European Union institutions consider the EU’s future international investment policy
Debate on the future of the European Union’s international investment policy is heating up as EU institutions weigh in with their recommendations.
With the entry into force of the Lisbon Treaty on 1 December 2009, the EU received exclusive competence over foreign direct investment, which has shifted the power to negotiate bilateral investment treaties with non-EU states (often termed ‘extra-EU BITs’) from the EU member states to the Union.
As a result, three European institutions—the European Commission, the European Council and the European Parliament—have begun the delicate task of forging a new legal framework for the negotiation of international investment agreements by the EU, as well as for a transition process for the more than 1,200 existing extra-EU BITs.
The European Commission kick-started the discussion in a 7 July 2010 draft Regulation and Communication. The Regulation would give member states temporary authority to maintain their existing BITs with non-EU countries, and even negotiate new ones. However, the Commission would have broad powers to withdraw that authority if it concluded that a member state’s BIT compromised the EU’s investment policy.
On 9 November 2010 the European Parliament held a hearing in Brussels to discuss the Commission’s proposal.
An important contribution to the debate came from Dr. Stephan Woolcock of the London School of Economics and Political Science (LSE), who presented a study commissioned by the Parliament, and prepared by LSE and the Overseas Development Institute (ODI).
The study addresses both the future EU policy on foreign direct investment as well as the draft regulation on transitional arrangements, and proposes a menu of options with respect to both issues. One particular point of concern is the “extreme vagueness” of the provisions in the current BITs:
“A problem arises, however, from the extreme vagueness of the BIT provisions, the absence of any binding and consistent case law as well the lack of any central instance that could guarantee the uniform interpretation and application of the law. This means that member states may have to pay large damages awarded by arbitrators who owe no allegiance to any constitution or constitutional treaty other than the BIT itself.”
With respect to the transitional arrangement, the study on the one hand appears to support the Commission’s draft regulation as a “framework that has the merit of ensuring that the Union can effectively take up its new exclusive competence and consistently develop its future policy on international investments.” At the same time, the study stresses the need for an institutional balance.
The European Council, which represents the interests of EU member states, has also weighed in with its views. In a document published on 25th October, the Council emphasizes that the new EU investment policy should not affect the protections under current member state BITs, and that the pillars of future EU investment agreements should be the provisions traditionally included in existing member states’ BITs—such as fair and equitable treatment, full protection and security, protection against expropriation, and dispute settlement mechanisms.
The Council also stresses that existing member state BITs should remain in force so long as they are not replaced by new EU investment agreements.
In contrast, the rapporteur of the European Parliament’s Committee on International Trade (INTA), onthe draft Regulation Swedish Green MEP Carl Schlyter, has produced a draft report recommending a sunset clause for all extra-EU BITs. Under Schlyter’s proposal, member states would be authorized to retain their BITs for a maximum of 13 years.
Schlyter warns that, “without a timeline, the [European Commission’s draft] Regulation would allow the emergence of parallel, potentially incompatible investment regimes, thus adding to legal uncertainty. While a sufficiently long transition is needed, an open ended duality in the EU investment policy would contradict the effective implementation of Article 207 (1) of the TFEU which clearly states that investment policy is the competence of the Union.”
A second INTA rapporteur, Kader Arif, comments on the Commission’s Communication. Arif expresses concern that investment treaty arbitrations may lead to conflicts between private interests and public regulatory activities, and calls for “good quality” agreements that take into account social and environmental concerns.
Arif also argues that the dispute settlement regime should include “greater transparency on cases heard in court and the judgments themselves, the opportunity for parties to appeal, the obligation to exhaust local judicial remedies (under certain conditions) before initiating international arbitration, the opportunity to use amicus briefs and the obligation to select one single place of arbitration and thus avoid ‘forum shopping.’”
While the European Commission has said it does not want to create a model EU investment treaty, Arif warns that this flexibility should not lead to “picking and choosing” among the elements he outlines in the Working Paper.
Transparency in UNCITRAL arbitration rules discussed in Vienna
A working group of the United Nations Commission on International Trade Law (UNCITRAL) turned its attention to the issue of transparency in investor-state arbitration, during a meeting in Vienna, Austria on 4-8 October 2010.
The UNCITRAL arbitration rules are the second most popular rules for settling investor-state arbitration, behind the World Bank’s International Centre for Settlement of Investment Disputes.
