Author: Kodru Mansour, Associate PeliFilip
1. The adoption of the Law on the termination of intra-EU BITs
On 27 February 2017, the Romanian Parliament adopted Law 18/2017 on the termination of Bilateral Investment Treaties (“BITs”) concluded between Romania and European Union Member States (“Law ”). The Law has been published in the Official Gazette no. 198 of 21 March 2017 and will enter into force on 24 March 2017.
Law 18/2007 approves the mutual and unilateral termination of all the 22 intra-EU BITs concluded by Romania and which are currently in force, as listed in the Annex to the Law.
According to the rules set out under Law 590/2003 governing the conclusion and termination of international treaties, upon the entry into force of the Law, the Romanian Government will be entitled to commence the diplomatic proceedings for ending the intra-EU BITS. Following the completion of the proceedings for terminating each BIT, the Ministry of Foreign Affairs will issue an Order regarding the termination of the respective treaty, which will be published in Official Gazette within 10 days as of the date of termination.
2. Origins of the problem
The decision to terminate intra-EU BITs was taken by the Romanian State due to issues of incompatibility between certain provisions of the BITs and the provisions of EU law governing the single market.
The issue of intra-EU BITs originated in the gradual expansion of European Union and the accession of countries which had previously concluded BITs with one or more Member States. This issue became apparent especially after the 2004-2007 waves of EU enlargement, when 12 new Member States from Central and Eastern Europe, including Romania, joined the European block.
This ‘internalization’ of previous extra-EU BITs generated an overlapping and/or potential contradiction between various protection mechanisms contained by the BITs and those of the European single market (e.g. provisions on capital transfer, state aid granted to foreign investors, clashes between the ‘most-favored nation treatment’ granted by certain BITs with the EU provisions on public policy exceptions etc).
From a legal point of view, this in turn creates a conflict between the general international treaty law governing the BITs and the EU law. The difficulty of this issue consists in that there is no ‘higher norm’ to decide which of any such regulations should prevail in case of conflict.
3. The clash between the EU and international legal order
According to general international law, validly concluded BITs are mandatory between parties and cannot be superseded by the Accession Treaties or by EU’s Constitutive Treaties, all these instruments having equally binding legal power in the eyes of the international law.
On the other hand, according to EU law, EU’s constitutive treaties have created an internal European legal order, which is primal for all Member States. Therefore, in the vision of the European governing bodies and the European Court of Justice, instruments of EU law supersede all other applicable legal instruments, including BITs, in respect of the matters within EU competencies such as establishing the rules governing the free movement of goods, capital, services and workers or the competition rules necessary for the functioning of the single market. In this vision, the provisions of EU law on such matters should prevail in case of conflict against any other legal provision.
The European Commission also noticed the tension between the legal regime of the intra-EU BITs and that of the single market. In its annual report to the Commission in 2006, the Economic and Financial Committee (“EFC”) emphasised that “part of [the BITs’] content [had] been superseded by Community law upon accession”1. The EFC recommended that Member States review the need for these BITs by the end of 2007. However, until quite recently, no action has been taken.
4. The Commission’s approach to the matter of intra-EU BITs
On 18 June 2015 the European Commission initiated infringement proceedings over the termination of intra-EU BITs against five Member States, including Romania (for the BIT concluded with Sweden).
The Commission’s main concern is that intra-EU BITs violate the principle of non- discrimination on grounds of nationality, due to the fact that investors from Member States that are not party to the respective BIT are excluded from the protection of the more favorable provisions of the BIT. Member States are generally at liberty to implement more favorable rules than those provided for under the EU law, as long as the benefits they create are available to EU investors on a nondiscriminatory basis. BITs, on the other hand, reserve substantive and procedural benefits to investors from the States parties to the BIT while excluding investors from other Member States.
The matter of the BITs’ (in)compatibility with the EU single market has also been raised in the notorious Micula case2. The claimants requested the Arbitral Tribunal established under the auspices of the International Center for Settlement of Investment Disputes to order Romania to pay damages for the unfair termination of the fiscal facilities granted to certain Swedish investors, and for thus failing to ensure a fair and equitable treatment of the claimants’ investments, as required by the Romania-Sweden BIT. By an award of 11 December 2013, the Arbitral Tribunal granted the claimants damages of ca. EUR 83 million.
The European Commission intervened in the proceedings as amicus curiae on behalf of the Romanian State, arguing that ordering the state to pay damages for the termination of fiscal facilities would equate to granting a ‘state aid’, which is incompatible with EU law, unless approved by the Commission. The European Commission also intervened in the enforcement proceedings of the Award, writing to the Romanian Government that “The foregoing analysis
1 ECFIN/CEFCPE(2006)REP/56882, Economic and Financial Committee, Annual EFC Report to the Commission and the Council on the Movement of Capital and the Freedom of Payments (2006), p. 7.
2 ICSID Case No. ARB/05/20.
indicates that any execution of the Award of 11 December 2013 would amount to the granting of incompatible “new aid”, subject to the State aid rules contained in the Treaty. The Commission regrets that Romania has already, according to the information provided, partially implemented the Award of 11 December 2013 by cancelling outstanding tax debts of European Food SA”3.
5. Does Law 18/2017 solve the issue of Romania’s intra-EU BITs and of the regime governing EU investments in Romania?
Despite the fact the actions of the European Commission targeted selected agreements, the outcome of these actions, and especially that of the infringement proceedings commenced on 18 June 2015, was bound to have broader ramifications for all existing BITs currently in force between Romania and EU Member States, due to the similarity of the investor protection mechanisms provided therein. It is in this context that Romania opted for the solution of terminating all intra-EU BITs in order to avoid further unfavorable consequences.
However, Parliament approval of the termination of the intra-EU BITs does not put a direct end to the existing treaties, let alone it does not regulate the issue of the applicability of BIT rules to previous investments after their termination (a clause commonly included in BITs).
If a consensus for terminating the BITs and regulating transitory situations is not reached between the States parties to the BITs, it is the rules of the BITs themselves that will determine the possibility of unilateral termination and/or the regime governing transitory situations. In the absence of such provisions, customary international law provides restrictive situations for the unilateral termination of a treaty and certain protection mechanisms for third-party rights acquired under an international instrument. All these matters will have to be addressed on a case by case basis and may give rise to complex litigation where mutual termination is not agreed and the BITs are unilaterally denounced by the Romanian State.
Notably, the Law also covers the BIT concluded between Romania and the United Kingdom. In this particular case, the termination of the BIT (and subject to the terms of the termination) risks rendering UK investors in Romania without any clear international mechanism for the protection of their investments, following completion of the Brexit. Unless a general investment treaty between the EU and the UK will be agreed during the Brexit negotiations, the investments of UK nationals will be subjected to the general Common Commercial Policy of the EU and to applicable national provisions for investors form third party states.
3 The European Commission Letter of 01 October 2014, C(2014) 6848 final.