As required by Regulation 1219/2012, the so-called Grandfathering Regulation, the European Commission recently published a report regarding the legal status of the approximately 1,300 bilateral investment treaties (BITs) that EU member states have concluded with third states, covering the period from 2013 until the end of 2019. A closer analysis of the report shows that not much has changed so far. However, changes can be expected due to domestic pressure in the member states.
The Grandfathering Regulation 1219/2012
Regulation 1219/2012 was the first piece of legislation which the EU adopted after it obtained exclusive competence over foreign direct investment (FDI) pursuant to the entry into force of the Lisbon Treaty on 1 December 2009. This Regulation does not cover the intra-EU BITs, which are scheduled to be terminated in due course.
The Grandfathering Regulation was the outcome of a bitter fight between the European Commission and the European Parliament on the one side, and the member states in the Council on the other side. In early 2010, in contrast to today’s post-TTIP and post-CETA environment, most member states still fully believed in the benefits of their BITs, which were largely based on the Dutch “gold standard” model BIT text. Member states thus vigorously defended them against any attempts by the European Commission to reform or even replace them.
The main concern of the member states was to maintain their 1,300 BITs, in particular in view of the fact that, at that time, the European Commission had no expertise in investment law, and had not yet fully developed its approach towards investment treaties, in particular the investor-state dispute settlement (ISDS) system. However, the European Commission’s first communication on these issues, which was published in July 2010, already foreshadowed what was to be expected.
The member states for their part were of the opinion that the transfer of the FDI competence to the EU was meant to apply only prospectively, and only to future EU investment agreements, but was certainly not meant to affect in any way their existing BITs. In contrast, the European Commission, and by extension the European Parliament, were of the view that, since the Lisbon Treaty, the EU has exclusive competence in this policy area; therefore all member states’ BITs must be terminated as soon as possible in order to make way for EU investment agreements.
Eventually, after two years of difficult negotiations, a compromise was found which incorporates the following principles in the Regulation:
- The grandfathering of all pre-Lisbon Treaty extra-EU BITs of member states.
- The replacement principle, meaning that new EU investment treaties with third countries will automatically replace all member state BITs with those countries.
- The authorisation principle, meaning that the European Commission is empowered to authorise the negotiation of new member state BITs as well as the re-negotiation or amendment of existing member state BITs with third countries.
The grandfathering principle
The European Commission accepted the main demand of the member states that all of their 1,300 pre-Lisbon Treaty BITs must be grandfathered, meaning that they must be considered to be in conformity with EU law and thus remain untouched by the EU. This will ensure legal certainty for their investors and for third states, and will prevent a sudden and unexpected distortion of the level of investment protection.
The replacement principle
However, the European Commission was only ready to accept the grandfathering principle in return for the replacement principle, which establishes the acceptance by member states that their BITs with third states will be automatically replaced by EU investment agreements with those respective states.
Accordingly, CETA and the attached investment protection agreement will replace the BITs which Canada currently has in place with ten central and eastern EU member states. Similarly, the EU-Singapore, EU-Vietnam and EU-Mexico free trade agreements will replace the member state BITs with these countries. Once these four EU agreements enter into force, they will replace no fewer than 57 member state BITs in one go. In this way, the EU will not only replace member state BITs efficiently, but impose its reform approach on third states.
However, in more recent free trade agreement negotiations, such as those with Japan, Australia and New Zealand, the EU has not included an investment protection chapter. As a result, arguably the BITs which, for instance, Australia has concluded with several central and eastern EU member states, would still remain in place, even after the EU-Australia free trade agreement has entered force. Consequently, the impact of the replacement principle seems too limited, unless the EU reverses its policy and decides to include investment protection chapters into its free trade agreements once more.
The authorisation principle
Finally, the Grandfathering Regulation had to deal with the situation that many negotiations regarding new BITs had continued, and were concluded and signed, after the Lisbon Treaty entered into force and before it was finalised. Moreover, in light of the fact that the EU would focus mainly on a handful of the most important trading partners such as Japan, China, Australia and New Zealand, the member states demanded to be able to continue to negotiate and conclude new BITs with third states that are not a priority for the EU.
The European Commission acknowledged that it would indeed be unable to cover the whole world with new EU investment treaties within a short period of time. It therefore accepted the possibility that member states could continue to negotiate new BITs or amend existing ones, albeit only after obtaining explicit authorisation from the European Commission. In this way, the European Commission could incrementally force member states to adopt its CETA approach in their BITs.
According to the European Commission’s report, no fewer than 164 requests for authorising new BIT negotiations were submitted by member states in the past seven years. This shows, as the report somewhat grudgingly acknowledges, that:
“[…] there exists a need to continue operating the transitional arrangements set out under Regulation (EU) No 1219/2012. This is confirmed by the fact that during the reporting period, the Commission received a constant flow – albeit with some fluctuations – of requests from Member States for bilateral investment agreements. Some Member States submitted a considerable number of requests under Chapter III and the geographical diversity in the network of third countries suggests that bilateral investment agreements are seen to be a useful tool for Member States to pursue economic opportunities and particular interests and priorities in cases where there is limited interest of the Union.”
Accordingly, the European Commission accepts that the Grandfathering Regulation is still needed and actually recommends its continued application.
Have member state BITs changed?
Thus, the key question is: have member state BITs actually changed since the EU obtained exclusive FDI competence and started its push to reform the ISDS system and substantive investment protection standards?
Prima facie, due to the Grandfathering Principle, the bulk of the 1,300 pre-Lisbon Treaty BITs simply continue in place unchanged. In this sense, not much has changed. However, some slow changes are nevertheless visible.
First, by virtue of the authorisation principle, the European Commission can force member states to incorporate its CETA approach in all new BITs or when re-negotiation existing BITs. In this way, albeit only in the coming decades, member state BITs will change and ultimately align with the EU’s CETA approach. For example, the European Commission now requires, in all of its authorisations, that member states include a provision which defers investment disputes to the multilateral investment court (MIC), currently negotiated within UNCITRAL, once it has been established. This is also reflected in the new model BIT texts, which the Netherlands, for example, has recently adopted.
Second, the statistics of the report indicate that after a spike of requests for authorisations in 2013 and 2014, the number of requests has significantly dropped. This is probably caused (at least partly) by the general backlash against BITs and ISDS, which has become more widespread and intense in many member states. In other words, there is simply no longer enough political support to negotiate new BITs.
Third, in recent years, several states have started to terminate their BITs with member states, for example South Africa, Indonesia and India, without intending to negotiate new ones with member states. Preferring to negotiate a single free trade agreement with the EU is probably another reason.
In sum, history proves that member states were right to demand the grandfathering of their BITs rather than accepting their immediate termination, as was originally demanded by the European Commission and European Parliament. Indeed, ten years after the EU obtained competence in this area, it has not been able to agree a single free trade agreement with an investment protection chapter that is fully operational. In fact, as mentioned above, the EU has even abandoned the investment protection chapters from its current free trade agreement negotiations, so it seems very unlikely in the short term that member state BITs will be replaced by European ones.
Consequently, if changes to member state BITs are to be expected, they will most likely come from internal, domestic pressure in the member states themselves. Indeed, many NGOs continue successfully to press for changes, albeit often with the help of misrepresentations. In addition, the fact that not only central and eastern EU member states, but Germany (and potentially the Netherlands), have been hit by investment claims, adds further fuel to the backlash against BITs and ISDS. Thus, changes to member state BITs may eventually come quicker than expected, but from an unexpected corner.