The European Commission's Non-Paper on Model Clauses for Member States' BITs with Third Countries

In October last year, the European Commission released a Non-Paper on Model Clauses with Annotations for EU Member States' negotiation of bilateral investment treaties ("BITs") with third countries. Non-papers do not communicate an official position of the Commission. The Model Clauses are not an official 'EU Model BIT' but suggestions for Member States' BITs.

The Model Clauses provide for investment protection within an EU framework. We provide a brief overview of key provisions in this Note. In line with the CJEU's Achmea Judgment (our German coverage here), the Model Clauses state that where a BIT is concluded with an EU candidate State, the BIT must be terminated on the candidate's accession to the EU.

Scope

The Model Clauses propose to exclude shell or mailbox companies from their scope by defining "investor" as a legal person engaged in "substantive business operations".

The definition of "investment" follows the 'Salini criteria' of duration, commitment of capital or other resources, and the assumption of risk or expectation of gain or profit. The Model Clauses exclude purely commercial transactions for the sale of goods or services. The same applies to orders or judgments of a court or arbitral awards. An express requirement of 'investment legality' is also included. The Model Clauses only cover investments in the post-establishment phase.

Investment Protection

The Model Clauses address current issues. We summarise notable developments below.

Right to Regulate and Non-Stabilisation

Host States maintain a right to regulate for policy objectives such as public health, social services, public education, safety, the environment (including climate change), public morals, social or consumer protection, privacy, and data protection, and the promotion and protection of cultural diversity. An express provision (non-stabilisation clause) confirms that a BIT does not amount to a host State's commitment that the legal and regulatory environment will not be subject to change.

National Treatment (NT) and Most-Favoured-Nation (MFN) Treatment

The NT and MFN standards do not extend to "public procurement" and "subsidies or grants […] including government-supported loans, guarantees and insurance." No benefits arising from double taxation treaties are extended to investors. MFN treatment is clarified not to extend to dispute settlement procedures contained in third country BITs.

Fair and Equitable Treatment (FET)

The Model Clauses state that a breach of FET includes denial of justice, lack of due process, arbitrariness, targeted discrimination, and abusive treatment. 'Legitimate expectations' of investors are a consideration when assessing FET. They require the making of specific representations to induce investment and investor reliance on the representation in the making of the investment.

Full Protection and Security (FPS)

To avoid an overlap with FET, the Model Clauses clarify that FPS only covers the "physical" integrity of investors and their investments.

Protection Against Unlawful Expropriation

The Model Clauses provide a standard provision on expropriation. Additionally, similar to newer Model BITs, expropriation is interpreted in accordance with an Annex. The Annex recognises that expropriation may be direct or indirect. Non-discriminatory measures with a legitimate policy objective do not constitute an expropriation. This includes measures in relation to public health, social services, public education, safety, the environment (including climate change), public morals, social or consumer protection privacy and data protection, and protection of cultural diversity.

Observance of Undertakings

The Model Clauses include an 'umbrella clause'. The clause only applies where a host State has used its sovereign powers to breach a written commitment. An exercise of powers of any ordinary commercial actor (e.g., non-payment, delay, or non-delivery) may not constitute a breach.

General Exceptions

The Model Clauses contain a general-exceptions clause which is modelled after Article XIV of the GATS. Host States may adopt measures with a legitimate public purpose (e.g. public security, human, animal or plant life or health), provided it is not arbitrary or discriminatory. The provision was influenced by the CJEU's opinion on CETA, recognising the importance of general exceptions in EU agreements and their impact on the autonomy of EU law.

Denial of Benefits

A denial of benefits clause allows host States to deny BIT benefits if measures are taken to maintain international peace and security, including protection of human rights. The Commission identifies that EU sanctions may provide for restrictive measures and enable the freezing of funds. Benefits may be denied without prior publicity or additional formality in exercising that right.

Corporate Social Responsibility and Responsible Business Conduct

The Model Clauses include provisions on sustainable development. BIT parties recognise the need for investor due diligence and the potential of adverse impacts of investments on the environment and labour conditions across the supply chain. Parties are required to promote CSR and responsible business practices by investors. There are no direct obligations on investors. The Model Clauses suggest endorsement of instruments such as the UN Global Compact, the UN Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the OECD Guidelines for Multinational Enterprises.

Environment and Climate Change

Environment and climate change are also addressed. Host States are free decide on domestic environmental protection in accordance with international agreements on environmental protection. They should not weaken levels of protection in environmental laws to encourage investment. The need to take action to combat climate change and its impacts is also recognised, consistent with the UN Framework Convention on Climate Change and the Paris Agreement.

Investor-State Dispute Settlement

The Model Clauses also include provisions on ISDS. However, no specific venue or applicable arbitration rules are referenced.

Scope

The Model Clauses define a "dispute" as an alleged breach of BIT investment protection standards, which allegedly caused loss or damage to the investor or its locally established enterprise.

Multilateral Dispute Settlement Mechanism

The Model Clauses aim at establishing a standing multilateral investment court with an appellate mechanism. Upon entry into force between the parties of an international agreement providing for such a court, any common rules in an existing BIT on ISDS by international arbitration would cease to apply. This has been the subject of on-going negotiations of the EU in the Working Group III of UNCITRAL on ISDS Reform.

Applicable Law and Rules of Interpretation

Domestic and EU law are excluded from the applicable law. Tribunals have no jurisdiction over the legality of a measure under domestic law. They are required to treat domestic law as matters of fact and to follow the prevailing interpretation given to it by host State courts.

Multiple Proceedings

The Model Clauses address parallel claims, multiple proceedings, and double recovery. Tribunals are required to dismiss claims where a claim was already submitted to a domestic or international court or other arbitral tribunal concerning the same treatment as that alleged to breach the BIT. This may not apply to interim injunctive or declaratory relief.

Claims Manifestly Without Legal Merit

Early dismissal of claims manifestly without legal merit are also covered. Objections must be filed within 30 days of establishment of a tribunal or 30 days after becoming aware of the relevant facts. Timing aside, this is similar to Article 41 of the 2022 ICSID Arbitration Rules.

Code of Conduct for Tribunals

The Model Clauses include provisions on "Ethics" in ISDS. An Annex on the "Code of Conduct for Members of Tribunals and Mediators" addresses the independence and impartiality of arbitrators and assistants. The Annex also contains obligations around confidentiality and disclosure and provides for rules on former tribunal members.

Comment

The European Commission's Model Clauses include current discussions in international investment law. They seek to ensure that investment protection in BITs with third countries are consistent and harmonised with EU law and policy. Hungary (2022), Spain (2021), Portugal (2019), and Austria (2016) are amongst some of the more recent EU Member States to sign BITs with third countries.

For further information, please contact Patricia Nacimiento, Partner, Bajar Scharaw, Counsel, Jacky Lui, Foreign Lawyer, or your usual Herbert Smith Freehills contact.