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40. Understanding Concerning Certain U.S. Bilateral Investment Treaties, signed by the U.S., the European Commission, and acceding and candidate countries for accession to the European Union (September 22, 2003)


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Understanding Concerning
Certain U.S. Bilateral Investment Treaties


The United States ("U.S."), the European Commission ("Commission"), and Acceding and Candidate Countries for accession to the European Union ("Acceding Countries" and "Candidate Countries," respectively) identified in Annex A (collectively "the Participants") wish to confirm their intent to support enlargement of the European Union ("EU"), the economic integration of new EU members, and a positive framework for continued U.S. investment in Acceding and Candidate Countries as they move toward full membership in the EU and thereafter.

The Participants recognize that bilateral investment treaties ("BITs") between the U.S. and Acceding and Candidate Countries contribute to investor confidence and encourage U.S. investment in these countries.

The Participants also recognize that U.S. investors will benefit from Acceding and Candidate Countries' accession to the EU and that long-term business relations will be fostered by EU enlargement.

The Participants also acknowledge the importance of granting protection to existing foreign investments when measures at the community level are enacted that might affect the rights of foreign investors.

At the same time, the Participants acknowledge that enlargement of the EU is based on the principle of full acceptance and implementation, upon the Acceding and Candidate Countries' accession, of the acquis communautaire, including obligations under Article 307 of the Treaty Establishing the European Community ("EC Treaty").
The Participants further recognize that, consequently, Acceding Countries have committed in Article 6.10 of the Act of Accession, and as a condition for the closure of chapter 26 of the negotiations (external relations), to take steps before accession to eliminate incompatibilities between the acquis and their agreements with third countries, and that similar commitments may be undertaken by Candidate Countries.

Therefore, the Participants wish to express their intent to seek compatibility between the Acceding and Candidate Countries' obligations that arise from membership in the EU, and thereafter under EU law, and their obligations arising from their BITs with the U.S.



In furtherance of these objectives:

1. The U.S., the Commission and the Acceding and Candidate Countries have held a series of discussions and meetings since mid-2002;

2. The Commission has identified, to the extent possible, EU measures in certain sectors that raise questions of compatibility with respect to Acceding and Candidate Countries' obligations in U.S. BITs;

3. The U.S. has reviewed these measures, and the Commission's and Acceding and Candidate Countries' assessment of them, and concurs with their conclusion that it would be desirable to take steps in the interest of avoiding incompatibilities with respect to U.S. BITs with Acceding and Candidate Countries; and

4. The Participants have concluded that the possibility exists that decisions that may be taken by the EU in the future may raise both issues relating to the compatibility of EU obligations and U.S. BITs, and questions regarding the protection of existing U.S. investments.

Therefore, the Participants: (a) express their intention to address the matters identified below by relying on interpretations and specific amendments to Acceding and Candidate Countries' BITs with the U.S., including specific sectoral exceptions, as well as consultations where appropriate; (b) intend that making the interpretations and specific amendments outlined in this Understanding will eliminate incompatibilities between obligations of the Acceding and Candidate Countries that arise as a result of membership in the EU and their obligations in their BITs with the U.S.; and (c) undertake the political commitment to make good faith efforts, as necessary, to seek to avoid or to remedy further incompatibilities.

I. Capital Movements

A. The EU is currently considering the relationship between the obligations of its Member States in international agreements to freely allow investment-related transfers and the authority of the EU Council of Ministers to restrict capital movements either by: (a) enacting temporary safeguard measures in exceptional circumstances involving serious difficulties in the operation of the economic and monetary union; or (b) imposing financial sanctions as a result of a common position or joint action in relation to a common foreign or security policy. See EC Treaty, arts. 59 and 60, respectively.


B. The Participants acknowledge that Acceding Countries, pursuant to Article 307 of the EC Treaty and Article 6.10 of the Act of Accession, as applicable, must take all appropriate steps to eliminate incompatibilities between the EC Treaty and their agreements with third countries, and that similar commitments may be undertaken by Candidate Countries.

C. The Participants concur that it is highly desirable to find, as soon as possible, a lasting solution that would avoid or remedy such incompatibilities and that would not subject U.S. BITs or U.S. investments to discriminatory treatment as compared to Member States' agreements with third countries or third countries' investments in Member States. The U.S. and the Commission will accordingly continue to consult on this matter in parallel with developments within the EU. In the absence of mutually satisfactory conclusions from the future consultations foreseen, the Participants acknowledge that the approach in this paragraph is without prejudice to the Commission's powers under Article 226 of the EC Treaty.

