UNIVERSITY OF AMSTERDAM
Brexit: reshaping or
settling international
investment law and
arbitration?
International Trade and Investment Law 2017/18
Supervisor: Dr. Hege Elisabeth Kjos27 July 2018
I hereby declare that the master thesis is a result of my own research and each statement has been acknowledged accordingly.
Abstract
When exploring the view that Brexit settles both international investment law and arbitration it becomes apparent that this is achievable if Britain relies on its advanced system of bilateral investment treaties (BITs). However the UK is still a member of the EU and through its membership and possibly future relationship with the bloc it can be argued that there is a possibility of reshaping these fields. The EU has now exclusive competence in concluding free-trade agreements and as a result Member States are expected to terminate their intra-EU BITs. After the Lisbon Treaty came into force they are required to seek the European Commission’s authorisation if they wish to conclude such BITs with third countries. The EU has proposed a new type of investment arbitration mechanism which will be part of its free-trade agreements. Such mechanism can now be found in CETA. Until Brexit takes place, the UK will be a member of the EU and the country will still be bound by EU law. Because of this it is possible that as an EU member, the UK might have to terminate its intra-EU BITs. The paper attempts to put forward arguments in support of Brexit settling and at the same time reshaping international investment law and arbitration.
Table of contents
1. Introduction 4
2. Overview of UK’s Investment regime 5
2.1. 1974 draft IPPA Model 5
2.2. 2008 draft IPPA Model 7
2.2. Interim conclusions 8
3. Investors and Brexit 9
3.1. UK investors abroad 9
3.2. Foreign Investors in the UK 11
3.3. Interim conclusions 12
4. Brexit and Arbitration 12
4.1. Investor-state arbitration and Brexit 13
4.2. Legitimate expectations under fair and equitable treatment 15
4.3. Interim conclusions 20
5. Brexit, the intra-EU and extra-EU BITs. 21
5.1. Intra-EU BITs 21
5.2. Extra-EU BITs 25
5.3. Reshaping international investment law and arbitration 27
5.4. Interim conclusions 28
Conclusion 28
1. Introduction
The UK has currently 95 bilateral investment treaties (BITs) in force, some of which are signed with other EU Member States1. These are known as intra-EU BITs. Given the
development of EU law and its approach towards intra-EU BITs following the Achmea2 judgment, the issue which arises is how Britain’s BITs with other EU countries will be affected and whether it will have to terminate them. EU law has also had an impact on the BITs Britain has signed or intends to sign with non-EU countries following the adoption of the Grandfathering Regulation.3 This in turn also raises the question whether the Brexit
process will reshape the international investment law system or this field will manage to withstand those changes and thus look even more settled.
Another aspect on which Brexit is relevant involves international investment arbitration. Given the EU’s view on investor-State arbitration there is a possibility that once Britain leaves the bloc, the country could become an attractive destination for investors. In order to get a better protection they could decide to restructure their investments so they could rely on Britain’s BITs. The EU has proposed a new dispute settlement mechanism known as Investment Court System (ICS) which it intends to use in its free-trade agreements. Already such mechanism can be found in CETA4. The aim of this mechanism is to address some of the
weaknesses in the traditional ISDS system. However the critics of this reform use Brexit in order to challenge it. Commentators suggest that post-Brexit Britain will be free to opt for a model that fits best the country’s needs. It is with no surprise that these commentators support the view that the UK should keep the traditional ISDS mechanism in its BIT programme. The thesis attempts to make the following findings. As far as the impact of Brexit on international investment law is concerned it appears that the UK’s system of BITs will not only survive the challenges of Brexit and the supremacy of EU law but it is also expected to play a more important role. Thus it could be argued that the system will look more settled. In relation to the second finding concerning arbitration, it will be demonstrated that Brexit can be used as a tool to defend the present arrangement of the ISDS mechanism. At the same time the thesis also puts forward arguments that Brexit could reshape both international investment law and arbitration. This can be best seen with the case of intra-EU and extra-EU BITs. In reaching these findings the thesis is structured as follows: first an overview of the UK’s investment programme is given and then the thesis examines the position of foreign investors in Britain and British investors abroad and how the whole Brexit process is expected to affect them. The following section will focus on arbitration. The first part of this section will show how Brexit could be used to address the present problems in the ISDS system and can actually be used as a tool to oppose future reforms. The second part of this section will focus on the
1 United Kingdom bilateral investment treaties available at <http://investmentpolicyhub.unctad.org/IIA/CountryBits/221> 2 Slovak Republic v. Achmea B.V. (Case C-284/16)
3 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries
likelihood of foreign investors bringing claims against the UK for having their legitimate expectations breached. The final section will explore the impact of Brexit and EU law on both intra and extra-EU BITs. The third part of this section will put forward arguments which support the idea of reshaping investment arbitration.
Brexit is a fast developing topic with commentators defending different views in relation to international investment law and arbitration. These commentators are closely linked or are part of the field of international investment law and arbitration. The sources include blogs, websites of law firms and media articles dedicated to investment law and arbitration. Other sources on which the thesis relies on include reports and studies conducted by different universities, think tanks, EU, and UK institutions. Each of these sources evaluates and makes predictions on the possible implications of Brexit and given that it is in an ongoing topic the thesis will follow the same pattern. As far as principles and theory are concerned the thesis relies on comments of scholars such as Denza, Schreuer, Glinavos and Brown. The primary sources include case law, BITs, Conventions, EU and domestic legislation.
2. Overview of UK’s Investment regime
The UK’s investment regime is regarded as one of the most advanced in the world. The country has currently 95 BITs in force. The aim of this section is to outline the development of the UK’s investment regime in order to introduce the reader to the importance of international investment law and arbitration in post-Brexit Britain. There are two fundamental moments of its development and that is why this section will first look into the 1974 model and in the next part it will cover the 2008 model. The 1974 IPPA5 draft was the first UK
Model Arrangement6. Since the beginning of the UK’s IPPA programme, the draft Model has
not been subjects to many revisions. However in 2008, a new IPPA Model was published7. As
it will be seen in the second part this section, the model text has not been subject to significant changes8. The aims of this section is to show how this model has become so advanced and
establish the important role of international investment law in the UK before the thesis moves on to find that Brexit is not expected to affect this regime.
