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Can Foreign Investors Sue The UK For Billions Over Brexit?

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About The Author

İnayet Aydeniz Baytaş (Regular Writer)

İnayet is currently working as a Legal Assistant at Money Global finance company. She has recently completed her LLM programme at Durham University. She is originally from Turkey, and was registered with the Istanbul Bar Association in 2016. Her main areas of interest are competition law, investment law and arbitration. Outside the law, İnayet enjoys playing tennis, wind surfing,  travelling and cycling.

Firms are making investment decisions right now that will last for years to come. They need more sense of clarity and continuity to support jobs and prosperity.

Rain Newton-Smith

The UK’s exit from EU raises questions as to whether foreign investors can bring investment arbitration claims against the UK for losses sustained as a result of Brexit. International investment law aims to protect foreign investors from unpredictable, unstable, and vague environments in order to ensure that investors can invest safely and securely. Therefore, foreign investors’ rights are protected under bilateral investment treaties (BITs) that countries sign.

The UK has signed 110 BITs with countries like Hong Kong, the UAE, and Russia. Furthermore – though there are no BITs with other major economies like the USA, the Netherlands, France, Spain, Japan, Belgium, and Switzerland do not, meaning there is no arbitration clause that could be invoked – the UK is a contracting party to Energy Charter Treaty (ECT) which lays down similar obligations to  BITs. As a result, there is a myriad of potential foreign investors from countries across the world who may be able to bring multibillion-pound claims against the UK.

Under a BIT (and the ECT), a signatory country is obliged to afford fair and equitable treatment (FET) to foreign investors by ensuring the stability of its legal framework and by protecting investors’ legitimate expectations (LEs). In accordance with BITs, if a country fails to comply with these commitments – via, for example, its legal regime changing abruptly or radically – foreign investors have a right to sue the country  for damages before an international investment arbitration tribunal at the International Centre for Settlement of Investment Disputes (ICSID). It is, however, able to avoid liability if it can show it has carried out legitimate regulatory changes.

Thus, it must be asked whether the changes that will be brought about by Brexit will cause sufficient instability to the state’s regulatory framework that it would allow foreign investors to sue for billions of compensation, or whether Brexit is a legitimate exercise of regulatory powers. In order to answer these questions, it is crucial to draw the line between legitimate regulation and unfair treatment of an investor.

This article will examine this issue, assessing the strength of the possible arguments that foreign investors and the UK government might bring were such claims to be brought.


What exactly falls under the FET obligation is still an ongoing debate in international investment law. It is generally a factual inquiry, whereby a number of factors – including the current stability of the country’s regulatory framework, the transparency thereof, and the investor’s legitimate expectations – are used to assess whether a regulatory change constitutes a breach of the FET obligation.

What constitutes the LEs of a foreign investor depends on the country’s legal framework surrounding the granting of decrees, licences, and permissions, and whether specific representations have been made to the investor that now look set to be breached. For example, local authorities’ refusal to renew a licence to operate a landfill, contrary to earlier representations made by government officials, were held by ICSID in TECMED v Mexico [2003] to be in violation of the FET obligation.

If Brexit does change the regulatory environment, this could potentially frustrate foreign companies' LEs. Whether this is the case will depend heavily on whether the changes are significant enough. Thus, the future relationship between the UK and the EU – and how that impacts the LEs of foreign investors’ – may be the central point of discussion in any Brexit-related claim.

Indeed, a key consideration when assessing a breach of LEs is the extent of the modification to the regulatory regime in a particular sector. For example, in El Paso v Argentina [2011], the ICSID stated that ‘total’ alteration of the legal framework for a sector will amount to a breach of LEs. With this in mind, if Brexit leads to a ‘total’ change – whereby, for example, the UK loses access to the Single Market – foreign investors may win their claims against the UK.

Foreign Investors’ Claims

The UK has been an attractive area for foreign investment for a number in years across a number of sectors, including the automotive banking industries. Indeed, figures from the Department for International Trade show that there have been 8,939 foreign investment projects in the UK in the past five years.

The UK’s access to the EU’s Single Market is one of its main attractions to overseas investors. Therefore, if the UK lost such access after a ‘Hard’ Brexit, foreign investors in the UK may not be able to take advantage of the benefits of the EU’s ‘Four Freedoms’: the free movement of goods, capital, and workers, as well as the freedom of establishment.

