Opinion procedure 2/15

Arguments

270.The Commission submits that Section A of Chapter Nine of the EUSFTA, which relates specifically to international investment and does not apply to inter-EU investments, falls within the European Union’s exclusive competence over the common commercial policy in so far as it applies to foreign direct investment. Relying on the test applied in cases concerning trade in services and goods and commercial aspects of intellectual property, the Commission argues that an agreement falls within the scope of Article 207(1) TFEU if it relates specifically to international investment in that it is essentially intended to promote, facilitate or govern international investments and has direct and immediate effects on those investments.

271.In distinguishing between portfolio investment (or other non-direct investments) and foreign direct investment (both of which may fall within the definition of Article 9.1 of the EUSFTA), the Commission proposes to transpose the Court’s definition of ‘direct investment’ in the context of the free movement of capital and payments to Article 207(1) TFEU.

272.According to the Commission, the common commercial policy covers both rules governing the initial access of investments to the market of the host State and the protection to be given to an investment after it has been admitted to the market (‘post-admission protection’). The latter includes protection against, for example, discrimination, unfair and inequitable treatment and expropriation without compensation. The Commission argues that, in referring to ‘foreign direct investment’, Articles 206 and 207(1) TFEU do not distinguish between market access and post-admission protection. Furthermore, excluding post-admission protection of foreign direct investment from the common commercial policy would also be contrary to the objectives laid down in Article 206 TFEU. In particular, the objective of ‘the progressive abolition of the restrictions on … foreign direct investment’ refers to the abolition of restrictions resulting both from barriers to the initial admission of an investment and obstacles to its subsequent operation and enjoyment. In that context, the Commission draws analogies with the European Union’s exclusive competence in the area of trade in goods and services, which is also not limited to market access.

273.The Commission adds that the common commercial policy already covers GATS standards applicable to post-admission treatment of mode 3 supply of services (that is to say, through commercial presence(215)). Similar standards are found in Chapter Eight of the EUSFTA. It would be illogical to conclude that the European Union lacks exclusive competence over the standards laid down in Chapter Nine but has exclusive competence over analogous standards included in Chapter Eight of the EUSFTA or in the GATS.

274.The Commission considers that Article 345 TFEU does not limit the European Union’s exclusive competence over Chapter Nine in so far as that chapter concerns expropriation. Article 9.6 of the EUSFTA subjects the exercise of the right to expropriate to conditions that are similar to those imposed by Articles 49 and 63 TFEU. That provision does not prejudice the rules governing the system of property ownership in each Member State: it neither prohibits a Member State from expropriating nor does it require that a Member State expropriate any assets owned by investors from Singapore.

275.The Commission also rejects the argument that the first part of Article 207(6) TFEU excludes expropriation clauses from the scope of the common commercial policy because no comparable EU policy exists within the internal market. That argument fails to recognise the distinction between express and implied exclusive external competences. Nor does the second part of Article 207(6) TFEU alter the Commission’s position: Article 345 TFEU does not as such exclude harmonisation of property rights. In any event, Article 9.6 of the EUSFTA does not harmonise legislative or regulatory provisions of the Member States within the meaning of Article 207(6) TFEU.

276.The Commission accepts that, in so far as Chapter Nine applies to portfolio investment, that chapter does not fall within the common commercial policy. It argues that the European Union nonetheless enjoys exclusive competence because portfolio investment is a capital movement within the meaning of Article 63 TFEU and the standards of treatment for which Chapter Nine provides are at least largely covered by the common rules laid down in that Treaty provision. In particular, the core standards of national treatment, fair and equitable treatment and protection against expropriation are covered by the prohibition in Article 63(1) TFEU. Whilst Article 63(1) TFEU is subject to the exception provided in Article 64(1) TFEU, the restrictions ‘grandfathered’ by the latter provision (that is to say, existing restrictions that are permitted to remain in place) do not include restrictions on portfolio investment. As a result, the conditions of the third ground under Article 3(2) TFEU are satisfied.

277.The Commission submits that its interpretation of ‘common rules’ in the third ground under Article 3(2) TFEU as covering Treaty provisions as well as rules of secondary law respects the rationale behind the ERTA case-law. That rationale is the protection of the unity of the common market and the uniform application of EU law and the need to ensure the uniform and consistent application of EU rules and the proper functioning of the system which they establish.(216) The Commission also maintains that the Treaty rules on the free movement of capital are unique because they have an external dimension. Furthermore, and subject to the exception in Article 64(1) TFEU, Article 63(1) TFEU itself achieves the full liberalisation of capital movements between the European Union and third countries. Thus, there is no need to enact secondary legislation in order to extend free movement of capital to capital movements between the Member States and third countries or to achieve full liberalisation. The fact that, with the exception of Pringle,(217) most cases concerning the application of the ERTA principle involve common rules contained in secondary law is because the Treaties often limit themselves to setting out policy objectives and conferring powers to legislate upon the institutions. Finally, unless the European Union has exclusive competence, it will not be possible to ensure that the common rules in Article 63(1) TFEU are applied uniformly and consistently.

278.Should the Court decide that the European Union does not have exclusive competence over portfolio investment on the basis of Article 3(2) TFEU read together with Article 63(1) TFEU, the Commission submits that the European Union nonetheless enjoys shared competence. For this, it relies on Article 216(1) TFEU which provides for the European Union’s right to conclude international agreements with third countries where that is ‘… necessary in order to achieve, within the framework of the European Union’s policies, one of the objectives referred to in the Treaties …’. In the present case, the objective is to achieve the free movement of capital, including portfolio investment between the European Union and third countries. The liberalisation of extra-EU capital movements cannot be effective unless third countries remove their own restrictions on capital movements between the European Union and their territories. For them to do so usually requires the conclusion of international agreements, based on reciprocity, with those countries. The Commission insists that it is not arguing that, because Chapter Nine is necessary to enable the European Union to exercise its external competences, the European Union enjoys exclusive competence.

279.The Parliament also argues in favour of EU exclusive competence as regards Section A of Chapter Nine of the EUSFTA. In particular, it submits that the European Union enjoys exclusive competence as regards portfolio investment because, on the one hand, coverage of portfolio investment by Chapter Nine is incidental to the main or dominant purpose of that chapter (ensuring protection for foreign direct investment), and, on the other hand, Article 3(2) TFEU may also apply where primary EU law may be affected. The Parliament subscribes specifically to the Commission’s position that the prohibition of expropriation in Article 9.6 of the EUSFTA is neither an interference with the Member States’ different property regimes and methods of registering and structuring property relations in different legal traditions, nor a harmonisation of the Member States’ laws.

