INTERVIEW WITH THE BILLIET & CO LAWYERS TEAM
INTERVIEW WITH THE BILLIET & CO LAWYERS TEAM
BREXIT AND ITS CONSEQUENCES FOR INVESTMENTS
Philippe Billiet - Philippe is a lawyer at Billiet & Co and member of the Advisory Board to the Brussels Diplomatic Academy (BDA).
Maarten Bentein – Maarten is a lawyer at Billiet & Co with professional experience in investment arbitration.
Thais Cristina Gadotti – Thais is a legal practitioner at Billiet & Co, trained in International and European Law.
1. Would Brexit liberate the UK authority from investment treaties that were entered into with EU? If not, what consequences could we anticipate?
Philippe: These matters can only be determined after the United Kingdom invokes article 50 of the TEU and the terms of its withdrawal are outlined. However, some circumstances can be anticipated by existing EU and international law rules. Once article 50 is invoked, the remaining EU countries are obliged to negotiate with the UK the terms of its exit and their future relationship. Such provision also foresees that all EU treaties shall cease to bind the UK 2 years following the notification of its intention to leave the EU. Thus, one could assume that the termination of investment treaties in relation with the UK is automatic.
2. Do those EU treaties also include treaties between the EU and third parties or only internal agreements?
Philippe: According to a briefing released in February 2016 by the European Parliament regarding article 50 TEU, the legal consequence of a withdrawal from the EU is not only the end of the application of internal agreements, but also agreements concluded by the EU and third countries or international organisations. Thus, the instruments accorded with third parties and EU would cease to apply to the UK, who would have to negotiate new arrangements with them.
3. Such treaties with third countries probably set out sole conditions under which their application ends, and it is likely that a Brexit is not one of them. Are there international rules applicable to such situation?
Philippe: Art 59 (1):b of the Vienna Convention on the Law of Treaties provides that the termination of a treaty can be implied if the provisions of the new treaty (in this case, the instrument outlining the details of the UK’s exit) are incompatible with the previous treaties that considered the UK a member of the EU.
4 - Why/when would the agreement to be made under Brexit be incompatible with existing treaties between the EU and third countries?
Philippe: The whole treaty may not be incompatible, however, the provisions considering the UK as a member state will be incompatible with the provisions of the new treaty liberating the UK from the EU (the incompatibility relates to the UK being bound or not by the obligations contracted by the EU). Moreover, article 61 of the VCLT deals with the supervening impossibility of the performance of a treaty when the obstacle results from the permanent disappearance of an object indispensable for the execution of the treaty, which in this case would relate to the disappearance of UK’s membership in the EU when it comes to an investment treaty entered into with the latter.
5 - Why would the end of EU membership constitute the disappearance of an indispensable object?
Philippe: The supervening impossibility of performance relates to the UK only, since it will be no longer bound by the obligations contracted by the EU. Besides that, article 62 of the VCLT provides that a fundamental change of circumstance not foreseen by the parties may be invoked by them if these circumstances constituted an essential basis of the consent of the parties and if the effect of the change is radically to transform the extent of obligations to be performed by them. The Brexit can certainly be considered a radical change of circumstance and the UK no longer being bound by those treaties as an EU member changes the extent of obligations to be performed.
6 – But couldn’t Brexit be foreseen by the parties throughout article 50 of the TEU plus the referendum (since the UK has chosen to leave)?
Philippe: The Brexit could be foreseen by the UK, since its population has chosen to leave the EU. However, some may say reasonably that the Brexit was not foreseen at all after 40 years of UK membership and for the fact that no country had withdrawn from the EU before. It is possible that many investors, especially Americans (since London is their hub to the EU) did not expect Brexit when they decided to establish their businesses in the UK, counting on the benefits of the common market and the UK membership in the EU.
7 – What about agreements signed both by the EU and the UK/member states?
Thais: In case the investment treaty takes the form of a mixed agreement (in which both the EU and its member states ratify it), it appears that the legal position would be the UK continuing to be bound by such instrument even after Brexit, in accordance with the principle of continuity. Thus, the UK may be able to sustain such agreements by exchanging notes with the counterparty State. The precedent for such positioning is the case involving the Czech Republic and Slovakia when they agreed to assume treaty obligations of the former Czechoslovakia. Even though this case relates to a free trade agreement, it can provide some insight when it comes to investment treaties. However, some have argued that the principle of continuity is designed to State Succession and government modifications, not being applicable in the situation under analysis.
