The protection of EU-UK investment in the future partnership agreement (UPDATED 20 May 2020)

As anticipated in our Brexit Insight of late February 2020, available here, this Insight provides an analysis of what we know so far about the EU and UK’s intentions for the protection of EU-UK investment in the future partnership agreement.  This Insight was originally posted in April 2020, and has been updated in order to reflect the draft “negotiating document” published by the UK on 19 May 2020.

We start by setting out the legal framework applicable to the conclusion of international investment agreements by the EU and EU Member States.  We conclude that (1) it is highly likely that investment protection will be addressed in the future partnership agreement and not left to bilateral negotiations between the UK and individual EU Member States, and (2) investors who assumed, with the advent of Brexit, that they may be able to continue to rely on the UK’s existing intra-EU BITs, might begin to consider restructuring their investments.

Legal framework

The Treaty of Lisbon (2009) transferred to the EU “exclusive competence” on foreign direct investment (FDI).  In particular, Article 207(1) of the Treaty on the Functioning of the European Union (TFEU) provides that FDI is considered part of the common commercial policy (CCP), while Article 3(1)(e) provides that the EU has exclusive competence over CCP.  The EU also has competence to conclude international agreements with third countries where “necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties” (Article 216(1) TFEU).  This necessarily includes the competence to conclude international agreements containing provisions on investment protection.

Pursuant to Article 3(2) TFEU, in the areas of its exclusive competence, the EU alone has the power to conclude international agreements.  In 2017, the Court of Justice of the European Union (CJEU) clarified in its Opinion 2/15 on the Free Trade Agreement between the EU and the Republic of Singapore that while the EU’s exclusive competence covers the protection of FDI, “non-direct foreign investment” (so-called “portfolio investments”) and the regime of investor-State dispute settlement remain “shared competences” (paragraphs 238-242, 292-293 and 305).  As a result, the competence to conclude international agreements covering such matters is a “shared competence”; and agreements of that nature are “mixed agreements”, requiring ratification by both the EU and by its Member States.

Member States retain a residual ability to negotiate and enter into international agreements relating to areas within the exclusive competence of the EU, such as FDI, “only if so empowered by the Union” (Article 2(1) TFEU).  The practical implications of the EU’s exclusive competence in the field of FDI, as it relates to the negotiation and conclusion of international investment agreements, were clarified by Regulation (EU) No. 1219/2012 of December 2012, “establishing transitional arrangements for bilateral investment agreements between Member States and third countries” (the Regulation), which entered into force on 9 January 2013.

The Regulation provides that existing bilateral investment agreements (BITs) will “remain binding on the Member States under public international law” and “should be maintained in force”, but that they will be “progressively replaced by agreements of the Union relating to the same subject matter” (recitals (5) and (6) and Articles 2-6).  However, Member States may also enter into negotiations with third countries, and sign and conclude investment agreements, provided that no agreement between the EU and that third country concerning direct investment exists, and provided that they receive authorisation from the European Commission (Articles 9 and 11 of the Regulation).  Such authorisation shall be given, unless the Commission concludes that the opening of negotiations meets one of the criteria laid down in Article 9(1).  Those criteria include that the Commission has already submitted (or decided to submit) a recommendation to open negotiations with the relevant third country or that such negotiations are already ongoing.  Since 18 February 2020, the Commission has published decisions on authorisations on the website of DG Trade (here).  In accordance with its obligations under the Regulation, the Commission reported to the European Parliament and the Council on the implementation of the Regulation on 6 April 2020 (here).  The Commission’s report confirms, inter alia, the need for the continued operation of the “transitional arrangements” set out in the Regulation (Report, page 7).

Unlike other areas of EU law that continue to apply to the UK as “retained EU law” pursuant to the EU (Withdrawal) Act 2018, the UK revoked retained EU law relating to Regulation No. 1219/2012 on exit day by way of Statutory Instrument 2019 No. 506, on the basis that it would “no longer be appropriate for the [UK] to be bound by these obligations” following the withdrawal of the UK from the EU (SI 2019 No. 506, Explanatory Note).  This is consistent with the Withdrawal Agreement, which provides that “it will be important for the [UK] to be able to take steps to prepare and establish new international arrangements of its own, including in areas of Union exclusive competence, provided such agreements do not enter into force or apply during that period, unless so authorised by the Union” and empowers the UK to do so (preamble; Article 129(4)).

Investment protection in the future partnership agreement

In the light of the declared aim of the EU and the UK to negotiate a comprehensive partnership agreement, and the legal framework set out above, it seems unlikely that any EU Member State would seek – let alone be authorised – to negotiate a new, standalone, BIT with the UK.  A review of the publicly stated and detailed negotiating positions of the EU and UK, both of which make reference to an intention to include some form of investment protection in the future agreement, reaffirms this conclusion.