280.The Council accepts that, from an economic perspective, trade and foreign direct investment are interlinked and that some aspects of the treatment of foreign direct investment relate to standard issues of common commercial policy (that is to say, market access such as the access of a foreign investor to import or export licences). However, it submits that the regulation of foreign direct investment does not necessarily pursue trade objectives. According to the Council, rule-making with regard to the admission, treatment and protection of foreign direct investment forms an independent area of international economic relations that is not automatically part of trade policy. The Council distinguishes between: (i) the admission of foreign direct investment (that is to say, market access: the decision whether a direct investor is allowed to invest in a host State and what (if any) restrictions or conditions apply); (ii) the movement of capital in relation to foreign direct investment (even if an investor can also raise funds in the host State and foreign direct investment thus does not always necessarily involve a cross-border movement of capital); and (iii) investment treatment.

281.According to the Council, Chapter Nine is a self-standing chapter that deals only with investment protection and uses a very broad asset-based definition of investments. That chapter concerns neither the admission nor the promotion of investment. Rules on the admission of investments are found in Chapter Eight of the EUSFTA.

282.The Council accepts that the European Union has exclusive competence over foreign direct investment that is related to the common commercial policy but proposes a narrower interpretation of the scope of Article 207(1) TFEU than that advanced by the Commission and the European Parliament. In that regard, the Council considers that it is not necessary for the Court to decide on the precise limits of the competence over foreign direct investment under the EUSFTA. Essentially, the Council alleges that the Commission has not shown that all standards set out in Section A refer to provisions that fall under the European Union’s exclusive competence over foreign direct investment or for any other type of investment covered by Chapter Nine.

283.As regards the national treatment clause in Article 9.3 of the EUSFTA, the Council focuses on the situations laid down in Article 9.3.3 in which the Parties may set aside the obligation of national treatment. According to the Council, the European Union cannot have exclusive competence to sign and conclude the EUSFTA in so far as it relates to measures taken by the Member States discharging their responsibility for national security. Nor does the European Union enjoy exclusive competence over the protection of national treasures or legislative competence to adopt measures in the field of direct taxation.

284.As regards the fair and equitable treatment clause and the full protection and security clause in Article 9.4 of the EUSFTA, the Council argues that the Commission has not demonstrated that the European Union has exclusive competence over either clause.

285.As regards the regime for compensation of losses to investments (covered by Chapter Nine) for which Article 9.5 of the EUSFTA provides, the Council submits that the European Union does not enjoy competence over the part of that provision that relates to Member States’ armed forces. It is also doubtful whether the European Union may sign and conclude, alone, an agreement that deals with the implications of war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the Member States.

286.With respect to the arrangements concerning expropriation contained in Article 9.6 of the EUSFTA, the Council submits that the Court’s case-law does not support the argument that all measures relating to expropriation in the EUSFTA fall entirely within the European Union’s exclusive competence. As a result of Article 345 TFEU, the European Union cannot have exclusive competence to sign and conclude Article 9.6 of the EUSFTA.

287.The Council also submits that the Commission has not argued, let alone demonstrated, that certain matters covered by Article 9.7.2 of the EUSFTA, in particular criminal or penal offences, social security, public retirement or compulsory saving schemes and taxation, fall within the European Union’s exclusive competence.

288.The Council disagrees with the Commission’s reliance on the third ground under Article 3(2) TFEU to claim exclusive competence with regard to the European Union in respect of portfolio investment.

289.First, whilst portfolio investment may involve a movement of capital, that type of investment cannot be equated with the free movement of capital under the Treaties. Article 63(1) TFEU does not deal with protecting investments. Nor does it deal with portfolio investment or direct investment as such. Article 63(1) TFEU applies only in so far as the movement of capital is involved. That is not necessarily always the case for foreign direct investment and portfolio investment. The Council further notes the importance of ensuring that third country operators do not circumvent permissible restrictions on the freedom of establishment (justified under Article 65(2) TFEU) by seeking to rely directly on Article 63 TFEU. The Court has distinguished between freedom of establishment and free movement of capital by adopting a centre of gravity approach in which it looks at which particular aspect of a situation is primarily affected by the alleged restriction.

290.Second, no provision in the Treaties confers a specific competence on the European Union to act in relation to portfolio investments or (a fortiori) the protection of portfolio investment. The Member States are therefore entitled, in the light of Articles 4(1) and 5(2) TFEU, to act in this area.

291.Third, should the Court nonetheless accept that portfolio investment is a capital movement within the meaning of Article 63(1) TFEU and that that provision confers on the European Union a specific power to act in relation to protecting that type of investment, the Council argues that the European Union has adopted no legislation under Article 63(1) TFEU relating to the protection of portfolio investment. The Council acknowledges that there is secondary law relating to, for example, the admission of securities to stock exchanges and to markets in financial instruments. Whilst those rules involve aspects of portfolio investment, none were adopted using the legal bases relating to free movement of capital.

292.Fourth, there can in any event be no implied exclusive EU external competence over portfolio investment because Article 63(1) TFEU is not a ‘common rule’ under Article 3(2) TFEU. Even assuming that there is primary law achieving full liberalisation of capital movements between Member States and third countries, the Council submits that the Commission’s novel reading of ‘common rules’ in Article 3(2) TFEU is flawed. The Court’s case-law shows that the European Union has to have exercised internal competence by adopting secondary legislation. That requirement is inherent in the notion of implied powers. The Commission is wrong to rely on Pringle and Opinion1/92.(218) In Pringle,(219) the Court held that the European Stability Mechanism (‘ESM’) Treaty fell as a whole outside the European Union’s claimed exclusive competence set out in Article 3(1)(c) TFEU. There was no need for the Court to examine the further question whether the ESM Treaty could nevertheless be held to affect ‘common rules or alter their scope’ within the meaning of Article 3(2) TFEU. In any event, it is clear that the objective in Pringle related to the European Union’s exercise of the powers which had been expressly conferred on it. The Council accepts that the Court did, in Opinion1/92,(220) refer to Treaty provisions on competition. The cases to which the Court referred in that Opinion nonetheless emphasised that internal competences must be exercised before an implied competence to conclude an international agreement arises or that the existence of such an implied competence is tied to a competence that is expressly conferred by the Treaties.

293.Should the Court accept that Article 63(1) TFEU is capable of constituting a ‘common rule’, the Council argues that the Commission has not shown how the area of portfolio investment has been ‘largely covered’ by the alleged ‘common rules’. Nor has the Commission shown that Chapter Nine, in so far as it relates to the protection of portfolio investment, would affect such common rules or alter their scope.

294.The Council is also concerned about the reasoning underpinning the Commission’s alternative argument that there is a shared competence over portfolio investment based on Article 216(1) TFEU. The need to attain a specific Treaty objective requires showing that competences have been conferred internally on the European Union to achieve that objective. That precludes the Commission from relying on Article 216(1) TFEU with regard to portfolio investment. Should the Court find that the European Union does have the required competence to regulate the protection of portfolio investment, the Council notes that the Commission does not argue that the European Union would be able to exercise that internal competence only through concluding an international agreement and that the exercise of internal and external competences over the protection of foreign portfolio investment has therefore to be concomitant. Furthermore, should the Commission be correct, there would be no need to conclude an international agreement: Article 63(1) TFEU would by itself achieve the full liberalisation of capital movement between the European Union and third countries.

