What impact could Brexit have on protections available to foreign direct investors?
One of the many questions raised by the UK’s pending withdrawal from the EU is what impact Brexit will have on protections afforded to foreign direct investments in the UK and overseas through investment treaties.
What are BITs?
Bilateral investment treaties, or BITs, are agreements between two countries that contain reciprocal undertakings designed to promote and protect private investments made by individuals and companies in each other’s territories. These impose obligations on the host state to ensure that foreign investors have certain guarantees, such as fair and equitable treatment; treatment no less favourable than that provided to investors under other treaties; free transfer of funds without restrictions; and compensation in the event of unjustified expropriation.
Typically, BITs also afford foreign investors with a direct right of action against a host state if it breaches its treaty obligations. The mechanism for resolving such investor-state disputes is through international arbitration. This right to refer disputes with host states to arbitration is above and beyond any contractual or domestic law remedies. Having a direct right of action against host states is an important protection for foreign investors. Without it, investors often find themselves with little or no means of recourse in the event of, for example, state expropriation of its assets without compensation. Often, investors in those circumstances find that they are unable to obtain remedy under the host state’s domestic laws or before its courts. That leaves only state-to-state negotiations, which not only politicises an otherwise private dispute but also may not be available where the investor’s home state is unable or unwilling to intervene.
States enter into investment treaties because offering these protections is an effective way to encourage more foreign direct investment, both inward and outward bound.
Extra-EU BITs and EU negotiated investment agreements
Following the entry into force of the Lisbon Treaty in 2009, the EU assumed exclusive competence over foreign direct investment as part of the EU’s Common Commercial Policy. However, the scope of the EU’s power is not clear cut and is likely to be the subject of a reference to the Court of Justice of the European Union. Taken at its highest, the EU’s power over foreign direct investment has resulted in EU Member States (including the UK) no longer being entitled to negotiate and conclude BITs without the EU’s approval and in the EU having the power to enter into EU-wide investment agreements without requiring individual Member State ratification.
The European Commission is gradually seeking to replace BITs between all EU Member States and non-EU countries (extra-EU BITs) with EU negotiated investment agreements. Transitional measures are in place to allow extra-EU BITs to remain in force until such time as they are replaced. The EU has already agreed trade and investment agreements with Canada, Singapore and Vietnam, though they are yet to come into force, and it is in the process of negotiating agreements with others including the US and China. One significant feature of the EU’s approach to EU investment agreements is its policy of replacing investor-state arbitration with a proposed two-tiered Investment Court System (ICS). The EU argues that the ICS would provide greater transparency and protect investment whilst preserving the rights of governments to regulate.
Under the ICS, disputes would be heard by publicly appointed judges and appeals could be brought on points of law and fact. This represents a significant departure from the existing investor-state dispute system of international arbitration, where the parties choose the arbitrators of their dispute and arbitral awards are generally final and binding with limited or no rights of appeal.
Concerns have however been raised about the proposed ICS system, including the lack of party autonomy, accountability and potential bias towards states (given ICS judges would be state-appointed). There are also serious concerns over the effectiveness and sustainability of these proposals. Moreover, it is doubtful that ICS judgments would be enforceable under the New York Convention or the ICSID Convention enforcement regimes. Those extensive enforcement regimes (covering most of the globe) are a significant reason why international arbitration has proved so popular, particularly amongst parties operating or transacting across the globe.
Following its withdrawal from the EU, it is unclear whether the UK will automatically cease to be a party to all or parts of EU investment agreements. Regardless, the UK’s existing extra-EU BITs would remain valid, which could be to the UK’s advantage. In particular, the fact that the majority of the UK’s 84 extra-EU BITs include investor-state arbitration provisions (rather than the controversial ICS provisions) could give the UK a strategic advantage from the perspective of investors, allowing the UK to remain a favoured destination through which to structure international investments.
The UK will also regain its powers to negotiate and conclude new investment agreements with non-EU countries and will be free to decide whether it wishes to adopt international arbitration or something akin to ICS provisions in such agreements.
There are currently more than 150 BITs between different EU Member States (intra-EU BITs). The Commission is opposed to intra-EU BITs and considers them to be superseded by and/or incompatible with EU law. The Commission has requested all Member States to terminate their intra-EU BITs (even though there is currently no adequate alternative in place), and has brought infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden on the basis that some of their intra-EU BITs violate EU law. Those infringement cases will likely be referred to the CJEU shortly. In the meantime, the CJEU is set to determine a dispute between Dutch insurer Achmea BV and Slovakia concerning the validity of the Netherlands/Slovakia BIT. If the CJEU rules that intra-EU BITs are incompatible with EU law this could undermine the enforceability of any award rendered under an intra-EU BIT.
The UK currently has 12 intra-EU BITs (with Bulgaria, the Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). Once the UK has left the EU, there will no longer be any uncertainty regarding the validity of these BITs. Until such time as the UK enters into an investment agreement with the EU, these BITs will remain in force and will continue to offer both states and foreign investors important protections including the ability submit disputes to investor-state arbitration. The EU’s policy of seeking termination of intra-EU BITs could therefore give post-Brexit UK a competitive advantage over other EU countries, increasing its attractiveness to investors wishing to invest in Central and Eastern Europe.