2.1. 1974 draft IPPA Model
In 1971, the UK Government published a paper where it announced its intention to prepare a draft IPPA Model and seek negotiations with developing countries9. This model was prepared
by the Foreign and Commonwealth Office and was published in 197210. One of the reasons
that led to the developing of a strategy of negotiating BITs was the weak influence that the
5 Investment Promotion and Protection Agreement
6 Eileen Denza, Investment Protection Treaties: United Kingdom Experience’’, The International and Comparative Law Quarterly Vol. 36, No. 4 (Oct., 1987), pp. 908-923, 910
7 ibid 708 8 ibid 705
9 Chester Brown, Commentaries on Selected Model Investment treaties, Oxford University Press, 2013, 702 10 ibid
UK and other OECD’s countries in the UN General Assembly had at the time11. When the
UK formulated its draft Model IPPA in 1974, it relied on the 1967 OECD Draft Convention of Foreign Property and the 1965 ICSID Convention12. Its main objectives were to facilitate
and encourage the entry of British foreign direct investment (FDI) in other countries and provide high standards of investor protection including fair and equitable treatment of UK investors13. In return Britain offered the same standards to its Contracting Parties. Other aims
were to provide legal protection regarding transfers of funds and adequate compensation in case of expropriation14. A third objective was to guarantee the right of investors to present
their case to international arbitration should a dispute arise with the host country15. Those
main objectives were the leading principles of the first UK draft Model IPPA.
The draft model was inspired by the texts German and Swiss Model BITs16 which at the time
were considered to be the most advanced models because they managed to withstand economic and political pressures17. After the adoption of the UK Model Arrangement the
country signed its first BIT with Egypt in 197518. This BIT illustrated how the UK Model was
inspired by the Swiss one. An example can be found with the definition of the umbrella clause in Article 2(2) of the UK-Egypt BIT which provides that ‘each host state will observe obligations with regard to investments of nationals or companies of the other contracting party’. In the Swiss-Philippines BIT19, Article X(2) states that ‘each Contracting Party shall
observe obligations and interests with regard to specific investments in its territory by investors of the other Contracting Party.’ The similarity between the umbrella clause provisions was noted in Joey Mining20 where the ICSID tribunal adopted the narrow test of the SGS v Pakistan21. The tribunal ruled that the parties need to induce clear and convincing evidence to elevate the level of breach of contract to that of a treaty breach22. In Joey Mining,
the ICSID tribunal followed the narrow approach from SGS v Pakistan to rule that the Egyptian state interfered with the company’s contractual rights23. Through these two
decisions, which applied the same test, the similarity of the provisions on the umbrella clause in the Swiss-Philippines and UK-Egypt BITs can be seen24.
11 Dr Andrew Walter, British Investment Treaties in South Asia: Current Status and Future Trends, Report Prepared for the International Development Center of Japan, January 2000, 9
<http://personal.lse.ac.uk/wyattwal/images/British.pdf> 12 Ibid 10 13 Ibid 14 Ibid 15 Ibid 16 Brown (n9) 702 17 Denza (n6) 910
18 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt ., for the Promotion and Protection of Investments, London 11 June 1975
19 Agreement between The Republic of the Philippines and The Swiss Confederation, 1997
20 Joy Mining Machinery Ltd v Egypt (ICSID Case No ARB/03/110) 6 August 2004 Award on Jurisdiction 21 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13 (6 August 2003, Decision of the Tribunal on Objections to Jurisdiction)
22 para 166 23 paras 81-82
24 Yuval Shany, Contract Claims vs. Treaty Claims: Mapping Conflicts Between Icsid Decisions on
835-As far as the UK-Egypt BIT is concerned it was the first to be signed and entered into force on the same day. It coincided with the new UK model arrangement with Singapore25.
Following the adoption of the UK’s IPPA program, the conclusion process of new treaties was slow26. This was due to the fact that most of the development countries were reluctant to
make the same commitments as they did in the 1960s when they concluded BITs with Germany and Switzerland27. Another reason for the slow process was that the perception of
the developing countries that BITs involved unilateral commitments in practice28. Even
though the commitments in those agreements are intended to be reciprocal, the practice suggests that it is less likely for a developing country to make a foreign investment in a developed country29. This was also in the case of the UK which is more likely to make
foreign investment in the territory of the other Contracting Party with a status of a developing country. Despite the slow progress of concluding investment treaties, the UK has signed 108 BITs, 95 of which are in force30 . Moreover it has to be noted that the UK started to develop
its IPPA system at a time when the country joined the EU. The 1974 Model paved the way for an advanced programme aiming to attract investments. In order to keep its programme and potentially develop it the UK decided to reform its model BIT in 2008. The next part of this section will focus on how the 2008 Model BIT has built on the 1974 one.
2.2. 2008 draft IPPA Model
Just like the 1974 model IPPA, the 2008 one provides that the UK and the other Contracting Party aim to create favourable conditions for greater investment by nationals of one State in the territory of the other State31. The preamble further goes on to state that recognising the
encouragement and reciprocal protection under international agreement of such investments will be conductive to the stimulation of individual business initiative and will increase prosperity in both States.
Another aspect on which the 2008 Model IPPA does not depart significantly from the 1974 model can be illustrated with the definition of the term investment. Despite some minor changes, the definition of the term investment remained broad32. For example Article 1(a) of
the 2008 Draft Model IPPA provides that investment means ‘every kind of asset, owned or controlled directly or indirectly’. If reference is made to Article 1(a) of the UK-Egypt BIT from 1975, it can be observed that the term investment means ‘every kind of asset and in particular though not exclusively it can include moveable and immovable property, shares, stock and debentures, claims to money, intellectual property and business concessions.’ It
25 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Singapore for the Promotion and Protection of Investments, 1975
26 Brown (n9) 704 27 ibid 28 ibid 29 ibid 30 ibid 704 31 UK Model BIT (2008) <http://investmentpolicyhub.unctad.org/Download/TreatyFile/2847> 32 ibid 711
appears that the slight difference of the definition of the term investment can be found with the inclusion of ‘directly’ or ‘indirectly’ in the 2008 Model IPPA33.
What makes the UK draft model IPPA so distinct from other Model BITs can be illustrated with reference to Article 5(2) which was also included in the 1974 Model IPPA34. The
provision deals with expropriation and it provides that when a ‘Contracting Party expropriates assets of a company of the other Contracting Party, the provisions of Article 5(1) will apply in order to guarantee prompt, adequate and effective compensation in respect of investments made by nationals or companies of the other contracting party’. In the commentary to draft Model IPPA it is mentioned that this provision is necessary because Article 1 provides a wide definition of the term investment which also includes shareholdings in locally incorporated companies35. In an event of an expropriation, what is expropriated are the shares of the
company36. The importance of this provision is that it reflects a principle, endorsed in the
Barcelona Traction37 case by the International court of Justice38. This principle requires that a
party expropriating one of its own companies in which nationals or companies of the other party own shares must apply these principles in order to guarantee prompt, adequate and effective compensation to these shares39.
