Regulation (EU) No 1219/2012: Status of Extra-EU BITs Clarified

On 20 December 2012, the Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries (the “Regulation”) was published in the Official Journal of the European Union and entered into force 20 days after the publication. The initiator of the Regulation’s adoption was the European Commission (the “Commission”), which announced the draft of the proposal in 2010.

Given that EU Member States have entered into approximately 1200 BITs with non-EU countries providing for divergent standards of treatment, this is a major step towards establishing and enforcing a uniform and fair system of foreign investment protection in the EU.

The Regulation puts an end to controversies and debates regarding the legal effect of BITs between EU Member States and non-EU countries (“extra-EU BITs”). The core of uncertainty surrounding extra-EU BITs originates from Article 207 of the Treaty on the Functioning of the European Union (the “TFEU”), which referred foreign direct investments to the exclusive competence of the EU.

Before the Lisbon Treaty entered into force on 1 December 2009, individual Member States were empowered to enter into BITs while the EU was securing the liberalization of foreign investments and focused on negotiating free trade agreements. In particular, the Commission is currently negotiating investment specifics, including investment protection, as part of its Free Trade Agreement talks with Canada, India, and Singapore. The Lisbon Treaty abandoned such dualism and devolved the competences in relation to foreign direct investments, including the negotiation and conclusion of BITs with non-EU states, to the EU. What was missing in the Lisbon Treaty and became an issue in practice, were transitional provisions clarifying the status of existing extra-EU BITs.

According to the Commission’s press-release, the Regulation pursues a smooth transition towards the new EU investment policy in two ways:

(i) It provides for legal certainty for European and foreign investors benefiting from investment protection offered in Member States’ bilateral investment agreements concluded with other parts of the world previous to the Lisbon Treaty. It clarifies the legal status of those agreements under EU laws and confirms that they may be maintained in force until they are replaced by an EU investment agreement.

(ii) At the same time, the Regulation also establishes a mechanism for empowering Member States – under certain conditions – to negotiate bilateral investment agreements with countries not immediately scheduled for EU-wide investment negotiations. This is designed to expand the scope of investment protection currently available to European investors.

Status of “before Lisbon Treaty” extra-EU BITs

The Regulation clearly states that extra-EU BITs concluded before the entry into force of the Lisbon Treaty will remain effective until replaced by an investment agreement of the EU. The Commission will be responsible for taking necessary steps to facilitate the replacement of existing BITs with EU investment agreements. When such agreements are signed, Member States will be required to withdraw their authorization of the respective existing BITs.

Pursuant to the Regulation, Member States are obliged to notify the Commission about their BITs with third countries entered into before 1 December 2009 or before the date of accession to the EU, whichever is later, and whether they wish to maintain them. The Commission will further assess the notified BITs “by evaluating whether one or more of their provisions constitute a serious obstacle to the negotiation or conclusion by the Union of bilateral investment agreements with third countries, with a view to the progressive replacement of the bilateral investment agreements” (Article 5 of the Regulation). Where the Commission establishes that such obstacles exist, the Commission and the Member State concerned shall confer in order to elaborate measures to resolve the matter. 60 days after the end of the consultations, the Commission “may indicate the appropriate measures to be taken by the Member State” (Article 6 of the Regulation).

Amendment and negotiation of new extra-EU BITs

The Regulation stipulates that a Member State may enter into negotiations with a third country in order to amend an existing or to conclude a new BIT provided that such intention was prior notified to and negotiations were authorized by the Commission. Following such notification and submission of the relevant documents, the Commission shall make the notification and, if requested, the documents, available to the other Member State subject to a confidentiality obligation. The authorization may be accompanied with the requirement to include into or remove from the negotiations’ agenda certain treaty clauses with a view to ensure compliance with EU law and investment policy.

The time limit for taking the decision is 90 days from the notification or from the receipt of additional information, if such is requested by the Commission. The Commission shall not grant authorization to open formal negotiations, if it concludes that such negotiations would:

(i) be in conflict with the EU law except for incompatibilities arising from the allocation of competences between the EU and Member States;

(ii) be superfluous, because the Commission has submitted or has decided to submit a recommendation to open negotiations with the third country concerned pursuant to Article 218(3) TFEU;

(iii) be inconsistent with the EU’s principles and objectives for external action (Chap-ter 1 of Title V of the Treaty on European Union); or

(iv) constitute a serious obstacle to the negotiation or conclusion of BITs with third countries by the EU.

