Brexit—the future of state-to-state, investor-state and domestic dispute resolution

The post below was first published on our PIL blog

The Brexit White Paper

The much-anticipated Brexit White Paper, ‘The United Kingdom’s exit from and new partnership with the European Union’, was published on 2 February 2017. This post focuses on a subject that has to date received relatively little attention—what it has to say about the future of dispute resolution. In its Chapter 2 (‘Taking control of our own laws’), and Annex A, the White Paper contains perhaps a surprising amount on dispute resolution, in comparison to the text devoted to the other eleven of the UK government’s 12 stated principles.

In this blog post we review the White Paper with the aim of discerning so far as possible the potential future of dispute resolution for the UK. In particular, we consider how the UK government envisages, at this relatively early stage, that disputes will be resolved under new post-Brexit UK-EU agreements, and if and how UK businesses will be able to enforce their provisions. We also consider certain implications of the end to the Court of Justice of the European Union (CJEU)’s jurisdiction in the UK and the adoption of the acquis under the Great Repeal Bill.

State-to-state dispute resolution

How will UK-EU disputes be resolved?

The White Paper is not clear on the kind of state-to-state dispute resolution provisions which the UK government wishes to achieve in its post-Brexit agreement with the EU. It notes that ‘[d]ispute resolution mechanisms ensure that all parties share a single understanding of an agreement, both in terms of interpretation and application’, and there is a general sense of support for the kind of state-to-state dispute resolution provisions which already exist in various bilateral and multilateral agreements. The features which are highlighted include amicable or political dispute resolution (NAFTA, MERCOSUR), co-operation and consultation (New Zealand—South Korea FTA, CETA), ad hoc arbitration (MERCOSUR) and panel procedures (NAFTA, WTO, CETA).

The state-to-state dispute resolution mechanism to which the most text in the White Paper is devoted is that found in the CETA, possibly because the CETA is so recent and offers evidence of the EU’s likely approach. However, other examples are given in Annex A, and the White Paper stresses that they are all ‘simply examples of existing practices—the correct approach for the agreement underpinning the future relationship between the EU and the UK will be a matter for negotiation’. More generally, it states that ‘the UK will seek to agree a new approach to interpretation and dispute resolution with the EU. This is essential to reassure businesses and individuals that the terms of any agreement can be relied upon, that both parties will have a common understanding of what the agreement means and that disputes can be resolved fairly and efficiently’.

What is clear is that the method of state-to-state dispute resolution in the UK’s agreement with the EU will differ from the status quo under the EU treaties. Currently the CJEU has exclusive jurisdiction under Article 344 TFEU to resolve disputes between Member States arising under the EU treaties. For example, Article 259 TFEU provides a procedure under which a Member State may bring the matter before the CJEU when it considers that another Member State has failed to fulfil an obligation under the Treaties. Following Brexit, the CJEU’s jurisdiction to resolve any disputes between the UK and other Member States or the EU institutions will fall away—the government’s commitment to this is clearly stated in the White Paper.

Limits on direct enforcement? Impact on UK businesses

As noted above, the White Paper envisages that resolution of disputes in relation to any new agreements between the UK and the EU will be at state to state level, before a similar type of adjudicatory body to those set up under other treaties (with the possible exception of any investment provisions creating private rights directly enforceable against the State, as discussed in the following section). This will represent a considerable difference from the current position.

At the moment, for example, if a UK business faces improper regulatory hurdles when it seeks to deliver services in another Member State, it can start proceedings in the courts of that Member State alleging breach of the free movement provisions in the EU treaties, which provisions can be directly applied by that national court. Under the UK-EU agreement envisaged by the White Paper, however, it will not have such a right, but will instead need to seek the support of the UK government at the state-to-state level under the treaty (unless the relevant Treaty provision is reflected in EU law or national law in the relevant EU Member State). This takes any enforcement decision out of the hands of business, leaving it to the discretion of government which will be influenced by many different factors, including broader economic and political issues, as well as the strictly legal merits. History shows that formal dispute resolution mechanisms under treaties at state to state level are rarely invoked.

Examples exist of the UK government legislating to try to protect against the consequences of unfair trading practices by other states contrary to international law, but this rarely provides adequate cover or compensation for the consequences of a breach on private entities. This may present a distinctly less favourable position for business.

Investment protection and investor-state dispute resolution

Investment protection is an area which will require further consideration in the context of both the UK’s negotiation of its relationship with the EU and its free trade negotiations with third countries. Under a number of EU FTAs (such as the EU-South Korea FTA), UK investors benefit from substantive protections for their investments in the third state and are able to bring proceedings directly against that state to enforce those protections. However, the UK government has made clear in relation to CETA that, ‘[o]n leaving the EU, the UK will no longer retain access to the trade preferences contained within CETA unless arrangements to do so are put in place as part of our negotiations with the EU’, confirming that this position is ‘not impacted by whether or not the existing trade deal was signed as a mixed agreement’ (see further our blog post discussing provisional application of CETA and Brexit here). The position is likely to be the same under other EU FTAs with third states.

