Title

Annotations to the Model Clauses for negotiation or re-negotiation of Member States’ Bilateral Investment Agreements with third countries

Preamble

(…)

RECOGNISING the importance of strengthening their investment relations, in accordance with the objective of sustainable development in the economic, social and environmental dimensions, and of promoting investment between them, mindful of the needs of the business communities of each Party, in particular small and medium-sized enterprises, and of high levels of environmental and labour protection through relevant internationally recognised standards and international agreements, to which both Parties are party;

REAFFIRMING their commitment to the principles of sustainable development and transparency;

SEEKING to establish an investment framework based on mutually advantageous rules to govern investment between the Parties that would enhance the competitiveness of their economies, make their markets more efficient and vibrant, and ensure predictable legal environment for further expansion of investment between them;

REAFFIRMING their commitment to the Charter of the United Nations and having regard to the principles articulated in the Universal Declaration of Human Rights;

[For agreements with third countries that have a status of ‘EU (potential) candidate country’:

BEARING IN MIND that, in light of the judgment of the Court of Justice of the European Union in Achmea (C-284/16), this Agreement should be terminated in the event of the [XX country ] accession to the European Union;

(…)

Commentary:

Preambles typically define the purposes and considerations that led the parties to conclude an agreement, as well as the foundation of their past, present, and future relations in so far as it relates to the agreement. Preambles can play an important role in the interpretation of Bilateral Investment Agreements (‘BIAs’): the motives and aims mentioned in a preamble can be used to help to understand and interpret the provisions contained in the operative part. The interpretative function of a preamble is recognised in the Vienna Convention on the Law of Treaties (1969) (‘VCLT’) which notes that, along with the text and other components of a treaty, the preamble may be relied upon for interpretative purposes (see Art. 31 (2) VCLT: ‘The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes…’).

The preamble at hand enshrines the principles that permeate the EU investment policy: it stresses the contribution of foreign investment to a country’s competitiveness and development, while highlighting that the pursuance of foreign investment should be in accordance with the objective and principles of sustainable development. Moreover, in case the BIA is to be concluded with a candidate or potential candidate State, the Preamble warns the counterparts that the BIA will need to be explicitly terminated at the moment of the (potential) candidate’s accession to the EU, in line with the Court of Justice of the EU’s ruling in Achmea (C-284/16), according to which investor-state arbitration clauses in international agreements that Member States concluded inter se are incompatible with EU law.

HAVE AGREED AS FOLLOWS:

Body

Article Objectives

The objective of this Agreement is to enhance the investment climate between the Parties, in accordance with the following provisions.

Commentary:

A clause that sets out the objective or purpose is common in international agreements. It sets out the main goals of the Parties to an agreement. Like a preamble, it informs the interpretative process when the Parties to the agreement and dispute settlement bodies try to interpret or apply a particular provision of the agreement. Being in the operative part, the objective has added weight in the interpretative process compared to a preamble.

Article Definitions

For the purpose of this Agreement:

“covered investment” means an investment in the territory of a Party owned or controlled, directly or indirectly, by an investor of the other Party, made in accordance with the law of the Party in whose territory the investment is made before or after the date of entry into force of this agreement;

“freely convertible currency” means a currency that can be freely exchanged against currencies that are widely traded in international foreign exchange markets and widely used in international transactions;

“investment” means every kind of asset that has the characteristics of an investment, including such characteristics as a certain duration, the commitment of capital or other resources, the assumption of risk, or the expectation of gain or profit. Forms that an investment may take include:

a) an enterprise;

b) shares, stocks and other forms of equity participation in an enterprise; c) bonds, debentures, loans and other financial instruments of an enterprise; d) interests arising from:

i) concessions conferred pursuant to domestic law or under a contract, including to search for, cultivate, extract or exploit

natural resources,

ii) turnkey, construction, production, or revenue-sharing contracts, or other similar contracts;

e) intellectual property rights;

f) claims to money or claims to performance under a contract;

g) any other moveable or immovable, tangible or intangible property, and related rights.

