Reform Options – Bosnia and Herzegovina’s Bilateral Investment Treaties
Clinic: National University of Singapore, Fall 2018
Beneficiary: Bosnia and Herzegovina Ministry of Foreign Trade and Economic Relations
Read the full memo here
1. Bosnia and Herzegovina (BiH) is a potential candidate country looking to accede to the European Union (EU). In May 2018, the Court of Justice of the European Union (CJEU) ruled in Achmea v Slovak Republic that the arbitration clauses in intra-EU Bilateral Investment Treaties (BITs) were incompatible with EU law. Following this, the EU Commission (the Commission), re-emphasised the need for intra-EU BITs to be terminated. If and when BiH accedes to the EU, BiH’s BITs with EU member states will become intra-EU BITs, which are incompatible with EU law.
2. Thus, this paper examines and evaluates reform options such as amendment of BIT provisions and termination of the BITs to ensure compliance with EU law. A summary of the key points of the paper is provided as follows.
Students presenting their project (above).
A. Termination, Suspension and Amendment Options
3. We first examine options such as termination, suspension and amendments. The VCLT is used as a roadmap for organising these options as it concerns the law of treaties and has generally been taken to reflect or codify the customary international law on this area.
4. States can unilaterally terminate their BITs in accordance with the provisions of the treaty under Article 54(a) of the VCLT. To do so, the state effecting the termination must have regard to the BIT provisions that may prevent them from terminating with immediate effect. States may have to comply with provisions on notice requirements and have regard to locked period provisions that qualifies when unilateral termination may be effected. It is uncontentious that this form of termination would trigger the sunset clause, which provides for BIT protection to investors for a stipulated duration after the BIT is terminated.
5. Another option is to terminate the BITs through mutual termination under Articles 54(b) of the VCLT. States can, with the consent of their counterparties, terminate the BITs at any time. Whether sunset clauses would apply in the case of mutual termination would depend on the wording of the BIT. If the sunset clause broadly refers to “termination” instead of termination under a particular provision of the BIT, mutual termination is likely to trigger the sunset clause. Thus, some EU memberstates saw the need to mutually terminate their BITs and simultaneously amend the sunset clauses with the effect of extinguishing it.
6. Apart from mutual termination, mutual suspension also releases states from their obligations under the BITs under Article 57(b) of the VCLT. States which enter into successive treaties may adopt this option as it allows the BIT to be revived as a fall back. In the event a successive treaty fails, a suspended BIT may be revived to offer investors protection. However, if there is no successive treaty, suspension is likely to result in a gap in investment protection, as suspension does not trigger sunset clause.
B. Claims available to investors upon termination of the BIT
7. Next, we consider that on termination of the BIT, investor protection under the BIT will cease. In defence, investors may argue that states are unable to terminate their rights without their consent as they have “direct rights”. States on the other hand may argue that investors’ rights are “intermediate” or “derivative” and can be revoked. It is suggested that the nature of the investors’ rights is based on an interpretation of the specific treaty language. At this point, we note that there is no known case where an investor has relied on these concepts of rights to argue against the termination of its rights under a BIT.
8. Yet, even if investors succeed in arguing that their rights are direct, states are likely to be able to mutually terminate any rights conferred on third parties as long as the treaty provides, or states otherwise agree under Article 70(1)(b) of the VCLT. Investors are also unlikely to succeed in arguing that they are ‘third states’ whose rights cannot be revoked under Article 37(2) of the VCLT.
9. For investors who have filed a claim prior to termination, there are strong arguments that states are estopped from frustrating their claim or are bound to arbitrate the moment the investor accepts the offer to arbitrate.
10. As a final attempt, all investors, whether they have submitted their claim to arbitration or not, may argue that states have denied them justice by terminating the BIT. However, investors may have difficulty justifying that there is a customary international law preventing states from terminating their BIT obligations.
C. Composite Options
11. Next, on recognising that BiH’s unique political and economic circumstances would not make any single reform option practicable or acceptable, we propose composite options drawing on all the reform options presented thus far and their implications.
12. The first composite option involves agreeing to terminate the intra-EU BIT and extinguishing the sunset clauses only on accession to the EU. Termination on accession draws on the mechanism in a free trade agreement that triggers the withdrawal of candidate countries on accession to the EU.
13. The second composite option considers that a multilateral solution could be preferable to a bilateral solution, given BiH’s extensive network of BITs. We propose a multilateral arrangement to mutually terminate all BITs BiH has with EU member states in “one strike”, followed by implementing a transitional arrangement which in a second “strike” terminates on BiH’s accession to the EU. We propose three permutations such a multilateral solution can take, and also support our proposal with a case study on a similar multilateral effort between then-acceding and candidate countries and a third country, facilitated by the Commission.
D. Sit back and wait?
14. Last, we consider the viability of not taking any action until BiH accedes to the EU. Some states have argued that accession to the EU leads to an implied termination of intra-EU BITs under Article 59 of the VCLT. This argument has not succeeded before any tribunal. Hence, it is likely that BiH’s BITs with EU member states will survive if it does not terminate them by the time it accedes to the EU. BiH would have to consider the potential consequences of being party to intra-EU BITs if it chooses this course of (in)action.
Read the full memo here.