One of the most interesting features of the UK’s IPPA programme relates to the provisions on investor-state arbitration. Through its IPPA programme the UK has created a regime which is very friendly towards foreign investors in the country. This in turn could serve as an advantage for the country following the withdrawal from the EU. Without doubt Britain will need to cope with the challenges of the new beginning and this is where the IPPA programme becomes relevant. Although it has been classified as one of the most advanced systems in the world, some commentators expressed concerned that following Brexit, foreign investors could revert to treaty shopping40. In such cases investors could establish the so-called ‘shell’
companies which are entities with no real economic activities in order to benefit from the UK’s investment treaties41. Such cases are not unknown and this can be witnessed with the
fact that law firms in the field of international investment law and arbitration are advising their clients to take BITs into account when planning their investments42.
2.2. Interim conclusions
The UK’s IPPA programme is regarded as one the most successful mechanisms in the world and thanks to the conclusion of more than 100 IPPAs, 95 of which are in force; the country has every right to believe that it can position itself on the international scene following Brexit. Considering the wide application of these treaties, it is expected that the IPPA programme will not only meet the challenges of Brexit but also the country could further build up on what it has achieved. In other words it is likely that Brexit can strengthen the role of the BITs. The
33 ibid 712 34 ibid 738 35 ibid 36 ibid
37 Case Concerning Barcelona Traction, Light, and Power Company, Ltd [1970] ICJ 1
38 Denza (n1) 912 39 Ibid
40 Trade Justice Movement, Worried About UK BITs? The case for reviewing UK investment protection provisions, p17
< https://www.tjm.org.uk/documents/reports/Worried_about_your_BITS_report__FINAL.pdf> 41 ibid
UK will aim to keep its BITs in order to attract foreign investors and thus re-establish itself on the international scene following its departure from the EU. Investment, be it foreign or outward is expected to play a major role for the economy of post-Brexit Britain. The position of foreign and British investors abroad will be considered in the next section.
3. Investors and Brexit
The dominant view is that the UK will rely heavily on its investment treaty programme once it leaves the EU in order to protect investors and attract new ones. From this the thesis will go on to show that international investment law is expected to play a major role in Britain’s life. This in turn opens the possibility of taking the view that Brexit could potentially settle the international investment law system. But as the section goes on, it will point out some of the concerns among foreign investors in the UK. This in turn will raise the question on what they can do to in order protect their investment. One possible action involves the possibility of bringing claims against the UK. However this will be part of the following section which will build on this one.
3.1. UK investors abroad
Following the EU referendum there have been many concerns as to how leaving the EU will affect UK investors abroad. It has been suggested by leading politicians that Brexit is an unique opportunity for British investors who would like to invest abroad43. The section will
attempt to explore if leaving the EU will actually put potential UK investors abroad in a better or a worse position than their current one.
According to trade secretary Liam Fox, outward direct investment is often regarded as a ‘fig leaf for outsourcing jobs and cutting jobs for British workers but it can also bring benefits to the UK economy’44. It appears that the country is the third largest outward investor in the
world after the US and Germany45. According to the trade secretary, outward foreign direct
investment is important for several reasons46. One reason is that outward investment would
be good for the UK’s bank balance and supporting it would help rebalancing the UK’s bank position47. Another reason is that by investing abroad, the British companies are expected to
be better off because it increases competitiveness and productivity. Moreover it allows UK companies to pick up new technologies and British brands could also become global ones48.
This in turn could lead to growth of UK businesses and enhance the reputation of those
43 Dr Liam Fox MP, Supporting overseas investment by British companies can bring vast benefits to the UK
BrexitCentral (19 September 2017)
<https://brexitcentral.com/supporting-overseas-investment-british-companies-can-bring-vast-benefits-uk/> 44 ibid
45 Foreign direct investment, net outflows
<https://data.worldbank.org/indicator/BM.KLT.DINV.CD.WD?locations=GB-DE-US-FR> 46 Dr Liam Fox (n35)
47 ibid 48 Ibid
businesses. Last but not least this can form the basis of an increased international trade49. By
supporting UK investment abroad, the government hopes to re-position the country on the international scene. Therefore supporting increased British investments abroad will be a central task50. Without doubt this appears as a very optimistic position and it provides hope for
the British businesses. However, the UK business sector does not appear as optimistic as the government.
It appears that the position of British business is pessimistic. According to a survey, 100 of the UK CEOs are considering relocation after Brexit51. The government’s expectations that
Brexit will boost British foreign investment abroad may not reflect the reality. Many UK businesses are keen to move to Dublin because as an EU member, Ireland could become an attractive alternative52. Through Ireland’s membership of the EU, those businesses can seek an
opportunity to access the European market. The idea of Brexit helping UK businesses to expand abroad and grow is without doubt a noble cause. But the reality is that expanding into new markets is a slow, costly and risky process53. Building a global Britain involves
strengthening ties with non-EU countries as well. The European economies are relatively similar to the UK one and already there are strong and developed ties between the EU and the UK54. As far as UK’s ties with non-EU countries are concerned, the country will have to first
revive, build and deepen those ties55.
For a global Britain, the EU will still remain an important partner. Currently the bloc is the UK’s biggest market even in terms of outward investment56. This represents a huge challenge
if the country wishes to reposition itself. In terms of population and productive capacity, the EU is much larger than the UK. So in case of a no deal Brexit, it is likely that the EU will treat the UK as a third country57and this can lead to a greater number of restrictions that can
affect the UK businesses. But this does not automatically mean that the UK businesses will suffer. At first sight it might appear that British businesses will be making investments at higher costs in EU countries58. However there are commentators who took the view that the
increased costs on the outward foreign direct investment could lead to increased investment in intangible capital which is deployed in UK subsidiaries across the EU59. Whether British
investors abroad could benefit from Brexit is something which remains to be seen in the years to come. The same can be said about foreign investors in the UK. Their situation will be explored in the next part of this section.
49 ibid 50 ibid
51 2016 CEO Outlock: a perspective for Brexit and beyond, KPMG 2016
<https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2016/10/KPMG-100-UK-CEOs-Survey-Commentary-2016.pdf>
52 International Investment After Brexit: Opportunities for Sweden, Business Sweden (December 2016), 9 53 Swati Dhingra, Gianmarco Ottavian, Veronica Rappoport, Thomas Sampson & Catherine Thomas, UK trade and FDI: A post Brexit perspective. Pap Reg Sci. 2018;97:9–24, 12‐
<https://doi.org/10.1111/pirs.12345> 54 ibid
55 ibid 56 ibid
57 Fiona Maxwell, EU finance official: UK will have to survive as third country, Politico (8 February 2018) 58 Ellen R. McGrattan & Andrea Waddle, The Impact of Brexit on Foreign Investment and Production, Staff report 542 (Revised February 2017), 2
3.2. Foreign Investors in the UK
The case of foreign direct investment in post-Brexit Britain is also of great concern. When the country leaves the EU, there is a risk that foreign direct investors in the UK can suffer significant losses. Prior to the Brexit referendum it was reported that leaving the EU could lead to a fall of foreign direct investment by 22%60. This can be supported with an empirical
analysis under which the undesired outcome was predicted61. Without doubt such data is of
concern but it needs to be taken with caution because this research was conducted prior to the referendum and at the time there were many unknowns. Furthermore many expected that the referendum will produce a different outcome. Following the referendum and the commencement of the withdrawal procedure, more research regarding the impact of Brexit has been conducted. What is interesting about this research is that it points to a less optimistic outcome as regards the position of foreign investors in post-Brexit Britain.
