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Legitimate Expectations of Financial Services Firms
in the Case of No-Deal Brexit
By Baktash Wali
Student ID: 11043326
e-mail: baktash.wali@student.uva.nl
A thesis submitted in partial fulfilment of the requirements for the degree of Master of Laws in International Trade and Investment Law
To
Amsterdam Graduate School of Law University of Amsterdam
26 July 2019
Thesis supervised by
Prof. Dr. S.W.B. (Stephan) Schill
Professor of International and Economic Law and Governance at the Faculty of Law of the University of Amsterdam
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ACKNOWLEDGEMENTS
The author wishes to thank Professor Schill for his constructive commentary and guidance at different stages of completing this dissertation. The feedback has been greatly helpful. The author also wishes to thank the various peers who provided comments and feedback. The author is solely accountable for any remaining errors, linguistic or otherwise.
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ABSTRACT
This article explores the viability of investor-state dispute settlement (ISDS) claims brought by foreign financial services firms against the United Kingdom in the event of a no-deal Brexit. The scope of this article is limited to claims based on the standard of fair and equitable treatment typically guaranteed by most bilateral investment treaties. This article considers whether the FET standard is breached by the frustration of the legitimate
expectations of investors. It does so through an illustrative case study of the mentioned firms. The main conclusion is that within a narrow fact pattern it is indeed likely for some of these claims to be successful.
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS ... 2 ABSTRACT ... 3 TABLE OF CONTENTS ... 4 I. INTRODUCTION ... 5II. INVESTOR EXPECTATION AND REGULATORY CHANGES ... 9
III. CASE STUDY ... 14
JURISDICTIONAL ISSUES ... 15
Nationality and the notion of investment ... 16
Legality: measure, effect and connection ... 18
Consent of the parties ... 20
Fork in the road ... 21
SUBSTANTIVE CLAIM ... 22
Historical evolution of FET and legitimate expectation ... 22
FET and legitimate expectations in customary international law ... 24
Under thematically relevant cases ... 26
IV. CONCLUSION ... 30 BIBLIOGRAPHY ... 33 PRIMARY SOURCES ... 33 Table of cases ... 33 Table of statutes ... 35 SECONDARY SOURCES ... 35 Official Sources ... 35 Books ... 36 Articles ... 37 Other Sources ... 38
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I. INTRODUCTION
Since the United Kingdom (UK) voted to leave the European Union (EU) in the 2016 referendum, British politics have been erratic, to put it modestly.1 When the UK’s former prime minister, Theresa May, presented the House of Commons with her negotiated agreement for leaving the EU, it was rejected by such a large margin that it constituted the greatest parliamentary defeat in the history of Britain.2 Following this defeat, other versions of this deal met the same fate.3 Confronted with this impasse, the EU has agreed to extend the deadline for reaching an exit agreement with the UK until October 2019.4 Meanwhile,
Theresa May has stepped down as prime minister. She has been replaced by Boris Johnson, who has promised to lead the UK out of the EU with or without a deal.5 All of this turmoil points to the great uncertainty surrounding the future relationship of the UK with the EU and the possibility of a no-deal scenario.6
The eventual departure of the UK from the EU will impact many areas of life and a range of industries on both sides of the border, including the financial industry. Currently, the UK is a major player in the global financial services market. London is the world’s top financial centre, ahead of New York, Hong Kong, Tokyo and Singapore, according to the Z/Yen Group’s index.7 This index—which measures the business environment, financial
sector development, infrastructure, human capital, and reputational factors—shows that the London market supplies a great deal of the financial services to the EU27.8 About 25 per cent
of the UK’s financial services revenue is reaped from the EU market through the conduct of international and financial services business.9 Reports from the UK show that over 5,000 UK
1 Editorial, ‘Results’ BBC (London, 24 June 2016) < https://www.bbc.com/news/politics/eu_referendum/results > accessed 06 June 2019.
2 'PM’S Brexit Deal Rejected by Huge Margin' BBC News (2019) <https://www.bbc.com/news/uk-politics-46885828> accessed 21 February 2019.
3 HC Deb 29 March 2019, Vol 675, Cols 771 – 775W.
4 Editorial, ‘Brexit: UK and EU agree delay to 31 October’ BBC (London, 11 April 2019) <
https://www.bbc.com/news/uk-politics-47889404> accessed 06 June 2019.
5 ‘Brexiteer Boris Johnson to be Britain's next prime minister’ Reuters (London, 23 July 2019).
< https://uk.reuters.com/article/uk-britain-eu-leader-johnson/brexiteer-boris-johnson-to-be-britains-next-prime-minister-idUKKCN1UI19S> accessed 23 July 2019.
6 Philip Stephens, ‘Brexit’s One Certain Outcome is Uncertainty’ Financial Times (London, 18 October 2018). <https://www.ft.com/content/ffaf17e6-d213-11e8-a9f2-7574db66bcd5> accessed 20 June 2019).
7 Z/Yen Group and China Development Institute, ‘The Global Financial Centres Index 20’ (September 2016). 8 Ibid.
9 Niamh Moloney, ‘Capital Markets Union, Third Countries, and Equivalence: Law, Markets, and Brexit’ In Danny Busch, Emilios Avgouleas, and Guido Ferrarini (eds), Capital Markets Union in Europe (Oxford University Press; 2018) 125.
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firms use EU ‘passports’ to offer their services in the EU’s single market and an overall 35 per cent of all wholesale financial services activity in the EU takes place in the UK.10
However, if the UK leaves the EU without an agreement dealing with financial services, ‘passporting’ will no longer be an option for the financial firms that export their services to the EU. Passporting is essentially the right of service providers from any Member State of the European Economic Area to offer their services on the entire single market without the requirement to establish branches or subsidiaries in each individual Member State.11 If the UK exits the Union without any deal, the UK’s access to the EU’s market will
be governed by the ‘third-country rules’ used by the EU to regulate the access of non-Member States to its capital market. Under this regime—also called the ‘equivalence regime’—a non-Member State’s regulation of the relevant industry has to be deemed equivalent to that of the EU before it is given access to the market for the provision of services within the industry in question. Furthermore, these third-country rules dictate that even when a country’s regulation of financial services is deemed equivalent to the EU’s, only wholesale banking services are able to enjoy the full passport benefits of providing cross-border services; retail banking services have to create branches in each Member State of the EU that they want to provide services in.
