'Gold Standards' for the International Investment Policy of the European Union

Memorandum to the European Commission, Cabinet of the Trade Commissioner, Mr. Damien Levie

Clinic: Graduate Institute, Spring 2011

Beneficiary: European Commission, Cabinet of the Trade Commissioner

Executive Summary

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This memorandum was prepared by students of the Investment Law Clinic at the Graduate Institute of International and Development Studies as a response to a request by the Private Office of the Trade Commissioner of the European Commission for research on what investment protection policy it could pursue. As such, we were asked to analyse the best practices for investment protection as provided for in international investment agreements, including but not limited to those concluded by EU Member States. In addition, we also consider the advantages and disadvantages of adopting a model BIT.

As foreign direct investment now falls within the exclusive competence of the EU through its Common Commercial Policy, it will have to consider the practical implications of this competence shift, such as the conclusion of international investment agreements. We recommend a European model BIT as the starting point and accordingly analyse the possible content in this memorandum.

Our analysis was guided by the EU’s ambition to be a competitive player in the investment field and its intention to improve investment conditions both within the EU’s territory and outside of it. While a BIT does not directly change the internal regulation of investments within a State, their value, as UNCTAD have highlighted, “…lies primarily in the contribution they can make to promote investment by helping to secure a welcoming and stable environment for foreign investment”.1 In addition, we were mindful throughout that good global governance, human rights, the rule of law and sustainable development all inspire the commercial policy of the EU. As such, the proposals suggested take these considerations as their premise and, in the authors’ opinion, represent the “gold standards” in international investment law.

The particular methodology adopted was as follows. First, we identified the pertinent issues in international investment law around which there exists a debate as to the level of investor protection they provide. Second, we set out the options in each area, the various configurations of which have resulted in a variety of outcomes in practice.

Finally, we analysed the practice for each option and concluded upon the option that provided the highest level of investor protection. At the end of each section, we suggested a possible construction of the standard to be included on the basis of the foregoing analysis.

Every international investment agreement contains a definition of investment and investor, which are intended to define the scope of the agreement. If the EU wishes to increase the number of investors entitled to protection, it would be well advised to make the definition of investment as broad and open-ended as possible. A non- exhaustive list of investments provides the maximum protection to investors in this respect. The EU will have to decide, however, as to the reach of the term ‘foreign direct investment’ and particularly whether this extends to portfolio investments. As for protected investors, residency or siège social establishes the weakest link to a contracting party and, accordingly, increases the pool of beneficiaries that fall within the remit of the international investment agreement. In addition, the breadth of this pool may in principle encompass not-for-profit organisations if the EU should wish to include them. Finally, increasing the phases over which investors are protected can be achieved by making explicit provision for the pre-establishment phase in the international investment agreement.

The practice of including a provision on fair and equitable treatment in international investment agreements is widespread but its formulation varies, with the result that the standard actually applied by tribunals can differ significantly too. A reference to fair and equitable treatment should feature in the preamble of the international investment agreement—in addition to a standalone clause—as this serves to bolster and expand the application of the standard. The fair and equitable treatment clause should have added to it the notion of ‘full protection and legal security’ as tribunal practice reveals that doing so tends to broaden the protection available to investors. Crucially, fair and equitable treatment should appear as an autonomous standard and not be linked to the international minimum standard, which generally implicates a lower standard of treatment (as NAFTA jurisprudence indicates). In order to increase investor protection further still, a number of international investment agreements include additional obligations to the standard construction of the fair and equitable treatment clause.

National treatment guarantees that foreign nationals receive the same (or better) treatment as nationals of the area in which investment is made. In order to set the standard as high as possible, it is recommended that the comparison pool be made EU-wide. In addition, the standard should apply to both investors and investments, with this stipulation being made explicit in the relevant clause. Further still, it can also be made to extend to the pre-establishment phase of investment activity. Finally, exceptions to national treatment should be limited to fundamental EU concerns.

A freedom of transfer provision is essential in a liberalised capital transfer market. All EU Member State investment agreements should include a regional economic integration organisation clause, which suspends freedom of transfer and exempts the application of a provision that may be in conflict with regional law. However, its necessity in an EU investment agreement will depend upon whether the EU enters into a mixed or bilateral investment agreement with a third country. Furthermore, as with other standards, exceptions to freedom of transfer should not allow contracting parties to hide from their obligations that are owed to investors.

Expropriation is the most severe interference with property and its provision in international investment agreements is indispensable. In addition, the EU has made clear that it should be addressed in the context of a European investment agreement, and that indirect expropriation must also be provided for. As such, the provision for expropriation should reflect this, ensuring that investors have the right to compensation where their property is subject to interference by the measures of contracting parties. However, it is also important that the EU is able to regulate for legitimate public welfare purposes without being exposed to compensation claims. Therefore, the EU will have to decide upon the distinction between these situations and situations of compensable indirect expropriation, which must also serve a public purpose. As regards the assessment of compensation, an EU investment agreement should incorporate reference to variables such as the date, valuation method and interest rate pertinent to the expropriation, as these can alter the magnitude of compensation that the investor ultimately receives.

That an investor has recourse to an effective dispute settlement mechanism is essential to any practicable international investment agreement and, as such, we felt it necessary to address this issue in addition to the standard clauses outlined above. The EU intends to provide for such a mechanism in an EU investment agreement. However, a number of challenges exist in the EU context. First, EU Member State national courts cannot review EU acts or legislation and are therefore not an appropriate forum for investor disputes with the EU. Second, recourse may be possible through the ECJ, provided the claim conforms to certain requirements, but uncertainty exists as to whether an international investment agreement would in practice be applied by the Court. Third, the amendment of existing investor-State dispute resolution mechanisms, such as ICSID, is both necessary and desirable if the EU is to be a party to proceedings. In addition to the foregoing dispute settlement options, a survey of fork-in-the-road clauses is provided and it is concluded that a number of models presently adopted by EU Member States could be followed.

Finally, a consideration of the form in which the abovementioned standards will ultimately manifest themselves is conducted in this memorandum. An EU model BIT provides for a consistent template from which the EU and EU Member States can draw upon in concluding international investment agreements with third states. It also ensures that EU interests will be addressed in these subsequent agreements. However, it does mean that EU Member States will have to relinquish some flexibility in the negotiation of future investment agreements and, hence, the advantages for EU Member States will have to be made clear. The key advantage for EU Member States is the increased bargaining power it gives them in concluding investment agreements with third states. There is also the added value of transparency, certainty and stability in the negotiation process. Given the increased number, needs and nature of actors in the negotiation and drafting of an EU [model] BIT, this also presents many challenges and will require complex as well as wide-ranging compromises. In general, however, it should make the EU a more attractive place to invest by incorporating gold standards in such a model BIT, from which investors will benefit through successive EU BITs. Practically speaking, the adoption of an EU [model] BIT allows for the (necessary) conclusion of mixed agreements to ensure maximum investor protection and should help to guard against forum shopping.

The memorandum concludes with an appraisal of what was intended to be achieved by the analysis of gold standards and the consideration of an EU model BIT. As such, it is recognised that certain areas that are related to the broader debate on EU investment policy are beyond the scope of this particular memorandum. These are identified and it is recommended that further work be conducted in an effort to build upon what has been achieved here.

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