UPDATED. As Brexit negotiations get underway in Brussels, GAR reports on a debate in London on whether the UK’s exit from the European Union could trigger viable investment arbitration claims against the state.
The debate featured Roger Alford of the University of Notre Dame Law School and Markus Burgstaller of Hogan Lovells, giving the potential view of foreign investors, while Jeremy Sharpe of Shearman & Sterling and Luis Gonzalez Garcia of Matrix Chambers gave the potential view of states. It was organised by London-based boutique Volterra Fietta and Notre Dame.
Following the arguments – which speakers emphasised did not reflect their personal views – a vote indicated that 42% of audience members thought Brexit would give rise to viable claims, while 58% thought it would not.
Britain’s unexpected decision to leave the EU in a referendum a year ago “set in motion a political, social and economic avalanche, the consequences of which are far from certain”, said Suzanne Spears of Volterra Fietta, opening the event. A key question is whether the UK will endure a “hard” or “soft” Brexit.
Part of the UK’s attractiveness as a destination for foreign investment has been its EU membership, which gives investors’ protections and the ability to trade freely in the EU’s single market, she said. A "hard" Brexit would affect free movement of people, free movement of goods and free movement of capital – or "passporting rights" – which allow investors in the UK to sell a nearly unlimited range of financial services to customers in the EU without having to get permission of individual members states.
The debaters considered whether disappointed investors will bring claims against the UK under its 90 in-force bilateral investment treaties and free trade agreements with countries across the world. Among these are BITs with India and China, both significant investors in the UK's automobile industry, Spears noted. This will be one of the industries hardest hit by Brexit owing to increased tariffs on cars and car parts and the raised cost of shipping them to Europe.
Also up for debate was whether such claims would have any chance of success in light of past claims brought against Argentina, Spain and Cyprus in relation to changes to their legal and regulatory frameworks. The wave of claims against Cyprus from Greek investors who say that their financial investments were compromised during the 2013 bail-in of Cypriot banks might be key given the likely impact of Brexit on UK financial services, Spears said.
In such cases, she noted the challenge of determining the right balance between investors' rights, on the one hand, and states' right to amend their regulatory framework, on the other, especially – in the case of Brexit – following a democratic vote.
A risk of crossing the line
“Drastic changes arising from Brexit are a given,” said Alford. The only question is whether they will be “so dramatic” as to give rise to legal claims. “Permanently eliminating European subsidies, dramatically raising tariffs between countries, abruptly creating immigration barriers for millions of high-skilled Europeans and foreclosing access to certain European markets are the kind of things that a hard Brexit would risk and that could alter the stability of the legal and business framework of the UK.”
“This is not about sovereign autonomy or freedom. The government has the right to enact, modify or cancel any law it chooses,” he said. “But some sovereign acts, like expropriating property or violating the fair and equitable treatment standard, require compensation to injured parties. Under international investment law there is a line governments cannot cross without financial consequences. If Brexit is mishandled, the British government risks crossing that line.”
With a “hard” Brexit, Alford saw potential for claims by foreign carmakers who thought they would be able to export their cars to Europe duty-free and will now face steep duties that will diminish their already “wafer-thin” profit margins.
He also anticipated claims from the over 5,000 UK financial institutions that have lost access to the single market.
A third potential set of claims would arise under the Energy Charter Treaty as a result of the UK having to scrap renewable energy targets and subsidies in light of reduced lending from the European Investment Bank.
Again and again, investment tribunals have found that the “stability” of the state’s regulatory framework is an essential element of the fair and equitable treatment standard under international law, Alford said – including such famous arbitrators as Albert Jan van den Berg, Charles Brower, Campbell McLachlan, Marc Lalonde and Yves Fortier. States that have paid the price include Argentina, Canada, the Czech Repubic, Mexico and Spain.
In Enron v Argentina, a tribunal described the destabilisation caused by that state’s response to its 2001 financial crisis in terms that could easily be used to describe Brexit: “Where there was certainty for investors, doubt and ambiguity are the order of the day. The longterm business outlook enabled by the tariff regime has been transformed into a day-to-day discussion about what comes next… [and is] subject to a protracted renegotiation process.”
Alford went on to highlight the potential for successful claims where the UK has made specific assurances to an investor that all will be well following “the great divorce” – as Prime Minister Theresa May did to Japanese car maker Nissan to encourage it to maintain its giant plant in the north of England.
“In the next two years, every foreign investor worth his salt should be demanding, as a condition of continued investment, that the government provide specific assurances. Then, if the government does not live up to those assurances, the investor has a valid claim against the UK," he advised.
Even if only a few investors can secure such assurances, this would be good for all the others – creating scope for them to sue the UK for non-transparent and discriminatory treatment.
Alford also had advice for the UK in relation to its planned bill allowing the repeal of legislation without parliamentary approval. “The name the Great Repeal Bill underscores the drama of the day,” he said. “If the government was really smart they would have called it the “Great, But Totally Routine, Business-As-Usual Repeal Bill.”
The first ever state to withdraw from the EU
Burgstaller agreed with Alford that a likely basis of post-Brexit claims is the obligation to accord foreign investors fair and equitable treatment set out in the Energy Charter Treaty and in typical UK BITs.
Among other things, fair and equitable treatment clauses protect investors' legitimate expectations at the time of making an investment, he noted.
He referred to a recent award issued on 4 May this year in Eiser v Spain, in which the tribunal recognised the state's "obligation to provide fundamental stability in the essential characteristics of the legal regime relied upon by investors in making long-term investments" and stated that "regulatory regimes cannot be radically altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment's value".