The equivalence regime has further drawbacks as well. The decision on the equivalent status of a country is a discretionary and unilateral decision of the EU Commission, one that can be withdrawn at any moment by the EU.12 This uncertainty makes risk management difficult. Additionally, the ability to provide the full range of services is vital for banks because these services not only form the core functions of these financial firms but are also a necessary part of corporate banking in general because these banks often rely on a
combination of passports for the provision of their integrated services.13
If the UK leaves without a deal, the change can only be implemented by means of primary legislation.14 As part of the Withdrawal Agreement, Her Majesty’s Treasury has
submitted the Financial Services Bill to the UK Parliament, which ‘enables the Treasury to
10 Ibid.
11 Prudential Regulation Authority, ‘Passporting’ (Bank of England).
<www.bankofengland.co.uk/pra/Pages/authorisations/passporting/default.aspx> accessed 06 June 2019. 12 Commission, ‘EU Equivalence Decisions in Financial Services Policy: An Assessment’ SWD (2017) 102, 8. 13 British Bankers Assocation, ‘Brexit Quick Brief #3 - What Is “Passporting” and Why Does It Matter?’ (BBA, 2016). <www.bba.org.uk/wp-content/uploads/2016/12/webversion-BQB-3-1.pdf> accessed 15 May 2019.
14 Federico Mor and Graeme Cowie, Financial Services (Implementation of Legislation) Bill 2017-19 (House of Commons Library Briefing Paper CBP-8493, 2019) < https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8493#fullreport> accessed 15 July 2019.
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make corresponding or similar provisions in UK law to [upcoming] EU financial services legislation in the event that the UK leaves the European Union without a deal.’15 Once enacted, this legislation will be ‘subject to any adjustments appropriate to the UK’s new position outside the EU.’ Like the Withdrawal Agreement itself, this power of the Treasury and any statutory instruments issued under this power will require the affirmative vote of both Houses.16 Therefore, once the UK is outside the EU without a deal, the Financial
Services Act will dictate the new rights and obligations of financial services firms in the UK, including newly placed limitations caused by the replacement of passporting rights with equivalence rules.
In the build up to these changes, the UK, and especially the City of London, has long been one the world’s most attractive destinations for foreign direct investment in financial services.17 More than two hundred foreign banks are registered in the City of London.18 Many of these banks have incorporated their subsidiaries in the City of London or other parts of the UK for the purpose of providing their financial services in the EU Member States through direct access to the single market.19 In other words, the UK’s attractiveness for foreign investors is largely due to it being the ‘gateway’ to the EU, the world’s largest single market.20 Because implementation of the Withdrawal Agreement (with Financial Services Act as one part of it) will cut this access off, losing free access to the European market will adversely affect the financial and commercial interests of these investors.
Brexit is a novel scenario for investment arbitration. Previously, no country has ever left the European Union, and no investors have lost passporting rights as a result of
legislation giving effect to such a departure. However, frustration of legitimate expectations resulting from changes in the regulatory environment is well established in the world of investment arbitration.21 Investors have sought redress for their losses on the grounds of legitimate expectation not only in developing countries, but also in developed Western economies. Recently, for example, this was the case for Spain, Italy, and Argentina. When Spain changed its energy provision regulations to accommodate more sustainable energy, the
15 Ibid. 16 Ibid.
17 Omar Ali, 'EY UK Attractiveness for Financial Services Investors 2018' (Ey.com, 2019).
<https://www.ey.com/uk/en/issues/business-environment/ey-attractiveness-survey-2018-uk-fs> accessed 22 February 2019. 18 City of London, 'THE IMPORTANCE OF FOREIGN BANKS TO THE CITY OF LONDON' (City of London 2015). 19 Huw Jones, Sinead Cruise and Andrew MacAskill, 'Brexit Britain's Financial Sector Faces 'Slow Puncture' (Reuters.com, 2018).
20 Ibid.
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aggrieved investors of its energy sector brought investor-state dispute settlement (ISDS) claims, for example, in Charanne22 and Eiser.23 Similarly, investors in Argentina brought claims of breach of a fair and equitable treatment (FET) treaty when Argentina refused to apply previously agreed adjustments to tariffs in Suez v Argentina24 and when Argentina tried to interfere with applicable tariffs through enactment of emergency measures in Impregilo v Argentina.25
In the case of Brexit, the outlined changes are going to have an economic effect on the finance industry. Firms will incur expenses in having to find new solutions or may even have to stop their operations entirely. Foreign-owned businesses may seek compensation under international investment treaties.26 Specifically, firms could argue that the Withdrawal Agreement implementing the departure of the UK from the EU goes against the UK’s FET obligation towards these firms under bilateral investment treaties (BITs). In this contingency, the claim is based on the financial firms having an expectation that their passporting rights would remain unchanged. These expectations could be derived from speeches of the former British prime minister, David Cameron, as oral administrative promises or, alternatively, on the so-called ‘Big Bang’ legislation that aimed at inducing investment in the UK’s finance industry.27
Considering the above circumstances, this thesis aims to investigate whether the regulatory changes in the financial services industry ordained by the Withdrawal Agreement resulting from no-deal Brexit could trigger successful claims of violation of legitimate expectations by foreign-owned businesses, and thereby breach of the FET principle. The focus of this thesis is on foreign financial firms incorporated in the UK and the potential of the eventual no-deal Withdrawal Agreement to infringe investor expectations protected under the UK’s treaty obligations to afford them fair and equitable treatment. Before analysing the success of such claims, I will delve into the individual elements of doctrine of legitimate expectations in the current case. I will first establish what legitimate expectations these investors could have of the UK and how the regulatory changes of no-deal Withdrawal
22 Charanne and Construction Investments v Spain, SCC Case No V 062/2012, Award (21 January 2016).
23 Eiser Infrastructure Limited and Energia Solar Luxembourg S.à.r.l v Kingdom of Spain, ICSID Case No ARB/13/36, Award (4 May 2017).
24 Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/03/19, Award (9 April 2015).
25 Impregilo SpA v Argentine Republic, ICSID Case No ARB/07/17, Award (21 June 2011).
26 See generally on investment treaties Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1st edn, Martinus Nijhoff Publishers 1995).
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Agreement are predicted to affect the rights of the investors before assessing the potential of such claims in light of the tribunals’ practice and literature. In other words, it has to be assessed whether expectations were created by the UK and, if so, what they were; what regulatory changes will occur as a result of the Withdrawal Agreement; and, whether these changes amount to the frustration of those expectations and breach of the FET standard.
This thesis draws on two categories of case precedents generally considered
influential on the evolution of the legitimate expectation doctrine. The first category includes the cases cited by most legal scholars and tribunals and having factual similarities to the Brexit situation. The second category are the cases relating to developed Western economies like Spain, Italy and Argentina (albeit the last of these is somewhat less developed).
The first section discusses the basis of any legitimate expectations of the investors and the regulatory environment changes, which highlights the disputed measure at the centre of this analysis. The second section examines the viability of the investors’ claims under the criteria set in tribunal practice in the relevant cases and in the literature on the topic. Finally, the last section will identify the circumstances, if any, in which the claims in question can be successful.
II. INVESTOR EXPECTATION AND REGULATORY CHANGES
UNCTAD defines legitimate expectations as follows: ‘claims relating to breach of legitimate expectations arise in situations when an investor is suffering losses due to the changes brought about by certain State measures. In other words, when a host State’s conduct causes adverse effects to an investment, that is, it reduces its economic value, an investor may allege that the State violates legitimate expectations that the investor had when making the
investment.’
