Resolving Incompatibilities of Bilateral Investment Treaties of the EU Member States with the EC Treaty: Individual and Collective Options

• Published date: 01 November 2010
• DOI: http://doi.org/10.1111/j.1468-0386.2010.00534.x
• Date: 01 November 2010
• Author: Ahmad Ali Ghouri

eulj_534806..830

Resolving Incompatibilities of Bilateral

Investment Treaties of the EU Member

States with the EC Treaty: Individual and

Collective Options

Ahmad Ali Ghouri*

Abstract: Bilateral Investment Treaties (BITs) concluded by the EU Member States

contain substantially similar clauses, including free movement of capital and investor-to-

state dispute resolution. Article 307 EC provides for the primacy of pre-accession treaties

over the EC Treaty and simultaneously requires the Member States to eliminate their

mutual incompatibilities. The European Court of Justice has declared that free movement

of capital clauses of Austrian and Swedish pre-accession extra-EU BITs are incompatible

with the EC Treaty as they will impede any restrictions on the movement of capital

imposed as future Community legislation. A similar ‘free movement of capital’ clause is

present in all extra-EU BITs of the Member States, whether pre- or post-accession.

Article 307, however, does not apply to the post-accession treaties which are equally

capable of contriving the same consequences of impeding the application of the EC Treaty.

In addition, the application of intra-EU BITs provides investors from BIT party states

access to the investor-to-state dispute resolution which is not available to investors from

the Member States who do not have BITs with those Member States. This is discrimina-

tion and may distort the principle of equal treatment within the EU. Furthermore, the

newly acceding EU States are facing extensive arbitral claims for carrying out the

BIT-EU conf‌licting obligations within their respective territories.

I Introduction

Bilateral Investment Treaties (BITs) are international agreements designed to protect

investors from party states in the event of expropriation, and contain clauses on

prohibition and compensation for expropriation, standards of treatment in the form of

national treatment, most-favoured-nation treatment and indiscrimination by the host

state, and free movement of capital between party states arising out of or relating to

* Doctoral Scholar, University of Turku, Finland and Lecturer in Law, University of the Punjab (Gujran-

wala Campus), Pakistan. Many thanks to Prof Jukka Mähönen (University of Turku), Prof Ole K.

Fauchald (University of Oslo) and my fellow Doctoral Scholars Gurwinder Singh, Anti-Jussi Lankinen

and Matti Urpilainen for their insightful reviews and valuable comments, and Janne Waklin (Information

Specialist) for his logistics support. I am also thankful to the Finnish Cultural Foundation for generous

funding for this research.

European Law Journal, Vol. 16, No. 6, November 2010, pp. 806–830.

© 2010 Blackwell Publishing Ltd., 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

investments.1The most distinguishing feature of these BITs, however, is the dispute-

settlement mechanism empowering the investors of each party state to bring disputes

before a supranational arbitral tribunal. In this respect, BITs deviate from the tradi-

tional state-to-state diplomatic protection by providing investor-to-state arbitration

commonly by the International Centre for Settlement of Investment Disputes (ICSID)

or United Nations Commission on International Trade Law (UNCITRAL) tribunals.

The investors may themselves bring claims against the states hosting the investments,

by-passing domestic remedies available within the host state and overriding traditional

diplomatic settlement of disputes by the investor’s home state. The signif‌icant feature

of BIT arbitration is also that the primary remedy is a damages award rather than a

non-monetary public law remedy.2The objective behind conclusion of BITs is to

document the investors’ rights and protections as these were either not lucid or not

provided at all by customary international law.3

The number of states joining the EU has grown over a period of time and the EU

legal order has also evolved into a collective Community regime in almost all areas of

commercial activity except foreign investment.4The following analysis reveals that, in

the absence of a Community regime, the EU foreign investments are currently gov-

erned by a total of 1,407 Bilateral Investment Treaties (the BITs) concluded by the EU

Member States, out of which 376 are concluded by the Member States inter-se (the

intra-EU BITs) and 1031 are with non-EU States (the extra-EU BITs) (see Table 6

below). A total 569 of these BITs have been concluded by Member States prior to their

joining the EU and 838 have been concluded thereafter (Table 6 below). The account

of contemporary BITs of the EU Member States was f‌irst opened in 1962 by the f‌irst

ever Germany-Pakistan BIT. The total number of BITs has constantly grown over time

and many states who were not EU members when they signed their BITs with then

Member States, have later acceded to the EU themselves.

In this landscape, the aim of this article is to highlight and seek to resolve the current

issues in the foreign investment regime for EU Member States. The study was moti-

vated by the recent European Court of Justice (ECJ) decisions against Austria and

Sweden,5declaring the ‘free transfer of capital’ clause in their extra-EU BITs incom-

patible with the Treaty Establishing the European Community (the EC Treaty).6The

1For more information about BITs, see online UNTAD Compendium, ‘Bilateral Investment Treaties

(BITs): A Compilation’, available at http://www.unctad.org/Templates/webf‌lyer.asp?docid=907&intItem

ID=3138&lang=1&mode=downloads.

2For detailed discussions on BITs and international investment law, see, eg, S.P. Subedi, International

Investment Law: Reconciling Policy and Principle (Hart Publishing, 2008); A. Newcombe and L. Para-

dell, Law and Practice of Investment Treaties. Standards of Treatment (Kluwer Law International, 2009).

3C. MeLachlan, L. Shore and M. Weiniger, International Investment Arbitration—Substantive Principles

(Oxford International Arbitration Series, 2008), at 265–266.

4Once the Treaty of Lisbon enters into force, foreign direct investment would come within the EU

competence. This would, however, not impede the application, enforcement and legal consequences of the

existing BITs concluded by the Member States. In this article the expressions ‘EU law’, ‘EC law’ and

‘Community law’ have been used interchangeably referring to the EU/EC law in aggregate and without

distinguishing the primary or secondary rules.

5Case C-205/06, Commission of the European Communities v Republic of Austria, judgment 3 March 2009

(Austrian BITs case) and Case C-249/06, Commission of European Communities v Kingdom of Sweden,

judgment 3 March 2009.

6Treaty Establishing the European Economic Community (signed on 25 March 1957 and entered into

force on 1 January 1958). Now the consolidated versions of the Treaty on European Union and of the

Treaty Establishing the European Community, [2006] OJ C321/1.

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