8 - Which treaties exist that are situated within this category?
Thais: Mixed agreements concluded by the EU and its member States are the WTO, UNCLOS and Association Agreements with neighbour countries. Member States are urging for CETA and TTIP to be also signed mixed agreements, considering that many issues dealing with such instruments are both of EU and Member State competence.
Moreover, it is important to keep in mind that some of these mixed agreements only enter into force after all parties ratify them (until then, parties are not bound by them). Hence, if the UK is still not officially party to such agreements, it is obvious that it will remain so once Brexit takes form.
The treaties that are provisionally applied to the EU (provisionally, because not all Member States have yet ratified them, although they “benefit” from the provisional application as an EU member), but not to all its Member States are: free trade agreements with Peru, Colombia, Central America, Eastern and Southern African States, Cameroon, more Southern African States, and most Caribbean countries.
On the contrary, some may say that mixed agreements concluded by the EU and its Member States may be automatically terminated as far as the UK is concerned, since some treaties contain provisions determining the parties as EU Member States, which could call into question the continuing participation of the UK in the treaty.
The UK may also prefer to have separate instruments with third countries instead of being bound by the ones concluded with the EU. Taking into consideration new investment arbitration courts to be set up through TTIP and CETA, the UK entering into new treaties with third countries could maintain the stability offered by the already known and appreciated system of investment arbitration (considering it is still unknown how such courts would work), acquiring consequently a competitive advantage through investors’ eyes.
10 - Would intra-EU BITs (currently dormant) be activated if Brexit occurs? Would this result in the UK having to respect higher protection standards than those currently existing? If yes, what consequences could we anticipate?
Maarten: Following the Lisbon Treaty, the European Commission started to consider intra-EU BITs as generally inconsistent with EU law, taking also the responsibility and supremacy over Member States to negotiate treaties with third countries (art. 207 TFEU). Thus, EU Member States are no longer free to unilaterally conclude treaties relating to exclusive EU competence. This way, the EU may try to dismantle existing BITs to replace them with new treaties entered into by the EU as a whole, supported by Regulation 1219/2012, which deals with extra-EU BITs and their eventual inconsistencies with EU law.
Thus, after the UK leaves the EU, intra-EU BITs involving the UK will turn into extra-EU BITs. However, it is unlikely that EU will accept Member States negotiating or maintaining treaties about issues that relates to exclusive EU competence, especially investment matters.
Accordingly, the answer for this question would depend on the amount of intervention by the European Commission, as well as the provisions of each of these intra-EU BITs. The UK still has 12 intra-EU BITs with Bulgaria, Croatia, the Czech Republic, Hungary, Estonia, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia; 3 BITs with candidate countries for EU accession (Albania, Serbia, Turkey) and 92 BITs with third countries. Although remote, there is the possibility that these treaties remain in place after UK leaves the EU and the investors may rely upon its provisions, especially for conflict resolution. But it is important to keep in mind that, in relation to current Intra-BITs, this autonomy would only apply to the UK once it leaves the EU, and not to the other Member States (considering the current EU framework), having the UK reach a universally-agreed deal with the whole block. Following the Micula v. Romania case and the suspension injunction that the EU issued against Romania when it tried to comply with an ICSID award, it is unlikely that the EU would renounce its interventionist approach and allow countries to maintain intra-EU BITs with the UK.
From an investor’s point of view, Brexit is not entirely dissatisfactory. If the UK maintains all its BITs, it can offer a higher level of investment protection and consequently a favourable ground to investors. Also, the UK will not need to take into consideration the input of the European Commission or the European Court of Justice (which are not always favourable to investors). The UK may also become a hub for incorporation of companies due to the protection afforded by UK BITs.
11. Could Brexit in itself trigger a violation of any investment treaty, allowing harmed investors to claim recovery? If yes, what consequences could we anticipate?
