BITs and the post-Brexit investment landscape

BITs are treaties between states which give investors from the investor state legal rights directly enforceable against the host state if investments are compromised by the host state. Such action includes direct expropriation by the host state without adequate compensation being paid to the investor, as well as indirect measures such as tax structures, the effect of which may unfairly prejudice foreign investors. A core feature of BITs is that they provide a mechanism for investor-state dispute settlement via private arbitration, thereby making use of experienced arbitrators and side-stepping the state's local courts. BITs are attractive to investors because they allow the investor to take action in their own right to protect their investment, in contrast to the position in trade agreements (or disputes over WTO obligations) where typically a business would need to persuade its own government to raise issues at state-to-state level. Investments can be routed into host states via investment vehicles situated in states party to relevant BITs. The higher standard of legal protection and therefore greater legal certainty offered by BITs to investors is generally thought to encourage and facilitate cross-border investment, benefitting both the foreign investor and the host state.

For some time, BITs between EU member states have been criticised by the European Commission. In March 2018 the Court of Justice of the European Union ("CJEU") held, in the Slowakische Republik v. Achmea BV, Case C-284/16 [2018] involving the Netherlands-Slovakia BIT, that such treaties are invalid as their investor-state dispute settlement provisions are incompatible with the EU single market. The CJEU considered that member state courts – not international tribunals, which do not answer to the CJEU – should settle disputes between European investors and member states.

A treaty which came into force on 29 August 2020 (the "Termination Agreement") will terminate all intra-EU BITs between ratifying states. However, the UK has declined to join it. The UK's position may be that these treaties will remain valid after the post-Brexit transition period ends (and EU law ceases to apply to the UK) on 31 December 2020.

To the extent that such treaties remain valid, investments may continue to be structured via the UK so as to attract BIT protection.

If, as suggested above, investors find BITs attractive because they provide greater comfort that their investment will be protected by law, then the changes to the BIT landscape as a result of Brexit could present an opportunity for the UK.  Investors may decide that, in order to secure the protection of BITs, they will structure their investments into relevant EU member states through UK-incorporated entities. However, there are a number of important caveats.

a) First, this issue only concerns BITs between the UK and twelve of the 27 EU member states: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia. It is not relevant to investments made in other member states.

b) Second, any advantage may be short-lived. It is possible that one or more of the twelve relevant member states could seek unilaterally to terminate the treaties. However, notwithstanding this, investors may consider that it is better to have the possibility of availing themselves of the protection they offer than not having it, or of having to take chances in member state courts.

c) Third, care needs to be taken to ensure that structuring the investment so as to take advantage of a BIT is not seen as an abuse of process. Typically, this risk is highest where an investor restructures an existing investment in order to take advantage of a BIT in relation to a foreseeable dispute, which has been found to amount to an abuse. However, in practice, it is widely accepted that, as a general principle, investors may legitimately take account of the availability of a BIT regime when deciding how to structure their investments, particularly in relation to new investments.

d) Fourth, it is also possible that the EU and UK may agree that the existing BITs should be replaced with a new investor protection regime, such as that contained in the EU-Canada free trade agreement ("FTA"). However, at the time of writing, such a regime did not appear to form part of the current Brexit negotiations.

e) Finally, it is important to note that the Termination Agreement expressly carves out claims under the Energy Charter Treaty (a multilateral investment treaty), to be dealt with in a subsequent agreement, and so these are still at large.

This is not yet entirely clear. The Termination Agreement does not disturb arbitrations concluded prior to 6 March 2018, the date of the CJEU judgment in the Achmea case.¹ By contrast, pending arbitrations are to be resolved in accordance with transitional provisions providing for either a "structured dialogue" between the parties or through a state's national courts, even where national time limits have expired. "New" arbitrations, i.e. those commenced after 6 March 2018, will retrospectively lack jurisdiction under the Termination Agreement. On its face, the Termination Agreement raises some difficult jurisdictional questions, and the extent to which arbitral tribunals will give effect to it (particularly in respect of retroactive provisions affecting arbitrations commenced prior to its entry into force) remains to be seen.

As a result of the Termination Agreement, EU investors who consider that they may have a claim under a BIT as a result of state action will instead have to consider whether they are able to bring actions in member state courts on the basis of EU and national law.  The European Commission has said that it considers that the existing EU framework provides adequate substantive and procedural safeguards for intra-EU investors in the single market who consider they have been affected by the actions of a member state, but some member states take a different view and have raised the need to take action without delay to "assess the establishment of new or better tools under European Union law and … an assessment of the current dispute settlement mechanism" ² to ensure "complete, strong and effective protection of investments within the EU".³

The EU has been working to garner support through the United Nations Commission on International Trade Law for a Multilateral Investment Court which will eventually replace bilateral investor-state dispute settlement mechanisms. The Multilateral Investment Court, like the Investment Court System, which the EU has incorporated into its bilateral trade agreements with Canada, Singapore, Vietnam and Mexico, would differ from traditional investor-state dispute settlement regimes in that it is proposed to be structured as a permanent body, made up of both a tribunal of first instance and an appeal tribunal, and to have procedures which enable greater transparency and intervention by interested third parties.

Meanwhile, the UK Government has stated that after Brexit, the UK will regain "full control" over its ability to negotiate international investment agreements (whether as BITs or chapters within broader FTAs) and will consider a range of options as it develops a new, post-Brexit trade and investment policy. As alternatives to existing institutional and ad hoc arbitral tribunals, the UK Government is considering the use of permanent dispute resolution bodies such as the Investment Court System. It is also looking at the European Commission's proposals for a Multilateral Investment Court. 

The degree of uncertainty in the international trade environment at present means that this may be thought to be a distant prospect. However, in the longer term, it is possible that the UK and EU's positions may re-converge if the EU's vision for a widely adopted Multilateral Investment Court, to replace the current system of investor-state arbitration, is eventually realised.