For greater certainty:

(a) returns that are invested shall be treated as investment;

(b) Any alteration of the form in which assets are invested or reinvested shall not affect their qualification as investments, provided that the form taken by the investment or reinvestment maintains its compliance with the definition of investment.

(c) “claims to money” does not include claims to money that arise solely from commercial transactions for the sale of goods or services by a natural person or an enterprise in the territory of a Party to a natural person or an enterprise in the territory of the other Party, or the extension of credit in relation to such transactions; and

(d) an order or judgment entered in a judicial or administrative action or an arbitral award shall not in itself constitute an investment.

“investor of a Party” means:

(i) a natural person of a Party; or

(ii) a juridical person duly constituted or otherwise organised under the law of the relevant Party, and engaged in the substantive business operations in the territory of a Party,

that has made a covered investment in the territory of the other Party.

"measure of a Party"; means any measure, whether in the form of a law, regulation, rule, procedure, decision, practice, administrative action, or any other form (1), which is adopted or maintained by (2):

(i) central, regional or local governments or authorities; and

(ii) non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities

"operation"; means conduct, management, maintenance, use, enjoyment and sale or other form of disposal of an investment;

“returns” means any amounts yielded by or derived from an investment or reinvestment, including profits, dividends, capital gains, royalties, interest, revenues from intellectual property rights, returns in kind and other lawful income.

Commentary:

Definitions ensure that the Parties to a BIA have a common understanding of key concepts that appear in the agreement. They are important as they determine the extent and the manner in which other provisions are to be applied.

Investment, covered investment

The definitions of ‘investment’ and ‘covered investment’ should be read together. Investment can take a wide variety of forms. Establishing an enterprise is a common way of making an investment. The term ‘enterprise’ is not defined separately but it normally covers all types of legal entities constituted or organised under the law of the host State. Other forms that an investment may take include equity and debt interests in a company, intellectual property rights, other forms of tangible or intangible property etc. The list is non-exhaustive. For a certain asset to be protected under the agreement it should have the ‘characteristics of investment’. The characteristics set out in the chapeau are distilled from jurisprudence of investment tribunals and are intended to ensure that only genuine investments will be protected under the agreement.

It is further clarified that ‘investment’, as defined by the treaty, does not include claims to money that arise solely from commercial transactions for the sale of goods or services; and that an order or judgment entered in a judicial or administrative action or an arbitral award shall not in itself constitute an investment, as these elements are not understood to meet the characteristics of investment.

An investment in the territory of a Party may be owned, directly or indirectly, by an investor of the other Party, i.e., ownership or control may be exercised through subsidiaries or affiliates, wherever located, so long as ownership and control can be traced to the investor of that other Party. Moreover, an investment should have been made in accordance with the law of the host State. As long as the above requirements are present, an investment will be a ‘covered investment’ under the Agreement and would, therefore, fall within the scope of its application (see ‘Scope’ Article).

Investor of a Party

Investors can be either natural or juridical persons. Normally a natural person will be considered ‘natural person of a Party’ if it is a national of that Party according to its laws. For a juridical person to qualify as ‘investor of a Party’, it must be duly constituted or otherwise organised under the law of that Party and have substantive business operations in that Party. This is to exclude from the protection of the agreement ‘shell/mailbox’ companies which are not genuine investors but are usually established to hide a person’s or another company’s activities; or are established for the purpose of gaining access to favourable investment protection treaties (practice known as ‘treaty shopping’).

Measure of a Party

A measure may take the form of action and/or failure to act. This is consistent with the rules set forth in the International Law Commission's 2001 Draft articles on Responsibility of States for internationally wrongful acts (‘ILC Draft articles’) that address the criteria for, and consequences of, State responsibility for internationally wrongful acts, and which are deemed to reflect customary international law. It is clarified in the commentaries of the ILC Draft articles that ‘[a]n internationally wrongful act of a State may consist in one or more actions or omissions or a combination of both.’ As such, a measure can manifest itself through various forms. Moreover, a measure may not just be limited to stipulations in legislation. A State is held responsible for the conduct of its organs at all levels. It may be the case that the authorities of a Party delegate certain actions to non-governmental bodies, hence why it is necessary to indicate in the definition that such measures are still considered ‘measures of a Party’. This reflects the rules on attribution of certain wrongful conduct to a State under the ILC Draft articles (Article 4, 5 and 8).