To date it does not seem that the Britain’s withdrawal from the EU has had devastating consequences on foreign direct investment. On the contrary, it can be observed that there has not been a dramatic collapse of foreign investment following the EU referendum62. It has been
reported that there has been a strong interest among North American investors to increase foreign investment in the UK63. A year after the Brexit referendum, it was observed that the
UK attracted a record amount foreign investment64. In short term, it appears that the biggest
fears of Brexit leading to dramatic fall of foreign investment did not come true. Despite leaving the EU within less than a year, the UK is still the most attractive location for foreign investment65. According to statistics, London continues to be a more attractive destination for
investment in the financial sector than Paris and Frankfurt66. Moreover the US and China are
among the biggest sources of foreign direct investment in financial services67. According to
the US Chamber of Commerce for example, the US is the largest investor in the UK by investing nearly $ 600 billion68.
Despite the fact that Brexit has not had an impact on foreign direct investment so far, it has to be noted that the country has not left the EU yet. Once it leaves, there will be a transition period which will last until 31 December 2020. During this period the current arrangement will remain. This raises the argument that increasing numbers of foreign investment which
60 Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen, The impact of Breixt on foreign investment in the UK, PaperBrixt 03 (April 2016), 3
<http://cep.lse.ac.uk/pubs/download/brexit03.pdf> 61 ibid 7
62 Signs of a Brexit impact on UK foreign direct investment, EY (29 March 2018)
<http://www.ey.com/uk/en/newsroom/news-releases/18-03-29-signs-of-a-brexit-impact-on-uk-foreign-direct-investment>
63 ibid
64 UK landed record foreign investment in year of Brexit vote Reuters (1 December 2017)
<https://uk.reuters.com/article/uk-britain-economy-investment/uk-landed-record-foreign-investment-in-year-of-brexit-vote-idUKKBN1DV4EI>
65 Ben Martin, UK remains Europe’s top destination for foreign investment in financial services, The Telegraph (30 June 2017)
<https://www.telegraph.co.uk/business/2017/06/29/uk-remains-europes-top-destination-foreign-investment-financial/>
66 ibid 67 ibid
68 US Chamber of Commerce, U.S.-UK Trade and Investment Ties
can be seen in the UK do not necessarily give reason for optimism simply because the impact of Brexit is still not visible. Those who oppose Brexit could well induce the argument that the rise of foreign direct investment is because of the decreased value of the sterling following the referendum result. According to the Office of National Statistics, sterling depreciation is one of the reasons of the increased value of foreign investment in the UK69. Indeed, there has been
an increase of foreign investment since the Brexit referendum. Even though the Brexit process is underway, Britain is still a member of the EU. It has been suggested that it is the EU membership which formed the basis of the increasing amount of foreign investment in the UK70.
3.3. Interim conclusions
For many years the UK has been a top destination for foreign investors. The country has created a business friendly atmosphere and this situation is likely to remain once the country leaves the EU. Moreover it is expected that Britain will create an even more business-friendly environment so it can continue to attract foreign investments. As already mentioned, senior UK politicians believe that Brexit represents a new opportunity for the country to encourage British investors to expand their businesses globally. Only time can show whether this will be the case. However the concerns among foreign investors remain and it remains to be seen what actions they could take. There is a possibility that some of them might wish to bring claims against the UK. The way in which Brexit interacts with arbitration together with the possibility of investors bringing claims against the UK will be explored in the next section.
4. Brexit and Arbitration
As Brexit is fast approaching one of the most discussed issues relates to its impact on arbitration. Already some law firms have advised foreign corporations to sue the UK if the country’s exit from the EU hurts their business interests71. Another impact involves the
international investment arbitration system itself. It has already been suggested that Brexit is an opportunity to preserve the current arrangement of the ISDS system as it is72. For example
some investment lawyers take the view that the process of appointing arbitrators should be kept and in particular the parties of the dispute should be able select them. What Brexit does is to echo the debate of whether the ISDS system requires reforms or it should be kept as it is. The first part of this section will attempt to explore whether the decision to leave the EU could either form the basis of settling investor-state arbitration or the system will head towards a new direction. Once it has been established that Brexit is an opportunity on the one hand to settle the ISDS and on the other hand to serve as a tool to reshape the system, the next
69 UK foreign direct investment: trends and analysis: Summer 2017, Office for National Statistics
<https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ukforeigndirectinvestmenttrend sandanalysis/summer2017#foreign-direct-investment-in-2016>
70 EU Membership and FDI, Unclassified report 6
<https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/220966/foi_e umembership_fdi.pdf>
71 Corporate Europe Observatory, Brexit bonanza: Lawyers encouraging corporations to sue UK & EU member state. International Trade, 25 September 2017
< https://corporateeurope.org/international-trade/2017/09/brexit-bonanza-lawyers-encouraging-corporations-sue-uk-eu-member-states>
part of this section will consider the possibility for foreign investors to bring claims against the UK and the likelihood of such claims to succeed. Commentators observe that most investors build their claims on the grounds that their legitimate expectations under fair and equitable treatment have been violated. Therefore the thesis will consider whether investors could raise such claims.
The thesis takes the view that such claims are unlikely to succeed given that arbitral tribunals have recognised on various occasions that the host state is within its right to make changes of its regulatory framework. This will be illustrated with the case of Spain which as a result of its exercise of sovereign powers was forced to defend a vast amount of claims. After all the arbitral tribunals have stated on various occasions that balance should be struck between the right of investors to structure their investments and the power of the host state to change its regulatory framework. Through this, the section will have concluded that the case of Brexit is unlikely to differ should the country is forced to defend an avalanche of claims. This way it can be established that international investment arbitration together with the international investment law system could appear more settled.