If amendments to the regulatory framework for renewable energy in Spain amount to a violation of fair and equitable treatment, then so does the UK's withdrawal from the EU, he argued. Indeed far more so, since the UK has spent 40 years in the EU and no other member state has ever withdrawn to date. Despite the scope to withdraw under Article 50 of the Treaty on European Union, investors could therefore reasonably expect that the UK, a "highly developed state", would not exercise this power.
Like other speakers, Burgstaller emphasised the effect on trade and financial services. Any introduction of customs duties or quantative restrictions on goods exported to the EU will increase operating costs and lead to a decline in profits for foreign investors that established themelves in the UK with a view to manufacturing goods there and selling them in the EU, he said. Losing passporting rights will have a similar effect on financial institutions, including banks and insurers, that established subsidiaries here with a view to providing services in the EU.
"These investors will have viable claims."
A non-discriminatory measure of general application
"There is no way to stop BIT claims being filed post-Brexit but the UK is likely to prevail", argued Sharpe, as the debate moved to the state perspective.
Drawing on tribunal findings in Impregilo v Argentina, ECE Projektmanagement v Czech Republic and Pushok v Mongolia, he argued that BITs cannot be treated like comprehensive stabilisation clauses in foreign investment contracts or as an insurance policy for investors.
Investors must accept that drastic changes in a state’s circumstances may lead to drastic changes in law, he said. They cannot claim BIT protections simply because "the government – or the voting public – were ill informed or misguided”.
In implementing Brexit, he noted that the UK’s elected legislature is implementing the will of the public as expressed in a referendum – in line with the UK’s democratic process, which was known to investors when they made their investment. Likewise, investors must be assumed to have known that the UK’s membership of the EU was voluntary and could be withdrawn on the basis of Article 50.
Sharpe went on to stress that the UK’s departure from the EU has financial consequences “for everyone in the UK, including domestic and foreign investors.” A claim for compensation cannot arise from “a non-discriminatory measure of general application affecting the whole of the country and its people,” he argued.
Referring to the assurance May gave Nissan, Sharpe reflected that government officials generally act with awareness of their domestic law but not international law obligations – meaning they may say things that, inadvertently, have implications for BIT arbitrations.
He noted that post-Brexit claims may come from anywhere in the world thanks to companies structuring their investments through jurisdictions that have BITs with the UK. The UK government has “no idea” where they will originate and should be prepared for one in relation to each and every investment, he warned.
A caveat to this is that investments structured in anticipation of bringing claims over Brexit will likely fail, in line with the tribunal's findings in Phillip Morris v Australia.
A fact of life
For an investor to submit a BIT claim there must be a measure that relates specifically to the investment and is attributable to the host state, argued Gonzalez Garcia, also giving the state perspective.
He questioned what the “disputed measure” would be in a post-Brexit claim, since the vote to exit the EU, the decision not to remain part of the European Economic Area or the Customs Union, and the failure of the UK and EU to reach a comprehensive trade deal are either not laws, regulations or procedures that can be challenged in an investment arbitration or cannot be attributed to the UK alone.
“There is simply no international obligation to remain indefinitely in the EU single market or conclude a trade deal with the EU,” he said.
A claim about customs duties, new tariffs or anti-dumping would relate to trade measures and be subject to state-state dispute settlement under the auspices of the World Trade Organization, not investment arbitration, he argued. A claim about the restriction of workers from outside the EU would relate to an immigration measure and also fall outside the scope of the BIT.
A “nexus” between the measure and a particular investment is furthermore lacking where the measure is “of general application”.
Gonzalez Garcia went on to address the applicability of specific protections of bilateral investment treaties.
Even if Brexit makes a business too uneconomic to continue, he said that investors will have at most suffered “the temporary loss of a business opportunity” – the ability to compete in the European market – for the period until the UK concludes a “bold and ambitious” new free trade agreement with the EU. They will not have suffered a permanent loss of control of their investment such as would trigger a successful expropriation claim.
A fair and equitable treatment or legitimate expectation claim would likewise founder since a guarantee to operate within the EU Single Market cannot be implied into the UK’s BITs or contracts. The subjective expectations of the individual investor is irrelevant, he said. “The current trend is that expectations should be based on specific legal commitments made to the investor by the state when it decided to make the investment”.
Concluding, Gonzalez Garcia called disappointment with changes to government policy "a fact of life" for foreign investors. If claims are allowed on the basis of Brexit, he said “BIT signatories would potentially be subject to a massive number of treaty claims every time a state ratifies, amends or terminates a free trade agreement, which surely cannot be what they intended.”
The arguments were summed up by Martins Paparinskis, director of graduate research studies and reader in public international law at University College London, who noted the possibility that injury to investors would arise out of the joint conduct of the UK and other international actors and the legal challenges that would raise regarding determination of attribution, breach, causality and remedies.
In a subsequent Q&A, delegates agreed that the chance of successful claims over Brexit is greatly increased where specific assurances have been made and that the Great Repeal Bill might be the "measure" on which investors base their claims. It was noted that the UK has no BIT with Japan, making a claim by Nissan unlikely.
Since the debate at the University of Notre Dame on 30 May, Theresa May failed to gain a majority for the Conservative party in the UK general election, a development which is seen as lessening the prospect of a "hard" Brexit. A series of terrorist incidents in London and the tragic fire at Grenfell Tower, just five minutes from GAR's office, may also have also forced the government to take its eye off the Brexit negotiations.