Article Scope

This Agreement shall apply to measures adopted or maintained by a Party affecting: (a) covered investments; and

(b) investors of a Party in respect of a covered investment.

For greater certainty, this Agreement provides only post-establishment protection and does not cover the pre-establishment phase or matters of market access.

Commentary:

Article ‘Scope’ must be read together with the definitions of ‘investment’, ‘covered investment’, ‘investor of a Party’ and ‘measure of a Party’. It sets out the limits of application of the agreement. The Agreement shall apply to measures affecting covered investments and investors of a Party in respect of a covered investment.

It is further clarified that the Agreement applies at the post-establishment stage i.e., it does not cover pre-establishment issues (e.g., market access, non-discrimination at the preestablishment stage)

Article Regional Economic Integration Organisation Clause

Nothing in this Agreement shall prevent a Party from exercising its rights and fulfilling its obligations deriving from their membership in any existing or future economic integration agreement, such as free trade area, customs union, common market economic and monetary union, including the European Union, or as to oblige a Party to extend to the investors of the other Party and to their covered investments, the benefits of any treatment, preference or privilege by virtue of its membership or participation in such economic integration agreement.

Commentary:

Article ‘Regional Economic Integration Organisation’, also known as the ‘REIO’ clause, ensures: i) that the Agreement does not prevent a Party from exercising its rights and fulfilling its obligations deriving from its membership in FTAs, custom unions and regional economic integration organisations; and ii) that the Parties to the Agreement are not obliged to extend to the investor of the other Party and their covered investments the better treatment the former confers to investors and their investments of countries that are members to the same FTA, customs union or REIO. That the Agreement shall not prevent a Party from exercising its rights and fulfilling its obligations as a member of the EU is stipulated in jurisprudence of the Court of Justice of the EU (See CJEU Opinion 1/17 on CETA, and C-205/06, C-249/06 or 118/07, where the Court ruled that a BIA is incompatible with the provisions of the EU Treaties, if it does not “contain a provision allowing the Member State concerned to exercise its rights and to fulfil its obligations as a member of the Community…”.).

Article Investment and Regulatory Measures

1. The Parties reaffirm the right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, social services, public education, safety, the environment including climate change, public morals, social or consumer protection, privacy and data protection, or the promotion and protection of cultural diversity.

2. For greater certainty, the provisions of this Agreement shall not be interpreted as a commitment from a Party that it will not change the legal and regulatory framework, including in a manner that may negatively affect the operation of covered investments or the investor’s expectations of profits.

3. For greater certainty and subject to paragraph 4, a Party’s decision not to issue, renew or maintain a subsidy

(a) in the absence of any specific commitment under law or contract to issue, renew, or maintain that subsidy; or

(b) in accordance with any terms or conditions attached to the issuance, renewal or maintenance of the subsidy,

shall not constitute a breach of the provisions of this Agreement.

4. For greater certainty, nothing in this Agreement shall be construed as preventing a Party from discontinuing the granting of a subsidy or requesting its reimbursement, where such action has been ordered by the competent authorities, or as requiring that Party to compensate the investor therefor.

Commentary:

Article ‘Investment and Regulatory Measures’ contains a reaffirmation of the Parties’ right to regulate within their territories to achieve legitimate policy objectives, and corollaries of such right. A non-exhaustive, illustrative list of such objectives is provided in the Article. As the body of investment treaty awards grew over time, a public debate arose on whether investment treaties, or the interpretation thereof by arbitral tribunals, unduly restrict the State’s regulatory space or even cause a ‘regulatory’ chill on the enactment and enforcement of laws, regulations, and policies that are in the public interest. For the avoidance of any doubt, it was deemed necessary to devise a clause whereby Parties would reaffirm their right to regulate in the public interest.

Paragraph 1 essentially confirms that the Parties can continue to pursue measures that are aimed for public policy aims. This is an inherent right of the States. It, being a standalone component of the Agreement and placed typically in the investment protection section of EU agreements, informs the interpretative analysis of the investment protection standards.