The White Paper comes at a time when the framework for resolution of investor-state disputes is under consideration in multiple fora. In summary, this dialogue focuses on two main topics:

• the substantive protections available to investors and
• the ‘mechanism’ by which those protections are enforced by investors against the state

The White Paper contemplates the possibility of direct enforcement of investor rights in relation to the UK’s new arrangement with the EU, however very little detail is given as to how the government might approach this. The focus of the White Paper is very much on state-to-state dispute resolution.

The issue remains politically sensitive in its own right. We have already seen concern expressed by the UK government about the perceived potential for substantive investment protections to impinge upon the exercise of sovereign powers—most notably this concern has been expressed in connection with the negotiation of the EU-US trade agreement, the TTIP. In the face of considerable disquiet from a spectrum of stakeholders about the implications of the TTIP, the UK government has recorded its support for express provisions upholding the right of governments to regulate in the public interest. This is evidenced by, for example, the UK government Response to the House of Commons Business, Innovation and Skills Committee’s Eleventh Report of Session 2014-15: Transatlantic Trade and Investment Partnership, which includes the UK government’s comments on the then draft of the investment chapter of the CETA and the Commission’s concept paper of January 2015. It is also implicit from the inclusion in the UK-Columbia BIT 2014 of an express provision enshrining the right of the contracting states to adopt any measure appropriate to ensure that an investment activity is undertaken in a manner sensitive to environmental concerns (provided that such measures are non-discriminatory and proportionate to the objectives sought). It is unclear whether the authors of the White Paper had the right to regulate in mind when they emphasised that ‘[a]ny arrangements [with the EU] must be ones that respect UK sovereignty’, but such an approach is in any event enjoying growing support with other governments including Canada, the US (by the previous administration although a similar approach may be expected from the new administration), Australia and across the EU.

As to the second issue of the mechanisms by which investor-state disputes will be resolved in the UK’s agreement with the EU (and those with other states), the White Paper offers few clues. Its Annex A refers to the investor-state dispute resolution provisions of the CETA, which incorporates the EU’s currently preferred system of creating an ‘investment court’, under which investor-state disputes are to be resolved by a panel of three tribunal members from a standing tribunal of 15 members (5 EU, 5 Canadian and 5 third country nationals) with the potential for appeal to an appellate tribunal.

It offers no comment on this system, however, which remains controversial and untested. As a member of the EU, the UK government will, or at least should, have had opportunity to express its views in this debate. Post-Brexit, the UK will be in a position to elaborate upon the to-date limited public expressions of its views in its own right, in the context of negotiation of its future agreements with both the EU and other states.

Nevertheless, the EU has its own agenda. The Commission has boldly advocated the creation of a multilateral investment court to hear investor-state disputes under its trade agreements with third countries. Indeed, assuming that the CETA is ratified, the EU is committed thereunder to ‘pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes’ (art 8.29). Even before CETA is ratified, having recently launched a further consultation on aspects of the proposed multilateral investment court, it would be difficult, particularly given the apparent strong support of the European Parliament, for the Commission to climb down from its current position regarding the establishment of such a body in any UK-EU negotiations.

The UK’s future negotiations with other states may also be affected by those states’ existing agreements and political positions on ISDS. By virtue of its agreement with the EU (assuming these agreements are ratified), Vietnam is similarly obliged to pursue the establishment of a multilateral investment tribunal. And others may follow. For these countries, the quickest route for the UK to finalise a trade agreement post-Brexit may be to adopt a modified version of the EU’s agreements, which may mean we see investment chapters which replicate this approach.

But other countries have not to date adopted the EU’s position. The US, for example, and other Pacific States, agreed to include in the TPP a system of ISDS using the ad hoc arbitration model common to the large majority of international investment agreements. While the Trump administration has of course recently rejected the TPP and indicated it may seek a renegotiation of NAFTA, it is not clear that this reflects a rejection of ISDS. The US has had a long history of favouring ISDS and USTR has been clear on why investment protection and ISDS is necessary and beneficial to the US. The US is high up the list of UK priorities for a trade deal, and we could therefore still see the US proposing ISDS (as per the 2012 US Model BIT) in any US-UK trade deal.

Domestic Law, the English Courts and the CJEU

The White Paper notes that Brexit will bring ‘an end to the jurisdiction of the CJEU in the UK’ but confirms that the UK ‘will continue to honour [its] international commitments and follow international law’.

It remains to be seen whether this dual commitment will give rise to any tensions. In the White Paper, the UK government has stated that, by way of the Great Repeal Bill, it will preserve existing EU law pending any decision by Parliament to amend or repeal it. However, it also recognises that changes will have to be made to the extent that existing laws would not function sensibly once we have left the EU. Interestingly, it is envisaged that these changes may be made by secondary legislation—and no doubt more significant changes are likely to follow as Parliament makes decisions on the way forward for the UK outside the EU.

The UK government has also said that, in general, it believes that the preserved EU law should continue to be interpreted in the same way as it is at the moment. One might assume that this means that UK courts will apply EU rules of interpretation to these laws and, at least, have regard to CJEU judgments, but there will be no further clarity on this until the detail of what is proposed is released.

Article first published on Lexis®PSL Arbitration on 24 February 2017 at Brexit—the future of state-to-state, investor-state and domestic dispute resolution.