4.1. Investor-state arbitration and Brexit
Although at this stage it cannot be said how Brexit is expected to affect the future of investor-state arbitration, some commentators believe that the ISDS reform should be avoided. So far these voices come from investment lawyers. Furthermore some of them believe that Brexit should be used as a tool to prevent such reforms73. Some of these reforms involve the proposal
of the European Commission for the creation of an Investment Court System (ICS). Such system is to be found in CETA. Before addressing the concerns among investment lawyers it is necessary to outline some of the main features of the ICS and how it departs from the traditional ISDS mechanism. Afterwards the arguments which oppose this system will be addressed in order to see how Brexit could be used to support the current ISDS arrangement. The idea of a ICS dispute mechanism involves the creation of a permanent court instead of ad hoc arbitral tribunals74. It represents a domestic and international court-like dispute settlement
mechanism which although will have similar features with domestic and international courts, it would be bound by rules of arbitration such as the ICSID Convention and UNCITRAL Arbitration Rules75. What is interesting about this system is that it consists of a first instance
Tribunal and an Appellate Tribunal76. The purpose of this two tier system is to improve
transparency and reduce cost of arbitration77. These are issues which are relevant in the
traditional ISDS system. Another feature of the ICS mechanism involves the inclusion of a time limit for a Tribunal to issue a final award78. An example of an ICS mechanism can be
found in CETA. What is significant with the ICS mechanism in CETA is the greater
73 ibid
74 Hyoeun Yang, The EU's Investment Court System and Prospects for a New Multilateral Investment Dispute Settlement System (October 12, 2017). KIEP Research Paper No. Policy References 17-06, p45
< https:// https://ssrn.com/abstract=3063843> 75 ibid
76 ibid 77 ibid 46 78 ibid
regulatory power given to both EU and Canada. According to Article 8.9.1., EU and Canada ‘reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity’.
Without doubt one of the most fundamental changes in the history of investor-state arbitration involves the creation of an Appellate Tribunal which was given powers to review awards. According to Article 8.28.2 CETA the Appellate Tribunal ‘may uphold, modify or reverse the Tribunal's award based on:(a) errors in the application or interpretation of applicable law; (b) manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law;(c) the grounds set out in Article 52(1) (a) through (e) of the ICSID Convention, in so far as they are not covered by paragraphs (a) and (b). The new ICS which the EU intends to use in its free-trade agreements represents a major change in the ISDS system. However some commentators have taken an opposite view and through Brexit they establish arguments which give preference to the present arrangement of the ISDS system.
Another aspect on which the ICS mechanism differs from the traditional ISDS one relates to the appointment of arbitrators. Under the ICS mechanism the arbitrators are publicly selected79. In the case of CETA the tribunal consists of 15 arbitrators. Article 8.27 provides
that five of them are EU nationals, five are from Canada and the remaining five are third country nationals. The provision goes on to state that the Chair of the proceedings should be a third party national.
However this reform has not been welcomed by all sides. Some lawyers take the view that the advantage of international investment arbitration lies with the fact that it is regulated at an international and not at an EU level80. They note that the two fundamental features of
investor-state arbitration include enforcement of arbitration agreements and arbitral awards81.
Once the UK leaves the EU, the country will still be a member of ‘The New York Convention’82. Thus arbitral awards can be enforced in every Contracting Party to the
Convention and as long as the UK is a party to the Convention, such arbitral awards will continue to be enforceable in Britain.
Other commentators have taken the view that the present ISDS system will actually work better for post-Brexit Britain because it can serve as a tool of attracting foreign investors in the country83. As a non-EU member the UK will be able to choose a model which will best fit
its needs. It could be that Britain may not wish to follow the EU’s intended approach to adopt the ISC mechanism in its future free-trade agreements. Without doubt the EU’s ISC system has its advantages but its development will require significant financial investment84. As the
ISC mechanism aims to pursue greater transparency, it includes various grounds for appeal of
79 Ibid 50
80 Shearman & Sterling, Brexit: Potential Implications for International Arbitration in London, 18 October 2016 < https://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/10/Brexit-Potential-Implications-for-International-Arbitration-in-London-IA-10182016.pdf>
81 ibid
82 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York on 10 June 1958
83 Crowell& Moring, Legal Considerations for the U.K.’s Investment and Trade Treaties after Brexit. 28 September 2016
< https://www.crowell.com/NewsEvents/AlertsNewsletters/all/Legal-Considerations-for-the-UKs-Investment-and-Trade-Treaties-After-Brexit>
84 Edward E. Poulton & Richard Allen, Silver Linings Playbook: The potential upside of Brexit for investment treaty arbitration, Global Arbitration News. 1 September 2006
an arbitral award as opposed to the limited grounds of annulment under the ICSID Convention85. This in turn could lead to prolonged proceedings and therefore such system
would be less attractive86. Finally, it has also been observed that despite the changes of the
procedure of appointing arbitrators the ISC mechanism could still give the potential claimants greater rights by allowing them to attack different regulations. That is why some commentators have described this mechanism as ‘zombie ISDS’87
As it can be seen, Brexit can serve as a tool which allows establishing arguments for the maintaining of the present ISDS system. Another important lesson from Brexit is that Britain’s departure from the EU is not expected to influence arbitration when it comes to enforcement of arbitral awards in the UK. After all the country will still remain a Party to ‘The New York Convention. However this does not mean that the concern of foreign investors in the UK will not be relevant. Many of them have structured their investments and had expectations that the country’s membership to the EU will also bring them benefits. That is why the next part of this section will attempt to explore the possibility of bringing claims on the grounds that the UK violated the investors’ legitimate expectations under the fair and equitable treatment.
4.2. Legitimate expectations under fair and equitable treatment
In PSEG v Turkey88, the Tribunal observed that the standard of fair and equitable treatment ‘has acquired prominence in investment arbitration as a consequence of the fact that other standards traditionally provided by international law might not in the circumstances of each case be entirely appropriate.89’ Regarding the fair and equitable standard the Tribunal also
said that its role ‘changes from case to case, it is sometimes not as precise as would be desirable. Yet, it clearly does allow for justice to be done in the absence of the more traditional breaches of international law standards. This role has resulted in the concept of fair and equitable treatment acquiring a standing on its own’90. It has been observed that the fair
and equitable standard is linked to the notion of fairness and the universally accepted sense of justice.91 At the beginning the meaning of the notion varied from country to country. It has
been suggested that the countries from the global north have opted for a wider approach while countries from the global south preferred a narrower approach. 92 But there were still
exceptions to this. For example the US has adopted the narrow approach given that ‘the country as a respondent has become concerned about the need to defend cases which concern inward investment.’93 Over the years the divisions between north and south regarding the
different perceptions of the term ‘fairness’ have diminished and as a result there is now a
85 ibid 86 ibid
87 Pia Eberhardt, The zombie ISDS – rebranded as ICS, rights for corporations to sue states refuse to die. March 2016, p5
< https://corporateeurope.org/international-trade/2016/02/zombie-isds>
88 PSEG Global, Inc., The North American Coal Corporation, and Konya Ingin Electrik Üretim ve Ticaret
Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, 4 June 2004, Decision on Jurisdiction
< https://www.italaw.com/cases/880> 89 para 238
90 para 239
91 Elihu Root, The Basis of Protection to Citizens Residing Abroad, 4 AM. J. INT’L L. 517, 521-22 (1910) 92 Rudolf Dolzer, Fair and Equitable Treatment: Today's Contours, 12 Santa Clara J. Int'l L. 7 (2014). 13 <http://digitalcommons.law.scu.edu/scujil/vol12/iss1/2>
more widely recognised view on fairness.94 This view is reflecting in all BITs which include
the fair and equitable treatment.95 However the role of the fair and equitable treatment in the
UK’s BITs appears to be of considerable interest.
