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New EU Regulation addressing the transition of extra-EU Bilateral Investment Treaties enters into force

On 12 December 2012, the European Union (the “EU” or the “Union“) adopted Regulation 1219/2012 (the “Regulation“), establishing transitional arrangements for bilateral investment treaties (“BITs“) between Member States and third countries, pending the eventual entry into force of EU-wide investment agreements. Following its publication in the Official Journal of the EU on 20 December 2012, the new Regulation entered into force on 9 January 2013.

Background

The Lisbon Treaty
The Treaty on the Functioning of the European Union (the “TFEU“) confers on the EU exclusive competence in respect of the common commercial policy (Article 3(1)(e)). Under that exclusive competence, according to Article 2(1) TFEU, only the EU may legislate and adopt legally binding acts in this field, whereas Member States may only do so themselves if so empowered by the EU.

The Lisbon Treaty, effective from 1 December 2009, brought foreign direct investment within the scope of the EU’s common commercial policy and, consequently, within the scope of the EU’s exclusive competence. Accordingly, agreements on foreign direct investment constitute legally binding acts of exclusive competence of the Union, including the external agreements in force, which will be progressively replaced by agreements of the EU. Moreover, international agreements relating to foreign investment concluded by Member States may include provisions that affect EU common rules on capital movements, laid down in the TFEU. However, the Lisbon Treaty did not set out any explicit transitional arrangements for such agreements, nor for the agreements that have been concluded by Member States with third countries even after the entry into force of the Lisbon Treaty. The Regulation was introduced to address that lacuna.

BITs between EU Member States and third countries
The EU is both the world’s leading host and source of foreign direct investment. Member States have concluded approximately 1200 BITs that today account for approximately half of the investment agreements currently in force around the world. These BITs provide investment protection guarantees that constitute an effective tool in the promotion and attraction of investment. In this regard, the Council of the EU (the “Council“) considered that:

“Given that bilateral investment agreements concluded by Member States with third parties are, so far, the main source of protection and legal security for the European investor abroad, the new legal framework should not negatively affect investor protection and guarantees enjoyed under the existing agreements”. (Position (EU) No. 11/2012 of the Council at first reading, 2012/C 352 E/02)
In the European Commission’s (the “Commission“) vision, the Union’s investment policy should take into account investment promotion efforts by Member States, provided they remain consistent with the common commercial policy. In the final debate regarding the Regulation before the European Parliament, EU Trade Commissioner Karel De Gucht stated:

“All the institutions agreed from an early stage that a new EU investment policy had to be based on existing experience in Member States. Indeed their investment agreements concluded over the last 60 years with further states constitute a precious acquis. At the same time it was, and still is, necessary to build a genuine EU policy”.

The European Commission’s Proposal
On 7 July 2010, the Commission submitted a Proposal for a Council and Parliament Regulation establishing transitional arrangements for BITs between Member States and third countries. The Commission’s Proposal was negotiated with the Council, the Member States and third countries, even before the Lisbon Treaty came into force. Following the entry into force of the Lisbon Treaty on 1 December 2009, the Commission asserted the EU’s exclusive competence over the conclusion of agreements covering all matters relating to foreign investment, including both foreign direct investment and portfolio investment.

The Commission considered that only a Regulation could ensure an appropriate transition and provide the necessary legal certainty on the status and validity of the BITs negotiated by Member States and third countries. Thus, the Proposal aimed to prevent inconsistencies that could compromise Member States’ commitments under EU law and provide stable and predictable conditions for investors operating under extra-EU BITs. Under public international law, BITs remain valid and binding on Member States, unless they expire or are replaced by EU agreements relating to the same subject-matter.

The Regulation

Pursuant to the Regulation, by 8 February 2013, Member States must notify the Commission of all existing BITs with third countries signed before the entry into force of the Lisbon Treaty which they wish to remain in force (Article 2). The process of notification includes providing a copy of those BITs to the Commission. Once notified, the Commission may assess whether the provisions of those BITs constitute a “serious obstacle” to the negotiation or conclusion of BITs between the EU and third countries, with a view to their progressive replacement (Article 5). If the Commission finds that one or more provisions of the BIT constitute a “serious obstacle”, it shall enter into consultations with the Member State concerned to identify the appropriate actions to resolve the matter. Those consultations must last no longer than 90 days (Article 6(2)). Within 60 days of those consultations ending, the Commission may indicate the measures to be taken by the Member State concerned in order to remove the obstacles (Article 6(3)).

When Member States intend to enter into negotiations with a third country to amend or conclude a BIT, they must notify the Commission in writing of their intentions and provide, inter alia, the relevant documentation as well as the objective of such negotiations (Articles 8 and 9). The Commission must authorise such negotiations. It will do so, unless it concludes that the opening of such negotiations by a Member State would be: (a) inconsistent with the EU’s investment policy; (b) incompatible with EU law; (c) superfluous (because the Commission has submitted or has decided to submit a recommendation to open negotiations with the third country concerned); or (d) that they constitute a “serious obstacle” to the negotiation or conclusion of bilateral agreements with third countries by the EU.
Before signing a BIT, Member States must also obtain the prior authorisation of the Commission. Member States are required to inform the Commission of the outcome of the negotiations and provide it with the text of the BIT (Article 11).

Additional duties are also imposed on Member States in relation to BITs covered by the Regulation (Article 13). First, the Commission must be informed of all meetings which will take place under the provisions of the BIT and be provided with an agenda of what is to be discussed at those meetings. Second, Member States must, without “undue delay”, inform the Commission of any representations made to it that a particular measure is inconsistent with that agreement. Member States must also inform the Commission of any request for dispute settlement lodged under the auspices of the BITs as soon as they become aware of such a request. They must also cooperate with the Commission to ensure that they mount an effective defence, which may include, where appropriate, the participation in the procedure by the Commission. Third, Member States must seek the agreement of the Commission before activating any relevant mechanisms for dispute settlement against a third country and shall, where requested by the Commission, activate such mechanisms. Member States are obliged to “fully cooperate” with the Commission in conducting the procedures triggered by these relevant mechanisms.

Finally, the Commission is obliged to present a report on the application of the Regulation to the European Parliament by 10 January 2020 (Article 15).

Analysis

The Regulation begins to establish a necessary legal framework to regulate BITs between Member States and third countries following the entry into force of the Lisbon Treaty. It represents a first effort by the EU towards achieving legal certainty for investors operating under those agreements and perhaps of more importance, it marks a substantial step towards the adoption of a common EU policy on foreign direct investment. Notably, however, it omits intra-EU BITs, which remain the subject of substantial ICSID and other claims by EU investors against other EU host States.

It is clear that there is still a long road ahead as regards the implementation of the Regulation, including future negotiations of the EU agreements that will replace the BITs entered into by Member States. The Commission has, however, already been given a mandate by the Council to negotiate new investment treaties with Singapore, Canada and India. The implementation of the EU’s fledgling international investment policy has begun.