Christopher Campbell and some other legal scholars, however, contend that arbitrators have invented the concept of legitimate expectations. Proponents of this view argue that this doctrine, derived from the FET standard, has no basis in law should be
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disavowed entirely.28 This concept is further criticised for giving excessive weight to investors’ interests at the cost of a state’s right to regulate29.
Nonetheless, this standard is part of the international investment law canon and the subject of much scholarship.30 It is generally understood to bring the concept of rule of law, as it exists in several domestic legal orders, into investment arbitration.31 As such, this
standard requires the legal framework of the host state to be predictable, its decision-making consistent, the legitimate expectations of the investors protected, and so on.32
Such legitimate expectations are commonly based on the administrative statements of the host country, but they can also be derived from the host country’s legislative framework, for example, if the host state induces the investor to believe that the regulatory framework will remain unchanged for a certain amount of time.33 Nonetheless, as was applied in the case of Saluka v. Czech Republic34, there is a test of proportionality between the expectations of the investor and the importance of the regulatory change, which means that the standard only protects expectations from disproportionate measures.
The legal basis of an investor’s legitimate expectations is in the specific assurance or representations made by the host state or, alternatively, its general regulatory environment.35 First, a specific representation in this context also includes statements made by government
28 Christopher Campbell, ‘House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law’. (2013) 30 (4) Journal of International Arbitration 361–380.
29 Anthony Depalma, ‘Nafta's Powerful Little Secret; Obscure Tribunals Settle Disputes, but Go Too Far, Critics Say’ The New York Times (New York City, 11 March 2001) <https://www.nytimes.com/2001/03/11/business/nafta-s-powerful-little-secret-obscure-tribunals-settle-disputes-but-go-too-far.html> accessed 15 July 2019.
30 A number of writers have published papers specifically on the concept: Julien Cazala, ‘La protection des attentes légitimes de l’investisseur dans l’arbitrage international’ (2009) 32 (5) Rev. 23 Intern Dr Econ; E. Snodgrass, ‘Protecting Investors’ Legitimate Expectations and Recognizing and Delimiting a General Principle’ (2006) 21 ICSID Rev. 53; Felipe Mutis Téllez, ‘Conditions and Criteria for the Protection of Legitimate Expectations Under International Investment Law’ (2012) 27 ICSID Rev. 432; Trevor Zeyl, ‘Charting the Wrong Course: The Doctrine of Legitimate Expectations in Investment Treaty Law’ (2011) 49 (1) Alberta L. Rev. 203; Michele Potestàà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’, (2013) 28 (1) ICSID Rev. 88–122; Abhijit P.G Pandya, ‘Legitimate Expectations in Investment Treaty Arbitration: an Unclear Future’ (2010) 15 (1) Tilburg L. Rev. 93– 119; Fred Wennerholm, ‘What Can You Expect?: the Role of Legitimate Expectations in Investment Protection Disputes’ in Kaj Hobér, Annette Magnusson, Marie Ö hrström (eds), Between East and West: Essays in Honour of Ulf Franke (Juris 2010) 265–276; Christoph Schreuer and Ursula Kriebaum, ‘At what Time must Legitimate Expectations Exist?’ in Jacques Werner and Arif Hyder Ali (eds), A Liber Amicorum: Thomas Wälde: Law beyond Conventional Thought (Cameron May 2009). 31 Stephan Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law’ (2006) 6 Global Administrative Law Series <www.iilj.org/20066SchillGAL.htm> accessed 25 June 2019.
32 Stephan Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’ (2007) 24 (5) Journal of International Arbitration <
http://www.kluwerlawonline.com/document.php?id=JOIA2007035&PHPSESSID=vrtb3le7cjtouel34d5plkdbp0> accessed 20 June 2019.
33 CMS Gas Transmission Company (n 27) [275–77].
34 Saluka Investments BV v. The Czech Republic, UNCITRAL, Partial Award, 17 March 2006.
35 See for example CMS Gas Transmission Company (n 27) [275–77]; International Thunderbird Gaming Corporation v United Mexican States, UNCITRAL, Award (26 January 2006) [21].
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officials in an official manner attributable to the state.36 Such attribution of legitimate expectation to public statements of politicians was discussed in the cases of Waste
Management v Mexico37 as well as Methanex v USA.38 In the early 2010s, the former Prime Minister advertised the UK as the gateway to the EU’s single market. He explicitly stated:
We will stand up, at each and every turn, for our financial services industry and the City of London. London is Europe’s pre-eminent financial centre. With this government, I am determined it will remain so.39
As such, this speech created legitimate expectation in investors. They were induced to invest in the UK’s finance industry by this speech. However, since the speech specifically
emphasised the City of London as the place to invest in, only firms situated in the City can legitimately claim to have relied on this representation. Based on these reasons, this group of investors can claim to an expectation of continued access to their passporting rights.
Secondly, legitimate expectations of investors can be based on the legal framework of the host state.40 Therefore, the basis of legitimate expectations for foreign-owned firms outside of London is the Big Bang legislation that was put in place to attract foreign investment in the UK finance industry and to make it the capital exporter that it is.41 If investors rely on the regulatory framework to make an investment, a mere change in the regulation is not enough to breach FET. In this case, the change in the environment has to be accompanied by another extraordinary aspect, such as a disproportionate effect on the assets of the investors, in order to amount to violation of FET.42
In any case, if the outcome of Brexit is a no-deal scenario, once the Withdrawal Agreement and the concomitant Financial Services Bill are ratified, both of these groups of investors will lose their passporting rights. Currently, as a member of the EU, the UK uses the EU’s ‘passporting’ regulation, which governs how EU financial actors access the single market for the provision of financial services. If a financial actor is permitted to offer a
36 International Thunderbird (n 35) [21].
37 Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/98/2, Award (2 June 2000). 38 Methanex Corporation v United States of America, UNCITRAL, Award (3 August 2005).
39 Cabinet Office, ‘Prime Minister David Cameron’s foreign policy speech’ (Lord Mayor’s Banquet, London, 15 November 2010) <www.gov.uk/government/speeches/speech-to-lord-mayors-banquet> accessed 2 June 2019.
40 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1, Award (25 July 2007) [131]; Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award (22 May 2007) [267]; Suez v Argentina (n 24) [267]; Dolzer and Schreuer (n 21) 134.
