Brexit, the UK and bilateral investment treaties

Framing the issues: the EU’s current position on BITs concluded by Member States

The Member States of the European Union are individually party to a total of around 1,400 investment agreements with third countries. Under international law, BITs remain valid and binding on Member States unless they expire or are replaced by EU agreements relating to the same subject-matter.

The Lisbon Treaty did not set out any explicit transitional arrangements for investment agreements between EU Member States and third countries, concluded either prior to or after the Lisbon Treaty coming into force. To remedy this gap, on 12 December 2012, the EU adopted Regulation 1219/2012 (the “Transitional Regulation”), establishing transitional arrangements for BITs already concluded between EU Member States and third countries, pending the eventual entry into force of EU-wide investment agreements; it entered into force on 9 January 2013. The EU’s intention is to progressively replace extra-EU’s BITs with third states by agreements negotiated with and concluded by the EU.

The key features of the Transitional Regulation are as follows:

1. All existing BITs with third countries signed before the entry into force of the Lisbon Treaty may remain in force;
2. Member States are required to notify the Commission of those BITs;
3. Where any provisions of the extra-EU BITs are assessed by the Commission to constitute a “serious obstacle” to the negotiation or conclusion of BITs between the EU and third countries, the Commission shall enter into consultations with the Member State concerned to identify the appropriate actions to resolve the matter;
4. When Member States intend to enter into negotiations with a third country to amend or conclude a BIT they must seek the authorisation of the Commission. The Commission will authorise these negotiations unless they would be inconsistent with the EU investment policy or EU law, superfluous, or constitute a “serious obstacle” to the negotiation or conclusion of bilateral agreements with third countries by the EU;
5. Member States must seek the agreement of the Commission before activating any relevant mechanisms for dispute settlement against a third country and shall, where requested by the Commission, activate such mechanisms.

How this relates to the UK

Once the UK ceases to be a Member State of the European Union, none of the above provisions will continue to apply and, in particular, the European Commission will no longer have any form of supervisory role over the operation and enforcement of BITs concluded by the United Kingdom.

The first obvious matter to underscore is that, until it withdraws from the EU, the UK currently remains bound by EU regime in relation to investment agreements. Accordingly:

1. The UK will not be able to negotiate new BITs with any third countries or renegotiate existing BITs without EU authorisation;
2. The UK’s extra EU BITs will have to be interpreted and applied consistently with EU law;
3. To the extent that any new IIA’s are successfully negotiated and concluded by the EU with any third countries prior to the UK’s withdrawal from the EU (e.g. most proximately Morocco and Tunisia), those could, at least provisionally, replace the UK BITs concluded with those countries. Investors would also have to bring claims pursuant to the EU agreements and those disputes will be governed by the EU’s dispute resolution rules.

it is unclear presently whether and to what extent the UK would continue to be bound by the Transitional Regulation

Moreover, it is unclear presently whether and to what extent the UK would continue to be bound by the Transitional Regulation and any EU IIAs even after it withdraws. The Government’s White Paper “Legislating for the United Kingdom’s withdrawal from the European Union” (March 2017) states that, pursuant to the “Great Repeal Bill”, EU law as it currently exists will be converted into UK law on the day of withdrawal and that historic decisions of the CJEU will continue to be binding on the domestic courts. It may be the case that the Transitional Regulation is not carried across, or that the requirement to notify/seek authorisation from the Commission is dispensed with (consistent with the general intention of the Government to dispense with references to EU institutions and bodies). However, no clear intention as regards this particular area of law has been formulated. Moreover, the terms under which the UK will exit the EU are completely unknown and it is uncertain whether the parties will opt to continue to cooperate vis à vis their investment policy.

To the extent that the Transitional Regulation (and any other relevant obligations vis a vis investment agreements) are not carried forward into UK law and the UK opts out of the common investment policy, once the UK finally withdraws from the EU, the consequences for third countries are twofold:

1. the UK will not be part of any IIAs eventually concluded between the EU and third countries, and any claims will have to be brought pursuant to the UK BITs.
2. By a similar token, the UK will be able to retain, renegotiate, and conclude BITs with third countries outside the UK without any limitation.

There is no reason to believe that the UK’s extra-EU BITs with third countries will be affected by its withdrawal from the EU. Similarly, cases currently pending or to be brought under these treaties are unlikely to be so affected.

Brexit and transparency in investor-state dispute settlement

After Brexit there will be no such Europeanisation replacement of the UK’s BITs with third countries.  So I suppose we can expect that the UK will try to conclude new BITs with third countries where there is currently no such Treaty.

Since a post-Brexit UK will not be directly bound by the positions taken by the EU and/or required by EU law in relation to the EU’s conclusion of future IIAs, in theory after Brexit the UK could adopt a policy in future BITS not to adopt the UNCITRAL rules on transparency in investor-state dispute settlement. This is unlikely to happen, however.  The clear trend in international law is for transparency in the adjudication and dispute settlement aspects of international investment agreements, and it is likely that the UK will follow this movement and in future BITs incorporate the UNCITRAL transparency rules and procedures.