295.The Council agrees that the European Union and the Member States share competence over Chapter Nine. However, since competence to protect portfolio investment is not conferred on the European Union, it is not possible for the European Union to exercise that competence without the participation of the Member States. In the alternative, the Council submits that, should the Court accept that the European Union does have shared competence over portfolio investment, whether that competence should be exercised through concluding the EUSFTA remains a political decision.

296.Most of the intervening Member States have taken a position on Section A. The arguments they put forward broadly correspond with the different aspects of the Council’s position.

297.Thus, they argue that the meaning of ‘direct investment’ in Article 64 TFEU and ‘foreign direct investment’ in Article 207(1) TFEU must be the same. In that regard, the case-law regarding the scope of Article 64 TFEU is relevant, as well as the definition of direct investment (and of portfolio investment) in Regulation (EC) No184/2005(221) and Directive88/361/EEC.(222)

298.The European Union’s exclusive competence as regards foreign direct investment is limited to the elimination of restrictions on that type of investment. In so far as the EUSFTA also guarantees other forms of protection, such rules do not fall within the European Union’s exclusive competence pursuant to Article 207(1) TFEU. That is the case for provisions regarding the promotion and protection of foreign direct investment (such as those relating to expropriation, the armed forces, direct taxation, criminal law and procedure).

299.Article 9.6 of the EUSFTA (expropriation) lays down general principles according to which the Parties are to apply their property laws. Such matters fall within the Member States’ competence which is to be exercised in accordance with EU law. Article 345 TFEU imposes a limitation on the European Union’s exercise of its competences under the Treaties.

300.It follows from Article 207(6) TFEU that the European Union may not exercise an exclusive competence to negotiate and conclude international trade agreements in areas in which it does not enjoy legislative competence to adopt internal legislation. That provision also precludes the European Union from enjoying exclusive competence, pursuant to Article 207(1) TFEU, for investments other than foreign direct investment.

301.The Commission’s novel interpretation of Article 3(2) TFEU would entail the European Union enjoying, pursuant to Articles 3(2) and 63 TFEU, exclusive competence over portfolio investment. It would also imply that every agreement liable to restrict investment, irrespective of whether it is part of the common commercial policy, could fall within the European Union’s implied exclusive competence. However, the Treaties make it clear that (express) exclusive competence exists only as regards foreign direct investment. Common rules within the meaning of Article 3(2) TFEU are rules of secondary law, not primary law. The existence of internal competence is not sufficient. The historical background to Article 3(2) TFEU confirms that interpretation. In any event, Article 63 TFEU is not a legal basis for exercising competence. The legal basis to act is found in Article 64(2) TFEU and is subject to limitations.

302.Furthermore, the conditions of Article 3(2) TFEU are not satisfied. The scope of Section A of Chapter Nine is much wider than that of Article 63 TFEU. Expropriation is not a restriction on the free movement of capital for which the Treaties provide. In so far as Article 63 TFEU applies, that would only guarantee the application of the principle of non-discrimination. No common rules have been adopted relating to expropriation.

303.The European Union may not, by agreeing to Article 9.10.1 of the EUSFTA, decide alone on the termination of agreements concluded by the Member States with Singapore. That provision does not respect the general principle, expressed in Article 59(1)(a) of the 1969 Vienna Convention, according to which international agreements may be terminated only by parties to them. Nor has the Commission put forward a basis in international law for its position. Furthermore, the European Union itself has recognised, in Regulation (EU) No1219/2012,(223) that bilateral agreements of the Member States signed before 1 December 2009 may remain in force or enter into force, in accordance with that regulation.

304.Finally, none of the grounds under Article 216 TFEU are satisfied. Therefore, the European Union does not enjoy shared competence as regards portfolio investment.

Analysis

Introduction

305.There are two routes by which the European Union could enjoy exclusive competence as regards the substantive rules governing investment found in Section A of Chapter Nine. Do those rules fall within the common commercial policy as described in Article 207(1) TFEU? If not, do they nevertheless form part of an area within which there are common rules (coinciding with that area or largely covering it) that may be affected or whose scope might be altered should the EUSFTA be concluded (third ground under Article 3(2) TFEU)? I shall address those possibilities in turn.

306.A further distinct issue arises with regard to Chapter Nine in so far as Article 9.10.1 of the EUSFTA states that, as a result of the entry into force of the EUSFTA, certain bilateral investment agreements between the Member States and Singapore (listed in an annex to Chapter Nine) will cease to exist. I shall discuss that matter separately.(224)

Exclusive competence on the basis of Article 207(1) TFEU, read together with Article 3(1) TFEU

–The meaning of ‘foreign direct investment’ in Article 207(1) TFEU

307.Chapter Nine defines the investments and investors that it covers. Unlike the Treaties, it does not distinguish between foreign direct investment and other forms of investment.(225) Neither the EUSFTA nor the Treaties refer to ‘portfolio investment’.

308.The Commission’s request offers the Court a first opportunity to interpret the concept of ‘foreign direct investment’ in Article 207(1) TFEU and to decide on the degree to which the common commercial policy covers the regulation of ‘foreign direct investment’. That type of investment was already included in Article III-315(1) of the Treaty Establishing a Constitution for Europe.(226) The content of that provision was identical to that of Article 207(1) TFEU.(227)

309.By virtue of Article 207(1) TFEU, coupled with Article 3(1)(e) TFEU, the European Union has exclusive competence over foreign direct investment. That competence applies together with competence over other matters falling within the common commercial policy (such as services) but which might also relate to investment (such as investment in the services sector).(228)

310.The Treaties do not define ‘foreign direct investment’. However, a number of provisions of the Treaties, Protocols and Declarations(229) use the term ‘investment’.

311.At a general level, I understand ‘investment’ to mean placing money or another asset into a commercial activity with the objective of making a profit.

312.Article 207(1) TFEU refers to one particular type of investment, that is to say, investment that is both ‘foreign’ and ‘direct’.

313.A foreign investment is an investment made by an EU natural or legal person in a third State or by a natural or legal person of a third State in the European Union. Foreign direct investment is thus a direct investment that contains a non-EU component.

314.The term ‘direct investment’ also appears in other Treaty provisions, in particular in Article 64(1) and (2) TFEU which is part of Chapter Four (‘Capital and payments’) of Title IV (‘Free movement of persons, services and capital’). Subject to Article 64(1) and (2) TFEU, Article 63 TFEU prohibits all restrictions on the movement of capital and on payments between Member States and between Member States and third countries. That prohibition is broad in scope. It applies, for example, to restrictions on the movement of capital which discourage non-residents from making investments in a Member State or which discourage that Member State’s residents from investing in other States.(230)

315.Article 64(1) TFEU is defined by reference to the categories of capital movements that are capable of being subject to restrictions.(231) It circumscribes the prohibition in Article 63 TFEU with respect to the movement of capital to or from third countries involving direct investment (including in real estate), establishment, the provision of financial services or the admission of securities to capital markets. Article 64(2) TFEU offers a legal basis for the Parliament and the Council to adopt measures as regards those forms of movement of capital. Under the conditions laid down in Article 64(3) TFEU, the Council may adopt also measures which constitute ‘a step backwards’ in EU law as regards the liberalisation of the movement of capital to or from third countries.

