Authors: Laura Peters und Sebastian Wuschka LL.M. (Geneva MIDS)
With the United Kingdom's withdrawal from the EU's internal market, the customs union and all of the EU's international agreements, a new chapter in Europe's legal, economic and political history has begun. Likewise, the protection of foreign investors against expropriation or other damaging measures must be reassessed in light of Brexit.
The EU-UK Trade and Cooperation Agreement, which has now provisionally entered into force ("TCA", available here), regulates free trade but takes a different approach to investment protection than previous EU agreements. The European-Canadian agreement CETA and the investment protection agreements with Singapore (see here), Vietnam and Mexico, for instance, contain a variety of substantive protections for investors and also implement investment court systems on a procedural level. The TCA provides for a much more limited investment protection.
On a substantive level, the TCA guarantees, among other things, market access (Article SERVIN 2.2), national treatment (Article SERVIN 2.3) and most favoured nation treatment (Article SERVIN 2.4). Contrary to the usual standards for investment protection, however, the TCA does neither contain a provision on fair and equitable treatment, nor one on expropriation.
For dispute settlement, Part 6 of the TCA exclusively (Article INST.11) foresees a state-to-state mechanism before arbitral tribunals instead of a direct right of action for investors as it is customary in investment treaties. Additionally, the TCA makes clear that its most favoured nation clause cannot serve as a basis to "import" access to international arbitration for investors from other treaties (Article SERVIN 2.4 para. 4). Further, domestic courts shall have no jurisdiction in relation to disputes under the TCA (Article INST.29 sec. 4a). Investors are therefore dependent on their home states or the EU to take up their claims. Private parties themselves can only participate in the procedure by providing "relevant information" through amicus curiae submissions (Article INST.26).
It is not to be expected that this merely fragmentary protection, which investors receive only with the assistance of their home states or the EU, will be substantially expanded through adjustments by the European Parliament or the contracting parties. For investors on both sides, it is therefore of increased importance to assess how their investments are protected beyond the TCA.
Investment protection in the EU has been a politically and legally sensitive issue in recent times. Nevertheless, a large number of bilateral investment treaties (BITs) still exists between various EU member states. The United Kingdom also has such agreements with other European states (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Romania, Slovakia and Slovenia – another agreement with Poland was unilaterally terminated by Poland recently). By contrast, the United Kingdom is not party to BITs with politically central EU states such as Germany, France, the Netherlands, Belgium, Spain and Italy.
The EU Commission, however, has for quite some time now urged member states to terminate their intra-EU BITs as part of its efforts to end intra-EU investment arbitration and instead to strengthen state courts and EU internal market rules. In its 2018 Achmea decision, the ECJ also declared arbitration clauses such as the one in the Dutch-Slovak BIT on which the relevant proceedings were based to be incompatible with Union law. The EU member states responded to this decision with three declarations in January 2019, with the United Kingdom still co-signing the main declaration of 22 member states at the time and committing, among other things, to terminate its BITs with other EU member states. Yet, this commitment was political in nature. The United Kingdom – as well as Austria, Finland, Ireland and Sweden – subsequently decided not to join the Termination Agreement concluded between the majority of EU member states with regard to the intra-EU BITs.
In relation to the non-terminated BITs, the EU Commission has initiated infringement proceedings against the United Kingdom, which the ECJ could also still rule on after Brexit in accordance with the provisions of the Withdrawal Agreement. In view of the fact that Brexit has now been effected, the consequences of these proceedings will, in any case, be very limited. The ECJ could, for instance, find that the United Kingdom violated EU law during its membership by not agreeing to the Termination Agreement. Ordering the United Kingdom to terminate its existing BITs with EU member states, however, should be out of the question as a matter of general international law. EU member states are nevertheless likely to advance the argument in future arbitrations and setting-aside proceedings before domestic courts that these treaties should have been terminated and therefore not be used as a basis for investment claims.
Overall, however, the United Kingdom’s existing BITs with EU member states will remain in force – unless they are terminated by the EU member states. In the event of a unilateral termination, the BITs’ so-called sunset clauses still guarantee a continued application of the treaties for an individually prescribed period of time beyond their termination. This already applies to the BIT between the United Kingdom and Poland, which was terminated in 2019 but continues to apply for 15 years from that date.
The situation is different with regard to the Energy Charter Treaty (ECT), to which the EU itself and over 50 states around the globe are signatories. This includes all EU member states except Italy, which withdrew in 2016. Although the ECT covers various large-volume energy investments by way of its sectoral scope, it only benefits a few investors in total. It is therefore not comparable with the level of protection a pan-European investment protection agreement would offer.
Unlike BITs, the ECT is not affected by the Achmea decision or the Termination Agreement. Still, the EU Commission has argued for some time that the ECT should not apply within the EU, but only to investments from or in countries outside the EU. This position has been consistently rejected by arbitral tribunals. After Brexit, it is also not likely to be of any relevance with regard to investment relations between the EU and the United Kingdom anymore, given that these are simply no longer intra-EU relations.
Energy investments between the EU and the United Kingdom are thus soundly protected at present. However, the ECT is currently undergoing a complex modernization process, the end of which is not yet in sight. It is possible that the level of protection for investors will be further reduced as part of the modernization process – at least this would be in line with the EU Commission's negotiating strategy.
The current situation leaves gaps in protection – especially for investments from or in Germany and other western EU member states. EU investors in the United Kingdom and UK investors in the EU are – due to the lack of solid investment protection provisions in the TCA – currently only protected by the described BITs or by the ECT. While the BITs only cover individual member states, the ECT solely applies to energy investments.
One can only speculate as to why the TCA does not contain elaborate provisions on investment protection. A conceivable explanation is political pressure, fueled by recent years' deepening damage to the image of investment protection agreements and arbitration tribunals. In addition, investment protection agreements often serve to equalize disparities in the rule of law between different member states or between the EU and non-European states. However, the United Kingdom has consistently ranked high on the EU Justice Scoreboard and was most recently ranked 13th in the World Justice Project's Rule of Law Index 2020 (with Germany ranked 6th). Investment protection may not have been seen as mandatory. Instead, the TCA negotiators may have deliberately left investment protection to the UK courts on the one hand. UK investments in eastern EU member states, which often only achieve lower rankings in the EU Justice Barometer and the Rule of Law Index, remain covered by BITs on the other hand. The continued need for such protection is aptly demonstrated by the 2018 Manchester Securities award, in which a PCA tribunal ordered Poland to pay damages for denial of justice.
An alternative to investment treaties for investment protection under international law would be to have recourse to the 1st Additional Protocol to the European Convention on Human Rights, which also the TCA refers to. However, the Strasbourg court is not overly welcoming to complex economic law claims and thus cannot be considered a real alternative to investment arbitration. Moreover, under the European Convention, the local remedies rule applies, requiring investors to first exhaust domestic remedies before recourse can be had to the Strasbourg court.
From the point of view EU investors in the UK and UK investors in the EU, it can overall be seen as a clear omission that the TCA does not regulate investment protection in a comprehensive manner. The protection of investments between the EU and the United Kingdom should consequently be examined in detail for each individual case. Once again, investors will often find it useful to consider investment structuring to gain treaty protection or the conclusion of state contracts with the host state of their investment, including direct arbitration agreements, in order to properly safeguard their rights.