In February 2017, the UK Government published a White Paper addressing the UK’s exit from, and new partnership with, the EU. One of the more eye-catching parts of the White Paper was the recognition that “our future relationship with the EU requires provision for dispute resolution“, followed by examples of the possible forms that could take. Of course, it is good advice for any parties to an agreement to recognise that disputes can arise, and provide for how they will resolve those disputes. In this case, though, early engagement with this issue is even more important given the complexities and politics associated with the various options.
One of the potential mechanisms in particular, the Investor-State Dispute Settlement (ISDS) procedure, has proved especially controversial in recent years, with trade unions and activist groups decrying its allegedly anti-sovereign effects and the side-lining of domestic courts.
Whichever of the mechanisms is ultimately adopted, though, companies will have to adapt to different methods of dispute resolution for the enforcement of their rights as against EU Member States and companies/individuals.
The UK’s membership of the EU gives the UK, and UK companies, numerous rights – chief among them being access to the single market. Much of the body of EU law is aimed at ensuring the efficacy of the single market, and some of these EU laws have direct effect in the UK. If so, they can be relied on by companies or individuals to bring claims against either the state or (in some circumstances) other companies or individuals. Where a company’s access within the market is impeded, therefore, or its directly effective rights otherwise infringed, that company can bring a legal challenge in domestic courts, which are capable of resolving disputes regarding EU law rights.
Domestic courts can refer questions of EU law interpretation to the Court of Justice of the European Union (CJEU). When the CJEU makes a decision, that decision is binding on all Member States; in the event of future legal disputes relating to the same subject, companies can rely on CJEU decisions in their domestic courts.
The likely future of disputes, post-Brexit
Whilst the terms of any trade deal with the EU remain to be determined, the White Paper has made clear that Brexit will bring an end to the CJEU’s jurisdiction over the UK. Rather, disputes regarding any rights under a trade deal would be resolved by a prescribed “dispute resolution mechanism“.
Dispute resolution mechanisms on the international plane can take a number of different forms, usually involving some sort of tribunal to decide disputes between states (as exists under the World Trade Organisation) or between certain classes of affected private individuals and states (ISDS mechanisms).
Whilst it is not clear yet which precise mechanism may be chosen, the contents of the White Paper present the following potential issues or difficulties:
- Different mechanisms, for different agreements. The White Paper expressly reserves the possibility that different agreements on different topics might use different mechanisms. Certain of the mechanisms cited as examples are very different from each other. This means that one company may potentially have to use different mechanisms to access relief in different situations.
- Potentially no recourse to a court or tribunal. The White Paper cites as examples some mechanisms (such as under bilateral agreements between the EU and Switzerland) which provide for disputes to be resolved by committees established for this purpose, without any recourse to a court or tribunal. Such mechanisms have the potential for decisions to be driven by political motivations, rather than necessarily commercial fairness, and give few or no rights and little power to affected companies.
- Significant shift to current system. Apart from decision-making by committee, all of the other mechanisms provide for disputes to be resolved ultimately by an arbitral process. The shift to an arbitral system, rather than litigation in domestic courts, is a sensitive issue. As explained below, whilst under bilateral and multilateral investment treaties arbitration is already the dispute mechanism of choice, it has had its critics and was a bone of contention in the ‘TTIP’ negotiations.
Specifc issues with ISDS provisions
The White Paper notes that almost all of the UK’s current bilateral investment treaty arrangements have ISDS provisions, and a number of the examples of existing trade deals cited in the White Paper contain ISDS provisions.
ISDS provisions provide for the arbitral resolution of claims, without recourse to national courts. Generally, ISDS provisions specify the arbitral rules to be followed, whether they be those of UNCITRAL and/or those of an institution such as the International Centre for Settlement of Investment Disputes, the International Chamber of Commerce (the ICC) or the Stockholm Chamber of Commerce (SCC).
International arbitration is of course common in commercial disputes. Its popularity in cross-border disputes continues to grow with parties attracted by promises of neutrality, flexibility of procedure and (in some cases) confidentiality. However, the use of arbitral processes for investment disputes (while common) has proved politically controversial. Opponents highlight that arbitral processes occur:
- outside of domestic courts;
- with specially appointed arbitrators;
- in confidential proceedings, with decisions not being binding in future disputes; and
- with different procedural rules to those of domestic courts.
In recent negotiations between the EU and third parties, ISDS provisions have come under severe criticism. For example, the European Economic and Social Committee, an EU consulting group, recently examined the proposed inclusion of ISDS provisions in the Transatlantic Trade and Investment Partnership (TTIP) and concluded that: “Opacity, lack of clear rules of arbitration, the lack of right of appeal, discrimination against domestic investors who cannot use the system, have undermined the credibility of this system.” (Sandy Boydle, EESC Rapporteur).
In part to address these criticisms, the free trade agreements concluded by the EU with Canada (CETA) and with Vietnam have provided for a permanent “investment court system” to hear investor-state disputes. The investment court will have a fixed roster of arbitrators, drawn from both contracting parties and from neutral thrid-party states, an appellate tribunal, and more transparency over proceedings, in line with the UNCITRAL Transparency Rules. Yet, as the near-derailment of CETA by the Belgian region of Walloon showed, even this model is not enough to satisfy some critics.
Osborne Clarke comment
While the White Paper does not offer a view on the UK government’s preferred model of dispute resolution, it is notable that the UK is seeking to agree an “ambitious free trade agreement“, rather than (for example) the sort of sector-by-sector agreements that Switzerland has with the EU. With ISDS being a typical feature of free trade agreements and the EU favouring this approach – by way of an investment court – it may be that this is one of the few points that the UK and EU are able to agree relatively easily.
Ultimately, it appears that companies will need to get to grips with a system that, for many, may be unfamiliar. This is particularly so given the UK’s ambition to negotiate a raft of free trade agreements with other countries once it leaves the EU, which may all have similar ISDS provisions. UK, EU and multinational organisations operating within those markets will need to think tactically about how to protect their rights at the point of investment, potentially including structuring their affairs so as to benefit from the highest level of investor protection possible.
Article written by Nina Lazic.