41 Anouk Papillon, ‘How did London come to be the world’s greatest financial hub?’ CityMetric (London, 20 January 2017) <https://www.citymetric.com/business/how-did-london-come-be-world-s-greatest-financial-hub-2729> accessed 01/06/2019. 42 Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and
Regulatory Change in International Investment Law’ (2011) 12 (6) The Journal of World Investment & Trade 806 <
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service in its ‘home’ Member State—where the actor is incorporated or registered—the financial actor can offer that service in the entire single market.43 In this instance, additional supervision is not necessary because home Member State’s EU membership means its supervisory regulation meets the EU standard, which is supervised by the European Supervisory Authorities (ESAs). This regulation is available only to firms registered or incorporated within the EU.44
If the UK crashes out of the EU without a deal, its financial services firms’ access to the single market will be regulated in accordance with the World Trade Organisation’s law, i.e. the General Agreement on Trade in Services (GATS). Under the GATS, the UK firms will have the right to establish subsidiaries in the EU or have a ‘commercial presence’. Therefore, the first alternative for the affected firms will be to create new subsidiaries in the EU. These subsidiaries will then be EU actors and have access to the full passport. However, creating subsidiaries is unlikely to provide a comprehensive solution for the loss of passports. Subsidiaries, as actors of the host state, are under the full weight of the host country’s
supervisory regulation as well as the EU’s ring-fenced capital and liquidity requirements.45
Therefore, creating subsidiaries, aside from causing disruptions in the operations of firms and subjecting the firms to potentially inflexible labour laws and taxation costs, will probably be unbearable for certain group structures because of the capital and liquidity requirements.46
Apart from the deployment of subsidiaries, under the GATS rules, the EU reserves the full ‘right to regulate’ the presence of financial services firms in its market.47 This regulation
is currently manifest in the so-called ‘equivalence rules’, which will govern the access of the UK’s firms to the EU’s market. These rules, at best, lack coherence. Segments of the capital market may be subject to no or few rules for third country access.48 Additionally, registration with ESMA and submission to its supervision may or may not be a condition of access.
The question then is what other access routes, apart from creating subsidiaries, are available to firms from the UK? The answer depends on the type of service that the firm provides. Currently, the UK plays a strong role in the provision of different kinds of (1) investment services, including risk management and securities and derivative trading; and (2)
43 Moloney (n 9) 104. 44 Ibid. 45 Ibid 105. 46 Ibid. 47 Ibid. 105 48 Ibid.
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financial market infrastructure, such as trading venues and central clearing counterparties.49 Investment services and infrastructure are regulated by two important EU instruments: (1) the Markets in Financial Instruments Directive II (MiFID II)/Markets in Financial Instruments Regulation (MiFIR) (2014), the EU’s rules for investment services and trading venues; and, (2) the European Market Infrastructure Regulation (EMIR) (2012). Between these two instruments, MiFID II/MiFIR, in turn, provide two ways of access for the provision of financial and investment services (such as dealing securities, broking, underwriting, advice, and discretionary/individual asset management). These routes are (1) branches and (2) the cross-border provision of services.
First, Member State may require firms that are classified as retail50 under MiFID to establish branches if they wish to provide MiFID II investment services to, or investment related activities with, retail clients or clients who request to be treated as elective
professional clients according to Articles 39-43 MiFID.51 However, branches do not support passports; therefore, providers of retail services have to establish branches in each Members State where they seek to access the market for the provision of their services. Additionally, despite not requiring an equivalence status for its home country, branches are subject to national and EU level regulation, including capital requirements.
Secondly, the remote provision of services by third-country firms serving eligible counterparties and professional clients (non-retail),52 is governed by Article 46 MiFIR. This regime provides a full EU passport to these wholesale53 exporting firms once they have registered with European Securities and Markets Authority (ESMA). Registration with ESMA is qualified by a series of conditions. The most important of these conditions is the adoption of an equivalence decision in relation to the relevant third-country by the
Commission54. This means wholesale services providers can receive a full EU passport for the cross-border provision of their services into the entire EU market depending, more or less, only on their home country securing the equivalence status from the European Commission. Whilst the equivalence status should not be difficult to secure for the UK because its
49 Ibid. 108
50 Retail firms serve those clients who do not meet the eligibility conditions for ‘professional’ or ‘eligible counterparties’ Under the MiFID II classification. These include individuals as well as local and regional authorities.
51 European Parliament and Council Directive 2014/65 of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance [2014] OJ L173/349 (MiFID II).
52 Ibid.
53 Wholesale exporters include firms that serve the ‘professional client’ and ‘eligible counterparty’ classes of clients, which covers large corporates as well as regulated financial institutions.
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regulations will be identical on the day one of exit, it will remain to be seen how this may develop as the regulations across the border potentially diverge with time.
In short, once a no-deal version of the Withdrawal Agreement is ratified by the UK, it will sever the passporting route for financial services firms, but with the possibility of having some alternative routes of access to the EU capital market. The first alternative for any firm is to create a subsidiary within the EU and to secure an EU passport, but due to its drawbacks, subsidiaries are not a comprehensive alternative to passporting rights. The second alternative depends on the type of services that a firm provides. EU regulation requires retail firms to create branches in every single Member State that they wish to offer their services in, but gives a full EU passport to wholesale firms for the cross-border provision of their full range of services. Additionally, wholesale firms can secure a passport only once their home country has been declared ‘equivalent’ by the EU Commission, which is not required for retail
businesses. Therefore, the legal instrument at the heart of this dispute is the no-deal scenario Withdrawal Agreement because of its negative impact on these firms.
III. CASE STUDY
To assess how the details of such a claim will play out, I provide this illustrative case study to map out the success of the claim in each case. The purpose of such a case study is to give an understanding of the situation for real firms in similar circumstance. Let us suppose that two investors, each from a country that has invested in the UK and has a BIT in force with the UK, brings an ISDS claim against the UK in an ICSID tribunal. Further, let’s assume that each of these firms invokes its right to FET, claiming that their legitimate expectations have been frustrated. The first firm is owned by an investor from the UAE and called ‘UFin Services’; the second firm is owned by a Turkish investor and called ‘TurFin Services’. For the sake of my analysis, I will assume that UFin primarily offers retail services and TurFin wholesale services. Now I will analyse both of these claims in a parallel but comparative manner in order to study the similarities as well as the differences between these claims depending on the claiming investor’s type of services.
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Jurisdictional Issues
The first step in this analysis is determining whether a tribunal would accept jurisdiction over this case. Determination of the jurisdiction of a tribunal over a case and the discussion of any problematic issues in this regard are a crucial first step. Any investor that wishes to bring an ISDS claim first has to establish the jurisdiction of a tribunal. To determine jurisdiction in this case, it has to be shown that the BIT between the investor’s home country and the UK covers the investor and that a UK act has, prima facie, violated of the terms of that Treaty.55 In other words, it has to be determined that there is an act by the government, that this act has a detrimental effect on the investment in question, and that a causal connection exists
between the state act and its adverse effect.
