The European Court of Justice today issued Opinion 2/15, in which it ruled that the EU does not have exclusive competence to enter into a bilateral free trade agreement (“FTA”) with Singapore. The Opinion makes it clear that non-direct investment protections and investor-state dispute resolution mechanisms in such treaties do not fall within the exclusive competence of the EU. So all 27 Member States have to conclude the FTA with Singapore.
The Opinion highlights the sorts of difficulties the UK would face in trying to conclude a FTA with the EU alone as part of any Brexit negotiations. The UK would have to remove these sorts of provisions altogether to avoid having to conclude the agreements with all 27 Member States. That may not be a particularly attractive option if the political aim of a broad and comprehensive agreement is to be achieved: both sorts of measures are important protections for investors and are standard features of most modern bilateral investment treaties.
The envisaged agreement was one of the first “new general” bilateral FTAs, in that it was a trade agreement that contained, in addition to provisions on the reduction of custom duties and of non-tariffs barriers to trade in goods and services, various other matters relating to trade, such as intellectual property protection, investment, public procurement, competition and sustainable development.
Negotiations concluded in October 2014 and the envisaged agreement was initially on 26 June 2015.
The Commission considered that the EU has exclusive competence to sign and conclude the envisaged agreement, on the basis that the majority of its provisions fell within the common commercial policy as defined in Article 207(1) TFEU and therefore within the EU’s exclusive competence pursuant to Article 3(1)(e) TFEU. In July 2015 the Commission sought an opinion from the European Court on this issue.
Several Member States and the Council argued that it had the characteristics of a mixed agreement. They considered that several provisions, in particular the provisions relating to non-direct foreign investment, fell within the competences of the Member States alone. They also argued that investment protection measures were not specifically linked to international trade, and so did not fall within the common commercial policy.
Non-direct investment protections and the lack of a specific link with trade between EU and Singapore
The Court agreed with the Member States’ position. Under Article 3(1)(e) TFEU, the TFEU is to have exclusive competence in the area of the commercial policy. The Court confirmed that to fall within that policy, the components of the FTA had to display a “specific link” with trade between the EU and Singapore (at ).
Chapter 9 of the envisaged FTA contained protections for every kind of asset owned “directly or indirectly” by a person of one Party in the territory of the Other Party.
The Court declared that the European Union has exclusive competence so far as concerns the parts of the agreement that related to the following matters:
- access to the EU market and the Singapore market so far as concerns goods and services (including all transport services) and in the fields of public procurement and of energy generation from sustainable non-fossil sources;
- the provisions concerning protection of direct foreign investments of Singapore nationals in the European Union (and vice versa);
- the provisions concerning intellectual property rights;
- the provisions designed to combat anti-competitive activity and to lay down a framework for concentrations, monopolies and subsidies;
- the provisions concerning sustainable development;
- the rules relating to exchange of information and to obligations governing notification, verification, cooperation, mediation, transparency and dispute settlement between the parties, unless those rules relate to the field of non-direct foreign investment (see below).
However, in respect of two aspects of the agreement the Court held that the European Union is not endowed with exclusive competence, namely the field of non-direct foreign investment (which it defined as ‘portfolio’ investments made without any intention to influence the management and control of an undertaking (at )) and the regime governing dispute settlement between investors and States.
Article 207(1) TFEU expressly included foreign direct investment within the scope of the EU’s common commercial policy. Indirect investment was not mentioned. The Commission had argued that the FTA had provisions that affected the rules on the free movement of capital for the purposes of Article 63 TFEU and therefore could fall within its exclusive competence (at ). The Court dismissed that argument on the basis that external agreements with third party States could not impact on the meaning or scope of the EU Treaties (at ). On that basis, the EU did not have exclusive competence to enter into this aspect of the FTA.
Investor-State dispute resolution mechanisms
The FTA established a regime for investor-state arbitration, whereby both the EU or the Member States themselves could be respondents to claims brought by investors of the other party. The regime required claimants to withdraw any pending claims submitted to a domestic court or tribunal concerning the same treatment (Article 9.17.1(f)) in order to bring arbitration proceedings under the FTA. The Court held that by removing jurisdiction of the domestic courts in such cases, this aspect of the FTA was not a purely ancillary nature to the substantive commitments in the rest of the FTA, and as such could not be established without Member States’ consent ([286 -293].
As I mentioned at the start of this article, the sort of measures in question which led to this FTA falling outside the EU’s competence are standard features of a modern investment treaty and any agreement without them could hardly to be said to be comprehensive. The timescale of these proceedings is worth noting: it took the European Court nearly two years to provide an Opinion following a request from the Commission. That factor alone and avoiding a similar sort of delay to the conclusion of such an agreement may mean that the UK in practice has no choice but to conclude an FTA with the EU and with all 27 Member States.
A link to the judgment can be found here.