The EU Proposal for a Regulation establishing transitional arrangements for bilateral investment agreements

December 28, 2010

By Antoine Martin.
The Treaty on the Functioning of the European Union (TFEU) establishes the European Union’s exclusive competence on trade (Article 206) and foreign direct investment (Article 207), as part of the common commercial policy under Article 3(1)(e) TFEU. EU FDI, however, are currently regulated through 1200 Bilateral Investment protection Treaties (BITs), creating various standards of treatment and a certain degree of legal uncertainty at the EU level.

As a result, and although BITs remain binding on the Member States under public international law, the Commission recently adopted a proposal for a Regulation as to how the BITs adopted between Member States and third countries might be handled in a close future.[1] The proposed Regulation would deal with the transitional consequences of the EU’s new competence on investment, maintain the status quo by authorising the continuation of the existing agreements entered into by EU Member States (Chapter 2 and Article 3 of the proposed Regulation) and suggest procedures as to the development of new agreements in time.

Member States, in addition, would be required to “take the necessary measures to eliminate incompatibilities, where they exist, with the law of the Union contained in Bilateral Investment Treaties concluded between them and third states” (Proposed Preamble at 8).

Overall, the Commission acting in the light of the exclusive competence of the EU regarding the common commercial policy would be involved at every stage of the negotiations by the Member States pursuant to Article 218(2) of the Treaty (“The Council shall authorise the opening of negotiations, adopt negotiating directives, authorise the signing of agreements and conclude them”), although States might require a certain degree of confidentiality to be maintained (Article 14).

Common international investment policy and the Commission

Article 6, for instance, would consider the possible withdrawal of the authorization to maintain existing agreements under Article 3 when (a) an agreement conflicts with the law of the Union, (b) an agreement overlaps, in part or in full, with an agreement of the Union in force with that third country or (c) an agreement constitutes an obstacle to the development and the implementation of the Union’s policies relating to investments. Such a decision, thus, would remain at the discretion of the Commission although some guidelines are provided in the proposal:

6(2). When the Commission considers that there are grounds to withdraw the authorization provided for in Article 3, it shall deliver a reasoned opinion to the Member State concerned on the necessary steps to be taken to comply with the requirements referred to in paragraph 1. Consultations shall take place between the Commission and the Member State concerned.

6(3). Where the consultations referred to in paragraph 2 fail to resolve the matter, the Commission shall withdraw the authorisation for the agreement concerned. The Commission shall take a decision on the withdrawal of the authorisation in accordance with the procedure referred to in Article 15(2). It shall include a requirement that the Member State takes appropriate action, and where necessary terminate the relevant agreement.

Article 4 and 5 of the proposed Regulation, in addition, would consider the obligation of States to ask for an authorisation to open negotiations and publish future agreements annually for review. The review, more specifically, would identify quantitative and qualitative aspects of the agreements in place, as well as the possible obstacles the agreements could present to the implementation of the common commercial policy by assessing, in particular, whether the agreements (a) conflict with the law of the Union other than the incompatibilities arising from the allocation of competences between the Union and its Member States, (b) overlap, in part or in full, with an agreement of the Union in force with that third country and this specific overlap is not addressed in the latter agreement, or (c) constitute an obstacle to the development and the implementation of the Union’s policies relating to investment, including in particular the common commercial policy.

Article 8 would require the notification to the Commission of a Member States’ intent to modify an existing or to conclude a new bilateral agreement with a third country. Member States would be requested to provide all relevant documentation relating to the re-negotiation or negotiation of an agreement, at least five calendar months before the beginning of the formal negotiations with the third country concerned.

Article 10 would ensure that Member States keep the Commission informed of authorised negotiations and renegotiations, whilst the Commission could request to participate to the negotiating process as an observer, “to ensure full transparency and consistency with the Union’s investment policy”.

The proposed procedural framework, it is added, is inspired by the empowerment mechanism set by Regulation No 662/2009 of 13 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries on particular matters concerning the law applicable to contractual and non- contractual obligations and Regulation No 664/2009 of 7 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries concerning jurisdiction, recognition and enforcement of judgments and decisions in matrimonial matters, matters of parental responsibility and matters relating to maintenance obligations, and the law applicable to matters relating to maintenance obligations(proposal, p7)

Commission‘s objections

The Commission’s power to authorise the opening of formal negotiations (under Article 8), however, would be regulated under Article 9 of the Regulation. The Proposal, indeed, details the substantive grounds allowing the Commission to deny the opening of formal negotiations. More specifically, a denial could occur where the opening of negotiations would (a) be in conflict with the law of the Union other than the incompatibilities arising from the allocation of competence between the Union and its Member States, or (b) undermine the objectives of negotiations underway or imminent between the Union and the third country concerned, or (c) constitute an obstacle to the development and the implementation of the Union’s policies relating to investment, including in particular the common commercial policy. Broad perspective.

Article 11, finally, would deal with the end of the negotiating process by indicating the procedure and conditions under which Member States could be authorised to sign and conclude BITs. In other words, Member States would have to notify the Commission of the outcome of the negotiations (under Article 10) before signing an agreement, while the Commission would verify that the agreement does not undermine “imminent or ongoing EU investment negotiations or conflict with the obligations of EU law:

3. Upon notification the Commission shall make an assessment as to whether the negotiated agreement does not:

(a) conflict with the law of the Union other than the incompatibilities arising from the allocation of competences between the Union and its Member States, or (b) undermine the objectives of negotiations underway or imminent between the Union and the third country concerned, or (c) constitute an obstacle to the development and the implementation of the Union’s policies relating to investment, including in particular the common commercial policy, or (d) conflict with the requirement of Article 9(2), where applicable.