316.Whatever the precise scope of Articles 63 and 64 TFEU, it seems to me that those provisions clearly apply to the movement of capital and payment to and from third countries involving direct investment, including foreign direct investment. Therefore, both those provisions and the case-law interpreting them are relevant when defining the scope of ‘foreign direct investment’ in Article 207(1) TFEU.

317.In interpreting ‘direct investment’ in Article 64(1) TFEU, the Court has relied on the definition of that term in Council Directive88/361 implementing Article 67 of the EEC Treaty.(232) Article 1(1) of that directive provides that capital movements are to be classified in accordance with the Nomenclature in Annex I (which the Court has accepted has indicative value(233)).

318.The Nomenclature under Annex I lists under ‘direct investments’: ‘(1) establishment and extension of branches or new undertakings belonging solely to the person providing the capital, and the acquisition in full of existing undertakings; (2) participation in new or existing undertakings with a view to establishing or maintaining lasting economic links; (3) long-term loans with a view to establishing or maintaining lasting economic links; and (4) reinvestment of profits with a view to maintaining lasting economic links’. That part of the annex also refers to the explanatory notes which define certain terms solely for the purpose of the Nomenclature and Directive88/361. Those notes define ‘direct investments’ as ‘investments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity’. The notes add that the concept ‘must therefore be understood in its widest sense’.

319.Against that background, the Court has found that the concept of ‘direct investment’ covers ‘investments by natural or legal persons which serve to establish or maintain lasting and direct links between the person providing the capital and the company to which that capital is made available in order to carry out an economic activity’.(234) In Test Claimants in the FII Group Litigation, the Court held that Article 63 TFEU covers, in principle, capital movements involving establishment or direct investment and found those latter terms to ‘relate to a form of participation in an undertaking through the holding of shares which confers the possibility of effectively participating in its management and control’.(235) In Haribo, the Court applied that test to conclude that a holding did not fall within the scope of Article 64(1) TFEU (by implication, therefore, that it was not a direct investment) where it involved less than 10% of the share capital of a company.(236)

320.That case-law appears to reflect definitions used elsewhere. For example, the Organisation for Economic Co-operation and Development (‘the OECD’) defines ‘direct investment’ as ‘… a category of cross-border investment made by a resident in one economy … with the object of establishing a lasting interest [evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise] in an enterprise … that is resident in an economy other than that of the direct investor’. The interest of the direct investor is in ‘… a strategic long-term relationship with the direct investment enterprise to ensure a significant degree of influence by the direct investor in the management of the direct investment enterprise’.(237) The International Monetary Fund (‘IMF’) defines a ‘direct investment’ as ‘… the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy’. According to the IMF, the ‘lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise’.(238) The United Nations Conference on Trade and Development (‘Unctad’) refers to the definitions used by the OECD and the IMF.

321.The case-law regarding the scope of Article 63 TFEU also helps to understand what is excluded from the notion of ‘direct investment’. Thus, the Court has distinguished that type of investment from ‘portfolio investments’, that is to say, ‘the acquisition of securities on the capital market solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking’.(239) That interpretation also corresponds with definitions of portfolio investment used elsewhere.(240)

322.Against that background, I interpret the term ‘foreign direct investment’ in Article 207(1) TFEU to mean investments made by natural or legal persons of a third State in the European Union and investments made by EU natural or legal persons in a third State which serve to establish or maintain lasting and direct links, in the form of effective participation in the company’s management and control, between the person providing the investment and the company to which that investment is made available in order to carry out an economic activity. In applying that definition, I consider that the fact that the direct investor owns at least 10% of the voting power of the direct investment enterprise may offer evidentiary guidance but is certainly not determinative.

–The regulation of ‘foreign direct investment’ as part of the common commercial policy

323.The Parties disagree on what forms of regulation of ‘foreign direct investment’ fall within the European Union’s common commercial policy. It is common ground that that policy covers market access (that is to say, conditions of entry and establishment) and promotion of investment. Thus, a provision such as Article 9.7 of the EUSFTA (‘Transfer’), which requires Parties to permit all transfers relating to an investment to be made in a freely convertible currency without restriction or delay and thus applies to market access, falls within the common commercial policy.

324.Does the common commercial policy also cover the protection of investors (and their investments) after they have accessed the foreign market?

325.In my opinion, it does.

326.It is clear that the common commercial policy covers, at least to some extent, the protection of certain foreign investments. That is because that policy covers trade in services, understood as the four modes of services covered by the GATS.(241) The GATS lays down obligations regarding, inter alia, both market access and national treatment, the most favoured nation principle and domestic regulation, in particular, with respect to the supply of a service by a service supplier of one Member, through commercial presence in the territory of any other Member (the so-called mode 3 supply of services, corresponding generally with ‘establishment’).(242) Commercial presence under that agreement means ‘any type of business or professional establishment, including through (i) the constitution, acquisition or maintenance of a juridical person, or (ii) the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service’.(243) Where foreign direct investment serves to establish a commercial presence for the purposes of supplying a service, it is covered by trade in services and therefore falls within the common commercial policy. Taking into account the types of obligation assumed under the GATS and the Court’s conclusion in Opinion1/08,(244) it is also clear that the common commercial policy covers market access and treatment to be accorded after a commercial presence has been established. At least some form of post-admission protection of foreign direct investment is therefore covered by the common commercial policy in so far as it encompasses trade in services.

327.Furthermore, the question whether the common commercial policy covers regulation that protects, through the application of the principle of national treatment, investment measures related to trade in goods has already been settled. The Court has held that the European Union has exclusive competence to conclude the Agreement on Trade-Related Investment Measures (‘the TRIMs Agreement’),(245) which applies to investment measures related to trade in goods(246) and lays down, inter alia, a national treatment obligation.(247)

328.It is also settled case-law that an EU act falls within the common commercial policy ‘… if it relates specifically to international trade in that it is essentially intended to promote, facilitate or govern trade and has direct and immediate effects on trade’.(248) The same test should therefore be applied to foreign direct investment. Thus, EU measures that are essentially intended to promote, facilitate or govern foreign direct investment and have direct and immediate effects on foreign direct investment and investors fall within the EU common commercial policy.

329.I would add that the specific context in which the phrase ‘foreign direct investment’ appears in Articles 206 and 207(1) TFEU corresponds with that in which the same expression was used in the Draft Articles on external action in the Constitutional Treaty proposed by the Praesidium to the Convention. In connection with (what became) Articles 206 and 207(1) TFEU, the Praesidium commented that a reference to foreign direct investment was added ‘… in recognition of the fact that financial flows supplement trade in goods and today represent a significant share of commercial exchanges’.(249) That suggests that investment and trade are essential components of an effective and unified common commercial policy. In an increasingly globalised economy, it must be assumed that decisions on export and import markets and on where to produce depend both on trade and on investment policies and regulation.