For example, tariffs and quotas placed on goods coming into and out of the UK would lead to additional costs, while the financial service industry would be adversely affected by restrictions on the free movement of capital. Ultimately, such impacts would increase foreign investors’ operating costs and cause a decline in their profits.

These, and other, potential impacts of Brexit may constitute a breach of the UK’s obligation to afford FET to, and protect the LEs of, foreign investors and thus be used as a basis for claims. This would involve claimants contending that there have been dramatic changes in the UK’s regulatory regime and arguments that the UK has failed to maintain a consistent legal framework. The claimants could further contend that their LEs have been violated by the enactment of new rules. In all, they would argue that the UK is liable for their costs of adapting their businesses in order to comply with the new regulatory framework.

A number of recent international investment arbitration cases suggest that such claims might be successful. For example, in Eiser Ltd v Spain [2017], the ICSID found that certain amendments to the Spanish regulatory framework for the renewable energy market violated its the FET obligation under the ECT, with the ICSID holding that Spain's FET obligation:

[N]ecessarily embraces an obligation to provide fundamental stability in the essential characteristics of the legal regime relied upon by investors in making long-term investments. [Furthermore, the FET obligation] means that regulatory regimes cannot be radically altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment’s value.

The ICSID reached a similar finding in Enron v Argentina [2007]. Here, the Argentinian government had abandoned fixed exchange rates and converted dollar accounts to the peso in response to a financial crisis. The ICSID found that Argentina’s measure altered the entire legal framework under which the investment was made; the government was thus liable for a breach of its FET obligation.

Other conditions that must be satisfied for an infringement of the FET obligation to be established is that the claimants’ LEs must be reasonable and changes of regime must not be foreseeable by investors. In this respect, foreign investors could argue that they reasonably expect fundamental stability in the UK’s regulatory regime because the UK is a highly developed country. Furthermore, the UK’s 40 years of EU membership and the extent to which it was involved in the European project could be cited to show that long-term investors could not have anticipated or foreseen the risk of Brexit occurring.

In the light of this, it seems likely that a foreign investors would have a strong argument if they were to claim that the UK’s withdrawal from the EU after 40 years of membership – and the ‘radical alterations’ to the regulatory framework that are likely to follow – would cause ‘fundamental’ instability to their business, to the extent that the UK could be held liable for breaching its FET obligations under the BITs it has signed.

Consequently, foreign investors could sue the UK on the ground that the substantial changes to the ‘essential characteristics of the legal regime relied upon by investors in making long-term investments’ as a result of Brexit damages their legitimate expectations, and that the UK thereby violated its FET obligation.

The UK’s Defences

General Points

Although foreign investors may appear to have strong claims, the UK may still be able to oppose these arguments using several grounds. Prior to considering the exact arguments the government could make in its defence, there are several general points to be considered that may hinder the foreign investors’ attempts to establish liability.

For one thing, sectors might not experience the dramatic changes that would be necessary for claims to be established. For example, as Theresa May’s Mansion House speech made clear, it is likely that the UK and EU’s competition law and data protection regulatory regimes will remain aligned.

Furthermore, arbitral tribunals are required to consider all the particular circumstances surrounding the case in assessing a country’s liability under its FET obligations. This could impact potential claims: for example, in the event of ‘no deal’ scenario that has severe impacts upon both the UK and the EU, the ICSID may hold that the foreign investors’ losses are not attributable to the UK alone because the EU is partially responsible.

Moreover, the impact of a potential transition period – whereby the UK and the EU rules remain aligned and the European Court of Justice retains jurisdiction – may halt the claims of foreign investors. Consequently, investors may wait for the transaction period ends to bring investment claims against the UK.

The fact that the effects of, and measures implemented after, Brexit are likely to be indiscriminate is important too. Because it will likely impact upon all citizens, business, and industries – whether domestic or foreign – the dispute is likely to be less severe than if the UK were to treats foreign investors unequally by, for example, exempting some from tariffs. The UK should therefore be cautious of trying to use regulatory exemptions and favours based on geopolitical considerations – such as rewarding Nissan over other car manufacturers – because this could enhance the likelihood of success of claims.

Specific Defences

In addition to these general considerations, there are several more precise arguments that the UK could rely on to avoid liability. First, it could contend that its government has sovereign rights to regulate on public concerns; after all, the FET obligation does not prevent a state from changing its regulatory regime. Indeed, as the ICSID held in El Paso v Argentina [2011]:

[T]he [FET] cannot be designed to ensure the immutability of the legal order, the economic world and the social universe, and to play the role assumed by stabilisation clauses specifically granted to foreign investors with whom the [country] has signed investment agreements.