In the hypothetical scenarios, article 8 of the each of the BITs refers to the ICSID tribunal as the only forum for dispute settlement. Thus, in this case, it has to be determined whether an ICSID tribunal would have jurisdiction over the claims. Article 25 of the ICSID Convention governs ICSID jurisdiction over a claim. It provides that ICSID has jurisdiction over any legal dispute arising directly out of an investment between a contracting state and a national of another contracting state.56 Essentially, there are five requirements that must be
fulfilled before a tribunal may assume jurisdiction. These requirements are as follows: (1) the dispute is a legal dispute; (2) there is a significant connection between the disputed measure and the investment; (3) the nationality of the claimant is that of a contracting party; (4) the investment meets the criteria of what is generally accepted as an investment by ICSID tribunals as well as what is defined as an investment under the BIT on the basis of which the claim is brought; and (5), both parties have consented to the specific dispute to be brought before the ICSID tribunal. As briefly discussed below, the nationality of the investors and requirement of what is considered ‘investment’ are non-problematic issues. After this, the discussion turns to the more contentious issues of the claim’s legality, the connection between the disputed measure and the adverse effect on the investment, and the consent of the parties.
55 Chiara Giorgetti (ed), Litigating International Investment Disputes: A Practitioner’s Guide (Brill 2014).
56 Convention on the Settlement of Investment Disputes between States and Nationals of Other States to which the parties to the dispute consent (opened for signature 18 March 1965, entered into force 14 October 1966) (ICSID Convention).
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Nationality and the notion of investment
In the hypothetical scenarios, the nationality of the investors is not an issue. Both of the hypothetical firms have the nationality of countries that are contracting parties to ICSID, namely, Turkey and UAE. In the case of real firms established in the UK, they will have to satisfy this requirement by showing that the firms’ home country is a contracting party to the ICSID Convention. If the claim is brought to another forum, the country’s accession to the ICSID Convention will not be required.
Further, acceptance of jurisdiction by an ICSID tribunal requires the investment to satisfy the requirements of what counts as investment within the meaning of Article 25 of the ICSID Convention as well as the definition contained in the BIT under which the claim is brought. The ICSID Convention does not define the notion of investment itself. However, tribunals generally rely on the widely used, albeit not binding, criteria set out in the Salini v Morocco57 case to determine whether a claimant’s investment satisfies the standard required for a tribunal to have jurisdiction. This test requires contribution of money or assets, certain duration of the activity, participation in risk, regularity of returns or profits, and (although somewhat contested) contribution to the economic development of the host.58
Because both of the hypothesised firms are assumed to be established and have a commercial presence in the UK, they meet the Salini criteria. Firstly, both UFin and TurFin, like most retail finance firms, would have an office and would have hired some personnel to manage their assets. Secondly, they would have been active for a number of years and there would have been an intention to carry on their business for an indefinite amount of time into the foreseeable future—until the Withdrawal Agreement came into force and completely changed the circumstances. Third, these firms would have taken part in the usual risks that come with being active members of the financial services industry. Finally, they can show regularity of profits and contribution to the UK’s gross domestic product in a quantitative fashion. Therefore, both of these firms and real firms in their position meet with relative ease the requirement of what is generally considered investment within the meaning of ICSID Convention.
57 Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, ICSID Case No Arb/00/04, Decision on Jurisdiction (23 July 2001).
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In addition to the Salini test, article 1(a) of the UAE-UK BIT defines investment as ‘every kind of asset owned or controlled by investors of either of the contracting Parties’.59
Seemingly, this is a broad definition and does not exclude portfolio investment or specific assets like sovereign debt or commercial transaction.60 Within this paragraph of article 1, provisions (a)(i) and (a)(iii) include ‘movable and immovable property and any other property’ and ‘liquid assets, deposits and claims to money or to any performance under contract having a financial value’ as investments.61 As shown earlier, financial services firms,
whether retail or wholesale, typically own at least one or more of these assets. Therefore, UFin, or a firm comparable to it, would be a covered investment within the meaning of the UAE-UK BIT.
Not dissimilarly, article 1(a) of the Turkey-UK BIT defines investment as ‘every kind of asset’ with no limitations such as the exclusion of portfolio investments or specific assets, requirement of ‘in accordance with the host State law’, or an exhaustive list of covered assets.62 As examples of what counts as investment under this treaty, subparapraphs (a)(i), (a)(iii), and (a)(v) of this article include ‘movable and immovable property and any other property rights such as mortgages, liens or pledges’, ‘claims to money or to any performance under contract associated with any investment having a financial value’, and ‘business
concessions conferred by law or under contract’.63 TurFin, being a larger wholesale firm, will
naturally have all or most of these assets. Therefore, TurFin, in addition to meeting the requirements of what counts as investment within the meaning of the ICSID Convention, also meets the requirements of what constitutes covered investment in the Turkey-UK BIT.
In short, nationality and the notion of investment for the determination of jurisdiction are not problematic. Both of the hypothetical firms, and comparable firms, meet the criteria of what is considered to be a covered investment both under the BITs as well as under article 25 of the ICSID Convention.
59 Agreement Between the Government of the United Arab Emirates and the Government of the United Kingdom of Great Britain and Northern Ireland for the Promotion and Protection of Investments (United Arab Emirates-United Kingdom, adopted 08 December 1992, entered into force 15 December 1993) UNCTAD (UAE-UK BIT).
60 Ibid. 61 Ibid.
62 Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Turkey for the Promotion and Protection of Investments (Turkey-United Kingdom, adopted 15 March 1991, entered into force 22 October 1996) UNCTAD (Turkey-UK BIT).
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Legality: measure, effect and connection
The legality of the dispute requires a prima facie case of violation of treaty standards.64 Therefore, a state act has to be identified; it has to be examined whether this act affected the investment; and finally, it has to be determined whether there is a significant connection between this act and the impact on the assets.
(i) Act of the state
Article 8(c) of the BIT between the UK and Turkey and article 9 (1) of the BIT between the UAE and the UK grant investors the right to bring arbitration suits based on the allegation of breach of the standards guaranteed by the agreement.65 Hence, the first step towards
establishing a prima facie case of violation of the treaty standard at the heart of this
analysis—FET as legitimate expectations—is identifying the state act that is disputed. This sovereign act in the current case would be the Withdrawal Agreement. As indicate in its name, this act will give effect to the withdrawal of the UK from the EU,66 which will result in
the loss of rights for natural and legal persons. Therefore, it is a sovereign act with
consequences for the investor. In other words, this instrument will bring about policies and initiatives that dictate which rights the investors can retain and which ones they will lose. It will do so through policy initiatives that constitute a regulation, administrative act, law or procedure that satisfies the requirements set forth by the treaties in question for the sovereign act affecting the investment67.
Nonetheless, it has to be noted that not every act or omission of the UK would necessarily serve as a disputed sovereign act and be the basis for a claim.68 For example, if the UK fails to reach a trade agreement with the EU, it will be difficult to classify this failure on its own as a state act on the grounds that it either did not satisfy the requirement of the treaty for a disputable measure or was not attributable to the UK.69 A tribunal would consider such a failure a political issue rather than a legal one, which would negate the tribunal’s jurisdiction over the dispute.70 Additionally, the UK has the right to exit the EU by invoking
64 Chiara Giorgetti (n 55).
65 (UAE-UK BIT) (n 59) art 8; (Turkey-UK BIT) (n 62) art 9.