330.The common commercial policy therefore comprises, apart from measures that enable and improve the entry of a foreign direct investment in the host country, measures that protect such investments in so far as the availability of that protection has a direct and immediate effect on whether to carry out the foreign direct investment and on the enjoyment of the benefits of that investment.

331.That reading of Article 207 TFEU enables the European Union to achieve the objectives of the common commercial policy. In accordance with Article 206 TFEU, in pursuing that policy, the European Union is to contribute to, inter alia, ‘… the progressive abolition of restrictions on international trade and on foreign direct investment …’. In my opinion, that phrase cannot be read as meaning that the common commercial policy is limited to the elimination of restrictions on market access for foreign direct investment. The objective of the progressive abolition of restrictions is not limited to whether goods or services can access a market or whether a foreign direct investment can enter a market. Border measures and entry limitations are merely one type of restriction. Many other types of measure (or the lack thereof) may also prevent, make more expensive or otherwise render more burdensome putting a product or service onto the market or making an investment so as to profit thereby. Such restrictions might result from, for example, discriminatory treatment; the lack of security, predictability and transparency in the regulation of international trade and foreign direct investment;(250) or the existence of unfair trade practices.

332.Consistent with that reading, the Court has accepted that the provisions on trade in goods and services (with the exception of transport) laid down in the GATT 1994 and the GATS fall within the common commercial policy.(251) Those agreements are not limited to rules on market access. Other types of rules relating to, in particular, domestic instruments are also needed because otherwise the benefits of market access could be rendered nugatory by, inter alia, discriminatory domestic measures.

333.The same reasoning must, in my view, apply to the regulation of foreign direct investment. After all, the effectiveness of rules permitting that type of investment could be entirely undermined if, once the investment has been made, the investor is left with no protection against, for example, discriminatory treatment (see Article 9.3 of the EUSFTA on ‘National treatment’, read together with Understanding 5, and Article 9.5.1 of the EUSFTA on ‘Compensation for Losses’), expropriation (see Article 9.6 of the EUSFTA on ‘Expropriation’), or restrictions on transfers (see Article 9.7 of the EUSFTA on ‘Transfer’). For example, if an investment has been allowed to access the market but the economic activity in which the investment was made is then expropriated without compensation, the outcome for the investor might be worse than if access had simply been refused. The same applies where an investor suffers losses in the host State as a result of its investment being requisitioned or unnecessarily destroyed by that State’s armed forces or authorities (see Article 9.5.2 of the EUSFTA on ‘Compensation for Losses’).

334.Similarly, if investors are denied fair and equitable treatment for their investments because they lack access to judicial proceedings, because they are faced with a fundamental breach of due process or because there is bad faith on the part of the host State, that may undermine the decision to make an investment in that State and to enjoy the benefits thereof (see Article 9.4 of the EUSFTA on ‘Standard of Treatment’). The same consequence may result from the lack of protection of the physical security of investors and investments (see again Article 9.4 of the EUSFTA on ‘Standard of Treatment’).

335.I see no reason to take a different view because provisions laying down exceptions to some of those standards, such as Article 9.3.3 of the EUSFTA, refer to objectives whose pursuit may lie within the Member States’ competences. The function of such provisions is to prescribe the conditions within which the Parties may adopt or enforce measures that are otherwise inconsistent with those standards in order to achieve legitimate objectives, such as the protection of public security or the maintenance of public order. Those are measures that fall within the scope of the European Union’s common commercial policy because of their specific relation to foreign direct investment. Thus, the conditions under which such measures may exceptionally be applied come equally within that policy.

336.I therefore conclude that the common commercial policy also covers the regulation of the protection of foreign direct investment in so far as the availability of that protection has a direct and immediate effect on whether to carry out the foreign direct investment and on the enjoyment of the benefits of that investment.

337.That means that Chapter Nine, Section A, of the EUSFTA falls within the Union’s exclusive competence in so far as the provisions in that section concern the liberalisation and protection of foreign direct investment within the meaning of Article 207(1) TFEU.

338.A number of Member States object, however, that the common commercial policy cannot cover standards of protection against expropriation of foreign direct investment. They argue that, in accordance with Article 345 TFEU, that matter falls within the Member States’ competence. According to that provision, the Treaties must in no way prejudice the rules in Member States governing the system of property ownership. When read in conjunction with Article 207(6) TFEU, that means (they argue) that the common commercial policy does not extend to expropriation of foreign direct investment.

339.I do not read Articles 207(6) and 345 TFEU in that way.

340.Article 345 TFEU expresses the principle that the Treaties are neutral in relation to Member States’ system of property ownership: the Treaties do not preclude, as a general rule, either nationalisation of undertakings or their privatisation.(252) However, the Court has held that Article 345 TFEU ‘… does not mean that rules governing the system of property ownership current in the Member States are not subject to the fundamental rules of the ?TFEU?, which rules include, inter alia, the prohibition of discrimination, freedom of establishment and the free movement of capital’.(253) In my opinion, it follows that, whilst the Member States may indeed choose their system of property ownership, the consequences resulting from that choice and the conditions under which property is held are not removed from the scope of applicable rules of EU law. Put another way, Article 345 TFEU cannot be read as meaning that Member States may regulate property ownership ‘to the exclusion of any ?EU? action in the matter’.(254)

341.Should the European Union conclude an international agreement (irrespective of the legal basis for doing so) that deprived the Member States of their right to expropriate property, that might indeed trespass upon the right guaranteed by Article 345 TFEU. That is not so, however, where the European Union agrees with a third State that neither Party to the agreement may nationalise or expropriate the investments made by investors of the other Party unless certain conditions are met. Such an agreement does not infringe the Member States’ prerogative (that is, the exclusive competence) to choose their system of property ownership. It merely limits the circumstances in which they may choose to nationalise or expropriate investments. In so far as such an agreement also covers foreign direct investment, Article 345 TFEU does not limit the European Union’s exclusive competence under Article 207(1) TFEU to agree with a third State to subject the exercise of that right to conditions. Nor does such an agreement harmonise within the European Union the conditions of expropriation.

342.I therefore consider that Article 345 TFEU, read in conjunction with Article 207(6) TFEU, does not restrict the exercise of the European Union’s exclusive competences under Article 207(1) TFEU.(255)

343.Accordingly, I conclude that Section A of Chapter Nine (‘Investment Protection’), in so far as it applies to foreign direct investment, falls entirely within the European Union’s exclusive competence under Article 207(1) TFEU.

344.Finally, I would add that, whilst ‘foreign direct investment’ is now clearly a matter falling within the common commercial policy, parts of Section A of Chapter Nine of the EUSFTA could very well fall within that policy by virtue of other aspects of Article 207(1) TFEU. I have already referred to the interaction between trade in services and investment.(256) Commercial aspects of intellectual property law and investment may similarly interact in so far as, under the EUSFTA, intellectual property rights and goodwill are a form of investment covered by that chapter.(257)

345.For the purposes of the present proceedings, however, it suffices that the content of Chapter Nine relates to at least one of the matters in Article 207(1) TFEU and thus falls within the common commercial policy.

