The UK is a party to 84 BITs with non-EU countries. Transitional measures allow BITs between EU Member States and non-EU countries (extra-EU BITs) which address matters within the EU’s exclusive competence to remain in force until such time as they are replaced by EU-wide international investment agreements between the EU itself and non-EU countries.
The European Commission (EC) has been gradually seeking to replace extra-EU BITs and has already agreed trade and investment agreements with Canada, Singapore and Vietnam (though these are yet to come into force) and is in the process of negotiating agreements with others including the US and China (though the status of these negotiations is in question given the Trump administration’s stated preference for bilateral rather than multilateral agreements and the UK’s intended withdrawal from the EU).
There had been some question over whether existing BITs between non-EU countries and individual EU Member States would automatically terminate and cease to be valid once EU-wide agreements come into force. This has been clarified in the CJEU’s opinion on EUSFTA which found that the EU has the power to enter into agreements with non-EU countries which replace commitments in BITs previously concluded between individual EU Member States and non-EU states, so long as the provisions in question fall within areas of EU exclusive competence.
There are a number of uncertainties around the impact Brexit will have on EU negotiated international trade and investment agreements. It is unclear whether the UK will automatically cease to be a party to all or parts of such agreements, whether the UK must formally give notice of termination, or whether there are other options. It is also unclear whether or to what extent “sunset clauses” within those agreements, which provide for the continuation of certain provisions for a certain period of time (often decades) after termination, will apply. This lack of clarity is partly due to the fact that whilst many EU negotiated agreements address what happens when states join the EU, none address EU Member States leaving the EU. As with much of the legal fall-out from Brexit, we are in somewhat unchartered territory.
Some commentators speculate that the UK may no longer be bound by any EU negotiated treaties with non-EU countries. However, the Attorney-General’s opinion on EUSFTA noted that “If an international agreement is signed by both the [EU] and its constituent Member States, both the [EU] and the Member States are, as a matter of international law, parties to that agreement. … [A Member State’s] participation in the agreement is, after all, as a sovereign State Party, not as a mere appendage of the [EU] (and the fact that the [EU] may have played the leading role in negotiating the agreement is, for these purposes, irrelevant).”. The CJEU did not address this question in its opinion on EUSFTA. The position will no doubt need to be considered on a case by case basis and the legal impact of Brexit will likely depend in part on whether the agreement in question was a mixed agreement, whether it was ratified by the UK and the EU, or whether it was an agreement exclusively within the EU’s competence and concluded by the EU alone.
Regardless, the UK’s existing 84 extra-EU BITs will remain valid, which could be to the UK’s advantage. Firstly, given that most EU international agreements are mixed agreements like EUSFTA, the obligation to involve all EU Member States will necessarily hamper the progress of negotiating and implementing EU-wide international agreements. Secondly, the fact that the majority of the UK’s extra-EU BITs include investor-state arbitration provisions could give the UK a strategic advantage from the perspective of investors. A significant feature of the EU’s approach to EU-wide international investment agreements is its policy of replacing investor-state arbitration with a two-tiered Investment Court System (ICS). (The EU’s ICS proposals are discussed in detail in another article in this issue “The EU’s proposed reform of investor-state dispute settlement”). ICS will likely feature in, or at least form a central plank of negotiations in relation to, all of the EU’s future BITs. However, those ICS provisions have proved controversial.
The EU argues that the ICS would provide greater transparency and protect investment whilst preserving the rights of governments to regulate. But concerns have been raised (particularly by investors) about the lack of party autonomy, accountability and sustainability of the ICS. The EU’s negotiations with the US over the Transatlantic Trade and Investment Partnership (TTIP) stalled partially due to differing views over the EU’s ICS proposals. The ICS was also a sticking point to obtaining EU Member State approval of CETA. Some believe that the EU’s ICS proposal is not compatible with EU law – a question which the CJEU was not asked to address in its recent opinion on EUSFTA but which is likely to be referred to the CJEU for determination shortly. The CJEU’s finding that ISDS regimes are not within the EU’s exclusive competence represents a further set-back to the EU.
An interesting conundrum results from the EU having exclusive competence over foreign direct investment but sharing competence with the EU Member States over ISDS. EU Member States cannot enter into foreign direct investment treaties (save with EU permission). The EU may enter into foreign direct investment agreements alone, but those would be toothless without some form of ISDS mechanism which it EU cannot unilaterally impose on EU Member States. As a result, the EU and all the EU Member States will need to reach agreement on these matters if they wish to avoid a deadlock. At this point, how they will reach agreement is not clear. If the EU insists on EU Member States adopting ICS provisions, it is likely to face serious opposition. Conversely, if the EU’s ICS proposals are not widely adopted by all EU Member States, it could render the EU’s ICS ambitions largely redundant.
After Brexit, the UK will also fully regain its powers to negotiate and conclude new investment agreements with non-EU countries, and in this respect it may benefit from being able to conclude deals with non-EU countries more efficiently and effectively than the EU. According to the UK government, a number of countries have already expressed an interest in concluding agreements with the UK once it has exited the EU. The Trump administration has gone as far as to suggest that an agreement with the UK could be concluded within months of Brexit. It remains to be seen if this enthusiasm continues and the UK is able in practice to quickly secure new investment agreements. But the opportunity is certainly there. Obviously however, in light of the CJEU’s opinion on EUSFTA, any mixed competence UK-EU trade agreement will necessarily entail more difficult, time-consuming negotiations given it will require full EU Member State participation.