The question of whether investment-treaty arbitrations conducted under the UNCITRAL rules should be subject to greater transparency came under the spotlight several years ago as the Working Group II began deliberations on revising the rules. However, at a meeting in February 2008, the Working Group decided to proceed with revising the rules in their ‘generic’ form, before exploring the specific issue of transparency in investor-state arbitration.
Having adopted the revised generic UNCITRAL rules in June 2010, the meeting in October 2010 was the first to discuss how transparency should be dealt with in the UNCITRAL rules.
In this context, the issue of transparency includes a range of practices, including publicly registering cases (such as through an on-line docket), publishing documents related to the arbitration, and providing rules for third-party (amicus curiae) submissions.
The UNCITRAL secretariat reports that there was “general agreement” among the participating governments that transparency was desirable in investor-state arbitration, but views differed on how best to achieve this objective.
A major divergence involves whether the transparency rules applicable to investment arbitration should become the default rules in case an investment treaty refers to UNCITRAL Rules. For instance, an annex to the generic UNCITRAL rules could be drafted to apply to all investor-state arbitration, unless the parties to the investment treaty explicitly opted out of the annex. This would ensure the maximum application of the transparency rules while leaving the opt-out option for states if they so wish. But a few states appear to prefer leaving the default rules as the less transparent generic rules. A further point of contention is whether or not the new rules should apply to disputes initiated after their adoption based on treaties that came into effect before their entry into force.
Members of the Working Group also debated what types of information should be made public; for example, whether it would only include basic facts about the arbitration (i.e., names of the disputing parties and the subject matter of the dispute), or all documents submitted to, and by, arbitral tribunals in investor-state arbitrations.
As a next step, the UNCITRAL secretariat has been asked to prepare analysis on the form and substance of the transparency issues discussed at the meeting, including sample provisions on transparency.
Uruguay prepares defense against Philip Morris
The government of Uruguay is preparing for a controversial investment dispute with the tobacco company Philip Morris International (PMI), despite reports the government would water down the cigarette labeling requirements that sparked the conflict.
PMI alleges that the labeling requirements and recent tax increase harm its investments and infringe on its trademarks in violation of the Switzerland-Uruguay bilateral investment treaty. PMI has its international headquarters in Lausanne, Switzerland.
The law firm Foley Hoag announced in a press release in October 2010 that it has been hired to defend Uruguay.
Philip Morris also turned to Uruguay’s Supreme Court, pleading that the government’s anti-tobacco measures are unconstitutional. But that case was recently struck down. The court’s 20 November 2010 decision states it is “an essential duty of the state … to adopt all measures it considers necessary to maintain the collective health” of citizens.
Uruguay has received broad international support for its efforts to discourage smoking: more than 170 countries signed a World Health Organization accord that expressed concern that the tobacco industry was seeking to undermine government policies to control tobacco consumption.
Congress to be consulted on revisions to the U.S. model BIT
The Obama administration will consult with the new U.S. Congress before finalizing a new model bilateral investment treaty.
Last year the United States began reviewing its model BIT with an emphasis on three topics: (a) dispute settlement provisions; (b) state-owned enterprises; and (c) financial services issues. The U.S. model BIT, which is carefully adhered to in U.S. negotiations over bilateral investment treaties and investment chapters in free trade agreements, was last updated in 2004.
As part of the review process, an advisory committee to the U.S. Department of State and the Office of the United States Trade Representative was established. Consisting of some 27 advisors, including participants from labour groups, business organizations, academia, public policy groups, and the legal profession, the committee offered their diverse views in September 2009.
Indeed, the Obama administration had hoped to finalise a new model by the end of 2009.
“There is a continued discussion with Congress on what a model BIT would look like, and we don’t want to start negotiating internationally before we have support from the Congress on at least the broad framework for a model BIT,” said Under Secretary of State for Economic, Energy, and Agricultural Affairs, Robert Hormats, as reported by Inside US Trade.
Inside US Trade reports that the question of whether to include obligations on labour rights and environmental protection is one of the obstacles to agreeing on a new model.
 The EU Approach to International Investment Policy after the Lisbon Treaty, European Commission Directorate-General for External Policies, Policy Department, 2010, http://www.europarl.europa.eu/activities/committees/studies.do?language=EN
 Kader Arif, Working Document on the European Union’s future investment policy, 18 November 2010, http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-452.839+01+DOC+PDF+V0//EN&language=EN
 Advisory Committee on International Economic Policy Submits Report on Review of U.S. Model Bilateral Investment Treaty, September 2009, http://www.state.gov/r/pa/prs/ps/2009/sept/130097.htm