Foreign investors can use BITs to sue over Brexit

Foreign direct investment in the UK economy has been badly hit by the uncertainty of Brexit. Both EU and non-EU investors are urgently seeking clarity about what any final deal may look like – or if there will be no deal. If it leaves them worse off, they may well seek to sue the UK government.

They have got legal redress, thanks to something known as BITs. They are bilateral investment treaties that EU members like the UK have signed with non-EU countries.

BITs are agreements that provide investors from one country with protection from breaches of international law by the host country, if they might adversely affect their investments. Investors are given a right to dispute the host country in arbitration claims, for example, before the International Centre for Settlement of Investment Disputes.

Over time some of these bilateral treaties have been brought under the competence of the EU Commission to review and regulate, because foreign direct investment is now included in the EU’s common commercial policy.

There are still many BITs, however, that do not come under the EU Commission’s umbrella. At first sight, that would appear to put the UK in a good position after Brexit as the rules can remain the same for non-EU foreign investors. But it could also be a problem post-Brexit.

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The UK has actively promoted itself on the international stage as the most business-friendly of EU member states, as well as providing access to the single market with its market of 500 million, and almost zero barriers to trade with the other members of the EU. One obvious example would be a company such as Nissan, the Japanese motor manufacturer, producing cars in the UK to sell across the EU.

Non-EU investors have come to the UK on the promise of a stable legal and economic framework and the opportunity to trade in the EU market. Legitimate expectations of these investors will be harmed in a no-deal or a hard Brexit, because it would trigger provisions within BITs about affording investors full protection, security and fair and equitable treatment.

It is certainly possible that non-EU investors will seek compensation from the UK as a result of the loss suffered from the vast EU legal framework being removed following a no-deal Brexit, or the loss of full single market access resulting from a hard Brexit. Moreover, should the pound suffer dramatically and cause an economic crisis to which the government’s response entails nationalisation (quite possible under a Labour government, but not unlikely even if the Tories remain in power), the most likely outcome would be claims for expropriation to which virtually no defence would be available.

A no-deal Brexit means that the UK leaves all the treaties under EU jurisdiction as well as the Customs Union and the Single Market. This would be a vast change to the existing legal regulatory framework within which the UK operates. Furthermore, Regulation 1219 will no longer apply to the UK, which means that the benefits from the treaties under EU competence will be lost.

Foreign direct investment in the UK economy is around £1 trillion, according to the UK Inward Investment Report 2014/2015. If the UK leaves with no deal, the benefits of the EU – i.e. no customs tariffs, no discriminatory internal taxes and quantitative restrictions within the EU between individual member states – will cease to apply. This is a huge legal, regulatory and economic change and businesses are preparing for it.

Thanks to Jason Hunter from #3blokesinapub for sharing his knowledge of foreign direct investment at one of their events in Swindon. You can watch their YouTube series here.

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Edited by Quentin Peel