D. The Participants note that the general exception addressing essential security interests contained in U.S. BITs with Acceding and Candidate Countries protects the right of a BIT Party to apply measures that it considers necessary to protect its own essential security interests, and that good faith reliance on the essential security exception would afford protection to the BIT Parties. They also note that in the case of an Acceding or Candidate Country these essential security interests may include those deriving from interests of the EU. The U.S. and individual Acceding and Candidate Countries will reflect, by means of an interpretation through an exchange of letters, these understandings of the general exception provision contained in U.S. BITs. (Draft text of an interpretation is contained in Annex B.)

II. Performance Requirements

A. Because EU requirements in certain sectors may result in incompatibilities with Acceding and Candidate Countries' obligations with respect to performance requirements in their U.S. BITs, the U.S. and individual Acceding and Candidate Countries will take steps to amend their bilateral investment treaties to provide that the performance requirement provisions are without prejudice to EU measures in certain sectors. Participants note that an EU measure requiring the use of EU or European goods or services may be satisfied by the use of goods or services of any country in the EU or Europe, respectively; and that such a measure is distinct from a requirement to use, in whole or in part, goods or services exclusively from a specific Acceding or Candidate Country that is a Party to a U.S. BIT. (Draft text of an amendment is contained in Annex C.)


B. Furthermore, the U.S. and individual Acceding and Candidate Countries will interpret, by exchange of letters, the obligations with respect to performance requirements in U.S. BITs to clarify that such obligations do not extend to performance requirements that merely establish conditions for the receipt of an advantage. (Draft text of an interpretation is contained in Annex C.)

III. Measures in Sensitive Sectors or Matters

Because there exist EU-wide measures in sensitive sectors that, upon implementation by Acceding and Candidate Countries when they become members of the EU, would conflict with the non-discrimination obligations (national and/or most-favored-nation treatment) of their BITs with the U.S., the United States and individual Acceding and Candidate Countries will take steps, where appropriate exceptions do not exist, to amend the agreements as provided in the text in Annex D. (Draft text of amendment is contained in Annex D, paragraphs 1 and 2.) The Participants also acknowledge that the obligation in Acceding and Candidate Countries' BITs of a Party to notify the other Party of actions in a sector subject to annex exceptions pertains to actions by the BIT Party and not to EU measures.

IV. Obligations with Respect to Third Parties Arising from EU Membership

U.S. bilateral investment treaties with Acceding and Candidate Countries include a general exception to the non-discrimination obligations for advantages accorded to the nationals or companies of any third country arising from either BIT Party's obligations as a member in a free trade area or customs union. Through an exchange of letters, the U.S. and individual Acceding and Candidate Countries will acknowledge that the exception covers advantages accorded to third-country nationals or companies pursuant to all obligations of a Party arising from its membership in an economic integration agreement, including the EU, that includes a free trade area or customs union. (Draft text of Protocol is contained in Annex E.)

V. Future Developments in EU Law

A. The Participants acknowledge that Acceding Countries, pursuant to Article 307 of the EC Treaty and Article 6.10 of the Act of Accession, as applicable, must take all appropriate steps to eliminate incompatibilities between the EC Treaty and their agreements with third countries, and that similar commitments may be undertaken by Candidate Countries. The Participants also recognize that the possibility exists that EU measures adopted in the future, whether under Article 57.2 of the EC Treaty or under any other provision, might not fall within the scope of the amendments or interpretations that will be made by the U.S. and the Acceding and Candidate Countries with respect to their BITs. The Participants further recognize that such measures might raise questions with respect to the compatibility of obligations arising from international agreements between the U.S. and current EU Member States.

B. In view of these possibilities, the U.S. and the Commission will consult through established means (e.g., informal contacts between Commission and U.S. officials responsible for investment, contacts through diplomatic channels and the U.S.-EU Senior Level Coordinating Group) when new EU measures affecting foreign investment are under consideration and may raise questions of compatibility with pre-existing international agreements between a Member State and the U.S. The purpose of such consultations will be to address, consistent with the objectives of this Understanding, any incompatibility that would arise from the adoption of any such measure. The U.S. and the Commission will make a good faith effort to take into account, in a manner similar to discussions leading to this Understanding, the views of Acceding and Candidate Countries, as well as Member States with international agreements with the U.S., that may be affected by the contemplated measure. In the absence of mutually satisfactory conclusions from the future consultations foreseen, the Participants acknowledge that the approach in this paragraph is without prejudice to the Commission's powers under Article 226 of the EC Treaty.

