Select 2017 Can foreign investors sue the UK for Brexit? Markus Burgstaller 4 October 2017
Framework for investment claims What is investment protection? The rise of investment arbitration Scope of investment protection
What is investment protection? Investment protection is provided by international treaties and national investment laws. The standards of protection are independent of local laws and domestic courts. Encourages foreign investment by reducing the political risks associated with investing in a foreign State. Claims can be based on legislative, executive or judicial conduct by a State. Hogan Lovells 3
The rise of investment arbitration Trends in known treaty-based ISDS cases, 1987 2016 Source: UNCTAD, IIA Issue Notes, May 2017 Hogan Lovells 4
Investment protection Investment protection typically applies to "investments" (typically, every kind of assets) made by "investors" (typically, nationals and companies incorporated in either Contracting State). Investment protection encompasses various standards of protection (such as prohibition of uncompensated expropriation; fair and equitable treatment). An investor may bring a claim against a State before an international arbitral tribunal. If the claim is successful, the tribunal will typically order the State to pay damages to the investor. An award may be enforced under the ICSID or the New York Convention against assets of a State that are not protected by sovereign immunity. Hogan Lovells 5
Investment claims against the UK due to Brexit Legal bases Likelihood of claims Potential formulation of claims Likelihood of success of claims
Legal bases For foreign investors to sue the UK for Brexit, they need to be able to rely on an investment treaty (bilateral or multilateral). UK Bilateral Investment Treaties (BITs): The UK currently has almost 100 BITs in force UK multilateral treaties: the Energy Charter Treaty (ECT) x the Comprehensive Economic and Trade Agreement (CETA) (provisional application starting 21 September 2017 does not apply to the majority of Chapter Eight (Investment)) Hogan Lovells 7
Legal bases: the intra-eu BITs question and the UK The question of whether tribunals in intra-eu cases have jurisdiction remains to be decided (Opinion of AG Wathelet of 19 September 2017; Judgment of the CJEU expected later this year or early next year). Once the UK ceases to be an EU Member State, UK BITs with the remaining EU Member States will loose their intra-eu character. Therefore, for the purposes of claims by EU investors in the UK, the intra- EU BITs question is likely to be moot. Hogan Lovells 8
Likelihood of claims How often has the UK been a respondent in investment cases to date? Which industries are potentially affected by Brexit? Where are foreign investors in the UK coming from? Do foreign investors in the UK have legal bases to bring a claim? Hogan Lovells 9
Cases involving the UK and UK investors UK as the respondent State Cases by UK investors 1 69 Source: UNCTAD Hogan Lovells 10
Affected industries: Goods manufacturers Some foreign investors established themselves in the UK with a view to manufacture goods here and trade them in the EU. EU accounts for half of the UK's trade and over 40% of value added in UK exports. Potentially affected sectors: automotive (for example, Tata, Nissan, and Toyota); train manufacturing (for example, Hitachi). Potential measures: introduction of custom duties or quantitative restrictions on goods exported to the EU (which will increase operating costs and lead to a decline in profits). Hogan Lovells 11
Affected industries: Financial services Financial institutions established their subsidiaries in the UK with a view to provide financial services in the EU. Trade in services represents 37% of the UK total exports and 23% of UK imports. Potentially affected sectors: Banks; Insurers. Potential measures: Losing passporting rights enabling financial institutions to provide financial services in the EU. Hogan Lovells 12
Top 10 countries of origin of FDI in the UK Recent UK Government statistics suggest that the top 10 countries of origin of foreign investment in the UK were: 1. United States 2. Netherlands 3. Luxembourg 4. France 5. UK offshore islands 6. Germany 7. Spain 8. Switzerland 9. Japan 10. Belgium None of these countries have a BIT in force with the UK Hogan Lovells 13
Top 10 countries of origin of FDI in the UK energy market Recent UK Government statistics suggest that the top 10 countries of origin of foreign investment in the UK energy market were: 1. Spain 2. Denmark 3. Germany 4. Norway 5. Ireland 6. France 7. China 8. United States 9. Netherlands 10. Japan All of these countries (save for China and the US) are Contracting Parties to the ECT (same as the UK) Hogan Lovells 14
Potential formulation of claims One standard of protection that foreign investors in the UK may attempt to rely upon is fair and equitable treatment. The ECT and UK BITs typically include an obligation to accord to investments of foreign investors fair and equitable treatment. Article 2(2) UK Model BIT (2008): "Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment ( )" Article 10(1) ECT: "Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment." (excerpt) Among others, these clauses protect foreign investors' legitimate expectations at the time of an investment. Hogan Lovells 15
Legitimate expectations and Brexit One expectation that foreign investors in the UK may claim to have had (until recently) was that they will be able to enjoy freedom of movement of goods, services and capital within the EU. Concerns regarding post-brexit legal stability have been expressed internally and externally: Law Society of Scotland highlighted that one of the most significant public interest issues will be "ensuring stability in the law" (Proposal. UK Government. Negotiation Priorities on leaving the EU: Proposals by the Law Society of Scotland, November 2016) Japan officially stressed to the EU and UK the importance of avoiding any major disruptions in the post-brexit landscape (Japan s Message to the United Kingdom and the European Union, September 2016) Japanese Financial Services Respondent: "There are still two years before the final exit of the UK from the EU will happen. Within that time period, we expect extreme uncertainty and risks surrounding exit negotiations." (Hogan Lovells, Brexometer Survey, March 2017) Hogan Lovells 16
