Frequently asked questions about investment protection and Brexit

That is a question which has triggered a lot of debate. Some of it is a little hysterical: there is no realistic prospect of suing simply “for Brexit”, for example. But Brexit will almost certainly bring about significant regulatory change and it is likely that this will have some impact upon investments made in the UK before the referendum on leaving the European Union. This means that it is legitimate to ask whether such changes in the regulatory and investment climate following Brexit might give rise to sustainable claims against the UK Government. We know that the UK Government’s view is that the short answer to this question is “no”. But in reality the short answer is that “no-one can know yet”. First of all, whilst there can be no doubt that Brexit will present enormous challenges, we don’t know precisely the nature of the regulatory landscape post-Brexit and the negotiations have to play out. But that said, the question arises because we live in uncertain times. It’s natural that foreign investors are looking again at the investments they have made in the UK, and at how those investments are protected under international law.

The UK has made promises in various bilateral investment treaties (BITs) agreed with foreign states. Those BITs contain rights for qualifying foreign investors to bring claims against the UK in investor-state arbitration. So the basic mechanics are there for a suit against the UK, in the right circumstances.

The UK’s BITs contain “Fair and Equitable Treatment” protections and this is a broad, adaptive standard (the FET standard). It is something of a “catch-all” for claims that don’t fall into some of the more clearly defined aspects of BIT protection, such as direct expropriation. And critically in this context, we know that in arbitration, one tribunal can see things slightly differently to another tribunal.

What we see from the jurisprudence emerging on the FET standard, is that it will protect a foreign investor from hoststate misconduct such as arbitrariness and bad faith, denial of justice and a lack of transparency. And then, broadly and dependent on the facts, it will also protect the investor’s “legitimate expectations”. Now that of course is again a broad concept. But there is at least some consensus that, given the right fact pattern and the wrong kind of Brexit, foreign investors might be able to show that the regulatory environment that existed when they made their investments in the UK will have changed significantly enough that their legitimate expectations have been impacted such to found claims.

We have seen significant numbers of investment claims follow regulatory change before: in Argentina of course, and in Spain where the shift in renewable energy policy to remove or significantly reduce feed-in tariffs and other incentives triggered claims. Might there be a similar rush to file against the UK? We will have to wait and see.

There will be hurdles to successful claims. As noted above, it would take a particular fact pattern, dependent on the precise deal that is ultimately struck with the EU and what that means for regulatory change and/or impact on investments in the UK. There is also a real question over whether Brexit and its consequences could properly be attributed to a sovereign act of the UK. Whilst the triggering of Article 50 specifically was clearly an act of Government, the precise consequences in terms of regulatory, tariff and passporting changes will effectively be imposed from outside the UK. Also BITs protect investment measures rather than trade measures.

In addition, there is the fact that Brexit, whilst not widely forecast, was not a totally fanciful risk: the promise of a referendum was part of the Conservative party’s manifesto in 2015, the referendum was in 2016 and the final outcome of Brexit is unlikely to be known until 2019. Even well before all that, the UK Independence Party (which campaigned for Brexit) had existed since 1993 and saw a significant share of the vote at the European elections in both 2004 (taking 15 percent vote share) and 2014 (when it took 26 percent, the largest share of the vote of any single party). Finally, as we’ve seen in the Phillip Morris case and others, Tribunals are willing to accept an “acceptable margin of change”. In other words, the FET standard is not a guarantee against novel state action, and Tribunal’s accept that states must be free, within some acceptable tolerance, to judge what is in the public interest and to legislate in pursuance of that. How this concept might apply to Brexit remains to be seen. In particular, if Tribunals are willing to tolerate some legislative change in pursuit of a government’s judgment as to what is in the public interest, there is arguably an even greater need for tolerance where (as with Brexit) the public interest in question is the directly democratic expression of the public itself.

What is certain however is that any claims against the UK government for Brexit would be highly controversial – legally and politically.