— The EU “negotiating directives” and draft legal text on the future agreement

The EU “negotiating directives”, which it published on 25 February, make reference to issues relevant to investment protection in various places.  They also contain a dedicated section on “Services and Investment”.  Within the preliminary section on “Objectives and Principles” (of the partnership), the directives note that the future partnership agreement “should facilitate, to the extent possible, trade and investment between the Parties, while respecting the integrity of the Union’s Single Market and of its Customs Union” (paragraph 17).  They also note the need to ensure that the Parties retain “the ability to regulate economic activities according to the levels of protection each deems appropriate in order to achieve legitimate public policy objectives” (paragraph 18).

In Section 3 on “Services and Investment”, the EU negotiating directives note that the partnership “should include ambitious, comprehensive and balanced provisions on trade in services and investment in services and non-services sectors, respecting each Party’s right to regulate” (paragraph 34).  They also note that the partnership “should include provisions on market access and national treatment under host state rules for the Parties’ service providers and investors, as well as address performance requirements imposed on investors” (paragraph 36).

The EU negotiating directives also set out various proposals relating to the protection and regulation of investment in specific sectors.  In relation to “energy and raw materials”, for example, the directives provide that the partnership should “include rules that support and further promote trade and investment in the renewable energy sector” and “aim at promoting the development of a sustainable and safe low-carbon economy, such as investment in renewable energies and energy efficient solutions” (paragraphs 79 and 80).  Relatedly, in a section on “level playing field and sustainability”, the negotiating directives provide that “where the parties increase their level of environmental, social and labour and climate protection beyond the commitments [addressed elsewhere in the directives], the envisaged partnership should prevent them from lowering those additional levels in order to encourage trade and investment” (paragraph 110).  Overall, the partnership “should promote a greater contribution of trade and investment to sustainable development” (paragraph 111).

The directives also refer to the intended institutional provisions of the future partnership agreement, including with respect to the resolution of disputes (paragraphs 149 and 158-161).  There is no specific reference to the inclusion of an investor-State dispute settlement mechanism.  Rather, the directives refer only to the need to include provisions encouraging “the Parties to make every attempt to resolve any matter concerning the operation of the envisaged partnership through discussion and consultation” (paragraph 158) and for the possibility of the governing body referring, where applicable, a dispute “to an independent arbitration panel” (paragraph 159).

These principles are reflected in the “negotiating document” transmitted to the UK and published on 18 March 2020 by the European Commission’s Task Force for Relations with the UK (“Draft text of the Agreement on the New Partnership with the United Kingdom”).

Part Two, Title VI of the draft text sets out draft provisions on “Services and Investment”, including the general principle that “the Parties affirm their commitment to establish a favourable climate for the development of trade and investment between them” (Article SERVIN.1.1.1).  Title VI also includes an “Investment liberalisation” chapter, which contains provisions on Market Access, National Treatment, Most-Favoured-Nation Treatment, Senior management, and Performance Requirements, (Articles SERVIN.2.2-2.6).  There are no substantive provisions relating to expropriation, fair and equitable treatment, or full protection and security (in contrast to the EU’s recent agreements with Canada, Vietnam and Singapore, for example).  Title VI also includes a requirement on the Parties to “maintain judicial, arbitral or administrative tribunals or procedures which provide, on request of an affected investor […] the prompt review of, and if justified appropriate remedies for, administrative decisions that affect establishment or operation […] of a Party in the territory of the other Party” (Article SERVIN.5.13).  Part Two, Title XIII deals with “energy and raw materials”, and states as its objective the facilitation of “trade and investment between the Parties in the areas of energy and raw materials, and to improve environmental sustainability, support security of supply and contribute to the fight against climate change in these areas”.

Consistent with the directives, the “Dispute Settlement” section of the draft text (Part Five, Title II) refers only to “disputes between the Parties concerning the interpretation and application of this Agreement”.  It makes no specific provision for the resolution of disputes between investors and a Party by an international arbitral tribunal.  Indeed, such a mechanism appears to be explicitly precluded by Part I, Title III of the “negotiating document”, which provides that (with the exception of certain articles in the section of the draft on “Security”), “nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties.”  It also makes explicit that “[a] Party shall not provide for a right of action under its law against the other Party on the ground that the other Party has acted in breach of this Agreement.”  (Both at Article COMPROV.16).

— The UK’s “approach to negotiations” with the EU and its draft “negotiating document”

As we explained in our previous Brexit Insight on the EU and UK’s negotiating priorities, the UK approach is based on the principle that the agreement should be along the lines of the free trade agreements already agreed by the EU in recent years, like the EU-Canada Comprehensive Economic and Trade Agreement (CETA).  As readers will know, CETA contains comprehensive provisions on investment protection, and includes a mechanism for the resolution of disputes between investors and States.

