A study on the impact of Brexit and other developments in EU law relating to arbitration under the bilateral investment treaties.
There have been several speculations on various issues regarding the fate of UK after Brexit, but the approach of this article is limited only to the legal consequences of Brexit. It provides an introduction and overview of the procedure and negotiations followed before and after the Brexit and further highlights the future of EU-UK relationship beyond transition period. The article presents an overview of the aspect of the primacy of EU law and the suspension of all the bilateral investment treaties by the European court of justice. It highlights the developments after the Achmea judgment, affecting the Intra European union Bilateral investment treaties and the impact of the termination agreement signed by the majority of EU Member States on 5th May, 2020 to terminate all the intra-EU BITs.
The origin of the formation of European union can be traced back to the year 1957, when countries like France, West Germany, Belgium, Italy, Luxembourg and the Netherlands signed the Treaty of Rome, which established the European Economic Community (EEC). The EEC is the predecessor of today’s European Union (hereinafter referred to as EU). European Union was an attempt to foster economic cooperation between European nations in the wake of World War II. It was believed that Nations that traded together, would be less likely to rage a war against each other.
Britain joined the European Union in the year 1973. However, just two years later it proposed to withdraw its membership from EU. Britain held a referendum in 1975, to decide whether the nation should exit EU or continue to be a member of it. The country voted against the exit from the EU, but the tension between Britain and EU kept escalating. One of the major issues was the funding given by Britain to EU.
Despite being the 3rd poorest country in the community, UK was contributing relatively more than other nations. UK got a rebate on the funding after Prime Minister Margret Thatcher negotiated with the EU and reduced the amount of funds contributed by the UK to the budget. Since then, some prime ministers have tried to bridge the gap and negotiate to strengthen the relations with EU, whereas, others have attempted to initiate an exit from EU.
Since the beginning of the membership, UK had the intentions to leave EU, However, the idea gained momentum, only after the speech of prime minister David Cameron in2013, wherein he spoke about the need to change the role of UK in the EU and that he would ask the nation to vote on the question i.e. Whether UK should remain a part of EU. Three years later, the 1UK held a referendum to decide on the same question and the nation voted in favour of the Brexit. A slight majority of 51,89% voted against remaining in the EU. 2Anne McNaughton & James Cameron, International: Key legal implications of UK withdrawal from the EU, 25 LSJ. 70 (2016).
Post the results David Cameron resigned from his office and the new prime minister, Theresa May was expected to arrange the Brexit. Consequently, the British govt activated Article 50 of the treaty of European union enacted under the Lisbon treaty. 3Treaty on European Union  OJ C 83/01. Article 50 essentially provides the option to any member state to withdraw from the EU in for any constitutional demands of its nation. 4Raymond J. Friel, Providing a Constitutional Framework for Withdrawal from the EU: Article 59 of the Draft European Constitution, 53 Int’l & Comp. L.Q. 412, 407–418 (2004). Any withdrawal of a member state is regulated through Article 50. However, in case the article stays silent with respect to any essential question, then the interpretation may be guided by the Vienna Convention on the Law of Treaties (hereinafter referred to as VCLT). 5Julia Told, BREXIT from the EU, 14(3) ECFR 494, 490–568 (2017).
In March 2017, the prime minister submitted the official letter giving notice of withdrawal from the EU. This marked the beginning of a two-year-long negotiation period for the Brexit. During the negotiation period, the EU rules had continued to apply on UK.
Now, the government had to decide on what would be the withdrawal procedure and the potential implications of the same. Several drafts and proposals regarding the withdrawal procedure were put forth for consideration in the House of Commons, but all of them failed to gain support. Due to this setback, the then prime minister Theresa May resigned from her post and with the appointment of Boris Johnson as the new prime minister, the approach towards the Brexit agreement changed.
He proposed the idea of opting for a “Hard Brexit”, in case they are unable to reach a withdrawal agreement with the EU. Hard Brexit is essentially a “no-deal Brexit”, where the nation exits the EU without any decisions on the consequences of the exit. The proposal of hard Brexit was vehemently opposed by the House of Commons, thus, it was imperative for the PM to form a suitable Brexit deal taking in account the framework for its future relationship with the EU. 6David Floyd ‘Brexit: How would withdrawal from the EU affect UK economic performance?’ Teaching Business & Economics 2016, vol. 20, pp. 12–13
Finally, in October 2019, the British prime minister and the representative of the EU formed a proposal for an orderly Brexit which was approved by the House of Commons, House of Lords, the Queen and the EU. On 31 January 2020, the UK made its exit from the EU, and with that Britain brought 47-year-old membership of the EU to an end.
Now it is expected that after the final withdrawal, the negotiation on the future relationship of the UK with member countries of the EU would also pace up. An agreement on the future relationship between EU and UK is most likely to include the content of foreign trade agreements usually covered by Art. 207, Treaty on the Functioning of the European Union (hereinafter referred to as TFEU) Common Commercial Policy. According to Art. 216 and Art. 207 of the TFEU, the EU has the competence to conclude international agreements in the field of Common Commercial Policy. 7Treaty on the Functioning of the European Union  OJ C202/1.