A similar vein of thought was applied in Parkerings-Compagniet AS v Lithuania [2007], in which the ICSID held that:

It is each [country’s] undeniable right and privilege to exercise its sovereign legislative power [and] to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.

Pursuant to these cases, BITs cannot be treated like comprehensive stabilisation clauses in foreign investment contracts or as an insurance policy for investors against the risk of any changes in the regulatory regime. The UK government has the regulatory power to enact, modify, or cancel regulations in order to respond changing circumstances that Brexit causes.

Moreover, as was confirmed in Phillip Morris v Uruguay [2016], the ICSID reserves countries an ‘acceptable margin of change’; changes falling therein do not constitutes an infringement of the FET obligation. This allows countries to take novel actions in the public interest. As the ICSID held in Total v Argentina [2013], countries have the responsibility to:

[A]mend their legislation in order to adapt it to change and the emerging needs and requests of their people in the normal exercise of their prerogatives and duties.

For this reason, the UK could argue that its government has the sovereign right to make changes to the regulatory environment that would be in the public interest, given the will of the UK citizens that was expressed in the referendum.

A further argument that could be employed by the UK would be based on the fact that the claims of foreign investors would arise following its imposition of customers’ duties and trade barriers as a consequences of Brexit. In this respect, the UK can argue that raising of tariffs or custom duties at the border cannot be an investment dispute, because investment treaties do not apply to trade measures. Therefore, a claim about new tariffs and custom duties may not be subject to investment arbitration.

The UK could also contend that the nature of the LEs involved and the extent to which the regulatory regime might change would be not extreme enough for a claim to be brought. Indeed, it might argue that at no point has the UK made any specific commitments or assurances to particular investors that would generate LEs; its general representations and attempts to advertise investing in the UK would likely be insufficient. Such an argument would be boosted by the decision in EDF v Romania [2009], where the ICSID stressed that:

Except where specific promises or representations are made by the [country] to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the [country’s] legal and economic framework.

Therefore, the UK government may be able to counter arguments that LEs have been infringed – even if Brexit brings fundamental changes to the UK legal regime – because no specific assurances have been given to particular investors. This would, of course, not be operable in cases in which such assurances have been made: for example, in late 2016, after Nissan threatened to leave the UK, the government made assurances to Nissan that the company would not suffer the consequences of Brexit.

Finally, foreseeability is an important factor to assess investors’ LEs. Foreseeability should be evaluated before the Brexit referendum and after the referendum in order to understand whether legitimate expectations are created. Before the referendum were announced, it is hard for foreign investors to predict Brexit result. Thus, their LEs can be protected who made their investment in the UK before the referendum. On the contrast, investors who came to the UK after the referendum should have been expected the effects of the referendum result, so their LEs cannot be frustrated by the total or part change of the legal environment which Brexit may cause.

Also, foreign investors’ claim that the risk of Brexit was unforeseeable may be countered by the UK on another ground. For instance, the UK could assert that – because Article 50 of the Treaty on the European Union (TEU) expressly states that ‘any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements’ – there was always a chance that the UK could withdraw itself from the EU. This is likely to be a weak argument: while it is not unreasonable to expect foreign investors to account for Article 50 of the TEU, it never appeared likely the UK would exercise it until 2016.


Any claims made by foreign investors against the UK government, in which they allege that Brexit and its impacts are a breach of FET obligations under a BIT or the ECT, would be highly controversial.

The success of such claims is hard to predict: both sides would have strong arguments and counter-arguments, and it is difficult to estimate which ones will prevail over the others. It will likely come down to the individual circumstances of each case, including the sector in which the investment was made and the measure implemented by the UK; that is, it is highly unlikely that Brexit would constitute a violation of an investment treaty per se. And, compounding the confusion, is that fact that the future relationship between the UK and the EU still remains under a cloud of uncertainty.

Ultimately, though, it is argued that the potential for such claims to be successfully brought should not be dismissed as hypothetical or another example of ‘Project Fear’; the UK government should take into account the potential of such claims when deciding how to proceed as the deadline for Brexit edges ever nearer.

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Tagged: Banking & Finance, Brexit, Commercial Law, European Union, International Law, Litigation, Regulators

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