In order to explore the UK’s approach it is necessary to explore situations when the standard arose in investment treaty claims.96 In such cases it is about whether the standard offers a
greater protection to investors.97 Brown observes that the commentary to the 1972 draft IPPA
model does not offer a clear answer on the matter.98 However there have been studies which
suggested that the fair and equitable treatment in fact did provide a greater protection to foreign investors. For example in his study on the fair and equitable treatment, Mann argued that the standard provides a greater protection than the one under customary international law99. According to him fair and equitable treatment envisages a conduct which goes beyond
the international minimum standard and it affords a greater protection than any other previously employed form of words100. Taking into account Mann’s study it can be said that
the UK’s investment treaties offer a greater standard of protection when it comes to the fair and equitable treatment.
However the relationship between the fair and equitable treatment and other standards in the UK BITs is also of significant importance101. Article 2(2) of the UK-Egypt BIT provides that
‘Investments of nationals or companies of either Contracting Party shall all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.’ This provision and the relationship with other standards of protection were discussed by the Tribunal in Wena Hotels Ltd v Egypt102. In this case the ICSID Tribunal analysed ‘fair and equitable treatment’ and ‘full protection’ and security standards together and observed that Egypt violated them even though the state did not participate directly in the seize of the hotels103. This was done by the Egyptian Hotels
Company and the tribunal observed that sufficient evidence has been induced in establishing that the Egyptian State was aware of the actions104. But it has to be noted that not all BITs the
UK has signed regard the fair and equitable treatment and ‘full protection and security’ standards together. Brown observes that UK-Colombia BIT105 for example regards the fair and
equitable treatment’ as a separate standard. 106 Article 2(4)(c) of the UK-Colombia BIT
provides that ‘A determination that there has been a breach of another provision of this Agreement or another international agreement does not establish that the obligation to accord fair and equitable treatment has been breached’.
The role of the fair and equitable standard is expected to play a major role for the UK because of the country’s departure from the EU. This is due to the growing concerns among foreign
94 ibid 95 ibid 16
96 Brown (n9) 721 97 ibid
98 ibid
99 F A Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52 British Yearbook of International Law 241, 244
100 ibid
101 Brown (n9) 723
102 Wena Hotels Ltd v Egypt (ICSID Case No ARB/98/4, Award of 8 December 2000) 103 para 84
104 ibid
105 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Colombia for the Promotion and Reciprocal Protection of Investments,
investors in Britain. Some of them have established themselves in the UK not only because of the favourable conditions there but also because the country is an EU member. This in turn gives those investors greater opportunities for their businesses. More importantly when signing BITs, the UK has made commitments. For example Article 2(2) of the UK Model BIT provides that ‘Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party…’. Therefore the issue that arises is whether the UK is breaching such commitments with its decision to leave the EU. If that is the case then foreign investors might feel the need to initiate investment claims against the UK.
But it has to be noted that currently there is a division as regards the likelihood of such claims to succeed. It has been suggested that foreign investors could initiate treaty claims against the UK and establish that the country has breached the fair and equitable treatment standard by failing to maintain a stable legal standard.107 In order to illustrate whether such claims are
likely to succeed, the position foreign investors in the financial sector will be considered. It has been suggested that the fair and equitable standard is the best tool to challenge major changes in a legal framework108. The likelihood of foreign investors wishing to submit such
claims increases with the fact that there have already been successful cases against Spain and Argentina109. Moreover such claims arose after relatively modest changes of their legal
framework110. The possibility of such claims to succeed is presented through a case study by
Glinavos who explores this option through a hypothetical scenario of a no-deal Brexit.111 The
case study involves a Mexican bank which operates from London. The Mexican bank chose London thanks to the so-called passporting rights. These rights authorise firms to carry out activities in any EU country with minimal additional authorisation112. The bank relied on the
UK-Mexico BIT113 signed in 2006. If Britain leaves the EU without a deal, it is expected that
the UK will lose passporting rights and thus foreign banks, such as the one from Mexico operating in London will suffer significant losses. If however the bank wishes to bring a claim against the UK, it could invoke the provisions on investor-State arbitration proceedings in the UK-Mexico BIT. However several factors will need to be taken into account.
One of these factors involves the role of the sovereign acts of the UK. This factor is more problematic and more difficult to establish because leaving the EU with a no-deal does not amount to an act which is attributable to the UK only114. Glinavos observes that it is likely that
failure to secure a deal will be regarded as a political and not an investment issue by the Tribunal when it assesses the claim.115 That is why potential actions against the UK will have
to be assessed on the basis of the British Government violating legitimate expectations of the foreign investors.
107 Amy Billing, Brexit: impact on dispute resolution, Energy Source, issue 19, 19 December 2017 < https://www.ashurst.com/en/news-and-insights/insights/brexit-impact-on-dispute-resolution/>
108 Ioannis Glinavos, Brexit, the City and Options for ISDS, ICSID Review, Vol. 0, No. 0 (2018), pp. 1–26, 2 109 ibid
110 ibid 111 ibid 4
112 Bank of England
< https://www.bankofengland.co.uk/prudential-regulation/authorisations/passporting>
113 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Mexican States for the Promotion and Reciprocal Protection of Investments (Signed 12 May 2006, entered into force on 25 July 2007)
114 Glinavos (n108), 8 115 ibid
In theory the Mexican bank could establish an argument that leaving the EU without a deal is a breach of the fair and equitable standard. What will form the basis of this argument according to Glinavos will not be the sovereign act of the UK to leave the EU but the fact that BITs put a price for the exercise of such acts. 116
As far as legitimate expectations are concerned, it is important to note that they can be created by explicit undertakings on the part of the host state in contracts and also by undertakings of a more general nature117. An important source for legitimate expectations will be the legal
framework provided by the host state118. Therefore the state of the law of the host country will
be of great importance to the investor119. As long as the law of the host state is transparent and
does not violate minimum standards, it will be very difficult for an investor to convince a tribunal that a proper application of the law leads to expropriation120. If this is applied to the
case of Brexit, it can hardly be concluded that there has been a lack of transparency in the process of EU withdrawal. Leaving the EU will require changes in the UK’s legal system but this does not automatically lead to the violation of such legitimate expectations. There will not be a violation if the changes in the legal system are within the boundaries of normal adjustments customary to the host state and accepted in other states121. Moreover such
potential changes should be predictable for the foreign investor at the time of investment122.