66 Arabella Lang and Vaughne Miller, ‘Brexit: An Overview’ (House of Commons Library, 23 June 2017)
<https://commonslibrary.parliament.uk/key-issues/brexit-an-overview/> accessed 17 January 2018.
67 CMS Gas Transmission Company (n 27)
68 See for example CMS Gas Transmission Company (n 27) [275–77]; International Thunderbird Gaming Corporation (n 35) [21]
69 Ioannis Glinavos, ‘Brexit, the City and Options for ISDS’ (2018) 33 ICSID Review 387 70 Ibid.
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Article 50 of Treaty of the European Union. The mere exercise of this right is not an action that can be the basis for a disputed measure because the UK is entitled to this right much in the same way that it has the sovereign right to pass any form of legislation.71 An investor cannot dispute the exercise of a right.72 However, once legislation is passed, if it breaches the treaty rights of an investor, that investor can rely on the ISDS mechanism in place to seek redress or remedy.73 For these reasons, this analysis considers the Withdrawal Bill, which will be enacted as the Withdrawal Agreement as a result of Brexit, as the disputed legal measure affecting the investors’ rights.
(ii) Impact on the investment
In addition to being based on a disputed state act, investors’ claims must be based on the specific impact of that measure on their assets, as opposed to the measure’s general negative impact on all business and profitability, in order to make the case for a prima facie violation of their treaty rights74. Assuming the UK leaves the EU without a deal, the Withdrawal Agreement will cancel out the passporting rights of financial actors such as UFin and TurFin, as discussed in detail in the previous section. The loss of these rights will result in specific damage to the business, assets, costs and profitability of these firms. As such, a claim would be based on the loss of existing rights that added to the value of these firms’ investments. Therefore, it is apparent that the coming into force of the Withdrawal Agreement will specifically damage the investments of UFin, TurFin and similar firms that rely on the EU passports as a vital part of their investments.
(iii) Significant connection
Furthermore, establishing jurisdiction requires investors to also show that there is a link between the disputed legislative act and the investment.75 The Withdrawal Act is a measure of general application that applies indiscriminately to every entity in the UK. Therefore, it may not be the case that this legislation is a disputable measure having a significant
connection with the negative impact on the investments of UFin and TurFin. However, as the tribunal in AES v Argentina held, the measure does not have to have specifically targeted the
71 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award (11 September 2007) 72 Ibid.
73 UNCTAD, ‘World Investment Report, FDI Policies for Development: National and International Perspectives’ (United Nations, New York and Geneva, 2003) 145-154; CMS Gas Transmission Company v Argentina (no. 29) [275–77]; International Thunderbird Gaming Corporation (n 35) [21].
74 See for example Charanne (n 22). 75 Methanex Corporation (n 38) [137-139].
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investor.76 It can be a measure of general application. As long as the measure has a direct and significant effect on the investment, it is considered to meet the connection criteria.77 As shown above, the Withdrawal Act will directly impact the investment of the hypothetical firms. Hence, the requirement for a significant connection is also met in the current case.
Consent of the parties
The next stumbling block on the way to getting a tribunal to accept jurisdiction over this claim is that both parties consented to the current dispute being submitted to the tribunal for arbitration. Article 25 of the ICSID Convention requires that both parties submit their consent regarding the present dispute in writing to the Centre.78 The consent of the investors in both cases can be assumed by the submission of their respective claims to the Centre.
Consent of the UK to the claim by UFin is contained in article 8 of the UAE-UK BIT.79 This article has broadly formulated wording to describe the scope of consent to the sort of investment claims to be submitted to the ICSID Centre. Paragraph (1) states ‘any dispute… concerning an investment’ (emphasis added). Such formulations generally encompass all claims related to investment.80 There are no limitations to the consent of the
UK in this case, such as the consent being limited to provisions subject to ISDS or policy areas being excluded from ISDS. Furthermore, in the present case the claim specifically concerns the treaty obligations of the UK, namely, its obligation to FET and not its
contractual obligations, for example. Therefore, for these reasons, it is highly likely that an ICSID Tribunal would find that the UK has consented to the dispute brought by UFin.
Regarding the claim brought TurFin, the UK’s consent is contained within article 8 of the Turkey-UK BIT.81 This article, almost identical in wording to the UAE-UK BIT, also takes a general approach to the types of claims that constitute a legal dispute within the meaning of the treaty. Paragraph 1(c) is the lead paragraph of an ISDS clause stating, ‘an alleged breach of any right conferred or created by this Agreement with respect to an
76 AES Corporation v Argentine Republic, ICSID Case No ARB/02/17, Decision on Jurisdiction (24 April 2005). 77 Ibid.
78 (ICSID Convention) (n 56) 79 UAE-UK BIT (n 59) art. 8
80 Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment (3 July 2002) [53].
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investment’ (emphasis added). This article also provides a list of specific basis for claims beyond the typical standards of protection in the ISDS clause of the treaty (e.g. contractual disputes). Additionally, this treaty contains an unqualified standard of FET under article 2(2),82 which is the right invoked by TurFin in this case. Therefore, UK’s consent can be assumed in this case as well.
Based on the forgoing, it is reasonable to assume that an ICSID Tribunal would find consent on the part of the UK if similar claims were brought. “Similar” in this sense means claims based on BITs having broad formulations for the disputes that are covered by them— or, in any case, BITs that contain FET clauses and define any dispute regarding the breach of these FET clauses as treaty disputes.
Fork in the road
One final hurdle that the claimants in the current case would have to overcome is the so-called fork-in-the-road clauses in the treaties on which they will rely. Article 8(2) of the UK-Turkey BIT states that parties must try to reach an agreement through local remedies within one year83 and article 8 (1) of the UAE-UK BIT states that parties must try to reach an
agreement through local remedies within three months.84 Further, both these articles provide
that only after this time limit has expired can the parties then can submit their claims to the ICSID Centre for conciliation or arbitration. Therefore, under the treaties both claimants have the obligation to first pursue local remedies before they can reach out to the Centre for filing their respective suits.
Once all of the above legal conditions are met, an ICSID tribunal will in all likelihood accept jurisdiction. The least problematic of these conditions are the nationality of the investor and the investment meeting the requirement of what is covered as investment under the ICSID Convention and the individual Treaties. Somewhat more contentious is the legality of the claim, established by identifying a measure of the State and its effect on the investors’ assets and finding a connection between the measure and the investment. However, tribunal
jurisprudence shows that these conditions are also fulfilled in the current case. Finally, the
82 Ibid art. 2 83 Ibid art. 8
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consent of the parties is once again rather unproblematic as the Treaties in question each contain a broad definition of what constitutes a dispute. For these reasons, an ICSID tribunal will accept jurisdiction over the substantive claims of the investors in the current case. The following section is an analysis of the success of the substantive part of these claims.