Paragraph 2 (the so-called ‘non-stabilisation clause’) clarifies that the investment protection provisions should not be interpreted as a commitment from Parties that the regulatory environment for investment would not change, even if such change may have a negative impact on the operation of covered investments or the investor’s expectations of profits. In  other words, there is no general duty on the Parties to compensate for changes in the regulatory framework that negatively affect the investors’ economic interests or expectations associated with their investments.

Paragraph 1 essentially confirms that the Parties can continue to pursue measures that are aimed for public policy aims. This is an inherent right of the States. It, being a standalone component of the Agreement and placed typically in the investment protection section of EU agreements, informs the interpretative analysis of the investment protection standards.

Paragraph 2 (the so-called ‘non-stabilisation clause’) clarifies that the investment protection provisions should not be interpreted as a commitment from Parties that the regulatory environment for investment would not change, even if such change may have a negative impact on the operation of covered investments or the investor’s expectations of profits. In other words, there is no general duty on the Parties to compensate for changes in the regulatory framework that negatively affect the investors’ economic interests or expectations associated with their investments.

Paragraph 3 clarifies what naturally flows from paragraph 2 in the field of subsidies. In the absence of a specific commitment to the contrary, a Party’s decision not to issue, renew or maintain a subsidy cannot be regarded as a breach of the Agreement.

Paragraph 4 addresses situations when a requirement to discontinue the granting of a subsidy, or to reimburse a subsidy, is imposed by competent authorities. Under EU law, for instance, State aid is considered unlawful when put into effect without prior notification, or before a decision of compatibility has been taken by the European Commission. Unlawful State aid is challengeable in that the European Commission or a national court may order the discontinuance or reimbursement of such State aid at any time (subject to certain conditions). The clause, accordingly, clarifies that the Agreement does not limit a Party’s right to do so.

Article Non-discriminatory Treatment

1. Each Party shall accord to investors of the other Party and to covered investments treatment no less favourable than that it accords, in like situations, to its own investors and to their investments, with respect to operation in its territory.

2. Each Party shall accord to investors of the other Party and to covered investments treatment no less favourable than that it accords, in like situations, to investors of a third country and to their investments, with respect to operation in its territory.

3. Paragraph 2 shall not be construed as obliging a Party to extend to investors of the other Party or to covered investment the benefit of any treatment resulting from measures providing for recognition, including of the standards or criteria for the authorisation, licencing, or certification of a natural person or enterprise to carry out an economic activity, or of prudential measures.

4. Paragraphs 1 and 2 shall not apply to:

(a) public procurement, or

(b) subsidies or grants provided by the Parties, including government-supported loans, guarantees and insurance.

5. For greater certainty, the “treatment” referred to in paragraph 2 does not include dispute settlement procedures provided for in other international agreements.

6. For greater certainty, substantive provisions in other international agreements concluded by a Party with a third country do not in themselves constitute the “treatment” referred to in paragraph 2. Measures of a Party pursuant to those provisions (3) may constitute such treatment and thus give rise to a breach of this Article.

Commentary:

Paragraph 1 and 2 ensures national and most-favoured-nation (‘MFN’) treatment to investors of the other Party and to covered investments at the post-establishment stage of the investment (see definition of ‘operation’ which encompasses the various angles of the post establishment stage). What is a ‘like situation’ is a matter to be determined in the light of the facts of the case.

Paragraph 3 states that a Party is not required to extend to investors of the other Party or to covered investments the benefit of any treatment resulting from double taxation agreements and measures providing for recognition, including of the standards or criteria for the authorisation, licencing, or certification of a natural person or enterprise to carry out an economic activity, or of prudential measures (usually found in mutual recognition agreements). Double taxation agreements and mutual recognition agreements are special types of agreements which are based on reciprocity arrangements. Extending such treatment on an MFN basis to other third countries would be contrary to their very purpose, because the benefits they entail are conditional on similar benefits granted in exchange.

