15 September 2016

Brexit and Arbitration: shaken but not stirred

This article was written by Dorothy Murray (partner), Craig Pollack (partner), Juliette Huard-Bourgois (professional support lawyer) and Stuart Bruce (associate).

Last June 51.9% of the British electorate voted in favour of leaving the European Union (‘EU’), setting the UK on an entirely new course in law, politics and economics domestically, regionally and internationally. It will take months, or even years, for the UK to negotiate its new relationship with the EU. Much will remain uncertain during this transition period.

One area that is relatively safe from the legal uncertainty created by Brexit is international arbitration.

No immediate impact on international arbitration in the UK

Arbitration, both domestic and international, has never been regulated or harmonised at the EU level. Since its inception in 1968, the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments has excluded arbitration from its scope of application.

As a result, Brexit will have no immediate impact on English arbitration law and procedure, including the English Arbitration Act 1996. Arbitration agreements that designate England as the seat, and arbitration awards made in England, will be enforceable in the same way that they always have been, whether in English, foreign or EU Member State courts. These issues are and remain governed by the New York Convention on the Recognition and Enforcement of Foreign Awards ('NY Convention’), even within the EU.

Possible side effects on commercial arbitration

While EU legislation does not directly apply to international arbitration, case law of the EU Court of Justice (‘CJEU’) has developed principles that impact on the practice of international arbitration in EU countries. The most important of these are:

  1. the prohibition on EU Member States courts from ordering anti-suit injunctions directed at proceedings pending before another EU Member States court, even where those proceedings are brought in breach of an arbitration agreement (Allianz SpA and Others v West Tankers Inc, Case C-185/07); and
  2. the duty for EU Member States courts to set aside or refuse to enforce an arbitral award that would be contrary to certain mandatory norms of EU law, such as the anti-trust rules provided in the Treaty on the Functioning of the EU (EcoSwiss v Benetton, Case C-126/97).

When Brexit ultimately happens, English courts will no longer be bound by CJEU’s case law, therefore:

  1. anti-suit injunctions that prevent a party from pursuing abusive court proceedings in an EU Member State will be available in the English courts; and
  2. like Swiss courts, the English courts will not be bound to sanction an arbitration award that is contrary to EU law. EU public policy will no longer form part of English public policy for the purposes of Article V of the NY Convention.

For certain market players and arbitration users, these possible side effects, coupled with the enduring legal certainty of English arbitration in the face of Brexit, are signs that London will continue to be, and will even strengthen its position as, a leading arbitral seat for international arbitration.

Change of direction for investor-state arbitration

It is possible that the field of investor-state arbitration will experience significant consequences of Brexit. By leaving the EU, the UK will ultimately leave the EU common trade and investment policy, which has had a considerable impact on the legal framework for investor-state arbitration involving EU Member States or EU investors.

Since the Lisbon Treaty came into force in 2009, the EU has launched massive reform efforts for its trade and investment policy and has gained exclusive competence to negotiate future free trade and investment agreements with non-EU states. Two immediate consequences of the EU’s enlarged competence have been that:

  1. Bilateral Investment Agreements ('BITs’) between two EU Member States (for example, the UK-Romania BIT) became unlawful under EU law and are gradually being repealed, a direct consequence of which is the unavailability of investor-state arbitration in intra-EU investor-state disputes; and
  2. the EU has negotiated free trade and investment agreements with third countries, including Singapore, Vietnam, Canada (CETA) and the USA (TTIP) and, as a consequence, pre-existing BITs between these countries and individual EU Member States (for example, the UK-Vietnam BIT) will be obsolete when these new agreements will be ratified and will come into force.

Brexit will certainly change this direction for the UK:

  1. intra-EU BITs to which the UK is party will become extra-EU BITs and will no longer be unlawful under EU law. If, and until, the UK enters into a general BIT with the EU itself, those BITs will survive and will continue to guarantee access to investor-state arbitration to UK investors in the EU and to EU investors in the UK, thereby increasing legal certainty in the short term; and
  2. the negotiation of free trade and investment agreements between the EU and third countries, including those with Singapore, Vietnam, Canada and the USA, will no longer be made on behalf of the UK. As a result, (i) pre-existing BITs between the UK and these countries (for example, the UK-Vietnam BIT) will survive and (ii) the UK will have to negotiate its own deal with these countries if it does not already have an agreement in place (this is the case with Canada and the US). 

For pre-existing ‘mixed’ investment agreements, i.e. agreements to which both the EU itself and the Member States are parties, we can expect that Brexit will not have a significant impact as the UK should be able to remain a party in its own right. This is the case of the Energy Charter Treaty.

For those who praise the benefits of investor-state arbitration, these Brexit developments are to be welcomed. Brexit will effectively inoculate the UK from the impacts of the legal revolution the EU is orchestrating in new investment agreements, namely the replacement of investor-state arbitration with an institutional investment court.

In this context, where Brexit allows UK BITs to survive, it also allows recourse to investor-state arbitration to survive, which could well foster increases in foreign investment from and to the UK. As a result, the UK may well become a favoured destination through which to structure international investments.

Others, however, are concerned that Brexit could give rise to a cascade of claims by disappointed foreign investors against the UK. Foreign companies that chose the UK as their gateway to the EU market might consider that Brexit amounts to a breach of their legitimate expectations.

Whatever the eventual consequences, investment law activity in the UK is likely to remain buoyant.

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