Client Alerts

EU institutions clash over future of BITs

Volterra Fietta Client Alert
2 June 2011

On 10 May 2011, the European Parliament voted to approve a series of amendments to the European Commission’s draft Regulation on Bilateral Investment Treaties (BITs) released in July of last year. At present, there are approximately 1,200 BITs in existence between EU Member States and third countries. The outcome of the tussle between the institutions of the European Union on this subject is thus likely to have a significant impact on investors and Member States alike.

What is a BIT?

A BIT is an agreement establishing the terms and conditions for investment by nationals and companies of one country in another country. They establish a legally binding level of protection in order to encourage investment flows between two countries. A BIT grants investors a number of guarantees; these typically include fair and equitable treatment, non-discrimination, protection from unlawful expropriation, free transfer of funds and full protection and security. Further, the majority of BITs offer investors direct recourse to international arbitration against the country concerned when their rights under the BIT have been violated.

The proposals

On 7 July 2010, the European Commission put forward a draft Regulation to establish ‘transitional arrangements for bilateral investment agreements between Member States and third countries’ (extra-EU BITs). The draft Regulation is therefore intended to address the transitional aspects of the EU’S new-found competence on investment. In the longer term, as EU investment policy gradually develops, it is anticipated that existing BITs will be progressively replaced by European instruments. Agreements entered into between Member States relating to investments (intra-EU BITs), hotly debated in their own right, are not covered by the draft Regulation.

Under the original draft Regulation, the Commission proposed a Regulation that would require all Member States to notify the Commission of all of their existing BITs with third countries. Moreover, the Commission would have the power to withdraw authorisation for any existing BIT that it determined would conflict with EU law or policy or would overlap with any future EU Treaty. The period of the Commission’s review of these BITs would last five years.

By contrast, the European Parliament’s amendments would mean that not all BITs would be automatically reviewed by the Commission. Instead, the amendments made by the Parliament would only allow the Commission to review those BITs which ‘constitute a serious obstacle to the conclusion of future Union agreements with third countries’. The period of review of existing BITs with third countries would also be extended from five to ten years. Last month, in April 2011, the European Parliament’s International Trade Committee voted in favour of the Parliament’s amendments.

Looking ahead

Uncertainty over the future of BITs has existed since the Lisbon Treaty entered into force in December 2009, transferring the exclusive competence for foreign direct investment to the European Union. In light of recent events, that uncertainty shows no signs of abating. Indeed, the changes proposed could considerably alter the legal protections available to investors. Somewhat surprisingly, it appears that there are no European business groups that are seeking to influence the process. Even more striking, it appears that major EU capital exporting States with extensive BIT programmes, such as the UK, the Netherlands, Germany, Spain, France and Belgium have been largely silent about the significant benefits that their economies have gained from the protections afforded under their BITs to their nationals investing overseas.

The Parliament, the European Commission and the Council of the European Union will now conduct negotiations to produce a final version of the Regulation. Any investor that is relying on the existence of a BIT where an EU Member State is a party should actively be seeking expert advice as these negotiations play out.

This Client Alert is published by Volterra Fietta as a news service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the issues covered be required, please contact us using the details shown below.