Before signing, the final version, the BIT must be approved by the Commission based on the above four criteria and the Commission’s requirement communicated with the authorization to open formal negotiations. The 90 days time limit is also applicable for rendering the decision on authorization to sign and conclude the BIT.

Intra-EU BITs

Whereas the Regulation clarifies the legal status of extra-EU BITs, BITs between third states and Member States entered into before accession of the latter to the EU (“intra-EU BITs”), remain an area of uncertainty. The Commission has consistently criticized intra-EU BITs for having a discriminatory effect, as their investor treatment standards naturally vary from treaty to treaty, which conflicts with Article 18 of the TFEU:

“Within the scope of application of the Treaties, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.

The European Parliament and the Council, acting in accordance with the ordinary legislative procedure, may adopt rules designed to prohibit such discrimination”.

The Commission was also concerned that the jurisdiction of arbitral tribunals to resolve investment disputes would undermine the power of the European Court of Justice to issue preliminary rulings on the relevant questions of EU law according to Article 267 TFEU.

In the recent past, the Commission has not proven to be successful in pursuing judiciary support for primacy of EU law over intra-EU investment treaties.

For example, in Eureko v. The Slovak Republic, the tribunal rejected Slovakia’s jurisdictional objection that the Netherlands-Slovak Republic BIT, on which its jurisdiction was alleged, was no longer applicable due to Slovakia’s accession to the EU. The tribunal upheld its jurisdiction, which was later confirmed by the Frankfurt Higher Regional Court in the setting aside proceedings. We have previously reported on this case. In essence, a German court rejected the argument that arbitration under a BIT undermines exclusive competence of the ECJ and noted that incompatibility with EU law could be argued at the enforcement stage, given that the investment arbitration at bar was based on UNCITRAL Rules. The decision has been appealed to the German Supreme Court, which has yet to render a decision.

However, a recently published award in Electrabel v. Hungary illustrates a different approach advocating primacy of EU law over investment treaties. The claim of a Belgian investor under the Energy Charter Treaty (the “ECT”) in this dispute arose from the termination of a power purchase agreement (the “Agreement”) by Hungary as, according to the preliminary decision of the Commission (the “Decision”), it provided for unlawful state aid. The Agreement related to a power plant, Dunamenti, that was privatized in 1995 when the Agreement was signed between Electrabel’s subsidiary Dunamenti Eromu, the owner-operator of Dunamenti, and MVM, a state-owned electricity provider. The Decision obliged Hungary to suspend the allegedly illegal state aid pending the Commission’s investigation of the Agreement.

The tribunal ruled that the ECT cannot exempt a state from enforcement of a legally binding decision of the Commission under EU law and, consequently, a foreign investor cannot rely on the ECT as a remedy in such circumstances (Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 4.169).

Legitimate expectations were also rejected as an argument put forward by Electrabel on the ground that both the ECT and EU law provide for a state policy of free market competition and, therefore, foreign investors should expect the liberalization of the internal market despite prior price arrangements (Electrabel S.A. (Belgium) v. Republic of Hungary, paraa. 4.133-4.142.).

The tribunal rejected the Commission’s jurisdictional objection presented in the form of an amicus curiae brief premised on the exclusive jurisdiction of EU courts over intra-EU disputes regarding EU law. The tribunal ruled that the dispute did not concern EU law as it is not the Commission’s decision but rather the consequence of Hungary’s conduct, which forms the subject matter of the dispute (Electrabel S.A. (Belgium) v. Republic of Hungary, para. 4.171.).

To summarize, these two developments (the adoption of the Regulation and the Electrabel award) are two important messages to investors regarding EU investment treaty policy: the good news – investors can still count on the same level of protection under BITs with non-EU states (the Commission, though, is still keeping an eye on BIT’s compatibility with EU law); the bad news – guarantees under intra-EU treaties can be interpreted in favor of EU law to the detriment of investors.