C. Furthermore, the United States and individual Acceding and Candidate Countries will acknowledge, in the respective exchange of instruments bringing into force the amendments contemplated in this Understanding, that pursuant to Article 307 of the EC Treaty and Article 6.10 of the Act of Accession, as applicable, countries acceding to the EU must take all appropriate steps to eliminate incompatibilities between the EC Treaty and their agreements with third countries. In addition, they will amend the relevant provisions of their BITs for this purpose. (Draft text is contained in Annex F.)

VI. Article 48 "European Companies"

Because the operation of Article 48 of the EC Treaty is among the reasons that the Commission seeks clarification and modification of the non-discrimination commitments in U.S. BITs with Acceding and Candidate Countries, and because the protection afforded to U.S. investments is of particular importance to U.S. investors, the Participants take note of the significance of the explanation provided by the Commission describing the scope and operation of Article 48 of the EC Treaty. (Statement provided at Annex G.)


VII. Protecting Existing Investments

A. The Participants acknowledge the Acceding and Candidate Countries' obligation under their BITs with the U.S. not to apply new discriminatory measures otherwise permitted by these countries' exceptions to the non-discrimination commitments of their BITs with the U.S. to existing investments. With respect to the protection of existing investments in the new sectors and matters to be excepted by the amendments described above in Section III of this Understanding, the United States and individual Acceding and Candidate Countries will take steps to amend their BITs to define existing investments and to establish the period of protection of such existing investments for purposes of these new excepted sectors and matters. (Draft text of amendment is contained in Annex D, paragraph 3.)

B. Furthermore, given that the protection of existing investments is a question relevant both to the accession of new members to the EU and to the adoption of new EU measures restricting foreign investment, the consultations referred to in Section V will be undertaken whenever: (1) the accession of new members raises questions concerning the implementation or application by the new member of EU measures that would affect U.S. investments; or (2) the imposition of new EU measures restricting foreign investment within the EU raises questions regarding the impact on existing U.S. investments. The objective of such consultations will be to protect existing investment.

Concluding Provisions

1. This Understanding constitutes a political arrangement reflecting the Participants' intentions with regard to the matters it addresses and is not an agreement binding under international law.

2. The Participants acknowledge that certain matters addressed in this Understanding require approval of national legislatures. The Participants will inform one another should difficulties arise in this regard.

3. The Participants will act to complete the steps outlined in this Understanding to amend or interpret Acceding Countries' BITs with the United States as soon as possible, but no later than April 30, 2004, and Candidate Countries' BITs with the United States as soon as possible, but no later than the date established for accession in their accession agreement with the EU.

4. Participants acknowledge that enlargement negotiations may be launched between the EU and future candidates for EU membership that are also Parties to U.S. BITs on the principle of full acceptance and implementation upon their accession of the acquis communautaire, including obligations under EC Treaty Article 307, and that this Understanding may be useful in eliminating incompatibilities between the obligations of EU membership and obligations under U.S. BITs.

For the United States: For the European Commission:

For the Czech Republic: For Estonia:

For Latvia: For Lithuania:

For Poland: For the Slovak Republic:

For Bulgaria: For Romania:

Dated: September 22, 2003


Understanding Concerning
Certain U.S. Bilateral Investment Treaties


ANNEXES



Annex A

List of Acceding and Candidate Countries
that Are Participants to this Understanding

Acceding Countries:

Czech Republic

Estonia

Latvia

Lithuania

Poland

Slovak Republic

Candidate Countries:

Bulgaria

Romania


Annex B

Essential Security

Draft Interpretation of Article [ ]*


(Excerpt)

"I have the honor to confirm the shared understanding of the Government of [Acceding or Candidate Country] and the Government of the United States of America (collectively, the "Parties") that paragraph [ ] of Article [ ]* of this Treaty reserves the right of each Party to take measures that it considers necessary for the protection of its own essential security interests. I have the further honor to confirm the Parties' understanding that, in the case of [Acceding or Candidate Country], these interests may include interests deriving from its membership in the European Union."

* Depending on the BIT, Article IX(1), Article X(1), Article XII(3).



