Spotlight on EU/UK investment protection under the Trade and Cooperation Agreement (13 January 2021)

13 January 2021

The United Kingdom (UK) and European Union (EU) signed the Trade and Cooperation Agreement (TCA or Agreement) on 24 December 2020, after extensive negotiations.  The Agreement ushers in a new chapter in the economic and trading relationship between the Parties, including in relation to investment protection. This article outlines the investment protection regime under the TCA, before exploring the potential consequences of the Agreement on the UK’s intra-EU BITs, and on investment protection between the UK and EU generally going forward.

 

Investment protection under the TCA

The TCA’s investment provisions, contained within Part Two, Heading One, Title II, preserves the bulk of both Parties’ draft negotiating texts (which we analysed in a Brexit Insight of May 2020).

At the outset, it enumerates a wide range of public policy objectives in respect of which the Parties “reaffirm” their right to regulate, including “protection of public health; social services; public education; safety; the environment, including climate change; public morals; social or consumer protection; privacy and data protection or the promotion and protection of cultural diversity” (Article SERVIN.1.1(2)).

As for its scope, the Agreement confines protection to investors with “substantive business operations” in their home States whose foreign enterprise seeks to create “lasting economic links” (Article SERVIN.1.2(h), (j), (k)).  It also includes a standalone denial of benefits clause (Article SERVIN.1.3), whereby a Party may deny the benefits of the section to an investor or service supplier of the other Party, or to a covered enterprise, if the denying Party adopts or maintains “measures related to the maintenance of international peace and security, including the protection of human rights”, which, among others, prohibit transactions with an investor.

As for substantive protections, the TCA contains provisions on market access, performance requirements, senior management, national treatment and most-favoured-nation treatment (Articles SERVIN 2.2-2.6).  These essentially replicate the provisions in the UK (Articles 10.2-10.6) and EU (Articles SERVIN.2.2-2.6) draft texts.  The protections do not apply to any existing non-conforming measures of either Party which have been identified and annexed in accordance with Article SERVIN.2.7.

However, the Agreement is more notable for its omissions.  For one, like the Parties’ draft texts, the treaty includes no substantive provisions relating to expropriation, fair and equitable treatment (FET), or full protection and security (FPS). Secondly, there is no investor-state dispute settlement (ISDS) mechanism.  Rather, it provides only for inter-State arbitration in respect of disputes “concerning the interpretation and application of the provisions of this Agreement” (Article INST.9), which excludes recourse to domestic courts or the Court of Justice of the European Union (CJEU).  This is a verbatim reproduction of both the UK (Article 33.2) and EU (Article INST.9) draft texts.  Additionally, Article COMPROV.16 specifies that the Agreement cannot be construed as conferring any rights or imposing any obligations on investors.

This omission emulates the same ISDS-less approach as adopted in the UK’s Comprehensive Economic Partnership Agreement (CEPA) with Japan in October 2020.  Unlike the UK-Japan CEPA, however, the TCA does not make any reference to the future negotiation of an ISDS mechanism.  It remains to be seen whether the EU and UK will separately seek to negotiate an investment protection agreement (IPA) of the like negotiated with Vietnam and Singapore, or which contain comparable protections to those found within the investment chapter of the EU’s free trade agreement with Canada (CETA). What is more certain, however, is that it is almost inconceivable that any individual EU Member State will seek or be able to obtain authorisation from the European Commission to negotiate a new bilateral agreement with the UK, which affords greater protection in relation to investment than that set out in the TCA.  Either that will need to be done with the EU as a whole, or not at all.

 

The impact on the UK’s (formerly) “intra-EU” BITs

The UK continues to maintain in force eleven BITs with other EU Member States (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Romania, Slovakia, and Slovenia), and one BIT (with Poland) that has been terminated but whose sunset clause will remain in force for a further 14 years.  Many anticipated that their status would be resolved by the TCA.  However, the TCA contains no equivalent to the CETA or the EU-Vietnam and EU-Singapore IPAs, each of which expressly terminates existing BITs between EU Member States and each trading partner.  As a result, the question arises as to whether the BITs continue to co-exist alongside the investment protection provisions of the TCA.