Paragraph 4 excludes public procurement, and subsidies or grants provided by the Parties, (including government-supported loans, guarantees and insurance) from the scope of the national treatment and MFN commitments. This follows the approach taken in EU agreements both on liberalisation and protection, whereby subsidies and public procurement are subject to separate chapters with their own set of disciplines.

Paragraph 5 clarifies that dispute settlement procedures in other international agreements do not form ‘treatment’ for the purposes of the MFN obligation. The clause at hand clarifies that the MFN clause was never intended and should not be read as allowing to import dispute settlement procedures or to dispense with requirements in the dispute settlement mechanism of the BIA at issue on the grounds that such requirements are not present in other treaties (see Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7 where the Tribunal allowed the investor, who brought the case under the Argentina-Spain BIA, to rely on what was deemed to be a ‘more favourable’ dispute settlement mechanism in the Chile Spain BIA).

Paragraph 6 equally clarifies that substantive provisions in other international agreements concluded by a Party with a third country do not in themselves constitute the “treatment” referred ton in paragraph 2. Accordingly, for a breach of MFN to be established, an investor cannot invoke a provision in another international agreement; it has to be an actual measure (e.g. law, regulation, decision etc.) that provides some better treatment to other foreign investors.

Article Treatment of Investors and of Covered Investments

1. Each Party shall accord in its territory to covered investments and to investors of the other Party with respect to their covered investments fair and equitable treatment and full protection and security in accordance with paragraphs 2 to 5.

2. A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 through measures or series or measures that constitute:

(a) denial of justice in judicial or administrative proceedings; or

(b) fundamental breach of due process, including a fundamental breach of transparency in judicial and administrative proceedings; or

(c) manifest arbitrariness; or

(d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or

(e) abusive treatment such as harassment, duress or coercion.

3. When determining a breach of paragraph 2, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment that created a legitimate expectation, upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.

4. For greater certainty, “full protection and security” refers to the Party’s obligations to ensure the physical security of investors and covered investments.

5. For greater certainty, a breach of another provision of this Agreement, or of any other international agreement, does not constitute a breach of this Article.

Commentary:

Paragraph 1 establishes a Party’s obligation to accord to covered investments and to investors of the other Party with respect to their covered investments fair and equitable treatment (‘FET’) and full protection and security (‘FPS’). Paragraphs 2-5 provide guidance and clarifications about the two standards of protection.

To begin with, paragraph 2 provides a closed list of improper and reprehensible State conduct that would constitute a violation of the standard. Element (a)-(e) have been distilled from arbitral jurisprudence and are widely regarded by tribunals, at this point of development of the FET obligation, to form its content.

Paragraph 3 provides that, in determining a breach of paragraph 2, a tribunal may consider whether a Party made a specific representation to induce investments that created a legitimate expectation, upon which the investor relied in deciding to make or maintain the covered investment, and which the Party subsequently frustrated. It follows that legitimate expectations may only be treated as a relevant consideration when assessing an allegation of violation of the FET standard through any of the (a)-(e) elements, and not as a standalone element that in itself would give rise to a violation of the FET standard.

Paragraph 4 clarifies that the obligation to provide ‘full protection and security’ only refers to the duty to protect the physical integrity of an investor and a covered investment against interference by use of force. This allows to draw a meaningful distinction from the FET standard, avoiding other forms of protection and security (e.g., legal) being read into the FPS standard.

Paragraph 5 clarifies that a breach of another provision of this Agreement, or of any other international agreement, does not constitute a breach of this Article. This is to prevent tribunals from automatically finding a breach of the FET standard when another provision in the BIA has been breached, or when violations of other international instruments occur, with FET (and the investor-State dispute settlement mechanism of the Agreement) serving as a ‘trojan horse’ for the enforcement of obligations in other international agreements.

Article Compensation for Losses

1. Investors of a Party whose covered investments suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the other Party shall be accorded by that Party, with respect to restitution, indemnification, compensation or other form of settlement, treatment no less favourable than that accorded by that Party to its own investors or to the investors of any non-Party, whichever is more favourable to the investor.

