The UK’s exit from the EU has somewhat sunk into people’s minds since the British referendum vote on leaving the EU in June last year. That vote, no doubt, sent shock waves far beyond the shores of the British Isles. It has, to some extent, marginalised the UK on the EU political stage, the UK being the first (and hopefully – some may say – the only) country ever to leave the EU. That said, the final word on Brexit has not yet been said. There is at least some hope (albeit remote) that the UK’s exit from the EU may still be stopped in its tracks. In the meantime, foreign investors have good reason to ask how their UK investments will be affected by Brexit, as and when it happens, and have to be forgiven for contemplating suitable avenues of redress in the event that their investments were to take a hit from Brexit in further course.
International financial institutions are one obvious group of investors whose investments might be affected, as are insurance companies, which have similarly benefited from the existing regime of passporting rights that have allowed them to export their services into the EU internal market. Automobile manufacturers that have opted for running their operations in the UK, enjoying the UK’s favourable investment environment and affording them all important access to the internal market, are another oft-cited group of investors that will likely be impacted by the UK’s departure from the internal market: they will no longer enjoy duty-free imports into the EU and may have to source car parts, for example, from other EU countries at a higher cost subject to import customs. This in turn will result in higher manufacturing costs and significantly impact the value proposition of their investment. Of course, a similar equation can be applied to any other foreign-owned manufacturing business that has settled in the UK for its favourable investment conditions.
Even though it cannot be said with certainty that foreign investors will have meritorious investment claims against the UK for any losses they suffer from the consequences of Brexit, there is at least some argument for saying that they may do. To start, the UK has well over 90 bilateral investment treaties (BITs) in place, under which foreign investors with frustrated investments may stand some chance to press successful claims against the UK. A lot will depend on the precise protection offered under the individual BIT, but suffice it to say that the considerations made here find support in the UK Model BIT, which has served as a template for the UK’s BIT negotiating practice. A further determining factor will be the question of whether Brexit – to the extent that it does happen – will be “soft” or “hard”: a soft Brexit may well leave foreign investments largely unaffected, whereas a hard Brexit is likely to have the opposite effect.
Brexit hardcore will mean that all of the UK’s links with the EU internal market will be abruptly severed, there being no substitute (such as membership of the European Free Trade Association (EFTA)) – nor a transition period – in place to dampen the effect of the UK’s exit from the internal market. In other words, a hard Brexit will leave foreign investors out in the cold, depriving them over night of the benefits of the four freedoms of movement (of goods, services, persons and capital) that lie at the heart of the EU internal market. There may also be instances of a sudden loss in EU subsidies that may have been relied upon by foreign investors when making their decision to invest in a particular sector of the UK economy. In addition, following initial reactions in the immediate aftermath of the Brexit vote and a tangible flight risk of leading international businesses from the UK, the UK government is said to have offered assurances to individual businesses in the form of specific undertakings that it would be business as usual, even after Brexit.
Under standard BIT frameworks, claims typically lie against a host state for unlawful expropriation or a violation of its obligations of fair and equitable treatment (FET). Either of these concepts may be wide enough to capture the UK’s actions in exiting the EU. Regulatory actions of a host state that frustrate a foreign investor’s legitimate expectations typically qualify as a form of indirect expropriation or a FET violation (for example, Técnicas Medioambientales Tecmed v Mexico) and may as such give rise to a lawful claim for compensation.
The investor’s legitimate expectations may be induced not only from specific undertakings, but from undertakings of a more general nature, including in particular abnormal changes in the host state’s regulatory environment. Host states have been found to owe an obligation to maintain the fundamental stability of the regulatory regime upon which a foreign investor specifically relied in making a long-term investment, and not to alter that regime in a way or manner that may deprive that investment of its investment value (for example, Eiser Infrastructure Ltd v Spain).
Clearly, most foreign (in particular non-European) investors will have chosen the UK for investment in order to ensure ready access to the EU internal market, with all the commercial and operational benefits that would bring, such as duty-free importing and exporting of goods into the EU, free movement of workforce and staff (offering the opportunity to hire skilled workers and employees from within the wider EU, that is other EU member states), and so on. It will have been their legitimate expectation that the UK’s membership of the EU would persist over the lifetime of their investment (it simply being an economically and geopolitically highly unrealistic proposition that any existing member state would ever contemplate, let alone take the decision to leave the EU). This is irrespective of the fact that Article 50 of the Treaty on European Union (TEU) contemplates the possibility of a member state terminating its relationship with the EU (an Article of the TEU that has never been used and was never intended to be used, taking into account the gradual evolution of the initial European Economic Community into an ever closer union). Quite tellingly, in my opinion, nor was there a reasonable expectation at the time of the referendum that the pro-Brexit campaign would ever succeed (further many many felt that there was misinformation which ultimately contributed to Brexit’s success).
Admittedly, previous investment tribunals have injected a measure of uncertainty into the interpretation and application of the concepts of expropriation and FET. In particular, permissible regulatory action by the host state does not usually give rise to a claim for compensation. That said, the difficulty mainly lies in distinguishing whether a host state action qualifies as a permissible regulatory measure or as impermissible and hence as indirect expropriation. International law has yet to identify what regulations precisely are permissible and commonly accepted as falling within the regulatory power of states and hence uncompensable (for example, Saluka Investments BV (The Netherlands) v The Czech Republic). In this sense, any future investment tribunal that may be called upon to determine whether Brexit has placed the UK in violation of its obligations towards foreign investors under a particular BIT is likely to take a very fact-sensitive approach and may find either way.
There is reasoned concern that, to the extent that any consequences of Brexit equally affect investments of both domestic and foreign investors, any disputed measures taken by the UK government do not discriminate between domestic and foreign investors and must be qualified as of general application, hence not giving rise to any successful investment claims. A stabilisation clause may lend relevant protection. However, it is arguable that the impact of Brexit on a foreign investment is only temporary, pending conclusion by the UK of a new free trade arrangement with the EU, and does therefore not give rise to any form of expropriation. That said, valuable guidance could possibly be drawn from the widely-reported investment actions filed by foreign investors against Spain for its regulatory change in renewable energy regimes (for two unsuccessful claims, see Charanne BV and Construction Investments SARL v The Kingdom of Spain (2) and Isolux Infrastructure Netherlands BV v Spain; for a recent successful claim, see again Eiser) or the investor-state actions that arose from the Cypriot financial crisis in 2013 (for example, Theodoros Adamakopoulos and others v Republic of Cyprus).
Importantly, pursuant to Eiser, for a regulatory change to give rise to a compensable claim, it must be fundamental and disregard the basic regulatory features on which the foreign investor originally relied when making the investment, a condition arguably fulfilled by a hard Brexit (leaving aside for a moment that within the Brexit context, any such condition would be of general application and hence non-discriminatory). It would merit some further investigation as to what extent the timely announcement of Brexit and the pending two-year exit negotiations (in addition to a potential transition period) could be argued to allow foreign investors sufficient time to safeguard their investments as appropriate. This could also provide a good defence to the UK to any future investment claims.
That said, the ultimate success of an investment claim may be secondary. To the extent that there is a real chance of a claim succeeding, a foreign investor will be unlikely to give up a claim in the hope that the UK government will wish to settle rather than run the risk of ultimate failure. Settlement may be too high a price to pay, both in terms of negative publicity, simple hard cash and the frustration of a continued business relationship with the foreign investor following settlement.