Brexit and anti-suit injunctions

Another way in which foreign States/investors may be affected by the UK’s withdrawal from the EU is in relation to forum in which investor-State arbitrations may be initiated.

In particular, the English courts at least have historically utilised the mechanism of an “anti-suit injunction” in the context of arbitrations. An anti-suit injunction is an order of the court for a party not to pursue court proceedings in another jurisdiction or to withdraw them where those proceedings were commenced in breach of an arbitration agreement. Accordingly, where an arbitration clause specifies London as the seat of arbitration, attempts to initiate the arbitration in another jurisdiction may be met with an anti-suit injunction from the courts in England and Wales.

If a party does not comply with the court order and refuses to withdraw proceedings, or initiates them anyway, they may be held in contempt of court and face a fine or custodial sentence. Moreover, third parties deemed to be colluding in the initiation or maintenance of wrongful foreign proceedings may be also be faced with an anti-suit injunction.

In the context of investor-State arbitrations, to the extent that the seat of arbitration is identified as the UK in any investment agreement (or the UK is deemed to be the “natural forum”), a party to the dispute could seek an anti-suit injunction from the UK courts to restrain any foreign proceedings.

the English courts at least have historically utilised the mechanism of an “anti-suit injunction” in the context of arbitrations

However, in Case C-185/07 Allianz SpA v. West Tankers Inc. EU:C:2009:69 [2009] 1 AC 1138 the CJEU held anti-suit injunctions to be unlawful and inconsistent with the Brussels Regulation 44/2001. In particular, under the Brussels Regulation it is the Member State court which is first seized that must rule on its jurisdiction first, against a background that the courts of the Member States are applying common rules of jurisdiction.  An anti-suit injunction from the courts of one Member State purporting to prevent parties continuing with proceedings which they have already commenced in another Member State was incompatible with the scheme of the Brussels Convention/Brussels Regulation because “such an anti-suit injunction also runs counter to the trust which the Member States accord to one another’s legal systems and judicial institutions …”: para 30.

Perhaps from a still unshaken confidence in the superiority of their legal system over all others, the English courts have continued to pronounce anti-suit injunctions in relation to proceedings taken in the courts of third country non-Member States: Shashoua and others v. Sharma [2009] EWHC 957 (Comm) [2009] 1 CLC 716.

The CJEU’s decision in West Tankers was widely criticized, particularly in the UK, for allowing a party to delay proceedings by initiating the arbitration in a “slow-moving” jurisdiction, thereby blocking the progress of the claim in the contractually agreed forum until a decision is taken by the Court first seized of the matter. In C-536/13 Gazprom v. Lithuania EU:C:2015:316 the CJEU held that since arbitral tribunals were not courts of a state, an anti-suit injunction in the context of an arbitral award prohibiting a party from bringing certain claims related to the arbitration before a court of a member state did not fall within the scope of the Brussels Regulation 44/2001, which governed only conflicts of jurisdiction between courts of the member states and did not infringe the general principle of mutual trust between the courts of the member States.

those who may wish for some flexibility in relation to the forum of the arbitration will want to consider carefully their exposure to the risks of a UK court order.

Brexit is likely to have substantial repercussions in this area of EU-ropeanised private international law. The Recast Brussels 1215/2012 (which, with effect from 10 January 2015, sets out the rules determining the proper jurisdiction among EU Member States in disputes on civil and commercial matters) is part of EU law and will, in principle, cease to have any direct applicability within the UK legal order when the UK leaves the EU (unless specific agreement is made in relation to it, including on the issue of the CJEU’s continuing jurisdiction authoritatively to determine the uniform meaning to be afforded to the Regulations for all States subject to it). The UK is party to the Lugano Convention and to the Hague Convention on Choice of Court Agreements. What the UK Government’s plans are (if any) for this area post-Brexit have not yet been made public.  In terms of how Brexit will impact the UK court’s use of anti-suit injunctions, as above, the White Paper makes clear that when the UK withdraws from the EU, pursuant to the Great Repeal Bill, historic judgements of the CJEU will continue to be binding on UK Courts. Presumably therefore, the CJEU’s decision in West Tankers will continue to restrain the UK Courts from issuing anti-suit injunctions against a party initiating proceedings in another EU Member State, unless this particular aspect of EU law is explicitly not carried forward (or it is not otherwise agreed between the EU and UK to continue to cooperate in this area).

To the extent that this aspect of the law is not carried forward and converted in to UK law, however, parties will be free to pursue anti-suit injunctions against the initiation of proceedings in a foreign jurisdiction whether those proceedings are taking place inside or outside the EU. For those seeking to ensure the swift adjudication of the arbitration, there could be advantages associated with specifying the UK as the seat as any attempts to delay proceedings through initiating them in an alternate jurisdiction could be frustrated by the UK courts. Conversely, those who may wish for some flexibility in relation to the forum of the arbitration will want to consider carefully their exposure to the risks of a UK court order.

