in form but significantly constrained in practice.
C. Findings of the Comparative Survey
Several insights emerge from this comparative survey. The most fundamental is the gap between the formal availability of judicial review and its scope in practice. Every jurisdiction offers some mechanism for challenging an adverse screening decision, and in most the relevant court has power in principle to annul it. But the substantive security assessment itself has remained largely insulated from scrutiny. Some jurisdictions expressly limit judicial review to procedural and formal legality. Even in jurisdictions where courts are empowered to review the merits, courts have shown little appetite for second-guessing the national security determinations of the executive.
A sharper point of divergence concerns how systems handle the evidentiary problem at the heart of these cases, given that the government’s case typically rests on material it is unwilling or unable to disclose. The UK and Spain have arrived at different answers. The NSIA’s special advocate procedure keeps classified material from the investor entirely, treating the appointment of an independent advocate as a sufficient procedural safeguard. The Tribunal Supremo, by contrast, has insisted on full party access to the classified administrative file — carving out only documents prepared by the CNI — grounding its position in equality of arms and effective judicial protection. These differing approaches reflect different underlying judgments about how to balance the rights of a party to access evidence against national security interests. Other jurisdictions will likely be forced to confront this issue as their FDI screening mechanisms mature.
Domestic proceedings do not, however, exist in isolation. The procedural features of the review available to an investor in national courts may bear directly on any concurrent or subsequent ISDS claim. It is to those issues that we now turn.
II. ISDS Issues Triggered by Parallel Proceedings
As noted above, in addition to domestic remedies, investors may also opt to pursue recourse against adverse screening decisions under international investment agreements. The interaction between these tracks raises a series of issues that are only beginning to be worked out in practice.
A. Fork in the Road
The most immediate issue is the ‘fork-in-the-road’ problem. Many investment treaties contain provisions specifying that once an investor submits a dispute to domestic courts or administrative tribunals, it may not subsequently bring the same dispute to international arbitration — and vice versa (see for example C. Schreuer et al., The ICSID Convention: A Commentary, 2024, Art. 26, paras. 64–99).
The effectiveness of a fork-in-the-road objection depends on whether the domestic and international proceedings are treated as the ‘same’ dispute. The ‘triple identity’ and ‘fundamental basis’ tests are discussed in, inter alia, CMS Gas Transmission Co. v. Argentina (Decision on Jurisdiction, 2003, para. 80), and Pantechniki SA Contractors & Engineers v. Albania (Award, 2009. para. 61).
In the FDI screening context, a domestic administrative law challenge and an ISDS claim are likely to be framed differently enough that a fork-in-the-road objection may not succeed, particularly given the general direction of arbitral practice to interpret fork-in-the-road clauses narrowly. The domestic claim is usually directed at the legality of a particular administrative or agency action under domestic law, whereas the ISDS claim is framed as a treaty breach under international law — with different legal standards and different available relief.
B. Due Process and Access to Documents
A more substantively interesting question is how an ISDS tribunal should assess a treaty claim arising from an FDI screening decision — and in particular, how the procedural quality of the domestic proceedings bears on that assessment. There are several points of intersection.
First, to the extent that the investor argues before an investment tribunal that the State violated the fair and equitable treatment (“FET”) standard in conducting the screening process, the domestic proceedings will be placed at issue. Where an investor argues, for example, that the FDI screening process did not afford it an opportunity to be heard, that the screening decision was not adequately reasoned, or that the underlying security evidence was never disclosed, whether the investor raised those arguments in domestic challenges, and how the courts addressed them, will be relevant. As noted above, domestic courts have, to varying degrees — and often for legitimate reasons of constitutional structure, separation of powers, and institutional competence — displayed substantial deference to the executive’s national security determinations, and have recognized that at least some types of evidence and information warrant heightened protection. How investment tribunals will measure the conduct and outcome of domestic proceedings in the national security context against treaty standards remains to be seen.
Second, an investor that has pursued domestic remedies without success may seek to frame its experience of the domestic proceedings as a denial of justice — arguing not merely that the outcome was wrong, or that the domestic courts’ treatment of its claims in that particular case was incorrect, but that the entire legal framework meant that it was denied access to justice.
The denial of justice standard under customary international law or the FET standard is a high bar: What is required is a fundamental failure of the domestic legal system to provide the investor with access to justice — whether through a refusal to adjudicate, or a process so structurally flawed as to be incapable of affording a fair hearing.
Investors may attempt to test certain features of domestic FDI screening frameworks against the denial of justice standard. For example, investors might attack procedures in which they are unable to see or respond to the evidence against them (such as the UK’s ‘special advocate’ process discussed above) as a denial of justice under international law. However, such arguments will likely have to grapple with the reality that States have compelling interests in protecting sensitive information, and in particular may reasonably take the position that they should not be forced to share classified material with an entity that has been assessed to present a national security threat. Where international law draws the line between protecting national security and denial of justice remains an open question.
Third, some of the same tensions that pervade domestic FDI screening proceedings are likely to resurface at the arbitral stage. A host State defending an ISDS claim arising from a screening decision will often be unable or unwilling to disclose sensitive national security material in the arbitration (even if that sensitive material entirely vindicates its underlying position), and will urge the tribunal to accord deference to its security assessments for much the same reasons it urged deference on domestic courts. In that sense, the arbitration does not so much resolve these underlying tensions as transplant them into a new forum.
But the institutional position of an investment tribunal is also meaningfully different from that of a domestic court. A domestic court operates within the same constitutional order as the executive whose decisions it reviews, and the deference it accords to national security determinations reflects settled understandings about the separation of powers and institutional competence. An investment tribunal enjoys no such relationship with the host State. It is an international body applying international standards, and its assessment of whether a State’s conduct met those standards is not constrained by domestic constitutional arrangements.
How tribunals will navigate these issues — how much weight to give State assertions of national security privilege, how to assess the adequacy of proceedings from which the investor was partly excluded, and whether to draw adverse inferences from non-disclosure of security-sensitive material —remains largely unresolved. The answers to these questions will have significant implications both for the effectiveness of investment treaty protection in the national security context and for States’ ability to take steps to protect their own national security without incurring international liability.
Conclusion
The intersection of FDI screening and international investment law is a rapidly developing area. As screening activity increases across Europe and major economies, and as the first generation of hard-fought domestic cases generates precedent, investors are beginning to explore the full range of available remedies. Several threads will be worth watching.
First, domestic review mechanisms vary significantly in their practical effectiveness, but share a common feature: substantial judicial deference to executive security assessments. That deference is not without legitimate justification, but whether it comports with the standards of international investment law is a question that arbitral tribunals will increasingly be asked to answer.
Second, particularly as both domestic courts and international arbitral tribunals may face institutional constraints on their ability to review the merits of security assessments, the procedural quality of the domestic proceedings will matter. That is so not only as a matter of domestic rule of law, but also because those proceedings form the evidentiary and legal backdrop against which any subsequent ISDS claim will be assessed. How a domestic court handled an investor’s challenge will bear directly on the shape and prospects of any downstream treaty claim.