Annex C

Performance Requirements

Draft Amendment of Article [_ _]*

(Excerpt)

As necessary for [Acceding or Candidate Country] to meet its obligations pursuant to measures adopted by the European Union, Article [ ]* of the Treaty shall not limit the ability of [Acceding or Candidate Country] to impose performance requirements:

(a) in the agricultural sector that relate to the production, processing and trade of agricultural and processed agricultural products, that implement quotas, or that require the purchase or use of goods produced or services provided in the European Union or, with respect to goods produced or services provided, a particular level or percentage of content from a source in the European Union; or

(b) in the audio-visual sector that relate to the production, distribution and exploitation of audio-visual works, that implement quotas, or that require the purchase or use of goods produced or services provided in Countries of the Council of Europe or, with respect to goods produced or services provided, a particular level or percentage of content from a source in Countries of the Council of Europe.

* Depending on the BIT, Article II(5), Article II(6) or Article VII.

Draft Interpretation of Article [__ ]*


(Excerpt)

"I have the honor to confirm the shared understanding of the Government of [Acceding or Candidate Country] and the Government of the United States of America (collectively, the "Parties") that the prohibition on performance requirements set forth in Article [ ]* of the Treaty does not extend to conditions for the receipt or continued receipt of an advantage, such as any advantage resulting from the establishment of a market organization for agricultural products and its market stabilizing effects."

* Depending on the BIT, Article II(5), Article II(6) or Article VII.


Annex D

Sensitive Sectors or Matters

Draft Amendment of Annex

(Excerpt)

1. As necessary to meet its obligations pursuant to measures adopted by the European Union, the Government of [Acceding or Candidate Country] reserves the right to make or maintain exceptions to national treatment, as provided in Article II, paragraph 1, in the sectors or matters it has indicated below:

Agriculture
Audio-visual
Securities, Investment Services and other Financial Services
Fisheries
Hydrocarbons
Subsidies
Transport (Air Carriers)
Transport (Inland Waterways)
Transport (Maritime)

2. As necessary to meet its obligations pursuant to measures adopted by the European Union, the Government of [Acceding or Candidate Country] reserves the right to make or maintain exceptions to most-favored-nation treatment, as provided in Article II, paragraph 1, in the sectors or matters it has indicated below:

Agriculture
Audio-visual
Hydrocarbons

3. Any exception by the Government of [Acceding or Candidate Country] exercised pursuant to paragraphs 1 or 2 above (i.e., through any law or regulation adopted by, or any EU measure directly applicable within, [Acceding or Candidate Country]) shall not apply, for the time period set forth below in subparagraph (a), to investments of nationals or companies of the United States that are existing in the relevant sector on [the effective date of this amendment] or on the date the European Commission publishes its proposal to enact the relevant measure in its Official Journal, whichever date is later.

a. The time period referred to in this paragraph shall be ten years from the date the relevant law or regulation adopted by, or EU measure directly applicable within, [Acceding or Candidate Country] takes effect, or twenty years from the date of entry into force of the Treaty, whichever date is later.


Annex D, cont.

b. In no case, however, may an exception exercised pursuant to paragraphs 1 or 2 above apply to an existing investment, as defined in this paragraph, to the extent that it would require divestment, in whole or in part, of such an existing investment.


Annex E

Obligations with Respect to Third Parties
Arising From European Union Membership
(Liberalization within the Community)


Draft Protocol or Amendment of Protocol

(Excerpt)

The Parties acknowledge that the terms of the customs union or free trade area exception found at Article [ ]* apply to all obligations of a Party by virtue of its membership in an economic integration agreement that includes a free trade area or customs union (e.g., the European Union), including obligations owed to nationals or companies of any third country.
* Depending on the BIT, Article II(9)(a), Article II(10) (a),
Article XII(2) (a).


Annex F

Future Developments of European Union Law

Acknowledgement in Exchange of Notes

(Excerpt)

I have the honor to refer to the [Treaty Between the Government of the United States of America and the Government of [Acceding or Candidate Country] Concerning the Encouragement and Reciprocal Protection of Investment], with Annex, signed at Washington on _________ (the "BIT").

Representatives of our two Governments have discussed the intentions of the Parties regarding the compatibility between [Acceding or Candidate Country's] obligations under the BIT and its obligations that arise from membership in the European Union.

As a result of these discussions, the two Governments have acknowledged that [Acceding or Candidate Country], pursuant to Article 307 of the Treaty Establishing the European Community ("EC Treaty") and Article 6.10 of [Acceding or Candidate Country's] Act of Accession, as applicable, must take all appropriate steps to eliminate incompatibilities between the EC Treaty and its other international agreements, including the BIT.

