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The European Union, investment treaties and investment arbitration post-Brexit

This blog considers the impact of Brexit on investment treaties and investment arbitration in the European Union (EU), in particular how the United Kingdom’s withdrawal from the EU will affect:

Intra-EU bilateral investment treaties

Following the entry into force of the Lisbon Treaty on 1 December 2009, the EU assumed exclusive competence for a common commercial policy, which was explicitly stated to include “foreign direct investment”. With the assumption of these new powers, the EU has sought to end bilateral investment treaties between EU member states. Last year, for example, the European Commission initiated infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden, requiring them to terminate their intra-EU BITs. The EU’s rationale is that such treaties fragment the single market by conferring rights to some EU investors on a bilateral basis.

The EU has also taken increasingly strident legal action with respect to investment treaty arbitrations brought under intra-EU BITs, including intervening in such cases by submitting amicus curiae briefs asking that tribunals decline jurisdiction. In the notable example of Micula v Romania, an International Centre for Settlement of Investment Disputes (ICSID) claim brought under the Sweden-Romania BIT, the EU even issued a suspension injunction against Romania to prevent it from paying an award in the claimants’ favour. The claimants asserted that Romania breached the BIT by withdrawing certain business incentives when it joined the EU; the EU argued that those underlying incentives constituted unlawful state aid.

It seems unlikely that the EU will alter its interventionist approach now that the Brexit risk has crystallised. Having said that, it is very doubtful that any action will be taken with respect to BITs involving the UK. In particular, such BITs will soon no longer be “intra-EU” and there would be no incentive for the UK or treaty counter-parties to terminate the current arrangements, only to have to agree new treaties. This might change if the UK and EU subsequently conclude their own investment agreement (or free trade agreement with an investment chapter). This is possible, but the history of international investment and trade negotiations suggests it will be many years before such an agreement might materialise.

Treaty negotiations with third party states

This ties in to the ongoing trade and investment agreements which the EU is negotiating with third party states, including Canada (Comprehensive Economic and Trade Agreement (CETA)) and the United States (Transatlantic Trade and Investment Partnership (TTIP)).

As proposed by the EU in TTIP, and as already agreed in CETA, the EU has sought to set a different path with respect to the resolution of investment disputes. This involves a move away from the system of investor-state arbitrations that has blossomed in recent decades. Rather, the EU has proposed establishing “investment courts” with a permanent bench, appeals procedures and a greater emphasis on transparency.

These proposals have received a mixed reception, including some significant concern in the arbitration community. It is not certain that TTIP negotiations will reach a final agreement, nor whether CETA itself will ultimately be ratified or come into force. Brexit adds another layer of uncertainty.

As set out in a press release by the European Commission of 5 July 2016, the Commission’s legal view is that the EU has exclusive competence under the Lisbon Treaty to enter into CETA, TTIP and similar agreements, without the need for the signature or approval of member states. Nevertheless, that same press release suggests that CETA should be a “mixed” agreement signed by both the EU and individual states. This appears to be a pragmatic move to stave off post-Brexit criticism of the Commission centralising and federalising power.

A “mixed” agreement leaves open the question of its application should one or more member state fail to ratify CETA. It also provides for the possibility of the UK remaining a party to CETA even once it has left the EU. Indeed, if CETA proceeds as a “mixed” agreement and the UK signs while still an EU member state, then the legal position would appear to be that CETA will subsist as between Canada and the UK notwithstanding Brexit. Alternatively, the UK may prefer to retain established and understood arbitration provisions in its BITs, thereby giving itself a possible competitive advantage in the eyes of investors wary of currently unknown and untested “investment courts”.

Conclusion

Brexit creates a number of uncertainties for investment treaties of the EU and related investment arbitration. The European Commission’s recent proposal that CETA be signed as a “mixed” agreement points to real, and perhaps growing, tension between the Commission and individual member states as to competencies for investment and trade. Indeed, even if the Commission is correct in its legal assertion of the EU’s exclusive competence, this may not be politically palatable to member states now reassessing the functioning of the EU post-Brexit. Proposals for “investment courts” may be looked at again and the European Commission may come under renewed pressure to defer more readily to member states in the future.

For the UK, there is also significant uncertainty. The UK will have to establish its investment priorities and positions as a state no longer part of the larger EU. Those priorities and positions will influence what happens to the UK’s BITs with EU member states, which will subsist in the near term, and will determine the nature and scope of any new treaties which the UK will seek to negotiate.

 

For other views on the impact of Brexit on arbitration, see:

Fietta Jiries Saadeh

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