The European Union’s competence on the basis of Article 63 TFEU, read together with Article 3(2) TFEU

346.It is common ground that Article 207(1) TFEU does not as such cover types of investment other than foreign direct investment. The Parties have mostly used the term ‘portfolio investment’ to describe those investments.

347.Unless (parts of) the EUSFTA rules governing those other types of investment are covered by the commitments on services,(258) the legal basis of the European Union’s action as regards such investment and the European Union’s exclusive competence must therefore be sought elsewhere.

348.It is not suggested that the European Union needs exclusive competence to conclude the EUSFTA in order to exercise its internal competence. Thus, the second ground under Article 3(2) TFEU does not apply.

349.However, the Parties disagree as to whether the European Union could derive exclusive competence over Chapter Nine, Section A, from the third ground under Article 3(2) TFEU, in so far as it concerns types of investment other than foreign direct investment.

350.I cannot subscribe to the Commission’s wide interpretation of Article 3(2) TFEU according to which ‘common rules’ includes Treaty provisions.

351.It is true that the text of Article 3(2) TFEU itself does not offer decisive guidance. Whilst the TFEU uses the concept of ‘common rules’ specifically in relation to the adoption of EU secondary legislation,(259) Title VII of Part Three of the TFEU is entitled ‘Common rules on competition, taxation and approximation of laws’. Thus, it categorises the Treaty provisions which it contains as ‘common rules’.

352.However, the third ground under Article 3(2) TFEU should be interpreted in the light of the judgment in ERTA and subsequent case-law applying the ERTA principle.(260) Viewed in that context, it is clear that the Commission’s broad interpretation of ‘common rules’ cannot be accepted.

353.Article 3(2) TFEU lays down additional grounds for the European Union to have exclusive competence to conclude an international agreement where the European Union does not enjoy express exclusive competence under Article 3(1) TFEU. That competence must therefore stem from some other basis than the Treaties themselves. For the third ground under Article 3(2) TFEU, that other basis is the impact which international agreements concluded by the Member States might have on ‘common rules’, that is to say rules adopted by the European Union in the exercise of its internal competence (to pursue a common policy) in certain areas. Thus, as the Court made clear in Opinion2/92, only the exercise of an internal competence (as distinct from its mere existence) can give rise to an (implied) exclusive external competence.(261) In Opinion 1/94, the Court emphasised that ‘… exclusive external competence does not automatically flow from ?the European Union’s? power to lay down rules at internal level’.(262)

354.The Commission’s argument would mean that Article 3(2) TFEU recognises the right of the European Union to conclude an agreement that affects the Treaties or alters their scope. However, the primary function of Article 3(2) TFEU is, as its wording makes clear, to delineate the nature of EU external competence. Its purpose cannot be to entitle the European Union to ‘affect’ rules of primary EU law or to ‘alter their scope’ by concluding an international agreement.(263) Primary law can be changed only by amending the Treaties in accordance with Article 48 TEU.(264) Contrary to the Commission’s submission, the risk of affecting EU primary law cannot establish exclusive external competence within the meaning of the third ground under Article 3(2) TFEU.(265) Nor can Article 3(2) TFEU be read as meaning that the European Union enjoys exclusive external competence on the sole basis that it has competence to adopt rules at internal level.(266)

355.The Commission has relied here on Pringle, where the Court examined whether the ESM Treaty (concluded by the Member States whose currency is the euro) affected the power of the European Union to grant, on the basis of Article 122(2) TFEU, ad hoc financial assistance to a Member State in difficulties or seriously threatened with severe difficulties by natural disasters or exceptional occurrences beyond its control. The Court there recorded that the establishment of the ESM did not affect the power of the European Union to grant, on the basis of Article 122(2) TFEU, ad hoc financial assistance to a Member State when it is found that the Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or circumstances beyond its control. However, it went to add that, since neither Article 122(2) TFEU nor any other provision of the TEU or the TFEU conferred a specific power on the European Union to establish a permanent stability mechanism such as the ESM, the Member States are entitled, in the light of Articles 4(1) and 5(2) TEU, to act in that area.(267) In verifying whether Article 3(2) TFEU precluded the Member States whose currency is the euro from concluding the ESM Treaty, the Court examined both Council Regulation (EU) No407/2010,(268) and the Treaty provision empowering the European Union to adopt secondary legislation. The Court concluded that Article 3(2) TFEU did not prevent a subset of the Member States concluding the ESM Treaty.

356.After describing the main purpose of Article 3(2) TFEU, the Court held in Pringle that ‘it follows also from [Article 3(2) TFEU] that Member States are prohibited from concluding an agreement between themselves which might affect common rules or alter their scope’.(269) That statement merely expresses the principle of primacy of EU law over national law, which operates in relation to both EU primary and secondary law. That part of the Court’s reasoning in Pringle does not support the proposition that EU exclusive competence to conclude an international agreement on the basis of the third ground under Article 3(2) TFEU may result from ‘common rules’ contained in EU primary law.

357.The Commission’s argument would also imply that exclusive external competence can be established on the basis of the third ground under Article 3(2) TFEU even where the internal competence underlying the Treaty provision on which it relies has not been exercised. If that were correct, the distinction between the second ground, which specifically covers the situation where an internal competence has not been exercised, and the third ground under Article 3(2) TFEU would partly disappear.

358.Furthermore, if the third ground under Article 3(2) TFEU were read as meaning that exclusive competence is a necessary consequence of the fact that an international agreement may affect Treaty provisions or alter their scope, the mere existence of a Treaty provision might be sufficient to conclude that the European Union had such a competence. If that were correct, why did the Treaty draftsmen not simply confirm the existence of that exclusive external competence explicitly?

359.I therefore take the view that ‘common rules’ in the third ground under Article 3(2) TFEU cannot be read so as to include ‘Treaty provisions’.

360.It is common ground that there is no EU secondary legislation under Articles 63(1) and 64(2) TFEU relating to types of investment other than foreign direct investment.

361.I therefore conclude that, in the absence of common rules, the conditions of the third ground under Article 3(2) TFEU are not satisfied. It follows that the European Union does not have exclusive competence on that basis. Nor has the Commission argued that it enjoys such competence on another basis.

362.Does the European Union have shared competence with the Member States?

The European Union’s shared competences with the Member States

363.The Commission argues, in the alternative, that there is shared competence for the European Union to conclude an international agreement concerning types of investment other than foreign direct investment on the basis of the second ground under Article 216(1) TFEU.