In order to avoid such incompatibilities, the two Governments have concluded that certain amendments to the BIT are necessary.

Therefore, I have the honor to propose that:

(Amendment proposal follows)

Draft Amendment of Article [__ ]*

Article [ ]* shall be amended by deleting the text of the existing paragraph in its entirety and substituting the following paragraph:

"The Parties agree to consult promptly, on the request of either, to resolve any disputes in connection with this Treaty, or to discuss any matter relating to the interpretation or application of this Treaty. The Parties also agree to consult promptly whenever a Party believes that steps are necessary to assure compatibility between this Treaty and the Treaty Establishing the European Community with a view to assuring compatibility."

* Depending on the BIT, Article V, Article X(1), or Article XII.


Annex G

Explanation Provided by
the European Commission concerning the Scope
and Operation of Article 48 of the EC Treaty


Article 48 reads as follows:

"Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.

"Companies or firms means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non�profit�making."

1. Article 48 EC is a provision complementing Article 43 EC, which is the basic rule in the chapter defining the right of establishment under the EC Treaty. The latter refers to "nationals of a Member State" only, but Article 48 makes it clear that the right of establishment is not only accorded to private individuals but also to (all) "companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community."

Subparagraph 2 adds a definition of "companies and firms" as meaning "companies or firms constituted under civil or commercial law, including co-operative societies, and other legal persons governed by public or private law, save for those which are non-profit-making."

The provision is important because company law and the law of legal persons had not been harmonised at all in the beginning of the EEC and are still far away from substantial harmonisation. Even mutual recognition of companies in a broader meaning has not been achieved (cf. Article 293, third stroke EC). Article 48 expresses therefore a kind of mutual recognition of legal personality under national law for the purpose of exercising the right of establishment.

In addition, companies as defined in Article 48 benefit from the freedom to provide services in the EU by virtue of Article 55 EC, which extends the application of the provisions of Articles 45-48 to services.

2. As is the case for the provision that it complements (Article 43), Article 48 confers individual rights, which are to be protected in courts.

Article 48 does not distinguish between companies or firms according to the nationality of their owner. A company or firm, endowed with legal personality, is treated like a natural person of the Member State under which law it is registered or in which it has its central administration or principal place of business. That means that the provisions of Article 43-47 EC apply fully to such companies or firms, irrespective of the nationality of the owners.

This includes also Article 46 EC, which permits "special treatment for foreign nationals on grounds of public policy, public security or public health." This provision, which, being a derogation to fundamental freedoms, must be interpreted in a very restrictive way, aims principally at allowing expulsion of natural persons in case of persistent unlawful behaviour, which is not possible with respect to a State's own nationals. It can, however, also be applied to companies and firms and would allow differentiation between them for reasons of and according to foreign ownership (e.g., in the case of a sanctions policy against a foreign country and their nationals, state of war or other public security and policy measures).

3. As Article 48 confers individual rights on companies and firms, any restriction imposed upon them by a Member State in the exercise of their right of free establishment can be challenged in national Courts, which have to grant the necessary protection required by the EC Treaty.

If in such a case a question concerning the interpretation of Articles 43-48 EC occurs, the national Court may, and if it takes a final decision, must, submit this question to the Court of Justice of the European Communities for a preliminary ruling which binds the national court (Article 234, first subparagraph, letter a), second and third subparagraph EC Treaty).

Moreover, a company or firm which considers that its rights under Article 48 have been violated or its right of establishment impeded may address a complaint to the European Commission, which, if it considers the complaint well-founded, may take action against the Member State concerned according to Article 226 EC (infringement procedure). The Court of Justice will decide whether the action is well-founded or not. According to ECJ case law (see "Francovich," 19 November 1991, case C-6/90, ECR 1991, page I-5357 and "Brasserie du p�cheur," 5 March 1996, ECR 1996, page I-1029), a company or firm which considers that its rights under Article 48 have been violated by a Member State can bring a compensation claim against that Member State under national law.

4. Article 48 does not prevent the EC legislator to provide for different treatment of third country companies and firms according to their ownership in the pursuit of a common policy or when adopting measures under specific treaty provisions (e.g., Article 57.2 EC). The provision would however not allow the EC legislator to authorise individual Member States to adopt measures which are not consistent with that Article.



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