The UK’s objective for the future partnership to include provisions on the protection of investments is addressed in Chapter 9 of its “approach to negotiations”, entitled simply “investment”.  That section calls for the agreement to include provisions on Market Access, National Treatment, performance requirements, senior management, and Most Favoured Nation Treatment (i.e., the very provisions included in the draft text released by the European Commission).  The UK also hopes for the agreement to include “exceptions, for example on national security” (Chapters 29-31, paragraph 82).

Like the EU, the UK’s negotiating approach emphasises the importance of the agreement including “provisions for sustainable development covering the protections afforded by labour and environmental law” (Chapter 25, paragraph 74) and “reciprocal commitments not to weaken or reduce the level of protection afforded by environmental laws in order to encourage trade or investment” (Chapter 27, paragraph 77).  It also provides that the agreement should “recognise both parties’ right to regulate to meet our respective climate goals” (Part 2, paragraph 16)

The UK approach to negotiations makes no explicit reference to the inclusion of mechanisms for the resolution of disputes between an investor and a Party (ISDS), but refers more generally to the necessity of providing “mechanisms for dialogue, and, if necessary, dispute resolution.”  (Chapter 32, paragraph 83).  In contrast to the EU negotiating directives and draft text, both of which foresee a role for the CJEU in relation to disputes raising questions of Union law, the UK negotiating approach specifies that “consistent with previous Free Trade Agreements concluded by the EU”, there will be no role for the Court of Justice of the European Union (Chapter 32, paragraph 83).

On 19 May 2020, the UK published the draft legal text it had “in recent weeks” already shared with the EU.  (As the letter from David Frost to Michel Barnier explains, the UK had previously kept the shared draft legal text confidential, but had agreed to publish it “as a constructive contribution to the negotiations, and in particular as a response to your suggestions […] that it would help [Mr Barnier] explain [the UK’s] proposals in more detail to Member States”.)  As anticipated in the UK’s “approach to negotiations”, the draft legal text contains provisions on Market Access (draft Article 10.2), National Treatment (Article 10.3), performance requirements (Article 10.6), senior management (Article 10.5), and most-favoured-nation treatment (Article 10.4).  It also emphasises the parties’ commitment to “promoting the development of international trade in such a way as to contribute to the objective of sustainable development”, and recognition of the interdependence of “economic development, social development and environmental protection” (Article 26.1.1).  It further includes a commitment not to waive or derogate from a party’s existing environmental law “to encourage trade or the establishment, acquisition, expansion or retention of an investment in its territory” (Article 28.5.2).

Consistent with the notable absence of reference to the inclusion of any ISDS mechanism in the UK’s “approach to negotiations”, the draft negotiating document does not include any ISDS mechanism.  Rather, it provides only mechanisms for the settlement of disputes between the parties “concerning the interpretation and application of the provisions of this Agreement” (Article 33.2).

Conclusion and comments

Both the EU and UK have expressed a desire to include investment protections for cross-border investment in the future partnership agreement.  In the light of the EU’s stated intention to negotiate an agreement with the UK that extends to investment protection, it would appear that no individual EU Member State would be able to obtain authorisation from the European Commission under the Regulation to enter into negotiations on a separate bilateral international investment agreement with the UK.

Indeed, given the relatively consistent positions so far (publicly) taken by each side in relation to investment protection, it seems highly likely that investment protection will in fact ultimately be addressed, in some form, in the final agreement.  For that reason, the EU will likely press for the UK’s existing twelve BITs with EU Member States to be terminated and replaced by the future partnership agreement (if they have not already been terminated by the UK bilaterally – as to which, see our separate reports here and here).

However, on the basis of the publicly available information discussed above, the investment protections envisaged by the future partnership are significantly less than those contained in the UK’s existing BITs.  There appears to be no intention – on either side – to include, for example, provisions on expropriation, FET and FPS, or to establish an investor-State dispute settlement mechanism that involves international arbitration.  These are provisions that are routinely relied upon by investors to obtain compensation for the unlawful treatment of their foreign investments.  This should therefore raise doubts for any investor that assumed, with the advent of Brexit, that it may be able to continue to rely on the UK’s existing intra-EU BITs.  Investors who are currently reliant on those BITs might therefore begin to consider whether their cross-border investments between the UK and those Member States, or vice versa, might be better protected if they were structured through other jurisdictions.

 

Regulation (EU) 1219/2012 can be found here.

The EU’s negotiating directives can be found here, and the European Commission’s Draft text of the Agreement on the New Partnership with the United Kingdom” is available here.

The UK’s approach to negotiations can be found here, and the UK’s draft negotiating document is available here.

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