Will hard Brexit leave the UK at arbitration risk?

As the chances of a hard Brexit mount, so too does the legal risk the UK government faces should it leave the EU with no deal at all in March 2019. Talks in Brussels have progressed slowly, and the ruling Conservative party leadership remains divided over the best way forward.

Unable to see past the current impasse, investors and their legal advisers are gearing up for the worst. Beyond inevitable operational shake-ups, a hard Brexit may even prompt some of them to take the UK government to court. If suing the UK under the investment protection provisions included in its myriad active international treaties would have been unthinkable only a few years ago, that risk has never been bigger today.

“The possibility of investors bringing claims – of suing the UK government – is possible. We can expect that, but their chances of succeeding as a result of the Great Repeal Bill [formally known as the EU (withdrawal) Bill 2017-2019] are very slim,” says Luis González García, an associate member at Matrix Chambers specialising in international law, trade and dispute resolution.

Brits in BITs

The UK has 95 bilateral investment treaties (BITs) in force with countries all over the globe. Although each treaty differs, most feature standard provisions guaranteeing investors ‘fair and equitable treatment’ in the host country, and shielding them from discriminatory treatment and expropriation. At the same time, the UK is also part of multilateral treaties that offer similar investment protections to a specific subset of investors, such as the Energy Charter Treaty (ECT) applying to investors in the energy sector from the 50 member countries.

Despite their bilateral – and thus reciprocal – nature, for many years BITs worked as a one-way tool for investors from the developed world to enforce their rights in developing countries. British investors have been among the most active in bringing claims before international arbitration tribunal under the provisions included in its BITs. These account for 69 of the known claims tracked by Unctad, second only to investors from the US (152), and the Netherlands (96). Conversely, the UK has been subject to only one known claim.

Yet developed countries no longer appear to have greater protection from investment claims. Canada and the US have been sued dozens of times under the North American Free Trade Agreement, while in Europe, Spain has been hit by a wave of claims under the ECT provisions. With this in mind, there are warnings that the UK authorities should take extreme care when it comes to defining a post-Brexit regulatory order.

“It is possible that Brexit will result in widespread regulatory changes, or it may not result in regulatory changes consistent with its investment treaties,” says Noah Rubins, head of the international arbitration practice group at law firm Freshfields Bruckhaus Deringer. “Any time there is a risk of additional regulatory change, people have to be attentive to that. People within the state need to be attentive to the requirement of these treaties and investors need to be conscious of the rights they have under these treaties.”

At the same time, he adds: “The UK is conscious of the treatment of foreign investors and tends to comport itself in a way that is consistent with its obligations under these treaties, of which the UK has a great many.”

A hard reality?

However, Brexit is an unprecedented occurrence and the Conservative government is struggling to come up with an agreed plan, making the case for a no-deal Brexit stronger than ever as the final March 2019 deadline approaches with no tangible breakthrough in the official negotiations.

“The harder the Brexit, the likelier there will be claims, and their chances of success will also be higher than [in a] soft Brexit scenario,” says Markus Burgstaller, a partner at law firm Hogan Lovells. “If the relationship between the EU and the UK fell back on World Trade Organization tariffs or made it more difficult for financial firms to operate, then the likelihood of claims will be higher, also because the possibility of success of these claims will be higher.”

For investors to have any chance of success in bringing arbitration claims against the UK, they will have to have a very clear case. Out of the country’s top 10 investing countries, only India and Hong Kong have an active BIT with the UK. Other major foreign investors in the UK, such as China or Russia, are also covered.

On the other hand, the ECT extends to most foreign investors exposed to the UK energy market. They will have to give evidence of a substantial loss to justify the claim. They will also have to demonstrate that the government – or better, a government act – can be blamed for it.

This last point will be the most difficult to prove. The so-called Great Repeal Bill is expected to be the only piece of legislation that formalises the UK’s withdrawal from the EU, translating EU law into UK law. Even though a final version has yet to be approved, it currently seems to be leaving little room for arbitration claims.

“The Great Repeal Bill is a non-discriminatory measure of general application affecting both foreign and UK investors, and in international law itself it cannot be a breach of standards of protection under international treaties,” says Mr González García.

Double-edged reassurances

The legal risks for the UK government do not end here though. “There is that line of international jurisprudence that suggests that a state is free to change its policies, but if it gave assurances to an investor that that regulatory regime wouldn’t change, then a claim would be more viable,” says Mr Burgstaller.

In October 2016, the government reassured Japanese Nissan, which is responsible for one in three cars produced in the UK, that Brexit would not disrupt its local operations. Even through the contents of the assurance are confidential, business secretary Greg Clark said in an interview with the BBC: “What I said [to Nissan] is that our objective would be to ensure that we have continued access to the markets in Europe and vice versa without tariffs and without bureaucratic impediments, and that is how we will approach those negotiations.”

Once reassured by the government, Nissan announced extra investment into the UK, betting on the country’s continued access to the European single market. Yet that reassurance may eventually backfire if talks collapse, prompting the Japanese carmaker, and any other investors in a similar situation, to consider filing a claim.

“If there is discrimination between two investors in a like situation, such that a government treats one investor in a different way to another one in like circumstances, and assuming that there is investment protection in place for the discriminated investor, that could strengthen a claim,” says Mr Burgstaller.

Paving the way

Representing a more feasible line of action for investors willing to hedge the Brexit risk they are facing, legal firms are adjusting their legal advice accordingly.

“There is so much uncertainty [at the moment]. I would not be advising [my clients] yet to come up with an investment claim, but what I would advise them to do is to try to get some concession from the government as a condition of continued investment in this country [...] and then I would say, if you can get that, you want to make clear that if the government doesn’t live up to these assurances, then I’d have a claim against you [the government],” says Suzanne Spears, partner at law firm Volterra Fietta.  

By mid-2018 it will be clear whether or not the UK and the EU are able to strike conciliatory terms for their divorce. Only then will investors and their legal advisers be able gauge the legal consequences of any Brexit agreement. Should a hard Brexit materialise, arbitration lawyers will be busier than ever – on both sides of the camp.