364.At the hearing, the Court asked both the Council and the Commission on what basis the European Union enjoyed internal competence over types of investment other than foreign direct investment. The Council said there was no legal basis in the Treaties for adopting secondary law governing types of investment other than foreign direct investment that could be considered to be ‘common rules’ within the meaning of the third ground under Article 3(2) TFEU. It nevertheless accepted that certain aspects of types of investment other than foreign direct investment might be made subject to legislative acts adopted on the basis of Treaty provisions (other than Articles 63 and 64 TFEU) governing the internal market. The Commission responded that, given the prohibition already contained in Article 63(1) TFEU, the Treaties (obviously) did not provide a legal basis for adopting secondary law in order to achieve liberalisation (as distinct from harmonisation) of capital movements, including portfolio investment. However, both Articles 114 and 352 TFEU offered a basis for eliminating restrictions on portfolio investments. That said, in so far as the EUSFTA did not seek to harmonise, Article 114 TFEU would not be an appropriate legal basis. The Commission argued that, in any event, it is not necessary to identify a legal basis for exercising internal competence before the Union can rely on Article 216(1) TFEU.

365.In my opinion, the second ground under Article 216(1) TFEU is relevant only if the European Union enjoys internal competence. For those purposes, a matter must fall within the scope of EU law and thus its competence.(270) It is not necessary that the European Union be competent to adopt secondary law.

366.It seems to me that all the conditions for applying the second ground under Article 216(1) TFEU are satisfied here.

367.Pursuant to Article 63 TFEU, the European Union clearly has competence over the liberalisation and protection of types of investment other than foreign direct investment in so far as such investments represent movements of capital between Member States and between Member States and third countries. Whilst the Treaties do not define ‘movements of capital’, the Court has interpreted that term by relying on the (non-exhaustive) nomenclature annexed to Directive 88/361.(271) Movements of capital are classified according to the economic nature of the assets and liabilities they concern. The definition is very broad. Thus, movements of capital cover, inter alia, real estate, securities, other instruments on the money market, units of collective investment undertakings, current and deposit accounts with financial institutions, credits related to commercial transactions or to the provision of services, financial loans and credits, sureties, other guarantees, rights of pledge, transfers in performance of insurance contracts, personal capital movements, physical import and export of financial assets, patents, designs, trade marks and inventions.

368.Other forms of regulation of those types of investment might be based on Article 114 TFEU in so far as they approximate laws governing the establishment and functioning of the internal market. Additional powers might also be derived from Article 352 TFEU.

369.The free movement of capital aspect of the internal market has both an internal and external component. An agreement seeking to achieve reciprocal liberalisation between the European Union and a third country, such as the EUSFTA, falls within the framework of that policy. Since such reciprocal commitments cannot be obtained without that third country’s consent, it may be necessary, within the meaning of the first ground under Article 216(1) TFEU, to conclude an international agreement to achieve that objective.

370.I therefore conclude that Section A of Chapter Nine, in so far as it applies to types of investment other than foreign direct investment, falls within the shared competences of the European Union and the Member States, on the basis of Article 4(2)(a) TFEU and the first ground under Article 216(1) TFEU, in conjunction with Article 63 TFEU.

Whether the EUSFTA may terminate bilateral agreements concluded between the Member States and Singapore

371.A separate question is whether the European Union has competence to agree to Article 9.10.1 of Chapter Nine, Section A, of the EUSFTA. That provision states that, as a result of the entry into force of the EUSFTA, the bilateral investment agreements between the Member States and Singapore listed in Annex 9-D(272) will cease to exist. Those agreements will be annulled, replaced and superseded by the EUSFTA. Footnote 19 to that provision(273) states that ‘for greater certainty, ?those agreements? shall be considered as terminated by ?the EUSFTA?, within the meaning of subparagraph 1(a) of Article 59 of the Vienna Convention on the Law of Treaties’.

372.In its request, the Commission argues that Article 9.10 (‘Relationship with other Agreements’), together with Articles 9.8 (‘Subrogation’) and 9.9 (‘Termination’), are clearly dependent on, and therefore ancillary to, the other substantive provisions on investment in Chapter Nine, Section A. At the hearing, the Commission submitted that, when the European Union concludes an international agreement in an area falling within its competence (at least when that competence is exclusive), the European Union succeeds the Member States in respect of their bilateral agreements with third States and can therefore act for the Member States, including by terminating such bilateral agreements.

373.The Council and a significant number of Member States argued that the European Union cannot, acting alone, agree with a third State to terminate and replace international agreements concluded by that State with the Member States and to which the European Union itself is not a party.

374.As I see it, it is necessary to rule definitively on that question only if the Court finds that the European Union enjoys exclusive competence over all other parts of the EUSFTA. Should the Court decide that the European Union’s competence is shared with the Member States and should the EUSFTA therefore need to be concluded by both the European Union and the Member States, the Member States (concerned) could themselves decide, by expressing their consent to be bound by the EUSFTA, whether or not to terminate their existing agreements with Singapore.

375.For the reasons which I have already given, I consider that the European Union does not enjoy exclusive competence over all of Chapter Nine, Section A (or, for that matter, all of the EUSFTA).(274)

376.For the sake of completeness, I shall nevertheless briefly consider whether the European Union, without being a party to the agreements concluded between the Member States and Singapore that are included in Annex 9-D, can agree with Singapore to terminate those agreements without the Member States’ consent.

377.That is a novel question.(275)

378.Where the European Union acquires exclusive (internal or external) competence in a particular area, it acts in an area over which Member States were previously competent. Whether or not the European Union decides to undo past actions of Member States will depend on how the European Union exercises that competence and on whether that creates some incompatibility with Member States’ earlier action. The conditions under which the European Union can exercise internal competences depend on EU law. In any event, EU action must be consistent with international law.(276)

379.Where the European Union assumes the powers previously exercised by the Member States in an area governed by an international agreement, the provisions of that agreement become, as a matter of EU law, binding on the European Union.(277) That was the Court’s position, as regards the GATT 1947 (to which all of the Member States (at the time) were a party but not the European Union), in International Fruit Company.(278) The binding effect of the GATT 1947 was a condition for establishing whether it affected the validity of EEC secondary law. The Court did not consider (nor did it need to) how that finding affected the Member States’ obligations under the GATT 1947 or their status as Contracting Parties to that agreement. As I see it, the implication of International Fruit Company is that, as a matter of EU law, the European Union had become exclusively competent for matters covered by the GATT 1947 and, as a matter of international law, the European Union had replaced the Member States as being the party responsible for compliance with the obligations they had assumed under the GATT 1947.

380.However, International Fruit Company did not address the question whether, where the European Union assumes the powers previously exercised by the Member States in an area that becomes part of the European Union’s exclusive competences, those powers include the right to terminate existing agreements concluded by the Member States with third countries. Indeed, the Member States continued to be Contracting Parties to the GATT 1947 which henceforth applied, as a matter of EU law, both to those Member States and to the EEC.

381.The Court has also held that, in principle, the application of the EU Treaties may not affect the Member States’ duty to respect the rights of third States under a prior agreement and to perform their obligations thereunder.(279) Thus, even if the Treaties transfer competence over a particular area entirely to the European Union, the Member States must continue to perform their obligations under international agreements with third States. That is consistent with the well-established principle under international law that internal law cannot justify failure to perform an international agreement or affect the validity of that agreement.(280) That also means that changes to the Treaties cannot result in the European Union substituting itself for the Member States in agreements which they have previously concluded with third States. Thus, a third State continues to be bound by an agreement with the Member State concerned and in principle full performance of that agreement is, in accordance with the principle of pacta sunt servanda,(281) due from both parties to the agreement.