Substantive Claim
The principle argument of the firms in this hypothetical situation is that the UK has violated the FET rights guaranteed in the BITs between their home states and the UK by passing a Bill that extinguishes their passporting rights—which existed at the time they invested in the British financial industry—thus frustrating their legitimate expectations. It is crucial to draw a distinction between this argument and the argument that the UK is not allowed to leave the EU because of its obligations under the Treaties. Thus, in making their claims, these firms do not wish to hinder the exercise of Britain’s sovereign right to leave the EU and to enact legislation, nor do they seek to impede the political process. Instead, the hypothetical firms, and comparable real firms, would aim at obtaining compensation for their loss or damage on the basis of the rights guaranteed by the BITs. Therefore, in order to analyse whether the legitimate expectations of the investors in the current case is frustrated, it is necessary to specify the scope and meaning of the FET doctrine and its breach through frustration of legitimate expectations. The following discussion briefly traces the historical transformation of this concept before assessing the current claim in light of precedent.
Historical evolution of FET and legitimate expectation
Despite being one of the most invoked standards in ISDS claims,85 there is no precise definition for this concept, and the language surrounding it remains heterogeneous across BITs.86 Historically, the concept of FET has been a gap-filling standard for the areas that
were not covered by other, more specific standards, such as expropriation.87 The first
significant cases on the basis of FET are only from the year 2000, namely, Metaclad and
85 Dolzer and Schreuer (n 21). 86 Ibid. 121
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Maffezini.88 Regardless of the ambiguity, most tribunals have relied on the definition of this standard in the Tecmed89 case for their analysis, which means this definition is probably the most authoritative historical definition of this standard.
The Arbitral Tribunal understands that the scope of the undertaking of fair and equitable treatment under Article 4(1) of the Agreement described above is that resulting from an autonomous interpretation, taking into account the text of Article 4(1) of the Agreement according to its ordinary meaning (Article 311 of the Vienna Convention), or from the international law and the good faith principle, on the basis of which the scope of the obligation assumed under the Agreement and the actions related to compliance therewith are to be assessed.90
Since Tecmed, this concept has evolved and become more nuanced. For example, in Saluka v Czech Republic, the tribunal held that states owe a duty to investors whose interests are protected under a treaty not to act in a manner that is non-transparent, unreasonable or discriminatory.91
The tribunal in Mondev v USA added that, for the sake of practicality, it would refrain from an historical discussion of the concept and rely on the specific applications of this concept to determine whether the concept has been violated in a case or not.92 Some of these specific applications are transparency, stability and the protection of the investor’s legitimate expectations.93 The practical approach established by the Mondev case is important because the ambiguous expansiveness surrounding the FET standard means it can be discussed at length. However, since the current case concerns only one specific application of this standard, namely, legitimate expectations, it is sufficient to focus on this particular application.
As held in the Mondev case, the concept of the legitimate expectations of investors is based on a transparent legal framework in the host country and any specific representations made in an explicit or implicit way to the investor by the host Member State or through the host Member State’s officials.94 Scholars interpret the host state’s legal framework to mean
that the investor is entitled to rely on legislation, treaties, the assurances contained in decrees,
88 Metaclad v Mexico, 5 ICSID Reports 209, Award (30 August 2000); Maffezini v Spain, 16 ICSID Review-FILJ (2001) 248, Award on Merits (13 November 2000).
89 Técnicas Medioambientales Tecmed SA v. Mexico, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003). 90 Ibid [155].
91 Saluka v Czech Republic, Partial Award (17 March 2006).
92 Mondev International Ltd v United States of America, ICSID Case No ARB(AF)/99/2, Award (11 October 2002). 93 Dolzer and Schreuer (n 21) 133.
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licenses and contracts.95 A crucial development in this vein comes from the more recent and factually similar case of Charanne and Construction Investments v Spain. The tribunal in the Charanne case held that in the absence of specific assurances, the legitimate expectations of the investor can still be frustrated.96 In such cases, in order to gauge whether the legitimate expectations of an investor are frustrated, the tribunal has to determine whether the change in the regulatory environment was brought about unreasonably, disproportionately or contrary to the public interest.97 However, in contrast to Charanne, the tribunal in Blusun v Italy,
where the claiming investor disputed Italy’s regulatory changes to energy feed-in tariffs, held that determining unreasonableness and contrariness to public interest is beyond the function of the tribunal.98 According to the tribunal in Eiser, the test of proportionality is crucial in determining whether there has been a breach of FET.99 This is consistent with Charanne and has also been confirmed by legal scholars.100
However, before the success of these claims can be studied in light of the
proportionality test, a customary international law discussion of these claims is necessary because the FET articles in both of the BITs in the hypothetical scenarios make reference to international law.101 Therefore, a starting point for the claimants and the tribunal would be to begin their claims on the basis of international law.
FET and legitimate expectations in customary international
law
In the first invocation of customary international law, a very high threshold was set for the violation of this standard. This principle was first invoked in Neer v. Mexico.102 It was held
that the person of the investor has to be afforded a minimum of international customary law
95 W. M. Reisman and M. H. Arsanjani, 'The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes' (2004) 19 ICSID Review 328.
96 Charanne (n 22). 97 Ibid.
98 Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3, Award (27 December 2016).
99 Eiser (n 23).
100 Radi Yannick, 'Balancing the Public and the Private in International Investment Law' in Horatia Muir Watt, and Diego P. Fernández Arroyo (eds) Private International Law and Global Governance (Oxford 2014); Charanne (n 22).
101 (UAE-UK BIT) (n 59) art 8; (Turkey-UK BIT) (n 61) art 8.
102 LFH Neer and Pauline Neer (USA) v United Mexican States, Award (15 October 1926), reprinted in (1946) 4 UNRIAA 60.
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treatment.103 A violation can occur as a result of outrage, bad faith, wilful neglect of duty, or insufficiency of government action unreasonably short of standards.104 Therefore, a very high threshold was set for the violation of this standard. In Mondev v US, property rights were considered in addition to the person of the investor and therefore actions stemming from less outrageous behaviour were also taken to constitute a violation.105 Later on, however, the
tribunal in Glamis v. US held that the standard since Neer has not changed, but what has changed is the understanding of what is considered shocking.106 Additionally, Glamis is
important because the tribunal held that in addition to not upholding a contractual obligation, a state must have denied justice or acted discriminatorily for a violation of FET to be
found.107
Notwithstanding these guidelines, it is problematic to limit the source of the FET standard to only customary international law because there is no consensus in what the minimum standard of treatment is under international law.108 Additionally, the tribunal in Lemire v Ukraine held that customary international law standard of minimum treatment can act as a floor not a ceiling for the FET rights of the investors.109 Put differently, this means that if treaty formulations of FET offer better rights for investors than what is considered appropriate under customary international law, a tribunal will rely on a direct interpretation of the treaty wording rather than on customary international law.110
The difficulty with the international law formulation of the FET standard is that, as shown above, it requires bad faith on behalf of the host state. Meanwhile, such a case would immediately fail because Brexit, and the subsequent Withdrawal Act, are the result of a democratic process, which excludes bad faith. Furthermore, as established earlier, if specific formulations of what constitutes a violation of FET are present in treaties, tribunal resort directly to these formulations and abstain from an international law analysis of this concept because of the indeterminate nature of international law. For these reasons, if the claimants in the case at hand follow an international law-based route, their claims will fail.