2. Without prejudice to paragraph 1 of this Article, investors of a Party who, in any of the situations referred to in that paragraph, suffer losses in the territory of the other Party shall be accorded prompt, adequate and effective restitution or compensation by the other Party, if these losses result from:

(a) requisitioning of their covered investment or a part thereof by the latter’s armed forces or authorities; or

(b) destruction of their covered investment or a part thereof by the latter’s armed forces or authorities, which was not required by the necessity of the situation;

The amount of such compensation shall be determined in accordance with the provisions of paragraph 2 of Article [Expropriation], from the date of requisitioning or destruction until the date of actual payment.

Commentary:

Article ‘Compensation for Losses’ (colloquially called ‘war clause’) regulates questions of compensation for losses suffered by foreign investors in war-type situations, or situations of major civil and political unrest/upheaval.

Paragraph 1 entitles investments covered by the BIA to the better of national or MFN treatment with respect to restitution, indemnification, compensation, or other forms of settlement relating to losses suffered in a Party’s territory owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot.

Paragraph 2 creates an unconditional obligation to pay compensation for such losses only when these result from requisitioning of the investors’ covered investment (or part thereof) by the host State’s armed forces or authorities, or from destruction not required by the necessity of the situation.

Article Expropriation

1. Neither Party shall nationalise or expropriate a covered investment either directly or indirectly through measures having an effect equivalent to nationalisation or expropriation (hereinafter referred to as “expropriation”) except:

(a) for a public purpose;

(b) under due process of law;

(c) in a non-discriminatory manner; and

(d) against payment of prompt, adequate and effective compensation.

For greater certainty, this paragraph shall be interpreted in accordance with Annex I (Expropriation).

2. The compensation referred to in paragraph 1 shall amount to the fair market value of the investment at the time immediately before the expropriation or the impending expropriation became publicly known or when the expropriation took place, whichever is earlier. Valuation criteria shall include going concern value, asset value including the declared tax value of tangible property, and other criteria, as appropriate.

3. The compensation shall include interest at a normal commercial rate from the date of expropriation until the date of payment. It shall be freely transferable in accordance with Article [Transfers].

4. The investor affected shall have a right, under the law of the expropriating Party, to prompt review of its claim and of the valuation of its investment, by a judicial or other independent authority of that Party, in accordance with the principles set out in this Article.

5. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, to the extent that such issuance is consistent with the Agreement on Trade-Related Aspects of Intellectual Property Rights in Annex 1C to the WTO Agreements (“TRIPS Agreement”).

Commentary:

Article ‘Expropriation’ incorporates into the agreement international law standards for expropriation and compensation.

Paragraph 1 bars all expropriations or nationalisations except those that are for a public purpose, in accordance with due process of law; carried out in a non-discriminatory manner; and subject to prompt, adequate and effective compensation.

Paragraphs 2 and 3 explain the meaning of ‘prompt, adequate and effective compensation’. It is stipulated that the measure of such compensation is the ‘fair market value’ of the investment immediately before the expropriation took place or became known (whichever is earlier), plus interest at a normal commercial rate from the date of expropriation until the date of payment. Such compensation should be freely transferrable in accordance with the Article on Transfers.

Paragraph 4 requires that the expropriating Party maintains laws that allow the prompt review of an investor’s claim and valuation of its investment by a judicial or other independent authority of that Party.

Paragraph 5 stipulates that the obligations on expropriation do not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, to the extent that this is consistent with the TRIPs Agreement. This is in recognition of the sensitivity around compulsory licencing, notably the fact that it is a legitimate limitation of the patent holders’ rights when the requirements under the TRIPS are met. Therefore, a TRIPS-compliant compulsory licencing should not give rise to expropriation claims; otherwise the very rationale of legitimising it would be nullified.

Article Transfers

1. Each Party shall permit all transfers relating to a covered investment to be made in a freely convertible currency, without restriction or delay and at the market rate of exchange prevailing on the date of transfer with regard to the currency to be transferred. Such transfers include:

(a) contributions to capital to maintain, develop or increase the investment;

(b) profits, dividends, capital gains, interest, royalty payments, management fees, technical assistance and other fees or returns derived from the covered investment;