4. Where the Commission finds that the negotiations have resulted in an agreement which does not fulfil the requirements referred to in paragraphs 3, the Member State shall not be authorised to sign and conclude the agreement.

Commission ‘s involvement in dispute settlement matters

The Commission would also be involved in dispute settlement matters. Article 13 would request Member States to inform the Commission as to the discussions, meetings and requests for dispute settlement “as soon as they become aware of such request and to cooperate with the Commission as regards the activation of dispute”.

Parameters for future investment agreements

The Communication published with the Proposal is also worth reading and commenting, because it provides the broad principles and parameters submitted by the Commission to select future investment agreements.

As to the Criteria submitted for the selection of partner countries, the Commission appears to follow a very liberal approach. It makes clear that “the Union should go where its investors would like to go, just like it should pave their way abroad, through the liberalisation of investment flows” (Communication, p6). State partners, in addition, would be strictly selected with regards to their stability and institutional environments:

“The EU’s interests in investment negotiations would also be determined inter alia by the political, institutional and economic climate of our partner countries. The ‘robustness’ of investor protection through either host country or international arbitration would be important determinants in defining priority countries for EU investment negotiations. In particular, the capacity and the practice of our partners in upholding the rule of law, in a manner that provides a certain and sound environment to investors, are key determinants for assessing the value of investment protection negotiations”.

Short-term perspective v. looking beyond foreign direct investment

In the short term, the Communication mentions, the prospects for realising the integration of investment into the common commercial policy arise in ongoing trade negotiations, where the Union has so far only focused on market access for investors (EU/Canada, EU/India, EU/Singapore, see Communication, p7).

It is also added, however, that a sustainable policy needs to be achieved, therefore imposing to look beyond simply attracting foreign investors. As the Communication formulates, “it is important that a common international investment policy not only enables the execution of a direct investment itself – the acquisition of a foreign enterprise or the establishment of one – but also that it enables and protects all the operations that accompany that investment and make it possible in practice: payments, the protection of intangible assets such as Intellectual Property Rights [or the repatriation of profits]. In this respect, the articulation of investment policy should be consistent with the Treaty’s Chapter on capital and payments (Articles 63-66 TFEU), which provides that, in principle, all restrictions on payments and capital movements, including those involving direct as well as portfolio investments, both between Member States and between Member States and third countries, are prohibited”.

In addition, whilst the room left to public interest and state development in BITs is currently criticised and reviewed, the Communication importantly emphasises that “the Union should include precise clauses covering this issue into its own future investment or trade agreements. A clear formulation of the balance between the different interests at stake, such as the protection of investors against unlawful expropriation or the right of each Party to regulate in the public interest, needs to be ensured” (Communication, p8, emphasis added).

Finally, it is added that “a common investment policy should also be guided by the principles and objectives of the Union’s external action more generally, including the promotion of the rule of law, human rights and sustainable development (Article 205 TFEU and Article 21 TEU). In this respect, the OECD Guidelines for Multinational Enterprises, which are currently being updated, are an important instrument to help balance the rights and responsibilities of investors” (Communication, p9). If implemented, the last point would be of major impact, essentially in the absence of a clear consensus as to the existing obligations of corporations under international law (See for instance our recent Notes on John Ruggie’s Draft Principles here).

Enforcing commitments and International responsibility

By contrast with a relatively silent Proposal (to this effect), the Communication finally suggests that the EU might take international responsibility for the actions and omissions of its Member States with regards to FDI treatment and policies.

First, a binding state-state dispute settlement already in force regarding trade issues could be extended to investment negotiations. An investor/state dispute mechanism would also be considered. It is however recalled that the EU cannot qualify as a Party to the ICSID Convention so far (Communication, p10) so that alternatives, compromises or modifications will be needed. Second, the Commission -given its exclusive competence- “takes the view that the European Union will also be the sole defendant regarding any measure taken by a Member State which affects investments by third country nationals or companies falling within the scope of the agreement concerned” (Communication, p10).

Concluding remarks

In conclusion, it seems that the proposal might answer various interrogations asked since the announcement of the EU supremacy over FDI policies.

The approach, in addition, makes sense because it integrates investment promotion and protection into a common framework of trade liberalisation and competition enhancement. Whilst the existing BITs create commitments which must be continued under public international law, it indeed looks like “an international investment policy geared towards supporting the competitiveness of European enterprises will be best served by cooperation and by negotiations at the level of the Union”(Communication, p6). To this extent, the emphasis put on a possible EU international responsibility for the measures taken by the State Members appears as a strong counterpart to the limited autonomy left to the States.

However, although a one-size-fits-all BIT model would make no sense because “it seems neither feasible nor desirable to replace the investment promotion efforts of Member States”, it is made clear that this degree of sovereignty remains permitted “as long as [these efforts] fit with the common commercial policy and remain consistent with EU law” (Communication, p6). The future, that is, will tell the degree of autonomy which the Commission is genuinely willing to grant to the Member States.


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