Presently, the UK is in the transition period which is likely to end by December 2020. The current rules on trade, travel, and business for the UK and EU will continue to apply during the transition period. New rules will take effect on 1 January 2021. On 31 December 2020, at the end of the transition period provided for in that agreement, UK will fully recover its economic and political independence and it will cease to be a part of the EU Single Market or the EU Customs Union.
The Approach Taken By UK Regarding The Future Relationship With EU
The future relationship between the UK and EU would be based on the parameters laid down in the UK / EU Political Declaration of 17 October. 8Hantzsche, Arno, and Garry Young. “The Economic Impact of Prime Minister Johnson’s New Brexit Deal.” National Institute Economic Review 250.1 (2019): F34-F37. The declaration essentially presents a framework for the future relationship between the European Union and the United Kingdom. It specifically emphasizes on the free trade agreement with the EU and also agreements on security and other areas of cooperation. In terms of approach, the UK government refuses the idea of having an institutionalized relationship.
It is adamant on the idea that the agreement to guide their future relationship with the EU must be friendly and flexible. Basically, it doesn’t want to have any obligations to align the laws of the nations with that of EU or EU’s institution. The UK aims to oust the jurisdiction of the Court of Justice in all the aspects of its governance. In its approach towards the negotiation, UK demands friendly cooperation between two sovereigns equals. Through this negotiation, it endeavours to restore its legal autonomy and the right to manage its resources.
One of the biggest challenges before the British Government is to ensure that any future arrangements for cooperation on law enforcement and judicial cooperation in criminal matters have to be made by taking into consideration the legal system of Scotland and Northern Ireland. It is essential to ensure that it doesn’t adversely affect the separate and distinct legal systems in those countries. The ultimate aim of these negotiations is to establish such a future relationship which not only benefits UK but also those territories for whose international relations the UK is responsible.
Impact Of Brexit On UK
UK’s position as an international arbitration center
It is obvious that after the departure of UK from EU, the EU laws will not be applicable in the affairs of UK. Consequently, it will change the position of UK in the world on many levels. Before Brexit, London was one of the world’s leading arbitration centers because of its arbitration friendly laws and experienced legal bar practicing such laws. The nation is still in the transition period, so it is difficult to ascertain as to what will be the actual outcome. However, a plausible outcome of it can be predicted by observing the functioning of EU law in the matter of arbitration and other factors that are considered by the parties while choosing the seat for arbitration.
Presently, the Brussels Regulations govern the recognition and enforcement of judgment within the EU. 9Nielsen, Peter Arnt. “New Brussels I Regulation, The.” Common Market L. Rev. 50 (2013): 503. The EU law is not applicable to the matters of arbitration within or outside the EU. Therefore, the position of London as an international arbitration center would not be adversely affected by Brexit. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (hereinafter referred to as New York convention, 1958) governs the international resolution of commercial disputes.
All the arbitral awards pronounced outside or within EU are recognized under the New York convention. The applicability of the convention remains unchanged by the Brexit and thereby leaving the position of London unaffected. The arbitral awards of UK would still be recognized and applied internationally, including within the EU countries.
On the contrary, it is anticipated that the position of London as an arbitration center would improve. he present trend suggests that the parties prefer those countries as their arbitration center which are not a member of EU. The legal system of that country is not dominated by the court of justice of EU; therefore, such countries are a better place to raise a claim against EU. Switzerland is one such country, which is considered a neutral place, where claims against EU can be raised.
Swiss seated arbitrations are preferred by most of the companies, specifically because swiss domestic laws are not affected by EU law, and swiss courts are not subjected to the jurisdiction of the CJEU or the European Commission. Post Brexit, EU law will cease to apply in UK and that would lure parties to opt for London as its arbitration seat. UK is likely to emerge as a more attractive and neutral jurisdiction to resolve international disputes because it is no more under an obligation of “Sincere Cooperation” in the enforcement of EU law. 10Art. 4(3) Treaty on European Union  OJ C 83/01.
Impact on Intra EU Bilateral investment treaties of UK
A Bilateral investment treaty is essentially an agreement that contains reciprocal undertakings for protecting foreign investors. These agreements impose obligations to protect investors abroad where investor’s rights are not already existing. Apart from ensuring fair, equal, transparent treatment of the foreign investment in the host country, the BITs also provide for a mechanism for resolving disputes through international arbitration. J11ames Rogers, Simon Goodall and Cara Dowling, Brexit and investor-state dispute settlement: What impact will Brexit have on foreign direct investment?, 8 International arbitration report, 24-27 (2017).
The UK is a signatory to more than 100 BITs with other countries around the world plus some 55 treaties containing investment provisions. Brexit has raised concerns amongst foreign investors because of the uncertainties about the future investment relationship of UK with EU member countries. The consequences of Brexit will be faced by many other nations because of the large bilateral investment treaty (BIT) networks of UK in the world.