Philippe: Brexit may trigger unforeseen frustrations to foreign investors leading to significant losses. Thus, investors may be able to allege breach of the principle of legitimate expectations, since they relied upon the circumstance of the UK being an EU Member State when the investment took place, enjoying benefits provided by EU law. These advantages can be exemplified by the possibility of exporting to EU countries without bureaucracy and the free movement of capital.
12. Which treaties offer such protection standards that may be triggered through Brexit?
Philippe: Legitimate expectations can be considered a part of Fair and Equitable Treatment, which is foreseen in the German Model BIT 2008; Energy Charter Treaty (art. 10:1); BIT between UK and Ukraine (art. 2:2); BIT between UK and Venezuela (art. 2:2); BIT between the UK and South Africa (art. 2:2), BIT between UK and Singapore (art. 2:2), BIT between the UK and Brazil (art. 2:2), etc.
Furthermore, if the impairment is as such as to hinder the investors of gaining the expected profit, they can claim compensation deriving from indirect expropriation (although, arguably, this is less likely to be triggered by the UK Government, which tends to be investor-friendly in its approach).
13. Any other unforeseen consequences of the Brexit (in light of investments)?
Thais: Brexit may be a positive thing for investors, who rely on a known and useful system for conflict resolution, not needing to adopt new provisions to be established by the European Commission. However, there are still uncertainties over practical issues and legal consequences.
The British Government can expect a variety of claims resulting from its acts and omissions following Brexit, such as impediment to the common market by companies established in London, visa policies for workers from other EU countries, import and export fees, and residence permits from citizens of other Member States, just to name a few. The UK will have to rebuild administrative capacity for areas that were until now handled by the EU. While assumptions are not transformed into certitudes, stakeholders may expect confusion through the coming intentional and unintentional measures that may affect them.
Furthermore, contractual issues may arise. Brexit could result in exercise of termination, force majeure, material adverse change and various modifications of control rights. Jurisdiction clauses and references to EU law will also be impacted, requiring a review of such provisions.
Maarten: Brexit is certainly expected to have some impact in the field of IP rights. First of all, existing EU Trade Marks (EUTMs) will not be valid in the UK, requiring therefore owners of the EUTMs to apply for protection in the UK for a national trademark. At the moment, it is unclear whether a transitional period will be introduced for the EUTM proprietors to transform their EUTM rights into a UK national right without loss of priority, or whether an extended recognition of EUTMs will be implemented until renewal of the trademark is required. For new EUTMs, two separate applications will be required, one for the EUTM and a separate one for the UK national trade mark, which will inevitably result in the increase of maintenance costs.
Brexit will also have similar effect on the framework of Registered Community Designs (RCDs), which will no longer be protected in the UK. As such, an additional registration of the RDC under UK law will be required for protection in the UK.
Regarding Pan-European injunctions post-Brexit, in case of a breach of IP rights in an EU Member State as well as in the UK, the owner of the EUTMs would need to initiate two separate sets of proceedings, one before an EU Member State court and another one before the UK courts.
As far as the European Patent Convention is concerned, no major changes are expected in terms of its applicability in the UK. This is because it is an international instrument, and parties to the Convention are expected to put pressure in the UK to ratify the Unitary Patent Court Agreement independently of the Brexit negotiations’ outcome.
In the context of competition law, certain transactions will no longer benefit from the “one stop shop review” under EU regulation, probably having to go through an additional layer of scrutiny by the British competition authorities. On the other hand, Brexit may enable absolute territorial protection to UK distributors, which is currently prohibited under EU law.
The legal framework for IP rights in the UK relies to a substantial extent on EU rules that, in the case of Regulations, have been directly applicable in the UK, while in the case of Directives, have been transposed into national law. Depending on the mode of negotiations between the UK and the EU, two different scenarios might take place, namely the “soft Brexit” and the “hard Brexit”. In the case of the former, the UK will be a Member of the European Economic Area (EEA) and the European Free Trade Association (EFTA), like Norway, and as such, it will continue to be bound by the EU Directives and the CJEU’s judgements. In the scenario of a “hard” Brexit, the UK will reject its ties with the EU law altogether and will be free to review and replace any domestic legislations regardless of their degree of harmonisation and compatibility with EU law.