The right to fair and equitable treatment (FET) by a host state is one of the most widely invoked standards of investment protection. The principle derives from customary international law and is a common feature of bilateral investment treaties (BITs), found at Article 2(2) of the UK’s Model BIT. Although the standard remains general, tribunals have recognised that the standard applies in certain factual situations in the context of BITs and investment treaty arbitration. Of these, this blog will consider whether the UK could be said to be in breach of the FET standard by failing to protect investors’ legitimate expectations and failing to provide a stable and predictable framework for investments.
Legitimate expectations
The test for breach of legitimate expectations looks at the host state’s conduct towards the investor at the time the investment is made. The conduct, which may be explicit, implicit, or inferred from the circumstances, must induce the investor to act in legitimate and reasonable reliance on the conduct. Subsequent failure to honour these expectations which causes damage to the investment will give rise to a claim.
The prevalence of reported contingency plans and actual decisions by companies to relocate to other EU member states following the result of the 2016 referendum clearly shows that continued access to the common market is a prime consideration for businesses in the UK. However, whether continued access to the common market can be considered a legitimate expectation sufficient to ground a claim for breach of the FET standard is more complex.
Given that the test refers to expectations raised at the time of the investment, it is likely that only those who made the decision to invest in the UK after its accession to the European Community (EC) in 1973, but before the result of the 2016 referendum, would be able to contemplate a claim. More problematic, however, is identifying the specific conduct of the UK allegedly giving rise to investors’ legitimate expectations. In the absence of any specific assurances or representations referring to access to the common market made by the UK when attracting foreign investors, the relevant question appears to be what expectations could legitimately be inferred from the broader circumstances of the UK’s having joined the EC. This seems to be just as much a broader question of the nature of the EU as it is a positive commitment by the UK.
On the one hand, the European project has been marked from the outset as one of integration through trade and the economy. Although these were the early focuses of the European Economic Community (EEC) treaties, the ideals of European federalism were apparent long before more modern political and constitutional reforms. Given the absence of any formal mechanism for member states to withdraw until the Lisbon Treaty in 2007, it may well be arguable that accession to the EC in 1973 did give rise to some degree of expectation that membership would be of some permanence. Certainly the extent of shock, both within the UK and the EU as well as globally, following the result of the 2016 referendum would appear to support potential investors’ claims that their expectations of continued access to the common market were legitimate.
On the other hand, investment arbitration tribunals recognise that sovereign states must be able to exercise their sovereign powers and authorities. It has been consistently held that it is not legitimate for investors to expect that laws will never change. Thus, a state’s exercise of legitimate sovereign authority in amending laws or regulations, considered against the broader circumstances of a host state’s history and political, economic and social conditions, has been frequently recognised as not being in breach of the FET standard. Such cases have typically involved regulatory powers, such as taxation measures. It is therefore likely that arbitration tribunals would attribute at least the same weight when considering the UK government’s sovereign authority against its commercial obligations to foreign investors in the context of the UK government’s conduct in implementing Brexit. Indeed, the facts of such a political decision are likely to carry greater weight in a tribunal’s considerations.
Stable and predictable framework for investments
Another possibility may be to claim that the continued uncertainty regarding the UK’s future trading relationships following its decision to leave the EU amounts to a failure to provide a stable and predictable framework for investment.
With just over one month to go until the anticipated exit day, there remains significant uncertainty as to the future trading conditions in the UK. The UK government has warned that, if no deal is secured before 29 March 2019 and no extension of time is requested by the UK and granted by the EU to negotiate the terms of exit, there could be up to six months of disruptions as 16,000 trucks passing through Dover and Calais each day are delayed because of customs checks on each side. Financial trading, largely insulated from physical delay through electronic trading environments, will nevertheless suffer from the same lack of legal and regulatory certainty, especially for long term contracts such as derivatives. In all cases, heavy losses are contemplated.
However, it cannot be said that there is no legal or regulatory certainty whatsoever. The European Union (Withdrawal) Act 2018 (EUWA) was finally passed in July 2018. It provides for the retention of EU-derived domestic legislation and for the conversion of all EU direct legislation into domestic law. Although the legal transition will not be as continuous as the EUWA intends, this should provide some immediate certainty.
Furthermore, tribunals have held that breaches of this standard will tend to be found where regulatory powers have not been exercised in a fair or equitable way. This differs slightly to the current Brexit situation, where the failure to provide stability and certainty stems from political gridlock rather than the arbitrary exercise of state power. The current situation may well be conceptually more akin to a claim for losses based on revolution, notwithstanding that the level of political crisis, though undoubtedly frustrating, falls far below what could reasonably be called “revolution” or “national emergency” under Article 4 of the Model BIT.
Conclusions
Although the UK’s decision to leave the EU has created considerable uncertainty for business in the UK, it is unlikely that Brexit in and of itself will constitute a breach of the UK’s obligations under its BITs.