103 Ibid. 104 Ibid.
105 Mondev (n 92).
106 Glamis Gold Ltd v United States of America, UNCITRAL, Award (8 June 2009). 107 Ibid.
108 Glinavos (n 69) 395.
109 Joseph Charles Lemire v Ukraine, ICSID Case No ARB/06/18, Award (28 March 2011). 110 Ibid.
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Under thematically relevant cases
States can violate the FET principle by making specific assurances to investors to create expectations and then changing their course of action.111 Such legitimate expectations are created by either the host state making an explicit promise or guarantee to the investor (as mentioned in Parkerings v Lithuania112) or, in the absence of explicit promises, through the circumstances surrounding the conclusion of the agreement to invest.113 In short, the FET standard in a BIT operates to prevent the contracting state from not affording investors fair and equitable treatment through the exercise of its legislative power.114 This treaty-based route, allows the FET standard to part ways from its customary international law application of requiring outrageous action on behalf of the State concerned.
As a starting point for analysing the current case, a tribunal would begin by
investigating whether specific assurances were made to the investors. If so, did the investors rely on these assurances? Did the state act in a manner inconsistent with these assurances?115 This method of analysis was established by the AES Summit Generation Limited and AES-Tisza Eromu Kft v Hungary tribunal over the claims arising out of the State’s reintroduction of older administrative pricing on electricity. Therefore, the first step is to determine whether the investor’s expectations were legitimate to begin with. BITs do not protect just any
expectation harboured by the investor, but only expectations that meet certain criteria.116
In the cases at hand, specific assurances were made to investors in the speech of the prime minister of the UK.117 He mentioned that London was the gateway to the EU market and that long-term stability could be expected. However, these speeches emphasised the City of London as the place to invest in;118 therefore, only firms incorporated in the City can argue that they relied on these speeches as specific assurances.
Conversely, firms outside of the City can base their legitimate expectations on the Big Bang regulation as discussed above. Investors’ expectations can also be based on the laws
111 Glinavos (n 69) 392.
112 Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award (11 September 2007). 113 Glinavos (n 61) 393.
114 Giorgio Sacerdoti, Pia Acconci, and Anna De Luca (eds), General Interests of Host States in International Investment Law (CUP 2014) 42.
115 AES Summit Generation Limited and AES-Tisza EromuKft v Hungary, ICSID Case No ARB/07/22, Award (23 September 2010).
116 Ibid.
117 Cabinet Office (n 37). 118 Ibid.
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and regulations of the host Member State. As stated by the tribunal in Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal SA v Argentine Republic, changes in the regulatory environment, laws and regulations together with the act of relying on them for making an investment, create legitimate expectations for the investor that need protection.119 Therefore, investments incorporated outside of the City can take this alternative route to establish the legitimacy of their expectations.
Additionally, in a crucial development in what legitimate expectations can be,120 the
tribunal in the Eiser case, which also came from Spain and therefore concerned a comparable scenario, pointed out that the expectation is not just of stability in the regulatory framework but also in the state’s policy towards investments.121 Therefore, investors require protection from detrimental modifications of the legal framework, even though they cannot expect the host state to not modify its regulatory regime, as was confirmed by the Impregilo SpA v Argentine Republic tribunal.122 This development cements the finding from Tecmed that investors can expect the host state not to arbitrarily revoke pre-existing decisions or permits issued by the state that were relied on by the investor.123 In the current case, the coming into force of the Withdrawal Agreement will result in the revocation of the UK’s decision to be part of the EU and grant firms incorporated in the UK access to the EU market and capital movement passports. These passports are a tangible, and economically valuable, part of the business model of the firms in the position of UFin and TurFin. Thus, on the basis of these Spanish and Argentinian precedents at least, the revocation of these passports will frustrate the legitimate expectations of the investors.
Notwithstanding these doctrinal developments, the debate on the frustration of
legitimate expectations has more nuances that need to be addressed. One important detail that comes out of the Charanne award is that if legitimate expectations are based on the general regulatory framework of the host state as opposed to specific assurances, the impact of the regulatory framework changes on the investment need to be drastic to constitute frustration of these expectations, because in this case they were deemed not drastic enough to amount to a FET violation.124 This is because the legitimate expectations of the investors are balanced
119 Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/03/19, Award (9 April 2015).
120 Dolzer and Schreuer (n 21) 139. 121 Eiser (n 22).
122 Impregilo (n 25) [29].
123 Técnicas Medioambientales Tecmed SA (n 89).
124 Charanne (n 22); Electrabel SA v Hungary, ICSID Case No ARB/07/19, Award (25 November 2015); UNCTAD, ‘ISDS: UNCTAD Series on Issues in International Investment Agreements II’ (United Nations, New York and Geneva, 2012).
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against the public interest needs that the disputed measure is supposed to address.125 This was also seconded by the Eiser award, which stated that the state has to respond to its public policy needs whilst still affording the investors fair and equal treatment.126
What this means for firms like UFin and TurFin is that if they are located outside of City of London, the impact on the assets resulting from the loss of passporting rights have to be significant in order for their legitimate expectations to be frustrated and their FET rights breached. This requirement is based on the higher threshold set for infringement of legitimate expectations in the absence of specific assurances.127 Because UFin, in this case, is a retail
services firm, after losing its passporting rights it will be required under MiFID/MiFR to create branches in every EU Member States that it wants to offer its services in. The task of creating a branch in every Member State is quite burdensome for any investor; therefore, a significant change from having passporting rights due to high costs and damage to the business model. Consequently, a tribunal considering UFin’s claim will still have a
convincing argument for the violation of its legitimate expectations even in the absence of specific representations made to it.
The situation for TurFin (or other wholesale firms), on the other hand, is different. Being a wholesale services firm means after losing its passporting rights, it will be able to acquire a full EU passport for cross-border provision of its full range of services on the entire EU market once the UK has obtained the ‘equivalent’ status from the European
Commission.128 Securing such status should not be difficult because the UK’s regulations will be identical to what is required under EU law on day one of its departure from the EU.129 In these circumstances, TurFin will always have the issue of risk management because the European Commission can revoke an equivalence decision at any given moment under third country rules and regulation of the of finance industry across the border may diverge in the long-run. However, until this happens, TurFin will be able to continue its operation with relatively little impact. Thus, TurFin’s claim will not stand this test of proportionality in the absence of specific assurances because a change in the regulatory environment does not result in a drastic change that renders the entire wholesale business model obsolete, as is the case for retail services.
125 Charanne (n 22). 126 Eiser (n 23); Blusun (n 98). 127 Charanne (n 22); Electrabel (n 124). 128 Moloney (n 9) 112. 129 Ibid.