The Centre for Economic Performance of the London School of Economics had stated that it is likely that Brexit might have a negative impact on the UK’s FDI. Before the withdrawal agreement was finalized, the House of Commons International Trade Committee published a report on the UK’s investment policy, where they concluded that the government’s investment policy is misconceived and non-existent. The report urged the government to take appropriate decision on the issue and clarify its stand on the investment protection standards as well as dispute resolution mechanisms for investors.
Currently, the UK has intra-EU BITs with twelve member states. 12Financial Stability, Financial Services and Capital Markets Union, Banking and financial services, 05 May 2020. Intra EU bits are essentially the bilateral investment agreements between the member states of EU. Post-Brexit all these BITS are no longer considered as intra-EU BITS, by virtue of the declarations signed in January 2019, along with all other EU member states, in which the UK undertook to terminate all BITs concluded between them.
EU Law V. The Bilateral Investment Treaties
In March 2018, the European court of justice in the Achmea case observed that investor-State arbitration clauses in intra-EU BITs are incompatible with the EU Treaties. 13Slovak Republic v. Achmea B.V. (Case C-284/16). In the judgment, the Court of Justice of the European Union found that Article 8 of the 1991 Netherlands-Slovakia BIT which provided for arbitration as a dispute resolution method, was incompatible with EU law.
The judgment laid the foundation for the termination agreement which is aimed to protect the autonomy of EU law. By virtue of this judgment the CJEU provided that the EU law precludes the application of an ISDS established by a BIT between two EU Members States. In this landmark judgment, the CJEU raised numerous queries and concerns regarding the future of 196 intra EU BITS that were in force at that time.
The EU legal system works on the principle of autonomy enshrined in particular in Article 344 of the Treaty on the Functioning of the European Union. The CJEU commented that the EU law stems from an independent source of law, the EU Treaties, and its primacy over the law of the EU Member States. According to the CJEU, the basis of the judicial system established under the EU treaties is to form a uniform and consistent legal system in all its member states. Its preliminary ruling procedure embodied in Article 267 of the Treaty on the Functioning of the European Union, which provides for consistency and uniformity in the interpretation of EU law. 14Ibid
After the Achmea decision, one of the biggest questions was whether the International Centre for Settlement of Investment Disputes proceeding provided for in intra-EU BITs and intra-EU disputes under the Energy Charter Treaty (ECT) would be rendered invalid. The concern was partially addressed on 5 May 2020, wherein a majority of the EU Member States signed an agreement to terminate all the intra-EU BITs (bilateral investment treaties, so as to invalidate all intra-EU investor-State arbitral proceedings. However, the ECT is not covered under the termination agreement and will be dealt with at a later stage. The EU member states may choose to enter into separate termination agreement relating to the ECT with mutual consent.
The termination agreement contains some fault lines, some of which can be spotted in Article 2 and 3 which terminate the sunset clause in BITs. Furthermore, Article 5 and 7 of the termination agreements, provide that the agreement shall have retrospective effect. This implies that it would render all the arbitral proceedings that have commenced after the Achmea judgment invalid. However, it doesn’t affect the arbitral proceedings concluded before the Achmea judgment, i.e. before 6 March 2018. Such provision falls against the international law as the VCLT bars the retrospective application of any treaty.
The Vienna Convention on the Law of Treaties, provides that treaties don’t provide for retroactive effect per se. Also, the termination of a treaty must not affect any right, obligation, or legal situation of the parties created through the execution of the treaty prior to its termination. Therefore, it is highly likely that the validity of such agreement is challenged on the ground of violation of the international convention.
Post Brexit, The EU law will cease to apply in UK that means the legal system of that country is not dominated by the court of justice of European Union anymore and that would lure companies to opt for London as its arbitration seat. UK is likely to emerge as a more attractive and neutral jurisdiction to resolve international disputes because it is no more under an obligation of “sincere cooperation” in the enforcement of EU law.
Furthermore, the Intra EU BITS of UK are no longer considered as intra-EU BITS, by virtue of the declarations signed in January 2019, along with all other EU member states, in which the UK undertook to terminate all BITs concluded between them. This will further attract companies to prefer the UK for dispute resolution as now there would be no slant towards the EU member states.
The most important update in relation to BITs has come on 5th may when the majority of EU members terminated the Intra EU BITs. This happened in consonance with the Achmea judgment, where CJEU rendered the arbitration initiated under Intra EU-BITs invalid. This was done to establish the supremacy of EU law and obtain uniformity and consistency in application and interpretation of EU law amongst all EU member states. However, the termination agreement has some fault lines which falls against international conventions such as VCLT.
Now, it would be interesting to see how the courts rule on this matter, whether they will conclusively find the enforceability of intra-EU dispute awards after Achmea or conduct a case-specific analysis. Presently, it can be concluded that Britain’s exit from the EU might cause short term difficulties in the functioning of the interstate dispute resolution process but there are no probable adverse impacts in the long run. if anything, the country might come out as a better place for international dispute resolution and lure more international investors towards itself.