The EU, Brexit and Investor-State Disputes

Published: 7/7/2016

The future of cross-border legal disputes is among the myriad questions raised by Britain’s proposed exit of the European Union and of significant relevance are the regimes for settling disputes between investors and states enshrined in any bilateral investment treaty (BIT).

There are currently around 190 BITs in force between the 28 EU Member States, 11 of which are accounted for by the UK which has treaties with Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. (The UK also has BITs with EU candidate countries Albania, Serbia and Turkey.) 

According to The International Centre for Settlements of Investment Disputes (ICSID), which hosts the majority of known international investment cases, the number of intra-EU investor disputes, where an investor of EU citizenship brings a claim against another EU Member State, are increasing annually with 39 for the year ending April 2014, 51 for 2015 and 72 for 2016. Together with the EU’s evolving policy regarding investor-state disputes, which itself has the potential to undermine confidence amongst investors, Brexit is likely to have some impact on these numbers in the future. 

The EU and Investor-State Disputes

The BIT system, which pre-dates the European Community and implicitly posits independence for Member States in treaty-making, represents an interesting challenge to the EU in its role as manager of relations between Member States and many aspects of their external relations with other blocs and with non EU Member States. 

The European Commission has devised three principal routes of attack against intra-EU BITs.

One of these is to make interventions in intra-EU BIT proceedings and to raise arguments against the validity of the process. In these arguments, the Commission questions the compatibility of EU law with any intra-EU BITs entered into prior to a country’s accession to the EU. The Commission has been explicit that the additional “reassurance” of a BIT is no longer necessary because “all Member States are subject to the same EU rules in the single market, including those on cross-border investments. What is more, all investors benefit from the same protection thanks to EU rules, for example non-discrimination on the grounds of nationality” (see here). In addition to arguments that the European Treaties supersede treaties made between EU Member States, the Commission asserts that BITs do not adequately take into account EU law and this may result in contradictions of the rights guaranteed in the EU Treaty. While, however, the Commission makes these arguments and has occasionally found support for them among Member States, it has not been successful when making them before investment arbitration tribunals which continue to guard their jurisdiction. 

A second prong of the attack has been infringement proceedings brought by the Commission in relation to intra-EU BITs. In June 2015, such proceedings were launched against five Member States - Austria, the Netherlands, Romania, Slovakia and Sweden - where intra-EU BITs had latterly come into play. The Commission’s view and methods can be appreciated by considering its reasoning for infringement proceedings to be brought against Romania, which reads: “The arbitral tribunal in the Micula case ordered Romania to pay damages to a Swedish investor, ignoring the Commission’s position that such an award would infringe EU state aid rules”. (The Micula case can be found here.) The political nature of this clash, which is founded in a debate on sovereignty, is evident and clearly contributes to an undermining of legal certainty in relation to intra-EU BITs. If successful in the infringement proceedings, the Commission will seek the immediate termination of intra-EU BITs.

A third element in the Commission’s quest to control Member States’ BIT arrangements is legislative, in the form of Regulation 1219/2012, which controls Member States’ BIT relations with non-EU states. The Regulation, in force since January 2013, sets out a new set of rules to manage disputes under the EU's investment agreements with its trading partners. This Regulation also gives the EU the power to withdraw authorisation for BITs under negotiation (where a BIT was incompatible with EU law or contradicted the EU’s policies on investment). 

While seeking to rein in the effectiveness of the existing BIT system amongst Member States, the Commission has also tabled a proposal for a new court to govern investor-state relations across the European Union and, in time, perhaps beyond. The International Court System (ICS) concept arose from responses to a public consultation on the EU-US Transatlantic Trade and Investment Partnership (TTIP), which had identified certain shortcomings with the arbitration mechanisms represented by investor-state dispute settlement such as that found in BITs (ISDS). If implemented, the ICS would replace all investor-state dispute settlements between Member States and any third party. The Commission states, “in parallel to TTIP negotiations, the Commission will start work, together with other countries, on setting up a permanent International Investment Court. The objective is that over time the International Investment Court would replace all investment dispute resolution mechanisms provided in EU agreements, EU Member States’ agreements with third countries and in trade and investment treaties concluded between non-EU countries.” Needless to say, concerns have been expressed over the ICS proposal which some believe will compound shortcomings already inherent in ISDS.

The impact of Brexit

The prospect of Brexit has of course raised the question of what terms the EU or the US will be prepared to negotiate trade agreements with Britain on, as well as of the very survival of the United Kingdom as a union, given the prospect of Scotland or Northern Ireland pursuing independent paths. The UK economy is a significant element of the EU’s economy and is also an economy that the US values for the way in which it is (de-)regulated. The EU institutions are in a state of confusion on the issue and, from the US perspective, the possibility of a Brexit has for the moment holed TTIP, and possibly therefore also the ICS, below the waterline. An invocation of Article 50 and an actual Brexit could potentially sink both ideas, altogether. 

Will Brexit also impact the number of intra-EU or EU-UK investor-state disputes? On the one hand the Commission’s opposition to BITs and a Brexit may create significant legal uncertainty around BITs which would suggest the likelihood of a decrease. On the other hand, Brexit is likely to free the UK from interference from the Commission with intra-EU BITs of the nature outlined above, renewing the confidence in this form of dispute resolution (retaining the ISDS provisions) where the UK is a party and avoiding the uncertainty of a new, untested, ICS. Commentators such as Sophie Nappert and Nikos Lavranos have also discussed the possibility of a post-Brexit Britain negotiating a new BIT with the EU as well as instituting BIT negotiations with non-EU countries (with some of which the EU may have signed or be in the process of negotiating BITs). Some advisers have argued that investors should structure their investments outside the EU to avoid the risk arising from confusion over the role of intra-EU BITs, and if that is the case a UK outside the EU but close to it may offer advantages. 

Regardless of the outcome of any Brexit negotiations in relation to BITs, however, in any interim period before agreement is reached, existing treaties between the UK and EU Member States will continue to be applicable and in force. 

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