Applying this to the case of Brexit, it might be argued that leaving the EU is predictable for a foreign investor. This can be witnessed through the fact that since the Thatcher Government, there has been a strong movement in British politics which has been supporting the idea of leaving the EU. In the past eight years the calls for a referendum on the EU membership increased and it became clear that after renegotiating the membership of the EU, the Government would call a referendum where people would have their say. This was even part of the Conservative Party’s election manifesto for the 2015 General Election where it was made clear that after renegotiating Britain’s membership with the EU, an in-out referendum will be held123. All these acts represent point to a high level of transparency. Therefore this
leaves enough room for an investor to predict the outcome of a possible negative result and adjust his plans. Bringing claims against the UK on the grounds that Brexit breaches legitimate expectation are likely to fail. Commentators observe that if at time of investment investor fails to take into account the economic, historical and political environment in the host state, a claim based on legitimate expectations is unlikely to succeed124. This point was
also raised in Saluka Investment BV (The Netherlands)125 where the tribunal observed that ‘that whatever assurance the Minister of Finance may have given, he could not bind future Governments…’126.
116 ibid 12
117 Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law (2nd Edition), OUP Oxford, 15.11.2012, 115 118 ibid 119 ibid 120 ibid 121 ibid 122 ibid
123 Conservative Party Manifesto 2015, 72 < https://www.conservatives.com/manifesto2015>
124 Yenkong Ngangjoh Hodu, A Critique of the Legitimate Expectations Doctrine in Investment Treaty Arbitration, EJIL: Talk!, 16 September 2013
< https://www.ejiltalk.org/a-critique-of-the-legitimate-expectations-doctrine-in-investment-treaty-arbitration/> 125 Saluka Investments B.V. v. The Czech Republic, UNCITRAL Partial Award 2006
However there is a possibility to introduce an argument that legitimate expectations of foreign investors in the UK could be breached. For example certain car manufacturers from Japan have decided to invest in the UK because thanks to the EU membership, produced cars can be sold anywhere within the EU and there is no need to pay duties. Those investors chose UK because they had legitimate expectations that thanks to the EU membership, the products could access the European market127.
In the event of a no deal Brexit, goods produced in the UK will have to be subject to duties if they are to enter the EU. This in turn could make the products more expensive and less attractive. The UK is aware of this possible outcome and that is why it aims to reach a deal with the EU in an attempt to avoid such scenario. This way such a major change could address the concerns of foreign investors128. It will also prevent the possibility of a violation
of the fair and equitable treatment standard129. These acts can in turn strengthen UK’s position
if the country is forced to defend claims.
So far changes of the legal framework which resulted in treaty claims involve the cases with Argentina, Spain and Cyprus130. For example with the case of Spain it has been observed that
it is ‘the closest example of a Western developed economy having faced an avalanche of ISDS claims due to significant changes in regulatory conditions’131. Even though the facts that
led to avalanche of claims against Spain are different from those of Brexit, the Spanish example shows how arbitral tribunals have dealt with a vast amount of claims as a result of major changes. From this example the thesis will attempt to explore the likelihood of claims being brought against the UK.
Another reason why Spain will be considered is because it is the country that has faced the highest number of claims under the Energy Charter Treaty.132 As of July 2018 there are 40
claims against Spain.133 Some of these cases such as Charanne134 involved new regulatory measures which raised the issue of weather investors’ legitimate expectations under the fair and equitable treatment have been violated. In finding that such measures did not breach the investors’ legitimate expectations the SCC Tribunal observed that ‘the Claimants could not have the legitimate expectation that the regulatory framework established by RD 661/2007 and RD 1578/2008 would remain unchanged for the lifetime of their plants. Admitting the existence of such an expectation would, in effect, be equivalent to freeze the regulatory framework applicable to eligible plants, although circumstances may change…’135 Moreover
the Tribunal noted that ‘the jurisprudence of the highest Spanish judicial authorities had clearly established, prior to the investment, the principle that national law allowed to make changes to the regulation.’136 The decision in Charanne gives important lessons for the
arbitral tribunals when they will be faced with claims involving legitimate expectations. It has
127 Roger Alford, Brexit and Foreign Investors’ Legitimate Expectations Kluwer Arbitration Blog (17 December 2016)
< http://arbitrationblog.kluwerarbitration.com/2016/12/17/brexit-and-foreign-investors-legitimate-expectations/> 128 ibid
129 ibid
130 Francesca Albert, Brexit related claims premature but certainly not impossible, Thomson Reuters (5 June 2017)
<http://arbitrationblog.practicallaw.com/brexit-related-claims-premature-but-certainly-not-impossible/> 131 Glivanos (n108) 18
132 International Energy Charter, ‘Investment Dispute Settlement Cases’
< https://energycharter.org/what-we-do/dispute-settlement/investment-dispute-settlement-cases/> 133 ibid
134 Charanne and Construction Investments v Spain, SCC Case No V 062/2012, Award (21 January 2016). 135 ibid para 503
been established that arbitral tribunals have to balance the expectations of investors against the right of the host State to intervene and adjust its regulatory framework.137
Even though decisions such as the one in Charanne can be welcomed by the UK since it recognises the right of the host State to intervene and regulate, in Masdar Solar138, the ICSID tribunal found that Spain was in breach of the investors’ legitimate expectations under the fair and equitable treatment. However even in this case the ICSID tribunal observed that it is ‘undisputed that a State is at liberty to amend its legislation’139. But in Masdar Solar the
ICSID tribunal said that: ‘On the basis of the due diligence exercised by Claimant, it believed that it had a legitimate expectation that the laws would not be modified, as they included stabilisation clauses’.140 Therefore Spain was in breach of the investors’ legitimate
expectations under the FET. Although the host States have the right to legislate, their power is not completely unrestricted. In CMS141 the tribunal observed that: ‘It is not a question of whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances, but neither is it a question of whether the framework can be dispensed with altogether when specific commitments to the contrary have been made. The law of foreign investment and its protection has been developed with the specific objective of avoiding such adverse effects’142
Applying all this in the case of Brexit, various conclusions could be drawn. It is unlikely that by leaving the EU, the investors’ legitimate expectations in the UK will be breached. First of all, the UK is exercising its sovereign powers. Secondly, the right of the host State to regulate has already been recognised by arbitral tribunals on numerous occasions. Even though the situation with the UK leaving the EU is very different from the situation involving the claims against Spain there is one thing which the two countries have in common. If for example foreign investors submit that the UK violated their legitimate expectations under the fair and equitable treatment, the arbitral tribunals will still have to find the balance between the legitimate expectations of the foreign investors on the one hand and on the other hand the right of the UK to regulate its framework. To date the arbitral tribunals have not deviated from their view that it is within the right of the host States to intervene and make changes in their systems when the circumstances so require.