The European Commission’s primary position, consistent with that which it has repeatedly taken in amicus submissions before investment tribunals, is almost certainly that the BITs were impliedly terminated under Article 59 of the Vienna Convention on the Law of Treaties (VCLT) at the point in time when the UK’s contracting party in each case acceded to the EU.  By extension, the UK’s withdrawal from the EU could not have had the effect of “reviving” those impliedly terminated BITs because they had already been terminated – and not suspended – upon the accession of each Contracting Party.  As a result, the European Commission may well have taken the view that there was nothing left for the TCA to terminate and that it was therefore unnecessary – and moreover wrong – to include a list of “terminated” BITs.  At the very least, the European Commission most likely took the view that the arbitration clause of each UK intra-EU BIT was invalidated by the January 2019 Declarations, such that at least the TCA – which embodies some substantive protections – impliedly terminates the remaining provisions of the BITs under Article 59 VCLT or renders them inapplicable under Article 30 VCLT.

The UK perspective is likely to be otherwise.  The UK, for its part, continues to list each of these BITs on its “UK Treaties Online” database as if they are in force, without distinguishing between their substantive or procedural protections.  It likely takes the view that its BITs were not impliedly terminated upon the accession of each of the Contracting Parties in the way described by the Commission, and that the arbitration clause in each BIT was not terminated by the January 2019 Declaration.  On that view, the BITs remain valid and applicable in full unless the TCA meets the requirements of Articles 30 or 59 of the VCLT.  It is doubtful that these provisions would apply, given that the BITs and the TCA have different parties (Member States, on the one hand, and the Union, on the other).  Further, on the substance, the UK’s view may well be both that it cannot be implied that the UK and EU both intended that investment protection between them would be governed by the TCA only, and that the provisions of the TCA are not so far incompatible with those of the BITs that the two treaties are not capable of being applied at the same time, given that the scope of the BITs is substantially wider than that of the TCA.

The other question that is not resolved by the TCA is what will happen to the European Commission’s infringement proceedings against the UK for its decision not to sign the multilateral treaty terminating intra-EU BITs (Termination Treaty).  During the transition period, Union law continued to be applicable to and in the UK under Article 127 of the Withdrawal Agreement.  As a result, during the transition period the UK remained under an obligation under EU law to terminate its intra-EU BITs, as it had undertaken to do in January 2019, in response to the CJEU’s judgment in Achmea.  Its decision not to sign the Termination Treaty, and the absence of any sign that the UK intended to effect termination of those intra-EU BITs bilaterally, prompted the European Commission to bring infringement proceedings against the UK (see here and here).  Now that the transition period has ended the UK is no longer subject to EU law, but it remains responsible under international law for its failure to fulfil any obligations to which it was subject during the transition period under the Withdrawal Agreement.  It is, accordingly, plausible that the European Commission will continue to pursue its infringement proceeding against the UK and to take it to the next step – referral to the CJEU, pursuant to Article 87 of the Withdrawal Agreement.  If it does so, the European Commission would presumably seek to force the UK to terminate its remaining BITs with EU Member States.

 

UK-EU investment protection going forward

The TCA will have left cross-border EU/UK investors who currently rely on the UK’s BITs with EU Member States in an uncertain position.  Under international law, there is room for debate about whether the UK’s BITs with EU Member States remain in force.  While the better view is that they remain in force as a matter of international law, their future is uncertain, given the absence of any sign yet that the European Commission intends to drop its infringement proceeding against the UK (it remains listed here as an active case).

If, however, they have been superseded by the TCA and therefore must be considered terminated, investors who previously enjoyed those protections will now enjoy much less in the way of protection than they did before.  The absence of an ISDS mechanism or expropriation and FET standards in the TCA – both of which are routinely relied upon by investors to obtain compensation for unlawful treatment of their foreign investments – mean less favourable conditions for investors.  In the absence of ISDS, aggrieved investors seeking to challenge host State measures will have to rely on the UK or EU to initiate State-to-State arbitration under Part Six of the TCA.  Investors will be entitled to file amicus curiae submissions (Article INST.26(3)), which the tribunal must consider but need not address.  With this in mind, investors reliant up to now on the UK’s BITs with EU Member States would have good reason to consider restructuring their cross-border investments through other jurisdictions in order to benefit from more fulsome investment protections.

Furthermore, with Brexit now complete, the UK may now become a more attractive forum for investors to enforce intra-EU BIT awards.  In this regard, the UK Supreme Court’s Judgment in the Micula case on 19 February 2020, which finally put to rest a five-year enforcement dispute by holding that the principle of “sincere cooperation” in Union law could not impede or prevail over the UK’s enforcement obligations under the ICSID Convention, may prove a harbinger for many enforcement proceedings to come.

The TCA became provisionally applicable on 31 December 2020, and will remain so until ratified in accordance with the procedures of both Parties.

The text of the Agreement is available here.  Our previous Brexit Insights article on the UK-EU investment relationship is here.

 

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