382.The Member States are however required to perform their obligations under those agreements in a manner consistent with EU law and with the European Union’s exercise of its newly acquired exclusive competences. Where it is not possible to do so without infringing EU law, the Member States must take the necessary action to bring those agreements into line with EU law. That obligation results both from the primacy of EU law and from the duty of sincere cooperation laid down in Article 4(3) TEU.

383.Article 351 TFEU, which concerns the relationship between agreements concluded by the Member States before 1 January 1958 (or before a particular Member State’s accession) between one or more Member States and one or more third countries, on the one hand, and the provisions of the Treaties, on the other hand, confirms that reasoning.

384.The purpose of the first paragraph of Article 351 TFEU is ‘… to make it clear, in accordance with the principles of international law, that application of the Treaty is not to affect the duty of the Member State concerned to respect the rights of third countries under a prior agreement and to perform its obligations thereunder …’.(282)

385.The second paragraph of that provision states that, to the extent that such agreements are not compatible with the Treaties, the Member State(s) concerned must take all appropriate steps to eliminate the incompatibilities established. Those steps might require them to terminate the agreement. Where there is no incompatibility between the prior agreement and the Treaties, no obligation to take remedial action arises.

386.Article 351 TFEU applies to the relationship between, on the one hand, the bilateral agreements concluded between Singapore and various individual Member States prior to their accession to the European Union (Bulgaria, the Czech Republic, Hungary, Lithuania, Poland, the Slovak Republic and Slovenia: that is, certain of the agreements listed in Annex 9-D),(283) and the Treaties, on the other hand. However, Article 351(1) TFEU does not as such govern the relationship between that first category of agreements and agreements subsequently concluded by Singapore and the European Union. Nor is it relevant to agreements concluded by other Member States.

387.So, instead of helping to advance the Commission’s case, Article 351 TFEU clearly confirms that a Member State remains a party to international agreements which it has previously concluded and that it bears responsibility for eliminating any incompatibilities between those agreements and the Treaties. Article 351 TFEU applies irrespective of whether the European Union enjoys exclusive or shared competences over the area covered by those agreements.

388.There is no Treaty provision that catalogues the obligations of Member States that conclude international agreements with third States (or with international organisations) after their accession to the European Union. Their obligations result both from the primacy of EU law and from the duty of sincere cooperation laid down in Article 4(3) TEU. Thus, the Treaties do affect Member States’ right to conclude such agreements after their accession to the European Union. They may do so only in areas falling within their competences and provided they comply with EU law.

389.If the allocation of competences between the European Union and the Member States subsequently changes and the European Union acquires additional competences that are exclusive in nature, I see no reason why the rules laid down in Article 351 TFEU should cease to apply. Member States must still take the appropriate steps to ensure that existing agreements in the area concerned, which are now also binding on the European Union,(284) are consistent with that new allocation of competences and whatever action the European Union subsequently takes in the exercise of its competences.

390.It seems to me that that conclusion is also fully consistent with international law.

391.The European Union and Singapore expressly refer, in footnote 19(285) to Article 9.10.1 of the EUSFTA, to Article 59 of the 1969 Vienna Convention. That provision is binding, as a matter of treaty law, on all the Member States and Singapore. The European Union itself is not and cannot be bound by the 1969 Vienna Convention because it is not a State. The Court has nonetheless relied on this provision in resolving questions regarding successive agreements.(286)

392.Article 59 of the 1969 Vienna Convention deals with the (implied) abrogation of a treaty between parties resulting from the conclusion by all of those parties of a later treaty. According to that provision, ‘(1). A treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty …’. The Commission concludes from this that the European Union should now be considered to be a party to the earlier bilateral agreements.

393.Article 59 in no way departs from the basic principle that termination of a treaty (in the same way as its conclusion) requires the consent of the parties to that treaty.(287) It primarily serves as a conflict rule for determining which treaty applies where there are successive agreements and all the parties to the earlier treaty are also parties to the later treaty but the earlier treaty is not terminated.(288) Where the European Union decides to exercise its newly acquired competences and concludes an agreement with a third State, that third State is bound by that new agreement as well as by any other agreements that it previously concluded with Member States covering the same subject matter. That may obviously result in legal uncertainty for the third State. Where Article 59 of the 1969 Vienna Convention applies, that conflict is resolved in favour of the later agreement between the European Union and the third State. Where it does not apply, the third State must in principle comply with both agreements.

394.However, Article 59 of the 1969 Vienna Convention applies only if it is accepted that (as a matter of international law) the European Union has succeeded the individual Member States as regards the bilateral agreements listed in Annex 9-D. It does not offer general guidance on succession as regards treaties. The 1969 Vienna Convention does not prejudge any question arising, as regards a treaty, from a succession of States.(289) Nor does the 1978 Vienna Convention on Succession of States in respect of Treaties(290) appear to address the specific situation at issue. (I would add that, whilst that convention has entered into force, only a few Member States are amongst the (limited) number of signatories.)

395.At the hearing, the Commission referred to what it described as a practice that is ‘well established’ and ‘accepted by a large number of third countries’. However, the few examples which it put forward all concerned what the European Union itself has done. The Commission offered no assistance as to whether other States consider such a practice to amount to a rule of international law.

396.Against that background, I can find no basis in international law (as it currently stands) for concluding that the European Union may automatically succeed to an international agreement concluded by the Member States, to which it is not a party, and then terminate that agreement. Such a rule would constitute an exception to the fundamental rule of consent in international law-making. Accepting the Commission’s position would mean that, as a result of changes in EU law and (possibly) the European Union’s exercise of its external competences, a Member State might cease to be a party to an international agreement, even though it was a State which had consented to be bound by that agreement and for which that agreement was in force.(291) The Member State’s rights and obligations under that agreement would become extinguished and, should the European Union decide to exercise its new competences, be replaced by rights and obligations assumed by the European Union with the third State, without the Member State having expressed its consent to those (fundamental) changes.

397.Finally, I note that the European Union has adopted secondary legislation (Regulation No1219/2012) establishing transitional arrangements for bilateral investment agreements between Member States and third countries. However, that regulation is expressly stated to be without prejudice to the allocation of competences between the European Union and the Member States under the TFEU.(292) It is based on the assumption that the European Union has exclusive competence over all matters covered by those earlier bilateral agreements and offers a basis under EU law for the Member States to act as regards existing and (possibly) new agreements. That regulation does not, however, contemplate that the European Union itself may (together with the third State bound by the bilateral agreement) terminate those earlier agreements.

398.I therefore conclude that the Member States enjoy exclusive competence to terminate bilateral investment agreements which they previously concluded with third States. As a result, the European Union has no competence to agree to Article 9.10 of the EUSFTA.