4.3. Interim conclusions
As it can be seen the dominant view is that claims against the UK on the grounds that the country’s decision to leave the EU breaches investors’ legitimate expectations are unlikely to succeed. Arbitral tribunals have ruled on numerous occasions that it is within the powers of the host state to make changes of its regulatory framework. They also pointed that balance should be struck between the host state’s right to regulate and the right of investors to structure their investments. Thus it appears that the Brexit process could further settle the international investment law and arbitration systems. However as there have been attempts to reform the current arrangement of the traditional ISDS system it has to be noted that if the UK
137 Fernando Dias Simoes, Charanne and Construction Investments v. Spain:Legitimate Expectations and
Investments in Renewable Energy RECIEL 26 (2) 2017, 179
< https://doi.org/10.1111/reel.12198>
138 Masdar Solar & Wind Cooperatief U.A. v. The Kingdom of Spain, ICSID Case No. ARB/14/1 (Award 16 May 2018)
139 para 485 140 para 499
141 CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8 (Award 12 May 2005)
and EU opt for the new ISC system in their future relationship, this could potentially pave the way of reshaping international investment law and arbitration.
5. Brexit, the intra-EU and extra-EU BITs.
Another way which shows how Brexit on the one hand settles the international investment law system and arbitration and on the other hand reshapes them requires a closer look of the UK’s BIT programme. What is meant by settling international investment law system and arbitration in this case is that the present arrangement will continue to have an important role in relation to investments and their protection. What is significant is that Britain has concluded some of these BITs, with other EU Member states and these are known as intra-EU BITs while those BITs which are between EU and non-EU countries are known as extra-EU ones. After Brexit, those BITs will no longer be regarded as intra-EU BITs but extra-EU. The first part of this section will look into the impact of the recent judgment in Achmea on the future of intra-EU BITs which to date is also relevant for the UK because the country is still a member of the EU. Following the CJEU ruling, it is expected that Member States will proceed to terminate their intra-EU BITs. The second part of this section will cover extra-EU BITs and the way the EU has addressed them following the adoption of the Grandfathering Regulation whose aim is to clarify their status. The section will then go to consider the provisions of the Regulation when Britain’s intra-EU BITs become extra-EU ones and conclude that the country’s investment regime will almost certainly remain unaffected.
5.1. Intra-EU BITs
On 6 March 2018, the CJEU issued its landmark judgment in Achmea which is expected to be a major step towards the termination of intra-EU BITs. For many years the European
Commission has been hostile towards such treaties. It has called on other member states to terminate them because negotiating free-trade agreements represents one of the Union’s exclusive policies.
Achmea judgment
In this case the German Constitutional Court made a reference for preliminary ruling and the CJEU was required to decide on the compatibility of investor-State arbitration provisions of the BIT between the Netherlands and Slovakia with EU law. The case involved a Dutch insurance company providing insurance products in Slovakia. The reforms in the Slovak health insurance market resulted in a prohibition of distributing profits generated by the subsidiary of Achmea in Slovakia. In response to these events, Achmea initiated UNCITRAL arbitration proceedings under Article 8 of the Netherlands-Slovakia BIT143. Frankfurt was
chosen as a place of arbitration and thus German law applied to the arbitration proceedings. An arbitral award was issued and Slovakia was required to pay damages. However the Slovakian State appealed but the appeal was dismissed by the Higher Regional Court in
143 Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic
Frankfurt. Slovakia then appealed to the German Federal Court of Justice which requested the CJEU for preliminary ruling to decide whether Articles 344, 267 TFEU should be interpreted as precluding a provision concerning investor-State arbitration in a BIT concluded between Member States.
In reaching the decision that investor-State provisions in intra-EU BITs are incompatible with EU law the CJEU took various considerations into account. It noted that EU law stems from an independent source of law which is the founding Treaties.144 Moreover EU law enjoys
primacy over the laws of the Member States.145 In light of those considerations, the CJEU
observed that the provision on investor-State arbitration in the Netherlands-Slovakia BIT an arbitral tribunal may be required to apply EU law when it comes to provisions related to the fundamental freedoms.146 Another consideration of the CJEU relates to the role of the
investment treaty tribunal and in particular whether it qualifies as a court or tribunal of a Member State. If it does, then it will be competent to request preliminary ruling. In answering that an investment treaty tribunal does not qualify as a court or tribunal the CJEU observed it is not part of the judicial system of neither the Netherlands nor Slovakia and its jurisdiction is precise and exceptional in nature147
The CJEU ruling in Achmea appears to have a huge impact on the Intra-EU BITs given their incompatibility with EU law. At first it appears that the judgment will be used as a tool by the European Commission to combat the intra-EU BITS. Over the years it has demonstrated its opposition towards investor-State arbitration and has encouraged the Member States to terminate their intra-EU BITs.148 Following the judgment in Achmea, it has also been
observed that those investment treaty tribunals established under intra-EU BITs can face the dilemma of either declining jurisdiction or risking that the awards issued by them be set aside on grounds of incompatibility with EU law149. Another point which has been raised following
the judgment relates to the enforcement of arbitral awards issued under intra-EU BITs. When enforcing such awards, national courts will have to comply with the CJEU judgment and thus lead the investor to seek enforcement of an award outside the European Union150. It is likely
that EU Member States will have to revise their intra-EU BITs151. In such cases it is possible
to argue that international investment law can be reshaped and this process starts from the EU’s side while the UK is still part of it. Because of its EU membership, the country is still bound by the judgments of the CJEU and such judgments still have to be taken into account when UK courts have to decide whether to enforce an award. In such circumstances Britain might be faced with the possibility of having to revise its BITs with other EU Member States. After all this judgment has an impact on the BITs which Britain has concluded with other EU countries.
144 para 33 145 ibid 146 para 42 147 para 45
148 Clement Fouchard & Marc Krestin, The Judgment of the CJEU in Slovak Republic v Achmea – A Loud Clap of Thunder on the Intra-EU BIT Sky! Kluwer Arbitration Blog
<http://arbitrationblog.kluwerarbitration.com/2018/03/07/the-judgment-of-the-cjeu-in-slovak-republic-v-achmea/>
149 Alert Memorandum, European Court of Justice: Investor-State Arbitration Under Intra-EU Bilateral Investment Treaties Is Incompatible with EU Law, p2, 9 March 2018
<https://www.clearygottlieb.com/-/media/files/alert-memos-2018/2018_03_09-investorstate-arbitration-under-intraeu-bilateral-investment-treaties-pdf.pdf>