Foreign investors suing UK for financial losses resulting from Brexit ?

One of the issues that has recently been raised among a number of commentators (see here and here) is that foreign investors might sue – in terms of taking investment arbitration claims for damages against the UK – in respect of their financial losses suffered as a result of changes in the UK’s regulatory and legal landscape resulting from Brexit.

Clearly this issue will depend very much on the terms of any withdrawal agreement negotiated between the UK and the EU 27. But the suggestion at this stage is that foreign owned business undertakings might try to obtain damages from the UK Government on the basis that the UK leaving the EU and the consequent transformation of the regulatory and legislative framework upon which they had invested in the UK violated, if not their rights, then at least their enforceable legitimate expectations protected under and in terms of the BITs concluded by the UK with their countries of origin – for example China, Hong Kong, Singapore, Mexico or indeed Russia.

foreign owned business undertakings might try to obtain damages from the UK Government

The example given by Glivanos is that of a Mexican-owned bank operating out of the City of London taking the UK to the ISDS arbitration mechanisms provided for under the UK-Mexico BITs seeking damages in respect of the loss of financial “passporting rights” to market its financial services freely throughout the rest of the EU. It is said that legitimate expectations are those which arose on the basis of the conditions offered by or prevailing in the host State at the time the original investment is made.

It is undoubtedly the case that as a State integrated into the EU single market the UK did actively promote itself on the international stage as a business friendly environment with relatively liberal line on regulation, but which allowed for foreign businesses based in the UK to access all the benefits of the EU Single Market. The investment by Nissan in car manufacturing in the UK and its plant in Sunderland comes immediately to mind in this regard.

The suggestion made by Glivanos that it would be difficult for the United Kingdom to make a legally compelling defence before an investment arbitral tribunal to the effect that that the significant regulatory changes resulting from Brexit – and, in particular, the closing off from immediate access to the EU Single Market of a non-EU foreign business which had invested in the UK on the strength of its EU membership – gave rise to no State liability for breach of the foreign investors‘ legitimate expectations because this was an unavoidable consequence of an internal democratic process within the UK. The whole point about BITs is to protect foreign investment against regime change or fundamental regulatory shifts, whether democratically mandated or not, which negatively impact upon the investors‘ fundamental property rights as recognised as a matter of international law.

In the matter of international trade, States are no longer sovereign, in the sense of having untrammeled power to act as they wish

Glivanos adds that even if ultimate legal success for the foreign investor is not assured in any such references to arbitration, by simply referring or threatening to refer the matter to an ISDS, the foreign investor may encourage a special deal to be made in their favour by the UK government, or some offer of financial settlement to be made. The case of Nissan car manufacturers who invested in the UK in Sunderland again comes to mind and the reports that the UK Government has agreed a special deal with them to encourage them to maintain their investment in the UK after Brexit. But a special deal for one opens the prospects of all foreign investors seeking similar deals from the Government, particularly against a background that one of the generally principles embodied in IIAs is precisely that of non-discrimination.

In essence, it is said, you don‘t need to win a case legally to win financially and politically. The anti-democratic aspects of globalisation appear to be coming home to roost.

Conclusion on Brexit and international investment

The problem which appears not (yet) to have been taken on board by our politcians is that when it comes to international trade and investment, whether inside or outside the EU, essentially law trumps politics.

In the matter of international trade, States are no longer sovereign, in the sense of having untrammeled power to act as they wish or is politically expedient. It is no simple matter – and may indeed be impossible – to “take back control” of one economy and its economic regulation within a globalised world.

Perhaps Brexit was not such a good idea after all, if the UK simply finds itself – even when no longer an EU member State – bound by economic regulations and international legal principles not of its own making and which, now it is effectively powerless to change…

AIDAN O’NEILL QC is a “double silk”, being Queen’s Counsel at both the Scottish and English Bars. He has a wide ranging legal practice north and south of the border. He has a particular expertise in commercial judicial review and in constitutional law. He is a specialist in European law/public law, specifically in relation to planning and environmental issues. He has a thriving employment law practice. He is a highly experienced pleader before the House of Lords/UK Supreme Court where he has appeared as senior counsel in over twenty appeals. He has also led cases before the Court of Justice of the European Union and has appeared before the European Court of Human Rights. In 2015 he was awarded the Legal 500 UK Bar Award for EU law silk of the year,.

TAMARA JABER is a barrister at Matrix Chambers. She practises in a broad range of areas including public law and human rights, asylum and immigration, and international law. She regularly appears before the immigration appeal tribunal. She also has experience in judicial review, inquests, education claims, and damages claims under the Human Rights Act.