Legitimate expectations and Brexit Foreign investors in the UK may claim that: they had legitimate expectations that the UK will remain a Member State of the EU and they could not have reasonably foreseen that the UK would decide to cease to be an EU Member State; the UK's withdrawal from the EU results in a fundamental change to the UK's regulatory framework; as a result of the withdrawal from the EU, the UK violated its obligations under fair and equitable treatment clauses by frustrating foreign investors' legitimate expectations; and the UK is liable for any losses incurred by foreign investors that were caused by that decision. Hogan Lovells 17
Likelihood of success arguments For Foreign investors relied on the UK being an EU Member State No EU Member State has ever withdrawn from the EU The UK's withdrawal from the EU will fundamentally change the legal framework applicable to foreign investors Against Withdrawal from the EU is a sovereign right of the UK Article 50 TEU expressly provides for withdrawal from the EU The UK's withdrawal from the EU is a non-discriminatory measure of general application affecting whole country and its people Hogan Lovells 18
Likelihood of success Recent international arbitral practice on regarding fundamental changes to regulatory framework: In Eiser v Spain a tribunal held that (Award, 4 May 2017): "The Tribunal finds that Respondent's obligation under the ECT to afford investors fair and equitable treatment does protect investors from a fundamental change to the regime in a manner that does not take account of the circumstances made in reliance on the prior regime." (para. 363) "Taking account of the context and of the ECT's object and purpose, the Tribunal concludes that Article 10(1)'s obligation to accord fair and equitable treatment necessarily embraces an obligation to provide fundamental stability in the essential characteristics of the legal regime relied upon by investors in making long-term investments." (para. 382) Foreign investors in the UK may claim that: if certain amendments to the regulatory framework for renewable energy in Spain amount to a violation of the fair and equitable treatment obligation in an investment treaty, then so does the UK's withdrawal from the EU after over forty years of EU membership, especially as no Member State has ever withdrawn from the EU to date. Hogan Lovells 19
Likelihood of success specific undertakings The claims would be strengthened if a foreign investor could evidence that they relied on specific undertakings by the UK Government, whereby the UK Government represented to the investor (in an agreement or otherwise) that there will not be a fundamental change. Example of a potential undertaking: Nissan In late 2016 the UK Government made assurances regarding the outcome of the UK's withdrawal from the EU to Nissan, a Japanese car maker producing 500,000 cars per year in its British plant. Prime Minister Theresa May met with Nissan's chief executive, who reported that "The Government gave us assurances that it was the Government's intention that they would have a competitive trading environment at the end of the process", which Nissan understood to isolate Nissan's business from any adverse effects of Brexit. Hogan Lovells 20
Conclusions 1. There is an extensive framework for protection of investments of foreign investors in the UK, including almost 100 BITs and the ECT. 2. However, the UK does not have save for the ECT applying to the energy sector investment treaties in place with many home States of its top foreign investors (e.g. the US, Germany, France). 3. Depending on the outcome of negotiations between the UK and the EU, the regulatory framework applicable to foreign investors in the UK may be (fundamentally) altered. 4. In particular goods manufacturers and financial institutions may be affected. 5. Some of these foreign investors may rely on investment treaties to bring claims against the UK in connection with Brexit. 6. The standard that is most likely to be relied upon is fair and equitable treatment, where investors may attempt to claim that their legitimate expectations as to the UK's EU membership were violated. 7. The likelihood of success of such claims is difficult to assess at this time and will depend on a number of case-specific factors, such as whether foreign investors received any specific assurances from the UK government. Hogan Lovells 21
Markus Burgstaller Partner, London Markus is a Partner in Hogan Lovells' International Arbitration Practice based in London. He acts for companies, private individuals, States, and international organisations in international disputes, including arbitrations under ICSID, UNCITRAL, ICC and LCIA rules and in proceedings before the Court of Justice of the European Union. He also advises companies, private individuals, States, and international organisations on public international law and EU law. He is recognized as a leading individual in public international law in the UK (Legal 500 2012 to 2016). He is "a very specialised lawyer and an impressive partner" (Chambers UK 2017), an "extremely well respected practitioner with substantive experience in complex public international law disputes before international courts and tribunals" (Chambers UK 2016), and "well known for his expertise in investment treaty arbitrations" (Chambers Global 2014). Markus is the author of many publications on international arbitration, frequently speaks at international conferences and guest lectures at universities such as the University of Cambridge, the London School of Economics and Political Science, Queen Mary University of London, the University of Hamburg, and Humboldt University in Berlin. T +44 20 7296 2871 markus.burgstaller@hoganlovells.com Practices International Arbitration International Trade and Investment Litigation Education Master of Philosophy, Mag. phil., University of Vienna, 2001 PhD in Public International Law, Dr.iur., University of Vienna, 2001 Master of Laws (LL.M.), New York University, 2001 Master of Laws, Mag.iur., University of Vienna, Hogan Lovells 22 1998
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